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


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

                                   FORM 10-QSB

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

                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999

                          Commission File Number 0-6580

                               [GRAPHIC OMITTED]






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


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

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934 during the past 12 months (or for such shorter  period that the  registrant
was  required  to file such  reports),  and (2) has been  subject to such filing
requirements for the past 90 days.
Yes  X    No____

         As of August 1, 1999 the registrant  had 1,688,698  shares of its $0.10
par value Common Stock issued and outstanding.

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

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


                                       -1-

<PAGE>



                                TABLE OF CONTENTS
                                                                         PAGE
                                                                        NUMBER

PART I - Financial Information
     Item 1.  Financial Statements
         Consolidated Balance Sheets
                 June 30, 1999 (unaudited) and December 31, 1998. .. . . .    3
         Consolidated Statements of Operations (unaudited)
                  For the Three and Six Months Ended June 30, 1999
                  and 1998 . . . . . . . . . . . .  .  .  .  .  .  .  .  .    4
         Consolidated Statements of Cash Flows (unaudited)
             For the Three and Six Months Ended June 30, 1999 and 1998 . .    5
         Notes to Consolidated Financial Statements  . . . . . . . . . . .  . 6
     Item 2.  Management's Discussion and Analysis . . . . . . . . . . . .  . 7
         Liquidity, Capital Expenditures and Capital Resources  . . . . . .   7
         Results of Operations . . . . . . . . .  . . . . . . . . . . . . .  10
             Overview . . . . . . . . . . . . . . . . . . . . . . . . . . .  10
                 Divestment of Rocky Mountain Assets.. . . . . . . . . . . ..10
             Total Revenue . . . . . . . . . . . . . . . . . . . . . . . . ..10
             Oil and Gas . . . . . . . . . . . . . . . . . . . . . . . . . ..11
             Gas Plant, Service and Supply . . . . . . . . . . . . . . . . ..12
             Consulting Arrangement - Related Party . . . . . . . . . . . .  12
             General and Administrative . . . . . . . . .  . . . . . . . . ..13
             Depreciation, Depletion and Amortization  . . . . . . . . . . ..13
             Interest Expense .  . . . . . . . . . . . . . . . . . . . . .   13
                 Impairment Expense - Oil and Gas Properties. . . . . . . .  14
                 Dividends and Net Loss Per Common Share. . . . . . . . . .  14
          Other Matters . . . . . . . . . . . . . . . . . . . . . . . . . .  14
                 Disclosure Regarding Forward-Looking Statements. . . . . .  14
                 Year 2000 Issue . . . . . . . . . . . . . . . . . . . . . ..15
PART II - Other Information . . . . . . . . . . . . . . . . . . . . . . . . .16
         Item 1.  Legal Proceedings . . . . . . . . . . . . . . . . . . . .  16
         Item 2.  Changes in Securities . . . . . . . . . . . . . . . . . .  16
         Item 3.  Defaults Upon Senior Securities . . . . . . . . . . . . .  17
         Item 4.  Submission of Matters to a Vote of Security Holders  . . . 17
         Item 5.  Other Information . . . . . . . . . . . . . . . . . . . .  17
         Item 6.  Exhibits and Reports on Form 8-K . . . . . . . . . . . . ..17
PART III - Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . .  17




                                       -2-

<PAGE>



PART 1 - FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS

                   PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

                                                      June 30,      December 31,
                                                        1999           1998
                                                   --------------  -------------
                                                    (unaudited)
                                     ASSETS

CURRENT ASSETS:
   Cash and equivalents                            $  867,161      $  1,049,582
   Trade receivables                                  321,270           420,460
   Prepaid expenses and other                         100,838           170,687
   Assets held for sale                                  -              100,000
                                                   -------------   -------------
        Total current assets                        1,289,269         1,740,729
                                                   ------------    -------------
OIL AND GAS PROPERTIES, at cost (full cost method):
   Unevaluated properties                           3,054,482         2,816,475
   Costs being amortized                           17,040,537        16,834,274
                                                   -----------     -------------
        Total oil and gas properties               20,095,019        19,650,749
   Less accumulated amortization                  (14,419,066)      (13,883,174)
                                                  ------------     -------------
        Net oil and gas properties                  5,675,953         5,767,575
                                                  ------------     -------------
 OTHER ASSETS:
   Debt issuance costs, net                           253,433           322,551
   Office equipment and vehicles, net                  64,540            74,623
   Deposits and other                                   7,493             7,493
                                                 -------------    --------------
          Total other assets                          325,466           404,667
                                                  -------------    -------------
TOTAL ASSETS                                    $   7,290,688     $   7,912,971
                                                   ============     ===========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
   Current maturities of long-term debt         $       6,065     $       5,825
   Accounts payable, trade                            182,358           310,447
   Accrued expenses                                   240,651           322,569
                                                   -------------    -----------
         Total current liabilities                    429,074           638,841
                                                   -------------    -----------
LONG-TERM DEBT, less current maturities:            2,399,799         2,293,261
                                                   ------------      ----------
STOCKHOLDERS' EQUITY:
   Preferred  Stock,  par value $0.01 per share,
       2,000,000  shares  authorized, 105,828
       and  107,336  shares of Series B 5% PIK
       Cumulative  Convertible Preferred Stock
       issued and outstanding, respectively
       (liquidation preference of $5,291,400 at
       June 30, 1999)                                   1,058             1,073
   Common Stock, par value $0.10 per share,
      4,000,000 shares authorized, 1,688,698
      and 1,601,062 shares issued and
      outstanding, respectively                       168,870           160,106
   Additional paid-in capital                      37,618,437        37,811,006
   Accumulated deficit                            (33,326,550)      (32,991,316)
                                                  ------------    -------------
         Total stockholders' equity                 4,461,815         4,980,869
                                                  ------------    -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY       $  7,290,688  $      7,912,971
                                                 ============      ============



