SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                  FORM 10-KSB/A
       |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
                                       or
        |_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                          Commission File Number 0-6580
                            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)                   (Zip code)

                                 (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)
   Series A Cumulative Convertible Preferred Stock (Par Value $0.01 Per Share)
             Common Stock Purchase Warrants (Expire August 13, 1998)
                                 Title of Class

Check  whether the issuer (1) 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 [ ]

Check if disclosure  of delinquent  filers in response to Item 405 of Regulation
S-B, is not contained in this form and no disclosure  will be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated  by reference  in Part III of this Form 10-KSB or any  amendment to
the Form 10-KSB. [ ]

The issuer's revenues for its most recent fiscal year were $6,165,664.

As of February 21, 1997,  Registrant had 8,357,427 shares of its $0.10 par value
Common  Stock and  141,822  shares of its  $0.01 par value  Series A  Cumulative
Convertible  Preferred Stock outstanding.  As of February 21, 1997 the aggregate
market value of the common stock, the  Registrant's  only class of voting stock,
held by  non-affiliates  was  $23,584,935.  This  calculation  is based upon the
closing sales price of $3.25 per share on February 21, 1997.





<PAGE>



                                TABLE OF CONTENTS

PART I                                                                    Page

ITEM 1.      BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . .    1
                      General. . . . . . . . . . . . . . . . . . . . . .    1
                      Recent Acquisitions and Development. . . . . . . .    1
                      Business Strategy. . . . . . . . . . . . . . . . .    2
                      Operations. . . . . . . . . . . . . . . . . . . .     2
                      Competition. . . . . . . . . . . . . . . . . . . .    3
                      Markets. . . . . . . . . . . . . . . . . . . . . .    3
                      Regulations. . . . . . . . . . . . . . . . . . . .    3
                      Operational Hazards and Insurance. . . . . . . . .    6
                      Administration. . . . . . . . . . . . . . . . . .     6
ITEM 2.      PROPERTY. . . . . . . . . . . . . . . . . . . . . . . . . .    7
                      Principal Oil and Gas Interests. . . . . . . . . .    7
                      Gulf Coast Prospects. . . . . . . . . . . . . . . .   8
                      Colorado Properties. . . . . . . . . . . . . . . .    9
                      Utah Properties           . . . . . . . . . . . . .  10
                      Wyoming Properties. . . . . . . . . . . . . . . .  . 10
                      Title to Properties. . . . . . . . . . . . . . . ..  11
                      Estimated Proved Reserves. . . . . . . . . . . . ..  11
                      Net Quantities of Oil and Gas Produced   . . . . ..  12
                      Drilling Activity. . . . . . . . . . . .. . . . . .  12
ITEM 3.      LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . .  . 12
ITEM 4.      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . .  13

PART II

ITEM 5.      MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
             STOCKHOLDER MATTERS. . . . . . . . . . . . . . . . . . . . .  13
                      Market Information. . . . . . . . . . . . . . . . .  13
                      Stockholders. . . . . . . . . . . . . . . . . . . .. 13
                      Dividends. . . . . . . . . . . . . . . . . . . . .   13
                      Recent Sales of Unregistered Securities    . . . .   14
ITEM 6.      MANAGEMENT'S DISCUSSION AND ANALYSIS. . . . . . . . . . . .   15
                      Selected Financial Data. . . . . . . . . . . . . .   15
                      Results of Operations. . . . . . . . . . . . . . . . 19
ITEM 7.      FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . 26
ITEM 8.      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
             AND FINANCIAL DISCLOSURE. . . . . . . . . . . . . . . . . . . 26

PART III

ITEM 9.      DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
             COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT. . . . . .  26
ITEM 10.     EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . .  28
ITEM 11.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT30
ITEM 12.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . . 32

PART IV

ITEM 13.     EXHIBITS AND REPORTS ON FORM 8-K. . . . . . . . . . . . . . . 34



<PAGE>



                                     PART I

ITEM 1 - BUSINESS

GENERAL

Pease Oil and Gas Company  ("Company"),  was incorporated  under the laws of the
state of Nevada on September  11,  1968.  The  Company's  address is 751 Horizon
Court,  Suite 203, Grand  Junction,  Colorado 81506 and its telephone  number is
(970)  245-5917.  The  Company  is  engaged  in the  oil  and  gas  acquisition,
exploration,  development and production business.  Historically,  the Company's
operations were in the western United States,  primarily in Colorado,  Nebraska,
Utah,  and  Wyoming.  During  1996 and  early in 1997,  the  Company  has  taken
initiatives  to expand its  operations  in to the Gulf Coast  region of Alabama,
Southern Louisiana and Texas.

On August 23, 1993,  the Company  acquired  Skaer  Enterprises,  Inc. a Colorado
corporation,   its  related  businesses  and  related  oil  and  gas  properties
(collectively  "Skaer").  Skaer  was  privately  owned  and  operated,  and  was
considered  one of the largest  private  independent  oil and gas  companies  in
Colorado,  operating  exclusively in the Denver-Julesburg  Basin ("DJ Basin") of
northeastern  Colorado.  This acquisition  substantially  expanded the Company's
operations  into providing oil field services,  oil field supplies,  natural gas
processing  and natural  gas  marketing.  Skaer was  acquired  for  $12,200,000,
including  $300,000  of various  costs  associated  with the  acquisition.  This
acquisition was financed through: i) the issuance of 900,000 shares of preferred
stock in a public offering which  generated net proceeds of $7,965,000;  ii) the
issuance  of  restricted  common and  preferred  stock  with an agreed  value of
$1,900,000 to the sellers; and iii) a $2,400,000 loan from a bank.

RECENT ACQUISITIONS AND DEVELOPMENTS

As  discussed in the  following  paragraphs,  the  Company,  through a series of
acquisitions and the development of strategic alliances with several private and
public  exploration  companies,  has positioned  itself to expand its asset base
into the Gulf Coast Region of Alabama, Southern Louisiana and Texas.

On January  10,  1997,  the Company  acquired a 7.8125%  After  Prospect  Payout
Working  Interest in the East Bayou  Sorrel  Prospect  from third  parties for a
total  purchase  price of $1.75  million.  The purchase  price  consisted of the
issuance of 315,000  shares of the Company's  common stock and $875,000 cash. On
March 3, 1997 the Company  acquired an additional  10% working  interest in this
prospect  from  unrelated  third  parties for $2.5  million  cash.  The prospect
contains a  discovery  well,  the C.E.  Schwing #1,  which in February  1997 was
producing in excess of 1,400 barrels of oil per day and 1,300 MCF of natural gas
per day with a flowing  tubing  pressure  of 6,300 PSI on a 12/64"  choke from a
perforated  interval of 13,208 feet to 13,226 feet. The C.E.  Schwing #1 went on
production in December 1996. These  acquisitions  were funded with the Company's
existing working capital and the proceeds  generated from a private placement of
common stock during February and March 1997. In that placement, the Company sold
1,500,000  shares  of  the  Company's  restricted  common  stock  to  accredited
investors for $2.50 per share. The private  placement was completed on March 10,
1997 generating net proceeds of approximately $3.3 million.

On  February  4, 1997 the  Company  entered  into a  definitive  agreement  with
National Energy Group, Inc. ("NEGX"),  a publicly held company  headquartered in
Dallas,  Texas.  NEGX is the  operator of the East Bayou  Sorrel  Prospect.  The
Agreement provides the Company the right and obligation to participate with NEGX
in  various  oil and gas  exploration  projects  over the course of the next two
years. Essentially,  the agreement consists of three main elements. First, Pease
has the right and obligation to participate as a 12.5% working interest owner in
NEGX's  outlined  exploration  program.  Specifically,  there are 10  identified
projects including: Mustang Island located in Nueces County, Texas; Bayou Sorrel
located in  Iberville  Parish,  Louisiana;  and  Robertsdale  located in Baldwin
County, Alabama. Second, subject to certain conditions defined in the agreement,
Pease  has the right and  obligation  to  participate  in any  future  prospects
generated  under NEGX's  exclusive  arrangement  with Sandefer Oil and Gas, Inc.
("Sandefer"). Sandefer is a private corporation owned and operated by a group of
geologists and  geophysicists  who generate Gulf Coast,  Southern  Louisiana and
other  wildcat  prospects.  The East  Bayou  Sorrel  prospect  discussed  in the
previous  paragraph  was  generated  by  Sandefer.  Third,  Pease is entitled to
participate in any third party  generated  prospects that NEGX  participates  in
subject to certain conditions as defined in the Agreement.



                                        1

<PAGE>



BUSINESS STRATEGY

The recent acquisitions and developments are the first steps in transforming the
Company.  Its future  business  strategy is to expand its reserve  base and cash
flow by  utilizing  its  existing  asset base in the Rocky  Mountain  Region and
cultivating the recent  acquisitions,  strategic  alliances and opportunities in
the Gulf Coast Region of Alabama, Southern Louisiana and Texas. The Company will
attempt to execute this strategy through:

o   Raising  significant  capital to take advantage of leading edge technologies
    such as horizontal drilling and 3-D seismic exploration projects;
o   Positioning  itself with strategic  sources of capital and partners that can
    react  to  opportunities  in the oil  and gas  business  when  they  present
    themselves;
o   Developing  alliances  with major oil and gas finders that have been trained
    by major oil companies;
o   Participating  in  exploration  projects that have  opportunities  involving
    relatively  small  amounts  of  capital  that  could  potentially   generate
    significant  rates of return.  These projects include areas with large field
    potentials  in Alabama,  Southern  Louisiana,  Texas and the Gulf of Mexico.
    Generally,  the  exploration  projects  will target  fields  with  potential
    reserves of 10 million barrels of oil or 100 Bcf of gas;
o   Implementing  the  Company's  investment  strategy  to  carefully  consider,
    analyze, and exploit the potential value of the Company's existing assets to
    increase the rate of return to its shareholders;
o   Reinvesting  operating cash flows into development drilling and recompletion
    activities;  o Continuing the expansion of the Company's  operations outside
    the D-J Basin; o Continuing the implementation of asset  rationalization and
    operating  efficiencies  designed to improve operating margins and lower per
    unit operating cost;
o   Acquiring  properties  that build upon and  enhance the  Company's  existing
    asset base;
o   Developing a long term track record regarding stock price  performance and a
    reasonable rate of return to shareholders.

The Company recognizes that the ability to implement its business  strategies is
largely  dependent on the ability to raise  additional debt or equity capital to
fund future acquisition,  exploration,  drilling and development activities. The
Company's Capital resources are discussed more thoroughly in Part II, Item 6, in
Management's Discussion and Analysis.

OPERATIONS

As of December  31,  1996,  the Company had varying  ownership  interests in 189
gross  productive  wells (174 net) located in five states.  The Company operates
179 of the 189 wells,  the other  wells are  operated by  independent  operators
under contracts that are standard in the industry.

 The following table presents information on the Company's major operating areas
as of December 31, 1996:
                                                 Net Proved Reserves
      STATE             REGION                     Bbls          Mcf
    CO, WY, NE          DJ Basin                 996,000      3,950,000
    Utah                Greater Cisco
                         and Four Corners        143,000        750,000
    Wyoming             Big Horn Basin            35,000           -
    CO & AR             Various                    1,000        133,000
                                               ------------   -----------
         Total                                 1,175,000      4,833,000
                                                 =========      =========

It is a primary  objective  of the  Company to  operate  most of the oil and gas
properties  located  in the Rocky  Mountain  Region in which it has an  economic
interest.  The  Company  believes,  with the  responsibility  and  authority  as
operator, it is in a better position to control costs, safety, and timeliness of
work as well as other critical factors affecting the economics of a well.

At the present  time,  oil and natural gas  prospects  pursued in the Gulf Coast
region will be pursued by the Company as a non-operator.


                                        2

<PAGE>



COMPETITION

The oil and gas  industry  is highly  competitive  in all  phases.  The  Company
encounters  strong  competition from other  independent oil and gas companies in
acquiring  economically  desirable prospects as well as in marketing  production
therefrom and obtaining external  financing.  Many of the Company's  competitors
may have financial resources,  personnel resources, and facilities substantially
greater than those of the Company.

Because there has been a decrease in exploration  for and development of oil and
gas properties in the United States,  there is increased  competition  for lower
risk  development  opportunities  and for  available  sources of  financing.  In
addition,  the marketing and sale of natural gas and processed gas are extremely
competitive.  Accordingly,  the  competitive  environment  in which the  Company
operates is unsettled.

MARKETS

Overview - The three principal  products  currently produced and marketed by the
Company  are crude oil,  natural gas and  natural  gas  liquids  ("NGL's").  The
Company does not currently use  commodity  futures  contracts and price swaps in
the sales or marketing of its natural gas and crude oil.

Crude Oil - Oil produced from the Company's properties is generally  transported
by truck to unaffiliated  third-party  purchasers at the prevailing  field price
("the posted price").  Currently,  the three primary purchasers of the Company's
crude oil are Total Petroleum, Inc., Texaco Trading and Transportation, Inc. and
Scurlock-Permian Corporation.  Together these three purchasers buy more than 80%
of the Company's annual crude oil production.  The contracts are  month-to-month
and subject to change. The market for the Company's crude oil is competitive and
therefore  the  Company  does not  believe  that the loss of one of its  primary
purchasers  would  have a  material  adverse  effect on the  Company's  business
because  other  arrangements  could be made to market  the  Company's  crude oil
products.  The  Company  does not  anticipate  problems  in  selling  future oil
production  since  purchases  are made based on current  market  conditions  and
pricing.  Oil prices are subject to volatility due to several factors beyond the
Company's 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 - The Company  sells its natural  gas  production  in two  principal
ways:  a.) at the  wellhead  to  various  pipeline  purchasers  or  natural  gas
marketing  companies;  and b.) at the tailgate of its Gas Plant to either Public
Service Company of Colorado  ("PSCo") or  Hewlett-Packard  Company  ("HP").  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 the Company receives a net price at the wellhead.

The  residue  gas sold at the  tailgate  of the  Company's  Gas Plant to PSCo is
subject  to a  month-to-month  contract  and the Gas sold to HP is  subject to a
17-year  contract.  The gas to both  parties  is priced on an MMBtu  basis at an
index spot price.  As a note, the current sales of processed  natural gas by the
Company to PSCo is not  directly  related to the  Company's  former  natural gas
marketing and trading  contract  which expired July 1, 1996.  See  "Management's
Discussion and Analysis--Total Revenue."

See Management's  Discussion and Analysis--Gas Plant Processing Revenues,  for a
discussion of the possibility that the Company might consider  shutting down its
Gas Plant.

Natural Gas Liquids - The Company  produces  two natural gas liquid  products at
its Gas Plant,  butane-gasoline mix and propane. The butane gasoline mix is sold
to an unaffiliated party at prevailing market prices on a month-to-month  basis.
The propane is sold under a  month-to-month  arrangement  with one or more local
propane wholesalers for resale to the local propane market. The Company does not
believe that the loss of the current  purchasers of these  products would have a
material  adverse effect on the Company's  business  because it believes  other,
similar arrangements could be made to market the Company's natural gas liquids.





                                        3

<PAGE>



REGULATIONS

General - All aspects of the oil and gas industry are  extensively  regulated by
federal,  state,  and local  governments  in all areas in which the  Company has
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  the
Company's operations may be subject.

