TRANSTEXAS GAS CORP
10-K, 1999-05-20
CRUDE PETROLEUM & NATURAL GAS
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<PAGE>   1
================================================================================

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

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

                   FOR THE FISCAL YEAR ENDED JANUARY 31, 1999

                                       OR

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

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

                         COMMISSION FILE NUMBER 1-12204

                           TRANSTEXAS GAS CORPORATION
             (Exact name of registrant as specified in its charter)

                  DELAWARE                              76-0401023
       (State or other jurisdiction of               (I.R.S. employer
       incorporation or organization)                identification no.)

   1300 NORTH SAM HOUSTON PARKWAY EAST
                  SUITE 310
               HOUSTON, TEXAS                              77032
   (Address of principal executive offices)             (Zip code)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (281) 987-8600

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

           Securities registered pursuant to Section 12(b) of the Act:

                                                       Name of Each Exchange
      Title of Each Class                               On Which Registered
      -------------------                               ---------------------
Common Stock, $.01 par value                          New York Stock Exchange*

      (*An application for de-listing has been filed with the Commission)


           Securities registered pursuant to Section 12(g) of the Act:

                                      None

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

   Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]  No [ ].

   Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K ____.

   The aggregate market value of the voting stock held by non-affiliates of the
registrant on May 12, 1999 was $8,017,876.50.

   The number of shares of common stock of the registrant outstanding on May 12,
1999 was 57,515,566.

                       DOCUMENTS INCORPORATED BY REFERENCE

   The information required by Part III (Items 10, 11, 12 and 13) are
incorporated by reference from the registrant's definitive proxy statement
relating to registrant's 1999 annual meeting of stockholders to be filed with
the Commission not later than 120 days after the end of the fiscal year covered
by this Form 10-K.

================================================================================

<PAGE>   2

                                        
                                        
                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                        PAGE
                                                                                                        ----

                                                   PART I

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


                                                   PART II

Item 5.      Market for Registrant's Common Equity and Related Stockholder Matters...................... 10
Item 6.      Selected Financial Data.................................................................... 11
Item 7.      Management's Discussion and Analysis of Financial Condition and Results of
              Operations................................................................................ 12
Item 7A.     Quantitative and Qualitative Disclosures about Market Risk................................  21
Item 8.      Financial Statements and Supplementary Data................................................ 22
Item 9.      Changes in and Disagreements With Accountants on Accounting and Financial
              Disclosure................................................................................ 52


                                                  PART III

Item 10.     Directors and Executive Officers of the Registrant......................................... 52
Item 11.     Executive Compensation..................................................................... 52
Item 12.     Security Ownership of Certain Beneficial Owners and Management............................. 52
Item 13.     Certain Relationships and Related Transactions............................................. 52


                                                   PART IV

Item 14.     Exhibits, Financial Statement Schedules and Reports on Form 8-K............................ 53

             Signatures................................................................................. 60
</TABLE>




<PAGE>   3



                                     PART I

ITEM 1.  BUSINESS

GENERAL

      TransTexas Gas Corporation (the "Company" or "TransTexas") is engaged in
the exploration for and development and production of natural gas and
condensate, primarily in South Texas and along the upper Gulf Coast. TransTexas'
business strategy is to utilize its experience in drilling and operating wells
in South Texas to continue to find, develop and produce reserves at a low cost.

      On April 19, 1999, TransTexas filed a voluntary petition for relief under
Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for
the District of Delaware (the "Bankruptcy Court"). On April 20,1999,
TransAmerican Energy Corporation ("TEC"), and its subsidiary, TransAmerican
Refining Corporation ("TARC"), also filed voluntary petitions under Chapter 11.
The bankruptcy cases are being jointly administered. TransTexas, TEC and TARC
are operating their businesses and managing their properties as
debtors-in-possession.

      The bankruptcy petitions were filed in order to preserve cash and to give
the Company the opportunity to restructure its debt. Pursuant to a Credit
Agreement (the "DIP Facility") dated April 27, 1999 among TransTexas, as
Borrower, various financial institutions, as Lenders, Credit Suisse First Boston
Management Corporation, as Administrative Agent, and TEC and TARC, as
Guarantors, the Lenders have agreed to provide up to $20 million in
post-petition financing to the Company (with an additional $10 million
potentially available). The Company has drawn $6 million under the DIP Facility
pursuant to an interim order of the Bankruptcy Court. Additional advances will
be subject to the entry of a final order.

      The Company's long-term goal is to convert unproven acreage to proved
reserves through drilling in underexploited areas. During fiscal 1999,
management's priority was the development of newly discovered areas such as the
Eagle Bay field. However, the high cost of drilling development wells and lack
of capital caused by cash flow problems required the Company to slow its
drilling efforts in the latter part of the year. The Company anticipates that
working capital available under the DIP Facility will allow the Company to
resume drilling activity and increase production. In order to meet its long-term
goals, TransTexas' strategy is to drill wells in areas of the Upper Texas Gulf
Coast where 3-D seismic data indicates productive potential and to drill
development wells in its proven producing areas such as the Eagle Bay field and
Wharton County. Planned implementation of this strategy is subject to approval
of the Bankruptcy Court.

      As of February 1, 1999, TransTexas' net proved reserves, as estimated by
Netherland, Sewell & Associates, Inc., were 161 Bcfe. As of January 31, 1999,
TransTexas owned approximately 482,000 gross (299,200 net) acres of mineral
interests. TransTexas' average net daily natural gas production for the year
ended January 31, 1999 was approximately 98 MMcfd, for a total net production
of 35.6 Bcf of natural gas. TransTexas' average net daily condensate and oil
production for the year ended January 31, 1999 was approximately 3,070 Bpd, for
a total net production of 1,120 MBbls of condensate and oil.

      During fiscal 1998, the Company sold the stock of TransTexas Transmission
Corporation ("TTC"), its subsidiary that owned substantially all of TransTexas'
Lobo Trend producing properties and related pipeline transmission system, for an
adjusted sales price of approximately $1.1 billion (the "Lobo Sale").
TransTexas' operating data for fiscal 1998 reflect the impact of the Lobo Sale.
During fiscal 1999, the Company sold certain producing properties and
substantially all of the assets comprising its drilling services division. The
Company is continuing to examine the feasibility of the sale of certain of its
producing properties in Webb, Zapata, Jim Hogg and Starr Counties, Texas. Any
such sale would be subject to approval by the lenders under the DIP facility and
by the Bankruptcy Court.

      TransTexas was organized in May 1993 to facilitate the refinancing of
TransAmerican Natural Gas Corporation ("TransAmerican"). TransTexas is a
subsidiary of TEC, which is indirectly wholly owned by                        

                                      1

<PAGE>   4



TransAmerican. TransTexas' operations currently consist of the natural gas
exploration and production businesses of TransAmerican that were transferred to
TransTexas in August 1993 (the "Transfer") pursuant to an agreement among
TransAmerican, TransTexas and John R. Stanley (the "Transfer Agreement").
TransTexas' principal executive office is located at 1300 North Sam Houston
Parkway East, Suite 310, Houston, Texas 77032, and its telephone number at that
address is (281) 987-8600.

OPERATING AREAS

      TransTexas' primary areas of operations as of January 31, 1999 are
discussed below:

      EAGLE BAY. In November 1996, TransTexas reached an agreement with an
unaffiliated third party to jointly conduct exploration of geological prospects
in the Galveston Bay area. The parties have drilled six out of 10 prospects
identified in the area, the first of which is known as Eagle Bay.

      In January 1998, TransTexas announced that it had successfully drilled,
completed and flow-tested its first well in Eagle Bay, the State Tract 331 #1,
located approximately one mile off the coast of San Leon, Texas, in a water
depth of less than 10 feet. This discovery well flow tested at a gross rate of
76.4 MMcfd of natural gas and 11,002 Bpd of condensate and oil.

      TransTexas has successfully drilled, completed and produced three
additional wells, the State Tract 331 #3, the State Tract 352 #1, and the State
Tract 330 #1. These confirmation wells flow-tested at gross rates of 41 MMcfd of
natural gas and 10,700 Bpd of condensate and oil, 53.9 MMcfd of natural gas and
6,264 Bpd of condensate and oil and 43.4 MMcfd of natural gas and 4,800 Bpd of
condensate and oil, respectively.

      As of January 31, 1999, the Eagle Bay field was producing at a rate of
57 MMcfd of natural gas and 8,300 Bpd of condensate and oil. Subsequent to
January 31, 1999, production from State Tract 330 #1 commenced. As of April 30,
1999, the Eagle Bay Field was producing at a rate of 77 MMcfd of natural gas and
9,800 Bpd of condensate and oil. As of January 31, 1999, TransTexas owned a 75%
working interest covering approximately 5,338 gross (5,249 net) acres in the
Eagle Bay area. Subsequent to January 31, 1999, the State Tract 331 #3 has
ceased production due to down-hole problems. The Company is currently
considering a workover or side-track of this well.

      In order to facilitate commercial production of natural gas and oil from
the Eagle Bay field and other contemplated production in the Galveston Bay area,
in July 1998, Galveston Bay Processing Corporation, a wholly owned subsidiary of
the Company, completed construction of onshore production facilities at Winnie,
Texas, approximately 60 miles east of Houston. These facilities are designed to
separate produced natural gas and condensate streams, dehydrate and treat
natural gas and stabilize condensate produced from the Eagle Bay field.
Production from Eagle Bay is currently transported to Winnie through a third-
party pipeline that crosses Galveston Bay.

      TransTexas intends to drill additional wells in Eagle Bay as a part of its
strategy to further increase reserves and production, and has identified
drilling locations from 3-D seismic data.

      OTHER GALVESTON BAY PROSPECTS. TransTexas has also drilled exploratory
wells on five other prospects in the Galveston Bay area. Four of these, the
Doornbos #1, State Tract 88A #1, State Tract 13E #1 and Maco #1 were
unsuccessful. As of January 31, 1999, the fifth prospect, Trout Point, was being
tested by the drilling of the Sheldon #1 Sidetrack #2. The original Sheldon #1
well was an attempt to test a series of reflectors located beneath salt as seen
on 3-D seismic. This well encountered gas bearing sands beneath the salt and was
drilling at a depth of 21,442 feet when a gas pocket was encountered that
eventually resulted in the sticking of the drill pipe and subsequent loss of the
hole. TransTexas attempted a sidetrack (Sidetrack #1) to re-drill the subsalt
section but was unsuccessful due to the hole deviating inside the salt body. A
second sidetrack, the Sheldon #1 Sidetrack #2, was then drilled to once again
attempt completion in the subsalt, gas bearing sands seen in the Sheldon #1.
Subsequent to January 31, 1999, TransTexas drilled the Sidetrack #2 to a depth
of 21,576 feet. Mechanical difficulties prevented the well from being drilled
further. Wireline

                                        2

<PAGE>   5



logs, run to a depth of 21,228 feet, suggested 88 feet of potential pay with
porosity of up to 27%. As much as 200 feet of additional sand was encountered in
the interval between 21,288 and 21,576 feet. The Company attempted to complete
the well after flow from these additional sands was encountered. While
attempting the completion, gas began flowing from the lower zone, and the well
was shut in with 6,800 pounds per square inch of pressure at the surface,
causing the 9-5/8 inch casing to burst. In order to prevent gas flow to the
surface from the resulting underground blowout, TransTexas cemented the well to
the surface. The Company intends to re-drill the prospect as the Sheldon #1-R
(replacement), as soon as funds are available, in order to confirm the presence
of commercially productive sands. As of January 31, 1999, TransTexas owned a 73%
working interest covering approximately 17,708 gross (16,880) net acres in the
Galveston Bay area prospects, including Eagle Bay.

      BOB WEST NORTH. In late 1994, TransTexas made a natural gas discovery in
the Bob West North area of southern Zapata County, Texas. As of January 31,
1999, TransTexas had drilled 56 wells and completed 53 wells in the area. As of
January 31, 1999, TransTexas' mineral interests in Bob West North consisted of a
100% working interest in 14,323 gross (12,126 net) acres. For the fiscal year
ended January 31, 1999, TransTexas produced 16.8 Bcf (11.7 Bcf net) from the Bob
West North area at an average net daily rate of 32 MMcfd. Recently obtained 3-D
seismic data indicates the potential for additional drilling locations to
further develop productive reservoirs in the area.

      FANDANGO SOUTH. As of January 31, 1999, TransTexas had drilled 13 wells,
and completed nine wells in the Fandango South field located in Jim Hogg County,
Texas. For the fiscal year ended January 31, 1999, TransTexas produced 2.3 Bcf
(1.7 Bcf net) of natural gas from this field, at an average net daily rate of 5
MMcfd. As of January 31, 1999, TransTexas held a 98% working interest in
approximately 4,871 gross (4,871 net) acres in Fandango South.

      WHARTON AND AUSTIN COUNTIES. In 1995, TransTexas entered into an agreement
with an unaffiliated third party acting as operator, to jointly develop the
mineral rights in the shallow Frio and Miocene sands in Wharton County, Texas.
As of January 31, 1999, 62 wells had been drilled in shallow formations in the
area, 26 of which had been completed. As of January 31, 1999, TransTexas held 
a 75% working interest in the shallow mineral rights in approximately 
42,246 gross (39,957 net) acres in Wharton County.

      TransTexas also acquired mineral rights covering deeper Yegua and Wilcox 
formations in Wharton County and adjacent Austin County. TransTexas has drilled
12, and completed 10, deeper wells in the area, including the Joel Hudgins #1,
the Rees-Gifford #1, the Obenhaus #2 and the Noska #1 in the Wilcox. TransTexas
intends to drill additional wells in the Yegua and Wilcox formations as a part
of its strategy to further increase reserves and production, and has identified
drilling locations from 3-D seismic data. As of January 31, 1999, TransTexas
held a 100% working interest in the mineral rights below the top of the Yegua
formation in approximately 55,760 gross (51,773 net) acres.

      For the fiscal year ended January 31, 1999, TransTexas' Wharton County
properties produced 5.3 Bcf (3.9 Bcf net) of natural gas, at an average net
daily rate of 11 MMcfd.

      LIVE OAK COUNTY. In June 1998, TransTexas announced that it had drilled,
completed and flow-tested its first well in Live Oak County, Texas, the McNeil
#1. This discovery well flow-tested at a rate of 19.2 MMcfd of natural gas.
Production commenced in August 1998. TransTexas intends to drill additional
wells to develop the field as a part of its strategy to further increase
reserves and production, and has identified potential drilling locations from
3-D seismic data. For the fiscal year ended January 31, 1999, TransTexas' Live
Oak County properties produced 1.0 Bcf (0.7 Bcf net) of natural gas, at an
average net daily rate of 2 MMcfd. As of January 31, 1999, TransTexas owned an
80% working interest in approximately 8,019 gross (8,004 net) acres in Live Oak
County.

                                        3

<PAGE>   6



      LOUISIANA. TransTexas entered into a separate venture with its Galveston
Bay co-venturer covering prospects in South Louisiana. During fiscal 1999,
TransTexas drilled three unsuccessful exploratory wells on three out of eight
prospects identified in the area. TransTexas owned a 37% working interest in a
discovery well in Vermilion Parish and a 25% working interest in a second well
that commenced production in May 1998 and September 1998, respectively. In
December 1998, TransTexas sold its interest in these wells for a sales price of
$4.7 million. As of January 31, 1999, TransTexas owned a 60% average working
interest in 16,857 gross (16,339 net) acres. Subsequent to January 31, 1999,
TransTexas assigned certain of its interests in South Louisiana to its Galveston
Bay co-venturer and no longer has any obligations to drill additional wells in
Louisiana.

      OTHER AREAS. TransTexas has also made discoveries of natural gas and oil
in other prospects that, as of January 31, 1999, were in the preliminary stages
of development drilling but which management believes have the potential to
increase reserves and production.

      TransTexas owns an 85% working interest in 1,927 gross (1,623 net) acres
in Brazoria County, Texas. As of January 31, 1999, TransTexas had drilled four
wells and completed three wells in Brazoria County. For the fiscal year ended
January 31, 1999, TransTexas' Brazoria County properties produced 1.1 Bcf (0.8
Bcf net) of natural gas, at an average daily rate of 2 MMcfd.

      TransTexas owns a 100% working interest in 14,415 gross (14,408 net) acres
in Chambers County, Texas. As of January 31, 1999, TransTexas had drilled seven
wells and completed four wells in Chambers County. TransTexas has conducted a
3-D seismic survey covering approximately 31 square miles that indicates
multiple prospective drilling locations. For the fiscal year ended January 31,
1999, TransTexas' Chambers County properties produced 5.3 Bcf (3.9 Bcf net) of
natural gas, at an average daily rate of 11 MMcfd.

      TransTexas holds a 98% working interest in approximately 11,442 gross
(8,014 net) acres in the La Grulla area of Starr County, Texas. As of January
31, 1999, TransTexas had drilled 38 wells and completed 19 wells in La Grulla. 
For the fiscal year ended January 31, 1999, TransTexas' La Grulla properties 
produced 1.8 Bcf (1.3 Bcf net) at an average net daily rate of 3 MMcfd.

EXPLORATION AND PRODUCTION OPERATIONS

      The exploration and production activities of TransTexas consist of
geological evaluation of current and prospective properties, the acquisition of
mineral interests in prospects and the development and operation of leased
properties for the production and sale of natural gas, condensate and crude oil.
TransTexas' technical staff consists of geologists, geophysicists and engineers.
TransTexas' technical staff selects drilling locations based on the
interpretation of available well data, enhanced by 3-D and 2-D seismic data.
TransTexas operates substantially all of its producing properties. TransTexas
believes that this experience is especially important in south and upper coastal
Texas, which are geologically complex.

      During the five years ended January 31, 1999, TransTexas completed
approximately 69% of 533 wells. As of January 31, 1999, TransTexas was drilling
three gross (two net) wells. As of January 31, 1999, TransTexas had a total of
127 productive wells. TransTexas had a working interest in the following numbers
of wells that were drilled during the periods indicated:

<TABLE>
<CAPTION>
                                                          YEAR ENDED JANUARY 31, 
                                            ---------------------------------------------------
                                                  1999             1998              1997         
                                            ---------------   --------------    ---------------
                                             GROSS     NET    GROSS     NET     GROSS      NET 

<S>                                           <C>      <C>    <C>      <C>      <C>       <C>
Exploratory Wells (1):
  Productive(2)                                9        9      13       11       36        33
  Non-Productive                               6        5      16       14       45        41
  % Productive                                60%      63%     45%      44%      44%       45%
Development Wells(1):
  Productive(2)                               14       12      47       43       67        66
  Non-Productive                               9        9      31       27        3         3
  % Productive                                61%      58%     60%      62%      96%       96%
</TABLE>


                                        4

<PAGE>   7




- --------------------
(1)      The number of net wells is the sum of the fractional working interests
         owned in gross wells.

(2)      Productive wells consist of producing wells and wells capable of
         production, including gas wells awaiting pipeline connection. Wells
         that are completed in more than one producing zone are counted as one
         well.

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

<TABLE>
<CAPTION>
                                                                      YEAR ENDED JANUARY 31,              
                                                            --------------------------------------
                                                               1999          1998           1997    
                                                            ----------    ----------    ----------
<S>                                                             <C>           <C>          <C>  
Production:
  Gas (Bcf) (1)........................................           35.6          72.4         153.6
  NGLs (MMgals)........................................            8.4          62.4         174.2
  Condensate and oil (MBbls)...........................          1,120          619            604
Average sales prices:
  Gas (dry) (per Mcf)(2)...............................         $ 2.10       $ 2.09         $ 2.14
  NGLs (per gallon)....................................            .21          .29            .36
  Condensate and oil (per Bbl).........................          11.91        19.20          21.54
Average lifting cost per Mcfe(3).......................            .37          .34            .29
</TABLE>

(1)      Net gas production volumes for the years ended January 31, 1998 and
         1997, include 7.3 and 32.0 Bcf delivered pursuant to volumetric 
         production payments.

(2)      Average prices for the years ended January 31, 1998 and 1997, include
         7.3 Bcf and 32.0 Bcf delivered pursuant to volumetric production 
         payments. The average gas price for TransTexas' undedicated production
         for these periods was $2.10 per Mcf and $2.39 per Mcf, respectively. 

(3)      Condensate and oil are converted to a common unit of measure on the
         basis of six Mcf of natural gas to one barrel of condensate or oil. The
         components of production costs may vary substantially among wells
         depending on the methods of recovery employed and other factors. The
         calculation of average lifting cost per Mcfe for the years ended
         January 31, 1998 and 1997, includes volumes delivered to third parties
         under volumetric production payments.

DRILLING SERVICES DIVISION

      On April 30, 1998, TransTexas sold its oilfield stimulation, cementing and
coiled tubing equipment and related facilities to an unaffiliated third party
for a sales price of $30 million, subject to post-closing adjustments. For the

                                        5

<PAGE>   8



year ended January 31, 1999, TransTexas recorded a $10.5 million pre-tax gain
as a result of this sale.

      On June 26, 1998, TransTexas sold its drilling rigs and related facilities
to an unaffiliated third party for a sales price of $75 million. On August 17,
1998, TransTexas sold its remaining well services assets to an unaffiliated
third party for a sales price of $20.5 million. TransTexas recorded pre-tax
gains of $51.2 million and $5.3 million, respectively, as a result of 
these sales.

      As a result of these sales, TransTexas no longer operates in the drilling
services segment. TransTexas currently obtains drilling services on an as needed
basis pursuant to an agreement with the third party to whom TransTexas sold its
drilling rigs in June 1998. Pursuant to the agreement, TransTexas is obligated
to engage the third party to provide drilling services for certain land drilling
activities and the third party is obligated to provide such services and to make
available up to 15 drilling rigs. TransTexas is currently renegotiating the
rates payable for such services and rigs.

NATURAL GAS TRANSPORTATION AND PROCESSING

      As a part of the Lobo Sale, TransTexas divested the majority of its
pipeline assets and no longer transports or processes a significant amount of
natural gas for third parties. TransTexas initially retained from the Lobo Sale
its right to earn a 37.5% interest in a 28-mile segment of 24-inch pipeline it
had previously built to connect the Bob West North field to a pipeline in Webb
County, Texas. Effective March 1, 1997, TransTexas entered into two agreements
with Lobo Pipeline Company for firm and interruptible gas transportation from
its Bob West North field to the Agua Dulce marketing hub or to the Exxon King
Ranch Gas Plant for gas processing. The agreements were for a term of
approximately 10 years and allowed for the transportation of up to a combined
total of 400 MMcfd. In August 1998, TransTexas entered into a Lobo Pipeline
settlement agreement whereby delivery commitments under such agreements were
released in exchange for TransTexas' right to earn an interest in the 24-inch
pipeline, elimination of certain amounts due TransTexas pursuant to the Lobo
Sale Agreement and a cash payment by TransTexas of $2.7 million. In July 1998,
TransTexas recorded a loss of $3.4 million as a result of this settlement.

      In July 1998, Galveston Bay Processing Corporation completed construction
of onshore production facilities at Winnie, Texas, approximately 60 miles east
of Houston. These facilities are designed to separate produced natural gas and
condensate streams, dehydrate and treat natural gas and stabilize condensate
from the Company's Eagle Bay field. Natural gas is transported by third-party
pipeline from Winnie to Port Arthur where it is processed to remove natural gas
liquids. TransTexas markets condensate and oil to third parties at the Winnie
facility.

      TransTexas has entered into agreements for the gathering, transportation,
processing and sale of natural gas produced from its Galveston Bay prospects.
Current capacity constraints for transportation do not allow for optimal flow
rates from the Eagle Bay field. TransTexas is negotiating additional agreements
in order to increase available capacity for transportation of natural gas from
the Eagle Bay field to Winnie.

      Other than the current capacity constraints at Eagle Bay, TransTexas
believes that there is currently adequate pipeline transportation capacity for
its hydrocarbon production in all of its operating areas. TransTexas intends to
build or contract for additional pipeline capacity as future needs require.
However, there can be no assurance that TransTexas will have funds available to
build additional pipeline capacity.

      On June 23, 1997, TransTexas and Shell Midstream Enterprises, Inc.
("Shell") entered into a five-year gas treating agreement at Shell's Fandango
Gas Plant to reduce the CO2 content of the Company's Fandango South gas
production, which became operational in May 1998. Pursuant to this agreement,
TransTexas has committed to deliver 75 MMcfd of natural gas for processing. The
agreement also allows TransTexas to assign one-third of its commitment to a
third party. A treating fee of $0.12 per Mcf must be paid by TransTexas, subject
to adjustment in certain circumstances.


                                        6

<PAGE>   9



      In June 1998, TransTexas and Duke Field Services, Inc. ("Duke") entered
into a three-year contract to extract natural gas liquids from the high-Btu
natural gas stream leaving the Winnie production facilities. TransTexas can
elect, at its discretion on a monthly basis, whether to process the natural gas
to recover natural gas liquids. The Company's decision whether to process the
natural gas is based on prevailing market prices. During fiscal 1999, TransTexas
produced 8.4 MMgals of natural gas liquids.

NATURAL GAS MARKETING

      TransTexas sells its natural gas on the spot market on an interruptible
basis or pursuant to long-term contracts at market prices. For the year ended
January 31, 1999, five purchasers accounted for a total of 71% of the
consolidated natural gas, condensate and NGLs revenues of TransTexas. TransTexas
believes that the loss of any single purchaser would not have a material adverse
effect on TransTexas due to the availability of other purchasers for TransTexas'
production at comparable prices.

      In January 1997, TransTexas and Koch Energy Trading Inc. entered into a
gas purchase contract pursuant to which TransTexas is required to deliver 25,000
MMBtu per day to a specified delivery point. The purchase price is determined by
an industry index less $0.08 per MMBtu. Deliveries commenced on June 1, 1997 and
are to continue through August 31, 1999.

      In June 1998, TransTexas entered into gas purchase agreements with Tejas
Gas Marketing, LLC and PanEnergy Marketing Company, which set forth the terms
and conditions covering the sale by TransTexas of substantially all of its gas
production from the Eagle Bay field in Galveston County, Texas. The agreements
provide for deliveries in excess of 50,000 MMBtu per day at a price calculated
from an industry index. The agreements have terms of five years and two years,
respectively.

PRODUCTION PAYMENTS

      In February 1998, TransTexas entered into a production payment drilling
program agreement with an unaffiliated third party for the reimbursement of
certain drilling costs with respect to wells drilled by TransTexas. Pursuant to
the agreement, upon the approval of the third party of a recently drilled or
currently drilling well for inclusion in the program, the third party will
commit to the reimbursement of all or a portion of the cost of such well, up to
an aggregate maximum for all such wells of $75 million. The program wells are
subject to a dollar-denominated production payment equal to the primary sum of
such reimbursed costs, plus an amount equivalent to a 15% annual interest rate
on the unpaid portion of such primary sum. As of January 31, 1999, the
outstanding balance of the production payment was $48.0 million.

      In September 1998, TransTexas sold to an unaffiliated third party a term
overriding royalty in the form of a dollar-denominated production payment in
certain of TransTexas' producing properties for net proceeds of $10 million. The
production payment calls for the repayment of the primary sum plus an amount
equivalent to a 16% annual interest rate on the unpaid portion of such primary
sum. As of January 31, 1999, the outstanding balance of the production payment
was $9.2 million.

HEDGING

      From time to time, TransTexas has entered into commodity price swap
agreements (the "Hedge Agreements") to reduce its exposure to price risk in the
spot market for natural gas. These Hedge Agreements were accounted for as hedges
and, accordingly, any gains and losses were deferred and recognized in the
respective month as physical volumes were sold. For the fiscal year ended
January 31, 1998, TransTexas made net settlement payments totaling approximately
$7.4 million to the counterparty pursuant to the Hedge Agreements. As of January
31, 1999, TransTexas had no Hedge Agreements or other derivative instruments
outstanding.


                                        7

<PAGE>   10



COMPETITION

      TransTexas encounters significant competition from major oil and gas
companies and independent operators in the acquisition of desirable undeveloped
natural gas leases and in the sale of natural gas. Many of its competitors are
large, well-established companies with substantially greater capital and human
resources than TransTexas' and which, in many instances, have been engaged in
the energy business for a much longer time than TransTexas.

      The primary bases for competition in the natural gas and oil exploration
and production businesses are available capital and the costs involved in
finding and developing gas and oil resources combined with commodity sales
prices and market access.

EMPLOYEES

      As of January 31, 1999, TransTexas had approximately 220 employees,
including approximately 70 field workers. TransTexas may engage the services of
independent geological, engineering, land and other consultants from time to
time. None of TransTexas' employees are parties to a collective bargaining
agreement.

GOVERNMENTAL REGULATION

      TransTexas' gas exploration, production and related operations are subject
to extensive rules and regulations promulgated by federal and state agencies.
Failure to comply with such rules and regulations can result in substantial
penalties. The regulatory burden on the gas industry increases TransTexas' cost
of doing business and affects its profitability. Because such rules and
regulations are frequently amended or reinterpreted, TransTexas is unable to
predict the future cost or impact of complying with such laws.

      The State of Texas (through the Texas Railroad Commission) and many other
states require permits for drilling operations, drilling bonds and reports
concerning operations, and impose other requirements related to the exploration
and production of natural gas. Such states also have statutes or regulations
addressing conservation matters, including provisions for the unitization or
pooling of gas properties, the establishment of maximum rates of production from
gas wells and the regulation of spacing, plugging and abandonment of such wells.
The statutes and regulations of the State of Texas limit the rate at which
natural gas can be produced from TransTexas' properties. Management believes
that these statutes and regulations have not materially impacted TransTexas'
results of operations; however, there can be no assurance that such statutes and
regulations will not affect TransTexas' operating results in the future.

      Several major regulatory changes have been implemented by the Federal
Energy Regulatory Commission ("FERC") since 1985 that affect the economics of
natural gas production, transportation and sales. In addition, the FERC
continues to promulgate revisions to various aspects of the rules and
regulations affecting those segments of the natural gas industry, most notably
interstate natural gas transmission companies, that remain subject to the FERC's
jurisdiction. These initiatives may also affect the intrastate transportation of
gas under certain circumstances. The stated purpose of many of these regulatory
changes is to promote competition among the various sectors of the gas industry.
The ultimate impact on TransTexas of these complex and overlapping rules and
regulations, many of which are repeatedly subjected to judicial challenge and
interpretation, cannot be predicted.

ASSUMPTION OR REJECTION OF CONTRACTS

      Pursuant to Section 365 of Chapter 11 U.S.C., the Company has the right to
assume or reject executory contracts. The Company is currently reviewing all
such contracts.

ENVIRONMENTAL MATTERS

      See Note 13 of Notes to Consolidated Financial Statements for a discussion
of environmental matters affecting TransTexas.

                                        8

<PAGE>   11




ITEM 2.  PROPERTIES

ACREAGE AND PRODUCTIVE WELLS

      The following table sets forth TransTexas' total developed and undeveloped
acreage and productive wells as of January 31, 1999:

<TABLE>
<CAPTION>
                                                                       DEVELOPED      UNDEVELOPED       PRODUCTIVE
                                                                        ACREAGE         ACREAGE          WELLS(1) 
                                                                       ---------       ---------        ----------

<S>                                                                     <C>            <C>                <C> 
      Gross........................................................    19,140        462,881          127
      Net (2)......................................................    16,263        282,933          110
</TABLE>

(1)      Of the total productive wells, 118 gross (108 net) were gas wells
         and 9 gross (2 net) were oil wells. As of January 31, 1999,
         TransTexas had interests in 2 productive wells which had multiple
         completions.

(2)      The number of net acres and net wells is the sum of the fractional
         working interests owned in gross acres and gross wells, respectively.

RESERVES

      As of February 1, 1999, TransTexas had total proved reserves of 120.7 Bcf
of natural gas and 6,640 MBbls of condensate and oil. See Note 17 of Notes to
Consolidated Financial Statements, which contains supplemental information
regarding TransTexas' proved reserves. Proved reserves are the estimated
quantities of natural gas, condensate and oil that geological and engineering
data demonstrate with reasonable certainty to be recoverable in future years
from known reservoirs under existing economic and operating conditions. Proved
developed reserves are proved reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods. The
estimation of reserves requires substantial judgment on the part of petroleum
engineers, resulting in imprecise determinations, particularly with respect to
recent discoveries. The accuracy of any reserve estimate depends on the quality
of available data and engineering and geological interpretation and judgment.
Results of drilling, testing and production after the date of the estimate may
result in revisions of the estimate. Accordingly, estimates of reserves are
often materially different from the quantities of natural gas, condensate and
oil that are ultimately recovered, and these estimates will change as future
production and development information becomes available. The reserve data
represent estimates only and should not be construed as being exact.

TITLE TO PROPERTIES/LIENS AND CLAIMS

      As is customary in the oil and gas industry, TransTexas performs only a
preliminary title investigation before leasing undeveloped properties.
Accordingly, working interest percentages and gross and net acreage amounts for
undeveloped properties are preliminary. However, a title opinion is 
typically obtained before the commencement of drilling operations and any
material defects in title are remedied prior to the time actual drilling of a
well on the lease is commenced. TransTexas has not obtained title opinions on 
all of its properties. The Company is uncertain as to the impact that failure to
obtain a title opinion has on the Company's title to developed properties.
TransTexas' properties are subject to customary royalty interests, liens
incident to operating agreements, liens for current taxes and other burdens. In
addition, numerous vendors have filed liens and claims against TransTexas and
Galveston Bay Processing Corporation that could materially affect certain of
TransTexas' and Galveston Bay Processing Corporation's properties. During
pendency of the bankruptcy proceedings, these claims are stayed.


                                        9

<PAGE>   12




ITEM 3.  LEGAL PROCEEDINGS

      See Notes 13 and 15 of Notes to Consolidated Financial Statements for
information about TransTexas' legal proceedings.


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

      There were no matters submitted to a vote of security holders during the
three months ended January 31, 1999.


                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
         MATTERS

      Prices for the common stock of TransTexas are currently quoted on Nasdaq's
Over The Counter Bulletin Board under the symbol "TTGGQ." TransTexas' common
stock traded on the New York Stock Exchange ("NYSE") under the symbol "TTG" from
October 30, 1997 until trading was suspended on April 19, 1999 due to the
Company's bankruptcy filing. On May 20, 1999, the NYSE filed with the Securities
and Exchange Commission an application to de-list the common stock. From March
10, 1994 until October 30, 1997, TransTexas' common stock traded on the Nasdaq
National Market tier of The Nasdaq Stock Market ("NNM") under the symbol "TTXG."
The following table sets forth, on a per-share basis for the periods indicated,
the high and low sales prices for TransTexas' common stock as reported by the
NYSE and NNM.

<TABLE>
<CAPTION>
                                                                                   HIGH         LOW   
                                                                                   ----         ---   

<S>                                                                              <C>         <C>     
      Fiscal year ended January 31, 1999:
         Fourth Quarter                                                          $  4.688    $  1.938
         Third Quarter                                                              6.938       1.000
         Second Quarter                                                            12.625       7.000
         First Quarter                                                             17.125      11.875

      Fiscal year ended January 31, 1998:
          Fourth Quarter                                                         $ 20.375    $ 13.500
          Third Quarter                                                            19.375      13.250
          Second Quarter                                                           17.250      13.250
          First Quarter                                                            17.500      12.000
</TABLE>

      As of May 12, 1999, there were approximately 157 record holders of
TransTexas' common stock.

      TransTexas has not paid any cash dividends on its capital stock since
inception, except a dividend of approximately $33 million to TransAmerican from
the proceeds of its initial public offering in March 1994. TransTexas' ability
to pay dividends in the future is restricted by TransTexas' existing debt
instruments and will depend on TransTexas' debt levels, earnings levels and book
value and discounted value of certain tangible assets. The Company does not
anticipate paying any dividends in the foreseeable future.

                                       10

<PAGE>   13



ITEM 6.  SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                                         SIX MONTHS ENDED
                                                       YEAR ENDED JANUARY 31,               JANUARY 31,        YEAR ENDED JULY 31, 
                                                  -------------------------------      --------------------   ---------------------
                                                     1999       1998       1997          1996       1995        1995         1994  
                                                  ---------   --------   --------      --------   ---------   ---------    --------
                                                                                                 (UNAUDITED)
                                                                    (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                               <C>         <C>        <C>           <C>        <C>         <C>          <C>     
STATEMENT OF OPERATIONS DATA:
Gas, condensate and NGLs revenue                  $  91,319   $164,538   $363,459      $124,663   $ 143,304   $ 275,627    $302,522
Transportation revenues                                  --     12,055     34,423        15,892      19,161      36,787      33,240
Gain on the sale of assets                           61,247    543,365      7,865           474          --          --          --
Other revenues                                        4,200      3,313        600           127          52         285         157
                                                  ---------   --------   --------      --------   ---------   ---------    --------
                                                    156,766    723,271    406,347       141,156     162,517     312,699     335,919
                                                                                                                                   
Operating costs and expenses                         29,482     62,356    137,019        45,629      50,893      99,310     103,459
Depreciation, depletion, and amortization            86,137     82,659    132,453        60,894      70,345     129,964     113,858
General and administrative expenses                  21,938     48,156     45,596        13,685      12,595      31,935      40,311
Litigation settlements                                   --         --    (96,000)      (18,300)         --          --      (1,000
Loss on asset impairment                            425,966         --         --            --          --          --          --
                                                  ---------   --------   --------      --------   ---------   ---------    --------
   Operating income (loss)                         (406,757)   530,100    187,279        39,248      28,684      51,490      79,291
Net interest expense                                 78,716     68,187     91,463        40,436      29,059      65,797      50,155
Income taxes and other                              (38,882)   161,669     12,491          (416)       (131)     (2,415)      5,380
Extraordinary loss, net of taxes                      1,142     72,043         --            --          --      56,637          --
                                                  ---------   --------   --------      --------   ---------   ---------    --------
   Net income (loss)                              $(447,733)  $228,201   $ 83,325     $    (772)  $    (244)  $ (68,529)   $ 23,756
                                                  =========   ========   ========     =========   =========  ==========    ========
                                                                                                                                   
Net income (loss) per share: (1)                                                                                                   
 Income (loss) before extraordinary item          $   (7.76)  $   4.49   $   1.13     $   (0.01)  $      --   $   (0.16)   $   0.33
   Extraordinary item                                  (.02)     (1.08)        --            --          --       (0.77)         --
                                                  ---------   --------   --------      --------   ---------   ---------    --------
   Net income (loss)                              $   (7.78)  $    3.41  $   1.13     $   (0.01)  $      --   $   (0.93)   $   0.33
                                                  =========   ========   ========     =========   =========  ==========    ========
                                                                                                                                   
Dividends declared per common share (2)                  --         --         --            --          --          --          --
</TABLE>


<TABLE>
<CAPTION>
                                                          JANUARY 31,
                                        ---------------------------------------------    JULY 31,   
                                           1999       1998       1997         1996        1995    
                                        ----------  ---------  ---------   ----------  ----------
<S>                                     <C>         <C>        <C>          <C>         <C>      
BALANCE SHEET DATA:
Working capital (deficit) (3)           $  27,072   $ (22,122) $   71,586   $  43,602   $ 106,836
Net property and equipment                292,143     701,598     846,393     715,340     601,460
Total assets                              345,367     816,635   1,053,152     938,827     826,570
Liabilities subject to 
 compromise                               718,139          --          --          --          --
Total debt (4)                             56,260     630,103     941,922     824,241     800,000
Stockholders' equity (deficit)           (430,015)     24,637    (150,795)   (154,440)   (153,668)
</TABLE>

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

(1)      Net income per share for the year ended July 31, 1994 gives effect to
         69,000,000 shares of common stock outstanding after a 69,000-for-1
         stock split which was effective in February 1994.

(2)      TransTexas' existing debt instruments contain certain restrictions with
         respect to the payment of dividends on TransTexas' common stock.

(3)      Working capital as of January 31, 1997 and 1996 and July 31, 1995
         includes $46.0 million, $46.0 million and $44.7 million, respectively,
         of cash restricted for the payment of interest.

(4)      Excludes long-term debt subject to compromise of $583.1 million as of 
         January 31, 1999.



                                       11

<PAGE>   14



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

      The following discussion should be read in conjunction with TransTexas'
Consolidated Financial Statements and Notes thereto included under Item 8 of
this report.

RESULTS OF OPERATIONS

      TransTexas' results of operations are dependent upon natural gas
production volumes and unit prices from sales of natural gas, condensate and
NGLs. The profitability of TransTexas also depends on its ability to minimize
finding and lifting costs and maintain its reserve base while maximizing
production. In fiscal 1998, TransTexas sold the stock of TransTexas Transmission
Corporation ("TTC"), its subsidiary that owned substantially all of TransTexas'
Lobo Trend producing properties and related pipeline transmission system, for an
adjusted sales price of approximately $1.1 billion (the "Lobo Sale").
Accordingly, TransTexas' operating results for the fiscal year ended January 31,
1998 reflect the impact of the Lobo Sale. TransTexas recorded a gain of $543.4
million on the Lobo Sale.

