<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549

                                   FORM 10-K

[X]             ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
                    OF THE SECURITIES EXCHANGE ACT OF 1934
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
                                       OR
[ ]            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                    OF THE SECURITIES EXCHANGE ACT OF 1934
                 FOR THE TRANSITION PERIOD FROM _____TO______

                        COMMISION FILE NUMBER 000-28463

                                   AROC Inc.
            (Exact name of registrant as specified in its charter)

                 DELAWARE                                  74-2932492
    (State or other jurisdiction of                     (I.R.S. Employer
    incorporation or organization)                     Identification No.)

         4200 EAST SKELLY DRIVE
                 SUITE 1000
          TULSA, OKLAHOMA                                                74135
(Address of principal executive offices)                              (Zip code)

Registrant's telephone number, including area code:        (918) 491-1100

          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

 Title of Each Class                 Name of Each Exchange on Which Registered
 -------------------                 -----------------------------------------
      (NONE)                                           (NONE)

          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                           Common Stock $0.001 each
                               (Title of Class)

     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 preceding 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
                                              ---     ---

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of the Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]

     The aggregate market value of the Registrant's voting stock held by non-
affiliates as of March 16, 2001 was approximately $164,167. Solely for purposes
of this calculation, all shareholders holding more than 10% of the voting stock
of the Company are assumed to be affiliates.

     On March 1, 2001 there were 55,278,837 shares of the Registrant's common
stock outstanding, 1,877,366 shares of preferred stock outstanding and
10,000,000 shares of the Registrant's convertible restricted voting stock
outstanding.

                      Documents Incorporated by Reference
                                     NONE
<PAGE>

                                   AROC Inc.

                                   FORM 10-K
                      FISCAL YEAR ENDED DECEMBER 31, 2000
                       ---------------------------------
                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                     PART I

<S>        <C>                                                                                                 <C>
Item 1.    Business............................................................................................    1
Item 2.    Properties..........................................................................................    3
Item 3.    Legal Proceedings...................................................................................    9
Item 4.    Submission of Matters to a Vote of Security Holders.................................................   10

                                                     PART II

Item 5.    Market for Registrant's Common Equity and Related Stockholder Matters...............................   10
Item 6.    Selected Financial Data.............................................................................   10
Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations...............   12
Item 7A.   Quantitative And Qualitative Disclosures About Market Risks.........................................   15
Item 8.    Financial Statements and Supplementary Data.........................................................   16
Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................   16

                                                   PART III

Item 10.   Directors and Executive Officers of the Registrant..................................................   17
Item 11.   Executive Compensation..............................................................................   19
Item 12.   Security Ownership of Certain Beneficial Owners and Management......................................   20
Item 13.   Certain Relationships and Related Transactions......................................................   21

                                                   PART IV

Item 14.   Exhibits, Financial Statement Schedules, and Reports on Form 10-K...................................   22
           Signatures..........................................................................................   24
</TABLE>

Cautionary Statement Regarding Forward Looking Statements

In the interest of providing the Company's stockholders and potential investors
with certain information regarding the Company's future plans and operations,
certain statements set forth in this Form 10-K relate to management's future
plans and objectives. Such statements are "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Although any
forward-looking statements contained in this Form 10-K or otherwise expressed by
or on behalf of the Company are, to the knowledge and in the judgment of the
officers and directors of the Company, expected to prove true and to come to
pass, management is not able to predict the future with absolute certainty.
Forward-looking statements involve known and unknown risks and uncertainties
which may cause the Company's actual performance and financial results in future
periods to differ materially from any projection, estimate or forecasted result.
These risks and uncertainties include, among other things, volatility of oil and
gas prices, competition, risks inherent in the Company's oil and gas operations,
the inexact nature of interpretation of seismic and other geological and
geophysical data, imprecision of reserve estimates, the Company's ability to
replace and expand oil and gas reserves, and such other risks and uncertainties
described from time to time in the Company's periodic reports and filings with
the Securities and Exchange Commission. Accordingly, stockholders and potential
investors are cautioned that certain events or circumstances could cause actual
results to differ materially from those projected, estimated, or predicted.
<PAGE>

                                    PART I

ITEM 1. BUSINESS

     AROC Inc. (the Company or AROC) is a Tulsa-based holding company of a group
whose principal activities are the exploration, development and production of
oil and gas and the acquisition of producing oil and gas properties. AROC was
incorporated and registered under the laws of Delaware on July 16, 1999. AROC's
corporate headquarters are at 4200 East Skelly Drive, Suite 1000, Tulsa,
Oklahoma 74135.


RECENT DEVELOPMENTS

     Effective August 11, 2000, several holders of the Company's common stock
and Series A preferred stock transferred their stock to Energy LLC (MPAC), an
affiliate of EnCap 1996 LP, El Paso and EnCap Investments. As a result MPAC has
the right to vote approximately 34% of the Company's common stock and
approximately 80% of the Series A preferred stock.

     On March 8, 2001, the Company's board of director's approved an issuer
tender offer by which the Company would offer to purchase all outstanding shares
of its common stock at a price of $0.06 per share. The board also named a
special committee, consisting of the independent member of the board, to make a
recommendation to the registrant's stockholders whether to accept the offer. The
Company believes that the expenses of the tender offer can be funded from
available cash. After completion of the tender offer, the board will consider
whether any additional transactions, such as a "going private" transaction are
appropriate. MPAC has indicated it will not tender its shares in the offer.
Therefore, any tenders received in the offer would have the effect of increasing
MPAC's ownership of the Company.

     The tender offer will be commenced by the filing with the Securities and
Exchange Commission and mailing to the Company's shareholders of appropriate
documentation, which will be mailed to all stockholders as soon as practical.
Stockholders of the Company should read the Tender Offer Statement on Schedule
TO once its filed with the Securities and Exchange Commission, as it will
contain important information about the tender offer. Investors will be able to
obtain the Tender Offer Statement on Schedule TO and other filed documents for
free at the Securities and Exchange Commission's website at www.sec.gov.
                                                            -----------

     In addition, at the March 8, 2001 meeting of the board of director's, the
board approved the resignation of Mr. John A. Keenan as Chairman, CEO and the
President of the Company and all related positions upon the earlier to occur of
the completion of the tender offer or seventy-five days from the date of the
board meeting, the payment from the Company of $2.6 million to Mr. Keenan and
other members of senior management upon their resignations. The board has not
formally determined a successor to Mr. Keenan or the other senior officers, but
expects to do so before the effective date of their resignations.

     As a result of the May 2, 2000 transactions described below, EnCap Equity
1996 Limited Partnership (EnCap 1996 LP) became the largest stockholder
(approximately 39%) of AROC Inc. (old AROC). Although old AROC is the legal
acquirer, EnCap 1996 LP is treated as having acquired old AROC for accounting
purposes. Accordingly, the transactions have been accounted for as a reverse
acquisition and EnCap 1996 LP is now referred to as AROC or the Company. The
historical financial statements are those of EnCap 1996 LP, which have been
restated for the equivalent number of shares received in the transactions. The
results of operations of AROC (legal acquirer) are included in the financial
statements of the combined AROC and EnCap 1996 LP financial statements from May
2, 2000 (acquisition date).

     On May 2, 2000, AROC completed the acquisition of additional oil and gas
properties, a refinancing of its debt and issuance of a new series of preferred
stock. The transactions involved several different elements.

     Effective May 1, 2000, AROC designated 2,200,000 shares of its authorized
preferred stock as Series A Preferred Stock. The Series A Preferred Stock
accrues cumulative dividends at the rate of $5.00 per share per year, payable
semiannually. Until May 1, 2002, dividends are payable in kind through the
issuance of additional shares of preferred stock at a price equal to the fair
market value of the preferred stock at the time of the payment. The preferred
stock has a liquidation preference of $50.00 per share and may be redeemable at
$50.00 per share at either the Company's or the holder's option upon the
occurrence of certain events. Each share of preferred stock is convertible at
any time into 384.6 shares of the Company's common stock and has the right to
vote in all matters on the same basis as if the preferred stock had been

                                       1
<PAGE>

converted into common stock. The terms of the preferred stock prohibit the
Company from taking certain actions without the consent of the holders of the
preferred stock. The preferred stock has a liquidation preference of $50.00 per
share at either the Company's or the holder's option upon the occurrence of
certain events.

     On May 2, 2000, the Company sold to Bank of America, N.A. (Bank of
America), EnCap Equity 1996 Limited Partnership (EnCap 1996 LP), Energy Capital
Investment Company PLC (ECIC), El Paso Capital Investments, L.L.C. (El Paso),
EF-II Holdings, LLC (EF-II), Picosa Creek Limited Partnership (Picosa) and EnCap
Investments, L.L.C. (EnCap Investments) 850,163 shares of the Company's newly
created Series A Preferred Stock for a total consideration of approximately
$42.5 million, received in satisfaction of outstanding obligations to those
parties and in consideration of cash and the purchase of an oil and gas property
interest.

     Also on May 2, 2000, pursuant to four separate Purchase and Sale Agreements
by and between (i) EnCap Equity 1994 Limited Partnership (EnCap 1994 LP), (ii)
ECIC and ECIC Corporation, (iii) EnCap 1996 LP, and (iv) Mountaineer Limited
Partnership, and the Company, the Company acquired direct or indirect ownership
of oil and gas properties having a net present value, discounted at 10%, of
approximately $62 million at May 1, 2000, using non-escalated prices of $2.50
per mcf of gas and $22.00 per barrel of oil. The properties included
approximately 280 wells located in Texas, Louisiana, New Mexico, and Wyoming.
The properties were acquired in exchange for the issuance to the sellers of an
aggregate of 930,140 shares of the Company's Series A Preferred Stock.

     In addition, on May 2, 2000, the Company entered into a Purchase Agreement
providing for the sale to ECIC and El Paso of a total of $17,000,000 in
subordinated notes in exchange for cash in that amount. The subordinated notes
bear interest at the rate of 12% per year, payable semiannually. Principal is
due May 1, 2007. Until May 1, 2002, interest is payable in kind by increasing
the principal amount of the debt. Additionally, the Company issued to ECIC and
El Paso warrants to purchase a total of 39,541,233 shares of the Company's
common stock at a price of $0.01 per share at any time until April 30, 2007
pursuant to such Purchase Agreement.

     As a result of these transactions, as of May 2, 2000, the Company had
outstanding 55,278,837 shares of common stock, 10,000,000 convertible restricted
voting shares, warrants to purchase 45,813,963 shares of common stock, and
1,780,303 shares of Series A Preferred Stock that are convertible into an
aggregate of 684,731,923 shares of common stock. EnCap 1996 LP, EnCap 1994 LP,
ECIC, EnCap Investments, Picosa, EF-II and El Paso have the right to vote in the
aggregate approximately 80% of the Company's voting securities and Bank of
America and its affiliates have the right to vote approximately 11.6% of the
Company's voting securities.

     Pursuant to a Credit Agreement dated as of May 2, 2000, among AROC, Toronto
Dominion (Texas), Inc., individually and as Agent, and the lenders named in that
agreement (the Credit Agreement), the Company obtained a new $35,000,000 credit
facility. The credit facility is secured by a first lien on substantially all of
the Company's assets and the credit facility imposes certain restrictions on the
Company's activities, including the payment of dividends and purchases of stock.
The credit facility provides for a revolving line of credit for three years.
Borrowings under the credit facility bear interest at either the LIBOR rate plus
from 2.25% to 3.0% or the agent's prime rate plus from .75% to 1.5%, at the
Company's election. Interest is payable quarterly beginning July 31, 2000.
Principal is payable in full on the third anniversary of the closing of the
credit facility. The borrowing base for the credit facility will typically be
redetermined semiannually, although the lenders and borrower each have the right
to make one additional redetermination each year.

     A portion of the proceeds of the cash received from the credit facility and
the sale of the subordinated notes were used to satisfy the Company's
obligations under its previous credit facility with Bank of America and the
remainder was used for working capital.

     In February 2001, the Company completed a sale of all of its interests in
the East Irish Sea, offshore UK. Proceeds from the sale of approximately $28.6
million will be used to reduce long-term debt and to fund U.S. capital
expenditures during the 2001 fiscal year. A contract to sell the UK properties
was executed between Hydrocarbons Resources Limited ("HRL") and Difco on
December 15, 2000. Burlington Resources (Irish Sea) Limited elected to exercise
its preemptive rights under the various joint operating agreements governing
these assets and notified Difco of its intent to acquire the properties in
January 2001, according to the same terms as offered by HRL.

                                       2
<PAGE>

COMPETITION

     The oil and natural gas industry is highly competitive in all its phases.
AROC encounters strong competition from many other energy companies in acquiring
economically desirable producing properties and drilling prospects and in
obtaining equipment and labor to operate and maintain its properties. As these
trends toward increasing competition continue, local-market knowledge, operating
efficiency, access to supplies and other factors will affect AROC's success.

GOVERNMENTAL AND ENVIRONMENTAL REGULATION

     Oil and gas production is subject to regulation under many international
and U.S. Federal and State statutes, rules, orders and regulations. Permits for
drilling, reworking and recompletion operations, drilling bonds and reports
concerning operations are required. Most jurisdictions have regulations
governing conservation matters, establishing maximum rates of production and the
regulation of the spacing, plugging and abandonment of wells.

     Environmental laws and regulations may affect the Company's operations and
costs. In particular, production and saltwater disposal operations and use of
facilities for treating, processing or otherwise handling hydrocarbons and
wastes therefrom are subject to stringent environmental regulations.
Environmental regulations are subject to frequent change and the Company cannot
predict ongoing costs of compliance or the future impact of such regulations on
operations.

OPERATIONS HAZARDS AND INSURANCE

     The operations of the Company are subject to all risks inherent in the
exploration for and production of oil and gas, including such natural hazards as
blowouts, cratering and fires, which could result in damage or injury to, or
destruction of, drilling rigs and equipment, formation, producing facilities or
other property, or could result in personal injury, loss of life or pollution of
the environment. Any such event could result in substantial expense to the
Company which could have a material adverse effect upon the financial condition
of the Company to the extent it is not fully insured against such risks but, in
accordance with standard industry practice, the Company is not fully insured for
all risks, either because such insurance is unavailable or because the Company
elects not to obtain insurance coverage because of cost. Although such
operational risks and hazards may to some extent be minimized, no combination of
experience, knowledge and scientific evaluation can eliminate the risk of
investment or assure a profit to any company engaged in oil and gas operations.

EMPLOYEES

     At December 31, 2000, AROC had 29 management and administrative employees
and 31 technical and operating employees, none of whom belonged to a union. The
Company's other field activities are accomplished through independent
contractors. The Company believes its relations with its employees and
contractors are satisfactory.

MARKETING

     The Company's oil and gas sales are not dependent on a single purchaser or
a few purchasers and management does not believe that it will be in the
foreseeable future since oil and gas purchasers are readily available in today's
markets. The oil and gas is sold under contracts of varying length with the
sales price based on published indices with slight premiums or discounts to the
applicable index.

ITEM 2. PROPERTIES

UK (EAST IRISH SEA) PROPERTIES

     AROC owned non-operated interests in 9 licenses comprising 12 blocks or
part-blocks in the East Irish Sea, offshore UK. The licenses, which are operated
by Burlington Resources (Irish Sea) Limited, contain 5 proven gas accumulations,
namely the Millom, Dalton, Calder, Crossans and Darwen gas fields. Two of these
fields, the Millom and Dalton fields, came on-stream in August 1999. AROC had a
10% working interest in these fields.

     Gas sales from the producing properties accounted for all of AROC's
revenues from UK operations for the year ended December 31, 2000.

                                       3
<PAGE>

     In February 2001, the Company completed a sale of all of its interests in
the East Irish Sea. Proceeds from the sale were used to reduce long-term debt
and are expected to be used to fund the Company's U.S. capital expenditure
program during the 2001 fiscal year. A contract to sell the UK properties was
executed between Hydrocarbon Resources Limited ("HRL") and Difco on December 15,
2000. Burlington Resources (Irish Sea) Limited elected to exercise its
preemptive rights under the various joint operating agreements governing these
assets and notified Difco of its intent to acquire the properties in January
2001, according to the same terms as offered by HRL. Since the properties were
under contract to be sold as of December 31,2000 and the transaction was closed
in February 2001, no related UK property information is included in the
following sections.

U.S. PROPERTIES

     AROC owns and operates producing properties in 9 states in the U.S., with
proved reserves located primarily in the states of Alabama, Louisiana,
Mississippi, Oklahoma and Texas. AROC continuously evaluates the profitability
of its oil, gas and related activities and has a policy of divesting itself of
unprofitable oil and gas properties or areas of operation that are not
consistent with its operating philosophy.

     AROC operates 415 producing or potentially productive wells in these areas
and also owns non-operated working interests in 200 producing or potentially
productive wells and non-operated royalty interests in a further 237 wells. In
support of its oil and gas operations, AROC also owns an interest in 31
saltwater disposal wells and 89 water injection wells. Oil and gas sales from
the producing oil and gas properties accounted for substantially all of AROC's
revenues from U.S. operations for the year ended December 31, 2000.

     The following summarizes AROC's principal areas of oil and gas production
activity in the U.S. as of December 31, 2000.

South Carlton Field, Alabama

     The South Carlton field is located in Clarke and Baldwin Counties in
southwest Alabama. AROC operates 60 active producing or potentially productive
oil wells and 5 salt-water disposal wells. Production is from the Massive and
Pilot Sands of the Tuscaloosa Formation at depths of 5,250-6,000 ft. In December
2000 the field produced at an average gross rate of 455 Bopd (377 Bopd net to
AROC's revenue interest in the property) from 37 wells. AROC has a 100% working
interest in the field. The estimated net remaining reserves to AROC's interest
in the field as of December 31, 2000 were 3,112 MBbls of oil.

