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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

         ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

                          Commission File Number 0-6580
                                [GRAPHIC OMITTED]






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

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

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

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

     Indicate  by check  mark  whether  the  issuer  (1) has filed  all  reports
required to be filed by Section 13 or 15(d) of the  Exchange Act during the past
12 months (or for such shorter  period that the  registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No__

     The issuer's revenues for its most recent fiscal year were $3,585,245.

     As of March 30, 2001 the issuer had 1,924,398 shares of its $0.10 par value
Common Stock issued and outstanding.  Based upon the closing sale price of $1.94
per share on March 30, 2001, the aggregate market value of the common stock, the
Registrant's only class of voting stock, held by non-affiliates was $3,279,000.

     Transitional Small Business Issuer Disclosure Format Yes __ No X




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<PAGE>



                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
PART I                                                     PAGE
ITEM 1  BUSINESS                                             1
<S>                                                          <C>
            History and Overview ........................    1
            Recent Developments .........................    1
            Business Strategy ...........................    1
            Operations ..................................    2
            Competition .................................    2
            Markets .....................................    2
            Regulations .................................    2
            Operational Hazards and Insurance ...........    4
            Business Risks ..............................    4
            Administration ..............................    9
ITEM 2  PROPE10IES
            Principal Oil and Gas Interests .............   10
            Gulf Coast Properties and Prospects .........   10
            Title to Properties .........................   11
            Estimated Proved Reserves ...................   11
            Net Quantities of Oil and Gas Produced ......   12
            Drilling Activity ...........................   13
ITEM 3  LEGAL13ROCEEDINGS
ITEM 4  SUBMI13ION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
            STOCKHOLDER MATTERS .........................   14
                Stockholders ............................   14
                Dividends ...............................   14
                Recent Sales of Unregistered Securities .   14
ITEM 6  MANAG15ENT'S DISCUSSION AND ANALYSIS
            Liquidity and Capital Resources .............   15
            Results of Operations .......................   16
            Other Matters ...............................   20
ITEM 7  FINAN22AL STATEMENTS
ITEM 8  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
          ON ACCOUNTING AND FINANCIAL DISCLOSURE            40
PART III
ITEM 9  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
          CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)
          OF THE EXCHANGE ACT                               40
ITEM 10 EXECUTIVE COMPENSATION                              42
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
          OWNERS AND MANAGEMENT                             43
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS      45
PART IV
ITEM 13 EXHIBITS AND REPORTS ON FORM 8-K                    46
</TABLE>


<PAGE>



                                     PART I

ITEM 1 - BUSINESS

HISTORY AND OVERVIEW

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

RECENT DEVELOPMENTS

Debt Restructuring

The Company  recently  restructured  $2.4  million,  or 86%, of its $2.8 million
convertible  debentures  that  were  due  April  15,  2001.   Essentially,   the
restructured  debt has been  extended  for two  years  in  exchange  for a lower
conversion  price  and a higher  interest  rate.  This  restructuring,  which is
discussed  in  greater  detail  later  in this  report  (see  Footnote  2 of the
financial  statements  beginning  on page 30),  has  substantially  improved the
Company's working capital and will allow the Company to continue  exploiting its
prospect inventory in 2001 using its existing funds.

Termination of Carpatsky Merger and Restructuring of
  Death Spiral Preferred Stock

The  Company  previously  announced  that its  proposed  merger  with  Carpatsky
Petroleum,   Inc.  ("Carpatsky")  had  been  terminated  on  November  7,  2000.
Concurrently,  the  Company  exchanged  its  outstanding  Series  B  Convertible
Preferred  Stock  for a new  Series  C  Preferred  eliminating  the  Series  B's
hyper-dilutive "death spiral" conversion feature. These transactions,  which are
discussed in greater  detail later in this report (see  Footnotes 5 and 6 of the
financial   statements   beginning   on  page  32),   combined   with  the  debt
restructuring,  has given the Company the opportunity to build upon its existing
asset base and actively pursue future growth.

2000 Results

The  Company  has had its best year ever in 2000 with  record net income of $1.2
million,  or $.66 per share. Net cash provided by operating  activities exceeded
$2.28  million,  representing  a 300%  increase from 1999.  These  unprecedented
results  reflect the  restructuring  of the convertible  death spiral  preferred
stock, the success with the drilling  program that offset declining  production,
and the higher commodity prices enjoyed in 2000.

BUSINESS STRATEGY

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

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

                                        1

<PAGE>

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

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

OPERATIONS

As of December 31, 2000,  we had varying  ownership  interests in 12 gross (1.55
net) non-operated wells located in Southern Louisiana and Texas.

The following  table presents oil and gas reserve  information  within our major
operating areas (onshore Louisiana and Texas) as of December 31, 2000:
<TABLE>
<CAPTION>
                            Net Proved Reserves
     ------------------------------------------------------------------
       Bbls                Mcf             Mcfe (1:6)         BOE (6:1)
     -------            ---------          ---------          --------
<S>  <C>                <C>                <C>                 <C>
     377,000            1,498,000          3,760,000           627,000
</TABLE>

COMPETITION

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

MARKETS

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

Crude Oil - Oil produced from our properties is generally  transported by truck,
barge or pipeline to unaffiliated third-party purchasers at the prevailing field
price. Currently,  the primary purchaser of our proportionate share of crude oil
is Plains  Marketing,  L.P. which bought over 80% of our crude oil production in
2000. The contracts are month-to-month and subject to change. The market for our
crude oil is competitive and therefore we do not believe that the loss of one of
our primary  purchasers  would have a material  adverse  effect on our  business
because other arrangements could be made to market our crude oil products. We do
not anticipate  problems in selling future oil production  because purchases are
made based on current market  conditions and pricing.  Oil prices are subject to
volatility  due to several  factors  beyond  our  control  including:  political
turmoil;  domestic and foreign  production  levels;  OPEC's ability to adhere to
production quotas; and possible governmental control or regulation.

Natural  Gas  - We  sell,  through  our  operating  partners,  our  natural  gas
production  at the  wellhead  to various  pipeline  purchasers  or  natural  gas
marketing  companies.  Our third party  operators  distribute the  corresponding
revenues once the funds are received from the purchaser.  The wellhead contracts
have various  terms and  conditions,  including  contract  duration.  Under each
wellhead  contract,  the  purchaser  is  generally  responsible  for  gathering,
transporting, processing and selling the natural gas and natural gas liquids and
we receive a net price at the wellhead.

REGULATIONS

General - All aspects of the oil and gas industry are  extensively  regulated by
federal,  state, and local governments in all areas in which we have operations.
The following discussion of regulation of the oil and gas industry is

                                        2

<PAGE>

necessarily brief and is not intended to constitute a complete discussion of the
various  statutes,  rules,  regulations  or  governmental  orders  to which  our
operations may be subject.

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

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

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

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

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

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

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

Also in recent  years,  political  pressure  has  increased  in states where the
Company  has been  active to  mandate  compensation  to  surface  owners for the
effects of oil and gas operations and to increase  regulation of the oil and gas
industry at the local  government  level. In general,  such local  regulation is
aimed at increasing the  involvement  of local  governments in the permitting of
oil and gas operations,  requiring additional  restrictions or conditions on the
conduct of  operations  to reduce the impact on the  surrounding  community  and
increasing financial assurance  requirements.  Accordingly,  such regulation has
the potential to delay,  increase the cost, or even  prohibit  entirely,  future
drilling activities.

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

                                        3

<PAGE>

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

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

OPERATIONAL HAZARDS AND INSURANCE

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

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

BUSINESS RISKS

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

The Company has historically  suffered operating losses for most, if not all, of
the  years it has been in  existence  and it  continues  to have an  accumulated
deficit at December 31, 2000.

     2000 was the first year ever that the Company had generated any significant
net income or any significant  operating cash flows.  Prior to that, the Company
had suffered recurring,  and sometimes significant,  operating losses. Operating
losses for 1998 and 1999 are as follows:

     o $10.4  million for the year ended  December 31, 1998;  and o $151,000 for
     the year ended December 31, 1999.

     At December 31, 2000 we had an  accumulated  deficit of  approximately  $32
million.

     Although the Company  generated an unprecedented  operating profit in 2000,
we are unable to give any assurances that we will continue to operate profitably
in the future.


                                        4

<PAGE>

We may require  additional  financing.  The terms may be  unfavorable to present
shareholders.  Failure to receive  financing  will  jeopardize  the  chances for
future success.

     We will be required to make substantial capital expenditures to develop our
existing reserves and to discover new oil and gas reserves.  Currently, the only
known  source of capital  the Company  has to fund its  anticipated  oil and gas
exploration and development  activities is through our existing  working capital
and our future  operating  cash  flows.  Historically,  we have  financed  these
expenditures primarily with proceeds from the sale of debt and equity securities
and with cash from  operations.  See  "Management's  Discussion  and Analysis of
Financial Condition and Results of  Operations--Liquidity,  Capital Expenditures
and  Capital  Resources"  elsewhere  in  this  report  for a  discussion  of the
Company's  anticipated capital budget. We cannot assure you that we will be able
to raise  capital  in the  future.  If we cannot  obtain  sufficient  additional
capital  resources  if and  when it is  needed,  our  operations  and  financial
condition will be adversely affected.

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

     Our  success  is  highly  dependent  on prices  for oil and gas,  which are
extremely  volatile.  Although the prices  received in 2000, and those currently
expected to be received  in 2001 appear  favorable,  any decline in the price of
oil or natural gas would have a material  adverse affect on our business.  It is
important to recegnize  that oil and gas markets are both seasonal and cyclical.
Prices of oil and gas affect the following aspects of our business:

     o       our revenues, cash flows and earnings;
     o       our ability to attract capital to finance our operations and the
               cost of the capital;
     o       the value of our oil and gas properties; and
     o       the profit or loss we incur in exploring for, developing and
               eploiting our reserves.

     Various  factors  beyond  our  control  will  affect  the prices of oil and
natural gas, including:

     o       the worldwide and domestic supplies of oil and natural gas;
     o       the ability of members of the Organization of Petroleum Exporting
               Countries to agree to and maintain
     o       political  instability  or armed conflict in oil or  natural gas
               producing
             regions;
     o       the  price  and level of  foreign  imports;
     o       the state of the national and international economy and the level
               of consumer demand;
     o       the price, availability and acceptance of alternative fuels;
     o       the availability of pipeline  capacity;
     o       weather  conditions;  and
     o       domestic  and foreign government regulations and taxes.

We will not control our oil and gas properties;  therefore,  we will continue to
be dependent upon the various operators of our properties.

     The Company is not  presently the operator of any of its oil or natural gas
properties  and prospects and these  arrangements  are expected to continue,  at
least for the foreseeable  future.  Thus, we will be unable to control  material
aspects of  commercialization  of our principal  assets and we will be dependent
upon the expertise,  diligence and financial condition of the operators of those
properties.

We will experience drilling and operating risks.

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

                                        5

<PAGE>

as a result of numerous factors, many of which are beyond our control, including
by way of illustration, the following circumstances:

     o         economic conditions;
     o         title problems;
     o         compliance with governmental requirements;
     o         weather conditions; and
     o         shortages and delays in labor, equipment, services and/
                 or supplies.

     Some or all of our future drilling activities may not be successful and, if
unsuccessful,  failure  of a single or a few wells may have a  material  adverse
effect on our future  results of operations  and ability to participate in other
projects.

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

 o fires;                     o natural disasters;
 o explosions                 o encountering formations with abnormal pressures;
 o blowouts;                  o cratering;
 o pipeline ruptures;         o spills;
 o power shortages; and       o equipment  failures.

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

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

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

 o  permits for  drilling  operations;       o  environmental  protection;
 o  road and pipeline  construction;         o  worker  safety  regulations;
 o  reports  concerning operations;          o  customs  regulations;
 o  spacing  of  wells;                      o  taxation.
 o  unitization and pooling of properties;   o  production  rates; and
 o  construction of processing facilities.

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


                                        6

<PAGE>

We must comply with environmental regulations.

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

We must develop additional reserves to replace reserves depleted by production.

     Our future  success  will  depend  upon our  ability to develop  our proved
non-producing  and  undeveloped  oil and natural gas  reserves in the Gulf Coast
area and to find or acquire  additional  oil and natural gas reserves  which are
economically recoverable.  Once production is established,  proved reserves will
decline  as they  are  depleted  by  production.  We must  continue  exploratory
drilling or  otherwise  acquire  proved  reserves  to  continue to increase  our
reserves and our production.  Our strategic plan includes increasing our reserve
base through exploratory drilling,  development and exploitation of our existing
properties and acquiring  other  exploratory or producing  properties if we have
sufficient  capital  resources  and  the  acquisition  meets  certain  projected
financial  guidelines.  We can  give no  assurance  that our  planned  drilling,
development  and  exploitation  projects will result in  significant  additional
reserves or that we will have success  drilling  productive  wells with reserves
that produce revenues exceeding finding, development and production costs.

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

     There are  numerous  uncertainties  inherent in  estimating  quantities  of
proved  reserves and in projecting  future rates of production and the timing of
development expenditures, including many factors beyond our control. The reserve
data  included  in this  report  represent  only  estimates.  In  addition,  the
historical  and projected  estimates of future net revenue from proved  reserves
and the present  value thereof are based upon certain  assumptions  about future
production levels, prices and costs that may prove to be incorrect over time. In
particular,  estimates of crude oil and natural gas reserves, future net revenue
from proved reserves and the discounted  present value thereof for our crude oil
and natural gas properties described in this report are based on the assumptions
that such  properties  will be  developed  in  accordance  with  their  proposed
development  programs  and that future  crude oil prices will remain the same as
crude  oil and  natural  gas  prices at  December  31,  2000,  with  respect  to
production attributable to our interests in our respective properties.

     In addition,  you should not construe the estimated present value of future
cash flow as the  current  market  value of the  estimated  oil and  natural gas
reserves attributable to our properties.  We have based the estimated discounted
future net cash flows from proved  reserves  included  in this  report  based on
prices  and  costs as of  December  31,  2000,  in  accordance  with  applicable
regulations  set forth by the SEC.  It should be noted  that the  actual  future
prices and costs may be  materially  higher or lower and that many  factors will
affect actual future net cash flows, including:

  o   the amount and timing of actual production,
  o   supply and demand for oil and natural gas,
  o   curtailments  or increases in consumption by natural gas  purchasers, and
  o   changes in governmental regulations or taxation.

     The timing of the production of oil and natural gas from  properties and of
the  related  expenses,  affect the timing of actual  future net cash flows from
proved  reserves and thus,  their actual  present  value.  In addition,  the 10%
discount  factor,  which we are required to use to calculate  present  value for
reporting  purposes,  is not necessarily the most  appropriate  discount factor,
given actual  interest rates at any given time and/or the risks to which the oil
and natural gas industry in general are subject.


                                        7

<PAGE>

We will face substantial competition.

     We will be competing  with both major and  independent  oil and natural gas
and  other  companies,  nearly  all of  which  will  have  substantially  larger
financial resources, operations, staffs and facilities. We will continue to face
intense  competition  from  both  major  and  independent  oil and  natural  gas
companies  when  we seek to  acquire  desirable  properties  and to  market  our
production.  These competitors have financial and other resources  substantially
in excess of those which will be available to us.  Accordingly,  our competition
could have a material adverse affect on our business.

Acquiring interests in other properties involves substantial risks.

