SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                  FORM 10-QSB/A
     |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934
                       FOR THE QUARTER ENDED JUNE 30, 1997
                                       or
        |_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                          Commission File Number 0-6580

                            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 81506
                       Grand Junction, Colorado (Zip code)
                    (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 August 6,1997 the issuer had 15,437,717
                   shares of its $0.10 par value Common Stock
                             issued and outstanding.

       Transitional Small Business Issuer Disclosure Format Yes ____ No X



<PAGE>



                               TABLE OF CONTENTS
                                                                       PAGE
                                                                      NUMBER


PART I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets. . . . . . . . . . . . . .. . . . . . . . . 3-4
June 30, 1997 (unaudited)
and December 31, 1996
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . 5
For the Three Months Ended June 30, 1997
(unaudited) and 1996 (unaudited)
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . 6
For the Six Months Ended June 30, 1997
(unaudited) and 1996 (unaudited)
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . 7-8
For the Six Months Ended June 30, 1997
(unaudited) and 1996 (unaudited)
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . 9-10
Item 2. Management's Discussion and Analysis . . . . . . . . . . . . . . 11
Disclosure Regarding Forward-Looking Statements . . . .  . . . . . . . . 11
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . .11
Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Drilling Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
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 Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Part II - Other Information . . . . . . . . . . . . . . . . . . . . . .  23
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . .  23
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . .  23
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . .  26
Item 4. Submission of Matters to a Vote of Security Holders . . . . . .  26
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . .27
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 27
Part III - Signatures . . . . . . . . . . . . . . . . . . . . . . . . . .28




                                       -2-

<PAGE>



                         PART 1 - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                   PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

                                                  June 30,          December 31,
                                                   1997                 1996
                                               ----------------   ------------
                                                (unaudited)
CURRENT ASSETS:
   Cash and equivalents                       $   3,529,578       $ 1,995,860
   Trade receivables                                486,269           599,648
   Inventory                                        434,702           408,787
   Prepaid expenses and other                        71,712            56,327
                                                ---------------   -------------
        Total current assets                      4,522,261         3,060,622
                                                 -------------    -------------
OIL AND GAS PROPERTIES, at cost
(successful efforts method):
   Exploratory wells in progress                    433,402           181,312
   Undeveloped properties                         2,116,731           351,727
   Developed properties                          13,112,633         9,505,408
                                                 ------------     -------------
        Total oil and gas properties             15,662,766        10,038,447
   Less accumulated depreciation, and depletion  (4,241,417)       (3,946,974)
                                                --------------   --------------
        Net oil and gas properties               11,421,349         6,091,473
                                                 ------------     -------------
PROPERTY, PLANT AND EQUIPMENT, at cost:
   Gas plant                                      4,099,285         4,099,285
   Service equipment and vehicles                   891,785           879,313
   Land, buildings and office equipment             462,212           459,228
                                               --------------    --------------
       Total property, plant and equipment        5,453,282         5,437,826
   Less accumulated depreciation                 (1,561,556)       (1,376,154)
                                                -------------    --------------
       Net property, plant and equipment          3,891,726         4,061,672
                                                -------------     -------------
 OTHER ASSETS:
   Deferred debt issuance costs (Note 6)            806,053         1,093,479
   Non-compete agreements                           283,680           306,678
   Other                                            272,493           274,830
                                               --------------    --------------
          Total other assets                      1,362,226         1,674,987
                                               -------------      -------------
TOTAL ASSETS                               $     21,197,562     $  14,888,754
                                               =============       ============









                                       -3-

<PAGE>



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

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

CURRENT LIABILITIES:
   Current maturities of long-term debt:
      Related parties                           $      -         $     285,895
      Other                                            27,578           45,944
   Accounts Payable, Exploratory Wells                418,820             -
   Accounts payable, trade                            205,412          267,540
   Accrued production taxes                           252,910          288,122
   Other accrued expenses                             246,581          265,427
                                               --------------    --------------
         Total current liabilities                  1,151,301        1,152,928
                                                -------------     -------------
LONG-TERM LIABILITIES:
   Long-term debt, less current maturities:
      Convertible Debentures, net of discount of
           $1,276,808 and $1,732,170, respectively
           (Note 6)                                 2,903,192        3,267,830
      Other                                            29,967           19,945
   Accrued production taxes                           179,460          256,088
                                               --------------    -------------
        Total long-term liabilities                 3,112,619        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, 13,161,077 and
   7,526,817 shares issued and outstanding,
   respectively.                                    1,316,108          752,682
Additional paid-in capital (Note 6)                26,621,820       19,112,104
Accumulated deficit (Note 6)                      (11,004,286)      (9,674,622)
                                                 -------------    --------------
         Total stockholders' equity                16,933,642       10,191,963
                                                 -------------     ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY                                       $     21,197,562    $  14,888,754
                                                 =============     ============



                                       -4-

<PAGE>



                   PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (unaudited)
                                                    For The Three Months
                                                       Ended June 30,
                                                   1997                 1996
                                              ---------------    -------------