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

Federal  Regulation of Sales and  Transportation  of Natural Gas - Historically,
the  transportation  and sale of natural gas in  interstate  commerce  have been
regulated 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, the Company's gas sales are no longer regulated.

The transportation and resale in interstate commerce of natural gas produced and
sold by the Company  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.  In Colorado such regulation is by the Colorado
Public  Utility  Commission.  Although  federal  and  state  regulation  of  the
transportation  and resale of natural gas produced by the Company currently does
not have any material direct impact on the Company,  such regulation does have a
material  impact on the market for the Company's  natural gas production and the
price the Company  receives for its natural gas  production.  Adverse changes in
the regulation  affecting the Company's gas markets could have a material impact
on the Company.

Commencing  in the  mid-1980's  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.

On April 8, 1992, the FERC issued Order No. 636 requiring material restructuring
of  the  sales  and  transportation  service  provided  by  interstate  pipeline
companies.  The primary element of Order No. 636 was the mandatory unbundling of
interstate gas  transportation  services and storage  separately  from their gas
sales.  The  unbundled  transportation  and storage  was  required to be offered
without  favoring  gas bought from the  pipeline.  Order No. 636 did not require
pipelines  to stop buying and  reselling  gas;  to the  contrary,  it  contained
specific  provisions to allow  pipelines to continue  unbundled sales of natural
gas.  However,  after  Order No. 636 there was little  reason for a pipeline  to
continue selling natural gas and most pipelines moved all or almost all of their
gas purchases and sales to affiliated marketing companies.

Order No. 636 does not regulate  gas  producers  such as the  Company.  However,
Order No. 636 does  appear to have  achieved  FERC's  stated  goal of  fostering
increased  competition within all phases of the natural gas industry.  Generally
speaking,  this increased  competition has driven the price down for natural gas
produced by the Company and other  producers in the DJ Basin. It is unclear what
further  impact  the  increased  competition  will have on the  Company as a gas
producer  and  seller  in the  future.  Increased  flexibility  and  competition
provides greater assurance of access to markets, but has consequently reduced or
restrained prices.

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 sold by the Company.


                                        4

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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.  The Company is not able to predict what will be enacted and thus what
effect, if any, such proposals would ultimately have on the Company.

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 the  Company  operates  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.  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 the Company's properties.

During the 1993  session of the  Colorado  legislature,  a coalition  of surface
owner  organizations  attempted  to  persuade  the  legislators  to enact a bill
requiring  the  payment of damages to surface  owners.  Such  legislation  could
increase the cost of the Company's  operations and erode the traditional  rights
of the oil and gas industry in Colorado to make reasonable use of the surface to
conduct drilling and development activities.  Although the bill was withdrawn by
the surface owners after it was significantly  amended,  and no such legislation
has been presented since 1993 (to the Company's knowledge), surface owner groups
have indicated  they may seek a statewide  constitutional  ballot  initiative to
mandate  compensation to surface owners and will attempt to increase  regulation
of the oil and gas industry at the local  government  level.  The involvement of
such local  governments  could not prohibit  the conduct of drilling  activities
within their boundaries which were the subject of permits issued by the Colorado
Oil and Gas Conservation  Commission ("COGCC") but that they could regulate such
activities under their land use authority.  Accordingly,  under these decisions,
local  municipalities  and  counties  may take the  position  that they have the
authority to impose restrictions or conditions on the conduct of such operations
which could materially  increase the cost of such operations or even render them
entirely uneconomic.  In 1993 and 1991 the Cities of Thornton,  Broomfield,  and
Greeley, the Town of Frederick and Boulder County, enacted such ordinances.  The
Company does not have any properties within these boundaries. The Company is not
able to predict which  jurisdictions may adopt such regulations,  what form they
will take or the ultimate effects of such enactments on its operations. However,
in general these  ordinances  are 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,  the ordinances  have the potential to delay and increase the cost,
or even in some  cases  to  prohibit  entirely,  the  conduct  of the  Company's
drilling activities.

In  response  to the  concerns of surface  owner  groups,  the COGCC has adopted
regulations for the D-J Basin governing notices to and consultation with surface
owners  prior  to  the  conduct  of  drilling   operations,   imposing  specific
reclamation  requirements  on operators upon the  conclusion of operations,  and
containing  bonding  provisions to enforce these new requirements.  The COGCC in
1994 modified its rules to require the mandatory  installation of surface casing
to depths below known fresh water aquifers in the D-J Basin and is continuing to
consider  additional  measures  for  protection  of  surface  owners,   enhanced
financial  assurance  requirements,  and  modifications  to its rules concerning
safety and plugging and abandonment.  The rules adopted or modified by the COGCC
to date have not had a material  impact on the Company but it is not possible to
predict  what  additional  changes  will  be made or  what  their  financial  or
operational impact will be on the Company.

Under  the  sponsorship  of  the  Colorado   Department  of  Natural  Resources,
legislation  was  approved in the 1994 session of the  Colorado  legislature  to
enhance  the  authority  of the  COGCC  to  regulate  oil  and  gas  operations.
Representatives  of the oil and gas  industry  were  involved in the drafting of
this legislation, along with representatives of the agricultural industry, local
governments and environmental  groups, and are working closely with the COGCC on
the  consideration  and drafting of new rules to address the concerns  that have
been raised  about the effects of oil and gas  operations.  Although the Company
believes  that it  generally  conducts  its  operation  in  accordance  with the
procedures contemplated in the pending regulatory initiatives, management is not
able to  predict  the  final  form of the  initiatives  or their  impact  on the
Company.


                                        5

<PAGE>



Recently, Wyoming increased its bonding and financial requirements for operators
acquiring existing properties. These new requirements are not expected to have a
significant impact on the Company or its operations.

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. In connection with its  acquisitions,  the Company attempts to
perform environmental assessments.  However,  environmental assessments have not
been performed on all of the Company's  properties.  To date,  expenditures  for
environmental  control  facilities and for remediation have not been significant
in relation to the Company's  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 the
Company. 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 the operating  costs of the
Company, as well as the oil and gas industry in general.

New initiatives regulating the disposal of oil and gas waste are also pending in
certain states,  including states in which the Company conducts operations,  and
these various initiatives could have a similar impact on the Company.  The COGCC
has enacted  rules  regarding  the  regulation  of disposal of oil field  waste,
including  waste  currently  exempt  from  federal  regulation.  These rules may
require the termination of production from some of the Company's  marginal wells
for which the cost of compliance would exceed the value of remaining production.
In addition,  as indicated  above,  the COGCC has enacted  regulations  imposing
specific  reclamation  requirements  on  operators  upon the  conclusion  of the
operations,  and is currently chairing a group including  representatives of the
oil  and  gas  industry,   environmental  groups,   surface  owners,  and  local
governments to consider adopting statewide reclamation  requirements.  The COGCC
is also in the process of preparing new rules  governing  production  pits which
are intended to require  closure of unlined pits and certain steel,  fiberglass,
cement and other  vessels in  designated  sensitive  areas (which will  probably
include  most of the areas in Colorado  that the Company  operates)  or adequate
proof that such pits or vessels are not  leaking.  As  currently  drafted,  such
rules would permit  operators to comply over a period of at least two years. The
COGCC proposals will be subject to review and comment of water quality  agencies
and other  interested  parties and thus may change from the  approach  described
above.  Management  believes that  compliance  with current  applicable laws and
regulations  or with  proposals  in their  present  form could  possibly  have a
material adverse impact on the Company,  but management is unable to predict the
final form of the pending regulations or their potential impact on the Company.

Wyoming has recently  established  more stringent  environmental  regulations to
ensure  compliance  with  federal  regulations.  These new  regulations  are not
expected to have a significant impact on the Company or its operations.

The Company believes that its 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 the  Company's  method  of
operations  than other similar  companies in the industry.  Although the Company
does not believe its 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 the capital expenditures,  earnings and competitive position
of the Company, the extent of which the Company now is unable to assess.

OPERATIONAL HAZARDS AND INSURANCE

The  Company's  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.


                                        6

<PAGE>



The Company  maintains  insurance of various types to cover its operations.  The
Company's  insurance  does not cover every  potential risk  associated  with the
drilling  and  production  of  oil  and  gas.  In  particular,  coverage  is not
obtainable  for certain  types of  environmental  hazards.  The  occurrence of a
significant  adverse  event,  the  risks  of  which  are not  fully  covered  by
insurance,  could  have a material  adverse  effect on the  Company's  financial
condition and results of  operations.  Moreover,  no assurance can be given that
the Company will be able to maintain  adequate  insurance in the future at rates
it considers reasonable.

ADMINISTRATION

Office Facilities - The Company currently rents  approximately 4,000 square feet
in an office facility in Grand Junction,  Colorado owned by an unrelated  party.
The rental rate is $31,440 per year through June 30, 2000.

Employees - As of February  21,  1997,  the Company had 35 full time  employees,
none of whom is  covered  by a  collective  bargaining  agreement.  The  Company
considers its relations with its employees satisfactory.

ITEM 2 - PROPERTIES

PRINCIPAL OIL AND GAS INTERESTS

Developed Acreage - The Company's  producing  properties as of December 31, 1996
are located in the following areas shown in the table below:

<TABLE>
<CAPTION>
                                         OIL      GAS                     Developed Acreage
                                        Gross    Net(2)   Gross   Net(2)    Gross   Net(2)
Fields ..................   State      Wells(1) Wells(1) Wells(1) Wells    Acreage  Acreage
-------------------------   --------   ------   ------   ------   ------   ------   ------
<S>                         <C>            <C>      <C>  <C>      <C>      <C>      <C>
Loveland Field ..........   Colorado       88       87                      5,083    5,047
Lower Horse Draw Field ..   Colorado        2        1                        400      204
North Minto Field .......   Colorado        3        3                        440      432
Pod Field ...............   Colorado        6        6                        600      600
Yenter Field ............   Colorado        6        6                      1,655    1,655
Johnson's Corner ........   Colorado        5        4                      1,122    1,122
West Peetz Field ........   Colorado        5        4                        785      785
Cisco Dome ..............   Utah            1        1       38       31    8,877    8,267
Cowboy ..................   Utah            4        4                      1,200    1,199
Enos Creek ..............   Wyoming         2        1                        280      215
Other Fields ............   CO/NB/UT       25       23        4        3    6,443    4,543
                                       ------   ------   ------   ------   ------   ------

    Totals ................               147      140       42       34   26,885   24,069
                                       ======   ======   ======   ======   ======   ======
</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 the  Company's  fractional
             working  interests  multiplied  by the number of wells or number of
             acres.

The majority of the Company's  producing oil and gas  properties  are located on
leases held by the Company for as long as production is maintained.

Undeveloped  Acreage - The Company's  gross and net working  interests in leased
undeveloped  acreage in the Rocky Mountain Region as of December 31, 1996 is 406
and 366 acres,  respectively.  All these  properties are located in Colorado and
will expire at various times in 1997 unless  production has been  obtained.  The
Company's

                                        7

<PAGE>



gross and net working  interests in leased and developed acreage in Louisiana as
of December 31, 1996 is 1600 and 100 acres  respectively.  This  consists of one
property and will expire in 1998 unless production has been obtained.

GULF COAST PROSPECTS

Overview - In 1997 and 1998, the Company will be directing a significant portion
of its  resources to the Gulf Coast  region,  which is currently one of the most
actively  explored  areas in the  United  States.  The  Company's  strategy  for
entering  the Gulf Coast area is to team up with the best oil and gas finders in
any specific  area.  The Company is focusing in South  Louisiana,  shallow Texas
State  waters and  specific  areas where the Company  believes it has  strategic
advantage  including Alabama and certain Texas areas., The parameters in general
are that the target reserves are 100 BCFG and/or 10 million bbls. oil. With this
strategy in mind,  the Company is typically  drilling to deeper  horizons  which
significant reserves have been found at shallower depths.

Currently,  three  prospects  are in the process of drilling or are  expected to
commence drilling in the first quarter of 1997. These include East Bayou Sorrel,
South Lake Arthur and Brazos Block 480. A brief  description of these  prospects
follows.

East Bayou Sorrel and Bayou Sorrel Area: This exploration prospect was generated
by Sandefer Oil and Gas. The initial exploratory  location was selected with the
use of  reprocessed  2D seismic data.  The well,  Schwing #1, was drilled in the
East Bayou Sorrel field,  Iberville  Parish,  LA, to a total depth of 13,200 ft.
Upon test it flowed at a sustained  rate of 1,026  barrels of oil and 980 Mcf of
gas per day with a flowing  tubing  pressure of 6,670 psi on an 8/64" choke.  In
February 1997,  the well was producing at or near the maximum  allowable rate of
1,400 barrels of oil per day on a restricted choke.

In January 1997, the Company  purchased a 7.8125% after prospect  payout working
interest  in the area of mutual  interest  (AMI) which  includes  the East Bayou
Sorrel Prospect. The Company acquired an additional 10% working interest in this
prospect in February 1997. The operator has identified seven productive zones in
the  Schwing  #1  well  of  which  only  one was  tested  and is on  production.
Additional pay sands may be discovered in the second well,  which is expected to
commence drilling operations in March 1997.

National Energy has planned a 33-square mile 3D seismic exploration program over
the Bayou Sorrel AMI area.  The seismic  program will  commence in 1997.  The 3D
data will  compliment an already  extensive  database of  reprocessed 2D seismic
data and a number of existing  well logs.  The  Company's  participation  in the
Bayou Sorrel drilling and 3D seismic exploration program are expected to provide
significant  exposure to potential  productive  drilling  opportunities.  The 3D
interpretation  should help define the  potential of the upper Marg vag pay zone
sandstone.  It is  believed  that a  productive  section  of a proven  producing
formation  will be found in Bayou  Sorrel  based on the existing 2D and well log
data. Because the formation is a profile producer in the region, Bayou Sorrel is
a potential  large  reserve  prospect.  Sandefer  Oil and Gas and NEGX have also
identified  two other fault blocks  suitable for drilling from existing data and
will focus on this area with the 3D seismic  exploration program which will give
the Company  additional  opportunities to participate in high potential  reserve
projects.

South Lake  Arthur - South Lake  Arthur is located in  Jefferson  Davis  Parish,
Louisiana.  It is a four-way  dip closure.  Sandefer Oil and Gas has  previously
drilled this prospect to 17,375 feet but the well was subsequently abandoned. In
reviewing the well data of this and other nearby wells,  it was determined  that
the well was most likely not tested  sufficiently  and  inadequately  completed.
Sandefer  geologists believe this well would have been found to be a producer if
it had been properly tested.  NEGX acquired this lease from Sandefer and planned
a well near the original Sandefer well. The well is currently being drilled. The
Company is  participating  at 1/16 of the working  interest  under its agreement
with NEGX. A very large gas field is in close proximity.  A productive sandstone
formation  underlies  the prospect at a depth of between  18,000 feet and 20,000
feet. A large multi-national natural resources firm has announced plans to drill
to the same  formation in the area,  which may reveal the potential of this deep
play and influence future participation in this prospect.