     We intend to evaluate and acquire  interests in both proved oil and natural
gas properties  and  exploratory  acreage.  To acquire  producing  properties or
undeveloped  exploratory  acreage  will  require  an  assessment  of a number of
factors including:

o   the potential value of the proved oil or gas properties and the likelihood
      of future production;
o   potentially recoverable reserves;
o   estimated operating costs;
o   potential  environmental and other  liabilities;  and o potential drilling
      and production difficulties.

     Such assessments  will necessarily be inexact and uncertain.  Our review of
assets to be acquired may not reveal all existing or potential  problems and the
assumptions  used in any  acquistion  may  ultimately  prove  to be  inaccurate.
Therefore,  any unsuccessful acquisition could have a material adverse effect on
the Company's financial condition.

Our corporate charter includes anti-takeover provisions.

     Our Board of Directors may issue up to 505,497 shares of unissued preferred
stock without shareholder approval and may set the rights, preferences and other
designations, including voting rights, of those shares as the Board of Directors
may  determine.  In  addition,  our  articles  of  incorporation  provide  for a
classified  Board of Directors.  Directors serve staggered  three-year terms and
may only be removed for cause.  These  provisions  may  discourage  transactions
involving actual or potential  changes of control,  including  transactions that
otherwise could involve  payment of a premium over  prevailing  market prices to
holders of our common  stock.  We have no plans,  arrangements,  commitments  or
understandings  relating to potential  future  issuances of preferred  stock. We
will not be subject to provisions  of the Nevada  General  Corporation  Law that
would make some  business  combinations  more  difficult.  See  "Description  of
Capital Stock--Anti-Takeover Statutes".

Our corporate charter limits director liability.

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

It is unlikely we will pay dividends on common stock.

     The Company has never  declared or paid cash  dividends on common stock and
we do not anticipate  that we will pay dividends in the foreseeable  future.  We
anticipate that future earnings, if any, will be retained for development of our
business.


                                        8

<PAGE>

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

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

     The market price of our common  stock could be adversely  affected by sales
of  substantial  amounts of common stock in the public market or the  perception
that such sales could occur.

     Trading in our common stock is sporadic and relatively infrequent. The sale
of a material  number of our shares of common stock in the public  market or the
perception  that such sales could occur could have a material  adverse effect on
the trading price of our common stock.


ADMINISTRATION

Office  Facilities  - We  currently  rent  approximately  3,400 square feet on a
month-to-month  basis in an office  facility in Grand  Junction,  Colorado.  The
rental rate is $2,400 per month.

Employees - As of December 31, 2000,  we had three  full-time  and one part-time
employees.  None are covered by a collective bargaining  agreement.  We consider
that our relations with our employees is satisfactory.



                                        9

<PAGE>

ITEM 2 - PROPERTIES

PRINCIPAL OIL AND GAS INTERESTS

Developed Acreage - Our producing properties as of December 31, 2000 are located
in the following areas shown in the table below:
<TABLE>
<CAPTION>
                                        OIL               GAS
                                 ----------------   ---------------
                                  Gross     Net(2)   Gross    Net(2) Developed Acreage
     Fields            State     Wells(1)   Wells   Wells(1)  Wells   Gross     Net(2)
------------------    -------    --------   -----   -------   -----  -------    ------
<S>                  <C>            <C>      <C>       <C>       <C>   <C>        <C>
East Bayou Sorrel    Louisiana      3        .48       -         -     368        59
South Lake Arthur    Louisiana      -          -       1       .20     349        73
Maurice              Louisiana      -          -       1       .08     196        16
Austin Bayou         Texas          -          -       1       .02      88         2
Ganado               Texas          -          -       3       .38     439        55
Texana               Texas          -          -       1       .13     174        22
Formosa              Texas          -          -       2       .26     295        37
                                  ----      -----     --      -----  ------     -----
     Grand Total                    3        .48       9      1.07   1,909       264
                                  ====      =====     ==      =====  ======     =====
</TABLE>
Footnotes

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

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

Undeveloped Acreage - Our gross and net working interests on undeveloped acreage
as of December 31, 2000 is as follows:
<TABLE>
<CAPTION>
                        Undeveloped Acreage       Expiration of Net Acreage(1)
                     --------------------------   ----------------------------
Prospect Description  State      Gross     Net      2001      2002       2003
-------------------- ---------   ------   -----   -------    -------    ------
<S>                  <C>            <C>     <C>       <C>         <C>        <C>
East Bayou Sorrel    Louisiana      90      14        14          -          -
Maurice              Louisiana     495      42        22          5         15
Formosa              Texas       9,028   1,129       769        180        180
Texana               Texas       7,970     996         -        218        778
                                ------   -----    ------     ------     ------
    Totals                      17,583   2,181       805        403        973
                                ======   =====    ======     ======     ======
</TABLE>


     (1)  Substantially  all of these leases had original terms of 2 or 3 years.
          The  table  illustrates  the year the net  acres  will  expire  unless
          production has been obtained.

GULF COAST PROPERTIES AND PROSPECTS

Overview - The U.S. Gulf Coast, although it has been actively explored,  remains
a prolific area with excellent  upside  potential for  exploration due to modern
proprietary  3-D  seismic  surveys.  We  believe  that  utilizing  the  advanced
technology of 3-D seismic modeling reduces the inherent risk associated with oil
and gas exploration  activities and therefore will enhance our ultimate  success
rate. The use of the 3-D seismic survey  fundamentally  changes the risk profile
of oil and gas exploration by decreasing drilling risks,  lowering finding costs
and locating  reserves not detectable by using  traditional  methods.  The three
significant areas where the Company  currently  participates as a non-operating,
minority interest partner utilizing 3-D technology are described below.


                                       10

<PAGE>

East Bayou Sorrel - During 1997, the Company  acquired a working interest and an
after prospect payout ("APPO") leasehold interest in the 1996 discovery of a new
oil and gas  field,  East  Bayou  Sorrel  Field  located  in  Iberville  Parish,
Louisiana.  The  production  from  the  three  producing  wells  in  this  field
represented  approximately  72% of the Company's  production (on a BOE basis) in
2000.  The  production  is  being  drawn  from  the CIB Haz 2 and CIB Haz 3 sand
formations.  The prospect "paid out" effective November 15, 1999 and our working
interest increased from 8.9% to 15.6% as a result of owning the APPO.

Maurice Field - In 1997, the Company joined Amerada Hess  Corporation to drill a
discovery well at Maurice Field,  Vermilion Parish,  Louisiana.  Since then, two
additional discovery wells have been drilled,  however, one of these was lost in
late  1999  due  to   downhole   mechanical   problems.   Based  on   additional
interpretation  of  a  3-D  seismic  survey,  another  well  commenced  drilling
operations  in  October  2000.  In  February  2001,  this  exploratory  well was
completed in the Bol Mex III sand at a measured depth of 16,370'.  However,  the
initial  completion  failed to procure a  satisfactory  cement job at the bottom
hole location, and water located below the productive zone was entering the well
bore.  A workover  rig was  engaged in April  2001 and  recompletion  efforts to
isolate the water from the  production  zone are underway as of the date of this
report.  Based on the  results  of this  well,  others  may be  drilled to fully
develop the field.  Production from this field represented  approximately 13% of
the Company's  production  (on a BOE basis ) in 2000 and is being drawn from the
Bol Mex III, Marg Tex and Camerina  sand  formations.  Our working  interests in
this field range from 6.9% to 9.5%.

Formosa,  Texana and Ganado Prospects - During 1997, the Company secured a 12.5%
working  interest in three on-shore upper Gulf Coast 3-D seismic survey projects
located in and around  Jackson  County,  Texas.  The 3-D surveys  cover over 200
square miles (approximately 130,000 acres). The subject lands for these prospect
areas lie in close  proximity  to some  prolific  productive  oil and gas fields
which produce from the  Frio/Yegua/Wilcox  sand  intervals.  Parallel  Petroleum
Corporation,  headquartered  in Midland  Texas,  operates  our  interests in the
Jackson  County  properties.  Using the 3-D data set,  Parallel has  generated a
multi-year prospect inventory ranging from lower risk/moderate  impact prospects
to higher  risk/higher  impact prospects.  With the cost of seismic  acquisition
paid for, most of our future capital  expenditure funds can be allocated to data
interpretation,  drilling and completion activities and leasehold  acquisitions.
Most of our  exploration  activities  will be focused on this area, at least for
the foreseeable future.

TITLE TO PROPERTIES

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

ESTIMATED PROVED RESERVES

Our oil and gas reserve and reserve value information is included in footnote 12
of  the  consolidated  financial  statements,  titled  "Oil  and  Gas  Producing
Activities."  This  information  is prepared  pursuant to Statement of Financial
Accounting  Standards No. 69, which includes the estimated net quantities of our
"proved" oil and gas reserves and the standardized  measure of discounted future
net cash flows.  The  estimated  proved  reserves  information  is based upon an
engineering  evaluation by Netherland,  Sewell & Associates,  Inc. The estimated
proved  reserves  represent  forward-looking  statements  and  should be read in
connection with the disclosure on forward-looking statements set forth elsewhere
in this report.



                                       11

<PAGE>

All of our oil and gas reserves are located in the  Continental  United  States.
The table below sets forth our estimated quantities of proved reserves,  and the
present value of estimated future net revenues  discounted by 10% per year using
prices we were  receiving at the end of each of the two fiscal years ending 1999
and 2000 on a non-escalated basis.
<TABLE>
<CAPTION>
                                                   Year Ended December 31,
                                                     2000          1999
                                                  -----------   -----------
<S>                                                   <C>           <C>
Estimated Proved Oil Reserves (bbls)                  377,000       334,000
Estimated Proved Gas Reserves (Mcf)                 1,498,000     1,359,000
Estimated Future Net Revenues                     $20,429,000   $ 8,157,000
Present Value of Estimated Future Net Revenues    $15,131,000   $ 6,270,000
Prices used to determined reserves:
   Oil (per Bbl)                                  $     25.81   $     24.91
   Gas (per Mcf)                                  $     10.15   $      2.77
</TABLE>
The Company believes that no major discovery or other favorable or adverse event
has occurred since December 31, 2000, which would cause a significant  change in
the estimated proved reserves reported herein.  The estimates above are based on
year-end  pricing  in  accordance  with the SEC  guidelines  and do not  reflect
current  prices.  Since January 1, 2001, no oil or gas reserve  information  has
been filed with or included in any report to any U.S.  authority or agency other
than the SEC and the  Energy  Information  Administration  (EIA).  The  basis of
reporting  reserves to the EIA for the  company's  reserves is identical to that
set forth in the foregoing table.

As of April 13,  2001,  the Company  was  participating  in the  drilling of two
exploratory  wells (owning a 12.5% working  interest) in Jackson County,  Texas,
and the recompletion of one exploratory well (owning a 9.5% working interest) in
Vermillion Parish, Louisiana.

NET QUANTITIES OF OIL AND GAS PRODUCED

Our net oil and gas  production for each of the last two years (all of which was
from properties located in the United States) was as follows:
<TABLE>
<CAPTION>
                        Year Ended December 31,
                        2000              1999
                       ------            ------
<S>                    <C>               <C>
Oil (bbls)             80,000            74,000
Gas (Mcf)             274,000           337,000
</TABLE>

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

<TABLE>
<CAPTION>
                  Average Sales Productions       Average
Year Ended     -------------------------------   Production
December 31    Oil (Bbls)   Gas (Mcf)  Per BOE  Cost Per BOE
-----------    ----------   ---------  -------  ------------
<S>            <C>          <C>        <C>        <C>
   2000        $   29.12    $   4.59   $ 28.55    $   4.50
   1999        $   17.80    $   2.46   $ 16.48    $   3.11
</TABLE>


                                       12

<PAGE>

DRILLING ACTIVITY

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

<TABLE>
<CAPTION>
                         2000               1999
                     ------------       ------------
   Wells Drilled     Gross    Net       Gross    Net
-------------------  -----   ----       -----    ---
Exploratory
     Oil               -        -         -        -
<S>                    <C>   <C>          <C>    <C>
     Gas               5     .633         3      .27
     Non-Productive    2     .254         4      .50
                      --     ----        --      ---
          Total        7     .887         7      .77
                      ==     ====        ==      ===
Development
     Oil               -        -         -        -
     Gas               -        -         -        -
     Non-Productive    -        -         -        -
                      --     ----        --      ---
          Total        -        -         -        -
                      ==     ====        ==      ===
</TABLE>
ITEM 3 - LEGAL PROCEEDINGS

We may from time to time be involved in various claims, lawsuits,  disputes with
third parties,  actions involving  allegations of  discrimination,  or breach of
contract  incidental to the operation of our business.  At December 31, 2000 and
as of the date of this report,  we were not involved in any litigation  which we
believe could have a materially  adverse  effect on our  financial  condition or
results of operations.

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

We did not  submit  any  matters to a vote of our  Security  holders  during the
fourth quarter ended December 31, 2000.



                                       13

<PAGE>

                                     Part II

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

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

<TABLE>
<CAPTION>
                                         Common Stock
                                     -------------------
                                     High            Low
1999:                                ----           ----
<S>                                  <C>            <C>
    First quarter                    1.00           0.41
    Second quarter                   0.70           0.41
    Third quarter                    0.63           0.44
    Fourth quarter                   0.45           0.25
2000:
    First quarter                    0.75           0.28
    Second quarter                   0.44           0.17
    Third quarter                    0.63           0.16
    Fourth quarter                   0.88           0.38
</TABLE>
Stockholders - As of January 1, 2001, we had at least 1,274 round-lot registered
holders of our common stock and 10 holders of our Series C Preferred stock.

Dividends - We have not paid cash  dividends on our common stock in the past and
do not anticipate doing so in the foreseeable future.

Under our  Articles  of  Incorporation,  as amended  ("Articles"),  the Board of
Directors  has the power,  without  further  action by the holders of the Common
Stock,  to  designate  the  relative  rights and  preferences  of the  Company's
Preferred Stock,  when and if issued.  Such rights and preferences could include
preferences as to liquidation,  redemption and conversion rights, voting rights,
dividends or other preferences,  any of which may be dilutive of the interest of
the  holders of the  Common  Stock.  The Board  previously  designated  Series A
Cumulative  Convertible Preferred Stock and Series B 5% PIK Cumulative Preferred
Stock, none of which is outstanding and all of which has been retired.

Recent  Sales of  Unregistered  Securities  - The  Company  issued  and sold the
following  securities without  registration under the Securities Act of 1933, as
amended  ("Securities  Act"),  during the quarter  ended  December  31, 2000 and
through the date of this report.

1.   Effective  November 8, 2000, we issued 99,503 shares of Series C Redeemable
     Cumulative  Preferred  Stock to six  entities.  Effective the same date, we
     also issued stock purchase warrants to 10 entities,  including six to which
     we issued  Series C Preferred  stock.  The warrants  entitle the holders to
     purchase up to  1,763,800  shares of our common stock at $0.50 per share at
     any time through  December 31, 2003. We issued the Series C Preferred,  the
     warrants and  $210,833 to the 10 entities in exchange  for all  outstanding
     105,828 shares or our Series B 5% PIK Convertible Preferred Stock which was
     held by the 10 entities. We canceled the Series B preferred Stock after the
     exchange.  We relied on exemptions from  registration  included in Sections
     3(a)(9) and 4(2) of the Securities  Act of 1933 in issuing the  securities.
     Each  entity  took  the  securities  for  investment  and the  certificates
     representing  the securities  bear  restrictive  legends  preventing  their
     transfer except in compliance with the Securities Act.

