EUROGAS INC, 10KSB, 1997-05-21

EUROGAS INC
10KSB, 1997-05-21
INDUSTRIAL INORGANIC CHEMICALS

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

FORM 10-KSB

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1996
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Commission file number 33-1381-D
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EuroGas, Inc.
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(Name of small business issuer in its charter)

Utah 87-0427676
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

942 East 7145 South, #101A, Midvale, Utah 84047
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(Address of principal executive offices) (Zip Code)

Issuer's telephone number (801) 255-0862
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Securities registered under Section 12(b) of the Exchange Act:

Title of each class Name of each exchange on which registered
None None
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Securities registered under Section 12(g) of the Exchange Act:

None
- - -----------------------------------------------------------------
(Title of class)

Check whether the issuer (1) filed all reports required to be filed by
section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes / / No /x/

Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. /x/

State Issuer's revenues for its most recent fiscal year. The Issuer had no
revenues for the year ended December 31, 1996.

The aggregate market value of the Issuer's voting stock held by
nonaffiliates of the Issuer was approximately $171,228,000 computed at the
closing bid price as reported by the OTC Electronic Bulletin Board for the
Issuer's common stock of $6.0625 as of May 14, 1997.

State the number of shares outstanding of each of the Issuer's classes of
common equity, as of the latest practicable date. The Issuer had 50,496,492
shares of its common stock, par value $0.001 per share, issued and outstanding
as of May 14, 1997.

DOCUMENTS INCORPORATED BY REFERENCE

If the following documents are incorporated by reference, briefly describe
them and identify the part of the Form 10-KSB (e.g., Part I, Part II, etc.) into
which the document is incorporated: (1) any annual report to security holders;
(2) any proxy or information statement; and (3) any prospectus filed pursuant to
rule 424(b) or (c) under the Securities Act of 1933, as amended. The list
documents should be clearly described for identification purposes (e.g., annual
report to security holders for fiscal year ended December 24, 1990). None.

Transitional Small Business Disclosure Format (check one): Yes / / No /x/

TABLE OF CONTENTS

Item Number and Caption Page
- - ----------------------- ----
<S> <C> <C>

PART I
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1.& 2. Description of Business and Properties ............................................ 3

3. Legal Proceedings ................................................................. 17

4. Submission of Matters to a Vote of Security Holders ............................... 18

PART II
- - -------

5. Market for Common Equity and Related Stockholder Matters .......................... 19

6. Management's Discussion and Analysis or Plan of Operation ......................... 20

7. Financial Statements .............................................................. 22

8. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure ........................................................................ 22

PART III
- - --------

9. Directors, Executive Officers, Promoters and Control Persons; Compliance With
Section 16(a) of the Exchange Act ................................................. 23

10. Executive Compensation ............................................................ 26

11. Security Ownership of Certain Beneficial Owners and Management .................... 29

12. Certain Relationships and Related Transactions .................................... 31

PART IV
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13. Exhibits and Reports on Form 8-K .................................................. 35

14. Signatures ........................................................................ 38

</TABLE>

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

PART I

ITEMS 1. AND 2. DESCRIPTION OF BUSINESS AND PROPERTIES

GENERAL

The Company is engaged in the exploration for coal bed methane gas in
Poland and natural gas in Slovakia and the Czech Republic. The Company holds
hydrocarbon concessions or is a joint venturer with entities that hold
hydrocarbon licenses granted by governmental agencies in each of these
countries. The Company's interest in Eastern Europe is based on the
encouragement provided by the national governments for the development of these
resources.

In August 1991, the United States Environmental Protection Agency (the
"EPA") and the United States Agency for International Development ("AID")
published a joint study on the possibility of economic recovery of methane gas
associated with Poland's extensive hard coal reserves. The joint study
concluded that coal bed methane was an abundant underdeveloped natural gas
resource in Poland and that the development and exploitation of this resource
would provide a much less environmentally harmful source of energy for Poland
than its extensive reliance on coal. The joint study stated that the potential
methane reserves were significant, estimating a total methane resource
associated with all coal mine concessions in Poland (both active and inactive
mines) of in excess of 1.3 trillion cubic meters. Shortly thereafter, Poland
began to solicit bids for concessions to explore for coal bed methane gas.

In January 1993, the Company's wholly-owned subsidiary, Pol-Tex Methane,
Sp. z.o.o. ("Pol-Tex"), was awarded exploration rights for coal bed methane gas
in a concession located in the Upper Silesian Coal Basin in Poland (the "Pol-Tex
Concession"). In September 1993, the Company's wholly-owned subsidiary,
GlobeGas, entered into a joint venture agreement with Rybnicka Spolka Weglowa SA
to form McKenzie Methane Ribnik Sp. z.o.o. ("MMR") to exploit a second
concession located in the Upper Silesian Coal Basin. In March 1996, the
Company's 85%-owned subsidiary, McKenzie Methane Jastrzebie Sp. z.o.o. ("MMJ"),
entered into a joint venture agreement for a third concession in the same area.
These three concessions (the "Polish Concessions") cover approximately 92,000
acres in south central Poland.

On March 24, 1997, The Company entered into an agreement with a subsidiary
of Texaco Incorporated ("Texaco") to sell the Pol-Tex concession, the largest of
the coal bed methane gas concessions held by the Company, to Texaco. The
agreement also grants a first right of refusal to Texaco to obtain a controlling
interest in the other Polish Concessions (the MMR and MMJ concessions) upon
which EuroGas intends to conduct development activities later this year. The
agreement is subject to the approval of the Polish Ministry of Environmental
Protection of Natural Resources and Forestry (the "Polish Ministry"). The
transaction is scheduled to formally close on or about June 13, 1997. (See the
discussion under "Activities in Poland" below.)

On April 28, 1997, Pol-Tex entered into a letter of intent with Polish Oil
and Gas Company ("POGC") to form a joint technical team to evaluate concessions
for natural gas exploration, currently held by POGC or in which it is in the
process of obtaining rights, located in the Carpathian Flysch and tectonic
Foredeep areas of Poland. The joint team will identify the areas to be subject
to a joint venture between the Company and POGC and the timing and extent of the
obligations of the two parties. The letter of intent specifies an exploration
budget of $15 million over a three year period and grants the Company the
exclusive right to negotiate with POGC concerning the concessions through
September 30, 1997.

As part of its intent to diversify and expand its interests in Europe, in
July 1996, the Company acquired Danube International Petroleum Company
("Danube") which holds rights to participate in exploration for natural gas in
Slovakia and the Czech Republic. (See discussion under "History" below.) The
Company has focused on the development of the Slovakian project, but retains an
interest in the Czech Republic. Danube is a partner in a joint venture
agreement (the "Slovakian Joint Venture") with NAFTA Gbely a.s. ("NAFTA")
organized for natural gas exploration and development under a license covering
128,000 acres located in the East Slovakian Basin (see discussion under
"Activities in Slovakia" below), a northeastern extension of the Pannonian Basin
which covers large parts of Hungary and the southeastern part of Slovakia. The
joint venture now operates pursuant to an exploration permit which expires April
24, 1999. The Slovakian Joint Venture recently completed one test well and has
commenced a second test well. In late 1996, NAFTA and the Company agreed to add
an additional area of mutual interest to their joint activities (sometimes
referred to as the Lipany area). The Company has entered into a preliminary
understanding to farmout its participation in the Slovakian Joint Venture. (See
discussion under "Activities in Slovakia" below.)

Danube also holds the right to earn a 25% to 50% interest in a joint
venture (the "Czech Joint Venture") with Moravske Naftove Doly a.s. ("MND")
which holds two licenses to explore for, develop, and produce natural gas from
an approximately 40,180 acre area located in the Zdanice area about 40
kilometers southeast of the city of Brno in the Czech Republic. (See discussion
under "Activities in Czech Republic" below.) Recently, certain disputes have
arisen over the operation of the Czech Joint Venture with MND. (See "ITEM 3.
LEGAL PROCEEDINGS.") Based on previous activities by others, including drilling
and testing in the license areas, management of the Company believes that
portions of this area have the potential for natural gas production.

On April 16, 1997, the Company announced that it had entered into a
Confidentiality Agreement which covered the possible participation in a number
of its projects by OMV Aktiengesellschaft. OMV is Austria's largest industrial
company and it explores and develops oil and gas projects in Europe, the
Mediterranean, and Asia, owns a number of oil refineries, and operates an
extensive pipeline network. OMV has been granted an option to purchase
2,000,000 shares of the Company's restricted common shares. The area under
current investigation includes the Slovakian Concession (including the Lipany
area) and other areas which may reach into Poland. The discussions with OMV are
preliminary in nature and there can be no assurance that an agreement will
result.

In connection with obtaining its concessions and its interest in the joint
ventures, negotiating and completing the acquisition of businesses and related
interests, completing exploration work to date, and funding the ongoing
activities of the Company, the Company had accumulated losses of $20,271,877
applicable to common shares through December 31, 1996, and had a stockholders'
deficit of $5,390,918 at December 31, 1996. The Company's independent auditor's
report for the year ended December 31, 1996, contains a qualification as to the
ability of the Company to continue as a going concern. Since December 31, 1996,
the Company has increased its equity by $4,950,000 as a result of direct cash
investment and conversion of previously outstanding indebtedness, although this
has been offset to some extent by continuing operating losses. Due to the
substantial drilling and exploration commitments of the Company and its current
lack of production, the Company expects that it will continue to incur losses
and that its accumulated deficit will increase. The Company has not had
revenues and does not currently have established production or proved reserves.
The Company has funded its cash flow requirements to date through a series of
equity and debt transactions. There can be no assurance that this source of
funding will continue to remain available to the Company. If available, there
is no assurance that it will provide the level of financing necessary for the
Company to meet its business objectives or even the Company's existing
obligations. (See "ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION.")

When used herein, the "Company" includes EuroGas, Inc., and its wholly-
owned subsidiaries, Danube and Energy Global, and the subsidiaries of each of
these subsidiaries, including GlobeGas, Pol-Tex, MMR, MMJ, Danube International
Petroleum Company B.V. ("Danube Netherlands"), Danube International Petroleum
Company, A.S. ("Danube Czech"), and Danube International Petroleum Company, A.S.
("Danube Slovakia"). (Also see the discussion under "History" below.)

FORWARD LOOKING INFORMATION MAY PROVE INACCURATE

This report on Form 10-KSB contains certain forward looking statements and
information relating to the Company and its business that are based on the
beliefs of management of the Company and assumptions made based on information
currently available to management. Such statements reflect the current views of
management of the Company and are not intended to be accurate descriptions of
the future. The discussion of the future business prospects of the Company is
subject to a number of risks and assumptions, including establishing beneficial
relationships with industry partners to provide funding and expertise to the
projects of the Company, locating commercial deposits of methane and natural gas
on the Company's concessions and licenses, the successful negotiation of
additional licenses and permits for the exploitation of any reserves located,
the successful completion of wells, the economic recoverability of in place
reservoirs of hydrocarbons, the successful addressing of technical problems in
competing wells and producing gas, the success of the marketing efforts of the
Company, the ability of the Company to establish required facilities to gather
and transport hydrocarbons that may be produced, and the ability of the Company
to obtain the necessary financing to successfully complete its goals. Should
one or more of these or other risks materialize or if the underlying assumptions
of management prove incorrect, actual results of the Company may vary materially
from those described. The Company does not intend to update the forward looking
statements contained in this report, except as may occur as part of its ongoing
periodic reports filed with the Securities and Exchange Commission.

ACTIVITIES IN POLAND

General

The Company believes that Poland offers an attractive environment in which
to explore for and develop methane gas. The Republic of Poland is bordered on
the north by the Baltic Sea and Russia, on the west by Germany, on the south by
the Czech Republic and Slovakia, and on the east by Lithuania, Belarus, and
Ukraine. Poland is comprised of approximately 120,000 square miles, with a
population of approximately 40 million people. Between 1945 and 1989, Poland's
communist political and economic systems were directly influenced by the former
Soviet Union. In 1989, Poland peacefully asserted its independence, adopted a
new constitution which established a parliamentary democracy, and began its
transition to a market based economy.

Poland has one of the fastest growing economies in Eastern Europe.
According to a report published in the June 15, 1996, issue of the Economist,
Poland's gross domestic product grew by an estimated 7% in 1995, compared to 5%
for the Czech Republic, 1.5% for Hungary, and a negative 4% for Russia. One of
the most important elements of Poland's economic growth has been the country's
development of an entrepreneurial private sector. In 1993, private enterprises
employed 58.9% of Poland's work force as compared to 33.3% in 1989. Poland's
international trade has also undergone significant change since Poland gained
its independence. For example, in 1986, the former Soviet Union accounted for
33% of Poland's imports and 28% of its exports. By 1993, these figures had
decreased to 4.6% and 5.5%, respectively, while the countries of the European
Union purchased 71.3% of Poland's exports and provided 63.9% of its imports.
Foreign investments in Poland between 1989 and 1995 were approximately $6.8
billion.

Coal bed methane gas production has been occurring for some time in the
United States and has drawn attention recently in Poland due in part to the
joint EPA/AID study. The Polish Concessions were originally pursued by
management of GlobeGas as they realized that there was a growing demand in
Europe for this type of gas which is a cleaner and more efficient source of
energy than coal. The Polish government adopted the position that production of
the potential methane reserves would not only benefit the country economically
but could also significantly reduce air pollution and acid rain in the country.

Methane is a component of natural gas that is used as a fuel in various
industries and as a source of residential heating. Before natural gas is used
as a fuel, heavy hydrocarbons such as butane, propane, and natural gasoline are
separated to meet pipeline specifications. The "heavy hydrocarbons" are
typically sold separately. The remaining gas constitutes "dry gas" composed of
methane and ethane. Once produced and separated, there is no substantial
difference between natural gas and methane. The demand in Europe for both
natural and methane gas has been traditionally high and the price generally runs
significantly higher than prices in the United States, although the price for
natural gas in Poland is generally lower than in the rest of the European
market. Gas production typically competes with coal and oil but is generally
considered to be a preferred product because of recent environmental concerns
expressed by governments in Europe.

According to reports published by the POGC, Poland imported approximately
80% of its natural gas consumption in 1994. Poland has an extensive collection
pipeline network readily accessible to it which should facilitate the
transmission and sale of any gas discovered on the Company's concessions.

The Polish Concession

The Pol-Tex Concession is located in south central Poland, in the Rybnik
Coal District in the Upper Silesian Coal Basin as shown on the map on the
following page. The Company, through its wholly-owned subsidiary, Pol-Tex,
entered into an agreement with the Polish affiliate of Texaco, Incorporated
("Texaco"), to sell the Pol-Tex concession, known as 134/93, to Texaco. The
transaction also includes the sale of approximately $200,000 in assets and
equipment.

Upon approval of the agreement by the Polish Ministry, Texaco will make an
initial payment to the Company of $500,000 and conduct a substantial initial
drilling program to appraise the Concession. Drilling and testing will be
completed by Texaco in accordance with a schedule to be approved by the Polish
Ministry and is expected to last approximately 18 months.

At the end of the 18-month period, Texaco can elect to continue to work on
the Concession in exchange for a $2,500,000 payment to the Company. If Texaco
elects to proceed, it has up to 30 months to undertake development work on the
Concession and then Texaco must elect whether or not to complete the acquisition
of the Concession. If Texaco then elects to proceed, it must pay the Company an
additional $2,500,000 and 14% of the net profit from the sale of the first 500
billion cubic feet of methane gas; 16% of the net profit from the sale of the
next 500 billion cubic feet; 18% of the net profits of the next 1 trillion cubic
feet sold; and 20% of the net profits thereafter. If Texaco elects not to
proceed after the initial 18 months, the Company would receive the Concession
back, with any improvements, subject to the approval of the Polish Ministry. If
Texaco elects not to proceed after the development phase, the Company can
reacquire the Concession at a price to be determined by the parties or a third
party appraiser, again subject to approval by the Polish Ministry.

In addition, the Company also granted Texaco the first right of refusal to
acquire control of its other coal bed methane concessions in Poland known as the
MMR and MMJ concessions, at a price to be determined either by the parties or a
third party appraiser. For now, the Company will continue to operate the MMR
and MMJ concessions.

The Texaco agreement is expected to close on or before June 13, 1997.

The Company has recently entered into a letter of intent with POGC granting
the Company the exclusive right to negotiate to enter into a joint venture with
POGC to develop a natural gas concession located in the Carpathian Flysch and
tectonic Foredeep regions of Poland. This exclusive right expires September 30,
1997. Under the terms of the letter of intent, the Company and POGC will form a
technical team, consisting of an equal number of representatives from each
party, to evaluate the concession area and to propose a development plan and
schedule. The letter of intent anticipates a $15 million commitment by the
Company over the initial three years of any joint venture that may be
established by the parties. The Company does not have extensive geophysical
information concerning this concession but, based on preliminary data, believes
that the potential for natural gas in the area justifies the expenditure of the
funds necessary to collect information.

Since the Company does not currently have the funds necessary to meet the
proposed development budget, it may seek to obtain an established industry
partner to participate in the proposed joint venture. There can be no assurance
that the Company will be able to do so or that such participation would be on
terms favorable to the Company.

The Company is also investigating the formation of a consortium of North
American power companies led by a Fortune 500 corporation to purchase any
methane gas production from the MMR and MMJ concessions. The consortium has
proposed the construction of a power plant on the MMR and MMJ concession areas.

[Graphic contained in original consisting of map depicting the general location
of the Pol-Tex Concession in Poland, the boundaries of the Concession, the
Rybnik Coal District, and the proposed drilling program.]

ACTIVITIES IN SLOVAKIA

Slovakia was until recently part of Czechoslovakia. On January 1, 1993,
the Czech Republic and Slovakia emerged as separate independent nations.
Slovakia is bounded on the north by Poland, on the east by Ukraine, on the south
by Hungary, and on the west by Austria and the Czech Republic. Slovakia has an
area of approximately 19,000 square miles and a population of approximately 5.5
million people. Slovakia has not been as quick to adopt free market reforms as
Poland and the Czech Republic and the former communist party, Party of the
Democratic Left, remains a major political force. Slovakia is a member of the
International Monetary Fund and the European Bank for reconstruction and
development and an associate member of the European Union. Bratislava is the
capital of Slovakia and its largest city.

The main economic segments of Slovakia are agricultural and manufacturing.
Various foreign companies have located manufacturing plants in Slovakia, taking
advantage of skilled, cheap professionals and other labor, as well as the close
proximity to "Western" Europe. A prime example of this is Volkswagen A.G.,
which has located manufacturing facilities in Slovakia. Energy in Slovakia is
provided by massive gas and oil imports from countries formerly a part of the
Soviet Union. Domestic production of oil and gas cover only a small percentage
of Slovakia's energy needs.

There are currently seven producing gas fields in the East Slovakian Basin,
a large geographical region in which the Company's joint venture interests are
located, although the Company does not currently have any producing wells or
reserves. Based on tested gas or gas shows over thick columns (up to 1,000
meters thick) in wells located in the south and west of the currently producing
fields near the Czech Joint Venture's interests, management of the Company
believes that large areas of the East Slovakian Basin hold the potential for a
thick column filled with tight gas.

Slovakian Joint Venture

The activities of the Slovakian Joint Venture with NAFTA are conducted
pursuant to a three year exploration permit granted on April 24, 1996 (the
"License"). As it continues its exploration and development on the area subject
to the License, the Joint Venture will require additional permits that have not
yet been granted. Recently, an area known as Lipany was added to the Slovakian
Joint Venture. Prior to the Company acquiring its interest in the Slovakia
Joint Venture, 11 wells were drilled in the area covered by the License between
1960 and 1982. All of these wells had gas shows, though none were completed for
commercial production. The Company believes that new wells can be drilled
offsetting the old wells that, if they have similar gas shows, can be completed
with routine techniques that now exist for the recovery of gas from these types
of formations.

A Map showing the location of the Company's natural gas interests in
Slovakia and a detail of natural gas occurrence the East Slovak Basin is set
forth on the following page.

The Slovakian Joint Venture drilled its initial well, Trebisov 5R, which
encountered a 980 meter thick gas column subdivided into an upper interval
(appearing at 1575 meters - 2100 meters below ground level) and a lower interval
(2100 meters - 2555 meters deep). In December of 1996, after hydrological
fracturing, the upper interval tested 1 million cubic feet of gas ("MMcf") per
day through a 10 millimeter choke with a flowing pressure of 450 pounds per
square inch ("psi") and the lower interval tested 0.4 MMcf per day through a 8
millimeter choke, with a flowing pressure of 275 psi. The tests were
preliminary and were conducted prior to the cleaning up of the well and removing
water from the well.

The Company has commenced an additional test well, Trebisov 8, located
approximately 1.2 kilometers northwest of Trebisov 5, that is designed to test
an adjoining fault lock. Total depth on this well is targeted for approximately
2,250 meters.

[Graphic contained in original depicting the general location of the areas of
mutual interest subject to the Slovakian Joint Venture.]

Under the terms of the agreement which governs the Slovakian Joint Venture,
the Company is obligated to provide 75% ($4,980,000) of the projected initial
test phase funding of $6,640,000 and 60% ($4,080,000) of the projected capital
investment cost for the initial production phase of $6,800,000. The test phase
began in May 1996, and is intended to continue through June 1997. In addition
to the Trebisov 5R and the Trebisov 8 well, the Company is obligated to provide
funding for one additional test well during this test phase and to complete a
seismic program to collect additional geophysical data. Any funds required for
the initial test phase in excess of $6,640,000 will be paid 60% by the Company
and 40% by NAFTA. The Company does not currently have the funding necessary to
meet its commitments under this agreement. (See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION.")

Subject to obtaining satisfactory results during the test phase, the
Slovakian Joint Venture plans to begin the development and production phase
covering an additional seven calendar quarters during which the wells drilled by
the joint venture that are believed to be commercial will be brought on line and
four additional wells will be drilled. If the cost of development and
production exceeds $6,800,000, additional funds will be paid 50% by the Company
and 50% by NAFTA.

In late 1996, the Company and NAFTA agreed to add an additional area in the
Lipany region of Slovakia as part of the joint venture. This area consists of
approximately 26,000 acres located in the northeastern part of Slovakia and lies
within a geological structure known as the Central Carpathian Paleogene Basin.
Six wells were drilled by the Communist regime in Lipany and tested with either
gas and/or oil showings. Those wells have not been plugged and the joint
venture may investigate re-entering those wells. The Company has now entered
into a preliminary understanding with Belmont Resources ("Belmont"), a small
publicly-held Canadian company, whereby Belmont would acquire a 40% working
interest in the Lipany area which would result in the ownership of 50% by NAFTA,
40% by Belmont Resources and 10% by the Company in the operations in the 26,000
acres. The proposed agreement contemplates the payment by Belmont of $100,000
Canadian (approximately $75,000 U.S.) and the completion by Belmont of the
$20,000 work program required by the terms of the joint venture. After
completion of the initial work program, Belmont may acquire an interest in the
Lipany area by delivering to the Company 5,000,000 shares of Belmont's common
stock currently traded on the Vancouver Stock Exchange and an agreement to
"carry" (pay the costs associated with) the Company's 10% interest. The
proposal also contemplates a $1,000,000 work program by Belmont, if Belmont
decides to proceed. The Company has the first right of refusal to provide
financing to Belmont for the $1,000,000. The Belmont shares received by the
Company would equal about 20% of the currently issued and outstanding shares of
Belmont, be subject to an escrow, a one-year holding period and then a staged
release. The completion of the transaction with Belmont is subject to obtaining
the consent of NAFTA and the Vancouver Stock Exchange.

The Company is also holding preliminary discussions with OMV
Aktiengesellschaft concerning the concessions subject to the Slovakian Joint
Venture and a participation by OMV in the Company's obligations under this
agreement. If the Company is able to reach an agreement with OMV, of which
there can be no assurance, such agreement would also be subject to the approval
of NAFTA.

The Slovakian Joint Venture is managed by a joint management committee
consisting of four appointees of each of the joint venture participants. Major
decisions with respect to the development and operation of the Slovakian
Concession require the approval of the joint management committee. Action taken
by the joint management committee is required to be unanimous. The Company,
through its subsidiary, Danube, acts as the operator of the Slovakian Concession
during the initial test phase and for all subsequent drilling and testing
operations. NAFTA acts as the operator for production operations. All of the
assets acquired by the joint venture are owned 50% by each of the participants.
If one of the participants wishes to undertake any drilling, testing,
production, or exploration work on the Slovakian Concession and is unable to
obtain the approval of the joint management committee, it can proceed with the
work at its own expense and risk. Any party drilling a successful well under
such conditions is entitled to recover 200% of the direct investment in the well
if it is drilled in an existing field or 400% of the direct investment if the
well is a wildcat well.

