SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                  FORM 10-QSB/A

       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934
                    FOR THE QUARTER ENDED SEPTEMBER 30, 1997

                          Commission File Number 0-6580

                                [GRAPHIC OMITTED]






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


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

               Securities registered pursuant to Section 12(b) of
                 the Act: None Securities registered pursuant to
                            Section 12(g) of the Act:
                     Common Stock (Par Value $.10 Per Share)
             Common Stock Purchase Warrants (Expire August 13, 1998)
                                 Title of Class

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

      As of November 11, 1997 the issuer had 15,741,769 shares of its $0.10
                 par value Common Stock issued and outstanding.

       Transitional Small Business Issuer Disclosure Format Yes ____ No X
                                       ---



                                       -1-

<PAGE>



                                TABLE OF CONTENTS
                                                                        PAGE
                                                                       NUMBER


PART I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . 3-4
September 30, 1997 (unaudited)
and December 31, 1996
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . 5
For the Three Months Ended September 30, 1997
(unaudited) and 1996 (unaudited)
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . 5
For the Nine Months Ended September 30, 1997
(unaudited) and 1996 (unaudited)
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . .6-7
For the Nine Months Ended September 30, 1997
(unaudited) and 1996 (unaudited)
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . 8-9
Item 2. Management's Discussion and Analysis . . . . . . . . . . . .  . . 10
Disclosure Regarding Forward-Looking Statements . . . .  . . . . . . . . .10
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . 10
Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . .13
Exploration Activity. . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
Total Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Oil and Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Natural Gas Marketing and Trading . . . . . . . . . . . . . . . .  . . . .18
Gas Plant Processing Revenues . . . . . . . . . . . . . . . . . .  . . . .19
Oil Field Services and Oil Field Supply . . . . . . . . . . . . . .  . . .20
Well Administration and Other Income . . . . . . . . . . . . . .  . . . . 20
General and Administrative . . . . . . . . . . . . . . . . . . . . . .  . 20
Consulting Agreement - Related Party . . . . . . . . . . . . . .  . . . . 21
Depreciation, Depletion and Amortization . . . . . . . . . . . .  . . . . 21
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  22.
Part II - Other Information . . . . . . . . . . . . . . . . . . . . . . . 23
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . 23
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . 27
Item 4. Submission of Matters to a Vote of Security Holders . . . . . .  .27
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . 27
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . .  28
Part III - Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . 28




                                       -2-

<PAGE>



                         PART 1 - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                   PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

                                          September 30,           December 31,
                                             1997                    1996
                                         ----------------        ------------
                                          (unaudited)

CURRENT ASSETS:
   Cash and equivalents                  $  3,939,355          $    1,995,860
   Trade receivables                          769,297                 599,648
   Inventory                                  393,899                 408,787
   Prepaid expenses and other                  64,585                  56,327
                                           -------------       ---------------
        Total current assets                5,167,136               3,060,622
                                            -----------         -------------
OIL AND GAS PROPERTIES, at cost
(successful efforts method):
   Undeveloped properties                   2,163,341                 351,727
   Exploration in progress                  3,764,767                 181,312
   Developed properties                    13,891,773               9,505,408
                                           ----------            -------------
        Total oil and gas properties       19,819,881              10,038,447
   Less accumulated depreciation, and
     depletion                             (4,462,831)             (3,946,974)
                                         ------------            --------------
        Net oil and gas properties         15,357,050               6,091,473
                                           ----------             -------------
PROPERTY, PLANT AND EQUIPMENT, at cost:
   Gas plant                                4,099,285               4,099,285
   Service equipment and vehicles             888,744                 879,313
   Land, buildings and office equipment       462,597                 459,228
                                         ------------             -------------
       Total property, plant and equipment  5,450,626               5,437,826
   Less accumulated depreciation           (1,647,747)             (1,376,154)
                                         ------------            --------------
       Net property, plant and equipment    3,802,879               4,061,672
                                          -----------             -------------
 OTHER ASSETS:
   Deferred debt issuance costs (Note 7)      731,617               1,093,479
   Non-compete agreements                     272,181                 306,678
   Other                                      272,493                 274,830
                                         ------------             -------------
          Total other assets                1,276,291               1,674,987
                                          -----------             -------------
TOTAL ASSETS                            $  25,603,356          $   14,888,754
                                           ==========             ============









                                       -3-

<PAGE>



                   PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                   (continued)

                                                 September 30,     December 31,
                                                     1997              1996
                                               ----------------   ------------
                                                  (unaudited)

CURRENT LIABILITIES:
   Current maturities of long-term debt:
      Related parties                                   -            285,895
      Other                                          31,210           45,944
   Accounts payable, exploration costs              455,503             -
   Accounts payable, trade                          250,197          267,540
   Accrued production taxes                         252,910          288,122
   Other accrued expenses                           219,452          265,427
                                                -------------    --------------
         Total current liabilities                1,209,272        1,152,928
                                                 ------------    -------------
LONG-TERM LIABILITIES:
   Long-term debt, less current maturities:
      Convertible Debentures, net of discount of
        $1,158,901 and $1,732,170, respectively
        (Note 7)                                  2,906,099        3,267,830
      Other                                          39,518           19,945
   Accrued production taxes                         204,941          256,088
                                                ------------     --------------
        Total long-term liabilities               3,150,558        3,543,863
                                                ------------      -------------
STOCKHOLDERS' EQUITY:
   Preferred Stock, par value $0.01 per share,
      2,000,000 shares authorized, none
      and 179,938  shares of Series A  Cumulative
      Convertible  Preferred  Stock issued and
      outstanding, respectively.                      -                 1,799
   Common Stock, par value $0.10 per share,
      40,000,000 shares authorized, 15,688,475 and
      7,526,817 shares issued and outstanding,
      respectively.                               1,568,848           752,682
   Additional paid-in capital (Note 7)           31,815,201        19,112,104
   Accumulated deficit (Note 7)                 (12,140,523)       (9,674,622)
                                                ------------    --------------
         Total stockholders' equity              21,243,526        10,191,963
                                                -----------      -------------

TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY                                         $  25,603,356 $     14,888,754
                                                ===========       ============



                                       -4-

<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,
                                                       -----------                       -----------
                                                    1997           1996           1997           1996
                                                 -----------    -----------    -----------    -----------