      TransTexas' operating data for the years ended January 31, 1999, 1998 and
1997, are as follows:


<TABLE>
<CAPTION>
                                                                    YEAR ENDED JANUARY 31, 
                                                            --------------------------------------
                                                                1999         1998          1997    
                                                            ----------    ----------    ----------

<S>                                                             <C>           <C>           <C>   
       Sales volumes:
         Gas (Bcf) (1).................................           35.6          72.4         153.6
         NGLs (MMgals).................................            8.4          62.4         174.2
         Condensate and oil (MBbls)....................          1,120           619           604

       Average prices:
         Gas (dry) (per Mcf) (2).......................         $ 2.10        $ 2.09        $ 2.14
         NGLs (per gallon).............................            .21           .29           .36
         Condensate and oil (per Bbl)..................          11.91         19.20         21.54

       Number of gross wells drilled...................             38           107           151
       Percentage of wells completed...................             61%           56%           68%
</TABLE>

(1)      Sales volumes for the years ended January 31, 1998 and 1997 include 7.3
         Bcf and 32.0 Bcf, respectively, delivered pursuant to volumetric
         production payments.

(2)      Average prices for the years ended January 31, 1998 and 1997 include
         amounts delivered pursuant to volumetric production payments. The
         average gas prices for TransTexas' undedicated production for these
         periods were $2.10 per Mcf and $2.39 per Mcf, respectively. 

       TransTexas uses the full-cost method of accounting for exploration and
development costs. Under the full-cost method, the cost for successful, as well
as unsuccessful, exploration and development activities is capitalized and
amortized on a unit-of-production basis over the life of the remaining proved
reserves. Net capitalized costs of gas and oil properties are limited to the
lower of unamortized cost or the cost center ceiling, defined as the sum of the
present value (10% discount rate) of estimated unescalated future net revenues
from proved reserves; plus the cost of properties not being amortized, if any;
plus the lower of cost or estimated fair value of unproved properties included
in the costs being amortized, if any; less related income tax effects. For the
year ended January 31, 1999, TransTexas recorded pre-tax impairments of its gas
and oil properties aggregating $426 million as a result of the limitations of 
net capitalized costs of gas and oil properties. Due to higher gas and oil
prices realized by the Company subsequent to January 31, 1999, the impairment
was less than would have been recorded using January 31, 1999 prices.


                                       12

<PAGE>   15



        A summary of TransTexas' operating expenses is set forth below (in
millions of dollars):

<TABLE>
<CAPTION>
                                                            YEAR ENDED JANUARY 31, 
                                                     -----------------------------------
                                                        1999         1998         1997   
                                                     ---------    ---------     --------

<S>                                                  <C>          <C>           <C>     
      Operating costs and expenses:
        Lease                                        $    10.4    $    15.2     $   27.5
        Pipeline and gathering                             8.7         18.1         37.2
        Natural gas liquids                               --           14.5         49.3
        Drilling services                                  3.3          3.1           .4
                                                     ---------     --------      -------
                                                          22.4         50.9        114.4
      Taxes other than income taxes (1)                    7.1         11.4         22.6
                                                     ---------    ---------     --------
                                                     $    29.5    $    62.3     $  137.0
                                                     =========    =========     ========
</TABLE>

- --------------------------
(1)      Taxes other than income taxes include severance, property and other
         taxes.

      TransTexas' average depletion rates have been as follows:

<TABLE>
<CAPTION>
                                                            YEAR ENDED JANUARY 31, 
                                                       1999         1998         1997   
                                                     ---------    ---------     --------

<S>                                                  <C>          <C>           <C>     
      Depletion rates (per Mcfe)                     $    1.96    $    1.11     $    .96
                                                     =========    =========     ========
</TABLE>


    YEAR ENDED JANUARY 31, 1999, COMPARED WITH THE YEAR ENDED JANUARY 31, 1998

      Gas, condensate and NGL revenues for the year ended January 31, 1999 
decreased by $73.2 million from the prior year, due primarily to decreases in
gas and NGLs sales volumes attributable to the divestiture of producing
properties as a result of the Lobo Sale and normal production declines on other
properties. These declines were partially offset by increased production from
Eagle Bay. The average monthly prices received per Mcf of gas ranged from $1.90
to $2.41 in the year ended January 31, 1999, compared to a range of $1.49 to
$3.01 in the prior year. As of January 31, 1999, TransTexas had a total of 127
producing wells compared to 157 producing wells at January 31, 1998.
Transportation revenues decreased $12.1 million over the prior year due
primarily to the divestiture of the pipeline system in connection with the Lobo
Sale. Drilling services revenues decreased by $0.4 million for the year ended
January 31, 1999 due to a decrease in services provided to third parties prior
to the sale of the drilling services division. TransTexas' net gain on the sale
of assets includes a pre-tax gain of $63.6 million for the sale of certain
drilling services division assets and a pre-tax loss of $2.4 million due to
post-closing adjustments to the Lobo Sale purchase price.

      Lease operating expenses for the year ended January 31, 1999 decreased by
$4.8 million from the prior year due primarily to the Lobo Sale offset by
increased operating expenses for the Eagle Bay field. Pipeline and gathering
expenses decreased by $9.4 million from the prior year due primarily to the
divestiture of the pipeline system. NGL costs decreased by $14.5 million from
the prior year due to the Lobo Sale and the resulting decrease in the volumes of
natural gas processed. Drilling service expenses for the year ended January 31,
1999 increased $0.2 million primarily due to increased costs related to
providing services to the new operator of the Lobo Trend properties prior to
divestiture of the Company's drilling services assets. Depreciation, depletion
and amortization expense for the year ended January 31, 1999 increased $3.5
million due to a $0.85 per Mcfe increase in the depletion rate due to higher
acquisition cost of properties and increased drilling and development costs
partially offset by the Lobo Sale and the resulting decrease in TransTexas'
undedicated natural gas production. General and administrative expenses
decreased by $26.3 million primarily as a result of a decrease in litigation
expense. Taxes other than income taxes decreased by $4.3 million over the prior
year due primarily to decreases in ad valorem, severance and excise taxes as a
result of the decrease in the number of producing wells, partially offset by an
increase in franchise taxes. The impairment loss of $426.0 million for the year
ended January 31, 1999 relates to an aggregate write-down

                                       13

<PAGE>   16



of $420.5 million of TransTexas' net capitalized costs of gas and oil properties
as a result of the limitation on net capitalized costs of gas and oil properties
and a $5.5 million write-down of an underutilized pipeline system.

      Interest income for the year ended January 31, 1999 decreased by $11.2
million as compared to the prior period due to lower cash balances available for
investment. TransTexas does not expect to earn significant interest income
during fiscal 2000. Interest expense decreased by $0.7 million primarily as a
result of the retirement of the Senior Secured Notes in June 1997, offset in
part by an increase in interest attributable to the issuance of
dollar-denominated production payments and a decrease in the amount of interest
capitalized in connection with unevaluated leasehold acreage.

      YEAR ENDED JANUARY 31, 1998, COMPARED WITH THE YEAR ENDED JANUARY 31, 1997

      Gas, condensate and NGL revenues for the year ended January 31, 1998
decreased by $198.9 million from the prior year, primarily due to decreases in
gas, condensate and NGLs sales prices and gas sales volumes as a result of the
divestiture of producing properties in connection with the Lobo Sale. The
average prices received per Mcf of gas, excluding amounts dedicated to
volumetric production payments, ranged from $1.49 to $3.01 in the year ended
January 31, 1998, compared to a range of $1.71 to $3.74 in the prior year. NGLs
sales volumes decreased as a result of decreases in the volumes of natural gas
processed. Transportation revenues decreased by $22.4 million for the year ended
January 31, 1998, due primarily to the divestiture of the pipeline system as a
result of the Lobo Sale. Drilling service revenues increased by $2.7 million for
the year ended January 31, 1998, due primarily to an increase in services
provided to third parties. Prior to 1997, the Company did not provide
significant drilling services to third parties; therefore, drilling services was
not recorded or accounted for as a separate business segment.

      Lease operating expenses for the year ended January 31, 1998 decreased by
$12.3 million from the prior year due primarily to the Lobo Sale and the
resulting decrease in the number of producing wells. Pipeline and gathering
expenses decreased by $19.1 million due primarily to the divestiture of the
pipeline system, offset partially by an increase of $2.3 million attributable to
contractual transportation charges. NGLs cost decreased by $34.8 million from
the prior year primarily due to the Lobo Sale and the resulting decrease in
volumes of natural gas processed. Drilling service expenses for the year ended
January 31, 1998 increased $2.7 million as compared to the prior year primarily
due to costs related to providing services to the new operator of the Lobo Trend
properties. Depreciation, depletion and amortization expense for the year ended
January 31, 1998 decreased by $49.8 million due to the Lobo Sale and the
resulting decrease in TransTexas' undedicated natural gas production, as a
result of the Lobo Sale, partially offset by a $0.15 increase in the depletion
rate. The depletion rate increased primarily as a result of the inclusion of
approximately $48 million of properties previously not subject to depletion, and
a reduction in TransTexas' proved reserves as a result of the Lobo Sale. General
and administrative expenses increased by $2.6 million due primarily to an
increase in professional services related to amendments to debt agreements
offset partially by a decrease in litigation expense. Taxes other than income
taxes decreased by $11.2 million over the prior year due primarily to decreases
in ad valorem, severance and excise taxes resulting from a decrease in the
number of producing wells associated with the Lobo Sale.

      Interest income for the year ended January 31, 1998 increased by $6.8
million as compared to the prior year due to higher cash balances available for
investment. Interest expense decreased by $16.4 million primarily as a result of
the retirement of the Senior Secured Notes offset in part by accretion of
interest on the Old Subordinated Notes (as defined) retired by TransTexas on
June 19, 1997.

LIQUIDITY AND CAPITAL RESOURCES

      On April 19, 1999, TransTexas filed a voluntary petition for relief under
Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for
the District of Delaware. On April 20, 1999, TEC and TARC also filed voluntary
petitions under Chapter 11. The bankruptcy cases are being jointly administered.
TransTexas, TEC and TARC are operating their businesses and managing their
properties as debtors-in-possession. As a result of the

                                       14

<PAGE>   17

Chapter 11 filings, absent approval from the Bankruptcy Court, the Company is
prohibited from paying, and creditors are prohibited from attempting to collect,
claims or debts arising prior to the bankruptcy.

      Pursuant to a Credit Agreement (the "DIP Facility") dated April 27, 1999
among TransTexas, as Borrower, various financial institutions, as Lenders,
Credit Suisse First Boston Management Corporation, as Administrative Agent, and
TEC and TARC, as Guarantors, the Lenders have agreed to provide up to $20
million in post-petition financing to the Company (with an additional $10
million potentially available). On April 28, 1999, $6 million was disbursed to
TransTexas under the Credit Agreement pursuant to an interim order of the
Bankruptcy Court. Additional advances will be subject to the entry of a final
order. Advances under the Credit Agreement bear interest at the rate of 13% per
annum. TransTexas' obligations are guaranteed by TEC and TARC and are secured by
a first priority senior priming lien (subject to certain exceptions) on all 
property of TransTexas, TEC and TARC. Amounts outstanding under the DIP 
Facility will mature on the earlier of October 20, 1999 or the effective 
date of a plan of reorganization.

      The bankruptcy petitions were filed in order to preserve cash and to give
the Company the opportunity to restructure its debt. The consummation of a plan
of reorganization is the primary objective of the Company. The plan of
reorganization will set forth the means for satisfying claims, including
liabilities subject to compromise, and interests in the Company. A plan of
reorganization may result in, among other things, material dilution or
elimination of existing security holders as a result of the issuance of
securities to creditors or new investors. The consummation of a plan of
reorganization will require approval of the Bankruptcy Court.

      At this time, it is not possible to predict the outcome of the bankruptcy
proceedings, in general, or the effect on the business of the Company or on the
interests of creditors, royalty owners or stockholders. There can be no
assurance that the plan of reorganization to be submitted by the Company will be
approved or that the Bankruptcy Court will permit TransTexas to continue to
operate as a debtor-in-possession. As a result, there is substantial doubt about
the Company's ability to continue as a going concern. See the Consolidated
Financial Statements of the Company included under Item 8 of this report.

      TransTexas makes substantial capital expenditures for the exploration and
development of natural gas and oil reserves in the normal course of business.
TransTexas historically has financed its capital expenditures, debt service and
working capital requirements with cash flow from operations, public and private
offerings of debt and equity securities, the sale of production payments, asset
sales, an accounts receivable revolving credit facility and other financings.
Cash flow from operations is sensitive to the prices TransTexas receives for its
natural gas and oil. A reduction in planned capital spending or an extended
decline in gas and oil prices could result in less than anticipated cash flow
from operations in fiscal year 2000 and later years which could have a material
adverse effect on TransTexas. Proceeds from natural gas and oil sales are
received at approximately the same time that production-related burdens, such as
royalties, production taxes and drilling program obligations, are payable.

      For the year ended January 31, 1999, total capital expenditures were
$194 million, including $16 million for lease acquisitions, $159 million for
drilling and development, and $19 million for gas gathering, other equipment and
seismic acquisitions. Capital expenditures for fiscal 2000 are estimated to be
$65 million which amount is in excess of anticipated cash flows from operating
activities. To finance these planned capital expenditures, TransTexas will be
required to supplement its anticipated cash flow from operations with a
combination of asset sales, financings or other capital-raising transactions.
The ability to incur capital expenditures, sell properties and obtain additional
financing is subject to the approval and ongoing supervision of the Bankruptcy
Court, as well as the approval of the lenders under the DIP Facility. There is
no assurance that adequate funds can be obtained on a timely basis or that the
Bankruptcy Court will approve such transactions.

      In February 1998, TransTexas entered into a production payment drilling
program agreement with an unaffiliated third party for the reimbursement of
certain drilling costs with respect to wells drilled by TransTexas. Pursuant to
the agreement, upon the approval of the third party of a recently drilled or
currently drilling well for inclusion in the program, the third party will
commit to the reimbursement of all or a portion of the cost of such well. The
program wells are subject to a dollar-denominated production payment equal to
the primary sum of such reimbursed costs, plus an amount equivalent to a 15%
annual interest rate on the unpaid portion of such primary sum. As of January
31, 1999, the outstanding balance of the production payment was $47.0 million.

                                       15

<PAGE>   18



      In September 1998, TransTexas sold to an unaffiliated third party a term
overriding royalty in the form of a dollar-denominated production payment in
certain of TransTexas' producing properties for net proceeds of $10 million. The
production payment calls for the repayment of the primary sum plus an amount
equivalent to a 16% annual interest rate on the unpaid portion of such primary
sum. As of January 31, 1999, the outstanding balance of the production payment
was $9.2 million.

      During the year ended January 31, 1999, TEC made advances to TransTexas
pursuant to a $50 million promissory note which matures on June 14, 2002. The
note bears interest at a rate of 11.375% per annum. At January 31, 1999, the 
outstanding balance on the note was $6.5 million.

      In December 1998, TransTexas borrowed $5.65 million from an unaffiliated
third party in order to meet a portion of its December 31, 1998 interest payment
obligations. This note bears interest at a rate of 18% per annum and is 
secured by a pledge of the stock of Galveston Bay Processing Corporation, a
mortgage on the Winnie processing facility, a pledge by TransAmerican of 5
million shares of TransTexas common stock and a lien on the Company's office
building. The Company also borrowed $1.4 million from TransAmerican in December
1998.

      TransTexas and BNY Financial Corporation are parties to a Second Amended
and Restated Accounts Receivable Management and Security Agreement (the "BNY
Facility"), dated as of October 14, 1997. As of January 31, 1999, outstanding
advances under the BNY Facility totaled approximately $0.3 million. Interest
accrues on advances at the rate of (i) the higher of (a) the prime rate of The
Bank of New York or (b) the Federal Funds Rate plus 1/2 of 1% plus (ii) 1/2 of
1%. Obligations under the BNY Facility are secured by liens on TransTexas'
receivables and inventory. The Company is currently negotiating a post-petition
amendment to the BNY Facility.

      In April 1998, TransTexas sold its oilfield stimulation, cementing and
coiled tubing equipment and related facilities for a sales price of $30 million,
subject to post-closing adjustments. In June 1998, TransTexas sold its drilling
rigs and related assets for a sales price of $75 million. TransTexas sold its
remaining drilling services assets in August 1998 for a sales price of $20.5
million. The Company no longer operates in the drilling services segment.

      In March 1998, TransTexas executed an amended and restated note in the
principal amount of approximately $14.9 million consolidating equipment
financing debt previously incurred. Concurrently, TransTexas incurred an
additional $14 million in equipment financing debt, evidenced by a promissory
note. These notes were repaid in June 1998 with proceeds from the sale of
TransTexas' drilling rigs.

      In December 1998, TransTexas sold certain gas and oil properties for net
proceeds of approximately $16.7 million.

      CONTINGENT LIABILITIES

      TransTexas has significant contingent liabilities. Although the outcome of
these contingencies or the probability of the occurrence of these contingencies
cannot be predicted with certainty, TransTexas does not expect these matters to
have a material adverse effect on its financial position. However, these
contingencies, individually and in the aggregate, amount to potential liability
which could have a material adverse effect on TransTexas' cash flows or results
of operations.


                                       16

<PAGE>   19



      TransTexas has entered into various contracts whereby TransTexas is
required to deliver an aggregate of approximately 125 MMcf per day to specified
delivery points. TransTexas will incur certain charges if it does not deliver
specified quantities under the contracts. Such charges totaled $1.9 million
during the year ended January 31, 1999.

      Pursuant to Section 365 of Chapter 11 U.S.C., the Company has the right to
assume or reject executory contracts. The Company is currently reviewing all
such contracts.

      Pursuant to the Lobo Sale Agreement, TransTexas is required to indemnify
the buyer for certain liabilities related to the assets previously owned by TTC.
Although TransTexas does not anticipate that it will incur any material
indemnity liability, no assurance can be given that TransTexas will have
sufficient funds to satisfy any such indemnity obligation or that any payment
thereof will not have a material adverse effect on its ability to fund its debt
service, capital expenditure and working capital requirements.

    POTENTIAL TAX LIABILITY

      Part of the refinancing of TransAmerican's debt in 1993 involved the
cancellation of approximately $65.9 million of accrued interest and of a
contingent liability for interest of $102 million owed by TransAmerican.
TransAmerican has taken the federal tax position that the entire amount of this
debt cancellation is excluded from its income under the cancellation of
indebtedness provisions (the "COD Exclusion") of the Internal Revenue Code of
1986, as amended, and has reduced its tax attributes (including its net
operating loss and credit carryforwards) as a consequence of the COD Exclusion.
No federal tax opinion was rendered with respect to this transaction, however,
and TransAmerican has not obtained a ruling from the Internal Revenue Service
(the "IRS") regarding this transaction. TransTexas believes that there is
substantial legal authority to support the position that the COD Exclusion
applies to the cancellation of TransAmerican's indebtedness. However, due to
factual and legal uncertainties, there can be no assurance that the IRS will not
challenge this position, or that such challenge would not be upheld. Under an
agreement between TransTexas, TransAmerican and certain of TransAmerican's
subsidiaries (the "Tax Allocation Agreement"), TransTexas has agreed to pay an
amount equal to any federal tax liability (which would be approximately $25.4
million) attributable to the inapplicability of the COD Exclusion. Any such tax
could be offset in subsequent years by alternative minimum tax credits and
retained loss and credit carryforwards to the extent recoverable from
TransAmerican. As a member of the TNGC Consolidated Group (defined below), each
of TransTexas, TEC and TARC will be severally liable for any tax liability
resulting from the above-described transactions. The IRS has commenced an audit
of the consolidated federal income tax returns of the TNGC Consolidated Group
for its taxable years ended July 31, 1995 and 1994. At this time, it is not
possible to predict the scope of the IRS' review or whether any tax deficiencies
will be proposed by the IRS as a result of its review.

      Based in part upon independent legal advice, TransTexas has determined
that it was not required to report any significant federal income tax liability
as a result of the Lobo Sale. There are, however, significant uncertainties
regarding TransTexas' tax position and no assurance can be given that its
position will be sustained if challenged by the IRS. TransTexas is part of an
affiliated group for tax purposes (the "TNGC Consolidated Group"), which also
includes TNGC Holdings Corporation, the sole stockholder of TransAmerican,
TransAmerican, TEC and TARC. No letter ruling has been or will be obtained from
the IRS regarding the Lobo Sale by any member of the TNGC Consolidated Group. If
the IRS were to successfully challenge TransTexas' position, each member of the
TNGC Consolidated Group would be severally liable under the consolidated tax
return regulations for the resulting taxes, in the estimated amount of up to
$270 million (assuming no reduction of tax attributes of the TNGC Consolidated
Group), possible penalties equal to 20% of the amount of the tax, and interest
at the statutory rate (currently 7%) on the tax and penalties (if any). The Tax
Allocation Agreement has been amended so that TransAmerican is obligated to fund
the entire tax deficiency (if any) resulting from the Lobo Sale. There can be no
assurance that TransAmerican will be able to fund any such payment at the time
due; therefore, the other members of the TNGC Consolidated Group may be required
to pay the tax. TransTexas' obligations for any liability arising from the Lobo
Sale would likely be in the form of reduced net operating loss carryforwards.

        If the aggregate ownership of TransTexas by members of the TNGC

                                       17

<PAGE>   20



Consolidated Group (excluding TransTexas) is less than 80% (measured by voting
power and value), TransTexas will no longer be a member of the TNGC Consolidated
Group for federal tax purposes ("Deconsolidation") and, with certain exceptions,
will no longer be obligated under the terms and conditions of, or entitled to
the benefits of, the Tax Allocation Agreement. A Deconsolidation could result
from the issuance of additional equity securities by TransTexas, or from the
sale or other disposal of shares of TransTexas by TEC or TransAmerican. Upon a
Deconsolidation of TransTexas, members of the TNGC Consolidated Group that own
TransTexas' common stock could incur a substantial amount of federal income tax
liability. If such Deconsolidation occurred during the fiscal year ending
January 31, 2000, the aggregate amount of this tax liability is estimated to be
approximately $100 million, assuming no reduction for tax attributes of the TNGC
Consolidated Group. However, such tax liability would be substantially reduced
or eliminated in the event that the IRS successfully challenged TransTexas'
position on the Lobo Sale. Each member of a consolidated group filing a
consolidated federal income tax return is severally liable to the IRS for the
consolidated federal income tax liability of the consolidated group. There can
be no assurance that each TNGC Consolidated Group member will have the ability
to satisfy any tax obligation attributable to these transactions at the time due
and, therefore, other members of the group, including TEC, TransTexas or TARC,
may be required to pay the tax.

      Generally, under the Tax Allocation Agreement, if net operating losses of
TransTexas are used by other members of the TNGC Consolidated Group, then
TransTexas is entitled to the benefit (through reduced current taxes payable) of
such losses in later years to the extent TransTexas has taxable income, remains
a member of the TNGC Consolidated Group and the other group members have the
ability to pay such taxes. If Deconsolidation of TransTexas occurs, TransTexas
would not thereafter receive any benefit pursuant to the Tax Allocation
Agreement for net operating losses of TransTexas used by other members of the
TNGC Consolidated Group prior to the Deconsolidation of TransTexas. Should
Deconsolidation occur, TransTexas would retain, as of January 31, 1999,
approximately $364.5 million of net operating loss carryforwards. However, such
net operating loss carryforwards could be reclaimed by the remaining members of
the TNGC Consolidated Group if certain events occur. Such events would include a
successful challenge to the tax treatment of the Lobo Sale.

      TransTexas is required, under the Tax Allocation Agreement, to pay any
Texas franchise tax (which is estimated not to exceed $11.4 million)
attributable to transactions by any member of the TNGC Consolidated Group in
prior years. As of January 31, 1999, TransTexas had paid approximately $9.6
million of such tax and estimates that approximately $0.6 million will be paid
in fiscal 2000. During the year ended January 31, 1999, TransTexas paid
approximately $5.6 million of Texas franchise taxes on behalf of affiliates.
Approximately $2.3 million of the franchise taxes paid exceeded the payable to
affiliates for such taxes and was recorded as a reduction of additional paid-in
capital.

      It is not possible to predict the impact of the bankruptcy filing on the
Tax Allocation Agreement, any obligations to the TNGC Consolidated Group or
TransTexas' tax attributes, including its net operating loss carryforwards. In
addition, the amount of net operating loss carryforwards remaining after
discharge from bankruptcy that may be used in any future year may be limited.


                                       18

<PAGE>   21

    INFLATION AND CHANGES IN PRICES

      TransTexas' results of operations and the value of its gas properties are
highly dependent upon the prices TransTexas receives for its natural gas.
Substantially all of TransTexas' sales of natural gas are made in the spot
market, or pursuant to long-term contracts at market prices. Accordingly, the
prices received by TransTexas for its natural gas production are dependent upon
numerous factors beyond the control of TransTexas, including the level of
consumer product demand, the North American supply of natural gas, government
regulations and taxes, the price and availability of alternative fuels, the
level of foreign imports of oil and natural gas and the overall economic
environment. Demand for natural gas is seasonal, with demand typically higher
during the summer and winter, and lower during the spring and fall, with
concomitant changes in price. As a result of high demand for drilling services
in 1998 and 1999, TransTexas experienced increases in the cost of oilfield
services and equipment used in exploration and development drilling, and to a
lesser extent well completion and production costs.

      Any significant decline in current prices for natural gas could have a
material adverse effect on TransTexas' financial condition, results of
operations and quantities of reserves recoverable on an economic basis. Based
on an assumed average net daily production level of approximately 90 MMcfd,
TransTexas estimates that a $0.10 per MMBtu change in average gas prices
received would change annual operating income by approximately $3 million.

    LACK OF COMPLETE YEAR 2000 COMPLIANCE

      The widespread use of computer programs that rely on two-digit date
programs to perform computations and decision-making functions may cause
information technology ("IT") systems to malfunction in and around the Year
2000. Such malfunctions may lead to significant business delays in the U.S. and
internationally. The Year 2000 problem will potentially impact the Company's
normal business activities because information necessary to monitor and control
various operations is controlled by computers. In addition to potential problems
from computer systems, potential problems could arise from equipment with
embedded chips.

      TransTexas has defined a Year 2000-compliant system as one capable of
correct identification, manipulation and calculation when processing data in
connection with the year change from December 31, 1999 to January 1, 2000. A
Year 2000-compliant system is also capable of correct identification,
manipulation and calculation using leap years both alone and in conjunction with
other dates.

                                       19

<PAGE>   22



      Not all of TransTexas' systems are compliant under the above definition.
However, TransTexas is addressing the issues associated with this problem in the
following manner.

o        In the first stage, TransTexas commenced preparation of an inventory of
         all IT and non-IT systems, as well as equipment that could have
         embedded chips, whether or not critical to the operation of the
         business. TransTexas also compiled a listing of material relationships
         with third parties with which it conducts business. These relationships
         include contractors, suppliers and financial institutions. This stage
         of the Year 2000 compliance process is approximately 95% complete.

o        In stage two, TransTexas is assessing the results of the completed
         portions of inventory done in the first stage to determine the Year
         2000 impact and what actions need to be taken to obtain Year 2000
         compliance. For TransTexas' internal systems, actions needed include
         obtaining vendor certification of Year 2000 compliance, remediating
         internal systems or replacing systems and equipment that cannot be
         remediated. This stage is approximately 85% complete with respect to
         internal systems. Major outstanding items include receipt of vendor
         certifications and installation of Year 2000 upgrades for certain
         non-critical systems. TransTexas has determined a course of action for
         remediation or replacement of all identified critical internal systems.
         TransTexas is surveying and obtaining information about Year 2000
         readiness of its material third-party relationships. Contingency plans
         will be developed for those third parties that cannot satisfactorily
         demonstrate Year 2000 compliance.

o        The third stage includes the repair, replacement or retirement of
         systems. This stage of the Year 2000 process is ongoing and is
         dependent upon the availability of upgrades from TransTexas' IT
         vendors, technician time to implement the upgrades and notification
         from other third parties of Year 2000 compliance. TransTexas has been
         upgrading packaged software throughout the organization. TransTexas
         began implementation of a new financial reporting system on December 1,
         1998. Several operational systems are in various stages of
         implementation, which should be completed prior to September 1999. The
         vendors of these new systems have provided certification that their
         respective software packages are Year 2000 compliant according to
         TransTexas' definition.

o        The last stage of the implementation process, which is approximately
         40% complete, includes testing all of the changes implemented
         individually and integrating those changes with all of the systems of
         TransTexas and its suppliers and customers. Various forms of testing
         are used depending on the type of change implemented. Each upgrade, to
         the extent economically feasible, will be run through a test
         environment before it is implemented. It is then tested to see how well
         it integrates into TransTexas' overall IT environment. Currently,
         TransTexas is not employing any independent verification processes of
         its systems' tests.

      As of January 31, 1999, TransTexas had incurred approximately $2 million
in direct costs with respect to its Year 2000 compliance program. TransTexas
anticipates spending an additional $0.5 million in direct costs to complete its
Year 2000 compliance program.

      Despite TransTexas' best efforts to ready its systems and infrastructure
for the Year 2000, there are many factors outside of TransTexas' control that
could affect readiness for the Year 2000. Although TransTexas believes that Year
2000 compliance will be accomplished by the implementation of the program
described above, there could be operational issues with the new systems
implemented that prevent TransTexas from solving the Year 2000 compliance issue
in a timely manner. In such event, TransTexas could be required to implement a
contingency plan for Year 2000 compliance. Although TransTexas has not
completely finalized its contingency plans, TransTexas will select from several
alternative plans including remediation of its software, installation of other
third party vendor software or some combination of alternatives. Substantial
completion of these plans is expected by September 1999 with continual
refinement until all of TransTexas' critical systems and all critical
third-party relationships have demonstrated Year 2000 compliance.


                                       20

<PAGE>   23



      The potential impact of the Year 2000 problem on TransTexas could be
material, as virtually every aspect of its business will be affected. TransTexas
may be adversely affected by this problem, depending on whether it and the
entities with which it does business address this issue successfully.

    FORWARD-LOOKING STATEMENTS

      Forward-looking statements, within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
are included throughout this report. All statements other than statements of
historical facts included in this report regarding TransTexas' financial
position, business strategy, and plans and objectives of management for future
operations, including, but not limited to words such as "anticipates,"
"expects," "estimates," "believes" and "likely" indicate forward-looking
statements. TransTexas' management believes its current views and expectations
are based on reasonable assumptions; however, there are significant risks and
uncertainties that could significantly affect expected results. Factors that
could cause actual results to differ materially from those in the
forward-looking statements include fluctuations in the commodity prices for
natural gas, crude oil, condensate and natural gas liquids, the extent of
TransTexas' success in discovering, developing and producing reserves,
conditions in the equity and capital markets, competition and the ultimate
resolution of litigation.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      As of January 31, 1999, the Company did not have any market risk sensitive
instruments.      


                                       21

<PAGE>   24



ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

<TABLE>
<CAPTION>
                                                                                                               PAGE
                                                                                                               ----

<S>                                                                                                           <C>
Report of Independent Accountants .............................................................................23

Financial Statements:

  Consolidated Balance Sheet ..................................................................................24

  Consolidated Statement of Operations ........................................................................25

  Consolidated Statement of Stockholders' Equity (Deficit).....................................................26

  Consolidated Statement of Cash Flows ........................................................................27

  Notes to Consolidated Financial Statements ..................................................................28
</TABLE>




                                       22

<PAGE>   25



                        REPORT OF INDEPENDENT ACCOUNTANTS





To the Stockholders and Board of Directors of
TransTexas Gas Corporation:


      In our opinion, the accompanying consolidated balance sheet and the
related consolidated statement of operations, of stockholders' equity (deficit)
and of cash flows present fairly, in all material respects, the financial
position of TransTexas Gas Corporation (debtor-in-possession) (the "Company") at
January 31, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended January 31, 1999, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

      The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As a result of the Company's
bankruptcy, there is substantial doubt about the Company's ability to continue
as a going concern. Management's plans are described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.


                                                      
PricewaterhouseCoopers LLP

Houston, Texas
May 20, 1999


                                       23

<PAGE>   26



                           TRANSTEXAS GAS CORPORATION
                             (Debtor-in-Possession)

                           CONSOLIDATED BALANCE SHEET
                 (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                                  JANUARY 31,             
                                                                                       -------------------------------
                                                                                            1999              1998     
                                                                                       ------------       ------------
                                      ASSETS

<S>                                                                                    <C>                <C>         
Current assets:
   Cash and cash equivalents ........................................................  $      3,775       $     38,502
   Accounts receivable ..............................................................        16,091             17,056
   Receivable from affiliates .......................................................         1,286                 --
   Inventories ......................................................................         3,210             16,437
   Other current assets .............................................................         3,693             10,719
                                                                                       ------------       ------------
      Total current assets ..........................................................        28,055             82,714
                                                                                       ------------       ------------

Property and equipment ..............................................................     1,459,630          1,418,293
Less accumulated depreciation, depletion and amortization ...........................     1,167,487            716,695
                                                                                       ------------       ------------
   Net property and equipment -- based on the full cost method of accounting for
   gas and oil properties of which $20,477 and $104,389
   are excluded from amortization at January 31, 1999 and 1998, respectively ........       292,143            701,598
                                                                                       ------------       ------------

Due from affiliates .................................................................            --              1,488
Other assets, net ...................................................................        25,169             30,835
                                                                                       ------------       ------------
                                                                                       $    345,367       $    816,635
                                                                                       ============       ============
           LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)


Current liabilities:
   Current maturities of long-term debt .............................................  $         --       $     10,181
   Accounts payable .................................................................            --             52,075
   Accrued interest payable to affiliate ............................................            --              6,762
   Accrued liabilities...............................................................           983             35,818
                                                                                       ------------       ------------
      Total current liabilities .....................................................           983            104,836
                                                                                       ------------       ------------

Liabilities subject to compromise....................................................       718,139                 --
Long-term debt, less current maturities .............................................            --              9,199
Production payments, less current portion ...........................................        56,260              4,121
Note payable to affiliate ...........................................................            --            486,991
Subordinated notes ..................................................................            --            115,815
Revolving credit agreement ..........................................................            --              7,917
Deferred income taxes ...............................................................            --             39,497
Payable to affiliates ...............................................................            --              3,002
Other liabilities ...................................................................            --             20,620

Commitments and contingencies (Note 13) .............................................            --                 --

Stockholders' equity (deficit):
   Common stock, $0.01 par value, 100,000,000 shares authorized, 57,515,566
      shares issued and outstanding at January 31, 1999 and 1998 ....................           740                740
   Additional paid-in capital .......................................................        19,915             26,834
   Retained earnings (accumulated deficit) ..........................................      (188,265)           259,468
                                                                                       ------------       ------------
                                                                                           (167,610)           287,042
   Treasury stock, at cost, 16,484,434 shares .......................................      (262,405)          (262,405)
                                                                                       ------------       ------------
      Total stockholders' equity (deficit) ..........................................      (430,015)            24,637
                                                                                       ------------       ------------
                                                                                       $    345,367       $    816,635
                                                                                       ============       ============
</TABLE>


               The accompanying notes are an integral part of the
                       consolidated financial statements.

                                       24

<PAGE>   27



                           TRANSTEXAS GAS CORPORATION
                             (Debtor-in-Possession)

                      CONSOLIDATED STATEMENT OF OPERATIONS
                 (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)



<TABLE>
<CAPTION>
                                                                      YEAR ENDED JANUARY 31,                       
                                                     ----------------------------------------------------
                                                         1999                 1998               1997      
                                                     ------------        ------------        ------------

<S>                                                  <C>                 <C>                 <C>         
Revenues:
   Gas, condensate and natural gas liquids .......   $     91,319        $    164,538        $    363,459
   Transportation ................................             --              12,055              34,423
   Gain on the sale of assets ....................         61,247             543,365               7,856
   Other .........................................          4,200               3,313                 609
                                                     ------------        ------------        ------------
      Total revenues .............................        156,766             723,271             406,347
                                                     ------------        ------------        ------------

Costs and expenses:
   Operating .....................................         22,352              50,957             114,453
   Depreciation, depletion and amortization ......         86,137              82,659             132,453
   General and administrative ....................         21,938              48,156              45,596
   Taxes other than income taxes .................          7,130              11,399              22,566
   Impairment of gas and oil properties ..........        425,966                  --                  --
   Litigation settlements ........................             --                  --             (96,000)
                                                     ------------        ------------        ------------
      Total costs and expenses ...................        563,523             193,171             219,068
                                                     ------------        ------------        ------------

   Operating income (loss) .......................       (406,757)            530,100             187,279
                                                     ------------        ------------        ------------

Other income (expense):
   Interest income ...............................          1,205              12,393               5,544
   Interest expense, net .........................        (79,921)            (80,580)            (97,007)
                                                     ------------        ------------        ------------
      Total other income (expense) ...............        (78,716)            (68,187)            (91,463)
                                                     ------------        ------------        ------------

      Income (loss) before income taxes ..........       (485,473)            461,913              95,816
Income tax expense (benefit) .....................        (38,882)            161,669              12,491
                                                     ------------        ------------        ------------

      Income (loss) before extraordinary item ....       (446,591)            300,244              83,325
Extraordinary item - loss on early
  extinguishment of debt, net of tax .............         (1,142)            (72,043)                 -- 
                                                     ------------        ------------        ------------
      Net income (loss) ..........................   $   (447,733)       $    228,201        $     83,325
                                                     ============        ============        ============

Basic and diluted net income (loss) per share:
   Income (loss) before extraordinary item .......   $      (7.76)       $       4.49        $       1.13
   Extraordinary item ............................          (0.02)              (1.08)                 -- 
                                                     ------------        ------------        ------------
                                                     $      (7.78)       $       3.41        $       1.13
                                                     ============        ============        ============

   Weighted average number of shares
   outstanding for basic and diluted net
   income (loss) per share .......................     57,515,566          66,905,903          74,000,000
                                                     ============        ============        ============
</TABLE>





               The accompanying notes are an integral part of the
                       consolidated financial statements.

                                       25

<PAGE>   28



                           TRANSTEXAS GAS CORPORATION
                             (Debtor-in-Possession)

            CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
                (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)


<TABLE>
<CAPTION>
                                                                                                          RETAINED
                                                       COMMON STOCK                  ADDITIONAL           EARNINGS       
                                             ------------------------------       PAID-IN CAPITAL       (ACCUMULATED     
                                               SHARES              AMOUNT        (CAPITAL DEFICIT)         DEFICIT)      
                                             ----------          ----------          ----------           ----------     


<S>                                          <C>                 <C>                 <C>                  <C>            
Balance at January 31, 1996                  74,000,000          $      740          $ (107,040)          $  (48,140)    

   Elimination of intercompany
     gain on property purchased
     from affiliate                                  --                  --                  --               (3,918)    
   Transfer of litigation escrow to
     affiliate                                       --                  --             (22,484)                  --     
   Contribution of Signal Capital
     Holdings Corporation stock by
     affiliate                                       --                  --               6,000                   --     
   Advances to affiliate                             --                  --                  --                   --     
   Net income                                        --                  --                  --               83,325    
                                             ----------          ----------          ----------           ----------     
Balance at January 31, 1997                  74,000,000                 740            (123,524)              31,267     

   Purchase of treasury stock,
     at cost, 16,484,434 shares                      --                  --                  --                   --     
   Advance to affiliate                              --                  --             (13,304)                  --     
   Contribution from affiliate                       --                  --              21,513                   --     
   Assumption of tax liability by
     TransAmerican                                   --                  --             129,549                   --     
   Contribution of debt issue costs                  --                  --              12,600                   --     
     by TEC
   Collection of advances to                         --                  --                  --                   --     
     affiliates
   Net income                                        --                  --                  --              228,201     
                                             ----------          ----------          ----------           ----------     
Balance at January 31, 1998                  74,000,000                 740              26,834              259,468     

   Advance to affiliate                              --                  --              (6,919)                  --
   Net loss                                          --                  --                  --             (447,733)    
                                             ----------          ----------          ----------           ----------     
Balance at January 31, 1999                  74,000,000          $      740          $   19,915           $ (188,265)    
                                             ==========          ==========          ==========           ==========     
</TABLE>





<TABLE>
<CAPTION>
                                         
                                                                                           TOTAL
                                              TREASURY              ADVANCES           STOCKHOLDERS'
                                               STOCK              TO AFFILIATES       EQUITY (DEFICIT)
                                              ----------           ----------           ----------


<S>                                           <C>                  <C>                  <C>        
Balance at January 31, 1996                   $       --           $       --           $ (154,440)

   Elimination of intercompany
     gain on property purchased
     from affiliate                                   --                   --               (3,918)
   Transfer of litigation escrow to
     affiliate                                        --                   --              (22,484)
   Contribution of Signal Capital
     Holdings Corporation stock by
     affiliate                                        --                   --                6,000
   Advances to affiliate                              --              (59,278)             (59,278)
   Net income                                         --                   --               83,325
                                              ----------           ----------           ----------
Balance at January 31, 1997                           --              (59,278)            (150,795)

   Purchase of treasury stock,
     at cost, 16,484,434 shares                 (262,405)                  --             (262,405)
   Advance to affiliate                               --                   --              (13,304)
   Contribution from affiliate                        --                   --               21,513
   Assumption of tax liability by
     TransAmerican                                    --                   --              129,549
   Contribution of debt issue costs                   --                   --               12,600
     by TEC
   Collection of advances to                          --               59,278               59,278
     affiliates
   Net income                                         --                   --              228,201
                                              ----------           ----------           ----------
Balance at January 31, 1998                     (262,405)                  --               24,637

   Advance to affiliate                               --                   --               (6,919)
   Net loss                                           --                   --             (447,733)
                                              ----------           ----------           ----------
Balance at January 31, 1999                   $ (262,405)          $       --           $ (430,015)
                                              ==========           ==========           ==========
</TABLE>











               The accompanying notes are an integral part of the
                       consolidated financial statements.