The Slovakian Joint Venture conducts its activities pursuant to a three-
year exploration permit expiring April 24, 1999. As work continues, the
Slovakian Joint Venture will require additional permits that have not yet been
granted. The Slovakian Joint Venture has not established the extent of any
reservoir that may have been tapped by its activities to date and has not
entered into any contracts for the sale or transportation of any gas that might
be recovered. If the Slovakian Joint Venture is unable to obtain the necessary
permits or if it is unable to establish ongoing production and sell the gas at a
sufficiently high price to pay the associated production costs, provide a return
on the capital expenditures made, provide funds for ongoing activities, and
provide a profit, it may be unable to continue its exploration and development
activities or successfully produce any natural gas that may be discovered.

ACTIVITIES IN THE CZECH REPUBLIC

General

The Czech Republic is bounded on the north by Poland, on the east by
Slovakia, on the south by Austria, and on the west and north by Germany. Until
January 1993, the Czech Republic was a part of Czechoslovakia. The Czech
Republic has an area of approximately 30,450 square miles and a population of
approximately 10.5 million people. The Czech Republic has been one of the most
successful countries in making the transition from a central economy to a free
market economy, partly because it was more industrialized than many of the other
countries in eastern Europe that were formally part of the communist block. By
the mid 1990s, approximately 80% of the companies in the Czech Republic had been
privatized or had announced a strategy for transition to private ownership.
Unemployment has remained relatively low. The annual value of exports in the
early 1990s was estimated at approximately $12.6 billion and annual imports
estimated at approximately $12.4 billion. The chief trading partners of the
Czech Republic are Germany, Slovakia, Poland, Austria, Hungary, Great Britain,
and Italy.

The Czech Republic has continued to move aggressively toward a free market
economy. It is an associate member in the European Union and has signed the
Partnership for Peace Agreement with Western Nations as a precursor to becoming
a member of the North Atlantic Treaty Organization. Prague is the capital of
the Czech Republic and its largest city.

The Czech Joint Venture

The Czech Joint Venture in which the Company has the right to earn a 25% to
50% interest holds two licenses to explore for, develop, and produce
hydrocarbons from an approximately 40,180 acre area in an area known as the
Zdanice Field about 40 kilometers southeast of the city of Brno in the Czech
Republic. Based on previous activities, including drilling and testing in the
license areas, management of the Company believes that portions of the area have
the potential for natural gas production. The two exploration permits held by
the Czech Joint Venture expire in 1998 and 2000, respectively. A map showing
the location of the Czech License and the Slovakian Joint Venture is set forth
on the following page.

On January 17, 1997, MND, the Company's joint venture partner in the Czech
Republic, notified the Company that the Company is delinquent in the payment of
certain obligations under the joint venture agreement and threatened to
terminate the association. The Company does not agree with MND's assertions and
has invoked its right to arbitrate this dispute. Pending resolution of the
dispute, the Company has suspended any further work in the Czech Republic. (See
"ITEM 3. LEGAL PROCEEDINGS.")

The Czechoslovakian government drilled nine wells in the area licensed to
the Czech Joint Venture prior to the Company acquiring an interest in this area.
Six of these wells encountered gas. The initial well, Zdanice #14, was drilled
in 1987 and initially tested at 4.1 MMcf per day. Another well, the Zdanice
#132, was drilled into a Miocene formation between the top sealing Nappes and
the Paleozoic basement formation. The Miocene section contained reservoir sands
that tested at up to 5.3 MMcf per day. The extent of the reservoirs that these
wells were drilled into is currently unknown since none of the earlier wells was
completed for production of commercial gas. In addition, none of these wells
are currently connected to transportation pipelines. However there is an
existing pipeline grid located within 8 kilometers.

[Graphic contained in original consisting of a map depicting the general
location of the areas of mutual interest subject to the joint venture agreements
in Slovakia and the Czech Republic.]

Recently the Company reentered Zdanice #14 well and the reservoir section
was perforated and acidized. A short-term test showed a flow rate of 2.37 MMcf
per day with a bottom hole flowing pressure of 924 psi and a bottom hole shut-in
pressure of 1009 psi. The calculated absolute open flow potential was
approximately 6.36 MMcf per day. The Zdanice #132 well was also reentered and
perforated. Initial testing of the Zdanice #132 reflected a flow rate of 1.33
MMcf per day with a bottom hole flowing pressure of 794 psi and a bottom hole
shut-in pressure of 981 psi. The absolute open hole flow potential was
calculated to be approximately 5 MMcf per day.

Under the terms of the joint venture, the Company is obligated to provide
funds for the initial test phase in the amount of $1,200,000 in exchange for a
25% working interest in the Czech License. The Company has the option to
acquire an additional percentage points of interest for each 3.28 million Czech
Crowns (approximately $110,000 per 1% interest based on the exchange rate for
Czech Crowns of 30.5 to each U. S. dollar as of May 15, 1997) in funding
provided by it up to an aggregate of 82 million Czech Crowns (approximately
$2,700,000 based on the May 15, 1997, exchange rate) for a total 50% working
interest. The Company does not currently have the funding necessary to meet
these obligations. Subsequent to establishing production from the wells,
obtaining the necessary financing, and successfully resolving the existing
dispute with MND, the Czech Joint Venture will proceed with additional
exploration work on the remaining acreage subject to its licenses.

The Czech Joint Venture is run by an operating committee consisting of four
representatives from each of the joint venture parties. The operating committee
is charged with making all major decisions on behalf of the joint venture, which
decisions are required to be made unanimously. If the parties are unable to
come to a resolution on any matter, the proposal of the operator shall prevail.
The Company acts as operator during the initial stage for drilling, testing, and
completion of any well. MND acts as operator with respect to each well as of
the initial commercial production from that well. The operating committee is
obligated to give preference to MND's affiliates and/or local goods, equipment,
and services, provided that they are available on terms competitive with those
offered by third parties. If any party is unable to obtain the approval of the
operating committee for any work it wishes to undertake on the Czech License, it
can advance the funds for such work and receive a return on that investment, if
successful, of 500% if a well is located in an existing field and 1000% if the
well is a wildcat.

The initial work in the Czech Republic has been recently completed, and the
Czech Joint Venture does not have a contract to sell any gas that may be
produced. In addition, it has not acquired transportation rights from the
owners of pipelines nor acquired right-of-ways necessary to connect with
existing pipelines. Finally, the Czech Joint Venture is operating under short-
term licenses that will need to be extended and expanded in order to continue
exploration and, if justified, development and production.

As a result of the dispute that has arisen with MND, the Company may not be
able to benefit from its interest in the Czech Joint Venture, although it
intends to aggressively pursue its rights. (See "ITEM 3. LEGAL PROCEEDINGS.")

RISKS ASSOCIATED WITH LOCATION OF COMPANY'S INTERESTS

The operations in Poland, Slovakia, and the Czech Republic carry with them
certain risks in addition to the risks normally associated with the exploration
and development of hydrocarbons. Although recent political and socio-economic
trends in these countries and the development of a capitalistic economy provide
opportunities for foreign investment, the risks of political instability, a
change of government, renegotiation of the concessions or contracts,
nationalization, foreign exchange restrictions, and other risks must always be
taken into account when operating in Eastern Europe. The terms of the governing
agreements are subject to administration by the various governments and are,
therefore, subject to changes in the government itself, changes in government
personnel, the development of new administrative policies and practices, the
adoption of new laws, and other factors. There can be no assurance that the
laws, regulations, and policies applicable to the concessions and licenses and
thus, indirectly to the Company, will not be adversely changed at some future
date.

COMPETITION

In seeking to explore for, develop, and produce oil and gas, the Company
competes with some of the largest corporations in the world, in addition to many
smaller entities involved in this area. Amoco holds a concession for the
production of coal bed methane located in the same area of Poland as the
Company's Pol-Tex Concession, and other major oil and gas companies hold
directly competing interests. Many of the entities that the Company competes
with have access to greater financial and managerial resources than the Company.
As a result of the exclusive nature of the concessions held by the Company, to
the extent that it is able to successfully explore for, develop, and produce
hydrocarbon resources, the Company will be able to exclude any competitor from
production of the resources located on the concessions, but it cannot exclude
competitors from providing natural gas or other energy sources at prices or on
terms that purchasers deem more beneficial.

GOVERNMENTAL REGULATION

The Company's activities in Poland and Slovakia are subject to political,
economic, social, and legal changes, including the adoption of new laws,
regulations, or administrative policies that may adversely affect the Company or
the terms of its exploration or production rights; political instability and
changes in government or public or administrative policies; changes in export
and transportation tariffs and local and national taxes; foreign exchange and
currency restrictions and fluctuations; inflation; adoption of additional
environmental regulations; and other matters. A change in any of these areas
could have a materially adverse impact on the prospects of the Company.

As a result of the negative effect of the break up of Czechoslovakia and
the uncertain economic policies of the Slovakian government, outside investors
have not sought to invest in Slovakia to the same extent that they have in
Poland. The Slovakian government has not pushed as significantly for market
reforms and the former communist party has remained a powerful political force.
Consequently, the risk of political, economic, and legal uncertainties may be
greater in Slovakia than in Poland. However, the stated policy of the Slovakian
government is to continue to create investment opportunities for foreign
entities.

All of the Company's gas interests are subject to the mining laws in the
respective countries in which they are located. Furthermore, the Company's
concessions and licenses are often subject, either explicitly or implicitly, to
ongoing review by governmental ministries. In the event that any of the
countries elect to change such mining laws, it is possible that the government
might seek to annul or amend the governing agreements in a manner unfavorable to
the Company or impose additional taxes or other duties on the activities of the
Company. As a result of the potential for political risks in these countries,
it remains possible that the governments might seek to nationalize or otherwise
cause the interest of the Company in the various concessions and licenses to be
forfeited.

Each of the countries has, and continues to adopt, laws governing
environmental concerns and the Company's drilling and exploration activities are
required to be conducted in accordance with these laws. While these laws are
not usually as fully developed and detailed as similar laws that exist in the
United States, the Company is required to conduct its operations in compliance
with such laws and must prepare and submit to the appropriate agency various
operational plans, including a discussion of environmental matters, which must
be approved before the Company can proceed.

EMPLOYEES AND CONSULTANTS

As of December 31, 1996, the Company had two administrative employees
located in Salt Lake City, Utah; 50 technical and field workers in Poland; 15
technical and field workers in the Czech Republic; and 25 technical and field
workers in Slovakia. Most of the Company's employees in Poland are currently
leased to Texaco. None of the Company's employees is represented by a
collective bargaining organization, and the Company considers its relationship
with its employees to be satisfactory. In addition to its employees, the
Company regularly engages technical and other consultants to provide specific
geological, geophysical, and other professional services.

OPERATIONAL HAZARDS AND INSURANCE

The Company is engaged in the drilling and production of methane and
natural gas and, as such, its operations are subject to the usual hazards
incident to the industry. These hazards include blowouts, cratering,
explosions, uncontrollable flows of gas or well fluids, fires, pollution,
releases of toxic gas, and other environmental hazards and risks. These hazards
can cause personal injury and loss of life, severe damage to and destruction of
property and equipment, pollution or environmental damage, and suspension of
activities. The Company has not as yet obtained any hazard insurance although
it has applications pending. The occurrence of a significant adverse event
that is not covered by insurance would have a material adverse effect on the
Company.

OFFICE SPACE

The Company leases the 35th floor and penthouse of the building located at
80 Broad Street, New York, New York, consisting of approximately 8,800 square
feet, under the terms of a sublease ending on August 31, 2000. The rent under
this lease is $11,025 per month and required an initial prepaid rent of $481,100
on execution. The Company received a rent allowance equal to the first four
months of the lease term commencing on September 1, 1996. The monthly lease
payments are subject to annual escalation, based on the operating expenses of
the building. The offices are currently occupied by the Company's public and
shareholder relations firm which currently provides services to the Company in
lieu of rent. The Company expects to use more of the space itself as its
operations expand.

On September 3, 1996, the Company entered into a three-year lease for
property located at 942 East 7145 South, #101A, Midvale, Utah, that provides for
monthly payments of $1,631.40. The lease provides for annual increases in the
lease payment in an amount equal to the increase in Consumer Price Index;
provided that, such annual increase shall be not less than 6% or greater than
10%.

The Company owns an office in Warsaw, Poland, consisting of 2,230 square
feet which is not a part of the transaction with Texaco.

The Company ultimately intends to operate its executive offices out of New
York, New York. The Company will also keep an administrative office in Salt
Lake City, Utah, headed by Hank Blankenstein, the Company's secretary and
treasurer.

Armando Ulrich, a Company consultant, provides space for the operation of
Energy Global as part of his consulting contract. (See "ITEM 9. DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS; COMPLIANCE WITH SECTION
16(a) OF THE EXCHANGE ACT: Key Consultants.")

HISTORY

The Company was incorporated in the state of Utah under the name
Northampton, Inc. ("Northampton"), on October 7, 1985. On August 3, 1994,
Northampton entered into a share exchange agreement with Energy Global, the
initial step in the Company becoming an oil and gas development stage entity,
which turned control of the company over to the former owners of Energy Global.
Energy Global had been formed as a holding company for GlobeGas, an operating
entity in which it held a minority interest. The minority interest in GlobeGas
was initially reported on the equity method on Northampton's financial
statements. The Company subsequently acquired a 100% interest in GlobeGas, and
since the operations of Energy Global and Northampton prior to the
reorganization were immaterial, the transaction has been accounted for as if
GlobeGas were the acquiring entity and the historical financial statements
included in this report are those of GlobeGas. (See Note 2 to the Financial
Statements.)

The agreement with Energy Global required that Northampton complete a stock
consolidation of one share for each twenty-four shares previously issued and
outstanding and deliver a sufficient number of post-consolidation shares of
common stock to the former owners of Energy Global to reduce the prior
shareholders' interest to approximately 10%. (See "ITEM 12. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS.") Thus the former shareholders of
Energy Global became the controlling shareholders of the Company, which changed
its name to EuroGas, Inc. Merlin V. Fish and Mark Burdge of the United States,
officers and directors of Northampton, continued to act as officers and
directors until December of 1995. All of the current officers and directors of
the Company have been appointed by the foreign shareholders. (See "ITEM 11.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.")

The original asset of Energy Global was a 16% minority interest in
GlobeGas, a Netherlands corporation that held, through a joint venture,
concessions in Poland. (GlobeGas was an 85% partner with a formerly state owned
Polish coal company and held three different concessions for the exploration and
exploitation of methane coal bed gas reserves in the Upper Silesian region of
Poland.) From September of 1994 through May of 1995, the Company delivered
$3,380,963.00 in cash in exchange for additional interests in GlobeGas, which
raised the Company's participation in GlobeGas to 19.13%. In May 1995, the
Company acquired the remaining 80.87% interest in GlobeGas in exchange for
$1,150,000 in cash, the issuance of 2,256,560 shares of restricted common stock,
and the issuance of 2,391,968 shares of newly created preferred stock (the "1995
Preferred Stock"), convertible at the rate of two shares of common stock for
each share of 1995 Preferred Stock. The Company originally booked its interest
in GlobeGas as an interest in a minority-held subsidiary, but since the
acquisition of the remaining interest in GlobeGas has restated its financial
presentation to reflect the historical cost basis of the assets held by GlobeGas
rather than the Company's purchase price, substantially reducing the carrying
value of these assets on the Company's balance sheets. (See Note 2 to the
Financial Statements.)

In May of 1996, the Company acquired the 15% interest in the Pol-Tex
Concession held by the Polish state coal company in exchange for a cash payment
of $25,000 and the release of the obligation of the Polish state coal company to
reimburse GlobeGas, the Company's then wholly-owned subsidiary, approximately
$1,200,000 for drilling and related costs.

In March of 1997, the Company, through its wholly-owned subsidiary Pol-Tex,
entered into an agreement with the Polish affiliate of Texaco, whereby Texaco
will acquire the rights to appraise, operate, and develop the Pol-Tex coal bed
methane gas concession, known as 134/93. The transaction also includes the sale
of approximately $200,000 in fixed assets and equipment.

Upon approval of the agreement by the Polish Ministry, which the parties
expect to obtain by June 1997, Texaco will make an initial payment to the
Company of $500,000 and conduct a substantial initial drilling program to
appraise the Concession. Drilling and testing will be completed by Texaco in
accordance with a schedule to be approved by the Polish Ministry and is expected
to last approximately 18 months.

In July 1996, the Company continued in its quest to acquire additional gas
interests in Eastern Europe by acquiring Danube. Danube was a participant in
joint ventures for the exploration and production of natural gas in Slovakia and
the Czech Republic. Both joint ventures are with formerly state owned gas
companies of Slovakia and the Czech Republic. Danube was acquired for
$3,000,000 in cash ($500,000 paid at closing and $2,500,000 which was due on or
before December 31, 1996, but which has not yet been paid) the issuance of
2,500,000 shares of the Company's restricted common stock, the issuance of
1,250,000 shares of a newly created preferred stock (the "1996 Preferred
Stock"), which is convertible into an aggregate of 2,500,000 additional shares
of the Company's common stock, and the issuance of warrants to purchase up to
5,000,000 shares of common stock at $3.00 per share during the five years
subsequent to the closing. (See "ITEM 3. LEGAL PROCEEDINGS.")

In connection with the transaction, the Company also issued 12,500,000
shares of common stock to Chemilabco, which held an interest in the operating
subsidiaries of Danube and options to participate in the Czech and Slovakian
operations of Danube. An outside investment group holds a 5% interest in the
gas projects of Danube that it received in exchange for a $1,000,000 investment
and which was granted prior to the acquisition of Danube by the Company. As
part of the acquisition, Danube agreed to pay advisory fees to SBC Warburg, a
United Kingdom investment bank, and Moyes Newby & Company. (See "ITEM 3. LEGAL
PROCEEDINGS.")

In July of 1996, the Company added Dr. Martin A. Schuepbach, the President
of Danube, as a director of the Company and appointed him as the Company's
president and chief executive officer. Mr. Schuepbach has recently resigned as
a director and officer of the Company and has asserted a claim based on his
employment agreement. (See "ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION" and "ITEM 3. LEGAL PROCEEDINGS.")

ITEM 3. LEGAL PROCEEDINGS

On August 1, 1995, the United States Securities and Exchange Commission
(the "SEC") issued a formal order In the Matter of EuroGas, Inc., to investigate
whether violations of applicable law may have occurred. The Company has
produced numerous documents pursuant to extensive subpoenas from the SEC and the
oral testimony of its officers and directors. The SEC has obtained similar
information from the Company's former independent public accountants. The
Company cannot predict the duration or outcome of this investigation.

In 1996, KUKUI, Inc. ("KUKUI"), acting separately and on behalf of the
Unsecured Creditors Trust of the Bankruptcy Estate of McKenzie Methane
Corporation (McKenzie Methane Corporation was an affiliate of the former owner
of Pol-Tex), had asserted certain claims against Pol-Tex and GlobeGas in
connection with lending activities between McKenzie Methane Corporation and the
management of GlobeGas prior to its acquisition by the Company. The claim
asserted that funds that were loaned to prior management may have been invested
in GlobeGas and, therefore, McKenzie Methane Corporation might have had an
interest in GlobeGas at the time of the acquisition of GlobeGas by the Company.
These claims were resolved pursuant to a settlement agreement entered into in
November 1996. Under the terms of the settlement agreement, the Company issued
100,000 shares of restricted Common Stock and an option to purchase up to
2,000,000 shares of Common Stock at any time prior to December 31, 1998, to the
Bishop's Estate (KUKUI's parent). The option can be exercised at $3.50 per
share if exercised within 90 days of the execution of the agreement with Texaco;
$4.50 per share if exercised prior to December 31, 1997; and $6.00 per share if
exercised prior to December 31, 1998. The Company also granted registration
rights with respect to the securities.

In March of 1997, a trustee over certain of the individual McKenzies and
other related entities asserted a claim to the proceeds that the Company would
receive from the Texaco agreement and exploitation of the Pol-Tex Concession in
an action entitled: Harven Michael McKenzie, debtor; Timothy Stewart McKenzie,
debtor; Steven Darryl McKenzie, debtor (case no. 95-48397-H2-7, Chapter 7; case
no. 95-48474-H2-7, Chapter 7; and case no. 95-50153-H2-7, Chapter 7,
respectively) W. Steve Smith, trustee, plaintiff v. McKenzie Methane Poland Co.,
Francis Wood McKenzie, EuroGas, Inc., GlobeGas, B.V. and Pol-Tex Methane,
SP.Z.O.O., defendants (Adv. No. 97-4114 in the United States Bankruptcy Court
for the Southern District of Texas Houston Division). The trustee's claim is
apparently based upon the theory that the Company may have paid inadequate
consideration for its acquisition of GlobeGas (which indirectly controlled the
Pol-Tex Concession in Poland) from persons who were acting as nominees for the
McKenzies or in fact may be operating as a nominee for the McKenzies and
therefore McKenzies' creditors are the true owners of the proceeds received from
the development of the Pol-Tex Concession in Poland. (KUKUI is also the
principal creditor of the McKenzies in these other cases.) While the Company is
not required to answer the complaint until June 1, 1997, it plans to vigorously
defend against such claim. The Company believes that the claim is totally
without merit based on its beliefs that the prior settlement with KUKUI bars any
such claim, the trustee over the McKenzies has no jurisdiction to bring such
claim against a Polish corporation (Pol-Tex) and the ownership of Polish mining
rights, that the Company paid substantial consideration for GlobeGas and that
there is no evidence that the creditors of the McKenzies invested any money in
the Pol-Tex Concession. The Company also believes that continued pursuit of
the claim may give rise to a separate cause of action against third parties
which the Company will pursue if necessary.

The Kingdom of the Netherlands has assessed a tax against the Company's
operating subsidiary, GlobeGas, even though it has significant operating losses.
The tax is the result of imputed earnings calculated on interest-free loans made
by GlobeGas. The Company intends to contest the tax. However, the Company may
be required to post a bond to contest the matter. The Company has recorded a
tax provision at December 31, 1996 of $911,051.

After the acquisition of Danube, certain problems arose as follows:

Moyes, Newby & Co., Inc. ("Moyes Newby"), a financial consulting firm
retained by the Company's subsidiary, Danube, prior to its acquisition by the
Company, has filed a complaint asserting a claim for $435,000 in commissions
related to a proposed financing, plus interest and attorneys' fees. The initial
agreement with Moyes, Newby & Co., Inc. was made by Mr. Schuepbach and Danube
prior to any involvement by the Company. The claim appears to be based both on
such agreement and on subsequent representations made by Mr. Schuepbach which
were not authorized by the Company's current board of directors. The Company
has offered to pay Moyes Newby $50,000 as commissions and 5% of any additional
amounts that may be received by the Company in the future as a result of the
efforts of Moyes Newby. Discovery recently commenced and the Company is
currently unable to predict the outcome of this matter.

By letter dated January 14, 1997, Martin Schuepbach resigned as president
and chief executive officer of the Company and as a member of its board of
directors. Mr. Schuepbach also asserted a breach of his employment contract.
The Company denies breach of Mr. Schuepbach's contract. The Company does not
feel that the loss of Mr. Schuepbach will hinder its operations as the Company
believes that his principal expertise as an engineer is readily replaceable.
The Company is not aware of any litigation having been filed with respect to
this matter. However, Mr. Schuepbach is also owed a portion of the $2,500,000
that was to be paid December 31, 1996, as part of the consideration in the
acquisition of Danube. This amount has not been paid by the Company to date.

On January 17, 1997, MND, the Company's joint venture partner in the Czech
Republic notified the Company that it is delinquent in the payment of certain
obligations of the joint venture agreement and threatened to terminate the
association. The Company does not agree with MND's assertions and has invoked
its right to arbitrate this dispute. Pending resolution of the dispute, the
Company has suspended any further work in the Czech Republic.

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

During the Company's fiscal year ended December 31, 1996, the Company did
not hold an annual meeting and no matters were submitted to a vote of the
security holders of the Company, through the solicitation of proxies or
otherwise.

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS

The common stock of the Company is traded on the Bulletin Board under the
symbol "EUGS" (recently changed from "EGAS"), under the symbol "EUGSF" on the
Frankfurt Stock Exchange and the symbol "EUGSBE" on the Berlin Stock Exchange.
As of May 14, 1997, there were 50,496,492 shares of the Company's common stock
issued and outstanding.

The following table sets forth the approximate range of high and low bids
for the common stock of the Company during the periods indicated based on
information concerning the trading of the common stock on the Bulletin Board.
All prices reflected herein have been adjusted retroactively to reflect the 24-
for-1 reverse stock split recently approved by the Company. The quotations
presented reflect interdealer prices, without retail markup, markdown,
commissions, or other adjustments and may not necessarily represent actual
transactions in the common stock.

<TABLE>
<CAPTION>
Quarter Ended High Bid Low Bid
------------- -------- -------
<S> <C> <C>
March 31, 1995 $4.75 $2.50
June 30, 1995 $4.875 $3.25
September 30, 1995 $4.50 $2.50
December 31, 1995 $3.625 $1.375
March 31, 1996 $3.25 $1.125
June 30, 1996 $7.875 $1.75
September 30 1996 $5.75 $2.875
December 31, 1996 $5.00 $2.875
March 31, 1997 $6.75 $3.4375
</TABLE>

The liquidity of the common stock may be limited, and the reported price
quotes may not be indicative of prices that could be obtained in actual
transactions. On May 14, 1997, the closing bid and asked price for the
Company's common stock in the over-the-counter market and the Frankfurt and
Berlin Exchange at approximately $6.0625 bid and $6.1875 asked.