REVENUE:
<S>                                              <C>           <C>            <C>            <C>
   Oil and gas sales .........................   $  868,749    $   594,730    $ 2,328,328    $ 1,846,708
   Natural gas marketing and trading .........         --             --             --        2,048,565
   Gas plant processing ......................      153,848        175,389        525,704        531,069
   Oil field services and supply .............      181,373        163,477        525,585        469,612
   Well administration and other income ......       28,666         28,196         67,570         84,684
                                                  -----------    -----------    -----------    -----------
        Total revenue ........................    1,232,636        961,792      3,447,187      4,980,638
                                                  -----------    -----------    -----------    -----------
OPERATING COSTS AND EXPENSES:
   Oil and gas production ....................      407,038        308,959      1,145,141        956,822
   Exploration costs .........................      813,174         75,000      1,178,890         75,000
   Natural gas marketing and trading .........         --             --             --        1,745,446
   Gas plant processing ......................       79,346        108,618        283,645        360,626
   Oil field services and supply .............      176,090        175,748        469,223        416,425
   General and administrative ................      339,079        258,941      1,045,258        746,883
   Consulting agreement-related party ........      159,292         86,985        340,470        166,811
   Depreciation, depletion and amortization ..      340,714        259,264        903,955        807,583
                                                 -----------    -----------    -----------    -----------
            Total operating costs and expenses    2,314,733      1,273,515      5,366,582      5,275,596
                                                 -----------    -----------    -----------    -----------
LOSS FROM OPERATIONS .........................   (1,082,097)      (311,723)    (1,919,395)      (294,958)
OTHER INCOME (EXPENSES):
   Interest income ...........................       70,029          8,700        133,142         17,784
   Interest expense (Note 7) .................     (120,314)      (137,128)      (669,602)      (266,383)
   Gain (Loss) on sale of assets .............       (3,855)       (24,362)       (10,046)        (7,713)
                                                 -----------    -----------    -----------    -----------
        Total other income (expenses), net ...      (54,140)      (152,790)      (546,506)      (256,312)
                                                 -----------    -----------    -----------    -----------
LOSS BEFORE INCOME TAXES .....................   (1,136,237)      (464,513)    (2,465,901)      (551,270)
INCOME TAXES .................................         --             --             --           41,409
                                                 -----------    -----------    -----------    -----------
NET LOSS .....................................   (1,136,237)      (464,513)    (2,465,901)      (509,861)
PREFERRED STOCK DIVIDENDS:
   In arrears ................................         --          (50,672)          --         (152,016)
   Converted into common stock ...............         --             --          (89,969)          --
                                                 ----------    -----------    -----------    -----------
         Total preferred stock dividends .....         --          (50,672)       (89,969)      (152,016)
                                                 ----------    -----------    -----------    -----------
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS .................................  $(1,136,237)  $   (515,185)   $(2,555,870)   $  (661,877)
                                                 ==========    ===========    ===========    ===========
NET LOSS PER COMMON SHARE
    As previously reported ...................  $     (0.07)  $      (0.07)   $     (0.19)   $     (0.09)
    Prior period adjustments (Note 7) ........        (0.01)          --            (0.02)          --
                                                               -----------    -----------    -----------    -----------
    As restated .............................   $     (0.08)  $      (0.07)    $    (0.21)   $     (0.09)
                                                 ===========    ===========    ===========    ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING ....................   14,976,000      7,310,000     12,191,000      7,254,000
                                                 ===========    ===========    ===========    ===========
</TABLE>






                                       -5-

<PAGE>



                   PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (unaudited)
                                                         For The Nine Months
                                                          Ended September 30,
                                                       1997            1996
                                                    ------------   -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss                                          $(2,465,901)  $   (509,861)
   Adjustments to reconcile net loss to net cash
      provided by operating activities:
      Provision for depreciation and depletion           869,458        773,086
      Amortization of intangible assets and discount
           on convertible debt                           478,762        113,936
      Exploration costs                                1,178,890         75,000
      Stock-based compensation                            60,000             -
      Loss on sale of property and equipment              10,045          7,713
      Issuance of common stock for services               10,155         61,027
      Provision for bad debt                                 -           21,491
   Changes in operating assets and liabilities:
   (Increase) decrease in:
      Trade receivables                                 (169,649)       554,857
      Inventory                                           34,164         98,437
      Prepaid expenses and other assets                  (23,421)       (32,367)
   Increase (decrease) in:
      Accounts payable                                   (17,343)      (964,444)
      Accrued expenses                                  (132,334)      (190,600)
                                                    --------------    ----------
    Net cash provided by (used in) operating
activities                                              (167,174)         8,275
                                                    --------------    ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Capital expenditures for property and equipment    (9,566,126)    (1,147,942)
   Proceeds from sale of property and equipment           52,867        145,740
   Proceeds from redemption of certificate of
          deposit                                         17,500         40,000
                                                    --------------   ----------
      Net cash provided by (used in) investing
          activities                                  (9,495,759)      (962,202)
                                                    --------------   -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from long-term debt                             -         3,415,000
   Repayment of long-term debt                          (331,747)    (1,827,848)
   Proceeds from sale of common stock                  9,480,000         68,750
   Proceeds from exercise of common stock
          options and warrants                         3,866,353           -
   Offering and other costs associated with long-
          term debt, stock and warrants               (1,408,178)      (524,101)
                                                     -------------   -----------
      Net cash provided by (used in) financing
          activities                                  11,606,428      1,131,801
                                                     ------------   ------------
 INCREASE IN CASH AND EQUIVALENTS                      1,943,495        177,874
 CASH & EQUIVALENTS, beginning of period               1,995,860        677,275
                                                    -------------    -----------
 CASH & EQUIVALENTS, end of period                     3,939,355        855,149
                                                    -------------    -----------

<PAGE>

                   PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (unaudited)
                                   (continued)
                                                          For The Nine Months
                                                          Ended September 30,
                                                        1997             1996
                                                      -----------    -----------

SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
   Cash paid for interest:
      Related parties                               $   42,417      $     -
      Other                                            357,801          134,123
                                                      ------------   -----------
         Total                                      $  400,218      $   134,123
                                                    ==============   ===========
   Cash paid for income taxes                       $    -          $      -
                                                    ==============   -----------
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
   Long-term debt incurred for purchase of vehicles $    50,691     $      -
                                                    ===============  ===========
   Conversion of debentures, net of discount, into
         common stock                               $   605,437     $      -
                                                     ==============  ===========
   Acquisition of oil and gas properties for common
         stock                                      $   885,000     $      -
                                                     ==============  ===========
   Estimated fair value of warrants granted for debt
         issuance costs                             $      -        $   475,000
                                                     ==============  ===========
   Debt Issuance Costs associated with converted
           debentures                               $   181,470     $      -
                                                     ==============  ===========
   Oil and gas equipment transferred to inventory   $    19,276     $      -
                                                     ==============  ===========



                                       -6-

<PAGE>



                   PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               September 30, 1997

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 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 and  Subsidiaries  (the Company) for
the year ended December 31, 1996. 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 the Company are set forth in Note 1 to the
Company's  financial  statements in Form 10-KSB for the year ended  December 31,
1996. 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 - Preferred Stock:
Pursuant to the terms of the Articles of Incorporation,  on June 11, 1997 all of
the  outstanding  Preferred  Stock  automatically  converted  into the Company's
Common Stock and Common  Stock  Purchase  Warrants.  On June 11, 1997 there were
96,847 shares of Preferred Stock  outstanding that converted into 308,692 shares
of Common Stock and 308,692 Common Stock Purchase Warrants.  Accordingly,  as of
September 30, 1997 there are no shares of Preferred Stock issued or outstanding.

Note 3 - Stock-Based Compensation
The  Company has  entered  into  consulting  agreements  with a director  and an
unrelated  individual to assist the Company in its acquisition,  exploration and
exploitation  activities  in the Gulf  Coast  region of the United  States.  The
agreements  are in  effect  until May and  December  1998 and  provide  for cash
compensation,  reimbursement of expenses, and a fee of .5% of the direct cost of
consummated  acquisitions which are identified by the consultant.  Additionally,
the Company agreed to pay the  consultants'  fees equal to 2% and 5% of net cash
flow after payout from certain identified exploration and exploitation projects.

The  agreements  also provided that the  consultants  would receive  options and
warrants  for an  aggregate of 150,000  shares.  These  options and warrants are
exercisable  for five years at exercise  prices  ranging from $3.00 to $3.44 per
share.  The Company has  determined  the value of these  options using the Black
Scholes model and has recognized the fair value of approximately  $180,000 as an
exploration cost in the accompanying  statements of operations for the three and
nine months ended September 30, 1997.

The Company has also granted warrants for an additional 100,000 shares of common
stock to Beta Capital Group, Inc. These warrants are exercisable for a period of
five years at an exercise  price of $3.75 per share.  The Company has determined
the value of these options using the Black Scholes model and has  recognized the
fair value of approximately $60,000 as consulting expense in the

                                       -7-

<PAGE>



accompanying  statements  of  operations  for the  three and nine  months  ended
September 30, 1997. A shareholder of Beta is a member of the Company's  Board of
Directors.

