Edgar Filing: VAALCO ENERGY INC /DE/

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-KSB
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the fiscal year ended December 31, 2001

[_]TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

For the transition period from to

Commission file number 0-20928

VAALCO Energy, Inc.
(Name of small business issuer in its charter)

Delaware 76-0274813
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

4600 Post Oak Place
Suite 309
Houston, Texas 77027
(Address of principal executive (Zip Code)
offices)

Issuer's telephone number: (713) 623-0801

Securities registered under Section 12(b) of the Exchange Act:

Title of each class Name of each exchange on which registered
------------------- -----------------------------------------

None

Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.10 par value
(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 [X] No
[_].

Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B 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].

The registrant's revenues for the fiscal year ended December 31, 2001 were
$1,865,312.

The aggregate market value of the voting and non-voting common equity of
the registrant held by non-affiliates, as of March 26, 2001 was $5,272,004.

As of March 26, 2001, there were outstanding 20,744,569 shares of Common
Stock, $.10 par value per share, of the registrant.

Documents incorporated by reference: Definitive proxy statement of VAALCO
Energy, Inc. relating to the Annual Meeting of Stockholders to be filed within
120 days after the end of the fiscal year covered by this Form, which is
incorporated into Part III of this 10-KSB.

Transitional Small Business Disclosure Format: Yes [_] No [X].

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VAALCO ENERGY, INC.

TABLE OF CONTENTS

PART I

Item 1. Business....................................................... 1
Item 2. Properties..................................................... 11
Item 3. Legal Proceedings.............................................. 16
Item 4. Submission of Matters to a Vote of Security Holders............ 16

PART II

Item 5. Market for Common Equity and Related Stockholder Matters....... 17
Item 6. Management's Discussion and Analysis or Plan of Operations..... 17
Item 7. Financial Statements and Supplementary Data.................... 23
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure........................................... 42

PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.............. 43
Item 10. Executive Compensation......................................... 43
Item 11. Security Ownership of Certain Beneficial Owners and
Management..................................................... 43
Item 12. Certain Relationships and Related Transactions................. 43
Item 13. Exhibits and Reports on Form 8-K............................... 43

PART I

Item 1. Business

Background

VAALCO Energy, Inc., a Delaware corporation, is a Houston-based independent
energy company principally engaged in the acquisition, exploration,
development and production of crude oil and natural gas. As used herein, the
terms "Company" and "VAALCO" mean VAALCO Energy, Inc. and its subsidiaries,
unless the context otherwise requires. VAALCO owns producing properties and
conducts exploration activities as operator of consortiums internationally in
the Philippines and Gabon. Domestically, the Company has interests in the
Texas Gulf Coast area.

VAALCO's Philippine subsidiaries include Alcorn (Philippines) Inc., Alcorn
(Production) Philippines Inc. and Altisima Energy, Inc. VAALCO's Gabon
subsidiaries are VAALCO Gabon (Etame), Inc. and VAALCO Production (Gabon),
Inc. VAALCO Energy (USA), Inc. holds interests in certain properties located
in the United States.

In connection with a merger with 1818 Oil Corp. in 1998, the Company issued
to the 1818 Fund II, L.L.P. (the "1818 Fund") Common Stock and Preferred Stock
which votes as a class with the Common Stock on an as converted basis,
representing approximately 65% of the outstanding voting power of the Company
on an as converted basis (excluding options and warrants). In addition, the
terms of the Preferred Stock acquired by the 1818 Fund provide that while the
Preferred Stock is outstanding, the holders of Preferred Stock voting together
as a class are entitled to elect three directors of the Company. Accordingly,
the 1818 Fund is able to control all matters submitted to a vote of the
stockholders of the Company, including the election of directors. (See "Risk
Factors--Control by 1818 Fund").

Recent Developments

In the fourth quarter of 2001, the Company, as Operator, announced its
intent to develop the Etame discovery located offshore of the Republic of
Gabon. Based upon estimates by the Company's independent reserve engineers,
the Company is booking 6.1 million barrels of proven undeveloped oil reserves
at December 31, 2001 representing $23.1 million of net present value of future
cash flows in conjunction with the plan to develop the field. The budget for
the field development is $43.2 million dollars ($13.1 million net to the
Company) to complete and gravel pack three existing wells with subsea
wellheads, and to lay flowlines to connect the wells to a 1.1 million barrel
floating production storage and offloading tanker ("FPSO"). Major contracts
for the FPSO, wellheads, flowlines, and the drilling rig have been awarded and
entered into to perform the project. The project is expected to come online
about September 1, 2002 at initial flow rates of at least 12,000 barrels of
oil per day ("BOPD"). (See Item 2--Properties/Gabon).

To fund its share of the development project, the Company has negotiated a
line of credit of $10.0 million with the International Finance Corporation
("IFC"), a subsidiary of the World Bank. The IFC Board of Directors approved
the loan in early March 2002. Prior to project completion date, the IFC loan
will be guaranteed by the Company via cash received from a loan from the 1818
Fund. To date, there have been no borrowings under the IFC line.

In June 2001, the Company announced the results of a well drilled in Brazos
County, Texas. The well was completed at an initial flow rate of 525 barrels
of oil per day and 1.4 million cubic feet of gas per day. The well was
completed horizontally in the Buda and Georgetown formations. An offset
location was completed in September 2001 and flowed at an initial rate of 191
barrels of oil per day and 1.8 million cubic feet of gas per day. VAALCO has a
30 percent working interest in the project.

with the wind up of the joint venture, the Company received $169,000 in cash,
a receivable for $47,000 representing its share of cash in the joint venture
and $259,000 of undeveloped acreage representing its proportionate 93.75%
working interest in kind in all remaining prospects within the joint venture.
Final completion of assignment documentation is ongoing.

General

The Company's strategy is to increase reserves and production in a cost-
effective manner through a program that balances lower risk exploratory and
development drilling on VAALCO's domestic acreage with high potential
international prospects. Internationally, financial exposure and political
risk are mitigated through alliances with experienced industry partners who
fund the majority of required capital. In 2002, substantially all of the
Company's capital and personnel resources will be committed to the project in
Gabon to achieve its completion.

International

The Company's international strategy is to pursue selected opportunities
that are characterized by reasonable entry costs, favorable economic terms,
high reserve potential relative to capital expenditures and the availability
of existing technical data that may be further developed using current
technology. The Company believes that it has unique management and technical
expertise in identifying international opportunities and establishing
favorable operating relationships with host governments and local partners
familiar with the local practices and infrastructure. The Company owns
producing properties and conducts exploration activities as operator of
consortium internationally in the Philippines and Gabon.

Domestic

The Company's domestic strategy is to build near-term cash flows through
focused acquisition of domestic properties that have significant exploration
or future development potential. Recognizing that international operations are
subject to greater social, economic and political volatility, the Company
seeks to build a stable domestic production and reserve base that will permit
the Company to continue to participate in more high-risk international
projects with greater reserve potential.

Customers

Substantially all of the Company's crude oil and natural gas is sold at the
well head at posted or indexed prices under short-term contracts, as is
customary in the industry. In the Philippines, for the year ended December 31,
2001, two purchasers of the Company's crude oil accounted for essentially all
of the Company's total crude oil sales. The Company marketed its crude oil
share in the Philippines under an agreement with SeaOil Corporation, a local
Philippines refiner ("SeaOil") and Caltex. While the loss of these buyers
might have a material effect on the Company in the near term, management
believes that the Company would be able to obtain other customers for its
crude oil. Domestic production is sold under two contracts, one for oil and
one for gas. The Company has access to several alternative buyers for oil and
gas sales domestically.

Employees

As of December 31, 2001, the Company had 24 full-time employees, 17 of
which were located in the Philippines. The Company is not subject to any
collective bargaining agreements and believes its relations with its employees
are satisfactory.

Competition

The oil and gas industry is highly competitive. Competition is particularly
intense with respect to acquisitions of desirable oil and gas reserves. There
is also competition for the acquisition of oil and gas leases

suitable for exploration and the hiring of experienced personnel. Competition
also exists with other industries in supplying the energy needs of consumers.
In addition, the producing, processing and marketing of oil and gas is
affected by a number of factors beyond the control of the Company, the effects
of which cannot be accurately predicted.

The Company's competition for acquisitions, exploration, development and
production include the major oil and gas companies in addition to numerous
independent oil companies, individual proprietors, drilling and acquisition
programs and others. Many of these competitors possess financial and personnel
resources substantially in excess of those available to the Company, giving
those competitors an enhanced ability to pay for desirable leases and to
evaluate, bid for and purchase properties or prospects. The ability of the
Company to generate reserves in the future will depend on its ability to
select and acquire suitable producing properties and prospects for future
drilling and exploration.

Environmental Regulations

General

The Company's activities are subject to federal, state and local laws and
regulations governing environmental quality and pollution control in the
United States and also are subject to the laws and regulations of the
Philippines and Gabon. Although no assurances can be made, the Company
believes that, absent the occurrence of an extraordinary event, compliance
with existing laws, rules and regulations regulating the release of materials
in the environment or otherwise relating to the protection of the environment
will not have a material effect upon the Company's capital expenditures,
earnings or competitive position with respect to its existing assets and
operations. The Company cannot predict what effect future regulation or
legislation, enforcement policies, and claims for damages to property,
employees, other persons and the environment resulting from the Company's
operations could have on its activities.

Solid and Hazardous Waste

The Company currently owns or leases, and in the past owned or leased,
properties that have been used for the exploration and production of oil and
gas for many years. Although the Company has utilized operating and disposal
practices that were standard in the industry at the time, hydrocarbons or
other solid wastes may have been disposed or released on or under the
properties owned or leased by the Company or on or under locations where such
wastes have been taken for disposal. In addition, some of these properties are
or have been operated by third parties. The Company has no control over such
entities' treatment of hydrocarbons or other solid wastes and the manner in
which such substances may have been disposed or released. State and federal
laws applicable to oil and gas wastes and properties have gradually become
stricter over time. Under new laws, the Company could be required to remediate
property, including groundwater, containing or impacted by previously disposed
wastes (including wastes disposed or released by prior owners or operators, or
property contamination, including groundwater contamination by prior owners or
operators) or to perform remedial plugging operations to prevent future or
mitigate existing contamination.

The Company generates wastes, including hazardous wastes that are subject
to the federal Resource Conservation and Recovery Act ("RCRA") and comparable
state statutes. The Environmental Protection Agency ("EPA") and various state
agencies have limited the disposal options for certain wastes, including
wastes designated as hazardous under RCRA and state analogs ("Hazardous
Wastes"). Furthermore, it is possible that certain wastes generated by the
Company's oil and gas operations that are currently exempt from treatment as
Hazardous Wastes may in the future be designated as Hazardous Wastes under
RCRA or other applicable statutes and, therefore, may be subject to more
rigorous and costly disposal requirements.

Superfund

The federal Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), also known as the "Superfund" law, generally imposes
joint and several liability for costs of investigation and

remediation and for natural resource damages, without regard to fault or the
legality of the original conduct, on certain classes of persons with respect
to the release into the environment of substances designated under CERCLA as
hazardous substances ("Hazardous Substances"). These classes of persons, or
so-called potentially responsible parties ("PRPs"), include the current and
certain past owners and operators of a facility where there has been a release
or threat of release of a Hazardous Substance and persons who disposed of or
arranged for the disposal of Hazardous Substances found at a site. CERCLA also
authorizes the EPA and, in some cases, third parties to take actions in
response to threats to the public health or the environment and to seek to
recover from the PRPs the costs of such action. Although CERCLA generally
exempts "petroleum" from the definition of Hazardous Substance, in the course
of its operations, the Company has generated and will generate wastes that may
fall within CERCLA's definition of Hazardous Substance. The Company may also
be the owner or operator of sites on which Hazardous Substances have been
released. To its knowledge, neither the Company nor its predecessors have been
designated as a PRP by the EPA under CERCLA; the Company also does not know of
any prior owners or operators of its properties that are named as PRPs related
to their ownership or operation of such properties.

Clean Water Act

The Clean Water Act ("CWA") imposes restrictions and strict controls
regarding the discharge of wastes, including produced waters and other oil and
natural gas wastes, into waters of the United States, a term broadly defined.
These controls have become more stringent over the years, and it is probable
that additional restrictions will be imposed in the future. Permits must be
obtained to discharge pollutants into federal waters. The CWA provides for
civil, criminal and administrative penalties for unauthorized discharges of
oil and hazardous substances and of other pollutants. It imposes substantial
potential liability for the costs of removal or remediation associated with
discharges of oil or hazardous substances and other pollutants. State laws
governing discharges to water also provide varying civil, criminal and
administrative penalties and impose liabilities in the case of a discharge of
petroleum or its derivatives, or other hazardous substances, into state
waters. In addition, the EPA has promulgated regulations that may require us
to obtain permits to discharge storm water runoff, including discharges
associated with construction activities. In the event of an unauthorized
discharge of wastes, the Company may be liable for penalties and costs.

Oil Pollution Act

The Oil Pollution Act of 1990 ("OPA"), which amends and augments oil spill
provisions of CWA, imposes certain duties and liabilities on certain
"responsible parties" related to the prevention of oil spills and damages
resulting from such spills in or threatening United States waters or adjoining
shorelines. A liable "responsible party" includes the owner or operator of a
facility, vessel or pipeline that is a source of an oil discharge or that
poses the substantial threat of discharge, or the lessee or permittee of the
area in which a discharging facility is located. OPA assigns joint and several
liability, without regard to fault, to each liable party for oil removal costs
and a variety of public and private damages. Although defenses exist to the
liability imposed by OPA, they are limited. In the event of an oil discharge
or substantial threat of discharge, the Company may be liable for costs and
damages.

The OPA also imposes ongoing requirements on a responsible party, including
proof of financial responsibility to cover at least some costs in a potential
spill. Certain amendments to the OPA that were enacted in 1996 require owners
and operators of offshore facilities that have a worst case oil spill
potential of more than 1,000 barrels to demonstrate financial responsibility
in amounts ranging from $10 million in specified state waters and $35 million
in federal outer continental shelf ("OCS") waters, with higher amounts, up to
$150 million based upon worst case oil-spill discharge volume calculations.
The Company believes that it has established adequate proof of financial
responsibility for its offshore facilities.