                                       26

<PAGE>   29



                           TRANSTEXAS GAS CORPORATION
                             (Debtor-in-Possession)

                      CONSOLIDATED STATEMENT OF CASH FLOWS
                            (IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
                                                                                     YEAR ENDED JANUARY 31,             
                                                                        ----------------------------------------------
                                                                           1999             1998              1997     
                                                                        ---------       -----------        -----------

<S>                                                                     <C>             <C>                <C>        
Operating activities:
   Net income (loss) ............................................       $(447,733)      $   228,201        $    83,325
   Adjustments to reconcile net income (loss) to                                       
     net cash provided (used) by operating activities:
         Extraordinary item .....................................           1,142            72,043                 --
         Depreciation, depletion and amortization ...............          86,137            82,659            132,453
         Impairment of gas and oil properties ...................         425,966                --                 --
         Amortization of debt issue costs .......................           5,730             2,030              8,387
         Accretion on subordinated notes ........................              --             4,941              1,647
         Gain on the sale of assets .............................         (61,247)         (543,365)            (7,856)
         Deferred income taxes ..................................         (38,882)          161,670             (8,889)
         Proceeds from volumetric production payments ...........              --                --             58,621
         Repayment of volumetric production payments ............              --           (45,134)                --
         Amortization of deferred revenue .......................              --            (9,420)           (36,917)
         Changes in assets and liabilities:                                            
            Accounts receivable .................................             965            61,604            (42,409)
            Receivable from affiliates ..........................          (1,286)            3,248                449
            Inventories .........................................          13,227            (3,953)            (1,060)
            Other current assets ................................           7,026            10,265             (2,154)
            Accounts payable ....................................           7,981            18,451              9,900
            Accrued interest payable to affiliates ..............           1,851             6,762                 --
            Accrued liabilities .................................           9,177           (50,966)            31,134
            Transactions with affiliates, net ...................          (6,166)           31,223             (6,825)
            Other assets ........................................             126                65             21,428
            Other liabilities ...................................          (5,384)           (8,371)           (20,173)
                                                                        ---------       -----------        -----------
              Net cash provided (used) by operating activities ..          (1,370)           21,953            221,061
                                                                        ---------       -----------        -----------
                                                                                       
Investing activities:                                                                  
   Capital expenditures .........................................        (190,601)         (423,915)          (340,651)
   Proceeds from the sale of assets .............................         156,212         1,062,490             92,518
   Withdrawals from cash restricted for interest ................              --            46,000             92,000
   Increase in cash restricted for interest .....................              --                --            (92,000)
   Advances to affiliate ........................................          (1,648)               --            (24,750)
   Payment of advances by affiliate .............................              --            24,750                 --
   Contribution to affiliate ....................................              --           (13,304)                --
                                                                        ---------       -----------        -----------
              Net cash provided (used) by investing activities ..         (36,037)          696,021           (272,883)
                                                                        ---------       -----------        -----------
                                                                                       
Financing activities:                                                                  
   Issuance of long-term debt ...................................          19,650            14,946             26,200
   Principal payments on long-term debt .........................         (62,235)          (10,128)           (19,135)
   Revolving credit agreement, net ..............................          (7,572)          (18,351)             5,903
   Issuance of production payments ..............................          69,824            20,977             28,598
   Principal payments on production payments ....................         (17,355)          (29,504)           (45,205)
   Issuance of note payable to affiliate ........................           1,395           486,991                 --
   Retirement of senior secured notes ...........................              --          (892,000)                --
   Issuance of subordinated notes ...............................              --                --             99,445
   Debt issue costs .............................................          (1,027)          (13,559)            (9,187)
   Increase in cash restricted for share repurchases ............              --          (399,284)                --
   Withdrawals from cash restricted for share repurchases .......              --           399,284                 --
   Purchases of treasury stock ..................................              --          (262,405)                --
   Transfer of litigation escrow to affiliate ...................              --                --            (22,484)
                                                                        ---------       -----------        -----------
              Net cash provided (used) by financing activities ..           2,680          (703,033)            64,135
                                                                        ---------       -----------        -----------
              Increase (decrease) in cash and cash equivalents ..         (34,727)           14,941             12,313
Beginning cash and cash equivalents .............................          38,502            23,561             11,248
                                                                        ---------       -----------        -----------
Ending cash and cash equivalents ................................       $   3,775       $    38,502        $    23,561
                                                                        =========       ===========        ===========
</TABLE>


               The accompanying notes are an integral part of the
                       consolidated financial statements.

                                       27

<PAGE>   30
                           TRANSTEXAS GAS CORPORATION
                             (Debtor-in-Possession)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    Organization

      TransTexas Gas Corporation (together with its subsidiaries, the "Company"
or "TransTexas") was incorporated in Delaware in May 1993 for the purpose of
owning and operating certain oil and gas and transmission assets previously
owned and operated by TransAmerican Natural Gas Corporation ("TransAmerican")
and certain of its subsidiaries. On August 24, 1993, certain of these operations
were transferred at predecessor basis pursuant to an agreement among TransTexas,
TransAmerican and certain of its subsidiaries, and TransAmerican's sole
stockholder (the "Transfer"). As a result of the Transfer, TransTexas succeeded
to the gas and oil properties, exploration and development operations, and
natural gas gathering and transportation operations of TransAmerican and certain
subsidiaries, except for specific excluded assets (including accounts
receivable) retained by TransAmerican.

      TransTexas is a subsidiary of TransAmerican Energy Corporation ("TEC"),
which is wholly owned by TEC/TransAmerican LLC, which is wholly owned by
TransAmerican. TransAmerican Refining Corporation ("TARC") is a wholly owned
subsidiary of TEC. Unless otherwise noted, the term "TransTexas" refers to
TransTexas Gas Corporation and its subsidiaries.

    Use of Estimates 

      The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date(s) of the financial
statements and the reported amounts of revenues and expenses during the
reporting period(s). TransTexas' most significant financial estimates are based
on litigation, income taxes and remaining proved gas and oil reserves (see Notes
13 and 17). Actual results could differ from these estimates. 

    Reclassifications

      Certain previously reported financial information has been reclassified to
conform with the current presentation.

    Cash and Cash Equivalents

      TransTexas considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash and cash 
equivalents at January 31, 1999 includes $1.4 million restricted for payments
of future goods and services provided by certain vendors.

    Inventories

      TransTexas' inventories, consisting primarily of tubular goods, are stated
at the lower of average cost or market.

    Gas and Oil Properties

      TransTexas uses the full cost method of accounting for exploration and
development costs. Under this method of accounting, the cost for successful as
well as unsuccessful exploration and development activities are capitalized.
Such capitalized costs and estimated future development and reclamation costs
are amortized on a unit-of-production method. Net capitalized costs of gas and
oil properties are limited to the lower of unamortized cost or the cost center
ceiling, defined as the sum of the present value (10% discount rate) of
estimated unescalated future net revenues from proved reserves; plus the cost of
properties not being amortized, if any; plus the lower of cost or estimated fair
value of unproved properties included in the costs being amortized, if any; less
related income tax effects. As of January 31, 1999, TransTexas' net capitalized
costs of gas and oil properties exceeded the cost center ceiling.

                                       28

<PAGE>   31


                           TRANSTEXAS GAS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


TransTexas adjusted its net capitalized costs resulting in a non-cash pre-tax
loss of approximately $426 million for the year ended January 31, 1999. Due to
higher gas and oil prices realized by the Company subsequent to January 31,
1999, the impairment was less than would have been recorded using January 31,
1999 prices.

      Proceeds from the sale of gas and oil properties are applied to reduce the
costs in the cost center unless the sale involves a significant quantity of
reserves in relation to the cost center, in which case a gain or loss is
recognized.

      Unevaluated properties and associated costs not currently being amortized
and included in gas and oil properties were $20 million and $104 million at
January 31, 1999 and 1998, respectively. The properties represented by these
costs were undergoing exploration activities at such date, or are properties on
which TransTexas intends to commence such activities in the future. TransTexas
believes that the unevaluated properties at January 31, 1999 will be
substantially evaluated in 12 to 24 months and it will begin to amortize these
costs at such time.

    Other Property and Equipment

      Other property and equipment are stated at cost. The cost of repairs and
minor replacements is charged to operating expense while the cost of renewals
and betterments is capitalized. At the time depreciable assets are retired or
otherwise disposed of, the cost and related accumulated depreciation or
amortization are removed from the accounts. Gains or losses on dispositions in
the ordinary course of business are included in the consolidated statement of
operations. Impairment of other property and equipment is reviewed whenever
events or changes in circumstances indicate that the carrying value of assets
may not be recoverable.

      Depreciation of oilfield services equipment and other buildings and
equipment is computed by the straight-line method at rates that will amortize
the unrecovered cost of depreciable property, including assets acquired under
capital leases, over their estimated useful lives of 4-10 years.

      Costs of improving leased property are amortized over the estimated useful
lives of the assets or the terms of the leases, whichever is shorter.

    Environmental Remediation Costs

      Environmental expenditures are expensed or capitalized as appropriate,
depending on their future economic benefit. Expenditures that relate to an
existing condition caused by past operations and that do not have future
economic benefits are expensed. Liabilities for these expenditures are provided
when the responsibility to remediate is probable and the amount of associated
costs is reasonably estimable.

    Debt Issue Costs

      Costs related to the issuance of long-term debt are classified as "Other
assets." Capitalized debt costs are amortized to interest expense over the
scheduled maturity of the debt utilizing the interest method. In the event of a
redemption of long-term debt, the related debt issue costs will be charged to
income in the period of presentation.

    Defined Contribution Plan

      TransTexas, through its indirect parent company, TransAmerican, maintains
a defined contribution plan, which incorporates a "401(k) feature" as allowed
under the Internal Revenue Code. All investments are made through Massachusetts
Mutual Life Insurance Company. Employees who are at least 21 years of age and
have completed one year of credited service are eligible to participate on the
next semiannual entry date. TransTexas matches 10%, 20%

                                       29

<PAGE>   32


                           TRANSTEXAS GAS CORPORATION
                             (Debtor-in-Possession)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


or 50% of employee contributions up to a maximum of 3% of the participant's
compensation, based on years of plan participation. TransTexas' contributions
with respect to this plan totaled $0.3 million, $0.5 million and $0.5 million
for years ended January 31, 1999, 1998 and 1997, respectively. All Company
contributions are currently funded.

    Treasury Stock

      TransTexas uses the cost method to account for treasury stock. In June
1997, TransTexas implemented a share repurchase program pursuant to which it
repurchased approximately 3.9 million shares from public stockholders for an
aggregate purchase price of approximately $61.4 million, and approximately 12.6
million shares from TARC and TEC for an aggregate purchase price of
approximately $201 million. The share repurchase program was terminated in
December 1997.

    Fair Value of Financial Instruments

      TransTexas includes fair value information in the Notes to Consolidated
Financial Statements when the fair value of its financial instruments can be
determined and is different from the book value. TransTexas generally assumes
the book value of those financial instruments that are classified as current
approximate fair value because of the short maturity of these instruments. For
noncurrent financial instruments, TransTexas uses quoted market prices or, to
the extent that there are no available quoted market prices, market prices for
similar instruments. Due to the bankruptcy filing (Note 2), the Company is
uncertain as to the timing and amount of liquidation or settlement of
liabilities subject to compromise. Accordingly, except for debt which has quoted
market prices, the Company does not believe it is practicable to estimate the
fair value of those liabilities.

    Revenue Recognition

      TransTexas recognizes revenues from the sales of natural gas, condensate
and natural gas liquids in the period of delivery. Revenues are recognized from
transportation of natural gas in the period the service is provided. The sales
method is used for natural gas imbalances that arise from jointly produced
properties. Volumetric production is monitored to minimize these natural gas
imbalances. A natural gas imbalance liability is recorded in other liabilities
if TransTexas' excess sales of natural gas exceed its estimated remaining
recoverable reserves for such properties.

    Concentration of Credit Risk

      Financial instruments that potentially expose TransTexas to credit risk
consist principally of cash, trade receivables and commodity price swap
agreements. TransTexas selects depository banks based upon management's review
of the financial stability of the institution. Balances periodically exceed the
$100,000 level covered by federal deposit insurance. To date, TransTexas has not
incurred any losses due to excess deposits in any financial institution. Trade
accounts receivable are generally from companies with significant natural gas
marketing activities, which would be impacted by conditions or occurrences
affecting that industry. TransTexas performs ongoing credit evaluations and,
generally, requires no collateral from its customers. TransTexas is not aware of
any significant credit risk relating to its customers and has not experienced
significant credit losses associated with such receivables.

    Hedging Agreements

      From time to time, TransTexas enters into commodity price swap agreements
(the "Hedge Agreements") to reduce its exposure to price risk in the spot market
for natural gas. The Hedge Agreements are accounted for as hedges if the pricing
of the hedge agreement correlates with the pricing of the natural gas production
hedged. Accordingly, gains or losses are deferred and recognized as an increase
or decrease in revenues in the respective month the physical volumes are sold.
For the years ended January 31, 1998 and 1997, TransTexas incurred net
settlement losses pursuant to the Hedge Agreements of approximately $7.4 million
and $37 million, respectively. TransTexas had no Hedge Agreements outstanding at
January 31, 1999 or 1998.

                                       30

<PAGE>   33


                           TRANSTEXAS GAS CORPORATION
                             (Debtor-in-Possession)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)



    Income Taxes

      TransTexas files a consolidated tax return with TransAmerican. Income
taxes are due from or payable to TransAmerican in accordance with a tax
allocation agreement, as amended, between TransTexas, TNGC Holdings Corporation,
TransAmerican and TransAmerican's other subsidiaries (the "Tax Allocation
Agreement"). It is TransTexas' policy to record income tax expense as though
TransTexas had filed separately. Deferred income taxes are recognized, at
enacted tax rates, to reflect the future effects of temporary differences
arising between the financial reporting and tax bases of assets and liabilities.
Income taxes include federal and state income taxes.

    Net Income (Loss) Per Share

      Basic and diluted net income (loss) per share has been calculated based on
the weighted average number of shares of common stock outstanding during each
period, excluding treasury shares.

    Recently Issued Pronouncements

      In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. The Company
will adopt SFAS 133 effective February 1, 2000. TransTexas is uncertain as to
the impact that adoption of SFAS 133 will have on its financial statements.

2.  CHAPTER 11 FILING AND LIQUIDITY

      On April 19, 1999, TransTexas filed a voluntary petition for relief under
Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for
the District of Delaware (the "Bankruptcy Court"). On April 20, 1999, TEC and
TARC also filed voluntary petitions under Chapter 11. The bankruptcy cases are
being jointly administered. TransTexas, TEC and TARC are operating their
businesses and managing their properties as debtors-in-possession. As a result
of the Chapter 11 filings, absent approval from the Bankruptcy Court, the
Company is prohibited from paying, and creditors are prohibited from attempting
to collect, claims or debts arising prior to the bankruptcy.

      Pursuant to a Credit Agreement (the "DIP Facility") dated April 27, 1999
among TransTexas, as Borrower, various financial institutions, as Lenders,
Credit Suisse First Boston Management Corporation, as Administrative Agent, and
TEC and TARC, as Guarantors, the Lenders have agreed to provide up to $20
million in post-petition financing to the Company (with an additional $10
million potentially available). On April 28, 1999, $6 million was disbursed to
TransTexas under the Credit Agreement pursuant to an interim order of the
Bankruptcy Court. Additional advances will be subject to the entry of a final
order. Advances under the Credit Agreement bear interest at the rate of 13% per
annum. TransTexas' obligations are guaranteed by TEC and TARC and are secured by
a first priority senior priming lien (subject to certain exceptions) on all 
property of TransTexas, TEC and TARC. Amounts outstanding under the DIP Facility
will mature on the earlier of October 20, 1999 or the effective date of a plan
of reorganization.

      The bankruptcy petitions were filed in order to preserve cash and to give
the Company the opportunity to restructure its debt. The consummation of a plan
of reorganization is the primary objective of the Company. The plan of
reorganization will set forth the means for satisfying claims, including
liabilities subject to compromise, and

                                       31

<PAGE>   34


                           TRANSTEXAS GAS CORPORATION
                             (Debtor-in-Possession)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


interests in the Company. A plan of reorganization may result in, among other
things, material dilution or elimination of existing security holders as a
result of the issuance of securities to creditors or new investors. The
consummation of a plan of reorganization will require approval of the Bankruptcy
Court.

      At this time, it is not possible to predict the outcome of the bankruptcy
proceedings, in general, or the effect on the business of the Company or on the
interests of creditors, royalty owners or stockholders. 

      As a result of the bankruptcy filing, a significant amount of the
Company's liabilities, including certain secured debt, are subject to
compromise. As of January 31, 1999, the liabilities subject to compromise
included the following (in thousands of dollars):

<TABLE>
<S>                                                 <C>           <C>
      Long-term debt                                              $125,170 (Note 6)
      Notes payable to affiliates                                  457,928 (Note 7)
      Accounts payable                                              66,231
      Accrued interest payable to affiliate                          8,613
      Accrued liabilities                                           44,961 (Note 9)
      Other liabilities                                             15,236 (Note 10)
                                                                  --------
                                                                  $718,139
                                                                  ========
</TABLE>

      The accompanying financial statements have been prepared on a going
concern basis which contemplates continuity of operations, realization of assets
and liquidation of liabilities in the ordinary course of business. As a result
of the bankruptcy filing and related events, there is no assurance that the
carrying amounts of assets will be realized or that liabilities will be
liquidated or settled for the amounts recorded. In addition, a plan of
reorganization, or rejection thereof, could change the amounts reported in the
financial statements. As a result, there is substantial doubt about the
Company's ability to continue as a going concern. The ability of TransTexas to
continue as a going concern is dependent upon confirmation of a plan of
reorganization, adequate sources of capital and the ability to sustain positive
results of operations and cash flows sufficient to continue to explore for and
develop gas and oil reserves.

      In the ordinary course of business, TransTexas makes substantial capital
expenditures for the exploration and development of natural gas and oil
reserves. TransTexas historically has financed its capital expenditures, debt
service and working capital requirements with cash flow from operations, public
and private offerings of debt and equity securities, the sale of production
payments, asset sales, an accounts receivable revolving credit facility and
other financings. Cash flow from operations is sensitive to the prices
TransTexas receives for its natural gas and oil. A reduction in planned capital
spending or an extended decline in gas and oil prices could result in less than
anticipated cash flow from operations in fiscal year 2000 and later years which
could have a material adverse effect on TransTexas. 

      Management's plans are to continue to incur capital expenditures with the
goal of increasing production and reserves. To finance these planned capital
expenditures, TransTexas will be required to supplement its anticipated cash
flow from operations with a combination of asset sales, financings or other
capital-raising transactions. The ability to incur capital expenditures, sell
properties and obtain additional financing is subject to the approval and
ongoing supervision of the Bankruptcy Court, as well as the approval of the
lenders under the DIP Facility. There is no assurance that adequate funds can be
obtained on a timely basis or that the Bankruptcy Court will approve such
transactions.

3.  OTHER CURRENT ASSETS

      The major components of other current assets are as follows (in thousands
of dollars):

<TABLE>
<CAPTION>
                                                                                             JANUARY 31,              
                                                                                     ---------------------------
                                                                                        1999              1998    
                                                                                     ----------        ---------
<S>                                                                                  <C>               <C>      
         Prepayments:
           Trade..................................................................   $      676        $   7,120
           Insurance..............................................................        2,300            3,171
         Other ...................................................................          717              428
                                                                                     ----------        ---------
                                                                                     $    3,693        $  10,719
                                                                                     ==========        =========
</TABLE>


                                       32

<PAGE>   35


                           TRANSTEXAS GAS CORPORATION
                             (Debtor-in-Possession)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


4.  PROPERTY AND EQUIPMENT

      The major components of property and equipment, at cost, are as follows
(in thousands of dollars):

<TABLE>
<CAPTION>
                                                                                  JANUARY 31,
                                                                         -----------------------------           
                                                                              1999             1998      
                                                                         -------------   -------------

<S>                                                                      <C>            <C>          
         Land.....................................................       $        710    $       1,373
         Gas and oil properties   ................................          1,394,325        1,246,584
         Gas gathering and transportation ........................             53,761           51,714
         Equipment and other .....................................             10,834          118,622
                                                                         ------------    -------------
                                                                         $  1,459,630    $   1,418,293
                                                                         ============    =============
</TABLE>

      In May 1997, TransTexas consummated a stock purchase agreement with an
unaffiliated buyer (the "Lobo Sale Agreement"), to effect the sale (the "Lobo
Sale") of the stock of TransTexas Transmission Corporation ("TTC"), its
subsidiary that owned substantially all of TransTexas' Lobo Trend producing
properties and related pipeline transmission system, for an adjusted sales price
of approximately $1.1 billion. With proceeds from the Lobo Sale, TransTexas
repaid certain indebtedness and other obligations, including production
payments, in an aggregate amount of approximately $84 million. TransTexas
recorded a gain of $543.4 million on the Lobo Sale. In accordance with the full
cost method, the cost of the properties sold was determined based on relative
fair market value.

      In January 1998, TransTexas sold a portion of its Lodgepole producing
properties for a sales price of $19.1 million. The proceeds from this sale were
credited to the full cost pool.

      On April 30, 1998, TransTexas sold its oilfield stimulation, cementing and
coiled tubing equipment and related facilities to an unaffiliated third party
for a sales price of $30 million, subject to post-closing adjustments. For the
year ended January 31, 1999, TransTexas recorded a $10.5 million pre-tax gain
as a result of this sale.

      On June 26, 1998, TransTexas sold its drilling rigs and related facilities
to an unaffiliated third party for a sales price of $75 million. On August 17,
1998, TransTexas sold its remaining drilling services assets to an unaffiliated
third party for a sales price of $20.5 million. TransTexas recorded pre-tax
gains of $51.2 million and $5.3 million, respectively, as a result of these
sales.

      Additional purchase price adjustments related to the Lobo Sale resulted in
a pre-tax loss on the sale of assets of $2.4 million during the year ended
January 31, 1999.

      In December 1998, TransTexas sold certain gas and oil properties for net
proceeds of approximately $16.7 million.


                                       33

<PAGE>   36


                           TRANSTEXAS GAS CORPORATION
                             (Debtor-in-Possession)


            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


5.  OTHER ASSETS

      The major components of other assets are as follows (in thousands of
dollars):

<TABLE>
<CAPTION>
                                                                                              JANUARY 31,                 
                                                                                     ----------------------------
                                                                                        1999              1998      
                                                                                     -----------      -----------
<S>                                                                                  <C>              <C>        
         Debt issue costs, net of accumulated amortization
           of $7,502 and $2,030 at January 31, 1999 and
           1998, respectively.....................................................   $     24,278     $    29,818
         Other ...................................................................            891           1,017
                                                                                     ------------     -----------
                                                                                     $     25,169     $    30,835
                                                                                     ============     ===========
</TABLE>

6.  LONG-TERM DEBT (SUBJECT TO COMPROMISE) AND PRODUCTION PAYMENTS

    LONG-TERM DEBT

      Long-term debt at January 31, 1999 is subject to compromise. See Note 2. 
Long-term debt consists of the following (in thousands of dollars):

<TABLE>
<CAPTION>
                                                                                              JANUARY 31,                 
                                                                                     ----------------------------
                                                                                        1999              1998      
                                                                                     -----------      -----------

<S>                                                                                  <C>            <C>          
         Revolving credit agreement...............................................   $        345   $       7,917
         13 3/4% Senior Subordinated Notes due 2001...............................        115,815         115,815
         Note payable ............................................................          5,650              --
         Notes payable, ranging from 9.25% to 15%, due through 2001...............          3,360          19,380
                                                                                     ------------   -------------
            Total long-term debt..................................................   $    125,170   $     143,112
                                                                                     ============   =============
</TABLE>
      TransTexas and BNY Financial Corporation ("BNY") are parties to a Second 
Amended and Restated Accounts Receivable Management and Security Agreement (the
"BNY Facility"), dated as of October 14, 1997. As of January 31, 1999,
outstanding advances under the BNY Facility totaled approximately $0.3
million. Interest accrues on advances at the rate of (i) the higher of (a) the
prime rate of The Bank of New York or (b) the Federal Funds Rate plus 1/2 of 1%
plus (ii) 1/2 of 1%. Obligations under the BNY Facility are secured by liens on
TransTexas' receivables and inventory and is guaranteed by Mr. Stanley. The BNY
Facility contains certain financial covenants including a limitation on net
losses. The Company is currently negotiating a post-petition amendment to the
BNY Facility.

      In December 1996, TransTexas issued $189 million in face amount of 13 1/4%
Series A Senior Subordinated Notes due 2003 (the "Old Subordinated Notes") to
unaffiliated third parties. On June 19, 1997, TransTexas completed an exchange
offer (the "Subordinated Notes Exchange Offer"), pursuant to which it exchanged
approximately $115.8 million aggregate principal amount of its 13 3/4% Series C
Senior Subordinated Notes due 2001 (the "Series C Subordinated Notes") for all
of the Old Subordinated Notes. On October 10, 1997, TransTexas completed a
registered exchange offer whereby it issued $115.8 million aggregate principal
amount of its 13 3/4% Series D Senior Subordinated Notes due 2001 (the
"Subordinated Notes") in exchange for all of the outstanding Series C
Subordinated Notes. The indenture governing the Subordinated Notes
("Subordinated Notes Indenture") includes certain restrictive covenants,
including, among others, limitations on incurring additional debt, asset sales,
dividends and transactions with affiliates. During the year ended January 31,
1998, TransTexas recorded a $72 million extraordinary charge, net of an income
tax benefit of $38.2 million, as a result of its tender offer for its senior
secured notes in the amount of $785.4 million and its exchange offer for its
subordinated notes in the amount of $115.8 million. The fair value of the
Subordinated Notes, based on quoted market prices as of January 31, 1999 and
1998, was $34.7 million and $129.7 million, respectively.


                                       34

<PAGE>   37


                           TRANSTEXAS GAS CORPORATION
                             (Debtor-in-Possession)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


      In December 1998, TransTexas borrowed $5.65 million from an unaffiliated
third party in order to meet a portion of its December 31, 1998 interest payment
obligations. This note bears interest at a rate of 18% per annum and is secured
by a pledge of the stock of Galveston Bay Processing Corporation, a mortgage on
the Winnie processing facility, a pledge by TransAmerican of 5 million shares of
TransTexas common stock and a lien on the Company's office building.

      As of January 31, 1998, TransTexas had outstanding notes payable bearing
interest at rates ranging from 9.43% to 14.41% per annum and maturing at various
dates through November 2001. These notes payable were collateralized by certain
of TransTexas' operating equipment. In March 1998, TransTexas executed an
amended and restated note in the principal amount of approximately $14.9 million
evidencing a portion of the notes payable described above. Concurrently,
TransTexas incurred an additional $14 million in equipment financing debt,
evidenced by a promissory note. Both notes were secured by a lien on equipment.
The notes bear interest at a rate of 13.87%, payable in monthly installments
with a final installment payable on April 1, 2001. These notes were repaid in
June 1998 with proceeds from the sale of drilling rigs.

    PRODUCTION PAYMENTS

      In February 1998, TransTexas entered into a production payment drilling
program agreement with an unaffiliated third party for the reimbursement of
certain drilling costs with respect to wells drilled by TransTexas. Pursuant to
the agreement, upon the approval of the third party of a recently drilled or
currently drilling well for inclusion in the program, the third party will
commit to the reimbursement of all or a portion of the cost of such well, up to
an aggregate maximum for all such wells of $75 million. The program wells are
subject to a dollar-denominated production payment equal to the primary sum of
such reimbursed costs, plus an amount equivalent to a 15% annual interest rate
on the unpaid portion of such primary sum. As of January 31, 1999, the
outstanding balance of the production payment was $48.0 million.

      In September 1998, TransTexas sold to an unaffiliated third party a term
overriding royalty in the form of a dollar-denominated production payment in
certain of TransTexas' producing properties for net proceeds of $10 million. The
production payment calls for the repayment of the primary sum plus an amount
equivalent to a 16% annual interest rate on the unpaid portion of such primary
sum. As of January 31, 1999, the outstanding balance of the production payment
was $9.2 million.


7.  NOTES PAYABLE TO AFFILIATES (SUBJECT TO COMPROMISE)

      Notes payable to affiliates at January 31, 1999 are subject to compromise.
See Note 2. Notes payable to affiliates consist of the following (in thousands
of dollars):

<TABLE>
<CAPTION>
                                                                                            JANUARY 31,           
                                                                                    --------------------------
                                                                                       1999             1998    
                                                                                    -----------     ----------
<S>                                                                                 <C>             <C>       
      TransTexas Intercompany Loan................................................  $   450,000     $  450,000
      Notes payable to affiliates.................................................        7,928         36,991
                                                                                    -----------     ----------
                                                                                    $   457,928     $  486,991
                                                                                    ===========     ==========
</TABLE>

      On June 13, 1997, TEC completed a private offering (the "TEC Notes
Offering") of $475 million aggregate principal amount of 11 1/2% Senior Secured
Notes due 2002 (the "TEC Series A Senior Secured Notes") and $1.13 billion
aggregate principal amount of 13% Senior Secured Discount Notes due 2002 (the
"TEC Series A Senior Secured Discount Notes" and, together with the TEC Series A
Senior Secured Notes, the "TEC Series A Notes") for net proceeds of
approximately $1.3 billion. On January 16, 1998, TEC completed a registered
exchange offer whereby it issued $475 million aggregate principal amount of 
11 1/2% Series B Senior Secured Notes due 2002 (the "TEC Senior Secured Notes")
and $1.3 billion aggregate principal amount of 13% Series B Senior Secured
Discount Notes due 2002 (the "TEC Senior Secured Discount Notes" and, together
with the TEC Series A Notes and TEC Senior Secured Notes, the "TEC Notes"). The
TEC Notes are senior obligations of TEC, secured by a lien on substantially all
its existing and future assets, including the intercompany loans described
below.

      With a portion of the proceeds of the TEC Notes Offering, TEC made an
intercompany loan to TransTexas (the "TransTexas Intercompany Loan"). The
TransTexas Intercompany Loan (i) is in the principal amount of $450 million,
(ii) bears interest at a rate of 107/8% per annum, payable semi-annually in cash
in arrears and (iii) is secured initially by a security interest in
substantially all of the assets of TransTexas other than inventory, receivables
and equipment.

                                       35

<PAGE>   38


                           TRANSTEXAS GAS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


The TransTexas Intercompany Loan will mature on June 1, 2002. The TransTexas
Intercompany Loan Agreement contains certain restrictive covenants, including,
among others, limitations on incurring additional debt, asset sales, dividends
and transactions with affiliates. In connection with the TEC Notes Offering, TEC
allocated $12.6 million of debt issuance costs to TransTexas which are reflected
as a contribution of capital. Such costs are being amortized over the term of
the TransTexas Intercompany Loan using the interest method. The TransTexas
Intercompany Loan Agreement contains provisions which increase the interest rate
from 10 7/8% to 12 7/8% per annum if certain financial ratios are not met. As a
result of TransTexas' failure to maintain the required ratios, the interest rate
on the TransTexas Intercompany Loan increased to 12 7/8% per annum effective
November 1, 1998. The increased interest rate will continue until the Company
has reserve value, as defined, equal to 90% of Net Debt or limits its quarterly
capital expenditures to the amount of its quarterly EBITDA, all as specified in
the TransTexas Intercompany Loan Agreement.
 
      During the year ended January 31, 1999, TEC made advances to TransTexas
pursuant to a $50 million promissory note which matures on June 14, 2002. The
note bears interest at a rate of 11.375% per annum. At January 31, 1999, the 
outstanding balance on the note was $6.5 million.

      In December 1998, TransTexas executed a note payable to TransAmerican in
the original principal amount of $1.4 million plus interest at a rate of 15% per
annum. The proceeds from this loan were used to meet a portion of the Company's
interest payment obligations on December 31, 1998.

8.  SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

      The following information reflects TransTexas' noncash investing and
financing activities (in thousands of dollars):

<TABLE>
<CAPTION>
                                                                       YEAR ENDED JANUARY 31,                
                                                            ------------------------------------------
                                                               1999            1998          1997     
                                                            ----------    ------------- --------------

<S>                                                        <C>            <C>           <C>      
      Assumption of tax liability by
        TransAmerican...................................    $     --      $  129,549    $     --  
                                                            ==========    ==========    ==========

      Contribution from affiliate.......................    $     --      $   21,513    $     --  
                                                            ==========    ==========    ==========

      Seller financed obligations incurred for
        capital expenditures............................    $     --      $     --      $    3,621
                                                            ==========    ==========    ==========

      Accounts payable and long-term
        liabilities for property and 
        equipment.......................................    $   38,841    $   32,666    $   27,192
                                                            ==========    ==========    ==========

      Exchange of Subordinated Notes....................    $     --      $  115,815    $     --  
                                                            ==========    ==========    ==========

      Contribution of debt issue
        costs from affiliate............................    $     --      $   12,600    $     --  
                                                            ==========    ==========    ==========
</TABLE>

      Cash paid for interest and income taxes are as follows (in thousands of
dollars):

<TABLE>
<CAPTION>
                                                                       YEAR ENDED JANUARY 31,                
                                                            ------------------------------------------
                                                               1999            1998          1997     
                                                            ----------    ------------- --------------

<S>                                                        <C>            <C>           <C>      
      Interest.........................................     $   69,970    $   52,563    $   85,254
                                                            ==========    ==========    ==========

      Income taxes (paid to TransAmerican).............     $   --        $   --        $    7,000
                                                            ==========    ==========    ==========
</TABLE>


                                       36

<PAGE>   39


                           TRANSTEXAS GAS CORPORATION
                             (Debtor-in-Possession)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


      TransTexas incurred approximately $89.6 million, $96.4 million and $112.9
million of interest charges of which approximately $9.7 million, $15.8 million
and $15.9 million were capitalized for the years ended January 31, 1999, 1998
and 1997, respectively.

9.  ACCRUED LIABILITIES (SUBJECT TO COMPROMISE)

      Accrued liabilities at January 31, 1999, other than "Current portion of
production payments," are subject to compromise. See Note 2. The major
components of accrued liabilities are as follows (in thousands of dollars):

<TABLE>
<CAPTION>
                                                                                           JANUARY 31,         
                                                                                    ----------------------
                                                                                       1999         1998    
                                                                                    ---------    ---------

<S>                                                                                 <C>          <C>      
      Royalties...................................................................  $   9,851    $   7,171
      Taxes other than income taxes...............................................      5,512        2,562
      Accrued interest............................................................      2,921        2,544
      Payroll.....................................................................      1,372        5,185
      Litigation settlements and other ...........................................      4,170        1,387
      Insurance...................................................................     12,819        9,041
      Current portion of production payments......................................        983          653
      Other.......................................................................      8,316        7,275
                                                                                    ---------    ---------
                                                                                    $  45,944    $  35,818
                                                                                    =========    =========
</TABLE>

10.  OTHER LIABILITIES (SUBJECT TO COMPROMISE)

      Other liabilities at January 31, 1999 are subject to compromise. See 
Note 2. The major components of other liabilities are as follows (in thousands 
of dollars):

<TABLE>
<CAPTION>
                                                                                           JANUARY 31,         
                                                                                    ----------------------
                                                                                       1999         1998    
                                                                                    ---------    ---------

<S>                                                                                 <C>          <C>      
         Litigation accrual.......................................................  $     527    $  15,008
         Litigation settlements...................................................      7,102        --
         Other ...................................................................      7,607        5,612
                                                                                    ---------    ---------
                                                                                    $  15,236    $  20,620
                                                                                    =========    =========
</TABLE>

11.  INCOME TAXES

      Income tax expense (benefit) includes the following (in thousands of
dollars):

<TABLE>
<CAPTION>
                                                                                   YEAR ENDED JANUARY 31,              
                                                                           ---------------------------------------
                                                                              1999         1998           1997     
                                                                           ----------   -----------    -----------

<S>                                                                        <C>          <C>            <C>        
      Federal:
        Current ........................................................   $    --      $   (21,380)   $    21,380
        Deferred .......................................................      (39,497)      144,256         (8,889)
                                                                           ----------   -----------    -----------
                                                                           $  (39,497)  $   122,876    $    12,491
                                                                           ==========   ===========    ===========
</TABLE>

      Included in "Payable to affiliates" at January 31, 1998 and 1997 are
income taxes payable to TransAmerican totaling approximately $3.0 million and
$14.4 million, respectively.

                                       37

<PAGE>   40


                           TRANSTEXAS GAS CORPORATION
                             (Debtor-in-Possession)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


      Total income tax expense differs from amounts computed by applying the
statutory federal income tax rate to income before income taxes. The items
accounting for this difference are as follows (in thousands of dollars):

<TABLE>
<CAPTION>
                                                                                   YEAR ENDED JANUARY 31,              
                                                                           ---------------------------------------
                                                                              1999         1998           1997     
                                                                           ----------   -----------    -----------

<S>                                                                        <C>          <C>            <C>        
      Federal income tax expense
        (benefit) at the statutory rate ...............................    $ (170,530)  $   122,876    $    33,536
      Increase (decrease) in tax resulting from:
         Tight sands credit............................................        --           --              (7,441)
         Adjustment of tax assumption..................................       (75,000)      --               --
         Valuation allowance...........................................       206,033       --             (13,604)
                                                                           ----------   -----------    -----------
                                                                           $  (39,497)  $   122,876    $    12,491
                                                                           ==========   ===========    ===========
</TABLE>

      Significant components of TransTexas' tax attributes are as follows (in
thousand of dollars):

<TABLE>
<CAPTION>
                                                                                               JANUARY 31,                    
                                                                                        ------------------------
                                                                                          1999           1998      
                                                                                        --------       ---------
<S>                                                                                     <C>           <C>       
      Deferred tax liabilities:
        Depreciation, depletion and amortization .................................      $   --        $   36,314
        Tax assumption............................................................          --            75,000
                                                                                        --------       ---------
                                                                                            --           111,314
                                                                                        --------       ---------
      Deferred tax assets:                                                             
        Depreciation, depletion and amortization..................................        75,368              --
        Net operating loss carryforwards..........................................       127,901          63,712
        Contingent liabilities ...................................................         1,833           6,553
        Other, net................................................................           931           1,552
                                                                                        --------      ----------
                                                                                         206,033          71,817
      Valuation allowance.........................................................      (206,033)           --   
                                                                                        ---------     ----------
      Net deferred tax assets.....................................................          --            71,817
                                                                                        --------      ----------
                                                                                        $   --        $   39,497
                                                                                        ========      ==========
</TABLE>

      Based in part upon independent legal advice, TransTexas has determined
that it was not required to report any significant federal income tax liability
as a result of the Lobo Sale. There are, however, significant uncertainties
regarding TransTexas' tax position and no assurance can be given that its
position will be sustained if challenged by the Internal Revenue Service (the
"IRS"). TransTexas is part of an affiliated group for tax purposes (the "TNGC
Consolidated Group"), which includes TNGC Holdings Corporation, the sole
stockholder of TransAmerican. No letter ruling has been or will be obtained from
the IRS regarding the Lobo Sale by any member of the TNGC Consolidated Group. If
the IRS were to successfully challenge TransTexas' position, each member of the
TNGC Consolidated Group would be severally liable under the consolidated tax
return regulations for the resulting taxes, in the estimated amount of up to
$270 million (assuming no reduction of tax attributes of the TNGC Consolidated
Group), possible penalties equal to 20% of the amount of the tax, and interest
at the statutory rate (currently 7%) on the tax and penalties (if any). The Tax
Allocation Agreement has been amended so that TransAmerican will become
obligated to fund the entire tax deficiency (if any) resulting from the Lobo
Sale. There can be no assurance that TransAmerican will be able to fund any such
payment at the time due and the other members of the TNGC

                                       38

<PAGE>   41


                           TRANSTEXAS GAS CORPORATION
                             (Debtor-in-Possession)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


Consolidated Group, thus, may be required to pay the tax. As a result, in 
1998, TransTexas reserved approximately $75 million with respect to the
potential tax liability for financial reporting purposes to reflect a portion of
the federal tax liability that TransAmerican might not be able to pay. As a
result of subsequent net operating losses and the bankruptcy filing, it is more
likely than not that any claims against TransTexas as a result of the Lobo Sale
will be in the form of reduced net operating loss carryforwards. Accordingly,
the $75 million reserve has been reclassified to the valuation allowance at
January 31, 1999.

      TransTexas agreed to contribute to TransAmerican $48.6 million of
alternative minimum tax credit carryforwards in connection with the assumption
by TransAmerican of the aforementioned contingency. The assumption of the tax
contingency net of the alternative minimum tax credits and the $75 million
contingent liability initially recorded by TransTexas was a credit to additional
paid-in capital of approximately $129.5 million.

      Part of the refinancing of TransAmerican's debt in 1993 involved the
cancellation of approximately $65.9 million of accrued interest and a contingent
liability for interest of $102 million owed by TransAmerican. TransAmerican has
taken the federal tax position that the entire amount of this debt cancellation
is excluded from its income under the cancellation of indebtedness provisions
(the "COD Exclusion") of the Internal Revenue Code of 1986, as amended, and has
reduced its tax attributes (including its net operating loss and credit
carryforwards) as a consequence of the COD Exclusion. No federal tax opinion was
rendered with respect to this transaction, however, and TransAmerican has not
obtained a ruling from the IRS regarding this transaction. TransTexas believes
that there is substantial legal authority to support the position that the COD
Exclusion applies to the cancellation of TransAmerican's indebtedness.
However, due to factual and legal uncertainties, there can be no assurance that
the IRS will not challenge this position, or that such challenge would not be
upheld. Under an agreement between TransTexas, TransAmerican and certain of
TransAmerican's subsidiaries (the "Tax Allocation Agreement"), TransTexas has
agreed to pay an amount equal to any federal tax liability (which would be
approximately $25.4 million) attributable to the inapplicability of the COD
Exclusion. Any such tax could be offset in subsequent years by alternative
minimum tax credits and retained loss and credit carryforwards to the extent
recoverable from TransAmerican. As a member of the TNGC Consolidated Group
(defined below), each of TransTexas, TEC and TARC will be severally liable for
any tax liability resulting from the above-described transactions. The IRS has
commenced an audit of the consolidated federal income tax returns of the TNGC
Consolidated Group for its taxable years ended July 31, 1995 and 1994. At this
time, it is not possible to predict the scope of the IRS' review or whether any
tax deficiencies will be proposed by the IRS as a result of its review.

