TATHAM OFFSHORE INC, 10-K, 2000-09-28

TATHAM OFFSHORE INC
10-K, 2000-09-28
OIL & GAS FIELD EXPLORATION SERVICES

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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 JUNE 30, 2000

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

FOR THE TRANSITION PERIOD FROM ____ TO ____

COMMISSION FILE NUMBER. 0-22892

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TATHAM OFFSHORE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 76-0269967
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

FIVE POST OAK PARK, SUITE 1550
4400 POST OAK PARKWAY
HOUSTON, TEXAS 77027
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 621-3996

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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
SERIES A 12% CONVERTIBLE EXCHANGEABLE PREFERRED STOCK
SERIES B 8% CONVERTIBLE EXCHANGEABLE PREFERRED STOCK
SERIES C 4% CONVERTIBLE EXCHANGEABLE PREFERRED STOCK

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 THE REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K.
---

AS OF SEPTEMBER 15, 2000, THERE WERE OUTSTANDING 26,079,625 SHARES OF
COMMON STOCK OF THE REGISTRANT. THE AGGREGATE MARKET VALUE ON SUCH DATE OF THE
VOTING STOCK OF THE REGISTRANT HELD BY NON-AFFILIATES WAS AN ESTIMATED $0.3
MILLION.

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TATHAM OFFSHORE, INC. AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED
JUNE 30, 2000

INDEX

<TABLE>
<S> <C>
PART I.....................................................................................................1
Items 1 & 2. Business and Properties..................................................................1
Item 3. Legal Proceedings.......................................................................16
Item 4. Submission of Matters to a Vote of Security Holders.....................................16

PART II...................................................................................................17
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters....................17
Item 6. Selected Financial Data.................................................................18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations...............................................................20
Item 7A. Quantitative and Qualitative Disclosure About Market Risk...............................29
Item 8. Financial Statements and Supplementary Data.............................................29
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure....................................................................29

PART III..................................................................................................30
Item 10. Directors and Executive Officers of the Registrant......................................30
Item 11. Executive Compensation..................................................................30
Item 12. Security Ownership of Certain Beneficial Owners and Management..........................30
Item 13. Certain Relationships and Related Transactions..........................................30

PART IV...................................................................................................43
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.........................43
</TABLE>

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The following text is qualified in its entirety by reference to the more
detailed information and consolidated financial statements (including the notes
thereto) appearing elsewhere in this Annual Report on Form 10-K (the "Annual
Report"). Unless otherwise indicated, (i) all current and prospective
information in this Annual Report gives effect to the Merger (as defined) and
related transactions completed on or before August 14, 1998, including the sale
of certain of Tatham Offshore's existing assets, the related retirement of
certain amounts of Tatham Offshore's Preferred Stock, the contribution to Tatham
Offshore of two semisubmersible drilling rigs, and the assumption of certain
debt, (ii) all references to "Tatham Offshore" or "Company" are to Tatham
Offshore, Inc. and its subsidiaries, and (iii) all financial information and per
share data in this Annual Report gives effect to the one for ten reverse stock
split Tatham Offshore completed on November 24, 1997.

Prior to August 1998, Tatham Offshore was in the oil and gas exploration
and development business, primarily in the Gulf of Mexico (the "Gulf"). The
Company has refocused its business from the oil and gas exploration and
production business in the Gulf to an integrated frontier investment strategy
targeting Atlantic Canada.

In connection with DeepTech International Inc.'s ("DeepTech") merger with a
subsidiary of El Paso Energy Corporation ("El Paso") completed on August 14,
1998, Tatham Offshore (i) transferred its ownership of Tatham Offshore
Development, Inc. ("Tatham Development"), which owned oil and gas producing
properties, to DeepTech and its remaining oil and gas properties to Leviathan
Gas Pipeline Partners, L.P. ("Leviathan"), a New York Stock Exchange-listed
master limited partnership in which DeepTech owned an effective 23.2% interest
on August 14, 1998, and (ii) acquired from DeepTech ownership of DeepFlex
Production Services, Inc. ("DeepFlex") and therefore the FPS Laffit Pincay (the
"Laffit Pincay") and the FPS Bill Shoemaker (the "Bill Shoemaker" and, together
with the Laffit Pincay, the "Rigs"). On August 14, 1998, RIGCO North America,
L.L.C. ("RIGCO") and FPS VI, L.L.C. ("FPS VI"), wholly-owned subsidiaries of
DeepFlex, owned all of the interests in the Laffit Pincay and the Bill
Shoemaker. For a description of certain items used herein relating to the oil
and gas industry, see Items 1 & 2. "Business and Properties -- Certain
Definitions."

PART I

ITEMS 1 & 2. BUSINESS AND PROPERTIES

OVERVIEW

Tatham Offshore, a Delaware corporation founded in 1989, has provided
offshore contract drilling services to the oil and gas industry in the Gulf and
Atlantic Canada and is currently pursuing an integrated energy related
investment strategy in Atlantic Canada. Through August 14, 1998, Tatham Offshore
had been engaged in the development, exploration and production of oil and gas
reserves located primarily in the Gulf focusing principally on the flextrend and
deepwater areas.

DEEPTECH MERGER AND RELATED TRANSACTIONS

On August 14, 1998, DeepTech merged with a subsidiary of El Paso (the
"Merger"). As a result of the Merger and related transactions, Tatham Offshore
and DeepTech were restructured by exchanging certain assets so that DeepFlex,
the indirect owner of two semisubmersible drilling rigs, became a wholly-owned
subsidiary of Tatham Offshore and Tatham Offshore transferred its interest in
the Sunday Silence prospect to DeepTech and transferred all of its remaining
assets located in the Gulf to Leviathan, an affiliate of DeepTech and formerly
an affiliate of Tatham Offshore. As such, all of the Company's oil and gas
operations in the Gulf are reflected as discontinued operations in the financial
statements. In connection with this reorganization, Tatham Offshore became
independent of DeepTech pursuant to a spin-off transaction effected by a Rights
Offering (the "Rights Offering") in which DeepTech offered and sold all of the
shares of Tatham Offshore common stock and Series A Preferred Stock held by
DeepTech to the stockholders of DeepTech.

On July 16, 1998, the Securities and Exchange Commission declared effective
Tatham Offshore's Registration Statement on Form S-1 relating to the offering of
rights to the DeepTech stockholders to purchase DeepTech's 28,073,450 shares of
Tatham Offshore common stock and 4,670,957 shares of Tatham Offshore's Series A
Preferred Stock in the Rights Offering. As a result of the Rights Offering,
unaffiliated parties purchased 3,378,693 shares of common stock and 562,148
shares of Series A Preferred Stock. Tatham Brothers Securities, LLC ("TB
Securities"), an affiliate of Mr. Thomas P. Tatham, Chairman of the Board and
Chief Executive Officer of Tatham Offshore, purchased 20,768,011 shares of
common stock and 3,455,444 shares of Series A Preferred Stock which resulted in
DeepTech receiving net proceeds from the Rights Offering of $75.0 million. In
exchange for committing to purchase a specified portion of the stock underlying
any unexercised rights, TB Securities received a fee of $6.9 million. In
connection with the Rights Offering, Tatham Offshore purchased and cancelled all
of the shares of

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Common Stock and Series A Preferred Stock that were not acquired by the holders
of rights or TB Securities in the Rights Offering, 3,926,746 shares of Common
Stock and 653,365 shares of Series A Preferred Stock, respectively, and the
proceeds from such purchase by Tatham Offshore were contributed by DeepTech to
Tatham Offshore. DeepTech no longer owns any of Tatham Offshore's capital stock
as a result of the Rights Offering.