Note 4 - Exploration Agreements:
During the quarter  ended  September  30, 1997,  the Company  entered into three
exploration  agreements with certain unrelated entities.  The Company acquired a
12.5%  interest in certain  seismic and lease options,  oil and gas leases,  and
seismic permits for an aggregate of approximately 130,000 gross acres located in
three counties in Texas.  At September 30, 1997,  the Company has  approximately
$1.6 million  included in  exploration in progress in the  accompanying  balance
sheet  representing funds advanced for its share of lease options and cash calls
on future  seismic  operations.  As the costs are  incurred,  the  Company  will
expense,  as  exploration  costs,  those  amounts  related  to  seismic or other
geological or  geophysical  costs.  Through  September 30, 1997, the Company had
incurred  approximately $158,000 for surveying and seismic costs which have been
charged to  exploration  costs.  Upon  evaluation  of the seismic  results,  the
Company is required  to pay its 12.5% share of the cost to exercise  the options
to enter into lease agreements for the properties.

Note 5 - Income Taxes:
The total  income tax expense or benefit  differs  from the amount that would be
provided by applying the  statutory  U.S.  Federal  income tax rate to income or
loss before taxes  primarily due to the  utilization of net operating loss carry
forwards, tax credit carry forwards, and percentage depletion carry forwards.

The income tax refund of $41,409  recorded in 1996 is related to a net operating
loss carry back.

Note 6 - Reclassifications:
Certain  reclassifications  have been made to the 1996  financial  statements to
conform to the presentation in 1997. The  reclassifications had no effect on the
1996 net loss.

Note 7 - Prior Period Adjustments:
The  carrying  amount  of  the  convertible  debentures,  debt  issuance  costs,
additional  paid-in capital,  the accumulated  deficit and interest expense have
been restated to change the valuation  assigned to the warrants  attached to the
convertible  debentures  issued in 1996.  The effect of the  adjustments  to the
September 30, 1997 financial statements is summarized as follows:
<TABLE>
<CAPTION>
                                                                               Net Loss Applicable to
                                                                               Common Stockholders
                                                                                Three           Nine
                                   Debt       Additional                        Months          Months
                   Convertible   Issuance      Paid-In      Accumulated         Ended           Ended
                   Debentures      Costs       Capital       Deficit           9/30/97         9/30/97
As
 previously
<S>                <C>           <C>         <C>            <C>             <C>             <C>
 reported .......  $ 4,065,000   $ 743,466   $ 30,404,822   $(11,877,196)   $ (1,053,153)   $ (2,292,543)
Prior period
 adjustments ....   (1,158,901)    (11,849)     1,410,379       (263,327)        (83,084)       (263,327)
                   -----------   ---------   ------------   ------------    ------------    ------------
As restated .....  $ 2,906,099   $ 731,617   $ 31,815,201   $(12,140,523)   $ (1,136,237)   $ (2,555,870)
                   ===========   =========   ============   ============    ============    ============
</TABLE>

The prior period  adjustments  had no effect on the September 30, 1996 financial
statements as previously reported.



                                       -8-

<PAGE>







ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS

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,  those regarding
the Company's  financial  position,  reserve  quantities and net present values,
business strategy,  plans and objectives of management of the Company for future
operations  and capital  expenditures,  and the future  results from oil and gas
drilling  operations,  are  forward-looking  statements and the assumptions upon
which such  forward-looking  statements are based are believed to be reasonable.
The Company can give no assurance that such  expectations  and assumptions  will
prove to have been  correct.  Reserve  estimates of oil and gas  properties  are
generally  different  from  the  quantities  of oil and  natural  gas  that  are
ultimately  recovered or found.  This is particularly true for estimates applied
to exploratory prospects.  Additionally, any statements contained in this report
regarding  forward-looking  statements  are subject to various known and unknown
risks, uncertainties and contingencies,  many of which are beyond the control of
the Company. Such things may cause actual results, performance,  achievements or
expectations to differ  materially from the  anticipated  results,  performance,
achievements  or  expectations.  Factors  that may affect  such  forward-looking
statements  include,  but are not limited to, the Company's  ability to generate
additional  capital,  risks inherent in oil and gas  acquisitions,  exploration,
drilling,   development  and  production,  price  volatility  of  oil  and  gas,
competition,   shortages  of  equipment,   services  and  supplies,   government
regulation,  environmental  matters,  financial condition of the other companies
participating  in the  exploration,  development  and  production of oil and gas
programs  and other  matters.  All written and oral  forward-looking  statements
attributable  to the Company or persons  acting on its behalf  subsequent to the
date  of  this  report  are  expressly  qualified  in  their  entirety  by  this
disclosure.

Liquidity and Capital Resources
At September 30, 1997, the Company's cash balance was $3,939,355 with a positive
working capital position of $3,957,864, compared to a cash balance of $1,995,860
and a positive  working capital position of $1,907,694 at December 31, 1996. The
change  in the  Company's  cash  balance  for the first  nine  months of 1997 is
summarized as follows:

 Cash Balance at December 31, 1996                                   $1,995,860
 Sources of Cash:
   Proceeds from the sale of common stock                             9,480,000
   Proceeds from the exercise of common stock options
       and warrants                                                   3,866,353
   Proceeds from the sale of property and equipment                      52,867
   Proceeds from the redemption of a certificate of deposit              17,500
                                                                     ----------
       Total Sources of Cash                                         15,412,580
 Uses of Cash:
   Acquisition of oil and gas interest in
       East Bayou Sorrel                                             (3,415,000)
   Exploration Activities                                            (5,464,200)
   Other Capital Expenditures                                          (686,926)
   Costs associated with the sale of common stock and
       exercise of common stock warrants                             (1,408,178)
   Payments on long term debt                                          (331,747)
   Cash used in operating activities                                   (167,174)
                                                                    ------------
      Total uses of cash                                            (11,473,225)
                                                                   -------------
 Cash balance at September 30, 1997                                  $3,939,355
                                                                     ==========

                                      -10-

<PAGE>



Although most of the  Company's  sources of cash during the first nine months of
1997 were derived from capital raising equity  transactions (which are discussed
more  thoroughly  later in this report under Item 2(c) in Part II below),  it is
important to note that a portion of the funds were used to acquire a significant
interest in the East Bayou Sorrel Field, located in Iberville Parish, Louisiana.
This field  includes two discovery  wells,  the Schwing #1 and #2 that accounted
for 26% of the Company's  oil and gas  production  (on a BOE basis),  31% of the
Company's oil and gas revenue,  and 54% of the Company's  operating  income from
oil and gas activities during the nine months of 1997. The operating  statistics
for these wells, along with all the other oil and gas properties, are more fully
illustrated  later in this report under the Results of Operations  section under
the caption "Oil and Gas". An additional  exploratory offset to the C.E. Schwing
#1 and #2, known as the C.E.  Schwing #3, is currently  being drilled to test an
additional fault block in this field. The proposed total depth of 13,500 feet is
expected to be reached by the end of November 1997.

The  Company's  primary  focus is to expand  its  operations  by  continuing  to
implement  an  aggressive  exploration  program  in the  Gulf  Coast  region  of
Louisiana,  Alabama and Texas.  As part of this plan,  on February 4, 1997,  the
Company signed a definitive agreement with National Energy Group, Inc. ("NEGX"),
a publicly held Company,  headquartered in Dallas, Texas. The agreement provides
the Company the right and  obligation to  participate  with NEGX in various Gulf
Coast  oil and gas  exploration  projects  over the  course  of next two  years.
Essentially,  the agreement consists of three main elements.  First, the Company
has the right and obligation to participate as a 12.5% working interest owner in
NEGX's  outlined  program which  consists of 10 identified  projects in Alabama,
Southern  Louisiana,  and Texas. The working  interest  percentage may vary on a
prospect by prospect  basis,  as  negotiated,  and has ranged from 10% to 20% to
date.  Second,  subject to certain  conditions  defined  in the  agreement,  the
Company  has the right and  obligation  to  participate  in any future  projects
generated under NEGX's exclusive  arrangement with Sandefer Oil and Gas Company,
Inc.  ("Sandefer").  Sandefer is a private  corporation  owned and operated by a
group  of  geologists  and  geophysicists  who  generate  Gulf  Coast,  Southern
Louisiana  and other  wildcat  prospects.  Third,  the  Company is  entitled  to
participate in any other third party generated  prospects that NEGX participates
in subject to certain conditions as defined in the agreement.