2.   On November 2, 2000,  we issued a total of 150,000  shares to our President
     and CFO as  additional  compensation.  For  financial  statement  reporting
     purposes,  the  issuance  was  recorded  at $60,938  (or $.40625 per share)
     representing the market value of our common stock on the date of grant. The

                                       14

<PAGE>

     certificates  representing the shares bear a restrictive legend prohibiting
     transfer except in compliance of the Securities Act.

3.   Effective  December 22, 2000, we issued a total of 34,500 shares to five of
     our directors as  compensation  in lieu of cash. The services were provided
     between  September 1, 1999 and December 31, 2000.  For financial  statement
     reporting  purposes,  the  issuance  was  recorded at $21,563 (or $.625 per
     share)  representing  the average  market  value of our common stock on the
     date the shares  were  issued.  The  Certificates  representing  the shares
     issued upon  conversion  bear a  restrictive  legend  prohibiting  transfer
     without  registration  under the Securities Act or the  availability  of an
     exemption from registration.

4.   Also on December 22,  2000,  we issued a total of 8,500 shares to our three
     employees for bonuses in lieu of cash.  For financial  statement  reporting
     purposes,  the  issuance  was  recorded  at  $5,313  (or  .625  per  share)
     representing the market value of our common stock on the date of grant. The
     Certificates   representing  the  shares  issued  upon  conversion  bear  a
     restrictive  legend  prohibiting  transfer without  registration  under the
     Securities Act or the availability of an exemption from registration.

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

In April 2001,  we  restructured  $2.4  million of our  outstanding  convertible
debentures,  which among other things,  reduced the conversion price from $30.00
to  $1.75.  Accordingly,   the  restructured  debentures  are  convertible  into
approximately   1.4  million  shares  of  our  common  stock.  Our  Articles  of
Incorporation authorized a total of up to 4.0 million shares of common stock, of
which 1.9  million  were  issued  and  outstanding  on March 30,  2001,  and the
remaining  2.1 million  authorized  shares have been  reserved for warrants that
were issued prior to the debenture restructuring.  Accordingly, we are obligated
to take appropriate action and seek stockholder  approval to increase the number
of authorized  common stock at the next annual  meeting of  stockholders  so the
debenture  holders will have the option to convert their  securities into common
stock sometime in the future.

ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2000,  our cash balance was $1,407,769  with a positive  working
capital  position of  $1,380,134,  compared to a cash  balance of $724,354 and a
positive  working capital  position of $922,105 of December 31, 1999. The change
in our cash balance is summarized as follows:

<TABLE>
<CAPTION>
<S>                                                                <C>
Cash balance at December 31, 1999                                  $    724,354
Sources of Cash:
     Cash provided by operating activities                            2,284,269
     Proceeds from the redemption of certificate of deposit              15,000
                                                                    -----------
          Total sources of cash                                       2,299,269
                                                                    -----------
Uses of Cash:
     Capital expenditures for oil and gas activities                 (1,398,485)
    Purchase and retirement of Series B Preferred Stock                (210,833)
     Repayment of long term debt                                         (6,122)
     Other capital expenditures                                            (414)
                                                                    -----------
          Total uses of cash                                         (1,615,854)
                                                                    -----------
Cash balance at December 31, 2000                                   $ 1,407,769
                                                                    ===========
</TABLE>
The  Company  generated  approximately  $2.2  million  in  cash  from  operating
activities  during  2000  principally  due to the  increased  oil and gas prices
enjoyed  during the year. As discussed more  thoroughly  later in the Results of
Operations  section under the caption "Oil and Gas", the average prices received
by the  Company in 2000 were  $29.12 per bbl of oil and $4.59 per Mcf of gas. In
addition,  the overall  financial  condition  of the  Company was  significantly
improved with the following events:
                                       15
<PAGE>

1)   the  termination  fees  of  $242,411  that  have  been  received,   or  are
     anticipated  to be  received,  as a result  of the  abandoned  merger  with
     Carpatsky  (this  is more  thoroughly  discussed  later in the  Results  of
     Operations section under the caption "Abandoned Merger Settlement");

2)   the  restructuring  of the Series B Preferred Stock in November 2000 which,
     among other things, ultimately relieved the Company from paying $376,196 of
     dividends (this restructuring is discussed more detail in Footnote 6 of the
     financial statements); and

3)   the Company recently restructured $2.4 million, or 86%, of its $2.8 million
     convertible  debentures that were due on April 15, 2001.  Essentially,  the
     restructured  debt has been  extended for two years in exchange for a lower
     conversion  price  and  a  higher  interest  rate  (this  restructuring  is
     discussed more thoroughly in Footnote 2 of the financial statements).

The costs  incurred in 2000 for oil and gas activities are summarized as follows
(the  difference  between the total  incurred,  as  illustrated in the following
table,  and the total  amount cash used in 2000,  relates to the net increase in
the accounts payable for these activities between December 31, 1999 and December
31, 2000).

<TABLE>
<CAPTION>
                                          Program Operator
                                   -------------------------------  Internal
Category:                            NEG      Parallel      AHC      Costs        Total      %
                                   -------    --------   ---------  --------   ----------  -----
<S>                                <C>        <C>        <C>        <C>        <C>           <C>
Acquisition of Unproved Properties $     -    $398,855   $ 32,248   $      -   $  431,103    27%
Exploration costs                        -     523,055    172,018     15,927      711,000    45%
Development and workovers           72,928           -     86,561          -      159,489    10%
Capitalized interest                     -           -          -    278,250      278,250    18%
                                   -------    --------   --------   --------    ---------  -----
          Total                    $72,928    $921,910   $290,827   $294,177   $1,579,842   100%
                                   =======    ========   ========   ========   ==========  =====
          Percent                       5%         58%        18%        19%         100%
</TABLE>
Our current oil and gas assets and prospect areas are summarized as follows:

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

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

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

Although we are non-operator in all of these areas, and therefore do not control
the timing of any development or exploration activities, we currently expect the
expenditures  that will be proposed for these areas by the respective  operators
through the first quarter of 2002 to be within the following ranges:


<TABLE>
<CAPTION>
                                                               Estimated Investment
                                                             ------------------------
                                                             Low End         High End
        Area                        Operator
--------------------------    ---------------------------  ----------       ----------
Formosa, Texana and Ganado    Parallel Petroleum, Corp.
<S>                           <C>                          <C>              <C>
                              ("Parallel")                 $1,649,000       $2,595,000
East Bayou Sorrel             National Energy Group, Inc.
                              ("NEG")                         305,000          681,000
Maurice Prospect              Amerada Hess Corporation
                              ("AHC")                         246,000          324,000
                                                           ----------     ------------
          Total                                            $2,200,000       $3,600,000
                                                           ==========       ==========
</TABLE>

Currently,  the only source of capital  the Company has to fund its  anticipated
oil and gas  exploration  and  development  activities,  is through our existing
working  capital and our future  operating  cash flows.  Accordingly,  given the
range of potential  capital  requirements that may be proposed through the first
quarter of 2002, our capital  resources may not be sufficient to fund all of the
proposed  activities.  Should  this  be the  case we  may:  a)  seek  additional
financing,  the source or terms which is  currently  unknown;  or b) elect other
alternatives  including:  the sale of existing  assets,  farming out of specific
projects  to  another  party,  establishing  a joint  venture  for a  particular
project, or opting out of a proposed operation or activity.

<PAGE>

RESULTS OF OPERATIONS

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


                                       16

<PAGE>

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

<TABLE>
<CAPTION>
                                                 For the Year Ended December 31,
                                                 -------------------------------
                                                      2000            1999
                                                   -----------     -----------
Production:
<S>                                                     <C>             <C>
     Oil (bbls)                                         79,937          73,947
     Gas (Mcf)                                         273,940         336,761
     BOE (6:1)                                         125,594         130,074
Average Collected Price:
     Oil (per bbl)                                 $     29.12     $     17.80
     Gas (per mcf)                                 $      4.59     $      2.46
     Per BOE (6:1)                                 $     28.55     $     16.48
Operating Margins:
     Revenue
          Oil                                      $ 2,327,450     $ 1,316,142
          Gas                                        1,257,795         827,915
                                                   -----------     -----------
               Total Revenue                         3,585,245       2,144,057
     Costs
          Lifting Costs                               (299,434)       (196,283)
          Production taxes                            (266,007)       (208,614)
                                                   -----------     -----------
               Total Costs                            (565,441)       (404,897)
                                                   -----------     -----------
     Operating Margin                              $ 3,019,804     $ 1,739,160
                                                   ===========     ===========
     Operating Margin Percent                              84%             81%
Production Costs per BOE before DD&A               $      4.50     $      3.11
Change in Revenue Attributable to:
     Production                                    $   (48,181)
     Price                                           1,489,369
                                                   -----------
          Total Increase in Revenue                $ 1,441,188
                                                   ===========
</TABLE>

Discoveries in 2000

   During 2000, we participated in the drilling of six exploratory wells located
   in Jackson County,  Texas, within the prospect areas operated by Parallel. Of
   these  six  wells,  four  were  productive  and two  were  dry.  Three of the
   discovery  wells  commenced  production  in  September  2000  and the  fourth
   discovery well was not completed  until  November  2000. The production  from
   these wells consists principally of natural gas and represented approximately
   10% of the Company's  total  production  in 2000 (on an  equivalent  units of
   production basis) and approximately 22% of the Company's total gas production
   in 2000. As previously  stated,  most of our  exploration  activities for the
   foreseeable future will focus on the Jackson County area.

Comparison of Oil and Gas Production between 2000 and 1999:

   Oil - The 5,990 bbl increase in oil  production  for the year ended  December
   31, 2000, when compared to the same period in 1999, is primarily attributable
   to increased production realized by the Company from the wells located in the
   East Bayou Sorrel field, operated by NEG. The increase in production realized
   by the  Company,  is not  attributable  to an overall  increase  in the 8/8's
   production from the wells, but rather an increased interest in the respective
   wells.  On November  15, 1999,  the  prospect  "paid out" and pursuant to the
   terms of our after prospect payout  agreement,  our working interest in these
   wells  increased  from  8.9% to 15.6%  giving  us more of the  overall  8/8's
   production subsequent to that date.


                                       17

<PAGE>

   Gas - The 62,821 Mcf decrease in gas  production  for the year ended December
   31, 2000 when compared to the same period in 1999, is primarily  attributable
   to the Maurice field  operations,  where: a) we have  experienced the natural
   decline of production inherent in oil and gas operations;  and b) the loss of
   one well in August 1999 due to down-hole mechanical  problems.  Specifically,
   the total decrease in our Maurice field gas production in 2000, when compared
   to 1999,  was over 115,740 Mcf. This  decrease was partially  offset from the
   new  production  from the discovery  wells in Jackson  County,  Texas,  which
   collectively, produced over 58,747 Mcf.

Comparison of Oil and Gas Revenue between 2000 and 1999:

   Oil and gas revenue for the year ended  December 31, 2000 increased over $1.4
   million,  when compared to the same period in 1999.  This increase in revenue
   is substantially  attributed to the significantly  higher prices received for
   the oil and gas in 2000. We received an average  $29.12 per bbl of oil during
   2000 compared to $17.80 per bbl for the same period in 1999 -  representing a
   $11.32 per bbl, or 64%  increase,  in 2000.  We received an average  price of
   $4.59 per Mcf of gas during  2000  compared  to $2.46 for the same  period in
   1999 representing a $2.13, or 87% increase, in 2000.

Comparison of Oil and Gas Costs between 2000 and 1999:

   Lifting  Costs - The  lifting  costs  increased  $103,151  for the year ended
   December 31, 2000 when compared to the same period in 1999 primarily  because
   of: a) increased water  production from the three wells at East Bayou Sorrel.
   Water disposal fees on an 8/8's basis are charged at a rate of $0.57 per bbl.
   The  average   8/8's  water   produced  from  these  wells  during  2000  was
   approximately  3,500 bbls per day compared to 2,100 bbls per day during 1999;
   and b) the  increased  lifting  costs from five  additional  discovery  wells
   located in Jackson County, Texas that were put on line in 2000.

   Production Taxes - The production taxes increased  $57,393 for the year ended
   December 31, 2000 when compared to the same period in 1999 primarily  because
   a  substantial  portion  of the  production  taxes are  based on the  revenue
   generated  and not on the volume  produced.  Accordingly,  the higher  prices
   received for oil and gas in 2000 have increased the production taxes.

Exploration Outlook:

   An exploratory  well in the Maurice  prospect  located in Vermillion  Parish,
   Louisiana, operated by AHC, commenced drilling operations in October 2000. In
   February  2001,  the well was completed in the Bol Mex III sand at a measured
   depth of  16,370'.  However,  the  initial  completion  failed  to  procure a
   satisfactory  cement job at the bottom hole  location and water located below
   the productive zone was entering the well bore. A workover rig was engaged in
   April 2001 and recompletion  efforts to isolate the water from the production
   zone were underway as of the date of this report.

   Based on the  success  we  enjoyed  in  2000,  we fully  expect  to  continue
   exploiting  our  assets  within  the  Jackson  County,  Texas  area  for  the
   foreseeable future. We expect as many as twelve (12) Frio and Yegua prospects
   may be drilled during 2001 within these  prospect  areas  depending on, among
   other things, weather and rig availability.

   In addition,  Parallel has also announced that a regional study of the Wilcox
   trend (examining  depths between 14,000' and 18,000' below the surface),  has
   recently been completed, where at least twelve (12) Wilcox prospects covering
   approximately 30,000 acres have been identified.  Although the 8/8's costs to
   drill a Wilcox  objective  is between $3.0 and $5.0  million,  and there is a
   higher degree of risk associated with depth and reservoir  quality,  Parallel
   believes the reserve  potential is  considerable.  Within the regional Wilcox
   study, at least four (4) of the identified  prospects are covered,  either in
   whole or in part,  within the Texana  Area of Mutual  Interest  (the  "Texana
   AMI")in which we have a 12.5% working interest.  The total acreage within the
   Texana AMI for the  identified  Wilcox  prospects  is over 8,000 acres and we
   have recently acquired  substantially  all of our proportionate  share of the
   corresponding leases (with terms of two or three years). This Regional Wilcox
   study, as it relates to the Texana AMI, appears extremely attractive based on
   the preliminary studies and may provide our Company with new opportunities in
   the future.


                                       18

<PAGE>

Cautionary Outlook:

   Approximately  72% of our production  for 2000, on a BOE basis,  was produced
   from the three  wells  located  at East  Bayou  Sorrel.  Of that,  54% of the
   production,  on a BOE basis, was produced from the Schwing #1 which averaged,
   on an 8/8's  basis,  1,260  bbls of oil per day and 1,270 Mcf per day for the
   first nine months of 2000 from the Cib Haz 3 formation.  In  September  2000,
   sand began  showing up in the  production  fluids in the  Schwing #1 and,  in
   order to mitigate the sand,  NEG (the operator of the well)  immediately  cut
   the production  rate back to  approximately  500 bbls per day and 550 Mcf per
   day. The well produced at this level until late December when the entire well
   bore sanded up and production  ceased.  Remedial  efforts,  utilizing  coiled
   tubing,  were  attempted  to clean out the well bore and restore  production,
   however, those efforts failed. Accordingly, plans are being made to sidetrack
   the well to an updip location in the productive reservoir. This procedure, if
   successful, would accomplish two objectives: 1) it would place the new bottom
   hole location away from the apparently damaged producing interval;  and 2) it
   would  relocate  the "take point" of this  reservoir to an updip  location to
   recover the "attic" oil that could not have been  recovered  from the present
   bottom  hole  location  even if the well  bore had not  sanded  up.  Although
   neither  the  Company or its  independent  reservoir  engineers,  Netherland,
   Sewell and Associates,  Inc., believe that the current  circumstances  impair
   the  existing  proved  reserves  attributable  to this  well in the Cib Haz 3
   formation,  the loss of the  production  will have an immediate  and negative
   impact on the Company's  future cash flows until such time  remedial  efforts
   can be successfully conducted.  Even then, there can be no assurance that the
   sidetrack,  or other potential  operations,  will ultimately be successful in
   restoring  this  interval  to  sustained  production.  Should  the  sidetrack
   operation, or other remedial procedure,  ultimately be unsuccessful, it would
   have a negative  impact on our  estimated  reserves,  future  production  and
   future cash flows.  The total net reserves  attributable  to the Cib Haz 3 in
   the  Schwing # 1 as of  December  31,  2000,  are  58,848  BOE,  representing
   approximately 9% of the Company's total proved reserves.