Air Emissions

The Company's operations are subject to local, state and federal
regulations for the control of emissions from sources of air pollution.
Federal and state laws require new and modified sources of air pollutants to
obtain

permits prior to commencing construction. Major sources of air pollutants are
subject to more stringent, federally imposed requirements including additional
permits. Federal and state laws designed to control hazardous (toxic) air
pollutants, might require installation of additional controls. Administrative
enforcement actions for failure to comply strictly with air pollution
regulations or permits are generally resolved by payment of monetary fines and
correction of any identified deficiencies. Alternatively, regulatory agencies
could bring lawsuits for civil penalties or require the Company to forego
construction, modification or operation of certain air emission sources.

Coastal Coordination

There are various federal and state programs that regulate the conservation
and development of coastal resources. The federal Coastal Zone Management Act
("CZMA") was passed in 1972 to preserve and, where possible, restore the
natural resources of the Nation's coastal zone. The CZMA provides for federal
grants for state management programs that regulate land use, water use and
coastal development.

In Texas, the Legislature enacted the Coastal Coordination Act ("CCA"),
which provides for the coordination among local and state authorities to
protect coastal resources through regulating land use, water, and coastal
development. The act establishes the Texas Coastal Management Program ("CMP").
The CMP is limited to the nineteen counties that border the Gulf of Mexico and
its tidal bays. The act provides for the review of state and federal agency
rules and agency actions for consistency with the goals and policies of the
Coastal Management Plan. This review may impact agency permitting and review
activities and add an additional layer of review to certain activities
undertaken by the Company.

OSHA and other Regulations

The Company is subject to the requirements of the federal Occupational
Safety and Health Act ("OSHA") and comparable state statutes. The OSHA hazard
communication standard, the EPA community right-to-know regulations under
Title III of CERCLA and similar state statutes require the Company to organize
and/or disclose information about hazardous materials used or produced in its
operations. The Company believes that it is in substantial compliance with
these applicable requirements.

Risk Factors

Environmental and Other Regulations

The laws and regulations of the United States, Philippines and Gabon
regulate the Company's business. These laws and governmental regulations,
which cover matters including drilling operations, taxation and environmental
protection, may be changed from time to time in response to economic or
political conditions. (See "Foreign Operations"). The Company prepared an
Environmental Impact Assessment for its development of the Etame field, and
filed the report with the Government of Gabon and the IFC.

The Company's domestic operations are subject to numerous laws and
regulations governing the discharge of materials into the environment or
otherwise relating to environmental protection. The Company's domestic
operations could result in liability for personal injuries, property damage,
oil spills, discharge of hazardous materials, remediation and clean-up costs
and other environmental damages. In addition, the Company could be liable for
environmental damages caused by previous property owners. As a result,
substantial liabilities to third parties or governmental entities may be
incurred; the payment of which could have a material adverse effect on the
Company's financial condition, results of operations and liquidity. The
Company maintains insurance coverage for its operations, including limited
coverage for sudden environmental damages, but does not believe that insurance
coverage for environmental damages that occur over time is available at a
reasonable cost. Moreover, the Company does not believe that insurance
coverage for the full potential liability that could be caused by sudden
environmental damages is available at a reasonable cost. Accordingly, the
Company may be subject to liability or may lose substantial portions of its
properties in the event of certain environmental damages. The Company could
incur substantial costs to comply with environmental laws and regulations.

Substantial portions of the Company's producing properties are located
offshore. The costs to abandon offshore wells may be substantial. For
financial accounting purposes the Company accrues a barrel oil equivalent
("BOE") charge over the life of a field to cover such abandonment costs. No
assurances can be given that such reserves will be sufficient to cover such
costs in the future as they are incurred.

The recent trend toward stricter standards in environmental legislation and
regulation in the U.S. is likely to continue. If such legislation were
enacted, it could have a significant impact on the operating costs of the
Company, as well as the oil and gas industry in general.

In addition, while the Company believes that it is currently in compliance
with environmental laws and regulations applicable to the Company's operations
in the Philippines, Gabon and the U.S., no assurances can be given that the
Company will be able to continue to comply with such environmental laws and
regulations without incurring substantial costs.

Forward-Looking Information and Risk Factors

This report includes "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended ("Exchange Act"). All statements
other than statements of historical fact included in this Report (and the
exhibits hereto), including without limitation, statements regarding the
Company's financial position and estimated quantities and net present values
of reserves, are forward looking statements. The Company can give no
assurances that the assumptions upon which such statements are based will
prove to have been correct. Important factors that could cause actual results
to differ materially from the Company's expectations ("Cautionary Statements")
are disclosed in the section "Risk Factors," elsewhere herein and in other
periodic reports filed under the Exchange Act, which are herein incorporated
by reference. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified by the Cautionary Statements.

Volatility of Oil and Gas Prices and Markets

The Company's revenues, cash flow, profitability and future rate of growth
are substantially dependent upon prevailing prices for oil and gas. The
Company's ability to borrow funds and to obtain additional capital on
attractive terms is also substantially dependent on oil and gas prices. The
Company's production in the Philippines is from mature offshore fields with
high production costs. The Company's margin on sales from these fields (the
price received for oil less the production costs for the oil) is lower than
the margin on oil production from many other areas. As a result, the
profitability of the Company's production in the Philippines is affected more
by changes in prices than production located in other areas. Historically, oil
and gas prices and markets have been volatile and are likely to continue to be
volatile in the future. Prices for oil and gas are subject to wide
fluctuations in response to relatively minor changes in supply of and demand
for oil and gas, market uncertainty and a variety of additional factors that
are beyond the control of the Company. These factors include international
political conditions, the domestic and foreign supply of oil and gas, the
level of consumer demand, weather conditions, domestic and foreign
governmental regulations, the price and availability of alternative fuels and
overall economic conditions. In addition, various factors, including the
availability and capacity of gas gathering systems and pipelines, the effect
of federal, state and foreign regulation of production and transportation,
general economic conditions, changes in supply due to drilling by other
producers and changes in demand may adversely affect the Company's ability to
market its oil and gas production. Any significant decline in the price of oil
or gas would adversely affect the Company's revenues, operating income, cash
flows and borrowing capacity and may require a reduction in the carrying value
of the Company's oil and gas properties and its planned level of capital
expenditures.

Replacement of Reserves

The Company's future success depends upon its ability to find, develop or
acquire additional oil and gas reserves that are economically recoverable.
Except to the extent that the Company conducts successful

exploration or development activities or acquires properties containing proved
reserves, the estimated net proved reserves of the Company will generally
decline as reserves are produced. There can be no assurance that the Company's
planned development and exploration projects and acquisition activities will
result in significant additional reserves or that the Company will have
continuing success drilling productive wells at economic finding costs. The
drilling of oil and gas wells involves a high degree of risk, especially the
risk of dry holes or of wells that are not sufficiently productive to provide
an economic return on the capital expended to drill the wells. In addition,
the Company's drilling operations may be curtailed, delayed or canceled as a
result of numerous factors, including title problems, weather conditions,
political instability, economic/currency imbalances, compliance with
governmental requirements or delays in the delivery of equipment and
availability of drilling rigs. Certain of the Company's oil and gas properties
are operated by third parties or may be subject to operating committees
controlled by national oil companies and, as a result, the Company has limited
control over the nature and timing of exploration and development of such
properties or the manner in which operations are conducted on such properties.

Substantial Capital Requirements

The Company makes, and will continue to make, substantial capital
expenditures for the acquisition, exploitation, development, exploration and
production of oil and gas reserves. Historically, the Company has financed
these expenditures primarily with cash flow from operations, asset sales, and
private sales of equity. During 2002, the Company is participating in the
development of the Etame Block offshore Gabon. The Company is the Operator for
the Block and thus responsible for contracting on behalf of all the remaining
parties participating in the project. The Company relies on the timely payment
of cash calls by its partners to pay for the 69.65% share of the budget for
which the partners are responsible. The estimated cost to develop the three
Etame wells and connect them to a tanker is $43.2 million ($13.1 million net
to the Company). There can be no assurances that costs on the Etame Block
could not be higher than expected requiring the Company to seek other sources
of financing. (See "Drilling Risks, Operating Hazards and Uninsured Risks").

Of the Company's estimated $13.1 million share of the development project
in Gabon, approximately $0.7 million had been spent as of December 31, 2001.
During 2002, the Company anticipates that it will make capital expenditures on
oil and gas properties of approximately $12.4 million, all in Gabon. The
Company has negotiated a line of credit for its subsidiary VAALCO Gabon
(Etame), Inc. in the amount of $10.0 million with the IFC to partially fund
its share of the development project, which was approved by the IFC Board of
Directors in early March 2002. Prior to project completion date ("Project
Completion"), the IFC loan is expected to be guaranteed by the Company and
cash collateralized with proceeds from a loan from the 1818 Fund. Project
Completion requires gross project production of 14,250 BOPD and gross proved
reserves of 16.5 million barrels and compliance with financial covenants and
other conditions, which may not be achieved. The IFC requires Project
Completion to occur prior to March 31, 2003.

At the date of this filing, the loan agreements for both the IFC loan and
the 1818 Fund loan have not been signed and there can be no assurance that the
loans will fund until they are signed. Management believes that execution of
each loan document is imminent, however until mutually acceptable agreements
are signed there is no binding commitment by either lenders. In addition to
each loan being subject to final approval by senior management of both
lenders, and the effectiveness of the other's loan, the terms of the IFC loan
provide that initial funding is subject to Gabon Government approval, which
the Company believes it will receive. A condition for receiving the 1818 Fund
loan is the signing of the IFC loan documents. The Company believes the cash
on hand at December 31, 2001 coupled with the loan from the IFC will be
sufficient to fund the Company's capital budget through 2002, but conditions
could change and costs could be higher than expected.

Drilling Risks

Drilling activities are subject to many risks, including the risk that no
commercially productive reservoirs will be encountered. There can be no
assurance that new wells drilled by the Company will be productive or that the
Company will recover all or any portion of its investment. Drilling for oil
and natural gas may involve

unprofitable efforts, not only from dry wells, but also from wells that are
productive but do not produce sufficient net revenues to return a profit after
drilling, operating and other costs. The cost of drilling, completing and
operating wells is often uncertain and cost overruns are common. The Company's
drilling operations may be curtailed, delayed or canceled as a result of
numerous factors, many of which are beyond the Company's control, including
title problems, weather conditions, compliance with governmental requirements
and shortages or delays in the delivery of equipment and services.

Operating Hazards and Uninsured Risks

The oil and gas business involves a variety of operating risks, including
fire, explosions, blow-outs, pipe failure, casing collapse, abnormally
pressured formations and environmental hazards such as oil spills, gas leaks,
ruptures and discharges of toxic gases, the occurrence of any of which could
result in substantial losses to the Company due to injury and loss of life,
severe damage to and destruction of property, natural resources and equipment,
pollution and other environmental damage, clean-up responsibilities,
regulatory investigation and penalties and suspension of operations. The
Company's production facilities are also subject to hazards inherent in marine
operations, such as capsizing, sinking, grounding, collision and damage from
severe weather conditions. The relatively deep offshore drilling conducted by
the Company overseas involves increased drilling risks of high pressures and
mechanical difficulties, including stuck pipe, collapsed casing and separated
cable. The impact that any of these risks may have upon the Company is
increased due to the low number of producing properties owned by the Company.
The Company and operators of properties in which it has an interest maintain
insurance against some, but not all, potential risks; however, there can be no
assurance that such insurance will be adequate to cover any losses or exposure
for liability. The occurrence of a significant unfavorable event not fully
covered by insurance could have a material adverse effect on the Company's
financial condition, results of operations and cash flows. Furthermore, the
Company cannot predict whether insurance will continue to be available at a
reasonable cost or at all.

Uncertainties in Estimating Reserves and Future Net Cash Flows

There are numerous uncertainties inherent in estimating quantities of
proved oil and gas reserves, including many factors beyond the control of the
Company. Reserve engineering is a subjective process of estimating the
underground accumulations of oil and gas that cannot be measured in an exact
manner. The estimates included herein are based on various assumptions
required by the Commission, including unescalated prices and costs and capital
expenditures, and, therefore, are inherently imprecise indications of future
net revenues. Actual future production, revenues, taxes, operating expenses,
development expenditures and quantities of recoverable oil and gas reserves
may vary substantially from those assumed in the estimates. Any significant
variance in these assumptions could materially affect the estimated quantity
and value of reserves set forth in this document. In addition, the Company's
reserves may be subject to downward or upward revision based upon production
history, results of future development, availability of funds to acquire
additional reserves, prevailing oil and gas prices and other factors.
Moreover, the calculation of the estimated present value of the future net
revenue using a 10% discount rate as required by the Commission is not
necessarily the most appropriate discount factor based on interest rates in
effect from time to time and risks associated with the Company's reserves or
the oil and gas industry in general.

It is also possible that reserve engineers may make different estimates of
reserves and future net revenues based on the same available data. In
calculating reserves on a BOE basis, gas was converted to oil at the ratio of
six Mcf of gas to one Bbl of oil. While this conversion ratio approximates the
energy equivalent of oil and gas on a Btu basis, it may not represent the
relative prices received by the Company on the sale of its oil and gas
production.

The estimated future net revenues attributable to the Company's net proved
reserves are prepared in accordance with Commission guidelines, and are not
intended to reflect the fair market value of the Company's reserves. In
accordance with the rules of the Commission, the Company's reserve estimates
are prepared using

period end prices received for oil and gas. Future reductions in prices below
those prevailing at year-end 2001 would result in the estimated quantities and
present values of the Company's reserves being reduced.

A substantial portion of the Company's proved reserves are or will be
subject to service contracts, production sharing contracts and other
arrangements. The quantity of oil and gas the Company will ultimately receive
under these arrangements will differ based on numerous factors, including the
price of oil and gas, production rates, production costs, cost recovery
provisions and local tax and royalty regimes. Changes in many of these factors
do not affect estimates of U.S. reserves in the same way they affect estimates
of proved reserves in foreign jurisdictions, or will have a different effect
on reserves in foreign countries than in the United States. As a result,
proved reserves in foreign jurisdictions may not be comparable to proved
reserve estimates in the United States.

