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

                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-QSB

     |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934
                                       or
     |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                    FOR THE QUARTER ENDED SEPTEMBER 30, 1999

                          Commission File Number 0-6580
                                [GRAPHIC OMITTED]







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


     Nevada                                                     87-0285520
(State or other jurisdiction of                             (I.R.S. Employer
incorporation or organization)                           Identification Number)
                          751 Horizon Court, Suite 203
                         Grand Junction, Colorado 81506
                    (Address of principal executive offices)
                                 (970) 245-5917
              (Registrant's telephone number, including area code)

         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 past 12 months (or for such shorter  period that the  registrant
was  required  to file such  reports),  and (2) has been  subject to such filing
requirements for the past 90 days. Yes X No____

         As of November  12, 1999 the  registrant  had  1,731,398  shares of its
$0.10 par value Common Stock issued and outstanding.

         Transitional Small Business Issuer Disclosure Format (check one):
  Yes ____   No   X

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


                                       -1-

<PAGE>



                               TABLE OF CONTENTS
                                                                         PAGE
                                                                         NUMBER


PART I - Financial Information
           Item 1.  Financial Statements
              Consolidated Balance Sheets. . . . . . . . . . . . . . . . .   3
                September 30, 1999 (unaudited) and December 31, 1998
              Consolidated Statements of Operations (unaudited) . . . . . .  4
                For the Three and Nine Months Ended September 30, 1999
                and 1998
              Consolidated Statements of Cash Flows (unaudited) . . . . . . 5-6
                For the Nine Months Ended September 30, 1999 and 1998
              Notes to Consolidated Financial Statements . . . . . . . . .   7
           Item 2.  Management's Discussion and Analysis
                      Liquidity, Capital Expenditures and Capital Resources 8-10
                    Results of Operations . . . . . . . . . .  . . . . . .   10
                      Overview . . . . . . . . . . . . . . . . . . . . . . . 10
                      Divestment of Rocky Mountain Assets . . . . . . . . .  10
                      Total Revenue . . . . . . . . . . . . . . . . . . . .  11
                      Oil and Gas . . . . . . . . . . . . . . . . . . . . .  11
                      General and Administrative . . . . . . . . . . . . .   13
                      Consulting Arrangement - Related Party . . . . . . .   13
                      Depreciation, Depletion and Amortization . . . . . .   13
                      Interest Expense. . . . . . . . . . . . . . . . . . . .14
                      Impairment Expense - Oil and Gas Properties. . . . .   14
                      Dividends and Net Loss Per Common Share. . . . . . .   14
                    Other Matters. . . . . . . . . . . . . . . . . . . . . . 15
                      Disclosure Regarding Forward-Looking Statements . . .  15
                      Year 2000 Issue. . . . . . . . . . . . . . . . . . . . 16
Part II - Other Information
           Item 1.  Legal Proceedings . . . . . . . . . . . . . . . . . . .  17
           Item 2.  Changes in Securities . . . . . . . . . . . . . . . . .  17
           Item 3.  Defaults Upon Senior Securities . . . . . . . . . . . .  18
           Item 4.  Submission of Matters to a Vote of Security Holders . .  18
           Item 5.  Other Information . . . . . . . . . . . . . . . . . . .  18
           Item 6.  Exhibits and Reports on Form 8-K . . . . . . . . . . .   18
Part III - Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . .  18




                                       -2-

<PAGE>



                         PART 1 - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                   PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

                                                      September 30, December 31,
                                                          1999         1998
                                                     -------------  ------------
                                                       (unaudited)

CURRENT ASSETS:
   Cash and equivalents ...........................  $     777,835  $ 1,049,582
   Trade receivables ..............................        341,966      420,460
   Prepaid expenses and other .....................         81,544      170,687
                                                      ------------  ------------
        Total current assets ......................      1,201,345    1,640,729
                                                      ------------  ------------

ASSETS HELD FOR SALE ..............................           --        100,000
                                                      ------------  ------------
OIL AND GAS PROPERTIES, at cost (full cost method):
   Unevaluated properties .........................      3,061,987    2,816,475
   Costs being amortized ..........................     17,215,012   16,834,274
                                                      ------------  ------------
        Total oil and gas properties ..............     20,276,999   19,650,749
   Less accumulated amortization ..................    (14,664,073) (13,883,174)
                                                      ------------  ------------
        Net oil and gas properties ................      5,612,926    5,767,575
                                                      ------------  ------------
 OTHER ASSETS:
   Debt issuance costs, net .......................        218,874      322,551
   Office equipment and vehicles, net .............         59,257       74,623
   Deposits and other .............................          7,493        7,493
                                                      ------------  ------------
          Total other assets ......................        285,624      404,667
                                                      ------------  ------------
TOTAL ASSETS ......................................   $  7,099,895 $  7,912,971
                                                      ============  ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
   Current maturities of long-term debt ............. $      5,741 $      5,825
   Accounts payable, trade ..........................      206,185      310,447
   Accrued expenses .................................      151,161      322,569
                                                       -----------   -----------
         Total current liabilities ..................      363,087      638,841
                                                       -----------   -----------
LONG-TERM DEBT, less current maturities: ............    2,453,506    2,293,261
                                                       -----------   -----------
STOCKHOLDERS' EQUITY:
   Preferred  Stock,  par value $0.01 per share,  2,000,000  shares  authorized,
    105,828  and  107,336  shares  of  Series  B 5% PIK  Cumulative  Convertible
    Preferred Stock issued and outstanding, respectively (liquidation preference
    of 5,313,145
    at September 30, 1999)  .................                1,058        1,073
   Common Stock, par value $0.10 per share, 4,000,000
    shares authorized, 1,731,398 and 1,601,062 shares
    issued and outstanding respectively ............       173,140      160,106
   Additional paid-in capital ......................    37,636,191   37,811,006
   Accumulated deficit .............................   (33,527,087) (32,991,316)
                                                       -----------  -----------
         Total stockholders' equity ................     4,283,302    4,980,869
                                                       -----------  -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........ $    7,099,895 $  7,912,971
                                                       ===========  ===========



                                       -3-

<PAGE>



                   PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (unaudited)




<TABLE>

<CAPTION>
                                                       For The Three Months         For The Nine Months
                                                        Ended September 30,          Ended September 30,
                                                   -------------------------    -------------------------
                                                     1999            1998           1999          1998
                                                   ----------   ------------    ----------   ------------