RECENT EVENTS

Defaults Under Credit Facilities

On September 30, 1996, RIGCO, a subsidiary of DeepFlex, entered into a $65
million senior secured credit facility with a syndicate of lenders (as amended,
the "Credit Facility"). Proceeds from the Credit Facility were used to acquire
the Bill Shoemaker, to fund significant upgrades to the Bill Shoemaker, and to
retire $30.3 million of other rig related indebtedness. In April 1997, the
Credit Facility was amended to provide for an additional $12.0 million to fund
the remaining refurbishments and upgrades to the Bill Shoemaker. Pursuant to the
terms of the Credit Facility, RIGCO was required to pay $58.1 million in
principal and $2.2 million in accrued interest on April 30, 1999. RIGCO did not
make payment of such amounts; as a result, an Event of Default occurred under
the Credit Facility.

In connection with the Merger, Tatham Offshore entered into a $22.9 million
short-term financing arrangement with Tatham Brothers, LLC ("Tatham Brothers")
(as amended, the "Short-Term Facility"). Proceeds from the Short-Term Facility
were used to refinance existing loans and provide funds necessary to satisfy
certain obligations of the Company in connection with the Merger and Rights
Offering. Pursuant to the terms of the Short-Term Facility, the Company was
required to pay $24.1 million in principal and $0.3 million in interest on April
30, 1999. Tatham Offshore did not make payment of such amounts; as a result, an
Event of Default has occurred and is continuing under the Short-Term Facility.
See "Note 5 -- Indebtedness -- Long-Term Debt -- Affiliates" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources" for additional discussion of the credit
facilities of Tatham Offshore and its subsidiaries.

Bankruptcy Filing by Subsidiaries

On August 9, 1999, RIGCO, FPS VI, FPS III, Inc. ("FPS III") and FPS V, Inc.
("FPS V") (collectively, the "Rig Subsidiaries"), wholly-owned subsidiaries of
DeepFlex, filed voluntary petitions under Chapter 11 of the United States
Bankruptcy Code (the "Bankruptcy Filing"). At the time of the Bankruptcy Filing,
RIGCO owned a 100% interest in the Bill Shoemaker and a 25% undivided interest
in the Laffit Pincay and FPS VI owned a 75% undivided interest in the Laffit
Pincay. FPS III and FPS V are the owners of RIGCO and FPS VI with FPS III owning
a 50% interest in RIGCO and FPS V owning a 50% interest in RIGCO and a 100%
interest in FPS VI. The bankruptcy proceedings of the Rig Subsidiaries are
administered jointly. As a result of the Bankruptcy Filing, the Rigs were
managed by the Company's rig related subsidiaries as debtors-in-possession. The
syndicate of lenders under the Credit Facility had a secured interest in
substantially all of the assets of RIGCO and FPS VI.

On May 1, 2000, RIGCO and FPS VI sold all of their interest in the Laffit
Pincay to Odin Millennium Partnership Ltd. for $28.5 million in cash. Expenses
associated with the sale totaled $0.3 million and $175,000 of the net proceeds
is being held by RIGCO, in a separate debtor-in-possession bank account, pending
the resolution of a maritime lien claim by one of RIGCO's pre-petition
creditors. The balance of the proceeds from the sale of the Laffit Pincay, $28.0
million, was paid to RIGCO's secured lenders in partial payment of their secured
claim under the Credit Facility. Loss from discontinued operations includes an
impairment provision of $12.9 million related to the sale of this rig.

On June 28, 2000, RIGCO sold all of its interest in the Bill Shoemaker to
Fred Olsen Energy ASA for $43.6 million in cash. Expenses associated with the
sale totaled $0.4 million. By order of the Bankruptcy Court, RIGCO established
separate debtor-in-possession bank accounts for (i) $2.0 million to secure
payment to Tatham Offshore for their interest in four of the anchor chains
located on the Bill Shoemaker, (ii) $0.6 million for administrative expenses
incurred in the Bankruptcy proceedings and (iii) $0.4 million for uncontested
claims of unaffiliated unsecured creditors. The secured lenders under the Credit
Facility and the DIP Loan (See "Liquidity and Capital Resources") received a
total of $36.6 million in final payment of all principal, interest and expenses
associated with the Credit Facility and DIP Loan. Pursuant to a Bankruptcy Court
Order, RIGCO paid $2.0 million to Tatham Offshore for Tatham Offshore's interest
in the four anchor chains on June 29, 2000. Loss from discontinued operations
includes an impairment provision of $44.6 million related to the sale of this
rig.

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On September 25, 2000, the Rig Subsidiaries filed a Motion to Dismiss the
Chapter 11 proceedings with the United States Bankruptcy Court (the "Motion to
Dismiss"). If the Motion to Dismiss is granted, the Rig Subsidiaries will be
required to immediately pay all unaffiliated pre-petition creditors with
undisputed claims in full. Additionally, the pending Motion to Dismiss directs
the Rig Subsidiaries to remit $325,000 in "Disputed Funds" sought by Sedco Forex
Corporation and Sedco Forex Canada Limited into a trust account to be held until
resolution of a lawsuit brought by RIGCO against these and other related parties
in the 165th Judicial District Court in Harris County, Texas. This lawsuit,
referenced hereinafter as the "Harris County Litigation," is discussed further
below.

Further, if the Motion to Dismiss is granted, all funds remaining after the
payments to the unaffiliated creditors and deposit of the Disputed Funds into a
trust account will be paid in cash to affiliated pre-petition creditors on a
pro rata basis. The affiliated creditors would also share any proceeds recovered
by RIGCO from the Harris County Litigation on a pro rata basis.

Lawsuit Against Sedco Forex (the Harris County Litigation)

Allegations against Sedco Forex include claims of gross negligence, breach
of contract, fraud, negligent misrepresentation and negligence. RIGCO has also
alleged that the manner in which Sedco Forex performed its duties with respect
to the Bill Shoemaker and Laffit Pincay during the course of the management and
charter agreements resulted in RIGCO's financial difficulties and caused it to
default on its secured debt obligations. RIGCO is seeking approximately $51
million in actual damages plus an unspecified amount of exemplary damages.

New Credit Facility

Effective July 1, 1999, Tatham Offshore entered into a revolving draw
facility with Tatham Investment Corp. which is 100% owned by Thomas P. Tatham.
The revolving draw facility provides for loans, at the lenders' sole discretion,
by Tatham Investment Corp. to the Company in amounts up to $5.0 million. The
revolving draw facility bears interest at the rate of 15% per annum and is
payable upon demand by the lender. Through September 15, 2000, the Company has
borrowed $4.2 million under this facility. The Company has pledged all of its
equity ownership in certain wholly-owned subsidiaries of the Company as well as
a certain promissory note issued by Tatham Offshore Canada, Limited to Tatham
Investment Corp. as security under this credit facility.