Foreign Operations

The Company's international assets and operations are subject to various
political, economic and other uncertainties, including, among other things,
the risks of war, expropriation, nationalization, renegotiation or
nullification of existing contracts, taxation policies, foreign exchange
restrictions, changing political conditions, international monetary
fluctuations, currency controls and foreign governmental regulations that
favor or require the awarding of drilling contracts to local contractors or
require foreign contractors to employ citizens of, or purchase supplies from,
a particular jurisdiction. In addition, if a dispute arises with foreign
operations, the Company may be subject to the exclusive jurisdiction of
foreign courts or may not be successful in subjecting foreign persons,
especially foreign oil ministries and national oil companies, to the
jurisdiction of the United States.

The Company's private ownership of oil and gas reserves under oil and gas
leases in the United States differs distinctly from its ownership of foreign
oil and gas properties. In the foreign countries in which the Company does
business, the state generally retains ownership of the minerals and
consequently retains control of (and in many cases, participates in) the
exploration and production of hydrocarbon reserves. Accordingly, operations
outside the United States may be materially affected by host governments
through royalty payments, export taxes and regulations, surcharges, value
added taxes, production bonuses and other charges.

The majority of the Company's proven reserves are located offshore of the
Republic of Gabon. The Company has recently undertaken to develop the Etame
Block offshore Gabon at a cost of $13.1 million net to the Company. The
Company has operated in Gabon since 1995 and believes it has good relations
with the current Gabonese government. However, there can be no assurance that
present or future administrations or governmental regulations in Gabon will
not materially adversely affect the operations or cash flows of the Company.

Certain of the Company's producing properties are located offshore Palawan
Island in the Philippines, and, consequently, a portion of the Company's
assets is subject to regulation by the government of the Philippines. Although
there has been unrest and uncertainty in the Philippines, to date, the
country's Office of Energy Affairs has been largely unaffected by political
changes. The Company has operated in the Philippines since 1985 and believes
that it has good relations with the current Philippine government. However,
there can be no assurance that present or future administrations or
governmental regulations in the Philippines will not materially adversely
affect the operations or cash flows of the Company.

All of the Company's current Philippine producing properties are located in
fields covered under Service Contract No. 14. To obtain favorable tax
treatment, Philippine nationals must own at least 15% of Service Contract No.
14. Residents of the Philippines currently own in excess of 15% of Blocks A,
B, C and D of Service Contract 14. The Company's ability to export oil
produced in the Philippines is restricted by the terms of Service Contract No.
14. The Company currently sells its oil production within the Philippines and
therefore may be exposed to foreign currency risk.

Control by 1818 Fund

In connection with a merger with 1818 Oil Corp. in 1998, the Company issued
to the 1818 Fund Common Stock and Preferred Stock which votes as a class with
the Common Stock on an as converted basis, representing approximately 65% of
the outstanding voting power of the Company on an as converted basis
(excluding options and warrants). In addition, the terms of the Preferred
Stock acquired by the 1818 Fund provide that while the Preferred Stock is
outstanding, the holders of Preferred Stock voting together as a class are
entitled to elect three directors of the Company. Accordingly, the 1818 Fund
is able to control all matters submitted to a vote of the stockholders of the
Company, including the election of directors.

In connection with the 1818 Oil Corp. merger, the Company made certain
changes to its bylaws which require that at least a majority of the directors
constituting the entire board of directors, which majority must include at
least one of the directors elected by the holders of Preferred Stock, approve
each of the following transactions effected by either the Company or, as
applicable, any subsidiary of the Company, (i) any issuance of or agreement to
issue any equity securities, including securities convertible into or
exchangeable for such equity securities (other than issuances pursuant to an
employee benefit plan); (ii) the declaration of any dividend; (iii) the
incurrence, assumption of or refinancing of indebtedness; (iv) the adoption of
any employee stock option or similar plan; (v) entering into employment or
consulting agreements with annual compensation exceeding $100,000; (vi) any
merger or consolidation; (vii) the sale, conveyance, exchange or transfer of
the voting stock or all or substantially all of the assets; (viii) the sale or
other disposition to another person, or purchase, lease or other acquisition
from another person, of any material assets, rights or properties; (ix)
certain expenditures in excess of $300,000; (x) the formation of any entity
that is not wholly-owned by the Company; (xi) material changes in accounting
methods or policies; (xii) any amendment, modification or restatement of the
certificate of incorporation or bylaws; (xiii) the settlement of any claim or
other action against the Company or subsidiary in an amount in excess of
$50,000; (xiv) approval or amendment of the annual operating budget; (xv) any
other action which is not in the ordinary course of business; and the
agreement to take any of the foregoing actions. Accordingly, none of the
foregoing actions can be taken by the Company without the approval of at least
one director designated by the holders of the Preferred Stock.

Environmental and Other Regulations

A substantial portion of the Company's producing properties are located
offshore. The costs to abandon offshore wells may be substantial. For
financial accounting purposes the Company accrues a per BOE charge

over the life of a field to cover such abandonment costs. No assurances can be
given that such reserves will be sufficient to cover such costs in the future
as they are incurred.

The Oil Pollution Act of 1990 imposes a variety of regulations on
"responsible parties" related to the prevention of oil spills. The
implementation of new, or the modification of existing, environmental laws or
regulations, including regulations promulgated pursuant to the Oil Pollution
Act of 1990, could have a material adverse impact on the Company.

Acquisition Risks

The Company intends to acquire oil and gas properties. Although the Company
performs a review of the acquired properties that it believes is consistent
with industry practices, such reviews are inherently incomplete. It generally
is not feasible to review in depth every individual property involved in each
acquisition. Ordinarily, the Company will focus its due diligence efforts on
the higher valued properties and will sample the remainder. However, even an
in-depth review of all properties and records may not necessarily reveal
existing or potential problems nor will it permit a buyer to become
sufficiently familiar with the properties to assess fully their deficiencies
and capabilities. Inspections may not be performed on every well, and
structural or environmental problems, such as ground water contamination, are
not necessarily observable even when an inspection is undertaken. The Company
may be required to assume preclosing liabilities, including environmental
liabilities, and may acquire interests in properties on an "as is" basis.
There can be no assurance that the Company's acquisitions will be successful.

Reliance on Key Personnel

The Company is highly dependent upon its executive officers and key
employees, particularly Messrs. Gerry, Walston and Scheirman. The unexpected
loss of the services of any of these individuals could have a detrimental
effect on the Company. The Company does not maintain key man life insurance on
any of its employees.

Item 2. Properties

Gabon

VAALCO has an interest in one offshore block in Gabon, the Etame Block.
Interest in the block vests in a production-sharing contract entered into by
the Company's subsidiary VAALCO (Gabon) Etame, Inc., providing for two three-
year terms, which commenced in July 1995. The Company negotiated an extension
of the contract into a third three-year term during 2001. At December 31,
2001, VAALCO owned a 30.35% interest in the production-sharing contract
covering the Etame Block.

Etame Block

The Etame Block is a 3,073 square kilometer block acquired in July 1995,
containing the Etame discovery drilled by the Company and two former Gulf Oil
Company discoveries, the North and South Tchibala discoveries. These
discoveries consist of subsalt reservoirs that lie 20 miles offshore in
approximately 250 feet of water depth. The Company and its partners undertook
an obligation to the Government of Gabon to obtain

and process seismic data and to drill one commitment well on the Etame Block
over the three-year primary term of the license. In April 1998, a
participation agreement was entered into with Western Atlas Afrique, Ltd.
("Western Atlas"), a subsidiary of Baker Hughes, to conduct a 320 square
kilometer seismic survey at Western Atlas' sole cost and to pay 80% of the
cost, up to $4.7 million, of the first commitment well. In return for these
payments, Western Atlas earned a 65% interest in the production-sharing
contract. In June 1998, Western Atlas completed the above-mentioned
acquisition of seismic data over the property. This data was processed, and
the Company drilled the commitment well, the Etame No. 1 well, later in 1998
resulting in a 3,700 BOPD Gamba sandstone discovery on the block. Completion
of the Etame No. 1 well satisfied all of the Company's obligations to the
Government of Gabon under the primary three-year term of the contract.

During 1998, the consortium of companies owning the Etame Block production
sharing contract agreed to renew the production sharing contract for three
additional years, thereby taking on a commitment to drill two additional
exploration wells and to perform a 3-D seismic reprocessing. A delineation
well, the Etame 2V well, was drilled in January 1999 and encountered
additional oil pay in the Gamba sandstone; however, the well encountered the
Gamba sandstone lower than expected. The Consortium elected to reprocess the
3-D seismic data prior to drilling additional delineation wells.

In January 2001, the Company acquired the 65% working interest in the Etame
Block owned by Western Atlas. Consideration for the acquisition was $1.0
million in cash and a future net profits interest in the event the existing
discoveries on the block are developed. The Company resold 52.5% of the
interest held by Western Atlas to two companies for $1.0 million and their
proportionate assumption of the future net profits interest. The Company now
holds a 30.35% interest in the Etame Block.

Based on the seismic reprocessing, the third exploration commitment well,
the Etame 3V well was drilled to further delineate the Etame discovery in
February 2001. The well found pay updip in the Gamba sandstone approximately
1.2 kilometers (0.75 miles) away from the Etame 1 well. In addition, pay was
found in the Dentale sandstones below the Gamba sandstone. A total of 34
meters (110 feet) of gross pay interval was encountered in the Etame 3V well.

In June 2001, drilling of the Etame 4V delineation well was completed. The
well was drilled approximately 2.4 kilometers (1.5 miles) from the Etame 1
discovery well and logged 32 meters (105 feet) of oil column with net pay of
approximately 24 meters (80 feet). The well was conventionally cored and
recovered 17 meters (57 feet) of oil-saturated sandstone in the Gamba and
Dentale formations. The Gamba sandstone, the primary target reservoir, was
approximately 14 meters (45 feet) thick in the well and was full of oil
throughout the entire interval. This represents approximately 30% greater sand
thickness than seen in the previous wells within the Gamba formation.

As a result of the two successful delineation wells drilled in 2001, the
Etame consortium has approved a budget to develop the field. An application
for commerciality was filed with the Government in Gabon, and in November
2001, the consortium was awarded a 50 square kilometer Exploitation Area
surrounding the field. The Exploitation Area has a term of up to 20 years to
permit the field to be developed and produced.

Initial development will consist of three subsea wells connected to an FPSO
at a cost of approximately $43.2 million ($13.1 million net to the Company).
The Company has awarded the contract for the FPSO, for the trees, for the
flowlines and umbilicals and for the use of a drilling rig to service
companies based on bids conducted over the past months. The Company
anticipates that the drilling rig will arrive on location in April 2002 and
that first production will be commence on or about September 1, 2002 at
initial flow rates of at least 12,000 BOPD. Based upon estimates by the
Company's independent reserve engineers, the Company booked 6.1 million
barrels of net proven undeveloped oil reserves in 2001 in connection with its
share of the development project.

To fund its share of the development project, the Company has negotiated a
line of credit of $10.0 million through the IFC. (See "Management's Discussion
and Analysis or Plan of Operations--Capital Resources and Liquidity" for a
discussion of the line of credit.

In July 2001, the Company negotiated a five-year extension of the Etame
Block on behalf of the consortium, consisting of a three-year initial term and
a two-year follow on term. The consortium committed to drill two additional
exploration wells during the initial three-year term. The consortium paid a
$1.0 million signing bonus ($0.3 million net to the Company) associated with
the five-year extension.

Philippines

The Company has an interest in two service contracts in the Philippines.
Service Contract No. 14 covers 158,000 offshore acres and Service Contract No.
6 covers 131,000 offshore acres. The Company produces the Nido and Matinloc
fields with a total gross production for 2001 of approximately 309,000 barrels
or 848 BOPD.

Nido Field

The Nido field is covered by Service Contract No. 14 and has four producing
wells. The field is produced using the cyclic method under which the field is
shut in for a period of time (generally 60 days) and then opened up to produce
(generally four to five days). During 2001, the four wells in the field
produced at an equivalent rate of 410 BOPD compared to 510 BOPD in 2000. The
Company has an approximate 22.1% working interest and an approximate 17.4% net
revenue interest in the field.

Matinloc Field

The Matinloc field is located within the contract area covered by Service
Contract No. 14 and has three producing wells. The field had produced an
aggregate production of approximately 10.3 MMBbls from 1982 through 1991.
Production was suspended from the field in 1991 until it was reactivated in
1995. During 2001, the field produced approximately 160 MBbls or 438 BOPD. The
Company has an approximate 38.1% working interest and an approximate 26.8% net
revenue interest in the field.

Galoc Field

The Galoc field is located within the contract area covered by Service
Contract No. 14 and is currently not producing. Four wells have been drilled
in this field, of which one well in 1,150 feet of water has undergone a long-
term testing program. The Galoc reservoir is made up of a sandstone turbidite
fan sequence that was deposited on top of the Lower Miocene limestone in a
deep-water environment. Previous wells tested in excess of 5,000 BOPD. The
Galoc field is one of the areas being studied extensively for the potential to
drill an additional delineation well in the field.

Domestic Properties

Brazos County Prospects

In June 2001, the Company announced the results of a well drilled in Brazos
County, Texas. The well was completed at an initial flow rate of 525 BOPD and
1.4 million cubic feet of gas per day ("MMCFD"). The well was completed
horizontally in the Buda and Georgetown formations. An offset location was
completed in September and flowed at an initial rate of 191 BOPD and 1.8
MMCFD. VAALCO has a 30% working interest in the project.

Frio County Texas

The Company owns a 10% working interest in 1395 acres in Frio County. A
well was drilled on the acreage in January, 2002 and tested approximately 84
BOPD and 514 MCFD. The well is awaiting hookup to a pipeline. After a long-
term production test, the ownership group will determine what additional
locations to drill on the acreage later in 2002 or 2003.