REVENUE:
<S>                                              <C>           <C>             <C>            <C>
   Oil and gas sales .........................   $   541,206   $    606,016    $ 1,504,065    $ 1,853,284
   Gas plant, service and supply .............          --          131,055           --          528,418
   Well administration and other income ......          --            4,116             80         22,640
                                                  -----------    -----------    -----------    -----------
        Total revenue ........................       541,206        741,187      1,504,145      2,404,342
                                                  -----------    -----------    -----------    -----------
OPERATING COSTS AND EXPENSES:
   Oil and gas production ....................       104,580        285,888        276,014        995,995
   Gas plant, service and supply .............          --          165,819           --          564,832
   General and administrative ................       305,588        544,669        691,605      1,071,555
   Consulting agreement-related party ........          --           63,925         37,750        189,386
   Depreciation, depletion and amortization ..       250,289        708,431        798,278      1,460,562
   Impairment ................................          --        2,100,000           --        2,739,043
                                                  -----------    -----------    -----------    -----------
            Total operating costs and expenses       660,456      3,868,732      1,803,647      7,021,373
                                                  -----------    -----------    -----------    -----------
LOSS FROM OPERATIONS .........................      (119,250)    (3,127,545)      (299,502)    (4,617,031)
                                                  -----------    -----------    -----------    -----------
OTHER INCOME (EXPENSES):
   Interest expense ..........................       (89,948)      (398,230)      (269,859)      (398,746)
   Interest income ...........................         8,662         21,525         33,590        167,695
   Gain (Loss) on sale of assets .............          --            2,500           --            2,957
                                                  -----------    -----------    -----------    -----------
        Total other income (expenses), net ...        81,286       (374,205)      (236,269)      (228,094)
                                                  -----------    -----------    -----------    -----------
NET LOSS .....................................  $   (200,537)  $  (3,501,750)   $ (535,771)   $(4,845,125)
                                                  ===========    ===========    ===========    ===========
NET LOSS APPLICABLE TO COMMON
     STOCKHOLDERS ............................  $   (245,846)  $  (3,992,024)   $ (713,588)   $(6,569,779)
                                                  ===========    ===========    ===========    ===========
NET LOSS PER COMMON SHARE ....................  $     (0.15)   $       (2.51)   $    (0.43)   $     (4.15)
                                                  ===========    ===========    ===========    ===========
WEIGHTED AVERAGE NUMBER OF
     COMMON SHARES OUTSTANDING ...............     1,689,600      1,593,000      1,668,400      1,584,200
                                                  ===========    ===========    ===========    ===========
</TABLE>





                                       -4-

<PAGE>



                   PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (unaudited)
                                                        For The Nine Months
                                                        Ended September 30,
                                                          1999         1998
                                                     -----------   -----------

CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss .......................................  $  (535,771)  $(4,845,125)
   Adjustments to reconcile net loss to net cash
      provided by operating activities:
      Provision for depreciation and depletion ....      798,278     1,460,562
      Provision for impairment ....................         --       2,739,043
      Amortization of intangible assets ...........      268,180       396,742
      (Gain) Loss on sale of property and equipment         --          (2,957)
   Changes in operating assets and liabilities:
   (Increase) decrease in:
      Trade receivables ...........................       78,494       207,297
      Inventory ...................................         --         128,418
      Prepaid expenses and other assets ...........       19,143       (33,902)
   Increase (decrease) in:
      Accounts payable ............................      (93,928)      145,521
      Accrued expenses ............................     (104,323)     (107,465)
                                                       ----------    ----------
     Net cash provided by operating activities ....      430,073        88,134
                                                       ----------    ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Capital expenditures for property and equipment      (638,597)   (6,250,614)
   Proceeds from sale of property and equipment ...      100,000     2,987,150
   Proceeds from redemption of certificate of
          deposit .................................       70,000          --
                                                       ----------    ----------
      Net cash used in investing activities .......     (468,597)   (3,263,464)
                                                       ----------    ----------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Repayment of long-term debt ....................       (4,342)   (1,201,327)
   Proceeds from exercise of common stock
          options and warrants ....................         --             939
   Offering costs .................................         --        (146,765)
   Payment of Preferred Stock dividends ...........     (177,817)     (141,357)
   Purchase and retirement of Series B preferred ..      (51,064)      (31,250)
                                                       ----------    ----------
          stock
      Net cash used in financing activities .......     (233,223)   (1,519,760)
                                                       ----------    ----------
 INCREASE (DECREASE) IN CASH &
      EQUIVALENTS .................................     (271,747)   (4,695,090)
 CASH & EQUIVALENTS, beginning of period ..........    1,049,582     6,547,804
                                                       ----------    ----------
 CASH & EQUIVALENTS, end of period ................  $   777,835  $  1,852,714
                                                       ==========    ==========


                                       -5-

<PAGE>



                   PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (unaudited)
                                   (continued)
                                                           For The Nine Months
                                                           Ended September 30,
                                                           1999         1998
                                                     -------------- ------------

SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
   Cash paid for interest .........................   $   209, 795   $  299,646
                                                          =========    ========
   Cash paid for income taxes .....................   $     --       $    --
                                                          =========    ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
   Increase (Decrease) in accounts payable for the
        purchase of property and equipment -
        principally oil and gas properties ........   $   (10,342)   $ (725,456)
                                                          =========    ========
   Capitalized portion of debt issuance/discount
        costs .....................................   $       --     $  396,141
                                                          =========    ========
   Long-term debt incurred for purchase of vehicles   $       --     $   32,610
                                                          =========    ========
   Accrued Preferred Stock dividends ..............   $       --     $   69,585
                                                          =========    ========



                                       -6-

<PAGE>



                   PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (unaudited)

Note 1 - Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. They do not include all information and notes required by
generally  accepted  accounting  principles for complete  financial  statements.
However,  except as disclosed  herein,  there has been no material change in the
information disclosed in the notes to consolidated financial statements included
in the Annual  Report on Form 10-KSB of Pease Oil and Gas Company  )"Pease") for
the year ended December 31, 1998. In the opinion of Management,  all adjustments
(consisting  of  normal  recurring  accruals)  considered  necessary  for a fair
presentation have been included. Operating results for the periods presented are
not  necessarily  indicative  of the results  that may be expected  for the full
year.

The  accounting  policies  followed  by  Pease  are set  forth  in Note 1 to our
financial  statements in Form 10-KSB for the year ended December 31, 1998. It is
suggested  that  these  financial  statements  be read in  conjunction  with the
financial statements and notes included in the Form 10-KSB.

Note 2 - Pending Merger:
On September  1, 1999 Pease Oil and Gas Company and  Carpatsky  Petroleum,  Inc.
signed an agreement to combine the two  companies  through a reverse  triangular
merger.  The  contemplated  merger is more thoroughly  discussed under Item 2 in
Management's Discussion and Analysis.