                                       -3-

<PAGE>



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

<TABLE>

<CAPTION>
                                                              For The Three Months          For The Six Months
                                                                 Ended June 30,                Ended June 30,
                                                             --------------------            ------------------
                                                               1999         1998           1999            1998
                                                           -----------    -----------    -----------    -----------
REVENUE:
<S>                                                   <C>              <C>            <C>            <C>
   Oil and gas sales ..............................   $      551,065   $   655,660    $   962,859    $  1,247,268
   Gas plant, service and supply ..................             --         152,095           --           397,363
                                                         -----------    -----------    -----------    ------------
        Total revenue .............................          551,065       807,755        962,859       1,644,631
                                                         -----------    -----------    -----------    ------------
OPERATING COSTS AND EXPENSES:
   Oil and gas production .........................           86,958       389,467        171,434         710,107
   Gas plant, service and supply ..................             --         177,274           --           399,013
   Consulting agreement-related party .............             --          62,549         37,750         125,461
   General and administrative .....................          206,357       269,231        386,017         526,886
   Depreciation, depletion and amortization .......          284,614       398,994        547,989         752,131
   Impairment expense - oil & gas properties ......             --         161,000           --           639,043
                                                         -----------    -----------    -----------    ------------
            Total operating costs and expenses ....          577,929     1,458,515      1,143,190       3,152,641
                                                         -----------    -----------    -----------    ------------
LOSS FROM OPERATIONS ..............................          (26,864)     (650,760)      (180,331)     (1,508,010)
OTHER INCOME (EXPENSES):
   Interest and other income ......................           13,611        82,483         25,008         165,151
   Interest expense ...............................          (89,981)         (269)      (179,911)           (516)
                                                         -----------    -----------    -----------    ------------
NET LOSS ..........................................   $     (103,234)  $  (568,546)   $  (335,234)   $ (1,343,375)
                                                         ===========    ===========    ===========    ============
NET LOSS APPLICABLE TO COMMON
   STOCKHOLDERS ...................................   $     (169,396)  $  (949,587)   $  (467,742)   $ (2,577,755)
                                                         ===========    ===========    ===========    ============
NET LOSS PER COMMON SHARE .........................   $        (0.10)  $     (0.60)   $     (0.28)   $      (1.63)
                                                         ===========    ===========    ===========    ============
WEIGHTED AVERAGE NUMBER OF
   COMMON SHARES OUTSTANDING ......................        1,688,698     1,580,500      1,657,570        1,579,800
                                                         ===========    ===========    ===========    ============
</TABLE>




                                       -4-

<PAGE>



                   PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (unaudited)
<TABLE>
<CAPTION>
                                                                        For The Six Months
                                                                           Ended June 30,
                                                                       1999           1998

CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                               <C>            <C>
   Net loss                                                       $  (335,234)   $(1,343,375)
   Adjustments to reconcile net loss to net cash provided by
      (used in) operating activities:
            Depreciation, depletion and amortization ..........       547,989        752,131
            Impairment expense ................................          --          639,043
            Amortization of debt discount and issuance costs ..       178,786           --
            (Gain) Loss on sale of assets .....................          --             (497)
            Changes in operating assets and liabilities:
                   (Increase) decrease in:
                        Trade receivables .....................        99,190        261,095
                        Inventory .............................          --           55,270
                        Prepaid expenses and other assets .....           (60)       (79,730)
                    Increase (decrease) in:
                        Accounts payable ......................      (113,290)       (67,853)
                        Accrued expenses ......................       (81,918)      (142,063)
                                                                     -----------  -----------
            Net cash provided by (used in) operating activities       295,463         74,021
                                                                     -----------  -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Capital expenditures for property, plant and equipment .....      (461,084)    (5,417,691)
   Proceeds from sale of property and equipment ...............       100,000        987,150
   Proceeds from redemption of certificate of deposit .........        69,910           --
                                                                     -----------  -----------
      Net cash provided by (used in) investing activities .....      (291,174)    (4,430,541)
                                                                     -----------  -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from exercise of warrants .........................          --              939
   Repayment of long-term debt ................................        (2,889)        (3,788)
   Payment of Series B Preferred Stock dividends ..............      (132,508)       (70,833)
   Purchase and retirement of Series B Preferred Stock ........       (51,313)          --
   Offering costs .............................................          --         (146,765)
                                                                     ----------- -----------
      Net cash provided by (used in) financing activities .....      (186,710)      (220,447)
                                                                     ----------- -----------
 INCREASE (DECREASE) IN CASH AND EQUIVALENTS ..................      (182,421)    (4,576,967)
 CASH AND EQUIVALENTS, beginning of period ....................     1,049,582      6,547,804
                                                                     ----------- -----------

 CASH AND EQUIVALENTS, end of period ..........................   $   867,161    $ 1,970,837
                                                                     =========== -----------

SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
   Cash paid for interest .....................................   $   138,774    $   199,058
                                                                     =========== ===========
   Cash paid for income taxes .................................   $      --      $      --
                                                                     =========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
   Increase (decrease) in payables for oil and gas ............   $     (14,805) $  (828,984)
        exploration activities
   Capitalized portion of amortized debt discount and issuance           --          264,094
        costs
   Debt incurred for purchase of vehicles .....................          --           32,610
</TABLE>

                                      -4-


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

Note 1 - Basis of Presentation:

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

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


Note 2 - Dividends and Net Loss Per Common Share:

