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

                     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 MARCH 31, 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 May 14, 1998 the registrant  had  15,791,205  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
<TABLE>
<CAPTION>

PART I - Financial Information
<S>       <C>                     
     Item 1.  Financial Statements
         Consolidated Balance Sheets.. . . . . . . . . . .. . . . . . . . . . . . . 3
                 March 31, 1998 (unaudited) and December 31, 1997
         Consolidated Statements of Operations . . . . . . . . . . . . . . . . .
                 For the Three Months Ended March 31, 1998 (unaudited) and 1997     4
                 (unaudited)
         Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . 
             For the Three Months Ended March 31, 1998 (unaudited) and 1997        5-6
             (unaudited)
         Notes to Consolidated Financial Statements  . . . . . . . . . . . . . .. . 7 
     Item 2.  Management's Discussion and Analysis . . . . . . . . . . . . . . .    8
                  Liquidity, Capital Expenditures and Capital Resources  . . . .. . 8
          Results of Operations . . . . . . . . .  . . . . . . . . . . . . . . .. . 9 
             Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  . .9
                 Change in Accounting Principle . . . . . . . . . . . . . . . .  . .9
                 Assets Held For Sale. . . . . . . . . . . . . . . . . . . . . .. . 9
             Total Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . .. .10
             Oil and Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .10
             Gas Plant Processing . . . . . .  . . . . . . . . . . . . . . . . .. .11
             Oil Field Services and Oil Field Supply . . . . . . . . . . . . . .. .12 
             Well Administration and Other Income . . . . . . . . . . . . . . .. . 12
             Depreciation, Depletion and Amortization  . . . . . . . . . . . . .. .13
             Interest Expense .  . . . . . . . . . . . . . . . . . . . . .  . .  . 14
                 Impairment Expense - Oil and Gas Properties. . . . . . . . . .  . 14
                 Dividends and Net Loss Per Common Share. . . . . . . . . . . .  . 14
          Other Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . .  . 15 
                 Recently Issued Financial Accounting Standards. . . . . . . . .. .15
                 Disclosure Regarding Forward-Looking Statements. . . . . . . .    15
                 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 . . . . . . . . . . . . . . .  . 16.
         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
</TABLE>



                                                           -2-

<PAGE>



PART 1 - FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS
                   PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                    <TABLE>
<CAPTION>

                                                               March 31,          December 31,
                                                                  1998               1997
                                                           ----------------     ------------
                                                            (unaudited)
                                    ASSETS

CURRENT ASSETS:
<S>                                                       <C>               <C>             
   Cash and equivalents                                   $       3,472,158 $      6,547,804
   Trade receivables                                               345,366           757,434
   Prepaid expenses and other                                       74,187            43,979
                                                            --------------   ---------------
        Total current assets                                     3,891,711         7,349,217
                                                              ------------     -------------
ASSETS HELD FOR SALE                                             3,832,376         4,048,000
                                                              ------------     -------------
OIL AND GAS PROPERTIES, at cost (full cost method):
   Unevaluated properties                                        6,724,538         4,522,917
   Costs being amortized                                        10,707,341         9,424,932
                                                               -----------     -------------
        Total oil and gas properties                            17,431,879        13,947,849
   Less accumulated amortization and impairment                 (5,577,442)       (4,965,232)
                                                              -------------    --------------
        Net oil and gas properties                              11,854,437         8,982,617
                                                               -----------      -------------
 OTHER ASSETS:
   Debt issuance costs, net                                        613,217           664,318
   Deposits and other                                              174,528           167,493
   Office equipment and vehicles, net                               96,122            82,498
                                                            --------------      --------------
          Total other assets                                       883,867           914,309
                                                             -------------      -------------
TOTAL ASSETS                                                    20,462,391        21,294,143
                                                               ===========                         ===========