The agreement with NEGX specifies  that the Company's  minimum  obligation is at
least $5.0 million per year in dry hole, or drilling,  costs.  Additional  costs
will  be  incurred  for  completion  and  development  of  successful  projects.
Accordingly,  the  Company  anticipates  the  actual  obligation  will be higher
assuming  that a reasonable  amount of success is achieved  with the  underlying
prospects.  Through  September 30, 1997, the Company had incurred total costs of
approximately $3,861,000 in connection with this agreement.

In  addition  to  the  agreement  with  NEGX,  the  Company  is  pursuing  other
exploration  opportunities with various industry partners. For instance,  during
the third quarter of 1997,  the Company signed  various  exploration  agreements
regarding a joint venture with Parallel Petroleum  Corporation  ("Parallel"),  a
publicly held entity headquartered in Midland, Texas. The agreements contemplate
the Company  will own a 12.5%  working  interest in three  separate  3-D seismic
exploratory  projects covering 130,000 acres in and around Jackson County, Texas
within the Yegua/Frio/Wilcox geological trend. The Company decided to pursue the
joint  venture  with  Parallel  based on  Parallel's  history  of success in the
Yegua/Frio/Wilcox  Trend.  For  example,  between  October  1994 and April 1997,
utilizing 3-D seismic imaging and other new technologies,  Parallel participated
in drilling 54  exploratory  wells,  of which 43 have been  producers  -- an 80%
success rate.  Beginning with seismic operations which commenced in August 1997,
the projects  contemplated  in the agreements with Parallel will span the course
of the next two to three years. Contingent on the result of the seismic surveys,
up to 75 wells may be drilled. Total cash commitments associated with this joint
venture are  approximately  $2.5 million in 1997 for land and seismic  costs (of
which approximately $1.7 had

                                      -11-

<PAGE>



been incurred through September 30, 1997) and an additional $2.5 million to $7.5
million over the term of the projects for drilling costs that are subject to the
results of the seismic surveys.

If even a modest percentage of the contemplated exploratory prospects with NEGX,
Parallel and other industry  partners are  successful  and those  properties are
eventually  fully  developed,  the  net  reserves  of  recoverable  oil  and gas
attributable  to the  Company's  interest  would be several  times the Company's
present   reserves.   The  Company's   current  Rocky   Mountain   reserves  are
approximately  2 million  barrels of oil (or  equivalent).  With the addition of
East Bayou Sorrel and other  discoveries  in the Gulf Coast region,  the Company
believes its reserves  have at least  doubled in 1997.  This,  combined with the
agreements  with NEGX and  Parallel  provide  the  Company  with an  exploration
program that has the potential to significantly  increase its existing  reserves
and future cash flow.

The Company  expects to spend $3.0 to $6.0 million  during the remainder of 1997
for exploration and development activities including the anticipated exploration
costs  associated  with the  agreements  with NEGX and  Parallel.  The Company's
current and  anticipated  cash position will be insufficient to cover the future
working  capital and  exploration  obligations and the Company will need to seek
additional  financing.  The Company is exploring various alternatives and future
sources of capital may include additional debt or equity financings, the sale of
certain existing assets, or a combination thereof.

The Company is currently exploring the possibility of selling its Rocky Mountain
oil and gas assets -- including the gas plant,  oil and gas  properties  and the
service  and  supply  operations.  On a best  efforts  basis,  the  Company  has
contracted with a divestment  firm,  with offices in Houston,  Texas and Denver,
Colorado,  to prepare and distribute a divestment  package and solicit potential
offers.  The  divestment  packages will be  distributed  to potential  buyers in
November 1997.  However, it cannot be determined at this time whether or not any
acceptable  offer(s) to purchase the assets will be  received,  nor if any offer
would ultimately be accepted by the Company.

Capital Expenditures

During the first nine months of 1997 the Company paid  $9,566,126 for investment
in capital assets which is summarized as follows:
                                                     For the Nine Months Ending
                                                         September 30, 1997
Acquisitions of oil and gas interest
    in East Bayou Sorrel                                  $    3,415,000
Exploration Activities -
    Successful Efforts                                         1,313,677
    Exploratory Wells in Progress                              1,667,101
    Exploratory Dry Holes                                        841,259
    Lease Options and Cash Calls on Future
       Seismic Operations                                      1,642,163
                                                              -----------
        Total Exploration Activities                           5,464,200
Workovers or Recompletions of Rocky Mountain
   properties                                                    597,632
        Total Oil and Gas properties                           9,476,832
Service and Other Field Equipment                                 85,464
Office Equipment                                                   3,830
                                                             --------------
        Total Capital Expenditures                        $    9,566,126
                                                               ==========



                                      -12-

<PAGE>



The  acquisitions of the oil and gas interest in East Bayou Sorrel  consisted of
purchasing a 10% working interest,  an additional  7.8125% after prospect payout
working interest, and a .001% overriding royalty interest. NEGX, the operator of
the property,  is initiating a 50-square mile 3-D seismic  program  covering the
East Bayou Sorrel field and  surrounding  areas that began in November  1997 and
should ultimately  complement an already  extensive  database of reprocessed 2-D
seismic and a number of existing  well logs. It is  anticipated  that East Bayou
Sorrel and the surrounding area will ultimately become one of the Company's core
production areas.

EXPLORATION ACTIVITY:

As of the  date of this  report,  the  following  is a  summary  of  exploratory
prospects currently in process or which are expected to commence drilling in the
fourth quarter of 1997:

                       AMERADA HESS CORPORATION: OPERATOR

    Maurice Field Prospect
      Company's working interest 8.4375%
      Well name: Trahan #1, Lafayette, Louisiana
      Status: Completion of 16,300 ft. well underway.  Production test will be
              performed upon completion
      of pipeline.  Testing awaiting.

    Maurice Field Prospect
      Company's working interest 8.4375%
      Well name: S. Broussard, et al No.1 (offset to Trahan #1)
      Status: Depending on rig availability, drilling is expected to commence
              in December 1997.

                     NATIONAL ENERGY GROUP, INC. : OPERATOR

    Southeast Gueydan Prospect
      Company's working interest 9.375%
      Well name: Hardee #1, Vermillion Parish, Louisiana
      Status: Drilling at approximately 9,900 ft.; Proposed Target Depth 16,750
              ft. (Miogyp Test)

    East Bayou Sorrel Prospect
      Company's working interest 10% with additional 6.7% After Prospect Payout
      Well name: Schwing #3, Iberville Parish, Louisiana
      Status: Drilling at approximately 12,000 ft.; Proposed Target Depth 13,500
              ft. (Marg Vag and Cib
      Haz Test)

    Robertsdale Alabama Prospect
      Company's working interest 10%
      Well name: McDaniel 9-10 #1, Baldwin County, Alabama
      Status: Drilling at approximately 19,100 ft.; Proposed Target Depth
              20,000 ft.

    West Grand Bayou Prospect
      Company's working interest 9.375%
      Well name: Ramos #1, Assumption Parish, Louisiana
      Status: Original objective was dry.  Based on an evaluation of the dip log
              and re-evaluation of 2-D seismic data, the operator is considering
              an attempt at a secondary objective.



                                      -13-

<PAGE>



    South Tiger Bayou Prospect
      Company's working interest 9.375%
      Well name: NEG Donner #1, Terrebonne Parish, Louisiana
      Status: Depending on rig availability, drilling is expected to commence in
              late November 1997.

    Bayou Sorrel Area
      Project: 3-D Seismic Shoot covering 50 square miles
      Status: Survey and drilling shot holes during November 1997.

                    PARALLEL PETROLEUM CORPORATION: OPERATOR

    Southwest Segno Prospect, Liberty County, Texas
      Company's working interest 30%
      Well name: No. 1 Cain Well
      Status: Depending on rig availability, drilling is expected to commence in
              late December 1997.

    PARALLEL 3-D SEISMIC PROGRAM:

      Texana Prospect: 25,000 acres 12.5% working interest
      Status: Surveying is approximately 90% complete.  Shot hole drilling is
              approximately 40% complete.