Other Domestic Properties

VAALCO owned an interest in approximately 1,000 acres located immediately
west of the Goliad town site. In January 1998, a farm out agreement was
entered into with an industry partner whereby the Company recovered its lease
costs and assigned a 75% working interest to its partner. The partner elected
not to drill on the acreage and the leases expired in October of 2001.

The Company owns an interest in 640 acres (224 net acres) in Dimmit County
on which a horizontal gas well was drilled in 1999 to the Georgetown formation
and placed on production in 2000. The Company also owns certain non-operated
interests in the Vermilion and Ship Shoal areas of the Gulf of Mexico, which
accounted for no significant production during the year ended December 31,
2001. No capital expenditures are anticipated in 2002 for these properties.

The Company elected to terminate its joint venture with Paramount
Petroleum, Inc., effective June 1, 2001. The joint venture focused on domestic
onshore prospects in Mississippi, Alabama and Louisiana. In connection with
the wind up of the joint venture, the Company received $169,000 in cash, a
receivable for $47,000 representing its share of cash in the joint venture and
$259,000 of undeveloped acreage representing its proportionate 93.75% working
interest in kind in all remaining prospects within the joint venture. Final
completion of assignment documentation is ongoing. The Company has an interest
in production from two small gas discoveries drilled by the joint venture.

Aggregate Production

Additional production data (net to the Company) for all of the Company's
operations for the years 2001 and 2000 are as follows:

Company Owned Production

Year Ended December 31,
---------------------------------------
2001 2000
------------------- -------------------
BOE(1) Bbl Mcf BOE(1) Bbl Mcf
------ ------ ----- ------ ------ -----

Average Daily Production (Oil in BOPD,
gas in MCFD)......................... 285 246 235 262 255 44
Average Sales Price ($/unit)(2)....... $15.85 $14.71 $3.84 $13.97 $13.76 $3.51
Average Production Cost ($/unit)...... $ 6.43 $ 6.43 $1.07 $ 5.04 $ 5.04 $0.84

--------
(1) BOE is barrels of oil equivalent with 6 Mcf of gas equal to 1 Bbl of oil.
(2) Oil prices from production from the Philippines properties are based on a
formula where transportation costs are netted from the sales price.

Reserve Information

A reserve report as of December 31, 2001 has been opined on by Netherland
Sewell & Associates, independent petroleum engineers. There have been no
estimates of total proved net oil or gas reserves filed with or included in
reports to any federal authority or agency other than the Commission since the
beginning of the last fiscal year. For 2001, the reserves are located in
Gabon, the Philippines and Texas. In 2000, all of the reserves were located in
the Philippines.

As of December
31,
--------------
2001 2000
------- ------

Crude Oil
Proved Developed Reserves (MBbls)............................. 349 686
Proved Undeveloped Reserves (MBbls)........................... 6,083 --
------- ------
Total Proved Reserves (MBbls)............................... 6,432 686
======= ======
Natural Gas
Proved Developed Reserves (MMcf).............................. 69 --
Proved Undeveloped Reserves (MMcf)............................ -- --
Total Proved Reserves (MMcf)................................ 69 --
Standardized measure of discounted future net cash flows at
10% (in thousands)........................................... $23,731 $2,702
======= ======

The standardized measure of discounted cash flows does not include all of
the costs of abandoning the Company's non-producing properties.

There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting future rates of production and timing of
development expenditures, including many factors beyond the control of the
Company. Reserve engineering is a subjective process of estimating underground
accumulations of crude oil and natural gas that cannot be measured in an exact
manner, and the accuracy of any reserve estimate is a function of the quality
of available data and of engineering and geological interpretation and
judgment. The quantities of oil and natural gas that are ultimately recovered,
production and operating costs, the amount and timing of future development
expenditures and future oil and natural gas sales prices may all differ from
those assumed in these estimates. The standardized measure of discounted
future net cash flow should not be construed as the current market value of
the estimated oil and natural gas reserves attributable to the Company's
properties. The information set forth in the foregoing tables includes
revisions for certain reserve estimates attributable to proved properties
included in the preceding year's estimates. Such revisions are the result of
additional information from subsequent completions and production history from
the properties involved or the result of a decrease (or increase) in the
projected economic life of such properties resulting from changes in product
prices. Moreover, crude oil amounts shown are recoverable under the service
contracts and the reserves in place remain the property of the Philippine
government.

In accordance with the guidelines of the Commission, the Company's
estimates of future net cash flow from the Company's properties and the
present value thereof are made using oil and natural gas contract prices in
effect as of year end and are held constant throughout the life of the
properties except where such guidelines permit alternate treatment, including
the use of fixed and determinable contractual price escalations. The contract
price as of December 31, 2001 was $8.99 per Bbl of oil for both Matinloc and
the Nido field. In Gabon, the price used was $18.84 per barrel representing a
$0.50 discount to the spot price of Brent Crude at December 31, 2001. The
Company has investigated prices received for similar crude oil coming out of
Gabon from the same types of formations as the crude oil in the Etame Block.
The Company believes that the $0.50 discount to Brent Crude represents a
reasonable estimate of the crude price it will receive. However, there can be
no assurances that the actual price the Company receives for Etame crude will
not differ from the estimate, as the price it receives will depend on demand
for West African crudes at the time of sale. See Financial Statements and
Supplementary Data for certain additional information concerning the proved
reserves of the Company.

Drilling History

The Company drilled or participated in the drilling of five wells for the
period ended December 31, 2001.

United States International
------------------- -------------------
Gross Net Gross Net
--------- --------- --------- ---------
2001 2000 2001 2000 2001 2000 2001 2000
---- ---- ---- ---- ---- ---- ---- ----

Exploration Wells
Productive......................... 3.0 1.0 0.70 0.25 2.00 0.00 0.61 0.00
Dry................................ 0.0 1.0 0.00 0.20 0.00 2.00 0.00 0.15
--- --- ---- ---- ---- ---- ---- ----
Total Wells...................... 3.0 2.0 0.70 0.45 2.00 2.00 0.61 0.15
=== === ==== ==== ==== ==== ==== ====

Acreage and Productive Wells

Below is the total acreage under lease and the total number of productive
oil and gas wells of the Company as of December 31, 2001:

United
States International
------------ --------------
Gross Net(1) Gross Net(1)
----- ------ ------- ------
(In thousands)

Developed acreage................................ 13.8 1.4 14.7 4.6
Undeveloped acreage.............................. 7.5 6.2 1,041.1 328.7
Productive gas wells............................. 2 0.4 -- --
Productive oil wells............................. 11 2.1 7 2.2

--------
(1) Net acreage and net productive wells are based upon the Company's working
interest in the properties.

Office Space

The Company leases its offices in Houston, Texas (approximately 8,000
square feet) and in Manila, The Republic of the Philippines (approximately
4,000 square feet), which management believes are suitable and adequate for
the Company's operations.

Item 3. Legal Proceedings

The Company is currently not a party to any material litigation.

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

None.

PART II

Item 5. Market for Common Equity and Related Stockholder Matters

General

The Company's Common Stock trades on the OTC Bulletin Board. The following
table sets forth the range of high and low sales prices of the Common Stock
for the periods indicated. The prices represent adjusted prices between
dealers, do not include retail markups, markdowns or commissions and do not
necessarily represent actual transactions. As of December 31, 2001 there were
approximately 100 holders of record of the Company's Common Stock.

Period High Low
------ ----- -----

2000:
First Quarter................................................. $0.63 $0.25
Second Quarter................................................ 0.34 0.19
Third Quarter................................................. 0.47 0.22
Fourth Quarter................................................ 0.51 0.16
2001:
First Quarter................................................. $0.68 $0.28
Second Quarter................................................ 1.10 0.40
Third Quarter................................................. 1.06 0.80
Fourth Quarter................................................ 0.93 0.37
2002:
First Quarter (through March 26, 2002)........................ $0.51 $0.40

On March 26, 2002 the last reported sale price of the Common Stock on the
OTC Bulletin Board was $0.41 per share.

Dividends

The Company has not paid cash dividends and does not anticipate paying cash
dividends on the Common Stock in the foreseeable future.

Item 6. Management's Discussion and Analysis or Plan of Operations

Introduction

The Company's results of operations are dependent upon the difference
between prices received for its oil and gas production and the costs to find
and produce such oil and gas. Oil and gas prices have been and are expected in
the future to be volatile and subject to fluctuations based on a number of
factors beyond the control of the Company. The Company does not presently
engage in any hedging activities and has no plans to do so in the near future.

The Company is participating in the development of the Etame Block, which
the Company operates on behalf of a consortium of five companies offshore of
the Republic of Gabon. The Company is administering a $43.2 million budget
($13.1 million net to the Company) to execute the development project.
Substantially all of the Company's capital resources and personnel will be
dedicated to the completion of the development project in 2002.

The Company's production in the Philippines is from mature offshore fields
with high production costs. The Company's margin on sales from these fields
(the price received for oil less the production costs for the oil) is lower
than the margin on oil production from many other areas. As a result, the
profitability of the Company's production in the Philippines is affected more
by changes in oil prices than production located in other areas.

The Company's results of operations are also affected by currency exchange
rates. While oil sales are denominated in U.S. dollars, operating costs in the
Philippines are predominately denominated in pesos. An increase in the
exchange rate of pesos to the dollar will have the effect of increasing
operating costs while a decrease in the exchange rate will reduce operating
costs.

A substantial portion of the Company's oil production is located offshore
of the Philippines. The Company produces into barges, which transport the oil
to market. Due to weather and other factors, the Company's production is
generally highest during the first and fourth quarters of the year.

Critical Accounting Policies

The following describes the critical accounting policies used by VAALCO in
reporting its financial condition and results of operations. In some cases,
accounting standards allow more than one alternative accounting method for
reporting, such is the case with accounting for oil and gas activities
described below. In those cases, the Company's reported results of operations
would be different should it employ an alternative accounting method.

Successful Efforts Method of Accounting for Oil and Gas Activities. The
Securities and Exchange Commission ("SEC") prescribes in Regulation SX the
financial accounting and reporting standards for companies engaged in oil and
gas producing activities. Two methods are prescribed: the successful efforts
method and the full cost method. Like many other oil and gas companies, VAALCO
has chosen to follow the successful efforts method. Management believes that
this method is preferable, as the Company has focused on exploration
activities wherein there are risk associated with future success and as such
earnings are best represented by attachment to the drilling operations of the
company.

Costs of successful wells, development dry holes and leases containing
productive reserves are capitalized and amortized on a unit-of-production
basis over the life of the related reserves. Estimated future abandonment and
site restoration costs, net of anticipated salvage values, are amortized on a
unit of production basis over the life of the related reserves. Other
exploration costs, including geological and geophysical expenses applicable to
undeveloped leasehold, leasehold expiration costs and delay rentals are
expensed as incurred.

In accordance with accounting under successful efforts, the Company reviews
proved oil and gas properties for indications of impairment whenever events or
circumstances indicate that the carrying value of its oil and gas properties
may not be recoverable. When it is determined that an oil and gas property's
estimated future net cash flows will not be sufficient to recover its carrying
amount, an impairment charge must be recorded to reduce the carrying amount of
the asset to its estimated fair value. This may occur if a field discovers
lower than anticipated reserves or if commodity prices fall below a level that
significantly effects anticipated future cash flows on the field. The Company
determines if an impairment has occurred through either identification of
adverse changes or as a result of the annual review of all fields. For the
year ended December 31, 2001, impairments of $567,145 were recognized. No
impairment was recognized in 2000.

Undeveloped acreage. At December 31, 2001, the Company had undeveloped
acreage on its balance sheet totaling $459,000, representing costs that are
not being amortized pending evaluation of the respective leasehold for future
development. Unproved properties are assessed quarterly for impairment in
value, with any impairment charged to expense.

earnings or a component of comprehensive income. Retroactive application to
periods prior to adoption is not allowed. The Company adopted SFAS No. 133, as
amended, effective January 1, 2001. The adoption had no effect on the
Company's financial position or results of operations as all existing
contracts either do not meet the definition of a derivative or qualify for the
normal purchases and sales exemption. The Company does not currently engage in
hedging activities.

On July 20, 2001, the Financial Accounting Standards Board issued SFAS No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." The Statements will change the accounting for business combinations
and goodwill in two significant ways. SFAS No. 141 requires that the purchase
method of accounting be used for all business combinations initiated after
June 30, 2001. Use of the pooling-of-interests method will be prohibited. SFAS
No. 142 changes the accounting for goodwill from an amortization method to an
impairment-only approach. Thus, amortization of goodwill, including goodwill
recorded in past business combinations, will cease upon adoption of that
statement, which for the Company will be January 1, 2002.

In August 2001, the Financial Accounting Standards Board issued SFAS No.
143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses
financial accounting and reporting for obligations associated with the
retirement of tangible, long-lived assets and the associated asset retirement
costs. This Statement requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred by
capitalizing it as part of the carrying amount of the long-lived assets. As
required by SFAS No. 143, the Company will adopt this new accounting standard
on January 1, 2002.

In October 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This
Statement establishes a single accounting model for the impairment or disposal
of long-lived assets. As required by SFAS No. 144, the Company will adopt this
new standard on January 1, 2002.

The Company is currently evaluating the effects of adopting these
statements.

Capital Resources and Liquidity

Historically, the Company's primary source of capital resources has been
from cash flows from operations, private sales of equity, borrowings and
purchase money debt. In 2000 and 2001, the Company's primary uses of capital
have been to fund its exploration operations. In 2002, the Company's primary
use of capital will be to develop the Etame Block.

The Company produces oil from the Matinloc and Nido fields in the South
China Sea, the Philippines. During the year ended December 31, 2001, total
production from the fields was approximately 308,000 gross barrels (69,000
barrels net) of oil. Substantially all of the Company's crude oil and natural
gas is sold at the well head at posted or index prices under short-term
contracts, as is customary in the industry. The Company markets its share of
crude oil under agreements with Seaoil and Caltex, both local Philippines
refiners. While the loss of these buyers might have a material effect on the
Company in the near term, management believes that the Company would be able
to obtain other customers for its crude oil.