Brazos Block 480 Prospect - Brazos  Block 480 is the only  offshore  prospect in
which the Company is presently  participating.  This prospect,  located within a
prolific  gas  producing  geologic  trend of offshore  Texas,  is believed to be
analogous to Amoco's Matagorda Block 519 Field which produced over 120 BCFG from
November 1985 through

                                        8

<PAGE>



September  1995. A well is scheduled to commence  drilling  operations  in April
1997,  at a site  located  adjacent to Cove Field about eight miles  offshore in
approximately 60 feet of water.  The prospect is tightly  controlled by numerous
2D seismic  lines.  A nine-square  mile 3D seismic survey has also been shot and
interpreted.

COLORADO PROPERTIES

Overview - The  Denver-Julesburg  ("DJ")  Basin  encompasses  most of  northeast
Colorado and parts of southeast Wyoming,  southwest Nebraska and western Kansas.
Oil and gas are produced mainly from Cretaceous sandstones and limestones,  with
the "D" and the "J" sandstones being the most prolific producers in the Basin at
depths ranging in general from approximately  5,000 feet to approximately  7,500
feet. The Company's activities have focused on the historically better producing
zones,  the "D" and the "J" sandstones and the Niobrara  formation.  At December
31, 1996,  84% of the Company's  reserves were in the DJ Basin. A summary of the
notable fields in the DJ Basin are as follows:

Loveland  Field,  Larimer and Weld Counties - Loveland Field is located near the
City of Loveland, Colorado, 40 miles north of Denver. The area is producing both
oil and gas at an  average  rate in 1996 of  approximately  248  barrels  of oil
equivalent ("BOE") per day (205 BOE net to the Company).  Loveland Gas Plant and
associated Pease facilities are located near the center of the field.  Johnson's
Corner  Field is located  just 4 miles east of  Loveland  Field.  Together,  the
Loveland Field,  Johnson's  Corner Field and Loveland Gas Plant  constitute more
than half of Pease's total Rocky Mountain assets.

All of the  Company's  gas  production  from the Loveland and  Johnson's  Corner
fields is  processed  in the  Company's  Loveland  Gas Plant,  which has a rated
capacity of  approximately  6,000 Mcf per day.  Pipeline systems are in place to
gather gas from the  Loveland  and  Johnson's  Corner  fields.  There is also an
interconnect into the Wattenberg pipeline system of K N Energy,  which gives the
gas plant access to third-party gas from the extensive Wattenberg field complex.
Approximately  1,000 Mcf of gas per day from the Loveland and  Johnson's  Corner
fields is currently  processed  through the Loveland gas plant.  The natural gas
produced from the Loveland area is extremely rich in liquid  composition with an
average heat  content of 1,430 BTU per cubic foot.  The ability of the gas plant
to recover natural gas liquids, such as propane and natural gasolines (B-G Mix),
from the gas enhances the value of gas  production and  significantly  increases
the economic  viability of additional  development in the Loveland and Johnson's
Corner fields.

Among the existing wells, numerous  opportunities exist to recomplete in certain
behind-pipe zones using newer stimulation  technologies.  In many wells,  Codell
sandstone and Timpas limestone  reserves remain  behind-pipe  which is available
for production upon  recompletion  of existing well bores.  Among the wells that
have  been  completed  in  these  zones,  the  Company  believes  that  original
completions were often inadequate because of limited  stimulation.  Of the three
benches (separate sedimentary levels) of the Niobrara Formation, the upper bench
has been  completed  in most wells  whereas  the middle  and lower  benches  are
available for production upon recompletion in many wells.  Currently,  a program
is being implemented to recomplete several selected wells.

Johnson's Corner Field, Larimer County,  Colorado - Johnson's Corner Field is an
extension of the Wattenberg  Field with Muddy "J" Sandstone gas production.  The
wells produce  approximately 40 BOE per day from the "J" sand. One well has also
been completed in the Codell and Niobrara formations and oil production from all
three  zones is  commingled.  Recently  two  wells  were  recompleted  in Codell
sandstone  and the  initial  results are  promising.  In  addition,  the Company
believes there are several additional in-fill development locations.

West Peetz Field,  Logan County,  Colorado - The Company operates 5 wells in two
leases in the West Peetz field.  The wells currently  produce about 20 BOPD from
the J sand. A detailed  geological  and  engineering  evaluation of the field in
early 1995 suggested  that West Peetz field can be produced  profitably for many
years to come and the field has an excellent potential for secondary recovery. A
low-cost simple water injection plan has been recommended and is currently under
consideration.

Pod Field,  Washington  County,  Colorado - In Pod Field, the Company has a 100%
working  interest  and  operates  five wells which  produce from the "J" sand. A
geological and engineering evaluation of the field conducted in 1995

                                        9

<PAGE>



indicates the  potential  presence of  undeveloped  gas reserves in the Niobrara
Formation.  However,  further study will be necessary  before any action will be
taken.

Yenter Field,  Logan County,  Colorado - Yenter Field is a structural trap which
has  produced  more than 10 MMBO and 24 BCFG  since the 1950s from the "J" sand.
Approximately  80% of wells in the field have been  plugged and  abandoned.  The
Company owns and operates five wells with  production of about 35 barrels of oil
per day ("BOPD"). Water produced with oil from these five wells is injected back
into  the  reservoir  to  help  maintain   reservoir   pressures  for  continued
production.  The Company has  conducted a complete  geological  and  engineering
study of Yenter Field, which has identified  undeveloped potential in additional
sandstone  reservoirs and  recommended  reworking "J" sandstone wells which have
been  shut in since  the mid  1970s,  and  upgrading  the  pressure  maintenance
program.  The  Company  desires  to acquire  additional  acreage in the field to
implement a secondary recovery program possibly with horizontal wells.

North Minto Field, Logan County, Colorado - North Minto is a "J" Sandstone field
and was  unitized  for  secondary  recovery  in 1989.  One  well  was  producing
approximately  8 BOPD during 1993.  The injection  well had been shut-in  during
October 1992.  The Company  completed  geologic and  engineering  reviews of the
field  after the  acquisition  and  consequently  re-established  the  injection
program which increased production to 32 BOPD. In 1996, the Company restored one
well back into production to benefit from the waterflood. Additional leases have
been  acquired  as a result of this study and two  additional  drill  sites have
reserve potential in the North Minto Unit.

Lower Horse Draw Field, Rio Blanco County,  Colorado - The Company has interests
in two wells that  produce  gas from the Mancos B  fractured  silty shale in the
Lower Horse Draw Field. Proved developed reserves include 162,000 Mcf of gas net
to the Company.

UTAH PROPERTIES

Cisco Dome Area,  Grand County,  Utah - In April 1995, the Company  purchased an
80% working interest in  approximately  8,877 acres in the Cisco Dome Field. The
Cisco Dome Field is located  adjacent to the Calf Canyon Field.  The property in
the Cisco Dome Field  contains 39 wells of which 21 are currently  producing gas
from  intervals  ranging  from  2,000  to  3,200  feet.  The  average  aggregate
production from these properties is approximately  400 Mcf and 7 bbls of oil per
day. The Company is presently working to recomplete several wells in behind-pipe
zones  to take  advantage  of  current  gas  prices  in the  market.  Among  the
recompleted  wells,  one is producing 250 Mcf per day. The company  expects that
after  finishing  the  recompletion   program,   daily  gas  production  can  be
significantly  increased.  Management of the Company has extensive knowledge and
experience with operations in and near this field. Cisco Dome field is large and
geologically  complex.  There are numerous  locations on the  Company's  acreage
available  for  additional  drilling.  A  geological  and  engineering  study is
currently  being  conducted to seek  further  development  opportunities  in the
existing wells as well as to delineate optimal drilling locations.

Cowboy  Field,  San Juan County,  Utah - The Company has a 100% interest in four
oil wells in Cowboy  Field in  southeast  Utah.  The field is within the Paradox
Basin and production is from the Pennsylvanian Ismay Formation.  The Company has
behind pipe potential and at least one development drillsite.

WYOMING PROPERTIES

Enos Creek Field,  Hot Springs County,  Wyoming - Enos Creek Field is located in
the southwestern  Big Horn Basin of central Wyoming.  In early 1992, the Company
entered into a farmout  agreement  with an industry  partner to co-develop  Enos
Creek Prospect.  During the summer of 1992, the Company and its partners drilled
a side track well from an existing  wellbore  targeted at a separate fault block
in the geologic  structure.  The well penetrated three oil zones while drilling,
one in the Curtis Formation and two in the Phosphoria Formation.

The well is  currently  producing  from the  Phosphoria  Formation.  The Company
intends to recomplete a well adjacent to existing well in the Tensleep Formation
sometime in the future.



                                       10

<PAGE>



TITLE TO PROPERTIES

As is  customary  in  the  oil  and  gas  industry,  only  a  perfunctory  title
examination  is  conducted  at the time oil and gas leases are  acquired  by the
Company.  Prior to the  commencement  of drilling  operations,  a thorough title
examination is conducted.  The Company  believes that title to its properties is
good and defensible in accordance with standards  generally  accepted in the oil
and gas industry,  subject to such exceptions,  which in the opinion of counsel,
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.  The Company does
not believe that any of these burdens will materially  interfere with the use of
the property.

ESTIMATED PROVED RESERVES

The oil and gas reserve and reserve  value  information  is included in Part II,
Item  7  at  footnote  12  of  the  consolidated  financial  statements,  titled
Supplemental Oil and Gas Disclosures.  This information is prepared  pursuant to
Statement of Financial Accounting Standards No. 69, which includes the estimated
net  quantities  of  the  Company's  "proved"  oil  and  gas  reserves  and  the
standardized   measure  of  discounted   future  net  cash  flows.  The  reserve
information  is based upon an engineering  evaluation by McCartney  Engineering,
Inc. The estimated  proved  reserves  represent  forward-looking  statements and
should be read in connection with the disclosure on  forward-looking  statements
included herein under Item 6 in Managements' Discussion and Analysis.

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

All of the Company's oil and gas reserves are located in the Continental  United
States. The Table below sets forth the Company's estimated  quantities of proved
reserves,  and the present value of estimated future net revenues  discounted by
10 percent  per year using  prices  being  received by the Company at the end of
each of the last three fiscal years on a non-escalated basis. The prices used at
December  31,  1996 were  $24.43  per barrel of oil and $3.73 per MCF of natural
gas:
                                                        December 31,
                                               1996       1995          1994
                                            ----------  ----------  -----------
Estimated Proved Oil Reserves (Bbls)        1,175,000    1,294,000    1,352,000
Estimated Proved Gas Reserves (Mcf)         4,833,000    5,851,000    5,724,000

Estimated Future Net Revenues (before the
     estimated future income taxes)      $ 26,506,000  $15,480,000  $14,016,000
Present Value of Estimated Future
    Net Revenues (before the estimated
    future income tax expenses)          $ 15,641,000  $ 9,616,000  $ 8,519,000

The table  above does not include the  reserve  values  associated  with the Gas
Plant.  The Gas Plant  reserves are disclosed in Part II, Item 7 of footnote 12.
No reserves have been  estimated  for the  Company's  interest in the East Bayou
Sorrel Prospect which was acquired  subsequent to the Company's last fiscal year
end and will not be estimated until at least a developmental  well is drilled on
the  property in 1997.  Other than that,  there has been no major  discovery  or
other  favorable or adverse  event that is believed to have caused a significant
change in the estimated quantities of proved reserves subsequent to December 31,
1996. However,  the prices for oil and gas have decreased as of the date of this
report below those used for the reserve  estimates.  The Company's  reserves for
its oil and gas  properties at December 31, 1996,  discounted at 10%,  using the
average  sales  prices in 1996 ($20.35 per bbl. of oil and $1.26 per Mcf of gas)
are approximately 47% lower, or $7.3 million dollars.





                                       11

<PAGE>



NET QUANTITIES OF OIL AND GAS PRODUCED

The Company's net oil and gas  production  for each of the last three years (all
of which was from properties located in the United States) was as follows:

                                Year Ended December 31,
                       1996              1995               1994
                    ---------         ---------         -------
     Oil (Bbls)      100,000           121,000           155,000
     Gas (Mcf)       412,000           497,000           543,000

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:

                          Average Sales Prices                     Average
     Year Ended                                                  Production
     December 31    Oil (Bbls)     Gas (Mcf)     Per BOE        Cost Per BOE
    -----------    -----------    -----------    --------       ------------
        1996         $20.35         $1.26         $15.10           $8.46
        1995         $16.77         $1.18          12.85           $7.92
        1994         $15.94         $1.36          13.09           $8.90

The above table represents activities related only to oil and gas production. It
does not include any value from the  natural  gas liquids  extracted  by the Gas
Plant.

DRILLING ACTIVITY

The following  table  summarizes the Company's oil and gas drilling  activities,
all of which were  located in the  continental  United  States,  during the last
three fiscal years:

                                   Year Ended December 31,
                          1996            1995                  1994
                          ----            -----                -------
Wells Drilled .....   Gross   Net       Gross   Net         Gross   Net

Exploratory
     Oil ..........     -      -          -      -            -      -
     Gas ..........     -      -          -      -            -      -
     Non-productive     1     .19                             1     .25
                       ---   -----       ----   -----        ---    ----
         Total ....     1     .19         -      -            1     .25
                       ===   =====       ====   =====        ===    ====

Development
     Oil ..........     1      1          -      -            4     3.92
     Gas ..........     -      -          -      -            -       -
     Non-productive     -      -          -      -            -       -
                       ---    ---        ----   ----        -----   -----
         Total ....     1      1                              4     3.92
                       ===    ===        =====  ====        =====   =====

The Company was not participating in any drilling activity at December 31, 1996.
However,  the Company is participating to the extent of a 6.25% working interest
in the E. Winn #1 well, a 17,375 foot Miogyp Sand test, in the South Lake Arthur
Prospect,  located in Jefferson Davis Parish, Louisiana, that commenced drilling
operations on January 9, 1997. Total depth is expected to be reached sometime in
April 1997. This prospect consists of approximately 1,600 gross acres.

ITEM 3 - LEGAL PROCEEDINGS

The  Company  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,
1996 and as of the date of this  report,  the  Company  was not  involved in any
litigation  which it  believes  could have a  materially  adverse  effect on its
financial condition or results of operations.

                                       12

<PAGE>



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

No matter was submitted to a vote of the Company's  Security  holders during the
fourth quarter ending December 31, 1996.

                                     Part II

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

(a) Market  Information  - The  Company's  Common  Stock has been  quoted on the
NASDAQ Small-cap  Market,  under the symbol WPOG, since July 1980. The Company's
Preferred  Stock,  has traded on the NASDAQ  Small-cap  Market  under the symbol
WPOGP since August 1993.