REVENUE:
   Oil and gas sales                          $    670,373       $    638,879
   Natural gas marketing and trading                  -               702,610
   Gas plant processing                            162,346            167,837
   Oil field services and supply                   145,893            104,533
   Well administration and other income             17,099             25,739
                                               ---------------  ---------------
        Total revenue                              995,711          1,639,598
                                                --------------    -------------
OPERATING COSTS AND EXPENSES:
   Oil and gas production                          410,304            353,947
   Exploration costs                                58,436                -
   Natural gas marketing and trading                  -               614,783
   Gas plant processing                             99,461            126,767
   Oil field services and supply                   139,475             93,402
   General and administrative                      380,730            262,504
   Consulting agreement-related party               97,795             64,778
   Depreciation, depletion and amortization        302,009            274,171
                                               --------------   --------------
            Total operating costs and expenses   1,488,210          1,790,352
                                                -------------    -------------
INCOME (LOSS) FROM OPERATIONS                     (492,499)          (150,754)
OTHER INCOME (EXPENSES):
   Interest income                                  45,054              7,676
   Interest expense:
      Amortization of debt issuance costs and
             discount (Note 6)                    (147,717)           (19,086)
      Interest paid or accrued                    (115,555)           (52,050)
   Gain (Loss) on sale of assets                    (8,547)            18,188
                                              ----------------- ---------------
        Total other expenses, net                 (226,765)           (45,272)
                                               --------------- ----------------
INCOME (LOSS) BEFORE INCOME TAXES                 (719,264)          (196,026)
INCOME TAXES                                          -                -
                                             -----------------  ---------------
NET INCOME (LOSS)                                 (719,264)          (196,026)
PREFERRED STOCK DIVIDENDS:
   In arrears                                         -               (50,672)
   Converted into common stock                     (44,984)            -
                                              ----------------   --------------
         Total preferred stock dividends           (44,984)           (50,672)
                                              ----------------   --------------
NET INCOME (LOSS) APPLICABLE TO
COMMON STOCKHOLDERS                         $     (764,248)     $    (246,698)
                                               ===============  ===============
NET INCOME (LOSS) PER COMMON SHARE
     As previously reported                 $        (0.05)     $       (0.03)
     Effect of prior period adjustment (Note 6)      (0.01)                -
                                             -----------------  ---------------
     As restated                            $        (0.06)     $       (0.03)
                                            ==================  ===============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING                              12,622,000           7,262,000
                                                ==========           =========


                                       -5-

<PAGE>



                   PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (unaudited)
                                                         For The Six Months
                                                           Ended June 30,
                                                     1997              1996
                                              -----------------   -------------

REVENUE:
   Oil and gas sales                          $   1,459,579           1,251,978
   Natural gas marketing and trading                  -               2,048,565
   Gas plant processing                            371,856              355,680
   Oil field services and supply                   344,212              306,135
   Well administration and other income             38,904               56,488
                                             -------------       --------------
        Total revenue                            2,214,551            4,018,846
                                             -------------        -------------
OPERATING COSTS AND EXPENSES:
   Oil and gas production                          738,103              647,863
   Exploration costs                               365,716                  -
   Natural gas marketing and trading                  -               1,745,446
   Gas plant processing                            204,299              252,008
   Oil field services and supply                   293,133              240,677
   General and administrative                      706,179              487,942
   Consulting agreement-related party              181,178               79,826
   Depreciation, depletion and amortization        563,241              548,319
                                             -------------       --------------
        Total operating costs and expenses       3,051,849            4,002,081
                                             -------------        -------------
INCOME (LOSS) FROM OPERATIONS                     (837,298)              16,765
OTHER INCOME (EXPENSES):
   Interest income                                  63,113                9,084
   Interest expense:
      Amortization of debt issuance costs and
            discount (Note 6)                     (307,844)             (19,086)
      Interest paid or accrued                    (241,444)            (110,169)
   Gain (Loss) on sale of assets                    (6,191)              16,649
                                             ---------------    ---------------
        Total other expenses, net                 (492,366)            (103,522)
                                             --------------     ---------------
INCOME (LOSS) BEFORE INCOME TAXES               (1,329,664)             (86,757)
 INCOME TAXES:
     Federal income tax refund                       -                   41,409
                                         ------------------     ---------------
NET INCOME (LOSS)                               (1,329,664)             (45,348)
PREFERRED STOCK DIVIDENDS:
   In arrears                                        -                 (101,344)
   Converted into common stock                     (89,969)               -
                                            ---------------       -------------
        Total preferred stock dividends            (89,969)            (101,344)
                                            ---------------     ---------------
NET INCOME (LOSS) APPLICABLE TO
COMMON STOCKHOLDERS                       $     (1,419,633)    $       (146,692)
                                            ===============     ===============
NET INCOME (LOSS) PER COMMON SHARE
      As previously reported              $          (0.11)    $          (0.02)
      Effect of prior period adjustment (Note 6)     (0.02)                 -
                                          ------------------      -------------
      As restated                         $          (0.13)    $         (0.02)
                                          ==================     ==============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING                              10,781,000           7,226,000
                                                ==========         ===========
<PAGE>

