UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                   FORM 10-KSB

            Annual Report Under Section 13 or 15(d) of the Securities
                      Exchange Act of 1934 [Fee Required]

                  For the fiscal year ended: December 31, 2001

                         Commission file number #1-13162

                              EMPIRIC ENERGY, INC.
                 (Name of small business issuer in its charter)

              Delaware                                  75-2455467
    (State or other jurisdiction of        (IRS Employer Identification No.)
      incorporation ororganization)

      14677 Midway Road, Suite 207
             Addison, Texas                                75001
(Address of principal executive offices)                 (Zip Code)


                                 (972) 387-4100
              (Registrant's telephone number, including area code)


Securities registered under Section 12(b) of the Exchange Act:

Title of each class on which registered                    Name of each exchange
     Common Stock ($.01 par value)                           Over the Counter

Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports),  and (2) has been
subject to such filing requirements for the past 90 days. Yes    No x
                                                             ---   ---

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

As of December  31,  2001,  the  aggregate  market value at voting stock held by
non-affiliates,  computed by reference to the closing  price on the OTC Bulletin
Board, was $3,800,000

As of December 1, 2001,  the number of shares  outstanding  of the  Registrants'
common stock was 15,359,039.

<PAGE>

                              EMPIRIC ENERGY, INC.

                              INDEX TO FORM 10-KSB


PART I.                                                                   PAGE #

Item 1.    Description of Business.............................................1

Item 2.    Description of Property...........................................2-3

Item 3.    Legal Proceedings...................................................4

Item 4.    Submission of Matters to a Vote of Security Holders.................4

PART II.

Item 5.    Market for Common Equity and Related Stockholder Matters..........4-5

Item 6.    Management Discussion and Analysis of
           Financial Condition and Results of Operations.....................5-7

Item 7.    Financial Statements................................................7

Item 8.  Changes in and Disagreements with Accountants on
         Accounting and Financial Disclosure  .................................7

     PART III.

Item 9.    Directors, Executive Officers, Promoters and Control Persons;
           Compliance with Section 16(a) of the Exchange Act...................8

Item 10. Executive Compensation................................................8

Item 11. Security Ownership of Certain Beneficial Owners
                      and Management...........................................9

Item 12. Certain Relationships and Related Transactions.....................9-10

Item 13. Exhibits and Reports on Form 8-K.....................................10

SIGNATURE PAGE................................................................10


<PAGE>

                                     PART I.

ITEM I.  DESCRIPTION OF BUSINESS

Background - From Inception to Present

     The  Company  is an  independent  oil and gas  exploration  and  production
company with leasehold properties in the Hugoton Panhandle Field (the "Panhandle
Field"), Holmes County, Mississippi, Pennsylvania and South Texas.

     On March 21, 1996, the Company signed an agreement with Westar Energy, Inc.
("Westar")  to take part in a joint  venture  drilling  program to be drilled in
"segments".  The  number of wells to be  drilled  in each  "segment"  were to be
mutually agreed upon between the parties.  The drilling program was accomplished
on leases owned by Westar in Indiana and  Westmoreland  Counties,  Pennsylvania.
Empiric received up to 55% working  interest in the eight wells,  seven of which
have been  successfully  completed  and were on production at December 31, 1999.
The Company  financed its portion of the drilling  and  completion  costs of the
first eight wells by obtaining  outside  investors and entered into an agreement
wherein  the Company  will retain 20% of the  revenues  and the  investors  will
receive 80% until the investors receive up to 117% of their investment, at which
time the revenues will be split 50/50 for the remaining  production  life of the
wells. The above formal agreement with Westar is no longer in effect.

     In April,  1998 the  Company  acquired  16  producing  wells and four newly
drilled wells located on  approximately  18,000 acres in Zavala  County,  Texas.
Initial  production rates and tests were very promising and the Company expected
to utilize a financial  commitment,  also received in April, to begin a drilling
program on the  remaining  acreage.  Unfortunately,  the  investor was unable to
fulfill his commitment and the drilling program did not materialize.  During the
year, rapid production  declines and falling prices required several wells to be
shut in until  prices  rebound  and one well to be plugged  and  abandoned.  The
Company sold interest in these properties to the operation in September 2001.

Offshore Well

     In April,  1999, the Company  participated with another  independent in the
drilling of an exploratory well on Vermilion Block 93/96,  offshore Louisiana in
a water depth of 18 ft. The prospect was  developed  with the latest 3-D seismic
data and showed the potential  for  substantial  gas reserves in three  separate
Miocene  sands  down to  8,400  ft.  The  Company  committed  to and paid for an
estimated 10% of the geological, seismic and drilling costs of the prospect. The
well was actually drilled to a depth of  approximately  8,400 ft. The sands were
encountered  as  projected.   Unfortunately,  the  reservoirs  were  not  sealed
adequately  and the gas remaining in the sands was  non-commercial  and the well
was plugged and abandoned.

     The  Company  is  also  actively  seeking  the  acquisition  of  additional
producing  and  non-producing  oil  and  gas  leases  directly  or  through  the
acquisition of or business  combinations with all or a portion of energy-related
companies or properties. (See Planned Activities.)


                                       1
<PAGE>


ITEM 2. DESCRIPTION OF PROPERTY

Oil and Gas Properties

     The  following  is  a  description  of  the  Company's   natural   resource
properties.  The  Company has no  agreement  for sales of oil and gas to foreign
governments or authorities.

     The Company had  interests  in oil and gas leases and wells in the Thornton
(Smackover) Field located in Holmes County,  Mississippi,  which was plugged and
abandoned in December,  2001, and in Zavala and Frio Counties,  Texas which were
sold in September, 2001.

     HOLMES COUNTY,  MISSISSIPPI. In October, 2001, the well developed a leak in
the  tubing,  which  resulted in  hydrogen-sulfide  gas,  being  released in the
casing.  It became  mandatory that the Company Plug and Abandon this well, which
was completed in December,  2001, at a total cost of approximately $200,000. The
Company no longer has any leasehold interest in this property.

     SOUTH TEXAS PROPERTIES.  The Company's interests,  varying from 33% to 51%,
in 12 producing wells in Zavala County, Texas were sold in September, 2001.

     The  Company  still has  interests  in oil and gas  leases and wells in the
Panhandle Field of Texas, primarily in Moore and Potter Counties, in Indiana and
Westmoreland  Counties,  Pennsylvania,  as well as the South  Thornton  Field in
Jefferson Parish, Louisiana.

     PANHANDLE  FIELD AREA. The Panhandle  Field covers 19 counties in the Texas
and Oklahoma panhandles and in Western Kansas.

     In October  1997,  the Company  sold all its working  interest  only in the
Baker lease of its West Texas Panhandle production properties (approximately 580
acres)  and  granted  a two  year  option  to sell  its  leasehold  interest  in
approximately   13,500   non-producing   acres   for  total   consideration   of
approximately  $230,000. The option expired in October, 1999. The Company signed
a  Representation  Agreement with a local energy company who owns  approximately
thirty  percent  (30%) of the  acreage  contiguous  to the  Company's  interest.
Whereas,  the local  company,  will do  geological  evaluation  and  explore the
possible sale, farm-out or farm-in of the Joint Properties.  All united expenses
will be the sole responsibility of the operators,  who will be reimbursed out of
any proceeds generated in any acceptable transaction.

     PENNSYLVANIA PROPERTIES. (See Westar Energy, Inc. Page 1)

     SOUTH THORNWELL  FIELD.  The Company has a thirty percent working  interest
(30%  working  interest)  in the  South  Thornwell  Field in  Jefferson  Parish,
Louisiana.  The 30% working interest is an approximate 850 acres, out of a 6,000
acre field. The Thornwell Field has produced approximately 3 trillion cubic feet
of gas to date.  According  to Shell Oil Company  interpretation  of 3D seismic,
there remains in excess of 323 Bcf of gas located in five pay zones.

