<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q
                                   (Mark One)

          [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                  For the quarterly period ended June 30, 1999

                                       or

          [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                             SECURITIES ACT OF 1934

                                -----------------

                           Commission File No. 1-14754

                                -----------------

                            PENDARIES PETROLEUM LTD.
             (Exact name of registrant as specified in its charter)


                                -----------------

                        PROVINCE OF NEW BRUNSWICK, CANADA
                 (State or other jurisdiction of incorporation)

        Internal Revenue Service - Employer Identification No. 52-2051576

                8 Greenway Plaza, Suite 910, Houston, Texas 77046
                                 (713) 355-2900

                                -----------------

            Indicate  by check mark  whether  the  registrant  (1) has filed all
reports  required to be filed by Section 13 or 15(d) of the Securities  Exchange
Act of 1934 during the preceding 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 total number of shares of the registrant's Common Shares, no par
value, outstanding on June 30, 1999, was 8,879,470.

                                       1
<PAGE>




                            PENDARIES PETROLEUM LTD.


PART I - FINANCIAL INFORMATION                                             PAGE

 Item 1. Financial Statements

         Consolidated Balance Sheets as of June 30, 1999
         (Unaudited) and December 31, 1998....................................3

         Consolidated Statements of Operations for the
         three and six months ended June 30, 1999
         With Comparative Figures for the Preceding Year (Unaudited)..........4

         Consolidated Statements of Cash Flows
         for the six months ended June 30, 1999
         With Comparative Figures for the Preceding Year (Unaudited)..........5

         Notes to Consolidated Financial Statements (Unaudited)...............6

 Item 2. Management's Discussion and Analysis of Financial
         Condition and Results of Operations..................................9

 Item 3. Quantitative and Qualitative Disclosures About Market Risk........None


PART II.  OTHER INFORMATION

 Item 1. Legal Proceedings...................................................14

 Item 2. Changes in Securities and Use of Proceeds...........................14

 Item 3. Defaults Upon Senior Securities.....................................14

 Item 4. Submission of Matters to a Vote of Security Holders.................14

 Item 5. Other Information...................................................14

 Item 6. Exhibits and Reports of Form 8-K....................................14


SIGNATURES...................................................................15

                                       2
<PAGE>






PART I:
          Item 1.             FINANCIAL STATEMENTS

                            PENDARIES PETROLEUM LTD.

                           CONSOLIDATED BALANCE SHEETS

                       June 30, 1999 and December 31, 1998

                        (All figures are in U.S. dollars)
<TABLE>

<CAPTION>
                                                                                         June 30,                December 31,
                                                                                           1999                      1998
                                                                                 ------------------      ------------------------
                                           ASSETS                                      (Unaudited)
                                           ------
CURRENT ASSETS
   <S>                                                                           <C>                           <C>
   Cash and cash equivalents                                                     $              6,732,350      $        7,873,280
   Accounts receivable                                                                            148,311                 105,750
   Prepaid expenses and other assets                                                              252,653                 208,451
                                                                                 ------------------------     -------------------

                                   Total current assets                                         7,133,314               8,187,481
                                                                                 ------------------------     -------------------

PROPERTY AND EQUIPMENT
   Oil and gas properties, recorded under the full cost method
     Proved                                                                                    10,337,926               7,890,804
     Unproved                                                                                  11,298,375              13,238,236
   Furniture, fixtures and office equipment                                                       168,679                 169,938
   Accumulated depreciation, depletion and amortization                                          (733,800)               (644,449)
                                                                                 -------------------------    -------------------

                                   Net property and equipment                                   21,071,180             20,654,529
                                                                                 -------------------------    -------------------

                                   Total Assets                                       $         28,204,494       $     28,842,010
                                                                                      ====================    ===================

                      LIABILITIES AND SHAREHOLDERS' EQUITY
                      ------------------------------------

CURRENT LIABILITIES
   Accounts payable                                                              $                 37,400     $            44,627
   Accrued liabilities                                                                             38,206                 115,235
                                                                                 ------------------------     -------------------

                                   Total current liabilities                                       75,606                 159,862
                                                                                 ------------------------     -------------------

SHAREHOLDERS' EQUITY
   Common shares
     Authorized, unlimited number of common shares
     Issued 8,879,470 and 8,781,970 common shares, respectively                                32,580,051              32,501,842
     Deficit                                                                                   (4,451,163)             (3,819,694)
                                                                                 -------------------------    -------------------

                                   Total sharesholders' equity                                 28,128,888              28,682,148
                                                                                 ------------------------     -------------------

                                   Total liabilities and shareholders' equity    $             28,204,494     $        28,842,010
                                                                                 ========================     ===================
</TABLE>

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



                                       3
<PAGE>



                            PENDARIES PETROLEUM LTD.