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

The net loss  applicable  to common  stockholders  is  determined  by adding any
dividends accruing to the benefit of the preferred stockholders to the net loss.
The dividends  included for this  calculation  include:  1) paid  dividends;  2)
accrued but unpaid dividends;  and 3) any imputed dividends  attributable to the
beneficial  conversion feature.  Accordingly,  the net loss applicable to common
stockholders  includes  the  following  charges  associated  with  the  Series B
Preferred Stock that was issued on December 31, 1998:

                                For the Three Months         For the Six Months
                                   Ended June 30,               Ended June 30,
                             --------------------------  -----------------------
                                  1999        1998          1999          1998
                                  ----------------      -----------   ----------
 Dividends declared             $ 66,162   $ 70,523       $ 132,508   $ 141,356
 Imputed non-cash dividend         -        310,518            -      1,093,024
                                --------   ---------    -----------  -----------
          Total                 $ 66,162   $381,041       $ 132,508 $ 1,234,380
                                ========  ===========     =========  ===========

The Series B Preferred  Stock became  convertible  into common stock on April 1,
1998 at a conversion  price equal to a 12% discount to the average trading price
of the common stock prior to conversion.  This discount  increased  periodically
until it topped out at 25% (this discount is considered a "beneficial conversion
feature").  The additional  non-cash imputed dividend charge included in the net
loss  applicable to common  stockholders  represents the intrinsic  value of the
discount  applicable  through  the  period  presented.  No  additional  non-cash
dividend  charges  will be  incurred  in future  periods  since  the  conversion
discount has previously topped out at 25%. The holders of the Series B Preferred
Stock are entitled to dividends equal to $2.50 per annum,  payable  quarterly in
cash or  additional  shares of  Series B  Preferred  Stock at the  option of the
Company.


                                       -5-

<PAGE>



ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS

Liquidity, Capital Expenditures and Capital Resources
At June 30,  1999,  the  Company's  cash  balance was  $867,161  with a positive
working capital  position of $860,195,  compared to a cash balance of $1,049,582
and a positive  working capital position of $1,101,888 at December 31, 1998. The
change in the Company's cash balance is summarized as follows:

         Cash balance at December 31, 1998                        $   1,049,582
         Sources of Cash:
            Cash provided by operating activities                       295,463
            Proceeds from the sale of property and equipment            100,000
                Proceeds from redemption of certificate of deposit       69,910
                  Total Sources of Cash                                 465,373
         Uses of Cash:
            Capital expenditures for exploration activities            (459,069)
            Series B Preferred Stock dividends                         (132,508)
            Purchase and retirement of Series B Preferred Stock         (51,313)
            Payments on long term debt                                   (2,889)
            Capital expenditures for office equipment                    (2,015)
                                                                  --------------
                  Total uses of cash                                   (647,794)
         Cash balance at June 30, 1999                            $     867,161

As noted,  most of the  Company's  uses of cash  were  deployed  in  exploration
activities  in the Gulf Coast which are  summarized  as follows (the  difference
between the total cash paid for  exploration  activities  in the above table and
the amount  illustrated  below,  related to the changes in  accounts  payable at
December 31, 1998 and June 30, 1999):

<TABLE>
<CAPTION>
                                                                PROGRAM OPERATOR
              Category                   NEGX      Parallel     AHC        Other        Total      %
------------------------------------    -------   ---------- ---------   ----------    -------   -----


<S>                                   <C>         <C>         <C>         <C>         <C>         <C>
  Successful Wells .................  $   --      $ 29,287    $141,969    $  1,494    $172,750    38%

  Exploratory Dry Holes ............      --        15,600        --          --        15,600     2%

  Land, G&G Costs on Seismic
           Programs ................     4,123     100,024        --          --       104,147    26%

  Capitalized Interest Costs .......      --          --          --       137,981     137,981    31%

  Other Exploration Costs ..........      --          --          --        13,786      13,786     3%
                                      --------    --------    --------    --------    --------   ----
         Total Exploration Costs ...  $  4,123    $144,911    $141,969    $153,261    $444,264   100%
                                                  ========    ========    ========    ========   ====
         Percent ...................       1%         33%         32%         34%        100%
</TABLE>

The  anticipated  capital  requirements  for 1999 related to the Company's  Gulf
Coast  exploration  program are more thoroughly  discussed in the Company's 1998
Annual  Report on Form  10-KSB.  There have been no  significant  changes in the
expected  capital  requirements  as of the date of this  report  and  under  the
existing  commitments,  will be at least  $260,000 for the remainder of 1999 and
additional capital requirements will be necessary in 2000 as discussed below.

In 1999 and  continuing  into 2000,  the Company  will focus its  activities  on
cultivating  its  existing   exploration  program  in  the  Gulf  Coast  region,
principally in Louisiana and Texas. This activity will focus on what the Company
considers its three core areas in the Gulf Coast, which are:

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

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

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

                                       -6-

<PAGE>



Under the existing commitments related to these three areas, the following table
summarizes the range of expected capital  requirements for the remainder of 1999
by program:
                                                     Estimated Investment
Operator                                     Minimum                  Maximum

East Bayou Sorrel Area                     $   -                  $    400,000
Formosa, Texana, and Ganado Prospects         55,000                   355,000
Maurice Prospect                             205,000                   460,000
                                           ----------              -------------
      Total                                $ 260,000               $ 1,215,000
                                            =========               ===========

If the above maximum anticipated capital  requirements are not required in 1999,
it is expected they will be in 2000.  Accordingly,  given the  potential  future
capital  requirements for the remainder of 1999 and 2000, the Company's  current
and anticipated  cash position may not be sufficient to cover the future working
capital and exploration obligations. The Company has vigorously explored various
alternatives for additional sources of capital. However, with the hyper-dilutive
potential of the outstanding  Series B Preferred Stock (should the holders elect
to convert into common stock), the Company has been unable to attract additional
equity capital.  For example,  using the Company's  recent common stock price of
$0.50,  and applying the applicable  discount of 25%,  should all the holders of
the Series B Preferred  Stock elect to convert  into common  stock,  the Company
would be required to issue  approximately 14.1 million shares in the conversion.
This would represent  approximately  90% of the then outstanding  common shares.
Presently,  the Company has only 4.0 million  shares of common stock  authorized
and is  obligated  under  the terms of the  Preferred  Stock  Agreement  to seek
approval of additional  authorized shares at its next meeting of stockholders to
allow for conversion should the Preferred stockholders choose to do so. However,
it cannot be  determined  at this time whether or not  additional  common shares
will be authorized by the common  shareholders and if not, what the consequences
may be.

