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


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

                                   FORM 10-QSB

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

                    FOR THE QUARTER ENDED SEPTEMBER 30, 1998

                          Commission File Number 0-6580
                                [GRAPHIC OMITTED]







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


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

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934 during the past 12 months (or for such shorter  period that the  registrant
was  required  to file such  reports),  and (2) has been  subject to such filing
requirements  for the past 90 days.  Yes X No____ 
     As of  November  13,  1998 the registrant had 16,007,048  shares of its 
$0.10 par value Common Stock issued and outstanding.  
Transitional  Small Business Issuer Disclosure Format (check one):Yes ____ No X
--------------------------------------------------------------------------------


                                       -1-

<PAGE>



TABLE OF CONTENTS
                                                                         PAGE
                                                                        NUMBER


PART I - Financial Information                                                 
           Item 1.  Financial Statements
                  Consolidated Balance Sheets. . . . . . . . .. . .           3
                       September 30, 1998 (unaudited) and December 31, 1997
                  Consolidated Statements of Operations (unaudited) . .       4
                        For the Three and Nine Months Ended September 30, 1998
                        and 1997
                  Consolidated Statements of Cash Flows (unaudited) . . .   5-6
                    For the Nine Months Ended September 30, 1998 and 1997
                  Notes to Consolidated Financial Statements . . . . . .    7-8
            Item 2.  Management's Discussion and Analysis . . . . . . . .     8
                               Liquidity and Capital Resources . . . . .      8
                         Results of Operations . . . . . . . . . .  . . .    10
                          Overview . . . . . . . . . . . . . . . . . . .     10
                              Change in Accounting Principle. . . . . . .    11
                              Assets Held For Sale. . . . . . . . . . . .    11
                          Total Revenue . . . . . . . . . . . . . . . . .    11
                          Oil and Gas . . . . . . . . . . . . . . . . . .    12
                          Gas Plant Processing . . . . . . . . . . . . . .   13
                          Oil Field Services and Oil Field Supply . . . .    14
                          Well Administration and Other Income . . . . . .   14
                          Consulting Agreement - Related Party . . . . . .   14
                          General and Administrative . . . . . . . . . . .   14
                          Depreciation, Depletion and Amortization . . . .   15
                          Interest Expense. . . . . . . . . . . . . . . .    15
                              Impairment Expense - Oil and Gas Properties.   15
                              Dividends and Net Loss Per Common Share. . .   16
                         Other Matters. . . . . . . . . . . . . . . . . .  . 16
                              Disclosure Regarding ForwardLooking Statements 16
                              Year 2000 Issue. . . . . . . . . . . . . . . ..17
Part II - Other Information . . . . . . . . . . . . . . . . . . . . . . . .  18
         Item 1.  Legal Proceedings . . . . . . . . . . . . . . . . . . . .  18
         Item 2.  Changes in Securities . . . . . . . . . . . . . . . . . .  18
         Item 3.  Defaults Upon Senior Securities . . . . . . . . . . . . .  18
         Item 4.  Submission of Matters to a Vote of Security Holders . . .  19
         Item 5.  Other Information . . . . . . . . . . . . . . . . . . . .  19
         Item 6.  Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 19
Part III - Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . .  20




                                       -2-

<PAGE>



                         PART 1 - FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS
                   PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                             September 30,        December 31,
                                                1998                  1997     
                                            ----------------    ----------------
                                              unaudited)

CURRENT ASSETS:                                                            
   Cash and equivalents                   $  1,852,714           $  6,547,804
   Trade receivables                           550,137                757,434
   Prepaid expenses and other                   77,881                 43,979
                                           --------------     ---------------
        Total current assets                 2,480,732              7,349,217
                                            ------------       -------------

ASSETS HELD FOR SALE                           988,157              4,048,000
                                            -------------       -------------
OIL AND GAS PROPERTIES, at cost 
(full cost method):
   Unevaluated properties                    6,567,076              4,522,917
   Costs being amortized                    12,499,361              9,424,932
                                             -----------         -------------
        Total oil and gas properties        19,066,437             13,947,849
   Less accumulated amortization            (8,370,751)            (4,965,232)
                                           -------------        --------------
        Net oil and gas properties          10,695,686              8,982,617
                                             -----------         -------------
 OTHER ASSETS:                                                   
   Deferred debt issuance costs, net           357,110                664,318
   Deposits and other                          167,493                167,493
   Office equipment and vehicles, net           70,965                 82,498
                                           --------------      --------------
          Total other assets                   595,568                914,309
                                            -------------       -------------
TOTAL ASSETS                           $    14,760,143       $     21,294,143
                                            ===========           ===========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
   Accounts payable, trade             $        773,538      $      1,500,239
   Accrued production taxes                     236,851               204,108
   Other accrued expenses                       407,982               349,396
                                               -----------       --------------
         Total current liabilities            1,418,371             2,053,743
                                              ------------        -------------
LONG-TERM LIABILITIES:
   Convertible Debentures, net of discount    2,215,879             2,922,703
   Accrued production taxes                     120,593               226,019
                                             -------------       --------------
        Total long-term liabilities           2,336,472             3,148,722
                                              ------------        -------------
STOCKHOLDERS' EQUITY:
   Preferred  Stock,  par value $0.01 per
      share,  2,000,000  shares  authorized,
      111,836  and  113,333  shares  of Series 
      B 5% PIK  Cumulative  Convertible
      Preferred Stock issued and outstanding,
      respectively (liquidation preference of
      $5,591,800 at September 30, 1998).          1,118                 1,133
   Common Stock, par value $0.10 per share, 
      40,000,000 shares authorized, 16,007,048
      and 15,789,955 shares issued and 
      outstanding, respectively.              1,600,705             1,578,996
   Additional paid-in capital                36,612,445            36,875,394
   Accumulated deficit                       27,208,968)          (22,363,845)
                                            ------------        ---------------
         Total stockholders' equity          11,005,300            16,091,678
                                            -----------          --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 14,760,143       $    21,294,143
                                            ===========             ===========



                                       -3-

<PAGE>



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

<TABLE>
<CAPTION>
                                                       For The Three Months       For The Nine Months
                                                        Ended September 30,       Ended September 30,       
                                                        1998           1997*             1998           1997*      
                                                    -----------    ------------     -----------    ------------