ATLANTIC CANADA STRATEGY

As its principal focus, the Company intends to pursue an integrated
investment strategy in Atlantic Canada. The Company believes that the Atlantic
Canada region offers significant investment opportunities. The Company's plans
include diversifying its business to include substantial natural gas gathering
and transmission facilities, fixed location gravity based platforms, related gas
processing facilities, a facility for the generation of electricity and other
related investments including upstream exploration and production activities and
the acquisition of oil and gas concessions or license interests. In Atlantic
Canada, as with any frontier region, there will be substantial risks associated
with investments in such projects. However, the Company believes that by using
an integrated investment approach related to the development of the region's
hydrocarbon reserves, the potential for investment returns is maximized. The
Company is contemplating pursuing the development of the projects described
below. Each of these projects is in a preliminary, conceptual phase. In
addition, (i) the Company does not currently possess the capital necessary to
implement its business strategy completely and there can be no assurances that
the Company

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will be able to obtain sufficient capital for any or all of the projects, (ii)
there can be no assurances that these projects and other opportunities will
prove to be economic or that they will occur, and (iii) many of these projects
will require governmental approvals, almost all of which the Company has yet to
receive. Moreover, if there are developments that the Company determines to be
indicative of a lack of reasonable opportunity to realize benefits for the
Company's stockholders, then the Company will pursue other opportunities,
wherever located.

Pipeline Activities. During 1997, Tatham Offshore Canada Limited, a
wholly-owned subsidiary of the Company, was formed to pursue business
opportunities in the Atlantic Canada region. In addition, the Company has caused
to be formed two limited partnerships, one in Canada and one in the United
States and both known collectively as North Atlantic Pipeline Partners to
construct and operate an offshore natural gas or multi-phase pipeline from the
Grand Banks area offshore Newfoundland to the east coast of the United States
with land falls in both Newfoundland and Nova Scotia.

Since another pipeline company was given regulatory authority to construct
a pipeline from the offshore Nova Scotia area, North Atlantic Pipeline Partners
refocused its efforts to concentrate on the first phase of the pipeline. As
redesigned, the initial phase of the pipeline project would be approximately 615
kilometers long and would originate in the Jeanne D'Arc Basin of the Grand Banks
area and extend to a point near Come-by-Chance, Newfoundland and would include
the construction of a gravity based structure ("GBS") on the Grand Banks.

In conjunction with its application to the National Energy Board of Canada
in 1997, North Atlantic Pipeline Partners obtained non-binding letters of intent
for the use of its system to deliver gas to the United States which total
approximately 500 MMcf per day. The Company believes that there is significant
reserve potential from the areas offshore Atlantic Canada and as that reserve
potential is developed, a second pipeline into the United States will be
required to meet increased demand for natural gas on the east coast of the
United States. The timing of increased drilling activity and the development of
the Atlantic Canada reserve potential is dependent upon major and independent
producers. As development drilling in the area continues, the Company will be
better able to assess the timing and construction requirements for a second
pipeline into the United States.

Gas Processing Facility. The natural gas that will be produced in the Grand
Banks area and potentially be transported through North Atlantic Pipeline
Partners' pipeline system is expected to contain significant quantities of
natural gas liquids ("NGLs"), such as ethane, propane, butanes and natural
gasoline. These NGLs can be recovered from the natural gas stream through
processing. The Company is investigating the possibility of developing a gas
processing plant to use the natural gas from the Grand Banks area. The Company
estimates that a processing plant to process the natural gas would cost
approximately $110 million and would be able to initially process up to 400 MMcf
of gas per day, with the ability to be upgraded to process additional natural
gas at a cost of approximately $75 million for each additional 400 MMcf per day.
In addition, the Company is evaluating opportunities to maximize economic value
from potential processing operations with petrochemical producers and with other
potential users of NGLs. The successful development of any such processing
project would be dependent on the construction of the pipeline system proposed
by the North Atlantic Pipeline Partners. The Company currently does not possess
the capital necessary to construct a gas processing plant and there can be no
assurances that the Company will be able to raise sufficient capital resources
at attractive rates to construct such a facility.

Power Generation Facility. To develop a market for the Grand Banks area
natural gas, in addition to a gas processing plant, the Company has examined the
feasibility of building a gas fired power generating plant at a cost of
approximately $260 million for 600 megawatts of combined cycle power generation.
Electrical generation in Newfoundland is currently not gas fired, relying
instead, in large part, on less efficient, transported fuel oil. The successful
development of any such power generation project would be dependent on the
construction of the pipeline system and gas processing facility discussed above.

Hydrocarbon Marketing Company. As part of its activities in the region, the
Company has formed North Atlantic Hydrocarbons Marketing, Inc. ("North Atlantic
Marketing") to buy natural gas and NGLs contained in the natural gas stream in
the production. North Atlantic Marketing would assume the marketing risk related
to the natural gas stream, purchasing the natural gas and entrained liquids, and
in some cases oil, from producers and finding a market for those hydrocarbons.

Oil and Gas Development. Significant oil and gas exploration and production
opportunities also exist throughout the region. The Company is actively seeking
to acquire working interests for proven and probable

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reserves in Atlantic Canada and has had independent studies undertaken of the
prospective reserves in the region. Those studies indicate that the region is
one of the largest potential gas regions in North America. Unlike other
international opportunities, the Company does not consider political instability
as a significant risk factor with respect to Canadian opportunities.

On September 18, 1998, Tatham Offshore Canada was informed by the
Canada-Newfoundland Offshore Petroleum Board that it was the successful bidder
on an exploration license offshore Newfoundland. The exploration license is
located on the Grand Banks and contains approximately 176,000 acres. The Company
has agreed to spend approximately CN $1,000,000 in the five years following the
grant of the license in qualified exploration expenditures in the defined area.
The Company may participate as a bidder in upcoming licensing rounds offshore
Newfoundland.

Other Opportunities. Among other potential businesses the Company may
enter, the Company is currently evaluating the feasibility of (i) an industrial
gas distribution system, (ii) an ice management system designed to manage and
reduce the risk of potential damage to its proposed offshore pipelines and
subsea facilities owned by other parties, operated through the Company's
subsidiary, Berg Masters Limited, (iii) a large diameter steel pipe rolling
mill, (iv) methanol production, (v) a LNG degasification facility and (vi) other
opportunities related to or located in Atlantic Canada. There can be no
assurances that such opportunities will prove economic, be financeable or will
occur.

CONTRACT DRILLING SERVICES

GENERAL

As of June 30, 1999, Tatham Offshore owned two semisubmersible drilling
rigs. However, both rigs were sold during the year ended June 30, 2000.

DESCRIPTION OF THE RIGS

Semisubmersible rigs are floating platforms that consist of an upper
working and living deck resting on vertical columns connected to lower hull
members. These rigs operate in a "semisubmerged" position, remaining afloat, off
bottom in a position in which the lower hull is from 55 to 90 feet below the
water line and the upper deck protrudes well above the surface. The Rigs are
positioned by chain mooring lines with anchors on the sea floor and remain
stable for drilling in the semisubmerged floating position due in part to their
wave transparency characteristics at the water line. The Rigs are able to change
draft through a water ballasting system that permits them to be submerged to a
predetermined depth so that a portion of the hulls are below the water surface
during drilling operations.

FPS Bill Shoemaker. The Bill Shoemaker is a self-propelled, twin pontoon,
eight column, second generation semisubmersible drilling rig of Aker H-3 design.
It can drill to depths of 25,000 feet, in water depths of up to 1,500 feet and
has a drilling variable load of approximately 3,850 short tons, a VARCO TDS-4S
top-drive drilling system, a 10,000 psi blow-out prevention system, 2,000 barrel
mud pits and eight 80,000 pound riser tensioners. This rig was built in 1976 and
was extensively refurbished, repaired, renovated and upgraded in 1997 at a cost
of approximately $56 million. The upgrades included installing a new heliport,
mud booster line, third mud pump, a third level of personnel accommodations and
a new electrical "SCR" system. In addition, the Bill Shoemaker underwent a
complete winterization program in this upgrade, and, as a result, is again able
to operate year-round in harsh environments, such as the North Sea, offshore
Newfoundland and eastern Canada, where it has operated in the past.