No dividends have been paid on the Company's securities, and the Company
does not have retained earnings from which to pay dividends. All cumulative
dividends with respect to the Company's preferred stock would be required to be
paid prior to the Company declaring or paying any dividend on its common stock.
(See "ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.") Even if the Company were to generate the necessary earnings, it
is not anticipated that dividends will be paid in the foreseeable future, except
to the extent required by the terms of the cumulative preferred stock currently
issued and outstanding.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION

GENERAL

The Company is engaged in the business of acquiring rights to methane and
natural gas prospects and exploring for and developing gas reserves. The
Company does not have any production or revenues and is classified as an
exploration enterprise in the development stage for financial reporting
purposes. The transaction with Energy Global and its subsidiary, GlobeGas, has
been accounted for as a reorganization with GlobeGas being considered the
acquiring company for accounting purposes. (This treatment is due primarily to
the fact that it was GlobeGas and its subsidiary, Pol-Tex, which held most of
the Company's assets and whose owners represented the majority shareholders of
the Company on completion of the reorganization.)

The Company accumulated losses attributable to common shares of
approximately $20,272,000 through December 31, 1996, most of which have been
paid by the issuance of stock or debt instruments (substantial portions of which
were issued to related parties), loan proceeds, and incurring payables. (See
"ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.") The Company's
stock and debt transactions provided net cash of $8,194,000, $2,927,000, and
$4,989,000 during the years ended December 31, 1996, 1995, and 1994,
respectively. Since December 31, 1996, the Company has continued to rely on
cash provided from financing activities to fund its ongoing activities and
expects that it will be required to continue to do so.

The Company's principal assets consist of unproved and undeveloped gas
properties. All costs incidental to the acquisition, exploration, and
development of such properties are capitalized, including costs of drilling and
equipping wells and directly related overhead costs which include the costs of
Company owned equipment. Since the Company has no proved reserves or
established production, these properties have not been amortized. In the event
that the Company is ultimately unable to establish production or sufficient
reserves on these properties to justify the carrying costs, the value of the
assets will need to be written down and the related costs charged to operations,
resulting in additional losses.

RESULTS OF OPERATIONS

The Company has not received any revenues since inception. The Company's
two major categories of operating costs are general and administrative and
interest costs associated with its indebtedness.

The Company incurred general and administrative costs of approximately
$4,739,000 in the year ended December 31, 1996, as compared to approximately
$3,528,000 for the year ended December 31, 1995, an increase of approximately
34%. This increase in general and administrative expenses was due primarily to
the expansion of the office and other facilities of the Company related to
increased exploration activities. Compensation paid by the Company increased (a
component of general and administrative costs) from approximately $1,300,000 in
1995 to approximately $2,992,000 in 1996.

Other expenses increased to approximately $1,391,000 for the year ended
December 31, 1996, as compared to approximately $700,000 for the previous year,
primarily as a result of increased interest expense (an increase of
approximately $412,000) related to substantially larger borrowings during 1996,
and increased exchange losses (an increase of approximately $320,000).

Depreciation and valuation allowance decreased to $132,000 in 1996 from
$481,000 in 1995, or approximately 72%. This resulted primarily from certain
assets becoming fully depreciated in 1995.

Due to the highly inflationary economies of the Eastern European countries
in which the Company operates, the Company is subject to extreme fluctuations in
currency exchange rates that can result in the recognition of significant gains
or losses during any period. These fluctuations resulted in a book loss in
excess of $400,000 in 1996.

The Company's net loss applicable to common stock increased from
approximately $4,328,000 in the year ended December 31, 1995, to approximately
$6,413,000 for the year ended December 31, 1996.

As of December 31, 1996, the Company reported approximately $14,253,000 in
mineral interests in unproved mineral properties, net of valuation allowance.
These properties are held, directly or indirectly through joint venture
relationships, under licenses or concessions that contain specific drilling or
other exploration commitments and that expire within one to three years, unless
the concession or license authority grants an extension or a new concession
license, of which there can be no assurance. The Company does not have an
assured source of funds to meet its commitments and if it loses its interests as
a result of its failing to perform or is unable to obtain any necessary
extension or additional license, the entire carrying value of the affected
property would be required to be written off. Under the full cost method by
which the Company accounts for its mineral interests in properties, costs of
unproved properties are assessed periodically and any resulting provision for
impairment which is required is charged to operations. The impact of such
reassessment and resulting impairment charge could be significant during any
particular period. As a result of the foregoing, the results of operations for
any particular period could be materially adversely affected and the Company's
currently reported losses may not be indicative of future results.

CAPITAL AND LIQUIDITY

Throughout its existence, the Company has relied on cash from financing
activities to provided cash required for operating and investing activities.
During 1996, operations required cash of approximately $3,985,000 as compared to
approximately $2,356,000 for the preceding year. The increase in net cash used
in operations is principally the result of the increased losses associated with
operations in 1996 since noncash adjustments were similar for both periods.
Since inception, operating activities have used net cash of $11,448,000,
principally to fund cumulative net losses of $20,272,000 applicable to common
shares.

Investing activities used net cash of approximately $3,727,000 and
$1,294,000 during 1996 and 1995, respectively, and approximately $14,123,000
since inception. Investing activities during 1996 and 1995 consisted almost
exclusively of the purchase of the mineral interests in properties in Poland,
the Czech Republic, and Slovakia on which the Company's activities are now
concentrated. Since inception, the Company has recorded approximately
$11,342,000 for the purchase of mineral interests of the $13,713,000 included in
investing activities. The remaining amount has primarily been used to acquire
equipment.

Financing activities provided net cash of approximately $8,194,000 and
$2,927,000 for 1996 and 1995, respectively, and $26,390,000 from inception
through December 31, 1996. During 1996 and 1995, the principal source of such
cash was loans, split between loans from related parties, which provided cash,
net of repayments, of approximately $3,540,000 in 1996 and $1,105,000 in 1995
and loans from others, which provided cash, net of repayments of approximately
$4,767,000 in 1996 and approximately 848,000 in 1995. From inception through
December 31, 1996, the proceeds from indebtedness to related parties have
provided net cash of approximately $9,947,000. (See "ITEM 12. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS.") Proceeds from indebtedness to others
provided net cash of approximately $6,447,000 from inception through December
31, 1996. The Company expects that it will continue to rely principally on the
proceeds from indebtedness to related parties to finance its activities.

At December 31, 1996, the Company had total current assets of approximately
$770,000 and total current liabilities of approximately $9,712,000, resulting in
a working capital deficit of approximately $8,942,000 or a negative working
capital ratio of 1:12.6. Included in current liabilities at December 31, 1996,
is the obligation to OMV Aktiengesellschaft ("OMV"), an unaffiliated Austrian
gas transmission company, of $1,802,500. This obligation was paid subsequent to
December 31, 1996. (See "ITEM 12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS.") As of December 31, 1996, the Company also had a $2,500,000
obligation to the former Danube shareholders who are now principal stockholders
of the Company. (See "ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS"
and "ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.")
While the Company is attempting to negotiate for an extension of the due date on
the Danube debt, it has not been successful to date. (See "ITEM 3. LEGAL
PROCEEDINGS.")

Since December 31, 1996, the Company has received approximately $2,750,000
in gross proceeds from the issuance of stock. In addition, debentures in the
principal amount of $2,200,000 plus accrued interest, were converted to 852,630
shares of common stock. The Company continues to have current liabilities
substantially in excess of its current assets. In addition, the Company is
committed to spend substantial amounts to satisfy its obligations under its gas
concessions. The Company will continue to require significant cash for
operating expenses and drilling commitments, even excluding compensation to
executive employees, consultants and their affiliates. (See "ITEM 10.
EXECUTIVE COMPENSATION: Employment and Consulting Arrangements.") The Company
does not have any agreement with anyone to provide the funds necessary to meet
these commitments. If the necessary funding is not available, the Company may
be unable to continue and it is unlikely that it would be able to sell its
interests for an amount sufficient to satisfy its obligations. Consequently, if
the Company is unable to continue, there will not be any value for its
shareholders.

The Company anticipates that the transaction with Texaco will improve the
Company's liquidity. The terms of the agreement include a cash payment to the
Company at closing of $500,000 plus Texaco's assumption of all Pol-Tex
concession obligations, including the obligation to spend additional amounts for
exploration. The Company anticipates that this transaction will close in June
1997, although the closing is subject to approval by the Polish Ministry so no
assurance can be given. In addition, the Company believes that the completion
of the Texaco agreement may enhance the Company's ability to attract third party
debt and equity capital. There can be no assurance, of course, that any
financing from other sources will be available.

As noted above, during 1996 and 1995, as well as subsequently, the Company
has relied principally on cash provided from financing activities to provide its
cash requirements, particularly cash provided from related parties. Although
the Company anticipates that it will be able to continue to obtain cash from
financing activities in the foreseeable future, there can be no assurance that
it will be able to do so.

If the Company is unable to establish production on reserves sufficient to
justify the carrying value of its assets or to obtain the necessary funding to
meet its short and long-term obligations or to fund its exploration and
development program, all or a portion of the mineral interests in unproved
properties will be charged to operations, leading to significant additional
losses.

ITEM 7. FINANCIAL STATEMENTS

The financial statements and supplementary data are set forth immediately
following the signature page.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE

The Company and its current auditors have not disagreed on any items of
accounting treatment or financial disclosure.

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

Set forth below is the name and age of each executive officer and director
of the Company, together with all positions and offices of the Company held by
each and the term of office and the period during which each has served:

<TABLE>
<CAPTION>
Name Age Positions With the Company Director Since
- - ---------------------- ---- -------------------------- --------------
<S> <C> <C> <C>
Dr. Reinhard Rauball 51 Director 1994 - August

Paul Hinterthur 60 President and Director 1995 - December

Hank Blankenstein 55 Secretary and Director 1995 - December

Dr. Gregory P. Fontana 37 Director 1996 - January

Dr. Hans Fischer 51 Director 1996 - January
</TABLE>

A director's regular term continues until the next annual meeting of
shareholders and thereafter until his successor is duly elected and qualified.
Officers serve at the pleasure of the board of directors. There is no family
relationship among the current directors and executive officers.

Effective November 1 1996, the Company appointed an executive committee
consisting of four members, Martin Schuepbach, Paul Hinterthur, and Hank
Blankenstein, all of whom were then directors and officers of the Company
(Martin Schuepbach resigned from the board of directors and executive committee
on January 14, 1997), and J. Toni Preuss, an officer and director of the
Company's subsidiary, GlobeGas. The executive committee is charged with
overseeing the day-to-day management of the Company and with making all
significant contractual and financial decisions.

COMPANY CONTROL

Dr. Reinhard Rauball, the chairman of the board of directors, and Wolfgang
Rauball, the Company's chief consultant, are brothers. Both gentlemen have been
key figures in arranging the original transaction with Energy Global, the
acquisition of the concessions in Poland, and the later acquisition of Danube,
which holds concessions in the Czech Republic and Slovakia. From time to time,
the Rauballs, principally Wolfgang Rauball, have also arranged for equity and
debt financing for the Company through parties with whom they have previous
business and personal relationships and have directly loaned some of their own
funds to the Company. (See "ITEM 12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS.")

While there is no formal agreement among the Rauballs and other debt and
equity holders of Company, the practical result of the relationships is to vest
control of the Company in the Rauballs.

The following sets forth brief biographical information for each of the
foregoing individuals.

Dr. Reinhard Rauball is a director of the Company. He has been an attorney
in Dortmund, Germany, since 1974, as well as a government appointed Notary since
1991. He was a law instructor at Bochum University from 1977 to 1979 and is the
author of numerous legal publications and books on constitutional law in
Germany. Dr. Rauball currently represents a number of prominent German
industrial companies and acts as counsel to the German government on special
projects. From 1983 to 1990, he was the chairman of the Supervisory Board of
Etienne Aigner, AG, a publicly-held company in Munich, Germany, which is a
leading international fashion concern with franchise shops in over 50 countries
around the world. He was the president of Borussia Dortmund, a leading German
soccer club, from 1979 to 1982 and 1984 to 1986.

Wolfgang Rauball has acted as an independent consultant to the European
subsidiaries of the Company since August 1994. He is president of Pol-Tex
Methane sp. z.o.o. in Poland and also acts as an alternate director of GlobeGas
B.V. Amsterdam. Mr. Rauball attended Darmstadt Technical University in Germany
from 1967 through 1971 but did not receive a degree. Thereafter, Mr. Rauball
worked as a mining geologist in Canada from 1972 to the present date. During
the period 1976 through 1986, his consulting activities were primarily for
companies conducting exploration for gold ore bodies in Canada, the United
States, and South America. Wolfgang Rauball arranges for financing for business
enterprises, primarily public companies engaged in the mineral industry. In
1993, Wolfgang Rauball was convicted by a German court of negligently causing
the bankruptcy of a German subsidiary of a Canadian company. Mr. Rauball was a
managing director of the Canadian company. Beginning in 1987, he was involved
in a contest for control of the Canadian company. During the contest, the
German subsidiary used some of its capital to purchase restricted securities of
an unrelated company, which purchase caused the German subsidiary to become
insolvent from a balance sheet point of view. Prior to being able to solve the
problem, Mr. Rauball was deprived of his ability to participate in management of
the Canadian company (his right to participate in management was subsequently
restored by the British Columbia Securities Commission in Canada). German law
is very strict in this regard and generally holds managing directors of parent
companies responsible for either infusing additional funds to make the
subsidiary solvent or making the appropriate bankruptcy filings on behalf of the
subsidiary, neither of which was done in this case. The German court held that
Mr. Rauball was negligent in participating in the original stock purchase by the
German subsidiary. Mr. Rauball received a suspended sentence and a monetary
fine of approximately $70,000. This type of activity is not a crime in either
the United States or Canada, where Mr. Rauball then resided, and therefore, the
board of directors of the Company does not feel that this matter compromises in
any way the value of Mr. Rauball's services.

Paul Hinterthur is a director and president of the Company. He has held
executive positions with the Company since 1995. After completing studies in
Economics in Frankfurt, London and Paris, he served in executive positions for
Dresdner Bank, one of the leading banks in the world from 1965 to 1984. During
his tenure with Dresdner Bank, he served in the financial centers of Frankfurt,
London, Tokyo, and Hong Kong. After retiring from the banking business, he has
been an independent international business and finance consultant for many
years. Mr. Hinterthur speaks five languages.

Hank Blankenstein is a director and secretary/treasurer of the Company. He
has had over 30 years experience in various levels of management positions. He
served as an administrative financial officer for a large semiconductor facility
from 1973 to 1985. Prior to that, he served in a number of operational
positions for high tech industry companies, having engineering production
supervising responsibilities, in charge of a 400 person division. He has been
involved in several high tech start-up situations serving in senior management
positions. He holds a bachelor of science degree in finance and banking from
Brigham Young University that was awarded in 1966.

Dr. Gregory P. Fontana is a director of the Company. He is currently an
attending cardiothoracic surgeon at Brotman Medical Center and Cedars-Sinai
Medical Center in California. He received his M.D. in 1984 at the University of
California followed by ten years of post graduate training at Duke University
and University of California at Los Angeles. Some of his academic appointments
include Clinical Fellow in Pediatric Cardiac Surgery at Harvard Medical School
and Clinical Assistant Professor of Surgery at UCLA School of Medicine and he
has received several research grants, including a National Research Service
Award and Minimally-Invasive Cardiac Surgery Grant. He belongs to several
professional organizations, including the American Heart Association, and has
authored numerous scientific presentations and bibliographies. He is currently
a consultant to Heartport, Inc., Redwood City, California.

Dr. Hans Fischer is a director of the Company. He is currently Professor
of Radiology at the University of California, Los Angeles, Harbor-UCLA Medical
Center where he has been on the faculty since 1992. He has been a chair,
member, and designated alternate on Research, Clinical Radiology, Quality
Assurance and Ambulatory Care Committees for Harbor-UCLA Medical Center since
1990. He trained at Leibniz-Gymnasium, Dortmund West Germany, School of
Medicine, University of Muenster West Germany and School of Sociology,
University of Muenster West Germany. He received his M.D. in 1971 and Ph.D. in
1985 from University of Muenster.

KEY CONSULTANTS AND EMPLOYEES

The following sets forth biographical information for certain of the
Company's key employees and consultants.

Andrew K. Andraczke, vice-president and secretary, and a member of the
management committee of Pol-Tex Methane, is responsible for business development
and coordination of administrative, legal, and political aspects of the venture
in Poland. He also directs computer operations and system support for
exploration and production.

Mr. Andraczke holds B.Sc., M.Sc., and Ph.D degrees in computer science and
application from Computer Science Institute of Polytechnical University in
Warsaw where he also taught as an Associate Professor. He served as the General
Manager of the Computing Center of the Center for Geological Research in the
Central Office of Geology (Ministry of Geology) from 1972 to 1976 where he
developed and implemented Poland's first general database of geological and
mineral resources of Poland. He also implemented computer mapping systems, oil
and gas reservoir simulations, and production control for mining operations.

In 1976, he moved from Poland to accept consulting contracts in France and
the United States. From 1976 to 1982, he worked for several oil and gas and
mining firms, including OTC Oklahoma Production in Tulsa, Kansas Oil
Consolidated in Tulsa, John W. Mecom Company in Houston, InteResources Group,
Inc. in Houston, and British Sulphur Corporation in London, performing reservoir
modeling of secondary and tertiary oil reservoirs, inorganic polymer floods, and
underground coal gasification projects. During this time, he also developed
data acquisition and reserve balance systems for mines in the U. S., Mexico, and
Egypt.

He joined Oil Exploration and Production Company in Houston in 1982 and
served as an internal consultant and management advisor on computer applications
and emerging technologies. He provided technical support for large projects
including integrated exploration systems, reservoir simulation, enhanced oil
recovery, and evaluation of production. He developed and supported reservoir
models for some of Tenneco's largest oil and gas fields and authored numerous
proprietary exploration and drilling systems for Tenneco.

Armando Ulrich acts as a consultant to the Company and serves as an officer
of two of the Company's subsidiaries, Energy Global and Pol-Tex Methane. Mr.
Ulrich made the original introduction of the Company to Energy Global and
GlobeGas. From 1981 to 1988, he worked with a number of bio-chemical institutes
in the development of various bio-medical projects. He currently produces wine
and olive oil on properties he owns in Tuscany, Italy.

J. Toni Preuss serves on the executive committee of the Company and has
been the managing director of GlobeGas, a Company subsidiary, since November
1995. Since 1970, he has been a representative of Idua Nova Insurance Company
in Hamburg, Germany, specializing in investment strategies. In 1980, he
established his own Sports Marketing Agency and Services Company which has an
international reputation and operations in Russia, Czech Republic, Holland,
Switzerland, and Turkey. He is the personal financial advisor for several
international soccer players and coaches.

SPECIAL CONTROL STATUS OVER THE ACCOUNTS OF GLOBEGAS

In connection with obtaining a loan for $1,800,000 in March of 1997, the
Company was required to grant Herb Zimmer approval over expenditures by GlobeGas
(the Company's main operating subsidiary). Mr. Zimmer still retains such
control despite repayment of the loan and therefore is deemed to be a control
person by the Company.

FORMER OFFICER

On January 14, 1997, Martin Schuepbach resigned from all his positions with
the Company on the stated grounds that the Company had failed to reimburse him
for certain amounts spent by him and had breached his employment agreement. The
Company believes that his principal expertise as an engineer is readily
replaceable and does not believe that his resignation will have a material
adverse effect on the Company. (See "ITEM 3. LEGAL PROCEEDINGS.")

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

The Company's stock is not registered under Section 12 of the Securities
and Exchange Act of 1934, as amended (the "Exchange Act"), and, as a
consequence, its officers, directors, and principal shareholders are not subject
to the reporting obligations of Section 16 of the Exchange Act.

ITEM 10. EXECUTIVE COMPENSATION

The following table sets forth the compensation paid by the Company and its
subsidiaries for the fiscal years ended December 31, 1996, 1995, and 1994, to
the chief executive officer of the Company and the other executive officers of
the Company who received compensation in excess of $100,000.

<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term Compensation
-----------------------------------

Annual Compensation Awards Payoffs
------------------------- ------------------------ --------
Other
Annual All Other
Compen- Restricted LTIP Compen-
Name and sation Stock Options/ Payouts sation
Principal Position Year Salary($) Bonus($) Awards($) SARs(#) ($) ($)
- - -------------------- -------- ------------- ------------ ---------- -------- -------- ---------
<S> <C> <C>
President

Paul Hinterthur 1996 $ 27,000
1995 $ 0
1994 $ 0

Merlin V. Fish 1996 $ 0
1995 $115,693
1994 $724,869(1)

Rolf Schlegel 1996 $ 0
1995 $ 0
1994 $194,000
</TABLE>

[FN]
(1) This includes amounts paid to MSA Mesa, which the Company believes Mr. Fish
may be deemed to have controlled at the time, although Mr. Fish has
disclaimed beneficial ownership of this entity. (See "ITEM 12. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS: Relationship With Merlin V. Fish,
Former President of the Company.")

The following table sets forth the information concerning the options
exercised by the named executive officers during the fiscal year ended December
31, 1996, and the value of unexercised options as of December 31, 1996.
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs at
FY End (#) FY End ($)
Shares Acquired Exercisable/ Exercisable/
Name on Exercise (#) Value Realized ($) Unexercisable Unexercisable
- - ------------------ --------------- ------------------ --------------- ---------------
<S> <C> <C> <C> <C>
Merlin V. Fish 41,667(1) $146,000 0/0 N/A
</TABLE>

[FN]
(1) This option was exercised by MSA Mesa, an entity that the Company believes
Mr. Fish may be deemed to have controlled at the time, although Mr. Fish
denies beneficial ownership of this entity. (See "ITEM 12. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS: Relationship With Merlin V. Fish,
Former President of the Company.")

ARRANGEMENT WITH DR. SCHUEPBACH

The Company had an employment agreement with Dr. Martin Schuepbach. The
employment agreement with Dr. Schuepbach was entered into as of July 12, 1996,
and had a term of three years. The employment agreement required devotion of
the full business time of Dr. Schuepbach to the Company, prohibited him from
competing in any fashion with the Company during the term of the agreement and
for one year subsequent to termination, and prohibited disclosure or use by him
of trade secrets or other confidential information of the Company.

Dr. Schuepbach's employment agreement provided for compensation of $240,000
per annum. In connection with the execution of the employment agreement, Dr.
Schuepbach was granted an option to acquire 250,000 shares of common stock, at
an exercise price of $1.50 per share. Under the terms of the agreement, the
right to exercise such options was to vest in Dr. Schuepbach with respect to 20%
of the shares as of the date of grant and an additional 20% on each following
anniversary of the date of grant. The options expire if not previously
exercised on January 16, 2001. The Company was to furnish Dr. Schuepbach with
health, medical, and disability insurance.

On January 14, 1997, Dr. Schuepbach resigned his position in the Company
and has asserted a breach of his employment agreement. (See "ITEM 3. LEGAL
PROCEEDINGS.")

EXECUTIVE EMPLOYMENT AND CONSULTING ARRANGEMENTS

During 1996, the board of directors authorized the payment of an annual
salary of $200,000 to Paul Hinterthur and $180,000 to Hank Blankenstein. The
board of directors also authorized the payment of a consulting fee to the
remainder of its board of directors in the amount of $180,000 for Dr. Reinhard
Rauball, $60,000 for Dr. Hans Fischer, and $60,000 for Dr. Gregory P. Fontana.
In addition, the board of directors authorized an annual consulting fee of
$300,000 payable to Wolfgang Rauball for services rendered to Pol-Tex Methane,
including acting in the capacity of president of Pol-Tex, and $250,000 for
services rendered to GlobeGas. The board of directors also authorized an annual
consulting fee of $250,000 payable to Ulrich Consulting for services rendered to
Energy Global and $180,000 to Armando Ulrich for services rendered to Pol-Tex
Methane, including acting in the capacity of deputy president. Ulrich
Consulting is controlled by Mr. Ulrich.

The Company has not had the cash available to pay the foregoing salaries
and consulting fees and each of the individuals, other than Dr. Martin A.
Schuepbach, has agreed to accept the amount paid during the current year as
payment in full of the obligation.

The Company has principally paid for administrative services by the hiring
of consultants. During 1994, the Company paid Armando Ulrich $100,000 in
consulting fees and Merlin V. Fish (former president) $81,121 directly for
services rendered and $643,748 indirectly in cash and stock to entities the
Company now believes Mr. Fish may be deemed to have controlled. Mr. Fish denies
beneficial ownership of these entities. (See "ITEM 12. CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS.")