REVENUE:
<S>                                                <C>            <C>             <C>             <C>         
   Oil and gas sales ...........................   $   606,016    $    868,749    $  1,853,284    $  2,328,328
   Gas plant processing ........................        76,719         153,848         256,246         525,704
   Oil field services and supply ...............        54,336         181,373         272,172         525,585
   Well administration and other income ........         4,116          28,666          22,640          67,570
                                                    ------------    ------------    ------------    ------------
        Total revenue ..........................       741,187       1,232,636       2,404,342       3,447,187
                                                    ------------    ------------    ------------    ------------
OPERATING COSTS AND EXPENSES:
   Oil and gas production ......................       285,888         390,718         995,995       1,125,214
   Gas plant processing ........................        99,898          79,346         275,046         283,645
   Oil field services and supply ...............        65,921         176,090         289,786         469,223
   General and administrative ..................       544,669         339,079       1,071,555       1,045,258
   Consulting agreement-related party ..........        63,925         159,292         189,386         340,470
   Depreciation, depletion and amortization ....       708,431         875,769       1,460,562       1,850,881
   Impairment ..................................     2,100,000       2,394,519       2,739,043       4,784,451
                                                   ------------    ------------    ------------    ------------
            Total operating costs and expenses .    (3,868,732)      4,414,813       7,021,373       9,899,142
                                                   ------------    ------------    ------------    ------------
LOSS FROM OPERATIONS ...........................    (3,127,545)     (3,182,177)     (4,617,031)     (6,451,955)
                                                    -----------    ------------    ------------    ------------
OTHER INCOME (EXPENSES):
   Early extinguishment of debt ................      (396,742)           --          (396,742)           --
   Interest income .............................        21,525          70,029         167,695         133,142
   Interest expense ............................        (1,488)       (105,655)         (2,004)       (507,667)
   Gain (Loss) on sale of assets ...............         2,500          (3,855)          2,957         (10,046)
                                                    -----------    ------------    ------------    ------------
        Total other income (expenses), net .....      (374,205)        (39,481)       (228,094)       (384,571)
                                                   ------------    ------------    ------------    ------------
NET LOSS .......................................   $(3,501,750)  $  (3,221,658)   $ (4,845,125)   $ (6,836,526)
                                                   ============    ============    ============    ============
NET LOSS APPLICABLE TO COMMON
     STOCKHOLDERS ..............................   $(3,992,024)  $  (3,221,658)   $ (6,569,779)   $ (6,926,495)
                                                  ============    ============    ============    ============
NET LOSS PER COMMON SHARE ......................   $     (0.25)   $      (0.22)   $      (0.41)   $      (0.57)
                                                  ============    ============    ============    ============
WEIGHTED AVERAGE NUMBER OF
     COMMON SHARES OUTSTANDING .................    15,930,000      14,976,000      15,842,000      12,191,000
                                                  ============    ============    ============    ============
</TABLE>

 *Restated for full cost method of accounting  for oil and gas  activities - See
Note 2 






                                       -4-

<PAGE>



                   PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (unaudited)
                                                        For The Nine Months
                                                        Ended September 30,    
                                                          1998           1997* 
                                                      -----------   -----------

CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss .......................................  $ (4,845,125) $ (6,836,526)
   Adjustments to reconcile net loss to net cash
      provided by operating activities:
      Provision for depreciation and depletion ....     1,460,562     1,816,384
      Provision for impairment ....................     2,739,043     4,784,451
      Loss on Early Extinguishment of Debt ........       396,742          --
      Amortization of intangible assets ...........          --         316,827
      Stock-based compensation ....................          --          70,154
      (Gain) Loss on sale of property and equipment        (2,957)       10,046
   Changes in operating assets and liabilities:
   (Increase) decrease in:
      Trade receivables ...........................       207,297      (169,649)
      Inventory ...................................       128,418        34,164
      Prepaid expenses and other assets ...........       (33,902)      (23,421)
   Increase (decrease) in:
      Accounts payable ............................       145,521       (17,343)
      Accrued expenses ............................      (107,465)     (132,334)
                                                       -----------  -----------
     Net cash provided by (used in) operating
          activities ..............................        88,134      (147,247)
                                                       -----------  -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Capital expenditures for property and equipment     (6,250,614)   (9,586,053)
   Proceeds from sale of property and equipment ...     2,987,150        52,867
   Proceeds from redemption of certificate of
          deposit .................................          --          17,500
                                                      -----------    -----------
      Net cash used in investing activities .......    (3,263,464)   (9,515,686)
                                                      -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Repayment of long-term debt ....................    (1,201,327)     (331,747)
   Proceeds from sale of common stock .............          --       9,480,000
   Proceeds from exercise of common stock
          options and warrants ....................           939     3,866,353
   Offering costs .................................      (146,765)   (1,408,178)
   Payment of Preferred Stock dividends ...........      (141,357)         --
   Purchase of 500 shares of Preferred Stock ......       (31,250)         --
                                                      -----------    -----------
      Net cash used in financing activities .......    (1,519,760)   11,606,428
                                                      -----------    -----------
 INCREASE (DECREASE) IN CASH &
      EQUIVALENTS .................................    (4,695,090)    1,943,495
 CASH & EQUIVALENTS, beginning of period ..........     6,547,804     1,995,860
                                                      -----------    -----------
 CASH & EQUIVALENTS, end of period ................  $  1,852,714  $  3,939,355
                                                      ===========    ===========

*Restated  for full cost method of accounting  for oil and gas  activities - See
Note 2.


                                       -5-

<PAGE>



                   PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (unaudited)
                                   (continued)
                                                         For The Nine Months
                                                          Ended September 30,  
                                                          1998            1997 
                                                   -------------  -------------

SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
   Cash paid for interest:
      Related parties .............................   $     -      $     42,417
      Other .......................................       299,646       357,801
                                                          --------     --------
         Total ....................................   $   299,646  $    400,218
                                                          ========     ========
   Cash paid for income taxes .....................   $       --   $      --
                                                          ========     --------
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
   Increase (Decrease) in accounts payable for the
        purchase of property and equipment -
        principally oil and gas properties ........   $   (725,456) $   455,503
                                                          ========   ========
   Capitalized portion of debt issuance/discount
        costs .....................................   $   396,141   $      --   
                                                          ========   ========
   Long-term debt incurred for purchase of vehicles   $   32,610    $    50,691
                                                          ========   ========
   Acquisition of oil and gas properties for common
         stock ....................................   $     --      $   885,000
                                                          ========   ========
   Accrued Preferred Stock dividends ..............   $   69,585    $     --   
                                                          ========   ========
   Conversion of debentures into common stock .....   $     --      $   605,437
                                                          ========   ========
   Debt Issuance Costs associated with converted
           debentures .............................   $     --      $   181,470
                                                          ========   ========