Note 3 - Long-term Debt:
         Long-term debt consists of the following:
                                                   September 30,    December 31,
                                                      1999              1998
 Convertible debentures, interest at 10%,
      due April 2001, unsecured,                  $   2,782,500   $   2,782,500
 Less unamortized discount                             (347,284)       (511,787)
                                                 ---------------  --------------
      Net carrying value                              2,435,216       2,270,713
                                                 ---------------  --------------
 Note payable to bank, interest at 8.5%,
      monthly payments of $669, due March 2003,
      collateralized by vehicle                          24,031          28,373
                                                 ---------------  --------------
      Total long-term debt                            2,459,247       2,299,086
      Less current maturities                            (5,741)         (5,825)
                                                 ---------------  --------------
        Long-term debt, less current maturities   $   2,453,506   $   2,293,261
                                                  =============    =============



                                       -7-

<PAGE>



ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS

Liquidity, Capital Expenditures and Capital Resources
At September  30, 1999,  our cash balance was $777,835  with a positive  working
capital  position of $838,258,  compared to a cash balance of  $1,049,582  and a
positive working capital position of $1,101,888 at December 31, 1998. The change
in our cash balance is summarized as follows:

   Cash balance at December 31, 1998                             $   1,049,582
   Sources of Cash:
      Cash provided by operating activities                            430,073
      Proceeds from the sale of property and equipment                 100,000
      Proceeds from redemption of certificate of deposit                70,000
                                                                ---------------
            Total Sources of Cash                                      600,073
   Uses of Cash:
      Capital expenditures for exploration activities                 (428,466)
      Interest paid and capitalized in full cost pool                 (208,116)
      Series B Preferred Stock dividends                              (177,817)
      Purchase and retirement of Series B Preferred Stock              (51,064)
      Payments on long term debt                                        (4,342)
      Capital expenditures for office equipment                         (2,015)
                                                                ---------------
            Total uses of cash                                        (871,820)
                                                                ---------------
   Cash balance at September 30, 1999                            $     777,835
                                                                ===============

Pease's uses of cash for exploration activities in the Gulf Coast are summarized
as  follows  (the  difference  between  the  total  cash  paid  for  exploration
activities in the above table and the amount illustrated  below,  represents the
net decrease in accounts  payable  between  December 31, 1998 and  September 30,
1999):
 <TABLE>
 <CAPTION>
                                                               PROGRAM OPERATOR

  Category ........              NEGX (1)    Parallel(3)  AHC(2)       Other       Total           %
------------------------------   --------    --------    --------    --------    --------    --------

<S>                              <C>         <C>         <C>         <C>         <C>               <C>
  Successful Efforts .........   $ (6,879)   $   --      $214,001    $   --      $207,122          50%
  Exploratory Dry Holes ......     (7,096)     23,666        --          --        16,570           4%
  Land, G&G-Seismic Programs .     15,446     157,725        --          --       173,171          41%
  Other Exploration Costs ....       --          --          --        21,261      21,261           5%
                                 --------    --------    --------    --------    --------    --------
         Total Exploration Costs $  1,471    $181,391    $214,001    $ 21,261    $418,124         100%
                                 ========    ========    ========    ========    ========    ========
         Percent .............         1%        43%         51%         35%        100%
                                 ========    ========    ========    ========    ========
</TABLE>
For the remainder of 1999 and continuing into 2000, we will focus our activities
on  cultivating  the  existing  exploration  program in the Gulf  Coast  region,
principally in Louisiana and Texas. This activity will focus on what we consider
our three core areas in the Gulf Coast, which are:

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

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

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

Pease is a non-operating partner in all three areas. Accordingly, we have little
control over the timing of new wells or the ability to control  costs.  However,
we can elect not to participate  in a proposed well and have the  opportunity to
farmout  proposals  to other  parties  should we elect not to  participate  in a
particular  exploratory  proposal.  Accordingly,  we  have  the  right,  not the
obligation, to participate in future exploratory drilling prospects within these
areas.  However,  assuming  sufficient  working capital is available,  it is our
intent to participate in all the  exploratory or development  proposals that are
fundamentally  sound  and  adequately  supported  with  competent  geologic  and
geophysical  data.  Under the present  known  circumstances,  should we elect to
participate in all of the

                                       -8-

<PAGE>



anticipated  proposals for these three areas, the following table summarizes the
range of expected capital requirements, by program, through the end of 2000:

                                             Estimated Investment
Operator                                   Minimum          Maximum
-------------------------------------    ----------      ------------
East Bayou Sorrel Area                   $    -          $   400,000
Formosa, Texana, and Ganado Prospects      200,000           600,000
Maurice Prospect                            50,000           600,000
                                         -----------     -------------
      Total                              $ 250,000       $ 1,600,000
                                          =========       ===========

Our current and  anticipated  cash  position may not be  sufficient to cover the
future working capital and exploration opportunities that may be proposed within
our three core areas.

As discussed  in previous  filings,  we began  actively  searching  for a merger
candidate in August 1998 in order to, among other things, increase Pease's asset
base and improve the chances of financing future opportunities.  On September 1,
1999,  we  signed an  Agreement  and Plan of Merger  ("Merger  Agreement")  with
Carpatsky Petroleum,  Inc. ("Carpatsky"),  a publicly held company traded on the
Alberta  Stock  Exchange  under  the  symbol  "KPY".  Carpatsky  is  engaged  in
production and development of oil, gas and condensate in the Republic of Ukraine
with  proven   reserves  much  greater  than  ours.  The  transaction  is  still
conditioned  upon,  among other things,  regulatory and  shareholder  approvals.
Pursuant  to the terms of the  proposed  merger  transaction,  Pease  will issue
approximately 34.5 million shares of common stock to acquire all the outstanding
stock of Carpatsky.  In addition,  all of Pease's currently outstanding Series B
Preferred Stock will be exchanged for approximately 8.9 million shares of common
stock at the close of the  transaction.  All  holders of the Series B  Preferred
stock  have  agreed  that no more  dividends  shall  accrue  or be paid on their
holdings  if  the   contemplated   transaction   with  Carpatsky  is  ultimately
consummated. They have also agreed not to sell or convert any outstanding shares
of the Series B Preferred until the  contemplated  transaction with Carpatsky is
either completed or abandoned. Should a merger occur, Pease will be obligated to
pay  out  of  its  existing  working  capital  approximately   $220,000  to  the
President/CFO  of Pease in connection  with the severance  terms included in his
employment agreement.