Domestically, the Company produces from wells in Brazos County, Texas.
During 2001, the company had net production of 18,000 barrels of oil and 71
million cubic feet of gas. Domestic production is sold under two contracts,
one for oil and one for gas. The Company has access to several alternative
buyers for oil and gas sales domestically.

proportionate 93.75% working interest in kind in all remaining prospects
within the joint venture. Final completion of assignment documentation is
ongoing. The Company has an interest in production from two small gas
discoveries drilled by the joint venture.

Effective June 30, 2000 the Company elected to withdraw from Hunt Overseas
Exploration Company L.P. ("Hunt"). The Company formerly held a 7.5% limited
partnership interest in Hunt. The Company's obligations under the partnership
were to contribute up to $22.5 million for its share of the exploration phase
of the partnership, $22.3 million of which had been funded as of June 30,
2000. In addition, if Hunt discovered oil, the Company may have been required
to contribute an additional $7.5 million to fund the appraisal of the
discovery. As a result of withdrawing from the Hunt venture, Hunt released
certain funds in escrow totaling $8.4 million and reimbursed the Company $1.3
million for its share of net working capital in the partnership as of June 30,
2000.

The Company continues to seek financing to fund the development of existing
properties and to acquire additional assets. The Company will rely on the
issuance of equity and debt securities, assets sales and cash flow from
operations to provide the required capital for funding future operations.
While there can be no assurance the Company will be successful in raising new
financing, management believes the prospects the Company has in hand will
enable it to attract sufficient capital to fund required oil and gas
activities.

During 2002, the Company anticipates that it will make capital expenditures
on oil and gas properties of approximately $12.4 million, all in Gabon. The
Company has negotiated a line of credit for its subsidiary VAALCO Gabon
(Etame), Inc. in the amount of $10.0 million with the IFC to partially fund
its share of the development project, which was approved by the IFC Board of
Directors in early March 2002. Prior to Project Completion, the IFC loan is
expected to be guaranteed by the Company and cash collateralized with proceeds
from a loan from the 1818 Fund. Project Completion requires gross project
production of 14,250 BOPD and gross proved reserves of 16.5 million barrels
and compliance with financial covenants and other conditions, which may not be
achieved. The IFC requires Project Completion to occur prior to March 31,
2003.

At the date of this filing, the loan agreements for both the IFC loan and
the 1818 Fund loan have not been signed and there can be no assurance that the
loans will fund until they are signed. Management believes that execution of
each loan document is imminent, however until mutually acceptable agreements
are signed there is no binding commitment by either lender. In addition to
each loan being subject to final approval by senior management of both
lenders, and the effectiveness of the other's loan, the terms of the IFC loan
provide that initial funding is subject to Gabon Government approval, which
the Company believes it will receive. A condition for receiving the 1818 Fund
loan is the signing of the IFC loan documents.

The 1818 Fund loan is expected to take the form of a $10 million
subordinated note secured by a second lien on certain collateral with respect
to the Company's investment in VAALCO Gabon (Etame), Inc. including the $10
million cash collateral to support the Company's guarantee of the IFC loan.
The interest rate on the loan is 12%. In conjunction with receiving the 1818
Fund loan, the Company will issue 15 million warrants at a price of $0.50 per
share, 7.5 million of which the Company will receive back if Project
Completion occurs on the Etame Block. The Company has formed an independent
committee of the Board of Directors, which has sought a fairness opinion with
regards to the terms of the 1818 Fund loan. The committee will meet prior to
the execution of the loan documents to review the fairness opinion and make
its recommendation concerning the loan. The Company believes the cash on hand
at December 31, 2001 coupled with the loan from the IFC will be sufficient to
fund the Company's capital budget through 2002.

Results of Operations

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

Amounts stated hereunder have been rounded to the nearest $100,000.

Cash Flows

Net cash provided by operating activities for 2001 was $3.0 million, as
compared to net cash provided by operating activities of $10.5 million in
2000. Net cash provided by operations in 2001 included $0.7 million from funds
taken out of escrow and $2.3 million provided by partners in the Philippines
and Gabon ventures. Net cash provided by operations in 2000 included $9.3
million from funds in escrow.

Net cash used in investing activities for 2001 was $5.6 million, as
compared to net cash used in investing activities of $0.9 million in 2000. The
Company participated in two exploration wells in Gabon at a cost of
approximately $3.2 million and expended an additional $0.7 million for the
development of the Etame Block in 2001. The Company also participated in four
wells in Texas at a cost of approximately $1.2 million. In 2000, cash used in
investments in unconsolidated entities resulted from $1.7 million in
contributions to Hunt partially offset by a $1.3 million reimbursement to the
Company upon its withdrawal from the Hunt partnership. The net investment
total for 2000 was $0.4 million. Exploration expenses of $0.4 million were
incurred in 2001 versus $0.3 million in 2000.

No net cash was provided by or used for financing activities for 2001 or
2000.

Revenues

Total oil and gas sales for 2001 were $1.7 million as compared to $1.3
million for 2000. The 2001 revenues were about equally split between Texas and
the Philippines, while 2000 revenues primarily occurred from operations in the
Philippines. Production volumes increased in 2001 due to the addition of the
Texas production. The Company realized a $0.2 million gain on the resale of a
portion of the Etame interest in 2001.

Operating Costs and Expenses

Production expenses for 2001 were $0.7 million as compared to $0.5 million
for 2000. In 2001, Philippines production expense increased due to more
frequent Nido liftings.

Exploration costs for 2001 were $0.4 million as compared to $0.9 million
for 2000. 2001 exploration expenses were primarily associated with undeveloped
acreage expirations, while 2000 exploration expenses included costs for dry
holes in Texas as well as expiring exploration acreage of $0.2 million.

Depreciation, depletion and amortization of properties for 2001 and 2000
was $1.2 million and $10 thousand respectively. Depletion in 2001 was
associated with the Brazos County, Texas wells and included an impairment of
$0.6 million.

General and administrative expenses for 2001 were $1.8 million as compared
to $1.9 million for 2000. Overhead reimbursements associated with operations
in Gabon contributed to the reduction of general and administrative expense.

Operating Loss

Operating loss for 2001 was $2.2 million as compared to a $2.0 million
operating loss for 2000. The Company incurred a $0.6 million impairment on
domestic producing properties in 2001.

Other Income (Expense)

Interest income for 2001 was $0.4 million compared to $0.6 million in 2000.
Both the 2001 and 2000 amounts represent interest earned and accrued on cash
balances and funds in escrow.

Equity loss in unconsolidated entities for 2001 was $1.0 million compared
to $3.2 million in 2000. Expenses in 2001 were associated with the Paramount
exploration effort and in 2000 were associated with both the Paramount venture
and the Hunt Partnership. The Company exited the Hunt Partnership in June
2000.

Other, net was a loss of $0.2 million in 2001 compared to a loss of $37
thousand in 2000. The 2001 loss included $0.2 million of accrued liabilities
associated with the Altisima subsidiary as a reserve for potential taxes that
may be payable by the subsidiary based on a ruling from the Philippines Bureau
of Internal Revenue.

In 2001, the Company incurred income taxes of $66,000, $18,000 of which is
deferred. In 2000, the Company recognized an income tax benefit of $30,000
associated with activity in the Philippines.

Net Loss

Net loss attributable to common stockholders for 2001 was $3.1 million as
compared to a net loss of $4.6 million in 2000. The 2001 losses resulted from
a combination of operating losses and other losses from the Paramount joint
venture. The 2000 net losses resulted from exploration expenses
internationally as well as domestically, primarily in the joint venture
activities.

Item 7. Financial Statements and Supplementary Data

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of VAALCO Energy, Inc. and
Subsidiaries:

We have audited the consolidated balance sheets of VAALCO Energy, Inc. and
its subsidiaries ("VAALCO") as of December 31, 2001 and 2000, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for the years then ended. These financial statements are the responsibility of
VAALCO's management. Our responsibility is to express an opinion on the
financial statements based on our audits.

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

In our opinion, the consolidated financial statements present fairly, in
all material respects, the financial position of VAALCO as of December 31,
2001 and 2000, and the results of its operations and its cash flows for the
years then ended in conformity with accounting principles generally accepted
in the United States of America.

Deloitte & Touche LLP

Houston, Texas
March 29, 2002

VAALCO ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands of dollars, except par value amounts)

As of December
31,
ASSETS ------------------
2001 2000
-------- --------

CURRENT ASSETS:
Cash and cash equivalents..................................... $ 9,804 $ 12,440
Funds in escrow............................................... 38 751
Receivables:
Trade....................................................... 179 237
Other....................................................... 255 153
Materials and supplies, net of allowance for inventory
obsolescence of $5........................................... 324 329
Prepaid expenses and other.................................... 34 24
-------- --------
Total current assets...................................... 10,634 13,934
-------- --------
PROPERTY AND EQUIPMENT-SUCCESSFUL EFFORTS METHOD
Wells, platforms and other production facilities.............. 2,648 1,154
Undeveloped acreage........................................... 459 555
Work in progress.............................................. 6,692 2,268
Equipment and other........................................... 98 65
-------- --------
9,897 4,042
Accumulated depreciation, depletion and amortization.......... (2,026) (850)
-------- --------
Net property and equipment................................ 7,871 3,192
-------- --------
OTHER ASSETS:
Investment in unconsolidated entities......................... -- 1,448
Deferred tax asset............................................ 393 410
Other long-term assets........................................ 50 57
TOTAL .................................................... $ 18,948 $ 19,041
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable and accrued liabilities...................... $ 1,173 $ 463
Accounts with partners........................................ 4,323 2,047
Income taxes payable.......................................... 30 10
-------- --------
Total current liabilities................................. 5,526 2,520
DEFERRED INCOME TAXES........................................... -- --
MINORITY INTEREST............................................... 13 13
FUTURE ABANDONMENT COSTS........................................ 3,294 3,294
-------- --------
Total liabilities......................................... 8,833 5,827
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY
Preferred stock, $25 par value, 500,000 authorized shares;
10,000 shares issued and outstanding in 2001 and 2000,
respectively................................................. 250 250
Common stock, $.10 par value, 100,000,000 authorized shares;
20,749,964 shares issued of which 5,395 are in the treasury
in 2001 and 2000............................................. 2,075 2,075
Additional paid-in capital.................................... 41,215 41,215
Accumulated deficit........................................... (33,413) (30,314)
Less treasury stock, at cost.................................. (12) (12)
-------- --------
Total stockholders' equity................................ 10,115 17,767
-------- --------
TOTAL..................................................... $ 18,948 $ 22,088
======== ========

See notes to consolidated financial statements.

VAALCO ENERGY, INC. AND SUBSIDIARIES

STATEMENTS OF CONSOLIDATED OPERATIONS

(in thousands of dollars, except per share amounts)

Year Ended
December 31,
----------------
2001 2000
------- -------

REVENUES:
Oil and gas sales......................................... $ 1,650 $ 1,279
Gain on sales of assets................................... 215 --
------- -------
Total revenues.......................................... 1,865 1,279
OPERATING COSTS AND EXPENSES:
Production expense........................................ 669 483
Exploration expense....................................... 434 910
Depreciation, depletion and amortization.................. 1,180 10
General and administrative expenses....................... 1,828 1,905
------- -------
Total operating costs and expenses...................... 4,111 3,308
------- -------
OPERATING LOSS.............................................. (2,246) (2,029)
OTHER INCOME (EXPENSE):
Interest income........................................... 359 638
Equity loss in unconsolidated entities.................... (973) (3,155)
Other, net................................................ (175) (37)
------- -------
Total other expense..................................... (787) (2,554)
------- -------
LOSS BEFORE TAXES........................................... (3,033) (4,583)
Income tax expense (benefit)................................ 66 (30)
------- -------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS................ $(3,099) $(4,553)
======= =======
BASIC LOSS PER COMMON SHARE................................. $ (0.15) $ (0.22)
======= =======
DILUTED LOSS PER COMMON SHARE............................... $ (0.15) $ (0.22)
======= =======
BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING................................................ 20,745 20,745
======= =======

See notes to consolidated financial statements.

VAALCO ENERGY, INC. AND SUBSIDIARIES

STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000

(in thousands of dollars, except share data)

Preferred
Stock Common Stock Additional Total
------------- ----------------- Paid-in Accumulated Treasury Stockholders'
Shares Amount Shares Amount Capital Deficit Stock Equity
------ ------ ---------- ------ ---------- ----------- -------- -------------

Balance at January 1,
2000................... 10,000 $250 20,749,964 $2,075 $41,215 $(25,761) $(12) $17,767
Net Loss............... -- -- -- -- -- (4,553) -- (4,553)
Balance at December 31,
2000................... 10,000 $250 20,749,964 $2,075 $41,215 $(30,314) $(12) $13,214
Net Loss............... -- -- -- -- -- (3,099) -- (3,099)
------ ---- ---------- ------ ------- -------- ---- -------
Balance at December 31,
2001................... 10,000 $250 20,749,964 $2,075 $41,215 $(33,413) $(12) $10,115
====== ==== ========== ====== ======= ======== ==== =======

See notes to consolidated financial statements.

VAALCO ENERGY, INC. AND SUBSIDIARIES

STATEMENTS OF CONSOLIDATED CASH FLOWS

(in thousands of dollars)

Year Ended
December 31,
----------------
2001 2000
------- -------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(3,099) $(4,553)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation, depletion and amortization................... 1,180 10
Equity loss in unconsolidated entities..................... 973 3,155
Gain on sale of assets..................................... (215)
Provision for deferred income taxes........................ 18 (40)
Abandonment reserve........................................ -- (3)
Exploration expense........................................ 434 905
Change in assets and liabilities that provided (used) cash:
Funds in escrow............................................ 713 9,323
Trade receivables.......................................... 58 174
Other receivables.......................................... (102) (22)
Materials and supplies..................................... 5 3
Prepaid expenses and other................................. (10) --
Accounts payable and accrued liabilities................... 710 (146)
Accounts with partners..................................... 2,276 1,644
Income taxes payable....................................... 20 10
------- -------
Net cash provided by operating activities................. 2,961 10,460
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Exploration expense......................................... (434) (281)
Investment in unconsolidated entities....................... 169 (406)
Additions to property and equipment......................... (6,361) (296)
Disposals of property and equipment......................... 1,028 59
Other--net.................................................. 1 (21)
------- -------
Net cash used in investing activities..................... (5,597) (945)
------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS..................... (2,636) 9,515
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 12,440 2,925
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 9,804 $12,440
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Non-cash items:............................................ $ -- $ --

See notes to consolidated financial statements.