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                        (All figures are in U.S. dollars)
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                            For the                                     For the
                                                          Three-Month                                  Six-Month
                                                         Period Ended                                 Period Ended
                                                           June 30,                                     June 30,
                                                           --------                                     --------

                                                    1999                 1998                  1999                1998
                                                    ----                 ----                  ----                ----
REVENUE
  <S>                                       <C>                  <C>                     <C>                 <C>
  Oil and gas income                        $      71,050        $      102,864          $    172,265        $    215,718
                                            ----------------     -----------------       ----------------    ---------------

EXPENSES
  Oil and gas operating expenses                   61,208                38,210               156,849              91,653
  General and administrative expenses             381,357               668,427               757,277           1,203,060
  Depreciation, depletion and amortization         42,301                94,832                90,053             179,998
  Exchange gain                                   (25,691)              (28,178)              (35,846)            (28,939)
  Stock option settlement                              -                     -                     -              450,000
                                            ----------------      ----------------       -----------------   ----------------
                                            $     459,175         $     773,291          $    968,333        $  1,895,772
                                            ----------------      ----------------       -----------------   ----------------
OTHER INCOME
  Interest Income                                  76,036               142,425               164,599             320,819
                                            ----------------      ----------------       -----------------   ----------------


NET LOSS                                         (312,089)             (528,002)             (631,469)         (1,359,235)
                                            ================      ================       =================   ================


NET LOSS PER SHARE
  Basic                                     $        (.04)        $        (.06)         $       (.07)       $       (.15)
                                            ================      ================       =================   ================
  Fully diluted                             $        (.04)        $        (.06)         $       (.07)       $       (.15)
                                            ================      ================       =================   ================

</TABLE>

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

                                       4
<PAGE>





                            PENDARIES PETROLEUM LTD.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                        (All figures are in U.S. dollars)
                                  (Unaudited)
<TABLE>
<CAPTION>
                                                                                              For the                For the
                                                                                             Six-Month              Six-Month
                                                                                            Period Ended          Period Ended
                                                                                              June 30,               June 30,
                                                                                                1999                   1998
                                                                                                ----                   ----

CASH FLOW FROM OPERATING ACTIVITIES
   <S>                                                                           <C>                     <C>
   Net loss                                                                      $            (631,469)  $          (1,359,235)
   Items not affecting cash:
      Depreciation, depletion and amortization                                                  90,053                 179,998
      Changes in non-cash working capital items-
         Accounts receivable                                                                   (42,561)                  4,477
         Accounts payable                                                                       (7,227)                (68,853)
         Accrued liabilities                                                                   (48,820)               (111,196)
         Prepaid expenses and other assets                                                     (44,202)                (53,366)
                                                                                 ----------------------  ----------------------
                             Net cash used in operating activities                            (684,226)             (1,408,175)
                                                                                 ----------------------  ----------------------

CASH FLOW USED IN INVESTING ACTIVITIES
   Additions to unproved oil and gas properties                                               (507,261)             (3,673,925)
   Additions to furniture, fixtures and office equipment                                           557                 (54,654)
                                                                                 ---------------------   ----------------------
                             Net cash used in investing activities                            (506,704)             (3,728,579)
                                                                                 ----------------------  ----------------------

CASH FLOW FROM FINANCING ACTIVITIES
   Net proceeds from exercise of common stock options                                           50,000                  42,000
   Deferred financing costs                                                                       -                   (206,794)
   Cumulative translation effects                                                                 -                      2,213
                                                                                 ---------------------   ---------------------
                            Net cash provided by financing activities                           50,000                (162,581)
                                                                                 ---------------------   ----------------------

DECREASE IN CASH AND CASH EQUIVALENTS                                                       (1,140,930)             (5,299,335)

CASH AND CASH EQUIVALENTS, beginning of period                                               7,873,280              15,133,285
                                                                                 ---------------------   ---------------------
CASH AND CASH EQUIVALENTS, end of period                                         $           6,732,350   $           9,833,950
                                                                                 =====================   =====================

</TABLE>


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

                                       5
<PAGE>





                            PENDARIES PETROLEUM LTD.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1999
                                   (Unaudited)
                        (All figures are in U.S. dollars)


1.    Nature of Operations
      --------------------

      Pendaries Petroleum Ltd. ("Pendaries" or "the Company"),  a New Brunswick,
      Canada corporation,  is a holding  company whose primary  interests are in
      exploration,  development and  production of oil and gas properties in the
      People's Republic of China.

2.    NATURE OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
      ------------------------------------------------------

      The  Company  completed  an initial  public  offering  and became a public
      company in Canada on December 12, 1996.