      TNGC Holdings Corporation ("TNGC"), TransAmerican and its existing
subsidiaries, including TARC, TEC and TransTexas, entered into a tax allocation
agreement, as amended (the "Tax Allocation Agreement"), the general terms of
which require TransAmerican and all of its subsidiaries to file federal income
tax returns as members of a consolidated group to the extent permitted by law.
Filing on a consolidated basis allows income and tax of one member to be offset
by losses and credits of another and allows deferral of certain intercompany
gains; however, each member is severally liable for the consolidated federal
income tax liability of the consolidated group.

      The Tax Allocation Agreement requires each of TransAmerican's subsidiaries
to pay to TransAmerican each year its allocable share of the federal income tax
liabilities of the consolidated group ("Allocable Share"). The Tax Allocation
Agreement provides for a reallocation of the group's consolidated federal income
tax liabilities among the members if the IRS or the courts ultimately
re-determine the group's regular tax or alternative minimum tax liability. In
the event of an IRS audit or examination, the Tax Allocation Agreement generally
gives TransAmerican the authority to compromise or settle disputes and to
control litigation, subject to the approval of TARC, TEC or TransTexas, as the
case may be, where such compromise or settlement affects the determination of
the separate tax liability of that company.

      Under the Tax Allocation Agreement, each subsidiary's Allocable Share for
each tax year will generally equal the amount of federal income tax it would
have owed had it filed a separate federal income tax return for each year

                                       39

<PAGE>   42


                           TRANSTEXAS GAS CORPORATION
                             (Debtor-in-Possession)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


except that each subsidiary will be able to utilize net operating losses and
credits of TransAmerican and the other members of the consolidated group
effectively to defer payment of tax liabilities that it would have otherwise
owed had it filed a separate federal income tax return. Each subsidiary will
essentially pay the deferred taxes at the time TransAmerican (or the member
whose losses or credits are utilized by such subsidiary) begins generating
taxable income or tax. This will have the effect of deferring a portion of such
subsidiary's tax liability to future years. The parties to the Tax Allocation
Agreement amended such agreement in May 1997 to include additional affiliates as
parties, and further amended the Tax Allocation Agreement in June 1997 to
allocate to TransAmerican, as among the parties, any tax liability associated
with the Lobo Sale.

      If the aggregate ownership of TransTexas by members of the TNGC
Consolidated Group (excluding TransTexas) is less than 80% (measured by voting
power and value), TransTexas will no longer be a member of the TNGC Consolidated
Group for federal tax purposes ("Deconsolidation") and, with certain exceptions,
will no longer be obligated under the terms and conditions of, or entitled to
the benefits of, the Tax Allocation Agreement. A Deconsolidation could result
from the issuance of additional equity securities by TransTexas, or from the
sale or other disposal of shares of TransTexas by TEC or TransAmerican. Upon a
Deconsolidation of TransTexas, members of the TNGC Consolidated Group that own
TransTexas' common stock could incur a substantial amount of federal income tax
liability. If such Deconsolidation occurred during the fiscal year ending
January 31, 2000, the aggregate amount of this tax liability is estimated to be
approximately $100 million, assuming no reduction for tax attributes of the TNGC
Consolidated Group. However, such tax liability would be substantially reduced
or eliminated in the event that the IRS successfully challenged TransTexas'
position on the Lobo Sale. Each member of a consolidated group filing a
consolidated federal income tax return is severally liable to the IRS for the
consolidated federal income tax liability of the consolidated group. There can
be no assurance that each TNGC Consolidated Group member will have the ability
to satisfy any tax obligation attributable to these transactions at the time due
and, therefore, other members of the group, including TEC, TransTexas or TARC,
may be required to pay the tax.

      TransTexas is required, under the Tax Allocation Agreement, to pay any
Texas franchise tax (which is estimated not to exceed $11.4 million)
attributable to prior year transactions by any member of the TNGC Consolidated
Group. As of January 31, 1999, TransTexas had paid $9.6 million of these
franchise taxes and estimates that it will pay approximately $0.6 million during
fiscal 2000. During the year ended January 31, 1999, TransTexas paid
approximately $5.6 million of Texas franchise taxes on behalf of affiliates.
Approximately $2.3 million of the franchise taxes paid exceeded the payable to
affiliates for such taxes and was recorded as a reduction of additional paid-in
capital.

      It is not possible to predict the impact of the bankruptcy filing on the
Tax Allocation Agreement, any obligations of TransTexas to the TNGC
Consolidated Group or the tax attributes of TransTexas, including its net
operating loss carryforwards. In addition, the utilization of any remaining net
operating loss carryforwards after discharge from bankruptcy may be limited.
Net operating loss carryforwards at January 31, 1999 were approximately $365
million.

12.  TRANSACTIONS WITH AFFILIATES 

      From August 1993 to June 1997, TransTexas provided accounting and legal
services to TARC and TEC and drilling and workover, administrative and
procurement, accounting, legal, lease operating, and gas marketing services to
TransAmerican pursuant to a services agreement. The fee to TARC and TEC for
general commercial legal services and certain accounting services (including
payroll, tax, and treasury services) was $26,000 per month. At TransAmerican's
request, TransTexas, at its election, provided drilling and workover services.
In June 1997, the receivable from TransAmerican under the services agreement was
paid and the services agreement was terminated.

      On June 13, 1997, a services agreement was entered into among
TransAmerican, TEC, TARC and TransTexas. Under the services agreement,
TransTexas provided accounting, legal, administrative and other services to
TARC, TEC and TransAmerican and its affiliates. TransAmerican will provide
advisory services to TransTexas, TARC and TEC. As of January 31, 1999, the
receivable from TARC and TransAmerican for services agreement fees of $0.2
million was charged to general and administrative expenses. As of January 31,
1999, receivables of $4.6 million for other services provided to TransAmerican
and certain of its affiliates were recorded as a reduction of additional paid-in
capital.


                                       40

<PAGE>   43


                           TRANSTEXAS GAS CORPORATION
                             (Debtor-in-Possession)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


      In connection with a December 15, 1998 transaction pursuant to which TARC
transferred its refinery assets to a minority-owned subsidiary, TCR Holding
Corporation, a Delaware corporation ("TCR Holding"), and TCR Holding transferred
such assets to its majority-owned subsidiary, TransContinental Refining
Corporation, a Delaware corporation ("TransContinental"), TransTexas entered
into an Amended and Restated Services Agreement with TransAmerican and its
affiliates (other than TCR Holding and TransContinental) and an Amended and
Restated Services Agreement (the "TCR Group Services Agreement") with TCR
Holding and TransContinental. Pursuant to the TCR Group Services Agreement,
TransTexas provides accounting, legal, administrative and other services to the
TCR Group through December 15, 2000 and receive payment for such services,
through February 28, 1999, in the amount of $200,000 per month. Subsequent to
February 28, 1999, the monthly fee will be adjusted based on an assessment of
the cost to TransTexas of providing such services. As of January 31, 1999, the
receivable from TransContinental for such services was $0.3 million.

      During the year ended January 31, 1999, TEC made advances to TransTexas 
pursuant to a $50 million promissory note which matures on June 14, 2002. The
note bears interest at a rate of 11.375% per annum. Interest payments are due
and payable each June 15 and December 15. As of January 31, 1999, the
outstanding balance of the note was $6.5 million and, the accrued interest was
$0.1 million.

      In December 1998, TransTexas executed a note payable to TransAmerican in
the original principal amount of $1.4 million plus interest at a rate of 15% per
annum. The proceeds from this loan were used to pay a portion of the Company's
interest payment obligations on December 31, 1998.

      In December 1994, TransTexas entered into an interruptible gas sales
agreement with TransAmerican, revenues from which totaled approximately $11.7
million for the year ended January 31, 1997. TransAmerican did not purchase any
gas from TransTexas during the years ended January 31, 1999 and 1998. All
amounts owed under the agreement were paid on June 13, 1997.

      In July 1995, TransTexas acquired certain oil leases in the Lodgepole
Prospect in North Dakota from TransAmerican for approximately $6.3 million,
which amount represented TransAmerican's cost for such leases. TransTexas
continued to acquire additional leases in the area. In October 1995, TransTexas
sold an undivided interest in its Lodgepole leases to TransDakota Oil
Corporation ("TDOC"), a subsidiary of TransAmerican. The sales price was
approximately $16.1, which amount represented the cost to TransTexas of the
interest sold. In September 1996, TransTexas purchased these and other oil and
gas leasehold interests in the Lodgepole area from TDOC for approximately $20.0
million. The purchase price was $3.9 million greater than TDOC's basis in the
properties. The properties were recorded in TransTexas' financial statements at
carryover basis and the $3.9 million was classified as a reduction of retained
earnings.

      In July 1996, TransAmerican executed a note payable to TransTexas
Exploration Corporation ("TTEX") in the original principal amount of $25 million
maturing on July 31, 1998. Advances by TTEX to TransAmerican under the note bore
interest at a rate of 15% per annum, payable quarterly. This note was repaid on
June 13, 1997.

      During 1995, TransAmerican acquired an office building which it
subsequently sold to TransTexas in February 1996 for $4 million. In February
1996, TransAmerican advanced $4 million of the proceeds from this sale to TARC
for working capital.


                                       41

<PAGE>   44


                           TRANSTEXAS GAS CORPORATION
                             (Debtor-in-Possession)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


      In order to facilitate the settlement of certain litigation in May 1996,
TransTexas advanced to TransAmerican $16.4 million of the settlement amount in
exchange for a note receivable. All amounts outstanding under this note were
repaid on June 13, 1997.

      TransTexas has made various advances to TransAmerican in an aggregate
amount of approximately $7 million for lease purchases and other corporate
expenses. This amount was repaid on June 13, 1997.

      In September 1996, TransTexas and TransAmerican entered into an agreement
pursuant to which TransTexas obtained an $11.5 million dollar-denominated
production payment, subsequently increased to $19 million, bearing interest at
17% per annum, burdening certain oil and gas interests owned by TransAmerican as
a source of repayment for certain of the receivables from TransAmerican
discussed above. At January 31, 1997, $59 million of remaining related-party
receivables was recorded as a contra equity account due to uncertainties
regarding the repayment terms for such receivables. TransTexas agreed to defer
any interest payments due from TransAmerican until 1998. As of January 31, 1997,
TransAmerican conveyed at historical cost certain oil and gas properties to
TransTexas for a purchase price of $31.6 million. A portion of the purchase
price was used to offset obligations under the September 1996 production
payment.

      In January 1997, an affiliate of TransTexas contributed all of the
outstanding common stock of Signal Capital Holdings Corporation ("SCHC"), with a
book value of $6 million, to TransTexas. In the same month, TransTexas
contributed the stock of SCHC to TTC.

      TransTexas sells natural gas to TARC under an interruptible long-term
sales contract. Revenues from TARC under this contract totaled approximately
$1.1 million and $2.7 million for the years ended January 31, 1998 and 1997,
respectively. There were no such sales to TARC during 1999.

13.  COMMITMENTS AND CONTINGENCIES

    LEGAL PROCEEDINGS

      CHAPTER 11 BANKRUPTCY. On April 19, 1999 (the "Petition Date"), TransTexas
filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy
Code in the United States Bankruptcy Court for the District of Delaware. On
April 20, 1999, TEC and TARC also filed voluntary petitions under Chapter 11.
The bankruptcy cases are being jointly administered under the caption "In re:
TransTexas Gas Corporation, et al., Debtors," Case No. 99-889. TransTexas, TEC
and TARC are operating their businesses and managing their properties as
debtors-in-possession. As a result of the Chapter 11 filings, absent approval of
the Bankruptcy Court, the Company is prohibited from paying, and creditors are
prohibited from attempting to collect, claims or debts arising prior to the
Petition Date.

      ARABIAN OFFSHORE PARTNERS. On June 27, 1997, Arabian Offshore Partners
filed a lawsuit against TransTexas in the 14th Judicial District Court, Dallas
County, Texas, seeking $20 million in damages in connection with TransTexas'
refusal to proceed with the acquisition of two jack-up drilling rigs.
TransTexas' motion for summary judgment was granted on January 13, 1998. The
plaintiffs have appealed.

      FINKELSTEIN. On April 22, 1991, Finkelstein filed a suit against
TransAmerican and various affiliates in the 49th Judicial District Court, Zapata
County, Texas, alleging an improper calculation of overriding royalties
allegedly owed to the plaintiff and seeking damages and attorneys' fees in
excess of $33.7 million. On November 18, 1993, the plaintiff added TransTexas as
an additional defendant. The parties arbitrated this matter in January 1997. In

                                       42

<PAGE>   45


                           TRANSTEXAS GAS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


May 1998, the arbitration panel awarded $13 million to plaintiff, and plaintiff
subsequently obtained a judgment against TransTexas for the awarded amount.
Pursuant to a settlement agreement, TransTexas will pay the amount awarded over
a 24-month period. If payments are not made, plaintiff will have the right to
enforce its judgment.

      HEIN MINERALS. On April 3, 1998, Henry and Luz A. Hein Minerals, L.C.
("Hein") filed suit in the 49th Judicial District Court, Zapata County, Texas,
against TransAmerican, TransTexas, TTC and Conoco, Inc. Plaintiff alleges that a
1990 mineral lease from plaintiffs to TransAmerican, comprising approximately
2,000 acres, was breached by failure to release certain acreage from the lease.
Plaintiff alleges trespass, tortious interference, conversion, fraud, breach of
fiduciary duty, breach of contract, conversion and slander of title, and claim
damages including $10 per day per acre that was not released. TransAmerican,
TransTexas and TransTexas Transmission's motion to transfer venue was denied by
the Court on April 1, 1999. The Court also set the case for trial on November 1,
1999. On April 29, 1999, TransTexas Gas Corporation removed the case to the
United States Bankruptcy Court for the Southern District of Texas, Laredo
Division. TransTexas intends to vigorously defend against these claims.

      ZURICH. On May 5, 1998, The Home Insurance Company and Zurich Insurance
Company filed suit against TransTexas in the United States District Court,
Southern District of New York, to enforce an arbitration award of approximately
$7.25 million relating to additional collateral for payments under workers'
compensation policies. In January 1999, the court entered a judgment in favor of
Zurich and Home, confirming the arbitration award. Zurich has also, by notice
dated November 25, 1998, filed a second arbitration with respect to its attempt
to satisfy a disputed premium payment of approximately $4.2 million. Zurich has
also made claims on collateral to cover unpaid loss billings of over $1 million.
Zurich's notice of arbitration names only TransAmerican, but TransTexas has
provided significant collateral to Zurich and objected to any draw on its
collateral.

      VENDOR CLAIMS. Numerous suppliers of goods and services have filed liens
against property of the Company and Galveston Bay Processing Corporation to
secure accounts payable. Many of these vendors have also filed collection suits
against the Company and Galveston Bay Processing Corporation and/or suits to
enforce their liens. These claims, as well as unasserted vendor claims,
represent aggregate accounts payable of approximately $36 million at
May 14, 1999.

      ROYALTY CLAIMS. Numerous royalty owners have made claims against the
Company for payment of unpaid royalties under mineral leases and other
agreements. These claims, as well as unasserted royalty claims, represent
aggregate unpaid royalties of approximately $10 million at May 14, 1999.

      GENERAL. All of the foregoing claims are stayed as a result of the Chapter
11 filings. The resolution in any reporting period of one or more of the
foregoing matters in a manner adverse to TransTexas could have a material
adverse effect on TransTexas' results of operations and cash flows for that
period. TransTexas is also a named defendant in other ordinary course, routine
litigation incidental to its business. Although the outcome of these other
lawsuits cannot be predicted with certainty, TransTexas does not expect these
matters to have a material adverse effect on its financial position. At January
31, 1999, the possible range of estimated losses related to all of the
aforementioned claims, in addition to the estimates accrued by TransTexas is $0
to $20 million. Litigation expense, including legal fees, totaled approximately
$1 million, $15 million and $19 million for the fiscal years ended
January 31, 1999, 1998 and 1997.

    ENVIRONMENTAL MATTERS

      TransTexas' operations and properties are subject to extensive federal,
state, and local laws and regulations relating to the generation, storage,
handling, emission, transportation, and discharge of materials into the
environment. Permits are required for various of TransTexas' operations, and
these permits are subject to revocation, modification,

                                       43

<PAGE>   46


                           TRANSTEXAS GAS CORPORATION
                             (Debtor-in-Possession)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


and renewal by issuing authorities. TransTexas also is subject to federal,
state, and local laws and regulations that impose liability for the cleanup or
remediation of property which has been contaminated by the discharge or release
of hazardous materials or wastes into the environment. Governmental authorities
have the power to enforce compliance with their regulations, and violations are
subject to fines or injunctions, or both. Certain aspects of TransTexas'
operations may not be in compliance with applicable environmental laws and
regulations, and such noncompliance may give rise to compliance costs and
administrative penalties. It is not anticipated that TransTexas will be required
in the near future to expend amounts that are material to the financial
condition or operations of TransTexas by reason of environmental laws and
regulations, but because such laws and regulations are frequently changed and,
as a result, may impose increasingly strict requirements, TransTexas is unable
to predict the ultimate cost of complying with such laws and regulations.

                                       44

<PAGE>   47


                           TRANSTEXAS GAS CORPORATION
                             (Debtor-in-Possession)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


    OPERATING LEASES

      As of January 31, 1999, TransTexas had long-term leases covering land and
other property and equipment. Rental expense was approximately $3 million, $2
million and $6 million for the years ended January 31, 1999, 1998 and 1997,
respectively. Future minimum rental payments required under operating leases
that have initial or remaining noncancellable lease terms in excess of one year
as of January 31, 1999, are as follows (in thousands of dollars):

<TABLE>
<S>                                                       <C>      
                      2000 ...........................    $     940
                      2001 ...........................          908
                      2002............................          778
                      2003............................          644
                      2004............................          245
                                                          ---------
                                                          $   3,515
                                                          =========
</TABLE>

    GAS SALES AND DELIVERY COMMITMENTS

      In January 1997, TransTexas and Koch Energy Trading Inc. entered into a
gas purchase contract pursuant to which TransTexas is required to deliver 25,000
MMBtu per day to a specified delivery point. The purchase price is determined by
an industry index less $0.08 per MMBtu. Deliveries commenced on June 1, 1997 and
are to continue through August 31, 1999.

      TransTexas has entered into various contracts whereby TransTexas is
required to deliver an aggregate of approximately 125 MMcf per day to specified
delivery points. TransTexas will incur certain charges if it does not deliver
specified quantities under the contracts. Such charges totaled $1.9 million in
fiscal 1999.


                                       45

<PAGE>   48


                           TRANSTEXAS GAS CORPORATION
                             (Debtor-in-Possession)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


      LOBO SALE

      Pursuant to the Lobo Sale Agreement, TransTexas is required to indemnify
the buyer for certain liabilities related to the assets previously owned by TTC.
Although TransTexas does not anticipate that it will incur any material
indemnity liability, no assurance can be given that TransTexas will have
sufficient funds to satisfy any such indemnity obligation or that any payment
thereof will not have a material adverse effect on its ability to fund its debt
service, capital expenditure and working capital requirements.

14.  BUSINESS SEGMENTS

      TransTexas currently conducts its operations in one industry segment:
exploration and production ("E&P"). Prior to the Lobo Sale, TransTexas also
operated a gas transportation segment. The drilling services segment was not
separately reported. The E&P segment explores for, develops, produces and
markets natural gas, condensate and natural gas liquids. The transportation
segment was engaged in intrastate natural gas transportation and marketing. All
of TransTexas' significant gas and oil operations are located in South Texas,
Louisiana and along the Texas Gulf Coast. TransTexas' revenues are derived
principally from sales to interstate and intrastate gas pipelines, direct end
users, industrial companies, marketers and refiners located in the United
States. 

      For the year ended January 31, 1999, five customers provided approximately
$65 million in E&P revenues. For the year ended January 31, 1998, three
customers provided approximately $79 million in E&P and Transportation revenues.
For the year ended January 31, 1997, three customers provided approximately $177
million in E&P and Transportation revenues.


                                       46

<PAGE>   49


                           TRANSTEXAS GAS CORPORATION
                             (Debtor-in-Possession)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


15.  LITIGATION SETTLEMENTS

      ALAMEDA. On May 22, 1993, Alameda Corporation ("Alameda") sued
TransAmerican in the 234th Judicial District Court, Harris County, Texas,
claiming that TransAmerican failed to account to Alameda for a share of the
proceeds TransAmerican received in a 1990 settlement of litigation with El Paso
Natural Gas Company ("El Paso"), and that TransAmerican has been unjustly
enriched by its failure to share such proceeds with Alameda. On September 20,
1995, the jury rendered a verdict in favor of TransAmerican. Alameda appealed to
the Fourteenth Court of Appeals, which affirmed the trial court judgment in
favor of TransAmerican. Alameda's motion for rehearing was denied and Alameda
appealed to the Texas Supreme Court. The Texas Supreme Court refused to hear
Alameda's appeal. Alameda filed a motion for rehearing which was denied by the
Texas Supreme Court on May 21, 1998. The judgment in favor of TransAmerican is
now final.

      BRIONES. In an arbitration proceeding, Jesus Briones, a lessor, claimed
that one of TransTexas' wells on adjacent lands had been draining natural gas
from a portion of his acreage leased to TransTexas on which no well had been
drilled. On October 31, 1995, the arbitrator found that drainage had occurred.
On June 3, 1996, the arbitrator issued a letter indicating that drainage damages
would be awarded to Briones in the amount of approximately $1.4 million. The
arbitrator entered his award of damages on June 27, 1996. On July 3, 1996,
TransTexas filed a petition in the 49th Judicial District Court, Zapata County,
Texas, to vacate the arbitrator's award. Briones also filed a petition to
confirm the arbitrator's award. In April 1997, the court granted Briones' motion
for summary judgment. In August 1997, the court entered a final judgment for
Briones in the amount of approximately $1.6 million. TransTexas' motions for new
trial were denied. TransTexas executed a settlement agreement with Briones in
February 1998.

      FINKELSTEIN. On April 15, 1990, H.S. Finkelstein filed suit against
TransAmerican in the 49th Judicial District Court, Zapata County, Texas,
alleging that TransAmerican failed to pay royalties and improperly marketed oil
and gas produced from certain leases. On September 27, 1994, the plaintiff added
TransTexas as an additional defendant. On January 6, 1995, a judgment against
TransAmerican and TransTexas was entered for approximately $18 million in
damages, interest and attorneys' fees. TransTexas and TransAmerican appealed the
judgment to the Fourth Court of Appeals, San Antonio, Texas, which affirmed the
judgment on April 3, 1996. TransTexas and TransAmerican filed a motion for
rehearing. On August 14, 1996, the Fourth Court of Appeals reversed the trial
court judgment and rendered judgment in favor of TransAmerican and TransTexas.
On August 29, 1996, Finkelstein filed a motion for stay and a motion for
rehearing with the court. On October 9, 1996, the court denied Finkelstein's
rehearing request. In November 1996, Finkelstein filed an application for writ
of error with the Supreme Court of Texas. The Texas Supreme Court denied
Finkelstein's application in March 1998. Finkelstein's motion for rehearing was
also denied and the Appellate Court judgment in favor of TransAmerican is now
final.

16.  CONSOLIDATED SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
      (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                                YEAR ENDED JANUARY 31, 1999               
                                                       ------------------------------------------------  
                                                         1ST           2ND          3RD           4TH
                                                       QUARTER       QUARTER      QUARTER       QUARTER  
                                                       -------       -------      -------       -------  

<S>                                                 <C>            <C>          <C>           <C>     
        Revenues..................................  $  33,467      $ 71,439     $   32,793    $  19,067
        Operating income (loss)...................      8,488        21,059(1)    (162,674)    (273,630)
        Net income (loss).........................     (6,803)         (806)      (147,763)    (292,361)
        Net income (loss) per share -- basic
          and diluted.............................      (0.12)        (0.01)         (2.57)       (5.08)
</TABLE>


                                       47

<PAGE>   50


                           TRANSTEXAS GAS CORPORATION
                             (Debtor-in-Possession)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


<TABLE>
<CAPTION>
                                                                YEAR ENDED JANUARY 31, 1998               
                                                       ------------------------------------------------  
                                                         1ST           2ND          3RD           4TH
                                                       QUARTER       QUARTER      QUARTER       QUARTER  
                                                       -------       -------      -------       -------  

<S>                                                 <C>            <C>          <C>           <C>     
        Revenues.................................   $  82,351      $ 575,420    $ 37,233     $  28,267
        Operating income (loss)..................       1,298        531,425(2)    9,586       (12,209)
        Net income (loss)........................     (14,538)       262,745      (1,249)      (18,757)
        Net income (loss) per share -- basic
          and diluted............................       (0.20)          3.61       (0.02)       (0.33)
</TABLE>


<TABLE>
<CAPTION>
                                                                YEAR ENDED JANUARY 31, 1997               
                                                       ------------------------------------------------  
                                                         1ST           2ND          3RD           4TH
                                                       QUARTER       QUARTER      QUARTER       QUARTER  
                                                       -------       -------      -------       -------  

<S>                                                 <C>            <C>           <C>           <C>     
        Revenues................................    $  95,958      $ 86,732      $ 80,104     $ 143,553
        Operating income........................       25,798       106,696(3)      5,858(4)     48,927
        Net income (loss).......................        3,020        71,561        (9,396)       18,140
        Net income (loss) per share -- basic
          and diluted...........................         0.04          0.97         (0.13)         0.25
</TABLE>

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

(1)      Operating income for the second quarter of 1999 includes a $47.6
         million gain on the sale of assets. 

(2)      Operating income for the second quarter of 1998 includes a $543 million
         gain on the sale of assets.

(3)      Operating income for the second quarter of 1997 includes a gain on
         settlement of litigation of $96.0 million.

(4)      Operating income for the third quarter of 1997 includes litigation
         expense of $7.5 million.

17.  SUPPLEMENTAL GAS AND OIL DISCLOSURE (UNAUDITED)

      The accompanying tables present information concerning TransTexas' gas and
oil producing activities and are prepared in accordance with Statement of
Financial Accounting Standards No. 69, "Disclosures about Oil and Gas Producing
Activities."

      Estimates of TransTexas' proved reserves and proved developed reserves
were prepared by Netherland, Sewell & Associates, Inc., an independent firm of
petroleum engineers, based on data supplied to them by TransTexas. Such
estimates are inherently imprecise and may be subject to substantial revisions
as additional information such as reservoir performance, additional drilling,
technological advancements and other factors become available.

      Capitalized costs relating to gas and oil producing activities are as
follows (in thousands of dollars):

<TABLE>
<CAPTION>
                                                                                            JANUARY 31,                 
                                                                                     ---------------------------
                                                                                        1999             1998      
                                                                                     ----------      -----------

<S>                                                                                 <C>              <C>       
         Proved properties .......................................................   $ 1,427,608     $ 1,142,195
         Unproved properties......................................................        20,477         104,389
                                                                                     -----------     -----------
          Total...................................................................     1,448,085       1,246,584
         Less accumulated depreciation, depletion and amortization ...............     1,164,224         652,090
                                                                                     -----------     -----------
                                                                                     $   283,861     $   594,494
                                                                                     ===========     ===========
</TABLE>


                                       48

<PAGE>   51


                           TRANSTEXAS GAS CORPORATION
                             (Debtor-in-Possession)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


      Costs incurred for gas and oil producing activities are as follows (in
thousands of dollars):


<TABLE>
<CAPTION>
                                                                                  YEAR ENDED JANUARY 31,                  
                                                                     -------------------------------------------
                                                                         1999            1998            1997   
                                                                     -----------     ------------    -----------

<S>                                                                  <C>             <C>             <C>        
         Property acquisitions....................................   $     13,084    $     56,205    $    50,963
         Exploration .............................................         98,294         196,728        100,737
         Development .............................................         77,322         123,273        162,313
                                                                     ------------    ------------    -----------
                                                                     $    188,700    $    376,206    $   314,013
                                                                     ============    ============    ===========
</TABLE>

      Results of operations for gas and oil producing activities are as follows
(in thousands of dollars):

<TABLE>
<CAPTION>
                                                                                  YEAR ENDED JANUARY 31,                  
                                                                     -------------------------------------------
                                                                         1999            1998            1997   
                                                                     -----------     ------------    -----------

<S>                                                                  <C>             <C>             <C>        
         Revenues ................................................   $     91,319    $    164,538    $  363,459
                                                                     ------------    ------------    ----------
         Expenses:
             Production costs ....................................         22,352          51,346        97,619
             Depreciation, depletion and amortization.............         84,883          62,933       122,570
             General and administrative...........................          9,767           9,635         8,710
             Impairment of gas and oil properties.................        425,966          --             --       
             Litigation settlement................................         --              --           (96,000)
                                                                     ------------    ------------    ----------
             Total operating expenses ............................        542,968         123,914       132,899
                                                                     ------------    ------------    ----------
             Income before income taxes...........................       (451,649)         40,624       230,560
         Income taxes (benefit)...................................       (158,077)         14,218        80,696
                                                                     ------------    ------------    ----------
                                                                     $   (293,572)    $    26,406    $  149,864
                                                                     ============     ===========    ==========
         Depletion rate per net equivalent Mcf....................  $       1.96           $1.11    $     0.96
                                                                     ============     ===========    ==========
</TABLE>

    Reserve Quantity Information

      Proved reserves are estimated quantities of natural gas, condensate and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions. Proved developed reserves are
those proved reserves that can be expected to be recovered through existing
wells with existing equipment and operating methods. Natural gas quantities
represent gas volumes which include amounts that will be extracted as natural
gas liquids. TransTexas' estimated net proved reserves and proved developed
reserves of natural gas (billions of cubic feet) and condensate (millions of
barrels) are shown in the table below.

<TABLE>
<CAPTION>
                                                                           YEAR ENDED JANUARY 31,                             
                                                        ---------------------------------------------------------
                                                                1999                1998              1997          
                                                        ------------------   -----------------   ----------------
                                                          GAS        OIL      GAS        OIL     GAS       OIL    
                                                          ---        ---      ---        ---     ---       ---    

<S>                                                      <C>        <C>      <C>         <C>    <C>         <C>
           Proved reserves:
              Beginning of year.....................     348.7      15.9     919.7       5.7     1,139.1    2.9
              Increase (decrease) during
               the year attributable to:
              Revisions of previous estimates.......    (127.1)(1)  (9.7)   (103.8)     (1.0)        6.5     .1
              Extensions, discoveries and other
                additions...........................      26.1       2.0     123.7      15.1        90.3    3.6
</TABLE>

                                       49

<PAGE>   52


                           TRANSTEXAS GAS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


<TABLE>
<S>                                                       <C>         <C>     <C>        <C>      <C>        <C>
              Sales of reserves.....................      (91.4)      (.5)   (525.8)    (3.3)    (204.9)    (.4)
              Purchase of reserves..................         --        --        --       --       11.3      .1
              Production............................      (35.6)     (1.1)    (65.1)     (.6)    (122.6)    (.6)
                                                        -------    ------    ------   ------     ------    -----
           End of year..............................      120.7       6.6     348.7     15.9      919.7     5.7
                                                        =======    ======    ======   ======     ======  ======

           Proved developed reserves:
              Beginning of year.....................      134.3       4.2     381.5      2.4      425.3      .9
              End of year...........................       87.8       5.0     134.3      4.2      381.5     2.4
</TABLE>
       (1) Reserve estimates were revised downward principally as a result of
           additional seismic information which indicated more highly faulted 
           structures in certain key properties causing reserves to be
           reclassified from proved to probable. 

    Standardized Measure Information

      The calculation of estimated future net cash flows in the following table
assumed the continuation of existing economic conditions and applied year-end
prices (except for future price changes as allowed by contract) of gas and
condensate to the expected future production of such reserves, less estimated
future expenditures (based on current costs) to be incurred in developing and
producing those proved reserves.

      The standardized measure of discounted future net cash flows does not
purport, nor should it be interpreted, to present the fair market value of
TransTexas' gas and oil reserves. These estimates reflect proved reserves only
and ignore, among other things, changes in prices and costs, revenues that could
result from probable reserves which could become proved reserves in fiscal 2000 
or later years and the risks inherent in reserve estimates. The standardized
measure of discounted future net cash flows relating to proved gas and oil
reserves is as follows (in thousands of dollars):

<TABLE>
<CAPTION>
                                                                                YEAR ENDED JANUARY 31,                  
                                                                     -------------------------------------------
                                                                        1999            1998            1997      
                                                                     -----------     -----------     -----------

<S>                                                                  <C>             <C>             <C>       
         Future cash inflows .....................................   $   296,831     $   898,257     $ 3,051,397
         Future production costs .................................       (57,453)       (154,725)       (506,882)
         Future development costs ................................       (33,180)       (198,180)       (459,326)
         Future income taxes .....................................        --              --            (563,812)
                                                                     -----------     -----------     -----------
         Future net cash flows....................................       206,198         545,352       1,521,377

         Annual discount (10%) for estimated
            timing of cash flows..................................       (44,668)       (149,679)       (464,121)
                                                                     -----------     -----------     -----------

         Standardized measure of discounted
            future net cash flows.................................   $   161,530     $   395,673     $ 1,057,256
                                                                     ===========     ===========     ===========
</TABLE>

      Principal sources of change in the standardized measure of discounted
future net cash flows are as follows (in thousands of dollars):

<TABLE>
<CAPTION>
                                                                                YEAR ENDED JANUARY 31,                  
                                                                     -------------------------------------------
                                                                        1999            1998            1997      
                                                                     -----------     -----------     -----------

<S>                                                                  <C>             <C>             <C>       
         Beginning of year .......................................   $   395,673     $  1,057,256   $   608,858
         Revisions:
         Quantity estimates and production rates .................      (194,041)(1)     (215,564)       13,903
           Prices, net of lifting costs ..........................       (76,157)        (348,781)      665,054
           Estimated future development costs.....................        58,455          (33,033)      (75,622)
</TABLE>

                                       50

<PAGE>   53


                           TRANSTEXAS GAS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


<TABLE>
<S>                                                                  <C>             <C>             <C>       
         Additions, extensions, discoveries and 
           improved recovery .....................................        42,184         238,403        209,932
         Net sales of production .................................       (73,819)       (124,498)      (262,066)
         Development costs incurred ..............................        77,322         119,944        156,430
         Accretion of discount ...................................        39,566         144,909         80,806
         Net changes in income taxes..............................            --         391,812       (192,608)
         Sale of a volumetric production payment..................            --             --        (165,949)
         Purchases (sales) of reserves............................      (107,653)       (834,775)        18,518
                                                                     -----------     -----------    -----------
           End of year ...........................................   $   161,530     $   395,673    $ 1,057,256
                                                                     ===========     ===========    ===========
</TABLE>
       (1) Reserve estimates were revised downward principally as a result of
           additional seismic information which indicated more highly faulted 
           structures in certain key properties causing reserves to be
           reclassified from proved to probable. 

      Year-end wellhead prices received by TransTexas from sales of natural gas,
including margins from natural gas liquids, were $1.79, $1.96 and $3.17 per Mcf
for 1999, 1998 and 1997, respectively. Year-end condensate prices were
$12.12, $13.54 and $23.99 per barrel for 1999, 1998 and 1997, respectively.


                                       51

<PAGE>   54




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

      Not applicable.


                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      The information required by this item is incorporated by reference from
TransTexas' definitive proxy statement to be filed with the Commission with 120
days after the end of the fiscal year covered by this Form 10-K.

ITEM 11.  EXECUTIVE COMPENSATION

      The information required by this item is incorporated by reference from
TransTexas' definitive proxy statement to be filed with the Commission with 120
days after the end of the fiscal year covered by this Form 10-K.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The information required by this item is incorporated by reference from
TransTexas' definitive proxy statement to be filed with the Commission with 120
days after the end of the fiscal year covered by this Form 10-K.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      The information required by this item is incorporated by reference from
TransTexas' definitive proxy statement to be filed with the Commission with 120
days after the end of the fiscal year covered by this Form 10-K.



                                       52

<PAGE>   55



                                     PART IV

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

<TABLE>
<CAPTION>
                                                                       PAGE
                                                                       ----

<S>                                                                     <C>
(a)  Financial Statements, Schedules and Exhibits

     (1)  Report of Independent Accountants...........................  23
          Consolidated Balance Sheet..................................  24
          Consolidated Statement of Operations........................  25
          Consolidated Statement of Stockholders' Equity (Deficit)....  26
          Consolidated Statement of Cash Flows........................  27
          Notes to Consolidated Financial Statements..................  28

     (2)  Report of Independent Accountants...........................  61
          Schedule II - Valuation and Qualifying Accounts.............  62

     (3)  Exhibits
</TABLE>

3.1  -   Articles of Incorporation (filed as an exhibit to the Company's
         Registration Statement on Form S-1 (No. 33-75050), and incorporated
         herein by reference).
     
3.2  -   By-laws of TransTexas (filed as an exhibit to the Company's
         Registration Statement on Form S-1 (No. 33-75050), and incorporated
         herein by reference).
     
4.1  -   Indenture dated as of June 15, 1995, among TransTexas, TTC and American
         Bank National Association, as Trustee (the "Indenture Trustee"), with
         respect to the Senior Secured Notes including the forms of Senior
         Secured Note and Senior Secured Guarantee as exhibits (filed as an
         exhibit to TransTexas' current report on Form 8-K dated June 20, 1995,
         and incorporated herein by reference).
     
4.2  -   Mortgage, Deed of Trust, Assignment of Production, Security Agreement
         and Financing Statement, effective as of June 23, 1995, from TransTexas
         to James A. Taylor, as trustee for the benefit of the Indenture Trustee
         (filed as an exhibit to TransTexas' current report on Form 8-K dated
         June 20, 1995, and incorporated herein by reference).
     
4.3  -   Pipeline Mortgage, Deed of Trust, Assignment, Security Agreement and
         Financing Statement, dated as of June 20, 1995, from TTC to James A.
         Taylor, as trustee for the benefit of the Indenture Trustee (filed as
         an exhibit to TransTexas' current report on Form 8-K dated on June 20,
         1995, and incorporated herein by reference).
     
4.4  -   Security Agreement, Pledge and Financing Statement, dated as of June
         20, 1995, by TransTexas in favor of the Indenture Trustee (filed as an
         exhibit to TransTexas' current report on Form 8-K dated June 20, 1995,
         and incorporated herein by reference).
     
4.5  -   Security Agreement, Pledge and Financing Statement, dated as of June
         20, 1995, by TTC in favor of the Indenture Trustee (filed as an exhibit
         to TransTexas' current report on Form 8-K dated June 20, 1995, and
         incorporated herein by reference).
     
4.6  -   Cash Collateral and Disbursement Agreement, dated as of June 20, 1995,
         among TransTexas, the Indenture Trustee and the Disbursement Agent
         (filed as an exhibit to TransTexas' current report on Form 8-K dated
         June 20, 1995, and incorporated herein by reference).
     
                                       53

<PAGE>   56



4.7   -  Pledge and Security Agreement dated as of September 19, 1996, between
         TransAmerican Exploration Corporation and Fleet National Bank
         (previously filed as an exhibit to TransTexas' Form 10-Q for the
         quarter ended October 31, 1996, and incorporated herein by reference).
     
4.8   -  Registration Rights Agreement dated as of September 19, 1996, by and
         among TransTexas, TransAmerican, TransAmerican Exploration Corporation
         and Fleet National Bank (filed as an exhibit to TransTexas' Form 10-Q
         for the quarter ended October 31, 1996, and incorporated herein by
         reference).
     
4.9   -  Pledge Agreement dated as of February 23, 1995, between TEC and First
         Fidelity Bank, National Association, as Trustee (filed as an exhibit to
         Post-Effective Amendment No. 5 to TransTexas' Registration Statement on
         Form S-3 (33-91494), and incorporated herein by reference).
   
4.10  -  Pledge Agreement dated as of February 23, 1995, between TARC and First
         Fidelity Bank, National Association, as Trustee (filed as an exhibit to
         Post-Effective Amendment No. 5 to TransTexas' Registration Statement on
         Form S-3 (33-91494), and incorporated herein by reference).
      
4.11  -  Registration Rights Agreement dated as of February 23, 1995, among
         TransTexas, TARC and TEC (filed as an exhibit to Post-Effective
         Amendment No. 5 to the Company's Registration Statement on Form S-3
         (33-91494), and incorporated herein by reference).
      
4.12  -  Pledge Agreement dated as of February 23, 1995, among TransAmerican,
         TransTexas and Halliburton Company (filed as an exhibit to
         Post-Effective Amendment No. 5 to TransTexas' Registration Statement on
         Form S-3 (33-91494), and incorporated herein by reference).
      