The Carpatsky assets consist of interests held in two separate  fields:  1.) the
Rudovsko-Chervonozavodskoye  natural gas and  condensate  field (the "RC" field)
located  in the  Poltava  District  of  Eastern  Ukraine;  and 2.)  the  Bitkov-
Babchensky oil field (the "Bitkov"field) located in the Ivano-Frankns'k District
of  southwest  Ukraine.  Common  to the  oil and gas  industry  in many  foreign
countries,  Carpatsky does not own an interest in any real property.  But rather
Carpatsky's  rights and obligations are governed by and structured through joint
ownership or joint venture  arrangements.  The agreements governing the RC field
provide Carpatsky with a net revenue interest ("NRI") in the project that varies
based on their proportionate  cumulative capital contributions.  Therefore,  the
actual  NRI  is   determined   by:  a.)  dividing   Carpatsky's   total  capital
contributions  by the total  capital  contributions  of the Joint  Account (this
computes  Carpatsky's  proportionate share of the total capital  contributions);
and b.) multiplying this quotient by 90%. Using this formula, Carpatsky's NRI as
of September 30, 1999 was 40% and is redetermined on a quarterly basis. Pursuant
to the terms of the  agreements,  Carpatsky's NRI in the RC field may not exceed
45%. Unlike the governing  documents  associated with the RC field,  Carpatsky's
ownership and NRI in the Bitkov Joint  Venture is not subject to adjustment  and
is fixed at 45%. In both fields,  Carpatsky's  planned operations will primarily
focus on exploitation  activities -- drilling  development  wells and performing
workovers on existing wellbores -- in order to monetize proven reserves.

Most of Carpatsky's  current oil and gas reserve value is attributable to the RC
field.  Carpatsky has reported that the 8/8's daily production from the RC field
for October  1999 was in excess of 20 million  cubic feet of natural gas and 120
bbls of  condensate  from 3 wells.  Two other  wells are in the final  stages of
completion  and should be on production  during the fourth quarter of this year.
In addition,  one other well is currently  drilling and is expected to reach its
proposed target depth of 18,000' early next year. Carpatsky expects two to seven
additional  development  wells will be drilled  (or start to be drilled) in this
field between now and the end of 2000. As previously stated,  Carpatsky's NRI in
the RC field on  September  30,  1999 was 40%.  However,  on  October  1,  1999,
Carpatsky's  NRI was  effectively  reduced  to 20%  when its  Ukrainian  partner
increased their equity position through an additional  contribution to the Joint
Account.  The Ukrainian  partner has asserted that  Carpatsky has until December
31, 1999 to make an additional  contribution of  approximately  $2.9 million.  A
failure to do so may cap  Carpatsky's  right in the RC field to a maximum NRI of
20% and could possibly prevent them from participating in future wells in the RC
field.  Carpatsky will attempt to meet this  obligation,  but will need to raise
additional capital to do so.

                                       -9-
<PAGE>



The recent  reduction in Carpatsky's  NRI in the RC field from 40% to 20%, along
with the knowledge that additional  capital would  ultimately be required in the
project, had been anticipated by both Carpatsky and Pease prior to entering into
the Merger Agreement.  However, at that time neither party knew exactly when the
Ukrainian partner was going to contribute additional equity and additional funds
would be required by Carpatsky,  Accordingly,  the exchange  ratio between Pease
and  Carpatsky  was  determined  using a 20%  NRI in the RC  Field.  The  Merger
Agreement  provides for an adjustment to the share  exchange  ratio in the event
additional capital is raised by Carpatsky before the merger is consummated.  The
spirit of the adjustment  provision  contemplates that the dilution necessary to
increase,  and then  maintain,  the NRI in the RC field  above  the 20% that the
merger was structured on, should be borne by both companies on a pro-rata basis.
Specifically, Carpatsky will receive 183,353 additional shares of Pease for each
$50,000  in net  proceeds  raised  before  closing  the  merger,  as long as the
proceeds  are used to  increase  its NRI in the RC field.  Although  Carpatsky's
management is vigorously  pursuing various  financing  alternatives to meet this
and future  obligations,  there can be no assurance at this time that  Carpatsky
will raise any  capital  before  December  31,  1999 or before the merger can be
closed.

If the proposed  merger with  Carpatsky is ultimately  consummated  and assuming
Carpatsky does not raise any additional  capital  between now and the closing of
the merger,  the newly  combined  entity  will be  required  to seek  additional
financing.   Carpatsky's  capital  requirements  for  drilling  and  development
activities in the Republic of Ukraine during 1999 and 2000 are expected to range
between $1.5 and $8.3  million  depending on their NRI in the RC field (the $8.3
million assumes a NRI of 45% and includes the $2.9 million that is due the Joint
Account by December 31, 1999). In addition,  Carpatsky's  management  expects it
will need an  additional  $1.5 million to meet its current and expected  working
capital requirements regardless of the NRI in the RC field. Carpatsky's projects
are expected to fund  themselves  beginning  sometime in 2000 through  operating
cash  flows  but  exactly  when,  or if,  this  will  actually  occur  cannot be
determined at this time.  Therefore,  the amount of future  capital that will be
sought assuming the merger occurs, cannot be determined at this time, but it can
be  reasonably  assured to be at least $3.0  million.  There can be no assurance
given at this time that the necessary  capital can or will be raised under terms
acceptable to the newly combined entity.

If the  contemplated  merger  with  Carpatsky  cannot  be  consummated  within a
reasonable  period  of  time,  then we may  have to seek  additional  financing.
However,  our common  stock was  delisted  from the Nasdaq  SmallCap  electronic
market  system on January  14, 1999 for failure to maintain an average bid price
of at least  $1.00 per share.  The stock is now  listed on the  over-the-counter
market on the NASD Bulletin  Board (OTC BB). It is believed that this  delisting
will have a material  negative impact on our ability to raise additional  equity
capital.  Given the  delisting,  combined with our  historically  poor financial
performance and the fact only four wells are responsible for most of our current
cash flow and  production,  it is  unclear  at this time what  alternatives  for
future  working  capital  will be  available,  if any,  or to  what  extent  the
potential dilution to the existing shareholders may be. If additional sources of
financing  are  not  ultimately  available,   we  may  have  to  consider  other
alternatives,  including the sale of existing  assets,  cancellation of existing
exploration agreements,  nonconsenting on proposed wells or workovers, farmouts,
joint  ventures,  restructuring  under the protection of the Federal  Bankruptcy
Laws and/or liquidation.