Two  holders of Series B  Preferred  Stock  converted  1,497  shares of Series B
Preferred  into 21,584  shares of Common Stock in 1998 and one holder  converted
683 shares of Series B Preferred into 87,636 shares of Common Stock in the first
quarter of 1999. In addition,  the Company  repurchased 4,500 shares of Series B
Preferred  from two  holders  in 1998 for  $206,250  and 825  shares of Series B
Preferred from two holders for $51,313 in the first half of 1999. All holders of
Series B  Preferred  have  agreed not to sell or convert  outstanding  shares of
Series B Preferred until the Carpatsky  transaction described below is completed
or until November 15, 1999, whichever is earlier.

In December 1998 National Energy Group,  Inc. filed an Involuntary  Petition for
an Order and Relief under Chapter 11 of Title 11 of the United States Bankruptcy
Code in United  States  Bankruptcy  Court for the  Northern  District  of Texas,
Dallas  Division.  As  operator of the East Bayou  Sorrel  field,  which  yields
approximately 50% of the Company's current  production,  the bankruptcy petition
might adversely  affect future  development or operation of the field;  however,
the Company  does not expect that its interest in the field or  production  from
currently existing wells will be affected.

The  Company  does have an  unsecured  claim in the  bankruptcy  proceeding  for
various  amounts which the Company  believes were paid to National Energy Group,
Inc. as operator in connection with the drilling of existing  wells.  Collection
of these  amounts  may be  delayed  or may not  occur,  pending  disposition  of
National Energy Group, Inc.'s reorganization proceeding.

The total  claim is  approximately  $60,000.  However,  no  receivable  has been
recorded in the financial statements as of June 30, 1999.

In addition,  the Company has an unsecured claim in the bankruptcy proceeding of
TransTexas,  the  operator  of 3  wells  in  which  the  Company  owns  a  small
(approximately   2%)  working   interest.   The  amount  of  the  claim  is  for
approximately  $30,000 and is related to the pre-petition  undistributed revenue
from  production  of the wells  operated  by  TransTexas.  The  Company has been
receiving all of the corresponding post-petition production revenue. The Company
has not provided any allowance for the pre-petition amounts since it anticipates
it will  collect  the full  amount of the  receivable  which is  recorded on the
balance sheet at June 30, 1999.

In September 1998, the Company engaged San Jacinto Securities,  Inc. ("SJS"), an
investment  banking  firm  located in Dallas,  Texas,  to assist the  Company in
pursuing various strategic alternatives. Their efforts have focused primarily on
seeking a  potential  merger  candidate  for the  Company.  As a result of their
efforts,  the Company  signed a letter of intent on May 30, 1999 with  Carpatsky
Petroleum,  Inc.  ("Carpatsky"),  a publicly held company  traded on the Alberta
Stock Exchange under the symbol "KPY.AL". Carpatsky is engaged in production and
development  of oil, gas and  condensate  in the Republic of Ukraine with proven
reserves  much greater than those of the  Company's.  The  transaction  is still
conditioned upon, among other things,

                                       -7-

<PAGE>



the preparation and approval of a definitive merger agreement and regulatory and
shareholder approvals. Pursuant to the terms of the proposed merger transaction,
Pease will issue  approximately 35 million shares of common stock to acquire all
the  outstanding  stock of  Carpatsky.  In  addition,  all of Pease's  currently
outstanding  Series B Preferred  Stock will be  exchanged  for  approximately  9
million shares of common stock at the close of the transaction.  In exchange for
their services, SJS was paid a $150,000 non-refundable cash fee in 1998 and will
receive an additional 3% of the merger value in excess of $5.0 million should it
occur. In addition,  should a merger occur, the Company will be obligated to pay
out of its existing  working  capital  approximately  $220,000 to the  Company's
President/CFO  in connection with the severance terms included in his employment
agreement.

The  Carpatsky  assets  consist of  interests in two  separate  fields:  1.) the
Rudovsko-Chervonozavodskoye  field (a/k/a the "RC" field) located in the Poltava
District  of Eastern  Ukraine;  and 2.) the Bitkov  field  located in  southwest
Ukraine.  In both areas,  Carpatsky's planned operations will primarily focus on
exploitation  activities -- drilling  development wells and performing workovers
on existing  wellbores -- in order to monetize  proven  reserves.  Carpatsky has
reported that the 8/8's daily  production from the RC field for July 1999 was in
excess of 30 million cubic feet of gas and 120 bbls of condensate  from 3 wells.
Two  other  wells  are in the  final  stages  of  completion  and  should  be on
production during the third quarter of this year. In addition, one other well is
currently drilling and is expected to reach its proposed target depth of 18,000'
during  the  fourth  quarter  of this  year.  Carpatsky  expects  four to  eight
additional development wells will be drilled in the RC field between now and the
end of  2000.  Carpatsky's  net  revenue  interest  ("NRI")  in the RC  field is
approximately  20% as of June 30,  1999.  However,  pursuant to the terms of the
joint venture  agreement,  Carpatsky has the right to increase its NRI to 45% by
repaying $6.4 million advanced on its behalf by its joint venture partner. Since
this additional  contribution  would  essentially be purchasing proved producing
reserves,  Carpatsky intends making payments to increase its NRI sometime in the
near future.  At the Bitkov  field,  the  Carpatsky-Ukrainian  joint  venture is
producing in excess of 100 Bbls per day and 500-600 Mcf per day.  Carpatsky owns
a 45% NRI in this field. A Ukrainian oil and gas agency estimates this field may
have gross  reserves in excess of 700  million  barrels of oil, of which only 60
million have been  produced to date.  A study is now  underway to determine  how
much of the field's reserves can be economically produced and the most efficient
way to do so.