Bid  Quotations  - The  following  table  shows  the  range  of high and low bid
quotations for each  quarterly  period since January 1, 1995, as reported by the
National  Association of Securities  Dealers,  Inc. (such  quotations  represent
prices  between  dealers  and do  not  include  retail  markups,  markdowns,  or
commissions and do not necessarily represent actual transactions.):
                                               Bid Prices
                                  Common Stock          Preferred Stock

       Quarter Ended             High      Low           High      Low
       ------------------      -------  --------        --------  -----
       December 31, 1996       3 5/16    2 1/16         10 3/4     6
       September 30, 1996      2 1/8    1 7/32           6 3/4     5 1/4
       June 30, 1996           1 11/16  1 5/64           7         4 1/4
       March 31, 1996          1 3/8      19/32          5         3-1/2

       December 31, 1995         9/16     13/32          4 5/8     3 7/8
       September 30, 1995        7/8      1/2            4 5/8     4 5/8
       June 30, 1995             31/32    5/8            5 7/8     4 3/4
       March 31, 1995          2 3/32   1 3/4            5 7/8     3 5/8

(b) Stockholders - As of February 21, 1997 the Company had 978 holders of record
of the  Company's  Common  Stock  and 17  holders  of  record  of the  Company's
Preferred  Stock.  This does not include the holders  whose shares are held in a
depository  trust in "street"  name. As of February 21, 1997 at least  5,306,000
shares (or 62%) of the issued and outstanding  common stock and at least 134,000
shares  (or 95%) of the  issued and  outstanding  preferred  stock was held in a
depository trust in "street" name.

(c)  Dividends - The Company has not paid cash  dividends on its Common Stock in
the past and does not anticipate doing so in the foreseeable future. The Company
is precluded from paying  dividends on its Common Stock so long as any dividends
on the Preferred Stock are in arrears.

Holders of shares of Preferred  Stock are entitled to receive,  when,  as and if
declared by the Board of Directors  out of funds at the time  legally  available
therefor,  cash  dividends  at an annual  rate of 10%  (equal to $1.00 per share
annually),  payable  quarterly in arrears.  Cumulative  dividends accrue and are
payable to holders of record as they appear on the stock books of the Company on
such record dates as are fixed by the Board of Directors.

The Preferred Stock was issued in August 1993 and the Company  declared and paid
five  consecutive  dividends for the quarters  ended  September 30, 1993 through
September  30,  1994.  In December  1994,  the Board of  Directors  voted not to
declare the quarterly cash dividend to holders of the Company's  Preferred Stock
for the fourth quarter of 1994.  The decision to not pay the quarterly  dividend
was a result of the Company's  continuing operating losses, the cash and working
capital  position,  and the Company's  belief that its primary  lender would not
approve the payment  thereof.  In March 1995,  the Board of  Directors  voted to
suspend payment on any future Preferred Stock dividends  indefinitely.  However,
pursuant to the terms of the Preferred Stock,  dividends will continue to accrue
on a quarterly  basis.  Dividends  paid in the future,  if any, on the Preferred
Stock will be contingent on many factors

                                       13

<PAGE>



including,  but not  limited  to,  whether  or not a dividend  can be  justified
through the cash flow and earnings generated from future operations.

The Preferred Stock will have priority as to dividends over the Common Stock and
any series or class of the Company's  stock  hereafter  issued,  and no dividend
(other than  dividends  payable  solely in Common  Stock or any other  series or
class of the Company's stock hereafter  issued that ranks junior as to dividends
to the Preferred  Stock) may be declared,  paid or set apart for payment on, and
no purchase,  redemption or other acquisition may be made by the Company of, any
Common  Stock or other  stock  unless all accrued  and unpaid  dividends  on the
Preferred Stock have been paid or declared and set apart for payment.

(d) Recent  Sales of  Unregistered  Securities  - During  the fiscal  year ended
December 31, 1996, the Company issued and sold the following  securities without
registration under the Securities Act of 1933, as amended.

             1. Between June 1996 and  November  15,  1996,  the Company  issued
    $5,000,000 in  collateralized  convertible  10%  debentures  and warrants to
    purchase up to 2,500,000  shares of the Company's  common stock at $1.25 per
    share.  The  securities  were  offered  and sold as  units,  with  each unit
    consisting of $50,000 in debentures and warrants to purchase  25,000 shares.
    The securities were sold by the Company and by 12 broker\dealers  registered
    as such with the Securities  and Exchange  Commission and who are members of
    the National  Association of Securities  Dealers,  Inc. The securities  were
    sold  to 105  private  investors  each of whom  qualified  as an  accredited
    investors as such term is defined in Regulation D adopted by the  Securities
    and Exchange  Commission under the Securities Act. The Company received $5.0
    million  for the  securities  and  paid  total  underwriting  discounts  and
    commissions of $547,000.  The debentures sold by the Company are convertible
    into common  stock of the Company at the  election of the holder at the rate
    of one  share  of  common  stock  for  each  $3.00 in  principal  amount  of
    debenture,  or a total of 1,666,666 shares upon conversion of all debentures
    issued.  The warrants  included in the units are  exercisable at any time by
    the  holder  and may be called for  redemption  by the  Company at $0.10 per
    share upon 45 days notice if the  reported  market price for common stock of
    the  Company  is at least  $3.00 per  share  for a period of 10  consecutive
    trading days or more. The Company relied upon Section 4(2) of the Securities
    Act and Rule 506 of Regulation D in claiming exemption from the registration
    requirements of the Securities Act for the securities issued.

             2. On March 9, 1996, the Company issued 38,050 shares of its common
    stock to 22 persons who were  employees  or directors of the Company in lieu
    of cash  for  services  to the  Company  valued  at  $38,050  for  financial
    reporting purposes.

             3. In March 1996 the Company issued warrants  entitling the holders
    to purchase up to 1,000,000  shares of the  Company's  common stock at $0.75
    per share to 14 persons in connection  with a consulting  agreement  between
    the Company and Beta Capital  Corp.,  with whom the Company has a consulting
    agreement. Issuance of the warrants was required by the consulting agreement
    and the exercise  price of the  warrants  was equal to the  reported  market
    price  for the  Company's  common  stock  at the  time  the  Company  became
    obligated to issue the warrants.  For financial  reporting  purposes,  these
    warrants  were valued at $294,000.  The warrants  are  exercisable  for five
    years from the date of issuance.

             4. On May 13, 1996,  the Company issued 82,353 shares of its common
    stock to three holders who elected to convert $70,000 in principal amount of
    outstanding  convertible debentures originally issued in a private placement
    in 1991.

             5. On August 13,  1996,  the Company  issued  15,000  shares of its
    common stock to a consultant  of the Company in lieu of cash for  consulting
    services to the Company valued at $22,977 for financial reporting purposes.

             6. On December 16, 1996,  the Company  issued  60,000 shares of its
    common stock to Willard H. Pease,  Jr., the  President of the Company,  upon
    conversion of a promissory  note of the Company in the  principal  amount of
    $60,000 issued to Mr. Pease in 1994 in payment of certain obligations.


                                       14

<PAGE>



             7. Between  November  22, 1996 and  December 13, 1996,  the Company
    issued  50,000  shares of its common stock upon  exercise of three  warrants
    held by two  persons.  The  warrants  were  exercised at $0.85 per share for
    total proceeds to the Company of $42,500.  The warrants had been issued in a
    private transaction in 1995 as compensation to a consultant.

             8. On December 16 and 17, 1996, the Company issued 17,500 shares of
    its common  stock upon  exercise of two warrants  held by two  persons.  The
    warrants had been issued in the private placement of securities described in
    subparagraph 1 above. The Company received proceeds of $21,875 upon exercise
    of the warrants.

             9. On December 16, 1996,  13,440 shares of common stock were issued
    to eight  nonemployee-directors  of the Company in lieu of cash for services
    to the  Company  valued at $24,261 by the Company  for  financial  reporting
    purposes.

             10.  Effective  November 15, 1996, the Company  issued  warrants to
    purchase  up to  223,500  shares  of  common  stock at $2.00 per share to 12
    broker\dealers  as  partial  compensation  to such  persons  for sale of the
    securities in the private  offering  described in subparagraph 1 above.  The
    warrants are  exercisable  upon issuance and expire if not  exercised  three
    years after issuance.

             11. On March 9, 1996,  the  Company  issued  warrants  to  purchase
    40,000  shares of common  stock at $0.75 per share to one  person in lieu of
    cash for consulting  services  provided to the Company valued at $22,400 for
    financial  reporting  purposes.  The  warrants  may be exercised at any time
    before March 9, 2001.

    As to each issuance of securities  identified above, the Company relied upon
Section 4(2) of the Securities Act in claiming  exemption from the  registration
requirements  of the Securities Act. All the persons to whom the securities were
issued had full  information  concerning the business and affairs of the Company
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 laws.



                                       15

<PAGE>



ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS

SELECTED FINANCIAL DATA

    Statement of Operations Data:                     Year Ended December 31,
                                                     1996                1995
                                                   ------------      ---------
Oil and gas sales                                  $2,546,676      $ 2,623,782
Natural gas marketing and trading                   2,067,379        3,872,565
Gas plant processing revenue                          818,356        1,135,050
Total revenue                                       6,165,664        9,031,816
Net loss                                           (1,411,582)        (765,436)
Preferred Stock Dividends:
   Declared                                             -                 -
   Converted                                          (22,750)        (117,000)
   In arrears                                        (179,938)        (202,688)
Non-cash inducement                                     -           (1,523,906)
                                                  -------------     -----------
Net loss applicable
   to common stockholders                         $(1,614,270)     $(2,609,030)
                                                   ===========      ===========

Per Share Data:                                      1996               1995
                                                  --------------    -----------
Before non-cash inducement charge                 $     (0.22)     $     (0.18)
Effect of non-cash inducement charge                    -                (0.24)
                                                  --------------    -----------
Net loss per
   common share                                   $     (0.22)     $     (0.42)
                                                  ==============  =============
Cash dividends declared per common share          $     -          $        -
                                                  ==============  =============

Balance Sheet Data:                                  As of December 31,
                                                    1996             1995
                                              ----------------    ---------
Working capital (deficit)                     $  1,907,694      $  (500,180)
Total assets                                  $ 14,888,754      $13,439,726
Long-term liabilities                         $  3,543,863      $ 1,602,811
Stockholder's equity                          $ 10,191,963      $ 9,017,262

Disclosure Regarding Forward-Looking Statements
This  report on Form 10-KSB  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
"Business and Properties" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" regarding the Company's financial position,
reserve  quantities  and  net  present  values,  business  strategy,  plans  and
objectives  of  management  of the  Company  for future  operations  and capital
expenditures, are forward-looking statements and the assumptions upon which such
forward- looking statements are based are believed to be reasonable. The Company
can give no assurance that such  expectations and assumptions will prove to have
been  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 the control of
the Company. Such things 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 Company's  ability to generate
additional  capital,  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,   government
regulation,  environmental  matters,  financial condition of the other companies
participating  in the  exploration,  development  and  production of oil and gas
programs  and other  matters.  All written and oral  forward-looking  statements
attributable  to the Company or persons  acting on its behalf  subsequent to the
date  of  this  report  are  expressly  qualified  in  their  entirety  by  this
disclosure.

                                       16

<PAGE>



Liquidity and Capital Resources
At December 31, 1996, the Company's cash balance was $1,995,860  with a positive
working capital  position of $1,907,694,  compared to a cash balance of $677,275
and a working  capital  deficit of $500,180 at December 31, 1995.  The change in
the Company's cash balance is summarized as follows:

    Cash balance at December 31, 1995                        $     677,275
    Cash used in operating activities                             (143,615)
    Capital expenditures                                        (1,403,413)
    Proceeds from the sale of property
      and equipment                                                163,821
    Redemption of certificate of deposit                            53,500
    Payments on long-term debt                                  (1,795,670)
    Net proceeds from issuance of
      convertible debt                                           4,323,992
    Proceeds from common stock
      subscription receivable and warrant exercises, net           119,970
                                                               ------------
    Cash balance at December 31, 1996                        $   1,995,860
                                                               ============

The  significant  improvement in the Company's cash balance and working  capital
position  is  directly  related to: a) the  proceeds  received  from the private
placement of convertible debentures;  and b) the repayment of the entire balance
of outstanding debt with Colorado  National Bank ("CNB").  In November 1996, the
Company   completed  a  private   placement  of  $5,000,000  of   collateralized
convertible debentures and warrants to purchase up to 2,500,000 shares of stock,
sold in "Units", which generated net cash proceeds of $4,300,000. Each Unit sold
for  $50,000  and  consisted  of  one  $50,000   five-year  10%   collateralized
convertible  debenture  and warrants to purchase  25,000 shares of the Company's
common  stock at $1.25 per share.  The  estimated  fair value of the  detachable
warrants of 41,829,000 has been treated as a discount  which is being  amortized
using the  interest  method.  After  considering  the  discount  and other  debt
issuance costs,  the effective  interest rate is 22% for these  debentures.  The
debentures are  collateralized  by a first priority  interest in certain oil and
gas  properties   owned  and  operated  by  the  Company.   The  debentures  are
convertible,  at the holders option,  into the Company's  common stock for $3.00
per share and may be redeemed by the Company, in whole or in part,  beginning at
a premium of 110% of the original principal amount and are subject to adjustment
beginning on April 25, 1999. Interest on the debentures is payable quarterly and
the entire  principal  balance will be due on April 15,  2001.  The warrants are
currently  exercisable and will expire on July 31, 2001. The Company is entitled
to call the warrants at any time after February 15, 1997 at a price of $0.10 per
warrant.  (As discussed later in this section,  the Company  initiated a call on
these  warrants on February 28,  1997.) In a  registration  statement  effective
February 10, 1997, the Company  registered for resale:  (1) the shares of common
stock into which the debentures  may be converted;  and (2) the shares of common
stock issuable upon exercise of the warrants.

The completion of that private  placement and repayment of the entire balance of
outstanding debt with CNB with a portion of the proceeds thereof,  significantly
improved the Company's working capital position and provided the funds necessary
to pursue  additional  acquisition,  drilling and  development  activities  on a
limited basis.  Recently, the Company has charted a course of action to maintain
its existing  asset base in the Rocky  Mountain  region and expand into the Gulf
Coast  region of  Alabama,  Southern  Louisiana  and  Texas  through a series of
acquisitions  and strategic  alliances which is discussed more thoroughly in the
following  paragraphs.  However,  this new  course of action  will  require  the
Company to seek a  significant  amount of  additional  capital to fully fund and
implement that plan.

On February 4, 1997,  the Company  signed a definitive  agreement  with National
Energy Group, Inc. ("NEGX"),  a publicly held Company,  headquartered in Dallas,
Texas.  The  agreement   provides  the  Company  the  right  and  obligation  to
participate  with NEGX in  various  oil and gas  exploration  projects  over the
course of next two years.  Essentially,  the  agreement  consists  of three main
elements.  First,  the Company has the right and  obligation to participate as a
12.5% working  interest  owner in NEGX's  outlined  program which consists of 10
identified projects in Alabama,  Southern Louisiana,  and Texas. Second, subject
to certain  conditions  defined in the agreement,  the Company has the right and
obligation  to  participate  in  any  future  projects  generated  under  NEGX's
exclusive arrangement with Sandefer Oil and Gas Company, Inc. ("Sandefer").
Sandefer is a private corporation owned and

                                       17

<PAGE>



operated by a group of  geologists  and  geophysicists  who generate Gulf Coast,
Southern Louisiana and other wildcat  prospects.  Third, the Company is entitled
to  participate  in  any  other  third  party  generated   prospects  that  NEGX
participates in subject to certain conditions as defined in the agreement.