Chittim Ranch Field, Texas

     The Chittim Ranch field is located in Maverick County in southwest Texas.
AROC has a working interest in approximately 12,800 gross acres and operates 6
active producing gas wells with a non-operated interest in 3 other wells (1 oil
and 2 gas producers). AROC currently has an 82% working interest in the
property. The field produces primarily from Glen Rose carbonates at a depth of
5,300 ft. with minor production coming from the Austin Chalk at a depth of 1,300
ft. In December 2000 the 9 wells produced at an average gross rate of 5 Bopd and
718 Mcfgpd (3 Bopd and 426 Mcfgpd net to AROC's revenue interest in the
property). AROC plans to utilize horizontal drilling techniques to maximize the
economic recovery of hydrocarbons from the Glen Rose carbonates. A horizontal
drilling program is planned as the most prudent operational means to achieve
maximum initial production rates and per well bore capture of hydrocarbons
through the drilling of the fewest development wells. It is anticipated that up
to 5 such wells will be drilled in 2001, commencing in May 2001. The estimated
net remaining reserves to AROC's interest in the field as of December 31, 2000
were 73 MBbls of oil and 11,541 MMcf of gas.

Oakhill Field, Texas

     The Oakhill field is located in Gregg and Rusk Counties in east Texas. AROC
has a 100% working interest in the Grissom and Kuykendall leases that lie within
the proven productive field area. These leases cover an area in excess of 640
acres. The field is productive in the Jurassic Cotton Valley Formation at a
depth of approximately 11,000 ft. AROC spudded its first well on the Grissom
lease in December 2000. The well was junked and abandoned in February of 2001
after it encountered mechanical difficulties. This location is to be re-drilled
at a later date. AROC is currently

                                       4
<PAGE>

drilling its second well on the Grissom lease. First production from this well
is anticipated in early May 2001. The estimated net remaining reserves to AROC's
interest in the field as of December 31, 2000 were 27 MBbls of oil and 8,935
MMcf of gas.

Black Warrior Basin Fields, Mississippi and Alabama

     AROC owns operated and non-operated working interests in 38 wells (36
operated, 2 non-operated) in Lamar, Fayette and Pickens Counties, Alabama and
Lee and Chickasaw Counties, Mississippi. AROC's working interest in the
properties varies between 10.4% and 100%. Production is from multiple sandstone
of Mississippian and Pennsylvanian age at depths of 1,900 to 4,600 ft. The
fields produced at a combined average gross rate of 2 Bopd and 2,689 Mcfgpd for
the month of December 2000 (1 Bopd and 1,156 Mcfgpd net to AROC's revenue
interest in the properties). The estimated net remaining reserves to AROC's
interest in these fields as of December 31, 2000 were 3 MBbls of oil and 4,686
MMcf of gas.

Tinsley Field, Mississippi

     The Tinsley field is located in Yazoo County, Mississippi. AROC operates 11
active producing or potentially productive oil wells and 2 salt-water disposal
wells in the field. AROC's working interest in the property is 100%. The field
produces from Upper Cretaceous age Eutaw Sandstones at a depth of approximately
4,500 ft. In December 2000 the field produced at an average gross rate of 149
Bopd (113 Bopd net to AROC's revenue interest in the property). The estimated
net remaining reserves to AROC's interest in the field as of December 31, 2000
were 611 MBbls of oil.

Bolton Field, Mississippi

     The Bolton field is located in Hinds County, Mississippi. AROC operates 1
active producing well in the field. AROC's working interest in the property as
of December 31, 2000 was 48.9%. The Ernest Roberts G.U. #1 well is currently
producing from Cotton Valley Formation sandstones at a depth of approximately
16,000 ft. In December 2000 the well produced at a curtailed average gross rate
of 4 Bopd and 202 Mcfgpd (1.5 Bopd and 72 Mcfgpd net to AROC's revenue interest
in the property). Workover operations in late December 2000 returned gross
production rates to approximately 22 Bopd and 1,148 Mcfgpd by February of 2001.
The estimated net remaining reserves to AROC's interest in the field as of
December 31, 2000 were 103 MBbls of oil and 2,362 MMcf of gas.

St. Martinville Field, Louisiana

     The St. Martinville Field is located in St. Martin Parish in south
Louisiana. AROC operates 24 active producing or potentially productive oil wells
in the field. AROC's working interest in the field is 24.1%. Production is from
Miocene sands at depths of 2,100-5,400 ft. In December 2000, the field produced
from 12 wells at an average gross rate of 170 Bopd and 85 Mcfgpd (38 Bopd and 19
Mcfgpd net to AROC's revenue interest in the property). The field contains
significant proven behind pipe potential. Planned future operations are to
recomplete 7 inactive well bores in behind pipe proven productive Miocene sands.
The estimated net remaining reserves to AROC's interest in the field as of
December 31, 2000 were 287 MBbls of oil and 159 MMcf of gas.

Pledger Field, Texas

     The Pledger Field is located in Brazoria County, Texas. AROC has a 92.2%
working interest in a 15,960 acre unit in the field. AROC operates 7 active
producing gas wells and 1 saltwater disposal well in the field. The field also
contains 23 temporarily abandoned wells. Production is from Tertiary Marginulina
and Frio sands at depths of approximately 6,700 to 7,200 ft. In December the
field produced at an average gross rate of 464 Mcfgpd (383 Mcfgpd net to AROC's
revenue interest in the property). The estimated net remaining reserves to
AROC's interest in the field as of December 31, 2000 were 1 MBbls of oil and
7,161 MMcf of gas.

Loco Hills and Maljamar Fields, New Mexico

     The Loco Hills and Maljamar Fields are located in the Artesia-Vacuum Trend
in Eddy and Lea Counties, New Mexico. AROC has a working interest of 90.7% to
99.5% in 6 leases in these fields. The properties are in varying stages of
waterflood. AROC owns and operates 49 active producing or potentially productive
oil wells and 28 water injection

                                       5
<PAGE>

wells in the fields. Production is from the Permian Queen, Seven Rivers,
Grayburg Jackson and San Andres Formations at depths of 2,500 to 5,000 ft.
During the period May to December 2000, AROC converted 21 wells to injection,
returned 2 plugged and abandoned wells to production and drilled 7 new producers
in the fields. The new producers had initial potential production rates of
between 35 and 96 Bopd. In addition to this, micro-organism injection commenced
on 3 of the leases and gas compression facilities were installed on 2 of the
leases. Gross production increased from an average of 163 Bopd and 35 Mcfgpd in
May 2000 to a peak of 335 Bopd and 201 Mcfgpd in August 2000. In December 2000
the fields produced at a combined average gross rate of 286 Bopd and 129 Mcfgpd
(246 Bopd and 110 Mcfgpd net to AROC's revenue interest in the property).
Reservoir fill-up and peak flood response from these properties is not expected
until the year 2003. The estimated net remaining reserves to AROC's interest in
these fields as of December 31, 2000 were 2,807 MBbls of oil and 784 MMcf of
gas.

South Harris Field, Texas

     The South Harris Field is located in Gaines County, Texas. AROC is the
operator of and has a working interest of 64.5% to 78.7% in 5 active producing
wells on a 160 acre lease in the field. Production is from the Permian San
Andres Formation at depths of approximately 5,000 to 5,200 ft. During the period
April through July 2000 the 3 existing producers on the Tetens `A' lease were
fracture stimulated with a resulting overall increase in production from
approximately 58 Bopd to over 250 Bopd. In December 2000 AROC drilled 2 oil
producers on the Tetens `A' lease. The Tetens `A' #4 and #5 wells were completed
and put into production in January 2001. Initial potential production rates for
these wells were 75 and 79 Bopd, respectively. In December 2000 the 3 wells on
the Tetens `A' lease produced at an average gross rate of 149 Bopd (87 Bopd net
to AROC's revenue interest in the property). The estimated net remaining
reserves to AROC's interest in the field as of December 31, 2000 were 458 MBbls
of oil.

M.A.K. (Spraberry) Field

     The M.A.K. (Spraberry) Field is located in Andrews and Martin Counties,
Texas. AROC has a 99.7% working interest in the M.A.K. (Spraberry) Unit covering
an area of 3,520 acres. Production is from the Permian Spraberry Gin Sand at a
depth of around 8,450 ft. AROC operates 17 active producing or potentially
productive oil wells and 10 injection wells in the field. The unit is undergoing
active water injection and appears to be showing initial flood response. In
December 2000 the unit produced at an average gross rate of 91 Bopd and 54
Mcfgpd (71 Bopd and 42 Mcfgpd net to AROC's revenue interest in the property).
The estimated net remaining reserves to AROC's interest in the field as of
December 31, 2000 were 1,462 MBbls of oil and 877 MMcfg.

Moore Field, Texas

     The Moore Field is located in Howard County, Texas. AROC has a 99.2% to
100% working interest in 11 leases and 1 unit covering an area of 3,500 acres.
Production is primarily from the Permian San Andres Formation at a depth of
around 3,200 ft. AROC operates 111 active producing or potentially productive
oil wells, 42 injection wells and 6 salt water disposal wells in the field. In
December 2000 the field produced at an average gross rate of 156 Bopd (125 Bopd
net to AROC's revenue interest in the property). The estimated net remaining
reserves to AROC's interest in the field as of December 31, 2000 were 2,081
MBbls of oil.

S.E. Share Field, Texas

     The S.E. Share Field is located in Ochiltree County in the northern part of
the Texas Panhandle. AROC has an interest in a limited partnership that is
currently 70%, potentially increasing up to 99%. The limited partnership holds
working interests in 5 leases and 1 waterflood unit in the field. Strand Energy,
on behalf of the limited partnership, operates the property, which contains 24
active producing or potentially productive wells and 6 injector wells. The
property comprises approximately 2,900 gross acres. AROC's effective working
interest in this property varies between 37.5% and 70%. Production in the
waterflood unit is from Pennsylvanian Upper Morrow sands at a depth of 7,450 ft.
Production has also been established from Pennsylvanian Upper Des Moines
carbonates at a depth of 6,400 ft. The S.E. Share Unit is undergoing active
water injection and is showing positive flood response. In December 2000 the
property produced at an average gross rate of 211 Bopd and 144 Mcfgpd (106 Bopd
and 83 Mcfgpd net to AROC's revenue interest in the property). In 2000 the
partnership drilled 1 new infill producer in the southern part of the field and
several

                                       6
<PAGE>

artificial lift revisions were performed. The estimated net remaining reserves
to AROC's interest in the field as of December 31, 2000 were 997 MBbls of oil
and 213 MMcfg.

     In addition to these fields, AROC has other producing properties and
associated activities in the U.S. Net proved reserves to AROC's interest in
these properties as of December 31, 2000 were 1,174 MBbls of oil and 8,983 MMcf
of gas.

RESERVES

     The following table sets forth summary information concerning our estimated
proved oil and gas reserves as of December 31, 2000, based on a report prepared
by Lee Keeling & Associates, Inc., independent petroleum engineers. Lee Keeling
& Associates sometimes referred to herein as the "independent engineer", and its
report is sometimes referred to herein as the "reserve report". All calculations
in the reserve report have been made in accordance with the rules and
regulations of the Securities and Exchange Commission and give no effect to
federal or state income taxes otherwise attributable to estimated future net
revenues from the sale of oil and gas. The present value of estimated future net
revenues has been calculated using a discount rate of 10%. The commodity prices
used in this calculation were $9.78 per Mcf for natural gas and $26.80 per
barrel of oil.

<TABLE>
<CAPTION>
                                             December 31, 2000
                                             -----------------
<S>                                          <C>
               Proved Reserves:

                    Natural Gas (Mmcf)              45,700
                    Oil (Mbbl)                      13,191
                                                    ------
                    Total (Mboe)                    20,807

               Proved Developed Reserves:

                    Natural Gas (Mmcf)              18,905
                    Oil (Mbbl)                      10,156
                                                    ------
                    Total (Mboe)                    13,307

               PV-10 (In Thousands):              $290,139
</TABLE>

PRODUCTIVE WELLS

     The following table sets forth AROC's producing wells at December 31, 2000:

<TABLE>
<CAPTION>
                                           Productive Wells
                          Oil                    Gas                    Total
                --------------------    --------------------   --------------------
                  Gross        Net        Gross       Net        Gross       Net
                 ------       ----       ------      ----       ------      ----
<S>             <C>          <C>        <C>           <C>      <C>          <C>
                    462      332.6          153      84.6          615     417.2

</TABLE>

     Productive wells consist of producing wells and wells capable of
production, including gas wells awaiting pipeline connections to commence
deliveries and oil wells awaiting connection to production facilities. Wells
that are completed in more than one producing horizon are counted as one well.
Of the gross wells reported above, 7 had multiple completions.

                                       7
<PAGE>

ACREAGE DATA

     The following table sets forth the developed and undeveloped leasehold
acreage held by AROC at December 31, 2000. Developed acres are acres that are
spaced or assignable to productive wells. Undeveloped acres are acres on which
wells have not been drilled or completed to a point that would permit the
production of commercial quantities of oil and gas, regardless of whether or not
such acreage contains proved reserves. Gross acres are the total number of acres
in which AROC has a working interest. Net acres are the sum of AROC's fractional
interests owned in the gross acres.

     States in which AROC held developed and undeveloped acreage at December 31,
2000 include Alabama, Colorado, Louisiana, Mississippi, Montana, New Mexico,
Oklahoma, Texas and Wyoming.

<TABLE>
<CAPTION>
                                           Gross                 Net
                                         ---------            ---------
<S>                                      <C>                <C>

  Developed acreage                        27,012               20,103
  Undeveloped acreage                      10,957                8,429
                                         ---------            ---------
  Total                                    37,969               28,532
                                         =========            =========
</TABLE>

PRODUCTION AND SALES

     The following table sets forth information with respect to sales of
production and average unit prices and costs for the periods indicated:

<TABLE>
<CAPTION>
                                                 Years ended December 31,
                                          ------------------------------------
                                           1998           1999           2000
                                          ------         ------         ------

<S>                                       <C>            <C>          <C>
     Net Production:
        Gas (Mmcf)                           631            361          1,805
        Oil (MBbls)                          193            151            512
                                          ------         ------         ------
        Total (Mboe)                         298            211            812

     Average sales price realized (1)
        Gas (per Mcf)                     $ 2.08         $ 2.31         $ 3.24
        Oil (per Bbl)                     $13.29         $16.82         $22.36
        Per BOE                           $13.00         $15.98         $21.28

     Average production costs per BOE     $ 9.13         $10.72         $13.87
</TABLE>

(1)  Includes effects of hedging.


                                       8
<PAGE>

DRILLING ACTIVITY

     During the periods indicated, AROC drilled or participated in the drilling
of the following exploratory and development wells. The information excludes
wells in which AROC has only a royalty interest.

<TABLE>
<CAPTION>
                                                   Years ended December 31
                         ---------------------------------------------------------------------------
                                   1998                     1999                       2000
                         ----------------------    ----------------------    -----------------------
                             Gross         Net         Gross         Net         Gross         Net
                          --------    --------      --------    --------      --------    --------
<S>                      <C>          <C>          <C>          <C>          <C>          <C>
Exploratory:
   Productive                    -           -             -           -             -           -
   Non-Productive                -           -             -           -             -           -
                          --------    --------      --------    --------      --------    --------
      Total                      -           -             -           -             -           -
                          ========    ========      ========    ========      ========    ========

Development:
   Productive                    -           -           1.0        0.34          18.0        12.4
   Non-Productive                -           -             -           -           2.0         1.1
                          --------    --------      --------    --------      --------    --------
      Total                      -           -             -           -          20.0        13.5
                          ========    ========      ========    ========      ========    ========

Total:
   Productive                    -           -           1.0        0.34             -           -
   Non-Productive                -           -             -           -             -           -
                          --------    --------      --------    --------      --------    --------
      Total                      -           -           1.0        0.34          20.0        13.5
                          ========    ========      ========    ========      ========    ========
</TABLE>

     At December 31, 2000, AROC was participating in the drilling of two
development wells.

     All of AROC's drilling activities are conducted with independent
contractors. AROC owns no drilling equipment.

TITLE TO PROPERTIES

     As is customary in the oil and gas industry, AROC conducts only a
perfunctory title examination at the time properties believed to be suitable for
drilling operations are first acquired. Prior to commencement of drilling
operations, a thorough drill site title examination is normally conducted and
curative work is performed with respect to significant defects. During
acquisitions, title reviews are performed on all material properties being
acquired.

ITEM 3. LEGAL PROCEEDINGS

     The Company is a named defendant in lawsuits, and is subject to claims of
third parties from time to time arising in the ordinary course of business.
While the outcome of lawsuits or other proceedings and claims against the
Company cannot be predicted with certainty, management does not believe the
outcome of these lawsuits will have a material adverse effect on the financial
position, results of operations or liquidity of the Company.

     Louis Dreyfus Natural Gas Corp. ("LNDG") filed a lawsuit in June 1999,
seeking reimbursement from Alliance Resources ("Alliance") and LaTex Petroleum
Corporation ("LaTex"), wholly-owned subsidiaries of the Company for expenses
incurred in making repairs to navigational aids on certain drilling platforms
located off the coast of Texas. LNDG sought actual damages plus court costs,
pre-and post-judgment interest, and attorney's fees. LNDG also sought a
declaratory judgment that Alliance and LaTex are liable for any future cost or
expenses owed with respect to the platforms and plugging and abandoning the oil
and gas wells located on the platforms. LNDG bases its suit on a Purchase and
Sale Agreement between American Exploration Corporation ("American") and LaTex
(LNDG claims to be the successor-in interest to American). Alliance filed a
special appearance and an answer subject thereto, objecting to personal
jurisdiction in Texas and denying that it owes any money to LNDG. LaTex also
filed an answer, denying it owes any money to LNDG. LNDG subsequently filed a
motion for summary judgment on its claims against LaTex. The district court
granted LNDG's motion on October 2, 2000 for $25,870 of expenses plus $43,299 in
attorneys' fees, and ordered LaTex to plug and abandon the wells and remove the
platforms. Latex has filed an appeal which is currently pending in the 14th
Court of Appeals. The Company will continue to vigorously defend this case.

                                       9
<PAGE>

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     (None)

                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
        MARKET INFORMATION AND DIVIDENDS

     The following information prior to the May 2, 2000 acquisition date (see
Item 1 Business-Recent Developments) is included because old AROC is the legal
acquirer in the reverse acquisition.

     From time to time since December 8, 1999, the Company's shares of common
stock, traded under the symbol "AROI.OB", have been traded in the over-the-
counter market quoted on the OTC Bulletin Board or the Pink Sheets. The
following table sets forth the high and low closing bid prices transaction
reporting system for the calendar periods indicated. These quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions.