Carpatsky  was  privately  held until 1995 at which time it obtained its listing
through a reverse merger into a Canadian public corporation.  Carpatsky, through
its joint  ventures,  currently  employs  nine  people in Kiev,  all of whom are
experienced oil and gas professionals.  Les Texas,  President and founder,  is a
Hungarian born and educated  geologist-geophysicist  with extensive  operational
experience  in the US and  abroad.  In the early  1990's he  returned to Eastern
Europe and initiated a dialogue with ranking  officials in the Ukrainian  energy
sector  resulting  in the  conclusion  of two  joint  venture  arrangements  and
associated licenses,  which now comprise the Carpatsky assets. The relationships
developed  by  Les  Texas  within  Ukraine's  energy  industry,   combined  with
Carpatsky's  performance to date,  have led the company's  Ukrainian  partner to
indicate that additional properties may be available sometime in the future.

Carpatsky's  other executive  personnel  include Fred Hofheinz and David Melman.
Fred Hofheinz, a Houston attorney and prominent  businessman,  has been involved
in the oil and gas industry for more than thirty years.  He is a former Mayor of
Houston.  David  Melman has become  affiliated  with the  company to assist with
corporate finance, re-capitalization and investment banking initiatives and will
be joining  Carpatsky as their CEO. Mr.  Melman,  an attorney,  has held several
senior  management  positions  in and served on several  Boards of  Directors of
publicly  traded oil and gas companies.  If the proposed  merger  transaction is
ultimately  consummated,  the corporate offices will be consolidated in Houston,
Texas and the reconstituted Board of Directors will consist of four members from
Carpatsky and one member from Pease.

If the proposed  merger with  Carpatsky  is  ultimately  consummated,  the newly
combined  entity will be required to seek  additional  financing.  For instance,
Carpatsky's capital requirements for drilling and development  activities in the
Republic of Ukraine  during 1999 and 2000 are expected to range between $5.0 and
$15.0 million (the $15.0 million  includes the $6.4 million required to increase
their  NRI to 45%  in  the RC  field).  Their  projects  are  expected  to  fund
themselves  sometime in 2000 through  operating  cash flows but exactly when, or
if, this will actually occur cannot be determined at this time.  Therefore,  the
amount of future capital that will be sought assuming the merger occurs,  cannot
be determined at this time, but it can be reasonably assured to be at least $5.0
million. There can be no assurance given at this time that the necessary capital
can or will be raised under terms acceptable to the newly combined entity.

If the  contemplated  merger  with  Carpatsky  cannot  be  consummated  within a
reasonable  period of time,  then the Company itself may have to seek additional
financing.  However,  the  Company's  common stock was delisted  from the Nasdaq
SmallCap electronic market system on January 14, 1999 for failure to maintain an
average bid price of at least $1.00 per share. The

                                       -8-

<PAGE>



stock is now listed on the  over-the-counter  market on the NASD Bulletin  Board
(OTC BB).  It is  believed  that this  delisting  will have a material  negative
impact on the Company's ability to raise additional  equity capital.  Therefore,
it is unclear at this time what  alternatives for future working capital will be
available, or to what extent the potential dilution to the existing shareholders
may be. If additional  sources of financing are not  ultimately  available,  the
company may have to consider other alternatives,  including the sale of existing
assets,  cancellation  of  existing  exploration  agreements,  nonconsenting  on
proposed wells or workovers,  farmouts, joint ventures,  restructuring under the
protection of the Federal Bankruptcy Laws and/or liquidation.

RESULTS OF OPERATIONS

Overview
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.  Accordingly,  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.

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

Total Revenue
Total Revenue from all operations was as follows:

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

Oil and gas sales ...................  $ 551,065   100%   $ 655,660    81%
Gas plant, service and supply .......      --       --      152,095    19%
                                       ---------  -----    ---------  ----
     Total revenue ..................  $ 551,065   100%   $ 807,755   100%
                                       =========  =====    =========  ====

                                          For the Six Months Ended June 30,
                                              1999              1998
                                           ----------      --------------
                                        Amount      %       Amount      %

Oil and gas sales ................    $  962,859   100%  $1,247,268    76%
Gas plant, service and supply ....         --      --       397,363    24%
                                      ----------  -----  ----------   ----
     Total revenue ...............    $  962,859   100%  $1,644,631   100%
                                      ==========  =====  ==========   ====

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



                                       -9-

<PAGE>



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,
                                       ----------------------------    ------------------------------
                                          1999              1998            1999             1998
                                      --------------     ----------     ----------      -----------