Pursuant  to the  terms  of the  agreement  with  NEGX,  the  Company's  minimum
obligation  is at least $5.0 million per year in dry hole,  or drilling,  costs.
Additional  costs will be incurred for completion and  development of successful
projects.  Accordingly,  the Company  anticipates the actual  obligation will be
higher  assuming  that a  reasonable  amount of  success  is  achieved  with the
underlying  prospects.  If all the prospects  prove to be productive  (which the
Company  believes is unlikely as the drilling  program is a wildcat  exploration
program),  the total  obligation  to the  Company for 1997 could be in excess of
$20.0 million.

If all the contemplated  exploratory prospects are successful and the properties
are eventually fully developed,  the net reserves  attributable to the Company's
interest would be several times the Company's  present  reserves.  The Company's
current  reserves are  approximately 2 million  barrels of oil (or  equivalent).
Accordingly,  the agreement  with NEGX provides the Company with an  exploration
program that has the potential to significantly  increase its existing  reserves
and future cash flow.

In order to fund the obligation with NEGX the Company intends to seek additional
financing.  The Company intends to pursue  additional equity through exercise of
outstanding  warrants,   private  equity  placements,   and/or  other  potential
financing  vehicles.  Specifically,  in December 1996,  the Company  initiated a
warrant call  underlying  warrants to purchase  250,000  shares of the Company's
common stock held by 11 persons that were exercisable at $1.25 per share.  These
warrants were issued as part of a "Unit" of common stock and warrants  issued in
a private  placement  during 1995.  All the holders of the  warrants  elected to
exercise  their  warrants  prior to redemption  by the Company.  Exercise of the
warrants generated net cash proceeds of $290,000 in January 1997.

Also,  during  February and early March,  1997, the Company  completed a private
placement of 1,500,000  shares of common stock for proceeds of $3.75  million as
described  below.  On February  28,  1997,  the Company  initiated a call of the
warrants that were attached to the convertible  debentures issued in the private
placement  which was completed in 1996. The warrants were held by  approximately
105 persons and are  exercisable  for $1.25 per share.  Pursuant to the terms of
the warrant,  the holders have  forty-five  days after the call notice (or until
April 15,  1997) to  exercise  their  warrants  or they will be  redeemed by the
Company for $.10 per  warrant.  If all the  warrants  are  exercised  (which the
Company  believes is likely  based on the market price of the  Company's  common
stock as of the date of this  report),  it will  generate  net  proceeds  to the
Company of approximately $2.9 million. The proceeds generated from these warrant
calls  should  cover  the  Company's   working  capital  needs,   including  the
anticipated exploration costs associated with the letter agreement with NEGX, at
least through the second  quarter of 1997.  After that, the Company will need to
seek additional financing.

Anticipating  the need for  additional  financing,  in February 1997 the Company
signed a  non-binding  letter of intent with a brokerage  firm setting forth the
terms and  conditions  under which the broker will attempt to assist the Company
with a future private  placement.  The letter  agreement with the brokerage firm
contemplates a future placement of at least $6.0 million dollars in common stock
in the second or third  quarter  of 1997.  The  agreement  is subject to several
contingencies  including, but not limited to, due diligence and the execution of
formal agreement.

If the  Company is  unsuccessful  in  completing  the private  placement,  or if
additional funds are necessary either before or after such a transaction,  it is
uncertain at this time what actions the Company will take. Possibilities include
other debt or equity financings or the sale of existing assets.

In March 1996 the  Company  retained  Beta  Capital  Group,  Inc.  ("Beta") as a
consultant  to the Company.  Beta is located in Newport  Beach,  California  and
specializes in emerging oil and gas companies that have capital  resources needs
and market  support  requirements.  Beta has worked  closely with the Company to
structure  its  financings  and meet the  Company's  expected  cash and  capital
resources requirements.  Mr. Antry was added to the Company's Board of Directors
on August 10, 1996. Beta's President,  Steve Antry, was an officer of Benton Oil
and Gas  Company  between  1989 and  1992.  During  that  time,  Mr.  Antry  was
instrumental  in  obtaining  various  sources of capital that Benton Oil and Gas
required  during  a  very  significant  growth  period.  Based  on  Mr.  Antry's
background,  the  Company  believes  that  Beta adds a  tremendous  value to the
Company because of their network of financial

                                       18

<PAGE>



resources.  Therefore, the Company will attempt to utilize Beta's syndication of
financial  resources  to  fund  future  capital  requirements.  See  "Consulting
Agreement--Related Party" on page 24 and "Item 9, Directors, Executive Officers,
Promoters  and Control  Persons;  Compliance  with Section 16(a) of the Exchange
Act."

In addition to the  identified  exploration  program with NEGX,  the Company has
pursued the  acquisition  of an oil and gas property in Southern  Louisiana.  On
January 10, 1996, the Company  acquired a 7.8125% After Prospect  Payout Working
Interest  ("APPO WI") in the East Bayou Sorrel Prospect from third parties for a
total  purchase  price of $1.75  million.  The purchase  price  consisted of the
issuance of 315,000  shares of the Company's  common stock and $875,000 in cash.
On March 3, 1997 the Company  acquired an additional 10% working interest in the
same prospect for $2.5 million cash from third parties.  The prospect includes a
discovery  well, the C.E.  Schwing #1, which in February 1997 produced at a rate
in excess of 1,400  barrels of oil per day and 1,300 Mcf of natural  gas per day
with a flowing tubing  pressure of 6,300 PSI on a 12/64" choke from a perforated
interval of 13,208 feet to 13,226 feet.  If that  production  rate is sustained,
this  acquisition  will increase the Company's net  production  (per BOE) by 25%
(based on 1996's average net daily production.  An offset  developmental well to
the C.E.  Schwing #1 is expected to commence  drilling  operations in the second
quarter of 1997.

These  acquisitions were funded with the Company's  existing working capital and
the proceeds  generated from a private placement of common stock during February
and March 1997.  In that  placement,  the Company sold  1,500,000  shares of the
Company's  restricted common stock to accredited  investors for $2.50 per share.
The private placement was completed on March 10, 1997 generating net proceeds of
approximately  $3.3  million.  The Company has agreed to use its best efforts to
register the shares sold in this private  placement for resale on or before July
10, 1997.

Capital Expenditures

During 1996,  the Company  capitalized  or invested  $1,403,413  in property and
equipment as follows:

   Oil and Gas Properties:
     Drilling Costs -
        Exploratory Dry Holes                                    $     525,000
        Developmental well                                             435,647
                                                                  ------------
            Total Drilling Costs                                       960,647
        Workovers or Recompletions of existing properties              206,627
        Deposit on future exploratory well                             181,312
                                                                  ------------
            Total Oil and Gas properties                             1,348,586
   Service Equipment and Rolling Stock                                  27,777
   Office Equipment                                                     19,930
   Gas Plant facility                                                    7,120
                                                                 -------------
                                                                   $ 1,403,413

During  1996  the  Company  drilled  two  new  wells.   The  first  well  was  a
"double-stacked"  horizontal - the first of its kind in  Colorado.  The well was
drilled  in   Loveland   Field,   located  in  Larimer   County,   Colorado.   A
"double-stacked"  horizontal  well consists of drilling two separate  horizontal
wells,  or legs, in two different  geologic  formations from a single well bore.
This technology has been used extensively in the Austin Chalk Formation in Texas
and  Pease Oil and Gas was the first  company  to  attempt  this  technology  in
Colorado. The geologic formations targeted during this well were the Niobrara, a
proved zone, and the Timpas,  an unproved zone.  Unfortunately,  the Timpas zone
was found to be  unproductive  and the  Company  wrote-off  $450,000 to dry hole
costs (this  represents the estimated costs  attributable to drilling the Timpas
leg). The remaining  costs  associated  with this well for the Niobrara leg were
capitalized as developmental costs.

The second  well was a deep  wildcat  prospect in  Southern  Louisiana  that was
generated  by NEGX.  The well was drilled in excess of 14,000 feet and  although
the logs  indicated  some  excellent  shows,  it appears the targeted  formation
either  did not  receive a  hydrocarbon  charge  or it had  passed  through  the
formation and the well was plugged and  abandoned.  The Company's  cost for this
dry hole was $75,000.


                                       19

<PAGE>



In 1996, the Company spent $206,627 for workovers,  recompletions  and equipment
acquisitions  related to maintaining or enhancing the current  production of its
producing oil and gas properties.

In November 1996, the Company also paid $181,312 for a deposit on an exploratory
well which commenced  drilling  operations on January 9, 1997. This well, the E.
Winn #1, is a 17,375 foot Miogyp Sand test,  in the South Lake Arthur  prospect,
located in  Jefferson  Davis  Parish,  Louisiana.  Total depth is expected to be
reached  sometime in April 1997. The deposit has been capitalized as of December
31,  1996 and will  remain  that  way,  along  with the  future  drilling  costs
incurred, until the outcome of the exploratory well is known.

RESULTS OF OPERATIONS

Overview

The Company's  largest source of operating  revenue is from the sale of produced
oil, natural gas, and natural gas liquids. Therefore, the level of the Company's
revenues  and  earnings  are  affected by prices at which  natural  gas, oil and
natural gas liquids are sold. As a result,  the Company's  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.

Early in 1995, the Company initiated a corporate  restructuring that focused on:
eliminating  areas of its business  that were losing money,  reducing  operating
costs, increasing efficiencies,  and generating funds for working capital. These
initiatives  included but were not limited to  downsizing  of the  Company's oil
field service and supply  operations  and closing the  administrative  office in
Denver,  Colorado.  As is more fully discussed later in this section under their
respective  captions,  the Company's oil field service supply operating  margins
have  been  historically  low and even  unprofitable.  The  burden  of these low
margins or  operating  losses have been  compounded  with the risks  inherent in
these  operations and the capital  investment  required to maintain and operate.
Accordingly, the decision was made to downsize these operations in May 1995. The
administrative office was closed because the Company could not afford the luxury
and expense of two administrative offices.

In December 1994 the Company's  Board of Directors did not declare the quarterly
cash  dividend  to  holders of the  Company's  Series A  Cumulative  Convertible
Preferred  Stock  ("Preferred  Stock") for the fourth  quarter of 1994. In March
1995, the Board of Directors  voted to suspend  payment on any future  Preferred
Stock  dividends  indefinitely.  These  decisions  were  based on the  Company's
working capital position at that time, and the belief that the Company's primary
lender  would not  approve a dividend  payment.  However,  pursuant to the terms
underlying  the  Preferred  Stock,  dividends  continue to accrue on a quarterly
basis and will  increase  the number of common  shares  that will be issued upon
conversion  of the  preferred  stock  pursuant  to the  terms  of the  Company's
Articles  of  Incorporation.  Whether  dividends  are paid in the  future on the
Preferred  stock will be contingent  on many factors,  including but not limited
to,  whether  or not a  dividend  can be  justified  through  the cash  flow and
earnings generated from future operations.

In  January  1995,  the  Company  extended  a  tender  offer  to  the  Preferred
stockholders.  On February 28, 1995,  the Company  completed the tender offer to
its Preferred  Stockholders whereby the holders of the Company's Preferred Stock
were given the opportunity to convert each share of Preferred Stock and all then
accrued and undeclared  dividends  (including the full dividend for the quarters
ended  December  31, 1995 and March 31,  1995) into 4.5 shares of the  Company's
Common Stock and warrants to purchase  2.625 shares of Common Stock at $5.00 per
share through December 31, 1996 and $6.00 per share through August 13, 1998 (the
date the warrants expire). As a result of the tender offer 933,492 shares of the
Preferred  stock converted into 4,200,716  shares of the Company's  Common Stock
and warrants to purchase  2,450,417 shares of Common stock. In addition,  21,600
shares of Preferred  Stock converted into 56,739 shares of Common Stock prior to
the tender offer.  In 1996, an additional  22,750 shares of the Preferred  Stock
converted into 69,670 shares of common  pursuant to terms of such conversion set
forth in the Company's  Articles of Incorporation.  Accordingly,  as of December
31, 1996 there remained  179,938 shares of Preferred  Stock  outstanding.  These
conversions substantially changed the capital structure of the Company.

Consideration of the  restructuring  initiatives is an important  component when
comparing the results of operations between the two periods presented.

                                       20

<PAGE>



Total Revenue
Total Revenue from all operations was as follows:
                                   For the Year Ended December 31,
                                    1996                     1995
                             ------------------       --------------------
                              Amount          %         Amount           %
Oil and gas sales            $2,546,676     41%       $2,623,782       29%
Natural gas marketing
  and trading                 2,067,379     34%        3,872,565       43%
Gas plant processing            818,356     13%        1,135,050       13%
Oil field services
  and supply                    618,225     10%        1,302,741       14%
Well administration
  and other income              115,028      2%           97,678        1%
                               --------   -----        ----------     -----
      Total revenue          $6,165,664    100%       $9,031,816      100%
                              =========    ====        =========       ====

The decrease in total revenue is a result of: a) the expiration of the Company's
natural gas  marketing  and trading  contract  with  Public  Service  Company of
Colorado  effective  July 1, 1996;  b) no third party gas was  processed  by the
Company's gas plant  facility in 1996; c) a decrease in oil and gas  production;
and  d)  downsizing  of the  Company's  service  and  supply  operations.  These
circumstances,  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,
                                               1996                     1995
                                             -----------             ---------
Production:
    Oil (bbls)                               100,000                    121,500
    Gas (Mcf)                                412,000                    496,500
    BOE (6:1)                                168,700                    204,000
Average Collected Price:
    Oil (per bbl)                        $     20.35              $       16.77
    Gas (per Mcf)                        $      1.26              $        1.18
    Per BOE (6:1)                        $     15.10              $       12.85
Gross Margin:
    Revenue                              $ 2,546,676              $   2,623,782
    Operating costs                       (1,426,549)                (1,617,318)
                                          -----------               -----------
      Gross Margin                       $ 1,120,127              $   1,006,464
                                          ==========                 =========
      Gross Margin Percent                       44%                        38%
                                          ===========                ==========
Average Production Costs per
  BOE before DD&A                        $     8.46               $       7.92
DD&A per BOE                                   3.50                       3.63
                                          -----------                ----------
    Total Costs of Production
      per BOE                            $    11.96               $      11.55
                                           =========                ===========
Change in oil and gas revenue
  attributed to:
    Production                           $  (465,388)
    Price                                    388,282
                                           ---------
     Net change between 1995 and 1996    $   (77,106)
                                          ===========

Most  of the  decrease  in oil  and  gas  production  can be  attributed  to the
following: 1) the sale of several marginal,  uneconomic, or nonstrategic oil and
gas properties in 1996 (see divested  production table below);  and 2) to a much
lesser extent the natural  decline in production that is inherent in oil and gas
wells. Both these circumstances were largely offset by an increase in price.


                                       21

<PAGE>



The production  included in the above tables and associated  with the wells sold
during 1996 is as follows:

                                         For the Year Ended December 31,
Divested Production                          1996             1995
-------------------                       ------------    ----------
Oil (bbls)                                   3,900           16,700
Gas (Mcf)                                    4,500           23,000
BOE (6:1)                                    4,650           20,500

Natural Gas Marketing and Trading
The Company had a "take-or-pay" contract with Public Service Company of Colorado
("PSCo")  which  called for PSCo to purchase  from the Company a minimum of 2.92
billion cubic feet ("BCF") of natural gas  annually.  The price paid the Company
by PSCo was based on the Colorado Interstate Gas Commission's "spot" price, plus
a fixed price bonus. The natural gas marketing and trading activities  represent
natural  gas that was  purchased  from third  parties and sold to PSCo under the
terms of the contract.