      The consolidated  interim financial  statements  included herein have been
      prepared by Pendaries without audit and reflect all adjustments which are,
      in the opinion of management, necessary to present a fair statement of the
      results of the interim period.  These  statements are presented on a basis
      consistent with annual audited consolidated financial statements.  Certain
      information,   accounting  policies  and  footnote   disclosures  normally
      included in consolidated  financial statements prepared in accordance with
      generally accepted accounting  principles have been omitted,  although the
      Company believes that the disclosures are adequate to make the information
      presented not misleading.  These consolidated interim financial statements
      should be read in conjunction with the consolidated  financial  statements
      and the  summary of  significant  accounting  policies  and notes  thereto
      included in the Company's latest annual financial statements.

      The consolidated  financial  statements include the accounts of Pendaries,
      Pendaries    Production,    Inc.,    Sino-American    Energy   Corporation
      (Sino-American)  and  Sino-American   Overseas  Energy  Corporation.   All
      significant intercompany transactions and balances have been eliminated.

      The  Company's  registration  statement  filed on Form  20-F was  declared
      effective by the U.S.  Securities  and Exchange  Commission  in June 1998.
      This  permitted  the Company to list its common  shares for trading on the
      American Stock Exchange.

3.    OIL AND GAS PROPERTIES - BOHAI BAY, CHINA
      -----------------------------------------

      Laopu  Block  Relinquishment  -  During  the  first quarter  of 1999,  the
      petroleum  contract  on the Laopu Block in the Bohai Bay, China,  covering
      approximately 78,000 gross acres was terminated by Pendaries and the other
      foreign contractors. All obligations had been fulfilled on this block.

      Block 05/36 -On March 4, 1999, the Operator,Kerr-McGee, and China National
      Offshore Oil Corp. ("CNOOC") agreed to extend  the  petroleum  contract on
      Block 05/36 into its second  phase which  covers the period March 31, 1999
      to February 28, 2001.  Block 05/36 is located in the  Bohai Bay, China and
      covers approximately 415,000 gross acres. Under the terms of the petroleum
      contract,  the foreign  contractors  are required to relinquish 25% of the
      acreage in the block upon  electing  to proceed to the second  exploration
      phase.  The Operator is negotiating  the acreage to be  relinquished  with

                                       6
<PAGE>


     CNOOC at this time.  The  Company  does not believe that the relinquishment
     will materially affect the future potential of  the block.  Entry into  the
     second  exploration  phase  carries  with  it a bonus  payment to  CNOOC of
     $250,000 ($37,500 net to Pendaries) and a one well commitment to be drilled
     during the second phase period by the foreign contractors.

4.    COMMON SHARES
      -------------

      Issuance of Stock Options
      -------------------------

      In February  1999,  certain  outside  directors of Pendaries  were granted
      options to purchase an  aggregate of  107,100 common shares.  The exercise
      price of the options is $0.59 per common share and have an expiration date
      of March 9, 2004.  On March 9, 1999, 84,500 options were issued  under the
      February 1999 grant as a result of two former directors electing to forego
      their respective  stock option grants.  There were no stock options issued
      under the Stock Option Plan in the second quarter of 1999.

      Issuance of Common Shares
      -------------------------

      In February  1999,  certain  outside  directors of Pendaries  were granted
      62,500  common shares as  compensation  for directors' fees.  The value of
      the share compensation was $36,875  and  was accrued at December 31, 1998.
      On March 9, 1999, 47,500 shares were issued under the  February 1999 grant
      as a result of two  former  directors  electing to forego their respective
      stock compensation  grants.  The value of  the shares  issued was $28,209.
      There  were no shares  issued  under the  Stock  Compensation  Plan in the
      second quarter of 1999.

      Stock Option Exercise and Cancellations
      ---------------------------------------

      In June 1999,  a director  exercised  50,000  Sino-American  options at an
      exercise  price of $1.00 per share for total  proceeds  to the  Company of
      $50,000. Pursuant to the Exchange Rights Agreement between the Company and
      Sino-American,  the 50,000  Sino-American shares issued as a result of the
      exercise will be converted to 50,000 common shares of the Company. On June
      30, 1999, 80,000 Sino-American options,  50,000 of which were owned by the
      same  director,  expired  unexercised.   Additionally,  3,500  options  to
      purchase  shares of the Company,  granted under the Company's Stock Option
      Plan, and held by a former employee  expired  unexercised.  As a result of
      the  expiration of 83,500  shares of  unexercised  options,  the number of
      fully  diluted  shares  of  the  Company  is  reduced  to  9,968,470  from
      10,051,970.