FPS Laffit Pincay. The Laffit Pincay is a second generation semisubmersible
drilling rig of Penrod/Reineke design. The Laffit Pincay is capable of drilling
to depths of 25,000 feet, in water depths of up to 1,200 feet and has a drilling
variable load of approximately 2,000 short tons, a 10,000 psi blow-out
prevention system, 1,600 barrel mud pits and six 80,000 pound riser tensioners.
This rig was built in 1976 and was refurbished, upgraded and renovated in 1996
at a cost of approximately $18 million with the installation of a VARCO TDS-3S
top-drive system and a new electrical "SCR" system.

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RIG MANAGEMENT

Pursuant to the management and charter agreements, the Sedco Forex Division
of Schlumberger marketed, managed, and operated the Rigs. On January 22, 1999,
RIGCO gave Sedco Forex a written termination notice of the management and
charter agreements for the Laffit Pincay. Effective March 23, 1999, RIGCO took
over the marketing, management and operational responsibilities for the Laffit
Pincay. On April 20, 1999, RIGCO gave Schlumberger a written termination notice
of the management and charter agreement for the Bill Shoemaker. Under the Bill
Shoemaker management and charter agreement, Schlumberger continued to man and
operate the rig through the conclusion of its drilling contract with Husky Oil
Operations Limited. In November 1999, RIGCO assumed the marketing, management
and operational responsibilities for the Bill Shoemaker.

CONTRACTS FOR DRILLING EQUIPMENT

Most drilling contracts are structured on a dayrate, footage or turnkey
basis. They usually extend over a period covering either the drilling of a
single well, a group of wells (a "well-to-well contract") or a stated term (a
"term contract") and are terminable if the drilling unit is destroyed or lost,
drilling operations are suspended for a specified time because of a breakdown of
major equipment or other events occur which are beyond either party's control.
In many instances, the customer may extend the contract term upon exercising
options to drill additional wells at fixed or mutually agreed upon terms. Most
of the Company's drilling contracts were obtained through competitive bids or
negotiations with customers and their terms and conditions vary depending on the
specific facts and circumstances.

A dayrate drilling contract generally provides for a basic drilling rate
based on a fixed rate per day. Under such a contract, the customer usually bears
a major portion of out-of-pocket costs of drilling and assumes most of the risk
associated with drilling operations such as risk of blowout, loss of hole, stuck
drill stem, machinery breakdowns, abnormal drilling conditions and risks
associated with subcontractors' services, supplies and personnel. In contrast,
the risks to the contractor on non-dayrate contracts could be substantially
greater than on a dayrate drilling contract because the contractor may, and
often does, assume more of those risks associated with drilling operations
generally assumed by the operator in a dayrate contract.

The duration of offshore drilling contracts is generally determined by
market demand and the respective management strategy of the offshore drilling
contractor and its customers. During periods of rising demand for offshore rigs,
contractors typically prefer well-to-well contracts since such contracts provide
them the flexibility to profit from increasing dayrates. In contrast, during
such periods, customers with reasonably definite drilling programs typically
prefer longer-term contracts to maintain prices at the lowest level possible.

FPS Bill Shoemaker. After completion of the upgrade and refurbishment in
July 1997, the Bill Shoemaker was mobilized to the Grand Banks area offshore
Newfoundland where it completed drilling an exploratory well for Amoco Canada
Petroleum Company Ltd. ("Amoco Canada") in the West Bonne Bay Field. Amoco
Canada exercised an option to drill a second well under this agreement but
failed to actually drill such well. To date, the Company has not received any
compensation relating to the Amoco Canada option well. Following the completion
of the Amoco Canada well, the Bill Shoemaker returned to the Gulf of Mexico and
effective January 25, 1998 was under contract to Shell Offshore Inc. ("Shell")
for a one-year period. The Company was notified by Sedco Forex that as of
November 18, 1998 Shell would cease using the Bill Shoemaker to conduct drilling
operations in the Gulf. The Company has been paid for drilling services
performed by the Bill Shoemaker for Shell through November 18, 1998 but has not
been paid for any period since that time.

After the early termination of the Shell contract, the Bill Shoemaker
underwent upgrades and refurbishments in a shipyard in Galveston, Texas prior to
returning to the Grand Banks area offshore Newfoundland. From March through
September 1999, the Bill Shoemaker drilled three wells for Husky Oil Operations,
Ltd. on their Whiterose project, offshore Newfoundland. On April 20, 1999, RIGCO
gave Sedco Forex a written termination notice of the management and charter
agreement for the Bill Shoemaker. The termination of the management and charter
agreement was effective following the end of the Husky contract in November
1999. During the year ended June 30, 2000, the Bill Shoemaker generated $13.3
million in revenue.

FPS Laffit Pincay. Following the completion of a refurbishment and upgrade
program in February 1996, the Laffit Pincay was placed under contract with
Leviathan to complete a previously drilled well and drill a new well in

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Garden Banks Block 117. Following the completion of the well for Leviathan, the
Laffit Pincay was committed to Phillips Petroleum Company to drill one well at
Garden Banks Block 70 in the Gulf with options to drill and/or complete three
additional wells at various Gulf locations. This contract was completed in late
September 1997 after Phillips drilled one of its "option" wells. Pennzoil
Exploration and Production Company entered into an agreement to drill two wells
following the completion of the two Phillips wells. Pennzoil drilled one of its
wells with the Laffit Pincay but failed to drill the second contract well. To
date, the Company has not received any compensation for the second Pennzoil
well. Following the early release of the Laffit Pincay from Pennzoil, the rig
was taken out of service for approximately six weeks to complete scheduled
maintenance and certain upgrades. From April 23, 1998 through July 18, 1998, the
Laffit Pincay was not under contract due to the softening of market conditions
for similar rigs in the Gulf and Sedco Forex's failure to properly market the
rig. From July 19, 1998 through August 11, 1998, the Laffit Pincay was under
contract with Ocean Energy, Inc. to conduct a one well program. From August 12,
1998 to the date of its sale, the Laffit Pincay did not have a drilling
contract.

CUSTOMERS

The Company provided offshore drilling services to a market that is
comprised of major and independent oil and gas companies. The Company did not
have as many customers as its competitors primarily due to the Company's limited
number of rigs and operating history and the manner in which it has
traditionally marketed its rigs through charter agreements with Sedco Forex.

COMPETITION

The contract drilling industry is an intensely competitive industry where
no one company is dominant. The Company's ability to continue to generate
business was dependent primarily on the level of domestic oil and gas
exploration and development activity and, in part on its ability to adapt to new
technology and drilling techniques as they become available. The Company
competed with numerous other drilling contractors, some of whom are
substantially larger than the Company and possess appreciably greater financial
and other resources.

