Petroleum & Resources Corporation (the Corporation) is registered under the Investment Company Act of 1940 as a diversified investment company. On March 28, 2000, the Corporation received shareholder approval to change its registration to a non-diversified investment company. The Corporation’s investment objectives as well as the nature and risk of its investment transactions are set forth in the Corporation’s registration statement.

Security Valuation--Investments in securities traded on national security exchanges are valued at the last reported sale price on the day of valuation. Over-the-counter and listed securities for which a sale price is not available are valued at the last quoted bid price. Short-term investments are valued at amortized cost. Written options are valued at the last quoted asked price.

Security Transactions and Investment Income--Investment transactions are accounted for on the trade date. Gain or loss on sales of securities and options is determined on the basis of identified cost. Dividend income and distributions to shareholders are recognized on the exdividend date, and interest income is recognized on the accrual basis.

2. FEDERAL INCOME TAXES
The Corporation’s policy is to distribute all of its taxable income to its shareholders in compliance with the requirements of the Internal Revenue Code applicable to regulated investment companies. Therefore, no federal income tax provision is required. For federal income tax purposes, the identified cost of securities, including options, at March 31, 2000 was $327,440,910, and net unrealized appreciation aggregated $284,029,115, of which the related gross unrealized appreciation and depreciation were $307,519,120 and $23,490,005, respectively.

Distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. Accordingly, periodic reclassifications are made within the Corporation’s capital accounts to reflect income and gains available for distribution under income tax regulations.

3. INVESTMENT TRANSACTIONS
Purchases and sales of portfolio securities, other than options and short term investments, during the three months ended March 31, 2000 were $5,625,673 and $22,943,120, respectively. The Corporation, as writer of an option, bears the market risk of an unfavorable change in the price of the security underlying the written option. Option transactions comprised an insignificant portion of operations during the period ended March 31, 2000 . All investment decisions are made by a committee, and no one person is primarily responsible for making recommendations to that committee.

4. CAPITAL STOCK
The Corporation may purchase shares of its common stock from time to time at such prices and amounts as the Board of Directors may deem advisable. During the three months ended March 31, 2000, the Corporation purchased 403,300 shares of common stock at a total cost of $13,163,096 and a weighted average discount from net asset value of 16.3%. At March 31, 2000, the Corporation held a total of 441,000 shares of its common stock.

The Corporation has 5,000,000 unissued preferred shares without par value.

The Corporation has an employee incentive stock option and stock appreciation rights plan which provides for the issuance of options and stock appreciation rights for the purchase of up to 815,000 shares of the Corporation’s common stock at 100% of the fair market value at date of grant. Options are exercisable beginning not less than one year after the date of grant and extend and vest over ten years from the date of grant. Stock appreciation rights are exercisable beginning not less than two years after the date of grant and extend over the period during which the option is exercisable. The stock appreciation rights allow the holders to surrender their rights to exercise their options and receive cash or shares in an amount equal to the difference between the option price and the fair market value of the common stock at the date of surrender.

Under the plan, the exercise price of the options and related stock appreciation rights is reduced by the per share amount of capital gain paid by the Corporation during subsequent years. At the beginning of 2000, there were 148,916 options outstanding at a weighted average exercise price of $22.4389 per share. During the three months ended March 31, 2000, the Corporation granted options including stock appreciation rights for 15,223 shares of common stock with an exercise price of $30.1875. During the period stock appreciation rights relating to 1,094 stock option shares were exercised at a weighted average market price of $34.75 per share and the stock options relating to these rights, which had a weighted average exercise price of $27.7125 were cancelled. At March 31, 2000, there were outstanding exercisable options to purchase 53,431 common shares at $13.815-33.625 (weighted average price of $18.428) per share and unexercisable options to purchase 109,614 common shares at $18.2125-33.6250 per share (weighted average price of $25.6841). The weighted average remaining contractual life of outstanding exercisable and unexercisable options was 4.0793 years and 7.0044 years, respectively. The total compensation expense for stock options and stock appreciation rights recognized for the three months ended March 31, 2000 was $459,089. At March 31, 2000 , there were 320,907 shares available for future option grants.

5. RETIREMENT PLANS
The Corporation provides retirement benefits for its employees under a non-contributory qualified defined benefit pension plan. The benefits are based on years of service and compensation during the last 36 months of employment. The Corporation’s current funding policy is to contribute annually to the plan only those amounts that can be deducted for federal income tax purposes. The plan assets consist primarily of investments in individual stocks and bonds and mutual funds.

The actuarially computed net pension cost credit for the three months ended March 31, 2000 was $37,206, and consisted of service cost of $21,758, interest cost of $48,874, expected return on plan assets of $89,299, and net amortization credit of $18,539.

In determining the actuarial present value of the projected benefit obligation, the interest rate used for the weighted average discount rate was 8.0%, the expected rate of annual salary increases was 7.0%, and the long-term expected rate of return on plan assets was 8.0%.

On January 1, 2000, the projected benefit obligation for service rendered to date was $2,480,710. During the three months ended March 31, 2000 , the projected benefit obligation increased due to service cost and interest cost of $21,758 and $48,874, respectively, and decreased due to benefit payments in the amount of $18,499. The projected benefit obligation at March 31, 2000 was $2,532,843.

On January 1, 2000, the actual fair value of plan assets was $4,501,921. During the three months ended March 31, 2000 , the fair value of plan assets increased due to the expected return on plan assets of $89,299 and decreased due to benefit payments in the amount of $18,499. At March 31, 2000 , the projected fair value of plan assets amounted to $4,572,721, which resulted in excess plan assets of $2,039,878. The remaining components of prepaid pension cost at March 31, 2000 included $762,382 in unrecognized net gain, $320,597 in unrecognized prior service cost and $64,923 is the remaining portion of the unrecognized net asset existing at January 1, 1987, which is being amortized over 15 years. Prepaid pension cost included in other assets at March 31, 2000 was $1,533,170.

In addition, the Corporation has a nonqualified benefit plan which provides employees with defined retirement benefits to supplement the qualified plan. The Corporation does not provide postretirement medical benefits.

6. EXPENSES
The cumulative amount of accrued expenses at March 31, 2000 for employees and former employees of the Corporation was $2,096,818. Aggregate remuneration paid or accrued during the three months ended March 31, 2000 to officers and directors amounted to $759,674.

Research, accounting and other office services provided by and reimbursed to The Adams Express Company, an investment company which owns 8.7% of the Corporation’s common stock, amounted to $125,083 for the three months ended March 31, 2000.

7. PORTFOLIO SECURITIES LOANED
The Corporation makes loans of securities to brokers, secured by cash deposits, U.S. Government securities, or bank letters of credit. The Corporation accounts for securities lending transactions as secured financing and receives compensation in the form of fees or retains a portion of interest on the investment of any cash received as collateral. The Corporation also continues to receive interest or dividends on the securities loaned. The loans are secured by collateral of at least 102%, at all times, of the fair value of the securities loaned plus accrued interest. Gain or loss in the fair value of securities loaned that may occur during the term of the loan will be for the account of the Corporation. At March 31, 2000, the Corporation had outstanding loans of $23,167,619 and held collateral of $23,804,997.