Operating  statistics for the Company's Marketing and Trading Activities for the
periods presented are as follows:

                                          For the Year Ended December 31,
                                            1996                       1995
                                         -------------              ---------
    Total Volume Sold (Mcf)               1,223,855                  2,586,205
    Average Price                       $      1.69             $         1.50
                                          -------------           ------------
             Total Revenue                2,067,379                 $3,872,565
    Costs                                (1,745,446)                (3,404,169)
                                         ------------               -----------
             Gross Margin               $   321,933                $   468,396
                                          ===========               ==========

The contract with PSCo expired on June 30, 1996. Historically, the price paid by
PSCo under that contract was at a premium above the market and therefore allowed
for the  marketing  and  trading  activities.  Although  the  Company  has  been
negotiating  with  PSCo to renew the  contract,  no  formal  agreement  has been
reached as of the date of this report.  Consequently,  no marketing  and trading
revenues have been  generated  subsequent to June 30, 1996.  With the increasing
competition  fostering  within all phases of the  natural  gas  industry,  it is
unlikely  that the contract  will be renewed at an above market  premium,  if at
all,  and the Company is unlikely to resume  marketing  and trading  activities.
Since the gross margin  represents  the net cash flow and income  generated from
this  activity,  the loss of this  premium  contract  price  has and will have a
material and negative impact on the Company's current and future operations.

Gas Plant Processing Revenues
This category accounts for the natural gas processed and the natural gas liquids
extracted and sold by the Gas Plant facility.

Operating statistics for the periods presented are as follows:
                                                 For the Year Ended December 31,
                                                        1996             1995
                                                     ----------       ---------
    Production:
          Natural Gas Processed (Mcf) -
               From Company owned wells                363,000          424,600
               Third party gas                                          228,000
                                                     ----------      ----------
                      Total gas processed              363,000          653,400
          Liquids Produced -
               B-G Mix (gallons)                       907,600        1,314,900
               Propane (gallons)                       694,000        1,053,900

      Average Sales Price of Liquids (per gallon)    $    0.45      $      0.34
                                                     ===========   ============


                                       22

<PAGE>



    Gross Margin:                               Amount          Amount
                                              ----------      ----------
               Revenue                        $ 818,356        $1,135,050
               Costs                           (464,512)         (942,867)
                                              ------------    ------------
                      Gross Margin            $ 353,844        $  192,183
                                               ===========     ===========
                      Gross Margin Percent          43%               17%

The decrease in  processing  volumes and revenue  during 1996 as compared to the
same periods in 1995, can be substantially  attributed to the Company  purchased
and  processed  third party gas between  February  1995 and  September  1995. In
October  1995 the Company  stopped  processing  third party gas to correct  some
operational problems. The operational problems have been corrected and the plant
is now  running  more  efficiently  and  effectively  than  it has in the  past.
However,  with  the  increased  competition  to  process  natural  gas  and  the
historically low gas prices prevalent in the Rocky Mountain Region,  the Company
has not been able to  purchase  third  party gas at an  economical  rate.  These
factors along with the  increasing  competitive  environment  in the natural gas
market, it is uncertain at this time if the Company will be able to compete with
other gas plants and purchasers of natural gas in its market area.  Accordingly,
it cannot be  determined  at this time when, or if, the Company will process any
additional third party gas.

Costs  associated with the Gas Plant  operations  consist of both semi-fixed and
variable  costs.  The  semi-fixed  costs consist of direct  payroll,  utilities,
operating supplies,  general and administrative costs, and other items necessary
in  the  day-to-day  operations.  The  semi-fixed  costs  average  approximately
$435,000 annually and are not expected to change significantly regardless of the
volume  processed by the Gas Plant.  The  variable  costs  consist  primarily of
purchased gas, plant fuel and shrink,  lubricants,  repair and maintenance,  and
costs of gas marketing and buying.  These costs are generally a direct  function
of the volume  processed by the Gas Plant and are expected to either increase or
decrease proportionately with the corresponding plant production.  When compared
to 1996,  the costs in 1995 were higher in amount and as a percentage of revenue
as a result of the Company  purchasing  and  processing  third party gas between
February 1995 and September 1995. Currently,  the gas processed by the Gas Plant
facility  is  from  wells  the  Company  owned.  Accordingly,  the  costs,  as a
percentage of revenue, have decreased in 1996.

As stated above, the Company  currently  processes  natural gas exclusively from
wells  owned  or  operated  by the  Company.  Given  the  extremely  competitive
environment in the DJ Basin where the gas plant facility is located,  management
is exploring  the  possibility  of  increasing  the  Company's  net cash flow by
entering  into  a gas  processing  agreement  with a  third  party.  Under  this
scenario,  the current  operations at the gas plant  facility would be shut down
and the gas  currently  processed  by the plant would be sold to a third  party.
Although no formal decision has been made,  this  possibility is being disclosed
since such a decision may ultimately  impact the carrying value of the gas plant
facility under Statement of Financial  Accounting Standards No. 121, "Accounting
for the  Impairment  of Long- Lived  Assets."  As of  December  31, 1996 the net
carrying value of the gas plant facility was approximately  $3.34 million. It is
not certain at this time if a decision of this nature will  ultimately  be made,
and if so, if that decision would ultimate  impact the carrying value of the gas
plant facility.  However,  should a determination be made in the future that the
carrying  value of the gas  plant  facility  will not be  realized,  a  non-cash
impairment  charge may need to be recognized  as prescribed  under SFAS No. 121,
which could have a material  negative impact on the Company's  future results of
operations and balance sheet.

Should  operations  at the  Company's  Gas Plant  Facility  be shut down and the
Company's gas processing activities  discontinued,  the Company would anticipate
incurring shut down costs, in addition to impairment charges as discussed above.
Although the amount of any such costs is unknown at this time,  the Company does
not anticipate that any such costs or expenses would be material. The Company is
not aware of any  environmental  degradation which exists, or the obligation for
remediation of which would arise under applicable state or federal environmental
laws.  The Company does not maintain a fund for  environmental  or other similar
costs.  Any such costs or expenses would be paid by the Company out of operating
capital.

Oil Field Services and Oil Field Supply
Operating  statistics for the Company's oil field service and supply  operations
for the periods presented are as follows:


                                       23

<PAGE>



                                         Service and Supply Operations
                                        For the Year Ended December 31,
                                           1996                   1995
                                       -------------           -----------
    Revenue                            $    618,225            $ 1,302,741
    Costs                                   553,343             (1,391,588)
                                       -------------            -----------
    Net Operating Income (Loss)        $     64,882          $     (88,847)
                                        ===========            ============

The  decrease  in revenue  from the service  and supply  operations  is directly
related to the  restructuring  initiatives  conducted  in 1995. A summary of the
restructuring for both operations is discussed in the following paragraphs.

Service Operations
Historically,  the Company's  service  business  operated out of two locations -
Loveland and Sterling Colorado. The services provided included:  servicing rigs,
vacuum trucks,  roustabout  services,  and hot oiling  services.  The operations
serviced both the Company's needs and those of third parties.  The restructuring
was focused on reducing the service rig, vacuum truck, and roustabout operations
to a point where the Company can service its own oil and natural gas  operations
efficiently  and at the lowest  possible  cost,  while  performing  only limited
services for third  parties.  Any services of this type to third parties will be
limited to those circumstances when the equipment and man power is not needed in
the Company's operations. The Company did retain its hot oiler fleet (consisting
of three trucks) and intends to continue providing this service to third parties
on a full time basis.

Supply Operations
Historically,  the Company's supply business has operated out of two locations -
Loveland and Sterling,  Colorado. The restructuring was focused on consolidating
the operations to one location (Loveland, Colorado), eliminating duplicate costs
and ultimately reducing the amount of inventory.

Although  total  revenues  from the  service  and  supply  operations  decreased
approximately  53%  from  1995 to 1996 as a  result  of the  restructuring,  the
margins improved since the operations ran more efficiently on the smaller scale.

Well Administration and Other Income
This  revenue  primarily  represents  the revenue  generated  by the Company for
operating oil and gas  properties.  There has been no significant  change in the
average monthly revenue between 1996 and 1995 and Management does not expect any
significant change in the future.

Consulting Arrangement - Related Party
The Company  entered into a consulting  agreement with Beta in March 1996.  Fees
and  reimbursed  expenses  incurred  by the  Company in  connection  with Beta's
contract  were  $257,199  for the year ended  December  31, 1996 with no similar
expenditures in 1995.

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
                                               1996                 1995
                                          -------------           ---------
    Oil and Gas Properties                  $ 589,853         $    741,924
    Gas Plant Operations                      234,534              245,953
    Service and Supply Operations             140,132              166,173
    Furniture and Fixtures                     45,126               46,437
    Non-Compete Agreements                     45,994               91,827
                                           -----------          -----------
      Total                                $1,055,639           $1,292,314
                                           ==========           ===========

As discussed  above under the caption Oil and Gas,  DD&A per BOE for oil and gas
properties  has  remained  relatively  constant for the periods  presented.  The
decrease in DD&A for the Service and Supply  Operations can be attributed to the
disposition of the  corresponding  assets during the  restructuring  initiatives
conducted  in  1995.  The  decrease  in  the  amortization  of  the  Non-compete
Agreements can be attributed to one agreement which became fully

                                       24

<PAGE>



amortized  in 1995.  That  particular  agreement  had an original  cost basis of
$100,000 and was amortized over a 24 month period.

Dry Hole, Plugging and Abandonment
As previously  discussed  under the caption  Capital  Expenditures,  the Company
charged  $450,000  to dry hole costs for the  estimated  costs  attributable  to
drilling the Timpas leg  attempted  on the  horizontal  well in Loveland  Field,
Colorado  and another  $75,000 for a dry hole on a wildcat  prospect in Southern
Louisiana that was generated by NEGX. The remaining costs in 1996 as well as all
the costs in 1995 relate to plugging and  abandonment of a few depleted wells in
the Rocky Mountain Region.

Restructuring Charges
The  restructuring  charges  incurred  in  1995  were  directly  related  to the
initiatives  discussed above under the caption Overview and consisted  primarily
of  severance  pay,  relocation  costs  and a  loss  on the  abandonment  of the
administrative office lease in Denver,  Colorado.  The Company did not incur any
such costs in 1996.

Interest Expense
The higher  interest  expense  incurred in 1996 is reflective of the increase in
the average  long-term debt  outstanding and  amortization of the  corresponding
debt,  discount and issuance  costs.  Both of these  circumstances  are directly
related  to the  convertible  debentures  sold by the  Company  pursuant  to the
private placement completed in November 1996 and previously  discussed under the
caption Liquidity and Capital Resources.

(Loss) Gain on Sale of Assets
The gain on sale of assets in 1995 is primarily related to the sale of oil field
service equipment in connection with the Company's restructuring initiatives and
the sale of various oil and gas  properties.  The loss on sale of assets in 1996
is  primarily  related to the sale of  certain  oil and gas  properties  and the
abandonment of obsolete or unusable office equipment, furniture and fixtures.

Net Loss Per Common Share
Net loss per common  share is computed by dividing  the net loss  applicable  to
common stockholders  (which includes accrued but unpaid preferred  dividends) by
the weighted  average number of common shares  outstanding  during the year. All
common stock equivalents have been excluded from the computations  because their
effect would be anti-dilutive.

The Company completed a tender offer to the Company's preferred  stockholders in
February  1995.  In  connection  therewith,  the Company  offered the  preferred
holders  4.5  common  shares  for each  preferred  share  owned.  The 4.5 shares
represented  an increase from the original  terms of the  preferred  stock which
provided for 2.625 common shares for each  preferred  share.  In order to comply
with an accounting  pronouncement,  the Company was required to reduce  earnings
available to common  stockholders  to convert  their  shares.  Since the Company
issued an additional 1,750,000 common shares in the tender offer compared to the
shares that would have been issued  under the  original  terms of the  preferred
stock,  the  Company was  required to deduct the fair value of these  additional
shares of  $1,523,906  from  earnings  available  to common  stockholders.  This
non-cash  charge resulted in the reduction of earnings per share by $.24 for the
year ended December 31, 1995.

While this charge is intended to show the cost of the  inducement  to the owners
of the Company's common shares immediately  before the tender offer,  management
does not believe that it  accurately  reflects the impact of the tender offer on
the Company's common stockholders. As disclosed to the preferred stockholders in
connection  with the  tender  offer,  the book  value per share of common  stock
increased from a negative amount to approximately $1.00 per share as a result of
the tender offer.  Therefore,  management believes that, even though the current
accounting  rules  require  the $.24  charge per common  share,  there are other
significant  offsetting factors by which the common shareholders  benefited from
this  conversion  which  are  not  reflected  in the  1995  earnings  per  share
presentation.



                                       25

<PAGE>



PART II - OTHER INFORMATION

ITEM 7.   FINANCIAL STATEMENTS

The Consolidated Financial Statements that constitute Item 7 are included at the
end of this report beginning on Page F-1.

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

This item is not applicable to the Registrant.

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 the Company,  the principal offices and positions with the
Company  held by each  person  and the date such  person  became a  director  or
executive  officer of the  Company.  The  executive  officers of the Company 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 the Company are as follows:
                                                                    Served as
         Name             Age      Position With the Company     Director Since
--------------------      ---      -------------------------    ---------------
Willard H. Pease, Jr. (1)  37   President, Chief Executive Officer     1983
                                  and Director (Term Expires 1999)

James N. Burkhalter        61   Vice President of Engineering and      1993
                                  Production and Director
                                  (Term Expires 1997)

Patrick J. Duncan (1)      34   Chief Financial Officer, Treasurer,    1995
                                  Corporate Secretary and Director
                                  (Term Expires 1997)

Steve A. Antry             41   Director (Term Expires 1997)           1996

Richard A. Houlihan (1)    57   Director (Term Expires 1998)           1996

Homer C. Osborne (2)       68   Director (Term Expires 1998)           1994

James C. Ruane (2)         63   Director (Term Expires 1998)           1980

Leroy W. Smith             68   Director (Term Expires 1997)           1996

Robert V. Timlin           66   Director (Term Expires 1997)           1981

Clemons F. Walker (2)      58   Director (Term Expires 1999)           1996

William F. Warnick (2)     50   Director (Term Expires 1999)           1988

                                       26

<PAGE>



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

     Willard H. Pease, Jr. has been President and Chief Executive Officer of the
Company since 1990. Mr. Pease was Executive  Vice President and Chief  Operating
Officer of the  Company  from 1983 to 1990.  Mr.  Pease is  responsible  for the
Company's corporate finance,  managing the day-to-day  operations of the Company
and is principally  responsible  for the Company's oil and gas  exploration  and
production  activities.  Mr. Pease has worked in the oil field business for over
17 years.  Mr.  Pease  received  a B.A.  degree in  management  with  additional
educational focuses in geology in 1983.