VAALCO ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000

(in thousands of dollars, unless otherwise indicated)

1. ORGANIZATION

VAALCO Energy, Inc., a Delaware corporation, is a Houston-based independent
energy company principally engaged in the acquisition, exploration,
development and production of crude oil and natural gas. As used herein, the
terms "Company" and "VAALCO" mean VAALCO Energy, Inc. and its subsidiaries,
unless the context otherwise requires. VAALCO owns producing properties and
conducts exploration activities as operator of consortium internationally in
the Philippines and Gabon. Domestically, the Company has interests in the
Texas Gulf Coast area.

VAALCO's subsidiaries include Alcorn (Philippines) Inc. and Alcorn
(Production) Philippines Inc., Altisima Energy, Inc., VAALCO Gabon (Etame),
Inc., VAALCO Production (Gabon), Inc., VAALCO Energy (USA), Inc. and 1818 Oil
Corp.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation--The accompanying consolidated financial
statements include the accounts of the Company and its wholly owned
subsidiaries, as well as the subsidiaries' share in the assets, liabilities,
income and expenses of joint operations. All significant transactions within
the consolidated group have been eliminated in consolidation.

Cash and Cash Equivalents--For purposes of the consolidated statement of
cash flows, the Company and its subsidiaries consider all highly liquid debt
instruments purchased with an original maturity of three months or less to be
cash equivalents. For the years ended December 31, 2001 and 2000, no payments
were made for income taxes or for interest.

Funds in Escrow--Current amounts represent an escrow for abandonment of
certain Gulf of Mexico properties ($38). Prior year funds in escrow included
an amount in escrow associated with the sale of VAALCO Energy (Gabon), Inc.,
which held a 32.5% interest in the Etame Concession. The sale closed in
January 2001.

Inventory Valuation--Materials and supplies are valued at the lower of
cost, determined by the weighted-average method, or market.

Income Taxes--VAALCO accounts for income taxes under an asset and liability
approach that recognizes deferred income tax assets and liabilities for the
estimated future tax consequences of differences between the financial
statement and tax bases of assets and liabilities. Valuation allowances are
provided against deferred tax assets that are not likely to be realized. The
Company calculates current and deferred income taxes on a separate company
basis.

Property and Equipment--The subsidiaries follow the successful efforts
method of accounting for exploration and development costs. Under this method,
exploration costs, other than the cost of exploratory wells, are charged to
expense as incurred. Exploratory well costs are initially capitalized until a
determination as to whether proved reserves have been discovered. If an
exploratory well is deemed to not have found proved reserves, the associated
costs are expensed at that time. All development costs, including
developmental dry hole costs, are capitalized. Provisions for impairment of
undeveloped oil and gas leases are based on periodic evaluations and other
factors. The Company recognizes gains for the sale of developed properties
based upon an allocation of property costs between the interest sold and the
interest retained based on the fair value of those interests.

VAALCO ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000

(in thousands of dollars, unless otherwise indicated)

The Company reviews its oil and gas properties for impairment whenever
events or changes in circumstances indicate that the carrying amount of such
properties may not be recoverable. When it is determined that an oil and gas
property's estimated future net cash flows will not be sufficient to recover
its carrying amount, an impairment charge must be recorded to reduce the
carrying amount of the asset to its estimated fair value. For years ending
December 31, 2001 impairments of $567,145 were recognized. No impairment was
recognized in 2000.

Depletion of wells, platforms and other production facilities are provided
on a field basis under the unit-of-production method based upon estimates of
proved developed reserves. Provision for estimated abandonment costs,
including platform dismantlement and site restoration, is included in
depreciation, depletion and amortization expense on a unit-of-production
basis. Provision for depreciation of other property is made primarily on a
straight-line basis over the estimated useful life of the property. The annual
rates of depreciation are as follows:

Office and miscellaneous equipment............................. 3-5 years
Leasehold improvements......................................... 8-12 years

In connection with the annual estimate of the Company's oil and gas
reserves for the fiscal year ended December 31, 2001, the Company's
independent petroleum engineers estimated proved oil reserves at December 31,
2001 to be 6.4 million barrels, of which 0.4 million barrels are classified as
proved developed, net to the Company. The Company had 69 million cubic feet of
proven developed gas reserves at December 31, 2001. The proved developed
reserves relate to the Company's Philippine and Texas operations. The proved
undeveloped reserves are associated with the Company's share of proven
reserves in the Etame field.

Investments--The Company invests funds in escrow and excess cash in
certificates of deposit and commercial paper issued by banks with maturities
typically not exceeding 90 days.

At December 31, 2001, the Company accounted for its investments in
unconsolidated entities under the equity method.

At December 31, 2001, the investment in unconsolidated entities was valued
at fair value using methods determined in good faith by management after
consideration of all relevant information, including, current financial
information and restrictions on dispositions. The values assigned to the
investments do not necessarily represent the amount which might ultimately be
realized upon the sale or other disposition, since such amounts depend on
future circumstances and cannot reasonably be determined until actual
liquidation occurs. However, because of the inherent uncertainty of such
valuations, those estimated values may differ significantly from the values
that would have been used had a ready market for the investments existed, and
the difference could be material.

Foreign Exchange Transactions--For financial reporting purposes, the
subsidiaries use the United States dollar as their functional currency.
Monetary assets and liabilities denominated in foreign currency are translated
to U.S. dollars at the rate of exchange in effect at the balance sheet date,
and items of income and expense are translated at average monthly rates.
Nonmonetary assets and liabilities are translated at the exchange rate in
effect at the time such assets were acquired and such liabilities were
incurred. Gains and losses on foreign currency transactions are included in
income currently and were insignificant during each of 2001 and 2000.

VAALCO ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000

(in thousands of dollars, unless otherwise indicated)

Accounts With Partners--Accounts with partners represent cash calls due or
excess cash calls paid by the partners for exploration, development and
production expenditures made by the following subsidiaries of the Company:
Alcorn Production Philippines and VAALCO Gabon (Etame), Inc.

Revenue Recognition--The Company recognizes revenues from crude oil and
natural gas sales upon delivery to the buyer.

Fair Value of Financial Instruments--The Company's financial instruments
consist primarily of cash, trade accounts and note receivables and trade
payables. The book values of cash, trade receivables, and trade payables are
representative of their respective fair values due to the short-term maturity
of these instruments. The book value of the Company's note receivable
instruments are considered to approximate the fair value, as the interest
rates are adjusted based on rates currently in effect.

Risks and Uncertainties--The Company's interests are located overseas in
certain offshore areas of the Philippines and Gabon.

Substantially all of the Company's crude oil and natural gas is sold at the
well head at posted or index prices under short-term contracts, as is
customary in the industry. For the year ended December 31, 2001 two purchasers
of the Company's crude oil accounted for essentially all of the Company's
total crude oil sales. The Company markets its crude oil share under
agreements with SeaOil and Caltex, both local Philippines refiners. While the
loss of these buyers might have a material effect on the Company in the near
term, management believes that the Company would be able to obtain other
customers for its crude oil. Domestic production is sold under two contracts,
one for oil and one for gas. The Company has access to several alternative
buyers for oil and gas sales domestically.

Estimates of oil and gas values as made in the financial statements require
extensive judgments and are generally less precise than other estimates made
in connection with financial disclosures. Assigning monetary values to such
estimates does not reduce the subjectivity and changing nature of such
estimates of value. The information set forth herein is therefore subjective
and, since judgments are involved, may not be comparable to estimates of value
made by other companies. The Company considers its estimates to be reasonable;
however, due to inherent uncertainties and the limited nature of data,
estimates are imprecise and subject to change over time as additional
information become available.

3. RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" which was
amended in June 1999 by SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities--Deferral of the Effective Date of FASB Statement No.
133" and in June 2000 by SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities". SFAS No. 133, as amended, is
effective for derivative instruments and hedging activities that require an
entity to recognize all derivatives as an asset or liability measured at its
fair value. Depending on the intended use of the derivative, changes in its
fair value will be reported in the period of change as either a component of
earnings or a component of comprehensive income. Retroactive application to
periods prior to adoption is not allowed. The Company adopted SFAS No. 133, as
amended, effective January 1, 2001. The adoption had no effect on the
Company's financial position or results of operations as all existing
contracts either do not meet the definition of a derivative or qualify for the
normal purchases and sales exemption. The Company does not currently engage in
hedging activities.

VAALCO ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000

(in thousands of dollars, unless otherwise indicated)

The Company is currently evaluating the effects of adopting these
statements.

Use of Estimates in Financial Statement Preparation--The preparation of
financial statements in conformity with generally accepted accounting
principles requires estimates and assumptions that affect the reported amounts
of assets and liabilities as well as certain disclosures. The Company's
financial statements include amounts that are based on management's best
estimates and judgments. Actual results could differ from those estimates.

Reclassifications--Certain amounts from 2000 have been reclassified to
conform to the 2001 presentation.

4. INVESTMENT IN UNCONSOLIDATED ENTITIES

At December 31, 2001 and December 31, 2000, VAALCO had the following
investments:

December 31, December 31,
2001 2000
------------ ------------

Investment in VAALCO Exploration LLC............... -- 1,448
---- ------
$ -- $1,448
==== ======

Investment in VAALCO Exploration LLC represented a 50/50 membership
interest shared by VAALCO Energy, Inc. and Robert Schneeflock of Paramount
Petroleum in VAALCO Exploration LLC. VAALCO Exploration was formed to conduct
exploration activities primarily in the onshore Gulf Coast area, including
Alabama, Mississippi and Louisiana. VAALCO and Schneeflock contributed capital
interests of 93.75% and 6.25%, respectively. Net Profit was allocated first
based on contributed capital interests up to the aggregate amount of Net Loss
allocated and thereafter based on membership interest of 50/50. Net Loss was
allocated first

VAALCO ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000

(in thousands of dollars, unless otherwise indicated)

based on membership interest up to the aggregate amount of Net Profit
allocated and thereafter based on contributed capital interest. VAALCO
invested $3.0 million to fund overhead, leases, seismic and other amounts in
connection with the business. The Company elected to terminate its joint
venture with Paramount Petroleum, Inc., effective June 1, 2001. The joint
venture focused on domestic onshore prospects in Mississippi, Alabama and
Louisiana. In connection with the wind up of the joint venture, the Company
received $169,000 in cash, a receivable for $47,000 representing its share of
cash in the joint venture and $259,000 of undeveloped acreage representing its
proportionate 93.75% working interest in kind in all remaining prospects
within the joint venture. Final completion of assignment documentation is
ongoing. The Company has production from two small gas discoveries drilled by
the joint venture.

The following summarizes the aggregated financial information for all
investments owned by VAALCO, which were accounted for under the equity method
as of December 31, 2000 and 2001 respectively:

December 31, December 31,
2001 2000
------------ ------------
(in (in
thousands) thousands)

Balance Sheet:
Current assets................................... $ 50 $ 311
Oil and gas property............................. -- 1,226
Other assets..................................... -- 17
Owner's equity................................... 50 1,544
Statement of Earnings:
Revenue.......................................... $ 13 $ 215
======= ======
Gross profit..................................... $ (988) $ (156)
======= ======
Net loss......................................... $(1,034) $ (330)
======= ======
VAALCO's share of net loss....................... $ (973) $ (310)
======= ======

5. STOCKHOLDERS' EQUITY

The following discussion of shares under option incorporates options
granted by the predecessor VAALCO. These obligations were assumed by the
Company pursuant to the merger.

In 1996 options were granted to an officer and director for 1,000,000
shares of the Common Stock of the Company at exercise prices of $0.375 per
share for 400,000 shares, $0.50 for 300,000 shares and $1.00 for 300,000
shares. The options vested over a term of three years and may be exercised for
five years from the vesting date. As of December 31, 2001, the options were
completely vested. None of the options had been exercised as of December 31,
2001.

In 1996, a former officer of the Company was granted warrants to purchase
shares of the Company's Common Stock. The warrants have a remaining term
expiring August 31, 2003 and consist of the right to purchase 250,000 shares
of Common Stock at an exercise price of $0.50 per share; 250,000 shares of
Common Stock at an exercise price of $2.50 per share; 250,000 shares of Common
Stock at an exercise price of $5.00 per share; and 250,000 shares of Common
Stock at an exercise price of $7.50 per share. None of the warrants had been
exercised as of December 31, 2001.

VAALCO ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000

(in thousands of dollars, unless otherwise indicated)

In 1997, another officer of the Company was granted options to purchase
1,000,000 shares at $0.625 per share, vesting 500,000 shares at August 1, 1997
and 500,000 shares at August 1, 1998. None of the options had been exercised
as of December 31, 2001.

An investment banking firm was granted 345,325 warrants to purchase the
Company's Common Stock on July 31, 1997 in connection with the private
placement of Common Stock. The warrants have a term of five years from the
date of issuance and consist of the right to purchase shares at $1.00 per
share. The same investment banking firm was granted 100,000 warrants to
purchase the Company's Common Stock on April 1, 1998 in connection with the
private placement of Common Stock. The warrants have a term of five years from
the date of issuance and consist of the right to purchase shares at $2.00 per
share. None of the warrants had been exercised as of December 31, 2001.

On November 29, and December 15, 2000, options to purchase a total of
600,000 shares were granted at $0.30 per share to two technical
representatives of the Company. The options have a term of five years from the
date of issuance. These options vested six months after issuance.