In 1994 and 1993, GlobeGas paid $194,000 and $237,000 to Rolf Schlegel, an
officer and director of GlobeGas, prior to its acquisition by the Company as a
wholly-owned subsidiary.

In 1995, Mr. Ulrich received $69,447 in consulting fees and expense
reimbursements and Merlin V. Fish received approximately $115,693. Neither the
Rauballs nor Mr. Hinterthur received any fees in 1995.

In 1996, the Company paid $479,166 to Wolfgang Rauball and $449,600 to
Armando Ulrich in fees and expense reimbursements. The Company paid its
officers Dr. Reinhard Rauball, Hank Blankenstein, and Paul Hinterthur $33,000,
$84,000, and $27,000, respectively, during 1996.

COMPENSATION OF DIRECTORS

The Company intends to compensate its outside directors for service on the
board of directors by payment of a monthly fee of $5,000 and reimbursement of
expenses incurred in attending board meetings. The Company does not separately
compensate its board members who are also employees of the Company for their
service on the board.

GRANT OF OPTIONS TO DIRECTORS, OFFICERS, AND OTHERS

In January 1996, the board of directors adopted the 1996 Stock Option and
Award Plan authorizing the grant of options to acquire up to 2,000,000 shares of
common stock. These options have an exercise price of $1.50 per share and a
term of five years from January 18, 1996. Options covering all of the
authorized shares have been issued to officers, directors, employees, and
consultants of the Company. (See "ITEM 11. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT.")

ITEM 11. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth, as of May 14, 1997, the number of shares of
the Company's common stock, par value $0.001, held of record or beneficially by
each person who held of record or was known by the Company to own beneficially,
more than 5% of the Company's common stock, and the name and shareholdings of
each officer and director and of all officers and directors as a group.

<TABLE>
<CAPTION>
Common Preferred Warrants and
Name of Person or Group(1) Stock Stock(2) Options(3) Percent(4)
- - -------------------------- ---------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
Principal Shareholders:
Chemilabco, B.V. 12,500,000 0 0 24.8%
World Trade Center
Amsterdam Netherlands

Crawford 3,000,000 0 0 5.9%
Middle & Eggmont Street
Kingston, St. Vincent,
Grenada

Dobbins Capital Corporation 1,022,500 429,167 1,880,833 7.1%
Dobbins Partners LP
2651 North Harwood
Suite 500
Dallas, Texas 75201

Dr. Martin Schuepbach(5) 772,500 429,167 1,880,833 6.6%
2651 North Harwood
Suite 120
Dallas, Texas 75201

Mempo Trust 705,000 391,666 1,488,334 5.6%
2651 North Harwood
Suite 260
Dallas, Texas 75201

Directors and Controlling
Persons:

Dr. Reinhard Rauball(6) 1,000,000 0 250,000 2.5%

Wolfgang Rauball(7) 1,600,000 0 50,000 3.3%

Paul Hinterthur(8) 100,000 0 200,000 0.6%

Dr. Gregory P. Fontana 0 0 100,000 0.2%

Dr. Hans Fischer 0 0 100,000 0.2%

Hank Blankenstein 0 0 200,000 0.4%

Herb Zimmer (9) 1,552,630 0 0 3.2%
--------- --------- --------- -----
All Officers, Directors, and
Controlling Persons 4,252,630 0 900,000 10.3%
as a Group (7 Persons)

</TABLE>

[FN]

(1) Except as otherwise indicated, to the best knowledge of the Company, all
stock is owned beneficially and of record by the listed shareholder, and
each shareholder has sole voting and investment power.

(2) Represents shares of 1995 or 1996 Preferred Stock of the Company. Each of
these shares is convertible into two shares of common stock of the Company
at the election of the holder or by the Company after a certain date.
A more complete description of the Preferred Stock is set forth immediately
following these notes.

(3) Represents warrants to acquire shares of Common Stock at an exercise price
of $3.00 per share that are all currently exercisable and options to
acquire shares of Common Stock at an exercise price of $1.50 per share,
all currently exercisable.

(4) The percentage indicated represents the number of shares of Common Stock
held by the indicated shareholder divided by the 50,496,492 shares of
Common Stock issued and outstanding as of May 12, 1997, for those
shareholders holding only Common Stock; assumes the conversion by the
individual shareholder of the Preferred Stock held (on a two-for-one
basis) and a corresponding increase in the number of shares of Common
Stock issued and outstanding for those shareholders holding Preferred
Stock; and assumes the exercise by the individual shareholder of options
and/or warrants held by that shareholder and the corresponding increase
in the issued and outstanding Common Stock for those shareholders
holding options or warrants.

(5) The 1,880,853 warrants and options shown for Mr. Schuepbach includes
250,000 shares subject to options exercisable at $1.50 per share and
1,630,883 shares subject to warrants exercisable at $5.00 per share.

(6) Prior to January of 1997, 2,053,917 shares of Common Stock were held
by Dr. Rauball as trustee for the benefit of other parties. While
Dr. Rauball remains the record owner, as trustee, of these shares,
he relinquished his trusteeship effective August 26, 1996, and
consequently, these shares are not reflected on the foregoing table.

(7) These shares are held in the name of the spouse and children of Wolfgang
Rauball. Wolfgang Rauball disclaims a direct economic interest in these
shares, but may be deemed to beneficially own such shares under the
guidelines of the Exchange Act.

(8) These shares are held in the name of the spouse of Mr. Hinterthur. Mr.
Hinterthur disclaims a direct economic interest in these shares, but
may be deemed to beneficially own them under the guidelines of the
Exchange Act.

(9) 852,630 of the shares of common stock listed are held by an affiliate of
Mr. Zimmer.

TERMS OF PREFERRED STOCK

There are 2,391,968 shares of the Company's 1995 Preferred Stock issued and
outstanding. The 1995 Preferred Stock votes as a class with the common stock,
except to the extent required otherwise by the laws of the state of Utah. The
holders of the 1995 Preferred Stock are entitled to dividends in the amount of
$0.05 per share per annum, payable 30 days after the end of each calendar year,
with the first payment to be made on January 31, 1996. During 1996, the Company
paid dividends of $120,000 with respect to the 1995 Preferred Stock. The
Company is prohibited from paying dividends with respect to any other class of
security until such time as all accrued dividends have been paid. Each share of
1995 Preferred Stock is convertible into two shares of common stock at the
election of the holder. If not otherwise converted, the 1995 Preferred Stock
automatically converts two years after the date of issuance. The Company has
the right to redeem the 1995 Preferred Stock on not less than 30 days written
notice at a price of $36.84 per share, plus any accrued but unpaid dividends.

In connection with the acquisition of Danube, the Company authorized the
1996 Series Preferred Stock consisting of 1,250,000 shares. Such shares are
entitled to cumulative cash dividends at the rate of $0.05 per annum, payable 31
days after the end of each fiscal year, with the first payment to be made
January 31, 1997. Since the Company does not have current or retained earnings
sufficient to pay a dividend, the dividend on the 1996 Series Preferred Stock
will not be paid for the 1996 year, but will accrue and be payable if and when
the Company has sufficient funds available. The 1996 Series Preferred Stock has
a liquidation preference of $5.00 per share and the Company has an option to
redeem the 1996 Series Preferred Stock at a price of $36.84 per share. The 1996
Series Preferred Stock shall automatically convert on July 3, 1997, at the rate
of two shares of common stock for each share of 1996 Series Preferred Stock.
The 1996 Series Preferred Stock is non-voting, except for those matters required
by law and any amendment of the articles of incorporation or bylaws that
adversely affects the rights of the 1996 Series Preferred Stock, any creation of
a class or series of stock that ranks senior or equivalent in the 1996 Series
Preferred Stock, any increase in the authorized amount of any shares issuable
under a class of preferred stock, or any decrease in the total number of
authorized shares of the 1996 Series Preferred Stock.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Prior to entering into the transaction with Energy Global and GlobeGas, the
Company had a number of related party transactions, descriptions of which are
set forth in the Company's prior reports. As part of the transaction with
Energy Global, the Company disposed of all of its other assets and paid all of
its other liabilities.

Unless otherwise indicated, the terms of the following transactions were
not the result of arm's length negotiations because such transactions were
between parties that were related or had other business, professional, or
personal relationships that may have affected terms of such transactions.

REINHARD RAUBALL AND WOLFGANG RAUBALL

Reinhard Rauball, the Chairman of the Board of Directors, and Wolfgang
Rauball, the Company's chief financial advisor and primary consultant, are
brothers (sometimes referred to as the "Rauballs"). Both gentlemen have been
key figures in arranging the original transaction with Energy Global and
GlobeGas, the acquisition of the concessions in Poland, and the later
acquisition of Danube, which holds concessions in the Czech Republic and
Slovakia. From time to time, the Rauballs, principally Wolfgang Rauball, have
arranged for equity and debt financing for the Company through parties with whom
they have previous business and personal relationships and have directly loaned
some of their own funds to the Company. Dr. Reinhard Rauball is an attorney and
has from time to time provided legal services to the Company.

While there is no formal agreement among the Rauballs and other debt and
equity holders, the practical result of the relationships is to vest control of
the Company in the Rauballs.

ACQUISITIONS

Energy Global

The Company issued 14,494,772 shares of common stock to acquire all of the
issued and outstanding stock of Energy Global, which had been formed as a
holding company for GlobeGas, an operating entity in which it held a minority
interest. In connection with this share exchange, Dr. Reinhard Rauball and
Wolfgang Rauball, affiliates of Energy Global, became controlling stockholders
and executive officers and directors of the Company. (See Note 1 to the
Financial Statements.)

The agreement with Energy Global required that the Company complete a stock
consolidation of one share for each twenty-four shares previously issued and
outstanding, reducing the prior shareholders' interest to approximately 10%.
Thus the former shareholders of Energy Global, including Dr. Reinhard Rauball
and Wolfgang Rauball, became the controlling persons of the Company. Mr. Fish
and Mr. Burdge of the United States continued to act as officers and directors
until December of 1995. All of the current officers and directors of the
Company have been appointed by the foreign shareholders. (See "ITEM 11.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.")

GlobeGas

The original asset of Energy Global was a 16% minority interest in
GlobeGas, a Netherlands corporation that held joint venture concessions in
Poland. (GlobeGas was an 85% partner with a formerly state owned Polish coal
company and held three different concessions for the exploration and
exploitation of methane coal bed gas reserves in the Upper Silesian region of
Poland.) From September of 1994 through May of 1995, the Company delivered
$3,380,963.00 in cash in exchange for additional interests in GlobeGas which
raised the Company's participation in GlobeGas to 19.13%. In May 1995, the
Company acquired the remaining 80.87% interest in GlobeGas in exchange for
$1,150,000 in cash, the issuance of 2,983,487 shares of restricted common stock,
and the issuance of 2,391,968 shares of newly created preferred stock (the "1995
Preferred Stock"), convertible at the rate of two shares of common stock for
each share of 1995 Preferred Stock. The Company originally booked its interest
in GlobeGas as an interest in a minority-held subsidiary, but since the
acquisition of the remaining interest in GlobeGas has restated its financial
presentation to reflect the historical cost basis of the assets held by GlobeGas
rather than the Company's purchase price, substantially reducing the carrying
value of these assets on the Company's balance sheets. (See Note 2 to the
Financial Statements.)

In May of 1996, in an unrelated transaction, the Company, through GlobeGas,
acquired the 15% interest in Pol-Tex held by the Polish state coal company in
exchange for a cash payment of $25,000 and the release of the obligation of the
Polish state coal company to reimburse GlobeGas, the Company's then wholly-owned
subsidiary, approximately $1,200,000 for drilling and development costs.

Danube

In July 1996, the Company continued in its quest to acquire additional gas
interests in Eastern Europe by acquiring Danube and the rights to participate in
Danube. Danube was a joint venture partner in agreements for the exploration
and production of natural gas in Slovakia and the Czech Republic. Both joint
ventures are with formerly state owned gas companies of Slovakia and the Czech
Republic. (See "ITEM 2. DESCRIPTION OF PROPERTIES.") Danube was acquired for
$3,000,000 in cash ($500,000 paid at closing and $2,500,000 which was due on or
before December 31, 1996, but which has not yet been paid) the issuance of
2,500,000 shares of the Company's restricted common stock, the issuance of
1,250,000 shares of a newly created preferred stock (the "1996 Preferred Stock")
which is convertible into an aggregate of 2,500,000 additional shares of the
Company's common stock, and the issuance of warrants to purchase up to 5,000,000
shares of common stock at $3.00 per share during the five years subsequent to
the closing. The Company also issued 12,500,000 shares of common stock to
Chemilabco B.V. ("Chemilabco") which held an interest in the operating
subsidiaries of Danube and options to participate in the Czech and Slovakian
Licenses. (The transaction was modified after the filing of the Company's 8-K
dated July 12, 1996, and the total amount of shares which may be issued under
all circumstances was substantially reduced. The net effect is to provide for
the eventual delivery of up to 8,500,000 fewer shares of the Company's common
stock to Chemilabco.) An outside investment group holds a 5% interest in the
gas projects of Danube that it received in exchange for a $1,000,000 investment
and which was granted prior to the acquisition of Danube by the Company.

In July of 1996, the Company added Dr. Martin A. Schuepbach, the president
of Danube, as a director of the Company and appointed him as the Company's
president and chief executive officer. Mr. Schuepbach has recently resigned as
a director and officer of the Company and has asserted a claim based on his
employment agreement. (See "ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION" and "ITEM 3. LEGAL PROCEEDINGS.")

The 12,500,000 shares of common stock were issued to Chemilabco in exchange
for services which it had previously provided to the Company and Danube,
participation rights held by Chemilabco, $500,000 in funding it had previously
provided to Danube, and the commitment to arrange for an additional $3,500,000
in financing for the Company. The financing commitment was reduced to
$2,200,000 (which the Company has received in the form of convertible
debentures), although the number of shares issued to Chemilabco was not
correspondingly reduced. A fee of $200,000 was paid to Herbert Zimmer in
connection with this transaction. (See discussion below under "Other
Relationships With European Consultants and Shareholders.") The $2,200,000
indebtedness was converted into 852,630 shares of common stock in April of 1997.
(See Item 6.)

OTHER RELATIONSHIPS WITH EUROPEAN CONSULTANTS AND SHAREHOLDERS

In addition to the Company's relationship with the Rauballs, the Company
has other related party transactions with its European advisors and shareholders
as follows:

Armando Ulrich currently acts as a consultant to the Company and is a
deputy officer of Pol-Tex. Mr. Ulrich is the person who originally introduced
the Company to the possible business transaction with Energy Global. Mr. Ulrich
also acts as an officer of Energy Global. Mr. Ulrich is affiliated with Sinbad
Ltd. which holds 715,742 shares of common stock of the Company, and Slovgold
Corporation which holds 250,000 shares of common stock. Mr. Ulrich was paid
$100,000 in cash finder's and consulting fees (including expense reimbursements)
in 1994, $69,447 in 1995, and $449,600 in 1996. (See Note 7 to the Financial
Statements and "ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT: Key Consultants.")

Herbert Zimmer, a certified accountant, holds 700,000 shares of common
stock and represents some of the Company's shareholders and debenture holders.
Mr. Zimmer has from time to time assisted the Company in completing its internal
accounting. Mr. Zimmer has received $70,000 as compensation for those services.
In addition, Mr. Zimmer was paid a fee of $200,000 in connection with the
issuance by the Company of $2,200,000 in convertible debentures. Mr. Zimmer
also provided a short-term loan to the Company of $1,800,000 in March of 1997,
which has subsequently been repaid. As a result of this transaction, an
employee of Mr. Zimmer was placed on the checking account of GlobeGas, the
principal operating subsidiary of the Company, and Mr. Zimmer has approval over
the expenditures. Mr. Zimmer has been treated as a control person by the
Company as a result of this relationship.

Ostrov Resources Ltd., a Canadian company and a shareholder of the Company,
originally held the rights to participate in the Polish concession and purchase
shares in GlobeGas. Ostrov provided approximately $500,000 in funding pursuant
to those original agreements but subsequently assigned all its rights to Energy
Global. Ostrov has also assisted the Company with short terms loans. Wolfgang
Rauball has longtime business ties with Ostrov.

The Company has received significant loans from Oxbridge Limited, the
parent of Chemilabco, the largest single shareholder of the Company. As of
December 31, 1996, the Company owed $1,750,000 to Oxbridge Limited.

In connection with the sale of Common Stock to certain European investors
in May of 1995 by the Company, a convertible debenture held in the name of Dr.
Rauball as trustee was converted to stock of the Company at the offering price
to the investors in the offering of $3.50 per share rather than the stated price
in the debenture of $5.00 per share.

RELATIONSHIP WITH MERLIN V. FISH, FORMER PRESIDENT OF THE COMPANY

Merlin V. Fish was the principal representative of the Company in
negotiating and completing the original transaction with Energy Global and
served as the Company's President until December 1995. As a fee for his
services in connection with the transaction, the Company released all of the
makers from a $215,490 receivable owed by him and his wife, Patricia Fish, and
Mr. and Mrs. Scott Waldron to the Company resulting from their previous purchase
of a subsidiary of the Company and released a $12,000 debt due from a then
affiliate of Mr. Fish.

In connection with the closing of the initial acquisition of Energy Global,
the Company issued 1,015,768 shares of common stock to MSA Mesa and its
affiliates. At the time of issuance, the Company was informed that MSA Mesa was
an unrelated third party. The Company now believes that MSA Mesa is, and was at
the time of the issuance, controlled, directly or indirectly through one or more
intermediaries, in part by Merlin V. Fish, the then president and a director of
the Company. Mr. Fish disclaims any beneficial ownership in or that he controls
MSA Mesa. As a result of the Company's conclusion that Mr. Fish's may be deemed
to control MSA Mesa, the Company has treated the issuance of shares to MSA Mesa
and its affiliates, as well as the $250,000 in cash which was paid to MSA Mesa,
as compensation paid to Mr. Fish in 1994. (See Statement of Stockholders'
Equity (Deficit) included in the Financial Statements.)

LOAN TRANSACTIONS

The Company has funded its operating requirements in part from funds
advanced from related parties. As of December 31, 1996, the Company owed an
aggregate of approximately $5,959,936 to such related parties. These advances
were evidenced by promissory notes that were due on demand and that bear
interest of 10% per annum. The due dates of these loans has recently been
extended to December 31, 1999, and are secured by shares of Pol-Tex Methane
Sp.z.o.o.

PART IV

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

EXHIBITS

<TABLE>
<CAPTION>
SEC
Exhibit Reference
Number Number Title of Document Location
- - ------- --------- --------------------------------------------------- ----------------------
<S> <C> <C> <C>
1 (2) Exchange Agreement between Northampton, Inc., Report on Form 8-K
and Energy Global, A.G. dated August 3, 1994,
Exhibit No. 1*

2 (2) Agreement and Plan of Merger between EuroGas, Inc., Report on Form 8-K
and Danube International Petroleum Company, Inc., dated July 12, 1996,
dated July 3, 1996, as amended Exhibit No. 5*

3 (3) Articles of Incorporation Registration Statement
on Form S-18, File
No. 33-1381-D
Exhibit No. 1*

4 (3) Amended Bylaws Annual Report on
Form 10-K for the
fiscal year ended
September 30, 1990,
Exhibit No. 1*

5 (3) Designation of Rights, Privileges, and Preferences Quarterly Report on
of 1995 Series Preferred Stock Form 10-QSB dated
March 31, 1995,
Exhibit No. 1*

6 (3) Designation of Rights Privileges and Preferences Report on Form 8-K
of 1996 Series Preferred Stock dated July 12, 1996,
Exhibit No. 1*

7 (3) Articles of Share Exchange Report on Form 8-K
dated August 3, 1994,
Exhibit No. 6*

8 (4) Warrant Agreement dated July 12, 1996, with Report on Form 8-K
Danube shareholders dated July 12, 1996,
Exhibit No. 2*

9 (4) Registration Rights Agreement dated July 12, 1996, Report on Form 8-K
with Danube shareholders dated July 12, 1996
Exhibit No. 3*

10 (4) Option granted to the Trustees of the Estate of Annual Report on
Bernice Pauahi Bishop Form 10-K for the
fiscal year ended
December 31, 1995,
Exhibit No. 10*

11 (4) Registration Rights Agreement by and among Annual Report on
EuroGas, Inc., and Kukui, Inc., and the Trustees of Form 10-K for the
the Estate of Bernice Pauahi Bishop fiscal year ended
December 31, 1995,
Exhibit No. 11*

12 (4) Convertible Debenture issued to Lux Immobilien Annual Report on
for $2,200,000 Form 10-K for the
fiscal year ended
December 31, 1995,
Exhibit No. 12*

13 (4) Option issued to OMV Aktiengesellschaft to acquire This Filing
up to 2,000,000 shares of restricted common stock

14 (10) Agreement in Principle between EuroGas, Inc., Annual Report on
and Chemilabco B.V., dated June 1996, Form 10-K for the
as amended November 1996 fiscal year ended
December 31, 1995,
Exhibit No. 13*

15 (10) 1996 Stock Option and Award Plan Annual Report on
Form 10-K for the
fiscal year ended
December 31, 1995,
Exhibit No. 14*

16 (10) Settlement Agreement by and among Kukui, Inc., and Annual Report on
Pol-Tex Methane, sp z.o.o., McKenzie Methane Form 10-K for the
Rybnik, McKenzie Methane Jastrzebie, GlobeGas, fiscal year ended
B.V. (formerly known as McKenzie Methane Poland, December 31, 1995,
B.V.), and the Unsecured Creditors' Trust of the Exhibit No. 15*
Bankruptcy Estate of McKenzie Methane Corporation

17 (10) Employment Agreement with Martin A. Schuepbach Report on Form 8-K
dated July 12, 1996 dated July 12, 1996,
Exhibit No. 6*

18 (10) General Agreement governing the operation of Report on Form 8-K
McKenzie Methane Poland, B.V. dated August 3, 1994,
Exhibit No. 2*

19 (10) Concession Agreement between Ministry of Annual Report on
Environmental Protection, Natural Resources, and Form 10-K for the
Forestry and Pol-Tex Methane Ltd. fiscal year ended
December 31, 1995,
Exhibit No. 18*

20 (10) Association Agreement between NAFTA a.s. Gbely Annual Report on
and Danube International Petroleum Company Form 10-K for the
fiscal year ended
December 31, 1995,
Exhibit No. 19*

21 (10) Agreement between Moravske' Naftove' Doly a.s. Annual Report on
and Danube International Petroleum Company Form 10-K for the
fiscal year ended
December 31, 1995,
Exhibit No. 20*

22 (10) Option to purchase shares of Northampton, Inc., in Report on Form 8-K
the name of Jill S. Holt dated August 3, 1994,
Exhibit No. 3*

23 (10) Form of Convertible Debenture Report on Form 8-K
dated August 3, 1994,
Exhibit No. 7*

24 (10) Form of Promissory Note, as amended, with attached Annual Report on
list of holders Form 10-K for the
fiscal year ended
December 31, 1995,
Exhibit No. 23*

25 (10) Amendment #1 to the Association Agreement Entered This Filing
on 13th July 1995, between NAFTA a.s. Gbely and
Danube International Petroleum Company

26 (10) Initial Agreement between Belmont Resources, Inc., This Filing
EuroGas Incorporated, and Danube International
Petroleum Company dated April 21, 1997

27 (10) Letter of Intent by and between Polish Oil and Gas This Filing
Company and Pol-Tex Methane, dated April 28, 1997

28 (21) Subsidiaries Annual Report on
Form 10-K for the
fiscal year ended
December 31, 1995,
Exhibit No. 24*

29 (27) Financial Data Schedule This Filing
</TABLE>

[FN]
*Incorporated by reference

REPORTS ON FORM 8-K

The Company did not file a report on Form 8-K during the quarter ended
December 31, 1996.

SIGNATURES

Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Company has caused this report to be
signed on its behalf by the undersigned, hereunto duly authorized.

EUROGAS, INC.