     The LDC  Operating,  Inc.  lease  (30%  working  interest  owned by Empiric
Energy, Inc.) includes the highest point of the structure which gives LDC access
to 60% of the remaining gas reserves.  This  represents a substantial  source of
production for Empiric's 30% working interest ownership in the field.


                                       2
<PAGE>

The Company became increasingly  concerned over the operational problems created
by the LDC Operating Company,  including completion of the two wells involved in
workover  programs  and related  problems.  The  Company,  with the approval and
cooperation of the principal Lease Owners,  executed a "top lease" of the entire
1,036  leasehold  acreage,  which  would  result in the Company  increasing  its
working interest from 30% to 100%.

     In September,  2001 the LDC Operating  Company filed Chapter 11 proceedings
in the United  States  Bankruptcy  Court,  Western  District of Louisiana  (Lake
Charles)  due to their  inability  to meet  timely  lease  payments,  payment of
current  expenses  and  similar  obligations.  A hearing was set for October 25,
2001.  There have been  subsequent  hearings,  including  the  rejection  of the
proposed re-organization plan proposed by LDC Operating Company.

     The Company  believes that a Chapter 7 Liquidation Plan will be proposed in
the very near future.  The Company  believes that it is prepared to reactivate a
100% "top lease" commitment and proceed with an orderly operational program.

Planned Activities

     As  described  elsewhere  in this report,  the Company has  developed  many
contacts in the  industry and has been  presented  with many  opportunities  for
investments in acquisitions or combinations  with other companies and/or working
interest  participation in promising proved and undeveloped  acreage  prospects.
The Company is  negotiating  agreements  in  principal  to acquire  interests in
producing wells and leasehold  acreage with further  development  possibilities.
This program for  development,  expansion  and financial  growth  depends on the
Company's  obtaining adequate working capital although a substantial  portion of
the cost will be provided by the Company's equity securities.

Productive Well Summary

     The following table sets forth certain information  regarding the Company's
ownership,  through December 31, 2001 for  Pennsylvania,  of productive wells in
the areas indicated.


                     PRODUCTIVE WELLS
                           OIL                            GAS
                    GROSS          NET          GROSS             NET

Pennsylvania          0             0            7.0              4.0



                                       3
<PAGE>

ITEM 3. LEGAL PROCEEDINGS

     The Company is a defendant,  in what it considers to be a spurious lawsuit,
that relates to the LDC Operating Company Bankruptcy,  and related claims to the
leasehold interest.


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

     No matters have been submitted to the vote of security  holders through the
date of this report.



                                       4
<PAGE>

                                    PART II.


ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     The Company's Common Stock and Series A Warrants were listed for trading on
the Boston Stock  Exchange  from October 24, 1994 to December 10, 1996, at which
time the securities  were de-listed  because of minimum unit prices being bid on
the Boston Stock Exchange.  The Common shares are now quoted on the OTC Bulletin
Board  market.  The  following are the high and low bid prices for the Company's
Common Stock as reported by the NASDAQ OTC Bulletin Board (Symbol: EMPE) for the
periods indicated in 2000 and 2001 regarding the OTC market.

                                                HIGH        LOW       CLOSE
                                    VOLUME    TRADE        TRADE      TRADE
      2000
      First Quarter                568,700    0.7987       0.7298     0.7729
      Second Quarter               697,100    0.6840       0.6550     0.6673
      Third Quarter                797,400    0.3956       0.3739     0.3878
      Fourth Quarter             1,653,500    0.8736       0.7394     0.7743

      2001
      First Quarter              1,165,200    0.9040       0.9249     0.8978
      Second Quarter             1,406,300    0.6006       0.6280     0.6001
      Third Quarter                879,500    0.4189       0.4281     0.4099
      Fourth Quarter             1,570,000    0.2490       0.2564     0.2519


As of  December  31,2001,  there were  approximately  645 record and  beneficial
holders of the Common Stock.

ITEM 6. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

Comparison of 2001 to 2000

     The following  schedule sets forth in summary form the financial results of
operations of the Company for the years ended December 31, 2000 and 2001.

               YEAR              REVENUES           PROFIT/LOSS
               ----              --------           -----------

               2000              $ 126,218         $ (2,089,173)
               2001              $ 192,289         $ (1,776,116)

     Revenues of $192,289 in 2001 were  $66,071 or 52% higher than during  2000.
The increase was due to higher production and higher prices.

     Production  expense of $264,162 in 2001 was  $146,795 or 12.5%  higher than
2000.  The  increase  was due to  unforeseen  repairs  to the  Smith gas well in
Mississippi required to conform to Mississippi regulations.



                                       5
<PAGE>

     Depletion and depreciation  expenses of $216,321 were $42,853 or 25% higher
than 2000. The  difference  was due primarily to higher  depletion due to higher
production  volumes  and lower  prices  used in the  preparation  of the reserve
reports in 2001.

     There was an impairment  expense for 2001 of $949,297  compared to $559,915
in 2000.  This  impairment is due  primarily to the sale of the Company's  South
Texas properties in 2001, and to lower prices in 2001 on existing reserves.

     General and  Administrative  expense of  $521,534  was $68,437 or 12% lower
than 2000. The decrease was due  principally to a decrease in consulting fees in
2001.

     Interest  expense of  $12,891  was  $28,029  or 68% lower  than  2000.  The
difference was due to a lower level of debt in 2001 than in 2000.

     As noted in the financial  statements,  the Company has suffered  recurring
losses from operations.  Future positive results are a function of the Company's
ability to raise capital or utilize  securities to acquire producing  properties
or drill  developmental  wells in order to  generate  profits.  In the event the
Company is not able to raise capital or acquire properties, there is substantial
doubt about the Company's ability to continue as a going concern.

Liquidity

     Cash flows  provided a decrease of $202,838 for 2001 leaving a cash balance
of $13,328 at December  31,  2001.  Net cash used by  operating  activities  was
$92,992  due  primarily  to the  net  loss of  $1,776,116,  offset  by non  cash
expenses. Net cash used by investing activities was $421,300 which was primarily
for the purchase of oil and gas properties. Financing activities, which included
the net proceeds  from the issuance of long term debt and sales of common stock,
provided cash of $311,454  which was used to support the operating and investing
activities described above.

     During the year 2001,  the Company  issued the following  securities  which
were outstanding at the end of the year:

          2,195,151        Common Shares, par value $0.01

              5,000        Class 'B' Warrants, each allowing the purchase of one
                           Common Share at $2.50 to $1.50 until May 13, 2004

            100,000        Class 'E' Warrants, each allowing the purchase of one
                           Common Share at $2.00 until May 13, 2002.



                                       6
<PAGE>

         The Common  Shares  were  issued at prices from $0.15 to $1.09 and were
issued for cash, receivables, components of debt, services and interest. None of
the above securities were registered.

         As of December 31, 2001, the Company had a working  capital  deficit of
$415,469 and an equity-to-debt ratio of about 5.5-to-1. The Company needs and is
seeking the infusion of working capital for expanded  drilling and developmental
programs,   for  further  debt  reduction  and  for  acquisition  of  production
properties to obtain  improved cash flow as set forth in the Planned  Activities
section above.


ITEM 7. FINANCIAL STATEMENTS

     The following financial statements are included as part of this Form 10-KSB
following the signature page:

                                                                            Page
  Independent Auditors Report as of December 31, 2001 and 2000...........F-1 & 2
  Balance Sheet - December 31, 2001 and 2000.................................F-3
  Statements of Operations - Years ended December 31, 2001 and 2000..........F-4
  Statements of  Changes in Stockholder's Equity - Years ended
     December 31, 2001 and 2000..........................................F-5 & 6
  Statements of Cash Flow - Years ended December 31, 2001and 2000............F-7
  Notes to Financial Statements......................................F-8 to F-19


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

     None.



                                       7
<PAGE>

                                    PART III.

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

     The Company has one  executive  officer  and one  director,  James J. Ling,
Chairman, Chief Executive Officer.  Following is a brief summary of the business
background and experience of Mr. Ling.