     James N.  Burkhalter has been Vice President of Engineering  and Production
of the Company since 1993,  and is  responsible  for the Company's  engineering,
production,  regulatory compliance,  and gas plant operations.  Prior to joining
the Company Mr. Burkhalter was owner and president of Burkhalter Engineering, an
engineering  firm which he formed in 1975.  Mr.  Burkhalter has been Chairman of
the Colorado Board of  Registration  for  Professional  Engineers and Surveyors,
serving eight years. From 1959 to 1975 Mr. Burkhalter worked for Amoco and Rocky
Mountain Natural Gas as a petroleum  engineer.  Mr.  Burkhalter  received a B.S.
degree in petroleum engineering in 1959 from the Colorado School of Mines.

     Patrick J. Duncan has been the Chief Financial Officer of the Company since
September,  1994,  the Company's  Corporate  Secretary  since April 1995 and the
Company's  Treasurer  since March 1996.  Mr. Duncan is  responsible  for all the
financial,  accounting and administrative  reporting and compliance  required by
his  individual  job  titles.  Mr.  Duncan  was an  Audit  Manager  with  HEIN +
ASSOCIATES  LLP,  Certified  Public  Accountants,  from 1991 until  joining  the
Company as the  Company's  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 founder and  president  of Beta  Capital  Group,  Inc., a
financial consulting firm located in Newport Beach, California. Beta specializes
in advising  emerging oil and gas  exploration  companies that have both capital
needs and market support requirements.  Prior to forming Beta in 1992, Mr. Antry
was an  executive  officer of Benton Oil & Gas  Company  from 1989 to 1992 and a
Marketing  Director for Swift Energy's income funds from 1987 to 1989. Mr. Antry
is also a registered  representative with Signal Securities,  Inc., a registered
broker/dealer,   and  has  B.B.A.  and  M.B.A.   degrees  from  Texas  Christian
University.

     Richard A. Houlihan is a Certified Public Accountant,  Senior Member of the
American Society of Appraisers and a Certified  General  Appraiser in Nevada and
Utah. He has been a principal of Houlihan  Valuation  Advisors  since 1986,  Mr.
Houlihan  also was founder and  president  of Solitude  Ski Resort,  founder and
president of Houlihan,  Lokey, Howard & Zukin, Inc., one of the largest business
valuation  firms  in  the  United  States,   was  financial  vice  president  of
Carr-Sigoloff  Industries Corporation  specializing in mergers and acquisitions,
and MAS Manager at Price Waterhouse & Company Management Advisory Services.  Mr.
Houlihan has a B.S.  degree from Brigham Young  University  and a M.V.S.  degree
from Lindenwood College.

     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  has  operated  Osborne Oil Company as a
separate entity since 1976.

     James C. Ruane has owned and operated Goodall's Charter Bus Service,  Inc.,
a bus chartering  business  representing  Grey Line in the San Diego area, since
1958. Mr. Ruane has been an oil and gas investor for over 20 years.

     Leroy W. Smith was  president  and owner of Doctors'  Financial  Management
Co.,  Inc.  from 1956  through  1994 with  offices  in  Burbank  and Santa  Ana,
California,  which  provided  accounting  and business  management  services for
professionals.  Since  retiring  in 1994 Mr.  Smith has  served as  trustee  and
managed three retirement  trusts with total market value of  approximately  $5.5
million.  Mr.  Smith is also an  Enrolled  Agent  before  the  Internal  Revenue
Service.

                                       27

<PAGE>



     Robert V. Timlin has been self-employed as a consulting  petroleum engineer
since 1989. Mr. Timlin has been involved in the oil and gas industry for over 30
years and has served in a managerial capacity with several companies,  including
HMT  Management  Inc., an oil and gas  management  firm,  from 1983 to 1988; T&M
Casing  Service,  Inc.,  from 1975 to 1983;  Dowell Studer,  Inc., and Husky Oil
Company.  Mr. Timlin received an Associates  Degree in petroleum  engineering in
1957.

     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.

     William F. Warnick has been a practicing  attorney in Lubbock,  Texas since
1971. Mr. Warnick serves as the Texas Attorney General's  appointee to the Texas
School Board Land Commission and is a member of the American, Texas, and Lubbock
Bar  Associations.  He is an oil and gas  investor  and has  served  in  various
management  positions of private independent oil and gas companies.  Mr. Warnick
received a B.A. degree in finance and a J.D. degree in 1971.

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

Section  16(a) of the  Securities  Exchange Act of 1934  requires the  Company's
officers  and  directors,  and  persons  who own more  than ten  percent  of the
Company's  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
the Company 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 the Company during the Company's fiscal year
ended  December 31, 1996, and Forms 5 and  amendments  thereto  furnished to the
Company  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 the
following  persons who were  directors,  officers and beneficial  owners of more
than 10% of the Company's outstanding Common Stock during such fiscal year filed
late reports on Forms 3 and 4.

James C. Ruane filed one late report on Form 4 reporting one transaction.  LeRoy
W. Smith filed one late report on Form 4 reporting two transactions.

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.  No executive officer received salary and bonus
in excess of $100,000 in 1996. The following information for the Chief Executive
Officer 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.



                                       28

<PAGE>


<TABLE>
<CAPTION>
                                      SUMMARY COMPENSATION TABLE
                                        Annual Compensation             Long-Term Compensation Awards
                                                                       Restricted       Securities
Name and Principal                                       Other Annual  Stock            Underlying
Position                      Year   Salary    Bonus     Compensation  Awards         Options/SARs(#)
--------                      ----   --------  -----     ------------  -------         ---------------
<S>                         <C>    <C>          <C>      <C>           <C>               <C>
Willard H. Pease, Jr ....   1996   $78,530(1)   $5,000(3)$101,250 (2)   None              110,400
      President and Chief   1995   $75,240(1)   None     None           None              139,600
      Executive Officer .   1994   $75,240(1)   None     None           None                None
</TABLE>

     (1)  Includes  $240  contributed  by  the  Company  to a  qualified  401(k)
retirement plan.

     (2) At December 31, 1995 the Company owed $60,000 to Mr.  Pease.  This loan
was  unsecured,  bore interest at 8% per annum and was originally due on January
31, 1996. On March 9, 1996 the Board of Directors  agreed to change the terms of
the note to allow the note to be convertible  into the Company's common stock at
$1.00 per share,  the then  current  market  rate,  in  exchange  for a one-year
extension on the note.  On December  16, 1996 Mr.  Pease  elected to convert the
note in its  entirety,  the note was canceled  and Mr.  Pease was issued  60,000
shares of the Company's  restricted  common stock.  The $101,250  shown as other
annual compensation represents the difference between the closing sales price as
reported by NASDAQ on December  16, 1996 and the  conversion  price of $1.00 per
share.  No  additional  amounts  have been  shown as Other  Annual  Compensation
because the  aggregate  incremental  cost to the  Company of  personal  benefits
provided to Mr.  Pease did not exceed the lesser of $50,000 or 10% of his annual
salary in any given year.

     (3) On March 9, 1996 the Board of Directors  granted Mr. Pease 5,000 shares
of the  Company's  common  stock for prior  services.  The shares were valued at
$5,000 or $1.00 per share which  represented  the market price of the  Company's
common stock on the date of grant. The shares are fully vested.

Option Grants in the Last Fiscal Year
Set forth below is information  relating to grants of stock options to the Chief
Executive Officer pursuant to the Company's Stock Option Plans during the fiscal
year ended December 31, 1996.

<TABLE>
<CAPTION>
                                             Option/SAR Grants in Last Fiscal Year

                                                     Individual Grants

                                        Number of
                                       Securities        % of Total
                                       Underlying        Options/SARs
                                       Options/          Granted to             Exercise or
                                       SARs              Employees in           Base Price            Expiration
 Name                                  Granted (#)       Fiscal Year            ($/Sh)                      Date
---------------                        -----------       -----------------      ---------------        --------
<S>                                    <C>                   <C>                  <C>                  <C>
Willard H. Pease, Jr.                  110,400 (1)           33.9%                $1.00(3)             03/08/01
      President and Chief               60,000 (2)           18.4%                $1.00(3)             01/31/97
      Executive Officer
</TABLE>

     (1) Consists of 8,900  shares  underlying  options  issued under one of the
Company's qualified stock option plans and 101,500 shares underlying warrants to
purchase  common stock.  All these Options and Warrants  became  exercisable  on
September 8, 1996.

     (2) At December 31, 1995 the Company owed $60,000 to Mr.  Pease.  This loan
was  unsecured,  bore interest at 8% per annum and was originally due on January
31, 1996. On March 9, 1996 the Board of Directors  agreed to change the terms of
the note to allow the note to be convertible  into the Company's common stock at
$1.00 per share,  the then  current  market  price,  in exchange  for a one-year
extension on the note.

     (3) The  exercise  price  listed  above was 100% of the market price of the
Common Stock on the date the options, warrants or convertible notes were granted
or approved by the Company's Board of Directors.



                                       29

<PAGE>



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 the  Company's  Common Stock held by Willard H. Pease,  Jr. at December
31, 1996. No options were exercised during fiscal 1996.

<TABLE>
<CAPTION>
                                      Aggregated Option/SAR Exercises in Last Fiscal Year
                                                  and FY-End Option/SAR Values
                                                                          Number of
                                                                          Securities                 Value of
                                                                          Underlying                 Unexercised
                                                                          Unexercised                In-the-Money
                                                                          Options/SARs               Options/SARs
                                                                          at FY-End (#)              at FY-End ($)
                      Shares Acquired     Value Realized                  Exercisable/               Exercisable/
 Name                 on Exercise (#)                   ($)               Unexercisable              Unexercisable
--------              -----------------      ------------------------     -------------              -------------
<S>                     <C>    <C>              <C>      <C>               <C>      <C>              <C>       <C>
Willard H. Pease, Jr.   60,000 (1)              $101,250 (1)               250,000/-0-               $544,557/-0- (2)
  President and Chief
  Executive Officer
</TABLE>

    (1) On December 16, 1996, Mr. Pease converted a $60,000 promissory note into
60,000  shares  of the  Company's  common  stock  pursuant  to the  terms of the
underlying  promissory  note.  The $101,250  shown as other annual  compensation
represents the difference  between the closing sales price as reported by NASDAQ
on December 16, 1996 and the conversion price of $1.00 per share.

    (2) The value of the unexercised In-the-Money Options 1996 was determined by
multiplying  the  number of  unexercised  options  by the  closing  sales of the
Company's  common stock on December  31,1996 as reported by NASDAQ and from that
total, subtracting the total exercise price.

Employment Contract
The Company has entered into an employment  agreement  with a Director,  Willard
Pease, Jr., who is also the Company's President and Chief Executive Officer. The
employment  agreement  was  entered  into in 1993 and may be  terminated  by the
Company  without cause on 30 days notice  provided the Company  continues to pay
the salary of Mr. Pease for 36 months.  The salary must be paid in a lump sum if
the  termination  occurs  after a change in control of the Company as defined in
the employment agreement. Mr. Pease may terminate the employment agreement on 90
days written notice. The base salary of Mr. Pease under the employment agreement
was increased to a base salary of $95,000 per year effective October 1, 1996.

Compensation of Directors
Directors who are employees do not receive  additional  compensation for service
as directors.  Other  directors each receive a $1,000 annual  retainer fee, $750
per meeting  attended and $100 per meeting  conducted via telephone  conference.
Directors may elect to receive the compensation either in cash or stock. All the
compensation  paid to the outside  directors in 1995 and 1996 was in the form of
stock.

ITEM 11-  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following  table sets forth  certain  information  regarding the  beneficial
ownership of the Company's  Common Stock,  its only class of outstanding  voting
securities  as of  February  21,  1997,  by (i) each  person who is known to the
Company to own  beneficially  more than 5% of the outstanding  Common Stock with
the  address  of each such  person,  (ii) each of the  Company's  directors  and
officers, and (iii) all officers and directors as a group:



                                       30

<PAGE>



    Name and Address of
      Beneficial Owner or             Amount and Nature of
Name of Officer or Director           Beneficial Ownership(1)   Percent of Class
---------------------------          ------------------------   ----------------
Steve Allen Antry
   901 Dove Street, Suite 230
   Newport Beach, CA 92660              671,832 Shares (2)           7.4%
James N. Burkhalter
   P.O. Box 60219
   Grand Junction, CO 81506             165,710 Shares (3)           2.0%
Patrick J. Duncan
   P.O. Box 60219
   Grand Junction, CO 81506             170,625 Shares (4)           2.0%
Richard A. Houlihan
   650 Town Center Drive, Suite 550
   Costa Mesa, CA 92625                 288,983 Shares (5)           3.4%
Homer C. Osborne
   1200 Preston Road #900
   Dallas, TX 75230                      49,407 Shares (6)           0.6%
Willard H. Pease, Jr.
   P.O. Box 60219
   Grand Junction, CO 81506             786,139 Shares (7)           9.2%
James C. Ruane
   5010 Market St.
   San Diego, CA 92102                  281,838 Shares (8)           3.3%
Leroy W. Smith
   P.O. Box 10040
   Santa Ana, CA 92711-0040             181,280 Shares (9)           1.8%
Robert V. Timlin
   1989 South Balsam
   Lakewood, CO 80277                    63,490 Shares (10)          0.8%
Clemons F. Walker
   748 Rising Star Drive
   Henderson, NV 89104                  362,763 Shares (11)          4.2%
William F. Warnick
   2022 Broadway
   Lubbock, TX 79401                     84,193 Shares (12)          1.0%

  All Officers and Directors
  as a  group (eleven persons)        3,106,260 Shares (13)         29.8%

(1) Beneficial  owners listed have sole voting and investment power with respect
to the shares  unless  otherwise  indicated.  On December  18,  1996,  Mr. Pease
converted a $60,000  promissory note into 60,000 shares of the Company's  common
stock  pursuant to the terms of the  underlying  promissory  note.  The $101,250
shown as other annual compensation represents the difference between the closing
sales price as reported by NASDAQ on December 16, 1996 and the conversion  price
of $1.00 per share.

(2) Includes  2,680 shares that are owned  directly by Mr.  Antry,  7,500 shares
underlying  options  that become  exercisable  on July 27, 1997,  61,137  shares
underlying presently  exercisable  warrants,  515 shares underlying  convertible
preferred stock and 600,000 shares  underlying  presently  exercisable  warrants
that are held by Mr. Antry's wife.

(3) Includes  15,710 shares owned  directly by Mr.  Burkhalter,  115,000  shares
underlying  presently  exercisable options, and 35,000 shares underlying options
that become exercisable on July 27, 1997.


                                       31

<PAGE>



(4)  Includes  20,625  shares  owned  directly  by Mr.  Duncan,  105,000  shares
underlying  presently  exercisable options, and 45,000 shares underlying options
that become exercisable on July 27, 1997.

(5)  Includes  151,150  shares  owned  directly by Mr.  Houlihan,  7,500  shares
underlying  options  that become  exercisable  on July 27, 1997,  97,500  shares
underlying presently exercisable options,  8,333 shares underlying a convertible
debenture,  and 24,500 shares owned by a trust that Mr. Houlihan has sole voting
and investment power.

(6)  Includes  6,607  shares  owned  directly  by  Mr.  Osborne,  35,300  shares
underlying  presently  exercisable  options, and 7,500 shares underlying options
that become exercisable on July 27, 1997.