Dated: May 16, 1997 By /s/ Paul Hinterthur
--------------------------------------
Paul Hinterthur, President
(Principal Executive Officer)

Dated: May 16, 1997 By /s/ Hank Blankenstein
--------------------------------------
Hank Blankenstein, Secretary/Treasurer
(Principal Financial and Accounting
Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Company and in the capacities and on the dates indicated:

Dated: May 16, 1997 By /s/ Reinhard Rauball
--------------------------------------
Dr. Reinhard Rauball, Director

Dated: May 16, 1997 By /s/ Paul Hinterthur
--------------------------------------
Paul Hinterthur, Director

Dated: May , 1997 By
----- --------------------------------------
Dr. Gregory P. Fontana, Director

Dated: May , 1997 By
----- --------------------------------------
Dr. Hans Fischer, Director

Dated: May 16, 1997 By /s/ Hank Blankenstein
--------------------------------------
Hank Blankenstein, Director

EUROGAS, INC. AND SUBSIDIARIES
(An Exploration Enterprise in the Development Stage)

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
AND
FINANCIAL STATEMENTS

December 31, 1996 and 1995
<PAGE>

EUROGAS, INC. AND SUBSIDIARIES
(An Exploration Enterprise in the Development Stage)

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Certified Public Accountants F-2

Consolidated Balance Sheets--December 31, 1996
and 1995 F-4

Consolidated Statements of Operations for the Years
Ended December 31, 1996, 1995 and 1994 and for the
Cumulative Period from June 7, 1991 (Date of Inception)
Through December 31, 1996 F-6

Consolidated Statements of Stockholders' Equity (Deficit)
for the Period June 7, 1991 (Date of Inception) Through
December 31, 1993 and for the Years Ended December
31, 1994, 1995 and 1996 F-7

Consolidated Statements of Cash Flows for the Years
Ended December 31, 1996, 1995 and 1994 and for the
Period June 7, 1991 (Date of Inception) Through
December 31, 1996 F-9

Notes to Consolidated Financial Statements F-11
</TABLE>

<PAGE>
HANSEN, BARNETT & MAXWELL
A Professional Corporation
CERTIFIED PUBLIC ACCOUNTANTS
(801) 532-2200 Fax (801) 532-7944
345 East 300 South, Suite 200
Salt Lake City, Utah 84111-2693
Member of AICPA Division of Firms
Member of SECPS
Member of Summit International Associates

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders
Eurogas, Inc.

We have audited the accompanying consolidated balance sheets of Eurogas, Inc.
(a Utah corporation) and Subsidiaries (an exploration enterprise in the
development stage, referred to herein as "the Company") as of December 31,
1996 and 1995, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for each of the three years in
the period ended December 31, 1996, and for the cumulative period from June 7,
1991 (date of inception) through December 31, 1996. 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 did not audit the consolidated financial
statements of Globegas B.V. and subsidiaries, a wholly-owned subsidiary, as of
December 31, 1995, for the years ended December 31, 1995 and 1994 and for the
cumulative period from June 7, 1991 (date of inception) through December 31,
1995, included in the period from June 7, 1991 (date of inception) through
December 31, 1996, which statements reflect total assets of $7,569,422 as of
December 31, 1995, and net loss of $2,210,336 and $2,204,283, respectively for
each of the two years in the period ended December 31, 1996 and $10,246,293
for the cumulative period from June 7, 1991 through December 31, 1995. Those
statements were audited by other auditors whose report has been furnished to
us and included an explanatory paragraph describing conditions which raised
substantial doubt about the ability of Globegas B.V. to continue as a going
concern. Our opinion, insofar as it relates to the amounts included for
Globegas B.V. and subsidiaries, is based solely on the report of the other
auditors.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated 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 and the report of the other auditors provide a reasonable
basis for our opinion.

In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements of Eurogas, Inc. and Subsidiaries referred
to above present fairly, in all material respects, the financial position of
Eurogas, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1996, and for the cumulative period from June
7, 1991 (date of inception) through December 31, 1996 in conformity with
generally accepted accounting principles.
(Continued)

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
(CONTINUED)

The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. The Company has experienced
losses since inception as a result of its exploration activities and from
general and administrative expenses relating to its development stage
activities. As discussed in Note 1 to the consolidated financial statements,
the Company is in the process of exploring coal bed methane gas interests but
development activities or commercial production has not begun. In addition,
the future of the Company is dependent on obtaining additional financing and
compliance with its concession agreements. These factors, among others, as
discussed in Note 1 of the consolidated financial statements, raise
substantial doubt about the Company's ability to continue as a going concern.
The consolidated financial statements do not include any adjustments which
might result from the outcome of these uncertainties.

/s/ Hansen, Barnett & Maxwell

HANSEN, BARNETT & MAXWELL

Salt Lake City, Utah
May 15, 1997
<PAGE>

EUROGAS, INC. AND SUBSIDIARIES
(An Exploration Enterprise in the Development Stage)
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
ASSETS
December 31,
1996 1995
------------- ------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 642,605 $ 72,212
Other receivables 122,047 19,691
Other current assets 4,942 11,810
------------- ------------
Total Current Assets 769,594 103,713

Property and Equipment
Mineral interests in unproved
properties, net of valuation
allowance 14,252,754 7,037,244
Other property and equipment 2,423,039 2,393,611
16,675,793 9,430,855
Less: accumulated depreciation (2,144,11) (1,955,074)
------------- ------------
Net Property and Equipment 14,531,680 7,475,781

Goodwill, net 14,319 19,862

Deposits and Long-Term Prepayments 586,546 81,011
------------- ------------
Total Assets $ 15,902,139 $ 7,680,367
============= ============
</TABLE>
(Continued)

The accompanying notes are an integral part of these financial
statements.
<PAGE>

EUROGAS, INC. AND SUBSIDIARIES
(An Exploration Enterprise in the Development Stage)
CONSOLIDATED BALANCE SHEETS (CONTINUED)

<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
December 31,
1996 1995
------------ ------------
<S> <C> <C>
Current Liabilities
Accounts payable $ 1,389,859 $ 327,193
Accrued expenses 2,659,721 1,890,779
Accrued taxes 911,051 911,051
Notes payable - current portion 3,688,788 2,047,696
Notes payable to related parties -
current portion 1,062,091 1,434,904
------------- ------------
Total Current Liabilities 9,711,510 6,611,623

Long-Term Debt
Notes payable 5,733,702 1,000,000
Notes payable to related parties 4,897,845 3,011,750
------------- ------------
Total Long-Term Debt 10,631,547 4,011,750

Minority Interest 950,000 -

Stockholders' Deficit
Preferred stock, $.001 par value,
3,641,968 shares and 2,391,968
shares authorized, issued and
outstanding 3,642 2,392
Common stock, $.001 par value,
325,000,000 shares authorized,
49,143,862 shares and 32,974,033
shares issued and outstanding 49,144 32,974
Additional paid-in capital 14,842,922 10,895,071
Cumulative foreign currency translation
adjustment (14,749) (14,749)
Deficit accumulated during the
development stage (20,271,877) (13,858,694)
------------- ------------
Total Stockholders' Deficit (5,390,918) (2,943,006)

Total Liabilities and Stockholders' Deficit $ 15,902,139 $ 7,680,367
============= ============
</TABLE>

The accompanying notes are an integral part of these financial
statements.
<PAGE>

EUROGAS, INC. AND SUBSIDIARIES
(An Exploration Enterprise in the Development Stage)
CONSOLIDATED STATEMENTS OF OPERATIONS

Operating Expenses
Impairment of mineral
interests in property - - - 969,101
Depreciation and valuation
allowance 132,459 480,999 619,913 2,095,879
General and administrative 4,739,380 3,528,114 2,666,204 13,686,114
----------- ----------- ----------- ------------
Total Operating Expenses 4,871,839 4,009,113 3,286,117 16,751,094
----------- ----------- ----------- ------------
Other Income (Expenses)
Interest income 18,588 9,580 19,251 298,842
Interest expense (1,057,039) (644,991) (372,815) (2,333,642)
Exchange gains (losses),
net (401,141) (81,213) 95,374 (550,298)
Other income 48,840 16,184 - 65,024
----------- ----------- ------------ ------------
Other Income (Expenses) (1,390,752) (700,440) (258,190) (2,520,074)
----------- ----------- ------------ ------------
Loss Before Income Taxes (6,262,591) (4,709,553) (3,544,307) (19,271,168)

Benefit from (Provision For)
Income Taxes - 468,148 (155,132) (763,941)
----------- ----------- ------------ ------------
Net Loss (6,262,591) (4,241,405) (3,699,439) (20,035,109)
Dividends Applicable to
Preferred Shares 150,592 86,176 - 236,768
----------- ----------- ----------- ------------
Net Loss Applicable to
Common Shares $(6,413,183) $(4,327,581) $(3,699,439) $(20,271,877)
=========== =========== =========== ============
Net Loss Per Common Share $ (0.16) $ (0.13) $ (0.15) $ (0.78)
=========== =========== =========== ============
Weighted Average Number
of Common Shares Used
In Per Share Calculation 41,059,000 32,459,436 25,249,825 26,018,412
=========== =========== =========== ============

</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>

EUROGAS, INC. AND SUBSIDIARIES
(An Exploration Enterprise in the Development Stage)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
Cumulative Deficit
Foreign Accumulated Total
Preferred Stock Common Stock Additional Currency During the Stockholders'
-------------------- -------------------- Paid-In Translation Development Equity
Shares Amount Shares Amount Capital Adjustment Stage (Deficit)
---------- -------- ---------- -------- ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 7, 1991
(Date of Inception) - $ - - $ - $ - $ - $ - $ -

Cash contributed as capital
investment without issuance
of stock, prior to March 1992 - - - - 3,675,264 - - 3,675,264
Issuance of common and preferred
stock, $0.00 pershare, for cash,
July 1992 2,391,968 2,392 14,494,772 14,495 6,233 - - 23,120
Issuance of common stock for
cash, $1.34 per share,
September 24, 1993 - - 2,983,487 2,983 3,997,017 - - 4,000,000
Foreign currency translation
adjustment - - - - - 16,181 - 16,181
Net loss for the period from
date of inception through
December 31, 1993 - - - - - - (5,831,674) (5,831,674)
--------- ------ ---------- ------- ----------- -------- ------------ -----------
Balance December 31, 1993 2,391,968 2,392 17,478,259 17,478 7,678,514 16,181 (5,831,674) 1,882,891
Issuance of common stock upon
reorganization with Northampton,
Inc. $0.00 per share, August 3,
1994 - - 2,844,055 2,844 (1,858) - - 986
Issuance of common stock upon
acquisition of Energy Global
A.G., $0.00 per share,
August 2, 1994 - - 217,043 217 493 - - 710
Issuance of common stock,
for cash, $0.16 per share,
August 2, 1994 - - 10,377,189 10,377 1,450,028 - - 1,460,405
Issuance of common stock for
compensation to officer, $0.24
per share, August 3, 1994 - - 1,015,768 1,016 242,768 - - 243,784
Foreign currency translation
adjustment - - - - - (30,930) - (30,930)
Net loss - - - - - - (3,699,439) (3,699,439)
--------- ------ ---------- ------- ----------- -------- ----------- -----------
Balance - December 31, 1994 2,391,968 2,392 31,932,314 31,932 9,369,945 (14,749) (9,531,113) (141,593)

Issuance of common stock upon
exercise of stock options for cash,
$0.24 per share, various dates - - 157,793 158 38,648 - - 38,806
Issuance of common stock for
compensation to officer upon
exercise of stock option, April
13, 1995, $0.00 per share - - 41,667 42 9,958 - - 10,000
Distribution to two shareholders
April 12, 1995 - - - - (1,150,000) - - (1,150,000)
Issuance of common stock for cash and
conversion of a $1,671,567 debenture,
$3.12 per share, net of $75,546
offering costs, July 3, 1995 - - 842,259 842 2,626,520 - - 2,627,362
Dividends on preferred shares - - - - - - (86,176) (86,176)
Net loss - - - - - - (4,241,405) (4,241,405)
--------- ------ ---------- ------- ----------- -------- ------------ -----------
Balance - December 31, 1995 2,391,968 $2,392 32,974,033 $32,974 $10,895,071 $(14,749) $(13,858,694) $(2,943,006)
(Continued)

</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>

EUROGAS, INC. AND SUBSIDIARIES
(An Exploration Enterprise in the Development Stage)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(Continued)

<TABLE>
<CAPTION>
Cumulative Deficit
Foreign Accumulated Total
Preferred Stock Common Stock Additional Currency During the Stockholders'
-------------------- -------------------- Paid-In Translation Development Equity
Shares Amount Shares Amount Capital Adjustment Stage (Deficit)
---------- -------- ---------- -------- ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1995 2,391,968 $2,392 32,974,033 $32,974 $10,895,071 $(14,749) $(13,858,694) $(2,943,006)

Issuance of common stock for
cash,$2.78 per share, June 20,
1996 - - 18,912 19 6,789 - - 6,808

Issuance of common stock upon
conversion of debentures, $2.96
per share, March and July, 1996 - - 1,128,917 1,129 3,340,621 - - 3,341,750

Issuance of common stock as
settlement costs, $4.58 per share - - 22,000 22 100,678 - - 100,700

Issuance of preferred and common
stock for purchase of subsidiary
$0.03 per share, July 3, 1996 1,250,000 1,250 15,000,000 15,000 499,763 - - 516,013

Dividends on preferred shares - - - - - - (150,592) (150,592)

Net loss for the year ended
December 31, 1996 - - - - - - (6,262,591) (6,262,591)
--------- ------ ---------- ------- ----------- -------- ------------ -----------
Balance - December 31, 1996 3,641,968 $3,642 49,143,862 $49,144 $14,842,922 $(14,749) $(20,271,877) $(5,390,918)
========= ====== ========== ======= =========== ======== ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>

EUROGAS, INC. AND SUBSIDIARIES
(An Exploration Enterprise in the Development Stage)
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
For the Cumulative
Period from June 7,
1991 (Date of
For the Years Ended Inception) through
December 31, December 31,
1996 1995 1994 1996
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss $(6,262,591) $(4,241,405) $(3,699,439) $(20,035,109)
Adjustments to reconcile
net loss to cash
provided by operating
activities:
Impairment of mineral
interests in properties - - - 969,101
Depreciation and amortization 132,458 480,999 619,913 2,095,878
Compensation paid with
issuance of common stock 351,808 10,000 243,784 605,592
Exchange (loss) gain (401,141) (81,213) 95,374 (550,298)
Changes in assets and
liabilities, net of asseets
acquired:
Receivables (97,595) 11,155 10,100 24,398
Accounts payable (210,990) 177,508 (40,618) 184,680
Accrued liabilities 2,468,676 1,746,946 181,104 4,587,217
Income tax payable - (468,938) 154,656 762,675
Other 33,903 9,200 (13,797) (92,544)
----------- ----------- ----------- ------------
Net Cash Used in
Operating Activities (3,985,472) (2,355,748) (2,448,923) (11,448,410)
----------- ----------- ----------- ------------
Cash Flows From Investing Activities
Purchases of mineral
interests in properties (3,335,616) (1,261,295) (1,650,424) (11,341,961)
Purchases of property and
equipment (32,726) (33,029) (204,149) (2,426,337)
Acquisitions of subsidiaries,
net of cash acquired 181,743 - 3,350 185,093
Increase in deposits and
prepayments (540,000) - - (540,000)
----------- ----------- ----------- ------------
Net Cash Used In
Investing Activities (3,726,599) (1,294,324) (1,851,223) (14,123,205)
----------- ----------- ----------- ------------
Cash Flows From Financing Activities
Proceeds from issuance of
debt - related parties 4,542,487 3,398,854 3,541,802 14,874,010
Repayment of debt -
related parties (1,002,026) (2,293,898) (187,345) (4,927,441)
Proceeds from issuance
of debt 4,846,995 1,245,196 173,929 7,837,526
Principal payments on debt (80,123) (397,500) - (1,390,429)
Proceeds from issuances of
common stock 6,808 974,060 1,460,765 10,116,537
Dividends paid on preferred (120,000) - - (120,000)
stock
----------- ----------- ----------- ------------
Net Cash Provided By
Financing Activities 8,194,141 2,926,712 4,989,151 26,390,203
----------- ----------- ----------- ------------
Effect of Exchange Rate Changes
on Cash and Cash Equivalents 88,323 (2,253) (57,386) (175,983)

Net Increase (Decrease) in
Cash and Cash Equivalents 570,393 (725,613) 631,619 642,605

Cash and Equivalents at
Beginning of Period 72,212 797,825 166,206 -
----------- ----------- ----------- ------------
Cash and Equivalents at
End of Period $ 642,605 $ 72,212 $ 797,825 $ 642,605
=========== =========== =========== ============
</TABLE>

The accompanying notes are an integral part of these financial
statements.
<PAGE>

EUROGAS, INC. AND SUBSIDIARIES
(An Exploration Enterprise in the Development Stage)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

<TABLE>
<CAPTION>
For the Cumulative
Period from June 7,
1991 (Date of
For the Years Ended Inception) through
December 31, December 31,
1996 1995 1994 1996
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Supplemental Disclosure of
Cash Flow Information
Cash paid for interest $ 97,162 $ 8,025 $ 22,698 $ 127,885
Cash paid for income taxes - - - -

</TABLE>

Supplemental Schedule of Noncash Investing and Financing Activities

During 1995, common stock of the Company was issued upon conversion of a
$1,671,567 convertible debenture along with accrued interest in the amount of
$20,541. Notes payable of $1,150,000 were issued to two shareholders as a
distribution from equity. The notes were immediately repaid.

During 1996, 1,128,917 shares of common stock were issued upon converstion of
$4,091,750 of note payables and related interest. The company purchased all of
the common stock of Danube International Petroleum Company for $600,000. In
conjunction with the acquisition, liabilities were incurred and preferred and
common stock was issued as follows:

<TABLE>
<CAPTION>
<S> <C>
Fair value of assets acquired $ 4,999,405
Liabilities assumed (433,392)
Amount due to sellers (2,500,000)
Minority interest recognized (950,000)
Common and preferred stocks issued (516,013)
-----------
Cash paid for common stock 600,000

Less cash acquired (781,743)
-----------
Net cash received $ (181,743)
===========
</TABLE>

The accompanying notes are an integral part of these financial
statements.
<PAGE>

EUROGAS, INC. AND SUBSIDIARIES
(An Exploration Enterprise in the Development Stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization--Globegas B.V. was formed as McKenzie Methane Poland B.V. on
June 7, 1991 under the laws of the Netherlands. Its name was changed to
Globegas B.V. (Globegas) on August 25, 1995. Upon its formation, Globegas
entered into three joint venture agreements with the Polish Ministry of
Environmental Protection of Natural Resources and Forestry whereby
Globegas obtained an interest in three 35 year coal bed methane gas
concessions located in the Upper Silesian Coal Fields of Poland.
Beginning in August 1994, Globegas entered into reorganization
transactions with Eurogas, Inc. and Energy Global A.G. whereby
Globegas was reorganized into Eurogas, Inc., as described in Note 2.
In August 1996, Eurogas, Inc. acquired Danube International Petroleum
Company, Inc. and thereby obtained an interest in natural gas properties in
Slovakia and the Czech Republic.

Principles of Consolidation--The accompanying consolidated financial
statements include the accounts of all majority-owned subsidiaries and joint
ventures, including Danube International Petroleum Company which was acquired
in July 1996 (See Note 2). All significant intercompany accounts and
transactions have been eliminated in consolidation.

Business Condition--The accompanying financial statements have been prepared
in conformity with generally accepted accounting principles, which
contemplates continuation of the Company as a going concern. However, at
December 31, 1996, current liabilities exceeded current assets by $8,941,916
and the Company has incurred losses of $20,271,877 since its inception in
June, 1991, and the Company had a stockholders' deficit of $5,390,918. As a
development stage enterprise, the Company's activities have been limited to
exploration activities with no identified proven reserves nor any production
of methane gas to date. Realization of the amounts included in gas properties
is dependent on the Company identifying and developing sufficient quantities
of proven and probable reserves of methane gas. If exploration activities
prove to be unsuccessful, all or a portion of the mineral interests in
unproved properties will be charged to operations. These factors raise
substantial doubt about the ability of the Company to continue as a going
concern.

In order to continue, the Company will need to obtain additional financing
sufficient to meet the short and long term obligations of the Company and to
fund the exploration and development of reserves of methane and natural gas,
if any, on concessions and licenses currently held by the Company. Management
plans to obtain needed financing through issuance of equity and debt securities.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should the Company be
unable to continue in existence.

Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions which affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts
of expenses duringthe reporting period. Actual results could differ from those
estimates.

Exploration Stage Activities--Since its formation, the Company's oil and gas
activities have consisted of the acquisition of unproved and undeveloped mineral
interests and of exploratory drilling. At December 31, 1996, the Company has
not identified any proven reserves associated with its mineral interests in
gas properties and is therefore considered to be in the exploration stage for
purposes of its oil and gas operations. However, it is considered a
development stage enterprise for financial reporting purposes.

Inventory--Inventories, consisting primarily of materials and supplies, are
stated at the lower of cost or market, cost being determined by the average
cost method.

Mineral Interests in Properties--The full cost method of accounting is used
to account for mineral interests in properties. Under this method all costs
incidental to the acquisition, exploration, and development of gas properties
are capitalized. These costs include costs of drilling and equipping wells,
as well as directly related overhead costs which include the costs of Company
owned equipment. Costs of unproved properties are assessed periodically and
any resulting provision for impairment which is required is charged to
operations. All capitalized costs of gas properties, including the estimated
future costs to develop proved reserves, if found, will be amortized using
the units-of-production method.

Other Property and Equipment--Other property and equipment are stated at
cost. Minor repairs, enhancements and maintenance costs are expensed when
incurred; major improvements are capitalized. Depreciation of property is
provided on a straight-line basis over the estimated useful lives, as follows:
buildings--40 years; equipment--3 to 5 years. Upon retirement, sale, or other
disposition of equipment, the cost and accumulated depreciation are
eliminated from the accounts, and gain or loss is included in operations.
Depreciation expense for the years ended December 31, 1996, 1995 and 1994
was $196.232, $480,999 and $619,913, respectively, of which $63,773 was
capitalized in mineral interests in 1996.

Financial Instruments --The Company considers all highly-liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents. The amounts reported as cash and cash equivalents, other
receivables, accounts payable and notes payable are considered to be
reasonable approximations of their fair values. The fair value estimates
presented herein were based on market information available to management
at the time of the preparation of the financial statements.

The Company had cash in Polish banks in the amount of $63,385 at December 31,
1996 for which the Company would incur certain costs if the cash were to be
transferred out of Poland.

Loss Per Share--Loss per share is calculated using the weighted average
number of shares of common stock outstanding during each period with the
exception that shares issued in the reorganization of Globegas into Eurogas
have been presented as if they were outstanding for all periods presented.
Common stock equivalents which would decrease the loss per share have not
been included in the calculation of loss per share.

Foreign Currency Translation--Foreign currency exchange gains and losses have
been reflected in the results of operations. Due to the highly-inflationary
Polish economy in which the Polish subsidiaries operate, the financial
statements of Globegas and its subsidiaries from inception through December
31, 1993 were prepared using the Dutch Guilder as the functional currency.
The consolidated balance sheets were then translated into U.S. dollars at the
year-end rates of exchange and the consolidated statements of operations were
translated at the weighted average exchange rates during each reporting
period. The effects of translating the financial statements into U.S.
dollars were recorded as a separate component of stockholders' equity. The U.S.
dollar became the functional currency of the Company and its subsidiaries
beginning in 1994. Accordingly, the financial statements of foreign
subsidiaries since 1994 have been measured in U.S. dollars using historical
exchange rates and all resulting exchange gains and losses have been included
in the results of operations.

Income Taxes--Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences in the balances of
existing assets and liabilities on the Company's financial statements and
their respective tax bases and attributable to operating loss carry forwards,
computed at enacted tax rates when such amounts are expected to be realized
or settled.

Effect of Recently Issued Financial Accounting Standards--In March 1995, the
Financial Accounting Standards Board (FASB) issued SFAS No. 121, Accounting
for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of, which became effective for the Company in 1996. The statement requires
the recognition of an impairment loss for long-lived assets when the estimate
of undiscounted future cash flows expected to be generated by the asset are
less than its carrying amount. Measurement of the impairment loss is based
on fair value of the asset. Prior to 1996, it has been the Company's policy
to evaluate its assets for possible impairment and recognize an impairment loss
if necessary. Accordingly, the impact of adoption of SFAS No. 121 in 1996
was not material to the consolidated financial statements of the Company.

In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation, which encourages the recognition of compensation from stock
options granted to employees based on the fair value of the options at the
grant dates. However, SFAS 123 permits the continued use of the intrinsic
value method under APB Opinion 25, Accounting for Stock Issued to Employees
and related Interpretations. The Company has continued to account for
stock-based compensation in accordance with APB Opinion 25.

NOTE 2--BUSINESS ACQUISITIONS

Acquisition of Energy Global A.G. and Northampton, Inc.--Energy Global A.G.
(EGA), a Liechtenstein corporation, was formed May 16, 1994 for the purpose
of investing in Globegas. From its formation through August 2, 1994, EGA
issued common stock for $34,000, which it expended in its development stage
activities, and borrowed $313,500, which it invested in Globegas.
Northampton, Inc., a publicly held Utah corporation, was incorporated October
7, 1985. It had business activities in prior periods; however, all previous
operations and assets were disposed of by August 2, 1994. On August 29, 1994,
its name was changed to Eurogas, Inc. (Eurogas).