                                       -6-

<PAGE>



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

Note 1 - Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. They do not include all information and notes required by
generally  accepted  accounting  principles for complete  financial  statements.
However,  except as disclosed  herein,  there has been no material change in the
information disclosed in the notes to consolidated financial statements included
in the Annual  Report on Form 10-KSB of Pease Oil and Gas Company (the  Company)
for the year  ended  December  31,  1997.  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,
1997. 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 - Change In Accounting Principle:
As more thoroughly discussed in the Company's 1997 Annual Report on Form 10-KSB,
the  Company  changed  its  method  of  accounting  for oil  and  gas  producing
activities from the successful efforts method to the full cost method during the
fourth quarter of 1997. The 1997 financial statements presented herein have been
restated to reflect the change. As a result of the change in accounting  method,
the net loss applicable to common shareholders increased in 1997 as follows:

<TABLE>
<CAPTION>
                                                     For the Three Months     For the Nine Months
                                                        Ended 9/30/97            Ended 9/30/97     
             Description                             Net Loss    Per Share      Net Loss      Per Share
<S>                                               <C>            <C>          <C>            <C>      
As Previously Reported Under Successful Efforts   $(1,053,153)   $  (0.07)    $(2,292,543)   $  (0.19)
As Reported under Full Cost ...................    (3,221,658)      (0.22)     (6,926,495)      (0.57)
                                                  -----------        -----    -----------       -----
      Increase in Net Loss under Full Cost ....   $(2,168,505)   $  (0.15)    $(4,633,952)   $  (0.38)
                                                  ===========        =====     ===========       =====
</TABLE>

Note 3 - Long Term Debt:
Long-term  debt at September  30, 1998 and  December  31, 1997  consisted of the
following:

                                             Dec. 31, 1997       Sept. 30, 1998
                                             -------------       --------------
Convertible debentures, interest at 10%
   collateralized by certain oil and gas 
   properties, due April 2001               $    3,975,000      $    2,782,500
Less unamortized discount                       (1,052,297)           (566,621)
                                            ----------------  -----------------
         Net carrying value                 $    2,922,703     $     2,215,879 
                                            ==============     ================

As more thoroughly discussed in the Company's 1997 Annual Report on Form 10-KSB,
the Company initiated a private placement in April 1996 to sell up to $5,000,000
of  collateralized  convertible  debentures  in the form of  "Units".  Each Unit
consisted of one $50,000 five-year 10% collateralized  convertible debenture and
detachable  warrants to purchase 25,000 shares of the Company's  common stock at
$1.25 per share.  In November  1996,  the offering was completed and the Company
was successful in selling the entire $5,000,000  generating net cash proceeds of
$4,300,000.  The estimated fair value of the  detachable  warrants of $1,829,000
was treated as a discount  and is bring  amortized  using the  interest  method.
During 1997,  $1,025,000 of the debentures  converted into common stock pursuant
to the terms of the debenture agreement. On September 30, 1998, the Company sold
certain oil and gas properties  located in the Rocky  Mountains,  along with its
gas plant, service and supply businesses,  that collateralized these debentures.
In connection  with that sale, the Company  prepaid  $1,192,500 of the principal
when the holders released the corresponding collateral.

Note 4 - Early Extinguishment of Debt:
In connection  with the prepayment of $1,192,500 on September 30, 1998 discussed
in Note 3, the Company  incurred a non-cash  charge of $396,742  associated with
the unamortized discount and debt issuance costs associated with the convertible
debentures.

                                       -7-

<PAGE>



Note 5 - 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.  During 1997, the net loss applicable to common
stockholders  includes  $89,969 for the nine months  ended of accrued but unpaid
dividends  related to the Series A Preferred Stock. The Series A Preferred Stock
automatically  converted into common on June 11, 1997. During 1998, 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:

                                    For the Period Ended September  30, 1998  
                                      Three Months                 Nine Months 
   Dividends declared               $     69,585                $    210,941
   Imputed non-cash dividend             420,689                   1,513,713
                                      ------------                ------------
                  Total             $    490,274                 $ 1,724,654
                                       ===========                 ===========

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 increases monthly through
March 1999 when the  discount  tops 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 September 30, 1998. As long
as any Series B Preferred  Stock is  outstanding,  additional  non-cash  imputed
dividend  charges will be incurred in future periods as the conversion  discount
increases until the discount tops out at 25%.

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS

Liquidity, Capital Expenditures and Capital Resources
At September 30, 1998, the Company's cash balance was $1,852,714 with a positive
working capital position of $1,062,361, compared to a cash balance of $6,547,804
and a positive  working capital position of $5,295,474 at December 31, 1997. The
change in the Company's cash balance is summarized as follows:

   Cash balance at December 31, 1997                            $   6,547,804
   Sources of Cash:
      Proceeds from the sale of property and equipment              2,987,150
      Cash provided by operating activities                            88,134
      Proceeds from the exercise of common warrants                       939
                                                               -----------------
            Total Sources of Cash                                   3,076,223
   Uses of Cash:
      Exploration Activities - Gulf Coast                           6,185,498
      Payments on long term debt                                    1,201,327
      Offering Costs associated with Series B Preferred Stock         146,765
      Dividends Paid on Series B Preferred Stock                      141,357
      Purchase of 500 shares of Preferred Stock                        31,250
      Other Capital Expenditures                                       65,116
                                                                ---------------
            Total uses of cash                                      7,771,313
                                                                  -------------
   Cash balance at September 30, 1998                           $   1,852,714
                                                                 =============

During 1998, the Company generated  approximately  $3.0 million from the sale of
existing assets consisting principally of its Rocky Mountain assets (certain oil
and gas properties,  the gas plant, service and supply businesses).  The Company
used  approximately  $1.2  million of these  proceeds  to pay down the  existing
convertible   debentures  in  connection  with  the  mortgage   release  of  the
corresponding oil and gas properties. The Company is currently under contract to
sell  substantially  all of its remaining Rocky Mountain assets for $855,000 and
is scheduled to close on December 4, 1998.  Should the sale close, the effective
date will be November 1, 1998 and all the proceeds will be available for working
capital.