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

CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss)                                 $(1,329,664)  $   (45,348)
   Adjustments to reconcile net loss to net cash
      provided by operating activities:
      Provision for depreciation and depletion           540,243       525,320
      Amortization of intangible assets/and discount
         on convertible debt                             330,842        42,084
      Exploration costs                                  365,716           -
      Loss (Gain) on sale of property and equipment        6,191       (16,648)
      Issuance of common stock for services               10,155        38,050
   Changes in operating assets and liabilities:
   (Increase) decrease in:
      Trade receivables                                  113,379       250,327
      Inventory                                           (6,639)       64,157
      Prepaid expenses and other assets                  (30,548)      (33,410)
   Increase (decrease) in:
      Accounts payable                                   (62,128)     (526,899)
      Accrued expenses                                  (130,686)     (204,125)
                                                     -------------  -----------
     Net cash provided by (used in)
       operating activities                             (193,139)       93,508
                                                      ------------  -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Capital expenditures for property and equipment    (4,817,767)     (541,801)
   Proceeds from sale of property and equipment           49,811       153,547
   Proceeds from redemption of certificate of
          deposit                                         17,500        26,500
                                                     -------------  -----------
      Net cash provided by (used in) investing
          activities                                  (4,750,456)     (361,754)
                                                     -------------  -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from long-term debt                            -         1,015,000
   Repayment of long-term debt                          (323,821)     (537,498)
   Proceeds from sale of Common Stock                  3,880,000        68,750
   Proceeds from exercise of Common Stock
          warrants                                     3,608,525          -
   Offering and other costs associated with long-
          term debt, stock and warrants                 (687,391)     (185,081)
                                                   ---------------  -----------
      Net cash provided by (used in) financing
          activities                                   6,477,313       361,171
                                                     -------------  -----------
 INCREASE IN CASH AND EQUIVALENTS                      1,533,718        92,925
 CASH & EQUIVALENTS, beginning of period               1,995,860       677,275
                                                      -------------  ----------
 CASH & EQUIVALENTS, end of period                  $  3,529,578     $ 770,200
                                                      =============  ==========




                                       -6-

<PAGE>



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

SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
   Cash paid for interest:
      Related parties                      $      42,417          $      -
      Other                                      243,019              98,216
                                            --------------      ---------------
         Total                             $     285,436          $   98,216
                                            ==============      ===============
   Cash paid for income taxes              $        -             $      -
                                            --------------       ------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
   Long-term debt incurred for purchase
     of vehicles                           $      29,582          $      -
   Conversion of debentures, net of         ==============       ==============
     discount into common stock            $     553,374          $      -
                                           ===============         ============
   Acquisition of oil and gas properties
     for common stock                      $     875,000          $      -
                                           ================        ============
   Estimated fair value of warrants granted
     for debt issuance costs               $        -             $  200,000
                                           ================        ============



                                       -7-

<PAGE>



                   PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  June 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 - Private Placement:

In July  1997,  the  Company  completed  a  private  placement  for the  sale of
2,240,000  shares of the Company's $0.10 par value common stock generating gross
proceeds  of  $5,600,000.  Pursuant  to  the  terms  of  the  private  placement
memorandum,  the Company  agreed to use its best efforts to file a  registration
statement on an appropriate  Form to register the shares,  for resale,  with the
United States Securities and Exchange Commission on or before November 15, 1997.

Note 3 - 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
June 30, 1997 there are no shares of Preferred Stock issued or outstanding.

Note 4 - 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.

                                       -8-

<PAGE>



                   PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 1997
                                   (continued)

Note 5 - 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 6 - 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 June
30, 1997 financial statements is summarized as follows:
<TABLE>
<CAPTION>
                                                                              Net Loss Applicable to
                                                                              Common Stockholders
                                                                              Three
                                  Debt       Additional                       Months        Six Months
                   Convertible  Issuance      Paid-In     Accumulated         Ended           Ended
                   Debentures   Costs         Capital     Deficit            6/30/97         6/30/97
As
 previously
<S>                <C>           <C>         <C>            <C>             <C>             <C>
 reported .......  $ 4,180,000   $ 817,837   $ 25,176,553   $(10,824,043)   $   (680,332)   $ (1,239,390)
Prior period
 adjustments ....   (1,276,808)    (11,784)     1,445,267       (180,243)        (83,916)       (180,243)
                   -----------   ---------   ------------   ------------    ------------    ------------
As restated .....  $ 2,903,192   $ 806,053   $ 26,621,820   $(11,004,286)   $   (764,248)   $ (1,419,633)
                   ===========   =========   ============   ============    ============    ============
</TABLE>

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



                                       -9-

<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 June 30, 1997,  the  Company's  cash balance was  $3,529,578  with a positive
working capital position of $3,370,960, 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 half 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                           3,880,000
   Proceeds from the exercise of common stock warrants              3,608,525
   Proceeds from the sale of property and equipment                    49,811
   Proceeds from the redemption of a certificate of deposit            17,500
                                                                  -----------
       Total Sources of Cash                                        7,555,836
 Uses of Cash:
   Acquisition of oil and gas interest in
       East Bayou Sorrel                                           (3,375,000)
   Exploratory Drilling                                              (838,703)
   Other Capital Expenditures                                        (604,064)
   Costs associated with the sale of common stock and
       exercise of common stock warrants                             (687,391)
   Payments on long term debt                                        (323,821)
   Cash used in operating activities                                 (193,139)
      Total uses of cash                                           (6,022,118)
 Cash balance at June 30, 1997                                     $3,529,578
                                                                    ==========