     The Common Stock of AROC has been periodically quoted on the Pink Sheets
since December 8, 1999, when the Company became publicly held.

<TABLE>
<CAPTION>
AROC Inc. Common Stock                                                 High                Low
                                                                      -----               -----
<S>                                                                   <C>                 <C>
From December 8, 1999 to December 31, 1999 (1)                            -                   -

Calendar 2000:
First Quarter (1)                                                         -                   -
Second Quarter (1)                                                        -                   -
Third Quarter                                                          0.375               0.001
Fourth Quarter                                                         0.080               0.001
</TABLE>

As of March 22, 2001, the approximate number of record holders of AROC Common
Stock was 4,866.

     AROC has not paid any cash dividends on the AROC Common Stock for at least
the last two complete fiscal years. In addition, AROC is now restricted from
paying dividends under the Credit Agreement.

     (1) Because AROC Inc. common stock quotes were not carried on the Bulletin
Board until July 2000, it is not possible to accurately ascertain prices for the
periods noted.

ITEM 6. SELECTED FINANCIAL DATA

     As a result of the May 2, 2000 transactions described below, EnCap Equity
1996 Limited Partnership (EnCap 1996 LP) became the largest stockholder
(approximately 39%) of AROC Inc. (old AROC). Although old AROC is the legal
acquirer, EnCap 1996 LP is treated as having acquired old AROC for accounting
purposes. Accordingly, the transactions have been accounted for as a reverse
acquisition and EnCap 1996 LP is now referred to as AROC or the Company. The
historical financial statements are those of EnCap 1996 LP, which have been
restated for the equivalent number of shares received in the transactions. The
results of operations of AROC (legal acquirer) are included in the financial
statements of the combined AROC and EnCap 1996 LP financial statements from May
2, 2000 (acquisition date).

     Effective January 1, 2000, the Company elected to convert from the full
cost method to the successful efforts method of accounting for its investments
in oil and gas properties. The Company believes that the successful efforts
method of accounting is preferable, as it will provide a fairer presentation of
the Company's drilling, exploration and development activities. Accordingly, all
prior year financial statements have been restated to conform with successful
efforts accounting. The effect of the change in accounting method as of December
31, 1999, was a reduction to accumulated deficit of $5.8 million attributable to
a decrease in net property and equipment. The change in accounting method
resulted in a decrease in net loss of $1.7 million ($0.03 per common share) for
1999, increase in net income of $4.8 million ($0.09 per common share) for 1998,
decrease in net income of $0.7 million ($0.01 per common share) for 1997 and a
decrease in net income of $0.03 million in 1996.

                                       10
<PAGE>

     The selected financial information presented below should be read in
     conjunction with the Company's audited financial statements and the notes
     thereto included under Item 8 and Management's Discussion and Analysis of
     Financial Condition and Results of Operations in Item 7.

              SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
        (in thousands, except per share amounts and average sales data)

<TABLE>
<CAPTION>
                                                                                     Years Ended December 31,
                                                                  --------------------------------------------------------------
Statement of Operations Data:                                      1996          1997         1998         1999         2000 (1)
                                                                  -------       -------      -------      -------      ---------

<S>                                                               <C>           <C>          <C>          <C>          <C>
   Oil and gas revenues                                           $   732       $ 4,848      $ 3,880      $ 3,374      $17,292

   Operating expenses:
      Lease operating expenses                                        277         2,437        2,722        2,263       11,268
      General and administrative expenses                              12           163          326          299        2,597
      Depreciation, depletion and amortization                        127           942        1,601        1,018        6,310
      Exploration expenses                                              -         1,026          245          568            -
                                                                 --------       -------     --------     --------     --------
         Total operating expenses                                     416         4,568        4,894        4,148       20,175
                                                                 --------       -------     --------     --------     --------
      Income (loss) from operations                                   316           280       (1,014)        (774)      (2,883)
                                                                 --------       -------     --------     --------     --------

   Other income (expense):
      Gain (loss) on sale of oil and gas properties                     -             -        5,641        2,541          (16)
      Impairment writedown and loss on sale of
        marketable equity securities                                    -             -         (741)      (6,061)        (263)
      Equity net losses of affiliate                                    -             -         (518)      (4,252)           -
      Interest  expense                                                 -             -            -            -       (3,576)
      Interest income and other, net                                    -             -          (33)          (6)          75
                                                                 --------       -------     --------     --------     --------
         Total other income (expense)                                   -             -        4,349       (7,778)      (3,780)
                                                                 --------       -------     --------     --------     --------
      Net income (loss)                                               316           280        3,335       (8,552)      (6,663)
                                                                 --------       -------     --------     --------     --------

   Preferred stock dividend requirements                                -             -            -            -       (6,009)
                                                                 --------       -------     --------     --------     --------
      Net income (loss) attributable to common stockholders       $   316       $   280      $ 3,335      $(8,552)    $(12,672)
                                                                 ========       =======     ========     ========     ========

   Basic income (loss) per common share                           $  0.01       $  0.01      $  0.06      $ (0.16)    $  (0.24)
                                                                 ========       =======     ========     ========     ========

   Average shares outstanding                                      53,679        53,679       53,679       53,679       53,679
                                                                 ========       =======     ========     ========     ========

Balance Sheet Data (end of  period):
   Total assets                                                   $ 3,744       $20,601      $28,555      $21,533     $128,885
   Net property and equipment                                       3,236        19,140       19,957       19,385       92,763
   Working capital (deficit)                                           51          (992)         302        1,582         (324)
   Long term debt                                                       -             -            -            -       39,612
   Stockholders' equity (deficit)                                   3,311        18,223       27,820       20,967      (15,827)

Reserve and Production Data:
   Production:
      Oil (MBbls)                                                      19           185          193          151          512
      Gas (MMcf)                                                      106           718          631          361        1,805
   Average sales prices:
      Oil (per Bbl)                                               $ 22.94        $19.07       $13.29       $16.82      $ 22.36
      Gas (per Mcf)                                                  2.70          2.32         2.08         2.31         3.24
   Proved reserves (end of period):
      Oil (MBbls)                                                     310         5,699        4,869        4,849       13,191
      Gas (MMcf)                                                    7,225        21,836       18,492        7,671       45,700
Present value of estimated future oil and gas net revenues
   Before income taxes (discounted 10%)                           $ 9,777       $50,455      $30,429      $47,403     $290,139
Standardized Measure                                              $ 9,777       $50,455      $30,429      $47,403     $203,426


</TABLE>

(1)  See Note 1 to consolidated financial statement for 2000 acquisitions.

                                       11
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS

     The information in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" refers to the Consolidated Financial
Statements of AROC included in this Form 10-K which are presented in accordance
with U.S. GAAP.

RESULTS OF OPERATIONS

     The factors which most significantly affect results of operations are (i)
the sale prices of crude oil and gas, (ii) the level of total sales volumes,
(iii) the level of lease operating expenses and (iv) the level of interest rates
on borrowings. Total sales volumes and the level of borrowings are significantly
impacted by the degree of success in efforts to acquire oil and gas properties
and in the ability to maintain or increase production from existing oil and gas
properties through development activities.

     The following table reflects certain historical operating data for the
years ended December 31:

<TABLE>
<CAPTION>
                                                                   Years Ended December 31,
                                                      ------------------------------------------------
                                                            1998             1999            2000
                                                      ------------------------------------------------
<S>         <C>                                          <C>           <C>              <C>
     Net sales volumes
        Oil (Mbbls)                                           193              151             512
        Natural gas (Mmcf)                                    631              361           1,805
                                                              ---              ---           -----
        Total  (MBOE)                                         298              211             812
     Average sales prices
        Oil (per Bbl)                                      $13.29           $16.82          $22.36
        Natural gas (per Mcf)                              $ 2.08           $ 2.31          $ 3.24
        Per BOE                                            $13.00           $15.98          $21.28
     Operating expenses per BOE of net sales
        Lease operating                                    $ 8.16           $ 9.78          $13.34
        Severance tax                                      $ 0.97           $ 0.94          $ 0.53
        General and administrative                         $ 1.09           $ 1.42          $ 3.07
        Depreciation, depletion and amortization           $ 5.37           $ 3.97          $ 8.07
</TABLE>

YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999

     Total revenues for the year ended December 31, 2000 were $17,292,353
compared to $3,374,342 for the year ended December 31, 1999. This increase
primarily resulted from an overall increase in production volumes and realized
prices during the year ended December 31, 2000 compared to the year ended
December 31, 1999. The increase in production volumes was mainly due to the
property acquisitions described earlier in the Recent Development section in
this document.

     Lease operating expenses increased to $11,267,918 for the year ended
December 31, 2000, compared to $2,262,371 for the year ended December 31, 1999.
The increase in operating expenses is primarily a result of the property
acquisitions described earlier in the Recent Development section in this
document.

     General and administrative expenses for the year ended December 31, 2000
were $2,597,403 which represents an increase over the $299,256 incurred in the
prior fiscal year. This was primarily due to costs associated with increased
staff levels required to manage the additional properties acquired by the
Company pursuant to the property acquisitions described earlier in the Recent
Developments section in this document.

     Depreciation, depletion and amortization expenses increased from $1,018,491
for the year ended December 31, 1999 to $6,310,182 for the year ended December
31, 2000. This was due primarily to higher production volumes related to the
property acquisitions described earlier in the Recent Development section in
this document.

                                       12
<PAGE>

     Interest expense increased to $3,575,904 for the year ended December 31,
2000. This was due to the increase in long-term debt as described earlier in the
Recent Development section in this document. The current corporate debt
structure includes both a senior credit facility and subordinate notes which
accrued interest since May 2, 2000.

     The net loss for the year ended December 31, 2000 was $12,671,553 ($0.24
per common share) compared to a net loss of $8,551,589 ($0.16 per common share)
for the year ended December 31, 1999.

YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998

     Total revenues for the year ended December 31, 1999 were $3,374,343
compared to $3,880,237 for the year ended December 31,1998. The decrease in
revenues can be attributed to property sales during the 1998 period offset by an
increase in realized prices of 27% for oil and 11% for natural gas.

     Lease operating expenses decreased 17% to $2,262,371 for the year ended
December 31,1999, compared to $2,722,203 for the year ended December 31, 1998.
The decrease in operating expenses was a result of property sales during the
1998 period. On an equivalent barrel basis, lease operating expenses increased
by $1.58 to $10.72 for the year ended December 31, 1999, compared to $9.14 for
the year ended December 31, 1998.

     General and administrative expenses for the year ended December 31, 1999
were $299,255 which represents a decrease of 11% over the $325,884 incurred in
the prior fiscal year. On an equivalent barrel basis general and administrative
expenses increased by $0.33 to $1.42 for the year ended December 31, 1999
compared to $1.09 for the year ended December 31, 1998.

     Depreciation, depletion and amortization expense decreased 36% to
$1,018,491 year ended December 31, 1999 from $1,601,385 for the year ended
December 31, 1998. This was due primarily to lower production volumes resulting
from property sales during the 1998 period. On an equivalent barrel basis
depreciation, depletion, and amortization decreased $1.40 to $3.97 for the year
ended December 31, 1999, compared to $5.37 for the year ended December 31, 1998.

     The net loss for the year ended December 31, 1999 was $8,551,589 ($0.16 per
common share) compared to a net income of $3,335,099 ($0.06 per common share)
for the year ended December 31, 1998.

CAPITAL RESOURCES AND LIQUIDITY

     The Company's capital requirements relate primarily to the acquisition of
developed oil and gas properties and undeveloped leasehold acreage and
exploration and development activities, and the servicing of the Company's debt.
In general, because the Company's oil and gas reserves are depleted by
production, the success of its business strategy is dependent upon a continuous
acquisition and exploration and development program and the acquisition of
additional reserves.

     Pursuant to a Credit Agreement dated as of May 2, 2000, among AROC, Toronto
Dominion (Texas), Inc., individually and as Agent, and the lenders named in that
agreement (the "Credit Agreement"), the Company obtained a new $35,000,000
credit facility. The credit facility is secured by a first lien on substantially
all of the Company's assets. The credit facility imposes certain restrictions on
the Company's activities, including the payment of dividends and purchases of
stock. The credit facility provides for a revolving line of credit for three
years. Borrowings under the credit facility bear interest at either the LIBOR
rate plus from 2.25% to 3.0% or the agent's prime rate plus from .75% to 1.5%,
at the Company's election. Interest is payable quarterly beginning July 31,
2000. Principal is payable in full on the third anniversary of the closing of
the credit facility. The borrowing base for the credit facility will typically
be redetermined semiannually, although the lenders and borrower each have the
right to make an additional redetermination once each year.

     In addition, on May 2, 2000, old AROC entered into a purchase agreement
providing for the sale to ECIC and El Paso of a total of $17,000,000 in
subordinated notes in exchange for cash in that amount. The subordinated notes
bear interest at the rate of 12% per year, payable semiannually. Principal is
due May 1, 2007. Until May 1, 2002, interest is payable in kind by increasing
the principal amount of the debt. Additionally, old AROC also

                                       13
<PAGE>

issued to ECIC and El Paso warrants to purchase a total of 39,541,233 shares of
AROC's common stock at a price of $0.01 per share at any time until April 30,
2007 pursuant to such purchase agreement.

     On February 23, 2001 the Company completed a transaction to sell all of its
UK assets. The assets were sold to Burlington Resources (Irish Sea) Limited for
approximately $28,600,000. Proceeds from this sale were used to reduce the
Company's long-term debt ($24.6 million) under the Credit Agreement and to fund
U.S. capital expenditures and operations ($4.0 million) during the 2001 fiscal
year. The Company's outstanding long-term debt under the Credit Agreement is
approximately $920,000 as of February 28, 2001.

CASH FLOWS AND LIQUIDITY

     At December 31, 2000, AROC reported current assets of $9,753,855 and
current liabilities of $10,077,966, which resulted in a working capital deficit
of $324,111.

     Operating activities of AROC used $452,910 during the year ended December
31, 2000, as compared to $213,865 in net cash flow for the year ended December
31, 1999.

     For the year ended December 31, 2000 and December 31, 1999, AROC's
investing activities used $9,267,077 and $4,888,429 provided respectively.

     Financing activities provided $9,937,018 for the year ended December 31,
2000, as compared to $4,169,840 used for the year ended December 31, 1999.

     Revenues generated by the Company's production activities are directly
affected by market prices of oil and natural gas. A decline in energy prices
could precipitate a decrease in future development activities and could cause a
decrease in future development activities and could cause a decrease in the
volume of reserves available for production.

     The Company does participate in option contracts with third-party oil and
gas merchants. These instruments are intended to reduce the Company's exposure
to short-term volatility in the market values of the underlying commodities or
if one of the counterparties fails to perform under a contract. For additional
information concerning the Company's derivative financial instruments, see Item
7A, Quantitative and Qualitative Analysis on Market Risk and Item 8, Financial
Statements and Supplementary Data, Note 11.

     The Company's ability to grow will depend, in part, upon management's
ability to identify and complete attractive acquisitions and investments in
joint ventures which may be subject to the effects of, and changes in the
following: domestic and international monetary policies, laws and regulations,
political and economic developments, inflation rates, taxes and operating
conditions.

     The business and operating results can be harmed by factors such as the
availability or cost of capital, changes in interest rates, changes in the tax
rates due to new tax laws, changes in the structured finance markets, market
perceptions of the energy industry or credit ratings.

CAPITAL EXPENDITURES

     The timing of most of the Company's capital expenditures is discretionary.
Currently, there are no material long-term commitments associated with the
Company's capital expenditure plans. Consequently, the Company has a significant
degree of flexibility to adjust the level of such expenditures as circumstances
warrant. The Company primarily uses funds available under its credit facility
and operating cash flows to fund capital expenditures. If the Company's
internally generated cash flows should be insufficient to meet its banking or
other obligations, the Company may reduce the level of discretionary capital
expenditures or increase the sale of non-strategic oil and gas properties in
order to meet such obligations.

      The level of the Company's capital expenditures will vary in future
periods depending on energy market conditions and other related economic
factors. As a result, the Company will continue its current policy of funding
capital expenditures with funds available under its credit facility and
internally generated cash flow.

                                       14
<PAGE>

INFLATION AND PRICES

     The Company's revenues, profitability and future growth rates will be
substantially dependent upon its success in reserve replacement, and prevailing
prices for oil and gas, which are in turn dependent upon numerous factors that
are beyond the Company's control, such as economic, political and regulatory
developments and competition from other sources of energy. The energy markets
have historically been volatile, and oil and gas prices can be expected to
continue to be subject to wide fluctuations in the future. A substantial or
extended decline in oil and gas prices could have a material adverse effect on
the Company's financial position, results of operations and access to capital,
as well as the quantities of oil and gas reserves that the Company may produce
economically.

     Inflation has not historically had a material impact on the Company's
financial statements, and management does not believe that the Company will be
materially more or less sensitive to the effects of inflation than other
companies in the oil and gas industry.

NEW ACCOUNTING PRONOUNCEMENTS

     In September 1998, the FASB issues SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" which established standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. It establishes conditions
under which a derivative may be designated as a hedge, and establishes standards
for reporting changes in the fair value of a derivative. SFAS No. 133 is
required to be implemented for the first quarter of the fiscal year ended 2001.

     The Company will adopt SFAS No. 133 effective January 1, 2001 and expects
that its current commodity derivative contracts will qualify for cash flow hedge
accounting treatment under SFAS No. 133 whereby changes in fair value will be
recognized in other comprehensive income (a component of stockholders' equity)
until settled, when the resulting gains and losses will be recorded in earnings.
Any hedge ineffectiveness will be charged currently to earnings. However, it is
believed that any ineffectiveness will be immaterial. The effect on the
Company's operations and other comprehensive income (loss) as a result of the
adoption of SFAS No. 133 will vary from period to period and will be dependent
upon prevailing commodity prices.

     Upon adoption of SFAS No. 133 on January 1, 2001, the Company will record a
liability of approximately $2.6 million relative to the fair value of its
current commodity derivative contracts. Also, the Company will record a charge
to other comprehensive income of approximately $2.6 million.