                                       -8-

<PAGE>



As noted,  most of the  Company's  uses of cash  were  deployed  in  exploration
activities  in the Gulf  Coast.  The costs  incurred in 1998 are  summarized  as
follows  (the  difference  between the total  incurred,  as  illustrated  in the
following  table,  and the total amount paid in 1998,  relates to the changes in
accounts  payable at December 31, 1997 and  September  30, 1998 as well as other
non-cash amounts capitalized in the full cost pool):

<TABLE>
<CAPTION>
                                                               PROGRAM OPERATOR                                                    

             Category ........         NEGX      Parallel           AHC         Other         Total             %
------------------------------   ----------    ----------    ----------    ----------    ----------    ----------

<S>                              <C>           <C>           <C>           <C>           <C>                   <C>
  Successful Efforts .........   $  695,775    $     --      $  642,916    $   38,087    $1,376,778            23%
                                               ----------    ----------    ----------    ----------    ----------
  Exploratory Dry Holes ......      646,527       182,185          --            --         828,712            14%
                                               ----------    ----------    ----------    ----------    ----------
  Land, G&G-Seismic Programs .    1,232,447     1,498,344          --            --       2,730,791            47%
                                               ----------    ----------    ----------    ----------    ----------
  Other Exploration Costs ....         --            --            --         932,313       932,313            16%
                                                                           ----------    ----------    ----------
         Total Exploration Costs $2,574,749    $1,680,529    $  642,916    $  970,400    $5,868,594           100%
                                 ==========    ==========    ==========    ==========    ==========    ==========
         Percent .............           44%           29%           11%           16%          100%
</TABLE>

Under the existing  commitments,  the Company's anticipated capital requirements
to meet  expected  drilling and  development  costs will be  approximately  $0.6
million for the remainder of 1998 and  approximately  $2.8 million for 1999. The
Company's  current and  anticipated  cash position will be insufficient 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 any  additional  equity capital during 1998. For example,
using the  Company's  recent  common  stock  price of $0.25,  and  applying  the
applicable  discount  of 22%,  should all the  holders of the Series B Preferred
Stock elect to convert into common  stock,  approximately  27.5  million  shares
would be issued in the conversion. This would represent approximately 63% of the
then  outstanding  common  shares.  The  Company has  entered  into  preliminary
negotiations  to  restructure  the  Preferred  Stock  into a  non-dilutive  debt
instrument.   However,  should  this  occur,  the  Preferred  Stockholders  have
indicated  they would  require a paydown on their  outstanding  obligation of at
least $1.5 million. The negotiations on the specific terms are ongoing. However,
should a paydown be required,  the Company would attempt to fund this obligation
through  existing  working  capital,  the sale of its remaining  Rocky  Mountain
assets, the sale of additional common stock and/or a sale, either in whole or in
part, of its interest in the Formosa, Texana and Ganado 3-D Prospects located in
and around Jackson County, Texas (operated by Parallel Petroleum).  It should be
noted this  concept and  negotiation  is in its early stages and there can be no
assurance such a transaction will ever come to fruition.

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 will focus primarily on
seeking a potential  merger  candidate  for the Company.  As of the date of this
report, over a dozen potential  candidates had been identified and due diligence
by many of these candidates has already commenced.  However, no assurance can be
given at this time whether or not a merger  transaction  will eventually  occur,
what  consideration  may be offered to the  Company  in such a  transaction,  or
whether an offer to merge will be accepted  by the Company or its  shareholders.
In exchange for their services, SJS will be paid a $150,000  non-refundable cash
fee (of which $50,000 was paid in September 1998) plus 3% of the merger value in
excess of $5.0 million.

The collapse of the oil market have significantly impaired the marketability and
value of the  Company's  existing  assets and the  ability  to raise  additional
capital.  Therefore, it cannot be determined at this time what courses of action
will  ultimately be taken by the Company.  In any case, the Company will have to
seek additional financing and it is unclear what alternatives for future working
capital  will be  available,  nor 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,  farmouts, joint vantures, restructuring under the protection of the
Federal Bankruptcy Laws and/or liquidation.

The Company's  common stock is traded on the Nasdaq SmallCap  electronic  market
system under the symbol  "WPOG".  Nasdaq  requires that a company  listed on the
SmallCap  market must  maintain an average bid price of at least $1.00 per share
to keep its listing.  The Company's  stock does not presently  trade for greater
than $1.00 per share and on July 2, 1998 the Nasdaq  notified  the Company  that
the stock would be delisted on October 2, 1998 unless the market  price is $1.00
per share or greater prior to that date. The Company applied for and was granted
a stay on the delisting  until at least November 20, 1998,  when an oral hearing
will be held in  Washington,  D.C.  to review the  Company's  circumstances  and
future plans. The Company will attend this hearing and appeal for an

                                       -9-

<PAGE>



extension of time to allow the current actions being initiated by the Company to
take their course.  On November 16, 1998, the Company's Board of Directors 
approved a reverse stock split of 10:1.  No shareholder approval is necessary 
and the Company is proceeding with the administrative procedures necessary to 
effect the reverse split.  Accordingly, the Company expects the reverse split 
will be effective in December, 1998.  However,  it cannot be determined at this
time whether or not delisting  will be stayed after November 20, 1998.  Should
delisting occur, the Company's common stock would be traded in the over-the-
counter market on the NASD Bulletin Board or on the "pink sheets".  Should the 
Company lose its listing on the Nasdaq SmallCap  electronic market system,  it 
will have a material negative impact on the Company's ability to raise 
additional equity capital. In addition, it may impair the ability for a
stockholder to liquidate any holdings.

In July 1998,  the Company  initiated  several  steps to improve  the  corporate
governance  and  direction  of  the  Company.  First,  the  Board  of  Directors
established an Executive  Committee  whose purpose is to formulate and implement
recommendations,  strategies  and  actions  which are  intended  to support  and
protect  shareholder  value.  Essentially,  the Executive  Committee manages the
day-to-day activities of the Company and has broad power and authority to act in
the absence of the full Board of Directors.

Secondly,  Mr. William F. Warnick  replaced Willard H. Pease, Jr. as Chairman of
the Board. Mr. Warnick is an outside Director, a practicing attorney in Lubbock,
Texas,  and also serves as the Texas Attorney  General's  appointee to the Texas
School Board Land Commission. Mr. Warnick has also served in numerous management
positions of private oil and gas companies.  Mr. Warnick received both a B.A. in
finance in 1968 and a J.D. degree in 1971.

Thirdly,  the Company  announced  the  addition of Mr. F.A.  (Allan) Wise to the
Board of Directors.  Mr. Wise has been professionally engaged in the oil and gas
business  for 30  years,  having  worked 7 years  for  Shell  Oil  Company  as a
petroleum  engineer and 9 years for Petro-Lewis  Corporation  where he served in
various  capacities,  including Vice President of Drilling and Production,  Vice
President of the Gulf Coast Region and Vice  President  of  Acquisitions.  Since
1987, Mr. Wise has been co-owner of Wise and Treece Petroleum Management,  inc.,
a petroleum engineering,  land and management consulting firm. Mr. Wise, through
the consulting  firm,  serves the oil and gas industry by providing a wide range
of technical and management  economic analysis and modeling of exploration plays
and the resulting development drilling; acquisition and financing of oil and gas
plays and properties;  financial modeling of oil and gas investment  structures;
supervision of oil and gas field development, drilling and petroleum engineering
and management consulting.