Consulting Arrangement - Related Party
In March 1996, the Company entered into a three-year  consulting  agreement with
Beta Capital Group,  Inc.  ("BCG") located in Newport Beach,  California.  BCG's
chairman, Steve Antry, has been a director of the Company since August 1996. The
consulting   agreement   provided   monthly   cash   payments  of  $17,500  plus
reimbursement  for  out-of-pocket  expenses.  Stephen  Fischer,  an  independent
contractor  for  BCG,  is also a member  of the  Company's  Board of  Directors.
Messrs.  Antry  and  Fischer  are also  principals  of Beta Oil & Gas,  Inc.,  a
publicly  held oil and gas  company  located  in  Tulsa,  Oklahoma.  We have not
incurred  any  costs  associated  with  this  consulting   agreement  since  its
expiration in February 1999.

General and Administrative
Total general and administrative ("G&A") expenses decreased $91,258 in 2000 when
compared to 1999 primarily as a result of reducing  personnel,  limiting travel,
eliminating unnecessary  administrative services and utilizing consultants on an
as needed basis.

Depreciation, Depletion and Amortization
Depreciation,  Depletion and Amortization  ("DD&A") for the periods presented by
cost center consisted of the following:
<TABLE>
<CAPTION>
                               For the Year Ended
                                  December 31,
                                                         -----------------------
                                                            2000         1999
                                                         ----------   ----------
<S>                                                      <C>          <C>
Oil and Gas Properties                                   $  998,249   $  985,113
Furniture and Fixtures                                       19,495       22,402
                                                         ----------   ----------
     Total                                               $1,017,744   $1,007,515
                                                         ==========   ==========
DD&A for the oil and gas properties, per BOE:            $     7.95   $     7.57
</TABLE>
DD&A for the oil and gas  properties is computed  using the  units-of-production
method utilizing only proved reserves at the end of the respective period.




                                       19

<PAGE>

ABANDONED MERGER SETTLEMENT

On  November  8, 2000,  the  Company  announced  that its  proposed  merger with
Carpatsky  Petroleum,  Inc.  ("Carpatsky") had been terminated.  Pursuant to the
terms of the Termination Agreement,  as amended,  Carpatsky: a) paid the Company
$82,411 in cash (in November  2000) for certain  accounting  and  administrative
services  provided to Carpatsky by the Company  between  October 1, 1999 and the
date of  termination;  and b) paid the Company an  additional  $70,000 (in April
2001) and  issued a  non-interest  bearing  note in the amount of  $180,000  for
compensation  associated  with the  failed  merger.  The note is  payable at the
earlier of: i) eight equal quarterly  installments of $22,500  beginning June 1,
2001; or ii) should Carpatsky raise any debt or equity capital of any kind, they
would be obligated to pay the Company  $90,000 for each one million  raised on a
pro-rata basis (up to the total obligation of $180,000). For financial statement
reporting  purposes,  the Company recorded as income all of the cash due and 50%
of the note.  The Company  provided an allowance  for bad debt for the remaining
50% of the note based on Carpatsky's current financial condition.

INTEREST EXPENSE

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

<TABLE>
<CAPTION>
                               For the Year Ended
                                  December 31,
                                                         ----------------------
                                                           2000         1999
                                                         ---------    ---------
<S>                                                      <C>          <C>
Interest paid or accrued                                 $ 280,156    $ 280,425
Amortization of debt discount                              138,236      138,236
Amortization of debt issuance costs                        219,337      219,337
                                                         ---------    ---------
     Total interest incurred                               637,729      637,998
Interest capitalized for exploration activities           (278,250)    (278,250)
                                                         ---------    ---------
     Interest expense                                    $ 359,479    $ 359,748
                                                         =========    =========
</TABLE>
There has been very little change in the total interest  incurred when comparing
the periods  presented  because the majority of our debt is  represented  by the
$2.8 million in convertible  debentures.  The principle balance of the debenture
did not change during the periods presented.

The  total  interest   capitalized  for  exploration   activities  has  remained
relatively constant when comparing the periods presented since we have, and will
continue to, incur costs on our unevaluated oil and gas properties.  Interest is
being properly capitalized in accordance with FAS 34 and FASB Interpretation No.
33,  on the  unevaluated  oil  and gas  costs.  Interest  capitalization  on the
unevaluated  oil and gas costs  ceases when the  corresponding  asset has become
evaluated and is ready for its intended use.

OTHER MATTERS

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
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations"  regarding our financial  position,  reserve  quantities,  plans and
objectives  of the  Company's  management  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. We can give
no assurance that such  expectations  and assumptions  will prove to be correct.
Reserve  estimates of oil and gas  properties  are generally  different from the
quantities of oil and natural gas that are ultimately  recovered or found.  This
is   particularly   true  for  estimates   applied  to  exploratory   prospects.
Additionally,  any statements contained in this report regarding forward-looking
statements  are subject to various known and unknown  risks,  uncertainties  and
contingencies,   many  of  which  are  beyond  our   control.   Such  risks  and
uncertainties   may  cause  actual   results,   performance,   achievements   or
expectations to differ  materially from the  anticipated  results,  performance,
achievements  or  expectations.  Factors  that may affect  such  forward-looking
statements include,

                                       20

<PAGE>

but are not  limited  to: our  ability  to  generate  sufficient  cash flow from
operations to complete our planned  drilling and exploration  activities;  risks
inherent in oil and gas  acquisitions,  exploration,  drilling,  development and
production;  price  volatility  of  oil  and  gas;  competition;   shortages  of
equipment, services and supplies; 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 beyond our
control. In addition, since all of the prospects in the Gulf Coast are currently
operated by another party, we may not be in a position to control costs,  safety
and timeliness of work as well as other critical  factors  affecting a producing
well  or  exploration   and  development   activities.   All  written  and  oral
forward-looking  statements attributable to our Company or persons acting on our
behalf  subsequent to the date of this report are  expressly  qualified in their
entirety by this disclosure.


                                       20

<PAGE>

ITEM 7 - FINANCIAL STATEMENTS

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                            Page
<S>                                                                          <C>
Independent Auditor's Report..............................................   23
Consolidated Balance Sheet - December 31, 2000............................   24
Consolidated Statements of Operations - For the Years Ended December 31,
2000 and 1999.............................................................   25
Consolidated Statements of Stockholders' Equity -
  For the Years Ended December 31, 2000 and 1999..........................   26
Consolidated Statements of Cash Flows - For the Years Ended December 31,
2000 and 1999.............................................................   27
Notes to Consolidated Financial Statements................................28-39
</TABLE>


                                       21

<PAGE>

                          INDEPENDENT AUDITOR'S REPORT











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

We have audited the accompanying consolidated balance sheet of Pease Oil and Gas
Company and  subsidiaries as of December 31, 2000, and the related  consolidated
statements of operations,  redeemable  preferred  stock and other  stockholders'
equity and cash flows for the years  ended  December  31,  2000 and 1999.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial  position of Pease Oil and Gas
Company and  subsidiaries  as of  December  31,  2000,  and the results of their
operations  and their cash flows for the years ended  December 31, 2000 and 1999
in conformity with generally accepted accounting principles.




HEIN + ASSOCIATES LLP

Denver, Colorado
February 7, 2001, except for
    Note 2, which is dated April 13, 2001


                                       22

<PAGE>

                   PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                                December 31, 2000


                                     ASSETS
<TABLE>
<CAPTION>
CURRENT ASSETS:
<S>                                                                <C>
     Cash and equivalents                                          $  1,407,769
     Trade receivables, net of allowance for bad debts of $15,621       634,107
     Prepaid expenses and other                                          60,144
                                                                   ------------
          Total current assets                                        2,102,020
                                                                   ------------
OIL AND GAS PROPERTIES, at cost (full cost method):
     Unevaluated properties                                           2,600,657
     Costs being amortized                                           19,539,376
                                                                   ------------
          Total oil and gas properties                               22,140,033
     Less accumulated amortization                                  (15,866,536)
                                                                   ------------
          Net oil and gas properties                                  6,273,497
OTHER ASSETS:
     Office equipment and vehicle                                       230,624
     Less accumulated depreciation                                     (195,508)
                                                                   ------------
          Net office equipment and vehicle                               35,116
    Note Receivable, net of allowance for bad debt of $90,000            90,000
     Debt issuance costs, net of accumulated amortization of $603,082    46,079
     Deposits and other                                                   4,995
                                                                   ------------
         Total other assets                                             176,190
                                                                   ------------
TOTAL ASSETS                                                       $  8,551,707
                                                                   ============
                      LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
     Current maturities of long-term debt:
          Convertible Debenture, net of unamortized
            discount of $73,113                                    $    308,387
          Other                                                           6,873
     Accounts payable, trade                                            328,744
     Accrued expenses                                                    77,882
                                                                   ------------
               Total current liabilities                                721,886
LONG-TERM DEBT, less current maturities, net of
  unamortized discount of $63,089:                                    2,410,525
                                                                   ------------
               Total liabilities                                      3,132,411
CONTINGENCIES (See Notes 4 and 11)                                  ------------
REDEEMABLE PREFERRED STOCK:
  Series C Preferred Stock, par value $0.01 per share, 99,503
    shares authorized, issued and outstanding. (Redeemable for
    $3,316,767 and a Liquidation preference of $4,975,150 at
    December 31, 2000)                                                4,975,150
OTHER STOCKHOLDERS' EQUITY:
  Undesignated   Preferred  Stock,  par  value  $0.01  per  share,  2.0  million
    authorized,  of which  1,395,000  have been  retired,  and 99,503  have been
    designated as Series C
  Common Stock, par value $0.10 per share, 4,000,000 shares
    authorized, 1,924,398 shares issued and outstanding.                192,440
  Additional paid-in capital                                         32,519,779
  Accumulated deficit                                               (32,268,073)
                                                                   ------------
               Total Other Stockholders' equity                         444,146
                                                                   ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                         $  8,551,707
                                                                   ============
</TABLE>
        The                   accompanying  notes are an integral  part of these
                              consolidated financial statements.

                                       23

<PAGE>

                   PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                 For the Years Ended December 31, 2000 and 1999




<TABLE>
<CAPTION>
                                                    2000                1999
                                                ------------       ------------
REVENUE:
<S>                                             <C>                <C>
     Oil and gas sales                          $  3,585,245       $  2,144,057
OPERATING COSTS AND EXPENSES:
     Oil and gas production costs                    565,441            404,897
     Consulting arrangement-related party               -                37,750
     General and administrative                      754,268            845,526
     Depreciation, depletion and amortization      1,017,744          1,007,515
                                                ------------       ------------
          Total operating costs and expenses       2,337,453          2,295,688
                                                ------------       ------------
INCOME (LOSS) FROM OPERATIONS                      1,247,792           (151,631)
OTHER INCOME (EXPENSES):
    Abandoned merger settlement                      242,411               -
     Interest and other income                        57,793             46,105
     Interest expense                               (359,479)          (359,748)
                                                ------------       ------------
NET INCOME (LOSS)                               $  1,188,517       $   (465,274)
    Net charges associated with the
      preferred stock                                   -              (265,524)
                                                ------------       ------------
NET INCOME (LOSS) AVAILABLE TO COMMON
  STOCKHOLDERS                                  $  1,188,517       $   (730,798)
                                                ============       ============
BASIC:
     Earnings (Loss) Per Share                  $       0.68       $      (0.43)
     Weighted Average Shares Outstanding           1,755,000          1,684,000
DILUTED:
     Earnings (Loss) Per Share                  $       0.66       $      (0.43)
     Weighted Average Shares Outstanding           1,813,000          1,684,000
</TABLE>





















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

                                       24

<PAGE>

                   PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED
            STOCK AND OTHER STOCKHOLDERS' EQUITY For the Years Ended
                           December 31, 2000 and 1999





<TABLE>
<CAPTION>
                                                                               Other Stockholders' Equity
                                                      ------------------------------------------------------------------------------
                                      Series C             Series B
                                     Redeemable          Convertible                            Additional              Total Other
                                   Preferred Stock     Preferred Stock       Common Stock       Paid-In  Accumulated   Stockholders'
                                   Shares   Amount    Shares    Amount    Shares     Amount     Capital     Deficit        Equity
                                   ------  ---------  -------   ------  ---------  -------- ----------- ------------    -----------
<S>                                <C>     <C>        <C>       <C>     <C>        <C>      <C>         <C>             <C>
BALANCES, December 31, 1998          -     $    -     107,336   $1,073  1,601,062  $160,106 $37,811,006 $(32,991,316)   $ 4,980,869
Purchase and retirement of Series
   B Preferred Stock                 -          -        (825)      (8)      -         -        (51,305)        -           (51,313)
Issuance of common stock for:
  Services of Directors in lieu
    of cash                          -          -        -        -        42,700     4,270      63,063         -            67,333
  Conversion of Series B preferred
    stock                            -          -        (683)      (7)    87,636     8,764      (8,757)        -              -
Series B preferred stock dividends   -          -        -        -          -         -       (177,816)        -          (177,816)
Net Loss                             -          -        -        -          -         -           -        (465,274)      (465,274)
                                   ------  ---------  -------   ------  ---------  -------- ----------- -------------   -----------
BALANCES, December 31, 1999          -          -     105,828    1,058  1,731,398   173,140  37,636,191  (33,456,590)     4,353,799
Purchase and retirement of Series
  B Preferred Stock                                    (6,325)     (63)      -         -       (210,770)        -          (210,833)
Preferred Stock Exchange           99,503  4,975,150  (99,503)    (995)      -         -     (4,974,155)        -        (4,975,150)
Issuance of common stock for:
    Bonuses to officer and
      employees in lieu of cash      -          -        -        -       158,500    15,850      50,400         -            66,250
    Services of Directors in lieu
      of cash                        -          -        -        -        34,500     3,450      18,113         -            21,563
Net Income                           -          -        -        -          -         -           -       1,188,517      1,188,517
                                   ------ ----------  -------   ------  ---------  -------- ----------- ------------    -----------
BALANCES, December 31, 2000        99,503 $4,975,150     -      $ -     1,924,398  $192,440 $32,519,779 $(32,268,073)   $   444,146
                                   ====== ==========  =======   ======  =========  ======== =========== ============    ===========
</TABLE>






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

                                       25

<PAGE>

                   PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                 For the Years Ended December 31, 2000 and 1999