      Stock Option Settlement
      -----------------------

      In connection with litigation with the former  president of  Sino-American
      over the  number  of stock  options  to which  the  former  president  was
      entitled,  in April 1998, the parties entered into a Settlement  Agreement
      pursuant  to which the  former  president  received  $450,000  (which  was
      accrued as of March 31,  1998) and  agreed to  execute a new Stock  Option
      Agreement reflecting a grant of 100,000 stock options (the number of stock
      options the Company  claimed had  originally  been  granted) and, with the
      exception of certain  restrictions  not imposed on other  option  holders,
      contains  terms  substantially  similar  to those  contained  in the Stock
      Option Agreements of all other option holders who had been granted options
      prior to 1996.

                                       7
<PAGE>

      Net Loss Per Share
      ------------------

      Basic  net  loss per  share is  calculated  on the  basis of the  weighted
      average  common  shares  outstanding  for the three and six month  periods
      ended June 30, 1999 and 1998 respectively.  The  Company's  stock  options
      were not included in the computation of  fully  diluted net loss per share
      because to do so would have been antidilutive for the periods presented.

5.    MURPHY AGREEMENT
      ----------------

      On April 24, 1998, Sino-American and the Company entered into an agreement
      with Murphy  Exploration & Production  Company  ("Murphy") to purchase its
      45% interest in Block 04/36 (the "Murphy  Agreement"),  which was extended
      to December  21,  1998 and then to March 22,  1999.  The Murphy  Agreement
      provided  that the Company  would pay a total of $38 million for  Murphy's
      interest;  $35 million of the  consideration was to be paid in cash and $3
      million in  Pendaries  Common  Shares.  Due to the  adverse  change in the
      condition  of the oil and gas  industry  subsequent  to the signing of the
      Murphy Agreement, the Company elected on  March 22, 1999 to let the agree-
      ment expire.  The  Company's  non-refundable deposit of $1 million paid to
      Murphy in April 1998 has been recorded as an  additional investment in its
      oil and gas  properties  related  to  this  opportunity  to  increase  its
      interest in Block 04/36.

6.    RECONCILIATION TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
      ------------------------------------------------------------------------

      These  consolidated  financial  statements  are expressed in U.S. dollars,
      which  is the  functional  currency  in all  areas  of  operation, and are
      prepared in accordance  with generally  accepted accounting  principles in
      Canada ("Canadian GAAP") which conform in all material respects with those
      in the  United  States ("U.S.GAAP") for the periods  presented,  except as
      outlined below.

      Oil and Gas Properties
      ----------------------

      In Canada,  if the net  capitalized  costs of oil and gas  properties in a
      cost  center  exceed an amount  equal to the sum of  estimated  future net
      revenues from proved oil and gas reserves in the cost center and the costs
      of properties not being  amortized,  both adjusted for income tax effects,
      such excess is charged to expense.  Also, the total  capitalized  costs of
      all cost  centers  are  subject  to a further  recoverability  test  which
      includes,   among  other  things,   provision  for  site  development  and
      restoration and future general,  administrative  and financial costs. This
      is not consistent  with U.S. GAAP.  For U.S. GAAP, if the net  capitalized
      costs of oil and gas properties in a cost center exceed an amount equal to
      the  sum of  estimated  discounted  present  value  at 10% of  future  net
      revenues from proved oil and gas reserves in the cost center and the costs
      of properties not being  amortized,  both adjusted for income tax effects,
      such excess is charged to expense.  Included in the  estimated  future net
      cash flows are  Canadian  provincial  tax credits  expected to be realized
      beyond the date at which the legislation,  under its provisions,  could be
      repealed. To date, the Canadian provincial government has not indicated an
      intention to repeal this legislation.

      If U.S. GAAP had been applied  instead of Canadian GAAP, the Company would
      have  recognized an impairment of its oil and gas  properties in Canada in
      the amount of $549,555  and  $2,195,799  in China in 1998.  There  were no
      material  differences  between  Canadian  GAAP  and  U.S. GAAP  during the
      quarters ended June 30,1999 and 1998.

                                       8
<PAGE>


ITEM  2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
            CONDITION AND RESULTS OF OPERATIONS

     The following  discussion and analysis  should be read in conjunction  with
     the unaudited consolidated financial statements included elsewhere and with
     the Company's Form 10-K for the year ended December 31, 1998.

     ACCOUNTING POLICIES

     The unaudited  consolidated financial statements and notes thereto included
     herein have been prepared in accordance with Canadian GAAP.

     As of June 30, 1999,  the  Company's  revenues  were derived from  interest
     income  and oil and gas  production  related to its  activities  in Canada.
     Accumulated  losses are presented on the balance  sheet as  "Deficit."  The
     unaudited  statements of operations  present  revenues and expenses for the
     quarter  and  year to date in  comparison  with the  same  periods  for the
     previous  year.  The unaudited  statements of   cash flows show the inflows
     and  outflows  for the  period  comparatively  with  those  of the previous
     year.