Production:
   Oil (Bbls)
<S>                                         <C>                 <C>          <C>              <C>
        Rocky Mtns ..................          --            16,186            --            34,981
        Gulf Coast ..................        18,741          13,778          36,912          23,674
                                        -----------     -----------     -----------     -----------
             Combined Total .........        18,741          29,964          36,912          58,655
                                        ===========     ===========     ===========     ===========
   Gas (Mcf)
        Rocky Mtns ..................          --            72,450            --           157,417
        Gulf Coast ..................       105,696          76,357         213,052         107,312
                                        -----------     -----------     -----------     -----------
              Combined Total ........       105,696         148,807         213,052         264,729
                                        ===========     ===========     ===========     ===========
   BOE (6:1)
        Rocky Mtns ..................          --            28,261            --            61,217
        Gulf Coast ..................        36,357          26,504          72,421          41,559
                                        -----------     -----------     -----------     -----------
              Combined Total ........        36,357          54,765          72,421         102,776
                                        ===========     ===========     ===========     ===========
Average Collected Price:
   Oil (per Bbl)
        Rocky Mtns ..................   $      --       $     11.92     $      --       $     12.73
        Gulf Coast ..................   $     15.79     $     13.47           13.37           14.02
                                        -----------     -----------     -----------     -----------
              Combined Average ......   $     15.79     $     12.63     $     13.37     $     13.25
                                        ===========     ===========     ===========     ===========
   Gas (per Mcf)
         Rocky Mtns .................   $      --       $      1.45     $      --       $      1.44
         Gulf Coast .................   $      2.41     $      2.26            2.20            2.26
                                        -----------     -----------     -----------     -----------
              Combined Average ......   $      2.41     $      1.86     $      2.20     $      1.78
                                        ===========     ===========     ===========     ===========
   Per BOE (6:1)
         Rocky Mtns .................   $      --       $     10.54     $      --       $     10.99
         Gulf Coast .................   $     15.15     $     13.50           13.30           13.82
                                        -----------     -----------     -----------     -----------
              Combined Average ......   $     15.15     $     11.97     $     13.30     $     12.14
                                        ===========     ===========     ===========     ===========

Operating Margins:
    Rocky Mtns:
        Revenue -
            Rocky Mtns. - Oil .......   $      --       $   192,983            --       $   445,403
            Rocky Mtns. - Gas .......          --           104,822            --           227,461
                                        -----------     -----------     -----------     -----------
                                               --           297,805            --           672,864
        Cost ........................          --          (287,993)           --          (580,698)
                                        -----------     -----------     -----------     -----------
            Operating Margin ........   $      --       $     9,812            --       $    92,166
                                        ===========     ===========     ===========     ===========
            Operating Margin % ......          --                 3%           --                14%

    Gulf Coast:
        Revenue -
            Gulf Coast - Oil ........   $   295,831     $   185,535     $   493,368     $   331,852
            Gulf Coast - Gas ........       255,234         172,320         469,491         242,552
                                        -----------     -----------     -----------     -----------
                                            551,065         357,855         962,859         574,404
        Costs .......................       (86,958)       (101,474)       (171,434)       (129,409)
                                        -----------     -----------     -----------     -----------
            Operating Margin ........   $   464,107     $   256,381     $   791,425     $   444,995
                                        ===========     ===========     ===========     ===========
            Operating Margin % ......            84%             72%             82%             77%

Combined Totals:
        Revenue .....................   $   551,065     $   655,660     $   962,859     $ 1,247,268
        Costs .......................       (86,958)       (389,467)       (171,434)       (710,107)
                                        -----------     -----------     -----------     -----------
            Operating Margin ........   $   464,107     $   266,193     $   791,425     $   537,161
                                        ===========     ===========     ===========     ===========
            Operating Margin % ......            84%             41%             82%             43%
Production Costs per BOE before DD&A:
        Rocky Mtn Region ............   $      --       $     10.19     $      --       $      9.49
        Gulf Coast Region ...........          2.39            3.83            2.37            3.11
                                        -----------     -----------     -----------     -----------
            Combined Average ........   $      2.39     $      7.11     $      2.37     $      6.91
                                        ===========     ===========     ===========     ===========
Change in Revenue
Attributable to:
  Production ........................   $  (219,421)                    $  (379,876)
  Price .............................       114,826                          95,467
                                         -----------                    -----------
 Total Decrease in Revenue ..........   $  (104,595)                    $  (284,409)
                                         ===========                    ===========
</TABLE>


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

In May 1999, the J.P. Owen well located in the Maurice  Prospect in Fayetteville
Parish,  Louisiana,  operated  by  AHC,  began  experiencing  significant  water
production  as a result  of a very poor  primary  cement  job in the  completion
casing.  Accordingly,  in June  1999  the  well  was  shut in and  attempts  are
currently underway by AHC to perform reasonable  remedial  operations to squeeze
the zones to shut off the water source and restore production.  Given the nature
of  the  procedures  being  undertaken  by  AHC,  the  Company  believes  it  is
problematic that the remedial operations will be successful. Should the remedial
operations  not be  successful,  it may have a negative  impact on the Company's
future  production  and cash flows.  For instance,  the Company's  proportionate
share of production from this well totaled 13,360 Mcf of gas and 490 Bbls of oil
for the first six months of 1999, representing approximately 4% (on a BOE basis)
of the Company's total  production  through June 30, 1999. At December 31, 1998,
this well  represented  approximately  14.5% of the Company's  estimated  proven
reserves  (PV-10).  It is unknown at this time  whether or not this well will be
successfully restored to production.