ITEM 7A. QUANTITATIVE AND QUALITATIVE ANALYSIS ON MARKET RISK

     The Company's primary market risks relate to changes in interest rates and
in the prices received from sales of oil and natural gas. The Company's primary
risk management strategy is to partially mitigate the risk of adverse changes in
its cashflows caused by increases in interest rates on its variable rate debt,
and decreases in oil and natural gas prices, by entering into derivative
financial and commodity instruments, including swaps, collars and participating
commodity hedges. By hedging only a portion of its market risk exposures, the
Company is able to participate in the increased earnings and cashflows
associated with decreases in interest rates and increases in oil and natural gas
prices; however, it is exposed to risk on the unhedged portion of its variable
rate debt and oil and natural gas production.

     Historically, the Company has attempted to hedge the exposure related to
its variable rate debt and its forecasted oil and natural gas production in
amounts which it believes are prudent based on the prices of available
derivatives and, in the case of production hedges, the Company's deliverable
volumes. The Company attempts to manage the exposure to adverse changes in the
fair value of its fixed rate debt agreements by issuing fixed rate debt only
when business conditions and market conditions are favorable.

     The Company does not use or hold derivative instruments for trading
purposes nor does it use derivative instruments with leveraged features. The
Company's derivative instruments are designated and effective as hedges against
its identified risks, and do not of themselves expose the Company to market risk
because any adverse change in the cashflows associated with the

                                       15
<PAGE>

derivative instrument is accompanied by an offsetting change in the cashflows of
the hedged transaction.

     Personnel who have appropriate skills, experience and supervision carry out
all derivative activity. The personnel involved in derivative activity must
follow prescribed trading limits and parameters that are regularly reviewed by
senior management. The Company uses only well-known, conventional derivative
instruments and attempts to manage its credit risk by entering into financial
contracts with reputable financial institutions.

     Following are disclosures regarding the Company's market risk sensitive
instruments by major category. Investors and other users are cautioned to avoid
simplistic use of these disclosures. Users should realize that the actual impact
of future interest rate and commodity price movements will likely differ from
the amounts disclosed below due to ongoing changes in risk exposure levels and
concurrent adjustments to hedging positions. It is not possible to accurately
predict future movements in interest rates and oil and natural gas prices.

     Interest Rate Risks (non-trading) - The Company uses both fixed and
variable rate debt to partially finance operations and capital expenditures. As
of December 31, 2000, the Company's debt, including subordinated debt, consists
of $25,500,000 in borrowings under the Credit Agreement which bears interest at
a variable rate, and $17,454,146 in borrowings under its 12% Senior Subordinated
Notes which bears interest at a fixed rate. The Company currently has no
derivative instruments in place related to debt. A hypothetical increase in
interest rates of two percentage points in variable rate debt would cause an
increase in interest expense of $510,000 during the 2001 fiscal year, assuming
that variable rate outstanding borrowings under the Credit Agreement (see Recent
Developments) remain at current levels.

     Commodity Price Risk (non trading) - The Company hedges a portion of the
price risk associated with the sale of its oil and natural gas production
through the use of derivative commodity instruments, which consist of floors and
collars. These instruments reduce the Company's exposure to decreases in oil and
natural gas prices on the hedged portion of its production by enabling it to
effectively receive a price that only fluctuates between a predetermined floor
and ceiling. As of January 31, 2001, the Company is bound by derivative
commodity hedges covering an aggregate of 220,000 barrels of oil and 1,000,000
MMBTU's of gas that extends through December 2001 (oil) and October 2001 (gas).
Under these contracts, the Company sells its oil and natural gas production at
posted market prices and receives or makes payments based on the differential
between the contract price and a floor and collar price which is based on posted
market indices.

<TABLE>
<CAPTION>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                  Page
                                                                                     ----
<S>                                                                                   <C>
Independent Auditors' Report..........................................................F-1

Consolidated Balance Sheets...........................................................F-2

Consolidated Statements of Operations.................................................F-4

Consolidated Statements of Stockholders' Equity (Deficit) and Comprehensive Income....F-5

Consolidated Statements of Cash Flows.................................................F-6

Notes to the Consolidated Financial Statements........................................F-7
 </TABLE>

                                       16
<PAGE>


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

                                Not Applicable


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     John A. "Jak" Keenan, aged 46, is the Chairman, President and Chief
Executive Officer of AROC. He has worked in the oil industry since 1976 and was
successively First Vice President of Corporate Development, Chief Operating
Officer and Director and President of the oil and gas division of Great Western
Resources, Inc. He resigned his position at Great Western Resources, Inc. in
August 1995 and accepted a position at the law firm of Jenkens & Gilchrist in
Houston, Texas, where he specialized in oil and gas transactions. He joined the
Board of Alliance in April 1996 and was Chairman and Managing Director of
Alliance at the time that AROC acquired all of the outstanding shares of
Alliance.

     Paul R. Fenemore, aged 45, is the Executive Vice President, Chief Operating
Officer and a Director of AROC. He has a B.Sc. degree in combined science
obtained in 1975 and a M.Sc. degree in marine geotechnics. He has extensive
experience in detailed technical and economic evaluations of exploration and oil
field appraisal and development projects and project management and has held
several technical and senior management positions with Gulf Oil Corporation,
Amoco Europe and West Africa Limited, Amerada-Hess UK Limited, Hamilton Brothers
(UK) Limited, CSX Oil and Gas Corporation, Cairn Energy PLC and Hunting Surveys
Limited. From 1991 until 1995, he was Managing Director of Petroleum Ventures
International and Spectron Petroleum Limited and became a fellow of the
Geological Society in 1992. He joined the Board of Alliance in May 1996 and was
the Operations and Business Development Director of Alliance at the time that
AROC acquired all of the outstanding shares of Alliance.

     Michael E. Humphries, aged 43, is a non-executive Director of AROC. Having
begun his career at Britoil Plc, he has spent 16 years working in the
international oil and gas arena and is currently Director of N M Rothschild and
Sons (Washington) LLC, based in Washington D.C., where he has responsibility for
Rothschild's oil and gas activities in North America. He joined the Board of
Alliance in December 1997.

      Robert L. Zorich, aged 52, is non-executive Director of AROC. Since 1988,
Mr. Zorich has been a Managing Director at EnCap Investments, L.L.C. Prior to
the formation of EnCap in 1988, Mr. Zorich was a Senior Vice President from 1986
to 1988 in charge of the Houston office of Trust Company of the West (TCW), a
large, privately-held pension fund manager. His responsibilities at TCW included
the investment and management of $140 million of the firm's oil and gas fund.
From 1981 to 1986, Mr. Zorich served as Co-Chief Executive Officer of MAZE
Exploration Inc., a Denver-based oil and gas company focused on acquisition,
exploration and development of oil and gas properties. Before forming MAZE, Mr.
Zorich was employed by Republic Bank Dallas from 1974 to 1980 as a Vice
President and Division Manager in the Energy Department. Approximately half of
his tenure with Republic Bank was devoted to managing the London energy office,
where he assembled a number of major project financings for development in the
North Sea. Mr. Zorich holds a Master Degree in International Management from the
American Graduate School of International Management in Phoenix, Arizona and a
B.A. degree in Economics from the University of California at Santa Barbara. He
serves on the board of directors of AROC Inc., Michael Petroleum Corp. and
Matrix Oil & Gas Inc., EnerMark Income Fund (TSE) and Enerplus Resources Fund
(NYSE). He is a member of the Independent Petroleum Association of America and
the Texas Independent Producers and Royalty Owners Association. Mr. Zorich
joined the Board of AROC in December 2000.

     Gary R. Petersen, aged 55, is a non-executive Director of AROC. Since 1988,
Mr. Petersen has been a Managing Director and Principal at EnCap Investments,
L.L.C. Prior to the formation of EnCap in 1988, Mr. Petersen was a Senior Vice
President and Manager of the Corporate Finance Division of the Energy Banking
Group of Republic Bank Corporation from 1985 to 1988. His duties and
responsibilities included mergers and acquisitions, financial advisory services
and institutional fund rasing

                                       17
<PAGE>

activities for the energy industry. Prior to his position at Republic Bank, Mr.
Petersen was an Executive Vice President and a member of the Board of Directors
of Nicklos Oil & Gas Company in Houston from 1979 to 1984. Previously, Mr.
Petersen was a Group Vice President in the Petroleum and Minerals Division of
Republic Bank. Mr. Petersen holds M.B.A. and B.B.A. degrees in Finance from
Texas Tech University and has done post-graduate work at American University and
the Stonier Graduate School of Banking at Rutgers University. He serves on the
board of AROC Inc., Bargo Energy Company, Matrix Oil & Gas Inc., Michael
Petroleum Corporation, Nuevo Energy Inc. (NYSE), Equus II, Inc. (ASE) and Energy
Capital Investment Company, PLC (LSE). Mr. Petersen joined the Board of AROC in
December 2000.

     D. Martin Phillips, aged 48 is a non-executive Director of AROC. He is
currently a Managing Director of EnCap Investments L.L.C. Prior to joining EnCap
in 1989, Mr. Phillips served as a Senior Vice President in the Energy Banking
Group of NCNB Texas National Bank in Dallas, Texas. In his capacity as Manager
of the U.S./International Division from 1987 to 1989, he had responsibility for
credit commitments totaling approximately $1 billion to a broad spectrum of
energy-related companies. Mr. Phillips began his career in 1978 with Republic
Bank Dallas (NCNB Texas' predecessor organization) and served in various senior
energy banking positions, including Vice President and Manager of Republic
Bank's Houston office, from 1986 to 1987. Mr. Phillips holds M.B.A. and B.S.
degree from Louisiana State University. He also attended the Stonier Graduate
School of Banking at Rutgers University. Mr. Phillips serves on the board of
directors of AROC Inc., BreitBurn Energy Company, LLC, Bargo Energy Company,
Matrix Oil & Gas, Inc. and 3TEC Energy Corporation. He is a member of the
Independent Petroleum Association of America, the American Petroleum Institute
and the Houston Producers' Forum. Mr. Phillips joined the Board of AROC in
December 2000.

     Francis M. Munchinski, aged 46, is the Vice President-Law and General
Counsel of AROC. He has been involved in the oil and gas business for over 20
years. He joined Alliance in June 1998 and was General Counsel of Alliance at
the time that AROC acquired all of the outstanding shares of Alliance. Prior to
joining Alliance, he was a shareholder at the law firm of Jenkens & Gilchrist in
Dallas, Texas, where he specialized in oil and gas law for over 13 years.

     Robert E. Schulte, aged 42, is the Chief Financial Officer and Vice
President of AROC. He has worked in the oil and gas industry since 1981 in both
domestic and international arenas. He has held management positions with Bow
Valley Petroleum and Kelt Energy. He served as Accounting Supervisor at Great
Western Resources, Inc. until he resigned in December 1995 at which time he
became Accounting Manager at Apache Corporation. He joined Alliance in September
1997 and was the Chief Financial Officer of Alliance at the time that AROC
acquired all of the outstanding shares of Alliance.

                                       18
<PAGE>


ITEM 11. EXECUTIVE COMPENSATION

     The following table sets forth certain information regarding compensation
paid or accrued during each of the Company's last three fiscal years to the
Company's Chief Executive Officer and each of the other most highly compensated
executive officers who earned at least $100,000 in salary and bonus in fiscal
2000 (the Named Executives).

     None of these expenses prior to the May 2, 2000 acquisition date are
reflected in the financial information and consolidated financial statements
included herein (See item 1 Business-Recent Developments). The information is
included because old AROC is the legal acquirer in the reverse acquisition.

                          SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                               Annual Compensation                            Long-Term Compensation|
------------------------------------------------------------------------------------------------------------------------------------
                            |       |                                     |                    Securities        |
                            |       |                     Other Annual    | Restricted Stock   Underlying        |  All Other
Name and Principal Position | Year  |  Salary    Bonus   Compensation (1) | Award(s) ($) (2)  Options/ SARs (#)  | Compensation (3)
----------------------------|-------|-------------------------------------|--------------------------------------|-----------------
<S>                          <C>     <C>       <C>       <C>                <C>               <C>                  <C>
                            |       |                                     |                                      |
J|hn A. Keenan              | 2000  | $180,000  $90,000          $32,250  |         $247,000                   - |          $     -
Chairman and                | 1999  |  180,000        -           32,000  |                -             890,000 |                -
 President,                 |       |                                     |                                      |
Chief Executive             | 1998  |  180,000   75,000           27,000  |                -             400,000 |                -
 Officer                    |       |                                     |                                      |
                            |       |                                     |                                      |
Paul R. Fenemore            | 2000  |  170,000   70,000           10,000  |          182,000                   - |                -
Vice President              | 1999  |  160,000        -           24,000  |                -             670,000 |                -
Chief Operating             | 1998  |  160,000   72,000           24,000  |                -             200,000 |                -
 Officer                    |       |                                     |                                      |
                            |       |                                     |                                      |
Francis M. Munchinski       | 2000  |  140,000   60,000                -  |          130,000                   - |                -
Vice President-Law          | 1999  |  140,000        -                -  |                -             520,000 |                -
General Counsel             | 1998  |   76,000   42,000                -  |                -                   - |            8,526
                            |       |                                     |                                      |
Robert E. Schulte           | 2000  |  125,000   40,000            5,146  |           97,500                   - |                -
Vice President              | 1999  |  100,000        -            4,081  |                -             285,000 |                -
Chief Financial Officer     | 1998  |   78,000   42,000            2,541  |                -              25,000 |           10,321
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

 (1) Amounts shown under Other Annual Compensation in 2000, 1999 and 1998
     represent pension and benefits.
 (2) The Named Executives were granted the following numbers of shares of
     restricted stock: Mr. Keenan - 1,900,000; Mr. Fenemore - 1,400,000;
     Mr. Munchinski - 1,000,000; and Mr. Schulte - 750,000, all of which
     were held at December 31, 2000. The Company believes that the value of
     the shares at December 31, 2000 was the same as at the date of grant
     as indicated in the table above. The shares vest in equal increments
     in April of 2001, 2002 and 2003 or upon a change in control of the
     Company. The Company does not intend to pay dividends on the shares
     during this period.
 (3) Amounts shown under All Other Compensation in 1999 and 1998 represent
     relocation expenses.

     None of the Named Executives received or exercised any stock options during
the fiscal year ended December 31, 2000, and none of the Named Executives held
any stock options at December 31, 2000.

                                       19
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth certain information, as of March 19, 2001,
about any person that is known to the Company to be the beneficial owner of more
than 5% of each class of AROC Common Stock and each executive officer and
director of AROC and all executive officers and directors of AROC as a group.
Except as otherwise indicated, each of the persons named below is believed by
AROC to possess sole voting and investment power with respect to the shares
beneficially owned by such person.

<TABLE>
<CAPTION>
  Name and Address of                                                Shares Owned           Percent Owned
  Beneficial Owner (1)                                               Beneficially          Beneficially (2)
  --------------------                                               ------------          ----------------
<S>                                                                  <C>                   <C>

  John A. Keenan (3)                                                   2,000,000                   *

  Paul R. Fenemore (4)                                                 1,400,000                   *

  Francis M. Munchinski (5)                                            1,000,000                   *

  Robert E. Schulte (6)                                                  750,000                   *

  Michael E. Humphries                                                   250,000                   *

  Robert L. Zorich (7)                                                         -                   -

  Gary R. Petersen (7)                                                         -                   -

  D. Martin Phillips (7)                                                       -                   -

  Bank of America, N.A. (8)                                           99,950,152               12.7%

  MPAC Energy, LLC (9)                                               653,615,887               88.0%

  All Directors and executive officers of AROC as a
  Group (8 persons) (3), (4), (5), (6), (7)                            5,400,000                   *
  *   Less than 1%
</TABLE>

(1)  All of AROC's directors and executive officers may be contacted at 4200
     East Skelly Drive, Suite 1000, Tulsa, Oklahoma 74135.

(2)  All share amounts and percentage information is calculated on the basis
     that the Company's Common Stock and Series A Convertible Preferred Stock
     (Preferred Stock) constitute a single class because each share of Preferred
     Stock is convertible at any time into 384.6 shares of the Company's Common
     Stock and has the right to vote in all matters on the same basis as if the
     Preferred Stock had been converted into Common Stock.

(3)  Includes 1,900,000 shares granted as restricted stock under the Company's
     2000 Omnibus Stock and Incentive Plan.

(4)  Consists of 1,400,000 shares granted as restricted stock under the
     Company's 2000 Omnibus Stock and Incentive Plan.

(5)  Consists of 1,000,000 shares granted as restricted stock under the
     Company's 2000 Omnibus Stock and Incentive Plan.

(6)  Consists of 750,000 shares granted as restricted stock under the Company's
     2000 Omnibus Stock and Incentive Plan.

                                       20
<PAGE>

(7)  Excludes stock owned by MPAC Energy, LLC, of which this individual is
     affiliated.

(8)  Consists of 1,500,000 shares of Common Stock and immediately exercisable
     warrants convertible into or exercisable for 2,404,519 shares of Common
     Stock issued to an affiliate of Bank of America, 241,204 shares of
     Preferred Stock and warrants to purchase 3,275,000 shares of Common Stock
     at a price of $0.01 per share. The address of Bank of America is 901 Main
     Street, Dallas, Texas 75202.

(9)  Consists of 15,545,454 shares of Common Stock, 10,000,000 shares of
     convertible voting shares that are convertible into 5,000,000 shares of
     Common Stock, warrants to purchase 39,541,233 shares of Common Stock at a
     price of $0.01 per share, and 1,556, 176 shares of preferred stock
     convertible into 598,529,200 shares of Common Stock.

     In addition to the interests set out above, John A. Keenan is interested in
45,000 shares of Common Stock held in the name of Diamond Securities Limited and
102,500 shares of Common Stock held in the name of Havensworth Limited by virtue
of having proxy over the voting rights attached to these shares of Common Stock
pending their sale, as required by a settlement of legal proceedings with the
former Managing Director of Alliance in August 1996.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The Company currently has entered into several energy derivative
transactions with El Paso Merchant Energy, a subsidiary of El Paso Energy (El
Paso) (see Note 11 to the Consolidated Financial Statements).