     The Company  follows the  full-cost  method of  accounting  for oil and gas
     properties.  Under this method,  all costs incurred in connection  with the
     exploration  and  development  of oil and gas reserves are  capitalized  in
     separate cost centers on a country-by-country basis. Such capitalized costs
     include contract and concession  acquisition;  geological,  geophysical and
     other  exploration  work;  drilling,  completing  and equipping oil and gas
     wells;  constructing production facilities and pipelines; and other related
     costs. The Company also  capitalizes  interest costs related to unevaluated
     oil and gas properties.

     Capitalized  costs  associated  with  the  acquisition  and  evaluation  of
     unproved  properties are excluded from amortization  until it is determined
     whether proved  reserves can be assigned to such  properties,  or until the
     value of the  properties  is  impaired.  Unproved  properties  are assessed
     periodically to determine whether any impairment has occurred.

     If the net  capitalized  costs of oil and gas  properties  in a cost center
     exceed an amount  equal to the sum of estimated  future net  revenues  from
     proved oil and gas reserves in the cost center and the costs of  properties
     not being amortized,  both adjusted for income tax effects,  such excess is
     charged to  expense.  The total  capitalized  costs of all cost  centers is
     subject  to a further  recoverability  test  which  includes,  among  other
     things,  provisions  for  site  development  and  restoration,  and  future
     general, administrative and financial costs.

     Substantially all of the Company's exploration,  development and production
     activities  are  conducted  jointly  with  others,  and  accordingly,   the
     Company's financial  statements reflect only its proportionate  interest in
     such activities.

     The  Company  owns an  interest  in  producing  oil and gas  properties  in
     Alberta, Canada. Depletion is provided based on the Company's proportionate
     interest of production in respect of proved reserves.

     The  Company  currently  has no  producing  oil and gas  properties  in the
     People's Republic of China. Therefore, related capitalized costs of oil and
     gas properties are not currently subject to depletion.

                                       9
<PAGE>

     CHINESE TAXES

     The Company's future net income, as defined under Chinese law, from Chinese
     sources,  will be subject to Chinese corporate income tax at a rate of 33%.
     In accordance with the terms of the tax treaty  between the U.S. and China,
     such taxes are creditable to U.S. corporate income taxes.

     RESULTS OF OPERATIONS

     Three Months Ended June 30, 1999 and 1998:

     The Company  incurred a net loss of  $312,089  and  $528,002  for the three
     months ended June 30, 1999 and 1998, respectively. The $215,913 decrease in
     net loss was a result of the following:

     Oil and gas  income  from the  Company's  properties  located  in  Alberta,
     Canada, decreased from $102,864 for the three months ended June 30, 1998 to
     $71,050 for the same period in 1999.  The $31,814  decrease was due to loss
     of income from the Morinville Field in Alberta,Canada, relating to workover
     operations carried out on that field and normal reservoir depletion.

     Oil and gas operating  expenses increased from $38,210 for the three months
     ended June 30, 1998 to $61,208 for the same  period in 1999.  The  increase
     was due to workover operations carried out in 1999 on a well located in the
     Morinville Field in Alberta, Canada.

     General and  administrative  expenses decreased from $668,427 in the second
     three months of 1998 to $381,357  for the  comparable  period of 1999.  The
     $287,070  decrease was due primarily to reduced salaries and related costs,
     cost savings in connection with the closing of the Toronto, Canada  office,
     and reduced outside legal and professional costs.

     Interest  income  decreased  by $66,389  from  $142,425  in the three month
     period  ended June 30, 1998 to $76,036 for the  comparable  period of 1999.
     The decrease was due to the reduction of cash  available for  investment in
     1999.

     Six Months Ended June 30, 1999 and 1998:

     The Company  incurred a net loss of  $631,469  and  $1,359,235  for the six
     months ended June 30, 1999 and 1998, respectively. The $727,766 decrease in
     net loss was a result of the following:

     Oil and gas  income  from the  Company's  properties  located  in  Alberta,
     Canada,  decreased  from $215,718 for the six months ended June 30, 1998 to
     $172,265 for the same period in 1999. The $43,453  decrease was due to loss
     of  income  from the  Wintering  Hills  Field and the  Morinville  Field in
     Alberta, Canada,  relating  to workover  operations  carried out on the two
     fields as well as natural reservoir depletion.

     Oil and gas operating  expenses  increased  from $91,653 for the six months
     ended June 30, 1998 to $156,849  for the same period in 1999.  The increase
     was due to workover  operations  carried out in 1999 on one well located in
     each of the Wintering Hills and Morinville fields in Alberta, Canada.