<TABLE>
<CAPTION>
                                                                  2000        1999
                                                               ----------  ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                            <C>         <C>
  Net Income (loss)                                            $1,188,517  $ (465,274)
  Adjustments to reconcile  net income  (loss) to net
    cash provided by (used in) operating activities:
      Depreciation, depletion and amortization                  1,017,744   1,007,515
      Amortization of debt discount and issuance costs            357,573     357,573
      Bad debt expense                                               -         23,710
      Loss (Gain) on sale of assets                                  -           (968)
      Issuance of common stock for services                        87,813      29,747
  Changes in operating assets and liabilities:
    (Increase) decrease in:
      Note and other receivable for abandonment of merger        (160,000)       -
      Trade receivables                                          (161,260)     (6,097)
      Prepaid expenses and other                                    3,703      24,338
        Increase (decrease) in:
          Accounts payable                                          6,836    (147,647)
          Accrued expenses                                        (56,657)    (83,607)
                                                               ----------  ----------
            Net cash provided by (used in)
              operating activities                              2,284,269     739,290
                                                               ----------  ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
     Capital expenditures for property, plant and equipment    (1,398,899)   (933,704)
     Redemption of certificate of deposit                          15,000      70,000
     Proceeds from sale of property, plant and equipment             -        101,005
                                                               ----------  ----------
               Net cash provided by (used in) investing
                 activities                                    (1,383,899)   (762,699)
                                                               ----------  ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
     Series B preferred stock dividends                              -       (244,653)
     Purchase and retirement of Series B Preferred Stock         (210,833)    (51,313)
     Repayment of long-term debt                                   (6,122)     (5,853)
                                                               ----------  ----------
               Net cash provided by (used in) financing
                 activities                                      (216,955)   (301,819)
                                                               ----------  ----------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS                   683,415    (325,228)
CASH AND EQUIVALENTS, beginning of year                           724,354   1,049,582
                                                               ----------  ----------
CASH AND EQUIVALENTS, end of year                              $1,407,769  $  724,354
                                                               ==========  ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
     Cash paid for interest                                    $  280,156  $  280,425
                                                               ==========  ==========
     Cash paid for income taxes                                $     -     $     -
                                                               ==========  ==========
</TABLE>










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

                                       26

<PAGE>

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

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

    Nature of Operations - At December 31, 2000 the principal  business of Pease
    Oil and Gas Company (the  "Company") is to participate  as a  non-operating,
    minority interest owner in exploration,  development, production and sale of
    oil, natural gas and natural gas liquids. The Company was previously engaged
    in the processing  and marketing of natural gas at a gas  processing  plant,
    the sale of oil and gas production equipment and oilfield supplies,  and oil
    and gas well completion and operational services.  However, during 1998, the
    Company's  gas  processing   plant  and  the  oilfield  service  and  supply
    businesses  were sold.  The Company  conducted  its  operations  through the
    following wholly-owned subsidiaries:  Loveland Gas Processing Company, Ltd.;
    Pease Oil Field  Services,  Inc.;  Pease Oil Field Supply,  Inc.;  and Pease
    Operating Company, Inc. All the subsidiaries are currently inactive.

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

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

    Oil and Gas Properties - The Company's oil and gas producing  activities are
    accounted for using the full cost method of accounting.  The Company has one
    cost  center  (full  cost  pool)  since  all of its oil  and  gas  producing
    activities are conducted in the United  States.  Under the full cost method,
    all costs  associated with the  acquisition,  development and exploration of
    oil and gas properties are capitalized, including payroll and other internal
    costs that are directly attributable to these activities. Any internal costs
    that are  capitalized  are  limited  to  those  costs  that can be  directly
    identified with the  acquisition,  exploration,  and development  activities
    undertaken by the Company for its own account,  and do not include any costs
    related to production,  general corporate  overhead,  or similar activities.
    The total amount of internal costs  capitalized  in unevaluated  oil and gas
    properties as of December 31, 2000 is $556,450, consisting only of interest.
    The Company  capitalizes  interest on its unevaluated oil and gas properties
    in accordance  with FASB  Interpretation  No. 33.  Accordingly,  interest is
    capitalized on oil and gas assets that have been excluded from the full cost
    amortization  pool.  The interest  that is  capitalized  becomes part of the
    related projects or properties and will be subject to amortization  when the
    costs of those  corresponding  assets are  transferred  to the  amortization
    pool. For the years ended December 31, 2000 and 1999,  capital  expenditures
    include other internal costs of $15,927 and $23,804, respectively.

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

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

    At December  31, 2000,  the Company  owned  approximately  2,181 net (17,583
    gross)  undeveloped acres. All of these leases were acquired with either two
    or three year terms. Unless production has been obtained through exploratory
    drilling, 805 of the net aces will expire in 2001, 403 net acres will expire
    in 2002,  and 973 net acres will  expire in 2003.  Substantially  all of the
    undeveloped  acreage  contain  identified  exploratory  prospects  or leads.
    Should the leases expire prior to an  exploratory  well being  drilled,  the
    value of these properties may be negatively affected.  This in turn may have
    a negative  material  impact on the Company's  future  results of operations
    and/or  its  financial  condition.  The  carrying  value of the  undeveloped
    acreage at

                                       27

<PAGE>

    December  31, 2000 was  $393,393.  At December  31,  2000,  the Company owns
    approximately  238 net (1,909 gross) developed acres.  Substantially  all of
    the  developed  acres have terms that allow the Company to hold the lease as
    long as production is maintained.

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

    The  capitalized   costs  of  evaluated  oil  and  gas  properties  (net  of
    accumulated   amortization  and  related  deferred  income  taxes)  are  not
    permitted to exceed the full cost ceiling.  The full cost ceiling involves a
    quarterly calculation of the estimated future net cash flows from proved oil
    and gas  properties,  using current prices and costs and an annual  discount
    factor  of 10%.  Accordingly,  the full  cost  ceiling  may be  particularly
    sensitive  in the  near  term  due to  changes  in oil  and  gas  prices  or
    production rates.

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

    Office Equipment and Vehicle -The office equipment and vehicle are stated at
    cost.  Depreciation for these assets is calculated  using the  straight-line
    method over 4 to 7 years which  represents the estimated useful lives of the
    corresponding  assets.  Depreciation expense related to the office equipment
    and the one  vehicle  amounted  to $19,495  and  $22,402 for the years ended
    December 31, 2000 and 1999, respectively.

    The costs of  normal  maintenance  and  repairs  are  charged  to  operating
    expenses as incurred.  Material  expenditures  which increase the life of an
    asset are capitalized and depreciated  over the estimated  remaining  useful
    life of the asset.  The cost of assets sold,  or otherwise  disposed of, and
    the related  accumulated  depreciation or amortization  are removed from the
    accounts, and any gains or losses are reflected in current operations.

    Debt Issuance Costs - Debt issuance  costs relate to the $5 million  private
    placement  of  convertible  debentures  discussed in Note 2. These costs are
    being amortized using the interest method.

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

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

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

    Revenue  Recognition - The Company recognizes revenues for oil and gas sales
    upon delivery to the purchaser. Gas imbalances, if they occur, are accounted
    for  using  the  "sales"  method.  However,  gas  imbalances  have  not been
    significant  in the  past  and are  not  expected  to be in the  foreseeable
    future.


                                       28

<PAGE>

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

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

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

    Hedging Activities- In June 1998, the Financial  Accounting  Standards Board
    ("FASB")  issued SFAS No. 133,  "Accounting  for Derivative  Instruments and
    Hedging  Activities."  SFAS No. 133  establishes  accounting  and  reporting
    standards   requiring  that  derivative   instruments   (including   certain
    derivative instruments embedded in other contracts), as defined, be recorded
    in the balance sheet as either an asset or liability measured at fair value,
    and requires that changes in fair value be recognized  currently in earnings
    unless specific hedge accounting  criteria are met.  Special  accounting for
    qualifying hedges allows unrealized gains and losses to be deferred in other
    comprehensive income for the effective portion of the hedge) until such time
    as the hedged  transaction  occurs,  and  requires  that a company  formally
    document,  designate, and assess the effectiveness of derivative instruments
    that receive hedge  accounting  treatment.  The Company  currently  does not
    engage in any activities that would be covered by SFAS 133.

2.  DEBT FINANCING ARRANGEMENTS:

 Long-Term Debt - Long-term debt at December 31, 2000 consists of the following:

<TABLE>
<CAPTION>
Convertible debentures, interest at 10%,
<S>                                                                 <C>
     Original maturity April 2001, senior and unsecured             $ 2,782,500
Less unamortized discount                                               (73,113)
                                                                    -----------
     Net carrying value                                               2,709,387
Note payable to bank, interest at 8.5%, monthly payments of $669,
     due March 2003, collateralized by a vehicle                         16,398
                                                                    -----------
          Total long-term debt                                        2,725,785
          Less current maturities, net of unamortized discount         (315,260)
                                                                    -----------
                    Long-term debt, less current maturities         $ 2,410,525
                                                                    ===========
</TABLE>
     In April 2001, the Company successfully restructured 86%, or $2,401,000, of
     the outstanding debentures.  These debenture holders agreed to extend their
     maturity  date for two years,  from April 15,  2001 to April 15,  2003,  in
     exchange for: a) lowering the conversion rate from $30.00 to $1.75;  and b)
     increasing  the  interest  rate from 10% to 11% per  annum.  Interest  will
     continue  to be due and payable on a quarterly  basis.  The new  conversion
     rate of $1.75  represented the current market rate of the Company's  common
     stock on the date the  restructuring  plan was  accepted by the majority of
     the debenture holders and formally  committed to by the Board of Directors.
     In addition, the Company agreed that, subject to certain exceptions,  it is
     prohibited from incurring  indebtedness that is senior to the Debentures so
     long as they are outstanding.


                                       29

<PAGE>

    The  Company  intends  to  continue  negotiating  with  the  holders  of the
    remaining  $381,500  of  outstanding   debentures  that  did  not  elect  to
    participate in the restructuring proposal.  However, these amounts have been
    reflected as a current  liability in the Company's balance sheet at December
    31, 2000.

    The $2,401,000 of debentures that were  restructured have been classified as
    long-term  debt on the December 31, 2000 balance  sheet in  accordance  with
    SFAS No. 6 titled  "Classification of Short-Term  Obligations Expected to be
    Refinanced".

    Aggregate  maturities of long-term debt, as  restructured  and excluding the
    unamortized non-cash discount, are as follows:
<TABLE>
<CAPTION>
      Year Ending December 31:
<S>             <C>                        <C>
                2001                       $     388,373
                2002                               7,499
                2003                           2,403,026
                                           -------------
                Total                       $  2,798,898
                                            ============
</TABLE>
    In connection with the original issuance of the convertible debentures,  the
    Company issued warrants to purchase  100,000 shares of the Company's  common
    stock. The exercise price of the warrants is $7.50 per share and they expire
    in March 2001.

3.   INCOME TAXES:

    Deferred tax assets (there are no deferred tax  liabilities)  as of December
    31, 2000 are comprised of the following:
<TABLE>
<CAPTION>
                                                                        2000
Long-term Assets:                                                   -----------
<S>                                                                   <C>
     Tax effect of net operating loss carryforwards                   9,720,000
     Property, plant and equipment                                      980,000
     Tax credit carryforwards                                           550,000
                                                                    -----------
          Total                                                      11,250,000
     Less valuation allowance                                       (11,250,000)
          Net long-term asset                                              -
                                                                    ===========
</TABLE>
    During  the years  ended  December  31,  2000,  the  Company  increased  the
    valuation allowance by approximately $174,000,  primarily due to an increase
    in the net  operating  loss  carryforwards  which are not  considered  to be
    realizable.  The Company  has  provided a  valuation  allowance  for the net
    operating loss and credit  carryforwards  based upon the various  expiration
    dates and the limitations which exist under IRS Sections 382 and 384.

    At December 31, 2000, the Company had net operating loss  carryforwards  for
    income tax purposes of approximately  $26.0 million,  which expire primarily
    in 2008  through  2020.  Some of these net  operating  losses are subject to
    limitations  under  IRS  Sections  382  and  384,   particularly   should  a
    significant  number of  debenture  holders  convert into common stock in the
    future.  Additionally,  the Company has tax credit carryforwards at December
    31, 2000, of approximately  $290,000 and percentage depletion  carryforwards
    of approximately $650,000.

4.   COMMITMENTS AND CONTINGENCIES:

    Employment  Agreement  - During  1994,  the Board of  Directors  approved an
    employment  agreement  with the  Company's  current  President/CFO.  As more
    thoroughly  discussed  in Note 6,  Mr.  Duncan's  employment  agreement  was
    amended in November 2000.  The agreement , as amended,  may be terminated by
    the officer upon 90 days notice or by the Company without cause upon 30 days
    notice.  In the event of a termination  by the Company  without  cause,  the
    Company  would be  required to pay the  officer  one year's  salary.  If the
    termination  occurs following a change in control,  which includes a merger,
    the  Company  would be required  to make a lump sum  payment  equivalent  to
    $150,000.


                                       30

<PAGE>

    Profit  Sharing Plan - The Company has  established a 401(k) profit  sharing
    plan (the "Plan") that covers all  employees  with six months of service who
    elect to  participate  in the Plan. The Plan provides that the employees may
    elect  to  contribute  up to 15% of their  salary  to the  Plan.  All of the
    Company's  contributions  are  discretionary and amounted to $962 and $1,351
    for the years ended December 31, 2000 and 1999, respectively.

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

    Contingencies  - 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 operations of its
    business.  The  Company is not  currently  involved  in any such  incidental
    litigation  which it believes could have a materially  adverse effect on its
    financial conditions or results of operations.

5.   ABANDONED MERGER:

    On November  8, 2000 the Company  announced  that its  proposed  merger with
    Carpatsky Petroleum,  Inc. ("Carpatsky") had been terminated.  Concurrently,
    the Company also exchanged its  outstanding  Series B Convertible  Preferred
    Stock  for  a  new  series  of  Preferred   to  eliminate   the  Series  B's
    hyper-dilutive  "death  spiral"  conversion  feature.  The  preferred  stock
    restructuring is more thoroughly discussed in Note 6.

    Under  terms  of the  original  Termination  Agreement,  Carpatsky  paid the
    Company $82,411 in cash for certain accounting and  administrative  services
    provided to Carpatsky  by the Company from October 1, 1999 through  November
    2000;  was  obligated to issue 1.5 million  shares of  Carpatsky  restricted
    common stock on or before  January 31, 2001;  and both  companies  exchanged
    broad general releases.

    The Carpatsky  shares were never  delivered  and the  Companies  amended the
    Termination Agreement in April 2001 to eliminate the obligation of Carpatsky
    to issue the shares and instead  provide for an  additional  cash payment of
    $70,000 and the delivery of a convertible  promissary  note in the amount of
    $180,000.  The note is  non-interest  bearing  and is to be  repaid in eight
    equal  quarterly  installments  of $22,500  beginning June 1, 2001.  Earlier
    payment will be required by Carpatsky  should they raise  additional debt or
    equity  capital.  Subject  to  certain  approvals  of the  Canadian  Venture
    Exchange,  the note is  convertible  into  Carpatsky  common  stock at $.075
    Canadian  (which  is  approximately  $.05  USD).  For  financial   statement
    reporting  purposes  the Company has  recorded as a  receivable  the $70,000
    (which was paid in April 2001) and 50% of the  non-interest  bearing note at
    December  31,  2000.  The other 50% of the note has been  reserved for as an
    allowance for bad debt based on Carpatsky's current financial condition.

6.  PREFERRED STOCK AND RESTRUCTURING:

    The Company has the  authority to issue up to 2,000,000  shares of Preferred
    Stock of which 1,395,000  shares have been retired.  The preferred stock may
    be issued in such  series and with such  preferences  as  determined  by the
    Board of Directors.