                                      -10-

<PAGE>



Although  most of the  Company's  sources of cash  during the first half 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 a discovery  well, the Schwing #1 that accounted for 20% of
the Company's oil and gas production (on a BOE basis),  25% of the Company's oil
and gas  revenue,  and 45% of the  Company's  operating  income from oil and gas
activities  during the first half of 1997.  The  operating  statistics  for this
well,  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". The exploratory  offset to the C.E. Schwing #1, known
as the C.E.  Schwing  #2, was drilled to a total depth of 13,600 feet during the
second quarter of this year and completed in two productive  zones in late June.
As of the date of this report,  the Schwing #2 was producing at rates similar to
the Schwing #1. Should this continue,  the Company's future  production and cash
flow could be enhanced considerably.

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.

Pursuant  to the  terms  of the  agreement  with  NEGX,  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  June 30, 1997,  the Company had incurred  total
costs of $1,164,879 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, in July
1997, the Company signed a letter of intent regarding a joint venture  agreement
with  Parallel  Petroleum  Corporation  ("Parallel"),  a  publicly  held  entity
headquartered in Midland,  Texas. The letter of intent  contemplates the Company
will own a 12.5%  working  interest in three  separate  3-D seismic  exploratory
projects   covering   130,000  acres  in  Jackson   County,   Texas  within  the
Yegua/Frio/Wilcox  geological  trend.  The  Company  decided to pursue the joint
venture with Parallel based on their 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. The
projects contemplated in the letter of intent with Parallel will span the course
of the next two to three years with seismic operations scheduled to begin in

                                      -11-

<PAGE>



September 1997.  Contingent on the result of the seismic surveys, up to 75 wells
may  be  drilled  over  the  course  of the  projects.  Total  cash  commitments
associated  with this joint venture are  approximately  $2.5 million in 1997 for
land and seismic costs 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
and Parallel 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,  the Company  believes its
reserves have at least doubled.  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.

In July 1997 the Company completed a private placement of 2.24 million shares of
restricted  common stock that  generated  gross  proceeds of $5.6  million.  The
Company  expects to spend $8.0 to $12.0 million during the remainder of 1997 for
exploration  and  development  activities.  The Company's  current cash position
should cover the Company's  working  capital  needs,  including the  anticipated
exploration  costs associated with the letter agreements with NEGX and Parallel,
at least through the third quarter of 1997. After that, the Company will need to
seek additional financing which may include additional debt or equity financings
or the sale of certain existing assets.

In March 1996 the  Company  retained  Beta  Capital  Group,  Inc.  ("Beta") as a
consultant  to the Company.  Beta is located in Newport  Beach,  California  and
specializes in emerging oil and gas companies that have capital  resources needs
and market  support  requirements.  Beta has worked  closely with the Company to
structure  its  financings  and meet the  Company's  expected  cash and  capital
resources requirements.  Beta's President, Steve Antry, was an officer of Benton
Oil and Gas  Company  between  1989 and 1992.  During that time,  Mr.  Antry was
instrumental  in  obtaining  various  sources of capital that Benton Oil and Gas
required  during  a  very  significant  growth  period.  Based  on  Mr.  Antry's
background,  the  Company  believes  that  Beta adds a  tremendous  value to the
Company because of their network of financial resources.  Therefore, the Company
will attempt to utilize Beta's syndication of financial resources to fund future
capital requirements.

Capital Expenditures
During the first half of 1997 the Company  paid  $4,817,767  for  investment  in
capital assets which is summarized as follows:
                                                      For the Six Months Ending
                                                                  June 30, 1997
 Acquisitions of oil and gas interest in East Bayou Sorrel         $3,375,000
 Drilling Costs -
     Drilling and Development of East Bayou Sorrel                    220,897
     Exploratory Wells in Progress                                    252,090
     Exploratory Dry Holes                                            365,716
        Total Drilling Costs                                          838,703
 Workovers or Recompletions of Rocky Mountain properties              569,980
                                                                  -----------
       Total Oil and Gas properties                                 4,783,683
 Service and Other Field Equipment                                     30,639
 Office Equipment                                                       3,445
                                                                -------------
      Total Capital Expenditures                                  $ 4,817,767
                                                                   ==========



                                      -12-

<PAGE>



The  acquisitions of the oil and gas interest in East Bayou Sorrel  consisted of
purchasing  a 10% working  interest and an  additional  7.8125%  after  prospect
payout working interest. This field includes two discovery wells that produced a
combined average of 2,681 BOPD and 4,970 MCFPD, (3,509 BOEPD) in July 1997. With
two more exploratory  wells scheduled to be drilled on this property in 1997, it
is  anticipated  this  field  will  ultimately  be  one of  the  Company's  core
properties. NEGX, the operator of the property, has planned a 33-square mile 3-D
seismic program covering the East Bayou Sorrel field and surrounding areas later
this year that will complement an already extensive  database of reprocessed 2-D
seismic and a number of existing well logs.