INDUSTRY CONDITIONS

The demand for offshore drilling services, and thus the Company's revenues
and earnings, were directly affected by the worldwide level of oil and gas
exploration and development activity. From the mid-1980s through the early
1990s, demand for offshore drilling rigs was declining or flat, and the industry
fleet of offshore drilling rigs was reduced. In recent years, demand for
offshore rigs has improved, but the supply of rigs is only now beginning to
increase. The industry has emphasized upgrading and refurbishing existing rigs,
due to the high capital costs and long lead times associated with new
construction. In the last two years, however, several competitors have begun
construction of new-build deepwater drillships and semisubmersible rigs in
response to increased demand for rigs with deepwater capabilities. The new-build
rigs and refurbished rigs are beginning to become available in the marketplace
which increases competition for an already reduced level of drilling contracts.

Technological advances such as extended reach drilling, multilateral
drilling techniques and new offshore development and production applications
have reduced the costs of developing oil and gas fields. As a result, previously
uneconomic discoveries, particularly in deeper water, have become viable, and
the industry has placed increasing emphasis on exploiting existing resources
using new applications. The development of three-dimensional seismic surveys has
reduced exploration risks, thus placing increased emphasis on selective
exploratory drilling. However, oil prices declined substantially during 1998,
which caused drilling budgets for 1999 to decline. Although temporary downturns
in oil prices do not generally have an impact on the demand for deepwater
drilling rigs, such declines caused dayrates to decline.

DEPENDENCE ON KEY PERSONNEL

The Company is highly dependent on the services and expertise provided to
it by the Company's Chairman of the Board and Chief Executive Officer, Mr.
Thomas P. Tatham, the loss of which could substantially impair the Company's
operations. The Company has not entered into an employment contract with Mr.
Tatham, nor has it obtained "key man" life insurance on his life. Mr. Tatham has
not received any salary or other compensation since August 14, 1998.

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<PAGE> 10

OIL AND GAS PROPERTIES

GENERAL

As of June 30, 1998, Tatham Offshore owned interests in oil and gas leases
in the Gulf covering approximately 31,809 gross (22,598 net) acres. See " --Oil
and Gas Reserves" for an estimate of Tatham Offshore's total proved developed
reserves of oil and gas and a discussion of the assumptions used in, and
inherent difficulties relating to, estimating reserves. However, all of these
leases were under contract to be transferred, and were transferred, in
transactions which closed on or before August 14, 1998.

DESCRIPTION OF SIGNIFICANT PROPERTIES

The following is a description of the significant properties that Tatham
Offshore held until August 14, 1998, the date the Merger and related
transactions were completed. See " -- DeepTech Merger and Related Transactions".

Viosca Knoll Block 817. Viosca Knoll Block 817 is a producing property that
is comprised of 5,760 gross (1,440 net) acres located 40 miles off the coast of
Louisiana in approximately 650 feet of water. Tatham Offshore owned a 25%
working interest (the "Subject Interest") in the Viosca Knoll Block 817 acreage,
which interest is burdened by a convertible production payment described below.
See "-- Reversionary Interests." From the inception of production in December
1995 through June 30, 1998, the Viosca Knoll Block 817 project produced 12.4 Bcf
of gas and 22,527 barrels of oil, net to Tatham Offshore's 25% working interest.
Gas production from Viosca Knoll Block 817 is dedicated to Leviathan for
gathering through the Viosca Knoll system.

Under the convertible production payment, the holders are entitled in the
aggregate to 25% of the proceeds from the production attributable to the Subject
Interest (after deducting all leasehold operating expenses, including platform
access and processing fees) until the holders have received the aggregate sum of
$16.0 million. At the option of the holders, the unpaid portion of the
production payment may be converted into Tatham Offshore common stock at any
time until September 2000. In March 1998, Mr. Tatham acquired one-half of this
convertible production payment. At June 30, 1998, the unpaid portion of the
convertible production payment obligation totaled $11.3 million.

West Delta Block 35. West Delta Block 35, a producing field located 10
miles off the coast of Louisiana in approximately 60 feet of water, was acquired
by Tatham Offshore in 1992 to drill for and produce remaining reserves in a
fault block of an abandoned field. In late 1992, Tatham Offshore farmed-out the
property and retained a 38% working interest in West Delta Block 35. The West
Delta Block 35 field commenced production in July 1993. From the inception of
production through June 30, 1998, the West Delta 35 field has produced 3.5 Bcf
of gas and 36,873 barrels of oil, net to Tatham Offshore's interest.

Ewing Bank Blocks 958, 959, 1002 and 1003. Tatham Development owns a 100%
working interest in Ewing Bank Blocks 958, 959, 1002 and 1003, the Sunday
Silence Project, an undeveloped field that is comprised of 20,160 gross acres
located approximately six miles south of Ewing Bank Blocks 914 and 915
(discussed below) in water depths ranging from 1,400 to 1,600 feet. In July
1994, Tatham Offshore completed the drilling of an exploratory well, the Ewing
Bank 958 #1. The Ewing Bank 958 #1 well, which was drilled to a total measured
depth of 17,600 feet, identified pay zones in the Pliocene aged formations lying
primarily at measured depths between 10,000 and 15,000 feet. Tatham Offshore
completed drilling a second well at Ewing Bank Block 1003 in September 1994 to
delineate the field. During October 1994, the Ewing Bank 1003 #1 delineation
well was flow-tested at a rate of approximately 8,700 barrels of oil and 5.4
MMcf of gas per day.

In June 1997, the United States Department of the Interior, Minerals
Management Service notified Tatham Offshore that its application for deepwater
royalty relief for the Sunday Silence Project had been approved under a federal
law enacted in November 1995. The royalty relief provides for the abatement of
federal royalty on the first 52.5 million barrels of oil equivalent produced
from the Sunday Silence Project.

In connection with the Merger and related transactions, Tatham Offshore
conveyed to DeepTech all of its outstanding shares of capital stock of Tatham
Development as discussed in " -- DeepTech Merger and Related Transactions".

Ewing Bank Blocks 914 and 915. Tatham Offshore owned a 100% working
interest in each of Ewing Bank Blocks 914 and 915, which are both located in a
water depth of approximately 1,000 feet. From the inception of production

8
<PAGE> 11

through June 30, 1998, the Ewing Bank 914 #2 well produced a total of 1.2
million barrels of oil and condensate and 3.4 Bcf of gas. In May 1997, the Ewing
Bank 914 #2 well was shut-in as a result of a downhole mechanical problem and in
May 1998, Tatham Offshore completed abandonment procedures on the Ewing Bank 914
#2 and the Ewing Bank 915 #4 wells.

Ship Shoal Block 331. Ship Shoal Block 331 is located 75 miles off the
coast of Louisiana in approximately 370 feet of water. Tatham Offshore held a
100% working interest in the 5,278 gross acres lease. In December 1997, Tatham
Offshore assigned its interests and related abandonment obligations in Ship
Shoal Block 331 to a third party. Prior to the production problems, the Ship
Shoal Block 331 project produced 88 MMcf of gas and 41,875 barrels of oil.

Reversionary Interests. Tatham Offshore canceled its reversionary working
interests of 37.5% in Viosca Knoll Block 817, 25% in Garden Banks Block 72 and
25% in Garden Banks Block 117 in connection with the Merger and related
transactions discussed in " -- DeepTech Merger and Related Transactions".

Ship Shoal Block 331 Platform. Tatham Offshore owned 100% of a multipurpose
platform located in Ship Shoal Block 331. The Ship Shoal 331 Platform is located
adjacent to Leviathan's platform at Ship Shoal Block 332 which serves as the
junction platform connecting two pipeline systems in which Leviathan owns an
approximate 25.7% interest. The Ship Shoal 331 Platform was conveyed to
Leviathan in connection with the Merger and related transactions discussed in
"-- DeepTech Merger and Related Transactions."