    In December 1997, the Board of Directors  "designated" 145,300 shares as the
    Series B 5% PIK  Cumulative  Convertible  Preferred  Stock  (the  "Series  B
    Preferred  Stock") and on December  31,  1997,  the Company  issued  113,333
    shares of Series B Preferred Stock for $5,666,650.

    The Series B Preferred  Stock was  convertible  into  common  stock at a 25%
    discount to the market price.  This discount  feature became  hyper-dilutive
    when the common stock price decreased  beginning  shortly after its issuance
    in December  1997.  Based on the price of the common stock on September  30,
    2000  ($.48 per share) the  outstanding  Series B could have been  converted
    into  approximately 15.5 million shares of common, or over 95% of the common
    equity  after a  conversion.  Under the  proposed  terms  for the  Carpatsky
    merger, the Series

                                       31

<PAGE>

    B Preferred Stockholders would have received approximately 10% of the merged
    entity. In either case, the Company common stockholders would have been left
    with very little  ownership.  In  addition,  it was  difficult  to value the
    common stock because the capital  structure  was so  uncertain.  Given these
    circumstances, the Board of Directors determined that the Series B Preferred
    stock should be replaced or restructured in conjunction with terminating the
    merger.

    Following  extensive  negotiations,   six  institutional  holders,   holding
    approximately  94% of the Series B  Preferred  stock with a stated  value of
    over $4.97 million,  exchanged their Series B for a new class of non-voting,
    non-convertible,  preferred  stock  designated  as the "Series C"  Preferred
    stock.  The Series C Preferred  must be redeemed,  at its stated  value,  on
    December 31, 2005.  However,  the Company may, at its  election,  redeem the
    Series C at a 331/3% discount (or  approximately  $3.13 million if all of it
    is redeemed),  either in whole or in part,  through  December 31, 2003.  The
    Company  redeemed  the  remaining  6% of the Series B Preferred  at a 331/3%
    discount,  or $210,833.  Therefore,  as of December  31,  2000,  there is no
    outstanding hyper-dilutive Series B Preferred Stock.

    The Series C  Preferred  will  receive  dividends  at a rate of 5% per annum
    starting  in the  second  quarter  of  2001.  The  Company  did  not pay any
    dividends on the Series B Preferred  stock since September 1, 1999 (when the
    Plan  of  Merger  was  signed  with  Carpatsky).  In  connection  with  this
    restructuring,  all the holders of the Series B Preferred  stock have waived
    all unpaid dividends in arrears.

    As an  inducement  for the Series B Preferred  stockholders  to  restructure
    their  investment  and grant a discounted  redemption  feature,  the Company
    issued  warrants  to  acquire  up  to  1,763,800   shares  of  common  stock
    exercisable  at $0.50 per share.  These warrants will expire on December 31,
    2003.

    In conjunction with the restructuring of the outstanding preferred stock and
    the  termination  of the  merger  with  Carpatsky,  the  Board of  Directors
    approved  an  amended  employment  agreement  for  Patrick  J.  Duncan,  the
    Company's  President  and CFO.  The amended  terms of the  agreement,  which
    became effective November 2, 2000, include provisions for: 1) a $50,000 cash
    bonus; 2) the issuance of 150,000 shares of restricted  common stock;  and a
    warrant to purchase up to 600,000  shares of the  Company's  common stock at
    $0.50 per share,  exercisable  at the earlier of: (a) December 31, 2004;  or
    (b)(i) as to 300,000 shares,  if the Company's  reported closing sales price
    for its common  stock is at least $1.50 for at least 80% of the trading days
    in a one month period (these warrants vested on March 5, 2000),  and (ii) as
    to other 300,000 shares,  if the Company's  reported closing sales price for
    its common stock is at least $2.00 for at least 80% of the trading days in a
    three month period or if the Company entered into a reorganization or merger
    transaction  in which the deemed or actual value received by the Company was
    equal to or greater than $2.00 per share (these warrants have not yet vested
    as of the date of this report).  In  consideration  for the cash bonus,  Mr.
    Duncan agreed to reduce his total  severance due upon change of control from
    $197,500 to $150,000.

    For financial statement  reporting purposes,  in addition to the cash bonus,
    the Company recognized a non-cash charge of $60,900 in the fourth quarter of
    2000 which  represents  the fair value of the 150,000  common  shares on the
    date of grant (or $.41 per  share).  There  will be no  financial  statement
    impact for the warrants  issued since the exercise  price was 18.75%  higher
    than the market price on the date of grant.

7.  NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS'

    A   reconciliation   of  net  income  to  net  income  available  to  common
stockholders is as follows:

<TABLE>
<CAPTION>
                                                     2000               1999
                                                 -----------        -----------
<S>                                              <C>                <C>
Net Income (Loss)                                $ 1,188,517        $  (465,274)
Fair value of warrants issued to preferred
  stockholders                                      (481,612)              -
Dividends waived by preferred stockholders           376,196               -
Gain on redemption of Series B Preferred Stock       105,416               -
Dividends declared and paid for the Series B
  Preferred Stock                                       -              (177,817)
Dividends in Arrears for the Series B
  Preferred Stock                                       -               (87,707)
                                                 -----------        -----------
Net Income (Loss) available to common
  stockholders                                   $ 1,188,517        $  (730,798)
                                                 ===========        ===========
</TABLE>


                                       32

<PAGE>

8.   EARNINGS PER COMMON SHARE

   The Company follows SFAS No. 128 "Earnings Per Share".  Accordingly,  "basic"
   earnings per common share is computed by dividing income  available to common
   stockholders  (the  "numerator")  by the  weighted-average  number  of common
   shares  outstanding  (the   "denominator")   during  the  periods  presented.
   "Diluted"  earnings per common share  reflects the  potential  dilution  that
   could occur if  securities  or other  contracts  to issue  common  stock were
   exercised or converted into common stock. A reconciliation  of the components
   of basic and diluted net income per common share for the periods presented is
   as follows:

<TABLE>
<CAPTION>
                                             2000                          1999
                                 ----------------------------  ----------------------------
                                                         Per                          Per
BASIC                              Income     Shares    Share   Income      Shares   Share
                                 ----------  ---------  -----  ---------  ---------  ------
  Income (Loss) available to
<S>                              <C>         <C>        <C>    <C>        <C>        <C>
    common stockholders          $1,188,517  1,755,000  $0.68  $(730,798) 1,684,000  $(0.43)
EFFECT OF
  DILUTIVE SECURITIES
   Warrants and stock options          -        58,000  (0.02)      -          -        -
                                 ----------  ---------  -----  ---------  ---------  ------
DILUTED
  Income (Loss) available to
    common stock including
    assumed conversions          $1,188,517  1,813,000  $0.66  $(730,798) 1,684,000  $(0.43)
                                 ==========  =========  =====  =========  =========  ======
</TABLE>
     As of  December  31,  2000,  there  were  2,594,995  options  and  warrants
     outstanding.  Of that total,  2,388,800  had a dilutive  effect on the 2000
     earnings per share calculation and resulted in 58,000 incremental  weighted
     average shares outstanding under the method for the year ended December 31,
     2000. The remaining  230,525  options were excluded from the calculation of
     diluted   earnings   per  share  in  2000  because  they  would  have  been
     antidilutive.

     "Diluted"  earnings per share in 1999 is identical to the "basic"  earnings
     per share for the same period since the affects of including  any potential
     common shares would have been antidilutive.

9.   STOCK BASED COMPENSATION:

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

   The plans  permit the  issuance of  incentive  and  nonstatutory  options and
   provide for a minimum  exercise  price equal to 100% of the fair market value
   of the  Company's  common  stock on the date of grant.  The  maximum  term of
   options  granted under the plan is 10 years and options  granted to employees
   expire three months after the  termination of  employment.  No options may be
   exercised  during the first six months of the option term.  No options may be
   granted after 10 years from the adoption date of each plan.  The following is
   a summary of  activity  under these  stock  option  plans for the years ended
   December 31, 2000 and 1999:


<TABLE>
<CAPTION>
                                         2000                1999
                                 -------------------  -------------------
                                            Weighted             Weighted
                                            Average              Average
                                   Number   Exercise    Number   Exercise
                                 Of Shares   Price    Of Shares   Price
                                 ---------  --------  ---------  --------
<S>                                 <C>     <C>          <C>     <C>
Outstanding, beginning of year      64,780  $  13.86     71,030  $  13.85
          Canceled                    -          -       (6,250)    13.75
          Expired                  (22,265)     7.77       -          -
          Granted                   25,000      0.50       -          -
          Exercised                   -          -         -          -
                                 ---------  --------  ---------  --------
Outstanding, end of year            67,515  $  10.92     64,780  $  13.86
                                 =========  ========  =========  ========
</TABLE>
                                       33
<PAGE>

All the options  granted in 2000 were issued with exercise  prices  greater than
the market price of the Company's common stock on the date of grant. All options
are  currently  exercisable  and if not  previously  exercised,  will  expire as
follows: <TABLE> <CAPTION>
                                                  Weighted
     Year Ended              Range of             Average
    December 31,          Exercise Prices         Exercise        Number
                          Low        High          Price         Of Shares
                         -----      ------        -------        ---------
<S>     <C>              <C>         <C>         <C>                <C>
        2001             10.00       18.10       $   12.80          10,015
        2002              5.00       29.70           18.35          32,500
        2003              0.50        0.50            0.50          25,000
                                                                 ---------
                                                 $   10.92          67,515
                                                                 =========
</TABLE>
   Warrants  and  Non-Qualified  Stock  Options - The Company  has also  granted
   warrants and  non-qualified  options which are  summarized as follows for the
   years ended December 31, 2000 and 1999:


<TABLE>
<CAPTION>
                                                     2000                1999
                                              ------------------  -------------------
                                                        Weighted             Weighted
                                                        Average              Average
                                              Number    Exercise   Number    Exercise
                                             Of Shares   Price    Of Shares   Price
                                             ---------  --------  ---------  --------
<S>                                            <C>      <C>         <C>      <C>
Outstanding, beginning of year                 230,525  $  16.21    570,071  $  40.87
     Granted to the Preferred Stockholders'  1,763,800      0.50       -          -
     Granted to Company's President/CFO        600,000      0.50       -          -
     Expired                                   (66,845)    16.30   (339,546)
     Exercised                                    -          -         -          -
                                             ---------            ---------
Outstanding, end of year                     2,527,480  $   1.45    230,525  $  16.21
                                             =========            =========
</TABLE>
   All the warrants  and  non-qualified  options have been issued with  exercise
   prices that were either equal to or greater than the market price on the date
   of grant. The warrants were valued as follows: a) the warrants granted to the
   preferred  stockholders were valued at their estimated fair value of $481,612
   in  accordance  with  SFAS 123  (accordingly  this  amount is  included  as a
   component  in the  reconciliation  between  net  income  and the  net  income
   available  to  common  stockholders);  and b)  the  warrants  granted  to the
   Company's  President/CFO were valued using the intrinsic method  (accordingly
   there  was no  impact  on the  Company's  statement  of  operations  for 2000
   however,  the pro forma  effect is  illustrated  below under the caption "Pro
   Forma Stock-Based  Compensation  Disclosures").  If not previously exercised,
   the warrants and non-qualified options will expire as follows:

<TABLE>
<CAPTION>
                                                    Weighted
      Year Ended               Range of              Average
     December 31,           Exercise Prices         Exercise         Number
                           Low         High           Price         Of Shares
                          -----       ------         -------        ---------
<S>      <C>              <C>       <C>            <C>                 <C>
         2001             $7.50     $  37.10       $    10.79          98,900
         2002             17.50        30.30            22.05          64,780
         2003              0.50         0.50             0.50       1,763,800
         2005              0.50         0.50             0.50         600,000
                                                                    ---------
                                                   $     1.45       2,527,480
                                                                    =========
</TABLE>
   Pro Forma  Stock-Based  Compensation  Disclosures  - The Company  applies APB
   Opinion 25 and related  interpretations  in accounting  for stock options and
   warrants which are granted to employees.  Accordingly,  no compensation  cost
   has been recognized for grants of options and warrants to employees since the
   exercise  prices  were not less than the fair value of the  Company's  common
   stock on the grant dates. Had compensation  cost been determined based on the
   fair value at the grant dates for awards  under those plans  consistent  with
   the method of FAS 123, the  Company's  net loss and loss per share would have
   been changed to the pro forma amounts indicated below.


                                       34

<PAGE>

<TABLE>
<CAPTION>
                                                        Year Ended December 31,
                                                        -----------------------
                                                           2000        1999
                                                        ----------  -----------
Net Income (Loss) applicable to common stockholders:
<S>                                                     <C>         <C>
     As reported                                        $1,188,517  $  (730,798)
     Pro forma                                           1,140,232     (730,798)
Net Income (Loss) per common share:
     As reported                                        $     0.68  $     (0.43)
     Pro forma                                                0.68        (0.43)
</TABLE>
   The weighted  average fair value of options and warrants granted to employees
   for the year  ended  December  31,  2000 was $0.33 per  share.  No options or
   warrants  were granted in 1999.  The fair value of each  employee  option and
   warrant  granted  in 1999  was  estimated  on the  date of  grant  using  the
   Black-Scholes  option-pricing  model  with  the  following  weighted  average
   assumptions:


<TABLE>
<CAPTION>
                                                For the Year Ended December 31,
                                                -------------------------------
                                                    2000             1999
                                                ------------      -------------
<S>                                                <C>                <C>
Expected volatility                                152.2%             N/A
Risk-free interest rate                              6.5%             N/A
Expected dividends                                    -               N/A
Expected terms (in years)                            3.1              N/A
</TABLE>
10. FINANCIAL INSTRUMENTS

   Statement of Financial  Accounting Standards No. 107 requires all entities to
disclose  the fair value of certain  financial  instruments  in their  financial
statements.  Accordingly,  at December 31, 2000,  management's  best estimate is
that the carrying  amount of cash,  receivables,  notes payable to  unaffiliated
parties,  accounts payable, and accrued expenses  approximates fair value due to
the short maturity of these instruments. Management estimates that fair value is
approximately equal to carrying value of the convertible debentures since market
interest rates have not changed significantly since the offering commenced.

11.  SIGNIFICANT CONCENTRATIONS:

   Substantially all of the Company's accounts  receivable at December 31, 2000,
resulted  from crude oil and natural gas sales to  companies  in the oil and gas
industry.  This  concentration of customers and joint interest owners may impact
our overall credit risk, either  positively or negatively,  since these entities
may be  similarly  affected  by  changes in  economic  or other  conditions.  In
determining  whether to require collateral from a significant  customer or joint
interest  owner,  the  Company  analyzes  the  entity's  net worth,  cash flows,
earnings,  and/or credit ratings.  Receivables are generally not collateralized;
however,  receivables from joint interest owners are subject to collection under
operating  agreements  which generally  provide lien rights.  Historical  credit
losses incurred on trade receivables by the Company have been insignificant.

   For the years ended  December 31, 2000 and 1999, the Company had oil sales to
a  single   customer  which  accounted  for  62%  and  46%  of  total  revenues,
respectively.

   At December 31, 2000,  substantially  all of the Company's cash and temporary
cash investments were held at a single financial  institution.  The Company does
not  maintain  insurance to cover the risk that cash and  temporary  investments
with a single  financial  institution  may be in excess of  amounts  insured  by
federal deposit insurance.

12. OIL AND GAS PRODUCING ACTIVITIES:

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

                                       35

<PAGE>

   purchase of a 10% working  interest in this  prospect for $2.5  million.  The
   assets acquired from this acquisition account for 67% of the Company's proved
   reserves at December 31, 2000.