From August 2, 1994 through October 1995, Globegas and its stockholders
entered into agreements to sell all of the outstanding capital stock of
Globegas to EGA. The agreements ultimately resulted in 100 percent ownership
of Globegas by EGA as of October 4, 1995. On August 3, 1994, Eurogas entered
into an acquisition agreement to acquire all of EGA's capital stock. As a
result of these agreements, between August 3, 1994 and September 22, 1995,
Eurogas issued 17,478,259 shares of common stock and 2,391,968 shares of
preferred stock to the Globegas stockholders and to entities which held
options to acquire Globegas stock. Eurogas issued 217,043 shares of common
stock in exchange for all of the EGA capital stock outstanding prior to the
acquisition. EGA only had nominal net assets at August 3, 1994. In May 1995,
Eurogas delivered and paid promissory notes to two Globegas stockholders
totaling $1,150,000. These notes were issued and paid in connection with the
acquisition and have been accounted for as distributions to those
shareholders. In November 1996, Eurogas also issued 100,000 shares of common
stock and options to purchase 2,000,000 shares of common stock at $3.50 to
$6.00 per share, based upon when the options are exercised, to settle a
claim associated with Globegas at the date of the acquisition.

These transactions were accounted for as the reorganization of Globegas and
the acquisition of EGA and Eurogas. Prior to the reorganization, Eurogas had
2,844,055 common shares issued and outstanding. In the reorganization,
the assets and liabilities of EGA and Eurogas were recorded at their
historical cost, which was considered to be their fair value because
EGA and Eurogas had no operations or material assets.

Legal and professional costs, in the amount of $27,714, were incurred in
connection with the reorganization and have been recorded as goodwill.
Goodwill is being amortized over a period of five years. The accompanying
financial statements have been restated for all periods presented to reflect
the preferred and common shares issued to the Globegas shareholders as a
result of the reorganization. The operations of EGA and Eurogas have been
included in the accompanying consolidated financial statements from the date
of the reorganization. Operations of EGA and Eurogas were immaterial prior to
the reorganization; therefore, pro forma operating information regarding the
prior operations is not presented.

Acquisition of Danube International Petroleum Company, Inc.--On July 12,
1996, the Company completed an acquisition of Danube International Petroleum
Company, Inc. and Subsidiaries (Danube). Danube is a joint venture partner in
agreements for the exploration and production of natural gas in Slovakia and
the Czech Republic. All of the issued and outstanding common stock of Danube
was acquired for $500,000 paid at closing, an obligation to pay $2,500,000 on
or before December 31, 1996, 15,000,000 shares of the Company's common
stock, 1,250,000 shares of a newly created 1996 Series preferred stock which
is convertible into an aggregate of 2,500,000 shares of common stock, and the
issuance of warrants to purchase up to 5,000,000 shares of common stock at
$3.00 per share during the five years subsequent to the date of the
acquisition. The obligation for $2,500,000 was not paid by December 31, 1996
and is therefore in default. The acquisition of Danube was accomplished by
Eurogas forming a wholly-owned subsidiary incorporated in Texas and Danube
merging into the subsidiary.

The acquisition was accounted for under the purchase method of accounting,
with the total purchase price being $3,616,013, determined primarily based
upon the fair value of the mineral interests acquired. Accordingly, the
preferred stock and common stock issued were assigned values of $73,716 and
$442,297, respectively, which was equal to the par value of these shares.
Goodwill was not recognized from the acquisition but the portion of the purchase
price in excess of historical cost was allocated to the mineral interests in
unproved properties. The operations of Danube have been included in the results
operations from July 1, 1996. Summary pro forma results of operations for the
years ended December 31, 1996 and 1995, assuming the acquisition occurred on
January 1, 1995, are as follows (unaudited):

<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Revenues $ - $ -
Net loss (6,712,908) (4,443,798)
Net loss applicable to common shares (6,894,750) (4,592,474)
Net loss per common share (0.14) (0.10)
</TABLE>

Acquisition of Remaining Interest in Pol-Tex Methane--On May 17, 1996 the
Company acquired the remaining 15% interest in the Company's subsidiary,
Pol-Tex Methane Co. Ltd., from the Polish Government for a cash payment of
$25,000 and the release of the obligation of the Polish Government to fund
development costs of the Concession.

NOTE 3--MINERAL INTERESTS IN UNPROVED PROPERTIES

The Company has gas properties located in Poland, Slovakia and the Czech
Republic. At December 31, 1996, a determination was not made, nor has a
determination been subsequently made, regarding the extent of any potential
gas reserves. However, management has evaluated the unproved properties at
December 31, 1996 and subsequently, and determined that recognition of
impairment of those properties was not necessary. No production has been
obtained from the unproved properties and, consequently, amortization of the
cost of the properties has not begun. If and when proved reserves are determined
to exist in commercial quantities, amortization of capitalized costs will be
recognized under the units-of-production method. Due to drilling in certain
areas for which the Company did not have its concession confirmed and currently
has no rights to future production, impairment has been deemed to have occurred
and a valuation allowance equal to the costs incurred for those areas has been
recognized as a reduction in the carrying value of unproved properties and
was expensed during the year ended December 31, 1993.

Costs incurred for mineral interests in gas properties consist of the
following:

<TABLE>
<CAPTION>
Acquisition Exploration
Period Incurred Costs Costs
-------------------------- ----------- -----------
<S> <C> <C>
Period from June 7, 1991 to
December 31, 1991 $ - $ 1,292,720
Year end December 31, 1992 - 1,850,442
Year end December 31, 1993 - 1,951,464
Year end December 31, 1994 - 1,650,424
Year end December 31, 1995 - 1,261,295
Year end December 31, 1996 4,217,069 2,998,441
------------ ------------
$ 4,217,069 $ 11,004,786
============ ============
</TABLE>

The Company had the following capitalized costs relating to gas properties at
December 31:

<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Mineral interests in unproved properties $ 15,221,855 $ 8,006,345
Less accumulated valuation allowance (969,101) (969,101)
------------ ------------
Net Capitalized Costs $ 14,252,754 $ 7,037,244
============ ============
</TABLE>

On March 24, 1997, the Company entered into an agreement with a subsidiary of
Texaco to sell the Pol-Tex concession, the largest of the coal bed methane
gas concession held by the Company, and substantially all of the Pol-Tex's
other property and equipment related to the Pol-Tex concession to the Texaco
subsidiary. The agreement also grants first right of refusal to the Texaco
subsidiary to obtain a controlling interest in two other concessions in Poland
that were then held by the Company. In exchange for the assets sold, the Company
received a carried net profits interest in the Pol-Tex concession, which
provides that the Company will be paid 14 to 20 percent of the net profits from
the concession after deducting the Texaco subsidiary's capital and operating
costs, based on production from the concession. The sale will be accounted for
as a change in the nature of the interest held in the concession and the other
assets and, accordingly, no gain or loss will be recognized from the
transaction in 1997.

NOTE 4--OTHER PROPERTY AND EQUIPMENT

Other property and equipment consist of the following at December 31:

<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Land $ 17,725 $ 13,449
Buildings 92,914 240,991
Drilling rigs and related equipment 2,312,400 2,139,171
------------ ------------
2,423,039 2,393,611
Less: Accumulated depreciation (2,144,113) (1,955,074)
------------ ------------
Net Property and Equipment $ 278,926 $ 438,537
============ ============
</TABLE>

NOTE 5--NOTES PAYABLE TO RELATED PARTIES

Loans from related parties at December 31, 1996 and 1995 were as follows:

1996 1995
------------ ------------
<S> <C> <C>
Loans from an officer and director who is
acting as trustee on behalf of others,
interest at 7.5%, due on demand and in
1999, unsecured. $ 1,405,439 $ 428,294
Loan from a company associated with an
officer and director,due in 1999 with
interest at 7.5%, unsecured. 269,643 -
Loan from an officer and director, due
in 1999, interest at 7.5%, unsecured. 1,142,047 491,231
Loan from the spouse of an officer and
director, due on demand, interest at
7.5%, unsecured. - 58,286
Loans from former officers, directors
and employees, due on demand with
interest at 10%, unsecured. 290,206 457,093
Amount due to a former officer, due
on demand with interest at 10%,
unsecured. 652,601 -
7.5% convertible debentures payable
to an officer and director who is
acting as trustee on behalf of others,
interest and principal was due June
30, 1999, converted during 1996 into
1,003,917 shares of common stock. - 3,011,750
7.5% convertible debenture, payable to
a consultant who provides managerial
services to the Company. Interest and
principal was due July 5, 2001,
converted during 1997 to 852,630
shares of common stock. 2,200,000 -
------------ ------------
Total Notes Payable to Related Parties 5,959,936 4,446,654
Less: Current Portion (1,062,091) (1,434,904)
------------ ------------
Notes Payable to Related Parties - Long-Term $ 4,897,845 $ 3,011,750
============ ============
</TABLE>

NOTE 6--NOTES PAYABLE

Other loans and notes payable at December 31, 1996 and 1995 were as follows:

<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
7.5% to 10% Loans due on demand
and in July 1996. $ - $ 245,196

Amount due to the former owners of
Danube, principal due December 31, 1996,
interest accrues at 10%, unsecured. 1,847,399 -
Loans due during 1999, interest at 10%,
unsecured. 4,022,591 -
7% note payable to an Austrian oil and
gas firm payable $400,000 on March 31,
1995 with quarterly installments of
$260,000 plus interest due beginning
July 1, 1995, secured by drilling
equipment, office equipment and buildings. 1,802,500 1,802,500
7.5% convertible debentures, interest
and principal due during 2001. Convertible
into 670,370 shares of common stock. 1,750,000 1,000,000
------------ ------------
Total Notes Payable 9,422,490 3,047,696

Less: Current Portion (3,688,788) (2,047,696)
------------ ------------
Note Payable - Long-Term $ 5,733,702 $ 1,000,000
============ ============
</TABLE>

Having not met the payment schedule for the Austrian oil and gas firm note,
the entire note was classified as current at December 31, 1996. Subsequent to
December 31, 1996, the Company paid the principal and interest due (unaudited).

Annual maturities of notes payable to related parties and others are as
follows:

<TABLE>
<CAPTION>
<S> <C>
Due during the year ended December 31:
1997 $ 4,750,879
1998 -
1999 6,681,547
2000 -
2001 3,950,000
------------
$ 15,382,426
============
</TABLE>

NOTE 7--INCOME TAXES

December 31,
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
The benefit from (provision for) income
taxes, which is all current, consists of
the following:

Foreign Taxes $ - $ 468,148 $ (155,132)
=========== =========== ===========
Deferred tax assets are comprised
of the following:
Tax loss carry forwards $ 1,001,917 $ 706,040 $ 485,475
Less valuation allowance (1,001,917) (706,040) (485,475)
----------- ----------- -----------
Net Deferred Tax Asset $ - $ - $ -
=========== =========== ===========
</TABLE>

The following is a reconciliation of the amount of tax (benefit) that would
result from applying the federal statutory rate to pretax loss with the
provision for income taxes at December 31:

<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Tax at statutory rate (34%) $(2,128,793) $(2,070,596) $(1,205,064)
Non-deductible expenses - 763 2,680
Deferred tax asset valuation
change 295,877 220,563 318,475
Effect of lower tax rates 1,832,916 1,381,120 1,039,041
----------- ---------- -----------
Total Income Tax Provision
(benefit) $ - $ (468,148) $ 155,132
=========== =========== ===========
</TABLE>

The Company has operating loss carry forwards of approximately $5,450,000 in
various countries which expire from 1997 through 2011.

NOTE 8--RELATED PARTY TRANSACTIONS

Loans from related parties are described in Note 5.

A former manager and shareholder of the Company provided escrow services in
the reorganization described in Note 2 through a company under his control.
During the years ended December 31, 1994, he received $194,000 for services
provided.

In contemplation of the reorganization described in Note 2, Northamption,
Inc. forgave debts from a former officer and director of $227,490. In
connection with the reorganization, the Company issued 1,025,768 shares of
common stock valued at $289,284 and paid a fee of $250,000 to entities the
Company believes he may be deemed to have controlled.

A shareholder of the Company has provided accounting services for the Company
and has received $26,000 and $70,000 as compensation for those services during
1996 and 1995, respectively. During 1996 the shareholder was paid a fee of
$200,000 in connection with the issuance by the Company of $2,200,000 in
convertible debentures. The shareholder also provided a short-term loan to the
Company of $1,800,000 in March of 1997, which has subsequently been repaid.
As a result of this transaction, the shareholder and his employer have provided
management services for the Company.

NOTE 9--COMMITMENTS AND CONTINGENCIES

The Company has entered into employment contracts for consulting services
with certain individuals, which include a former director and members of his
immediate family. The contracts had original terms that ranged from six
months to three years. The contracts were terminated during 1997. Commitments
under these terminated contracts were approximately $300,000 at December
31, 1996.

The Company has entered into an agreement with the Ministry of Environmental
Protection of Natural Resources and Forestry of Poland dated March 19, 1996,
whereby the Company agreed to a specified working program relating to its
Pol-Tex Methane concession. The working program required the expenditure of
$2,918,000 towards certain drilling and completion procedures by December 31,
1996, of which approximately 85 percent was completed. The Company has
continued with the program in 1997. The concession agreement stipulates that
the following payments are to be made once commercial production commences:
a one-time payment of $287,900 and 9 percent of sales from the concession for
a period of 20 years. In connection with the sale of the concession to the
Texaco subsidiary, the obligations under the agreement will be assumed by the
Texaco subsidiary.

The Company has entered into land use agreements with the owners of its well
drilling sites whereby the Company has paid land use fees under those
agreements. Those agreements are for an indefinite length of time and do not
require the payment of royalties if and when gas production begins.

The Company has been informed that it is the subject of an investigation by
the United States Securities and Exchange Commission (SEC), involving the
financial and other information set forth in the Company's periodic filings
and press releases. The Company has produced numerous documents and the oral
testimony of its officers and directors pursuant to extensive subpoenas from
the SEC. The SEC has obtained similar information from the Company's prior
independent public accountants. The Company cannot currently predict the
duration or outcome of this investigation.

The Kingdom of the Netherlands has assessed a tax against the Company's
operating subsidiary, Globegas, even though it has significant operating
losses. The tax is the result of imputed earnings calculated on interest-free
loans made by Globegas. The Company accrued a liability in the amount of
$911,051 at December 31, 1996 relating to this assessment.

An unrelated entity filed a claim against the Company in connection with
lending activities between that entity and the management of Globegas prior
to the reorganization with Eurogas. The claim asserted that funds which were
loaned to management may have been invested into Globegas and therefore the
entity might have had an interest in Globegas at the date of its
reorganization with Eurogas. In November 1996, Eurogas entered into an
agreement which settled the claim. Eurogas issued 100,000 shares of common
stock to the entity (which have been included in the issuance of 17,478,259
shares of common stock discussed in Note 2) and granted the entity options to
purchase 2,000,000 shares of common stock at $3.50 to $6.00 per share based
upon when the options are exercised. The options were exercisable upon
issuance and are exercisable through December 1998.

In March of 1997, a bankruptcy trustee appointed for certain former
shareholders of Globegas asserted a claim to the proceeds that the Company
would receive from the Texaco agreement. The Trustee's claim is apparently
based upon the theory that the Company may have paid inadequate consideration
for its acquisition of Globegas (which indirectly controlled the Pol-Tex
Concession in Poland) from shareholders and therefore they are the true owners
of the proceeds received from the development of the Pol-Tex Concession in
Poland. While the Company is not required to answer the complaint until
June 1, 1997, it plans to vigorously defend against such claim. The Company
believes that the claim is totally without merit based on the fact that a
condition of a prior settlement with the principal creditor of the estate bars
any such claim, that the court has no jurisdiction over Pol-Tex or its
interests held in Poland, and that the Company paid substantial consideration
for Globegas.

In July of 1996 Dr. Martin A. Schuepbach, the President of Danube, was added
to the Board of Directors of the Company and was appointed as the Company's
president and chief executive officer for a term of three years. On January
14, 1997, Mr. Schuepbach resigned as a director and officer of the Company
and asserted that a breach of his employment contract has occurred and that
he is entitled to monthly compensation for the remainder of the term of the
contract. The Company plans to deny any breach. To date the Company is not
aware of any litigation having been filed in this matter and cannot estimate
a possible contingent liability.

On January 17, 1997 the Company's joint venture partner in the Czech Republic
notified the Company it is delinquent in the payment of certain obligations
of the joint venture agreement and threatened to terminate the association.
The Company disagrees with the assertion and has invoked its right to arbitrate
this dispute. Pending resolution, the Company has suspended any further work
in the Czech Republic. The Company is currently unable to predict the outcome
or make any estimates regarding the related loss contingency.

A financial consulting firm was retained by Danube prior to its acquisition
by the Company to assist in raising capital in exchange for commissions based
on the capital obtained. Upon completion of the Danube acquisition by Eurogas,
the financial consultant filed a complaint asserting a claim of $435,000 for
commissions, interest and legal fees. Prior to the acquisition of Danube the
financial consulting firm was successful in raising a limited amount of money
and Eurogas has offered a settlement of $50,000, the approximate amount it
believes is due (which amount is included in accrued expenses in the
accompanying financial statements), plus additional commissions for future
financing received as a result of the consulting firm's efforts.

The Company paid $120,000 of dividends on its 1995 Series preferred stock
during 1996. The dividends may have been inappropriately paid under Utah
law due to the existence of a stockholders' deficit throughout the year
ended December 31, 1996. As a result, the Company may have a claim against
the preferred shareholders who received the dividends for their repayment.

NOTE 10--STOCKHOLDERS' EQUITY

Date of Inception - Stock Agreement--Globegas was formed under an agreement
dated June 7, 1991. The Company was "in-formation" until the stock was
formally issued in July 1992. The June 7, 1991 agreement identified an
investor as a 50% owner and required the investor to make cash contributions
for funding of the Polish methane gas exploration. Of the required
contributions, the former investor made cash contributions prior to July 1992
of $3,675,264. When the stock was issued in July 1992, due to the
unfulfillment of the former investor's required cash contributions, he was
not issued shares of stock. Instead, the amount of the capital contribution
has been included in additional paid-in capital.

Preferred Stock--The 1995 Series Preferred Stock of the Company, issued on
April 12, 1995, is non-voting, non-participating, and has a liquidation
preference of $0.10 per share plus unpaid dividends. The 1995 Series
Preferred stockholders are entitled to an annual dividend of $0.05 per
share. Each share of the 1995 series preferred stock will be converted
automatically into two shares of the Company's common stock on July 3, 1997.

The 1996 Series Preferred Stock of the Company, issued on July 12, 1996, is
non-voting, and has a liquidation preference of $5.00 per share. Stockholders
of the 1996 Series stock are entitled to an annual cumulative dividend of $0.05
per share. Each share of the 1996 Series preferred stock will be converted
automatically into two shares of the Company's common stock on July 3, 1997.

NOTE 11--STOCK OPTIONS

The Company granted stock options and warrants during 1996 in connection with
the acquisition of Danube and the settlement of claims relating to the
Globegas reorganization. The Company has also granted options to its
employees and consultants during 1996 under the Stock Option and Award Plan
which was adopted in January 1995. Options for 2,000,000 shares of common
stock were authorized and granted in January 1996. The options granted to
employees and consultants are exercisable at $1.50 over a period of five years
and expire at the end of the fifth year. The market value of the underlying
common stock was equal to the exercise price on the date granted and,
therefore, no compensation was recognized.

The Company has elected to continue to account for stock-based compensation
under the provisions of APB Opinion No. 25 rather than SFAS No. 123.
Accordingly, compensation cost, based on fair values of stock options, is not
required to be recognized. If compensation cost had been determined based on
the fair values at the grant dates according to SFAS No. 123, net loss
applicable to common shares and loss per common share would have been
increased to the pro forma amounts shown below.

<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Net loss applicable to common shares:
As reported $(6,413,183) $(4,327,581)
Pro forma (8,492,547) (4,327,581)
Net loss per common share:
As reported (0.16) (0.13)
Pro forma (0.21) (0.13)
</TABLE>

The weighted average fair value of options granted was $1.04 per share in
1996. The fair value of each option is estimated on the date of grant using
the Black-Scholes pricing model with the following assumptions: Average
risk-free interest rate - 5.7%; Expected volatility - 82.6%; Expected life -
5 years. The transactions for shares under options and warrants during 1996
were as follows:

<TABLE>
<CAPTION>
Wtd. Avg.
Shares Exer. Price
---------- -----------
<S> <C> <C>
Outstanding at beginning of year - $ -
Granted 9,000,000 2.78
--------- --------
Outstanding at end of year 9,000,000 2.78
========= ========
Exercisable a end of year 8,800,000 $ 2.81
========= ========
</TABLE>

Options and warrants outstanding at December 31, 1996 were exercisable from
prices ranging from $1.50 to $3.50.

NOTE 12--SUBSEQUENT EVENTS

On April 28, 1997, the Company's subsidiary, Pol-Tex, entered into a letter
of intent with Polish Oil and Gas Company ("POGC") to form a joint technical
team to evaluate concessions for methane gas exploration in the Carpathian
Flysch and Tectonic Foredeep areas of Poland for which POGC currently holds
concessions or is in the process of obtaining concessions. The joint team
will identify the areas to be subject to a joint venture between the Company
and POGC and the timing and extent of the obligations of the two parties. The
letter of intent specifies an exploration budget of $15 million over a three
year period and grants the Company the exclusive right to negotiate with POGC
through September 30, 1997. (Unaudited).

The Company borrowed $1,800,000 under a promissory note from a related
company in March 1997 and used the proceeds to repay a note payable and
related accrued interest. The Company also issued 500,000 shares of common
stock for $2,750,000 or $5.50 per share in March 1997. A portion of the
proceeds from the issuance of the common stock was used to repay the
promissory note payable to the related party.

In March 1997, a 7.5%--$2,200,000 convertible debenture and accrued interest
were converted into 852,630 shares of common stock. In March 1997, the Company
also granted a stock option to an unrelated company for 2,000,000 shares of
common stock exercisable at $4.00 per share until April 1, 1998, $5.00 per share
until March 31, 1999 and $6.00 per share through March 31, 2000, when it will
expire if not exercised. The stock option was granted as a non-refundable
deposit towards obtaining an interest in oil and gas properties, joint
ventures or equity transactions which is currently under negotiation. The
amount of the deposit will be approximately $1,150,000 based on the fair
value of the stock option on the date the parties agreed that it would be
granted.

The Company signed an agreement with a Texaco subsidiary, as discussed further
in Note 3.

Report of Independent Registered Auditors
-----------------------------------------

To the Board of Directors of Globegas B.V.

We have audited the accompanying consolidated balance sheets of Globegas B.V.
(formerly McKenzie Methane Poland, B.V.) (a development stage enterprise) as of
December 31, 1995 and 1994, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years then
ended and for the period from June 7, 1991 (inception) through December 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 financial position of Globegas B.V. (a
development stage enterprise) as of December 31, 1995 and 1994 and the
consolidated results of their operations and their consolidated cash flows for
each of the three years then ended and for the period of June 7, 1991
(inception) through December 31, 1995 in conformity with accounting principles
generally accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming
the Company and its subsidiaries will continue as a going concern. The Company's
subsidiaries have experienced losses since inception as a result of their
development activities. As discussed in Note B to the financial statements, the
Company's subsidiaries are in the process of developing coal bed methane gas
reserves but commercial production has not begun. In addition, the future of the
Company is dependent on obtaining additional financing and compliance with its
concession agreement with the Polish Ministry of Environmental Protection of
Natural Resources and Forestry. These factors, among others, as discussed in
Note B to the financial statements, raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.