     James J. Ling, age 79, is a co-founder of the Company and has been Chairman
of the  Board,  Chief  Executive  Officer  and a  Director  since  inception  in
September,  1992.  Since 1985,  Mr. Ling has been  President of Hill  Investors,
Inc.,  a  company  organized  to  hold  oil and gas  investments  and to  render
consulting services.


ITEM 10. EXECUTIVE COMPENSATION

     The following table sets forth the compensation paid by the Company to each
of its executive officers for services rendered to the Company in all capacities
during the fiscal year ended December 31, 2001 and 2000.

                            SUMMARY COMPENSATION TABLE
NAME/POSITION              FISCAL YEAR    SALARY(1) (2)   BONUS*   STOCK OPTIONS

James J Ling(1) (2)           2000        $ 120,000        -0-          -0-
                              2001        $ 120,000        -0-          -0-

Renn Rothrock, Jr.(3)         2000        $ 120,000     $ 20,000        -0-


                        *See Employment Contract Summary.

(1) Mr. Ling does not receive compensation directly from the Company.  Under the
terms of a management  consulting agreement entered into between the Company and
Hill Investors,  Inc, Hill provides management consulting services for which the
Company paid Hill a monthly fee of $7,500 until April 1998 and $10,000 per month
until October 2001.

(2) Because of the Company's  working capital  condition,  Mr. Ling has received
partial cash compensation through his respective  associated companies for years
1998 and 1999. He has received a notes  payable for a portion of the  consulting
fees not paid in cash,  which  are or have  been  recorded  on the  books of the
Company.

(3) Mr. Renn Rothrock, Jr. left the company on December 31, 2000.

     In the opinion of Mr.  Ling,  the fact that he is not  compensated  through
consulting contracts rather than directly from the Company has no adverse effect
on his duties  and  fiduciary  obligations  to the  Company  as an  officer  and
director.  Mr. Ling devotes substantially all of his time to the business of the
Company and is not engaged in significant outside activities.



                                       8
<PAGE>

1994 Stock Option Plan

     The Board of Directors of the Company, on January 10, 1994, adopted a stock
option plan (the "Plan") to provide for the grant of non-qualified stock options
to  employees  and  advisors  of the  Company.  A total of 250,000  shares  were
authorized  and reserved for issuance  under the Plan,  subject to adjustment to
reflect changes in the Company's  capitalization  in the event of a stock split,
stock  dividend  or  similar  event.  The Plan is  administered  by the Board of
Directors  who has the sole  authority to interpret  the Plan,  to determine the
persons to whom  options  will be granted,  the number of options  granted,  the
exercise  price,  duration and other terms of the options.  Stockholders  of the
Company approved the Plan on March 29, 1994.

     Since 1994 the Board of Directors  authorized  additional  shares to be set
aside for  issuance  under  the Plan  bringing  to  2,250,000  the total  shares
authorized  for the Stock  Option  Plan.  Options  of  475,000  shares are still
pending as of 2001 leaving 1,775,000 shares available.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth the number of shares of Common Stock held by
the principal Officers and Directors of the Company as of December 31, 2001:

                               Shares Beneficially
          Name                        Owned                        % of Class
          ----                --------------------                 ----------

      James J. Ling(1)             1,005,872                          6.5%

(1)  Includes  214,075  shares of Common  Stock  held by the  Dorothy  Ruth Ling
     Trust,  of which Mr. Ling is Trustee;  and,  791,797 shares of Common Stock
     held by Hill Investors,  Inc.,  owned by the DRL Trust of which Mr. Ling is
     President.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The Company entered into a three year management  consulting agreement with
Hill Investors,  Inc.  ("Hill") dated October 1, 1992 (renewed for another three
year period in October 1998),  whereby Hill provides the services of Mr. Ling as
Chairman and Chief  Executive  Officer of the Company for which Hill  received a
monthly fee of $7,500 until April 1998 and $10,000 per month thereafter.  In the
event of the death or disability  of Mr. Ling during the term of the  agreement,
the agreement shall automatically  terminate or, in the case of a reorganization
of the Company during the term of the agreement, the agreement may be terminated
at Mr. Ling's option.  Upon any such termination for the foregoing  reasons such
payments  shall  continue  for a  period  of 36  months  from  the  date of such
termination.  Mr. Ling  presently  devotes the  majority of his working time and
efforts to the business and affairs of the Company and expects to continue doing
so for the foreseeable  future.  Under the terms of the agreement the Company is
obligated to provide to Hill suitable office  facilities and to reimburse it for
expenses  incurred  in  connection  with  Hill's or Mr.  Ling's  services to the
Company, including,  without limitation, the cost of providing an automobile and
health and life  insurance  for Mr.  Ling.  Pursuant to the  agreement,  Hill is
obligated to certain covenants of  confidentiality  and  non-competition  and is
entitled to receive the benefits of indemnification  against damages and cost of
defense of  litigation  or claims  resulting  from certain acts in the course of
performance  of its or Mr.  Ling's  management  duties  as  provided  for in the
Company's  By-Laws.   This  contract  will  automatically  be  extended  for  an
additional period of three years from each full year anniversary date unless the
Company notifies Mr. Ling to the contrary.


                                       9
<PAGE>

     Hill is a Delaware corporation which currently  owns791,797 shares or about
5 percent  of the  Company's  outstanding  Common  Stock.  Mr.  Ling is the sole
officer and director of Hill, and under existing SEC regulations, the beneficial
owner of 100 percent of its outstanding capital stock.


ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

     August, 2001 8-K for change of Auditors.



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,  hereunto duly
authorized.



                                                      /s/ James J. Ling
                                                     ---------------------------
                                                     James J. Ling. Chairman and
                                                         Chief Executive Officer



                                       10
<PAGE>

                              EMPIRIC ENERGY, INC.

                          INDEX TO FINANCIAL STATEMENTS


                                                                            Page
                                                                            ----

Independent Auditors' Report................................................ F-2


Balance Sheets December 31, 2001 and 2000....................................F-3

Statements of Operations
  for the Years Ended December 31, 2001 and 2000.............................F-4

Statements of Changes in Stockholders' Equity
  for the Years Ended December 31, 2001 and 2000.............................F-5

Statements of Cash Flows
  for the Years Ended December 31, 2001 and 2000.............................F-7


Notes to Financial Statements........................................F-8 to F-19



                                       F-1


                                       11
<PAGE>

                          INDEPENDENT AUDITORS' REPORT



Board of Directors
Empiric Energy, Inc.


We have audited the  accompanying  balance sheet of Empiric  Energy,  Inc. as of
December  31,  2001  and  the  related  statements  of  operations,  changes  in
stockholders'  equity and cash flows for the year then  ended.  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 audit in accordance with auditing standards  generally accepted
in the  United  States of  America.  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  audit  provides  a
reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the financial  position of Empiric  Energy,  Inc. as of
December 31, 2001,  and the results of its operations and its cash flows for the
year then ended in conformity with accounting  principles  generally accepted in
the United States of America.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  Note 1 to the
financial  statements,  the Company  has  suffered  recurring  losses that raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these  matters are also  described  in Note 1. The  financial
statements do not include any adjustments  that might result from the outcome of
this uncertainty.

A significant  portion of the  Company's oil and gas  properties at December 31,
2001 are unproved leasehold costs.



                                                            Jackson & Rhodes P.C


Dallas, Texas
March 25, 2002




                                       F-2


<PAGE>

                          INDEPENDENT AUDITORS' REPORT



To the Board of Directors and Stockholders
Empiric Energy, Inc.
Dallas, Texas

We  have  audited  the  accompanying   statements  of  operations,   changes  in
stockholders'  equity  and  cash  flows of  Empiric  Energy  for the year  ended
December 31, 2000.  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 audit.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all  material  respects,  the  results of  operations  and cash flows of Empiric
Energy,  Inc. for the year ended December 31, 2000, in conformity with generally
accepted accounting principles.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  Note 1 to the
financial statements,  the Company has suffered recurring losses from operations
and future working capital  requirements are dependent of the Company's  ability
to generate  profitable  operations.  These conditions raise  substantial  doubt
about the Company's ability to continue as a going concern.  Management's  plans
in regard to these  matters are to these  matters are  described  in Note 1. The
financial  statements do not include any adjustments  that might result from the
outcome of this uncertainty.