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


<TABLE>
<CAPTION>
           Description                  2000       1999        1998
----------------------------------   ----------  ---------  ----------
<S>                                  <C>         <C>        <C>
Acquisition of proved properties     $     -     $    -     $     -
Acquisition of unproved properties      431,103     76,912     507,307
Exploration                             711,000    314,997   5,439,095
Development and workovers               159,489    239,276      13,468
Capitalized interest                    278,250    278,250     852,980
                                     ----------  ---------  ----------
     Total                           $1,579,842  $ 909,435  $6,812,850
                                     ==========  =========  ==========
</TABLE>
   Unevaluated Oil and Gas Properties - The following table sets forth a summary
   of oil and gas property  costs not being  amortized at December 31, 2000,  by
   the year in which such costs were incurred:


<TABLE>
<CAPTION>
                              Total       2000       1999       1998       1997
                           ----------  ---------  ---------  ----------  ---------
<S>                        <C>         <C>        <C>        <C>         <C>
Property acquisition costs $  393,393  $ 360,393  $  33,000  $     -     $    -
Exploration costs           1,650,814     49,282     53,186   1,008,001    540,345
Capitalized interest          556,450    278,250    278,200        -          -
                           ----------  ---------  ---------  ----------  ---------
     Total                 $2,600,657  $ 687,925  $ 364,386  $1,008,001  $ 540,345
                           ==========  =========  =========  ==========  =========
</TABLE>

   All of the  Company's  unevaluated  costs at  December  31,  2000  relate  to
   seismic,  geological and leasehold costs incurred for the Formosa, Texana and
   Ganado  prospect areas located in Jackson County,  Texas.  The total prospect
   area  encompasses  approximately  130,000 acres.  The current status of these
   prospects is that seismic has been acquired, processed,  re-processed, and is
   being interpreted on an on-going basis. Drilling commenced on these prospects
   in 1999 and will continue  into the  foreseeable  future.  As a result of the
   original  efforts and the  reprocessing,  six (6) wells were drilled in these
   prospect areas in 2000 and as of December 31, 2000 an additional  twelve (12)
   "drill  ready"  prospects  and  several  dozen  leads in the  Frio and  Yegua
   formations have been  identified.  As these prospects are drilled sometime in
   the future,  the Company expects that additional  prospects and leads will be
   generated as the  information  obtained from the new well bores is integrated
   into the 3-D data set. In addition,  Parallel Petroleum,  the operator of the
   prospect  areas,  initiated  a  Regional  Survey  during  2000 of the  Wilcox
   formations  (examining  depths between  14,000' and 17,500' below the earth's
   surface) and has identified at least twelve (12) prospects  where the reserve
   potential may be considerable. Five (5) of those Wilcox prospects are located
   within the Texana and Ganado areas of mutual interest where the Company holds
   a 12.5% working  interest.  During 2000 the Company  acquired or extended the
   leases on  substantially  all of the  identified  leads and  prospects in the
   Wilcox Play.  Most of these  leases have a term of two to three years.  It is
   expected  additional leases will be acquired in the future as other prospects
   are identified and leads are evaluated.  As a result of the additional  leads
   and prospects  generated  from the  reprocessed  seismic and the  preliminary
   results of the Wilcox  study,  the Company  believes  that the time needed to
   fully  evaluate  these  costs will be  extended  at least to the end of 2002.
   However,  the Company does not expect the delay in the  evaluation  will have
   any material negative impact on the valuation of the unevaluated costs.

   Capitalization  of Interest - For the years ended December 31, 2000 and 1999,
   the  Company   capitalized   interest   costs  of  $278,250,   and  $278,250,
   respectively,  related  to  unevaluated  oil and  gas  properties  and  other
   exploration activities.

   Full Cost Ceiling - At December 31, 2000 the Company's  full cost ceiling was
   substantially higher than net value of the evaluated oil and gas properties.

   Full Cost  Amortization  Expense - Amortization  expense amounted to $998,249
   and  $985,113 for the years ended  December 31, 2000 and 1999,  respectively.
   Amortization expense per equivalent units of oil and gas produced amounted to
   $7.95 and $7.57 for the years ended December 31, 2000 and 1999  respectively.
   Natural gas is converted to  equivalent  units of oil on the basis of six Mcf
   of gas is equivalent to one barrel of oil.

                                       36

<PAGE>

   Results of  Operations  from Oil and Gas  Producing  Activities  - Results of
   operations   from  oil  and  gas   producing   activities   (excluding   well
   administration  fees,  general  and  administrative  expenses,  and  interest
   expense) for the years ended December 31, 2000 and 1999 are presented below.


<TABLE>
<CAPTION>
                                         2000              1999
                                      -----------      -----------
<S>                                   <C>              <C>
Oil and gas sales                     $ 3,585,245      $ 2,144,057
Production costs                         (565,441)        (404,897)
Amortization expense                     (998,249)        (985,113)
                                      -----------      -----------
Results of operations from
  oil/gas producing activities        $ 2,021,555      $   754,047
                                      ===========      ===========
</TABLE>
   No  provision  for income taxes was  provided in  determining  the Results of
   Operations from Oil and Gas Producing  Activities  because:  a) no income tax
   expense was  incurred  during the  periods  presented;  and b) the  Company's
   substantial net operating loss  carry-forwards and the tax deductions and tax
   credits and allowances  relating to the Company's proved oil and gas reserves
   would have eliminated any corresponding tax liability.

   Oil and Gas Reserve Quantities  (Unaudited) - Proved oil and gas reserves are
   the estimated  quantities of crude oil,  natural gas, and natural gas liquids
   which geological and engineering  data demonstrate with reasonable  certainty
   to be  recoverable  in future  years from  known  reservoirs  under  existing
   economic and operating conditions.  Proved developed oil and gas reserves are
   those reserves  expected to be recovered through existing wells with existing
   equipment  and  operating  methods.  The  reserve  data is based  on  studies
   prepared by the Company's consulting petroleum engineers,  Netherland, Sewell
   & Associates, Inc. Reserve estimates require substantial judgment on the part
   of petroleum  engineers resulting in imprecise  determinations,  particularly
   with  respect  to new  discoveries.  Accordingly,  it is  expected  that  the
   estimates  of  reserves  will  change as future  production  and  development
   information becomes available. All proved oil and gas reserves are located in
   the United States.  The following table presents  estimates of our net proved
   oil and gas reserves,  and changes  therein for the years ended  December 31,
   2000 and 1999.


<TABLE>
<CAPTION>
                                              2000                1999
                                        ------------------  ------------------
                                         Oil        Gas      Oil        Gas
                                        (Bbls)     (Mcf)    (Bbls)     (Mcf)
                                        -------  ---------  -------  ---------
<S>                                     <C>      <C>        <C>      <C>
Proved reserves, beginning of year      334,000  1,359,000  275,000  1,368,000
     Purchase of minerals in place         -          -        -          -
     Sale of minerals in place             -          -        -          -
     Extensions, discoveries, and
       other additions                  130,000    534,000  130,000    330,000
     Revisions of previous estimates     (7,000)  (121,000)   3,000     (2,000)
     Production                         (80,000)  (274,000) (74,000)  (337,000)
                                        -------  ---------  -------  ---------
Proved reserves, end of year            377,000  1,498,000  334,000  1,359,000
                                        =======  =========  =======  =========
Proved developed reserves, beginning
  of year                               310,000    648,000  261,000    920,000
                                        =======  =========  =======  =========
Proved developed reserves, end of year  352,000    695,000  310,000    648,000
                                        =======  =========  =======  =========
</TABLE>
   The  downward  revisions  of  "previous  estimates"  in 2000  were  primarily
   attributable  to previously  recorded  "behind pipe" reserves in two wells in
   the  Maurice  field were  removed  after  attempts to  recomplete  those sand
   intervals in one of those wells failed in 2000 due to poor porosity and other
   rock quality factors.  The upward  revisions of "extensions,  discoveries and
   other  additions"  in both  2000  and 1999  were  primarily  attributable  to
   significant extensions of the estimated ultimate recoveries of oil and gas at
   the East Bayou Sorrel Field.

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

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

                                       37
<PAGE>

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

   The following summary sets forth the Company's future net cash flows relating
   to proved oil and gas  reserves as of December 31, 2000 and 1999 based on the
   standardized measure prescribed in SFAS No. 69.


<TABLE>
<CAPTION>
                                                               2000         1999
                                                           -----------  -----------
<S>                                                        <C>          <C>
 Future cash inflows                                       $24,936,000  $12,080,000
 Future production costs                                    (3,343,000)  (3,089,000)
 Future development costs                                   (1,164,000)    (834,000)
 Future income tax expense                                        -            -
                                                           -----------  -----------
      Future net cash flows                                 20,429,000    8,157,000
 10% annual discount for estimated timing of cash flow      (5,298,000)  (1,887,000)
                                                           -----------  -----------
 Standardized Measure of Discounted Future Net Cash Flows  $15,131,000  $ 6,270,000
                                                           ===========  ===========

   Average prices used to estimate the reserves:

Oil (per bbl)                                              $     25.81  $     24.91
Gas (per mcf)                                              $     10.15  $      2.77
</TABLE>

   Changes in Standardized Measure (Unaudited) - The following are the principal
   sources of change in the standardized  measure of discounted  future net cash
   flows for the years ended December 31, 2000 and 1999:


<TABLE>
<CAPTION>
                                                          2000          1999
                                                       -----------  -----------
<S>                                                    <C>          <C>
Standardized measure, beginning of year                $ 6,270,000  $ 2,951,000
Sale of oil and gas produced, net of production costs   (3,020,000)  (1,739,000)
Sale of minerals in place                                     -            -
Net changes in prices and production costs               8,023,000    2,504,000
Net changes in estimated development costs                (221,000)    (245,000)
Revisions of previous quantity estimates                  (235,000)    (267,000)
Discoveries, extensions and other additions              4,256,000    2,771,000
Accretion of discount                                       58,000      295,000
                                                       -----------  -----------
Standardized Measure, end of year                      $15,131,000  $ 6,270,000
                                                       ===========  ===========
</TABLE>

                                       38

<PAGE>

                               PART II (Continued)

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

This item is not applicable to the Registrant.

                                    PART III

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

Directors and Executive Officers
The following  table sets forth the names and ages of the current  directors and
executive officers of 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:


<TABLE>
<CAPTION>
                                                         Served as
      Name           Age          Position             Director Since
------------------   ---  --------------------------   --------------
<S>                   <C> <C>                               <C>
Patrick J. Duncan     38  President, Chief Financial        1995
                            Officer, and Director
Steve A. Antry        45  Director                          1996
Stephen L. Fischer    42  Director                          1997
Homer C. Osborne      71  Director                          1994
James C. Ruane        66  Director                          1980
Clemons F. Walker     61  Director                          1996
</TABLE>

   The Company's  Board of Directors  held 3 meetings  during 2000. Two of these
were actual  meetings at which all directors  attended except for James C. Ruane
who missed one meeting. The other meeting was held by unanimous written consent.

   The  Company  does not have an audit  committee.  However,  the entire  board
reviews the Company's  quarterly and annual financial  statements and meets with
the Company's independent auditors to review the results of the annual audit and
address any accounting matters or questions raised by the auditors.

   The Company  does not have a  compensation  committee.  The entire board will
periodically  review the  compensation of the Company's  officers and administer
and award options under all the Company's stock option plans.

   Patrick J. Duncan has been the Company's  President  since November 1998, the
Company's  Chief  Financial  Officer  since  September  1994,  and the Company's
Treasurer  since March 1996. In addition to managing the day- do-day  activities
of the Company, 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 our  Controller  in April
1994.  From 1988 until 1991, Mr. Duncan was an Audit  Supervisor  with Coopers &
Lybrand,  Certified Public  Accountants.  Mr. Duncan received a B.S. degree from
the University of Wyoming in 1985.


                                       39

<PAGE>

   Steve A. Antry is a  founder,  the  President  and  Chairman  of the Board of
Directors of Beta Oil and Gas,  Inc., a publicly  held entity  headquartered  in
Tulsa,  Oklahoma.  In addition,  Mr. Antry founded Beta Capital  Group,  Inc., a
financial  consulting firm in November 1992, and was its President  through June
1997.  Beta  Capital  Group,  Inc.  specializes  in  selecting  and working with
emerging oil and gas  exploration  companies  which have production and drilling
prospects strategic for rapid growth yet also need capital and market support to
achieve that growth.  Mr.  Antry  remains  Chairman of the Board of Directors of
Beta  Capital  Group,  Inc.  but  resigned as its  President  to devote his full
attention to Beta Oil and Gas.  Before  forming Beta Capital  Group,  Inc.,  Mr.
Antry was an  officer  of Benton  Oil & Gas  company,  from 1989  through  1992,
ultimately  becoming  President  of a wholly owned  subsidiary.  Mr. Antry was a
Marketing  Director  for Swift Energy from 1987  through  1989.  Mr. Antry began
working  in the oil  fields  in  Oklahoma  in 1974.  He has  served  in  various
exploration  management  capacities with different  companies,  including Warren
Drilling  Company,  as Vice  President of  Exploration  and Nerco Oil and Gas, a
division of Pacific  Power and Light,  where he served as Western  Regional Land
Manager.  Mr. Antry is a member of the  International  Petroleum  Association of
America "IPAA", serving on the Capital Markets Committee and has B.B.A.
and M.B.A. degrees from Texas Christian University.

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

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

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

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

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

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

The following  disclosure is based solely upon a review of the Forms 3 and 4 and
any  amendments  thereto  furnished to the Company  during our fiscal year ended
December  31,  2000,  and Forms 5 and  amendments  thereto  furnished to us with
respect to such fiscal  year,  or written  representations  that no Forms 5 were
required to be filed by such  persons.  Based on this review no person who was a
director,  officer  or  beneficial  owner  of  more  than  10% of the  Company's
outstanding  common  stock during such fiscal year filed late reports on Forms 3
and 4.




                                       40

<PAGE>

ITEM 10 - EXECUTIVE COMPENSATION

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

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                         Long-Term
                                    Annual Compensation            Compensation Awards(2)
                               -------------------------------  ----------------------------
                                                     Other      Restricted     Securities
 Name and Principle                                  Annual       Stock        Underlying
     Position            Year   Salary    Bonus   Compensation    Awards     Options/SARs(#)
---------------------    ----  --------  -------  ------------  ----------   ---------------
<S>                      <C>   <C>       <C>          <C>        <C>             <C>
Patrick J. Duncan        2000  $ 97,500  $50,000      None       150,000         600,000
 President and CFO(1)    1999  $ 97,957    None       None         None           None
                         1998  $104,370    None       None         None           None
Willard H. Pease, Jr.
 Former President and
 CEO(3)                  1998  $108,303  $25,000   $ 150,000       None           None
</TABLE>

(1)  Mr.  Duncan  was  appointed  by the  Board of  Directors  as the  Company's
     President to succeed Mr. Pease.  No  additional  amounts have been shown as
     Other Annual Compensation because the aggregate  incremental cost to us for
     personal  benefits  provided  to Mr.  Duncan  did not  exceed the lesser of
     $50,000 or 10% of his annual salary in any given year.