The Executive Committee is comprised of four voting members:  Patrick J. Duncan,
the  Company's  President/CFO,  Steve Antry,  a Director and  consultant  to the
Company,  William F. Warnick and F. A. Wise. The Board of Directors  implemented
these  changes to enhance the  decision  making  processes in all aspects of the
Company's  business.   The  Executive  Committee  is  diligently  working  on  a
resolution to the Company's financing needs and other corporate issues. However,
the outcome is unknown at this time.

Lastly,  on  November 3, 1998 the Board of  Directors  accepted  Mr.  Willard H.
Pease,  Jr.'s  resignation  as President  and CEO of the Company.  Mr. Pease had
served the Company as President  and CEO for the past 8 years.  He will continue
to serve the Company as an employee in a non-management position. Mr. Patrick J.
Duncan was immediately  approved by the Board as Interim  President.  Mr. Duncan
has served the  Company as CFO since  September  1994.  In  connection  with his
resignation, Mr. Pease agreed, among other things, to: a.) reduce the amount due
upon termination of his employment from $375,000 to $150,000; and b.) reduce his
annual salary from $125,000 to $80,000.

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.

Change In Accounting Principle
As more thoroughly  discussed in the Company's Annual Report on Form 10-KSB, the
Company  changed its method of accounting  for oil and gas producing  activities
from the successful  efforts method to the full cost method.  The 1997 financial
statements  presented  herein have been  restated  to reflect  the change.  As a
result of the change in  accounting  method,  the net loss  applicable to common
shareholders increased in 1997 as follows:



                                      -10-

<PAGE>



<TABLE>
<CAPTION>
                                                     For the Three Months         For the Nine Months
                                                          Ended 9/30/97              Ended 9/30/97     
               Description                          Net Loss      Per Share      Net Loss      Per Share
<S>                                               <C>            <C>             <C>            <C>    
As Previously Reported Under Successful Efforts   $(1,053,153)   $  (0.07)       $(2,292,543)   $(0.19)
As Reported under Full Cost ...................    (3,221,658)      (0.22)        (6,926,495)    (0.57)
                                                  -----------        -----       -----------      -----
      Increase in Net Loss under Full Cost ....   $(2,168,505)   $  (0.15)       $(4,633,952)   $(0.38)
                                                  ===========        =====       ===========      =====
</TABLE>

The  majority  of the  increased  loss in 1997 is  recognized  in the  financial
statements  under the caption  "Impairment  Expense" which is discussed later in
this section.

Management  believes the full cost method of accounting is preferable because it
will most accurately reflect the results of the Company's future operations.  In
connection  with the Company's  change in strategy from primarily an acquisition
and production  company to an  exploration  and  production  company,  it is now
focusing its efforts in the Gulf Coast region of the United States.  The Company
seeks  to  allocate  its  capital  resources  over a  diversified  portfolio  of
exploration  and  development  projects  within that area. It seeks to achieve a
balance  between the risks of exploratory  drilling and the return on investment
by investing in projects with large potential.  Dry holes,  abandoned properties
and seismic projects are an inherent part of the exploration  process.  However,
management believes that it is through  disciplined,  consistent  application of
this  balanced  portfolio  strategy  that  the  desired  return  on  its  entire
investment  will be achieved.  Management  believes that the full cost method of
accounting  is the method  used by many  independent  oil and gas  companies  of
comparable  size to the  Company  and allows  investors  to better  measure  the
performance  of the Company.  Management  further  believes that advanced  three
dimensional seismic and computer-aided  exploration technology has become a much
more  significant  factor in the success of an  exploration  program than in the
past.  Management  believes  that  expensing  these costs when  incurred,  as is
required under successful  efforts,  is inconsistent  with the value they add to
the exploration process.

Assets Held For Sale
During the fourth quarter of 1997, the Company's  Board of Directors  determined
that the Company's long-term strategy has shifted to exploration and development
activities  in the Gulf Coast region and that the Rocky  Mountain  assets should
ultimately  be  divested.  At the date of this  report,  the  Company had sold a
majority  of its  Rocky  Mountain  assets  consisting  of  certain  oil  and gas
properties,  the gas plant and service and supply  businesses for  approximately
$2.3 million.  Substantially all of the remaining Rocky Mountain assets are also
under  contract  for  $855,000  and the  transaction  is  scheduled  to close on
December 4, 1998. Accordingly, the production, revenue, costs, operating margins
and cash flows currently generated and discussed under the captions "Oil and Gas
- Rocky  Mountains",  "Gas Plant  Processing",  "Oil Field Services and Supply",
"Well  Administration  and Other Income" will no longer be part of the Company's
future  operations.  Since these  assets  include a  significant  portion of the
Company's  historical  operations,  the  sale  of  these  assets,  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:
<TABLE>
<CAPTION>
                                           For the Three Months Ended September 30, 
                                                    1998                         1997              
                                        ------------------------   --------------------------
                                           Amount           %           Amount           %     

<S>                                       <C>               <C>       <C>                <C>
Oil and gas sales                         $  606,016        82%       $   868,749        70%
Gas plant processing                          76,719        10%           153,848        13%
Oil field services and supply                 54,336         7%           181,373        15%
Well administration and other income           4,116         1%            28,666         2%
                                        ------------     ------     -------------     ------
     Total revenue                        $  741,187       100%        $1,232,636       100%
                                         ===========       ====        ==========       ====

                                        For the Nine Months Ended September 30,    
                                                    1998                         1997            
                                        ------------------------     ------------------------
                                            Amount          %           Amount           %  

Oil and gas sales                         $1,853,284        77%       $ 2,328,328        68%
Gas plant processing                         256,246        11%           525,704        15%
Oil field services and supply                272,172        11%           525,585        15%
Well administration and other income          22,640         1%            67,570         2%
                                         -----------     ------        ----------     ------
     Total revenue                        $2,404,342       100%       $ 3,447,187       100%
</TABLE>

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

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

<TABLE>
<CAPTION>
                                      For the Three Months              For the Nine Months
                                      Ended September 30,               Ended September 30,     
                                ----------------------------     ----------------------------
                                       1998            1997           1998             1997    
                                 -----------      ----------       ----------     -----------