     As a result of the May 2, 2000 transactions described below, EnCap Equity
1996 Limited Partnership (EnCap 1996 LP) became the largest stockholder
(approximately 39%) of AROC Inc. (old AROC). Although old AROC is the legal
acquirer, EnCap 1996 LP is treated as having acquired old AROC for accounting
purposes. Accordingly, the transactions have been accounted for as a reverse
acquisition and EnCap 1996 LP is now referred to as AROC or the Company. The
historical financial statements are those of EnCap 1996 LP, which have been
restated for the equivalent number of shares received in the transactions. The
results of operations of AROC (legal acquirer) will be included in the financial
statements of the combined AROC and EnCap 1996 LP financial statements from May
2, 2000 (acquisition date).

     On May 2, 2000, AROC completed the acquisition of additional oil and gas
properties, a refinancing of its debt and issuance of a new series of preferred
stock. The transactions involved several different elements.

     Effective May 1, 2000, AROC designated 2,200,000 shares of its authorized
preferred stock as Series A Preferred Stock. The Series A Preferred Stock
accrues cumulative dividends at the rate of $5.00 per share per year, payable
semiannually. Until May 1, 2002, dividends are payable in kind through the
issuance of additional shares of preferred stock at a price equal to the fair
market value of the preferred stock at the time of the payment. The preferred
stock has a liquidation preference of $50.00 per share and may be redeemable at
$50.00 per share at either the Company's or the holder's option upon the
occurrence of certain events. Each share of preferred stock is convertible at
any time into 384.6 shares of the Company's common stock and has the right to
vote in all matters on the same basis as if the preferred stock had been
converted into common stock. The terms of the preferred stock prohibit the
Company from taking certain actions without the consent of the holders of the
preferred stock. The preferred stock has a liquidation preference of $50.00 per
share at either Company's or the holder's option upon the occurrence of certain
events.

     On May 2, 2000, the Company sold to Bank of America, N.A. (Bank of
America), EnCap Equity 1996 Limited Partnership (EnCap 1996 LP), Energy Capital
Investment Company PLC (ECIC), El Paso Capital Investments, L.L.C. (El Paso),
EF-II Holdings, LLC (EF-II), Picosa Creek Limited Partnership (Picosa) and EnCap
Investments, L.L.C. (EnCap Investments) 850,163 shares of the Company's newly
created Series A Preferred Stock for a total consideration of approximately
$42.5 million, received in satisfaction of outstanding obligations to those
parties and in consideration of cash and the purchase of an oil and gas property
interest.

                                       21
<PAGE>

     Also on May 2, 2000, pursuant to four separate Purchase and Sale Agreements
by and between (i) EnCap Equity 1994 Limited Partnership (EnCap 1994 LP), (ii)
ECIC and ECIC Corporation, (iii) EnCap 1996 LP, and (iv) Mountaineer Limited
Partnership, and the Company, the Company also acquired direct or indirect
ownership of oil and gas properties having a net present value, discounted at
10%, of approximately $62 million at May 1, 2000, using non-escalated prices of
$2.50 per mcf of gas and $22.00 per barrel of oil. The properties included
approximately 280 wells located in Texas, Louisiana, New Mexico, and Wyoming.
The properties were acquired in exchange for the issuance to the sellers of an
aggregate of 930,140 shares of the Company's Series A Preferred Stock.

     In addition, on May 2, 2000, the Company entered into a Purchase Agreement
providing for the sale to ECIC and El Paso of a total of $17,000,000 in
subordinated notes in exchange for cash in that amount. The subordinated notes
bear interest at the rate of 12% per year, payable semiannually. Principal is
due May 1, 2007. Until May 1, 2002, interest is payable in kind by increasing
the principal amount of the debt. Additionally, the Company issued to ECIC and
El Paso warrants to purchase a total of 39,541,233 shares of the Company's
common stock at a price of $0.01 per share at any time until April 30, 2007
pursuant to such Purchase Agreement.

     As a result of these transactions, as of May 2, 2001, the Company had
outstanding 55,278,837 shares of common stock, 10,000,000 convertible restricted
voting shares, warrants to purchase 45,813,963 shares of common stock, and
1,780,303 shares of Series A Preferred Stock that are convertible into an
aggregate of 684,731,923 shares of common stock. EnCap 1996 LP, EnCap 1994 LP,
ECIC, EnCap Investments, Picosa, EF-II and El Paso have the right to vote in the
aggregate approximately 80% of the Company's voting securities and Bank of
America and its affiliates have the right to vote approximately 11.6% of the
Company's voting securities.

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)  Financial Statements (included in Item 8. Financial Statements and
     Supplementary Data)

(b)  Exhibits

(1) 3.1      Certificate of Incorporation of AROC Inc. (3.1)
(1) 3.2      Certificate of Amendment dated October 13, 1999, to Certificate of
             Incorporation of AROC Inc. (3.3)
(2) 3.3      Certificate of Amendment dated December 8, 1999, to Certificate of
             Incorporation of AROC Inc. (3.1)
(3) 3.4      Certificate of Designation of the Series A Preferred Stock of AROC
             Inc., as filed with the Secretary of State of Delaware May 1, 2000
             (3.1)
(1)  3.4     Bylaws of AROC Inc. (3.2)
(1)  10.1    Registration Rights Agreement dated October 13, 1999 among AROC
             Inc. (formerly American Rivers Oil Company) and members of the
             Benton family (10.4)
(3)  10.2    Amended and Restated Registration Rights Agreement, dated as of
             December 31, 2000, by and among AROC Inc., EnCap Equity 1996
             Limited Partnership, Energy Capital Investment Company PLC, Shahara
             Oil, L.L.C., El Paso Capital Investments, L.L.C. and Picosa Creek
             Limited Partnership (10.7)
(3)  10.3    Amended and Restated Registration Rights Agreement, dated as of
             December 31, 2000, by and among AROC Inc., Bank of America, N.A.
             and LaSalle Street Natural Resources Corporation (10.8)
(1)  10.4    Warrant Agreement dated as of October 13, 1999 among AROC Inc.
             (formerly American Rivers Oil Company) and holders of Series D, E,
             F, G and H Warrants (10.5)
(1)  10.5    Warrant Agreement dated as of October 13, 1999 among AROC Inc.
             (formerly American Rivers Oil Company) and holders of Series I
             Warrants (10.6)
(3)  10.6    Warrant Agreement dated December 31, 2000, relating to the issuance
             of Series J Warrants of AROC Inc. (4.1)

                                       22
<PAGE>

(3)  10.7    Purchase and Sale Agreement, dated December 31, 2000, by and
             between EnCap Equity 1996 Limited Partnership and AROC Inc. (10.1)
(3)  10.8    Purchase and Sale Agreement, dated December 31, 2000, by and among
             Energy Capital Investment Company PLC, ECIC Corporation and AROC
             Inc. (10.2)
(3)  10.9    Purchase and Sale Agreement, dated December 31, 2000, by and
             between EnCap Equity 1994 Limited Partnership and AROC Inc. (10.3)
(3)  10.10   Purchase Agreement dated May 1, 2000, by and between AROC Inc.,
             EnCap Equity 1996 Limited Partnership, Energy Capital Investment
             Company PLC and El Paso Capital Investments, L.L.C. (10.5)
(3)  10.11   Preferred Stock Purchase Agreement, dated as of May 1, 2000, among
             Bank of America, N.A., EnCap Equity 1996 Limited Partnership,
             Energy Capital Investment Company PLC, El Paso Capital Investments,
             L.L.C., EF-II Holdings LLC, Picosa Creek Limited Partnership, EnCap
             Investments, L.L.C. and AROC Inc. (10.6)
(3)  10.12   Credit Agreement dated as of May 1, 2000, among AROC Inc., Toronto
             Dominion (Texas), Inc., individually and as Agent and the Lenders
             (10.9)
(4)  10.13   Sale and Purchase Agreement dated February 1, 2001 by and between
             Difco Limited and Burlington Resources (Irish Sea) Limited.
(3)  10.14*  Employment Agreement dated as of December 8, 1999 between AROC Inc.
             and John A. Keenan
(3)  10.15*  Employment Agreement dated as of June 1, 2000 between AROC Inc. and
             Paul R. Fenemore
(3)  10.16*  Employment Agreement dated as of December 8, 1999 between AROC Inc.
             and Francis M. Munchinski
(3)  10.17*  Employment Agreement dated as of December 8, 1999 between AROC Inc.
             and Robert E. Schulte
(3)  10.18*  2000 Omnibus Stock and Incentive Plan of AROC Inc. dated as of
             April 12, 2000
(4)  21.1    Subsidiaries
(1)   Incorporated by reference to the indicated exhibit filed with the
      Registrant's Registration Statement on Form S-4 (Regis. No. 333-85237).
(2)   Incorporated by reference to the indicated exhibit filed with the
      Registrant's on Form 8-K dated as of December 8, 1999.
(3)   Incorporated by reference to the indicated exhibit filed with Registrant's
      on Form 8-K dated as of May 1, 2000.
(4)   Filed herewith
(*)   Designates management contracts or compensatory plans or arrangements.


                                       23
<PAGE>

                                  SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                        AROC Inc.
Date:  April 17, 2001                   /s/ John A. Keenan
                                        ------------------------------
                                        John A. Keenan, Chairman
                                        and Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1934, this Report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:

      Signature                           Title                      Date
      ---------                           -----                      ----

/s/ John A. Keenan        Chairman and Chief Executive Officer  April 17, 2001
------------------------
John A. Keenan

/s/ Paul R. Fenemore      Director and Chief Operating Officer  April 17, 2001
------------------------
Paul R. Fenemore

/s/ Robert L. Zorich      Director                              April 17, 2001
------------------------
Robert L. Zorich

/s/Gary R. Petersen       Director                              April 17, 2001
------------------------
Gary R. Petersen

/s/ Michael E. Humphries Director                               April 17, 2001
------------------------
Michael E. Humphries

/s/ D. Martin Phillips    Director                              April 17, 2001
------------------------
D. Martin Phillips

                                       24
<PAGE>

INDEX TO FINANCIAL STATEMENTS



<TABLE>
<CAPTION>
                                                                                                  Page
                                                                                                  ----
<S>                                                                                               <C>

Independent Auditors' Report....................................................................   F-1

Consolidated Balance Sheets - December 31, 1999 and 2000........................................   F-2

Consolidated Statements of Operations-Three Years Ended December 31, 2000.......................   F-4

Consolidated Statements of Stockholders' Equity (Deficit) -Three Years Ended December 31, 2000..   F-5

Consolidated Statements of Cash Flows-Three Years Ended December 31, 2000.......................   F-6

Notes to the Consolidated Financial Statements..................................................   F-7
</TABLE>

           All schedules are omitted as the required information is
                         inapplicable or not required.
<PAGE>

                           Independent Auditors' Report



Board of Directors
AROC Inc. and Subsidiaries


We have audited the consolidated balance sheets of AROC Inc. and subsidiaries as
of December 1999 and 2000, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for each of the years
in the three-year period ended December 31, 2000. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of AROC
Inc. and subsidiaries as of December 31, 1999 and 2000 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2000 in conformity with accounting principles generally
accepted in the United States of America.

As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for oil and gas properties from the full cost
method to the successful efforts method.


                                        KPMG LLP


Tulsa, Oklahoma
April 17, 2001

                                      F-1
<PAGE>

                                   AROC INC.

                          Consolidated Balance Sheets
                          December 31, 1999 and 2000

<TABLE>
<CAPTION>
                                                                                    1999                    2000
                                                                                -----------            ------------
<S>                                                                             <C>                    <C>
Current assets:
  Cash                                                                          $   901,546            $  1,118,577
  Accounts receivable                                                               923,813               4,415,859
  Marketable securities available for sale                                          322,166                       -
  UK oil and gas property interests held for sale                                         -               3,952,000
  Other current assets                                                                    -                 267,419
                                                                                -----------            ------------
     Total current assets                                                         2,147,525               9,753,855
                                                                                -----------            ------------

Property and equipment, at cost
  Oil and gas properties, successful efforts method                              21,825,838             100,745,042
  Other property and equipment                                                            -                 596,049
  Less accumulated depreciation, depletion and                                   (2,440,657)             (8,578,368)
   amortization                                                                 -----------            ------------

     Net property and equipment                                                  19,385,181              92,762,723

Other assets:
  Deposits and other assets                                                               -                 144,990
  UK oil and gas property interests held for sale                                         -              24,395,118
  Deferred debt issuance costs, less accumulated
   amortization                                                                           -               1,828,804
                                                                                -----------            ------------

                                                                                $21,532,706            $128,885,490
                                                                                ===========            ============
</TABLE>


         See accompanying notes to consolidated financial statements.

                                      F-2
<PAGE>

                                   AROC INC.

                          Consolidated Balance Sheets
                                  (continued)

<TABLE>
<CAPTION>
            Liabilities and Stockholders' Equity (Deficit)
            ----------------------------------------------

                                                                         ---------------------------------------------
                                                                                   1999                     2000
                                                                         --------------------      -------------------
<S>                                                                      <C>                       <C>
Current liabilities:
     Accounts payable - trade                                                     $   486,676             $  7,293,764
     Accrued expenses payable                                                               -                2,784,202
     Payable to affiliates                                                             78,872                        -
                                                                                  -----------             ------------
               Total current liabilities                                              565,548               10,077,966

Long-term debt                                                                              -               39,611,765
                                                                                  -----------             ------------

Total liabilities                                                                     565,548               49,689,731
                                                                                  -----------             ------------

Series A Voting mandatorily redeemable preferred stock-par value $0.001;
     $50 per share redemption value: 2,200,000 shares authorized:
     1,877,366 shares issued and outstanding                                                -               95,023,123

Stockholders' equity (deficit):
Common Shares - par value $0.001; 100,000,000 shares authorized;
     48,678,837 and 55,278,837 shares issued and outstanding at
     December 31, 1999 and 2000 respectively                                           48,679                   55,279
Convertible Shares - par value $0.001; 10,000,000 authorized;
     10,000,000 issued and outstanding                                                 10,000                   10,000
Additional paid-in capital                                                         25,741,395                2,056,703
Unearned compensation - restricted stock                                                    -                 (658,000)
Accumulated other comprehensive loss                                                 (213,123)                       -
Accumulated deficit                                                                (4,619,793)             (17,291,346)
                                                                                  -----------             ------------

                Total Stockholders' equity (deficit)                               20,967,158              (15,827,364)
                                                                                  -----------             ------------
                                                                                  $21,532,706             $128,885,490
                                                                                  ===========             ============
</TABLE>

         See accompanying notes to consolidated financial statements.

                                      F-3
<PAGE>

                                   AROC INC.

                     Consolidated Statements of Operations
                 Years ended December 31, 1998, 1999 and 2000

<TABLE>
<CAPTION>
                                                   ----------------------------------------------------------
                                                        1998                   1999                 2000
                                                   ------------           -------------          ------------
<S>                                           <C>                     <C>                                <C>
Oil and gas revenues                               $  3,880,237           $   3,374,342          $ 17,292,353

Operating expenses:
   Lease operating expenses                           2,722,203               2,262,371            11,267,918
   General and administrative expenses                  325,884                 299,256             2,597,403
   Depreciation, depletion and amortization           1,601,385               1,018,491             6,310,182
   Exploration expenses                                 244,696                 568,013                     -
                                                    -----------           -------------          ------------
      Total operating expenses                        4,894,168               4,148,132            20,175,503
                                                    -----------           -------------          ------------

 Loss from operations                                (1,013,913)               (773,789)           (2,883,150)
                                                   ------------           -------------          ------------

Other income (expense):

   Gain (loss) on sale of oil and gas
      properties                                      5,641,180               2,540,918               (16,602)
   Impairment writedown and loss on sale of
     marketable equity securities                      (741,486)             (6,060,890)             (262,689)
   Interest expense                                           -                       -            (3,575,904)
   Equity in net losses of affiliate                   (518,039)             (4,251,961)                    -
   Interest income and other, net                       (32,625)                 (5,867)               75,315
                                                   ------------           -------------          ------------

   Total other income (expense)                       4,349,030              (7,777,800)           (3,779,880)
                                                   ------------           -------------          ------------

Net income (loss)                                  $  3,335,099           $  (8,551,589)         $ (6,663,030)

Preferred stock dividend requirements                         -                       -            (6,008,523)
                                                   ------------           -------------          ------------
Net income (loss) attributable to
   common stockholders                             $  3,335,099           $  (8,551,589)         $(12,671,553)
                                                   ============           =============          ============


Basic income (loss) per common share               $       0.06           $       (0.16)         $      (0.24)
                                                   ============           =============          ============
Average common shares outstanding                    53,678,837              53,678,837            53,678,837
                                                   ============           =============          ============
</TABLE>

         See accompanying notes to consolidated financial statements.

                                      F-4
<PAGE>

                                   AROC INC.