RESULTS OF OPERATIONS

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

Divestment of Rocky Mountain Assets
As  thoroughly  discussed  in our  1998  Annual  Report  on Form  10-KSB,  Pease
substantially  completed  the  sale  of  its  Rocky  Mountain  assets  in  1998.
Accordingly,  the Rocky Mountain  revenues,  costs,  operating  margins and cash
flows  historically  generated and  discussed  under the captions "Oil and Gas",
"Gas Plant,  Service and  Supply" and "Other  Income"  will no longer be part of
Pease's future operations.  Since these assets included a significant portion of
our  historical  operations,  the sale of  these  assets  has and  will  have an
immediate and material  negative  impact on our future cash flows and results of
operations.
                                      -10-

<PAGE>



Total Revenue
Total Revenue from all operations was as follows:

                                        For the Three Months Ended September 30,
                                             1999                   1998
                                        -------------         ----------------
                                       Amount      %          Amount        %

Oil and gas sales ................. $  541,206   100%      $  606,016     82%
Gas plant, services and supply ....       --      --          131,055     18%
Other .............................       --      --            4,116      *
                                     ---------- -----       ----------   -----
     Total revenue ................ $  541,206   100%      $  741,187    100%
                                     ==========  ===        ==========   =====

                                        For the Nine Months Ended September 30,
                                             1999                   1998
                                      ---------------         ----------------
                                       Amount      %          Amount        %

Oil and gas sales ..............    $1,504,065   100%      $1,853,284     77%
Gas plant, services and supply .         --       --          528,418     22%
Other ..........................            80    *            22,640      1%
                                   -----------   ---       ----------   ------
     Total revenue .............    $1,504,145   100%      $2,404,342    100%
                                    ==========   ===       ==========  =======
                                    * Less than 1%

The  decrease  in total  revenue,  along with any known  trends or changes  that
effect  revenue  on  a  line-by-line  basis,  are  discussed  in  the  following
paragraphs under their respective captions.

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

                               For the Three Months        For the Nine Months
                               Ended September 30,          Ended September 30,
                           -------------------------  --------------------------
                               1999         1998           1999         1998
                           -----------    ----------  ----------      ----------

Production:
   Oil (Bbls)
        Rocky Mtns .....         --         12,900          --          47,900
        Gulf Coast .....       16,900       13,700        53,800        37,300
   Gas (Mcf)
        Rocky Mtns .....         --         70,900          --         228,300
        Gulf Coast .....       68,500       90,100       281,500       197,400
   BOE (6:1)
        Rocky Mtns .....         --         24,700          --          86,000
        Gulf Coast .....       28,300       28,700       100,700        70,200

Average Collected Price:
   Oil (per Bbl)
        Rocky Mtns .....   $     --     $    11.19      $   --        $  12.32
        Gulf Coast .....   $    20.30   $    11.13      $  15.54      $  12.96
   Gas (per Mcf)
         Rocky Mtns ....   $     --     $     1.28      $   --        $   1.39
         Gulf Coast ....   $     2.89   $     2.43      $   2.37      $   2.34
   Per BOE (6:1)
         Rocky Mtns ....   $     --     $     9.51      $   --        $  10.56
         Gulf Coast ....   $    19.11   $    12.93      $  14.93      $  13.46





                                      -11-

<PAGE>



<TABLE>
<CAPTION>
                                          For the Three Months               For the Nine Months
                                           Ended September 30,               Ended September 30,
                                       ---------------------------     -------------------------------
                                           1999           1998             1999             1998
                                       ------------     ----------     ----------         -----------

Operating Margins
 (Excl. DD&A/Impairment):
    Rocky Mtns:
        Revenue -
<S>                                     <C>             <C>             <C>             <C>
            Rocky Mtns. - Oil .......   $      --       $   144,664     $      --       $   590,067
            Rocky Mtns. - Gas .......          --            90,573            --           318,034
                                        -----------     -----------     -----------     -----------
                                               --           235,237            --           908,101
        Production Costs ............          --          (236,720)           --          (870,227)
                                        -----------     -----------     -----------     -----------
            Operating Margin ........   $      --       $    (1,483)    $      --       $    37,874
                                        ===========     ===========     ===========     ===========
            Operating Margin % ......          --               (1%)           --                4%

    Gulf Coast:
        Revenue -
            Gulf Coast - Oil ........   $   343,201     $   152,164     $   836,569     $   484,016
            Gulf Coast - Gas ........       198,005         218,615         667,496         461,167
                                         -----------     -----------     -----------     -----------
                                            541,206         370,779       1,504,065         945,183
        Production Costs ............      (104,580)        (49,168)       (276,014)       (125,768)
                                        -----------     -----------     -----------     -----------
            Operating Margin ........   $   436,626     $   321,611     $ 1,228,051     $   819,415
                                        ===========     ===========     ===========     ===========
            Operating Margin % ......            81%             87%             82%             87%

Production Costs per BOE before DD&A:
        Rocky Mtn Region ............   $      --       $      9.58     $      --       $     10.12
        Gulf Coast Region ...........   $      3.70     $      1.71     $      2.74     $      1.79
Change in Total Revenue
Attributable to:
  Production ........................   $  (260,428)    $  (659,938)
  Price .............................       195,618         310,719
                                         -----------     -----------
    Total Revenue Decrease ..........   $   (64,810)    $  (349,219)
                                         ===========     ===========
</TABLE>

In May 1999 the J. P. Owen well located in the Maurice  Prospect in Fayetteville
Parish,  Louisiana,  operated  by  AHC,  began  experiencing  significant  water
production  as a result  of a very poor  primary  cement  job in the  completion
casing.  Accordingly,  the well was shut in and during the third quarter of 1999
AHC performed various remedial operations  attempting to squeeze the zones, shut
off the water  source and  restore  production.  However,  the  procedures  were
unsuccessful and the well has been temporarily abandoned.  We do not believe the
loss of the well bore at that interval will impair our total reserves quantities
because our independent petroleum reservoir engineers have advised us that these
reserves will probably be classified as "Proved Undeveloped".  However,  because
production has been lost, it will negatively impact current and anticipated cash
flows for at least the near  future.  In 1999,  Pease's  proportionate  share of
production  from this well totaled  13,360 Mcf of gas and 490 Bbls of oil before
it was shut in. There was no production  from this well in 1998. At December 31,
1998, this well represented approximately 14.5% of our estimated proven reserves
(PV-10).

Therefore,  as of the date of this report,  substantially all of Pease's current
oil and gas  production is generated from four of the ten wells in which we hold
a working  interest.  Of the four main  producing  wells,  three are operated by
National  Energy  Group,  Inc.,  and the other one is operated  by Amerada  Hess
Corporation  ("AHC").  All these wells are deep,  high  pressure,  water  driven
reservoirs that are inherently laden with geologic,  geophysical, and mechanical
risks and  uncertainties.  The  unexpected  loss of any one of these wells would
have a material negative impact on our estimated reserves, future production and
future cash flows.