Information with respect to the Company's stock options are as follows:

Vested Weighted
Options/ Shares Average
Warrants Under Exercise
Exercisable Option Price
----------- --------- --------

Balance, December 31, 1999.................... 3,495,325 3,495,325 $1.76
Granted....................................... 600,000 0.30
Forfeited..................................... 25,000 25,000 10.25
--------- --------- -----
Balance, December 31, 2000.................... 3,470,325 4,070,325 $1.49
Vested........................................ 600,000 0.30
Forfeited..................................... 225,000 225,000 1.47
--------- --------- -----
Balance, December 31, 2001.................... 3,845,325 3,845,325 $1.50
========= ========= =====

The following table summarizes information about stock options outstanding
as of December 31, 2001:

Weighted- Weighted- Weighted-
Number Average Average Number Average
Outstanding Remaining Exercise Exercisable Exercise
Range of Exercise Prices At 12/31/01 Contractual Life Price At 12/31/01 Price
------------------------ ----------- ---------------- --------- ----------- ---------

$0.375 to 1.00.......... 2,995,325 1.59 years $0.60 2,995,325 $0.60
1.01 to 2.50........... 350,000 1.55 years 2.36 350,000 2.36
2.51 to 5.00........... 250,000 1.67 years 5.00 250,000 5.00
5.01 to 10.25.......... 250,000 1.67 years 7.50 275,000 7.50
$0.375 to 10.25......... 3,845,325 1.60 years $1.50 3,845,325 $1.50

SFAS No. 123, "Accounting for Stock-Based Compensation" encourages, but
does not require companies to record compensation cost for stock-based
employee compensation plans at fair value as determined by generally
recognized option pricing models such as the Black-Scholes model or the
binomial model. Because of the inexact and subjective nature of deriving non-
freely traded employee stock option values using these methods, the Company
has adopted the disclosure-only provisions of SFAS No. 123 and continues to
account for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees."

VAALCO ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000

(in thousands of dollars, unless otherwise indicated)

The provision of SFAS No. 123 had no material effect for 2001.

The Company follows SFAS No. 128--"Earnings per Share," which establishes
the requirements for presenting earnings per share ("EPS"). SFAS No. 128
requires the presentations of "basic" and "diluted" EPS on the face of the
income statement.

The following schedule is presented as a reconciliation of the numerators
and denominators of basic and diluted earnings per share computations.

For the Year Ended December 31,
2001
-----------------------------------
Per-Share Net Loss Shares
Amount (Numerator) (Denominator)
--------- ----------- -------------

Basic EPS
Net loss attributable to common
shareholders........................ $(0.15) $(3,099) 20,745
Effect of Diluted Securities
Common stock options................. -- -- --
Diluted EPS
Net loss attributable to common
shareholders........................ $(0.15) $(3,099) 20,745

For the Year Ended December 31,
2000
-----------------------------------
Per-Share Net Loss Shares
Amount (Numerator) (Denominator)
--------- ----------- -------------

Basic EPS
Net loss attributable to common
shareholders........................ $(0.22) $(4,553) 20,745
Effect of Diluted Securities
Common stock options................. -- -- --
Diluted EPS
Net loss attributable to common
Shareholders........................ $(0.22) $(4,553) 20,745

Options excluded from the above calculation, as they are anti-dilutive, are
3,845,325 and 4,070,325 for 2001 and 2000, respectively.

6. INCOME TAXES

The Company and its domestic subsidiaries file a consolidated United States
income tax return. Certain subsidiaries' operations are also subject to
Philippine income taxes.

Provision (benefit) for income taxes consists of the following:

Year Ended
December 31,
-------------
2001 2000
------ ------

U.S. federal:
Current....................................................... $ -- $ --
Deferred.................................................... -- --
Philippine:
Current..................................................... 48 10
Deferred.................................................... 18 (40)
----- ------
Total..................................................... $ 66 $ (30)
===== ======

VAALCO ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000

(in thousands of dollars, unless otherwise indicated)

The primary differences between the financial statement and tax bases of
assets and liabilities at December 31, 2001 and 2000 are as follows:

Year Ended
December 31,
---------------
2001 2000
------- -------

Deferred Tax Liabilities:
Unrealized foreign exchange gain.......................... $ 243 $ 225
------- -------
Deferred Tax Assets:
Reserves not currently deductible......................... 1,044 1,044
Operating loss carryforwards.............................. 9,756 8,684
Alternative minimum tax credit carryover.................. 647 647
Other assets.............................................. 253 227
------- -------
11,700 10,602
Valuation allowance......................................... 11,064 9,967
------- -------
636 635
------- -------
Net deferred tax asset...................................... $ 393 $ 410
======= =======

Pretax income (loss) is comprised of the following:

Year Ended
December 31,
-----------------
2001 2000
-------- -------

United States............................................ $ (2,561) $(4,514)
Foreign (Philippine/Gabon)............................... (538) (39)
-------- -------
$(3,099) $(4,553)
======== =======

The tax benefit derived by applying the federal statutory tax rate to the
Company's pretax loss is offset by an increase in the valuation allowance
applied to the Company's deferred tax assets.

At December 31, 2001, the Company and its subsidiaries had no foreign tax
credit ("FTC") carryforwards for United States tax purposes.

At December 31, 2001, the Company and its subsidiaries had net operating
loss ("NOL") carryforwards of approximately $27.9 million for United States
income tax purposes. A full valuation allowance has been provided against this
NOL. Due to previous ownership changes, Internal Revenue Code section 382 will
limit future utilization of the net operating loss carryforwards.

At December 31, 2001, the Company was subject to federal taxes only, with
no allocations made to state and local taxes.

7. RELATED-PARTY TRANSACTIONS

Other long-term assets included $31,221 in notes due from employees at
December 31, 2001.

VAALCO ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000

(in thousands of dollars, unless otherwise indicated)

8. COMMITMENTS AND CONTINGENCIES

At December 21, 2001 the Company owned a 30.35% interest in a block
offshore Gabon, the Etame Block. The block contains the recent Etame discovery
as well as previous discoveries that the Company is currently evaluating to
determine their commercial viability. The Company and its partners undertook
an obligation to the Government of Gabon to obtain and process seismic data
and to drill one commitment well on the Etame Block over the three-year term
of the license. In April 1998, a participation agreement was entered into with
Western Atlas Afrique, Ltd. ("Western Atlas"), a subsidiary of Western Atlas
International, Inc., to conduct a 320 square kilometer seismic survey at
Western Atlas' sole cost and to pay a disproportionate 80% of the cost, up to
$4.7 million, of the first commitment well. In return for these payments,
Western Atlas earned a 65% interest in the production-sharing contract. In
June 1998, Western Atlas completed the above-mentioned acquisition of seismic
data over the property. This data was processed, and the Company drilled the
commitment well, the Etame No. 1 well, in June 1998 resulting in a 3,700 BOPD
Gamba sandstone discovery on the block. Completion of the Etame No. 1 well
satisfied all of the Company's obligations to the Government of Gabon under
the primary three-year term of the contract.

During 1998, the consortium of companies owning the Etame Block production
sharing contract agreed to renew the production sharing contract for three
additional years, thereby taking on a commitment to drill two additional
exploration wells and to perform a 3-D seismic reprocessing. A delineation
well, the Etame 2V well, was drilled in January 1999 and encountered
additional oil pay in the Gamba sandstone, however the well encountered the
Gamba sandstone lower than expected. The consortium elected to reprocess
seismic prior to drilling any additional delineation wells

In January 2001, the Company acquired the 65% interest in the Etame Block
offshore Gabon, West Africa from Western Atlas Afrique, Ltd. a subsidiary of
Baker Hughes. Consideration for the acquisition was $1.0 million in cash and a
future net profits interest in the event the existing discoveries on the block
are developed. The Company resold 52.5% of the interest held by Western Atlas
Afrique to two companies for $1 million and their proportionate assumption of
the future net profits interest. The second exploration commitment well due
under the second exploration period, the Etame 3V was subsequently drilled to
further delineate the Etame discovery in February, 2001. The well successfully
encountered Gamba sandstone pay updip from the Etame 1 well and satisfied the
remaining well obligations under the second exploration period.

In June 2001, drilling of the Etame 4V delineation well was completed. The
well was drilled approximately 2.4 kilometers (1.5 miles) from the Etame 1
discovery well and successfully encounter Gamba sandstone pay updip of the
Etame 3V well. As a result of the two successful delineation wells drilled
this year, the Etame consortium has approved a budget to develop the field.
Initial development will consist of three subsea wells connected to a floating
production, storage and offloading tanker ("FPSO") at a cost of approximately
$43.2 million ($13.1 million net to the Company). The project is expected to
come online in the third quarter of 2002 at initial flow rates of at least
12,000 barrels of oil per day.

In July of 2001, the consortium elected to renew the Etame block for an
additional five-year term, consisting of a three-year and a two-year follow-on
term. The consortium committed to drill two additional wells on the block
during the three-year term. A one well commitment is required to obtain the
two-year extension.

VAALCO ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000

(in thousands of dollars, unless otherwise indicated)

9. SUBSEQUENT EVENT

At the date of this filing, the loan agreements for both the IFC loan and
the 1818 Fund loan have not been signed and there can be no assurance that the
loans will fund until they are signed. Management believes that execution of
each loan document is imminent, however until mutually acceptable agreements
are signed there is no binding commitment by either lender. In addition to
each loan being subject to final approval by senior management of both
lenders, and the effectiveness of the other's loan, the terms of the IFC loan
provide that initial funding is subject to Gabon Government approval, which
the Company believes it will receive. A condition for receiving the 1818 Fund
loan is the signing of the IFC loan documents.

VAALCO ENERGY, INC. AND SUBSIDIARIES

SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES

(Unaudited)

(in thousands of dollars, unless otherwise indicated)

The following information is being provided as supplemental information in
accordance with certain provisions of SFAS No. 69, "Disclosures about Oil and
Gas Producing Activities". The Company's reserves are located offshore of the
Republic of the Philippines. The following tables set forth costs incurred,
capitalized costs, and results of operations relating to oil and natural gas
producing activities for each of the periods. (See "Footnote 1--ORGANIZATION")

Costs Incurred in Oil and Gas Property

Acquisition, Exploration and Development Activities

United States International
------------- -------------
2001 2000 2001 2000
------ ------ ------ ------

Costs incurred during the year:
Exploration(1)............................... $1,819 $1,278 $4,008 $ 19
Acquisition--unproved........................ 54 13 294 --
------ ------ ------ ------
Total...................................... $1,873 $1,291 $4,302 $ 19
====== ====== ====== ======
Company's share of equity method investee's
costs incurred(1)............................. $ -- $ 18 $ -- $1,430
====== ====== ====== ======

--------
(1) Includes costs which are capitalized or expensed.

In 2001, of the $434 of United States exploration costs incurred, $0 was
expensed for dry hole costs. In 2001, international exploration costs included
$4,302 in capitalized costs for Etame Block and $0 in expensed geophysical
costs. In 2000, of the $905 of U.S. exploration costs incurred, $707 was
expensed for dry hole costs. International exploration costs included
capitalized costs in 2000 of $14 for Etame, and $5 was expensed for
geophysical costs. The Company's share of investee's costs was for the
Paramount joint venture in the U.S.

Capitalized Costs Relating to Oil and Gas Producing Activities:

Year Ended
December 31,
---------------
2001 2000
------- ------

Capitalized costs--
Unproved properties not being amortized................. $ 7,151 $2,823
Properties being amortized................................ 2,648 1,154
------- ------
Total capitalized costs............................... 9,799 3,977
Less accumulated depreciation, depletion, and
amortization........................................... (2,026) (816)
------- ------
Net capitalized costs................................... $ 7,773 $3,161
======= ======
Company's share of equity method investee's net
capitalized costs........................................ $ -- $4,427
======= ======

The capitalized costs pertain to the Company's producing activities in the
Philippines, the Etame discovery and U.S. activities. As a result of the
merger with 1818 Oil Corp., $39.5 million carried by VAALCO in previously
fully depleted costs carried in capitalized costs were closed out against the
associated accumulated depreciation, depletion and amortization.

VAALCO ENERGY, INC. AND SUBSIDIARIES

SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES--(Continued)

(Unaudited)

(in thousands of dollars, unless otherwise indicated)

Results of Operations for Oil and Gas Producing Activities:

United
States International
------------- --------------
2001 2000 2001 2000
------ ----- ----- -------

Crude oil and gas sales..................... $ 708 $ 81 $ 842 $ 1,198
Production expense.......................... (232) (54) (414) (428)
Exploration expense......................... -- (905) -- (5)
Depreciation, depletion and
amortization............................... (1,162) -- -- --
------ ----- ----- -------
Income (loss) before taxes.................. (686) (878) 428 765
Income tax (provision) benefit.............. -- (66) 30
------ ----- ----- -------
Results from oil and gas
producing activities....................... $ (686) $(878) $ 362 $ 795
====== ===== ===== =======
Company's share of equity method investee's
results of operations...................... $ (875) $(310) $ -- $(2,845)
====== ===== ===== =======

Proved Reserves

The following tables set forth the net proved reserves of VAALCO Energy,
Inc. as of December 31, 2001 and 2000, and the changes therein during the
periods then ended.

Oil (MBbls) Gas (MMcf)
----------- ----------

PROVED RESERVES:
BALANCE AT DECEMBER 31, 1999......................... 661 --
Production......................................... (92) --
Revisions.......................................... 117 --
----- ---
BALANCE AT DECEMBER 31, 2000......................... 686 --
Additions.......................................... 6,105 140
Production......................................... (87) (71)
Revisions.......................................... (272) --
----- ---
BALANCE AT DECEMBER 31, 2001......................... 6,432 69
===== ===

Oil (MBbls) Gas (MMcf)
PROVED DEVELOPED RESERVES ----------- ----------

Balance at December 31, 2000......................... 686 --
Balance at December 31, 2001......................... 349 69

All of the Company's Proved Developed Reserves are located offshore the
Republic of the Philippines and in Texas. Revisions in reserves primarily
reflect the impact of lower crude prices on the economic life of reserves in
the Philippines.

VAALCO ENERGY, INC. AND SUBSIDIARIES

SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES--(Continued)

(Unaudited)

(in thousands of dollars, unless otherwise indicated)

Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Oil Reserves

The information that follows has been developed pursuant to procedures
prescribed by SFAS No. 69 and utilizes reserve and production data estimated
by independent petroleum consultants. The information may be useful for
certain comparison purposes, but should not be solely relied upon in
evaluating VAALCO Energy, Inc. or its performance.