           Consolidated Statements of Stockholders' Equity (Deficit)
                 YEARS ENDED DECEMBER 31, 1998, 1999 and 2000

<TABLE>
<CAPTION>




                                                                           Unearned      Accumulated       Retained
                                                           Additional    Compensation       Other          Earnings
                                      Common  Convertible    Paid-in      Restricted    Comprehensive    (Accumulated
                                      Shares    Shares       Capital        Stock       Income (Loss)      Deficit)        Total
                                      ------    ------       -------         -----      -------------      -------         -----
<S>                                   <C>     <C>          <C>            <C>           <C>             <C>            <C>
Balance at December 31, 1997         $48,679      $10,000  $ 17,567,541   $       -     $           -   $    596,697   $ 18,222,917
  Contributions                            -            -    17,661,200           -                 -              -     17,661,200
  Distributions                            -            -    (5,317,506)          -                 -              -     (5,317,506)
  Comprehensive income (loss):
    Net income                             -            -             -           -                 -      3,335,099      3,335,099
    Net unrealized change in
        marketable equity securities       -            -             -           -        (6,081,623)             -     (6,081,623)
                                                                                                                        -----------
        Total comprehensive loss                                                                                         (2,746,524)
                                     -------      -------  ------------   ---------     -------------   ------------   ------------
Balance at December 31, 1998          48,679       10,000    29,911,235           -        (6.081,623)     3,931,796     27,820,087
  Contributions                            -            -     1,846,287           -                 -              -      1,846,287
    Distributions                          -            -    (6,016,127)          -                 -              -     (6,016,127)
    Comprehensive income (loss):
    Net loss                               -            -             -           -                 -     (8,551,589)    (8,551,589)
    Net unrealized change in
        marketable equity securities       -            -             -           -         5,868,500              -      5,868,500
                                                                                                                        -----------
        Total comprehensive loss                                                                                         (2,683,089)
                                     -------      -------  ------------   ---------     -------------   ------------   ------------
Balance at December 31, 1999          48,679       10,000    25,741,395           -          (213,123)    (4,619,793)    20,967,158
  Contributions                            -            -        88,366           -                 -              -         88,366
  Distributions                            -            -    (1,125,698)          -                 -              -     (1,125,698)
  Issuance of preferred stock              -            -   (28,243,708)          -                 -              -    (28,243,708)
  Warrants issued to lender                -            -     4,744,948           -                 -              -      4,744,948
  Issuance of restricted stock         6,600            -       851,400    (858,000)                -              -              -
  Preferred stock dividends                -            -             -           -                 -     (6,008,523)    (6,008,523)
  Vesting of restricted stock-
    compensation expense                   -            -             -     200,000                 -              -        200,000
  Comprehensive loss:
    Net loss                               -            -             -           -                 -     (6,663,030)    (6,663,030)
    Net unrealized change in
        marketable equity securities       -            -             -           -           213,123              -        213,123
                                                                                                                        -----------
        Total comprehensive loss           -            -             -           -                 -              -     (6,449,907)
                                     -------      -------  ------------   ---------     -------------   ------------   ------------
Balance at December 31, 2000         $55,279      $10,000  $  2,056,703   $(658,000)    $           -   $(17,291,346)  $(15,827,364)
                                     =======      =======  ============   =========     =============   ============   ============


</TABLE>

         See accompanying notes to consolidated financial statements.

                                      F-5
<PAGE>

                                   AROC INC.

                  Notes to Consolidated Financial Statements

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                 YEARS ENDED DECEMBER 31, 1998, 1999 and 2000

<TABLE>
<CAPTION>
                                                                       1998              1999             2000
                                                                   -------------     ------------    ------------
<S>                                                                <C>               <C>             <C>
Cash flows from operating activities:
  Net income (loss)                                                $  3,335,099      $(8,551,589)    $ (6,663,030)
  Adjustments to reconcile net income (loss) to net
    cash provided by (used in) operating activities:
      (Gain) loss on sale of oil and gas properties                  (5,641,180)      (2,540,618)          16,602
      Depreciation, depletion and amortization                        1,601,385        1,018,491        6,310,182
      Impairment writedown and loss on sale of marketable
        equity securities                                               741,486        6,060,890          262,689
      Compensation expense                                                    -                -          200,000
      Interest expense and deferred loan amortization                         -                -        2,145,357
      Equity in net losses of affiliate                                 518,039        4,251,961                -
      Changes in assets and liabilities:
        Accounts receivable                                             200,535         (283,406)      (2,114,001)
        Other assets                                                     74,375                -         (400,016)
        Accounts payable                                             (1,360,952)        (181,305)        (131,821)
        Payable to affiliates                                          (281,830)          11,711          (78,872)
                                                                   ------------      -----------     ------------
          Net cash used in operating activities                        (813,043)        (213,865)        (452,910)
                                                                   ------------      -----------     ------------
Cash flows from investing activities:
  Proceeds from sale of oil  and gas properties                       3,219,862        2,540,918          419,050
  Addition to oil and gas properties                                 (7,056,631)        (446,801)     (10,264,965)

  Proceeds from sale of marketable equity securities                  1,073,515        2,794,312                -
  Purchase of marketable equity securities                           (4,146,033)               -                -
  Acquisition of old AROC                                                     -                -          578,838
  Investment in affiliate                                            (4,770,000)               -
-
                                                                   ------------      -----------     ------------
      Net cash provided by (used in) investing activities           (11,679,287)       4,888,429     $ (9,267,077)
                                                                   ------------      -----------     ------------
Cash flows from financing activities:
  Deferred loan cost                                                          -                -       (1,155,448)
  Payment of long-term debt                                                   -                -      (40,345,951)
  Proceeds from issuance of preferred stock                                   -                -        2,703,150
  Proceeds from issuance of long-term debt                                    -                -       49,500,000
  Contributions                                                      17,661,200        1,846,287           88,366
  Distributions                                                      (5,317,506)      (6,016,127)        (853,099)
                                                                   ------------      -----------     ------------
      Net cash provided by (used in) financing activities            12,343,694       (4,169,840)       9,937,018
                                                                   ------------      -----------     ------------
        Net increase (decrease) in cash                                (148,636)         504,724          217,031

Cash at beginning of period                                             545,458          396,822          901,546
                                                                   ------------      -----------     ------------
Cash at end of period                                              $    396,822      $   901,546     $  1,118,577
                                                                   ============      ===========     ============

Supplemental Disclosures of Cash Flow
   Information - cash paid during the period for interest          $          -      $         -     $  1,082,446
                                                                   ============      ===========     ============

Supplemental disclosure of noncash investing and
  financing activities:
    Distribution of stock                                                     -                -          272,600
    Preferred shares issued for banking fees                                  -                -          962,000
    Preferred shares to refinance debt                                        -                -       35,299,439
    Preferred shares to purchase oil and gas properties
      and acquisition of old AROC                                             -                -       21,805,304

    Charges to stockholders equity for issuance of
      preferred stock                                                         -                -       28,243,708

    Marketable equity securities (fair value) received from
      sale of interest in oil and gas properties                      6,257,820                -                -

</TABLE>

         See accompanying notes to consolidated financial statements.

                                      F-6
<PAGE>

                                  AROC INC.

                  Notes to Consolidated Financial Statements


(1)  Organization and Summary of Significant Accounting Policies

     Organization and basis of presentation

     As a result of the May 2, 2000 transactions described below, EnCap Equity
     1996 Limited Partnership (EnCap 1996 LP) became the largest stockholder
     (approximately 39%) of AROC Inc. (old AROC). Although old AROC is the legal
     acquirer, EnCap 1996 LP is treated as having acquired old AROC for
     accounting purposes. Accordingly, the transactions have been accounted for
     as a reverse acquisition and EnCap 1996 LP is now referred to as AROC or
     the Company. The historical financial statements are those of EnCap 1996
     LP, which have been restated for the equivalent number of shares received
     in the transactions. The results of operations of AROC (legal acquirer)
     are included in the financial statements of the combined AROC and EnCap
     1996 LP financial statements from May 2, 2000 (acquisition date).

     On May 2, 2000, AROC completed the acquisition of additional oil and gas
     properties, a refinancing of its debt and issuance of a new series of
     preferred stock. The transactions involved several different elements.

     Effective May 1, 2000 the Company designated 2,200,000 shares of its
     authorized preferred stock as Series A preferred stock. The Series A Voting
     Redeemable Preferred Stock accrues cumulative dividends at the rate of
     $5.00 per share per year, payable semiannually. Until May 1, 2002,
     dividends are payable in kind through the issuance of additional shares of
     preferred stock at a price equal to the fair market value of the preferred
     stock at the time of the payment. The preferred stock has a liquidation
     preference of $50.00 per share and may be redeemable at $50.00 per share at
     either Company's or the holder's option upon the occurrence of certain
     events. Each share of preferred stock is convertible at any time into 384.6
     shares of the Company's common stock and has the right to vote in all
     matters on the same basis as if the preferred stock had been converted into
     common stock. The terms of the preferred stock prohibit the Company from
     taking certain actions without the consent of the holders of the preferred
     stock. Upon the first to occur of (1) an event of default, as defined, or
     (2) May 1, 2005, each holder of a share of Series A Voting Redeemable
     Preferred Stock shall be entitled to require that the Company redeem all of
     the Series A Voting Redeemable Preferred Stock held by such holder by
     paying in cash the redemption price ($50.00 per share plus unpaid
     dividends).

     On May 2, 2000, old AROC sold to Bank of America, EnCap 1996 LP, ECIC, El
     Paso Capital Investments, L.L.C. (El Paso), EF-II Holdings, LLC (EF-II),
     Picosa Creek Limited Partnership (Picosa) and EnCap Investments, L.L.C.
     (EnCap Investments) 850,163 shares of the Company's newly created Series A
     Voting Redeemable Preferred Stock for a total consideration of
     approximately $42.5 million, received in satisfaction of outstanding
     obligations to those parties and in consideration of cash (approximately
     $2,700,000) and the purchase of an oil and gas property interest (valued at
     approximately $2,000,000).

     Also, on May 2, 2000, pursuant to four separate Purchase and Sale
     agreements by and between (i) EnCap Equity 1994 Limited Partnership (EnCap
     1994 LP), (ii) Energy Capital Investment Company PLC (ECIC) and ECIC
     Corporation, (iii) EnCap 1996 LP, and (iv) Mountaineer Limited Partnership,
     (together the Sellers) and old AROC, old AROC acquired direct or indirect
     ownership of oil and gas properties located in Texas, Louisiana, New Mexico
     and Wyoming (EnCap Acquisition). The properties were acquired in exchange
     for the issuance to the Sellers of an aggregate of 930,140 shares of the
     Company's Series A Voting Redeemable Preferred Stock.

     In addition, on May 2, 2000, old AROC entered into a purchase agreement
     providing for the sale to EnCap 1996 LP, ECIC and El Paso of a total of
     $17,000,000 in subordinated notes in exchange for cash in that amount.

                                      F-7
<PAGE>

                                  AROC INC.

                  Notes to Consolidated Financial Statements

     The subordinated notes bear interest at the rate of 12% per year, payable
     semiannually. Principal is due May 1, 2007. Until May 1, 2002, interest is
     payable in kind by increasing the principal amount of the debt.
     Additionally, old AROC also issued to ECIC and El Paso warrants to purchase
     a total of 39,541,233 shares of AROC's common stock at a price of $0.01 per
     share at any time until April 30, 2007 pursuant to such purchase agreement.

     After these transactions, as of May 2, 2000, the Company had outstanding
     55,278,837 shares of common stock, 10,000,000 convertible restricted voting
     shares, warrants to purchase 45,813,963 shares of common stock, and
     1,780,303 shares of Series A Voting Redeemable Preferred Stock that are
     convertible into an aggregate of 684,731,923 shares of common stock.
     EnCap 1996 LP, EnCap 1994 LP, ECIC, EnCap Investments, Picosa, EF-II and El
     Paso have the right to vote in the aggregate approximately 80% of the
     Company's voting securities and Bank of America and its affiliates have the
     right to vote approximately 11.6% of the Company's voting securities.

     Pursuant to a Credit Agreement dated as of May 2, 2000, among AROC, Toronto
     Dominion (Texas), Inc., individually and as Agent, and the lenders named in
     that agreement (the "Credit Agreement"), the Company obtained a new
     $35,000,000 credit facility. The credit facility is secured by a first lien
     on substantially all of the Company's assets. The credit facility imposes
     certain restrictions on the Company's activities, including the payment of
     dividends and purchases of stock. The credit facility provides for a
     revolving line of credit for three years. Borrowings under the credit
     facility bear interest at either the LIBOR rate plus from 2.25% to 3.0% or
     the agent's prime rate plus from .75% to 1.5%, at the Company's election.
     Interest is payable quarterly beginning July 31, 2000. Principal is payable
     in full on the third anniversary of the closing of the credit facility. The
     borrowing base for the credit facility will typically be redetermined
     semiannually, although the lenders and borrower each have the right to make
     an additional redetermination once each year.

     A portion of the proceeds of the cash received from the credit facility and
     the sale of the subordinated notes were used to satisfy the Company's
     obligations under its previous credit facility with Bank of America and the
     remainder was used for working capital.

     The accompanying financial statements include the Company's pro rata share
     of the assets and liabilities of Mountaineer Limited Partnership, Famcor
     Oil W.T, L.P., Pledger Partners, Ltd., St. Martinville Partners, Ltd., and
     Wheel-Moore, Ltd.

     The Company is engaged in the exploration, development, production and
     operation of oil and gas properties. Operations are primarily conducted in
     Mississippi, Alabama, Oklahoma, Texas, Louisiana, New Mexico, Wyoming and
     offshore United Kingdom (UK).

     Acquisitions

     The fair value of the assets and liabilities of the acquired businesses
     (EnCap Acquisition and AROC) at May 2, 2000 is as follows (In thousands):

          Cash                             $    578
          Other current assets                1,993
          Other assets                          145
          Property, plant and equipment      97,083
          Long-term debt                    (68,645)
          Current Liabilities                (9,349)
                                           --------

          Net purchase price               $ 21,805
                                           ========


                                      F-8
<PAGE>

                                   AROC INC.

                  Notes to Consolidated Financial Statements

     The net purchase price includes $21,097,000 for EnCap Acquisition
     (interests in certain oil and gas properties) and $708,000 for old AROC.
     The EnCap Acquisition properties were acquired in exchange for preferred
     stock as described above. The old AROC acquisition represents the purchase
     step-up resulting from the reverse acquisition (discussed above) of the
     remaining 80% of old AROC common stock not already owned by EnCap 1996 LP.
     The purchase price (step-up) was based on the equivalent common stock value
     ($0.13 per share) of the Series A Redeemable Preferred Stock discussed
     above. The net purchase price was allocated to the acquired assets and
     liabilities based on their relative fair values.

     The following summarized unaudited pro forma results of operations for the
     years ended December 31, 2000 and 1999, assumes that the May 2, 2000: (i)
     reverse acquisition of AROC Inc. (legal acquirer) by EnCap 1996 LP
     (accounting acquirer), (ii) the acquisition of interest in oil and gas
     properties (EnCap Acquisition) and (iii) the refinancing of AROC debt, all
     occurred as of January 1, 1999. The information is presented in thousands
     with the exception of the per share information.

                                                       1999         2000
                                                       ----         ----

          Oil and gas revenues                       $ 16,062     $ 24,010
                                                     ========     ========

          Net loss                                   $ (2,524)    $ (8,117)
                                                     ========     ========

          Net loss for common stockholders           $(11,425)    $(17,092)
                                                     ========     ========

          Loss per common share                      $  (0.21)    $  (0.32)
                                                     ========     ========

     Consolidation

     The consolidated financial statements include the financial statements of
     the Company and all of its majority owned subsidiaries. All significant
     intercompany balances and transactions have been eliminated in
     consolidation.

     Investment in Affiliate

     The investment in affiliate has been accounted on the equity method. he
     equity method of accounting is used for companies and other investments in
     which the Company has significant influence; generally, this represents
     common stock ownership of approximately between 20% and 50%.

     Income (Loss) Per Share

     Basic loss per share has been computed by dividing the net loss
     attributable to common stockholders by the weighted average number of
     common shares outstanding during the period.

     The effects of potential common shares (warrants, stock options and
     preferred stock conversion) are anti-dilutive. Accordingly, diluted loss
     per share is not presented.

     Foreign Currency Translation

     The financial statements of the Company's UK subsidiary whose functional
     currency is not the U.S. dollar is translated for consolidation purposes at
     the rate of exchange at the balance sheet date. Exchange differences
     arising on the retranslation of net assets are reported as a component of
     stockholders' deficit in accumulated other comprehensive loss. In the
     underlying financial statements,

                                      F-9
<PAGE>

                                   AROC INC.

                  Notes to Consolidated Financial Statements


     transactions with third parties are translated into the functional currency
     at the exchange rate prevailing at the date of each transaction. Monetary
     assets and liabilities denominated in currencies other than the functional
     currency are translated into U.S. dollars at the exchange rate prevailing
     at the balance sheet date. Any exchange gain or loss is recorded in the
     consolidated statements of operations.

     Marketable Equity Securities

     Marketable securities consist of equity securities, which are classified as
     available-for-sale. Available for-sale securities are recorded at fair
     value. Unrealized holding gains and losses are excluded from earnings and
     are reported as a separate component of other comprehensive income until
     realized. Realized gains and losses from the sale of securities and
     determined on an average cost basis.

     A decline in the market value of any available-for-sale security below cost
     that is deemed other than temporary is charged to operations, resulting in
     the establishment of a new cost basis for the security. Dividend income is
     recognized when earned. The Company recorded a charge to operations of
     approximately $1,600,000 in 1999 due to an other than temporary decline in
     market value of available-for-sale securities. In addition the Company
     realized losses of $741,846, $4,460,890 and $262,689 from sale of
     securities in 1998, 1999 and 2000, respectively.

     Financial Instruments and Derivatives

     The carrying amounts of the Company's financial instruments, which include
     accounts receivable, accounts payable, accrued expenses and payable to
     affiliates, approximate fair values, because of their short-term nature.

     Changes in the value of financial instruments, utilized to hedge commodity
     risk are recognized in the statement of operations when the underlying
     transactions are recognized. Changes in the value of financial instruments,
     which do not meet the criteria to be treated as a hedge of an underlying
     risk are recognized in the statement of operations as they occur.

     The reported amount of long term debt payable - senior facility
     approximates fair value as interest approximates market rates. Fair value
     is not readily determinable for subordinated notes payable to EnCap and
     affiliates.

     Revenues

     Revenues represent income from production and delivery of oil and gas,
     recorded net of royalties in kind. The Company follows the sales method of
     accounting for gas imbalances. A liability is recorded only if the
     Company's takes of gas volumes exceed its share of estimated recoverable
     reserves from the relevant well. No receivables are recorded for those
     wells where the Company has taken less than its ownership share of gas
     production.

     Oil and Gas Properties

     The Company follows the successful efforts method of accounting for oil and
     gas operations whereby costs to acquire mineral interest in oil and gas
     properties, to drill exploratory wells that find proved reserves and to
     drill and equip development wells are capitalized. Exploration costs,
     including geological and geophysical and cost of carrying and retaining
     unproved properties, are charged to operations as incurred.

     Depreciation, depletion and amortization of the Company's capitalized costs
     of proved oil and gas properties are computed using the unit-of-production
     method based on proved reserves as estimated by Lee Keeling and Associates
     (Independent Petroleum Engineers).

                                      F-10
<PAGE>

                                   AROC INC.