CUSTOMERS AND CONTRACTS

Ewing Bank Gathering Agreement. In 1992, Leviathan, DeepTech and Tatham
Offshore entered into the Ewing Bank Gathering Agreement (the "Ewing Bank
Agreement"). Pursuant to the Ewing Bank Agreement and the Master Gas Dedication
Agreement (as discussed below), all existing and future oil and gas production
from Tatham Offshore's leaseholds in the Ewing Bank project area was dedicated
to Leviathan for transportation.

Master Gas Dedication Agreement. In December 1993, Leviathan and Tatham
Offshore entered into the Master Gas Dedication Agreement pursuant to which
Tatham Offshore dedicated to Leviathan transportation of all future production,
if any, from Tatham Offshore's Viosca Knoll Block 817, Garden Banks Block 72,
Garden Banks Block 117 and Ship Shoal Block 331 project areas and, in certain
cases, additional acreage contained in adjoining areas of mutual interest. In
exchange, Leviathan agreed to install certain pipeline facilities necessary to
transport production from these areas and to provide transportation services
with respect to such production.

Marketing Agreements. Tatham Offshore and Offshore Gas Marketing, Inc.
("Offshore Marketing"), a subsidiary of DeepTech, entered into agreements
whereby Offshore Marketing agreed to purchase all of the gas, oil and condensate
produced by Tatham Offshore. The agreement provides Offshore Marketing fees
equal to 2% of the sales value of crude oil and condensate and $0.015 per
dekatherm of natural gas for selling Tatham Offshore's production. During the
year ended June 30, 1998, Tatham Offshore's sales to Offshore Marketing totaled
$10.8 million. During the year ended June 30, 1999, Tatham Offshore's sales to
Offshore Marketing totaled $0.9 million.

All of the foregoing agreements were either terminated or assigned to
DeepTech or Leviathan in connection with the Merger and related transactions.

OIL AND GAS RESERVES

Estimates of Tatham Offshore's oil and gas reserves as of June 30, 1998
have been made by the Company's reserve engineers. As of June 30, 1998, the
Company estimated that the aggregate of Tatham Offshore's proved developed
reserves totaled 62,300 barrels of oil and 7,684 MMcf of gas. Estimated proved
reserves totaled 41,900 barrels of oil and 5,989 MMcf of gas for Viosca Knoll
Block 817 and 20,400 barrels of oil and 1,695 MMcf of gas for West Delta Block
35.

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<PAGE> 12

are only attempts to define the degree of speculation involved. For these
reasons, estimates of the economically recoverable oil and natural gas reserves
attributable to any particular group of properties, classifications of such
reserves based on risk of recovery and estimates of the future net revenue
expected therefrom, prepared by different engineers or by the same engineers at
different sites, may vary substantially. The meaningfulness of such estimates is
highly dependent upon the assumptions upon which they are based.

Estimates with respect to proved reserves that may be developed and
produced in the future are often based upon volumetric calculations and upon
analogy to similar types of reserves rather than upon actual production history.
Estimates based on these methods are generally less reliable than those based on
actual production history. Subsequent evaluation of the same reserves based upon
production history will result in variations, which may be substantial, in the
estimated reserves. A significant portion of Tatham Offshore's reserves is based
upon volumetric calculations.

The estimated future net cash flows and the present value of estimated
future net cash flows discounted at 10% per annum, from the production and sale
of the proved developed reserves attributable to the Company's interest in oil
and gas properties as of June 30, 1998, as determined by the Company's reserve
engineers in accordance with the requirements of applicable accounting standards
before income taxes totaled $3.5 million and $3.4 million, respectively. In
preparing such estimates, the Company used prices of $12.28 per barrel of oil
and $1.76 per Mcf of gas as of June 30,1998. All of Tatham Offshore's reserves
at June 30, 1998 were classified as proved developed reserves.

In accordance with applicable requirements of the Securities and Exchange
Commission (the "Commission"), the estimated discounted future net revenue from
estimated proved reserves are based on prices and costs at fiscal year end
unless future prices or costs are contractually determined at such date. Actual
future prices and costs may be materially higher or lower. Actual future net
revenue also will be affected by factors such as actual production, supply and
demand for oil and gas, curtailments or increases in consumption by natural gas
purchasers, changes in governmental regulations or taxation and the impact of
inflation on costs.

In accordance with the methodology approved by the Commission, specific
assumptions were applied in the computation of the reserve evaluation estimates.
Under this methodology, future net cash flows are determined by reducing
estimated future gross cash flows to Tatham Offshore for oil and natural gas
sales by the estimated costs to develop and produce the underlying reserves,
including future capital expenditures, operating costs, transportation costs,
royalty and overriding royalty burdens, production payments and net profits
interest expense on certain of Tatham Offshore's properties.

Future net cash flows were discounted at 10% per annum to arrive at
discounted future net cash flows. The 10% discount factor used to calculate
present value is required by the Commission, but such rate is not necessarily
the most appropriate discount rate. Present value of future net cash flows,
irrespective of the discount rate used, is materially affected by assumptions of
future oil and natural gas prices and timing of production, which may prove to
be inaccurate. In addition, the calculations of estimated net revenue do not
take into account the effect of certain cash outlays, including, among other
things, general and administrative costs, interest expense and dividends. The
present value of future net cash flows shown above should not be construed as
the current market value as of June 30, 1998, or any prior date, of the
estimated oil and natural gas reserves attributable to Tatham Offshore's
properties.

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<PAGE> 13

PRODUCTION, UNIT PRICES AND COSTS

The following table sets forth certain information regarding the production
volumes of, average unit prices received for and average production costs for
Tatham Offshore's sale of oil and gas for the periods indicated:

<TABLE>
<CAPTION>
Natural Gas (MMcf) Oil and Condensate (Mbbl)
Year Ended June 30, 1998 Year Ended June 30, 1998
---------------------------- ------------------------
<S> <C> <C>
Net production 4,532 16
Average sales price $ 2.34 $16.24
Average production costs $ 1.13 $ 6.79
</TABLE>

----------
(1) The components of production costs may vary substantially among wells
depending on the methods of recovery employed and other factors, but
generally include demand and commodity charges under transportation
agreements, platform access and processing fees, maintenance and
repair, labor and utilities costs.

The relationship between Tatham Offshore's average prices and its average
production costs depicted by the table above is not necessarily indicative of
future results of operations expected by Tatham Offshore.

ACREAGE

Undeveloped acreage is considered to be those lease acres on which wells
have not been drilled or completed to a point that would permit the production
of commercial quantities of oil and gas, regardless of whether or not such
acreage contains proved reserves. All of Tatham Offshore's acreage is
undeveloped. Gross acres refer to the combined number of acres in which a
working interest is owned directly by Tatham Offshore. The number of net acres
is the sum of the fractional ownership of working interests owned directly by
Tatham Offshore in the gross acres. At June 30, 2000, Tatham Offshore had a 100%
working interest in Exploratory License EL No. 1042 consisting of 71,251
hectares (approximately 176,000 acres) offshore Newfoundland, Canada.

OIL AND GAS DRILLING ACTIVITY

The Company did not have any oil and gas drilling activity for the years
ended June 30, 1998, 1999 and 2000. As of June 30, 2000, the Company did not
have an interest in producing oil or gas wells.