Production:
   Oil (Bbls)
<S>                                   <C>             <C>             <C>             <C>   
        Rocky Mtns ...........        12,900          20,200          47,900          60,500
        Gulf Coast ...........        13,700          15,500          37,300          31,200
                                 -----------     -----------     -----------     -----------
             Combined Total ..        26,600          35,700          85,200          91,700
                                 ===========     ===========     ===========     ===========
   Gas (Mcf)
        Rocky Mtns ...........        70,900         103,005         228,300         296,500
        Gulf Coast ...........        90,100          41,000         197,400          57,900
                                 -----------     -----------     -----------     -----------
              Combined Total .       161,000         144,000         425,700         354,400
                                 ===========     ===========     ===========     ===========
   BOE (6:1)
        Rocky Mtns ...........        24,700          37,400          86,000         109,900
        Gulf Coast ...........        28,700          22,300          70,200          40,900
                                 -----------     -----------     -----------     -----------
              Combined Total .        53,400          59,700         156,200         150,800
                                 ===========     ===========     ===========     ===========
Average Collected Price:
   Oil (per Bbl)
        Rocky Mtns ...........   $     11.19     $     17.26     $     12.32     $     19.12
        Gulf Coast ...........   $     11.13     $     18.54     $     12.96     $     19.25
                                 -----------     -----------     -----------     -----------
              Combined Average   $     11.16     $     17.82     $     12.60     $     19.16
                                 ===========     ===========     ===========     ===========
   Gas (per Mcf)
         Rocky Mtns ..........   $      1.28     $      1.17     $      1.39     $      1.39
         Gulf Coast ..........   $      2.43     $      2.72     $      2.34     $      2.75
                                 -----------     -----------     -----------     -----------
              Combined Average   $      1.92     $      1.61     $      1.83     $      1.61
                                 ===========     ===========     ===========     ===========
   Per BOE (6:1)
         Rocky Mtns ..........   $      9.51     $     12.56     $     10.56     $     14.27
         Gulf Coast ..........   $     12.93     $     17.87     $     13.46     $     18.60
                                 -----------     -----------     -----------     -----------
              Combined Average   $     11.34     $     14.55     $     11.86     $     15.45
                                 ===========     ===========     ===========     ===========
Operating Margins
 (Excl. DD&A/Impairment):
    Rocky Mtns:
        Revenue -
            Rocky Mtns. - Oil    $   144,662     $   348,825     $   590,067     $ 1,155,850
            Rocky Mtns. - Gas         90,573         120,924         318,034         412,149
                                 -----------     -----------     -----------     -----------
                                     236,235         469,749         908,101       1,567,999
        Production Costs .....      (236,720)       (373,494)       (870,227)     (1,093,249)
                                 -----------     -----------     -----------     -----------
            Operating Margin .   $    (1,485)    $    96,255     $    37,874     $   474,750
                                 ===========     ===========     ===========     ===========
            Operating Margin %            (1%)           20%              4%             30%

    Gulf Coast:
        Revenue -
            Gulf Coast - Oil .   $   152,164     $   288,368     $   484,016     $   600,987
            Gulf Coast - Gas .       218,615         110,632         461,167         159,342
                                 -----------     -----------     -----------     -----------
                                     370,779         399,000         945,183         760,329
        Production Costs .....       (49,168)        (17,224)       (125,768)        (31,965)
                                 -----------     -----------     -----------     -----------
            Operating Margin .   $   321,611     $   381,776     $   819,415     $   728,364
                                 ===========     ===========     ===========     ===========
            Operating Margin %            87%             96%             87%             96%
</TABLE>



                                      -11-

<PAGE>



<TABLE>
<CAPTION>
                                            For the Three Months             For the Nine Months
                                             Ended September 30,             Ended September 30,       
                                       ---------------------------     -------------------------------
                                           1998             1997            1998           1997    
                                       ------------     ----------     ----------       -----------

Combined Totals:
<S>                                     <C>             <C>             <C>             <C>        
        Revenue .....................   $   606,014     $   868,749     $ 1,853,284     $ 2,328,328
        Costs .......................      (285,888)       (390,718)       (995,995)     (1,125,214)
                                        -----------     -----------     -----------     -----------
            Operating Margin ........   $   320,126     $   478,031     $   857,289     $ 1,203,114
                                        ===========     ===========     ===========     ===========
            Operating Margin % ......            52%             55%             46%             52%
Production Costs per BOE before DD&A:
        Rocky Mtn Region ............   $      9.58     $      9.99     $     10.11     $      9.95
        Gulf Coast Region ...........          1.71            0.77            1.79            0.78
                                        -----------     -----------     -----------     -----------
            Combined Average ........   $      5.35     $      6.54     $      6.38     $      7.46
                                        ===========     ===========     ===========     ===========

Change in Revenue
Attributable to:
  Production ........................   $  (135,550)                    $    (8,247)
  Price .............................      (127,185)                       (466,797)
                                        -----------                      -----------
     Total Revenue Decrease .........   $  (262,735)                    $  (475,044)
                                        ===========                      ===========
</TABLE>

Approximately  25% of the  decrease  in oil and  gas  production  for the  Rocky
Mountain  region can be attributed to the natural  decline in production that is
inherent in oil and gas wells and the other 75% can be attributed to the sale of
the Company's  Utah  properties in May 1998 (that sale had an effective  date of
April 1, 1998). The increase in oil and gas production for the Gulf Coast region
can be attributed to the 1997 discoveries. The deterioration in commodity prices
(particularly  oil) between the periods  presented  has been the single  largest
negative factor impacting the results of operations.

In early Octobe 1998, the Company announced the completion of the State 2102 #1
in the E. Bayou Sorrel Vield, Iberville Parish.  This well was tested in the Cib
hazz 3 formation at a rate of 3,048 barrels of oil and 2.8 million cubic feet of
natural gas per day.  The operator, National Energy Group, Inc., intends to
produce this well at approximately 1,400 barrels of oil per day and increase the
production levels in the future if the conditions allow.  The Company owns a
8.92% working interest in this well.

Also in early October 1998, the Company announced the completion of the J.P.Owen
#1 in the Maurice Field, Lafayette Parish, Louisiana.  This well was initially
tested at 9 million cubic feet of natural gas per day and 400 barrels of 
condensate.  After the first few days the well began producing water which
caused the operator, Amerada Hess Corp., to reduce the production rate to 
approximately 3 million cubic feet per day and increase the rate of its offset
well, the Trahan #1, to approximately 15 million cubic feet of natural gas per
day (the Trahan #1 had historically produced at approximately 10 MMcf/d).  The
Company owns a 8.4% working interest in this field.