4.13  -  Pledge Agreement dated as of February 23, 1995, among TransAmerican,
         TransTexas and RECO Industries, Inc. (filed as an exhibit to
         Post-Effective Amendment No. 5 to TransTexas' Registration Statement on
         Form S-3 (33-91494), and incorporated herein by reference).
      
4.14  -  Pledge Agreement dated as of February 23, 1995, among TransAmerican,
         TransTexas and Frito-Lay, Inc. (filed as an exhibit to Post-Effective
         Amendment No. 5 to TransTexas' Registration Statement on Form S-3
         (33-91494), and incorporated herein by reference).
      
4.15  -  Pledge Agreement dated as of February 23, 1995, among TransAmerican,
         TransTexas and EM Sector Holdings, Inc. (filed as an exhibit to
         Post-Effective Amendment No. 5 to TransTexas' Registration Statement on
         Form S-3 (33-91494), and incorporated herein by reference).
      
4.16  -  Stock Pledge Agreement dated January 27, 1995, between TransAmerican
         and ITT Commercial Corp. (filed as an exhibit to Post-Effective
         Amendment No. 5 to TransTexas' Registration Statement on Form S-3
         (33-91494), and incorporated herein by reference).
      
4.17  -  Registration Rights Agreement dated January 27, 1995, among
         TransAmerican, TransTexas and ITT Commercial Finance Corp. (filed as an
         exhibit to Post-Effective Amendment No. 5 to TransTexas' Registration
         Statement on Form S-3 (33-91494), and incorporated herein by
         reference).
      
4.18  -  Note Purchase Agreement dated December 13, 1996 between TransTexas and
         the Purchasers of 13 1/4% Series A Senior Subordinated Notes due 2003
         (filed as an exhibit to Post-Effective Amendment No. 5 to TransTexas'
         Registration Statement on Form S-3 (33-91494), and incorporated herein
         by reference).
      
4.19  -  Indenture dated December 13, 1996 between TransTexas and Bank One,
         Columbus, NA, as Trustee (filed as an exhibit to Post-Effective
         Amendment No. 5 to TransTexas' Registration Statement on Form S-3
         (33-91494), and incorporated herein by reference).
      
                                       54

<PAGE>   57




4.20  -  Registration Rights Agreement dated December 13, 1996 between
         TransTexas and each of the Purchasers of the Subordinated Notes (filed
         as an exhibit to Post-Effective Amendment No. 5 to TransTexas'
         Registration Statement on Form S-3 (33-91494), and incorporated herein
         by reference).
      
4.21  -  First Supplemental Indenture dated May 29, 1997 by and among
         TransTexas, TTC and Firstar Bank of Minnesota, N.A., as trustee (filed
         as an exhibit to TransTexas' current report on Form 8-K dated May 29,
         1997, and incorporated herein by reference).
      
4.22  -  Second Supplemental Indenture dated June 13, 1997 between TransTexas,
         as issuer, and Firstar Bank of Minnesota, N.A., as trustee (filed as an
         exhibit to TransTexas' current report on Form 8-K dated June 13, 1997,
         and incorporated herein by reference).
      
4.23  -  Indenture dated June 13, 1997 governing TransTexas' Senior Subordinated
         Notes due 2001 between TransTexas, as issuer, and Bank One, N.A., as
         trustee (filed as an exhibit to TransTexas' Registration Statement on
         Form S-4 (333-33803), and incorporated herein by reference).
      
4.24  -  Registration Rights Agreement dated June 13, 1997 between TransTexas
         and the holders of TransTexas' Senior Subordinated Notes due 2001
         (filed as an exhibit TransTexas' Registration Statement on Form S-4
         (333-33803), and incorporated herein by reference).
      
4.25  -  Loan Agreement dated June 13, 1997 between TransTexas and TEC (filed as
         an exhibit to TransTexas' current report on Form 8-K dated June 13,
         1997, and incorporated herein by reference).
      
4.26  -  Security and Pledge Agreement dated June 13, 1997 by TransTexas in
         favor of TEC (filed as an exhibit to TransTexas' current report on Form
         8-K dated June 13, 1997, and incorporated herein by reference).
      
4.27  -  Disbursement Agreement dated June 13, 1997 among TransTexas, TEC and
         Firstar Bank of Minnesota, as disbursement agent and Trustee (filed as
         an exhibit to TransTexas' current report on Form 8-K dated June 13,
         1997, and incorporated herein by reference).
      
4.28  -  Forms of Mortgage dated June 13, 1997 between TransTexas and
         TransAmerican Energy Corporation, (filed as an exhibit to TransTexas'
         Registration Statement on Form S-4 (333-33803), and incorporated herein
         by reference).
      
4.29  -  Intercreditor and Collateral Agency Agreement dated June 13, 1997 among
         Firstar Bank of Minnesota, TEC and TransTexas (filed as an exhibit to
         TEC's Form 10-Q for the quarter ended July 31, 1997, and incorporated
         herein by reference).
      
4.30  -  Registration Rights Agreement dated August 12, 1997, by and among
         TransTexas, Firstar Bank of Minnesota, N.A., TEC and TARC (filed as an
         exhibit to Post-Effective Amendment No. 6 to TransTexas' Registration
         Statement on Form S-4 (33-91494) and incorporated herein by reference).
      
4.31  -  First Supplemental Indenture dated as of September 2, 1997, between
         TransTexas, as issuer, and Bank One, N.A., as trustee (filed as an
         exhibit to TransTexas' Registration Statement on Form S-4 (333-33803),
         and incorporated herein by reference).
      
4.32  -  First Amendment to Loan Agreement dated December 30, 1997 between
         TransTexas and TEC (filed as an exhibit to TransTexas' annual report on
         Form 10-K for the year ended January 31, 1998, and incorporated herein
         by reference).
      
    
                                       55

<PAGE>   58



4.33  -  First Amendment to Disbursement Agreement dated December 30, 1997
         between TransTexas, TEC and Firstar Bank of Minnesota, as disbursement
         agent and Trustee (filed as an exhibit to TransTexas' annual report on
         Form 10-K for the year ended January 31, 1998, and incorporated herein
         by reference).
      
4.34  -  Second Amendment dated December 15, 1998 to Loan Agreement between
         TransTexas and TEC (filed as an exhibit to TEC's current report on Form
         8-K dated February 23, 1999, and incorporated herein by reference).
      
10.1  -  Services Agreement dated August 24, 1993, by and among TransTexas and
         TransAmerican (filed as an exhibit to TransTexas' current report on
         Form 8-K dated August 24, 1993, and incorporated herein by reference).
      
10.2  -  Tax Allocation Agreement dated August 24, 1993, by and among
         TransAmerican, TransTexas, and the other subsidiaries of TransAmerican,
         as amended (filed as an exhibit to TransTexas' Registration Statement
         on Form S-1 (No. 33-75050), and incorporated herein by reference).
      
10.3  -  Interruptible Gas Sales Terms and Conditions, between TransTexas and
         TARC, as amended (filed as an exhibit to TARC's Registration Statement
         on Form S-1 (No. 33-82200), and incorporated herein by reference).
      
10.4  -  Bank Group Agreement dated August 24, 1993, by and among TransAmerican,
         TransTexas, and the Bank Group (filed as an exhibit to TransTexas'
         current report on Form 8-K dated August 24, 1993, and incorporated
         herein by reference).
      
10.5  -  Gas Purchase Agreement dated June 8, 1987, by and between TransAmerican
         and The Coastal Corporation, as amended by the Amendment to Gas
         Purchase Agreement dated February 13, 1990, by and between
         TransAmerican and Texcol Gas Services, Inc., as successor to The
         Coastal Corporation (filed as an exhibit to TransTexas' Registration
         Statement on Form S-1 (No. 33-62740), and incorporated herein by
         reference).
      
10.6  -  Gas Purchase Agreement dated October 29, 1987, by and between
         TransAmerican and The Coastal Corporation as amended by the Amendment
         to Gas Purchase Agreement dated February 13, 1990, by and between
         TransAmerican and Texcol Gas Services, Inc., successor to The Coastal
         Corporation (filed as an exhibit to TransTexas' Registration Statement
         on Form S-1 (No. 33-62740), and incorporated herein by reference).
      
10.7  -  Gas Transportation Agreement dated the Effective Date (as therein
         defined), by and between TransAmerican and The Coastal Corporation, as
         amended by the Amendment to Gas Transportation Agreement dated February
         13, 1990, by and between TransAmerican and Texcol Gas Services, Inc.,
         successor to The Coastal Corporation (filed as an exhibit to
         TransTexas' Registration Statement on Form S-1 (No. 33-62740), and
         incorporated herein by reference).
      
10.8  -  Firm Natural Gas Sales Agreement dated September 30, 1993, by and
         between TransTexas and Associated Natural Gas, Inc. (filed as an
         exhibit to TransTexas' Form 10-Q for the quarter ended October 31,
         1993, and incorporated herein by reference).
      
10.9  -  Form of Indemnification Agreement by and between TransTexas and each of
         its directors (filed as an exhibit to TransTexas' current report on
         Form 8-K dated August 24, 1993 and incorporated herein by reference).
      
    
                                       56

<PAGE>   59



10.10 -  Gas Purchase Agreement dated November 1, 1985, between TransAmerican
         and Washington Gas and Light Company, Frederick Gas Company, Inc., and
         Shenandoah Gas Company (filed as an exhibit to TransTexas' Registration
         Statement on Form S-1 (No. 33-75050), and incorporated herein by
         reference).
      
10.11 -  Natural Gas Sales Agreement between TransTexas and Associated Natural
         Gas, Inc. dated September 30, 1993 (filed as an exhibit to TransTexas'
         Form 10-Q for the quarter ended October 31, 1993, and incorporated
         herein by reference).
      
10.12 -  Amendment Extending Gas Purchase Agreement between TransTexas and
         Washington Gas Light Company, Inc., and Shenandoah Gas Company, as
         amended, dated November 1, 1993 (filed as an exhibit to TransTexas'
         Form 10-Q for the quarter ended January 31, 1994, and incorporated
         herein by reference).
      
10.13 -  Agreement for Purchase of Production Payment between TransTexas and
         Southern States Exploration, Inc. dated April 1, 1994 (filed as an
         exhibit to TransTexas' Form 10-Q for the quarter ended April 30, 1994,
         and incorporated herein by reference).
      
10.14 -  Assignment of Proceeds Production Payment between TransTexas and
         Southern States Exploration, Inc. dated April 1, 1994 (filed as an
         exhibit to TransTexas' Form 10-Q for the quarter ended April 30, 1994,
         and incorporated herein by reference).
      
10.15 -  Transfer Agreement dated August 24, 1993, by and among TransAmerican,
         TransTexas, TTC, and John R. Stanley (filed as an exhibit to
         TransTexas' current report on Form 8-K dated August 24, 1993, and
         incorporated herein by reference).
      
10.16 -  Amended and Restated Accounts Receivable Management and Security
         Agreement between TransTexas and BNY Financial Corporation (filed as an
         exhibit to TransTexas' Form 10-Q for the quarter ended October 31,
         1995, and incorporated herein by reference).
      
10.17 -  Note Purchase Agreement, dated as of May 10, 1996, among TransTexas,
         TCW Shared Opportunity Fund II, L.P. and Jefferies & Company, Inc.
         (filed as an exhibit to the Company's Form 10-Q for the quarter ended
         April 30, 1996, and incorporated herein by reference).
      
10.18 -  Master Swap Agreement, dated June 6, 1996, between TransTexas and AIG
         Trading Corporation (filed as an exhibit to TransTexas' Form 10-Q for
         the quarter ended April 30, 1996, and incorporated herein by
         reference).
      
10.19 -  Purchase Agreement, dated January 30, 1996, between TransTexas and
         Sunflower Energy Finance Company (filed as an exhibit to TransTexas'
         Form 10-Q for the quarter ended April 30, 1996, and incorporated herein
         by reference).
      
10.20 -  Production Payment Conveyance, executed on January 30, 1996, from
         TransTexas to Sunflower Energy Finance Company (filed as an exhibit to
         TransTexas' Form 10-Q for the quarter ended April 30, 1996, and
         incorporated herein by reference).
      
10.21 -  First Supplement to Purchase Agreement, dated as of February 12, 1996,
         among TransTexas, Sunflower Energy Finance Company and TCW Portfolio
         No. 1555 DR V Sub-Custody Partnership, L.P. (filed as an exhibit to
         TransTexas' Form 10-Q for the quarter ended April 30, 1996, and
         incorporated herein by reference).
      
10.22 -  First Supplement to Production Payment Conveyance, executed February
         12, 1996, among TransTexas, Sunflower Energy Finance Company and TCW
         Portfolio No. 1555 DR V Sub-Custody Partnership, L.P. (filed as an
         exhibit to TransTexas' Form 10-Q for the quarter ended April 30, 1996,
         and incorporated herein by reference).
     

                                       57

<PAGE>   60



10.23 -  Purchase Agreement, dated May 14, 1996, among TransTexas, TCW Portfolio
         No. 1555 DR V Sub-Custody Partnership, L.P. and Sunflower Energy
         Finance Company (filed as an exhibit to TransTexas' Form 10-Q for the
         quarter ended April 30, 1996, and incorporated herein by reference).
      
10.24 -  Production Payment Conveyance, executed May 14, 1996, from TransTexas
         to TCW Portfolio No. 1555 Dr V Sub-Custody Partnership, L.P. and
         Sunflower Energy Finance Company (filed as an exhibit to TransTexas'
         Form 10-Q for the quarter ended April 30, 1996, and incorporated herein
         by reference).
      
10.25 -  Employment Agreement between TransTexas and Richard Bianchi dated
         August 12, 1996 (filed as an exhibit to TransTexas' Form 10-Q for the
         quarter ended October 31, 1996, and incorporated herein by reference).
      
10.26 -  Employment Agreement between TransTexas and Arnold Brackenridge dated
         August 12, 1996 (filed as an exhibit to TransTexas' Form 10-Q for the
         quarter ended October 31, 1996, and incorporated herein by reference).
      
10.27 -  Stock Purchase Agreement dated as of May 29, 1997 by and between
         TransTexas and First Union Bank of Connecticut, as trustee (filed as an
         exhibit to TransTexas' current report on Form 8-K dated May 29, 1997,
         and incorporated herein by reference).
      
10.28 -  Interruptible Gas Transportation Agreement dated Effective March 1,
         1997 between TransTexas, as shipper, and Lobo Pipeline Company, as
         transporter (filed an exhibit to TransTexas' Form 10-Q for the quarter
         ended July 31, 1997, and incorporated herein by reference).
      
10.29 -  Intrastate Firm Gas Transportation Agreement dated effective March 1,
         1997 between TransTexas, as shipper, and Lobo Pipeline Company, as
         transporter (filed an exhibit to TransTexas' Form 10-Q for the quarter
         ended July 31, 1997, and incorporated herein by reference).
      
10.30 -  Master Services Contract dated May 30, 1997 between Conoco Inc. and
         TransTexas (filed an exhibit to TransTexas' Form 10-Q for the quarter
         ended July 31, 1997, and incorporated herein by reference).
      
10.31 -  Agreement for Services dated effective March 1, 1997 between Conoco
         Inc. and TransTexas (filed an exhibit to TransTexas' Form 10-Q for the
         quarter ended July 31, 1997, and incorporated herein by reference).
      
10.32 -  Services Agreement dated June 13, 1997 among TNGC Holdings Corporation,
         TransAmerican, TEC, TARC, TransTexas and TTXD (filed an an exhibit to
         TransTexas' Form 10-Q for the quarter ended July 31, 1997, and
         incorporated herein by reference).
      
10.33 -  Amendment No. 3 to Tax Allocation Agreement dated May 29, 1997 (filed
         an an exhibit to TransTexas' Form 10-Q for the quarter ended July 31,
         1997, and incorporated herein by reference).
      
10.34 -  Amendment No. 4 to Tax Allocation Agreement dated June 13, 1997 (filed
         an an exhibit to TransTexas' Form 10-Q for the quarter ended July 31,
         1997, and incorporated herein by reference).
      
10.35 -  Amendment No. 2 to Transfer Agreement dated May 29, 1997 (filed an an
         exhibit to TransTexas' Form 10-Q for the quarter ended July 31, 1997,
         and incorporated herein by reference).
      
10.36 -  Amendment No. 3 to Transfer Agreement dated June 13, 1997 (filed an an
         exhibit to TransTexas' Form 10-Q for the quarter ended July 31, 1997,
         and incorporated herein by reference).
      
      
                                       58
      
<PAGE>   61
      
      
      
 10.37 -  Second Amended and Restated Accounts Receivable Management Agreement
          dated October 14, 1997 between TransTexas and BNY Financial 
          Corporation (filed as an exhibit to TransTexas' Form 10-Q for the
          quarter ended October 31, 1997, and incorporated herein by reference).
      
 10.38 -  Employment Agreement dated December 1, 1997 between TransTexas and
          Arnold Brackenridge (filed as an exhibit to TransTexas' annual report
          on Form 10-K for the year ended January 31, 1998, and incorporated
          herein by reference).
      
 10.39 -  Employment Agreement Settlement dated April 28, 1998 between 
          TransTexas and Richard Bianchi (filed as an exhibit to TransTexas'
          annual report on Form 10-K for the year ended January 31, 1998, and
          incorporated herein by reference).
      
 10.40 -  Severance Agreement dated November 21, 1997 between TransTexas and Lee
          Muncy (filed as an exhibit to TransTexas' annual report on Form 10-K
          for the year ended January 31, 1998, and incorporated herein by
          reference).
      
 10.41 -  Purchase Agreement dated February 23, 1998 between TransTexas and TCW
          (filed as an exhibit to TransTexas' annual report on Form 10-K for the
          year ended January 31, 1998, and incorporated herein by reference).
      
 10.42 -  Production Payment Conveyance dated February 23, 1998 between
          TransTexas and TCW (filed as an exhibit to TransTexas' annual report 
          on Form 10-K for the year ended January 31, 1998, and incorporated
          herein by reference).
      
 10.43 -  Asset Purchase Agreement dated May 26, 1998 by and among TransTexas,
          Bayard Drilling, L.P. and Bayard Drilling Technologies, Inc. (Filed as
          an exhibit to TransTexas' current report on Form 8-K dated June 26,
          1998, and incorporated herein by reference).

*10.44 -  Employment Agreement between the Company and John R. Stanley dated
          November 1, 1998.

*10.45 -  Employment Agreement between the Company and Ed Donahue dated
          December 1, 1998.
      
*10.46 -  Credit Agreement dated April 27, 1999 among TransTexas, Credit Suisse
          First Boston Management Corporation, the Lenders named therein and TEC
          and TARC, as guarantors.
      
*21.1  -  Schedule of Subsidiaries of TransTexas.
      
*23.1  -  Consent of PricewaterhouseCoopers LLP.
      
*23.2  -  Consent of Netherland, Sewell & Associates, Inc.
      
*27.1  -  Financial Data Schedule.

- ------------------------   
*filed herewith

(b) There were no reports on Form 8-K filed during the three months ended
    January 31, 1999.

                                       59

<PAGE>   62




                                   SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on May 17, 1999.

                               TRANSTEXAS GAS CORPORATION



                               By:          /s/ JOHN R. STANLEY            
                                  -----------------------------------------
                                   John R. Stanley, Chief Executive Officer


      Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities indicated on May 17, 1999.


<TABLE>
<CAPTION>
                  NAME                                                TITLE



<S>                                                    <C>
        /s/ JOHN R. STANLEY                            Director and Chief Executive Officer
- -------------------------------------                    (Principal Executive Officer)
          John R. Stanley                                



        /s/ THOMAS B. MCDADE                           Director and Chairman of the Board
- -------------------------------------
          Thomas B. McDade



        /s/ JAMES V. LANGSTON                          Director
- -------------------------------------
          James V. Langston



        /s/ ROBERT L. MAY                              Director
- -------------------------------------
          Robert L. May



        /s/ EDWIN B. DONAHUE                           Vice President and Chief Financial Officer
- -------------------------------------                    (Principal Financial and Accounting   
          Edwin B. Donahue                                Officer)                             
                                                         
</TABLE>



                                       60

<PAGE>   63






                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholders and Board of Directors
TransTexas Gas Corporation:


      Our report on the consolidated financial statements of TransTexas Gas
Corporation, which includes an explanatory paragraph regarding the Company's
ability to continue as a going concern, is included on page 23 of this Form
10-K. In connection with our audits of such financial statements, we have also
audited the related financial statement schedule listed in the index on page 53
of this Form 10-K.

      In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.


PricewaterhouseCoopers LLP

Houston, Texas
May 20, 1999


                                       61

<PAGE>   64



                                                                     SCHEDULE II

                           TRANSTEXAS GAS CORPORATION
                             (Debtor-in-Possession)

                        VALUATION AND QUALIFYING ACCOUNTS
                            (IN THOUSANDS OF DOLLARS)





<TABLE>
<CAPTION>
                                    BALANCE AT                                                         BALANCE AT
                                    BEGINNING        ADDITIONS                          OTHER              END
         DESCRIPTION                OF PERIOD        AT COSTS       RETIREMENTS        CHANGES          OF PERIOD  
         -----------                ---------        --------       -----------        -------          ---------  

<S>                              <C>                <C>              <C>              <C>            <C>         
Year ended January 31, 1997:
   Valuation allowance -
    long-term receivables        $     1,230        $    516         $   1,746        $  --          $     --    
                                 ===========        ========         =========        =========      ============

Year ended January 31, 1998:
   Valuation allowance -
    long-term receivables        $    --            $ --             $   --           $  --          $     --    
                                 ===========        ========         =========        =========      ============

Year ended January 31, 1999:
   Valuation allowance -
    long-term receivables        $    --            $    191         $   --           $  --          $        191
                                 ===========        ========         =========        =========      ============
</TABLE>


                                       62

<PAGE>   65

                               INDEX TO EXHIBITS
                               -----------------


<TABLE>
<CAPTION>
EXHIBIT
NUMBER                        DESCRIPTION
- ------                        -----------

<S>      <C>                                                                     
3.1  -   Articles of Incorporation (filed as an exhibit to the Company's
         Registration Statement on Form S-1 (No. 33-75050), and incorporated
         herein by reference).
     
3.2  -   By-laws of TransTexas (filed as an exhibit to the Company's
         Registration Statement on Form S-1 (No. 33-75050), and incorporated
         herein by reference).
     
4.1  -   Indenture dated as of June 15, 1995, among TransTexas, TTC and American
         Bank National Association, as Trustee (the "Indenture Trustee"), with
         respect to the Senior Secured Notes including the forms of Senior
         Secured Note and Senior Secured Guarantee as exhibits (filed as an
         exhibit to TransTexas' current report on Form 8-K dated June 20, 1995,
         and incorporated herein by reference).
     
4.2  -   Mortgage, Deed of Trust, Assignment of Production, Security Agreement
         and Financing Statement, effective as of June 23, 1995, from TransTexas
         to James A. Taylor, as trustee for the benefit of the Indenture Trustee
         (filed as an exhibit to TransTexas' current report on Form 8-K dated
         June 20, 1995, and incorporated herein by reference).
     
4.3  -   Pipeline Mortgage, Deed of Trust, Assignment, Security Agreement and
         Financing Statement, dated as of June 20, 1995, from TTC to James A.
         Taylor, as trustee for the benefit of the Indenture Trustee (filed as
         an exhibit to TransTexas' current report on Form 8-K dated on June 20,
         1995, and incorporated herein by reference).
     
4.4  -   Security Agreement, Pledge and Financing Statement, dated as of June
         20, 1995, by TransTexas in favor of the Indenture Trustee (filed as an
         exhibit to TransTexas' current report on Form 8-K dated June 20, 1995,
         and incorporated herein by reference).
     
4.5  -   Security Agreement, Pledge and Financing Statement, dated as of June
         20, 1995, by TTC in favor of the Indenture Trustee (filed as an exhibit
         to TransTexas' current report on Form 8-K dated June 20, 1995, and
         incorporated herein by reference).
     
4.6  -   Cash Collateral and Disbursement Agreement, dated as of June 20, 1995,
         among TransTexas, the Indenture Trustee and the Disbursement Agent
         (filed as an exhibit to TransTexas' current report on Form 8-K dated
         June 20, 1995, and incorporated herein by reference).
</TABLE>


<PAGE>   66



<TABLE>
<CAPTION>
EXHIBIT
NUMBER                        DESCRIPTION
- ------                        -----------

<S>      <C>                                                                     
4.7   -  Pledge and Security Agreement dated as of September 19, 1996, between
         TransAmerican Exploration Corporation and Fleet National Bank
         (previously filed as an exhibit to TransTexas' Form 10-Q for the
         quarter ended October 31, 1996, and incorporated herein by reference).
     
4.8   -  Registration Rights Agreement dated as of September 19, 1996, by and
         among TransTexas, TransAmerican, TransAmerican Exploration Corporation
         and Fleet National Bank (filed as an exhibit to TransTexas' Form 10-Q
         for the quarter ended October 31, 1996, and incorporated herein by
         reference).
     
4.9   -  Pledge Agreement dated as of February 23, 1995, between TEC and First
         Fidelity Bank, National Association, as Trustee (filed as an exhibit to
         Post-Effective Amendment No. 5 to TransTexas' Registration Statement on
         Form S-3 (33-91494), and incorporated herein by reference).
   
4.10  -  Pledge Agreement dated as of February 23, 1995, between TARC and First
         Fidelity Bank, National Association, as Trustee (filed as an exhibit to
         Post-Effective Amendment No. 5 to TransTexas' Registration Statement on
         Form S-3 (33-91494), and incorporated herein by reference).
      
4.11  -  Registration Rights Agreement dated as of February 23, 1995, among
         TransTexas, TARC and TEC (filed as an exhibit to Post-Effective
         Amendment No. 5 to the Company's Registration Statement on Form S-3
         (33-91494), and incorporated herein by reference).
      
4.12  -  Pledge Agreement dated as of February 23, 1995, among TransAmerican,
         TransTexas and Halliburton Company (filed as an exhibit to
         Post-Effective Amendment No. 5 to TransTexas' Registration Statement on
         Form S-3 (33-91494), and incorporated herein by reference).
      
4.13  -  Pledge Agreement dated as of February 23, 1995, among TransAmerican,
         TransTexas and RECO Industries, Inc. (filed as an exhibit to
         Post-Effective Amendment No. 5 to TransTexas' Registration Statement on
         Form S-3 (33-91494), and incorporated herein by reference).
      
4.14  -  Pledge Agreement dated as of February 23, 1995, among TransAmerican,
         TransTexas and Frito-Lay, Inc. (filed as an exhibit to Post-Effective
         Amendment No. 5 to TransTexas' Registration Statement on Form S-3
         (33-91494), and incorporated herein by reference).
      
4.15  -  Pledge Agreement dated as of February 23, 1995, among TransAmerican,
         TransTexas and EM Sector Holdings, Inc. (filed as an exhibit to
         Post-Effective Amendment No. 5 to TransTexas' Registration Statement on
         Form S-3 (33-91494), and incorporated herein by reference).
      
4.16  -  Stock Pledge Agreement dated January 27, 1995, between TransAmerican
         and ITT Commercial Corp. (filed as an exhibit to Post-Effective
         Amendment No. 5 to TransTexas' Registration Statement on Form S-3
         (33-91494), and incorporated herein by reference).
      
4.17  -  Registration Rights Agreement dated January 27, 1995, among
         TransAmerican, TransTexas and ITT Commercial Finance Corp. (filed as an
         exhibit to Post-Effective Amendment No. 5 to TransTexas' Registration
         Statement on Form S-3 (33-91494), and incorporated herein by
         reference).
      
4.18  -  Note Purchase Agreement dated December 13, 1996 between TransTexas and
         the Purchasers of 13 1/4% Series A Senior Subordinated Notes due 2003
         (filed as an exhibit to Post-Effective Amendment No. 5 to TransTexas'
         Registration Statement on Form S-3 (33-91494), and incorporated herein
         by reference).
      
4.19  -  Indenture dated December 13, 1996 between TransTexas and Bank One,
         Columbus, NA, as Trustee (filed as an exhibit to Post-Effective
         Amendment No. 5 to TransTexas' Registration Statement on Form S-3
         (33-91494), and incorporated herein by reference).
</TABLE>


<PAGE>   67



<TABLE>
<CAPTION>
EXHIBIT
NUMBER                        DESCRIPTION
- ------                        -----------

<S>      <C>                                                                     
4.20  -  Registration Rights Agreement dated December 13, 1996 between
         TransTexas and each of the Purchasers of the Subordinated Notes (filed
         as an exhibit to Post-Effective Amendment No. 5 to TransTexas'
         Registration Statement on Form S-3 (33-91494), and incorporated herein
         by reference).
      
4.21  -  First Supplemental Indenture dated May 29, 1997 by and among
         TransTexas, TTC and Firstar Bank of Minnesota, N.A., as trustee (filed
         as an exhibit to TransTexas' current report on Form 8-K dated May 29,
         1997, and incorporated herein by reference).
      
4.22  -  Second Supplemental Indenture dated June 13, 1997 between TransTexas,
         as issuer, and Firstar Bank of Minnesota, N.A., as trustee (filed as an
         exhibit to TransTexas' current report on Form 8-K dated June 13, 1997,
         and incorporated herein by reference).
      
4.23  -  Indenture dated June 13, 1997 governing TransTexas' Senior Subordinated
         Notes due 2001 between TransTexas, as issuer, and Bank One, N.A., as
         trustee (filed as an exhibit to TransTexas' Registration Statement on
         Form S-4 (333-33803), and incorporated herein by reference).
      
4.24  -  Registration Rights Agreement dated June 13, 1997 between TransTexas
         and the holders of TransTexas' Senior Subordinated Notes due 2001
         (filed as an exhibit TransTexas' Registration Statement on Form S-4
         (333-33803), and incorporated herein by reference).
      
4.25  -  Loan Agreement dated June 13, 1997 between TransTexas and TEC (filed as
         an exhibit to TransTexas' current report on Form 8-K dated June 13,
         1997, and incorporated herein by reference).
      
4.26  -  Security and Pledge Agreement dated June 13, 1997 by TransTexas in
         favor of TEC (filed as an exhibit to TransTexas' current report on Form
         8-K dated June 13, 1997, and incorporated herein by reference).
      
4.27  -  Disbursement Agreement dated June 13, 1997 among TransTexas, TEC and
         Firstar Bank of Minnesota, as disbursement agent and Trustee (filed as
         an exhibit to TransTexas' current report on Form 8-K dated June 13,
         1997, and incorporated herein by reference).
      
4.28  -  Forms of Mortgage dated June 13, 1997 between TransTexas and
         TransAmerican Energy Corporation, (filed as an exhibit to TransTexas'
         Registration Statement on Form S-4 (333-33803), and incorporated herein
         by reference).
      
4.29  -  Intercreditor and Collateral Agency Agreement dated June 13, 1997 among
         Firstar Bank of Minnesota, TEC and TransTexas (filed as an exhibit to
         TEC's Form 10-Q for the quarter ended July 31, 1997, and incorporated
         herein by reference).
      
4.30  -  Registration Rights Agreement dated August 12, 1997, by and among
         TransTexas, Firstar Bank of Minnesota, N.A., TEC and TARC (filed as an
         exhibit to Post-Effective Amendment No. 6 to TransTexas' Registration
         Statement on Form S-4 (33-91494) and incorporated herein by reference).
      
4.31  -  First Supplemental Indenture dated as of September 2, 1997, between
         TransTexas, as issuer, and Bank One, N.A., as trustee (filed as an
         exhibit to TransTexas' Registration Statement on Form S-4 (333-33803),
         and incorporated herein by reference).
      
4.32  -  First Amendment to Loan Agreement dated December 30, 1997 between
         TransTexas and TEC (filed as an exhibit to TransTexas' annual report on
         Form 10-K for the year ended January 31, 1998, and incorporated herein
         by reference).
</TABLE>


<PAGE>   68



<TABLE>
<CAPTION>
EXHIBIT
NUMBER                        DESCRIPTION
- ------                        -----------

<S>      <C>                                                                     
4.33  -  First Amendment to Disbursement Agreement dated December 30, 1997
         between TransTexas, TEC and Firstar Bank of Minnesota, as disbursement
         agent and Trustee (filed as an exhibit to TransTexas' annual report on
         Form 10-K for the year ended January 31, 1998, and incorporated herein
         by reference).
      
4.34  -  Second Amendment dated December 15, 1998 to Loan Agreement between
         TransTexas and TEC (filed as an exhibit to TEC's current report on Form
         8-K dated February 23, 1999, and incorporated herein by reference).
      
10.1  -  Services Agreement dated August 24, 1993, by and among TransTexas and
         TransAmerican (filed as an exhibit to TransTexas' current report on
         Form 8-K dated August 24, 1993, and incorporated herein by reference).
      
10.2  -  Tax Allocation Agreement dated August 24, 1993, by and among
         TransAmerican, TransTexas, and the other subsidiaries of TransAmerican,
         as amended (filed as an exhibit to TransTexas' Registration Statement
         on Form S-1 (No. 33-75050), and incorporated herein by reference).
      
10.3  -  Interruptible Gas Sales Terms and Conditions, between TransTexas and
         TARC, as amended (filed as an exhibit to TARC's Registration Statement
         on Form S-1 (No. 33-82200), and incorporated herein by reference).
      
10.4  -  Bank Group Agreement dated August 24, 1993, by and among TransAmerican,
         TransTexas, and the Bank Group (filed as an exhibit to TransTexas'
         current report on Form 8-K dated August 24, 1993, and incorporated
         herein by reference).
      
10.5  -  Gas Purchase Agreement dated June 8, 1987, by and between TransAmerican
         and The Coastal Corporation, as amended by the Amendment to Gas
         Purchase Agreement dated February 13, 1990, by and between
         TransAmerican and Texcol Gas Services, Inc., as successor to The
         Coastal Corporation (filed as an exhibit to TransTexas' Registration
         Statement on Form S-1 (No. 33-62740), and incorporated herein by
         reference).
      
10.6  -  Gas Purchase Agreement dated October 29, 1987, by and between
         TransAmerican and The Coastal Corporation as amended by the Amendment
         to Gas Purchase Agreement dated February 13, 1990, by and between
         TransAmerican and Texcol Gas Services, Inc., successor to The Coastal
         Corporation (filed as an exhibit to TransTexas' Registration Statement
         on Form S-1 (No. 33-62740), and incorporated herein by reference).
      
10.7  -  Gas Transportation Agreement dated the Effective Date (as therein
         defined), by and between TransAmerican and The Coastal Corporation, as
         amended by the Amendment to Gas Transportation Agreement dated February
         13, 1990, by and between TransAmerican and Texcol Gas Services, Inc.,
         successor to The Coastal Corporation (filed as an exhibit to
         TransTexas' Registration Statement on Form S-1 (No. 33-62740), and
         incorporated herein by reference).
      
10.8  -  Firm Natural Gas Sales Agreement dated September 30, 1993, by and
         between TransTexas and Associated Natural Gas, Inc. (filed as an
         exhibit to TransTexas' Form 10-Q for the quarter ended October 31,
         1993, and incorporated herein by reference).
      
10.9  -  Form of Indemnification Agreement by and between TransTexas and each of
         its directors (filed as an exhibit to TransTexas' current report on
         Form 8-K dated August 24, 1993 and incorporated herein by reference).
</TABLE>


<PAGE>   69



<TABLE>
<CAPTION>
EXHIBIT
NUMBER                        DESCRIPTION
- ------                        -----------

<S>      <C>                                                                     
10.10 -  Gas Purchase Agreement dated November 1, 1985, between TransAmerican
         and Washington Gas and Light Company, Frederick Gas Company, Inc., and
         Shenandoah Gas Company (filed as an exhibit to TransTexas' Registration
         Statement on Form S-1 (No. 33-75050), and incorporated herein by
         reference).
      
10.11 -  Natural Gas Sales Agreement between TransTexas and Associated Natural
         Gas, Inc. dated September 30, 1993 (filed as an exhibit to TransTexas'
         Form 10-Q for the quarter ended October 31, 1993, and incorporated
         herein by reference).
      
10.12 -  Amendment Extending Gas Purchase Agreement between TransTexas and
         Washington Gas Light Company, Inc., and Shenandoah Gas Company, as
         amended, dated November 1, 1993 (filed as an exhibit to TransTexas'
         Form 10-Q for the quarter ended January 31, 1994, and incorporated
         herein by reference).
      
10.13 -  Agreement for Purchase of Production Payment between TransTexas and
         Southern States Exploration, Inc. dated April 1, 1994 (filed as an
         exhibit to TransTexas' Form 10-Q for the quarter ended April 30, 1994,
         and incorporated herein by reference).
      
10.14 -  Assignment of Proceeds Production Payment between TransTexas and
         Southern States Exploration, Inc. dated April 1, 1994 (filed as an
         exhibit to TransTexas' Form 10-Q for the quarter ended April 30, 1994,
         and incorporated herein by reference).
      
10.15 -  Transfer Agreement dated August 24, 1993, by and among TransAmerican,
         TransTexas, TTC, and John R. Stanley (filed as an exhibit to
         TransTexas' current report on Form 8-K dated August 24, 1993, and
         incorporated herein by reference).
      
10.16 -  Amended and Restated Accounts Receivable Management and Security
         Agreement between TransTexas and BNY Financial Corporation (filed as an
         exhibit to TransTexas' Form 10-Q for the quarter ended October 31,
         1995, and incorporated herein by reference).
      
10.17 -  Note Purchase Agreement, dated as of May 10, 1996, among TransTexas,
         TCW Shared Opportunity Fund II, L.P. and Jefferies & Company, Inc.
         (filed as an exhibit to the Company's Form 10-Q for the quarter ended
         April 30, 1996, and incorporated herein by reference).
      
10.18 -  Master Swap Agreement, dated June 6, 1996, between TransTexas and AIG
         Trading Corporation (filed as an exhibit to TransTexas' Form 10-Q for
         the quarter ended April 30, 1996, and incorporated herein by
         reference).
      
10.19 -  Purchase Agreement, dated January 30, 1996, between TransTexas and
         Sunflower Energy Finance Company (filed as an exhibit to TransTexas'
         Form 10-Q for the quarter ended April 30, 1996, and incorporated herein
         by reference).
      
10.20 -  Production Payment Conveyance, executed on January 30, 1996, from
         TransTexas to Sunflower Energy Finance Company (filed as an exhibit to
         TransTexas' Form 10-Q for the quarter ended April 30, 1996, and
         incorporated herein by reference).
      
10.21 -  First Supplement to Purchase Agreement, dated as of February 12, 1996,
         among TransTexas, Sunflower Energy Finance Company and TCW Portfolio
         No. 1555 DR V Sub-Custody Partnership, L.P. (filed as an exhibit to
         TransTexas' Form 10-Q for the quarter ended April 30, 1996, and
         incorporated herein by reference).
      
10.22 -  First Supplement to Production Payment Conveyance, executed February
         12, 1996, among TransTexas, Sunflower Energy Finance Company and TCW
         Portfolio No. 1555 DR V Sub-Custody Partnership, L.P. (filed as an
         exhibit to TransTexas' Form 10-Q for the quarter ended April 30, 1996,
         and incorporated herein by reference).
</TABLE>


<PAGE>   70



<TABLE>
<CAPTION>
EXHIBIT
NUMBER                        DESCRIPTION
- ------                        -----------

<S>      <C>                                                                     
10.23 -  Purchase Agreement, dated May 14, 1996, among TransTexas, TCW Portfolio
         No. 1555 DR V Sub- Custody Partnership, L.P. and Sunflower Energy
         Finance Company (filed as an exhibit to TransTexas' Form 10-Q for the
         quarter ended April 30, 1996, and incorporated herein by reference).
      
10.24 -  Production Payment Conveyance, executed May 14, 1996, from TransTexas
         to TCW Portfolio No. 1555 Dr V Sub-Custody Partnership, L.P. and
         Sunflower Energy Finance Company (filed as an exhibit to TransTexas'
         Form 10-Q for the quarter ended April 30, 1996, and incorporated herein
         by reference).
      
10.25 -  Employment Agreement between TransTexas and Richard Bianchi dated
         August 12, 1996 (filed as an exhibit to TransTexas' Form 10-Q for the
         quarter ended October 31, 1996, and incorporated herein by reference).
      
10.26 -  Employment Agreement between TransTexas and Arnold Brackenridge dated
         August 12, 1996 (filed as an exhibit to TransTexas' Form 10-Q for the
         quarter ended October 31, 1996, and incorporated herein by reference).
      
10.27 -  Stock Purchase Agreement dated as of May 29, 1997 by and between
         TransTexas and First Union Bank of Connecticut, as trustee (filed as an
         exhibit to TransTexas' current report on Form 8-K dated May 29, 1997,
         and incorporated herein by reference).
      
10.28 -  Interruptible Gas Transportation Agreement dated Effective March 1,
         1997 between TransTexas, as shipper, and Lobo Pipeline Company, as
         transporter (filed an exhibit to TransTexas' Form 10-Q for the quarter
         ended July 31, 1997, and incorporated herein by reference).
      
10.29 -  Intrastate Firm Gas Transportation Agreement dated effective March 1,
         1997 between TransTexas, as shipper, and Lobo Pipeline Company, as
         transporter (filed an exhibit to TransTexas' Form 10-Q for the quarter
         ended July 31, 1997, and incorporated herein by reference).
      
10.30 -  Master Services Contract dated May 30, 1997 between Conoco Inc. and
         TransTexas (filed an exhibit to TransTexas' Form 10-Q for the quarter
         ended July 31, 1997, and incorporated herein by reference).
      