                  Notes to Consolidated Financial Statements

     Oil and gas properties are assessed for impairment whenever changes in
     facts and circumstances indicate a possible significant deterioration in
     the future cash flows expected to be generated by an asset group. If, upon
     review, the sum of the undiscounted pretax cash flows are less than the
     carrying value of the asset group, the carrying value is written down to
     estimated fair value. Individual assets are grouped for impairment purposes
     at the lowest level for which there are identifiable cash flows that are
     largely independent of the cash flows of other groups of assets generally
     on a field-by-field basis. The fair value of impaired assets is determined
     based on expected future cash flows using discount rates commensurate with
     the risks involved. Long-lived assets committed by Management for disposal
     are accounted for at the lower cost or fair value, less cost to sell.

     A contract to sell all the Company's interests in the East Irish Sea,
     offshore UK (acquired on May 2, 2000-see Note 1) was executed between
     Hydrocarbons Resources Limited ("HRL") and Difco (wholly-owned subsidiary
     of the Company) on December 15, 2000. Burlington Resources (Irish Sea)
     Limited elected to exercise its preemptive rights under the various joint
     operating agreements governing these assets and notified Difco of its
     intent to acquire the properties in January 2001, according to the same
     terms as offered by HRL. In February 2001, the Company completed the sale.
     Proceeds from the sale of $28.6 million will be used to reduce long-term
     debt ($24.6 million) and to fund U.S. capital expenditures and operations
     ($4.0 million) during the 2001 fiscal year. Accordingly, the UK property
     interests are shown in the accompanying 2000 balance sheet as assets held
     for sale. The amount reflects proceeds adjusted for UK operations to the
     February 2001 disposition date. UK income from operations of $1.4 million
     was excluded from consolidated operations for the period October 1, 2000 to
     December 31, 2000.

     Other Property and Equipment

     Other property and equipment is recorded at cost and depreciated over the
     estimated useful lives (generally three to seven years) using the straight-
     line method. The cost of normal maintenance and repairs is charged to
     expense as incurred. Significant expenditures that increase the life of an
     asset are capitalized and depreciated over the estimated useful life of the
     assest. Upon retirement or disposition of assets, related gains or loses
     are reflected in operations.

     Income Taxes

     Prior to the May 2, 2000 acquisition date (see note 1) the Company was not
     subject to taxation, and the tax effects of its activities accrue to the
     individual partners of EnCap 1996 LP. EnCap 1996 LP's tax returns are
     subject to examination by the federal and state taxing authorities. If such
     examinations result in adjustments, the tax liability of the former
     partners of EnCap Equity 1996 LP, if any, would accordingly be adjusted.
     After the May 2, 2000 transactions discussed in Note 1, the Company
     (including EnCap 1996 LP) has become a taxable corporation.

     Deferred tax assets and liabilities are recognized for the estimated future
     tax consequences attributable to differences between the financial
     statement carrying amounts of existing assets and liabilities and their
     respective tax bases. Deferred tax assets and liabilities are measured
     using enacted tax rates in effect for the year in which those temporary
     differences are expected to be recovered or settled. The effect on deferred
     tax assets and liabilities of a change in tax rates is recognized in the
     consolidated statement of operations in the period that includes the
     enactment date.

     Deferred Debt Issuance Costs

     Deferred debt issuance costs are initially capitalized as intangible assets
     and are amortized (interest method) over the term of the debt to which they
     relate.

                                      F-11
<PAGE>

                                   AROC INC.

                  Notes to Consolidated Financial Statements

     Hedging Activities

     The Company uses oil and gas derivatives to manage its exposure to
     commodity price fluctuations. Changes in value of derivatives utilized to
     hedge commodity price and interest rate risk are recognized in the
     consolidated statements of operations when the underlying transactions are
     recognized. Changes in value of financial instruments which do not meet the
     criteria to be treated as a hedge of an underlying risk are recognized in
     the consolidated statements of operations as they occur.

     The Company's criteria for a derivative instrument to qualify for hedge
     accounting treatment are as follows:
          --the timing or duration and characteristics of the underlying
            exposure must have been identified;
          --changes in the value of the derivative must highly correlate with
            changes in the value of the exposure;
          --the derivative has been designated as a hedge of a specific asset,
            liability or anticipated transaction; and
          --the derivative instrument reduces exposure to fluctuations caused
            by movements in commodity prices, currency exchange rates, or
            interest rates.

     For any termination of derivatives receiving hedge accounting treatment,
     gains and losses are deferred when the related underlying exposures remain
     outstanding and are included in the measurement of the related transaction
     or balance. In addition, upon any termination of the underlying exposures,
     the derivative is marked-to-market and the resulting gain or loss is
     included with the gain or loss on the terminated transaction.

     Cash Flow Statement

     For the purposes of the consolidated statement of cash flows, the Company
     treats all investments with an original maturity of three months or less to
     be cash equivalents.

     Stock Option Plan

     The Company applies the intrinsic value-based method of accounting
     prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting
     for Stock Issued to Employees," and related interpretations, in accounting
     for its fixed plan stock options. As such, compensation expense would be
     recorded on the date of grant only if the current market price of the
     underlying stock exceeded the exercise price. Financial Accounting
     Standards Board Statement (SFAS) 123, "Accounting for Stock-Based
     Compensation," established accounting and disclosure requirements using a
     fair value-based method of accounting for stock-based employee compensation
     plans. As allowed by SFAS 123, the Company has elected to continue to apply
     the intrinsic value-based method of accounting described above, and has
     adopted the disclosure requirements of SFAS 123.

     Accounting Estimates

     In the course of preparing financial statements, management makes various
     assumptions and estimates to determine the reported amounts of assets,
     liabilities, revenue and expenses in relation to the disclosure of
     commitments and contingencies. Changes in these assumptions and estimates
     will occur as a result of the passage of time and the occurrence of future
     events and, accordingly, the actual results could differ from the amounts
     estimated.

                                      F-12
<PAGE>

                                   AROC INC.

                  Notes to Consolidated Financial Statements

     Business Segments

     The Company considers itself to be involved in one business activity and
     does not meet the criteria established by Financial Accounting Standards
     Board Statement SFAS 131, "Segment Disclosures and Related Information".

     The UK oil and gas properties were acquired on May 2, 2000 in connection
     with the acquisition (see note 1) and were held for sale, (under contract)
     in the fourth quarter of 2000 (see note 1). Revenues from the United
     Kingdome (UK) production were $674,000 for the period from May 2, 2000 to
     September 30, 2000. Loss from UK operations was $345,000 for the period
     from May 2, 2000 to September 30, 2000. Capital expenditures were
     $1,680,000 for the period from May 2, 2000 to September 30, 2000.

     Comprehensive Income (Loss)

     The Company follows SFAS 130, "Reporting Comprehensive Income" which
     established standards for reporting and display of comprehensive income and
     its components in a full set of general-purpose financial statements. The
     components of total comprehensive income (loss) for the periods consist of
     net losses and net unrealized changes in value of marketable equity
     securities.

     New Accounting Pronouncement

     In September 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
     Instruments and Hedging Activities" which established standards for
     derivative instruments, including certain derivative instruments embedded
     in other contracts, and for hedging activities. It requires that an entity
     recognize all derivatives as either assets or liabilities in the statement
     of financial position and measure those instruments at fair value. It
     establishes conditions under which a derivative may be designated as a
     hedge, and establishes standards for reporting changes in the fair value of
     a derivative. SFAS No. 133 is required to be implemented for the first
     quarter of the fiscal year ended 2001, early adoption is permitted.

     The Company will adopt SFAS No. 133 effective January 1, 2001 and expects
     that its current commodity derivative contracts will qualify for cash flow
     hedge accounting treatment under SFAS No. 133 whereby changes in fair value
     will be recognized in other comprehensive income (a component of
     stockholders' equity) until settled, when the resulting gains and losses
     will be recorded in operations. Any hedge ineffectiveness will be charged
     currently to operations. The effect on the Company's operations and other
     comprehensive income (loss) as a result of the adoption of SFAS No. 133
     will vary from period to period and will be dependent upon prevailing
     commodity prices.

     Upon adoption of SFAS No. 133 on January 1, 2001, the Company will record a
     liability of approximately $2.6 million relative to the fair value of its
     current commodity derivative contracts. Also, the Company will record a
     charge to other comprehensive income (loss) of approximately $2.6 million.

(2)  Accounting Change

     During the fourth quarter of 2000, the Company elected to change its
     accounting method for oil and gas properties from the full cost method to
     the successful efforts method. The Company believes that the successful
     efforts method of accounting is preferable, in the circumstances because it
     will provide a better measure of the results of its future exploration and
     development activities. Accordingly, all prior year financial statements
     have been restated to conform with successful efforts accounting. The
     effect

                                      F-13
<PAGE>


                                   AROC INC.

                  Notes to Consolidated Financial Statements

     of the change in accounting method as of December 31, 1999, was a reduction
     to accumulated deficit of $5.8 million attributable to a decrease in net
     property and equipment. The change in accounting method resulted in a
     decrease in net loss of $1.7 million ($.03 per common share) for 1999 and
     an increase in net income of $4.8 million ($.09 per common share) for 1998.

(3)  Income Taxes

     The Company incurred net losses for financial and tax purposes subsequent
     to the May 2, 2000 transactions discussed in Note 1. The Company (EnCap
     1996 LP) was not subject to tax prior to the May 2, 2000 transactions.
     Deferred tax assets are comprised of the following as of December 31, 2000
     (in thousands):

     Deferred tax assets:
        Net operating and other loss carryovers                $ 22,400
        Percentage depletion carryforward                           510
        Accrued, expenses not deductible until paid                 481
                                                               --------
           Total deferred tax assets                             23,391
        Valuation allowance                                     (13,122)
                                                               --------
        Deferred tax liabilities-                                10,269
        property and equipment                                  (10,269)
                                                               --------
           Net deferred tax assets                             $      -
                                                               ========

     A valuation allowance is required when it is more likely than not that all
     or a portion of the deferred tax assets will not be realized. The ultimate
     realization of the deferred tax assets is dependent upon future
     profitability. Accordingly, a valuation allowance has been established to
     reduce the deferred tax assets to a level which, more likely than not, will
     be realized.

     The Company has U.S. net operationg loss carryforwards to offset future
     taxable earnings of approximately $64 million at December 31, 2000, of
     which approximately $57 million of losses are limited under Section 382 of
     the Internal Revenue Code to approximately $2.1 million per year. If not
     previously utilized or limited, the net operating losses will expire in
     varying amounts from 2004 to 2020. Subsequently recognized tax benefit's
     relating to the valuation allowance for deferred tax assets as of December
     31, 2000 will be allocated to property and equipment.

(4)  Notes Payable and Long-Term Debt

     Long-term debt at December 31, 2000 consists of the following (in
     thousands):

          Toronto Dominion (Texas) Inc.-Senior Facility            $25,500
          Subordinated Notes                                        18,405
                                                                   -------
                                                                    43,905
               Less unamortized discount                            (4,293)
                                                                   -------
          Long-term debt                                           $39,612
                                                                   =======

     Pursuant to a Credit Agreement dated as of May 2, 2000, among the Company,
     Toronto Dominion (Texas), Inc., individually and as Agent, and the lenders
     named in the Credit Agreement, the Company obtained a new $35,000,000

                                      F-14
<PAGE>

                                   AROC INC.

                  Notes to Consolidated Financial Statements

     credit facility. The credit facility is secured by a first lien on
     substantially all of the Company's assets. The credit facility provides for
     a revolving line of credit for three years. Borrowings under the credit
     facility bear interest at either the LIBOR rate plus from 1.75% to 3.0% or
     the Agent's prime rate plus from .25% to 1.5%, at the Company's election.
     The Agent's prime rate as of December 31, 2000 was 9.5%. Principal is
     payable in full on the third anniversary of the closing of the credit
     facility. The borrowing base for the credit facility will typically be
     redetermined semiannually, although the lenders and borrower each have the
     right to make one additional redetermination each year.

     In addition, on May 2, 2000, the Company entered into a Purchase Agreement
     providing for the sale to ECIC and El Paso of a total of $17,000,000 in
     subordinated notes in exchange for cash in that amount. The subordinated
     notes bear interest at the rate of 12% per year, payable semiannually.
     Principal is due May 1, 2007. Until May 1, 2002, interest is payable in
     kind by increasing the principal amount of the debt. Additionally, the
     Company issued to ECIC and El Paso warrants to purchase a total of
     39,541,233 shares of the Company's common stock at a price of $0.01 per
     share at any time until April 30, 2007 pursuant to such Purchase Agreement.
     The fair value of its warrants ($4,744,948) relating to the subordinated
     notes has been treated as a discount and is amortized over the term of the
     notes.

     The debt agreements contain financial covenant requirements and certain
     restrictions on the Company's activities, including the payment of
     dividends and purchases of stock. In addition, the agreements restrict
     liens on assets and the acquisitions or sale of assets.

     On February 23, 2001 the Company completed a transaction to sell all of its
     interest in UK oil and gas properties. The oil and gas properties were sold
     to Burlington Resources (Irish Sea) Limited for approximately $28,600,000.
     Proceeds from this sale were used to reduce the Company's long-term debt
     under the Credit Agreement to approximately $920,000 as of February 28,
     2001.

(5)  Employee Benefit Plans

     The Company maintains an employee savings and profit sharing plan "(the
     Plan)" which covers substantially all of its employees. The Plan is
     comprised of a 401(k) saving portion and a noncontributory defined
     contribution portion. Employees are qualified to participate after
     approximately 30 days of service. Participation in the 401(k) plan is
     voluntary, and the Company matches contributions up to six percent of the
     employees' salary at a rate of 50 percent of the employee's contribution.
     The Company contributed $78,993 to the Plan during 2000.

     The noncontributory portion of the Plan allows the Company to share annual
     profits with employees. Annual payments to the Plan are elective.
     Management elected to make no contributions to the Plan for the year ended
     December 31, 2000. The Company is under no obligation to make contributions
     to the Plan in the future.

(6)  Stockholders' Equity

     Each convertible share is entitled to one-half vote on all matters in which
     the common shares are entitled to vote and have rights identical to the
     common shares except for certain restrictions on transfer. In addition, the
     holders of the convertible shares have a contingent right based on certain
     performance targets relating to production volumes and/or reserve values to
     acquire from 5,000,000 to 20,000,000 common shares prior to 2003.

     On March 8, 2001, the Company's board of director's approved an issuer
     tender offer by which the Company would offer to purchase all outstanding
     shares of its common stock at a price of $0.06 per share. The board also

                                      F-15
<PAGE>

                                   AROC INC.

                  Notes to Consolidated Financial Statements

     named a special committee, consisting of the independent member of the
     board, to make a recommendation to the registrant's stockholders whether to
     accept the offer. The Company believes that the expenses of the tender
     offer can be funded from available cash. After completion of the tender
     offer, the board will consider whether any additional transactions, such as
     a "going private" transaction are appropriate. Effective August 11, 2000,
     several of the holders of the Company's common stock and Series A preferred
     stock transferred their stock to Energy LLC (MPAC), an affiliate of EnCap
     1996 LP, El Paso and EnCap Investments. As a result MPAC has the right to
     vote approximately 34% of the Company's common stock and approximately 80%
     of the Series A preferred stock. MPAC has indicated it will not tender its
     shares in the offer. Therefore, any tenders received in the offer would
     have the effect of increasing MPAC's ownership of the Company.

(7)  Employee Plans and Severance Payment

     On April 18, 2000, the Company adopted the 2000 Omnibus Stock and Incentive
     Plan (the Stock Plan). This plan is intended to provide additional
     incentives through the award of options, stock appreciation rights, shares
     of restricted stock, and performance awards to directors, officers, key
     employees and consultants. No options have been issued under the Stock Plan
     at December 31, 2000.

     During the year ended December 31, 2000, the Company granted 6,600,000
     shares of restricted stock to the directors, officers and certain key
     employees. Under the Stock Plan, the shares vest in equal increments in
     April 2001, 2002, and 2003 or upon a change in control of the Company as
     defined in the Stock Plan. The estimated market value of the shares awarded
     was $858,000. This amount was recorded as unearned compensation-restricted
     stock and is shown as a separate component of stockholders' equity
     (deficit). Unearned compensation will be amortized to expense over the
     three year vesting period.

     On March 8, 2001, the Company approved severance payments aggregating $2.6
     million to senior management upon their resignation which will be the
     earlier to occur of the completion of the tender offer (see Note 6) or 75
     days from the approval date.

(8)  Warrants

     The following is a summary of warrants outstanding as of December 31, 2000:

<TABLE>
<CAPTION>
         Warrant series      Strike price    Last date for exercise   Shares

<S>                          <C>             <C>                      <C>
     Series "D"                 $0.86        March 31, 2001              287,119
     Series "E"                  0.86        October 31, 2001             30,953
     Series "F"                  1.38        December 16, 2002           275,139
     Series "G"                  1.60        April 30, 2007            1,210,938
     Series "H"                  0.01        October 30, 2008          3,275,000
     Series "I"                  0.01        April 30, 2007            1,193,581
     Series "J"                  0.01        April 30, 2007           39,541,233
                                                                      ----------
     Total Warrants                                                   45,813,963
                                                                      ==========
</TABLE>

(9)  Contingencies and Commitments

     The Company is a named defendant in lawsuits, and is subject to claims of
     third parties from time to time arising in the ordinary course of business.
     While the outcome of lawsuits or other proceedings and claims against the
     Company cannot be predicted with certainty, management does not believe the
     outcome of these lawsuits will have material adverse effect on the
     financial position, results of operations or liquidity of the Company.

                                      F-16
<PAGE>

                                   AROC INC.