With the addition of these two wells, the Company's total current net daily
production from its Gulf Coast properties is approximately 300 bbls of oil and
1,300 Mcf of gas (or 520 BOE) per day.
<PAGE>

Gas Plant Processing
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:

<TABLE>
<CAPTION>
                                                      For the Three Months           For the Nine Months
                                                       Ended September 30,           Ended September 30,   
                                                -------------------------------    --------------------------
                                                      1998             1997          1998             1997     
                                                -----------      --------------    ----------    -------------

Production:
<S>                                                   <C>             <C>            <C>             <C>    
  Natural Gas Processed (Inlet Mcf) ..........        77,500          86,000         232,700         250,200
  Liquids Produced -
           B-G Mix (gallons) .................       204,400         192,100         542,200         588,300
           Propane (gallons) .................       130,100         163,600         404,800         485,000
                                                 -----------     -----------     -----------     -----------
                   Total liquids produced ....       334,500         355,700         947,000       1,073,300
                                                 ===========     ===========     ===========     ===========
  Total Liquids produced per Inlet Mcf ("GPM")          4.32            4.14            4.07            4.29
                                                 ===========     ===========     ===========     ===========
  Average Sales Price of Liquids (per gallon)    $      0.23     $      0.40     $      0.27     $      0.41
                                                 ===========     ===========     ===========     ===========
Gross Margin: ................................        Amount          Amount          Amount          Amount
                                                 -----------     -----------     -----------     -----------
  Revenue ....................................   $    76,719     $   153,848     $   256,246     $   525,704
  Costs ......................................       (99,898)        (79,346)       (275,046)       (283,645)
                                                 -----------     -----------     -----------     -----------
         Gross Margin ........................   $   (23,179)    $    74,502     $   (18,800)    $   242,059
                                                 ===========     ===========     ===========     ===========
         Gross Margin Percent ................           (30%)            48%             (7%)            46%
</TABLE>

The  decrease  in natural  gas  processing  volumes  (per Mcf)  during 1998 when
compared  to 1997,  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 natural  gas.  The  decrease in revenue in 1998 when  compared to
1997 is a direct  result of: 1.) the volume of natural  gas  processed;  2.) the
substantial decrease in liquid prices; and 3.) the gas plant encountered


                                      -12-

<PAGE>



several  operational  problems  during  1998  that  forced  the plant to flare a
significant amount of unprocessed gas (thus lowering the GPM).

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.  These  costs are  generally  a direct  function of the
volume  processed  by the Gas  Plant and are  expected  to  either  increase  or
decrease proportionately with the corresponding plant production.

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:

<TABLE>
<CAPTION>
                                     For the Three Months             For the Nine Months
                                      Ended September 30,             Ended September 30,      
                                 -----------------------------   ----------------------------
                                     1998            1997           1998              1997     
                                 -----------    --------------   ------------   --------------

<S>                               <C>           <C>               <C>              <C>      
Revenue                           $ 54,336      $   181,373       $272,172         $ 525,585
Costs                              (65,921)        (176,090)      (289,786)         (469,223)
                                  ----------    ------------     -----------      -----------
   Net Operating Income (Loss)    $(11,585)     $     5,283      $ (17,614)        $  56,362
                                  =========     ==============    ==========      ===========
</TABLE>

Total revenue,  and the net operating income decreased in 1998, when compared to
1997 as a result of the Company's  supply store manager and hot oil truck pusher
resigning  in light of the  anticipated  sale of the Rocky  Mountain  assets and
taking a portion of the Company's business with them.

Well Administration and Other Income
The decrease in well  administration  and other income is a direct result of the
Company selling its Utah oil and gas properties  effective April 1, 1998.  These
properties generated most of this revenue.

Consulting Arrangement - 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 chairman,  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.

General and Administrative
Although there is no substantial  difference in G&A expenses for the nine months
ended when comparing 1997 to 1998, the Company did incur additional  expenses in
the third  quarter of 1998 when  compared to the same period in 1997 as follows:
1.) $150,000 to San Jacinto Securities,  Inc., associated with its engagement to
pursue  strategic   alternatives   (principally   merger   candidates)  and  2.)
approximately $60,000 in legal and other professional fees.

Depreciation, Depletion and Amortization
Depreciation,  Depletion and Amortization  ("DD&A") for the periods presented by
cost center consisted of the following:
<TABLE>
<CAPTION>
                                                        For the Three Months                 For the Nine Months
                                                        Ended September 30                 Ended September 30       
                                                      --------------------------         ---------------------------
                                                          1998              1997              1998             1997    
                                                      -------------    ---------          ------------    ------------

<S>                                               <C>                  <C>                 <C>           <C>        
Oil and Gas Properties - Rocky Mtns.              $     79,429         $ 452,595           $  265,510    $ 1,054,646
Oil and Gas Properties - Gulf Coast                    526,841           303,874              866,477        437,300
Gas Plant Operations                                    63,973            60,182              181,371        180,540
Service and Supply Operations                           26,698            35,093              110,395        106,618
Furniture and Fixtures                                  11,490            12,526               36,809         37,280
Non-Compete Agreements                                      -             11,499                 -            34,497
                                                     --------------  -----------         -----------------------------
    Total                                         $    708,431         $ 875,769           $ 1,460,562   $ 1,850,881
                                                      ========         =========           ===========    ===========
</TABLE>





                                      -13-

<PAGE>



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

         Rocky Mountains          3.21       12.11          3.09          9.60
         Gulf Coast              18.37       13.61         12.33         10.70
         Combined Total          11.35       12.67          7.25          9.90

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. Therefore,  the variances
in the DD&A rates for oil and gas properties (per BOE) for the periods presented
are a function of the estimated  reserves (which are  significantly  affected by
the price of oil and gas) and the net costs  being  amortized  at the end of the
respective   reporting   periods.   The   deterioration   of  commodity   prices
(particularly  oil)  between the periods  presented  has,  among other  factors,
lowered the value of the Company's  reserves and effectively  increased its rate
of DD&A of oil and gas properties per BOE.

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

<TABLE>
<CAPTION>
                                              For the Three Months               For the Nine Months
                                               Ended September 30,                Ended September 30,    
                                               1998             1997               1998            1997 

<S>                                     <C>                <C>                  <C>            <C>       
Interest paid or accrued                $    101,680       $   105,296          $ 299,313      $  346,740
Amortization of debt discount                 80,946            83,628            242,838         272,366
Amortization of debt issuance costs           51,101            52,793            153,304         171,899
                                         ------------       -----------         ---------        --------
         Total interest incurred             233,727           241,717            695,455         791,005
Interest capitalized                        (232,239)         (136,062)          (693,451)       (283,338)
                                         ------------      ------------         ---------      ----------
              Interest expense          $      1,488       $   105,655          $   2,004      $  507,667
                                         ============       ===========         ===========      =========
</TABLE>

The lower  interest  incurred  in 1998 is  attributed  to the face  value of the
convertible debentures issued in 1996 decreased from an average balance of $4.48
million  during  the first nine  months of 1997 to an  average  balance of $3.98
million  during  1998.  The decrease in the average  balance  during the periods
presented is attributed  to a portion of the  convertible  debentures  converted
into common stock  during  1997.  More  interest  was  capitalized  in 1998 when
compared to 1997 since the average  amounts  invested in unevaluated oil and gas
properties was substantially higher in 1998.