      Ganado Prospect: 25,000 acres 12.5% working interest
      Status: Surveying is approximately 70% complete.  Ready to start shot hole
              drilling.

      Formosa Grande Prospect: 80,000 acres 12.5% working interest
      Status: Recording is approximately 21% complete.  Shot hole drilling is
              approximately 50% complete.

                      TRANSTEXAS GAS CORPORATION: OPERATOR

    Company has a 2.129% carried working interest in both wells

    Well name: Bennett #4, Brazoria, Texas
    Status: Drilling at approximately 9,400 ft.; Proposed Target Depth 13,000 ft

    Well name: Zinn Unit #1, Brazoria, Texas
    Status: Drilling at approximately 9,000 ft.; Proposed Target Depth 14,153 ft

RESULTS OF OPERATIONS

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

Total Revenue
Total Revenue from all operations was as follows:


                                      -14-

<PAGE>


<TABLE>
<CAPTION>

                                                         For the Three Months
                                                         Ended September 30,
                                                    1997                 1996
                                                ----------             ---------

<S>                                     <C>               <C>   <C>             <C>
Oil and gas sales ....................  $  868,749        70%   $  594,730      61%
Natural gas marketing and trading ....        --           --        --          --
Gas plant processing .................     153,848        13%      175,389      18%
Oil field services and supply ........     181,373        15%      163,477      17%
Well administration and other income .      28,666         2%       28,196       4%
                                        ----------   ----------   ----------   ---------
     Total revenue ...................  $1,232,636       100%   $  961,792     100%
                                        ==========   ==========   ==========   =========

                                                          For the Nine Months
                                                          Ended September 30,
                                                    1997                 1996
                                                ----------            ----------

Oil and gas sales ....................  $2,328,328        68%   $ 1,846,708      37%
Natural gas marketing and trading ....       --                   2,048,565      41%
Gas plant processing .................     525,704        15%       531,069      11%
Oil field services and supply ........     525,585        15%       469,612       9%
Well administration and other ........      67,570         2%        84,684       2%
                                        ----------   ----------  ----------   ----------
     Total revenue ...................  $3,447,187       100%   $ 4,980,638     100%
                                        ==========   ==========  ==========   ==========
</TABLE>

The decrease in total revenue for the first nine months of 1997 when compared to
the same period in 1996 is primarily a result of the expiration of the Company's
natural gas  marketing  and trading  contract  with  Public  Service  Company of
Colorado  effective July 1, 1996. As illustrated,  revenues  generated from that
contract were $2,048,565,  or 41% of the total revenue for the first nine months
of 1996. This  circumstance,  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:
<TABLE>
<CAPTION>

                                For the Three Months        For the Nine Months
                                 Ended September 30,        Ended September 30,
                                ---------------------       -------------------
                                 1997      1996             1997        1996
                               -------   --------          --------    -------
Production:
   Oil (Bbls)
<S>                             <C>       <C>                <C>       <C>
        Rocky Mtns .........    20,200    23,600             60,500    76,500
        Gulf Coast .........    15,500      --               31,200      --
                               -------   -------             -------   -------
             Combined Total     35,700    23,600             91,700    76,500
                               -------   =======             =======   =======
Gas (Mcf)
        Rocky Mtns .........   103,000    98,700            296,500   316,500
        Gulf Coast .........    41,000      --               57,900      --
                               -------   -------             -------   -------
              Combined Total   144,000    98,700            354,400   316,500
                               =======   =======             =======   =======
BOE (6:1)
        Rocky Mtns .........    37,400    40,000            109,900   129,300
        Gulf Coast .........    22,300      --               40,900      --
                               -------   -------             -------   -------
              Combined Total    59,700    40,000            150,800   129,300
                               =======   =======             =======   =======
</TABLE>


                                      -15-

<PAGE>



<TABLE>

Average Collected Price:
   Oil (per Bbl)
<S>                              <C>           <C>           <C>               <C>
        Rocky Mtns ...........   $   17.26     $   21.10     $          19.12  $      19.48
        Gulf Coast ...........   $   18.54     $    --       $          19.25  $        --
                                 ---------     ---------     -------------     -------------
              Combined Average   $   17.82     $   21.10     $          19.16  $      19.48
                                 =========     =========     =============     =============
Gas (per Mcf)
         Rocky Mtns ..........   $    1.17     $    0.98     $           1.39  $       1.12
         Gulf Coast ..........   $    2.72     $    --       $           2.75  $        --
                                 ---------     ---------     -------------     -------------
              Combined Average   $    1.61     $    0.98     $           1.61  $       1.12
                                 =========     =========     =============     =============
Per BOE (6:1)
         Rocky Mtns ..........   $   12.56     $   14.85     $          14.27  $      14.28
         Gulf Coast ..........   $   17.87     $    --       $          18.60  $        --
                                 ---------     ---------     -------------     -------------
              Combined Average   $   14.55     $   14.85     $          15.45  $      14.28
                                 =========     =========     =============     =============
Operating Margins:
   Rocky Mtns:
       Revenue ...............   $ 469,759     $ 594,730     $   1,567,999     $  1,846,708
       Costs .................    (389,814)     (308,959)       (1,113,176)        (956,822)
                                 ---------     ---------     -------------     -------------
         Operating Margin ....   $  79,945     $ 285,771     $     454,823     $    889,886
                                 =========     =========     =============     =============
   Operating Margin Percent ..          17%           48%               29%              48%
   Gulf Coast:
        Revenue ..............   $ 399,000     $    --       $     760,329     $        --
        Costs ................     (17,224          --             (31,965)             --
                                 ---------     ---------     -------------     -------------
          Operating Margin ...   $ 381,776     $    --       $     728,364     $        --
                                 =========     =========     =============     =============
   Operating Margin Percent ..          96%         --                  96%             --
Combined Totals:
       Revenue ...............   $ 868,749     $ 594,730     $   2,328,328     $  1,846,708
       Costs .................    (407,038)    $(308,959)       (1,145,141)    $   (956,822)
                                 ---------     ---------     -------------     -------------
         Operating Margin ....   $ 461,720     $ 285,771     $   1,183,187     $    889,886
                                 =========     =========     =============     =============
   Operating Margin Percent ..          53%           48%               51%              48%
Production Costs per
BOE before DD&A:
          Rocky Mtn Region ...   $   10.43     $    7.60     $       10.13     $       7.36
          Gulf Coast Region ..   $    0.77     $    --       $        0.78     $        --
                                 ---------     ---------     -------------     -------------
              Combined Average   $    6.82     $    7.60     $        7.60     $       7.36
                                 =========     =========     =============     =============
Change in Revenue
Attributable to:
    Production ...............   $ 300,752                   $     338,547
    Price ....................     (26,733)                        143,073
                               -------------                 -------------
  Total Increase in Revenue ..   $ 274,019                   $     481,620
                               =============                 =============
</TABLE>

Most of the decrease in oil and gas production for the Rocky Mountain region can
be attributed to the following: 1) the sale of several marginal,  uneconomic, or
nonstrategic  oil and gas  properties in the second  quarter 1996 that accounted
for  3,900  bbls.  of oil and 4,500  Mcf of gas in the  prior  year;  and 2) the
natural decline in production that is inherent in oil and gas wells.  Both these
circumstances  were largely  offset by an increase in  commodity  prices and new
production from the Gulf Coast Region.

The operating costs of the Rocky Mountain properties  increased  considerably in
1997 (both as a  percentage  of revenue  and per BOE) when  compared to the same
periods in 1996, primarily as a result of an extensive amount of maintenance and
stimulation  procedures  that were  needed to maintain  production.  Most of the
wells in the Rocky Mountain region are between 10 and 30 years

                                      -16-

<PAGE>



old and the Company  expects to incur  higher  costs from time to time since the
equipment  is aging and the  reservoirs  are on the latter  part of the  decline
curve.  Although the Company does not expect future costs of the Rocky  Mountain
properties to increase,  and anticipates  that they may even be lower, it cannot
be determined  when, if, or how much the costs of the Rocky Mountain  properties
will be in the future based on the age of the wells and corresponding equipment.