A significant  portion of the  Company's oil and gas  properties at December 31,
2000 are unproved leasehold costs.

Hein + Associates LLP

Dallas, Texas
March 30, 2001



                                       F-3

<PAGE>
<TABLE>
<CAPTION>

                              EMPIRIC ENERGY, INC.
                                  BALANCE SHEET
                           December 31, 2001 and 2000

                                     ASSETS
                                                                                  2001            2000
                                                                             ------------    ------------
<S>                                                                          <C>             <C>
Current assets:
    Cash and cash equivalents                                                $     13,328    $    216,166
                                                                                    2,910          26,339
                                                                             ------------    ------------
    Oil and gas sales receivable
              Total current assets                                                 16,238         242,505
                                                                             ------------    ------------

Property and equipment:
     Oil and gas properties (full cost method):
            Unproved leasehold costs                                         $  2,730,419    $  1,790,102
            Proved leasehold costs and well equipment                           4,572,790       4,709,390
     Less accumulated depletion, depreciation and impairment                   (4,496,492)     (3,332,286)
                                                                             ------------    ------------
                   Net property and equipment                                   2,806,717       3,167,206
                                                                             ------------    ------------
Other assets                                                                       15,086           4,898
                                                                             ------------    ------------
                                                                             $  2,838,041    $  3,414,609
                                                                             ============    ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Current portion of long-term debt                                       $     20,071         110,706
     Accounts payable and accrued expenses                                        173,183          64,179
     Payroll taxes payable                                                         70,134          69,491
     Notes payable                                                                100,885            --
     Due to related parties                                                        67,434          66,720
                                                                             ------------    ------------
                Total current liabilities                                         431,707         311,096

Long-term liabilities, less current portion                                           625          13,024
                                                                             ------------    ------------
                         Total liabilities                                        432,332         324,120
                                                                             ------------    ------------
Commitments and contingencies:  (Note 7 and 8)                                       --              --

     Series P preferred stock, subject to mandatory redemption (Note 9)             8,750            --

Stockholders' equity (Note 5):
    Series A convertible preferred stock                                             --            43,168
    Series B convertible preferred stock                                             --             1,250
    Series C convertible preferred stock                                             --             3,723
    Common stock, $.02 par value; 20,000,000 shares authorized; 15,346,539
        And 13,151,388 shares issued (15,196,539 outstanding in 2001)             153,467         131,515
    Common stock subscribed, 37,500 shares                                           --               375
    Additional paid-in capital                                                 10,740,614       9,675,525
    Receivables                                                                      --           (74,061)
    Accumulated deficit                                                        (8,467,122)     (6,691,006)
                                                                             ------------    ------------
                                                                                2,426,959       3,090,489
    Less treasury stock, 150,000 shares, at cost                                  (30,000)           --
                                                                             ------------    ------------
           Total stockholders equity                                            2,396,959       3,090,489
                                                                             ------------    ------------
                                                                             $  2,838,041    $  3,414,609
                                                                             ============    ============
</TABLE>


                 See accompanying notes to financial statements
                                       F-4


<PAGE>

                              EMPIRIC ENERGY, INC.
                            STATEMENTS OF OPERATIONS
                      Year Ended December 31, 2001 and 2000

                                                        2001            2000
                                                   ------------    ------------

Oil and gas revenues                               $    192,289    $    126,218
                                                   ------------    ------------

Cost and expenses:
        Production expense                               70,975         117,367
        Plugging and abandonment                        193,187            --
        Depletion and depreciation                      216,321         173,468
        Impairment of oil and gas properties            949,297         559,915
        Equity compensation expense                        --           690,000
        General and administrative                      525,734         589,971
                                                   ------------    ------------
               Total Expenses                         1,955,514       2,130,721
                                                   ------------    ------------
Loss from operations                                 (1,763,225)     (2,004,503)
Other  income (expense):
         Interest expense                               (12,891)        (40,920)
                                                   ------------    ------------

Net Loss                                             (1,776,116)     (2,045,423)

Dividends applicable to preferred stock
                                                           --           (43,750)
                                                   ------------    ------------

Net loss applicable to common stock                $ (1,776,116)   $ (2,089,173)
                                                   ============    ============

Basic and diluted net loss per common share        $      (0.12)   $      (0.20)
                                                   ============    ============

Weighted average common shares outstanding           14,441,686      10,353,000
                                                   ============    ============



                 See accompanying notes to financial statements
                                       F-5

<PAGE>
<TABLE>
<CAPTION>

                              EMPIRIC ENERGY, INC.
                  STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
               Years Ended December 31, 2001 to December 31, 2000


                                                                                        Common                      Additional
                                                               Common Stock             Stock         Preferred       Paid-In
                                                           Shares         Amount      Subscribed        Stock         Capital
                                                        -----------    -----------    -----------    -----------    -----------
<S>                                                     <C>            <C>            <C>            <C>            <C>
Balances, December 31, 1999                               9,046,027    $    90,461    $       469    $    43,168    $ 5,882,146
Issuance of common stock subscribed                          46,875            469           (469)          --             --
Common Stock, preferred stock and
        Warrants issued for cash                            633,725          6,337           --            4,348        706,824
Common stock issued for services                            167,800          1,678           --             --           87,583
Common Stock Warrants issued for services                      --             --             --             --          115,000
Change in value of variable stock options                      --             --             --             --          690,000
Common stock issued in the acquisition of                      --
    oil and gas properties                                1,617,000         16,170           --        1,227,995
Conversion of notes payable to common
       Stock, preferred stock and warrants                1,080,744         10,808           --              313        551,724
Conversion of accounts payable and due
      Related party to common stock,                        459,217          4,592            312        296,878
      Preferred stock and warrants                             --
Common stock dividend to Series B
       Preferred stock shareholders                         100,000          1,000           --             --           42,750
Common stock subscribed                                        --             --              375           --           74,625
Cash received for stock subscription receivable                --             --             --             --             --
Net Loss                                                       --             --             --             --             --
                                                        -----------    -----------    -----------    -----------    -----------
Balances, December 31, 2000                              13,151,388        131,515            375         48,141      9,675,525
Issuance of common stock subscribed                          37,500            375           (375)          --             --
Common Stock, preferred stock and warrants
        Issued for cash                                     712,500          7,125           --            2,800        415,075
Common stock & options issued for services                  230,378          2,304           --             --          166,740
Common stock issued for in the acquisition of
       Oil and gas properties                               353,100          3,531           --             --          316,425
Conversion of notes payable to common
     Stock, preferred stock and warrants                    139,000          1,390           --             --           26,885
Conversion of accounts payable and to due
      Related party to common stock, preferred              210,000          2,100           --             --          102,900
      Stock and warrants
Conversion of preferred stock to common stock               512,673          5,127           --          (50,941)        37,064
Purchase of treasury stock                                     --             --             --             --             --
Net loss
                                                        -----------    -----------    -----------    -----------    -----------
Balances, December 31, 2001                              15,346,539    $   153,467    $      --      $      --      $10,740,614
                                                        ===========    ===========    ===========    ===========    ===========


                 See accompanying notes to financial statements
                                       F-6


<PAGE>


                              EMPIRIC ENERGY, INC.
            STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
               Years Ended December 31, 2000 to December 31, 2001

                                                       Obligation to
                                                        Repurchase
                                                         Treasury                     Accumulated      Treasury
                                                           Stock       Receivables      Deficit         Stock          Total
                                                        -----------    -----------    -----------    -----------    -----------