REGULATION

The oil and gas industry is extensively regulated by federal, state and
provincial authorities in the United States and Canada. Further, numerous
departments and agencies, both federal and state, have issued rules and
regulations binding on the oil and gas industry and its individual members, some
of which carry substantial penalties for the failure to comply. Legislation
affecting the oil and gas industry is under constant review and statutes are
constantly being adopted, expanded or amended. This regulatory burden increases
the oil and gas industry's cost of doing business.

In particular, the drilling industry is dependent on the demand for
services from the oil and gas exploration industry and, accordingly, is affected
by changing tax laws, price controls and other laws relating to the energy
business. The Company's business is affected generally by political developments
and by federal, state, provincial, local and foreign laws, rules and regulations
which may relate directly to the oil and gas industry. The adoption of laws,
rules and regulations, both domestic and foreign, which curtail exploration and
development drilling for oil and gas for economic, environmental or other policy
reasons may adversely affect the Company's operations by limiting available
drilling and production opportunities. The Company's foreign operations are
subject to political, economic, environmental and other uncertainties associated
with foreign operations, as well as the additional risks of fluctuating currency
values and exchange controls. Governments may from time to time suspend or
curtail drilling operations or leasing activities when such operations are
considered to be detrimental to the environment or to jeopardize public safety.

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<PAGE> 14

ENVIRONMENTAL

General. The Company's operations are subject to extensive federal, state
and local statutory and regulatory requirements relating to environmental
affairs, health and safety, waste management and chemical products. In recent
years, these requirements have become increasingly stringent and in certain
circumstances, they impose "strict liability" on a company, rendering it liable
for environmental damage without regard to negligence or fault on the part of
such company. To the Company's knowledge, its operations are in substantial
compliance, and are expected to continue to comply in all material respects,
with applicable environmental laws, regulations and ordinances.

It is possible, however, that future developments, such as stricter
environmental laws, regulations or enforcement policies could affect the
handling, manufacture, use, emission or disposal of substances or wastes by the
Company. In addition, some risk of environmental costs and liabilities is
inherent in the Company's operations and products as it is with other companies
engaged in similar or related businesses, and there can be no assurance that
material costs and liabilities, including substantial fines and criminal
sanctions for violation of environmental laws and regulations, will not be
incurred by the Company. Furthermore, the Company will likely be required to
increase its expenditures during the next several years to comply with higher
industry and regulatory safety standards. However, such expenditures cannot be
accurately estimated at this time.

Solid Waste. The Company's operations may generate or transport both
hazardous and nonhazardous solid wastes that are subject to the requirements of
the federal Resource Conservation and Recovery Act ("RCRA"), as amended, 42
U.S.C. Section 6901 et. seq., and its regulations, and comparable state statutes
and regulations. Further, it is possible that some wastes that are currently
classified as nonhazardous, via exemption or otherwise, perhaps including wastes
currently generated during exploration, development and production operations
may, in the future be designated as "hazardous wastes," which are subject to
more rigorous and costly treatment, storage, transportation and disposal
requirements. Such changes in the regulations may result in additional
expenditures or operating expenses by the Company. As recently as August 8,
1998, the Environmental Protection Agency ("EPA") added four petroleum refining
wastes to the list of RCRA hazardous wastes. While the full impact of the rule
has yet to be determined, the rule may, as of February 1999, impose increased
expenditures and operating expenses on the Company, which may take on increased
obligations relating to the treatment, storage, transportation and disposal of
certain petroleum refining wastes that previously were not regulated as
hazardous wastes.

Hazardous Substances. The Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), 42 U.S.C. Section 9601 et. seq., and
comparable state statutes, also known as "Superfund" laws, impose liability,
without regard to fault or the legality of the original conduct, on certain
classes of persons that cause or contribute to the release or threatened release
of a "hazardous substance" into the environment. These persons include the
current owner or operator of a site, the past owner or operator of a site, and
companies that transport, dispose of or arrange for the disposal of the
hazardous substances found at the site. CERCLA also authorizes the EPA or state
agency and, in some cases third parties, to take actions in response to threats
to the public health or the environment and to seek to recover from the
responsible classes of persons the costs they incur. Despite the "petroleum
exclusion" of Section 101(14) that currently encompasses natural gas, the
Company may nonetheless generate or transport "hazardous substances" within the
meaning of CERCLA, or comparable state statutes, in the course of its ordinary
operations. In addition, certain petroleum refining wastes that previously were
not regulated as hazardous wastes may now fall within the definition of CERCLA
hazardous substance. Thus, the Company may be responsible under CERCLA or the
state equivalents for all or part of the costs required to clean up sites where
a release of a hazardous substance has occurred.

Air. Tatham Offshore's operations may be subject to the Clean Air Act
("CAA"), 42 U.S.C. Section 7401-7642, et. seq., and comparable state statutes.
The 1990 CAA amendments and accompanying regulations, state or federal, may
impose certain pollution control requirements with respect to air emissions from
operations, particularly in instances where a company constructs a new facility
or modifies an existing facility. The Company may also be required to incur
certain capital expenditures in the next several years for air pollution control
equipment in connection with maintaining or obtaining operating permits and
approvals addressing other air emission-related issues. However, the Company
does not believe its operations will be materially adversely affected by any
such requirements.

Water. The Federal Water Pollution Control Act ("FWPCA"), or Clean Water
Act, 33 U.S.C. Section 1311 et. seq., imposes strict controls against the
unauthorized discharge of produced waters and other oil and gas wastes into
navigable waters. The FWPCA provides for civil and criminal penalties for any
unauthorized discharges of oil and

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<PAGE> 15

other hazardous substances in reportable quantities and, along with the Oil
Pollution Act of 1990 ("OPA"), 33 U.S.C. Sections 2701-2761, imposes
substantial potential liability for the costs of removal, remediation and
damages. Similarly, the OPA imposes liability for the discharge of oil into or
upon navigable waters or adjoining shorelines. Among other things, the OPA
raises liability limits, narrows defenses to liability and provides more
instances in which a responsible party is subject to unlimited liability. One
provision of the OPA requires that offshore facilities establish and maintain
evidence of financial responsibility of $150 million. State laws for the control
of water pollution also provide varying civil and criminal penalties and
liabilities in the case of an unauthorized discharge of petroleum, its
derivatives or other hazardous substances into state waters. Further, the
Coastal Zone Management Act ("CZMA"), 16 U.S.C. Sections 1451-1464,
authorizes state implementation and development of programs containing
management measures for the control of nonpoint source pollution to restore and
protect coastal waters. State and federal wetlands presentation programs may
also impose certain restrictions on dredge and fill and development activities.

Endangered Species. The Endangered Species Act ("ESA"), 7 U.S.C. Section
136, seeks to ensure that activities do not jeopardize endangered or threatened
plant and animal species, nor destroy or modify the critical habitat of such
species. Under the ESA, certain exploration and production operations, as well
as actions by federal agencies or funded by federal agencies, must not
significantly impair or jeopardize the species or its habitat. The ESA provides
for criminal penalties for willful violations of the Act. Other statutes which
provide protection to animal and plant species and thus may apply to the
Company's operations are the Marine Mammal Protection Act of 1972, 16 U.S.C.
Sections 1361 to 1421h, the Marine Protection and Sanctuaries Act, the Fish and
Wildlife Coordination Act, the Fishery Conservation and Management Act and the
Migratory Bird Treaty Act. The National Historic Preservation Act, 16 U.S.C.
Section 470, may impose similar requirements.