Natural Gas Marketing and Trading
The Company had a "take-or-pay" contract with Public Service Company of Colorado
("PSCo")  which  called for PSCo to purchase  from the Company a minimum of 2.92
billion cubic feet ("BCF") of natural gas  annually.  The price paid the Company
by PSCo was based on the Colorado Interstate Gas Commission's "spot" price, plus
a fixed price bonus. The natural gas marketing and trading activities  represent
natural  gas that was  purchased  from third  parties and sold to PSCo under the
terms of the  contract.  The  contract  with  PSCo  expired  on June  30,  1996.
Historically,  the price paid by PSCo under that contract was at a premium above
the market and therefore allowed for the marketing and trading activities.  With
the  increasing  competition  fostering  within  all phases of the  natural  gas
industry,  it is unlikely  that the Company  will be able to  negotiate  another
contract  that pays at an above  market  premium.  Accordingly,  the  Company is
unlikely to resume marketing and trading  activities.  The operating results for
this  operation  for the first nine  months of 1996 and 1997 are as follows  (no
information  is shown for the  quarters  ending  September 30 since the contract
expired on June 30, 1996):
                                             For the Nine Months
                                             Ended September 30
                                       1997                       1996
                                 ----------------           -------------

Total Volume Sold (Mcf)                 -                     1,223,855
Average Price                           -                          1.67
                                 ----------------           -------------
      Total Revenue                     -                 $   2,048,565
Costs                                   -                    (1,745,446)
                                 ----------------           -------------
      Gross Margin                      -                 $     303,119
                                 ================           =============
      Gross Margin Percent                                           15%

Since the gross margin  represents  the net cash flow and income  generated from
this  activity,  the loss of this  premium  contract  price  has and will have a
material and negative impact on the Company's current and future operations.

Gas Plant Processing Revenues
This category accounts for the natural gas processed and the natural gas liquids
extracted  and sold by the Gas  Plant  facility.  Operating  statistics  for the
periods presented are as follows:

                                                        For the Three Months
                                                        Ended September 30,
                                                    1997                1996
                                                -------------       ------------
                                                   Volumes             Volumes
Production:
    Natural Gas Processed (Mcf)                     86,000              89,200
                                                =============       ============
    Liquids Produced :
            B-G Mix (gallons)                      192,100             224,000
            Propane (gallons                       163,600             166,600
                                                -------------       ------------
                  Total                            355,700             390,600
                                                =============       ============
Average Sales Price of Liquids (per gallon)     $     0.40         $      0.40



                                      -17-

<PAGE>



    Gross Margin:                               Amount                 Amount
                                          ----------------         ------------
             Revenue                        $   153,848           $    175,389
             Costs                              (79,346)              (108,618)
                                          -----------------        ------------
                   Gross Margin             $    74,502           $     66,771
                                          =================        ============
                      Gross Margin Percent           48%                    38%

                                                     For the Nine Months
                                                     Ended September 30,
                                                 1997                   1996
                                          -----------------        ------------
                                               Volumes                Volumes
Production:
    Natural Gas Processed (Mcf)                 250,200                 274,700
                                          ==================      =============
    Liquids Produced:
            B-G Mix (gallons)                   588,300                 685,300
            Propane (gallons)                   485,000                 515,700
                                          -------------------     -------------
                  Total                       1,073,300               1,201,000
                                           ==================     =============
Average Sales Price of Liquids (per gallon) $      0.41           $        0.45

    Gross Margin:                              Amount                  Amount
                                            ----------------       ------------
             Revenue                        $   525,704           $     531,069
             Costs                             (283,645)               (360,626)
                                            ----------------       ------------
                   Gross Margin             $   242,059           $     170,443
                                            ================       ============
                      Gross Margin Percent           46%                    32%

The  decrease  in natural  gas  processing  volumes  (per Mcf)  during 1997 when
compared to the same periods in 1996,  can be  substantially  attributed  to the
normal  decline in  production  from the two fields  owned and  operated  by the
Company that supply the gas plant with the natural gas. The change in revenue in
1997 when  compared to the same period in 1996 is a direct  result of the volume
of natural gas processed and the corresponding changes in liquid prices.

Costs  associated with the Gas Plant  operations  consist of both semi-fixed and
variable  costs.  The  semi-fixed  costs consist of direct  payroll,  utilities,
operating supplies,  general and administrative costs, and other items necessary
in the day-to-day  operations.  The semi-fixed  costs are not expected to change
significantly  regardless of the volume processed by the Gas Plant. The variable
costs consist  primarily of purchased  gas,  plant fuel and shrink,  lubricants,
repair and maintenance,  and costs of gas marketing and buying.  These costs are
generally  a direct  function of the volume  processed  by the Gas Plant and are
expected to either increase or decrease  proportionately  with the corresponding
plant production. The costs associated with the gas plant decreased in 1997 when
compared to the same periods in 1996  primarily  because of  reductions in plant
personnel and because less gas was processed.

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


                                      -18-

<PAGE>



                                            For the Three Months
                                             Ended September 30,
                                            1997                1996
                                         ------------       --------
Revenue                                  $ 181,373      $    163,477
Costs                                     (176,090)         (175,748)
                                         ----------       ------------
Net Operating Income                     $   5,283      $    (12,271)
                                         ===========     =============
Net Operating Margin Percent                    11%              (8%)

                                             For the Nine Months
                                             Ended September 30,
                                            1997               1996
                                         -----------        --------
Revenue                                  $ 525,585      $   469,612
Costs                                     (469,223)        (416,425)
                                         -----------     -----------
Net Operating Income                     $  56,362      $    53,187
                                         ===========    ============
Net Operating Margin Percent                   11%              11%

As expected,  there has been no material change in the results of operations for
the periods presented and the Company does not expect any significant changes in
the future.

Well Administration and Other Income
This  revenue  primarily  represents  the revenue  generated  by the Company for
operating oil and gas  properties.  There has been no significant  change in the
average  monthly  revenue  between 1997 and 1996 and the Company does not expect
any significant change in the future.

General and Administrative
General and  administrative  ("G&A") expenses  increased  approximately  $80,000
during the third  quarter of 1997 and  approximately  $298,000  during the first
nine months of 1997 when compared to the same periods in 1996. The increases for
the first nine months of 1997 are summarized below:

 $  110,000 -    For consulting services (geological, geophysical, legal,
                 accounting, land and other)associated with the Company's
                 expansion into the Gulf Coast.
     56,000 -    Travel and entertainment costs associated with the Company's
                 expansion into the Gulf Coast.
     47,000 -    Payroll costs associated with an increase in base pay and
                 insurance benefits for virtually all the Company's officers and
                 employees.
     36,000 -    Recovery of Bad Debt in 1996 (this reduced G&A expense in 1996
                 - no such amounts were recovered in 1997)
     25,000 -    A Directors and Officers Liability Insurance Policy purchased
                 on July 1, 1996.
     19,000 -    Directors compensation
      5,000 -    All other, net.
$   298,000

The Company  expects future G&A costs to be at least at those levels incurred in
the third quarter of 1997, or approximately $120,000 to $130,000 per month.

Consulting Agreement - Related Party
In March 1996 the Company  entered into a three-year  consulting  agreement with
Beta Capital Group, Inc. ("Beta").  Beta, located in Newport Beach,  California,
specializes  in emerging  companies  with both capital needs and market  support
requirements. Beta's president, Steve Antry, has been a

                                      -19-

<PAGE>



director of the Company since August 1996.  The  consulting  agreement with Beta
provides for minimum  monthly cash  payments of $17,500 plus  reimbursement  for
out-of-pocket expenses.