Balances, December 31, 1999                                 (11,875)   $   (99,061)   $(4,601,833)   $      --      $ 1,303,475
Issuance of common stock subscribed                            --             --             --             --             --
Common stock, preferred stock and  warrants
         Issued for cash                                       --             --             --             --          717,509
Common stock issued for services                               --             --             --             --           89,261
Common stock warrants issued for services                      --             --             --             --          115,000
Change in value of variable stock options                      --             --             --             --          690,000
Common stock issued in the acquisition of                      --
    oil and gas properties                                     --             --             --        1,244,165

Conversion of notes payable to common
       Stock, preferred stock and warrants                   11,875           --             --             --          574,720
Conversion of accounts payable and due
      Related party to common stock,                           --             --             --             --          301,782
      Preferred stock and warrants
Common stock dividend to Series B
       Preferred stock shareholders                            --             --          (43,750)          --             --
Common stock subscribed                                        --             --             --             --           75,000
Cash received for stock subscription receivable                --           25,000           --             --           25,000
Net Loss                                                       --             --       (2,045,423)          --       (2,045,423)
                                                        -----------    -----------    -----------    -----------    -----------
Balances, December 31, 2000                                    --          (74,061)    (6,691,006)          --        3,090,489
Issuance of common stock subscribed                            --             --             --             --             --
Common stock, preferred stock and warrants
         Issued for cash                                       --             --             --          425,000
Common stock issued for services                               --             --             --          169,044
Common stock issued for in the acquisition of                  --             --
       oil and gas properties                                  --           74,061        394,017
Conversion of notes payable to common stock,
      Preferred stock and warrants                             --             --             --             --           28,275
Conversion of accounts payable and due related
      Party to Common stock, preferred stock and               --             --             --             --          105,000
       Warrants
Conversion of preferred stock to common stock                  --             --             --             --           (8,750)
Purchase of treasury stock                                     --             --             --          (30,000)       (30,000)
Net loss                                                 (1,776,116)    (1,776,116)
                                                        -----------    -----------    -----------    -----------    -----------
Balances, December 31, 2001                             $      --      $      --      $(8,467,122)   $   (30,000)   $ 2,396,959
                                                        ===========    ===========    ===========    ===========    ===========
</TABLE>


                 See accompanying notes to financial statements
                                      F-7

<PAGE>
<TABLE>
<CAPTION>

                              EMPIRIC ENERGY, INC.
                            STATEMENTS OF CASH FLOWS
                     Years Ended December 31, 2001 and 2000

                                                                        2001           2000
                                                                    -----------    -----------
<S>                                                                 <C>            <C>
Cash flows from operating activities:
       Net loss                                                     $(1,776,116)   $(2,045,423)
       Adjustments to reconcile to net loss to net
                   cash used in operating activities:
       Depletion, depreciation and impairment                         1,165,618        733,383
       Common stock and warrants issued for services                    169,044        204,261
       Change in value of variable stock options                           --          690,000
       Change in assets and liabilities:
             Accounts receivable                                         21,649         18,708
             Accounts payable and accrued expenses                      136,803         28,522
             Plugging and abandonment liabilities (notes payable)       100,885           --
            Oil and gas revenues payable                                (16,590)        15,193
            Due to related party                                        105,715        129,949
           Other assets                                                    --            1,539
                                                                    -----------    -----------
                    Net cash used by operating activities               (92,992)      (223,868)
                                                                    -----------    -----------
Cash flows from investing activities:
      Proceeds from sale of oil and gas properties                      125,000           --
      Purchase of oil and gas properties                               (546,300)      (417,320)
                                                                    -----------    -----------
                Net cash used investing activities                     (421,300)      (417,320)
                                                                    -----------    -----------
Cash flows from financing activities:
     Proceeds from long-term debt                                        25,000           --
     Repayments of long-term debt                                      (108,546)       (22,730)
     Proceeds from sale and subscription of stock                       425,000        817,509
     Purchase of treasury stock                                         (30,000)          --
                                                                    -----------    -----------
            Net cash provided by financing activities                   311,454        794,779
                                                                    -----------    -----------
Net increase (decrease) in cash and cash equivalents                   (202,838)       153,591
Cash and cash equivalents at beginning of the year                      216,166         62,575
                                                                    -----------    -----------

Cash and cash equivalents at the end of the year                    $    13,328    $   216,166
                                                                    ===========    ===========
Supplemental cash flow information:
          Interest paid                                             $     4,910    $     1,668
                                                                    ===========    ===========

Non-Cash investing and financing activity:
    Conversion of preferred stock to common stock                   $     8,750    $      --
                                                                    ===========    ===========
    Purchase of oil and gas properties with equity securities       $   394,017    $ 1,244,165
                                                                    ===========    ===========
    Conversion of accounts payable to notes payable                 $      --      $   125,729
                                                                    ===========    ===========
    Conversion of due to related party to common stock              $   105,000      $177,7669
                                                                    ===========    ===========
    Conversion of accounts payable to common stock                  $      --      $   124,013
                                                                    ===========    ===========
    Conversion of notes payable to common stock                     $    28,725    $   574,720
                                                                    ===========    ===========
    Common stock dividend issued to preferred stockholders          $      --      $    43,750
                                                                    ===========    ===========
</TABLE>

                 See accompanying notes to financial statements.
                                       F-8


<PAGE>

1.   Summary of Significant Accounting Policies

     Description of Business

     Empiric Energy, Inc. (the "Company") was incorporated under the laws of the
     state of  Delaware  in 1992.  The  Company is  engaged in the  acquisition,
     exploration and development of oil and gas properties, which are located in
     Texas and  Pennsylvania  as of December  31,  2001.  The  Company  also has
     working  interests in unproved  leasehold acreage in Texas and Louisiana as
     of December 31, 2001.

     Basis of Presentation

     The accompanying  financial statements have been prepared assuming that the
     Company  will  continue  as a  going  concern.  The  Company  has  suffered
     recurring losses that raise substantial doubt about its ability to continue
     as a going concern. The financial statements do not include any adjustments
     that might result from the outcome of this uncertainty.

     The Company is currently  negotiating  to acquire  existing  production and
     performing a workover on existing wells in Louisiana to provide future cash
     flow.

     Use of Estimates and Assumptions

     Preparation  of the  Company's  financial  statements  in  conformity  with
     generally  accepted  accounting  principles  requires  management  to  make
     estimates  and  assumptions   that  affect  certain  reported  amounts  and
     disclosures. Accordingly, actual results could differ from those estimates.

     Cash and Cash Equivalents

     The Company considers all liquid investments,  with an original maturity of
     three months or less when purchased, to be cash equivalents.



                                                                     F-9

<PAGE>

1.   Summary of Significant Accounting Policies (Continued)

     Oil and Gas Properties

     The  Company  uses the  full  cost  method  of  accounting  for oil and gas
     properties.  The Company's  properties  are all located in the  continental
     United States, and therefore, its costs are capitalized in one cost center.
     Under  the  full  cost  method,  all  costs  related  to  the  acquisition,
     exploration or development of oil and gas properties are  capitalized  into
     the  "full  cost  pool."  Such  costs   include   those  related  to  lease
     acquisitions,  drilling and  equipping  of  productive  and  non-productive
     wells, delay rentals,  geological and geophysical work and certain internal
     costs directly associated with the acquisition,  exploration or development
     of oil and gas  properties.  During  the years  ended  December  31,  2000,
     internal  costs  capitalized  into the full cost  pool  were  approximately
     $53,000. Upon the sale or disposition of oil and gas properties, no gain or
     loss is  recognized,  unless such  adjustments  of the full cost pool would
     significantly  alter the relationship  between capitalized costs and proved
     reserves.  Unproved  properties,  which are not subject to  depletion,  are
     assessed  periodically for possible impairment.  Any impairment amounts are
     transferred  to the  proved  oil and gas  properties.  The  Company  had no
     impaired unproved properties as of December 31, 2001.