At June 30, 1997, the Exploratory  Wells in Progress  ("WIP") and  corresponding
costs incurred through the first half of 1997 were as follows:
<TABLE>
<CAPTION>

                                          WIP                 Transfer   From WIP to:     WIP
                                        Balance                           Developed   Balance
                Property ............  12/31/96   Additions   Dry Hole   Properties   6/30/97

<S>                                    <C>        <C>         <C>        <C>          <C>
E. Winn #1 (South Lake Arthur) ......  181,312    175,590        --          --       356,902
Brazos Block 480 ....................     --      317,789    (317,789)       --          --
C.E. Schwing #2 (East Bayou Sorrel) .     --      365,761        --      (365,761)       --
Shoccoe Prospect ....................     --       47,927     (47,927)       --          --
Tiger Bayou Prospect ................     --       63,000        --          --        63,000
Austin Bayou Prospect ...............     --       13,500        --          --        13,500
                                     ----------   --------    --------    --------    --------
                                       181,312    983,567    (365,716)   (365,761)    433,402
                                     ==========   ========    ========    ========    ========
</TABLE>

The E. Winn #1, an exploratory well in the South Lake Arthur  Prospect,  located
in Jefferson  Davis  Parish,  Louisiana,  was drilled to a total depth of 17,800
feet in April 1997. Although the deep objective of a Miogyp Sand test was dry, a
productive  zone uphole was found and tested in June 1997 at a flow rate of 4200
MCFPD.  The Company owns a 20.3% working interest in this well. The pipeline and
other  production  facilities are currently  being built and the Company expects
this well to be put on production  in August 1997.  At that time,  all the costs
capitalized through June 30, 1997 along with the future completion costs will be
transferred to Developed Properties.

Brazos Block 480, an offshore prospect in Texas, was drilled to a total depth of
13,500 feet in May 1997 and found to be dry. The  Company's  portion of the cost
of this exploratory dry hole was $317,789.

As previously  discussed,  the C.E. Schwing #2 is another  discovery well in the
East Bayou Sorrel Field, located in Iberville Parish,  Louisiana.  This well was
completed in late June 1997 and all the corresponding  costs were transferred to
Developed Properties.  In July 1997, the Schwing #2 produced an average of 1,330
BOPD, 3,413 MCFPD (or 2,267 BOEPD) and 247 barrels of water per day.

The Shoccoe Prospect, located in Mississippi,  was a shallow exploratory well in
which the Company owned an 8.33% working interest.  The cost of this exploratory
dry hole was $47,927.

The costs  incurred  through  June 30, 1997 for the Tiger Bayou and Austin Bayou
Prospects represent land costs. Both prospects are currently being drilled as of
the date of this report.

In  the  first  half  of  1997,   the  Company  spent  $569,980  for  workovers,
recompletions and equipment acquisitions related to maintaining or enhancing the
current production of its producing oil and gas properties in the Rocky Mountain
region.

                                      -13-

<PAGE>



DRILLING ACTIVITY:

As of the date of this  report,  the  following  exploratory  prospects  were in
process of drilling:

1. Trahan #1 (Maurice Prospect) - located in Lafayette and Vermillion  Parishes,
Louisiana  began drilling on June 23, 1997. This prospect is operated by Amerada
Hess and the  target  depth of 16,500' is  expected  to be reached in  September
1997. The Company owns a 10.0% working interest in this prospect.

2. McDaniel 9-10 #1 (Robertsdale  Prospect) - located in Baldwin County, Alabama
began  drilling  on July 15,  1997.  This  prospect  is operated by NEGX and the
target depth 20,000' is expected to be reached in October 1997. The Company owns
a 10.0% working interest in this prospect.

3.  Ramos #1 (West  Grand  Bayou  Prospect)  -  located  in  Assumption  Parish,
Louisiana began drilling on July 20, 1997. This prospect is operated by NEGX and
the target  depth of  17,900' is  expected  to be reached in October  1997.  The
Company owns a 10.0% working interest in this prospect.

4.  Lutcher  Moore #1 (Tiger  Bayou  Prospect) - located in  Terrebonne  Parish,
Louisiana began drilling on July 23, 1997. This prospect is operated by NEGX and
the target  depth of  12,850' is  expected  to be  reached in August  1997.  The
Company owns a 20% working interest in this prospect.

5. Bennett #1 (Austin Bayou Prospect) - located in Brazoria County,  Texas began
drilling on August 1, 1997.  This  prospect is  operated by  TransTexas  and the
target depth of 13,000' is expected to be reached in October 1997. This prospect
is a farmout by the Company to  TransTexas  and the Company  owns a carried 2.5%
working interest in this prospect.

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:

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

Oil and gas sales                    $   670,373      67% $    638,879      39%
Natural gas marketing and trading              -        -      702,610      43%
Gas plant processing                     162,346      16%      167,837      10%
Oil field services and supply            145,893      15%      104,533       6%
Well administration and other             17,099       2%       25,739       2%
                                       ---------   ------   ----------   ------
     Total revenue                   $   995,711     100% $  1,639,598     100%
                                        ========     ====    =========     ====
                                               For the Six Months
                                                 Ended June 30,
                                                1997                1996
                                     ----------------------   ----------------

Oil and gas sales                     $   1,459,579   65% $    1,251,978    31%
Natural gas marketing and trading                 -     -      2,048,565    51%
Gas plant processing                        371,856   17%        355,680     9%
Oil field services and supply               344,212   16%        306,135     8%
Well administration and other                38,904    2%         56,488     1%
                                         ----------------    ----------- ------
     Total revenue                    $   2,214,551  100% $    4,018,846   100%
                                          =========  ====      =========   ====