During  1997,  the Company has also  granted  Beta  warrants  for an  additional
100,000 shares of common stock.  These warrants are  exercisable for a period of
five years at an exercise  price of $3.75 per share.  The Company has determined
the value of these options using the Black Scholes model and has  recognized the
fair value of  approximately  $60,000 as consulting  expense in the accompanying
statements of operations for the three and nine months ended September 30, 1997.
A shareholder of Beta is a member of the Company's Board of Directors.

Depreciation, Depletion and Amortization
Depreciation,  Depletion and  Amortization  ("DD&A") for the periods  presented,
excluding the amortization of debt issuance costs, consisted of the following:

                                           For the Three Months
                                             Ended September 30,
                                          1997                   1996
                                   --------------         ----------------

Oil and Gas Properties               $   221,414           $    143,691
Gas Plant and Other Buildings             60,932                 60,938
Rolling Stock                             24,728                 25,000
Other Field Equipment                      9,615                  8,671
Furniture and Fixtures                    12,526                  9,465
Non-Compete Agreement                     11,499                 11,499
                                      ----------              ----------
        Total                        $   340,714           $    259,264
                                       =========               =========

                                             For the Nine Months
                                             Ended September 30,
                                          1997                    1996
                                  ---------------         ----------------

Oil and Gas Properties               $   545,018           $    458,060
Gas Plant and Other Buildings            182,790                183,878
Rolling Stock                             75,619                 73,618
Other Field Equipment                     28,749                 24,553
Furniture and Fixtures                    37,280                 32,977
Non-Compete Agreement                     34,497                 34,497
                                       ----------              ---------
        Total                        $   903,953           $    807,583
                                       =========               =========

The increase in DD&A for the periods  presented is primarily  related to the oil
and  gas  properties  which  is a  result  of  increased  production.  Based  on
production, DD&A for the oil and gas properties has remained relatively constant
ranging from $3.54 to $3.71 per BOE during the periods presented.



                                      -20-

<PAGE>



Interest
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,
                                        1997         1996        1997         1996
                                     ----------   ----------   ---------   ----------

<S>                                   <C>          <C>         <C>          <C>
Interest paid or accrued ..........   $ 105,296    $  76,775   $ 346,740    $ 186,944
Amortization of debt issuance costs      53,337       60,353     444,265       79,439
                                      ---------    ---------   ---------    ---------
Total interest incurred ...........     158,633      137,128     791,005      266,383
Interest capitalized ..............    (121,403)        --      (121,403)        --
                                      ---------    ---------   ---------    ---------
Interest expense ..................   $  37,230    $ 137,128   $ 669,602    $ 266,383
                                      =========    =========   =========    =========
</TABLE>

The higher  interest  incurred  in 1997 is  reflective  of the  increase  in the
average  long-term debt  outstanding,  and the amortization of the corresponding
debt  issuance  costs and  discount.  All of these  circumstances  are  directly
related to the convertible  debentures sold by the Company pursuant to a private
placement of convertible debentures completed in November 1996.


                                      -21-

<PAGE>



PART II - OTHER INFORMATION

Item 1. Legal Proceedings

The  Company  may from time to time be  involved  in various  claims,  lawsuits,
disputes with third parties, actions involving allegations of discrimination, or
breach of contract  incidental to the operation of its business.  The Company is
not currently involved in any such incidental litigation which it believes could
have a  materially  adverse  effect on its  financial  condition  or  results of
operations.

Item 2. Changes in Securities

(a)  Effective  June 11, 1997, in  accordance  with  provisions of the Company's
Articles of  Incorporation,  all outstanding $0.01 par value Series A Cumulative
Convertible  Preferred Stock were automatically  converted into Common Stock and
Common Stock Purchase  Warrants.  Other than the  foregoing,  there have been no
modifications to any instruments defining the rights of the holders of any class
of registered securities during the period covered by this report.

(b) No  rights  evidenced  by any  class  of  registered  securities  have  been
materially  limited or qualified by the  issuance or  modification  of any other
class of securities.

(c) Recent sales of  unregistered  securities.  The Company  issued and sold the
following  securities without  registration under the Securities Act of 1933, as
amended ("Securities Act"), during the nine months ended September 30, 1997.

1.  Effective  January 10, 1997 the Company  issued 315,000 shares of its common
stock to three unrelated  entities,  Atocha  Exploration,  Inc., Potosky Oil and
Gas, Inc., and Browning Oil Company, Inc., in exchange for an undivided interest
in a producing oil and gas prospect designated as the East Bayou Sorrel Prospect
in Iberville Parish, Louisiana.

2. On January 31, 1997 the Company  issued  250,000  shares of its common  stock
upon exercise of  outstanding  purchase  warrants of $1.25 per share for a total
proceeds of  $312,500.  The holders of the warrants  received  them as part of a
"unit" sold in a private  placement  in 1995 that  consisted of common stock and
warrants.  The Company  relied upon Section 4(2) of the  Securities Act and Rule
506 of Regulation D in claiming exemption from registration  requirements of the
Securities  Act for  securities  sold.  The shares of common  stock  issued upon
exercise  of  the  warrants  were  registered  for  resale  by  the  holders  in
Registration No. 33-94536.

3. Between  February 1, 1997 and March 10, 1997,  the Company  issued  1,500,000
shares of its common stock for  $3,750,000 to a group of private  investors each
of whom  qualified  as an  accredited  investor  as  such  term  is  defined  in
Regulation D adopted by the Securities and Exchange Commission. The Company paid
a selling  commission of $300,000.  The Company  relied upon Section 4(2) of the
Securities  Act and Rule 506 of  Regulation  D in  claiming  exemption  from the
registration requirements of the Securities Act for the securities sold.


                                      -22-

<PAGE>



4. Between March 14, 1997 and April 15, 1997,  the Company sold 52,000 shares of
its  common  stock for  $130,000  to a group of private  investors  each of whom
qualified  as an  accredited  investor as such term is defined in  Regulation  D
adopted by the  Securities and Exchange  Commission.  The Company paid a selling
commission of $10,400.  The Company  relied upon Section 4(2) of the  Securities
Act and Rule 506 of  Regulation D in claiming  exemption  from the  registration
requirements of the Securities Act for the securities sold.

5. Through  September 30, 1997 holders of $935,000 of the Company's  outstanding
collateralized   convertible  10%  debentures  ("Debentures")  surrendered  such
Debentures to the Company for  conversion  into 311,665  shares of the Company's
common stock in accordance  with conversion  provisions of the  Debentures.  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 and "stop transfer"  instructions
have been issued to the transfer  agent.  The shares of common stock issued upon
conversion have been  registered for resale by the holders on  Registration  No.
333-19589.  The Company  relied upon  Section  3(a)9 of the  Securities  Act for
issuance of the securities.

6. On February 14, 1997,  the Company issued 4,000 shares of its common stock to
two consultants of the Company in lieu of cash for consulting  services rendered
to  the  Company  valued  at  $8,000  for  financial  reporting  purposes.   The
Certificates   representing   the  shares  issued  bear  a  restrictive   legend
prohibiting  transfer  without  registration  under  the  Securities  Act or the
availability of an exemption from registration and "stop transfer"  instructions
have been issued to the transfer agent.

7. Between March 1, 1997 and April 15, 1997 the Company issued  2,482,500 shares
of its common  stock upon  exercise  of a like  number of  warrants at $1.25 per
warrant for a total  proceeds of $3,103,125.  Holders of such warrants  acquired
the warrants in the Company's 1996 private placement of Debentures and Warrants.
The warrants would have expired if not  previously  exercised on April 15, 1997.
The Certificates representing the shares issued upon exercise bear a restrictive
legend prohibiting transfer without registration under the Securities Act or the
availability of an exemption from registration and "stop transfer"  instructions
have been issued to the  transfer  agent.  The shares  issued  upon  exercise of
warrants  were   registered  by  the  Company  for  resale  by  the  holders  in
Registration No. 333-19589.  The Company relied upon Rule 506 of Regulation D in
claiming  exemption for the registration  requirements of the Securities Act for
issuance of the securities upon exercise of the warrants.