(2)  At the time of the restructuring of the outstanding preferred stock and the
     termination of the merger with Carpatsky,  the Board of Directors  approved
     and amended  employment  agreement  for Patrick J.  Duncan,  the  Company's
     President  and CFO.  The  amended  terms  of the  agreement,  which  became
     effective  November 2, 2000,  include  provisions  for:  1) a $50,000  cash
     bonus; 2) the issuance of 150,000 shares of restricted  common stock, and a
     warrant to purchase up into 600,000 shares of the Company's common stock at
     $0.50 per share,  exercisable  at the earlier of: (a) December 31, 2004; or
     (b)(i) as to 300,000 shares, if the Company's  reported closing sales price
     for its common stock is at least $1.50 for at least 80% of the trading days
     in a one month period (these warrants vested on March 5, 2001), and (ii) as
     to other 300,000 shares, if the Company's  reported closing sales price for
     its common  stock is at least $2.00 for at least 80% of the trading days in
     a three month period or should the Company enter into a  reorganization  or
     merger  transaction  in which the deemed or actual  value  received  by the
     Company is equal to or greater than $2.00 per share (these warrants had not
     yet vested as of the date of this report).  In  consideration  for the cash
     bonus,  Mr. Duncan agreed to reduce his total  severance due upon change of
     control from $197,500 to $150,000.

(3)  Mr. Pease's  employment  with the Company was terminated in December 1998 .
     In accordance with his amended employment  agreement,  Mr. Pease received a
     cash payment of $150,000 for severance.

Option Grants in the Last Fiscal Year

The following table provides supplemental  information relating to the Company's
grants of warrants  during 2000 to the executive  officers  named in the Summary
Compensation  Table above,  including the relative size of each grant,  and each
grant's exercise price and expiration date. There were no stock options or stock
appreciation rights ("SARs") granted during the last fiscal year.






                                       41

<PAGE>

                     Option/SARs Grants in Last Fiscal Year


<TABLE>
<CAPTION>
                                                      Individual Grants
                       ---------------------------------------------------------
                                                      Percent of Total
                         Numbers of Securities          Options/SARs
                               Underlying           Granted to Employees  Exercise or Base  Expiration
     Name              Options/SARs(2) Granted (=)     in Fiscal Year       Price ($/Sh)       Date
-----------------      ---------------------------  --------------------  ----------------  ----------
<S>                             <C>                         <C>                 <C>          <C>
Patrick J. Duncan               600,000                     96%                 $0.50        12/31/05
</TABLE>
Aggregated  Option  Exercises  in the Last Fiscal  Year and the Fiscal  Year-End
  Option Values

The table below provides  information with respect to the unexercised options to
purchase  the  Company's  common stock held by the named  executive  officers at
December 31, 2000. No options were exercised during fiscal 2000.

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


<TABLE>
<CAPTION>
                                                                 Number of
                                                                 Securities     Value of
                                                                 Underlying     Unexercised
                                                                 Unexercised    In-the-Money
                                                                 Options/SARs   Options/SARs
                                                                 at FY-End (#)  at FY-End ($)
                            Shares Acquired                      Exercisable/   Exercisable/
           Name             on Exercise (#)  Value Realized ($)  Unexercisable  Unexercisable
--------------------------  ---------------  ------------------  -------------  -------------
<S>                              <C>                <C>            <C>          <C>
Patrick J. Duncan                None               None           0/600,000    $ 0/225,000(1)
     President and CFO
</TABLE>
   (1)      The value of the unexercised  In-the-Money Options was determined by
            multiplying the number of unexercised warrants or options (that were
            in other money on  December  31,  2000) by the closing  sales of the
            Company's  common  stock on December 31, 2000 (as reported by OTCBB)
            and from that total, subtracting the total exercise price.

Employment Contract
As  discussed  in detail  in Note 6 of the  financial  statements,  the Board of
Directors  amended the Employment  Agreement of Patrick J. Duncan on November 2,
2000. The Employment Agreement,  among other things,  appoints Mr. Duncan as the
Company's  President and Chief Financial Officer,  provides for an annual salary
of  $97,500  and  provides  for a  severance  payment of  $150,000  should he be
terminated without cause or for a change of control of the Company.

Compensation of Directors
Directors who are  employees or otherwise  receive  compensation  from us do not
receive additional compensation for service as directors. Outside directors each
receive a $2,500 annual  retainer  fee,  $750 per meeting  attended and $100 per
meeting conducted via telephone conference.  Historically,  all fees are paid in
the form of the Company  restricted  common stock but future fees may be paid in
cash and/or common stock.  In December 2000, the Company issued 34,500 shares of
restricted common stock valued at $21,563 to our five non-employee  directors as
compensation  for services  from  September 1, 1999 though  December 31, 2000 in
lieu of cash fees.

ITEM 11 - SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS

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 January 1, 2001,  by (i) each of the  Company's  directors and
officers,  and (ii) each  person or entity  who is known to the  Company  to own
beneficially  more than 5% of the  outstanding  common stock with the address of
each such  person or  entity.  Beneficial  owners  listed  have sole  voting and
investment power with respect to the shares unless otherwise indicated.



                                       42

<PAGE>

                      SECURITY OWNERSHIP OF MANAGEMENT AND
                            CERTAIN BENEFICIAL OWNERS


<TABLE>
<CAPTION>
                               Amount and Nature of      Percent of
Name of Officer or Director   Beneficial Ownership(1)    Class (12)
---------------------------   -----------------------    ----------
<S>                               <C>                       <C>
Steve A. Antry                    20,750 Shares (2)          1.08%
Patrick J. Duncan                476,064 Shares (3)         21.17%
Stephen L. Fischer                20,995 Shares (4)          1.09%
Homer C. Osborne                  24,759 Shares (5)          1.28%
James C. Ruane                    41,892 Shares (6)          2.17%
Clemons F. Walker                 28,985 Shares (7)          1.50%
                                  -----------------         ------
All Officers and Directors as a
  group (six persons)            613,445 Shares (8)         26.90%
Kayne Anderson, et al.
 1800 Avenue of the Stars
 Second Floor
 Loss Angeles, CA 90067          991,717 Shares (9)(10)     34.01%
State Street, et al
 Chase/Chemical Bank
 A/C State Street Bank & Trust Co.
 4 New York Plaza
 Ground Floor/Receive Window
 New York, NY 10004              666,667 Shares (9)(11)     25.73%
Security Ownership of Series C
 Preferred Stockholders
 as a Group (6 entities)       1,658,384 Shares (9)(12)     46.29%(13)
</TABLE>

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

(2)  Includes  15,000  shares that are owned  directly by Mr.  Antry,  and 5,750
     shares underlying presently exercisable options.

(3)  Includes  151,564  shares  owned  directly  by Mr.  Duncan,  24,500  shares
     underlying  presently  exercisable  options,  and 300,000 shares underlying
     presently exercisable warrants.  Does not include 300,000 shares underlying
     warrants which are not presently exercisable.

(4)  Includes 15,595 shares owned directly by Mr.  Fischer,  400 shares owned by
     his wife and 5,000 shares underlying presently exercisable options.

(5)  Includes  17,276  shares  owned  directly by Mr.  Osborne and 7,483  shares
     underlying presently exercisable options.

(6)  Includes 33,953 shares owned directly by Mr. Ruane,  456 shares held by Mr.
     Ruane as trustee for two trusts,  over which shares Mr. Ruane may be deemed
     to have shared  voting and  investment  power and 7,483  shares  underlying
     presently exercisable options.

(7)  Includes  23,235  shares  owned  directly  by Mr.  Walker and 5,750  shares
     underlying presently exercisable options.

(8)  Includes  262,929  shares  owned,  directly or  indirectly,  55,966  shares
     underlying  presently  exercisable  options,  and 300,000 shares underlying
     presently exercisable warrants.


                                       43

<PAGE>

(9)  Percentages  and shares shown for the 6 beneficial  owners  underlying  the
     warrants  they  received in  connection  with the surrender of the Series B
     Preferred Stock in November 2000.

(10) The warrants  held by four  entities  which are  effectively  controlled by
     Kayne  Anderson  Investment  Management,  Inc.,  a  Nevada  corporation,  a
     registered investment advisor. The entities which directly own the warrants
     are Kayne Anderson  Diversified  Capital Partners,  L.P., Arbco Associates,
     L.P., Kayne Anderson Non-Tradition Investments, and Kayne Anderson Capital
     Partners, L.P.

(11) The warrants are held by two  entities,  Marine Crew & Co, and  Sandpiper &
     Co. that are effectively controlled by State Street Research and Management
     Company, a registered investment advisor.

ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Transactions with Beta Capital Group, Inc.-
In March 1996, the Company entered into a three-year  consulting  agreement with
Beta Capital Group,  Inc.  ("BCG").  BCG's  president,  Steve Antry,  has been a
director of the Company since August 1996.  The  consulting  agreement  with BCG
provided for, among other things,  minimum monthly cash payments of $17,500 plus
reimbursement  for  out-of-pocket  expenses.  During 1999,  the last year of the
agreement,   BCG  received   $35,000  for   consulting   fees  plus  $2,750  for
reimbursement  out-of-pocket  expenses  pursuant  to  the  terms  of  consulting
agreement.

Transactions with Other Directors-
In July 1998 our Board of Directors  established an Executive Committee designed
to manage the  significant  aspects of our  business on a committee  basis.  Mr.
William F. Warnick,  a director,  was elected as Chairman of the  Committee.  In
exchange for his services in 1998, Mr.  Warnick  received cash  compensation  of
$44,010 plus $17,966 for reimbursement of out-of-pocket  expenses.  In 1999, Mr.
Warnick received cash  compensation of $17,550 plus $6,307 for  reimbursement of
out-of-pocket  expenses. The Executive Committee was dissolved by unanimous vote
of the Board of Directors on April 26, 1999 at the request of Mr. Duncan and Mr.
Antry because they did not feel the Executive  Committee was being  utilized and
any significant transactions were already being addressed by the full Board. Mr.
Warnick resigned as director and Chairman of the Board on September 10, 1999.


                                       44

<PAGE>

                                     PART IV

ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:


<TABLE>
<CAPTION>
Exhibit
No.                            Description and Method of Filing
---  -------------------------------------------------------------------
<S>  <C>
3.1  Articles of Incorporation.  Incorporated by reference to Exhibit 3.1 of the
     Registrant's  Annual  Report  on Form  10-KSB  for the  fiscal  year  ended
     December 31, 1998.

3.2  Certificate of Amendment to the Articles of Incorporation filed on June 23,
     1993.  Incorporated by reference to Exhibit 3.2 of the Registrant's  Annual
     Report on Form 10-KSB/A for the fiscal year ended December 31, 1999.

3.3  Certificate of Amendment to the Articles of Incorporation filed on June 29,
     1993.  Incorporated by reference to Exhibit 3.3 of the Registrant's  Annual
     Report on Form 10-KSB/A for the fiscal year ended December 31, 1999.

3.4  Plan of  Recapitalization.  Incorporated by reference to Exhibit 3.4 of the
     Registrant's  Annual  Report on Form  10-KSB/A  for the  fiscal  year ended
     December 31, 1999.

3.5  Certificate of Amendment to the Articles of Incorporation  filed on July 5,
     1994.  Incorporated by reference to Exhibit 3.5 of the Registrant's  Annual
     Report on Form 10-KSB/A for the fiscal year ended December 31, 1999.

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

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

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

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

4.1  Certificate of  Designation of Series C Redeemable 5% Cumulative  Preferred
     Stock.  Incorporated  by  reference  to  Exhibit  10.1 of the  Registrant's
     Current Report on Form 8-K dated November 8, 2000.

10.1 1993 Stock  Option Plan.  Incorporated  by reference to Exhibit 10.1 of the
     Registrant's  Annual  Report on Form  10-KSB/A  for the  fiscal  year ended
     December 31, 1999.

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



                                       45

<PAGE>

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

10.6 1996  Stock  Option  Plan.   Incorporated  by  reference  to  10.6  of  the
     Registrant's  Annual  Report on Form  10-KSB/A  for the  fiscal  year ended
     December 31, 1999.

10.7 1997 Long Term Incentive Option Plan.  Incorporated by reference to Exhibit
     10.7 of the Registrant's Annual Report on Form 10-KSB/A for the fiscal year
     ended December 31, 1999.

10.9 Exploration Agreement dated 1/1/97 between Parallel Petroleum  Corporation,
     Sue-Ann Production Company, TAC Resources, Inc., Allegro Investments, Inc.,
     Beta  Oil and Gas  Company,  Pease  Oil and Gas  Company,  Meyer  Financial
     Services,   Inc.,  Four-Way  Texas,  LLC  regarding  the  Ganado  Prospect.
     Incorporated by reference to Exhibit 10.9 of the Registrant's Annual Report
     on Form 10-KSB/A for the fiscal year ended December 31, 1999.

10.14 Termination  Agreement  with Carpatsky  Petroleum,  Inc. dated November 7,
      2000.  Incorporated by reference to Exhibit 10.1 of  Registrant's  Current
      Report on Form 8-K dated November 8, 2000.

10.15 Certificate of Designation of Series C Redeemable 5% Cumulative  Preferred
      Stock of Pease Oil and Gas Company, as filed November 8,2000. Incorporated
      by reference to Exhibit 10.2 of  Registrant's  Current  Report on Form 8-K
      dated November 8, 2000.

10.16 Preferred  Stock Exchange  Agreement,  dated  effective  November 1, 2000.
      Incorporated by reference to Exhibit 10.3 of  Registrant's  Current Report
      on Form 8-K dated November 8, 2000.

10.17 Preferred Stock  Surrender  Agreement,  dated effective  November 1, 2000.
      Incorporated by reference to Exhibit 10.4 of  Registrant's  Current Report
      on Form 8-K dated November 8, 2000.

10.18 Form of Warrant issued in connection  with surrender of Series B Preferred
      Stock.  Incorporated by reference to Exhibit 10.5 of Registrant's  Current
      Report on Form 8-K dated November 8, 2000.

10.19 Amended and Restated Termination  Agreement with Carpatsky Petroleum, Inc.
      dated April 3, 2001.

10.20 Employment Agreement with Patrick J. Duncan dated November 2, 2000.

10.21 Form of Warrant issued to Patrick J. Duncan.

10.22 Promissory Note of Carpatsky Petroleum, Inc. dated April 3, 2001.
</TABLE>


(b) Reports on Form 8-K: The Company filed the following reports on Form 8-K for
the period October 1, 2000 through march 30, 2001:

       Item Reported        Date          Financial Statements
       -------------   ----------------   --------------------
   (1)     5.7         November 8, 2000   None- Not Applicable
   (2)     5           April 9, 2001      None- Not Applicable

                                       46

<PAGE>
                                   SIGNATURES


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

                                    PEASE OIL AND GAS COMPANY

Date: April 16, 2001                By: /s/ Patrick J. Duncan
                                    -----------------------------------------
                                    Patrick J. Duncan
                                    Principal Executive Officer and Principal
                                      Accounting Officer


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


Date: April 16, 2000                By: /s/ Patrick J. Duncan
                                    -----------------------------------
                                    Patrick J. Duncan
                                    President, Chief Financial Officer, Director

Date: April 16, 2000                By: /s/ Steve A. Antry
                                    -----------------------------------
                                    Steve A. Antry, Director

Date: April 16, 2000                By: /s/ Stephen L. Fischer
                                    -----------------------------------
                                    Stephen L. Fischer, Director

Date: April 16, 2000                By: /s/ Homer C. Osborne
                                    -----------------------------------
                                    Homer C. Osborne, Director

Date: April 16, 2000                By: /s/ James C. Ruane
                                    -----------------------------------
                                    James C. Ruane, Director

Date: April 16, 2000                By: /s/ Clemons F. Walker
                                    -----------------------------------
                                    Clemons F. Walker, Director

                                       47