Impairment Expense - Oil and Gas Properties
The  Company  changed  its  accounting  method for oil and gas  activities  from
successful efforts to full cost during the fourth quarter of 1997. 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 Company
expects that the benefits  obtained from the prospects that do prove successful,
together with benefits from past discoveries,  will 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 successful  efforts,  is not relevant to
the full  cost  concept.  In light of the  transformation  from  Rocky  Mountain
acquisition and development to Gulf Coast exploration, the Company believes this
method will be a preferable method of accounting. 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 by a charge to impairment.

Accordingly,  the impairment recognized in 1998 can be substantially  attributed
to  the  costs   incurred  in  connection   with  dry  holes  and  a  continuing
deterioration  of commodity prices  (particularly  oil) since December 31, 1997.
The  impairment  recognized  during the first nine months of 1997 is  associated
with  approximately  $1.2 million in dry holes, and $3.6 million associated with
the Rocky Mountain assets and the cumulative  effect of the change in accounting
methods from  successful  efforts to full cost. As  thoroughly  discussed in the
Company's 1997 10-KSB, the cumulative

                                      -14-

<PAGE>



effect of the accounting  change  retroactively  increased the carrying value of
the oil and gas properties (which at the time consisted principally of the Rocky
Mountain  properties).  Essentially,  the significant drop in oil and gas prices
between  December 31, 1996 and  September  30, 1998 have  continued to lower the
"ceiling"  on the full cost pool and the Company  has  incurred  the  additional
impairment charges.

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.  During 1997, the net loss applicable to common
stockholders  includes  $89,969 for the nine months  ended of accrued but unpaid
dividends  related to the Series A Preferred Stock. The Series A Preferred Stock
automatically  converted into common on June 11, 1997. During 1998, 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:

                                      For the Period Ended September  30, 1998  
                                      Three Months             Nine Months     
    Dividends declared                $    69,585             $    210,941
    Imputed non-cash dividend             420,689                1,513,713
                                       -----------             ------------
                  Total               $   490,274              $ 1,724,654
                                       ==========               ===========

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 increases monthly through
March 1999 when the  discount  tops 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 September 30, 1998. As long
as any Series B Preferred  Stock is  outstanding,  additional  non-cash  imputed
dividend  charges will be incurred in future periods as the conversion  discount
increases until the discount tops out at 25%.

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
"Business and Properties" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" 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, 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 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 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 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;  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  beyond the  Company's  control.  In
addition, since all of the prospects in the Gulf Coast are currently operated by
another party,

                                      -15-

<PAGE>



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 begun to address  possible  remedial  efforts in connection with
computer software that could be affected by the Year 2000 problem. The Year 2000
problem is the result of computer programs being written using two digits rather
than four to define the applicable  year. Any 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 utilizes a number of computer programs across its entire operation.  The
Company has not completed its assessment,  but currently believes that the costs
of  addressing  this  issue  should not have a  material  adverse  impact on the
Company's  financial  position.  However,  if the Company and third parties upon
which it relies  are  unable to  satisfactorily  address  this issue in a timely
manner, it could result in a material  financial risk to the Company.  There can
be no  assurances  that Year 2000  problems  will not occur with  respect to the
Company's computer systems or business  affiliations.  The Year 2000 problem may
impact other entities with which the Company transacts business, and the Company
cannot  predict  the  effect of the Year 2000  problem on such  entities  or the
Company.


                                      -16-

<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 first nine months of
         1998 and through the date of this Report.

     1. On February 2, 1998, the Company issued 1,250 shares of its common stock
upon  exercise of  outstanding  stock  purchase  warrants at $0.75 per share for
total proceeds of $938 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.  These  warrants  were issued in  February  1996 in  connection  with the
Consulting  Agreement  entered into with Beta Capital Group,  Inc. The shares of
common stock issued upon exercise of the warrants were  registered for resale by
the holder in Registration No. 333-19589.  
     2. On May 20, 1998 the Company issued 30,027  shares of its  common  stock 
upon  conversion  of 497 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 July 17, 1998 the Company  issued 63,544 shares of its common
stock  upon  conversion  of  500  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.  
     4. On August 18,  1998 the  Company  issued  122,272  shares of its
common  stock upon  conversion  of 500 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 also
relied upon Section 4(2) of the  Securities  Act in claiming  exemption  for the
registration  requirement of the Securities  Act. All of the persons to whom the
securities were issued had full information  concerning 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.



                                      -17-

<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

There were no matters submitted to a vote of shareholders.

Item 5. Other Information

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

Resignation  of a Director  
On  November 1, 1998,  Mr. R.  Thomas  Fetters,  Jr. resigned  his  position  as
 a  director  of the  Company.  The  resignation  was voluntary  and did not 
involve any disputes or  disagreements  with the Company, its management or 
Board of Directors.

Purchase of Series B Preferred Stock
On September 9, 1998, the Company purchased (redeemed) and retired 500 shares of
the Series B Preferred Stock  ("Preferred  Stock") for $31,250 and on October 5,
1998 an additional  4,000 shares for $175,000.  The Company  decided to purchase
these shares in lieu of allowing them to convert into  approximately 1.1 million
shares of common stock.  As part of the  transaction,  those (not all) preferred
holders agreed not to attempt any additional conversions until at least December
15, 1998 (they  collectively  hold 7,336  shares of  Preferred  Stock with a par
value of $366,800).

Item 6. Exhibits and Reports on Form 8-K

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

                  (1) Exhibit 27-1,  "Financial Data Schedule" - for the quarter
                  ended  September 30, 1998. (2) Exhibit 27-2,  "Financial  Data
                  Schedule"  - for  the  quarter  ended  September  30,  1997 as
                  restated for accounting change from successful efforts to full
                  cost for oil and gas activities.

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

      Item Reported                  Date                Financial Statement 
     -------------          ------------------------   ---------------------
  (1)      5, 7               September 9, 1998          None - Not Applicable

There were no financial  statements filed during the quarter ended September 30,
1998 other than the Company's  Quarterly  Report on Form 10-QSB for the second
quarter ended June 30, 1998.






                                      -18-

<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: November 16, 1998              By: /s/ Patrick J. Duncan
                                     Patrick J. Duncan
                                     President and Principal Accounting Officer

Date: November 16, 1998              By: /s/ William F. Warnick
                                     William F. Warnick
                                     Chairman of the Board



                                      -19-

<PAGE>