     General and administrative  expenses decreased from $1,203,060 in the first
     six  months of 1998 to  $757,277  for the  comparable  period of 1999.  The
     $445,783  decrease was due primarily to reduced salaries and related costs,
     cost savings in connection  with the closing of the Toronto, Canada office,
     and reduced outside legal and professional costs.

                                       10
<PAGE>

     During the six  months  ended  June 30,  1998,  the  Company  recorded  the
     settlement  of  litigation  with the former  president  of its wholly owned
     subsidiary,  Sino-American  Energy  Corporation,  over the  number of stock
     options to which the former president was entitled,  and in April 1998, the
     parties  entered into a Settlement  Agreement  pursuant to which the former
     president  received  $450,000  and  agreed to  execute  a new Stock  Option
     Agreement  reflecting a grant of 100,000 stock options (the number of stock
     options the Company  claimed had  originally  been  granted)  and, with the
     exception  of certain  restrictions  not imposed on other  option  holders,
     contains terms substantially similar to those contained in the Stock Option
     Agreements of all other option  holders who had been granted  options prior
     to 1996. The $450,000  settlement amount was charged to expense as of March
     31,  1998.  There were no such  expenses  in the first six month  period of
     1999.

     Interest income decreased by $156,220 from $320,819 in the six month period
     ended June 30,  1998 to $164,599  for the  comparable  period of 1999.  The
     decrease was due to the reduction of cash available for investment in 1999.

     LIQUIDITY AND CAPITAL RESOURCES

     From inception (July 5, 1994) the Company's capital by year is shown below.
     Of the total,  $31,027,761  represents  cash  raised by  issuance of common
     shares,  $1,325,000  represents oil and gas properties paid for by issuance
     of common shares, and $227,290  represents services paid for by issuance of
     common shares.

<TABLE>
<CAPTION>
                               Common
                               Share              Exercise of            Exercise of
         Period                Equity               Warrants               Options               Total
         ------                ------               --------               -------               -----
       <S>                  <C>                 <C>                <C>                       <C>
       Year - 1995          $ 3,287,500         $        -         $            -            $  3,287,500
       Year - 1996           22,812,658                  -                  20,000             22,832,658
       Year - 1997               68,000             944,488              5,196,115              6,208,603
       Year - 1998              131,081                  -                  42,000                173,081
       Year - 1999               28,209                  -                  50,000                 78,209
                           ------------         -----------        ---------------           ------------
                 Totals    $ 26,327,448         $   944,488        $     5,308,115           $ 32,580,051
                           ============         ===========        ===============           ============
</TABLE>

During the same periods, the Company incurred capital expenditures as follows:
<TABLE>
<CAPTION>
                             Oil and Gas          Oil and Gas            Furniture,
                              Properties           Properties           Fixtures and
         Period                Canada                China               Equipment               Total
         ------                ------                -----               ---------               -----
       <S>                 <C>                  <C>                <C>                       <C>
       Year - 1995         $        -           $  3,597,631       $        59,758           $  3,657,389
       Year - 1996            1,966,088            2,981,853                62,613              5,010,554
       Year - 1997                  -              7,739,641               105,286              7,844,927
       Year - 1998                  -              4,843,827               (57,719)             4,786,108
       Year - 1999                  -                507,261                (1,259)               506,002
                           ------------         ------------       ---------------           ------------
                  Totals   $  1,966,088         $ 19,670,213       $       168,679           $ 21,804,980
                           ============         ============       ===============           ============
</TABLE>

     After capital  expenditures  and funds used in  operations  the Company had
     cash of  $6,732,350  at June 30, 1999.  There is no credit  facility with a
     financial institution or any other outstanding debt.

                                       11
<PAGE>

     YEAR 2000 DISCLOSURE

     The Year 2000 issue relates to the problems  associated  with the inability
     of computer  programs  and  equipment to properly  calculate,  store or use
     dates after December 31, 1999. Hardware and software systems which only use
     a  two-digit  convention  for  keeping  track  of  dates  would  improperly
     interpret the Year 2000 as the Year 1900. Errors of this type can result in
     system  failures,   miscalculations   and  the  disruption  of  operations,
     including, among other things,  a  temporary  inability to engage in normal
     business.  In response to the Year 2000 issue, the Company has  developed a
     strategic plan divided into the following phases:  inventory assessment and
     review of vendor representations, in-house testing, third party integration
     and development of a contingency plan.