The  decrease in total  revenue 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  $702,610,  or 43% of the total revenue for the second  quarter of
1997 and  2,048,565,  or 51% of the total  revenue  for the first six  months of
1997.  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 Six Months
                                         Ended June 30,               Ended June 30,
                                         --------------               --------------
                                        1997          1996          1997          1996
                                      -----------   -----------   -----------   -----------
Production:
   Oil (Bbls)
<S>                                     <C>           <C>           <C>           <C>
        Rocky Mtns ..............       20,092        26,457        40,070        53,057
        East Bayou Sorrel .......        8,308          --          16,137          --
                                   -----------   -----------   -----------   -----------
             Combined Total .....       28,400        26,457        56,207        53,057
                                   ===========   ===========   ===========   ===========
Gas (Mcf)
        Rocky Mtns ..............      100,725       111,972       192,937       228,150
        East Bayou Sorrel .......       11,375          --          18,238          --
                                   -----------   -----------   -----------   -----------
              Combined Total ....      112,100       111,972       211,175       228,150
                                   ===========   ===========   ===========   -----------
BOE (6:1)
        Rocky Mtns ..............       36,880        45,119        72,226        91,082
        East Bayou Sorrel .......       10,204          --          19,177          --
                                   -----------   -----------   -----------   -----------
              Combined Total ....       47,084        45,119        91,403        91,082
                                   ===========   ===========   ===========   ===========
Average Collected Price:
   Oil (per Bbl)
        Rocky Mtns ..............  $     18.43   $     19.71   $     19.88   $     18.72
        East Bayou Sorrel .......  $     19.20   $      --     $     20.01   $      --
                                   -----------   -----------   -----------   -----------
              Combined Average ..  $     18.66   $     19.71   $     19.92   $     18.72
                                   ===========   ===========   ===========   ===========
Gas (per Mcf)
         Rocky Mtns .............  $      1.12   $      1.05   $      1.51   $      1.13
         East Bayou Sorrel ......  $      2.44   $      --     $      2.71   $      --
                                   -----------   -----------   -----------   -----------
              Combined Average ..  $      1.25   $      1.05   $      1.61   $      1.13
                                   ===========   ===========   ===========   ===========
Per BOE (6:1)
         Rocky Mtns .............  $     13.10   $     14.16   $     15.05   $     13.75
         East Bayou Sorrel ......  $     18.35   $      --     $     19.42   $      --
                                   -----------   -----------   -----------   -----------
              Combined Average ..  $     14.24   $     14.16   $     15.97   $     13.75
                                   ===========   ===========   ===========   ===========
</TABLE>


                                            -14-

<PAGE>



<TABLE>

Operating Margins:
   Rocky Mtns:
<S>                              <C>             <C>             <C>             <C>
       Revenue ...............   $   483,171     $   638,879     $ 1,087,227     $ 1,251,978
       Costs .................   $  (385,384)    $  (353,947)    $  (688,284)    $  (647,863)
                                 -----------     -----------     -----------     -----------
         Operating Margin ....   $    97,787     $   284,932     $   398,943     $   604,115
                                 ===========     ===========     ===========     ===========
   Operating Margin Percent ..            20%             45%             37%             48%
   East Bayou Sorrel:
        Revenue ..............   $   187,202     $      --       $   372,352     $      --
        Costs ................   $   (24,920)    $      --       $   (49,819)    $      --
                                 -----------     -----------     -----------     -----------
          Operating Margin ...   $   162,282     $      --       $   322,533     $      --
                                 ===========     ===========     ===========     ===========
   Operating Margin Percent ..            87%           --                87%           --
Combined Totals:
       Revenue ...............   $   670,373     $   638,879     $ 1,459,579     $ 1,251,978
       Costs .................   $  (410,304)    $  (353,947)    $  (738,103)    $  (647,863)
                                 -----------     -----------     -----------     -----------
         Operating Margin ....   $   260,069     $   284,932     $   721,476     $   604,115
                                 ===========     ===========     ===========     ===========
   Operating Margin Percent ..            39%             45%             49%             48%
Production Costs per
BOE before DD&A:
          Rocky Mtn Region ...   $     10.64     $      7.85     $      9.57     $      7.08
          Gulf Coast Region ..   $      2.44     $      --       $      2.60     $      --
                                 -----------     -----------     -----------     -----------
              Combined Average   $      8.87     $      7.85     $      8.11     $      7.08
                                 ===========     ===========     ===========     ===========
Change in Revenue
Attributable to:
    Production ...............   $     7,096                     $     9,729
    Price ....................   $    24,398                     $   107,632
                                 -----------                     -----------
  Total Increase in Revenue ..   $    31,494                     $   117,361
                                 ===========                     ===========
</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 (per BOE)
and new production from the East Bayou Sorrel Field in Louisiana.

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 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.