Gas Plant, Service and Supply
As previously  discussed,  the Company sold these assets in 1998.  However,  the
historical operating results are as follows:

<TABLE>
<CAPTION>
                                          For the Three Months                        For the Six Months
                                              Ended June 30,                             Ended June 30,
                                 -------------------------------------        ---------------------------------
                                       1999                     1998                1999              1998
                                 ----------------          --------------       ------------     --------------

<S>                             <C>                         <C>                 <C>                <C>
Revenue                         $       -                   $  152,095          $     -            $  397,363
Costs                                   -                     (177,274)               -              (399,013)
                                -----------------           -----------         ------------       ------------
   Net Operating Income         $       -                   $  (25,179)         $     -            $   (1,650)
                                ================            ============        ============        ===========
</TABLE>

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



                                      -10-

<PAGE>



General and Administrative
The decrease in general and  administrative  ("G&A") expenses of $140,869 during
the first half of 1999 when compared to the same period in 1998 is summarized as
follows:

$ 100,289     -  Net reduction of payroll costs substantially attributed to the
                 elimination of administrative positions
   30,000     -  Legal and accounting.
    9,722     -  Travel costs.
      858     -  All other, net.
$ 140,869

The Company has and will take steps to  significantly  reduce  future G&A costs,
and expects "core" G&A costs in 1999 to be approximately  $60,000 to $70,000 per
month. However, it is expected additional amounts will be incurred in connection
with the efforts to consummate a merger transaction.

Depreciation, Depletion and Amortization
Depreciation,  Depletion and Amortization  ("DD&A") for the periods presented by
cost center consisted of the following:

<TABLE>
<CAPTION>
                                                        For the Three Months                     For the Six Months
                                                           Ended June 30                           Ended June 30
                                                    --------------------------             -----------------------------
                                                        1999           1998                  1999               1998
                                                   -----------       ---------            ------------      ------------

<S>                                                 <C>           <C>                      <C>                <C>
Oil and Gas Properties - Gulf Coast                 $ 278,801     $  205,469               $ 535,892          $ 339,636
Oil and Gas Properties - Rocky Mtns.                     -            83,162                       -            186,081
Gas Plant, Service and Supply
   Operations                                            -            97,136                       -            201,095
Furniture and Fixtures                                  5,813         13,227                  12,097             25,319
                                                    ----------     -----------             -----------        -----------
    Total                                           $ 284,614     $  398,994               $ 547,989          $ 752,131
                                                    =========       ==========               ==========        =========
</TABLE>

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

<TABLE>
<S>                                     <C>            <C>          <C>          <C>
         Rocky Mountains                $    -         $   2.94     $    -       $ 3.04
         Gulf Coast                     $   7.67       $   7.75     $   7.40     $ 8.17
         Combined Total                 $   7.67       $   5.27     $   7.40     $ 5.12
</TABLE>

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

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

<TABLE>
<CAPTION>
                                                    For the Three Months           For the Six Months
                                                        Ended June 30,                Ended June 30,
                                                  ------------------------      -----------------------
                                                     1999          1998             1999        1998
                                                  ---------    -----------      ---------    ----------

<S>                                               <C>          <C>              <C>          <C>
Interest paid or accrued ......................   $  69,958    $  99,372        $ 139,105    $ 197,633
Amortization of debt discount .................      54,835       80,946          109,669      161,892
Amortization of debt issuance costs ...........      34,559       51,102           69,118      102,203
                                                  ---------    ---------         ---------    ---------
         Total interest incurred ..............     159,352      231,420          317,892      461,728
Interest capitalized for exploration activities     (69,371)    (231,151)        (137,981)    (461,212)
                                                  ---------    ---------         ---------    ---------
              Interest expense ................   $  89,981    $     269        $ 179,911    $     516
                                                  =========    =========        =========    =========
</TABLE>

The lower interest incurred in 1999 is substantially attributed to the reduction
of outstanding debt. In connection with the sale of the Rocky Mountain assets in
1998, the Company paid down $1.2 million (or 30%) of the outstanding convertible
debentures.  This reduced the  outstanding  principal  from $4.0 million to $2.8
million.


                                      -11-

<PAGE>



Impairment Expense - Oil and Gas Properties
The Company uses the full cost method of accounting for oil and gas  activities.
The full  cost  method  regards  all  costs  of  acquisition,  exploration,  and
development  activities  as  being  necessary  for the  ultimate  production  of
reserves.  All of those costs are incurred with the knowledge  that many of them
relate to  activities  that do not result  directly  in finding  and  developing
reserves.  However,  the  benefits  obtained  from the  prospects  that do prove
successful, together with benefits from past discoveries, may ultimately recover
the costs of all activities,  both successful and unsuccessful.  Thus, all costs
incurred in those  activities  are  regarded  as  integral  to the  acquisition,
discovery,  and development of reserves that ultimately  result from the efforts
as a whole  and are  thereby  associated  with the  Company's  proved  reserves.
Establishing a direct  cause-and-effect  relationship between costs incurred and
specific reserves discovered,  which is the premise under the successful efforts
accounting method, is not relevant to the full cost concept.  However, the costs
accumulated  in the  Company's  full cost pool are  subject to a  "ceiling",  as
defined by Regulation  SX Rule  4-10(e)(4).  As prescribed by the  corresponding
accounting  standards for full cost, all the accumulated  costs in excess of the
ceiling, are to be expensed periodically by a charge to impairment.  The Company
incurred an impairment charge of $639,043 during the first six months of 1998 as
a result of costs  incurred  with dry holes  (which  increased  the  accumulated
costs) and the continuing  collapse of oil and gas prices  between  December 31,
1997 and June 30, 1998 that substantially lowered the "ceiling" of the full cost
pool. No impairment charge was recognized during the first half of 1999.