The future cash flows are based on sales prices and costs in existence at
the dates of the projections, excluding the interests of the Philippine
government and the other consortium members. Future production costs do not
include overhead charges allowed under joint operating agreements or
headquarters general and administrative overhead expenses. Future development
costs include amounts accrued attributable to future abandonment when the
wells become uneconomic to produce. The standardized measure of discounted
cash flows for 2001 do not include the costs of abandoning the Company's non-
producing properties.

United States International
-------------- ----------------
December 31, December 31,
-------------- ----------------
2001 2000 2001 2000
------ ------ -------- ------

Future cash inflows....................... $ 556 $ -- $117,539 $7,914
Future production costs................... (192) -- (55,506) (3,327)
Future development costs.................. -- -- (26,188) (1,377)
Future income tax expense................. (49) -- -- --
------ ----- -------- ------
Future net cash flows..................... 315 -- 35,845 3,210
Discount to present value................. --
at 10% annual rate........................ (41) -- (11,988) (508)
------ ----- -------- ------
Standardized measure of discounted future
net cash flows........................... $ 274 $ -- $ 23,457 $2,702
====== ===== ======== ======

Future development costs at December 31, 2001 includes $1,377 for future
abandonment costs which have been accrued by the Company. Due to the
availability of net operating loss carryforwards, there is no future income
tax expense attributable to the Company's Philippines reserves. No income
taxes are shown for Gabon reserves due to the fact that profit oil paid to the
Gabon government is in lieu of corporate income taxes.

VAALCO ENERGY, INC. AND SUBSIDIARIES

SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES--(Continued)

(Unaudited)

(in thousands of dollars, unless otherwise indicated)

Changes in Standardized Measure of Discounted Future Net Cash Flows:

The following table sets forth the changes in standardized measure of
discounted future net cash flows as follows:

December 31,
---------------
2001 2000
------- ------

BALANCE AT BEGINNING OF PERIOD ............................. $ 2,702 $2,823
Sales of oil and gas, net of production costs............... (968) (796)
Net changes in prices and production costs.................. (635) 99
Revisions of previous quantity estimates.................... (437) 294
Reserve additions........................................... 23,339 --
Changes in estimated future development costs............... -- --
Development costs incurred during the period................ -- --
Accretion of discount....................................... (270) 282
Net change in income taxes.................................. -- --
Change in production rates (timing) and other............... -- --
------- ------
BALANCE AT END OF PERIOD ................................... $23,731 $2,702
======= ======

In accordance with the guidelines of the U.S. Securities and Exchange
Commission, the Company's estimates of future net cash flow from the Company's
properties and the present value thereof are made using oil and natural gas
contract prices in effect as of year end and are held constant throughout the
life of the properties except where such guidelines permit alternate
treatment, including the use of fixed and determinable contractual price
escalations. The contract price as of December 31, 2001 was $8.99 per Bbl for
both Matinloc oil for Nido oil in the Philippines. In Gabon, the price used
was $18.84 per barrel representing a $0.50 discount to the spot price of Brent
Crude at December 31, 2001. The Company has investigated prices received for
similar crude oil coming out of Gabon from the same types of formations as the
crude oil in the Etame Field. The Company believes that the $0.50 discount to
Brent Crude represents a reasonable estimate of the crude price it will
receive. However, there can be no assurances that the actual price the Company
receives for Etame crude will not differ from the estimate, as the price it
receives will depend on demand for West African crudes at the time of sale.

VAALCO ENERGY, INC. AND SUBSIDIARIES

SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES--(Continued)

(Unaudited)

(in thousands of dollars, unless otherwise indicated)

Under the Production Sharing Contract in Gabon, the Gabonese government is
the owner of all oil and gas mineral rights. The right to produce the oil and
gas is stewarded by the Directorate Generale de Hydrocarbeures and the
Production Sharing contract was awarded by a decree from the State. Pursuant
to the service contract, the Gabon government receives a variable royalty
depending on production rate. The consortium maintains a Cost Account, which
entitles it to receive 70% of the production remaining after deducting the
royalty so long as there are amounts remaining in the cost account. At
December 31, 2001 there was $35.7 million in the cost account. In lieu of
corporate income taxes the consortium also receives an allocation of the
remaining "profit oil" production from the contract area after deducting the
royalty and the cost oil. So long as amounts remain in the Cost Account, the
net share that the consortium receives from production can range from a low of
67.7% of production at production rate in excess of 25,000 barrels per day to
a high of 82.5% of production at rates below 5,000 barrel per day.

Under the service contract, it is not anticipated that the Gabonese
government will take physical delivery of its allocated production. Instead,
the Company is authorized to sell the Gabonese government's share of
production and remit the proceeds to the Gabonese government.

Under the laws of the Republic of the Philippines, the Philippine
government is the owner of all oil and gas mineral rights. However, pursuant
to The Oil Exploration and Development Act of 1972, the Philippine government,
acting through its Office of Energy Affairs (formerly, the Petroleum Board),
may enter into service contracts under which contractors will be granted
exclusive rights to perform exploration, drilling, production and other
"petroleum operations" in a contract area. Further, such Act vested the
Ministry of Energy with regulatory powers over business activities relating to
the exploration, exploitation, development and extraction of energy resources.

Pursuant to the service contracts, the Philippine government receives an
allocation of the production from the contract area instead of a royalty.
Under the service contracts, the Philippine government does not take actual
delivery of its allocated production. Instead, the Company has been authorized
to sell the Philippine government's share of production and remit the proceeds
to the Philippine government. Under this production sharing scheme, the
consortium is permitted a Filipino Participation Incentive Allowance ("FPIA")
and a deduction to recover certain costs expended on the development of the
contract area of up to 60% of gross revenues from the contract area. The FPIA,
a deduction equivalent to 7.5% of project gross revenue, is allowed when
Filipino ownership participation in the consortium equals or exceeds 15%,
which is the case for Service Contract No. 14. The consortium also receives a
production allowance of approximately 50% of the balance of the oil after
deducting FPIA and cost recovery oil. The remaining oil is shared 40% by the
consortium and 60% by the Philippine government. Under this scheme, the
consortium currently receives approximately 90.3% of the oil produced and the
Philippine government receives approximately 9.7%. Because the cost recovery
account contains over $200 million, the Company anticipates receiving the
maximum 60% of cost oil during the life of the Nido and Matinloc reserves.

Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure

None.

PART III

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

Information required by this item will be included in the Company's proxy
statement for its 2001 annual meeting, which will be filed with the Commission
within 120 days of December 31, 2001, and which is incorporated herein by
reference.

Item 10. Executive Compensation

Item 11. Security Ownership of Certain Beneficial Owners and Management

Item 12. Certain Relationships and Related Transactions

Item 13. Exhibits and Reports on Form 8-K

2. Plan of acquisition, reorganization , arrangement, liquidation or
succession

2.1(a) Stock Acquisition Agreement and Plan of Reorganization dated February
17, 1998 by and among the Company and the 1818 Fund II, L.P.

2.2(c) First Amendment to Stock Acquisition Agreement and Plan of
Reorganization, dated April 21, 1998

2.3(j) Stock Purchase Agreement between Western Atlas International, Inc., as
Seller, and VAALCO Gabon (Etame), Inc. as Purchaser, dated January 4,
2001.

2.4(j) Stock Purchase Agreement between VAALCO Energy, Inc., as Seller and
PanAfrican Energy Corporation Ltd., as Purchaser, dated January 15,
2001.

2.5(j) Share Sale and Purchase Agreement By and Between VAALCO Gabon (Etame),
Inc., and Sasol Petroleum International (Pty) Ltd. dated February 5,
2001.

3. Articles of Incorporation and Bylaws

3.1(b) Restated Certificate of Incorporation

3.2(b) Certificate of Amendment to Restated Certificate of Incorporation

3.3(b) Bylaws

3.4(b) Amendment to Bylaws

3.5(c) Designation of Convertible Preferred Stock, Series A

10. Material Contracts

10.1(d) Service Contract No. 6, dated September 1, 1973, among the Petroleum
Board of the Republic of the Philippines and Mosbacher Philippines
Corporation, et al, as amended.

10.2(d) Operating Agreement, dated January 1, 1975, among Mosbacher
Philippines Corporation, Husky (Philippines) Oil, Inc. and Amoco
Philippines Petroleum Company.

10.3(d) Service Contract No. 14, dated December 17, 1975, among the Petroleum
Board of the Republic of the Philippines and Philippines--Cities
Service, Inc., et al, as amended.

10.4(d) Operating Agreement, dated July 17, 1975, among Philippines-Cities
Service, Inc., Husky (Philippines) Oil, Inc., Oriental Petroleum and
Minerals Corporation, Philippines-Overseas Drilling & Oil Development
Corporation, Basic Petroleum and Minerals, Inc., Landoil Resources
Corporation, Westrans Petroleum, Inc. and Philippine National Oil
Company, as amended.

10.5(d) Memorandum of Understanding, dated April 2, 1979, among the Bureau of
Energy Development of the Republic of the Philippines and
Philippines--Cities Service, Inc., et al.

10.6(d) Indemnity Agreement entered into among the Company and certain of its
officers and directors listed therein.

10.7(e) Exploration and Production Sharing contract between the Republic of
Gabon and VAALCO Gabon (Equata), Inc. dated July 7, 1995.

10.8(e) Exploration and Production Sharing contract between the Republic of
Gabon and VAALCO Gabon (Etame), Inc. dated July 7, 1995.

10.9(e) Deed of Assignment and Assumption between VAALCO Gabon (Etame), Inc.,
VAALCO Energy (Gabon), Inc. and Petrofields Exploration & Development
Co., Inc. dated September 28, 1995.

10.10(e) Deed of Assignment and Assumption between VAALCO Gabon (Equata),
Inc., VAALCO Production (Gabon), Inc. and Petrofields Exploration &
Development Co., Inc. dated September 8, 1995.

10.11(f) Letter of Intent for Etame Block, Offshore Gabon dated January 22,
1998 between the Company and Western Atlas International, Inc.

10.12(f) Farm In Agreement for Service Contract No. 14 Offshore Palawan
Island, Philippines dated September 24, 1996 between the Company and
SOCDET Production PTY, Ltd.

10.13(f) Letter Agreement between the Company and Northstar Interests LLC.
dated December 5, 1996.

10.14(g) Registration Rights Agreement, dated July 28, 1997, by and among the
Company, Jefferies & Company, Inc. and the investors listed therein.

10.15(h) Warrant Agreement to Purchase Shares of Common Stock of VAALCO
Energy, Inc., dated July 31, 1997, between VAALCO Energy, Inc. and
Jefferies & Company, Inc.

10.16(c) Registration Rights Agreement among the Company and The 1818 Fund II,
L.P., dated April 21, 1998

10.17(c) Registration Rights Agreement dated April 21, 1998 by and among the
Company, Jefferies & Company, Inc. and the investors listed therein.

10.18(i) Assignment Agreement between the Company, members of the Service
Contract 14 Consortium and SOCDET dated December 29, 1998

10.19(j) Conveyance of Production Payment from Western Atlas Afrique, Ltd. to
Western Atlas International, Inc. dated December 29, 2000.

10.20(k) 2001 Stock Incentive Plan dated August 16, 2001

21.1 Subsidiaries of the Registrant

--------
(a) Filed as an exhibit to the Company's report on Form 8-K filed with the
Commission on March 4, 1998 (file no. 000-20928) and hereby incorporated
by reference herein.

(b) Filed as an exhibit to the Company's Registration Statement on Form S-3
filed with the Commission on July 15, 1998 and hereby incorporated by
reference herein.
(c) Filed as an exhibit to the Company's Report on Form 8-K filed with the
Commission on May 6, 1998 and hereby incorporated by reference herein.
(d) Filed as an exhibit to the Company's Form 10 (File No. 0-20928) filed on
December 3, 1992, as amended by Amendment No. 1 on Form 8 on January 7,
1993, and by Amendment No. 2 on Form 8 on January 25, 1993, and hereby
incorporated by reference herein.
(e) Filed as an exhibit to the Company's Form 10-QSB for the quarterly period
ended September 30, 1995, and hereby incorporated by reference herein.
(f) Filed as an exhibit to the Company's Form 10-KSB for the annual period
ended December 31, 1996, and hereby incorporated by reference herein.
(g) Filed as an exhibit to the Company's Form 10-QSB for the quarterly period
ended June 30, 1997, and hereby incorporated by reference herein.
(h) Filed as an exhibit to the Company's Form 10-KSB for the annual period
ended December 31, 1997, and hereby incorporated by reference herein.
(i) Filed as an exhibit to the Company's Form 10-KSB for the annual period
ended December 31, 1998, and hereby incorporated by reference herein.
(j) Filed as an exhibit to the Company's Form 10-KSB for the annual period
ended December 31, 2000, and hereby incorporated by reference herein.
(k) Filed as an exhibit to the Company's Registration Statement Form S-8 filed
with the Commission on August 18, 2001.

(b) Reports on Form 8-K.

None

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.

VAALCO ENERGY, INC.
(Registrant)

/s/ W. Russell Scheirman
By __________________________________
W. Russell Scheirman, President,
Chief Financial Officer and Director

Dated March 30, 2001

In accordance with the Exchange Act, this report has been signed below on
the 30th day of March, by the following persons on behalf of the registrant
and in the capacities indicated.

Signature Title
--------- -----

/s/ Robert L. Gerry, III Chairman of the Board, Chief
______________________________________ Executive Officer and Director
Robert L. Gerry, III (Principal Executive Officer)

/s/ Virgil A. Walston, Jr. Vice Chairman of the Board, Chief
______________________________________ Operating Officer and Director
Virgil A. Walston,Jr.

/s/ W. Russell Scheirman President, Chief Financial Officer
______________________________________ and Director (Principal Financial
W. Russell Scheirman Officer and Principal Accounting
Officer)

/s/ Director
______________________________________
Walter W. Grist

/s/ Director
______________________________________
T. Michael Long

/s/ Director
______________________________________
Arne R. Nielsen

/s/ Director
______________________________________
Lawrence C. Tucker