                                           LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:                                             1,321,321         1,500,239
   Accrued production taxes                                        204,108           204,108
   Other accrued expenses                                          389,178           349,396
                                                              ------------     -------------
LONG-TERM LIABILITIES:
   Convertible debentures, net                                   3,003,649         2,922,703
   Accrued production taxes                                        297,180           226,019
                                                              -------------    --------------
        Total long-term liabilities                              3,300,829         3,148,722
                                                               ------------     -------------
STOCKHOLDERS' EQUITY:
   Preferred  Stock,  par value $0.01 per share,  2,000,000 
       shares  authorized, 113,333 shares of Series B 5% PIK 
       Cumulative  Convertible Preferred Stock issued
       and outstanding (liquidation preference of $5,666,650)        1,133             1,133
   Common Stock, par value $0.10 per share, 40,000,000
       shares authorized, 15,791,205 and 15,789,955 shares
       issued and outstanding, respectively.                     1,579,121         1,578,996
   Additional paid-in capital                                   36,805,373        36,875,394
   Accumulated deficit                                         (23,138,672)      (22,363,845)
                                                               ------------     -------------
         Total stockholders' equity                             15,246,955        16,091,678
                                                               -----------      ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                $     20,462,391 $      21,294,143
                                                               ===========      ============
</TABLE>


                                                           -3-

<PAGE>



                   PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (unaudited)
<TABLE>
<CAPTION>
                                                                                For The Three Months
                                                                                 Ended March 31,
                                                                       1998                    1997
                                                                                             (Note 2)
                                                         
REVENUE:
<S>                                                     <C>                       <C>                  
   Oil and gas sales                                    $              591,608    $             789,206
   Gas plant processing                                                 91,119                  209,510
   Oil field services and supply                                       154,149                  198,319
   Well administration and other income                                 15,654                   21,805
                                                                  ------------          ----------------
        Total revenue                                                  852,530                1,218,840
                                                                   -----------             -------------
OPERATING COSTS AND EXPENSES:
   Oil and gas production costs                                        320,640                  328,819
   Gas plant                                                            81,813                  104,838
   Oilfield services and supply                                        139,926                  153,658
   Consulting arrangement-related party                                 62,912                   83,383
   General and administrative                                          257,655                  325,449
   Depreciation, depletion and amortization                            353,137                  466,606
   Impairment expense - oil and gas properties                         478,043                1,621,532
                                                                    ----------           ---------------
                Total operating costs and expenses                   1,694,126                3,084,285
                                                                     ---------           --------------
LOSS FROM OPERATIONS                                                  (841,596)              (1,865,445)

OTHER INCOME (EXPENSES):
   Interest income                                                      67,014                   18,059
   Interest expense                                                       (246)                (215,473)
   Gain or (Loss) on sale of assets                                     -                         2,356
                                                              ----------------        -----------------
NET LOSS                                                $             (774,828)   $          (2,060,503)
                                                                   ============           =-------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS              $           (1,628,167)   $          (2,105,487)
                                                                    ===========           ==============
NET LOSS PER COMMON SHARE (Note 3)                      $                 (.10)   $                (.24)
                                                               ================          ===================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING                                                         15,791,000                 8,923,000
                                                                    ==========           ===============
</TABLE>


                                                           -4-

<PAGE>



                   PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (unaudited)
<TABLE>
<CAPTION>
                                                                       For The Three Months
                                                                          Ended March 31,
                                                                          1998          1997
                                                                                      (Note 2)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                     <C>          <C>        
   Net loss                                                             (774,828)    (2,060,503)
   Adjustments to reconcile net loss to net cash provided by
      (used in) operating activities:
            Depreciation, depletion and amortization                     353,137         466,606
            Amortization of debt discount and issuance costs                   -         120,633
            Impairment expense                                           478,043       1,621,532
            Loss on sale of assets                                             -         (2,356)
            Issuance of common stock for services                              -           8,000
            Other                                                              -               -
            Changes in operating assets and liabilities:
                   (Increase) decrease in:
                        Trade receivables                                412,068           8,313
                        Inventory                                         25,050        (50,517)
                        Prepaid expenses and other assets                (37,243)       (29,972)
                    Increase (decrease) in:
                        Accounts payable                                 (27,299)        108,769
                        Accrued expenses                                   9,098         (12,362)
                                                                   -------------  --------------
            Net cash provided by (used in) operating activities          438,026         178,143
                                                                    ------------  -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Capital expenditures for property, plant and equipment             (3,373,669)     (4,589,521)
   Proceeds from sale of property and equipment                            7,420          56,559
                                                                   -------------  --------------
      Net cash provided by (used in) investing activities             (3,366,249)     (4,532,962)
                                                                      ----------- --------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from exercise of warrants                                        939       2,264,650
   Repayment of long-term debt                                            (1,597)       (318,901)
   Proceeds from sale of common stock                                          -       3,880,000
   Offering costs                                                       (146,765)       (564,882)
                                                                    ------------- ---------------
      Net cash provided by (used in) financing activities               (147,423)      5,260,867
                                                                    -------------  -------------
 INCREASE (DECREASE) IN CASH AND EQUIVALENTS                          (3,075,646)        906,048
 CASH AND EQUIVALENTS, beginning of period                             6,547,804       1,995,860
                                                                     -----------   -------------