/s/ Grant Thornton

GRANT THORNTON

Warsaw, Poland
Date October 31, 1996

Globegas B.V.
(A Development Stage Enterprise)

<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS

December 31,

<S> <C> <C>
ASSETS 1995 1994
CURRENT ASSETS
Cash and Cash equivalents $ 71,870 $ 793,795
Sundry debtors 19,691 16,900
Material and supplies 8,251 8,284
Prepayments 2,071 22,647
---------- ----------

Total current assets 101,883 841,626

PROPERTY AND EQUIPMENT - AT COST
Gas properties not subject to amortization,
at cost using the full cost method of 8,006,345 6,745,050
accounting
Other property and equipment 2,377,751 2,341,903
---------- ----------
10,384,096 9,086,953
Less accumulated depreciation and valuation
allowance 2,916,557 2,446,002
---------- ----------

7,467,539 6,640,951
---------- ----------

$ 7,569,422 $ 7,482,577
=========== ===========

LIABILITIES AND STOCK-
HOLDERS' EQUITY

CURRENT LIABILITIES
Accounts payable - trade $ 312,350 $ 114,050
Current maturities of long-term debt 1,802,500 2,200,000
Accrued expenses 1,119,804 226,880
Unsecured notes payable 1,134,660 621,130
Taxes payable 762,575 1,231,613
Due to related parties 1,607,652 58,860
----------- -----------

Total current liabilities 6,739,541 4,452,533

COMMITMENTS -- --

STOCKHOLDERS' EQUITY
Common stock - $57.80 par value; authorized
2000 shares; issued and outstanding 600
shares on 1995 and 424 shares in 1994 34,680 24,507
Contributed capital 11,056,243 11,056,243
Cumulative foreign currency translation adjustment
(14,749) (14,749)
Deficit accumulated in the development stage (10,246,293) (8,035,957)
----------- -----------

Total stockholders' equity 829,881 3,030,044
----------- -----------
$ 7,569,422 $ 7,482,577
=========== ===========
</TABLE>

Globegas B.V.
(A Development Stage Enterprise)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
Period from
June 7 1991
(inception)
through
Year ended December 31, December 31,
------------------------------------------- ------------
1995 1994 1993 1995
<S> <C> <C> <C> <C>
Revenues
Interest income $ 7,795 $ 18,562 $ 239,423 $ 277,780
Foreign exchange gains --- 83,422 72,810 211,676
Other 16,184 --- --- 16,184
---------- ----------- ---------
23,979 101,984 312,233 505,640

Costs and expenses
Impairment of gas properties --- --- 969,101 969,101
Depreciation and valuation
allowance 470,555 614,393 588,345 1,947,456
General and administrative 1,816,676 1,087,913 1,614,116 5,401,223
Foreign exchange losses, net 80,175 --- --- 370,312
Interest 315,805 316,330 258,797 890,932
Other 20,142 132,975 105,166 410,334
---------- ---------- --------- ----------
2,703,353 2,151,611 3,535,525 9,989,358
---------- ---------- --------- ----------

LOSS BEFORE TAXES 2,679,374 2,049,627 3,223,292 9,483,718

INCOME TAXES (469,038) 154,656 140,004 762,575

NET LOSS $ 2,210,336 $ 2,204,283 $ 3,363,296 $10,246,293
========== =========== ========== ==========

Net loss per share $ 4,733.05 $ 5,324.36 $ 8,408.24 $ 24,512.66
========== =========== ========== ==========

Weighted average outstanding
shares 467 414 400 418
========== =========== ========== ==========
</TABLE>

Globegas B.V.
(A Development Stage Enterprise)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

Years ended December 31, 1995, 1994, and 1993 and the period from June, 1991 (inception)
through December 31, 1995
Deficit Total
accumulated capital
Capital stock Cumulative the and
------- -----
Contributed translation development stockholders'
Shares Amount capital adjustment deficit equity
------ ------ ----------- ----------- ----------- -------------

<S> <C> <C> <C> <C> <C> <C>
Balance at June, 1991 --- $ --- $ --- $ --- $ --- $ ---
(Inception)
Contributed capital --- --- 3,675,264 --- 3,675,264
Net loss --- --- --- --- (835,015) (835,015)
--------- ----------- ------------- ------------ -------------

Balance January 1, 1992 --- --- 3,675,264 --- (835,015) 2,840,249
Issuance of capital stock 400 23,120 --- --- --- 23,120
Net loss --- --- --- --- (1,633,363) (1,633,363)
Foreign currency translation
adjustment --- --- --- (382) --- (382)
--------- ----------- ------------- ------------ -------------

Balance December 31, 1992 400 23,120 3,675,264 (382) (2,468,378) 1,229,624
Contributed capital --- 4,000,000 4,000,000
Foreign currency translation
adjustment --- --- --- 16,563 16,563
Net loss --- --- --- --- (3,363,296) (3,363,296)
--------- ---------- ------------- ------------ -------------

Balance, December 31, 1993 400 23,120 7,675,264 16,181 (5,831,674) 1,882,891

Issuance of additional shares
of capital stock 24 1,387 3,380,979 --- --- 3,382,366
Foreign currency translation
adjustment --- --- --- (30,930) --- (30,930)
Net loss --- --- --- --- (2,204,283) (2,204,283)

Balance December 31, 1994 424 $ 24,507 11,056,243 $ (14,749) $ (8,035,957) $ 3,030,044
Issuance of additional shares
of capital stock 176 10,173 --- --- --- 10,173
Net loss --- --- --- --- (2,210,336) (2,210,336)
--------- ---------- ------------- ----------- ------------ -----------

Balance December 31, 1995 600 $ 34,680 $ 11,056,243 $ (14,749) $(10,246,293) $ 829,881
========= =========== ============= ============ ============ ===========

</TABLE>

Globegas B.V.
(A Development Stage Enterprise)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Period from
June 7 1991
(inception)
through
Year ended December 31, December 31,
-------------------------------------------------------------------
1995 1994 1993 1995
<S> <C> <C> <C> <C>
Net loss $ $ $ $
Adjustments to reconcile net loss to (2,210,336) (2,204,283) (3,363,296) (10,246,293)
net cash used in operating
activities
Impairment -- -- 969,101 969,101

Depreciation and amortization 470,555 614,393 588,345 1,947,456
Decrease (increase) in sundry debtors 9,662 11,593 9,426 121,993
Decrease (increase) in materials and
supplies 35 43,652 12,025 (7,482)
Decrease (increase) in prepayments 20,675 13,540 10,728 (36,466)
(Decrease) increase in accounts
payable 186,517 (63,616) (143,284) 381,322
Increase(decrease) in accrued
expenses 894,406 223,457 (21,815) 1,136,208
Increase (decrease) in taxes pending (469,038) 154,565 140,004 762,575
------------- ------------ ------------ -------------

Net cash used in operating
activities (1,097,524) (1,206,608) (1,798,766) (4,971,586)
Cash flows from investing activities
Payments for gas properties (1,261,295) (1,650,424) (1,951,464) (8,006,345)
Capital expenditure for other
property and equipment (35,848) (185,470) (186,835) (2,377,751)
------------- ------------ ------------- -------------

Net cash used in investing
activities (1,297,143) (1,835,894) (2,138,299) (10,384,096)
Cash flows from financing activities
Proceeds from related party
borrowings 1,548,792 286,339 1,516,264 7,152,829
Repayment of related party
borrowings -- (331,709) (3,665,160) (5,545,177)
Proceeds from issuance of long-term
debt -- -- 2,200,000 2,200,000
Proceeds from issuance of notes
payable 116,030 390,481 114,804 793,283
Proceeds from issuance of stock and
capital contributions
10,173 3,382,366 4,000,000 11,090,923
------------- ------------ ------------ -------------
Net cash provided by financing
activities 1,674,995 3,727,477 4,165,908 15,691,858
Effect of exchange rate changes on
cash
(2,253) (57,386) (66,456) (264,306)
------------- ------------ ------------ -------------

NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (721,925) 627,589 162,387 71,780
Cash and cash equivalents at
beginning of year
793,795 166,206 3,819 --
------------- ------------ ------------ ------------
Cash and cash equivalents at end of
year $ 71,870 $ 793,795 $ 166,206 71,870
============= ============ ============ ============

Supplemental information: No interest or tax payments have been made since
inception.

Globegas B.V.
(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 1995, l994, and 1993

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICES

A summary of the significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows.

1. Description of Business and Principles of Consolidation
-------------------------------------------------------

On August 2, 1994 MCK Development entered into an agreement with Energy Global
AG (EGA), a subsidiary of EuroGas Inc., to sell all of the outstanding shares of
Globegas B.V. The agreement provided for the acquisition to be on an instalment
basis which has resulted in 100% ownership of Globegas B.V. by EGA as of October
4, 1995. Effective August 25, 1995 Globegas B.V. changed its name from McKenzie
Methane Poland B.V.

The consolidated financial statements include the accounts of Globegas B.V. and
its three Polish subsidiaries -- Pol-Tex Methane Sp. z o.o. (PTM), McKenzie
Methane Rybnik Sp. z o.o. (MMR) and McKenzie Methane Jastrzebie Sp. z. o.o.
(MMJ). Globegas B.V. (the Company) is a Dutch holding company. PTM and MMJ
were formed with the state owned Jastrzebska Spolka Weglowa Spolka Akcjna
(JSWSA) who hold a 15% interest (Refer to Note I - Subsequent events). MMR was
formed with the state owned Rybnicka Spolka Weglowa Spolka Akcjna (RSWSA) who
hold a 15% interest. PTM has obtained a 35 year concession for exploration from
the Polish Ministry of Environmental Protection of Natural Resources and
Forestry and is in the process of developing coal bed methane gas reserves in
the Upper Silesian Coal Fields of Poland. The Company began methane gas
exploration in 1991. It is devoting substantially all of its efforts to
exploring and developing the methane gas reserves. However, proved reserves have
not been established. MMR commenced preliminary exploration activities during
the year. MMJ has no current activities. All intercompany accounts and
transactions have been eliminated on consolidation. As operating losses in PTM
applicable to the minority interest (JSWSA) exceed the minority interest's share
capital, all the losses have been charged to PTM and included in the
accompanying financial statements.

2. Use of estimates
----------------

The preparation of financial statements in conformity with United States
generally accepted accounting principles ("US GAAP") requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from these
estimates.

3. Development Stage Enterprise
----------------------------

The Company's operating subsidiary has devoted substantially all of it's efforts
to exploring for and development of coal bed methane gas reserves. Commercial
production has not commenced at December 31, 1995.

4. Gas Properties Not Subject to Amortization
------------------------------------------

The full cost method of accounting is used to account for gas properties. Under
this method of accounting all costs incidental to the acquisition, exploration,
and development of properties are capitalized and amortised using the units of
production method. These costs include costs of drilling and equipping wells,
as well as directly related overhead costs which includes the costs of company
owned equipment. At December 31, 1995, a determination cannot be made about the
extent of methane gas reserves that should be classified as proven reserves.
Consequently, the associated properties have not yet been amortized. The
Company expects to begin gas production in 1997. These costs are evaluated
periodically for impairment and if an impairment is indicated, the costs are
charged to operations. Due to drilling in certain areas for which the Company
did not have its concession confirmed and currently has no rights to future
production, impairment has been deemed to occur and the capitalised costs and
certain properties are included in costs and expenses in the accompanying
statement of operations for the year ended December 31, 1993.

Costs incurred for gas properties consist of the following:

</TABLE>
<TABLE>
<CAPTION>
Acquisition and
Period incurred Exploration
Costs
<S> <C>
Year ended December 31. 1995 $ 1,261,295
Year ended December 31. 1994 1,650,424
Year ended December 31, 1993 1,951,464
Year ended December 31, 1992 1,850,442
Period from June 7, 1991 to December 31, 1991 1,292,720
-----------

$ 8,006,345
===========
</TABLE>

All the Company's gas properties are located in Poland. The Company had the
following capitalized costs relating to gas properties at December 31,
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Unevaluated gas properties $ 7,037,244 $ 5,775,949
Proved gas properties 969,101 969,101
----------- -----------

8,006,345 6,745,050
Less accumulated valuation allowance 969,101 969,101
----------- -----------
$ 7,037,244 $ 5,775,949
=========== ===========
</TABLE>

5. Depreciation
------------

Depreciation is provided on a straight-line basis over the estimated useful
lives, at the following rates:

Buildings 40 years
Equipment and vehicle 3 to 5 years

6. Loss Per Share
--------------

Loss per share is calculated using the weighted average number of shares
outstanding during each year. Common stock equivalents result in negative
dilution and have not been included in the calculation.

7. Cash Equivalents
----------------

The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents. At December 31, 1995
and 1994 $64,466 and $64,489 respectively were held by banks in Poland. The
Company would incur certain costs if the cash were to be transferred out of
Poland.

8. Foreign Currency Translation
----------------------------

In the year ended December 31, 1995, the financial statements of the Company are
measured using US Dollars, as the functional currency. The consolidated balance
sheet accounts are translated into US dollars at the year-end rates of exchange
and the consolidated statements of operations items are translated at the
weighted average exchange rates for the year. Accordingly, the effect of
translating the Company's financial statements into U.S. dollars has
historically been recorded as a separate component of stockholders' equity.
Foreign exchange adjustments attributable to the financial statements of the
Company's subsidiaries, due to the highly inflationary Polish economy in which
they operate, are reflected in the operating statement.

9. Date of Inception - Stock Agreement
-----------------------------------

The Company was formed under an agreement dated June 7, 1991. The Company was
"in-formation" until the stock was formally issued in July, 1992.

The June 7, 1991 agreement identified a former investor as a 50% owner. The
agreement also required the former investor to make cash contributions up to
$20,300,000 for funding of the Polish methane gas exploration. Of the
$20,300,000 required contribution, the former investor made cash contributions
prior to March, 1992 of $3,675,264. When the stock was issued in July, 1992,
due to the unfulfillment of the former investor's required cash contributions,
he was not issued shares of stock. Instead, the amount is included as capital
contribution.

10. Income Taxes
------------

Deferred tax assets and liabilities are recognised for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases at enacted tax rates when such amounts are expected to be realised or
settled.

11. Long life assets
----------------

The introduction of FASB 121 - "Impairment of Long Life Assets" in the 1996
financial statements is unlikely to have a material impact.

NOTE B - REALIZATION OF ASSETS

At December 31, 1995, current liabilities exceeded current assets by $6,637,658
and the Company has losses of $10,246,293 accumulated since inception in July,
1991. The Company is considered a development stage company as defined by
Statement of Financial Accounting Standard No. 7, having not commenced planned
principal operations. Activities have been limited to exploration activities
with no significant production of methane gas to date. Realization of the
amounts included in gas properties is dependent on the Company developing
sufficient quantities of proven and probable reserves of methane gas. If
exploration activities prove to be unsuccessful, all or a portion of the gas
properties not subject to amortization will be charged to operations. These
factors raise substantial doubt about the ability of the Company to continue in
its current form. In order to continue, the Company will need to raise debt and
equity capital to meet the short and long term obligations of the Company and to
fund the exploration and development of proven reserves of methane gas on
concessions currently held by the Company. The financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or amounts and classification of liabilities that might
be necessary should the Company be unable to continue in existence

NOTE C - OTHER PROPERTY AND EQUIPMENT

Other property and equipment consist of the following at:
<TABLE>
<CAPTION>
December 31.
------------
1995 1994
<S> <C> <C>
Buildings and land $ 254,440 $ 254,440
Drilling rigs and related equipment 2,123,311 2,087,463

2,377,751 2,341,903
Less accumulated depreciation 1,947,456 1,476,901

$ 430,295 $ 865,002
</TABLE>

NOTE D - LONG-TERM DEBT

Long-term debt payable at December 31, 1995 and 1994 is as follows
<TABLE>
<CAPTION>
December 31.
------------
1995 1994
<S> <C> <C>
Note payable to OMV Aktiengcsellschaft an Austrian $ 1,802,500 $ 2,200,000
Company, with interest at 7% repayable $400,000 due
March 31, 1995 and subsequent quarterly instalments of
$260,000 plus interest beginning July 1, 1995. The note is
denominated in US dollars. The note is secured by certain
drilling equipment, office equipment and land and
buildings. The note contains an option OMV can exercise
to purchase 25% of Pol-Tex Methane Sp. z o. o. should the
Company default on the repayment of the note.
1,802,500 2,200,000
Less Current Maturities (1,802,500) (2,00,000)

$ ------ $ ------
=========== ============

</TABLE>

The company has not made the quarterly repayments as required by the terms of
the note payable to OMV. As a result the Company is in default, and
accordingly, the whole amount of the note has been classified as current in the
accompanying balance sheet. OMV has not exercised their option to purchase PTM.

NOTE E - UNSECURED NOTES PAYABLE
<TABLE>
<CAPTION>
December 31
-----------
1995 1994
<S> <C> <C>
Unsecured notes payable to employee, denominated in US
dollars, payable on demand with interest rate at 12.5% $ 290,206 $ 290,206

Unsecured note payable to former director, denominated in
US dollars, payable in March 1995 with an interest
rate of 10% 108,027 108,027

Unsecured loan payable to minority shareholder of EuroGas Inc,
denominated in US dollars, payable in July 1996 with an
interest rate of 10% 245,196 ----

Unsecured loan payable to company controlled by alternate director
denominated in US dollars, payable by December 1996 with
an interest rate of 10% 268,334 ----
Other 222,897 222,897
---------- ----------

$1,134,660 $ 621,130
========== ==========
</TABLE>

NOTE F - DUE TO RELATED PARTIES

Due to related parties consist of the following at:
<TABLE>
<CAPTION>
December 31.,
-------------
1995 1994
<S> <C> <C>
Payable to holding company, EGA 1,548,792
Payable to former holding company, MCK Development 58,860 58,860
---------- ---------

$1,607,652 $ 58,860
========== =========
</TABLE>

NOTE G - INCOME TAXES
<TABLE>
<CAPTION>
December 31,
1995 1994 1993
<S> <C> <C> <C>
The provision for income tax expense,
all current, consists of the following:

Dutch Domestic Income Tax (469,038) 154,656 140,004
========== ========= =========

Deferred tax assets are comprised of the following:
Tax loss carry forwards 323,000 264,000 167,000
Less valuation allowance (323 000) (264,000) (167,000)
---------- --------- ---------

Net deferred tax asset $ -- $ -- $ --
========= ========= =========
</TABLE>

The net charge in the deferred tax valuation allowance was $59,000 and $97,000
for the years ended 1995 and 1994, respectively. At December 31, 1995 PTM had
tax loss carry forwards of approximately $323,000 in Poland, expiring at various
dates through 1997.

Dutch Domestic income tax is assessed at various rates on foreign exchange
gains, gains on the sale of property and equipment and interest income

NOTE H - RELATED PARTY TRANSACTIONS

A former stockholder and director of the Company provided various administrative
services through a company for which he is an employee. The payments for these
services in the years ended December 31, 1994 and 1993 were approximately
$194,000 and $237,000, respectively.

NOTE I - COMMITMENTS AND CONTINGENCIES

The Company has entered into employment contracts for consulting services with
certain individuals, which include a former director and members of his
immediate family. The contracts range from six months to three years and will
continue until either party to the contract gives notice to terminate.

Current Future commitments under these contracts are as follows;
<TABLE>
<CAPTION>
<S> <C>
Payable in 1996 $ 170,400
Payable in 1997 99,400
----------

$ 269,800
==========
</TABLE>

By a decision of the Ministry of Environmental Protection of Natural Resources
and Forestry dated March 19, 1996 the Company is committed to investing
$2,918,000 by December 31, 1996 in accordance with a specific investment
schedule set out by the Ministry. As at September 30, 1996 the Company has met
approximately 80% of its obligations.

The concession agreement with the Ministry of Environmental Protection of
Natural Resources and Forestry stipulates that the following payments are to be
made once commercial production commences:
i one time cost of $287,900
ii 9% of sales over a period of 20 years

The Company has not entered into agreements with the owners of land where
drilling has taken place or where proposed drilling is too take place as to the
price for the land once commercial production commences.

On August 9,1995 the Company's parent, EuroGas Inc. was served a formal order of
private investigation by the US Securities and Exchange Commission (SEC). To
date the SEC has issued a subpoena requiring the production of certain
documents. The SEC staff has advised that its inquiry should not be construed
as an indication by the SEC or its staff that any violations of law have
occurred.

Dutch law requires the annual statutory filing of financial statements with the
Chamber of Commerce in the Netherlands. The company has only filed through the
year ended December 31, 1992 and as a result could incur a maximum penalty of
$5,000.

NOTE J - SUBSEQUENT EVENT

On May 17, 1996 the Company acquired the remaining 15% interest in PTM.

On June 7, 1996 the Company entered into an agreement with a major oil and gas
entity which provided that the Company would only negotiate with such a major
oil and gas entity concerning the sale of PTM or the joint development of the
concessions held by PTM until January 31, 1997.

EUROGAS, INC.

Option to Acquire up to
2,000,000 Shares of Restricted Common Stock, Par Value $0.001

THIS OPTION WILL BE VOID
AFTER 11:59 P.M. MOUNTAIN TIME ON MARCH 31, 2000

This Option has not been registered under the United States Securities Act of
1933, as amended (the "Securities Act"), and is a "restricted security" within
the meaning of Rule 144 promulgated under the Securities Act. This Option has
been acquired for investment and may not be sold or transferred without
complying with Rule 144 in the absence of an effective registration or other
compliance under the Securities Act.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE OR OTHER
REGULATORY AUTHORITY, NOR HAS THE COMMISSION OR ANY
STATE OR OTHER REGULATORY AUTHORITY PASSED ON THE
ACCURACY OR ADEQUACY OF THIS OPTION. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

1. Grant of Option. This certifies that, for value received, OMV
Aktiengesellschaft (the "Holder"), is entitled to purchase, and receive up to
2,000,000 fully paid and nonassessable shares of common stock, par value $0.001
(the "Option Shares"), of EuroGas, Inc., a Utah corporation (the "Company"), at
a price of (the "Exercise Price") (i) $4.00 per Option Share if exercised prior
to April 1, 1998, (ii) thereafter, $5.00 per Option Share if exercised prior to
or on March 31, 1999; and (iii) thereafter, $6.00 per Option Share if exercised
prior to or on the expiration of the Option on Marchl 31, 2000. This Option
shall be exercisable on presentation and surrender of this Option with the
purchase form attached hereto, duly executed, at the principal office of the
Company at 942 East 7145 South, #101A, Midvale, Utah 84047, and by paying in
full and in lawful money of the United States of America by cash or cashier's
check, the Exercise Price for the Option Shares as to which this Option is
exercised, all on the terms and conditions hereinafter set forth. The number of
Option Shares to be received on exercise of this Option and the Exercise Price
may be adjusted on the occurrence of such events as described herein. If the
rights represented hereby are not exercised by 11:59 p.m., Mountain Time, on
March 31, 2000, this Option shall automatically become void and of no further
force or effect, and all rights represented hereby shall cease and expire.

2. Exercise of Option. On the exercise of all or any portion of this
Option in the manner provided above, the Holder exercising the same shall be
deemed to have become a holder of record of the Option Shares for all purposes,
and certificates for the securities so purchased shall be delivered to the
Holder within a reasonable time, but in no event longer than ten days after this
Option shall have been exercised as set forth above. This Option may be
exercised in whole or in part, so long as each exercise is in increments of
100,000 shares. If this Option shall be exercised in respect to only a part of
the Option Shares covered hereby, the Holder shall be entitled to receive a
similar Option of like tenor and date covering the number of Option Shares with
respect to which this Option shall not have been exercised, and, until receipt
of same this Option shall represent the Option relating to the remaining shares
subject to this Option. On the exercise of all or any portion of this Option,
at the instruction of the Holder, the Company shall offset any amounts due by it
to Holder against payment of the exercise price for the Options.

3. Exchange of Options. This Option is exchangeable, on the presentation
and surrender hereof, by the Holder at the office of the Company, for a new
Option or Options of like tenor representing in the aggregate the right to
subscribe for and purchase the number of Option Shares which may be subscribed
for and purchased hereunder.

4. Fully Paid Shares. The Company covenants and agrees that the Option
Shares which will be issued on the exercise of the rights represented by this
Option will be, when issued, fully paid and nonassessable and free from all
taxes, liens, and charges with respect to the issue thereof. The Company
further covenants and agrees that during the period within which the rights
represented by this Option may be exercised, the Company will have authorized
and reserved a sufficient number of shares of its common stock, $0.001 per
share, to provide for the exercise of the rights represented by this Option.

5. Antidilution Provisions. The Exercise Price and number of Option
Shares purchasable pursuant to this Option may be subject to adjustment from
time to time as follows:

(a) If the Company shall take a record of the holders of its common
stock for the purpose of entitling them to receive a dividend in shares,
the Option Price in effect immediately prior thereto and the number of
Option Shares shall be adjusted so that the Holder of this Option shall
thereafter be entitled to receive the number of Option Shares to which the
Holder would have been entitled had such Option been exercised immediately
prior to the occurrence of such event. Such adjustment shall become
effective immediately after the opening of business on the day following
the date on which such dividend becomes effective.

(b) If the Company shall subdivide the outstanding shares of common
stock into a greater number of shares, combine the outstanding shares of
common stock into a smaller number of shares, or issue by reclassification
any of its shares, the Option Price in effect immediately prior thereto and
the number of Option Shares shall be adjusted so that the Holder of this
Option thereafter surrendered for exercise shall be entitled to receive,
after the occurrence of any of the events described, the number of Option
Shares to which the Holder would have been entitled had such Option been
exercised immediately prior to the occurrence of such event. Such
adjustment shall become effective immediately after the opening of business
on the day following the date on which such subdivision, combination, or
reclassification, as the case may be, becomes effective.

(c) If any capital reorganization or reclassification of the
Company's common stock, or consolidation or merger of the Company with
another corporation or the sale of all or substantially all of its assets
to another corporation shall be effected in such a way that holders of
common stock shall be entitled to receive stock, securities, or assets with
respect to or in exchange for common stock, then, as a condition of such
reorganization, reclassification, consolidation, merger, or sale, lawful
adequate provisions shall be made whereby the Holder of this Option shall
thereafter have the right to acquire and receive on exercise hereof such
shares of stock, securities, or assets as would have been issuable or
payable (as part of the reorganization, reclassification, consolidation,
merger, or sale) with respect to or in exchange for such number of
outstanding common shares of the Company as would have been received on
exercise of this Option immediately before such reorganization,
reclassification, consolidation, merger, or sale.