                                      -15-

<PAGE>



Natural Gas Marketing and Trading
Operating  statistics for the Company's Marketing and Trading Activities for the
periods presented are as follows:
                                                  For the Three Months
                                                      Ended June 30,
                                              1997                     1996
                                       -------------------        ------------
Total Volume Sold (Mcf)                          -                   498,277

Average Price                         $          -              $       1.41
                                       -------------------        ------------
           Total Revenue              $          -              $    702,610
Costs                                            -                  (614,784)
                                       -------------------        ------------
            Gross Margin              $          -              $     87,826
                                        ==================        ============
            Gross Margin Percent                                         13%
                                                  For the Six Months
                                                      Ended June 30,
                                             1997                       1996
                                       -------------------        ------------
Total Volume Sold (Mcf)                          -                  1,223,756
Average Price                         $          -               $       1.67
                                       -------------------        ------------
           Total Revenue              $          -               $  2,048,565
Costs                                            -                 (1,745,446)
                                       -------------------        ------------
            Gross Margin              $          -               $    303,119
                                        ==================        ============
            Gross Margin Percent                                          15%

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.  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:



                                      -16-

<PAGE>
                                              For the Three Months
                                                  Ended June 30,
                                            1997                    1996
                                      -----------------          ------------
                                           Volumes                 Volumes
Production:
    Natural Gas Processed (Mcf)            85,312                  91,590
                                      ===================       ===============
    Liquids Produced :
            B-G Mix (gallons)             204,100                 226,300
            Propane (gallons              162,300                 173,700
                                      ------------------         --------------
                  Total                   366,400                 400,000
                                      ==================         ==============
Average Sales Price of Liquids
  (per gallon)                        $      0.44               $    0.47

    Gross Margin:                          Amount                  Amount
                                        ----------------          ------------
             Revenue                  $   162,346               $ 167,837
             Costs                       ( 99,461)               (126,767)
                                       ------------------        --------------
                   Gross Margin       $    62,885               $  41,070
                                        =================        ==============
                   Gross Margin Percent       39%                      24%

                                                   For the Six Months
                                                     Ended June 30,
                                            1997                     1996
                                      -------------------       ------------
                                           Volumes                Volumes
Production:
    Natural Gas Processed (Mcf)           164,242                 185,447
                                       ================        ==============
    Liquids Produced:
            B-G Mix (gallons)             396,200                 461,400
            Propane (gallons)             321,400                 349,000
                                       ---------------         ---------------
                  Total                   717,600                 810,400
                                       ===============         ===============
Average Sales Price of Liquids
  (per gallon)                       $       0.52             $      0.44

    Gross Margin:                         Amount                  Amount
                                      ----------------          ------------
             Revenue                 $    371,856             $   355,680
             Costs                       (204,299)               (252,008)
                                      ----------------         --------------
               Gross Margin          $    167,557             $   103,672
                                      ================        ================
               Gross Margin Percent           45%                     29%

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

                                      -17-

<PAGE>



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 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:
                                         For the Three Months
                                            Ended June 30,
                                         1997              1996
                                     -------------     --------
Revenue                              $  145,893       $  104,533
Costs                                  (139,475)        ( 93,402)
                                     -----------     ------------
Net Operating Income                 $    6,418       $   11,131
                                     ============     ==========
Net Operating Margin Percent               4%               11%

                                         For the Six Months
                                            Ended June 30,
                                         1997              1996
                                     -------------     --------
Revenue                              $  344,212        $ 306,135
Costs                                  (293,133)        (240,677)
                                      ----------     -----------
Net Operating Income                 $   51,079        $  65,458
                                      ==========     ===========
Net Operating Margin Percent               15%             21%

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  $118,000
during the second quarter of 1997 and  approximately  $218,000  during the first
half of 1997 when  compared to the same periods in 1996.  The  increases for the
first half of 1997 are summarized below:

 $  56,000     -   For consulting services (legal, accounting, land and other)
                   associated with the Company's expansion into the Gulf Coast.
    37,000     -   Travel and entertainment costs associated with the Company's
                   expansion into the Gulf Coast.
    36,000     -   Recovery of Bad Debt in 1996 (this reduced G&A expense in
                   1996 - no such amounts were recovered in 1997)
    33,000     -   Payroll costs associated with an increase in base pay and
                   insurance benefits for virtually all the Company's officers
                   and employees.
    26,000     -   A Directors and Officers Liability Insurance Policy
                   purchased on July 1, 1996.
    20,000     -   Directors compensation
    10,000     -   All other, net.
  --------
$  218,000


                                      -18-

<PAGE>



The Company  expects future G&A costs to be at least at those levels incurred in
the second quarter of 1997, or approximately $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 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.

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
                                       1997             1996
                                    ----------      -----------

Oil and Gas Properties            $   183,732     $    156,468
Gas Plant and Other Buildings          60,929           60,868
Rolling Stock                          23,789           25,570
Other Field Equipment                   9,676            7,936
Furniture and Fixtures                 12,384           11,830
Non-Compete Agreement                  11,499           11,499
                                     --------         --------
        Total                         302,009          274,171
                                      =======          =======

                                        For the Six Months
                                           Ended June 30,
                                      1997               1996
                                   -----------      ------------

Oil and Gas Properties             $  323,604     $    314,369
Gas Plant and Other Buildings         121,858          122,940
Rolling Stock                          50,893           48,618
Other Field Equipment                  19,134           15,882
Furniture and Fixtures                 24,754           23,512
Non-Compete Agreement                  22,998           22,998
                                     --------         --------
        Total                         563,241          548,319
                                     =======           =======

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.