 CASH AND EQUIVALENTS, end of period                                   3,472,158       2,901,908
                                                                     ===========   -------------

</TABLE>

                                                           -5-

<PAGE>



                   PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (unaudited)
                                   (continued)
<TABLE>
<CAPTION>
                                                                      For The Three Months
                                                                          Ended March 31,
                                                                          1998          1997
                                                           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
<S>                                                                  <C>         <C>          
   Cash paid for interest                                            $  100,772  $     161,014
                                                                      ==========    ============

   Cash paid for income taxes                                        $         - $         -
                                                                    ============    ------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
   Conversion of long-term debt, net of discount, to common stock    $        -  $      156,007
   Debt incurred for purchase of vehicles                                 32,609         29,582
   Payables for oil and gas exploration activities                     1,072,413        229,103
   Issuance of common stock for oil and gas properties                        -         875,000
   Capitalized portion of amortized debt discount and issuance
        costs                                                            132,046         39,494
</TABLE>





                                                           -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 by $1,450,103 ($.16 per
share) for the first quarter of 1997.

Note 3 - 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  common  stock  equivalents  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 both accrued but unpaid
dividends and any imputed  dividends  attributable to the beneficial  conversion
feature.  During the first  quarter of 1997,  the net loss  applicable to common
stockholders  includes  $44,984 of accrued but unpaid  dividends  related to the
Series A Preferred  Stock that  automatically  converted into common on June 11,
1997.  During  the first  quarter  of 1998,  the net loss  applicable  to common
stockholders  includes $70,833 of accrued  dividends plus an additional  imputed
non-cash  dividend  charge of  $782,506  related  to the  beneficial  conversion
feature attached to the Series B Preferred Stock that was issued on December 31,
1997.

The Series B Preferred Stock became  convertible  into common stock on March 31,
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 of $782,506  included in the net loss  applicable to common  stockholders
during  the first  quarter of 1998  represents  the  intrinsic  value of the 12%
discount  applicable at March 31, 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.






                                                           -7-

<PAGE>



ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS

Liquidity, Capital Expenditures and Capital Resources
At March 31, 1998,  the Company's  cash balance was  $3,472,158  with a positive
working capital position of $1,977,104, 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:

<TABLE>
<S>                               <C> <C>                                <C>          
         Cash balance at December 31, 1997                               $   6,547,804
         Sources of Cash:
            Cash provided by operating activities                              438,026
            Proceeds from the sale of property and equipment                     7,420
            Proceeds from the exercise of common warrants                          939
                                                                          -----------------
                  Total Sources of Cash                                        446,385
         Uses of Cash:
            Exploration Activities - Gulf Coast                             (3,351,991)
            Offering Costs associated with Series B Preferred Stock           (146,765)
            Other Capital Expenditures                                         (21,678)
            Payments on long term debt                                          (1,597)
                                                                          ---------------
                  Total uses of cash                                        (3,543,709)
         Cash balance at March 31, 1998                                  $   3,472,158
</TABLE>

As noted,  most of the  Company's  uses of cash  were  deployed  in  exploration
activities in the Gulf Coast which are summarized as follows:

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

Category:
<S>                                      <C>                           <C>           <C>           <C>             <C>
  Discovery and Wells in Process         362,517             -         207,414       11,549        581,480         17%
  Exploratory Dry Holes                  490,125         148,826          -            -           638,951         19%
  Land, G&G Costs on Seismic
     Programs                          1,228,510         768,789          -          75,262      2,072,561         62%
  Other Exploration Costs                   -                -            -          58,999         58,999          2%
                                       ---------       ----------    ----------  -------------  -----------    -------
         Total Exploration Costs       2,081,152         917,615       207,414      145,810      3,351,991        100%
                                       =========        =========    ==========   ==========     =========      ======
         Percent                              62%             27%            6%           5%           100%
</TABLE>

The  anticipated  capital  requirements  for 1998 related to the Company's  Gulf
Coast  exploration  program are more thoroughly  discussed in the Company's 1997
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 $4.0 million for the remainder of 1998.