In any such case, appropriate provision shall be made with respect to
the rights and interests of the Holder of this Option to the end that the
provisions hereof shall thereafter be applicable in relation to any shares
of stock, securities, or assets thereafter deliverable on the exercise of
this Option. In the event of a merger or consolidation of the Company with
or into another corporation or the sale of all or substantially all of its
assets that results in the issuance of a number of shares of common stock
of the surviving or purchasing corporation greater or less than the number
of shares of common stock of the Company outstanding immediately prior to
such merger, consolidation, or purchase are issuable to holders of common
stock of the Company, then the Option Price in effect immediately prior to
such merger, consolidation, or purchase shall be adjusted in the same
manner as though there was a subdivision or combination of the outstanding
shares of common stock of the Company. The Company will not effect any
such consolidation, merger, or sale unless prior to the consummation
thereof the successor corporation resulting from such consolidation or
merger or the corporation purchasing such assets shall assume by written
instrument mailed or delivered to the Holder hereof at its last address
appearing on the books of the Company, the obligation to deliver to such
Holder such shares of stock, securities, or assets as, in accordance with
the foregoing provisions, such Holder may be entitled to acquire on
exercise of this Option.

(d) If (i) the Company shall take a record of the holders of its
shares of common stock for the purpose of entitling them to receive a
dividend payable otherwise than in cash, or any other distribution in
respect of the shares of common stock (including cash), pursuant to,
without limitation, any spin-off, split-off, or distribution of the
Company's assets; or (ii) the Company shall take a record of the holders of
its shares of common stock for the purpose of entitling them to subscribe
for or purchase any shares of any class or to receive any other rights; or
(iii) in the event of any classification, reclassification, or other
reorganization of the shares that the Company is authorized to issue, any
consolidation or merger of the Company with or into another corporation, or
any conveyance of all or substantially all of the assets of the Company; or
(iv) in the event of the voluntary or involuntary dissolution, liquidation,
or winding up of the Company; then, and in any such case, the Company shall
mail to the Holder of this Option, at least 30 days prior thereto, a notice
stating the date or expected date on which a record is to be taken for the
purpose of such dividend, distribution or rights, or the date on which such
classification, reclassification, reorganization, consolidation, merger,
conveyance, dissolution, liquidation, or winding up, as the case may be.
Such notice shall also specify the date or expected date, if any is to be
fixed, as of which holders of shares of common stock of record shall be
entitled to participate in such dividend, distribution, or rights, or shall
be entitled to exchange their shares of common stock for securities or
other property deliverable upon such classification, reclassification,
reorganization, consolidation, merger, conveyance, dissolution,
liquidation, or winding up, as the case may be.

(e) If the Company, at any time while this Option shall remain
unexpired and unexercised, sells shares of common stock to an affiliate of
the Company, excluding shares issued on the exercise of options issued and
outstanding as of the date hereof and shares issued to officers and
directors under stock option plans of the Company existing as of the date
hereof, at a price lower than the Exercise Price provided herein, as the
same may from time to time be adjusted pursuant to this section 5, then the
Exercise Price of these Options shall be reduced automatically to such
lower price at which the Company has sold or agreed to sell its common
stock.

(f) No fraction of a share shall be issued on exercise, but, in lieu
thereof, the Company, notwithstanding any other provision hereof, may pay
therefor, in cash, the fair value of any such fractional share at the time
of exercise.

6. Disposition of Option Shares. The registered owner of this Option, by
acceptance hereof, agrees that, before any disposition is made by the registered
owner of any Option Shares, the owner(s) shall give written notice to the
Company describing briefly the manner of any such proposed disposition. No such
disposition shall be made in the United States unless and until:

(a) the Company has received an opinion from counsel for the owner(s)
of the Option Shares stating that no registration under the Securities Act
is required with respect to such disposition; or

(b) a registration statement or post-effective amendment to a
registration statement under the Securities Act has been filed by the
Company and made effective by the Commission covering such proposed
disposition.

7. Governing Law. This agreement shall be construed under and be
governed by the laws of the State of Utah.

8. Notices. All notices, demands, requests, or other communications
required or authorized hereunder shall be deemed given sufficiently if in
writing and if personally delivered; if sent by facsimile transmission,
confirmed with a written copy thereof sent by second day express delivery or
registered mail, return receipt requested and postage prepaid; if sent by
registered mail or certified mail, return receipt requested and postage prepaid;
or if sent by second day express delivery:

If to the Company, to: EuroGas, Inc.
Attn: Hank Blankenstein, Secretary
942 East 7145 South, #101A
Midvale, Utah 84047
Facsimile: (801) 255-2005
Confirmation: (801) 255-0862

With a copy to: Howard S. Landa, Esq.
Kruse, Landa & Maycock, L.L.C.
50 West Broadway, Eighth Floor
Salt Lake City, Utah 84101
Facsimile: (801) 531-7091
Confirmation: (801) 531-7090

If to the Holder: OMV Aktiengesellschaft
Gerasdorfer Strabe 151
P.O. Box 200
A-1210 Vienna, Austria
Facsimile: 011-431-404-40/3797
Confirmation: 011-431-404-40/3514

or other such addresses and facsimile numbers as shall be furnished by any party
in the manner for giving notices hereunder, and any such notice, demand,
request, or other communication shall be deemed to have been given as of the
date so delivered or sent by facsimile transmission, three days after the date
so mailed, or two days after the date so sent by second day delivery.

9. Loss, Theft, Destruction, or Mutilation. Upon receipt by the Company
of reasonable evidence of the ownership of and the loss, theft, destruction, or
mutilation of this Option, the Company will execute and deliver, in lieu
thereof, a new Option of like tenor.

DATED this 24th day of March, 1997.

EUROGAS, INC.

By /s/ Paul Hinterthur
Duly Authorized Officer

AMENDMENT #1

TO THE ASSOCIATION AGREEMENT ENTERED ON 13TH JULY 1995

Contracting Parties

1. NAFTA a.s. Gbely
Address: 908 45 Gbely, Slovak Republic
Organisation Identification Number: 31 409 938

Represented by: Ing. Karol Rakovsky - Chairman of the Board of
Directors
Ing. Jozef Cechovic - Vice Chairman of the Board of
Directors

(Hereinafter referred to as "NG")

2. DANUBE INTERNATIONAL PETROLEUM COMPANY, Structural Unit
Address: Obchodna 21, 811 06 Bratislava, Slovak Republic

Represented by: Erika Csekes, Manager of the Structural Unit
-a proxy having power of attorney

(Hereinafter referred to as "DIPC")

as the "NAFTA-DANUBE" Association Members

have agreed
on herein alterations to The Association Agreement entered on 13th July 1995.
Therefore Subsections 4. and 5. with the following content have been added to
the Article III, "Purpose and Subject of the Association":

ARTICLE III.
Purpose and Subject of the Association

4. The Association Members have agreed that it is a subject of mutual interest
to expand the area of the joint exploration programme and conduct further
exploration for hydrocarbons in the Area of Mutual Interest - "AMI 3"
defined in the Exhibit E.
AMI 3 includes Lipany region with area of 48.33 km2. It is a joint
activity of the Association Members.
NG represents and warrants that it is a fully authorised owner of an
exploration license in AMI 3 as stipulated in Section 4, Act NO. 52/1988
Coll. amended by Act No. 497/1991 Coll.

5. Implementation of AMI 3 work programme:

5.1 The Testing Phase #1 in the Lipany area
The Testing Phase shall be conducted within three (3) months from the
date of execution of the Amendment #1.
Engineering and geological study shall be elaborated within three
months (3) from the date of execution of the Amendment #1.
DIPC agrees to cover 100% of the costs for this Testing Phase, which
is around 20 000.-USD (twenty thousand US Dollars).

5.2 The Testing Phase #2 in the Lipany area
The Testing Phase #2 is contingent of the results of Testing Phase #1.
The Test Phase shall be conducted after the date of execution of the
Amendment #1 in a time frame determinated by the JMC.
The Testing Phase #2, which includes completion and fracturing of the
Lipany 1 well, shall be concluded after the date of execution of the
Amendment #1 in a time frame determinated by the JMC.
DIPC agrees to cover 100% of the costs for the Testing Phase #2, which
amounts to 1 000 000.-USD (one million US Dollars).

5.3 DIPC agrees to provide either 100% of funds for The Testing Phases #1
and #2 or any equivalent investment for other relevant works agreed
by JMC.

5.4 All the additional investments required after finishing The Testing
Phases #1 and #2 shall be paid in the following proportion:

NG 50%
DIPC 50%

5.5 In case that it becomes a subject of The Association interest to use
the positive wells "Lipany 3" and "Lipany 4" owned by NG, the
Association Members have agreed to elaborate an Amendment #2 to the
Association Agreement which shall stipulate conditions of a NG
material investment of the above wells and an equivalent DIPC
financial deposit. The financial deposit will be used to cover the
costs of work agreed by JMC.

The other provisions of The Association Agreement entered on 13th July 1995 have
not been altered, revised or amended and remain valid.

FINAL CONDITIONS

1. The Association Members have read The Amendment #1 to The Association
Agreement entered on 13th July 1995 and declare that they have signed it
voluntarily, not under compulsion or evidently disadvantageous conditions.
As stipulated in the Article XV., the Subsection 2., of The Association
Agreement, The Amendment #1 was unanimously agreed by the "NAFTA - DANUBE"
JMC on 24th October 1996.
Each Association Member shall receive two originals of this Amendment
written in Slovak.
2. The Amendment #1 shall become effective on the date on which it is signed.
3. Exhibit "E" is the only attachment to The Amendment #1.

In Gbely In Bratislava

NAFTA a.s. Gbely DANUBE INTERNATIONAL PETROLEUM
COMPANY - represented by the Manager of
its Structural Unit in Slovakia

/s/ Ing. Karol Rakovsky /s/ Erika Csekes

/s/ Ing. Jozef Cechovic

EXHIBIT "E"

COORDINATES AND PLANE OF AMI III.

[Chart/Graph depicting Exploration System of coordinates: JTSK
Area of Bajerovce and AMI III]
POINT abscissa "Y" abscissa "X"

1.
2. 279720.00 1186820.00
3. 274900.00 1191300.00
4. 275200.00 1192900.00
5. 281390.00 1191840.00
6. 291630.00 1189830.00
7.

PLANE of AMI III. = 48 330 750m

INITIAL AGREEMENT

BELMONT RESOURCES INC.
1180 - 666 Burrard St.
Vancouver, B.C.
V6C 2X8

TO: EUROGAS INCORPORATED
942 E. 7145 S., #101A
Midvale, Utah
84047

DANUBE INTERNATIONAL PETROLEUM COMPANY
Obchodna 21, 811 06
Bratislava, Slovak Republic

April 21, 1997

RE: FARMOUT AGREEMENT

The following is an Initial Agreement between Belmont Resources Inc.
("Belmont"), Eurogas Incorporated ("Eurogas") and its wholly owned subsidiary,
Danube International Petroleum Company ("Danube"), with respect to the
acquisition of a 40% interest by Belmont in a certain oil and gas property known
as the Area of Mutual Interest 3 ("AMI3") located in Slovakia described in the
Agreement executed November 20, 1996 amending the Association Agreement between
Nafta a.s. Gbely and Danube and dated July 15, 1995 (collectively, the "Nafta
Agreements"). By execution of this Initial Agreement, Belmont, Eurogas and
Danube agree to enter into a formal definitive purchase agreement on or before
May 20, 1997, and other documents that more fully delineate and formalize the
terms outlined in this Initial Agreement (collectively, the "Farmout
Agreement"). In addition, these agreements and documents shall be subject to
the approval of such regulatory authorities as have jurisdiction over the
affairs of Belmont (hereafter referred to as "Regulatory Authorities") and shall
be based on the following terms and conditions:

1. Eurogas and Danube grant Belmont an option to acquire a 40% working
interest in the AMI3 property (the "Option") free and clear of all liens,
charges, encumbrances, claims rights or interest of any person and such
option shall be deemed to have been exercised upon completion of the
following:

(a) the payment by Belmont to Eurogas in the amount of CDN $100,000 which
shall be a non-refundable deposit;

(b) the completion of a due diligence assessment of AMI3 comprising the
work of Testing Phase #1 as required under the Nafta Agreements, which
shall be completed within 90 days of the date of execution of this
Initial Agreement and shall cost no more than USD $20,000 (the "Due
Diligence Assessment"), the cost of which shall be non-refundable.

(d) written notification by Belmont to Eurogas of its intention to
exercise the Option; and

(e) the delivery by Belmont of an agreement to carry Danube's 10% interest
in the AMI3 property.

2. During the Due Diligence Assessment, Eurogas shall allow full access to the
AMI3 property and all records located in the United States and Slovakia
related tot the AMI3 property. It is understood that it shall be a
condition precedent of this Initial Agreement for the sole benefit of
Belmont that the results of the Due Diligence Assessment shall be
satisfactory in all material respects to Belmont, its advisors and the
Vancouver Stock Exchange;

3. The payment of the Shares shall be subject to:

(a) the receipt by Belmont of a Form 55 (as prescribed by the British
Columbia Securities Commission) and a valuation report (collectively,
the "Valuation Report") acceptable to Belmont AND the Vancouver Stock
Exchange showing a valuation of a 40% interest in the AMI3 property
equal to at least the following amount:

USD $2,000,000 + 5,000,000xBMP

where BMP = market price of Belmont shares at the time of announcement
of this Initial Agreement

(b) the satisfaction of any requirements imposed by the Vancouver Stock
Exchange of the acquisition by Belmont of the 40% interest in the AMI3
property pursuant to the Nafta Agreements (the "Interests").

(c) the receipt by Belmont of written confirmation of the registration of
Belmont's interest with the applicable Slovakian government
authorities (the "Registration") and closing legal opinions from the
Slovakian and United States legal counsel of Eurogas and Danube
relating thereto.

4. The Shares shall be subject to:

(a) a 1 year Canadian hold period commencing from the date of the
Registration (the "Hold Period");

(b) a voluntary pooling arrangement wherein 25% of the shares are to be
released upon the expiry of the Hold Period and 25% to be released
every 90 days thereafter. Until such shares are released from the
pool, they shall be kept in trust (the "Pooling Arrangement"); and

(c) notwithstanding any provision in this Initial Agreement, an escrow
arrangement providing for, inter alia, the escrowing of the Shares
until the completion of a USD $1,000,000 financing by Belmont. The
escrow period shall run concurrently with the Hold Period.

5. Subject to the exercise of the Option, the Registration, the Payment of the
Shares, the execution of the Pooling Agreement and the completion of a
financing of not less than USD $1,000,000 within 150 days at which time,
the obligation by Belmont to carry out the USD $1,000,000 work program
shall commence and any penalty relating to any and all non-payments shall
become effective. Belmont agrees to grant to EuroGas the first right of
refusal on the USD $1,000,000 financing and any further financing that may
be required. For greater certainty, it is agreed that Belmont shall not be
responsible for any work commitments and penalties until the occurrence of
the Events and in the event that the penalty arises, such penalty shall be
paid out of Belmont's entitlement to the proceeds of production from the
AMI3 property. Further, this Initial Agreement provides for an option
only, and except as specifically provided otherwise, nothing herein
contained shall be construed as obligating Belmont to do any acts or make
any payments hereunder and any act or acts or payment or payments as shall
be made hereunder shall not be construed as obligating Belmont to do any
further act or make any further payment.

6. Eurogas covenants to provide to Belmont:

(i) Copies of all records and information as they relate to the AMI3
property and all previous activities carried out on such property as
is reasonably requested by Belmont;

(ii) An on-site due diligence review of the AMI3 property by Belmont.

7. The parties shall execute such of the documents and do such other things
that may be reasonably necessary to give full effect to the transactions
contemplated hereby.

8. This Initial Agreement is subject to Vancouver Stock Exchange and shall be
subject to and governed in accordance with the laws of the Province of
British Columbia and the parties hereto do attorn to the exclusive
jurisdiction of the Courts of the Province of British Columbia. This
Initial Agreement constitutes the entire agreement between the parties and
supersedes all prior letters of intent, agreements, representations,
warranties, statements, promises, information, arrangement and
understanding, whether oral or written, express or implied. No
modification or amendment to this Initial Agreement may be made unless
agreed to by the parties thereto in writing. Time shall be of the essence

9. This Initial Agreement may be executed i n counterpart and the counterparts
altogether shall constitute a fully executed Initial Agreement, and any
facsimile signature shall be taken as an original.

10. Upon acceptance of this Initial Agreement, the parties will instruct their
attorneys and solicitors to prepare forthwith a definitive agreement to be
executed and substituted for this Initial Agreement. Such definitive
agreement shall contain inter alia the terms and conditions set out herein
and such other terms, conditions, representations and warranties which may
be required by the Belmont's solicitors and which may be agreed upon by the
counsel for Eurogas and Danube, acting reasonably. This Initial Agreement
shall remain in full force and effect until the earlier the execution and
delivery of a definitive agreement or May 20, 1997. For greater certainty,
if this Initial Agreement shall terminate before a definitive agreement is
reached, Belmont shall have no obligation whatsoever relating to this
Initial Agreement.

Yours truly,

BELMONT RESOURCES INC.

/s/ V. Agyaeos
Per: Authorized Signatory
Name: V. Agyaeos

Accepted and agreed to this April 21, 1997

EUROGAS INCORPORATED

/s/ Hank Blankenstein
Per: Authorized Signatory
Name: Hank Blankenstein

Accepted and agreed to this April 21, 1997

DANUBE INTERNATIONAL PETROLEUM COMPANY

/s/ Hank Blankenstein
Per: Authorized Signatory
Name: Hank Blankenstein

Accepted and agreed to this April 21, 1997

LETTER OF INTENT

This letter of intent has been signed on April 28, 1997 in Warsaw,

by and between:

POLISH OIL AND GAS COMPANY, JOINT STOCK COMPANY (Polskie Gornictwo Naftowe i
Gazownietwo S.A.) with its registered office at 6 Krucza Street room 14,00 - 537
Warsaw, Poland, hereinafter referred to as PGNiG S.A., Division Geological
Office Geonafta represented by Director Marek Hoffmann

and

POL-TEX METHANE limited liability company, with its registered office at 5
Zamkowa Street, 44-268 Jastrzebie Zdroj, Poland, hereinafter referred to as PTM
Ltd., represented by President Wolfgang Rauball and Deputy President Andrzej K.
Andraczke.

I. PRESENTATION OF THE PARTIES

Polish Oil and Gas Company is a joint stock company, registered in the
commercial register of the District Court in the capital city of Warsaw - XVI
Commercial Department at No RHB 48382, on the basis of the verdict of the Court
dated 30th Oct. 1996 act. sign. XVI reg. no. H 12934/96.

Polish Oil and Gas Company, Joint Stock Company acts on the ground of its
charter, conferred upon the deed of foundation by the Ministry of State Treasury
on 21st Oct. 1996, which defines aim and scope of activity of the company (being
public services company) among the other things as:

- exploration, development and exploitation of oil and natural gas
reservoirs,

- surface and drilling geophysics, minerals' and waters' exploration, as
well as their exploitation, intensification of production, reservoir
testing and reconstruction, and liquidation of bore-holes and oil
wells.

Within the organizational framework of PGNiG S.A., the above tasks are
carried directly by its branch - Geological Bureau GEONAFTA (Biuro Geologiczne
GEONAFTA).

POL-TEX METHANE is a limited liability company, wholly owned by foreign
capital, registered in the commercial register of the District Court in Katowice
- - - VII Commercial Register Department at No RHB 5508, based on the verdict of the
Court dated 5th Sept. 1990.

The scope of activity of the company among the other things is:

- exploration and exploitation of methane and other hydrocarbons,

- full range of services concerning above.

POL-TEX METHANE states, that is wholly owned by and represents for this Letter
of Intent purposes the Eurogas Inc., 80 Broad Street Penthouse, New York, NY
10004. European Division: GlobeGas B.V., Herengracht 486, 1017 Amsterdam.

II. PRELIMINARY AGREEMENTS

1. PGNiG S.A. is the owner of valid concessions for exploration and documented
natural gas reservoirs in the area of Carpathian Flysch and tectonic Foredeep
("exploration concessions"), granted by the Minister of Environmental
Protection, Natural Resources and Forestry, presented in detail on the map being
the attachment to this Letter of Intent, and conformably to the concessions -
agreements on establishing mining usufruct for PGNiG S.A.'s benefit.

2. There are also other areas in the region of Carpathian Flysch and Foredeep,
interesting from the point of view of geological exploration being the areas of
interest of PGNiG S.A. and PTM Ltd. and for which PGNiG does not currently hold
the concessions.

3. PTM Ltd. is able and inclined to supply capital, and equipment
indispensable to accomplish the exploration concession agreed with PGNiG S.A.,
for the total amount of 15.000.000. (fifteen million) USD, within a period of
three years.

4. PTM Ltd. is ready to participate also in the undertakings which can create
the base (accordingly to pt. 2) for applications of exploration concessions.

Bearing the above stated in mind, both parties pledge themselves to perform
the below activities in order to settle the content and conclude the contract of
the joint-venture, assuring accomplishment of the concessions as defined in pt.
1 and works as defined in pt. 4 and concessions granted as result of these
works.

III. DEFINING (CHOICE) OF THE CONCESSION

1. No later than 21 days from the execution of this Letter of Intent both
parties will create work Team from the employees of PGNiG and PTM. This Team
will have 4 to 6 persons in equal number from both companies. The Team will
choose the concessions (part II pt. 1) and/or areas for which concessions are
not yet granted but for which there are expectations to achieve positive results
(part II pt. 4).

2. The team will present to both parties the conclusions of its works not
later than to September 30, 1997. These conclusions will create the base to
make the final decisions for both parties to choose the exploration concessions
and/or the areas for which concessions are still not granted.

3. The conclusions and the decisions undertaken upon them will create the
base to define the detailed subject and the range of the mutual agreement and
the timing of its execution.

IV. OBJECT AND SCOPE OF THE JOINT-VENTURE CONTRACT

1. Both parties confirm, that the joint-venture contract should in particular
define:

a/ concession for exploration and (or) documentation of natural gas
reservoirs, as choosen by both parties and as defined in the part III of
this Letter.

b/ conditions of PTM Ltd. engagement to perform the concession's rights, in
accordance with the concession's requirements.

c/ PTM Ltd.'s obligation to cover the expenses of the activities (as
defined in Part II of the Letter), with the irrevocable statement that the
costs engagement will be at PTM Ltd.'s own risk.

d/ budget estimate and schedule of its utilization, during the time the
agreement is binding.

e/ reciprocal obligation that, in case of satisfactory result of
exploration works, both parties shall conclude a separate agreement, not
later than 3 months since the day the geological documentation has been
approved by the appropriate authority, and decide either to perform the
concession for natural gas exploitation jointly, or pass by PGNiG the
rights to information gained through the geological works (geological
documentation) to PTM Ltd. or to any other party; or - decide about the
principles and time of the reciprocal settlement between them, in each
case, the accounts clearing shall provide refund of the capital invested by
PTM Ltd. during the exploration works together with the suitable profit.

f/ other rights and duties, and the principles of the parties cooperation
while performing the exploration concession.

g/ rules of settling the disputes.

h/ time of binding force of the agreement, as well as conditions and the
mode of dissolution of the contract.

i/ other adjustments and assurances.

2. Parties shall try, if possible, to establish a company with their sole
participation, for accomplishing the joint-venture. In such instance, the
agreement for joint-venture should define all aspects required by Polish law,
adequate for the articles of association (charter) of the company, and all the
necessary licenses and confirmations from both of the parties and the permit of
appropriate State authorities.

3. If referrals in this Letter of Intent are made to mutual undertaking for
cooperation of parties to execute the exploration concessions, it is understood
that the works as defined in part II pt. 4 are part of this undertaking as well.

V. ADDITIONAL CLAUSES

1. Languages:

The present Letter of Intent has been written in Polish and English. Both
language versions are of equal importance and have the same binding force.

2. Exclusivity:

PGNiG S.A. commits itself, that until time to September 30, 1997 nobody except
PTM Ltd. will be offered, negotiated or entered into a contract for performing
the rights from the exploration concessions or the areas of future interest for
which the concessions are not yet granted as defined in part II of this Letter
of Intent, except for those areas as defined in the attached map, referred to in
paragraph II.1., which are currently under study by third parties.

VI. DELIVERIES

All announcements relating to this Letter of Intent will be considered
valid, as long as they are in writing and are delivered personally to the
authorized representative of the party informed, or are sent to the address of
the other party by a registered mail, telex or fax.

The addresses for deliveries are shown in the preamble of this Letter.

VII. EFFECTIVE DATE OF THE LETTER OF INTENT

This Letter of Intent becomes effective on the day it is signed.

For PGNiG S.A. For PTM Ltd.
Marek Hoffmann, Director Wolfgang Rauball, President
Geonafta Office

/s/ Marek Hoffmann /s/ Wolfgang Rauball

Warsaw, April 28, 1997 Andrzej K. Andraczke, Vice-President

/s/ Andrzej K. Andraczke

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE BALANCE SHEET AS OF DECEMBER 31, 1996, AND STATEMENTS OF OPERATIONS FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>

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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
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<SECURITIES> 0
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