                                      -12-

<PAGE>



General and Administrative
The net decrease in G&A  expenses  between the periods  presented is  summarized
below:

    Comparison  of the  Decrease  or  (Increase)  in Costs  between  the Periods
    presented.

For the 3 months     For the 9 months
ended 9/99 vs 9/98   ended 9/99 vs 9/98    Description

$   73,486            $    173,774         Reduction of payroll as a result of
                                             eliminating executive and
                                             administrative positions
   150,000                 150,000         Nonrefundable fee paid to San Jacinto
                                             Securities to assist the Company in
                                             seeking a merger candidate
    71,992                 101,992         Legal and accounting
    15,554                  25,276         Travel
    26,469                  19,604         Consulting
     4,132                  12,475         Filing fees associated with NASDAQ
    (1,825)                  3,308         All other, net
  (100,727)               (106,479)        Costs associated with pursuing the
                                             merger with Carpatsky
-----------            --------------
$  239,081            $    379,950         Net decrease between the periods
===========            ==============        presented

We have taken steps to  significantly  reduce G&A costs,  and expect  "core" G&A
costs  in 1999  and 2000 to be  approximately  $60,000  to  $70,000  per  month.
However, we expect additional amounts  (aggregating  $25,000 to $50,000) will be
incurred in connection  with efforts to consummate the merger  transaction  with
Carpatsky.

Consulting Arrangement - Related Party
In March  1996 we  entered  into a  three-year  consulting  agreement  with Beta
Capital  Group,  Inc.  ("Beta")  located in Newport  Beach,  California.  Beta's
chairman,  Steve  Antry,  has been a director of Pease since  August  1996.  The
consulting agreement, which ended in February 1999, provided for minimum monthly
cash payments of $17,500 plus reimbursement for out-of-pocket expenses.

Depreciation, Depletion and Amortization
Depreciation,  Depletion and Amortization  ("DD&A") for the periods presented by
cost center consisted of the following:
<TABLE>
<CAPTION>
                                          For the Three Months     For the Nine Months
                                           Ended September 30      Ended September 30
                                      ------------------------  --------------------------
                                          1999          1998         1999         1998
                                      ------------  ----------  -----------   ------------

<S>                                    <C>          <C>          <C>          <C>
Oil and Gas Properties - Gulf Coast    $  245,007   $  526,841   $  780,899   $  866,477
Oil and Gas Properties - Rocky Mtns          --         79,429         --        265,510
Gas Plant, Service and Supply
    Operations .....................         --         90,671         --        291,766
Furniture and Fixtures .............        5,282       11,490       17,379       36,809
                                       ----------   ----------   ----------   ----------
    Total ..........................   $  250,289   $  708,431   $  798,278   $1,460,562
                                       ==========   ==========   ==========   ==========
</TABLE>

DD&A for the oil and gas  properties,  per BOE, for the periods  presented is as
follows:

<TABLE>
<S>                                    <C>          <C>          <C>           <C>
Rocky Mountains                        $    -       $     3.21   $     -       $    3.09
Gulf Coast                             $     8.67   $    18.36   $     7.75    $   12.33
Combined Total                         $     8.67   $    11.35   $     7.75    $    7.25
</TABLE>

DD&A for the oil and gas  properties  is  computed  based on one full  cost pool
using the total estimated reserves at the end of each period presented and prior
to applying the ceiling test discussed  later in this section under  "Impairment
Expense".  The  estimated  portion of DD&A for the Rocky  Mountains and the Gulf
Coast are illustrated  here for analysis  purposes only.  Total DD&A for the oil
and gas properties decreased in 1999 when compared to

                                      -13-

<PAGE>



1998  principally  as a result  of the  impairment  charges  recognized  in 1998
significantly reduced the net value of full cost pool being amortized in 1999.

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

<TABLE>
<CAPTION>
                                          For the Three Months      For the Nine Months
                                          Ended September 30,       Ended September 30,
                                          1999            1998           1999          1998
                                      -----------    ------------   -----------    -----------

<S>                                   <C>            <C>            <C>            <C>
Interest paid or accrued ..........   $    70,690    $   101,680    $   209,795    $   299,313
Amortization of debt discount .....        54,834        323,784        164,503        485,676
Amortization of debt issuance costs        34,559        205,005        103,677        307,208
                                      -----------    -----------    -----------    -----------
         Total interest incurred ..       160,083        630,469        477,975      1,092,197
Interest capitalized ..............       (70,135)      (232,239)      (208,116)      (693,451)
                                      -----------    -----------    -----------    -----------
              Interest expense ....   $    89,948    $   398,230    $   269,859    $   398,746
                                      ===========    ===========    ===========    ===========
</TABLE>

The lower interest incurred in 1999 is substantially attributed to the reduction
of  outstanding  debt during the third quarter of 1998.  In connection  with the
sale of the Rocky  Mountain  assets,  we paid down $1.2  million (or 30%) of the
outstanding  convertible  debentures  in September  1998,  thereby  reducing the
outstanding  principal  from $4.0 million to $2.8 million.  At the same time, we
charged to interest expense  $396,742,  representing 30% of the unamortized debt
discount and debt issuance costs associated with the debt.

Impairment Expense - Oil and Gas Properties
Pease uses the full cost method of accounting  for oil and gas  activities.  The
full cost method regards all costs of acquisition,  exploration, and development
activities as being  necessary for the ultimate  production of reserves.  All of
those  costs  are  incurred  with the  knowledge  that  many of them  relate  to
activities  that do not result  directly  in finding  and  developing  reserves.
However,  the benefits  obtained  from the prospects  that do prove  successful,
together with benefits from past discoveries,  may ultimately  recover the costs
of all activities, both successful and unsuccessful. Thus, all costs incurred in
those  activities are regarded as integral to the  acquisition,  discovery,  and
development of reserves that  ultimately  result from the efforts as a whole and
are  thereby  associated  with  our  proved  reserves.   Establishing  a  direct
cause-and-effect  relationship  between  costs  incurred and  specific  reserves
discovered, which is the premise under the successful efforts accounting method,
is not relevant to the full cost concept.  However, the costs accumulated in our
full cost pool are  subject to a  "ceiling",  as defined by  Regulation  SX Rule
4-10(e)(4).  As prescribed by the  corresponding  accounting  standards for full
cost,  all the  accumulated  costs in excess of the ceiling,  are to be expensed
periodically by a charge to impairment.