                  Notes to Consolidated Financial Statements

     Louis Dreyfus Natural Gas Corp. ("LNDG") filed a lawsuit in June 1999,
     seeking reimbursement from Alliance Resources ("Alliance") and LaTex
     Petroleum Corporation ("LaTex"), wholly-owned subsidiaries of the Company
     for expenses incurred in making repairs to navigational aids on certain
     drilling platforms located off the coast of Texas. LNDG sought actual
     damages plus court costs, pre-and post-judgment interest, and attorney's
     fees. LNDG also sought a declaratory judgment that Alliance and LaTex are
     liable for any future cost or expenses owed with respect to the platforms
     and plugging and abandoning the oil and gas wells located on the platforms.
     LNDG bases its suit on a Purchase and Sale Agreement between American
     Exploration Corporation ("American") and LaTex (LNDG claims to be the
     successor-in interest to American). Alliance filed a special appearance and
     an answer subject thereto, objecting to personal jurisdiction in Texas and
     denying that it owes any money to LNDG. LaTex also filed an answer, denying
     it owes any money to LNDG. LNDG subsequently filed a motion for summary
     judgment on its claims against LaTex. The district court granted LNDG's
     motion on October 2, 2000 for $25,870 of expenses plus $43,299 in
     attorneys' fees, and ordered LaTex to plug and abandon the wells and remove
     the platforms. Latex has filed an appeal which is currently pending in the
     14th Court of Appeals. The Company will continue to vigorously defend this
     case.

     The Company leases office space and certain property and equipment under
     various lease agreements. As of December 31, 2000, future minimum lease
     commitments were approximately as follows:

<TABLE>
<CAPTION>

          Years Ending December 31,
          -------------------------
<S>                                                    <C>
                    2001                               $199,034
                    2002                                202,233
                    2003                                 84,820
</TABLE>

     Rent expense under all operating leases was $190,765 during the year ended
     December 31, 2000 (none in 1999 and 1998).

(10) Related Party Transactions

     The Company currently has entered into several energy derivative
     transactions with El Paso Merchant Energy, a subsidiary of El Paso Energy
     (El Paso) (see Note 11).

     See note 1 for additional related party transactions.

(11) Hedging Activities

     The Company utilizes various option and swap contracts and other financial
     instruments to hedge the effect of price changes on future oil and gas
     production. The index price for the natural gas collars settles based on
     NYMEX Henry Hub, while the oil collar settles based on the prices for West
     Texas Intermediate on NYMEX. The basis swaps lock in the basis differential
     between NYMEX Henry Hub and the El Paso/Permian delivery point or the Waha
     West Texas delivery point.

     Derivative instruments give rise to credit risk due to possible non-
     performance by the counterparties. However, through ongoing controls, the
     Company monitors the credit worthiness of its counterparties. The Company
     accounts for its commodity derivatives contracts using the hedge (deferral)
     method of accounting.

                                      F-17
<PAGE>

                                   AROC INC.

                  Notes to Consolidated Financial Statements

     On December 1, 1999, the Company entered into a sales agreement to sell
     approximately 200 bbls produced per day from specific oil leases to a third
     party at a price of $19.12 per bbl. The contract expired on November 30,
     2000.

     At May 2, 2000 the Company had agreements with El Paso Merchant Energy to
     hedge approximately 30%-40% of its existing monthly oil production by
     installing a floor of $19.00/barrel (NYMEX) and collars between
     $24.00/barrel and $26.65/barrel (NYMEX). These commodity price hedge
     arrangements expired on December 31, 2000. The Company also had an
     agreement with El Paso Merchant Energy to hedge approximately 50% of its
     existing monthly U.S. gas production by installing a floor of $2.40/MMBTU
     (NYMEX Natural Gas) and a collar of $3.00/MMBTU (NYMEX Natural Gas). This
     commodity price hedge agreement expired on October 31, 2000. In addition
     the Company had an agreement with El Paso to hedge approximately 50% of its
     existing monthly UK gas production by installing a floor of 10.5
     pence/therm (IPE) and a collar of 12.55 pence/therm (IPE). This commodity
     price hedge agreement expired on September 30, 2000. The Company also had
     several agreements with El Paso Merchant Energy to hedge approximately 30%-
     40% of its existing monthly oil production by installing a floor of
     $19.00/barrel (NYMEX) and collars between $24.00/barrel and $29.50/barrel
     (NYMEX). These commodity price hedge arrangements expired on December 31,
     2000.

     On May 10, 2000, the Company completed a transaction with El Paso Merchant
     Energy to hedge approximately 70% of its existing monthly U.S. gas
     production by installing a floor of $2.50/MMBTU (NYMEX Natural Gas) and a
     collar of $3.90/MMBTU (NYMEX Natural Gas). This commodity price hedge
     agreement will expire on October 31, 2001. The hedge agreement had a
     negative fair value of $2.6 million at December 31, 2000.

     On January 19, 2001 the Company completed a transaction with Equvia Trading
     to hedge approximately 40% of its existing monthly oil production by
     purchasing a floor of $21.00/Barrel (NYMEX). This commodity price hedge
     will expire on December 31, 2001.

(12) Disposition of Oil and Gas Properties

     During the years ended December 31, 1998, 1999 and 2000, the Company sold
     oil and gas properties for approximately $9.5 million $2.5 million and $0.4
     million realizing gains of $5.6 million, $2.5 million and losses of $16
     thousand, respectively.

(13) Investment in Affiliate

     On October 31, 1998, AROC acquired 11,250,000 common shares of old AROC for
     $4,770,000 cash. The investment represented approximately 20% of the old
     AROC shares outstanding. The following summarizes the Company's investment
     in old AROC for the period from acquisition through December 31, 1999 (in
     thousands):

<TABLE>
<CAPTION>

                                                1998    1999
                                                ----    ----
<S>                                           <C>       <C>

          Investment at beginning of year     $     -   $ 4,252
          Acquisition of AROC common stock      4,770         -
          Equity in net losses                   (518)   (4,252)
                                               ------   -------
          Investment at end of year            $4,252   $     -
                                               ======   =======
</TABLE>

                                      F-18
<PAGE>

                                   AROC INC.

                  Notes to Consolidated Financial Statements

     The Company discontinued the equity method when its investment was reduced
     to zero, as it had no funding requirements or contingent liabilities.

     Old AROC and its subsidiaries were engaged in oil and gas exploration,
     development and production (full cost method) in the United States and
     United Kingdom. Summarized financial information for old AROC and
     subsidiaries as of and for their fiscal years ended April 30, 1999 and 2000
     follows (in thousands):

                                                   1999            2000
                                                   ----            ----

          Current assets                         $  2,451        $  3,229
          Net property, plant and equipment
               (full cost method)                  30,355          40,200
          Other assets                              3,357           2,936
          Current liabilities                       8,072          10,151
                                                 --------        --------
          Non-current liabilities                  44,727          63,057
                                                 --------        --------
          Stockholders' deficit                   (16,636)       $(26,843)
                                                 ========        ========

          Oil and gas revenues                   $  6,234        $ 12,506
                                                 ========        ========

          Impairment of oil and gas properties   $(28,260)       $ (2,500)
                                                 ========        ========

          Net loss                               $(34,464)       $(10,974)
                                                 ========        ========

     The Company's equity in old AROC net losses is based on old AROC's January
     31 financial statements.

(14) Significant Customers

     Oil and gas sales to five customers represented substantially all of the
     Company's revenues for 1998 and 1999. Oil and gas sales for 2000 included
     17%, 12%, 10% and 9% to four customers. There are adequate buyers or
     purchasers of the Company's production such that management believes the
     loss of one or more of the above customers would not have a material
     adverse effect on the results of operations of the Company.

                                      F-19
<PAGE>

                                   AROC INC.

                  Notes to Consolidated Financial Statements

(15) Quarterly Financial Data (unaudited)

     Quarterly operating results for 2000 and 1999 are summarized as follows in
     thousands:

<TABLE>
<CAPTION>
                                                                                 Quarter Ended
                                        ------------------------------------------------------------------------------------------

                                               March 31                 June 30               September 30          December 31
                                        -------------------      ------------------      -------------------      ----------------
<S>                                       <C>                      <C>                     <C>                      <C>
2000:
Oil and gas revenues                                $ 1,079                 $ 4,465                  $ 5,697           $ 6,051
                                                    -------                 -------                  -------           -------

Loss from operations                                $  (581)                $   641                  $    86           $(3,029)
                                                    -------                 -------                  -------           -------

Net loss                                            $  (591)                $  (399)                 $(1,269)          $(4,404)(1)
                                                    -------                 -------                  -------           -------


Net loss attributable to
 common stockholders                                $  (591)                $(1,882)                 $(3,495)          $(6,704)
                                                    -------                 -------                  -------           -------

Basic loss per common share                         $ (0.01)                $ (0.04)                 $ (0.07)          $ (0.12)
                                                    -------                 -------                  -------           -------

1999:
Oil and gas revenues                                $   555                 $   823                  $   957           $ 1,039
                                                    -------                 -------                  -------           -------

Loss from operations                                $  (286)                $ ( 122)                 $    73           $  (439)
                                                    -------                 -------                  -------           -------

Net income (loss)(2)                                $(5,026)                $(3,782)                 $(1,828)          $ 2,084
                                                    -------                 -------                  -------           -------

Basic income (loss) per common share                $ (0.09)                $ (0.07)                 $ (0.03)          $  0.03
                                                    -------                 -------                  -------           -------
</TABLE>

(1)  Includes approximately $1.4 million of litigation and workover expense.

(2)  First quarter includes $4.3 million of equity in net losses of affiliate.
     The second and third quarters include impairment writedown and losses on
     sales of marketable equity securities of $3.6 million and 1.9 million,
     respectively. The fourth quarter includes a gain on sale of oil and gas
     properties of $2.5 million.

During the fourth quarter of 2000 the Company changed its method of accounting
for oil and gas properties from the full cost method of accounting to the
successful efforts method (see Note 2). The effect of the change in accounting
method was as follows in thousands:

<TABLE>
<CAPTION>
                                                                              Quarter Ended
                                       -----------------------------------------------------------------------------------------

                                             March 31                 June 30                 September 30         December 31
                                       -----------------      ---------------------      --------------------     --------------
<S>                                   <C>                    <C>                        <C>                       <C>
2000:
Net loss                                          $ (719)                   $  (465)                   $ (741)        $     -
                                                  ------                    -------                    ------         -------

Basic loss per common share                       $(0.01)                   $ (0.01)                   $(0.01)        $     -
                                                  ------                    -------                    ------         -------

1999:
Net loss                                          $  (91)                   $   (95)                   $ (123)        $ 2,040
                                                  ------                    -------                    ------         -------

Basic loss per common share                       $    -                    $     -                    $    -         $  0.03
                                                  ------                    -------                    ------         -------
</TABLE>




                                      F-20
<PAGE>

                                   AROC INC.

                  Notes to Consolidated Financial Statements



  Supplemental Financial Information for Oil and Gas Producing Activities
(Unaudited)
     Results of Operations from Oil and Gas Producing Activities

     The following sets forth certain information with respect to the Company's
     results of operations from oil and gas producing activities for the years
     ended December 31, 1998, 1999 and 2000  (in thousands):

<TABLE>
<CAPTION>
                                                                                Years Ended December 31,
                                                              ---------------------------------------------------------
                                                                   1998                 1999                   2000
                                                              --------------        -------------          ------------
<S>                                                           <C>                   <C>                    <C>

Revenues                                                        $ 3,880                $ 3,374               $ 17,292

Production costs                                                 (2,434)                (2,065)               (10,838)
Gross production taxes                                             (288)                  (198)                  (430)
Exploration expenses                                               (245)                  (568)                     -
Depreciation, depletion and amortization                         (1,601)                (1,018)                (6,259)
                                                                -------                -------               --------

Results of operations (excluding corporate                      $  (688)               $  (475)              $   (235)
       overhead and interest costs)                             =======                =======               ========

</TABLE>


     Capitalized Costs and Cost Incurred Relating to Oil and Gas Activities

<TABLE>
<CAPTION>
                                                                                      December 31,
                                                           ----------------------------------------------------------------
                                                                      1998                 1999                 2000
                                                                (in thousands)        (in thousands)       (in thousands)
                                                           ----------------------------------------------------------------
<S>                                                          <C>                    <C>                  <C>

Total capitalized costs                                            $21,560              $21,826             $100,745
Less accumulated depreciation and                                   (1,603)              (2,441)              (8,526)
 depletion                                                         -------              -------             --------
Net capitalized costs                                              $19,957              $19,385             $ 92,219
                                                                   =======              =======             ========

Costs incurred during the year:
 Exploration costs                                                 $   201              $   544             $      -
                                                                   =======              =======             ========

 Development costs                                                 $ 7,101              $   471             $  6,664
                                                                   =======              =======             ========
 Purchase of minerals in place                                     $     -              $     -             $ 72,353
                                                                   =======              =======             ========
</TABLE>

     Estimated Quantities of Proved Oil and Gas Reserves

     The estimates of proved oil and gas reserves were prepared by independent
     petroleum engineers.  The Company emphasizes that reserve estimates are
     inherently imprecise.  Accordingly, the estimates are expected to change as
     more current information becomes available.  In addition, a portion of the
     Company's proved reserves are undeveloped, which increases the imprecision
     inherent in estimating reserves which may ultimately be produced.

     Proved reserves are estimated quantities of crude oil, natural gas, and
     natural gas liquids which geological and engineering data demonstrate with
     reasonable certainty to be recoverable in future years from known
     reservoirs under existing economic and operating conditions.  Proved
     developed reserves are those which are expected to be recovered through
     existing wells with existing equipment and operating methods.

                                      F-21
<PAGE>

                                   AROC INC.

                  Notes to Consolidated Financial Statements



     The Company's interests in UK oil and gas properties (acquired May 2, 2000
     - see Note 1) were under contract to sell at December 31, 2000 and
     subsequently sold in February 2001.  The property interest has been
     classified as held for sale in the accompanying December 31, 2000 balance
     sheet. As a result of the subsequent sale, the reserves and related
     standardized measure of discounted future cash flows do not include the UK
     oil and gas property interests.

     The following is an analysis of the Company's U.S. proved oil and gas
     reserves:

<TABLE>
<CAPTION>
                                                           Oil (Mbbls)          Gas (MMcf)
                                                       -------------------  -------------------
<S>                                                    <C>                  <C>
Proved reserves at December 31, 1997                                5,699               21,836

Purchases of reserves-in-place                                        916                1,596
Revisions of previous estimates                                      (193)                (631)
Production                                                         (1,553)              (1,309)
                                                                   ------              -------

Proved reserves at December 31, 1998                                4,869               18,492

Purchase of reserves-in-place                                           -                    -
Revisions of previous estimates                                       131              (10,460)
Production                                                           (151)                (361)
                                                                   ------              -------

Proved reserves at December 31, 1999                                4,849                7,671

Purchase of reserves-in-place                                      10,899               40,783
Revisions of previous estimates                                    (1,895)                (242)
Production                                                           (480)              (1,392)
Sales of reserves-in-place                                           (182)              (1,120)
                                                                   ------              -------

Proved reserves at December 31, 2000                               13,191               45,700
                                                                   ======              =======

Proved developed reserves at:
     December 31, 1998                                              2,196                3,077
     December 31, 1999                                              2,302                2,286
     December 31, 2000                                             10,156               18,905

</TABLE>
     Discounted Future Net Cash Flows

     In accordance with Statement of Financial Accounting Standards No. 69,
     estimates of the standardized measure of discounted future cash flows were
     determined by applying period-end prices, adjusted for fixed and
     determinable escalations, to the estimated future production of year-end
     proved reserves.  Future cash inflows were reduced by the estimated future
     production and development costs based on period-end costs to determine
     pre-tax cash inflows over the Company's tax basis in the associated proved
     oil and gas properties.  Net operating losses, credits and permanent
     differences were also considered in the future income tax calculation.
     Future net cash inflows after income taxes were discounted using a 10%
     annual discount rate to arrive at the Standardized Measure.

     Future income tax expenses are estimated using the United States statutory
     tax rate less effects for net operating loss carryforwards, and tax basis
     of oil and gas properties. Estimates for future general and administrative
     and interest expense have not been considered.

                                      F-22
<PAGE>

                                   AROC INC.

                  Notes to Consolidated Financial Statements


The estimated standardized measure of discounted future cash flows for the years
ended December 31, 1998, 1999 and 2000 (in thousands) follows:

<TABLE>
<CAPTION>
                                                                           Years Ended December 31,
                                                     --------------------------------------------------------------------
                                                                1998                    1999                  2000
                                                     ---------------------   ---------------------   --------------------
<S>                                                   <C>                    <C>                     <C>

Future cash inflows                                         $ 89,557                $140,486             $ 744,487
Future production and                                        (42,600)                (52,244)             (220,731)
     development costs                                      --------                --------             ---------

Future net cash inflows before
     income tax expense                                       46,957                  88,242               523,756
Future income tax expense                                          -                       -              (144,189)
                                                            --------                --------             ---------
Future net cash flows                                         46,957                  88,241               379,567
10% annual discount for estimated
     timing of cash flows                                    (16,528)                (40,839)             (176,141)
                                                            --------                --------             ---------

Standardized measure of
    discounted future net cash flows                        $ 30,429                $ 47,403             $ 203,426
                                                            ========                ========             =========

</TABLE>

The changes in standardized measure of discounted future net cash flows (in
thousands) follows:

<TABLE>
<CAPTION>
                                                                   Years Ended December 31,
                                                  -----------------------------------------------------------------
                                                            1998                    1999                2000
                                                  -------------------      -------------------     ----------------
<S>                                                <C>                     <C>                     <C>


Beginning of period                                     $ 50,455                  $ 30,429                $ 47,403
Increases (decreases)
     Sales, net of production costs                       (1,158)                   (1,112)                 (6,024)
     Net change in sales prices, net
          of production costs                            (16,371)                   42,929                 184,092
     Changes in estimated future
          development costs                               (3,999)                     (110)                 (8,504)
     Revisions of previous quantity
           estimates                                       5,818                   (16,574)                (16,254)
     Accretion of discount                                 5,045                     3,043                   4,740
     Net change income taxes                                   -                         -                 (79,841)
     Purchases of reserves-in-place                            -                         -                  90,101
     Sales of reserves-in-place                          (11,745)                        -                  (1,883)
     Changes of production rates
           (timing) and other                              2,384                   (11,202)                (10,404)
                                                        --------                  --------                --------


End of period                                           $ 30,429                  $ 47,403                $203,426
                                                        ========                  ========                ========
</TABLE>

The Company has a gas collar in effect at December 31, 2000 through October 31,
2001 (see Note 11). The fair value of this collar was a negative $2.6 million at
December 31, 2000. The pricing effects of the collar have not been pushed down
to the individual properties and accordingly such pricing has not been reflected
in the above SFAS No. 69 disclosures.

                                      F-23