8. Between March 1, 1997 and June 3, 1997,  the Company issued 135,000 shares of
its common stock upon exercise of outstanding  stock purchase  warrants at $0.75
per share for total  proceeds  of  $101,250  to the  Company.  The  Certificates
representing  the  shares  issued  upon  exercise  bear  a  restrictive   legend
prohibiting  transfer  without  registration  under  the  Securities  Act or the
availability of an exemption from registration and "stop transfer"  instructions
have been  issued to the  transfer  agent.  The  holder  of the  warrants  is an
affiliate of Beta  Capital  Group,  Inc.  with whom the Company has a consulting
agreement and to whom the warrants were issued in February  1996.  The shares of
common stock issued upon exercise of the warrants were  registered for resale by
the holder in Registration No. 333-19589.

                                      -23-

<PAGE>



9.  Between  June 23, 1997 and  September  30, 1997 the Company  issued  116,250
shares of its common stock upon exercise of outstanding  stock purchase warrants
at $0.75 per share for total  proceeds of $87,188 to the  Company.  The warrants
were originally  issued to Beta Capital Group,  Inc. with whom the Company has a
consulting  agreement  and to whom the  warrants  were issued in February  1996.
Subsequent to their issuance,  Beta  re-assigned the warrants to another holder.
The Certificates representing the shares issued upon exercise bear a restrictive
legend prohibiting transfer without registration under the Securities Act or the
availability of an exemption from registration and "stop transfer"  instructions
have been issued to the transfer  agent.  The shares of common stock issued upon
exercise  of  the  warrants  were   registered  for  resale  by  the  holder  in
Registration No. 333-19589.

10.  Between  January 1997 and September 29, 1997,  the Company  issued  138,850
shares of its common stock upon exercise of outstanding  stock purchase warrants
issued  by the  Company  between  1994 and  1996 to  certain  broker/dealers  in
connection with private  placements of Company  securities during such time. The
Company  received  $216,900  of proceeds  upon  exercise  of the  warrants.  The
Certificates  representing  the shares  issued upon  exercise bear a restrictive
legend prohibiting transfer without registration under the Securities Act or the
availability of an exemption from registration and "stop transfer"  instructions
have been issued to the transfer  agent.  The shares of common stock issued upon
exercise  were  registered  by the  Company  for  resale  by the  holders  under
Registration Nos. 333-19589 and 33-94536.

11. On June 25,  1997 the Company  issued 670 shares of its common  stock to one
retiring  director in lieu of cash for services to the Company  valued at $2,155
for financial  reporting  purposes.  The  Certificates  representing  the shares
issued bear a restrictive legend prohibiting transfer without registration under
the Securities Act or the  availability  of an exemption from  registration  and
"stop transfer" instructions have been issued to the transfer agent.

12. On July 14, 1997 the Company  issued 3,150 shares of its common stock to one
director in exchange for an overriding royalty interest in the producing oil and
gas prospect  designated as the East Bayou Sorrel  Prospect,  Iberville  Parish,
Louisiana.  The shares were valued at $10,000 for financial  reporting purposes.
The  Certificates  representing  the shares  issued  bear a  restrictive  legend
prohibiting  transfer  without  registration  under  the  Securities  Act or the
availability of an exemption from registration and "stop transfer"  instructions
have been issued to the transfer agent.

13. On July 18, 1997,  the Company issued  2,240,000  shares of its common stock
for  $5,600,000  to a group of private  investors  each of whom  qualified as an
accredited  investor  as such term is  defined  in  Regulation  D adopted by the
Securities and Exchange  Commission.  The principal  underwriter was San Jacinto
Securities,  inc.  and the Company  paid selling  commissions  of $560,000.  The
Company  relied  upon  Section  4(2)  of the  Securities  Act  and  Rule  506 of
Regulation D in claiming  exemption from the  registration  requirements  of the
Securities Act for the securities sold. The Certificates representing the shares
issued a restrictive legend prohibiting  transfer without registration under the
Securities Act or the  availability of an exemption from  registration and "stop
transfer" instructions have been issued to the transfer agent.


                                      -24-

<PAGE>



14.  Between  August 29, 1997 and  September 9, 1997 the Company  issued  42,675
shares of common  stock to two former  directors  upon  exercise of  outstanding
options. The Company received $45,390 of proceeds upon exercise of the warrants.
The Certificates representing the shares issued a restrictive legend prohibiting
transfer without registration under the Securities Act or the availability of an
exemption from registration and "stop transfer" instructions have been issued to
the transfer agent.

The  Company  relied  on  section  4(2) of The  Securities  Act in  issuing  the
securities described in paragraphs 1, 6, 8, 12 and 14 without registration. Each
of the persons who acquired the securities had full  information  concerning the
business  of  the  officers  of  the  Company,   certificates  representing  the
securities bear a restrictive  legend as described above and the securities were
acquired for investment.

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) In December 1994, the Board of Directors elected to forgo the declaration of
the regular quarterly dividend for the Company's Series A Cumulative Convertible
Preferred  Stock for the fourth  quarter of 1994.  In March  1995,  the Board of
Directors  elected to suspend the Preferred  Stock  dividend  indefinitely.  The
dividends  continued to accrue on a monthly basis and were cumulative.  Pursuant
to the  terms  of the  Articles  of  Incorporation,  on June  11,  1997  all the
outstanding  Preferred Stock (96,847 shares on that date) plus all the dividends
in arrears,  automatically converted into Common Stock and Common Stock Purchase
Warrants at a ratio of 3.1875 to 1. Accordingly, as of September 30, 1997, there
were no shares of Preferred Stock outstanding and no dividends in arrears.

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

In connection with the automatic conversion of all of the Company's  outstanding
Preferred Stock into Common Stock and Common Stock Purchase Warrants on June 11,
1997,  the terms of office of two  directors  who were elected to represent  the
Preferred  Stockholders,  Mr.  LeRoy Smith and Mr.  Steve  Antry,  automatically
terminated  and they  were no  longer  directors  pursuant  to the  terms of the
Articles of Incorporation.  In July 1997, Mr. Antry was elected as a director to
fill one of the vacancies to serve in that capacity  until the Annual Meeting of
Stockholders in 1998.

On October 1, 1997, Mr. Richard A. Houlihan resigned his position as a director.
Mr.  Houlihan  tendered  his  resignation  to pursue other  interests  and allow
someone more active with the Company to be added on the Board of Directors.  The
Board  appointed  Mr.  Stephen L.  Fischer to fill the vacancy.  Mr.  Fischer is
associated  with Beta Capital Group,  Inc. as an independent  contractor and has
been active in the Company's marketing efforts since March 1996.



                                      -25-

<PAGE>



On November 7, 1997,  Mr. J. N. "Newt"  Burkhalter  resigned  his  position as a
director. Mr. Burkhalter is currently the Company's Vice President of Production
and Engineering.  However,  Mr. Burkhalter  intends to retire from this position
sometime  in the near  future  and work for the  Company  from time to time as a
consultant,  on an as needed basis.  Since Mr.  Burkhalter  intends to serve the
Company as a consultant in the future, he tendered his resignation as a director
to establish independence between himself and the Company. The Company's current
Board,  as  established  by Board  Resolution  in  accordance  with the By-Laws,
consists of ten (10) seats. Mr.  Burkhalter's  resignation  created a vacancy on
the Board,  with a term expiring at the Annual Meeting of  Stockholders in 2000.
The Company  will either  appoint a qualified  candidate to fill this vacancy in
the near future or reduce the number of directors to nine (9).

Item 6. Exhibits and Reports on Form 8-K

    (a)        The following exhibits are filed with this report:
               (1)  Exhibit 27, "Financial Data Schedule".

    (b)  There  were no  reports  on Form 8-K filed  during  the  quarter  ended
September 30, 1997.




                                      -26-

<PAGE>


                                   SIGNATURES

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

                            PEASE OIL AND GAS COMPANY



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



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


                                      -27-