(7) Includes 121,173 shares that are owned directly by Mr. Pease, 364,966 shares
are owned by entities  affiliated with Mr. Pease over which shares Mr. Pease has
sole  voting  and  investment  power,   148,500  shares   underlying   presently
exercisable options, 50,000 shares underlying options that become exercisable on
July 24, 1997, and 101,500 shares underlying presently exercisable warrants.

(8) Includes  107,528 shares owned  directly by Mr. Ruane,  4,560 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,  12,500 shares underlying  presently
exercisable  warrants,  70,000 shares underlying presently  exercisable options,
and 7,500 shares underlying options that become exercisable on July 27, 1997.

(9) Includes 1,280 shares owned directly by Mr. Smith,  10,000 shares owned by a
trust  that Mr.  Smith  acts as the  Trustee  and is  therefore  deemed  to have
beneficial  ownership,  5,000 shares owned by his wife, 10,000 shares underlying
presently  exercisable  options,  7,500  shares  underlying  options that become
exercisable on July 27, 1997,  100,000 shares underlying  presently  exercisable
warrants  that are  owned by two  separate  trusts  that Mr.  Smith  acts as the
Trustee and is therefore  deemed to have  beneficial  ownership,  12,500  shares
underlying  convertible  preferred  stock owned  directly by Mr.  Smith;  12,500
shares  underlying  convertible  preferred  stock  held by his wife,  and 22,500
shares  underlying  convertible  preferred  stock that are owned by two separate
trusts  that Mr.  Smith  acts as the  Trustee  and is  therefore  deemed to have
beneficial ownership.

(10)  Includes  5,990  shares  owned  directly  by  Mr.  Timlin,  26,693  shares
underlying  presently  exercisable  options, and 7,500 shares underlying options
that become exercisable on July 27, 1997.

(11)  Includes  142,062  shares owned  directly by Mr.  Walker,  212,686  shares
underlying presently exercisable warrants,  7,500 shares underlying options that
become  exercisable  on July 27,  1997,  and 515 shares  underlying  convertible
preferred stock.

(12)  Includes  26,693  shares  owned  directly by Mr.  Warnick,  50,000  shares
underlying  presently  exercisable  options, and 7,500 shares underlying options
that become exercisable on July 27, 1997.

(13) Includes 583.800 shares underlying presently  exercisable options,  190,000
shares underlying  options that become  exercisable on July 27, 1997,  1,185,073
shares  underlying  presently  exercisable  warrants,  48,530 shares  underlying
convertible preferred stock, and 8,333 shares underlying a convertible note.

ITEM 12-CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

From time to time,  various  officers  and  directors  of the  Company and their
affiliates  have  participated  in the  drilling of oil and gas wells which were
drilled and  operated by the Company.  All such persons and entities  have taken
working  interests  in the  wells  and have paid the  drilling,  completion  and
related  costs of the  wells on the same  basis  as the  Company  and all  other
working interest owners. On occasions of such participation the Company retained
the  maximum  interest  in the  well  that it  could  justify,  given  its  cash
availability and the risk involved.


                                       32

<PAGE>



In August  1996,  Richard A.  Houlihan,  a director of the  Company  purchased a
$25,000 10%  collateralized  debenture that included warrants to purchase 25,000
shares  of  Common  Stock  at  $1.25  per  share  on the  same  terms  as  other
nonaffiliated purchasers.

At December 31, 1996 the Company owed  certain  affiliates  of Willard H. Pease,
Jr.  $116,719  principal,  plus  $31,398  in accrued  interest,  for oil and gas
revenue  attributable  to  interests  in wells  operated by the Company that are
owned by the individuals and related entities.  Of the principal amount,  $2,877
was incurred in 1994, $4,603 was incurred in 1993, $20,992 was incurred in 1992,
$85,518 was incurred in 1991 and $2,729 was incurred in 1990.

At December  31, 1995 the Company  owed  $60,000 to Willard H. Pease,  Jr.,  the
Company's  President and CEO. This loan was unsecured,  bears interest at 8% per
annum  and was  originally  due in  January  1996.  In March  1996 the  Board of
Directors  agreed  to  change  the  terms of the  note to  allow  the note to be
convertible into the Company's common stock at $1.00 per share, the then current
market price, in exchange for a one-year extension of the note. In December 1996
Mr. Pease elected to convert the note in its entirety, the note was canceled and
Mr. Pease was issued 60,000 shares of the Company's restricted common stock.

Until June 1993,  Willard H. Pease,  Jr. owned an oil well  servicing  business,
Grand  Junction Well  Services,  Inc.  ("GJWS"),  which  operated a workover and
completion  rig.  In June 1993,  the  Company  acquired  GJWS from Mr.  Pease by
merging GJWS into a newly-formed  subsidiary of the Company.  In the merger, the
Company  issued Mr.  Pease 46,667  shares of Common  Stock and the  Company's 6%
secured convertible  promissory note in the principal amount of $175,000,  for a
total value of $350,000,  which was the estimated  fair market value of the GJWS
assets and business.  The note was originally  payable in three annual principal
installments of $45,000 on October 1, 1994, $65,000 on April 1, 1995 and $65,000
on April 1, 1996. The October 1, 1994 principal  payment of $45,000 was paid and
the remaining installments were extended to October 1, 1997 and October 1, 1998,
respectively.  The unpaid  principal  portion of $130,000 is  convertible at the
election of Mr. Pease into Common Stock at $5.00 per share.  The transaction was
approved unanimously by the disinterested directors of the Company.

In March 1996 the Company  entered into a three-year  consulting  agreement with
Beta Capital Group, Inc.  ("Beta").  Beta's  president,  Steve Antry, has been a
director of the Company since August 1996.  The  consulting  agreement with Beta
provides for minimum  monthly cash  payments of $17,500 plus  reimbursement  for
out-of-pocket  expenses. The Company 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.  During 1996 the Company paid
Beta, or its agents,  a total of $424,706 under the terms of the agreement.  The
total amount paid  consisted of: a.) $162,500 for monthly  consulting  fees; b.)
$94,700 for the reimbursement of out-of-pocket  expenses;  c.) $163,000 for fees
related to funds  generated  from  private  placements;  and d.) $4,506 for fees
related to funds  generated  from the exercise of  warrants.  In addition to the
cash  compensation,  the Company  granted Beta  warrants to purchase 1.0 million
shares of the  Company's  common stock for $.75 per share.  As allowed under the
terms of the agreement,  Beta subsequently assigned 400,000 of those warrants to
other parties,  including 100,000 to a Mr. Richard  Houlihan,  a director of the
Company. All these warrants expire in April 2001.

All existing loans or similar advances to, and transactions  with,  officers and
their affiliates were approved or ratified by the independent and  disinterested
directors. Any future material transactions with officers,  directors and owners
of 5% or more of the Company's  outstanding Common Stock or any affiliate of any
such person  shall be on terms no less  favorable  to the Company  than could be
obtained from independent  unaffiliated  third parties and must be approved by a
majority of the independent disinterested directors.



                                       33

<PAGE>



                                     PART IV


ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K

Exhibit No.           Description and Method of Filing

(3.1)                 Articles of Incorporation, as amended. (1)
(3.2)                 Plan of Recapitalization. (1)
(3.3)                 Certificate of Amendment to the Articles of Incorporation
                      filed on July 6, 1994.  (2)
(3.4)                 Certificate of Amendment to the Articles of Incorporation
                      filed on December 19, 1994. (2)
(3.5)                 Bylaws, as amended and restated May 11, 1993. (1)
(4.1)                 Representative's Preferred Stock Purchase Warrant. (1)
(4.2)                 Warrant Agency Agreement between Willard Pease Oil and Gas
                      Company and American Securities Transfer, Inc. dated
                      August 23, 1993. (1)
(4.3)                 Amendment to Warrant Agency Agreement dated January 5,
                      1995. (2)
(4.4)                 Certificate of Designation of Series A Cumulative
                      Convertible Preferred Stock. (1)
(4.5)                 Certificate of Amendment of Certificate of Designation of
                      Series A Cumulative Convertible
                      Preferred Stock filed on August 16, 1993. (2)
(4.6)                 Second Certificate of Amendment of Certificate of
                      Designation of Series A Cumulative Convertible Preferred
                      Stock filed on November 1, 1994. (2)
(10.1)                Residue Gas Sales and  Purchase  Agreement  dated June 22,
                      1986,  between Western Gas Supply Company and Loveland Gas
                      Processing,  Ltd.,  and  Amendments  dated July 30,  1986,
                      August 12, 1986, September 11, 1986, April 16, 1987, April
                      1, 1988,  January 2, 1992, March 26, 1992 and May 1, 1992.
                      (1)
(10.2)                Amendment  dated December 1, 1993,  between Public Service
                      Company of Colorado and Loveland Gas Processing Co., Ltd.,
                      to Residue Gas Sales and Purchase Agreement dated June 22,
                      1986,  between Western Gas Supply Company and Loveland Gas
                      Processing, Ltd.
                      (2)
(10.3)                Gas Purchase and Sale Contract dated November 1, 1988,
                      between Fuel Resources Development Co. as seller and
                      Loveland Gas Processing Co., Ltd., as buyer, pertaining to
                      the purchase of gas, and Amendments dated November 1, 1990
                      January 24, 1991, May 1, 1991, July 5, 1991, August 1,
                      1991, April 1, 1992 and August 1, 1992. (1)
(10.4)                Purchase Order No. 5 dated January 1, 1994 from Loveland
                      Gas Processing Co., Ltd. to Fuel Resources Development Co.
                      that amends the Gas Purchase and Sale Contract dated
                      November 1, 1988, between Fuel Resources Development Co.
                      and Loveland Gas Processing, Ltd. (2)
(10.5)                Form of Warrants issued to Ronin Group Ltd., and Clemons
                      F. Walker for the purchase of an aggregate of 240,000
                      shares of Common Stock. (3)
(10.6)                1990 Stock Option Plan. (1)
(10.7)                1993 Stock Option Plan (1)
(10.8)                1994 Employee Stock Option Plan. (2)
(10.9)                Form of 12% Convertible Unsecured Promissory Notes issued
                      by Pease Oil and Gas Company in 1994 Private Placement.(2)
(10.10)               Form of Warrants issued to brokers Sales Agents in 1994
                      Private Placements.  (2)
(10.11)               Employment Agreement effective September 16, 1994 between
                      Pease Oil and Gas Company and Willard H. Pease, Jr. (2)
(10.12)               Employment Agreement effective December 27, 1994 between
                      Pease Oil and Gas Company and Patrick J. Duncan. (2)
(10.13)               Employment Agreement effective December 27, 1994 between
                      Pease Oil and Gas Company and James N. Burkhalter. (2)
(10.18)               Interconnect Agreement dated January 1, 1995, between KN
                      Front Range Gathering Company and Loveland Gas Processing
                      Co., Ltd.(2)
(10.19)               Gas Gathering Agreement dated February 1, 1995, between KN
                      Front Range Gathering Company and Loveland Gas Processing
                      Co., Ltd. (2)

                                       34

<PAGE>



(10.20)               Agreement dated August 15, 1994, between Hewlett-Packard
                      Company, Loveland Gas Processing Co., Ltd., Pease Oil and
                      Gas Company and Pease Operating Company. (2)
(10.21)               Purchase and Sale Agreement dated April 24, 1995 among
                      Pease Oil and Gas Company, Thermo Cogeneration Partnership
                      L.P and Seahawk Energy, Inc.  (3)
(10.22)               Agreement between Beta Capital Group, Inc., and Pease Oil
                      and Gas Company dated March 9, 1996. (4)
(10.24)               Form of Warrants issued to Beta Capital Group, Inc. (8)
(10.25)               1996 Stock Option Plan. (8)
(10.26)               Mortgage, Assignment of Proceeds, Security Agreement and
                      Financing  Statement  from  Pease Oil and Gas  Company  to
                      Holders of 1996  Collateralized  Subordinated  Convertible
                      Debentures dated as of November 15, 1996. (8)
(10.27)               Purchase and Sale Agreement dated December 31, 1996 by and
                      between Atocha Exploration, Inc., Browning Oil Company,
                      Inc., Potosky Oil and Gas, Inc. and Pease Oil and
                      Gas Company. (5)
(10.28)               Letter Agreement dated February 4, 1997 by and between
                      National Energy Group, Inc. and Pease Oil and Gas Company.
                      (6)
(10.29)               Purchase and Sale Agreement dated February 26, 1997 by and
                      between Transworld Exploration & Production, Inc. (7)
(21)                  List of Subsidiaries. (3)
(23)                  Consents of Experts
(23.1)                Consent of McCartney Engineering, LLC Consulting Petroleum
                      Engineers
(23.2)                Consent of Hein + Associates LLP, Certified Public
                      Accountants
(27)                  Financial Data Schedule.

Footnotes:
   (1)  Incorporated by reference to Registration Statement No. 33-64448 on Form
        SB-2.
   (2)  Incorporated by reference to the  Registrant's  1994 Annual Report
        on Form 10-KSB for the fiscal year ended December 31, 1994.
   (3)  Incorporated by  reference  to  Registration  Statement  No.  33-94536
        on Form SB-2.
   (4)  Incorporated by reference to the  Registrant's  Annual Report on Form
        10-KSB for the fiscal year ended December 31, 1995.
   (5)  Incorporated  by  reference  to Form 8-K filed  January 10,  1997.
   (6)  Incorporated  by  reference  to  Form  8-K  filed  February  19,  1997.
   (7)  Incorporated by reference to Form 8-K filed March 17, 1997.
   (8)  Incorporated  by  reference  to Form  10-KSB for the fiscal year ended
        December 31, 1996 filed March 28, 1997.






















                                       35

<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:  March 27, 1998                  By:/s/ Willard H. Pease, Jr.
                                       ----------------------------
                                       Willard H. Pease, Jr.
                                       President and Chief Executive Officer

Date:  March 27, 1998                  By: /s/ Patrick J. Duncan
                                       -------------------------
                                       Patrick J. Duncan
                                       Chief Financial Officer, Treasurer,
                                       and Principal Accounting Officer

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

Date:  March 27, 1998                  By:/s/ Willard H. Pease, Jr.
                                       ----------------------------
                                       Willard H. Pease, Jr., President
                                       and Chairman of the Board

Date:  March 27, 1998                  By: /s/ Patrick J. Duncan
                                       -------------------------
                                       Patrick J. Duncan
                                       Chief Financial Officer,
                                       Treasurer, and Director

Date:  March 27, 1998                  By:/s/ Steve A. Antry
                                       ---------------------
                                       Steve A. Antry, Director

Date:  March 27, 1998                  By: /s/ R. Thomas Fetters, Jr.
                                       ------------------------------
                                       R. Thomas Fetters, Jr., Director

Date:  March 27, 1998                  By:/s/ Stephen L. Fischer
                                       --------------------------
                                       Stephen L. Fischer, Director

Date:  March 27, 1998                  By:/s/ Homer C. Osborne
                                       -----------------------
                                       Homer C. Osborne, Director

Date:  March 27, 1998                  By:/s/ James C. Ruane
                                       ---------------------
                                       James C. Ruane, Director

Date:  March 27, 1998                  By:/s/ Clemons F. Walker
                                       ------------------------
                                       Clemons F. Walker, Director

Date:  March 27, 1998                  By:/s/ William F. Warnick
                                       -------------------------
                                       William F. Warnick, Director

                                       36