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

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

<TABLE>
<CAPTION>
                                     For the Three Months      For the Six Months
                                        Ended June 30,            Ended June 30,
                                    ----------------------   -----------------------
                                         1999         1998         1999         1998
                                   ----------   ----------   ----------   ----------
<S>                                <C>          <C>          <C>          <C>
Dividends declared .............   $   66,162   $   70,523   $  132,508   $  141,356
Non-cash imputed dividend charge         --        310,518         --      1,093,024
                                   ----------   ----------   ----------   ----------
         Total .................   $   66,162   $  381,041   $  132,508   $1,234,380
                                   ==========   ==========   ==========   ==========
</TABLE>

The Series B Preferred  Stock became  convertible  into common stock on April 1,
1998 at a conversion  price equal to a 12% discount to the average trading price
of the common stock prior to conversion.  This discount  increased  periodically
until it topped out at 25% (this discount is considered a "beneficial conversion
feature").  The additional  non-cash imputed dividend charge included in the net
loss  applicable to common  stockholders  represents the intrinsic  value of the
discount applicable through the period presented. No additional non-cash imputed
dividend  charges  will be  incurred  in future  periods  since  the  conversion
discount has previously topped out at 25%. The holders of the Series B Preferred
Stock are entitled to dividends equal to $2.50 per annum,  payable  quarterly in
cash or  additional  shares of  Series B  Preferred  Stock at the  option of the
Company.

OTHER MATTERS

Disclosure Regarding Forward-Looking Statements
This  report on Form 10-QSB  includes  "forward-looking  statements"  within the
meaning  of  Section  27A of  the  Securities  Act  of  1933,  as  amended  (the
"Securities  Act"),  and Section 21E of the Securities  Exchange Act of 1934, as
amended (the "Exchange Act"). All statements other than statements of historical
facts included in this report, including,  without limitation,  statements under
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations"  regarding the Company's  contemplated  merger,  financial position,
reserve quantities, plans and objectives of management of the Company for future
operations  and  capital  expenditures,  and  statements  regarding  the planned
Carpatsky  transactions and the Carpatsky assets are forward-looking  statements
and the assumptions upon which such forward-looking statements are based are

                                      -12-

<PAGE>



believed  to be  reasonable.  The  Company  can  give  no  assurance  that  such
expectations and assumptions will prove to be correct.  Reserve estimates of oil
and gas  properties  are  generally  different  from the  quantities  of oil and
natural gas that are ultimately  recovered or found.  This is particularly  true
for estimates  applied to exploratory  prospects.  Additionally,  any statements
contained in this report  regarding  forward-looking  statements  are subject to
various known and unknown risks, uncertainties and contingencies,  many of which
are beyond the control of the Company.  Such risks and  uncertainties  may cause
actual results,  performance,  achievements or expectations to differ materially
from the anticipated results, performance, achievements or expectations. Factors
that may affect such forward-looking statements include, but are not limited to:
the contemplated  merger not be consummated,  the Company's  ability to generate
additional capital to complete its planned drilling and exploration  activities;
risks inherent in oil and gas acquisitions,  exploration,  drilling, development
and  production;  price  volatility  of oil and gas;  competition;  shortages of
equipment,  services  and  supplies;  U.S.  and foreign  government  regulation;
environmental matters;  implications to Carpatsky from conducting its operations
in Ukraine and related political and geographical risks;  financial condition of
the other companies participating in the exploration, development and production
of oil and gas programs;  and other matters  beyond the  Company's  control.  In
addition, since all of the prospects in the Gulf Coast are currently operated by
another party, the Company may not be in a position to control costs, safety and
timeliness of work as well as other critical factors  affecting a producing well
or exploration and development activities. All written and oral forward- looking
statements  attributable  to  the  Company  or  persons  acting  on  its  behalf
subsequent to the date of this report are expressly  qualified in their entirety
by this disclosure.

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

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

Because  the  Company  believes  that  it has no  material  internal  Year  2000
problems,  the  Company  has not  expended  and  does  not  expect  to  expend a
significant amount of funds to address Year 2000 issues. It is Company policy to
continue to review its suppliers' Year 2000 compliance and require  assurance of
Year 2000  compliance  from new suppliers;  however,  such  monitoring  does not
involve a significant cost to the Company.

The  Company is  materially  dependent  on Plains  Marketing,  L.P.  ("Plains"),
National Energy Group, Inc. ("NEG") and Amerada Hess Corporation ("AHC") for the
delivery and payment of the  Company's oil and natural gas.  These  companies in
turn are dependent on various third party vendors for delivery and payment.  The
Company has or will request  written  assurances  from Plains,  NEG and AHC that
they have  examined  their  Year 2000  issues.  However,  as of the date of this
report,  the Company has not received a response.  The Company will  continue to
request such  assurance  but it should be  emphasized  that no assurance  can be
given at this time that Plains,  NEG or AHC, or their third party vendors are or
will be Year  2000  compliant.  In the event  that one or more of the  Company's
vendors, including Plains, NEG, AHC and their respective vendors, were to have a
material  Year  2000  problem,   the  Company   believes  that  the  foreseeable
consequences  would be a  temporary  delay in  revenue  collection  caused by an
interruption in computerized billing (and not an interruption in the actual flow
of the Company's oil or natural gas), which may have a substantial impact on the
Company's  ability  to  conduct  operations.  The  Company  does  not  have  any
contingency plan to address this possibility.






                                      -13-

<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) and (b): not applicable

(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, 1999 and through the date of this Report.

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

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

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

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



                                      -14-

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

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

No matter was  submitted  to a vote of  Company's  security  holders  during the
period covered by this report.

Item 5. Other Information

There is no  information  reportable  under this item for the period  covered by
this report.

Item 6. Exhibits and Reports on Form 8-K

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

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

(b)      The Company filed the following report on Form 8-K for the period
         April 1, 1999 through the date of this report:

               Item Reported            Date              Financial Statements
               -------------            ----              --------------------
         (1)        5               June 4, 1999          None - Not Applicable


                                   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: August 13, 1999               By: /s/ Patrick J. Duncan
                                    Patrick J. Duncan
                                    President, Chief Financial Officer
                                    and Principal Accounting Officer




                                      -15-

<PAGE>