The Company's  current and  anticipated  cash position will be  insufficient  to
cover the future working  capital and  exploration  obligations  and the Company
will  need to seek  additional  financing.  The  Company  is  exploring  various
alternatives and future sources of capital may include additional debt or equity
financings,  the sale of certain  existing  assets,  or a  combination  thereof.
However,  it  cannot  be  determined  at this  time,  what  alternatives  may be
available,   nor  to  what  extent  the  potential   dilution  to  the  existing
shareholders  may be. In addition,  if  additional  sources of financing are not
ultimately  available,  the  Company may have to  consider  other  alternatives,
including  cancellation  of existing  exploration  agreements,  farmouts,  joint
ventures, a merger, and/or liquidation.

The Company is  currently  attempting  to sell or  otherwise  monitize its Rocky
Mountain assets.  Although no formal agreements have been reached as of the date
of this  report,  the Company has been  conducting  on-going  negotiations  with
several parties  interested in the assets.  The depressed and volatile commodity
prices  experienced since November 1997 (and continuing through the date of this
report) have  hindered the  negotiations.  However,  the Company is committed to
selling  the Rocky  Mountain  Assets and  anticipates  most,  if not all, of the
related assets

                                                           -8-

<PAGE>



will be sold sometime in 1998 assuming that  acceptable  terms can be negotiated
with a willing  purchaser.  The Company's  obligations under its outstanding 10%
Collateralized  Convertible  Debentures  (the  "Convertible  Debentures") in the
principal amount of $3.975 million,  together with interest thereon,  is secured
by a first priority  security  interest in substantially  all of the oil and gas
reserves in Larimer and Weld Counties, Colorado, which constituted approximately
60% of all of the Company's  Rocky  Mountain  proved  reserves of oil and gas at
December 31, 1997. A portion of any proceeds  received from the Company upon the
sale of its Rocky Mountain oil and gas properties attributable to the properties
which secure the Convertible Debentures will not be available to the Company, as
such  proceeds  must be set aside and  reserved  as security  for the  Company's
obligations under the Convertible Debentures.  The Company intends to substitute
other oil and gas assets as collateral for the Convertible Debentures,  but such
substitution requires the written approval of the holders of at least two-thirds
of the  oustanding  Convertible  Debentures.  The  Company  intends to seek such
approval for  substitution  at such time, if ever, as an acceptable  sale of its
Rocky Mountain oil and gas  properties is negotiated and placed under  contract.
However,  it cannot be  determined  at this time the amount of capital,  if any,
that would be available for future exploration and development activities should
the Rocky Mountain assets be sold.

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. Therefore, 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
stockholders  increased by $1,450,103 ($0.16 per share) during the first quarter
of  1997.  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.  If and when these assets are sold, the revenue,  costs,
operating  margins and cash flows  currently  generated and discussed  under the
captions  "Gas  Plant  Processing",  "Oil  Field  Services  and  Supply",  "Well
Administration  and  Other  Income"  would no  longer  be part of the  Company's
operations. Since these


                                                           -9-

<PAGE>





assets include a significant  portion of the Company's current  operations,  the
sale of these assets, when and if it occurs, 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 March 31,
                                                       1998                   1997
                                              --------------------    ------------------
                                                 Amount        %         Amount      %

<S>                                          <C>              <C>   <C>             <C>
Oil and gas sales                            $  591,608       69%   $   789,206     65%
Gas plant processing                             91,119       11%       209,510     17%
Oil field services and supply                   154,149       18%       198,319     16%
Well administration and other income             15,654        2%        21,805      2%
                                            -----------    ------   -----------  ------
     Total revenue                           $  852,530      100%    $1,218,840    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:

                                         For the Three Months
                                            Ended March 31,
                                       1998                1997
                               ---------------        ----------

Production:
Oil (Bbls)
        Rocky Mtns.                    18,795             19,969
        Gulf Coast                      9,896              7,829
                                    ---------          ---------
             Combined Total            28,691             27,798
                                     ========           ========
Gas (Mcf)
        Rocky Mtns.                    84,967             95,443
        Gulf Coast                     30,955              6,864
                                     --------          ---------
              Combined Total          115,922            102,307
                                      =======            =======
BOE (6:1)
        Rocky Mtns.                    32,956             35,876
        Gulf Coast                     15,055              8,973
                                     --------          ---------
              Combined Total           48,011             44,849
                                     ========           ========