Accordingly,  we incurred an impairment  charge of  $2,739,043  during the first
nine  months  of 1998 as a  result  of costs  incurred  with  dry  holes  (which
increased  the  accumulated  costs) and the  continuing  collapse of oil and gas
prices  between  December  31, 1997 and  September  30, 1998 that  substantially
lowered the "ceiling" of the full cost pool. No impairment charge was recognized
during the first  nine  months of 1999  because  the net book value of full cost
pool is less than the estimated "ceiling".

Dividends and Net Loss Per Common Share
Net loss per common  share is computed by dividing  the net loss  applicable  to
common  stockholders by the weighted average number of common shares outstanding
during  the year.  All  potential  common  shares  have been  excluded  from the
computations because their effect would be antidilutive.

The net loss  applicable  to common  stockholders  is  determined  by adding any
dividends accruing to the benefit of the preferred stockholders to the net loss.
The dividends  included for this  calculation  include:  1) paid  dividends;  2)
accrued but unpaid dividends;  and 3) any imputed dividends  attributable to the
beneficial  conversion feature.  Accordingly,  the net loss applicable to common
stockholders  includes  the  following  charges  associated  with  the  Series B
Preferred Stock that was issued on December 31, 1997:





                                      -14-

<PAGE>



                              For the Three Months       For the Nine Months
                              Ended September 30         Ended September 30
                           ------------------------   -----------------------
                                1999         1998        1999        1998
                          ------------  -----------   ----------  -----------

Dividends declared ......   $   45,309   $   69,585   $  177,817   $  210,941
Imputed non-cash dividend         --        420,689         --      1,513,713
                            ----------   ----------   ----------   ----------
     Total ..............   $   45,309   $  490,274   $  177,817   $1,724,654
                            ==========   ==========   ==========   ==========

The Series B Preferred  Stock is  convertible  into common stock at a conversion
price equal to a 25% discount to the average  trading  price of the common stock
prior to  conversion.  This discount  started at 12% in April 1998 and increased
periodically  until  it  topped  out at  25%  (this  discount  is  considered  a
"beneficial  conversion  feature").  The additional  non-cash  imputed  dividend
charge included in the net loss applicable to common stockholders represents the
intrinsic  value of the discount  applicable  through the period  presented.  No
additional non-cash dividend charges have been or will be incurred subsequent to
December 31, 1998 since the conversion discount has topped out at 25%.

The holders of the Series B Preferred  Stock are entitled to dividends  equal to
$2.50 per annum,  payable  quarterly  in cash or  additional  shares of Series B
Preferred  Stock at our option.  However,  in connection  with the  contemplated
merger with Carpatsky  Petroleum,  Inc., the Preferred  stockholders have signed
Agreements Not to Sell or Convert Securities which stated that our obligation to
accrue and pay  additional  dividends  on the Series B Preferred  stock shall be
deferred  from the date  that an  Agreement  and Plan of Merger  with  Carpatsky
Petroleum,  Inc. is signed.  Therefore,  dividends  were accrued and paid to the
Preferred  stockholders  through the close of business on September 1, 1999.  If
the merger  with  Carpatsky  Petroleum,  Inc. is  consummated,  there will be no
further dividends accrued or paid. If the merger is not consummated, we shall at
that time accrue and pay dividends for the period from September 1, 1999 through
the date on which the merger is abandoned.

OTHER MATTERS

Disclosure Regarding Forward-Looking Statements
This  report on Form 10-QSB  includes  "forward-looking  statements"  within the
meaning  of  Section  27A of  the  Securities  Act  of  1933,  as  amended  (the
"Securities  Act"),  and Section 21E of the Securities  Exchange Act of 1934, as
amended (the "Exchange Act"). All statements other than statements of historical
facts included in this report, including,  without limitation,  statements under
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations" regarding Pease's contemplated merger,  financial position,  reserve
quantities, plans and objectives of Pease's management for future operations and
capital   expenditures,   and   statements   regarding  the  planned   Carpatsky
transactions  and the Carpatsky  assets are  forward-looking  statements and the
assumptions upon which such forward-looking statements are based are believed to
be reasonable.  We can give no assurance that such  expectations and assumptions
will  prove to be  correct.  Reserve  estimates  of oil and gas  properties  are
generally  different  from  the  quantities  of oil and  natural  gas  that  are
ultimately  recovered or found.  This is particularly true for estimates applied
to exploratory prospects.  Additionally, any statements contained in this report
regarding  forward-looking  statements  are subject to various known and unknown
risks,  uncertainties and  contingencies,  many of which are beyond our control.
Such risks and uncertainties may cause actual results, performance, achievements
or expectations to differ materially from the anticipated results,  performance,
achievements  or  expectations.  Factors  that may affect  such  forward-looking
statements  include,  but are not  limited  to: the  contemplated  merger not be
consummated,  our ability to generate additional capital to complete its planned
drilling and exploration activities; risks inherent in oil and gas acquisitions,
exploration,  drilling,  development and production; price volatility of oil and
gas;  competition;  shortages  of  equipment,  services and  supplies;  U.S. and
foreign government regulation;  environmental matters; implications to Carpatsky
from conducting its operations in Ukraine and related political and geographical
risks;  financial  condition  of  the  other  companies   participating  in  the
exploration,  development  and  production  of oil and gas  programs;  and other
matters beyond our control. In addition,  since all of the prospects in the Gulf
Coast are currently  operated by another  party,  we may not be in a position to
control costs,  safety and timeliness of work as well as other critical  factors
affecting  a producing  well or  exploration  and  development  activities.  All
written and oral  forward-looking  statements  attributable  to Pease or persons
acting  on our  behalf  subsequent  to the  date of this  report  are  expressly
qualified in their entirety by this disclosure.



                                      -15-

<PAGE>



Year 2000 Issue
Pease has  conducted a review of its  computer  systems to identify  the systems
that could be affected by the "Year 2000"  issue.  The Year 2000  problem is the
result of computer  programs  being written using two digits rather than four to
define  the  applicable  year.  Any of our  programs  that  have  time-sensitive
software  may  recognize a date using '00' as the year 1900 rather than the year
2000. This could result in a major system failure or miscalculations.

We do not believe  that the Year 2000  problem  will pose a material  operations
problem for Pease. Our computer  software  providers have assured us that all of
our software is or will be Year 2000 compliant (i.e.  will function  properly in
the year 2000 and beyond).  Our accounting software providers have asserted they
will  provide  written  assurance  that its  products  are or will be Year  2000
compliant. To our knowledge, after investigation, no "imbedded technology" (such
as microchips in an  electronic  control  system) of Pease poses a material Year
2000 problem.