10.31 -  Agreement for Services dated effective March 1, 1997 between Conoco
         Inc. and TransTexas (filed an exhibit to TransTexas' Form 10-Q for the
         quarter ended July 31, 1997, and incorporated herein by reference).
      
10.32 -  Services Agreement dated June 13, 1997 among TNGC Holdings Corporation,
         TransAmerican, TEC, TARC, TransTexas and TTXD (filed an an exhibit to
         TransTexas' Form 10-Q for the quarter ended July 31, 1997, and
         incorporated herein by reference).
      
10.33 -  Amendment No. 3 to Tax Allocation Agreement dated May 29, 1997 (filed
         an an exhibit to TransTexas' Form 10-Q for the quarter ended July 31,
         1997, and incorporated herein by reference).
      
10.34 -  Amendment No. 4 to Tax Allocation Agreement dated June 13, 1997 (filed
         an an exhibit to TransTexas' Form 10-Q for the quarter ended July 31,
         1997, and incorporated herein by reference).
      
10.35 -  Amendment No. 2 to Transfer Agreement dated May 29, 1997 (filed an an
         exhibit to TransTexas' Form 10-Q for the quarter ended July 31, 1997,
         and incorporated herein by reference).
      
10.36 -  Amendment No. 3 to Transfer Agreement dated June 13, 1997 (filed an an
         exhibit to TransTexas' Form 10-Q for the quarter ended July 31, 1997,
         and incorporated herein by reference).
</TABLE>


<PAGE>   71



<TABLE>
<CAPTION>
EXHIBIT
NUMBER                        DESCRIPTION
- ------                        -----------

<S>      <C>                                                                     
10.37 -  Second Amended and Restated Accounts Receivable Management Agreement
         dated October 14, 1997 between TransTexas and BNY Financial Corporation
         (filed as an exhibit to TransTexas' Form 10-Q for the quarter ended
         October 31, 1997, and incorporated herein by reference).
      
10.38 -  Employment Agreement dated December 1, 1997 between TransTexas and
         Arnold Brackenridge (filed as an exhibit to TransTexas' annual report
         on Form 10-K for the year ended January 31, 1998, and incorporated
         herein by reference).
      
10.39 -  Employment Agreement Settlement dated April 28, 1998 between TransTexas
         and Richard Bianchi (filed as an exhibit to TransTexas' annual report
         on Form 10-K for the year ended January 31, 1998, and incorporated
         herein by reference).
      
10.40 -  Severance Agreement dated November 21, 1997 between TransTexas and Lee
         Muncy (filed as an exhibit to TransTexas' annual report on Form 10-K
         for the year ended January 31, 1998, and incorporated herein by
         reference).
      
10.41 -  Purchase Agreement dated February 23, 1998 between TransTexas and TCW
         (filed as an exhibit to TransTexas' annual report on Form 10-K for the
         year ended January 31, 1998, and incorporated herein by reference).
      
10.42 -  Production Payment Conveyance dated February 23, 1998 between
         TransTexas and TCW (filed as an exhibit to TransTexas' annual report on
         Form 10-K for the year ended January 31, 1998, and incorporated herein
         by reference).
      
10.43 -  Asset Purchase Agreement dated May 26, 1998 by and among TransTexas,
         Bayard Drilling, L.P. and Bayard Drilling Technologies, Inc. (Filed as
         an exhibit to TransTexas' current report on Form 8-K dated June 26,
         1998, and incorporated herein by reference).

*10.44 - Employment Agreement between the Company and John R. Stanley dated
         November 1, 1998.

*10.45 - Employment Agreement between the Company and Ed Donahue dated 
         December 1, 1998.
      
*10.46 - Credit Agreement dated April 27, 1999 among TransTexas, Credit Suisse
         First Boston Management Corporation, the Lenders named therein and TEC
         and TARC, as guarantors.
      
*21.1 -  Schedule of Subsidiaries of TransTexas.
      
*23.1 -  Consent of PricewaterhouseCoopers LLP
      
*23.2 -  Consent of Netherland, Sewell & Associates, Inc
      
*27.1 -  Financial Data Schedule
</TABLE>
- -------------------     
*filed herewith







<PAGE>   1
                                                                   EXHIBIT 10.44

                              EMPLOYMENT AGREEMENT


This agreement is made and entered into as of the 1st day of November, 1998, by
and between TransTexas Gas Corporation, hereinafter called "Company" and Mr.
John R. Stanley, Sr., hereinafter called "Employee".

1.       The term of this Agreement is for three years commencing on November 1,
1998, and ending on October 31, 2001. Thereafter Employee shall be considered an
"at will" Employee subject to termination for any cause at any time. This
agreement may be terminated prior to the end of the term pursuant to paragraph
6, 7 or 8 hereof.

2.       The Company agrees to employ Employee for the term of this Agreement,
and Employee shall have and fulfill such duties, responsibilities and
obligations as are usual and customary for the C.E.O., subject to the direction
and control of the Chairman and the Board of Directors.

3.       Employee agrees Employee will faithfully and diligently serve the
Company to the best of his ability.

4.       During his service hereunder, Employee's salary shall be US - $500,000 
per year payable in installments in accordance with the Company's regular
payroll practices.

5.       At such costs and eligibility restrictions applicable to all employees,
Employee shall participate in all plans and benefits generally applicable or
available to employees of the Company, including but not limited to health,
hospital and surgical benefits, sick, life insurance plans, and AD&D insurance.

6.       This agreement shall be terminable by the Company for "cause" without 
advance notice. In the event of such termination properly for cause, the salary
set forth above shall cease on the effective date of termination, however,
benefits earned to date shall be paid in full. "Cause" shall mean:

         a.       Neglect or mismanagement by Employee of his duties,
         responsibilities and obligations which either significantly damages or
         could have significantly damaged the property or interest of the
         Company; or

         b.       Material breach of this Agreement by Employee; or

         c.       Inability of Employee to perform his duties, responsibilities
         and obligations by reason of illness, accident or other incapacity for
         a continuous period of six months.

7.       This Agreement shall be terminable by Employee for cause. In the event
that Employee terminates this Agreement properly for cause within thirty days
after he knows or should have


<PAGE>   2

known of the existence of such cause, the Company shall be obligated to pay
Employee his salary up to the effective date of such termination and severance
as hereinafter provided. "Cause" shall mean:

         a.       Wrongful behavior or willful neglect by the Company, not
         caused by Employee; or

         b.       Material breach of its obligations under this Agreement by the
         Company; or

         c.       Sale, reorganization or merger of the Company resulting in a
         change in the actual control of the Company.

8.       The Company shall have the right to terminate this Agreement without
cause by giving Employee written notice of such termination and paying him
through the end of his contract as set forth in paragraph 1.

9.       The entire understanding and agreement between the parties has been
incorporated into this Agreement. This Agreement shall inure to the benefit of,
and shall be binding upon the Company, its successors and assigns and upon
Employee and his heirs, successors, and assigns. Employee agrees that this
Agreement may be assigned by the Company to a subsidiary, affiliate, or
successor of the Company; such assignments, however, shall not relieve the
Company of any of its obligations hereunder except to the extent that such
obligations are actually paid and discharged by such subsidiary, affiliate, or
successor. This agreement may not otherwise be assigned without the prior
written approval of the other party.

10.      Any disputes concerning or arising out of interpretation or application
of this Agreement shall be determined by final and binding arbitration under and
in accordance with the rules and procedures of the American Arbitration
Association provided that the dispute is submitted to arbitration by written
demand therefor delivered to and received by the other party within sixty days
after occurrence of the event giving rise to the dispute.

11.      If there is a conflict between the Company personnel policies and this
Agreement, this Agreement shall prevail.

TransTexas Gas Corporation                      Mr. John R. Stanley, Sr.

By: /s/ Don D. Jordan                           By: /s/ John R. Stanley, Sr.
    --------------------------                      ------------------------
        Don D. Jordan    

By: /s/ James R. Lesch                          Date: December 9, 1998
   ---------------------------                        ----------------------
        James R. Lesch

By: /s/ Robert L. May               
    --------------------------
        Robert L. May

By: /s/ Thomas B. McDade        
    --------------------------
        Thomas B. McDade

<PAGE>   1
                                                                   EXHIBIT 10.45

                              EMPLOYMENT AGREEMENT


This agreement is made and entered into as of the 1st day of December, 1998, by
and between TransTexas Gas Corporation, hereinafter called "Company" and Edwin
Donahue, hereinafter called "Employee".

1.       The term of this Agreement is for two years commencing on December 1,
1998, and ending on November 30, 2000. Thereafter Employee shall be considered
an "at will" Employee subject to termination for any cause at any time. This
agreement may be terminated prior to the end of the term pursuant to paragraph
6, 7 or 8 hereof.

2.       The Company agrees to employ Employee for the term of this Agreement,
and Employee shall have and fulfill such duties, responsibilities and
obligations as are usual and customary for the Vice President and Chief
Financial Officer, subject to the direction and control of the Board of
Directors and the Chief Executive Officer.

3.       Employee agrees Employee will faithfully and diligently serve the
Company to the best of his ability.

4.       During his service hereunder, Employee's salary shall be $300,000 per
year payable in installments in accordance with the Company's regular payroll
practices, and any bonus or other consideration as approved by the Board of
Directors.

         a.       In addition to the amounts included in clause 4 above, and on
                  consideration for successful past and current financing
                  efforts, employee shall be entitled to a bonus of $500,000.
                  One-half, or $250,000 shall be due on or before January 31,
                  1999 and the balance of $250,000 shall be due on or before
                  July 31, 1999.

5.       At such costs and eligibility restrictions applicable to all employees,
Employee shall participate in all plans and benefits generally applicable or
available to employees of the Company, including but not limited to health,
hospital and surgical benefits, disability, life insurance plans, and AD&D
insurance.

         b.       During his service hereunder, Employee shall receive four (4)
                  weeks of vacation per calendar year.

6.       This agreement shall be terminable by the Company for "cause" without
advance notice. In the event of such termination properly for cause, the salary
set forth above shall cease on the effective date of termination, however,
benefits earned to date shall be paid in full. "Cause" shall mean:


<PAGE>   2

         a.       Neglect or mismanagement by Employee of his duties,
         responsibilities and obligations which either significantly damages or
         could have significantly damaged the property or interest of the
         Company; or 

         b.       Material breach of this Agreement by Employee; or

         c.       Inability of Employee to perform his duties, responsibilities
         and obligations by reason of illness, accident or other incapacity for
         a continuous period of six months.

7.       This Agreement shall be terminable by Employee for cause. In the event
that Employee terminates this Agreement properly for cause within thirty days
after he knows or should have known of the existence of such cause, the Company
shall be obligated to pay Employee his salary up to the effective date of such
termination and severance as hereinafter provided. "Cause" shall mean:

         a.       Wrongful behavior or willful neglect by the Company, not
         caused by Employee; or

         b.       Material breach of its obligations under this Agreement by the
         Company; or

         c.       Sale, reorganization or merger of the Company resulting in a 
         change in the actual control of the Company.

         d.       Relocation of Employee for an extended period of time outside
         the greater Houston area.

7a.      This agreement shall be terminable by Employee without cause by giving
Company at least thirty (30) days written notice of such termination. The
Company shall not be obligated to pay Employee his salary past the effective
date of such termination. The Company has no obligation to pay severance under a
termination without cause of Employee.

8.       The Company shall have the right to terminate this Agreement without
cause by giving Employee written notice of such termination and paying him
through the end of his contract as set forth in paragraph 9.

9.       In the event that the Company terminates Employee other than for cause 
before the end of the term of this Agreement, or Employee terminates this
Agreement for cause before the end of the term of this Agreement, the Company
shall pay to Employee his salary for the remaining term of this Agreement plus
an additional six months salary ($150,000.00).

10.      The entire understanding and agreement between the parties has been
incorporated into this Agreement. This Agreement shall inure to the benefit of,
and shall be binding upon the Company, its successors and assigns and upon
Employee and his heirs, successors, and assigns. Employee agrees that this
Agreement may be assigned by the Company to a subsidiary, affiliate, or
successor of the Company; such assignments, however, shall not relieve the
Company of any 



<PAGE>   3

of its obligations hereunder except to the extent that such obligations are
actually paid and discharged by such subsidiary, affiliate, or successor. This
agreement may not otherwise be assigned without the prior written approval of
the other party.

11.      Any disputes concerning or arising out of interpretation or application
of this Agreement shall be determined by final and binding arbitration under and
in accordance with the rules and procedures of the American Arbitration
Association provided that the dispute is submitted to arbitration by written
demand therefor delivered to and received by the other party within sixty days
after occurrence of the event giving rise to the dispute.

12.      If there is a conflict between the Company personnel policies and this
Agreement, this Agreement shall prevail.

13.      For purposes of clause 4(a), TransAmerican Natural Gas Corporation
joins as a party to this contract and agrees to be jointly and severally liable
with respect thereto.

TransTexas Gas Corporation                  Edwin Donahue

By: /s/ John R. Stanley                     By: /s/ Edwin Donahue
    -----------------------------               ------------------------------
        John R. Stanley

Date: December 1, 1998                      Date: December 1, 1998
      ----------------------------                ----------------------------

<PAGE>   1
                                                                   EXHIBIT 10.46


================================================================================


                                CREDIT AGREEMENT


                                      AMONG


                           TRANSTEXAS GAS CORPORATION,
                                    BORROWER,


                               THE SEVERAL LENDERS
                        FROM TIME TO TIME PARTIES HERETO,


                                       AND


               CREDIT SUISSE FIRST BOSTON MANAGEMENT CORPORATION,
                             AS ADMINISTRATIVE AGENT


                           DATED AS OF APRIL 27, 1999


================================================================================


<PAGE>   2

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                               Page
                                                                                                               ----

<S>                                                                                                            <C>
SECTION 1. DEFINITIONS


   1.1  Defined Terms.............................................................................................1

   1.2  Other Definitional Provisions.............................................................................9

SECTION 2.  AMOUNT AND TERMS OF COMMITMENTS


   2.1  Commitments...............................................................................................9

   2.2  Notes.....................................................................................................9

   2.3  Procedure for Loan Borrowing.............................................................................10

   2.4  Additional Loans.........................................................................................10

SECTION 3.  GENERAL PROVISIONS APPLICABLE TO THE LOANS


   3.1  Interest Rates and Payment Dates.........................................................................10

   3.2  Optional Prepayments.....................................................................................10

   3.3  Computation of Interest and Fees.........................................................................11

   3.4  Pro Rata Treatment and Payments..........................................................................11

   3.5  Taxes....................................................................................................11

SECTION 4.  REPRESENTATIONS AND WARRANTIES


   4.1  Financial Condition......................................................................................13

   4.2  Existence; Compliance with Law...........................................................................13

   4.3  Power; Authorization; Enforceable Obligations............................................................14

   4.4  No Legal Bar.............................................................................................14

   4.5  No Material Litigation...................................................................................14

   4.6  No Default...............................................................................................14

   4.7  Ownership of Property; Liens.............................................................................15

   4.8  Intellectual Property....................................................................................15

   4.9  Taxes....................................................................................................15

   4.10  Federal Regulations.....................................................................................15

   4.11  ERISA...................................................................................................15

   4.12  Investment Company Act; Other Regulations...............................................................16
</TABLE>


                                      -i-
<PAGE>   3

<TABLE>
<S>                                                                                                            <C>
   4.13  Subsidiaries............................................................................................16

   4.14  Security Interests......................................................................................16

   4.15  Accuracy and Completeness of Information................................................................16

   4.16  Labor Relations.........................................................................................17

   4.17  Insurance...............................................................................................17

   4.18  Purpose of Loans........................................................................................17

   4.19  Year 2000 Compliance....................................................................................17

   4.20  Order Expenses..........................................................................................17

   4.21  Effectiveness of Orders.................................................................................17

SECTION 5.  CONDITIONS PRECEDENT


   5.1  Conditions to First Advance of Loans.....................................................................17

   5.2  Conditions to Second Advance of Loans....................................................................20

   5.3  Release of Funds from Cash Collateral Account............................................................21

SECTION 6.  AFFIRMATIVE COVENANTS


   6.1  Financial Statements.....................................................................................21

   6.2  Certificates; Other Information..........................................................................22

   6.3  Payment of Obligations...................................................................................22

   6.4  Conduct of Business and Maintenance of Existence.........................................................22

   6.5  Maintenance of Property; Insurance.......................................................................22

   6.6  Inspection of Property; Books and Records; Discussions...................................................23

   6.7  Notices..................................................................................................23

   6.8  Environmental Laws.......................................................................................24

   6.9  Year 2000 Covenants......................................................................................24

SECTION 7.  NEGATIVE COVENANTS


   7.1  Limitation on Indebtedness...............................................................................24

   7.2  Limitation on Liens......................................................................................24

   7.3  Limitation on Guarantee Obligations......................................................................25

   7.4  Limitation on Fundamental Changes........................................................................25

   7.5  Limitation on Sale of Assets.............................................................................25

   7.6  Limitation on Dividends..................................................................................26

   7.7  Limitation on Capital Expenditures.......................................................................26
</TABLE>

                                      -ii-
<PAGE>   4

<TABLE>
<S>                                                                                                           <C>
   7.8  Limitation on Investments, Loans and Advances............................................................26

   7.9  Limitation on Optional Payments and Modifications of Debt Instruments....................................26

   7.10  Limitation on Transactions with Affiliates..............................................................27

   7.11  Limitation on Lines of Business; Limitation on Drilling Activity........................................27

   7.12  Governing Documents.....................................................................................27

SECTION 8.  EVENTS OF DEFAULT


SECTION 9.  THE ADMINISTRATIVE AGENT


   9.1  Appointment..............................................................................................30

   9.2  Delegation of Duties.....................................................................................30

   9.3  Exculpatory Provisions...................................................................................30

   9.4  Reliance by Administrative Agent.........................................................................30

   9.5  Notice of Default........................................................................................31

   9.6  Non-Reliance on Administrative Agent and Other Lenders...................................................31

   9.7  Indemnification..........................................................................................32

   9.8  Administrative Agent in Its Individual Capacity..........................................................32

   9.9  Successor Administrative Agent...........................................................................32

SECTION 10.  MISCELLANEOUS


   10.1  Amendments and Waivers..................................................................................32

   10.2  Notices.................................................................................................33

   10.3  No Waiver; Cumulative Remedies..........................................................................34

   10.4  Survival of Representations and Warranties..............................................................34

   10.5  Payment of Expenses and Taxes...........................................................................34

   10.6  Successors and Assigns; Participations and Assignments..................................................35

   10.7  Set-off.................................................................................................36

   10.8  Counterparts............................................................................................37

   10.9  Severability............................................................................................37

   10.10  Integration............................................................................................37

   10.11  GOVERNING LAW..........................................................................................37

   10.12  Submission To Jurisdiction; Waivers....................................................................37

   10.13  Acknowledgements.......................................................................................38

   10.14  WAIVERS OF JURY TRIAL..................................................................................38

   10.15  Intercompany Loans.....................................................................................38

   10.16  Concerning the Collateral..............................................................................39
</TABLE>


                                     -iii-
<PAGE>   5

Schedules

Schedule 1                 Lenders and Commitments
Schedule 4.1               Material Changes
Schedule 4.5               Material Litigation
Schedule 4.13              Subsidiaries
Schedule 4.17              Insurance
Schedule 7.1               Existing Indebtedness
Schedule 7.2               Existing Liens
Schedule 7.3               Existing Guarantees
Schedule 7.10              Transactions with Affiliates
Schedule 7.11              Permitted Drilling Activities

Exhibits

Exhibit A         Form of Note
Exhibit B         Form of Blocked Account Agreement 
Exhibit C         Form of Guarantee
Exhibit D         Form of Non-Bank Status Certificate
Exhibit E         Form of Secretary's Certificate
Exhibit F         Form of Legal Opinion
Exhibit G         Form of Assignment and Acceptance

<PAGE>   6

                                CREDIT AGREEMENT

                  CREDIT AGREEMENT, dated as of April 27, 1999, among TRANSTEXAS
GAS CORPORATION, a Delaware corporation and a debtor-in-possession (the
"Borrower"), the lenders from time to time parties to this Agreement (the
"Lenders") and CREDIT SUISSE FIRST BOSTON MANAGEMENT CORPORATION, as
administrative agent for the Lenders hereunder.

                                    RECITALS

                  The Borrower has filed a voluntary bankruptcy petition for
relief under Chapter 11 of the United States Bankruptcy Code (as amended from
time to time, the "Bankruptcy Code") in the United States Bankruptcy Court for
Delaware (the "Bankruptcy Court"), commencing a case (the "Borrower's Case") on
April 19, 1999 (the "Petition Date").

                  Additionally, TransAmerican Energy Corporation, a Delaware
corporation ("TEC") and TransAmerican Refining Corporation, a Texas corporation
("TARC"; together with TEC, each a "Guarantor", collectively the "Guarantors"),
affiliates of the Borrower, have also filed voluntary bankruptcy petitions for
relief under Chapter 11 of the Bankruptcy Code with the Bankruptcy Court,
commencing their respective cases (each a "Guarantor's Case", collectively the
"Guarantors' Cases"; together with the Borrower's Case, the "Chapter 11 Cases")

                  The Borrower has requested that, during the pendancy of the
Chapter 11 Cases, each of the Lenders make a term loan to the Borrower in the
aggregate principal amount of $20,000,000, the proceeds of which would be used
to for working capital purposes in the ordinary course of business and to pay
fees and expenses incurred in connection herewith. The Guarantors are willing to
guarantee all obligations of the Borrower hereunder. The Lenders are willing to
make such credit available to the Borrower, but only on these terms, and subject
to the conditions, set forth in this Agreement.

                  The parties hereto hereby agree as follows:

                  SECTION 1 DEFINITIONS

                  1.1 Defined Terms. As used in this Agreement, the following
terms shall have the following meanings:

                  "Administrative Agent": Credit Suisse First Boston Management
         Corporation, as the administrative agent for the Lenders under this
         Agreement and the other Loan Documents to the extent provided herein
         and therein.

                  "Affiliate": as to any Person, any other Person (other than a
         Subsidiary) which, directly or indirectly, is in control of, is
         controlled by, or is under common control with, such Person. For
         purposes of this definition, "control" of a Person (including, with its
         correlative meanings, "controlled by" and "under common control with")
         means the power, directly or indirectly, either to (a) vote 10% or more
         of the securities having 


<PAGE>   7

         ordinary voting power for the election of directors of such Person or
         (b) direct or cause the direction of the management and policies of
         such Person, whether by contract or otherwise.

                  "Agreement": this Credit Agreement, as amended, supplemented
         or otherwise modified from time to time.

                  "Approval Orders": the collective reference to the Interim
         Order, the Final Order and the Guarantee Orders.

                  "Assignee": as defined in Section 10.6(c).

                  "Assignment and Acceptance": as defined in Section 10.6(c).

                  "Avoidance Action" shall mean any action which seeks (a) to
         invalidate, avoid, subordinate or otherwise impair any claims of the
         Lenders under this Agreement or any liens created by the Loan Documents
         or (b) to recover any transfer made to the Administrative Agent or any
         Lender by or on behalf of the Borrower or any Guarantor, provided, that
         Avoidance Action shall not include any action taken to investigate any
         of the foregoing.

                  "Bankruptcy Code": as defined in the Recitals hereto.

                  "Bankruptcy Court": as defined in the Recitals hereto.

                  "Blocked Account Agreement": the Blocked Account Agreement, in
         the form of Exhibit B attached hereto, among the Borrower and the
         Administrative Agent.

                  "Borrower": as defined in the Heading hereto.

                  "Borrower Carve Out Expenses": fees payable to the Clerk of
         the Bankruptcy Court and the United States Trustee pursuant to 28
         U.S.C. Section 1930, and the allowed fees and expenses of attorneys,
         accountants and other professionals retained by the Borrower and any
         Official Committee appointed in the Chapter 11 Case; provided, that
         Borrower Carve Out Expenses shall not include fees and expenses
         incurred at any time in connection with any Avoidance Actions.

                  "Borrower's Case": as defined in the Recitals hereto.

                  "Business Day": a day other than a Saturday, Sunday or other
         day on which commercial banks in New York City are authorized or
         required by law to close.

                  "Capital Stock": any and all shares, interests, participations
         or other equivalents (however designated) of capital stock of a
         corporation, any and all similar ownership interests in a Person (other
         than a corporation) and any and all warrants or options to purchase any
         of the foregoing.

                                       -2-
<PAGE>   8

                  "Cash Collateral Account": a demand deposit account
         established and maintained by the Borrower with the Administrative
         Agent (or one of its Affiliates), which shall be subject to a Blocked
         Account Agreement.

                  "Cash Equivalents": (a) securities with maturities of 90 days
         or less from the date of acquisition issued or fully guaranteed or
         insured by the United States Government or any agency thereof, (b)
         certificates of deposit and eurodollar time deposits with maturities of
         90 days or less from the date of acquisition and overnight bank
         deposits of any Lender or of any commercial bank having capital and
         surplus in excess of $500,000,000, (c) repurchase obligations of any
         Lender or of any commercial bank satisfying the requirements of clause
         (b) of this definition, having a term of not more than seven days with
         respect to securities issued or fully guaranteed or insured by the
         United States Government, (d) commercial paper of a domestic issuer
         rated at least A-1 or the equivalent thereof by Standard and Poor's
         Ratings Group ("S&P") or P-1 or the equivalent thereof by Moody's
         Investors Service, Inc. ("Moody's") and in either case maturing within
         90 days after the day of acquisition, (e) securities with maturities of
         90 days or less from the date of acquisition issued or fully guaranteed
         by any state, commonwealth or territory of the United States, by any
         political subdivision or taxing authority of any such state,
         commonwealth or territory or by any foreign government, the securities
         of which state, commonwealth, territory, political subdivision, taxing
         authority or foreign government (as the case may be) are rated at least
         A by S&P or A by Moody's, (f) securities with maturities of 90 days or
         less from the date of acquisition backed by standby letters of credit
         issued by any Lender or any commercial bank satisfying the requirements
         of clause (b) of this definition or (g) shares of money market mutual
         or similar funds which invest exclusively in assets satisfying the
         requirements of clauses (a) through (f) of this definition.

                  "Chapter 11 Cases": as defined in the Recitals hereto.

                  "Closing Date": the date on which the conditions precedent set
         forth in Section 5.1 shall be satisfied.

                  "Code": the Internal Revenue Code of 1986, as amended from
         time to time.

                  "Collateral": all property and interests in property of the
         Loan Parties, now owned or hereinafter acquired, upon which a Lien is
         purported to be created in favor of the Lenders by the Approval Orders.

                  "Commitment": as to any Lender, its obligation to make a Loan
         to the Borrower pursuant to Section 2.1 in the amount set forth
         opposite such Lender's name on Schedule 1.

                  "Commitment Percentage": as to any Lender, the percentage
         equal to the quotient of such Lender's Commitment divided by the
         aggregate Commitments.

                  "Commonly Controlled Entity": an entity, whether or not
         incorporated, which is under common control with the Borrower within
         the meaning of Section 4001 of ERISA 


                                      -3-
<PAGE>   9

         or is part of a group which includes the Borrower and which is treated
         as a single employer under Section 414 of the Code.

                  "Contractual Obligation": as to any Person, any provision of
         any security issued by such Person or of any agreement, instrument or
         other undertaking to which such Person is a party or by which it or any
         of its property is bound.

                  "Default": any of the events specified in Section 8, whether
         or not any requirement for the giving of notice, the lapse of time, or
         both, or any other condition, has been satisfied.

                  "Dollars" and "$": dollars in lawful currency of the United
         States of America.

                  "Environmental Laws": any and all foreign, Federal, state,
         local or municipal laws, rules, orders, regulations, statutes,
         ordinances, codes, decrees, requirements of any Governmental Authority
         or other Requirements of Law (including common law) regulating,
         relating to or imposing liability or standards of conduct concerning
         protection of human health or the environment, as now or may at any
         time hereafter be in effect.

                  "ERISA": the Employee Retirement Income Security Act of 1974,
         as amended from time to time.

                  "Event of Default": any of the events specified in Section 8;
         provided that any requirement for the giving of notice, the lapse of
         time, or both, or any other condition, has been satisfied.

                  "Final Order": the order of the Bankruptcy Court in the
         Borrower's Case granting final approval for this Agreement.

                  "Final Period": the period of time during which the Final
         Order is in effect.

                  "Financing Lease": any lease of property, real or personal,
         the obligations of the lessee in respect of which are required in
         accordance with GAAP to be capitalized on a balance sheet of the
         lessee.

                  "Funding Date" shall mean the date on which advances under the
         Loans are made hereunder.

                  "GAAP": generally accepted accounting principles in the United
         States of America in effect from time to time.

                  "Governing Documents": as to any Person, its articles or
         certificate of incorporation and by-laws, its partnership agreement,
         its certificate of formation and operating agreement, and/or the other
         organizational or governing documents of such Person.

                                      -4-
<PAGE>   10

                  "Governmental Authority": any nation or government, any state
         or other political subdivision thereof and any entity exercising
         executive, legislative, judicial, regulatory or administrative
         functions of or pertaining to government.

                  "Guarantee": the Guarantee to be executed and delivered by the
         Guarantors, substantially in the form of Exhibit C, as the same may be
         amended, supplemented or otherwise modified from time to time.

                  "Guarantee Obligation": as to any Person (the "guaranteeing
         person"), any obligation of (a) the guaranteeing person or (b) another
         Person (including, without limitation, any bank under any letter of
         credit) to induce the creation of which the guaranteeing person has
         issued a reimbursement, counterindemnity or similar obligation, in
         either case guaranteeing or in effect guaranteeing any Indebtedness,
         leases, dividends or other obligations (the "primary obligations") of
         any other third Person (the "primary obligor") in any manner, whether
         directly or indirectly, including, without limitation, any obligation
         of the guaranteeing person, whether or not contingent, (i) to purchase
         any such primary obligation or any property constituting direct or
         indirect security therefor, (ii) to advance or supply funds (1) for the
         purchase or payment of any such primary obligation or (2) to maintain
         working capital or equity capital of the primary obligor or otherwise
         to maintain the net worth or solvency of the primary obligor, (iii) to
         purchase property, securities or services primarily for the purpose of
         assuring the owner of any such primary obligation of the ability of the
         primary obligor to make payment of such primary obligation or (iv)
         otherwise to assure or hold harmless the owner of any such primary
         obligation against loss in respect thereof; provided, however, that the
         term Guarantee Obligation shall not include endorsements of instruments
         for deposit or collection in the ordinary course of business. The terms
         "Guarantee" and "Guaranteed" used as a verb shall have a correlative
         meaning. The amount of any Guarantee Obligation of any guaranteeing
         person shall be deemed to be the lower of (a) an amount equal to the
         stated or determinable amount of the primary obligation in respect of
         which such Guarantee Obligation is made and (b) the maximum amount for
         which such guaranteeing person may be liable pursuant to the terms of
         the instrument embodying such Guarantee Obligation, unless such primary
         obligation and the maximum amount for which such guaranteeing person
         may be liable are not stated or determinable, in which case the amount
         of such Guarantee Obligation shall be such guaranteeing person's
         maximum reasonably anticipated liability in respect thereof as
         determined by the Borrower in good faith.

                  "Guarantee Order" shall mean an order of the Bankruptcy Court
         in each Guarantor's Case in form and substance acceptable to the Lender
         approving the Guarantee.

                  "Guarantor": as defined in the Recitals hereto.

                  "Guarantor Carve Out Expenses" shall mean fees payable to the
         Clerk of the Bankruptcy Court and the United States Trustee pursuant to
         28 U.S.C. Section 1930, and the allowed fees and expenses of attorneys,
         accountants and other professionals retained by a Guarantor and any
         Official Committee appointed in a Guarantor's Case; provided, that


                                      -5-
<PAGE>   11

         Guarantor Carve Out Expenses shall not include fees and expenses
         incurred at any time in connection with any Avoidance Action.

                  "Guarantor's Case": as defined in the Recitals hereto.

                  "Indebtedness": of any Person at any date, without
         duplication, (a) all indebtedness of such Person for borrowed money
         (whether by loan or the issuance and sale of debt securities) or for
         the deferred purchase price of property or services (other than current
         trade liabilities incurred in the ordinary course of business and
         payable in accordance with customary practices), (b) any other
         indebtedness of such Person which is evidenced by a note, bond,
         debenture or similar instrument, (c) all obligations of such Person
         under Financing Leases, (d) all obligations of such Person in respect
         of letters of credit, acceptances or similar instruments issued or
         created for the account of such Person and (e) all liabilities secured
         by any Lien on any property owned by such Person even though such
         Person has not assumed or otherwise become liable for the payment
         thereof.

                  "Insolvency": with respect to any Multiemployer Plan, the
         condition that such Plan is insolvent within the meaning of Section
         4245 of ERISA.

                  "Insolvent": pertaining to a condition of Insolvency.

                  "Interest Payment Date": the last day of each month, or if
         such day is not a Business Day, the next succeeding Business Day.

                  "Interest Rate": 13% per annum.

                  "Interim Order": the order of the Bankruptcy Court in the
         Borrower's Case granting interim approval for this Agreement.

                  "Interim Period": the period of time during which the Interim
         Order is in effect (but shall not include the Final Period).

                  "Lenders": as defined in the heading hereto.

                  "Lien": any mortgage, pledge, hypothecation, assignment,
         deposit arrangement, encumbrance, lien (statutory or other), charge or
         other security interest or any preference, priority or other security
         agreement or preferential arrangement of any kind or nature whatsoever
         (including, without limitation, any conditional sale or other title
         retention agreement and any Financing Lease having substantially the
         same economic effect as any of the foregoing), and the filing of any
         financing statement under the Uniform Commercial Code or comparable law
         of any jurisdiction in respect of any of the foregoing.

                  "Loan": any loan made by any Lender pursuant to this
         Agreement.

                  "Loan Documents": this Agreement, the Notes and the Guarantee.

                  "Loan Parties": the Borrower and the Guarantors.


                                      -6-
<PAGE>   12

                  "Material Adverse Effect": a material adverse effect on (a)
         the business, operations, property, condition (financial or otherwise)
         or prospects of the Borrower and its Subsidiaries taken as a whole or
         any Guarantor and its Subsidiaries taken as a whole or (b) the validity
         or enforceability of this or any of the other Loan Documents or the
         rights or remedies of the Administrative Agent or the Lenders hereunder
         or thereunder, excluding, however, any consequences of the Chapter 11
         Cases.

                  "Maturity Date": the earlier to occur of (i) October 20, 1999
         and (ii) the effective date of a Plan of Reorganization.

                  "Multiemployer Plan": a Plan which is a multiemployer plan as
         defined in Section 4001(a)(3) of ERISA.

                  "Non-Bank Status Certificate": as defined in Section
         3.6(b)(i)(B).

                  "Non-Excluded Taxes": as defined in Section 3.5.

                  "Note": as defined in Section 2.2.

                  "Obligations": the unpaid principal amount of, and interest
         (including, without limitation, interest accruing after the maturity of
         the Loans and interest accruing after the filing of any petition in
         bankruptcy, or the commencement of any insolvency, reorganization or
         like proceeding, relating to the Borrower, whether or not a claim for
         post-filing or post-petition interest is allowed in such proceeding) on
         the Loans, and all other obligations and liabilities of the Loan
         Parties to the Administrative Agent and the Lenders, whether direct or
         indirect, absolute or contingent, due or to become due, or now existing
         or hereafter incurred, which may arise under, or out of or in
         connection with this Agreement, the Notes, the Guarantees and any other
         Loan Documents and any other document made, delivered or given in
         connection therewith or herewith, whether on account of principal,
         interest, reimbursement obligations, fees, indemnities, costs, expenses
         (including, without limitation, all fees and disbursements of counsel
         to the Administrative Agent or to the Lenders that are required to be
         paid by a Loan Party pursuant to the terms of the Loan Documents) or
         otherwise.

                  "Official Committee" shall mean any committee appointed in a
         Chapter 11 case by the United States Trustee pursuant to Section 1102
         of the Bankruptcy Code.

                  "Participant": as defined in Section 10.6(b).

                  "PBGC": the Pension Benefit Guaranty Corporation established
         pursuant to Subtitle A of Title IV of ERISA.

                  "Person": an individual, partnership, corporation, limited
         liability company, business trust, joint stock company, trust,
         unincorporated association, joint venture, Governmental Authority or
         other entity of whatever nature.

                  "Petition Date": as defined in the Recitals hereto.


                                      -7-
<PAGE>   13

                  "Plan": at a particular time, any employee benefit plan which
         is covered by ERISA and in respect of which the Borrower or a Commonly
         Controlled Entity is (or, if such plan were terminated at such time,
         would under Section 4069 of ERISA be deemed to be) an "employer" as
         defined in Section 3(5) of ERISA.

                  "Plans of Reorganization": the collective reference to the
         plans of reorganization in each of the Chapter 11 Cases.

                  "Register": as defined in Section 10.6(d).

                  "Regulation U": Regulation U of the Board of Governors of the
         Federal Reserve System as in effect from time to time.

                  "Reorganization": with respect to any Multiemployer Plan, the
         condition that such plan is in reorganization within the meaning of
         Section 4241 of ERISA.

                  "Reportable Event": any of the events set forth in Section
         4043(c) of ERISA, other than those events as to which the thirty day
         notice period is waived under Sections .21, .22, .23, .26, .27 or .28
         of PBGC Reg. Section 4043.

                  "Required Lenders": at any time, Lenders the Commitment
         Percentages of which aggregate at least 65%.

                  "Requirement of Law": as to any Person, the certificate of
         incorporation and by-laws or other organizational or Governing
         Documents of such Person, and any law, treaty, rule or regulation or
         determination of an arbitrator or a court or other Governmental
         Authority, in each case applicable to or binding upon such Person or
         any of its property or to which such Person or any of its property is
         subject.

                  "Responsible Officer": the chief executive officer and the
         president of the Borrower or, with respect to financial matters, the
         chief financial officer of the Borrower.

                  "Single Employer Plan": any Plan which is covered by Title IV
         of ERISA, but which is not a Multiemployer Plan.

                  "Subsidiary": as to any Person, a corporation, partnership or
         other entity of which shares of stock or other ownership interests
         having ordinary voting power (other than stock or such other ownership
         interests having such power only by reason of the happening of a
         contingency) to elect a majority of the board of directors or other
         managers of such corporation, partnership or other entity are at the
         time owned, or the management of which is otherwise controlled,
         directly or indirectly through one or more intermediaries, or both, by
         such Person. Unless otherwise qualified, all references to a
         "Subsidiary" or to "Subsidiaries" in this Agreement shall refer to a
         Subsidiary or Subsidiaries of the Borrower.

                  "TARC": as defined in the Recitals hereto.

                  "TEC": as defined in the Recitals hereto.


                                      -8-
<PAGE>   14

                  "Transferee": as defined in Section 10.6(f).

                  "United States Trustee": the United States Trustee for
         Region 3.

                  "Weekly Budget": a four-week budget of projected operating
         expenses, capital expenditure, and working capital needs of the
         Borrower, on a weekly basis for the four weeks covered by the budget in
         form and substance approved by the Required Lenders, in their sole
         discretion.

                  "Year 2000 Problem": the risk that computer applications used
         by the Borrower and its Subsidiaries may be unable to recognize and
         perform properly date-sensitive functions involving certain dates prior
         to, and any date on or after, December 31, 1999.

                  1.2 Other Definitional Provisions. (a) Unless otherwise
specified therein, all terms defined in this Agreement shall have the defined
meanings when used in any Notes or any certificate or other document made or
delivered pursuant hereto.

                  (b) As used herein and in any Notes, and any certificate or
other document made or delivered pursuant hereto, accounting terms relating to
the Borrower and its Subsidiaries not defined in Section 1.1 and accounting
terms partly defined in Section 1.1, to the extent not defined, shall have the
respective meanings given to them under GAAP.

                  (c) The words "hereof", "herein" and "hereunder" and words of
similar import when used in this Agreement shall refer to this Agreement as a
whole and not to any particular provision of this Agreement, and Section,
Schedule and Exhibit references are to this Agreement unless otherwise
specified.

                  (d) The meanings given to terms defined herein shall be
equally applicable to both the singular and plural forms of such terms.

                  SECTION 2. AMOUNT AND TERMS OF COMMITMENTS

                  2.1 Commitments. Subject to the terms and conditions hereof,
each Lender severally agrees to make a term loan (a "Loan") to the Borrower on
the Closing Date in an amount not to exceed its pro-rata share (based on the
amount of the Commitment of such Lender then in effect); provided, that the
Commitments shall terminate at 3:00 p.m., New York City time, on April 30, 1999
or such later date as shall be agreed to by the Lenders, if the Loans have not
been made prior to that time.

                  2.2 Notes. The Loan of each Lender shall be evidenced by a
promissory note of the Borrower, substantially in the form of Exhibit A with
appropriate insertions as to payee, date and principal amount (a "Note"),
payable to the order of such Lender and representing the obligation of the
Borrower to pay the amount of the Loan made by such Lender. Each Lender is
hereby authorized to record the date and amount of its Loan and the date and
amount of each payment or prepayment of principal thereof on the schedule
annexed to and constituting a part of its Note, and any such recordation shall
constitute prima facie evidence of the accuracy of the information so recorded;
provided, that the failure of such Lender to make any such recordation


                                       -9-
<PAGE>   15

shall not impair or otherwise affect the validity or enforceability of its Note.
Each Note shall (a) be dated the Closing Date, (b) be stated to mature on the
Maturity Date and (c) bear interest for the period from the date thereof on the
unpaid principal amount thereof at the interest rates per annum specified in
Section 3.1. Interest on the Notes shall be payable on the dates specified in
Section 3.1(c).