Average Collected Price:
   Oil (per Bbl)
        Rocky Mtns.                  $  13.43           $  21.35
        Gulf Coast                      14.79              20.87
                                     ---------         ---------
              Combined Average       $  13.90           $  21.22
                                     -=======           ========
Gas (per Mcf)
         Rocky Mtns.                 $   1.44          $    1.86
         Gulf Coast                      2.27               3.17
                                     ----------       ----------
              Combined Average       $   1.66          $    1.95
                                     =========         =========
Per BOE (6:1)
         Rocky Mtns.                 $  11.38           $  16.84
         Gulf Coast                     14.38              20.63
                                     ---------         ---------
              Combined Average       $  12.32           $  17.60
                                     ========           ========



                                                          -10-

<PAGE>



                                                   For the Three Months
                                                       Ended March 31,
                                                 1998               1997
                                            -------------       -----------

 Operating Margins:
    Rocky Mtns:
        Revenue -
                 Rocky Mtns. - Oil          $   252,420        $   426,339
                 Rocky Mtns. - Gas              122,639            177,717
                                            ------------       ------------
                                                375,059            604,056
        Costs                                  (292,705)          (300,356)
                                            -------------      -------------
                 Operating Margin          $     82,354        $   303,700
                                            =============      ===========
                 Operating Margin Percent            19%                50%
Gulf Coast:
        Revenue -
                 Gulf Coast - Oil          $    146,317        $   163,418
                 Gulf Coast - Gas                70,232             21,732
                                           -------------      -------------
                                                216,549            185,150
        Costs                                   (27,935)           (28,463)
                                           --------------     --------------
                 Operating Margin          $    188,614        $   156,687
                                           ============         ===========
                 Operating Margin Percent            87%                85%
Combined Totals:
        Revenue                            $    591,608        $   789,206
        Costs                                  (320,640)          (328,819)
                                           -------------      -------------
                 Operating Margin          $    270,968        $   460,387
                                            ===========        ===========
                 Operating Margin Percent            46%                58%
Production Costs per BOE before DD&A:
        Rocky Mtn Region                   $       8.89     $         8.37
        Gulf Coast Region                          1.86               3.17
                                           ---------------    ---------------
                 Combined Average          $       6.68     $         7.33
                                           ==============     ==============
Change in Revenue Attributable to:
        Production                         $     38,638
        Price                                  (236,236)
                                           ------------
Total Decrease in Revenue                  $   (197,598)
                                            ==========

As noted,  the 25% decrease in oil and gas revenue  during the first  quarter of
1998  when  compared  to the  first  quarter  of  1997  can be  attributed  to a
substantial  decrease in commodity  prices between the two periods.  Most 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.  The increase in oil and gas  production for the Gulf Coast region can be
attributed to the 1997 discoveries.

The operating costs per BOE for the Gulf Coast properties decreased in 1998 when
compared to the same period in 1997, primarily as a result of the higher volumes
produced.  Since a portion of the lifting costs are fixed, the cost per unit (or
BOE) decreases as more oil and gas are produced.

Gas Plant Processing
This category accounts for the natural gas processed and the natural gas liquids
extracted and sold by the Gas Plant facility.



                                                          -11-

<PAGE>



Operating statistics for the periods presented are as follows:

<TABLE>
<CAPTION>
                                                                  For the Three Months Ended March 31,
                                                                1998                  1997
                                                           ---------------           ---------
         Production:
<S>                                                             <C>                  <C>   
               Natural Gas Processed (Inlet Mcf)                72,600               78,900

               Liquids Produced -
                   B-G Mix (gallons)                           154,100              192,100
                    Propane (gallons)                          134,000              159,100
                                                             ----------        -------------
                           Total liquids produced              288,100              351,200
                                                             ==========        =============
             Total Liquids produced per Inlet Mcf ("GPM")         3.97                 4.45

             Average Sales Price of Liquids (per gallon)    $     0.31      $          0.48
                                                            ============      ===============

         Gross Margin:                                           Amount             Amount
                                                            -----------        ----------
                    Revenue                                  $  91,119      $       209,510
                    Costs                                      (81,813)            (104,838)
                                                            ------------      --------------
                           Gross Margin                      $   9,306       $      104,672
                                                             ==========         ============
                           Gross Margin Percent                     10%                  50%
</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 several
operational  problems  during the first  quarter  that forced the plant to flare
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:

                                              For the Three Months
                                                 Ended March 31,
                                            1998                    1997
                                        -------------           ---------
         Revenue                         $ 154,149              $ 198,319
         Costs                            (139,926)              (153,658)
                                         -----------           ------------
             Net Operating Income        $  14,223             $   44,661
                                        ==========              =========

Total revenue,  and the net operating margin decreased in 1998, when compared to
1997 as a result of less work  generated  from the  Company's  hot oil services.
This is a  result  of the  Company's  truck  pusher  resigning  in  light of the
anticipated  sale of the Rocky  Mountain  assets  and  taking a  portion  of the
Company's business with him.