     The Company has completed its  initial  assessment  phase by  compiling  an
     inventory  listing  of  all  in-house  systems  and  reviewing  all  vendor
     representations regarding the Year 2000 issue that the Company has received
     to date. The  licensor  of  the  Company's  in-house  software  system  has
     certified that such software is  programmed to  properly  address Year 2000
     scenarios. In addition, the initial assessment has shown that less critical
     in-house software  and  non-information technology or equipment are either
     not date specific or are capable of addressing the Year 2000.  Based on the
     initial review and reliance on vendor representations,  the Company expects
     that all such in-house systems will perform their respective functions in a
     customary  manner when faced with Year 2000  scenarios.  In  addition,  the
     Company has determined that functions which have been  out-sourced to third
     parties,  consisting  mainly of processing  needs, are performed by systems
     purchased  within the last few years and are  programmed  to recognize  the
     Year 2000.

     The Company  conducted its in-house  testing phase,  reviewing core systems
     and  core-non-information   technology.   To  date,  the  Company  has  not
     encountered  any material system  disruption  during in-house testing,  and
     therefore, the  Company  expects that the  performance of such systems will
     not be substantially  disrupted by  Year 2000  scenarios.   However,  being
     primarily involved in the  acquisition, development and  exploration of oil
     and gas  internationally,  the Company's "mission  critical"  equipment and
     technology is off-site under the control of the  operators of the Company's
     properties. Although these systems are primarily non-information technology
     systems which are not date specific,  they  rely on external power sources,
     such as electricity, supplied by third parties. The Company is relying upon
     representations by  these operators and their third party suppliers that no
     material  disruption of  services is  anticipated  as a  result of the Year
     2000. However, the most reasonably likely worst case Year 2000 scenario for
     the Company  would involve a  prolonged  disruption of third party services
     affecting  the  productivity  of  core  equipment,  which could  result  in
     substantial decrease  in  the  Company's  oil  and  gas production.  It may
     not be economically  feasible for the  operator to  maintain a separate and
     duplicate  secondary   power  supply  for  every  major  component  of  the
     operator's "mission critical" equipment. Therefore, unanticipated prolonged
     losses of certain  services  could  cause material disruptions for which no
     economically feasible contingency plan has been developed. Such event could
     result in a business interruption that could have a material adverse effect
     on the Company's production payments from its properties and  the Company's
     results of operations and financial condition.


     In  addition  to  its  internal   review  and  testing,   the  Company  has
     communicated  with  its  third  party  suppliers,   service  providers  and
     customers to determine the status of their Year 2000  compliance  programs.
     The  Company has  received  and is relying on Year 2000  readiness  reports
     periodically  issued by various third parties,  such as financial  services
     providers. The Company will continue to have formal communications with its
     significant  suppliers  and business  partners to  determine  the extent to
     which the  Company is  vulnerable  to either the third  parties' or its own
     failure  to  correct  Year  2000  issues.   Third  party  notification  and
     integration  was completed  during the second quarter of 1999. All of these
     third parties have responded and have provided favorable representations as
     to their Year 2000  readiness.  These third parties have  received  similar
     representations from the Company.  While there can be no guarantee that the
     systems  of other  companies  on which the  Company  relies  will be timely
     converted or that the  conversion  will be  compatible  with the  Company's
     systems,  based on  representations  received to date, the Company does not
     foresee material  disruptions in the Company's business as a result of Year
     2000 issues involving third parties.
                                       12
<PAGE>


     During its assessment,  the Company has taken steps to prevent  anticipated
     Year 2000  disruptions.  However,  based on the readiness  surveys received
     through  the second  quarter  of 1999 from its third  party  suppliers  and
     service  providers,  the  Company  does not believe it will need to further
     develop  its  existing  contingency  plan  to  address  Year  2000  related
     disruptions.  Although the effects of Year 2000 issues  cannot be predicted
     with certainty, to date, all systems tested have performed adequately,  and
     therefore,  the Company believes that the potential impact, if any, of such
     disruption will, at most,  require employees to manually complete otherwise
     automated  tasks of  calculations.  The  Company  does not expect  that any
     additional  training  would be required to perform  these tasks on a manual
     basis. The Company does not believe that such event would materially affect
     the Company's ability to continue business activities,  although performing
     such tasks may  require  additional  time or  personnel.  In  addition,  if
     needed, the Company will identify and arrange for other vendors, purchasers
     and third party  contractors  to provide such services in order to maintain
     normal business operations.

     The Company has, and will  continue to,  utilize both internal and external
     resources to complete  tasks and perform  testing  necessary to address the
     Year 2000 issues.  The Company has not  incurred,  and does not  anticipate
     that it will incur,  any  significant  costs relating to the assessment and
     remediation of Year 2000 issues.

     DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

     The statements  contained in this Quarterly Report on Form 10-Q ("Quarterly
     Report")  that are not  historical  facts,  including,  but not limited to,
     statements found in this Management's  Discussion and Analysis of Financial
     Condition and Results of Operations,  are  forward-looking  statements,  as
     that term is defined in Section 21E of the  Securities  and Exchange Act of
     1934, as amended,  that involve a number of risks and  uncertainties.  Such
     forward-looking  statements  may be or may  concern,  among  other  things,
     capital  expenditures,  drilling activity,  acquisition plans and proposals
     and dispositions,  development activities, cost savings, production efforts
     and  volumes,   hydrocarbon   reserves,   hydrocarbon  prices,   liquidity,
     regulatory  matters  and  competition.   Such  forward-looking   statements
     generally are accompanied by words such as "plan,"  "estimate,"  "expect, "
     "predict, " "anticipate,  " "projected, " "should, " "assume, " "believe, "
     or other words that convey the  uncertainty  of future  events or outcomes.
     Such forward-looking  information is based upon management's current plans,
     expectations, estimates and assumptions and is subject to a number of risks
     and   uncertainties   that  could   significantly   affect  current  plans,
     anticipated actions, the timing of such actions and the Company's financial
     condition and results of operations.  As a consequence,  actual results may
     differ materially from expectations,  estimates or assumptions expressed in
     or implied by any  forward-looking  statements  made by or on behalf of the
     Company.  Among the  factors  that  could  cause  actual  results to differ
     materially  are:  fluctuations  of the  prices  received  or demand for the
     Company's  oil and natural gas,  the  uncertainty  of drilling  results and
     reserve estimates,  operating hazards,  acquisition risks, requirements for
     capital,   general   economic   conditions,   competition   and  government
     regulations,  as well as the  risks  and  uncertainties  discussed  in this
     Quarterly Report,  including,  without limitation,  the portions referenced
     above, and the  uncertainties  set forth from time to time in the Company's
     other  public  reports,  filings  and  public  statements.

                                       13
<PAGE>


     PART II - OTHER INFORMATION


     Item 1. Legal Proceedings - None

     Item 2. Changes in Securities - None

     Item 3. Defaults Upon Senior Securities - N/A

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

       A. The Company  held an  Annual and  Special  Meeting of  Shareholders on
          June 11, 1999 (the  "Meeting").  At the record date (April 28,  1999),
          8,829,470  shares of common  stock were issued and  outstanding,  with
          shareholders having cumulative voting rights regarding the election of
          directors.  At the  Meeting  six  nominees  were  elected  to serve as
          Directors  of the  Company  for a term  expiring  at the  2000  annual
          meeting  of   shareholders.   Also  voted  on  at  the  Meeting   were
          propositions to 1) elect two or more directors by a single  resolution
          as opposed to electing each director nominee separately,  2) amend the
          1997  Stock  Option  Plan to  increase  the  number  of  shares of the
          Company's common stock reserved for issuance by 250,000 shares, and 3)
          reappoint  Arthur Andersen LLP as auditor of the Company and authorize
          the  directors  to  set  the  auditor's  remuneration.  All  directors
          nominated were elected and all propositions passed. The details of the
          vote are as follows:
<TABLE>

<CAPTION>
                                                                                              BROKER
                                               FOR           AGAINST       WITHHELD          NON-VOTES             ABSTENTIONS
                                               ---           -------       --------          ---------             -----------

NOMINEES FOR DIRECTORS
  <S>                                       <C>             <C>             <C>              <C>                    <C>
  Robert E. Rigney                          6,042,579           -           9,133            1,865,414              912,344
  Ben F. Barnes                             6,042,579           -           9,133            1,865,414              912,344
  Paul H. Farrar                            6,042,579           -           9,133            1,865,414              912,344
  Bobby J. Fogle                            6,042,579           -           9,133            1,865,414              912,344
  Shingyi Ho                                6,042,579           -           9,133            1,865,414              912,344
  James C. Roe                              6,042,579           -           9,133            1,865,414              912,344

PROPOSITION VOTES
   Proposition 1 - Single ballot
       for director election                5,833,985           -           5,025            1,919,728            1,070,732
  Proposition 2 - Increase in
       Shares for 1997 Stock Option
       Plan                                 3,614,030       33,100        147,875            4,131,816              902,649
  Proposition 3 - Reappoint
       Auditors                             6,018,959           -           2,300            1,893,967              914,244
</TABLE>


Item 5.     Other Information - N/A

Item 6.     Exhibits and Reports on Form 8-K - None

                                       14
<PAGE>






SIGNATURES

Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned, thereunto duly authorized.

                                               PENDARIES PETROLEUM LTD.



Date:   August 5, 1999                         By:   /s/Bobby J. Fogle
                                                  --------------------
                                                     Bobby J. Fogle
                                                     Vice President,Finance and
                                                     Chief Financial Officer



                                       15
<PAGE>