     Under the full-cost  method of  accounting,  a "full-cost  ceiling test" is
     required  wherein net  capitalized  costs of oil and gas properties  cannot
     exceed the present  value of estimated  future net revenues from proved oil
     and gas reserves,  discounted at 10%, plus the cost of unproved  properties
     not subject to depletion,  less any related income tax effects.  During the
     years ended December 31, 2001 and 2000, the Company recorded  impairment of
     the full cost pool in the amount of $949,297 and$559,915, respectively.

     Depletion  of  proved  oil  and  gas   properties  is  computed  using  the
     unit-of-production  method based on estimated  proved oil and gas reserves.
     Depletion expense of $214,909 and $168,976 was recorded for the years ended
     December 31, 2001 and 2000,  respectively.  Depletion per equivalent mcf of
     natural gas was approximately  $2.43 and $4.02 for the years ended December
     31, 2001 and 2000, respectively.

     Other Property

     Other assets  classified as property and  equipment  are  primarily  office
     furniture and equipment and vehicles, and are carried at cost. Depreciation
     is provided  using the  straight-line  method over  estimated  useful lives
     ranging  from three to five years.  Gain or loss on  retirement  or sale or
     other  disposition  of  assets  is  included  in  income  in the  period of
     disposition.  Depreciation  expense for other  property and  equipment  was
     $1,412  and  $4,492  for the  years  ended  December  31,  2001  and  2000,
     respectively.



                                      F-10

<PAGE>

1.   Summary of Significant Accounting Policies (Continued)

     Loss Per Share

     Basic loss per share is computed  based on the weighted  average  number of
     shares of common  stock  outstanding  during the period.  Diluted  loss per
     share  takes all  potentially  dilutive  common  shares  (such as  options,
     warrants and  convertible  securities)  into  consideration.  For the years
     ended December 31, 2001 and 2000, the Company's  potential  dilutive common
     shares totaling 1,113,000 and 2,673,000,  respectively, are not included in
     the  dilutive  calculation  of  loss  per  share  as the  effect  would  be
     antidilutive.

     Income Taxes

     The Company has adopted  Statement of Financial  Accounting  Standards  No.
     109,  "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires the use
     of the asset and liability  method of computing  deferred income taxes. The
     objective of the asset and  liability  method is to establish  deferred tax
     assets and liabilities for the temporary  differences between the financial
     reporting  basis and the tax basis of the Company's  assets and liabilities
     at  enacted  tax rates  expected  to be in effect  when  such  amounts  are
     realized or settled.

     Stock-Based Compensation

     The Company applies Statement of Financial  Accounting Standards (SFAS) No.
     123 "Accounting for Stock-Based  Compensation,"  which requires recognition
     of the  value of stock  options  and  warrants  granted  based on an option
     pricing model.  However, as permitted by SFAS 123, the Company continues to
     account for stock  options and warrants  granted to directors and employees
     pursuant to Accounting  Principles  Board Opinion No. 25,  "Accounting  for
     Stock Issued to Employees," and related interpretations.  See Note 7. Stock
     options or warrants that are re-priced  subsequent to December 15, 1998 are
     treated as variable stock options  beginning on July 1, 2000 as required by
     Interpretation  No.  44  of  the  Financial   Accounting  Standards  Board,
     "Accounting for Certain Transactions Involving Stock Compensation."

2.   Related Party Transactions

     Hill  Investors,  Inc., an affiliate of the chairman of the Company's board
     of directors,  has a consulting  agreement  with the Company that calls for
     monthly  payments  of  $10,000  for  management  consulting  services.  The
     agreement expired in October 2001. During the years ended December 31, 2001
     and 2000, the Company incurred expense under this agreement of $120,000 per
     year.

     Clyde  Skeen  Business  Consultants,  an  affiliate  of a deceased  Company
     officer  and  member  of  the   Company's   board  of   directors,   had  a
     month-to-month  consulting agreement with the Company until September 2000.
     During the year ended December 31, 2000, the Company incurred expense under
     this agreement of $31,500.


                                      F-11

<PAGE>
<TABLE>
<CAPTION>

2.   Transactions (Continued)

     At  December  31,  2001 and  2000,  the  Company  had  liabilities  to Hill
     Investors,  Inc. and Clyde Skeen Business  Consultants that totaled $67,434
     and $66,720 for unreimbursed expenses and management fees.

     During the years ended  December 31, 2001 and 2000,  the Company  converted
     total liabilities of $105,000 and $392,848,  respectively, due to officers,
     directors  and family  members of officers and directors to common stock of
     the Company.

3.   Notes Payable and Long-Term Debt

     Long-term debt at December 31, consisted of the following:

                                                                  2001         2000
                                                                ---------    ---------
<S>                                                             <C>          <C>
     Note payable to a bank, interest at 7.25%, monthly
     payments of interest with principal due upon demand
     Note was collateralized by a $40,000 certificate of
     deposit owned by a stockholder
     Converted to common stock in 2000                          $    --      $  40,000

     Unsecured not payable to an individual, interest at 8%,
     principal and interest due at maturity of December 1999
     This note was in default at December 31, 2000
     Converted to common stock in 2000                               --         15,000

     Other unsecured notes payable, various terms and
     maturities through December 2002                              20,696       68,730
                                                                ---------    ---------
                                                                   20,696      123,730
                                                                  (20,071)    (110,706)
                                                                ---------    ---------
       Less current portion                                     $     625    $  13,024
</TABLE>


     Maturities  of long-term  debt based on  contractual  requirements  for the
     years ending December 31 are as follows:

                      2002                                  $20,071
                      2003                                      625

     Notes  payable  represent  8% notes  converted  from  accounts  payable for
     certain  plugging and abandonment  liabilities.  The notes are due on April
     15,  2002;  however,  the Company is  presently  negotiating  with the note
     holders in an attempt to pay the notes off with cash and common shares.

                                      F-12

<PAGE>
<TABLE>
<CAPTION>

4.   Income Taxes

     The  Company's  deferred  tax assets and  liabilities  are  composed of the
     following at December 31, 2001 and 2000:


     Deferred tax assets:                                     2001           2000
                                                          -----------    -----------
<S>                                                       <C>            <C>
        Difference in bases of oil and gas properties     $   972,000    $   533,000
        Net operating loss carryforward                     3,269,000      2,756,000
                                                          -----------    -----------
     Total deferred tax assets before valuatio allowance    4,241,000    $ 3,289,000
     Valuation allowance                                   (4,241,000)    (3,289,000)
                                                          -----------    -----------
                                                          $      --      $      --
                                                          ===========    ===========
     Net change in valuation allowance                    $   925,000    $  (484,000)
                                                          ===========    ===========
</TABLE>

     At December 31, 2001, the Company has net operating loss  carryforwards  of
     approximately  $9,340,000  for both  financial  statement and tax reporting
     purposes.  Unused  operating  loss  carryforwards  may  provide  future tax
     benefits,  although  there can be no  assurance  that  these net  operating
     losses can be recognized in the future.  These losses may be used to offset
     future taxable income,  subject to the provisions of Internal  Revenue Code
     Section 382,  and if not fully  utilized,  expire  starting in 2011 through
     2016.

5.   Stockholders' Equity

     At December  31,  2000,  the Company has  $575,000  face amount of Series A
     preferred  stock  outstanding.  Series A preferred  stock is denominated in
     face amounts  rather than shares,  has no par value,  no interest  rate, no
     dividend rate, no voting privileges,  a liquidation preference equal to the
     face amount and is  convertible  into  common  stock at a rate of $3.33 per
     share of common stock.  There is $1,150,000 of face amount  authorized  for
     the Series A convertible preferred stock. All Series A shares were canceled
     by the Company in 2001.

     During 2000, the Company  designated  Series B and C convertible  preferred
     stock. Each series of convertible  preferred stock has a par value of $0.05
     per share, no interest rate, no voting privileges,  a one-time common stock
     dividend,  a liquidation  preference and is convertible  into common stock.
     All Series B shares were cancelled by the Company in 2001.