Well Administration and Other Income
As expected,  there has been no material change in the well  administration  and
other income during the periods presented.


                                                          -12-

<PAGE>



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
The decrease in general and  administrative  ("G&A")  expenses of  approximately
$68,000  during the first  quarter of 1998 when  compared  to the same period in
1997 is summarized as follows:

$  28,000        -        Net reduction of payroll costs substantially 
                          attributed to the elimination of two administrative
                          positions (these positions eliminated as a result of 
                          the anticipated sale of the Rocky Mountain assets).
   19,000        -        Consulting services.
   13,000        -        Travel and entertainment costs.
    8,000        -        All other, net.
$  68,000

Although  the  Company  has and will take steps to reduce and monitor G&A costs,
there  can  be no  assurance  future  G&A  costs  will  not be at  those  levels
experienced in 1997. Even if the Rocky Mountain assets are ultimately  sold, the
Company does not expect any other significant reductions in future G&A expenses,
at least in the near term.  This is primarily due to any reductions  that may be
made due to the  divestment  will likely be offset by additional  administrative
costs associated with the Gulf Coast exploration activities.

Depreciation, Depletion and Amortization
Depreciation,  Depletion and Amortization  ("DD&A") for the periods presented by
cost center consisted of the following:
                                             For the Three Months Ended March 31
                                                            1998         1997
         Oil and Gas Properties - Rocky Mountains      $  102,919       295,020
         Oil and Gas Properties - Gulf Coast              134,167        50,225
         Gas Plant Operations                              58,630        60,929
         Service and Supply Operations                     45,329        36,562
         Furniture and Fixtures                            12,092        12,370
         Non-Compete Agreements                             -            11,500
                                                       -----------   -----------
           Total                                       $   353,137   $  466,606
                                                         =========     =========

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

         Rocky Mountains                        $          3.1   $        8.22
         Gulf Coast                                       8.92            5.59
         Combined Total                                   4.94            7.69

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 and the net costs being  amortized at
the end of the respective reporting periods.



                                                          -13-

<PAGE>



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

                                            For the Three Months Ended March 31,
                                                       1998                1997
                                                 --------------       ---------
      Interest paid or accrued                     $ 98,261            $125,889
      Amortization of debt discount                  80,946              98,186
      Amortization of debt issuance costs            51,101              61,941
                                                   ----------         ---------
               Total interest incurred              230,308             286,016
      Interest capitalized                         (230,061)            (70,543)
                                                    ---------         ---------
               Interest expense                  $      247            $215,473
                                                  ==========            =======

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 $4.85
million during the first quarter of 1997 to an average  balance of $3.98 million
during the first quarter of 1998. The decrease in the average balance during the
periods  presented  is  attributed  to a portion of the  convertible  debentures
converted into common stock. 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
As previously  discussed,  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 during the first quarter. The
impairment  recognized  in the  first  quarter  of  1997  can be  attributed  to
approximately  $307,000  in dry  holes  and  $1.3  million  associated  with 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
effect of the accounting  change increased the carrying value of the oil and gas
properties  (which  at the time  consisted  principally  of the  Rocky  Mountain
properties).  A significant drop in oil and gas prices between December 31, 1996
and March 31, 1997 substantially lowered the "ceiling" on the full cost pool and
the Company incurred the additional impairment charge.

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  common  stock  equivalents  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 both accrued but unpaid
dividends and any imputed  dividends  attributable to the beneficial  conversion
feature.  During the first  quarter of 1997,  the net loss  applicable to common
stockholders  includes  $44,984 of accrued but unpaid  dividends  related to the
Series A Preferred  Stock that  automatically  converted into common on June 11,
1997. During the first quarter

                                                          -14-

<PAGE>



of 1998,  the net loss  applicable to common  stockholders  includes  $70,833 of
accrued  dividends  plus an  additional  imputed  non-cash  dividend  charge  of
$782,506 related to the beneficial  conversion  feature attached to the Series B
Preferred Stock that was issued on December 31, 1997.