Interest Expense
The higher  interest  expense  incurred in 1996 is reflective of the increase in
the average  long-term debt  outstanding and  amortization of the  corresponding
debt issuance costs and the discount  associated with the convertible  debt. 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.




                                      -19-

<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 six months  ended  June 30,  1997 and
through the date of this Report.

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.


                                      -20-

<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  June 30,  1997  holders of $820,000  of the  Company's  outstanding
collateralized   convertible  10%  debentures  ("Debentures")  surrendered  such
Debentures to the Company for  conversion  into 273,332  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 125,000 shares of
its common stock upon exercise of outstanding  stock purchase  warrants at $0.75
per share  for total  proceeds  of  $82,500  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.

                                      -21-

<PAGE>



9. Between June 23, 1997 and July 21, 1997 the Company  issued  20,000 shares of
its common stock upon exercise of outstanding  stock purchase  warrants at $0.75
per share for total  proceeds of $15,000 to the Company  (10,000 shares had been
issued as of June 30, 1997). 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 May 12, 1997, the Company issued 75,350 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
$134,900  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 Company paid a selling  commission 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.



                                      -22-

<PAGE>



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 June 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

The  Company's  Annual  Meeting of  Stockholders  was held at the Newport  Beach
Marriott  Hotel and Tennis  Club,  900  Newport  Center  Drive,  Newport  Beach,
California on Saturday,  May 31, 1997, at 10:00 A.M.  Pacific Daylight Time. The
matters  submitted to a vote of the  Company's  security  holders as well as the
results of the votes cast are as follows:

      I.       Matters Voted Upon by Holders of Common Stock

               The election of three Class A directors to serve on the Company's
               Board of Directors  totaling eleven  directors.  A summary of the
               votes cast are as follows:

                          Votes Received
                            In Favor of             Votes Withheld
                                      % of                    % of
                           Number    Shares         Number   Shares
R. Thomas Fetters, Jr.    9,801,218   77.7%          38,076     .3%
James N. Burkhalter       9,801,218   77.7%          38,076     .3%
Patrick J. Duncan         9,799,718   77.6%          39,576     .3%

               As a result of the voting, R. Thomas Fetters, James N. Burkhalter
               and Patrick J. Duncan were  elected as Class A Directors to serve
               in that  capacity  until the Annual  Meeting of  Stockholders  in
               2000.

      II.      Matters Voted Upon by Holders of Preferred Stock

               (1)      The election of two  directors to represent  the holders
                        of Preferred  Stock on the Company's  Board of Directors
                        totaling eleven  directors.  A summary of the votes cast
                        are as follows:



                                      -23-

<PAGE>



                                 Votes Received
                                 In Favor of                Votes Withheld
                                             % of                       % of
                                 Number     Shares          Number     Shares
               Steve Antry       103,238     92.67%          372        .3%
               LeRoy Smith       103,238     92.67%          372        .3%

               As a result of the votes, Steve Antry and Leroy Smith shall serve
               on the Company's  Board of Directors  representing  the Preferred
               Stockholders  until  such time all past due  dividends  have been
               paid or until  re-elected or replaced at the next Annual  Meeting
               of the Company's stockholders in 1998.

      II.      Matters Voted Upon by Holders of Common Stock and Preferred Stock

               The approval of an  amendment  to the  Articles of  Incorporation
               increasing  the number of authorized  shares of common Stock from
               25  million  to 40  million.  A summary  of the votes cast are as
               follows:
                                  Shares             % of
                    Vote          Voted             Shares
               --------------     -----------        ------
               In Favor of        9,431,576          74.4%
               Against              328,282           2.6%
               Withheld              79,436            .6%
               Not Voted          2,778,592          22.4%

               As a  result  of the  voting,  the  stockholders  of the  Company
               ratified,  approved and adopted the  amendment to the Articles of
               Incorporation  to  increase  the  authorized  Common  Stock to 40
               million shares.

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  two  directors   that  were  elected  to  represent  the  Preferred
Stockholders,  Mr. LeRoy Smith and Mr. Steve Antry, were  automatically  dropped
from  the  Board  of  Directors  pursuant  to  the  terms  of  the  Articles  of
Incorporation.  In July 1997,  Mr. Antry was reinstated as a Class B director to
serve in that  capacity  until  the  Annual  Meeting  of  Stockholders  in 1998.
Accordingly,  the  Company's  current  Board of  Directors  consists of ten (10)
directors.

Item 6. Exhibits and Reports on Form 8-K

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

               (1) Exhibit 27, "Financial Data Schedule".



                                      -24-

<PAGE>



    (b) The  following  reports on Form 8-K were filed during the quarter  ended
June 30, 1997:

               Item Reported           Date              Financial Statements

               (1) Item 5              May 31, 1997       None
               (2) Items 5 and 7       June 12, 1997      None
               (3) Items 5 and 7       June 27,1997       None

               There were no financial statements filed during the quarter ended
June 30, 1997 other than the 10-QSB for the quarter ended March 31, 1997.




                                      -25-

<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


                                      -26-