     Series C convertible  preferred stock is entitled to a one-time dividend of
     common  stock of an entity that the  Company  had  intended to enter into a
     stock  exchange  with  during  2000 or 2001.  This stock  exchange  has not
     occurred  and the  letter of intent  has  expired.  Additionally,  Series C
     convertible  preferred stock is convertible  into common stock at a rate of
     $2.00 per share of common stock for each $1.00 of liquidation value. Series
     C convertible  preferred  stock is callable for conversion at the Company's
     option any time after the common stock of dividend is paid or at the end of
     one year which will range from October to December 2001. As of December 31,
     2000, the Company had 74,450 shares of Series C convertible preferred stock
     outstanding  with a liquidation  preference of $480,000,  convertible  into
     240,000  shares of common  stock.  All the Company's  outstanding  Series C
     preferred shares were converted to common shares during 2001.

                                      F-13

<PAGE>

5.   (Continued)

     In 1998, the Company  designated Series B and C warrants to purchase common
     stock.  The Series B warrants have an exercise  price of $2.50 per share of
     common stock and expire three years from the date of the grant.  The Series
     C warrants  have an exercise  price of $3.00 per share of common  stock and
     expire  four years from the date of the grant.  As of  December  31,  2001,
     there are 5,000 and nil warrants  outstanding for the Series B and Series C
     warrants,  respectively.  There  were no  Series  B  warrants  or  Series C
     warrants exercised during the years ended December 31, 2001 and 2000.

     In 1999, the Company  designated Series D and E warrants to purchase common
     stock.  The Series D warrants have an exercise  price of $1.50 per share of
     common  stock and can be  exercised  until May 2001.  The Series E warrants
     have an exercise price of $2.00 per share of common stock and can exercised
     until May 2002.  These  warrants  may be  called  by the  Company  at $0.10
     (Series D) and $0.15 (Series E) per warrant if the  Company's  common stock
     trades  for  $1.88  (Series  D) and  $2.50  (Series  E) per  share  for ten
     consecutive  days.  As of December 31,  2001,  there are 50,000 and 100,000
     warrants outstanding for the Series D and Series E warrants,  respectively.
     There were no Series D warrants or Series E warrants  exercised  during the
     years ended December 31, 2001 and 2000.  During the year ended December 31,
     2000, 50,000 Class D warrants were issued by the Company in connection with
     the issuance of the Series B convertible preferred stock.

     During 2000, the Company  designated two new series of warrants to purchase
     common  stock.  The Series F warrants  have an exercise  price of $0.75 per
     share of common stock and can be exercised until April 2005. The Redeemable
     Series F warrants have an exercise price of $2.50 per share of common stock
     and can be exercised until September 2003. The Redeemable Series F warrants
     may be called by the Company for $0.25 per warrant if the Company's  common
     stock trades for $3.13 per share for ten consecutive days.

     During the year ended  December  31,  2000,  there  were  250,000  Series F
     warrants issued as described below and 48,000  Redeemable Series F warrants
     issued  in  connection  with  the  issuance  of the  Series  C  Convertible
     Preferred Stock. All of the Series F and redeemable  Series F warrants were
     outstanding at December 31, 2001.

     During 2000,  the Company  issued  250,000 Series F warrants to a financial
     consulting  company.  The fair value of the warrants as  determined  by the
     Black-Scholes  option  pricing model of $115,000 was recorded as an expense
     during the year ended December 31, 2000.

     During  2000,  the  Company  issued  1,617,000  shares of  common  stock in
     exchange for an interest in unproved  leases and  properties  in Louisiana.
     The value of the stock as  determined by the quoted  trading  prices on the
     dates  of the  transactions  of  $1,244,165  was  recorded  to oil  and gas
     properties during the year ended December 31, 2000.

     During 2001,  the Company issued 353,100 shares of common stock in exchange
     for an interest in unproved leases and  properties.  The value of the stock
     as determined by the quoted trading prices on the dates of the transactions
     of $394,017  was recorded to oil and gas  properties  during the year ended
     December 31, 2001.

                                      F-14
<PAGE>
<TABLE>
<CAPTION>

6.   Stock Based Compensation

     Stock Option Plans

     In  1994,  the  Company  established  a Stock  Option  Plan  to  compensate
     directors,  employees,  advisors and consultants. All options granted under
     the plan are  exercisable at $1.00 per share and expire five years from the
     date of the grant.  The exercise  price for all options  granted under this
     plan was re-priced in March 1999 to $0.50 per share.  At December 31, 2001,
     there are 1,700,000  stock  options  reserved and available for grant under
     the plan.

     The  following is a summary of activity for the stock  options  granted for
     the years ended December 31, 2001 and 2000:


                                             December 31, 2001                 December 31, 2000
                                      -------------------------------   -------------------------------
                                                         Weighted                          Weighted
                                         Number of         Average         Number of         Average
                                          Shares       Exercise Price       Shares       Exercise Price
                                      --------------   --------------   --------------   --------------
<S>                                   <C>              <C>              <C>              <C>
     Outstanding, beginning of year        1,170,000   $         0.50        1,170,000   $         0.50
     Granted                                  60,000   $         0.50             --     $         --
     Cancelled or expired                   (755,000)  $         0.50             --     $         --
                                      --------------   --------------   --------------   --------------
     Outstanding end of year                 475,000   $         0.50        1,170,000   $         0.50
                                      ==============   ==============   ==============   ==============
     Exercisable,end of year                 475,000   $         0.50        1,170,000   $         0.50
                                      ==============   ==============   ==============   ==============
</TABLE>


     If not previously exercised,  options outstanding at December 31, 2001 will
     expire as follows:

     As  discussed  in Note 1, the  re-priced  options  are  treated as variable
     options and the  difference  between the quoted stock price on July 1, 2000
     of $0.41 per share and the quoted stock price at December 31, 2000 of $1.00
     per share is  recorded  as an expense for all the  re-priced  options.  The
     total effect for the year ended  December 31, 2000 was  $690,000,  which is
     included in expenses.


                                                  Weighted
                                 Number of         Average
                                   Shares       Exercise Price
                               --------------   --------------
     December 31, 2002                 75,000   $         0.50
     December 31, 2003                340,000   $         0.50
     December 31, 2006                475,000   $         0.50
                               --------------   --------------
                                      475,000   $         0.50


                                      F-15
<PAGE>


6.   Stock Based Compensation (Continued)

     Pro Forma Stock-Based Compensation Disclosures

     As discussed in Note 1, the Company  applies APB Opinion No. 25 and related
     interpretations  in  accounting  for its  stock  options.  Accordingly,  no
     compensation  cost has been  recognized  for grants of options to employees
     since the  exercise  prices  were not lower than the  market  prices of the
     Company's  common stock on the measurement  dates.  Had  compensation  been
     determined  based on the estimated fair value at the measurement  dates for
     awards under those plans consistent with the method  prescribed by SFAS No.
     123,  the  Company's  net loss and net loss per share  for the years  ended
     December  31,  2000  would  have  been  changed  to the pro  forma  amounts
     indicated below.  Compensation  under SFAS No. 123 for 2001 would have been
     nominal.

                                            2000
                                      -------------
     Net loss:
       As reported                    $  (1,431,673)
       Pro Forma                      $  (1,460,673)
     Net loss per common share
       As reported                    $        0.14
       Pro Forma                      $        0.14

7.   Environmental Issues

     The Company is engaged in oil and gas  exploration  and  production and may
     become subject to certain liabilities as they relate to environmental clean
     up of well  sites or other  environmental  clean up of well  sites or other
     environmental  restoration procedures as they relate to the drilling of oil
     and gas wells and the operation  thereof.  In the Company's  acquisition of
     existing or previously  drilled well bores, the Company may not be aware of
     what  environmental  safeguards  were  taken at the time  such  wells  were
     drilled  or  during  such  time  the  wells  were  operated.  Should  it be
     determined that a liability exists with respect to any environmental  clean
     up or  restoration,  the liability to cure such a violation could fall upon
     the  Company.  No claim  has been  made,  nor is the  Company  aware of any
     liability  which the Company may have,  as it relates to any  environmental
     clean up, restoration or the violation of any rules or regulations relating
     thereto.