Because we believe that we has no material internal Year 2000 problems,  we have
not  expended  and do not  expect  to  expend a  significant  amount of funds to
address  Year 2000  issues.  It is  Pease's  policy to  continue  to review  our
suppliers'  Year 2000  compliance and require  assurance of Year 2000 compliance
from new suppliers; however, such monitoring does not involve a significant cost
to us.

Pease is materially  dependent on Plains Marketing,  L.P.  ("Plains"),  National
Energy Group, Inc. ("NEG") and Amerada Hess Corporation ("AHC") for the delivery
and payment of our oil and natural gas. These companies in turn are dependent on
various  third party  vendors for delivery and payment.  We have or will request
written  assurances from Plains,  NEG and AHC that they have examined their Year
2000  issues.  However,  as of the date of this  report,  we have not received a
response. We will continue to request such assurance but it should be emphasized
that no assurance  can be given at this time that  Plains,  NEG or AHC, or their
third party vendors are or will be Year 2000 compliant.

In the event that one or more of our  vendors,  including  Plains,  NEG, AHC and
their respective vendors,  were to have a material Year 2000 problem, we believe
that  the  foreseeable  consequences  would  be a  temporary  delay  in  revenue
collection  caused  by an  interruption  in  computerized  billing  (and  not an
interruption  in the actual  flow of our oil or natural  gas),  which may have a
substantial  impact on our  ability  to conduct  operations.  We do not have any
contingency plan to address this possibility.

                                      -16-

<PAGE>



PART II - OTHER INFORMATION

Item 1. Legal Proceedings

Pease may from time to time be involved in various  claims,  lawsuits,  disputes
with third parties,  actions involving allegations of discrimination,  or breach
of contract  incidental to the  operation of our business.  We are not currently
involved  in any such  incidental  litigation  which  we  believe  could  have a
materially adverse effect on our financial condition or results of operations.

Item 2. Changes in Securities

(a) and (b): not applicable

(c)      Recent  sales of  unregistered  securities.  Pease  issued and sold the
         following  securities without  registration under the Securities Act of
         1933, as amended  ("Securities  Act"),  during the first nine months of
         1998 and through the date of this Report.

         1.       On January 28,1999 we issued 16,209 shares of our common stock
                  upon conversion of 200 shares of Series B Preferred Stock. The
                  Certificates  representing  the shares issued upon  conversion
                  bear  a  restrictive  legend   prohibiting   transfer  without
                  registration  under the Securities Act or the  availability of
                  an  exemption  from  registration.   The  shares  issued  upon
                  conversion  were registered by us for resale by the holders in
                  Registration No. 333-44305.  We relied upon Section 3(a)(9) of
                  the Securities Act of 1933, as amended,  in claiming exemption
                  from the  registration  requirements of the Securities Act for
                  issuance of the securities upon conversion.

         2.       On March 1, 1999 we issued  30,759  shares of our common stock
                  upon conversion of 233 shares of Series B Preferred Stock. The
                  Certificates  representing  the shares issued upon  conversion
                  bear  a  restrictive  legend   prohibiting   transfer  without
                  registration  under the Securities Act or the  availability of
                  an  exemption  from  registration.   The  shares  issued  upon
                  conversion  were registered by us for resale by the holders in
                  Registration No. 333-44305.  We relied upon Section 3(a)(9) of
                  the Securities Act of 1933, as amended,  in claiming exemption
                  from the  registration  requirements of the Securities Act for
                  issuance of the securities upon conversion.

         3.       On March 23, 1999 we issued  40,668 shares of our common stock
                  upon conversion of 250 shares of Series B Preferred Stock. The
                  Certificates  representing  the shares issued upon  conversion
                  bear  a  restrictive  legend   prohibiting   transfer  without
                  registration  under the Securities Act or the  availability of
                  an  exemption  from  registration.   The  shares  issued  upon
                  conversion  were registered by us for resale by the holders in
                  Registration No. 333-44305.  We relied upon Section 3(a)(9) of
                  the Securities Act of 1933, as amended,  in claiming exemption
                  from the  registration  requirements of the Securities Act for
                  issuance of the securities upon conversion.

         4.       On September  24, 1999,  we issued a total of 42,700 shares to
                  five of our directors for  compensation of services in lieu of
                  cash. The services were provided  between  January 1, 1997 and
                  August 31, 1999. For financial  statement  reporting purposes,
                  the  issuance  was  recorded  at $67,333  (or $1.58 per share)
                  representing  the average market value of Pease's stock on the
                  various dates the services  were  rendered.  The  Certificates
                  representing   the  shares  issued  upon   conversion  bear  a
                  restrictive legend prohibiting  transfer without  registration
                  under the Securities Act or the  availability  of an exemption
                  from registration.

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

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Item 3. Defaults Upon Senior Securities

(a)      There  has  been no  material  default  in the  payment  of  principal,
         interest,   or  any  other  material  default,   with  respect  to  any
         indebtedness  of the small business issuer during the period covered by
         this report.

(b)      There has been no material  default in the payment of dividends for any
         class of preferred stock during the period covered by this report.

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

There were no matters submitted to a vote of shareholders.

Item 5. Other Information

Discretionary Voting by Management
Unless we  receive  notice  from a  stockholder  that the  stockholder  plans to
present a matter for  consideration  at the next annual meeting of stockholders,
including  information  about the matter to be presented,  by March 14, 1999 (45
days before the date we mailed our proxy  materials to stockholders in 1998), we
will have  discretionary  authority to vote all shares for which we hold proxies
in opposition to the matter if  presented.  This  procedure is intended to be in
response to amendments to Rule 14a-4 under the Securities  Exchange Act of 1934,
recently adopted by the Securities and Exchange Commission.

Item 6. Exhibits and Reports on Form 8-K

(a)      The following exhibits are filed with this report:

                  (1) Exhibit 27,  "Financial  Data  Schedule" - for the quarter
ended September 30, 1999.

(b) The  following  report  on Form  8-K was  filed  during  the  quarter  ended
September 30, 1998:

       Item Reported                Date            Financial Statement
       -------------             ----------        ------------------------
(1)        5, 7             September 14, 1999      None - Not Applicable

There were no financial  statements filed during the quarter ended September 30,
1999 other than Pease's  Quarterly  Report on Form 10-QSB for the second quarter
ended June 30, 1999.



                                   SIGNATURES

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



                            PEASE OIL AND GAS COMPANY


Date: November 15, 1998                   By: /s/ Patrick J. Duncan
                                              Patrick J. Duncan
                                             President and Principal
                                              Accounting Officer





                                      -18-

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