                  2.3 Procedure for Loan Borrowing. The proceeds of the Loans
will be disbursed in two advances, the first advance on the Closing Date in the
amount of $6,000,000.00 in connection with the Interim Order and the second
advance in the amount of $14,000,000.00 in connection with the Final Order upon
satisfaction of the conditions set forth in Section 5.2. The Borrower shall give
the Administrative Agent irrevocable notice (which notice must be received by
the Administrative Agent prior to 10:00 a.m., New York City time, one Business
Day prior to each Funding Date requesting that the Lenders make advances under
the Loans on such Funding Date and specifying (i) the Funding Date (which in the
case of the first advance shall be the Closing Date) and (ii) the amount to be
advanced. Upon receipt of such notice the Administrative Agent shall promptly
notify each Lender thereof. Not later than 11:00 a.m. on the each Funding Date
each Lender shall credit the Cash Collateral Account the amount of such Lender's
pro rata share of the Loans to be advanced in immediately available funds.

                  2.4 Additional Loans. One or more existing Lenders, and/or one
or more other Persons acceptable to the Required Lenders, may make an additional
Loan to the Borrower in an aggregate principal amount not to exceed $10,000,000
as contemplated by Section 3.2. Any such additional Loan shall be evidenced by a
Note issued by the Borrower and shall otherwise be treated as a Loan hereunder.

                  SECTION 3. GENERAL PROVISIONS APPLICABLE TO THE LOANS

                  3.1 Interest Rates and Payment Dates. 

                  (a) Each Loan shall bear interest for each day at the Interest
Rate.

                  (b) If all or a portion of (i) any principal of any Loan, (ii)
any interest payable thereon, or (iii) any other amount payable hereunder shall
not be paid when due (whether at the stated maturity, by acceleration or
otherwise), the principal of the Loans and any such overdue interest or other
amount shall bear interest at a rate per annum equal to the Interest Rate plus
2% until such overdue principal, interest or other amount is paid in full (as
well after as before judgment).

                  (c) Interest shall be payable in arrears on each Interest
Payment Date, provided, that interest accruing pursuant to paragraph (b) of this
Section shall be payable from time to time on demand.

                  3.2 Optional Prepayments. The Borrower may prepay the Loans,
in whole but not in part, without premium or penalty, upon at least five
Business Days' irrevocable notice to the Administrative Agent, specifying the
date and amount of prepayment; provided, that (i) no such prepayment may occur
prior to the date which is 30 days following the Closing Date, (ii) no such
prepayment shall be permitted if either the Lenders, new lenders acceptable to
the Required 


                                      -10-
<PAGE>   16

Lenders or a combination thereof have increased the aggregate Commitments
hereunder to at least $30,000,000 and (iii) no such prepayments shall be
permitted unless made with the proceeds of a new debtor-in-possession financing
facility consented to by the Administrative Agent. Upon receipt of any such
notice the Administrative Agent shall promptly notify each Lender thereof. If
any such notice is given, the Loans shall be due and payable on the date
specified therein, together with accrued interest to such date. Amounts prepaid
on account of the Loans may not be reborrowed. The Loan may not otherwise be
prepaid without the prior consent of the Required Lender.

                  3.3 Computation of Interest and Fees. Commitment fees and
interest shall be calculated on the basis of a 360-day year for the actual days
elapsed.

                  3.4 Pro Rata Treatment and Payments. Each payment (including
each prepayment) by the Borrower on account of principal of and interest on the
Loans and any fees shall be made pro rata according to the respective
outstanding principal amounts of the Loans then held by the Lenders. All
payments (including prepayments) to be made by the Borrower hereunder, whether
on account of principal, interest, fees or otherwise, shall be made without
set-off or counterclaim and shall be made prior to 12:00 noon, New York City
time, on the due date thereof to each Lender, at such Lender's office specified
in Section 10.2, in Dollars and in immediately available funds. If any payment
hereunder becomes due and payable on a day other than a Business Day, such
payment shall be extended to the next succeeding Business Day, and, with respect
to payments of principal, interest thereon shall be payable at the then
applicable rate during such extension.

                  3.5 Taxes.

                  (a) All payments made by the Borrower under this Agreement and
any Note shall be made free and clear of, and without deduction or withholding
for or on account of, any present or future income, stamp or other taxes,
levies, imposts, duties, charges, fees, deductions or withholdings, now or
hereafter imposed, levied, collected, withheld or assessed by any Governmental
Authority, excluding net income taxes and franchise taxes (imposed in lieu of
net income taxes) imposed on the Administrative Agent or any Lender as a result
of a present or former connection between the Administrative Agent or such
Lender and the jurisdiction of the Governmental Authority imposing such tax or
any political subdivision or taxing authority thereof or therein (other than any
such connection arising solely from the Administrative Agent or such Lender
having executed, delivered or performed its obligations or received a payment
under, or enforced, this Agreement or any Note). If any such non-excluded taxes,
levies, imposts, duties, charges, fees deductions or withholdings ("Non-Excluded
Taxes") are required to be withheld from any amounts payable to the
Administrative Agent or any Lender hereunder or under any Note, the amounts so
payable to the Administrative Agent or such Lender shall be increased to the
extent necessary to yield to the Administrative Agent or such Lender (after
payment of all Non-Excluded Taxes) interest or any such other amounts payable
hereunder at the rates or in the amounts specified in this Agreement, provided,
however, that the Borrower shall not be required to increase any such amounts
payable to any Lender that is not organized under the laws of the United States
of America or a state thereof if such Lender fails to comply with the
requirements of clause (b) of this Section. Whenever any Non-Excluded Taxes are
payable by the Borrower, as promptly as possible thereafter the Borrower shall
send to the Administrative 


                                      -11-
<PAGE>   17

Agent for its own account or for the account of such Lender, as the case may be,
a certified copy of an original official receipt received by the Borrower
showing payment thereof. If the Borrower fails to pay any Non-Excluded Taxes
when due to the appropriate taxing authority or fails to remit to the
Administrative Agent the required receipts or other required documentary
evidence, the Borrower shall indemnify the Administrative Agent and the Lenders
for any incremental taxes, interest or penalties that may become payable by the
Administrative Agent or any Lender as a result of any such failure. The
agreements in this Section shall survive the termination of this Agreement and
the payment of the Loans and all other amounts payable hereunder.

                  (b) Each Lender that is not incorporated under the laws of the
United States of America or a state thereof shall:

                  (i) (A) if such Lender is a "bank" within the meaning of
         Section 881(c)(3)(A) of the Code, deliver to the Borrower and the
         Administrative Agent (x) two duly completed copies of United States
         Internal Revenue Service Form 1001 or 4224, or successor applicable
         form, as the case may be, and (y) an Internal Revenue Service Form W-8
         or W-9, or successor applicable form, as the case may be, or (B) if
         such Lender is not a "bank" within the meaning of Section 881(c)(3)(A)
         of the Code and cannot deliver either Internal Revenue Service Form
         1001 or 4224, deliver (x) a certificate substantially in the form of
         Exhibit D (a "Non-Bank Status Certificate") and (y) two completed and
         signed copies of Internal Revenue Service Form W-8 or successor
         applicable form;

                  (ii) deliver to the Borrower and the Administrative Agent two
         further copies of any such form or certification on or before the date
         that any such form or certification expires or becomes obsolete and
         after the occurrence of any event requiring a change in the most recent
         form previously delivered by it to the Borrower; and

                  (iii) obtain such extensions of time for filing and complete
         such forms or certifications as may reasonably be requested by the
         Borrower or the Administrative Agent;

unless in any such case an event (including, without limitation, any change in
treaty, law or regulation) has occurred prior to the date on which any such
delivery would otherwise be required which renders all such forms inapplicable
or which would prevent such Lender from duly completing and delivering any such
form with respect to it and such Lender so advises the Borrower and the
Administrative Agent. Such Lender shall certify (i) in the case of a Form 1001
or 4224, that it is entitled to receive payments under this Agreement without
deduction or withholding of any United States federal income taxes, (ii) in the
case of a Non-Bank Status Certificate, that it is not a "bank" as such term is
defined in Section 881(c)(3)(A) of the Code, and (iii) in the case of a Form W-8
or W-9, that it is entitled to an exemption from United States backup
withholding tax. Each Person that shall become a Lender or a Participant
pursuant to Section 10.6 shall, upon the effectiveness of the related transfer,
be required to provide all of the forms and statements required pursuant to this
Section, provided that in the case of a Participant such Participant shall
furnish all such required forms and statements to the Lender from which the
related participation shall have been purchased.


                                      -12-
<PAGE>   18

                  SECTION 4. REPRESENTATIONS AND WARRANTIES

                  To induce the Administrative Agent and the Lenders to enter
into this Agreement and to make the Loans, the Borrower hereby represents and
warrants to the Administrative Agent and each Lender that:

                  4.1 Financial Condition.

                  (a) The consolidated balance sheet of the Borrower and its
consolidated Subsidiaries as at January 31, 1998 and the related consolidated
statements of income and of cash flows for the fiscal year ended on such date,
reported on by PricewaterhouseCoopers LP, copies of which have heretofore been
furnished to each Lender, are complete and correct and present fairly the
consolidated financial condition of the Borrower and its consolidated
Subsidiaries as at such date, and the consolidated results of their operations
and their consolidated cash flows for the fiscal year then ended. The unaudited
consolidated balance sheet of the Borrower and its consolidated Subsidiaries as
at October 31, 1998 and the related unaudited consolidated statements of income
and of cash flows for the nine-month period ended on such date, certified by a
Responsible Officer, copies of which have heretofore been furnished to each
Lender, are complete and correct in all material respects and present fairly the
consolidated financial condition of the Borrower and its consolidated
Subsidiaries as at such date, and the consolidated results of their operations
and their consolidated cash flows for the nine-month period then ended (subject
to normal year-end audit adjustments and the absence of footnotes). All such
financial statements, including the related schedules and notes thereto, have
been prepared in accordance with GAAP applied consistently throughout the
periods involved (except as approved by such accountants or Responsible Officer,
as the case may be, and as disclosed therein). Neither the Borrower nor any of
its consolidated Subsidiaries had, at the date of the most recent balance sheet
referred to above, any material Guarantee Obligation, contingent liability or
liability for taxes, or any long-term lease or unusual forward or long-term
commitment, including, without limitation, any interest rate or foreign currency
swap or exchange transaction or other financial derivative, which is not
reflected in the foregoing statements or in the notes thereto. Except as set
forth on Schedule 4.1, during the period from October 31, 1998 to and including
the date hereof there has been no sale, transfer or other disposition by the
Borrower or any of its consolidated Subsidiaries of any material part of its
business or property and no purchase or other acquisition of any business or
property (including any Capital Stock of any other Person) material in relation
to the consolidated financial condition of the Borrower and its consolidated
Subsidiaries at October 31, 1998.

                  (b) The operating forecast and cash flow projections of the
Borrower and its consolidated Subsidiaries and the initial Weekly Budget, copies
of which have heretofore been furnished to the Lenders, have been prepared in
good faith under the direction of a Responsible Officer of the Borrower, and in
accordance with GAAP. The Borrower has no reason to believe that as of the date
of delivery thereof such operating forecast and cash flow projections and such
Weekly Budget are materially incorrect or misleading in any material respect, or
omit to state any material fact which would render them misleading in any
material respect.

                  4.2 Existence; Compliance with Law. Each of the Borrower and
its Subsidiaries (a) is duly organized, validly existing and in good standing
under the laws of the


                                      -13-
<PAGE>   19
jurisdiction of its organization, (b) has the corporate power and authority, and
the legal right, to own and operate its property, to lease the property it
operates as lessee and to conduct the business in which it is currently engaged,
(c) is duly qualified as a foreign corporation and in good standing under the
laws of each jurisdiction where its ownership, lease or operation of property or
the conduct of its business requires such qualification and (d) is in compliance
with all Requirements of Law except to the extent that the failure to comply
therewith could not, in the aggregate, reasonably be expected to have a Material
Adverse Effect.

                  4.3 Power; Authorization; Enforceable Obligations. Upon entry
of the Interim Order and the Final Order, as applicable, the Borrower has the
corporate power and authority, and the legal right, to make, deliver and perform
the Loan Documents to which it is a party and to borrow hereunder and has taken
all necessary corporate action to authorize the borrowings on the terms and
conditions of this Agreement and any Notes and to authorize the execution,
delivery and performance of the Loan Documents to which it is a party. After
entry of the Interim Order and the Final Order, as applicable, no consent or
authorization of, filing with, notice to or other act by or in respect of, any
Governmental Authority or any other Person is required in connection with the
borrowings hereunder or with the execution, delivery, performance, validity or
enforceability of the Loan Documents to which the Borrower is a party. This
Agreement has been, and each other Loan Document to which it is a party will be,
duly executed and delivered on behalf of the Borrower. Upon entry of the Interim
Order and the Final Order, as applicable, this Agreement constitutes, and each
other Loan Document to which it is a party when executed and delivered will
constitute, a legal, valid and binding obligation of the Borrower enforceable
against the Borrower in accordance with its terms, subject to the effects of
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and
other similar laws relating to or affecting creditors' rights generally, general
equitable principles (whether considered in a proceeding in equity or at law)
and an implied covenant of good faith and fair dealing.

                  4.4 No Legal Bar. Upon entry of the Interim Order and the
Final Order, as applicable, the execution, delivery and performance of the Loan
Documents to which the Borrower is a party, the borrowings hereunder and the use
of the proceeds thereof will not violate any Requirement of Law or Contractual
Obligation of the Borrower or of any of its Subsidiaries and will not result in,
or require, the creation or imposition of any Lien on any of its or their
respective properties or revenues pursuant to any such Requirement of Law or
Contractual Obligation (other than Liens created by the Approval Orders in favor
of the Administrative Agent). 

                  4.5 No Material Litigation. Except as set forth on Schedule
4.5, no litigation, investigation or proceeding of or before any arbitrator or
Governmental Authority is pending or, to the knowledge of the Borrower,
threatened by or against the Borrower or any of its Subsidiaries or against any
of its or their respective properties or revenues (a) with respect to any of the
Loan Documents or any of the transactions contemplated hereby or thereby, or (b)
which could reasonably be expected to have a Material Adverse Effect.

                  4.6 No Default. No Default or Event of Default has occurred
and is continuing.


                                      -14-
<PAGE>   20

                  4.7 Ownership of Property; Liens. Each of the Borrower and its
Subsidiaries has good record and marketable title in fee simple to, or a valid
leasehold interest in, all its real property, and good title to, or a valid
leasehold interest in, all its other property, and none of such property is
subject to any Lien except as permitted by Section 7.2.

                  4.8 Intellectual Property. The Borrower and each of its
Subsidiaries owns, or is licensed to use, all trademarks, tradenames,
copyrights, technology, know-how and processes necessary for the conduct of its
business as currently conducted except for those the failure to own or license
which could not reasonably be expected to have a Material Adverse Effect (the
"Intellectual Property"). No claim has been asserted and is pending by any
Person challenging or questioning the use of any such Intellectual Property or
the validity or effectiveness of any such Intellectual Property, nor does the
Borrower know of any valid basis for any such claim. The use of such
Intellectual Property by the Borrower and its Subsidiaries does not infringe on
the rights of any Person, except for such claims and infringements that, in the
aggregate, could not reasonably be expected to have a Material Adverse Effect.

                  4.9 Taxes. Each of the Borrower and its Subsidiaries has filed
or caused to be filed all tax returns which, to the knowledge of the Borrower,
are required to be filed and has paid all taxes shown to be due and payable on
said returns or on any assessments made against it or any of its property and
all other taxes, fees or other charges imposed on it or any of its property by
any Governmental Authority (other than any the amount or validity of which are
currently being contested in good faith by appropriate proceedings and with
respect to which reserves in conformity with GAAP have been provided on the
books of the Borrower or its Subsidiaries, as the case may be or taxes in the
aggregate amount not to exceed $2,000,000.00); no tax Lien has been filed, and,
to the knowledge of the Borrower, no claim is being asserted, with respect to
any such tax, fee or other charge.

                  4.10 Federal Regulations. No part of the proceeds of any Loans
will be used for "purchasing" or "carrying" any "margin stock" within the
respective meanings of each of the quoted terms under Regulation U of the Board
of Governors of the Federal Reserve System as now and from time to time
hereafter in effect, or for any purpose which violates, or which would be
inconsistent with, the provisions of the regulations of such Board of Governors.
If requested by any Lender or the Administrative Agent, the Borrower will
furnish to the Administrative Agent and each Lender a statement to the foregoing
effect in conformity with the requirements of FR Form G-3 or FR Form U-1
referred to in said Regulation U.

                  4.11 ERISA. Neither a Reportable Event nor an "accumulated
funding deficiency" (within the meaning of Section 412 of the Code or Section
302 of ERISA) has occurred during the five-year period prior to the date on
which this representation is made or deemed made with respect to any Plan, and
each Plan has complied in all material respects with the applicable provisions
of ERISA and the Code. No termination of a Single Employer Plan has occurred,
and no Lien in favor of the PBGC or a Plan has arisen, during such five-year
period. The present value of all accrued benefits under each Single Employer
Plan (based on those assumptions used to fund such Plans) did not, as of the
last annual valuation date prior to the date on which this representation is
made or deemed made, exceed the value of the assets of such Plan allocable to
such accrued benefits. Neither the Borrower nor any Commonly Controlled Entity
has had a complete or partial withdrawal from any Multiemployer Plan, and
neither the Borrower


                                      -15-
<PAGE>   21

nor any Commonly Controlled Entity would become subject to any liability under
ERISA if the Borrower or any such Commonly Controlled Entity were to withdraw
completely from all Multiemployer Plans as of the valuation date most closely
preceding the date on which this representation is made or deemed made. No such
Multiemployer Plan is in Reorganization or Insolvent.

                  4.12 Investment Company Act; Other Regulations. The Borrower
is not an "investment company", or a company "controlled" by an "investment
company", within the meaning of the Investment Company Act of 1940, as amended.
The Borrower is not subject to regulation under any Federal or State statute or
regulation (other than Regulation X of the Board of Governors of the Federal
Reserve System) which limits its ability to incur Indebtedness. 



                  4.13 Subsidiaries. Schedule 4.13 sets forth the name of TEC
and each direct or indirect Subsidiary of TEC, its form of organization, its
jurisdiction of organization, the total number of issued and outstanding shares
or other interests of Capital Stock thereof, the classes and number of issued
and outstanding shares or other interests of Capital Stock of each such class,
the identity of each holder or group of holders of Capital Stock thereof and the
number of shares or other interests of such Capital Stock held by each such
holder and the percentage of all outstanding shares or other interests of such
class of Capital Stock held by such holders.

                  4.14 Security Interests. After entry of the Interim Order or
the Final Order, as applicable, and the Guarantee Orders, the Administrative
Agent for the ratable benefit of the Lenders shall have a legal, valid and
enforceable, first priority perfected security interest in all right, title and
interest of the Loan Party in the "Collateral" described therein, other than as
provided in the Interim Order during its pendency and the Final Order during its
pendency.

                  4.15 Accuracy and Completeness of Information.

                  (a) All factual information, reports and other papers and data
with respect to the Loan Parties (other than projections) furnished, and all
factual statements and representations made, to the Administrative Agent or the
Lenders by a Loan Party, or on behalf of a Loan Party, were, at the time the
same were so furnished or made, when taken together with all such other factual
information, reports and other papers and data previously so furnished and all
such other factual statements and representations previously so made, complete
and correct in all material respects, to the extent necessary to give the
Administrative Agent and the Lenders true and accurate knowledge of the subject
matter thereof in all material respects, and did not, as of the date so
furnished or made, contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements contained
therein not misleading in light of the circumstances in which the same were
made.

                  (b) All projections with respect to the Loan Parties furnished
by or on behalf of a Loan Party to the Administrative Agent or the Lenders were
prepared and presented in good faith by or on behalf of such Loan Party. No fact
is known to a Loan Party which materially and adversely affects or in the future
is reasonably likely (so far as such Loan Party can reasonably foresee) to have
a Material Adverse Effect which has not been set forth in the financial
statements referred to in Section 4.1 or in such information, reports, papers
and data or otherwise disclosed in writing to the Administrative Agent or the
Lenders prior to the Closing Date.


                                      -16-
<PAGE>   22

                  4.16 Labor Relations. No Loan Party is engaged in any unfair
labor practice which could reasonably be expected to have a Material Adverse
Effect. There is (a) no unfair labor practice compliant pending or, to the best
knowledge of each Loan Party and each of the Subsidiaries, threatened against a
Loan Party before the National Labor Relations Board which could reasonably be
expected to have a Material Adverse Effect and no grievance or arbitration
proceeding arising out of or under a collective bargaining agreement is so
pending or threatened; (b) no strike, labor dispute, slowdown or stoppage
pending or, to the best knowledge of each Loan Party, threatened against a Loan
Party; and (c) no union representation question existing with respect to the
employees of a Loan Party and no union organizing activities are taking place
with respect to any thereof.

                  4.17 Insurance. Each Loan Party has, with respect to its
properties and business, insurance covering the risks, in the amounts, with the
deductible or other retention amounts, and with the carriers, listed on Schedule
4.17, which insurance meets the requirements of Section 6.5 hereof as of the
Closing Date.

                  4.18 Purpose of Loans. The proceeds of the Loans shall be used
by the Borrower for working capital purposes in the ordinary course of business
in accordance with the Weekly Budgets.

                  4.19 Year 2000 Compliance. From and after the Closing Date,
the Borrower believes that the Year 2000 Problem would not reasonably be
expected to have a Material Adverse Effect on the Borrower.

                  4.20 Order Expenses.

                  (a) During the Interim Period, upon the entry of the Interim
Order, the Obligations shall constitute allowed administrative expenses in the
Borrower's Case having priority in payment over all other administrative
expenses and unsecured claims, other than the Borrower Carve Out Expenses.

                  (b) During the Final Period, upon the entry of the Final
Order, the Obligations shall constitute allowed administrative expenses in the
Borrowers Case having priority in payment over all other administrative expenses
and unsecured claims, other than the Borrower Carve Out Expenses.

                  4.21 Effectiveness of Orders. Each of the Interim Order, the
Final Order and the Guarantee Order, as applicable, are in full force and effect
from the time after the date on which each was entered and has not been stayed,
reversed, modified or amended without the consent of the Lender.

                  SECTION 5. CONDITIONS PRECEDENT

                  5.1 Conditions to First Advance of Loans. The agreement of
each Lender to make the first advance of its Loan is subject to the
satisfaction, immediately prior to or concurrently with the making of the first
advance of such Loan on the Closing Date, which shall


                                      -17-
<PAGE>   23

be on or prior to April 30, 1999 or such later date as shall be agreed to by the
Lenders, of the following conditions precedent:

                  (a) Loan Documents. The Administrative Agent shall have
         received: (i) this Agreement, executed and delivered by a duly
         authorized officer of the Borrower, with a counterpart for each Lender;

                           (ii) for the account of each Lender, a Note of the
                  Borrower conforming to the requirements hereof and executed by
                  a duly authorized officer of the Borrower;

                           (iii) the Guarantee, executed and delivered by a duly
                  authorized officer of the party thereto, with a counterpart or
                  a conformed copy for each Lender; and

                           (iv) the Blocked Account Agreement, executed and
                  delivered by a duly authorized officer of each party thereto,
                  with a counterpart or a conformed copy for each Lender.

                  (b) Secretary's Certificates. The Administrative Agent shall
         have received, with a counterpart for each Lender, a certificate of
         each Loan Party, dated the Closing Date, substantially in the form of
         Exhibit E, with appropriate insertions and attachments, satisfactory in
         form and substance to the Administrative Agent, executed by the
         President or any Vice President and the Secretary or any Assistant
         Secretary of such Loan Party.

                  (c) Corporate Proceedings of the Loan Parties. The
         Administrative Agent shall have received, with a counterpart for each
         Lender, a copy of the resolutions, in form and substance satisfactory
         to the Administrative Agent, of the Board of Directors of each Loan
         Party authorizing (i) the execution, delivery and performance of this
         Agreement and the other Loan Documents to which it is a party, (ii) the
         borrowings contemplated hereunder and (iii) the granting by it of the
         Liens created pursuant to the Approval Orders, certified by the
         Secretary or an Assistant Secretary of such Loan Party as of the
         Closing Date, which certificate shall be in form and substance
         satisfactory to the Administrative Agent and shall state that the
         resolutions thereby certified have not been amended, modified, revoked
         or rescinded.

                  (d) Incumbency Certificates. The Administrative Agent shall
         have received, with a counterpart for each Lender, a certificate of
         each Loan Party, dated the Closing Date, as to the incumbency and
         signature of the officers of such Loan Party executing any Loan
         Document satisfactory in form and substance to the Administrative
         Agent, executed by the President or any Vice President and the
         Secretary or any Assistant Secretary of such Loan Party.

                  (e) Corporate Documents. The Administrative Agent shall have
         received, with a counterpart for each Lender, true and complete copies
         of the certificate of incorporation and by-laws of each Loan Party,
         certified as of the Closing Date as 


                                      -18-
<PAGE>   24

         complete and correct copies thereof by the Secretary or an Assistant
         Secretary of such Loan Party.

                  (f) Good Standing Certificates. The Administrative Agent shall
         have received, with a copy for each Lender, certificates dated as of a
         recent date from the Secretary of State or other appropriate authority,
         evidencing the good standing of each Loan Party in the jurisdiction of
         its organization.

                  (g) Fees. The Administrative Agent and the Lenders shall have
         received the fees to be received on the Closing Date, as set forth in a
         letter of even date herewith, and shall have received reimbursement for
         all costs and expenses in accordance herewith.

                  (h) Legal Opinions. The Administrative Agent shall have
         received, with a counterpart for each Lender, the executed legal
         opinions of Young Conaway Stargatt & Taylor and Gardere & Wynne, LLP,
         counsel to the Borrower and the other Loan Parties, substantially in
         the form of Exhibit F. Such legal opinion shall cover such other
         matters incident to the transactions contemplated by this Agreement as
         the Administrative Agent may reasonably require.

                  (i) Guarantee Expenses. The obligations of the Guarantors
         under the Guarantee (the "Guarantor Obligations") shall constitute
         allowed administrative expenses in each Guarantor's Case having
         priority over all other administrative expenses of the kinds specified
         in Sections 503(b) or 507(b) of the Bankruptcy Code and unsecured
         claims, other than Guarantor Carve-Out Expenses, and shall be paid as
         ordinary course expenses during each Guarantor's Case without notice,
         hearing or court approval. The doctrine of marshaling shall not be
         available or applicable with respect to the payment of any Guarantor
         Obligations or any enforcement of remedies by the Administrative Agent
         and the Lenders.

                  (j) Approval Orders. The Interim Order and the Guarantee
         Orders, in form and substance satisfactory to the Lenders, shall be in
         effect and provide that no Avoidance Action may be commenced by any
         person after the later of (i) 60 days following the Petition Date or
         (ii) the date on which the United States Trustee forms the official
         committee of unsecured creditors.

                  (k) Liens. The Approval Orders shall create in favor of the
         Administrative Agent for the benefit of the Lenders a first priority
         perfected security interest in all "Collateral" described in the Order,
         other than as provided in the Interim Order during its pendency and the
         Final Order during its pendency.

                  (l) Review of Bankruptcy Filings. The Administrative Agent and
         each of the Lenders shall have reviewed and approved all documents and
         pleadings submitted to the Bankruptcy Court with respect to the interim
         and final approval of this Loan Agreement.

                  (m) Weekly Budget. The Administrative Agent and each of the
         Lenders shall have reviewed and approved the most recent Weekly Budget
         of the 



                                      -19-
<PAGE>   25

         Borrower covering, on a week-by-week basis, a period of four weeks from
         the Petition Date.

                  (n) Capital Structure. The capital structure of the Borrower
         and the Guarantors shall be satisfactory to the Administrative Agent
         and the Lenders.

                  (o) Reserve Report. The Administrative Agent and the Lenders
         shall have received an engineer's report with respect to proven
         reserves of the Borrower, which shall be in form and substance
         satisfactory to the Administrative Agent and the Lenders.

                  (p) Representations and Warranties. Each of the
         representations and warranties made by the Borrower and the other Loan
         Parties in or pursuant to the Loan Documents shall be true and correct
         in all material respects on and as of such date as if made on and as of
         such date.

                  (q) No Default. No Default or Event of Default shall have
         occurred and be continuing on such date or after giving effect to the
         Loans requested to be made on such date.

                  (r) Additional Matters. All corporate and other proceedings,
         and all documents, instruments and other legal matters in connection
         with the transactions contemplated by this Agreement, the other Loan
         Documents shall be satisfactory in form and substance to the
         Administrative Agent, and the Administrative Agent shall have received
         such other documents and legal opinions in respect of any aspect or
         consequence of the transactions contemplated hereby or thereby as it
         shall reasonably request.

              5.2 Conditions to Second Advance of Loans. The agreement of each 
Lender to make the second advance of its Loan is subject to the satisfaction,
immediately prior to or concurrently with the making of the second advance of
such Loan, of the following conditions precedent:

                  (a) The Final Order, in form and substance satisfactory to the
         Administrative Agent and the Lenders shall have been entered by the
         Bankruptcy Court;

                  (b) The Borrower and the Guarantors shall have each filed a
         Plan of Reorganization in their respective Chapter 11 Cases, each in
         form and substance satisfactory to the Administrative Agent and the
         Lenders;

                  (c) no Event of Default has occurred and is then continuing;

                  (d) all representations and warranties contained in this
         Agreement or any other Loan Documents are true and correct in all
         material respects; and

                  (e) no change in circumstances shall have occurred that could
         reasonably be expected to have a Material Adverse Effect.


                                      -20-
<PAGE>   26

                  5.3 Release of Funds from Cash Collateral Account. The
Borrower shall be permitted to withdraw funds from the Cash Collateral Account
to pay expenses of the Borrower in accordance with the Weekly Budget so long as,
as of the date of such withdrawal: 

                  (a) no Event of Default has occurred and is continuing, or
will occur as a result of such withdrawal;

                  (b) all representations and warranties contained in this
Agreement or any other Loan Documents are true and correct in all material
respects; and

                  (c) no change in circumstances has occurred that could
reasonably be expected to have a Material Adverse Effect.

If an Event of Default has occurred and is continuing, the Required Lenders may
direct the Administrative Agent to no longer honor or permit withdrawals by the
Borrower from the Cash Collateral Account.

                  SECTION 6. AFFIRMATIVE COVENANTS

                  The Borrower hereby agrees that, so long as any of the
Commitments remain in effect or any amount is owing to any Lender or the
Administrative Agent hereunder or under any other Loan Document, the Borrower
shall and (except in the case of delivery of financial information, reports and
notices) shall cause each of its Subsidiaries to: 

                  6.1 Financial Statements. Furnish to each Lender:

                  (a) as soon as available, but in any event not later than 60
days after the end of each of the first three quarterly periods of each fiscal
year and 105 days after the last fiscal quarter of each fiscal year of the
Borrower, the unaudited consolidated balance sheet of the Borrower and its
consolidated Subsidiaries as at the end of such quarter and the related
unaudited consolidated statements of income and retained earnings and of cash
flows of the Borrower and its consolidated Subsidiaries for such quarter and the
portion of the fiscal year through the end of such quarter, setting forth in
each case in comparative form the figures for the previous year, certified by a
Responsible Officer as being fairly stated in all material respects (subject to
normal year-end audit adjustments); and

                  (b) as soon as available, but in any event not later than 30
days after the end of each calendar month, the unaudited consolidated and
consolidating balance sheet of the Borrower and its consolidated Subsidiaries as
at the end of such month and the related unaudited consolidated and
consolidating statements of income and retained earnings and of cash flows of
the Borrower and its consolidated Subsidiaries for such month and the portion of
the fiscal year through the end of such month, setting forth in each case in
comparative form the figures for the previous year, certified by a Responsible
Officer as being fairly stated in all material respects (subject to normal
year-end audit adjustments);

all such financial statements shall be complete and correct in all material
respects and shall be prepared in reasonable detail and in accordance with GAAP
applied consistently throughout the 


                                      -21-
<PAGE>   27

periods reflected therein and with prior periods (except as approved by such
accountants or officer, as the case may be, and disclosed therein).

                  6.2 Certificates; Other Information. Furnish to each Lender:

                  (a) concurrently with the delivery of the financial statements
referred to in Sections 6.1(a) and (b), a certificate of a Responsible Officer
(i) stating that, to the best of such Officer's knowledge, the Borrower during
such period has observed or performed all of its covenants and other agreements,
and satisfied every condition, contained in this Agreement and the other Loan
Documents to be observed, performed or satisfied by it, and that such Officer
has obtained no knowledge of any Default or Event of Default except as specified
in such certificate and (ii) showing in detail the calculations supporting such
Officer's certification of the Borrower's compliance with the requirements of
Section 7.1;

                  (b) with respect to each Weekly Budget after the Weekly Budget
entered with the Interim Order, not later than 20th day of each month, a
proposed Weekly Budget for the next succeeding month, which proposed Weekly
Budget shall become the Weekly Budget for such next succeeding month if approved
by the Required Lenders no later than the twenty-fifth day of such month (to the
extent modified by the Required Lenders, as so modified, the Weekly Budget for
such next succeeding month);

                  (c) promptly, such additional financial and other information
as any Lender may from time to time reasonably request; and

                  (d) within 14 days after the Closing Date, a listing of all
voluntary liens encumbering the assets of the Loan Parties, in form and
substance satisfactory to the Administrative Agent and the Lenders.

                  6.3 Payment of Obligations. Pay, discharge or otherwise
satisfy at or before maturity or before they become delinquent, as the case may
be, all its post-petition obligations of whatever nature and other obligations
approved by the Bankruptcy Court, except where the amount or validity thereof is
currently being contested in good faith by appropriate proceedings and reserves
in conformity with GAAP with respect thereto have been provided on the books of
the Borrower or its Subsidiaries, as the case may be.

                  6.4 Conduct of Business and Maintenance of Existence. Continue
to engage in business of the same general type as now conducted by it and
preserve, renew and keep in full force and effect its corporate existence and
take all reasonable action to maintain all rights, privileges and franchises
necessary or desirable in the normal conduct of its business except as otherwise
permitted pursuant to Section 7.5; comply with all Contractual Obligations and
Requirements of Law except to the extent that failure to comply therewith could
not, in the aggregate, be reasonably expected to have a Material Adverse Effect.

                  6.5 Maintenance of Property; Insurance. Keep all property
useful and necessary in its business in good working order and condition;
maintain with financially sound and reputable insurance companies insurance on
all its property in at least such amounts and against at least such risks as are
usually insured against in the same general area by companies engaged in the
same or a similar business, which insurance shall name the Administrative Agent


                                      -22-
<PAGE>   28

as lender loss payee, in the case of property or casualty insurance, and as an
additional insured, in the case of liability insurance; and furnish to each
Lender, upon written request, full information as to the insurance carried.

                  6.6 Inspection of Property; Books and Records; Discussions.
Keep proper books of records and account in which full, true and correct entries
in conformity with GAAP and all Requirements of Law shall be made of all
dealings and transactions in relation to its business and activities; and permit
representatives of any Lender to visit and inspect any of its properties and
examine and make abstracts from any of its books and records at any reasonable
time and as often as may reasonably be desired and to discuss the business,
operations, properties and financial and other condition of the Borrower and its
Subsidiaries with officers and employees of the Borrower and its Subsidiaries
and with its independent certified public accountants.

                  6.7 Notices. From and after the Closing Date, promptly give
notice to the Administrative Agent and each Lender of:

                      (a) the occurrence of any Default or Event of Default;

                      (b) any (i) default or event of default under any
         Contractual Obligation of the Borrower or any of its Subsidiaries or
         (ii) litigation, investigation or proceeding which may exist at any
         time between the Borrower or any of its Subsidiaries and any
         Governmental Authority, which in either case, if not cured or if
         adversely determined, as the case may be, could reasonably be expected
         to have a Material Adverse Effect;

                      (c) any litigation or proceeding affecting the Borrower or
         any of its Subsidiaries in which the amount involved is $1,000,000 or
         more and not covered by insurance or in which injunctive or similar
         relief is sought;

                      (d) of the acquisition by any Loan Party of any property
         or interest in property (including, without limitation, real property),
         that is not subject to a perfected Lien in favor of the Administrative
         Agent pursuant to the Approval Orders;

                      (e) the following events, as soon as possible and in any
         event within 30 days after the Borrower knows or has reason to know
         thereof: (i) the occurrence or expected occurrence of any Reportable
         Event with respect to any Plan, a failure to make any required
         contribution to a Plan, the creation of any Lien in favor of the PBGC
         or a Plan or any withdrawal from, or the termination, Reorganization or
         Insolvency of, any Multiemployer Plan or (ii) the institution of
         proceedings or the taking of any other action by the PBGC or the
         Borrower or any Commonly Controlled Entity or any Multiemployer Plan
         with respect to the withdrawal from, or the terminating, Reorganization
         or Insolvency of, any Plan; and

                      (f) any development or event which has had or could
         reasonably be expected to have a Material Adverse Effect.


                                      -23-

<PAGE>   29

Each notice pursuant to this Section shall be accompanied by a statement of a
Responsible Officer setting forth details of the occurrence referred to therein
and stating what action the Borrower proposes to take with respect thereto. 

                  6.8 Environmental Laws.

                  (a) Comply with, and ensure compliance by all tenants and
subtenants, if any, with, all applicable Environmental Laws in all material
respects and obtain and comply in all material respects with and maintain, and
ensure that all tenants and subtenants obtain and comply with and maintain, any
and all licenses, approvals, notifications, registrations or permits required by
applicable Environmental Laws in all material respects.

                  (b) Conduct and complete in all material respects all
investigations, studies, sampling and testing, and all remedial, removal and
other actions required under Environmental Laws and promptly comply in all
material respects with all lawful orders and directives of all Governmental
Authorities regarding Environmental Laws.

                  6.9 Year 2000 Covenants. No later than the Closing Date, the
Borrower and its Subsidiaries shall review the areas within their business and
operations which could be adversely affected by, and shall have developed or be
developing a program to address on a timely basis, the Year 2000 Problem, and
shall have made or be making related appropriate inquiry of material suppliers
and vendors. From time to time, at the request of the Administrative Agent, the
Borrower and its Subsidiaries shall provide to the Administrative Agent such
updated information or documentation as is requested regarding the status of
their efforts to address the Year 2000 Problem. 

                  SECTION 7. NEGATIVE COVENANTS

                  The Borrower hereby agrees that, so long as any amount is
owing to any Lender or the Administrative Agent hereunder or under any other
Loan Document, the Borrower shall not, and shall not permit any of its
Subsidiaries to, directly or indirectly:

                  7.1 Limitation on Indebtedness. Create, incur, assume or
suffer to exist any Indebtedness, except:

                  (a) Indebtedness of the Borrower under this Agreement;

                  (b) Indebtedness of the Borrower to any Subsidiary and of any
Subsidiary to the Borrower or any other Subsidiary;

                  (c) Indebtedness secured by Liens permitted under Section 7.2;
and

                  (d) Indebtedness outstanding on the date hereof and listed on
Schedule 7.1 and any refinancings, refundings, renewals or extensions thereof.

                  7.2 Limitation on Liens. Create, incur, assume or suffer to
exist any Lien upon any of its property, assets or revenues, whether now owned
or hereafter acquired, except as otherwise provided in the Interim Order during
its pendency and the Final Order during its


                                      -24-
<PAGE>   30
pendency and for Liens which are subordinate to the Liens created by the
Approval Orders in favor of the Administrative Agent for the benefit of the
Lenders, and except for:

                  (a) Liens for taxes not yet due or which are being contested
in good faith by appropriate proceedings, provided that adequate reserves with
respect thereto are maintained on the books of the Borrower or its Subsidiaries,
as the case may be, in conformity with GAAP;

                  (b) carriers', warehousemen's, mechanics', materialmen's,
repairmen's or other like Liens arising in the ordinary course of business which
(i) are not overdue for a period of more than 60 days or which are being
contested in good faith by appropriate proceedings or (ii) are subject to the
automatic stay in the Borrower's Chapter 11 Case;

                  (c) pledges or deposits in connection with workers'
compensation, unemployment insurance and other social security legislation and
deposits securing liability to insurance carriers under insurance or
self-insurance arrangements;

                  (d) deposits to secure the performance of bids, trade
contracts (other than for borrowed money), leases, statutory obligations, surety
and appeal bonds, performance bonds and other obligations of a like nature
incurred in the ordinary course of business; and

                  (e) easements, rights-of-way, restrictions and other similar
encumbrances incurred in the ordinary course of business which, in the
aggregate, are not substantial in amount and which do not in any case materially
detract from the value of the property subject thereto or materially interfere
with the ordinary conduct of the business of the Borrower or such Subsidiary.

                  7.3 Limitation on Guarantee Obligations. Create, incur, assume
or suffer to exist any Guarantee Obligation except for Guarantee Obligations in
existence on the date hereof and listed on Schedule 7.3.