                                      F-16
<PAGE>

8.   Commitments and Contingencies

     Fair Value of Financial Instruments

     The  following   disclosure  of  the  estimated  fair  value  of  financial
     instruments is made in accordance  with the  requirements  of SFAS No. 107,
     "Disclosures about Fair Value of Financial Instruments." The estimated fair
     value amounts have been determined by the Company,  using available  market
     information and appropriate valuation methodologies.

     The fair value of financial  instruments  classified  as current  assets or
     liabilities  including  cash and cash  equivalents  and notes and  accounts
     payable  approximate  carrying value due to the short-term  maturity of the
     instruments.

     Leases

     The Company has a  non-cancellable  sublease  for office  space.  The lease
     requires minimum monthly rental payments of $1,766 until expiration in June
     2002.

     The Company  incurred  rent  expense of $21,858,  and $31,085 for the years
     ended December 31, 2001 and 2000, respectively.

       Concentration of Credit Risk

       The Company invests its cash and certificates of deposit primarily in
       deposits with major banks. Certain deposits, at times, are in excess of
       federally insured limits. The Company has not incurred losses related to
       its cash.

9.   Series P Preferred Stock, Subject to Mandatory Redemption

     During 2001, the Company  designated Series P convertible  preferred stock.
     Each  Series P  convertible  preferred  share  has a par value of $0.05 per
     share,  no  interest  rate and no voting  privileges.  Series P shares  are
     subject to mandatory  redemption monthly depending on net revenues from the
     G. A. Lyons lease in Louisiana.  The shares  redeemed shall be equal to 25%
     of the net revenue of the lease.  Each shareholder  shall have the right to
     accept  redemption  of the  shares at $1.00 per share or  convert to common
     stock at $1.00 per share.

     Series P preferred stock has been classified outside of permanent equity in
     accordance with rules of the Securities and Exchange Commission. The shares
     are reported at fair value.  Because the mandatory redemption is contingent
     on the  occurrence of certain net revenues  from an oil and gas lease,  the
     redemption  amount will not be reflected in the financial  statements until
     the contingent net revenues are recognized.


                                      F-17
<PAGE>
<TABLE>
<CAPTION>


10.  Supplemental Information on Oil and Gas Producing Activities

     The following table sets forth certain  information with respect to the oil
     and gas producing activities of the Company:





                                                                           Years Ended December 31,
                                                                              2001           2000
                                                                          -----------    -----------
<S>                                                                       <C>            <C>
     Costs incurred in iol and gas producing activities:
       Acquisition of unproved properties                                 $   940,317    $ 1,618,030
       Acquisition of proved properties                                          --           43,455
                                                                          -----------    -----------
         Total costs incurred                                             $   940,317    $ 1,661,485
                                                                          ===========    ===========
     Net capitalized costs related to oil and gas producing activities:
       Unproved leasehold costs                                           $ 2,730,419    $ 1,790,102
       Proved lease hold costs                                            $ 4,572,790      4,709,390
         Less accumulated depletion and impairment                        $(4,496,492)   $(3,333,286)
                                                                          -----------    -----------
           Net oil and gas property costs                                 $ 2,806,717    $ 3,167,206
</TABLE>


                                      F-18

<PAGE>
<TABLE>
<CAPTION>

     The  following  table  for  2001 is based on  information  prepared  by the
     Company and 2000 is based on information  prepared by a petroleum  engineer
     who is the former president of the Company. The tables summarize changes in
     the  estimates of the  Company's  net interest in total proved  reserves of
     crude  oil and  condensate  and  natural  gas,  all of which  are  domestic
     reserves:

                                                                  (Unaudited)
                                                                  -----------
                                                       2001                         2000
                                                       ----                         ----
                                                  Oil            Gas          Oil            Gas
                                               (Barresl)        (MCF)      (Barresl)        (MCF)
                                               ----------    ----------    ----------    ----------
<S>                                            <C>           <C>           <C>           <C>
     Balance, beginning of year                    26,347       353,074        98,214     1,839,535
        Revisions of previous estimates              --            --          (3,562)     (468,855)
        Abandonment of minerals in plade (1)         --            --         (67,344)     (981,334)
        Sales of minerals in place                (25,963)     (178,162)         --            --
        Production                                   (384)      (84,781)         (961)      (36,272)
                                               ----------    ----------    ----------    ----------
     Balance, end of year                            --          90,131        26,347       353,074
                                               ==========    ==========    ==========    ==========
     Proved developed reserves:
        December 31, 2001                            --          90,131        78,349     1,478,366
                                               ==========    ==========    ==========    ==========
        December 31, 2000                           6,311       237,981         6,311       237,981
                                               ==========    ==========    ==========    ==========
</TABLE>


(1)  Abandonment  of minerals in place  resulted from the expiration of a proved
     undeveloped leasehold


10.  Supplemental Information on Oil and Gas Producing Activities (Continued)

     Proved oil and gas  reserves  are the  estimated  quantities  of crude oil,
     condensate  and  natural  gas  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 reserves that can be expected to
     be recovered  through existing wells with existing  equipment and operating
     methods.  The above estimated net interests in proved reserves are based on
     subjective  engineering  judgments  and may be affected by the  limitations
     inherent in such estimation.  The process of estimating reserves is subject
     to continual  revision as  additional  information  becomes  available as a
     result of drilling,  testing,  reservoir  studies and  production  history.
     There  can be no  assurance  that  such  estimates  will not be  materially
     revised in subsequent periods.

11.  Standardized Measure of Discounted Future Net Cash Flows (Unaudited)

     The  standardized  measure of discounted  future net cash flows at December
     31,  2001 and 2000,  relating  to proved oil and gas  reserves is set forth
     below. The assumptions  used to compute the standardized  measure are those
     prescribed by the Financial Accounting Standards Board and, as such, do not
     necessarily  reflect the Company's  expectations  of actual  revenues to be
     derived  from those  reserves  nor their  present  worth.  The  limitations
     inherent in the reserve quantity  estimation process are equally applicable
     to the  standardized  measure  computations  since these  estimates are the
     basis for the valuation process.

                                                       Years Ended December 31,
                                                          2001          2000
                                                      -----------   -----------

     Future cash inflows                              $   224,000   $ 2,809,000
     Future development and production costs              (49,000)     (740,000)
                                                      -----------   -----------
     Future net cash flows, before income tax             175,000     2,069,000
     Future income taxes                                     --            --
                                                      -----------   -----------
     Future net cash flows                                175,000     2,069,000
     10% annual discount                                  (99,000)     (692,000)
                                                      ===========   ===========
     Standard measure of discounted
       future net cash flows                          $    76,000   $ 1,377,000


                                      F-19
<PAGE>
<TABLE>
<CAPTION>

11.  Standardized  Measure  of  Discounted  Future  Net Cash  Flows  (Unaudited)
     (Continued)

     Future net cash flows were computed  using year-end  prices and costs,  and
     year-end  statutory tax rates  (adjusted for  permanent  differences)  that
     relate to existing  proved oil and gas reserves at year end. The  following
     are  the  principal  sources  of  change  in the  standardized  measure  of
     discounted net cash flows:

                                                               Years Ended December 31,
                                                                  2001           2000
                                                              -----------    -----------
<S>                                                           <C>            <C>
     Sales of oil and gas produced, net of production costs   $  (121,000)   $    (9,000)
     Abandonment of minerals                                         --       (1,822,000)
     Net changes in prices and production costs                  (291,000)     1,109,000
     Revisions and other                                          (39,000)    (1,010,000)
     Sales of minerals in place                                  (988,000)          --
     Accretion of discount                                        138,000        283,000
                                                              -----------    -----------
       Net change                                              (1,301,000)    (1,449,000)
     Balance, beginning of year                                 1,377,000      2,826,000
                                                              -----------    -----------
     Balance, end of year                                     $    76,000    $ 1,377,000
                                                              ===========    ===========

                                      F-20
</TABLE>