The Series B Preferred Stock became  convertible  into common stock on March 31,
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 of $782,506  included in the net loss  applicable to common  stockholders
during  the first  quarter of 1998  represents  the  intrinsic  value of the 12%
discount  applicable at March 31, 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.

OTHER MATTERS

Recently Issued Financial Accounting Standards
In June 1997, the FASB issued  Statement of Financial  Accounting  Standards No.
130, "Reporting  Comprehensive Income" ("SFAS 130"), which establishes standards
for  reporting  and  display of  comprehensive  income and its  components.  The
components of comprehensive income refer to revenues, expenses, gains and losses
that are excluded from net income under current accounting standards,  including
foreign currency  translation items,  minimum pension liability  adjustments and
unrealized  gains  and  losses  on  certain   investments  in  debt  and  equity
securities.  SFAS  130  requires  that  all  items  that  are  recognized  under
accounting  standards as  components  of  comprehensive  income be reported in a
financial  statement  displayed  in equal  prominence  with the other  financial
statements;  the total of other comprehensive income for a period is required to
be  transferred  to a component  of equity  that is  separately  displayed  in a
statement of financial position at the end of an accounting period.  SFAS 130 is
effective for both interim and annual periods beginning after December 15, 1997.
The Company does not believe that this SFAS will have any significant  impact on
its financial statements.

In June 1997, the FASB issued  Statement of Financial  Accounting  Standards No.
131,  "Disclosures  about  Segments of an  Enterprise  and Related  Information"
("SFAS 131"). SFAS 131 establishes  standards for the way public enterprises are
to report  information about operating  segments in annual financial  statements
and requires the reporting of selected  information about operating  segments in
interim financial reports issued to shareholders.  It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers.  SFAS 131 is effective for periods beginning after December 15, 1997.
The  Company  does not  believe  that  this SFAS  will  currently  result in any
significant new disclosures in its financial statements.

Disclosure Regarding Forward-Looking Statements
This  report on Form 10-KSB  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

                                                          -15-

<PAGE>



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 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 has been informed by the suppliers of substantially all of the Company's
software  that all of those  suppliers'  software that is used by the Company is
Year 2000 compliant.  The Company has no internally  generated  software.  After
reasonable  investigation,  the  Company  has not yet  identified  any Year 2000
problems  but will  continue  to  monitor  the issue.  However,  there can be no
assurances  that Year 2000 problems will not occur with respect to the company's
computer systems. 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.

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 quarter ended March
         31, 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 shares for total proceeds of $938 to the
                  Company.  These  warrants  were  issued  in  February  1996 in
                  connection  with the  consulting  agreement  entered into with
                  Beta Capital  Group,  Inc.  Shares of common stock issued upon
                  exercise of the  warrants  were  registered  for resale by the
                  holder in Registration No. 333-19589.

         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.

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.


                                                          -16-

<PAGE>


(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 27-1,  "Financial Data Schedule" - for the quarter
                  ended  March 31,  1998.  (2)  Exhibit  27-2,  "Financial  Data
                  Schedule" - for the quarter ended March 31, 1997 as restated
                  for accounting change from successful efforts to full cost for
                  oil and gas activities.

(b) The following  reports on Form 8-K were filed during the quarter ended March
31, 1998:

<TABLE>
<CAPTION>
                           Item Reported                     Date                Financial Statement
                           -------------             ------------------------   --------------------
<S>               <C>               <C>                      <C> <C>                                 
                  (1)               5, 7             January 13, 1998           None - Not Applicable
                  (2)               5, 7             March 9, 1998              None - Not Applicable
</TABLE>

There were no financial statements filed during the quarter ended March 31, 1998
other  than the  Company's  Annual  Report  on Form  10-KSB  for the year  ended
December 31, 1997.

                                                       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: May 19, 1998                  By: /s/ Willard H. Pease, Jr.
                                    Willard H. Pease, Jr.
                                    President and Chief Executive Officer

Date: May 19, 1998                  By: /s/ Patrick J. Duncan
                                    Patrick J. Duncan
                                    Chief Financial Officer, Treasurer,
                                    and Principal Accounting Officer



                                                          -17-

<PAGE>