                  7.4 Limitation on Fundamental Changes. Enter into any merger,
consolidation or amalgamation, or liquidate, wind up or dissolve itself (or
suffer any liquidation or dissolution), or convey, sell, lease, assign, transfer
or otherwise dispose of, all or substantially all of its property, business or
assets, or make any material change in its present method of conducting
business, except:

                  (a) any Subsidiary of the Borrower may be merged or
consolidated with or into the Borrower (provided that the Borrower shall be the
continuing or surviving corporation) or with or into any one or more wholly
owned Subsidiaries of the Borrower (provided that the wholly owned Subsidiary or
Subsidiaries shall be the continuing or surviving corporation); and

                  (b) any wholly owned Subsidiary may sell, lease, transfer or
otherwise dispose of any or all of its assets (upon voluntary liquidation or
otherwise) to the Borrower or any other wholly owned Subsidiary of the Borrower.

                  7.5 Limitation on Sale of Assets. Convey, sell, lease, assign,
transfer or otherwise dispose of any of its property, business or assets
(including, without limitation, receivables and leasehold interests), whether
now owned or hereafter acquired, or, in the case of 


                                      -25-
<PAGE>   31

any Subsidiary, issue or sell any shares of such Subsidiary's Capital Stock to
any Person other than the Borrower or any wholly owned Subsidiary, except:

                  (a) the sale or other disposition of obsolete or worn out
property in the ordinary course of business;

                  (b) the sale or other disposition of any property (including
hydrocardons) in the ordinary course of business;

                  (c) the sale of inventory in the ordinary course of business;

                  (d) the sale or discount without recourse of accounts
receivable arising in the ordinary course of business in connection with the
compromise or collection thereof; and

                  (e) as permitted by Section 7.4(b).

                  7.6 Limitation on Dividends. Declare or pay any dividend
(other than dividends payable solely in common stock of the Borrower) on, or
make any payment on account of, or set apart assets for a sinking or other
analogous fund for, the purchase, redemption, defeasance, retirement or other
acquisition of, any shares of any class of Capital Stock of the Borrower or any
warrants or options to purchase any such Stock, whether now or hereafter
outstanding, or make any other distribution in respect thereof, either directly
or indirectly, whether in cash or property or in obligations of the Borrower or
any Subsidiary.

                  7.7 Limitation on Capital Expenditures. Make or commit to make
(by way of the acquisition of securities of a Person or otherwise) any
expenditure in respect of the purchase or other acquisition of fixed or capital
assets (excluding any such asset acquired in connection with normal replacement
and maintenance programs properly charged to current operations) except for
expenditures in the current Weekly Budget; provided that in no event shall the
Borrower make Capital Expenditure in connection with new oil and gas fields or
wells or other exploration activity, other than the drilling of proven oil and
gas fields and wells or prospect areas, in each case as described on Schedule
7.11.

                  7.8 Limitation on Investments, Loans and Advances. Make any
advance, loan, extension of credit or capital contribution to, or purchase any
stock, bonds, notes, debentures or other securities of or any assets
constituting a business unit of, or make any other investment in, any Person,
except :

                  (a) extensions of trade credit in the ordinary course of
business;

                  (b) investments in Cash Equivalents; and

                  (c) investments by the Borrower in any Subsidiary and
investments by such Subsidiary in the Borrower and in other Subsidiaries of the
Borrower.

                  7.9 Limitation on Optional Payments and Modifications of Debt
Instruments. (a) Make any optional payment or prepayment on or redemption or
purchase of any Indebtedness (other than the Loans) and (b) amend, modify or
change, or consent or agree to any 


                                      -26-
<PAGE>   32

amendment, modification or change to any of the terms any Indebtedness (other
than any such amendment, modification or change which would extend the maturity
or reduce the amount of any payment of principal thereof or which would reduce
the rate or extend the date for payment of interest thereon).


                  7.10 Limitation on Transactions with Affiliates. Except as set
forth on Schedule 7.10, enter into any transaction, including, without
limitation, any purchase, sale, lease or exchange of property or the rendering
of any service, with any Affiliate unless such transaction is (a) otherwise
permitted under this Agreement, (b) in the ordinary course of the Borrower's or
such Subsidiary's business and (b) upon fair and reasonable terms no less
favorable to the Borrower or such Subsidiary, as the case may be, than it would
obtain in a comparable arm's length transaction with a Person which is not an
Affiliate.

                  7.11 Limitation on Lines of Business; Limitation on Drilling
Activity.

                  (a) Enter into any business, either directly or through any
Subsidiary, except for those businesses in which the Borrower and its
Subsidiaries are engaged on the date of this Agreement.

                  (b) Engage in any drilling other than the drilling of proven
oil and gas fields and wells or prospect areas, in each case as described on
Schedule 7.11 or in a Weekly Budget.

                  7.12 Governing Documents. Amend its certificate of
incorporation (except to increase the number of authorized shares of common
stock), partnership agreement or other Governing Documents, without the prior
written consent of the Required Lenders, which shall not be unreasonably
withheld or delayed.

                  SECTION 8. EVENTS OF DEFAULT

                  If any of the following events shall occur and be continuing:

                       (a) The Borrower shall fail to pay any principal of any
         Loan when due in accordance with the terms thereof or hereof; or the
         Borrower shall fail to pay any interest on any Loan, or any other
         amount payable hereunder or under the other Loan Documents, within five
         days after any such interest or other amount becomes due in accordance
         with the terms thereof or hereof; or 

                       (b) Any representation or warranty made or deemed made by
         the Borrower or any other Loan Party herein or in any other Loan
         Document or which is contained in any certificate, document or
         financial or other statement furnished by it at any time under or in
         connection with this Agreement or any such other Loan Document shall
         prove to have been incorrect in any material respect on or as of the
         date made or deemed made; or

                       (c) The Borrower shall default in the observance or 
         performance of any agreement contained in Section 7; or 


                                      -27-
<PAGE>   33

                  (d) The Borrower or any other Loan Party shall default in the
         observance or performance of any other agreement contained in this
         Agreement or any other Loan Document (other than as provided in
         paragraphs (a) through (c) of this Section), and such default shall
         continue unremedied for a period of 30 days; or

                  (e) The Borrower or any of its Subsidiaries shall (i) default
         in any payment of principal of or interest of any Indebtedness (other
         than the Loans) or in the payment of any Guarantee Obligation, beyond
         the period of grace (not to exceed 30 days), if any, provided in the
         instrument or agreement under which such Indebtedness or Guarantee
         Obligation was created; or (ii) default in the observance or
         performance of any other agreement or condition relating to any such
         Indebtedness or Guarantee Obligation or contained in any instrument or
         agreement evidencing, securing or relating thereto, or any other event
         shall occur or condition exist, the effect of which default or other
         event or condition is to cause, or to permit the holder or holders of
         such Indebtedness or beneficiary or beneficiaries of such Guarantee
         Obligation (or a trustee or agent on behalf of such holder or holders
         or beneficiary or beneficiaries) to cause, with the giving of notice if
         required, such Indebtedness to become due prior to its stated maturity
         or such Guarantee Obligation to become payable, and in each case, the
         consequences of such default shall not be stayed by the Chapter 11
         Cases; or

                  (f) (i) Any Person shall engage in any "prohibited
         transaction" (as defined in Section 406 of ERISA or Section 4975 of the
         Code) involving any Plan, (ii) any "accumulated funding deficiency" (as
         defined in Section 302 of ERISA), whether or not waived, shall exist
         with respect to any Plan or any Lien in favor of the PBGC or a Plan
         shall arise on the assets of the Borrower or any Commonly Controlled
         Entity, (iii) a Reportable Event shall occur with respect to, or
         proceedings shall commence to have a trustee appointed, or a trustee
         shall be appointed, to administer or to terminate, any Single Employer
         Plan, which Reportable Event or commencement of proceedings or
         appointment of a trustee is, in the reasonable opinion of the Required
         Lenders, likely to result in the termination of such Plan for purposes
         of Title IV of ERISA, (iv) any Single Employer Plan shall terminate for
         purposes of Title IV of ERISA, (v) the Borrower or any Commonly
         Controlled Entity shall, or in the reasonable opinion of the Required
         Lenders is likely to, incur any liability in connection with a
         withdrawal from, or the Insolvency or Reorganization of, a
         Multiemployer Plan or (vi) any other event or condition shall occur or
         exist with respect to a Plan; and in each case in clauses (i) through
         (vi) above, such event or condition, together with all other such
         events or conditions, if any, could reasonably be expected to have a
         Material Adverse Effect; or

                  (g) One or more judgments or decrees shall be entered against
         the Borrower or any of its Subsidiaries involving in the aggregate a
         liability (not paid or fully covered by insurance) of $500,000 or more,
         and all such judgments or decrees shall not have been vacated,
         discharged, stayed or bonded pending appeal within 60 days from the
         entry thereof or shall not otherwise be stayed by the Chapter 11 Cases;
         or

                  (h) The Lien created by the Approval Orders shall cease to be
         enforceable and of the same effect and priority purported to be created
         thereby; or

                                      -28-
<PAGE>   34

                  (i) Any Guarantee shall cease, for any reason, to be in full
         force and effect or any Guarantor shall so assert; or

                  (j) Any Avoidance Action with respect to the Obligations or
         any payments in respect thereof or with respect to the Collateral is
         commenced by either the Borrower or a Guarantor against the
         Administrative Agent or any Lender; or

                  (k) Any order shall be entered in any Chapter 11 Case which
         (i) provides for the appointment of a trustee or an examiner with
         expanded powers which is not reversed within thirty (30) days of the
         entry thereof; (ii) dismisses such Chapter 11 Case or converts such
         Chapter 11 Case into a Chapter 7 case; (iii) confirms a plan of
         reorganization that is not a Plan of Reorganization as defined herein;
         (iv) without the consent of the Lenders, revokes, reverses, stays or
         otherwise modifies any Approval Order, including without limitation,
         any order approving the granting of any Lien on the Collateral or
         granting any expense a priority equal to or greater than the priority
         granted to the Lenders (any of (i) through (iv), a "Case Order"); (v)
         in the reasonable judgment of the Lenders, impairs or adversely affects
         the Collateral, the Guarantee, or the likelihood that the Borrower will
         discharge in full its obligations to the Lenders under this Agreement
         in a timely manner; or (vi) stays or restrains the effectiveness of any
         provision of this Agreement or the pledge of the Collateral; or

                  (l) A motion for any Case Order shall be made by (i) the
         Official Committee, which is not withdrawn within thirty (30) days
         following the date on which such motion is made, (ii) the Borrower or
         any Guarantor or (iii) any other Person and (x) the Official Committee
         shall have consented thereto or shall have failed to contest such
         motion within thirty (30) days following the date on which such motion
         is made or (y) the Borrower or any Guarantor shall have consented
         thereto or shall have failed to contest such motion within thirty (30)
         days following the date on which such motion is made; or

                  (m) The Borrower and the Guarantors fail to file a Plan of
         Reorganization in their respective Chapter 11 Cases within thirty (30)
         days following the Closing Date;

                  (n) The entry of an order authorizing the borrower or any
         guarantor to obtain financing from BNY Financial Corporation ("BNY")
         and/or use cash collateral of BNY on terms and conditions which the
         Lenders do not expressly consent to in writing (provided, however, the
         Lenders will have no right to withhold such consent to an order which
         grants to BNY a super priority claim pursuant to Bankruptcy Code
         Section 507(b) on a pari passu basis with such claim granted to the
         Lenders under the Interim Order);

then, and in any such Event of Default, with the consent of the Required
Lenders, the Administrative Agent may, or upon the request of the Required
Lenders, the Administrative Agent shall, by notice to the Borrower, declare the
Loans hereunder (with accrued interest thereon) and all other amounts owing
under this Agreement to be due and payable forthwith, whereupon the same shall
immediately become due and payable.


                                      -29-
<PAGE>   35

                  SECTION 9. THE ADMINISTRATIVE AGENT

                  9.1 Appointment. Each Lender hereby irrevocably designates and
appoints the Administrative Agent as the Administrative Agent of such Lender
under this Agreement and the other Loan Documents, and each such Lender
irrevocably authorizes the Administrative Agent, in such capacity, to take such
action on its behalf under the provisions of this Agreement and the other Loan
Documents and to exercise such powers and perform such duties as are expressly
delegated to the Administrative Agent by the terms of this Agreement and the
other Loan Documents, together with such other powers as are reasonably
incidental thereto. Notwithstanding any provision to the contrary elsewhere in
this Agreement, the Administrative Agent shall not have any duties or
responsibilities, except those expressly set forth herein, or any fiduciary
relationship with any Lender, and no implied covenants, functions,
responsibilities, duties, obligations or liabilities shall be read into this
Agreement or any other Loan Document or otherwise exist against the
Administrative Agent.

                  9.2 Delegation of Duties. The Administrative Agent may execute
any of its duties under this Agreement and the other Loan Documents by or
through agents or attorneys-in-fact and shall be entitled to advice of counsel
concerning all matters pertaining to such duties. The Administrative Agent shall
not be responsible for the negligence or misconduct of any agents or attorneys
in-fact selected by it with reasonable care.

                  9.3 Exculpatory Provisions. Neither the Administrative Agent
nor any of its officers, directors, employees, agents, attorneys-in-fact or
Affiliates shall be (i) liable for any action lawfully taken or omitted to be
taken by it or such Person under or in connection with this Agreement or any
other Loan Document (except for its or such Person's own gross negligence or
willful misconduct) or (ii) responsible in any manner to any of the Lenders for
any recitals, statements, representations or warranties made by the Borrower or
any officer thereof contained in this Agreement or any other Loan Document or in
any certificate, report, statement or other document referred to or provided for
in, or received by the Administrative Agent under or in connection with, this
Agreement or any other Loan Document or for the value, validity, effectiveness,
genuineness, enforceability or sufficiency of this Agreement or any other Loan
Document or for any failure of the Borrower to perform its obligations hereunder
or thereunder. The Administrative Agent shall not be under any obligation to any
Lender to ascertain or to inquire as to the observance or performance of any of
the agreements contained in, or conditions of, this Agreement or any other Loan
Document, or to inspect the properties, books or records of the Borrower.

                  9.4 Reliance by Administrative Agent. The Administrative Agent
shall be entitled to rely, and shall be fully protected in relying, upon any
Note, writing, resolution, notice, consent, certificate, affidavit, letter,
cablegram, telegram, telecopy, telex or teletype message, statement, order or
other document or conversation believed by it to be genuine and correct and to
have been signed, sent or made by the proper Person or Persons and upon advice
and statements of legal counsel (including, without limitation, counsel to the
Borrower or any other Loan Party), independent accountants and other experts
selected by the Administrative Agent. The Administrative Agent may deem and
treat the payee of any Note as the owner thereof for all purposes unless a
written notice of assignment, negotiation or transfer thereof shall have been
filed with the Administrative Agent. The Administrative Agent shall be fully
justified in failing 


                                      -30-
<PAGE>   36

or refusing to take any action under this Agreement or any other Loan Document
unless it shall first receive such advice or concurrence of the Required Lenders
as it deems appropriate or it shall first be indemnified to its satisfaction by
the Lenders against any and all liability and expense which may be incurred by
it by reason of taking or continuing to take any such action. The Administrative
Agent shall in all cases be fully protected in acting, or in refraining from
acting, under this Agreement and the other Loan Documents in accordance with a
request of the Required Lenders, and such request and any action taken or
failure to act pursuant thereto shall be binding upon all the Lenders and all
future holders of the Loans.

                  9.5 Notice of Default. The Administrative Agent shall not be
deemed to have knowledge or notice of the occurrence of any Default or Event of
Default hereunder unless the Administrative Agent has received notice from a
Lender or the Borrower referring to this Agreement, describing such Default or
Event of Default and stating that such notice is a "notice of default". In the
event that the Administrative Agent receives such a notice, the Administrative
Agent shall give notice thereof to the Lenders. The Administrative Agent shall
take such action with respect to such Default or Event of Default as shall be
reasonably directed by the Required Lenders; provided that unless and until the
Administrative Agent shall have received such directions, the Administrative
Agent may (but shall not be obligated to) take such action, or refrain from
taking such action, with respect to such Default or Event of Default as it shall
deem advisable in the best interests of the Lenders.

                  9.6 Non-Reliance on Administrative Agent and Other Lenders.
Each Lender expressly acknowledges that neither the Administrative Agent nor any
of its officers, directors, employees, agents, attorneys-in-fact or Affiliates
has made any representations or warranties to it and that no act by the
Administrative Agent hereinafter taken, including any review of the affairs of
the Borrower or any other Loan Party, shall be deemed to constitute any
representation or warranty by the Administrative Agent to any Lender. Each
Lender represents to the Administrative Agent that it has, independently and
without reliance upon the Administrative Agent or any other Lender, and based on
such documents and information as it has deemed appropriate, made its own
appraisal of and investigation into the business, operations, property,
financial and other condition and creditworthiness of the Borrower and the other
Loan Parties and made its own decision to make its Loans hereunder and enter
into this Agreement. Each Lender also represents that it will, independently and
without reliance upon the Administrative Agent or any other Lender, and based on
such documents and information as it shall deem appropriate at the time,
continue to make its own credit analysis, appraisals and decisions in taking or
not taking action under this Agreement and the other Loan Documents, and to make
such investigation as it deems necessary to inform itself as to the business,
operations, property, financial and other condition and creditworthiness of the
Borrower. Except for notices, reports and other documents expressly required to
be furnished to the Lenders by the Administrative Agent hereunder or under the
other Loan Documents, the Administrative Agent shall not have any duty or
responsibility to provide any Lender with any credit or other information
concerning the business, operations, property, condition (financial or
otherwise), prospects or creditworthiness of the Borrower or any other Loan
Party which may come into the possession of the Administrative Agent or any of
its officers, directors, employees, agents, attorneys-in-fact or Affiliates.


                                      -31-
<PAGE>   37

                  9.7 Indemnification. The Lenders agree to indemnify the
Administrative Agent in its capacity as such (to the extent not reimbursed by
the Borrower and without limiting the obligation of the Borrower to do so),
ratably according to their respective Commitment Percentages in effect on the
date on which indemnification is sought, from and against any and all
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements of any kind whatsoever which may at any time
(including, without limitation, at any time following the payment of the Loans)
be imposed on, incurred by or asserted against the Administrative Agent in any
way relating to or arising out of, the Commitments, this Agreement, any of the
other Loan Documents or any documents contemplated by or referred to herein or
therein or the transactions contemplated hereby or thereby or any action taken
or omitted by the Administrative Agent under or in connection with any of the
foregoing; provided that no Lender shall be liable for the payment of any
portion of such liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements resulting solely from the
Administrative Agent's gross negligence or willful misconduct. The agreements in
this Section shall survive the payment of the Loans and all other amounts
payable hereunder.

                  9.8 Administrative Agent in Its Individual Capacity. The
Administrative Agent and its Affiliates may make loans to, accept deposits from
and generally engage in any kind of business with the Borrower and the other
Loan Parties as though the Administrative Agent were not the Administrative
Agent hereunder and under the other Loan Documents. With respect to the Loans
made by it, the Administrative Agent shall have the same rights and powers under
this Agreement and the other Loan Documents as any Lender and may exercise the
same as though it were not the Administrative Agent, and the terms "Lender" and
"Lenders" shall include the Administrative Agent in its individual capacity.

                  9.9 Successor Administrative Agent. The Administrative Agent
may resign as Administrative Agent upon 10 days' notice to the Lenders. If the
Administrative Agent shall resign as Administrative Agent under this Agreement
and the other Loan Documents, then the Required Lenders shall appoint from among
the Lenders a successor agent for the Lenders, which successor agent shall be
approved by the Borrower, whereupon such successor agent shall succeed to the
rights, powers and duties of the Administrative Agent, and the term
"Administrative Agent" shall mean such successor agent effective upon such
appointment and approval, and the former Administrative Agent's rights, powers
and duties as Administrative Agent shall be terminated, without any other or
further act or deed on the part of such former Administrative Agent or any of
the parties to this Agreement or any holders of the Loans. After any retiring
Administrative Agent's resignation as Administrative Agent, the provisions of
this Section 9 shall inure to its benefit as to any actions taken or omitted to
be taken by it while it was Administrative Agent under this Agreement and the
other Loan Documents.

                  SECTION 10. MISCELLANEOUS

                  10.1 Amendments and Waivers. Neither this Agreement nor any
other Loan Document, nor any terms hereof or thereof may be amended,
supplemented or modified except in accordance with the provisions of this
Section 10.1. The Required Lenders may, or, with the written consent of the
Required Lenders, the Administrative Agent may, from time to time, (a) enter
into with the Borrower written amendments, supplements or modifications hereto
and to the other Loan Documents for the purpose of adding any provisions to this
Agreement or the 


                                      -32-
<PAGE>   38

other Loan Documents or changing in any manner the rights of the Lenders or of
the Borrower hereunder or thereunder or (b) waive, on such terms and conditions
as the Required Lenders or the Administrative Agent, as the case may be, may
specify in such instrument, any of the requirements of this Agreement or the
other Loan Documents or any Default or Event of Default and its consequences;
provided, however, that no such waiver and no such amendment, supplement or
modification shall (i) reduce the amount or extend the scheduled date of
maturity of any Loan or of any installment thereof, or reduce the stated rate of
any interest or fee payable hereunder or extend the scheduled date of any
payment thereof or increase the aggregate amount or extend the expiration date
of any Lender's Commitment, in each case without the consent of each Lender
affected thereby, or (ii) amend, modify or waive any provision of this Section
10.1 or reduce the percentage specified in the definition of Required Lenders or
Majority Lenders, or consent to the assignment or transfer by the Borrower of
any of its rights and obligations under this Agreement and the other Loan
Documents or release all or substantially all of the Collateral or release all
or substantially all of the Guarantors from their obligations under the
Guarantees, in each case without the written consent of all the Lenders, or (ii)
amend, modify or waive any provision of Section 9 without the written consent of
the then Administrative Agent. Any such waiver and any such amendment,
supplement or modification shall apply equally to each of the Lenders and shall
be binding upon the Borrower, the Lenders, the Administrative Agent and all
future holders of the Loans. In the case of any waiver, the Borrower, the
Lenders and the Administrative Agent shall be restored to their former positions
and rights hereunder and under the other Loan Documents, and any Default or
Event of Default waived shall be deemed to be cured and not continuing; but no
such waiver shall extend to any subsequent or other Default or Event of Default
or impair any right consequent thereon.

                  10.2 Notices. All notices, requests and demands to or upon the
respective parties hereto to be effective shall be in writing (including by
facsimile transmission) and, unless otherwise expressly provided herein, shall
be deemed to have been duly given or made (a) in the case of delivery by hand,
when delivered, (b) in the case of delivery by mail, three days after being
deposited in the mails, postage prepaid, or (c) in the case of delivery by
facsimile transmission, when sent and receipt has been electronically confirmed,
addressed as follows in the case of the Borrower and the Administrative Agent,
and as set forth in Schedule I in the case of the other parties hereto, or to
such other address as may be hereafter notified by the respective parties
hereto:

         The Borrower:        1300 North Sam Houston Parkway East
                              Houston, Texas  77032
                              Attention  Ed Donahue
                              Fax: (281) 986 - 8865
                              Telephone:  (281) 987 - 8600


                                      -33-
<PAGE>   39

         The Administrative 
         Agent:               Credit Suisse First Boston Management Corporation
                              11 Madison Avenue
                              New York, New York  10010
                              Attention: Donna P. Alderman
                              Fax:  (212) 325-8290
                              Telephone:  (212) 325-2315

provided that any notice, request or demand to or upon the Administrative Agent
or the Lenders pursuant to Section 2.3 shall not be effective until received.

                  10.3 No Waiver; Cumulative Remedies. No failure to exercise
and no delay in exercising, on the part of the Administrative Agent or any
Lender, any right, remedy, power or privilege hereunder or under the other Loan
Documents shall operate as a waiver thereof; nor shall any single or partial
exercise of any right, remedy, power or privilege hereunder preclude any other
or further exercise thereof or the exercise of any other right, remedy, power or
privilege. The rights, remedies, powers and privileges herein provided are
cumulative and not exclusive of any rights, remedies, powers and privileges
provided by law.

                  10.4 Survival of Representations and Warranties. All
representations and warranties made hereunder, in the other Loan Documents and
in any document, certificate or statement delivered pursuant hereto or in
connection herewith shall survive the execution and delivery of this Agreement
and the making of the Loans hereunder.

                  10.5 Payment of Expenses and Taxes. The Borrower agrees (a) to
pay or reimburse the Administrative Agent and the Lenders for all their
out-of-pocket costs and expenses incurred in connection with the development,
preparation and execution of, and any amendment, supplement or modification to,
this Agreement and the other Loan Documents and any other documents prepared in
connection herewith or therewith, and the consummation and administration of the
transactions contemplated hereby and thereby, including, without limitation, the
reasonable fees and disbursements of counsel to the Administrative Agent, (b) to
pay or reimburse each Lender and the Administrative Agent for all its costs and
expenses incurred in connection with the enforcement or preservation of any
rights under this Agreement, the other Loan Documents and any such other
documents, including, without limitation, the fees and disbursements of counsel
to each Lender and of counsel to the Administrative Agent, (c) to pay,
indemnify, and hold each Lender and the Administrative Agent harmless from, any
and all recording and filing fees and any and all liabilities with respect to,
or resulting from any delay in paying, stamp, excise and other taxes, if any,
which may be payable or determined to be payable in connection with the
execution and delivery of, or consummation or administration of any of the
transactions contemplated by, or any amendment, supplement or modification of,
or any waiver or consent under or in respect of, this Agreement, the other Loan
Documents and any such other documents, and (d) to pay, indemnify, and hold each
Lender and the Administrative Agent harmless from and against any and all other
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements of any kind or nature whatsoever with respect
to the execution, delivery, enforcement, performance and administration of this
Agreement, the other Loan Documents and any such other documents, including,
without


                                      -34-
<PAGE>   40

limitation, any of the foregoing relating to the violation of, noncompliance
with or liability under, any Environmental Law applicable to the operations of
the Borrower, any of its Subsidiaries, any Guarantor or any of the Properties
(all the foregoing in this clause (d), collectively, the "indemnified
liabilities"), provided, that the Borrower shall have no obligation hereunder to
the Administrative Agent or any Lender with respect to indemnified liabilities
arising from (i) the gross negligence or willful misconduct of the
Administrative Agent or any such Lender or (ii) legal proceedings commenced
against the Administrative Agent or any such Lender by any security holder or
creditor thereof arising out of and based upon rights afforded any such security
holder or creditor solely in its capacity as such. The agreements in this
Section shall survive repayment of the Loans and all other amounts payable
hereunder.

                  10.6 Successors and Assigns; Participations and Assignments.

                  (a) This Agreement shall be binding upon and inure to the
benefit of the Borrower, the Lenders, the Administrative Agent and their
respective successors and assigns, except that the Borrower may not assign or
transfer any of its rights or obligations under this Agreement without the prior
written consent of each Lender.

                  (b) Any Lender may, in accordance with applicable law, at any
time sell to one or more banks or other entities ("Participants") participating
interests in any Loan owing to such Lender, any Commitment of such Lender or any
other interest of such Lender hereunder and under the other Loan Documents. In
the event of any such sale by a Lender of a participating interest to a
Participant, such Lender's obligations under this Agreement to the other parties
to this Agreement shall remain unchanged, such Lender shall remain solely
responsible for the performance thereof, such Lender shall remain the holder of
any such Loan for all purposes under this Agreement and the other Loan
Documents, and the Borrower and the Administrative Agent shall continue to deal
solely and directly with such Lender in connection with such Lender's rights and
obligations under this Agreement and the other Loan Documents. The Borrower
agrees that if amounts outstanding under this Agreement are due or unpaid, or
shall have been declared or shall have become due and payable upon the
occurrence of an Event of Default, each Participant shall, to the maximum extent
permitted by applicable law, be deemed to have the right of setoff in respect of
its participating interest in amounts owing under this Agreement to the same
extent as if the amount of its participating interest were owing directly to it
as a Lender under this Agreement, provided that, in purchasing such
participating interest, such Participant shall be deemed to have agreed to share
with the Lenders the proceeds thereof as provided in Section 10.7(a) as fully as
if it were a Lender hereunder.

                  (c) Any Lender may, in accordance with applicable law, at any
time and from time to time assign to any Lender or any affiliate thereof or,
with the consent of the Administrative Agent (which shall not be unreasonably
withheld), to an additional bank or financial institution (an "Assignee") all or
any part of its rights and obligations under this Agreement and the other Loan
Documents pursuant to an Assignment and Acceptance, substantially in the form of
Exhibit G, with appropriate completions (an "Assignment and Acceptance"),
executed by such Assignee, such assigning Lender (and, in the case of an
Assignee that is not then a Lender or an affiliate thereof, by the
Administrative Agent) and delivered to the Administrative Agent for its
acceptance and recording in the Register. Upon such execution, delivery,
acceptance and recording, from and after the effective date determined 


                                      -35-
<PAGE>   41

pursuant to such Assignment and Acceptance, (x) the Assignee thereunder shall be
a party hereto and, to the extent provided in such Assignment and Acceptance,
have the rights and obligations of a Lender hereunder with Commitments as set
forth therein, and (y) the assigning Lender thereunder shall, to the extent
provided in such Assignment and Acceptance, be released from its obligations
under this Agreement (and, in the case of an Assignment and Acceptance covering
all or the remaining portion of an assigning Lender's rights and obligations
under this Agreement, such assigning Lender shall cease to be a party hereto).

                  (d) The Administrative Agent, on behalf of the Borrower, shall
maintain at the address of the Administrative Agent referred to in Section 10.2
a copy of each Assignment and Acceptance delivered to it and a register (the
"Register") for the recordation of the names and addresses of the Lenders and
the Commitment of, and principal amount of the Loans owing to, each Lender from
time to time. The entries in the Register shall be conclusive, in the absence of
manifest error, and the Borrower, the Administrative Agent and the Lenders may
(and, in the case of any Loan or other obligation hereunder not evidenced by a
Note, shall) treat each Person whose name is recorded in the Register as the
owner of a Loan or other obligation hereunder as the owner thereof for all
purposes of this Agreement and the other Loan Documents, notwithstanding any
notice to the contrary. Any assignment of any Loan or other obligation hereunder
not evidenced by a Note shall be effective only upon appropriate entries with
respect thereto being made in the Register. The Register shall be available for
inspection by the Borrower or any Lender at any reasonable time and from time to
time upon reasonable prior notice.

                  (e) Upon its receipt of an Assignment and Acceptance executed
by an assigning Lender and an Assignee (and, in the case of an Assignee that is
not then a Lender or an affiliate thereof, by the Administrative Agent), the
Administrative Agent shall (i) promptly accept such Assignment and Acceptance
and (ii) on the effective date determined pursuant thereto record the
information contained therein in the Register and give notice of such acceptance
and recordation to the Lenders and the Borrower.

                  (f) The Borrower authorizes each Lender to disclose to any
Participant or Assignee (each, a "Transferee") and any prospective Transferee
any and all financial information in such Lender's possession concerning the
Borrower and its Affiliates which has been delivered to such Lender by or on
behalf of the Borrower pursuant to this Agreement or which has been delivered to
such Lender by or on behalf of the Borrower in connection with such Lender's
credit evaluation of the Borrower and its Affiliates prior to becoming a party
to this Agreement.

                  (g) For avoidance of doubt, the parties to this Agreement
acknowledge that the provisions of this Section concerning assignments of Loans
and Notes relate only to absolute assignments and that such provisions do not
prohibit assignments creating security interests, including, without limitation,
any pledge or assignment by a Lender of any Loan or Note to any Federal Reserve
Bank in accordance with applicable law.

                  10.7 Set-off. In addition to any rights and remedies of the
Lenders provided by law, each Lender shall have the right, with prior notice to
the Borrower only to the extent required by applicable law, any other such
notice being expressly waived by the Borrower to the extent permitted by
applicable law, upon any amount becoming due and payable by the


                                      -36-
<PAGE>   42

Borrower hereunder (whether at the stated maturity, by acceleration or
otherwise) to set-off and appropriate and apply against such amount any and all
deposits (general or special, time or demand, provisional or final), in any
currency, and any other credits, indebtedness or claims, in any currency, in
each case whether direct or indirect, absolute or contingent, matured or
unmatured, at any time held or owing by such Lender or any branch or agency
thereof to or for the credit or the account of the Borrower. Each Lender agrees
promptly to notify the Borrower and the Administrative Agent after any such
set-off and application made by such Lender, provided that the failure to give
such notice shall not affect the validity of such set-off and application.

                  10.8 Counterparts. This Agreement may be executed by one or
more of the parties to this Agreement on any number of separate counterparts
(including by facsimile transmission of signature pages hereto), and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument. A set of the copies of this Agreement signed by all the parties
shall be lodged with the Borrower and the Administrative Agent.

                  10.9 Severability. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.

                  10.10 Integration. This Agreement and the other Loan Documents
represent the agreement of the Borrower, the Administrative Agent and the
Lenders with respect to the subject matter hereof, and there are no promises,
undertakings, representations or warranties by the Administrative Agent or any
Lender relative to subject matter hereof not expressly set forth or referred to
herein or in the other Loan Documents.

                  10.11 GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND
OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.

                  10.12 Submission To Jurisdiction; Waivers. The Borrower hereby
irrevocably and unconditionally:

                  (a) submits for itself and its property in any legal action or
proceeding relating to this Agreement and the other Loan Documents to which it
is a party, or for recognition and enforcement of any judgment in respect
thereof, to the non-exclusive general jurisdiction of the courts of the State of
New York, the courts of the United States of America for the Southern District
of New York, and appellate courts from any thereof;

                  (b) consents that any such action or proceeding may be brought
in such courts and waives any objection that it may now or hereafter have to the
venue of any such action or proceeding in any such court or that such action or
proceeding was brought in an inconvenient court and agrees not to plead or claim
the same;


                                      -37-
<PAGE>   43

                  (c) agrees that service of process in any such action or
proceeding may be effected by mailing a copy thereof by registered or certified
mail (or any substantially similar form of mail), postage prepaid, to the
Borrower at its address set forth in Section 10.2 or at such other address of
which the Administrative Agent shall have been notified pursuant thereto;

                  (d) agrees that nothing herein shall affect the right to
effect service of process in any other manner permitted by law or shall limit
the right to sue in any other jurisdiction; and

                  (e) waives, to the maximum extent not prohibited by law, any
right it may have to claim or recover in any legal action or proceeding referred
to in this Section any special, exemplary, punitive or consequential damages.

                  10.13 Acknowledgements. The Borrower hereby acknowledges that:

                  (a) it has been advised by counsel in the negotiation,
execution and delivery of this Agreement and the other Loan Documents;

                  (b) neither the Administrative Agent nor any Lender has any
fiduciary relationship with or duty to the Borrower arising out of or in
connection with this Agreement or any of the other Loan Documents, and the
relationship between the Borrower and the other Loan Parties, on one hand, and
Agent and Lenders, on the other hand, in connection herewith or therewith is
solely that of debtor and creditor; and

                  (c) no joint venture is created hereby or by the other Loan
Documents or otherwise exists by virtue of the transactions contemplated hereby
among the Lenders or among the Borrower and the Lenders.

                  10.14 WAIVERS OF JURY TRIAL. THE BORROWER, THE ADMINISTRATIVE
AGENT AND THE LENDERS HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY
IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER LOAN
DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN.

                  10.15 Intercompany Loans. It is expressly understood,
acknowledged and agreed by the Borrower that Firstar Bank of Minnesota, N.A. as
Trustee (together with its successors and assigns, the "Indenture Trustee")
under the Indenture issued by TEC and dated as of June 13, 1997, may, in its
sole discretion and without the consent of any Person, take all actions it deems
necessary or appropriate in order to (a) collect and receive any and all amounts
payable in respect of the obligations of the Borrower under the Loan Agreement
dated as of June 13, 1997 between the TEC and the Borrower (as the same may be
amended, modified or supplemented from time to time) and each promissory note
issued thereunder by the Borrower and all security instruments related thereto
(collectively, the "IC Documents") and (b) enforce or effect all security
interest under the IC Documents in accordance with and to the extent provided in
the IC Documents. Such actions shall include, but not be limited to, enforcing
or effecting any term or provision of the IC Documents or advising, instructing
or otherwise directing TEC's agents with respect to the enforcement of any term
or provision of the IC Documents. The Indenture Trustee shall have the sole
right to take all such actions until the Required Lenders or the Indenture
Trustee otherwise agree.


                                      -38-
<PAGE>   44

                  10.16 Concerning the Collateral. The Borrower hereby grants a
lien on and security interest in all of the Borrower's right title and interest
in and to the Collateral to secure the full payment and performance of the
Obligations.


                            [Signature Pages Follow]


                                      -39-
<PAGE>   45

                  IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and delivered by their proper and duly authorized
officers as of the day and year first above written.


                                 TRANSTEXAS GAS CORPORATION, Borrower


                                 By:
                                    -----------------------------------------
                                    Title:


                                 CREDIT SUISSE FIRST BOSTON 
                                   MANAGEMENT CORPORATION
                                   as Administrative Agent and as a Lender


                                 By:
                                    -----------------------------------------
                                    Title:


                                 ANGELO GORDON & CO. L.P., Lender


                                 By:
                                    -----------------------------------------
                                    Title:


                                 OAKTREE CAPITAL MANAGEMENT L.L.P., Lender


                                 By:
                                    -----------------------------------------
                                    Title:





                        Credit Agreement: Signature Page
<PAGE>   46

                                                                       EXHIBIT D

                                   CERTIFICATE

                  Reference is hereby made to the Credit Agreement, dated as of
April __, 1999, among TransTexas Gas Corporation, the lenders parties thereto,
and Credit Suisse First Boston Management Corporation, as administrative agent
(as amended, restated, supplemented or otherwise modified from time to time, the
"Credit Agreement"). Pursuant to the provisions of Section 3.5(b)(i)(B) of the
Credit Agreement, the undersigned hereby certifies that it is not a "bank" as
such term is defined in Section 881(c)(3)(A) of the Internal Revenue Code of
1986, as amended.


                                      [NAME OF LENDER]


                                      By:
                                         -------------------------------------
                                         Title:


Date:___________________, 19__


<PAGE>   1
                                                                    Exhibit 21.1

                         Subsidiaries of the Registrant


         Name                                                     Jurisdiction
         ----                                                     ------------

Galveston Bay Pipeline Company                                    Delaware


Galveston Bay Processing Corporation                              Delaware


PetroAmerican Offshore, Inc.                                      Delaware


PetroAmerican Services Corporation                                Delaware


TransTexas Drilling Services, Inc.                                Delaware


TransTexas Exploration Corporation                                Delaware


TransTexas Gas Corporation - Liberia                              Liberia


TransTexas Energia de Mexico, S.A. de C.V.                        Mexico




<PAGE>   1
                                                                    Exhibit 23.1


                       CONSENT OF INDEPENDENT ACCOUNTANTS


We consent to the incorporation by reference in the registration statement of
TransTexas Gas Corporation (the "Company") on Form S-3 (33-91494) of our report,
which contains an explanatory paragraph regarding the Company's ability to
continue as a going concern, dated May 20, 1999, on our audits of the Company's
financial statements and financial statement schedules as of January 31, 1999
and 1998, and for the years ended January 31, 1999, 1998 and 1997, which report
is included in the Company's annual report on Form 10-K.




PricewaterhouseCoopers LLP


Houston, Texas
May 20, 1999

<PAGE>   1
                                                                    Exhibit 23.2


                   CONSENT OF INDEPENDENT PETROLEUM ENGINEERS


We consent to the incorporation by reference in the registration statement of
TransTexas Gas Corporation (the "Company") on Form S-3 (33-91494) of, and the
references to, our reserve report dated February 1, 1999 ("Reserve Report"), and
to the use of our name under the caption "Experts" and elsewhere therein in the
form and context in which they appear. We also consent to the references to our
Reserve Report and to the use of our name in the Company's Annual Report on Form
10-K for the year ended January 31, 1999 in the form and context in which they
appear.

                                   NETHERLAND, SEWELL & ASSOCIATES, INC.


                                   By:  /s/ Danny D. Simmons              
                                      ------------------------------------
                                        Danny D. Simmons
                                        Senior Vice President

Houston, Texas
May 17, 1999



<TABLE> <S> <C>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TRANSTEXAS
GAS CORPORATION'S CONSOLIDATED BALANCE SHEET AT JANUARY 31, 1999 AND THE
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED JANUARY 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
       
<S>                             <C>
<PERIOD-TYPE>                   12-MOS
<FISCAL-YEAR-END>                          JAN-31-1999
<PERIOD-START>                             FEB-01-1998
<PERIOD-END>                               JAN-31-1999
<CASH>                                           3,775
<SECURITIES>                                         0
<RECEIVABLES>                                   17,377
<ALLOWANCES>                                         0
<INVENTORY>                                      3,210
<CURRENT-ASSETS>                                28,055
<PP&E>                                       1,459,630
<DEPRECIATION>                               1,167,487
<TOTAL-ASSETS>                                 345,367
<CURRENT-LIABILITIES>                                0
<BONDS>                                        581,865
                                0
                                          0
<COMMON>                                           740
<OTHER-SE>                                   (430,755)
<TOTAL-LIABILITY-AND-EQUITY>                   345,367
<SALES>                                         91,319
<TOTAL-REVENUES>                               156,766
<CGS>                                                0
<TOTAL-COSTS>                                  563,523
<OTHER-EXPENSES>                                     0
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                              79,921
<INCOME-PRETAX>                              (485,473)
<INCOME-TAX>                                  (38,882)
<INCOME-CONTINUING>                          (446,591)
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                (1,142)
<CHANGES>                                            0
<NET-INCOME>                                 (447,733)
<EPS-PRIMARY>                                   (7.78)
<EPS-DILUTED>                                   (7.78)
        

</TABLE>


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