Communication of Hazards. The Occupational Safety and Health Act ("OSHA"),
as amended, 29 U.S.C. Section 651 et. seq., the Emergency Planning and Community
Right-to-Know Act ("EPCRA"), as amended, 42 U.S.C. Section 11001 et. seq., and
comparable state statutes require the Company to organize and disseminate
information to employees, state and local organizations, and the public about
the hazardous materials used in its operations and its emergency planning.

OPERATIONAL HAZARDS AND INSURANCE

Tatham Offshore's exploration, production and development and drilling
operations are subject to the usual hazards incident to the drilling and
production of natural gas and crude oil, such as blowouts, cratering,
explosions, uncontrollable flows of oil, natural gas or well fluids, fires,
pollution, releases of toxic gas and other environmental hazards and risks.
These hazards can cause personal injury and loss of life, severe damage to and
destruction of property and equipment, pollution or environmental damages and
suspension of operations. In addition, a pipeline may experience damage as a
result of an accident or other natural disaster. To mitigate the impact of
repair costs associated with such an accident or disaster, the Company maintains
insurance of various types that it considers to be adequate to cover its
operations. Such insurance is subject to deductibles that the Company considers
reasonable and not excessive. The Company's insurance does not cover every
potential risk associated with the drilling and production of oil and natural
gas, but is consistent with insurance coverage generally available to the
industry. The Company's insurance policies do not provide coverage for losses or
liabilities relating to pollution, except for sudden and accidental occurrences.

The occurrence of a significant event not fully insured or indemnified
against, or the failure of a party to meet its indemnification obligations,
could materially and adversely affect the Company's operations and financial
condition. The Company believes that it is adequately insured for public
liability and property damage to others with respect to its operation. However,
no assurance can be given that the Company will be able to maintain adequate
insurance in the future at rates it considers reasonable.

INTERNATIONAL OPERATIONS AND RISKS

The Company conducts some of its operations outside the United States.
Risks associated with operating in international markets include foreign
exchange restrictions and currency fluctuations, foreign taxation, changing
political conditions and foreign and domestic monetary policies, expropriation,
nationalization, nullification, modifications or renegotiation of contracts, war
and civil disturbances or other risks that may limit or disrupt markets. The
ability of the Company to compete in the international markets may also be
adversely affected by

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<PAGE> 16

foreign government regulations that favor or require the awarding of such
contracts to local contractors, or by regulations requiring foreign contractors
to employ citizens of, or purchase supplies from, a particular jurisdiction. No
predictions can be made as to what foreign government regulations may be enacted
in the future that could be applicable to the Company's operations.

EMPLOYEES

As of August 31, 2000, Tatham Offshore had 15 employees. Prior to August
14, 1998, all individuals, including executive officers, necessary to meet the
financial, geological, engineering and other technical and administrative
requirements of the Company were provided by DeepTech pursuant to a management
agreement with Tatham Offshore (the "Management Agreement"), or affiliates of
DeepTech pursuant to service contracts. The Management Agreement, as amended,
provided for an annual management fee of 26% of DeepTech's overhead expenses.
For the year ended June 30, 1998, DeepTech charged Tatham Offshore $4.4 million
pursuant to such Management Agreement. The Management Agreement was terminated
on August 14, 1998. See " -- DeepTech Merger and Related Transactions".

UNCERTAINTY OF FORWARD LOOKING STATEMENTS AND INFORMATION

This Annual Report contains certain forward looking statements and
information that are based on management's beliefs as well as assumptions made
by and information currently available to management. Such statements are
typically punctuated by words or phrases such as "anticipate," "estimate,"
"project," "should," "may," "management believes," and words or phrases of
similar import. Although management believes that such statements and
expressions are reasonable and made in good faith, it can give no assurance that
such expectations will prove to have been correct. Such statements are subject
to certain risks, uncertainties and assumptions. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated, estimated
or projected. Among the key factors that may have a direct bearing on the
Company's results of operations and financial condition are: (i) competitive
practices in the industry in which the Company competes, (ii) the impact of
current and future laws and government regulations affecting the industry in
general and the Company's operations in particular, (iii) environmental
liabilities to which the Company may become subject in the future that are not
covered by an indemnity or insurance, (iv) the impact of oil and natural gas
price fluctuations and (v) significant changes from expectations of capital
expenditures and operating expenses and unanticipated project delays. The
Company disclaims any obligation to update any forward-looking statements to
reflect events or circumstances after the date hereof.

CERTAIN DEFINITIONS

The following are abbreviations and words commonly used in the oil and gas
industry and in this Annual Report.

"bbl" or "barrel" means barrels, a standard measure of volume for oil,
condensate and natural gas liquids which equals 42 U.S. gallons.

"Bcf" means billion cubic feet (or thousand MMcf).

"development well" means a well drilled within the proved area of an oil or
gas reservoir to the depth of a stratigraphic horizon known to be productive.

"exploratory well" means a well drilled to find commercially productive
hydrocarbons in an unproved area or to extend significantly a known oil or
natural gas reservoir.

"farm-in" or "farm-out" refers to an agreement whereunder the owner of a
working interest in an oil and gas lease delivers the contractual right to earn
the working interest or a portion thereof to another party who desires to drill
on the leased acreage. Generally, the assignee is required to drill one or more
wells in order to earn a working interest in the acreage. The assignor usually
retains a royalty or a working interest after payout in the lease. The assignor
is said to have "farmed-out" the acreage. The assignee is said to have
"farmed-in" the acreage.

"gross" oil and natural gas wells or gross acres are the total number of
wells or acres, respectively, in which the Company has an interest, without
regard to the size of that interest.

14
<PAGE> 17

"Mbbl" means thousand barrels.

"Mcf" means thousand cubic feet, a standard measure of volume for gas.

"MMbtu" means million British Thermal Units, a unit of heat measure with
one btu being the amount of heat needed to raise the temperature of one pound of
water one degree Fahrenheit.

"MMcf" means million cubic feet.

"net" oil and natural gas wells or "net" acres or "net" production or
reserves are the total gross number of wells or acres, respectively, in which
the Company has an interest multiplied times the Company's working interest in
such wells or acres.

"OCS" means Outer Continental Shelf, an area offshore the United States
over which the federal government has jurisdiction, which extends from the end
of state territorial waters (three to twelve nautical miles offshore, depending
on the state) to 200 nautical miles from shore. The term OCS as used herein
includes not only those areas on the Shelf itself, but those areas in the
flextrend and the deepwater, to a limit of 200 nautical miles, as well.

"royalty" means an interest in an oil and gas lease that gives the owner of
the interest the right to receive a portion of the production from the leased
acreage (or of the proceeds of the sale thereof), but generally does not require
the owner to pay any portion of the costs of drilling or operating the wells on
the leased acreage. Royalties may be either landowner's royalties, which are
reserved by the owner of the leased acreage at the time the lease is granted, or
overriding royalties, which are usually carved from the leasehold interest
pursuant to an assignment to a third party reserved by an owner of the leasehold
in connection with a transfer of the leasehold to a subsequent owner.

"working interest" means an interest in an oil and gas lease that gives the
owner of the interest the right to drill for and produce oil and gas on the
leased acreage and requires the owner to pay a share of the costs of drilling
and production operations. The share of production to which a working interest
owner is entitled will always be smaller than the share of costs that the
working interest owner is required to bear, with the balance of the production
accruing to the owners of royalties. For example, the owner of a 100% working
interest in a lease burdened only by a landowner's royalty of 12.5% would be
required to pay 100% of the costs of a well but would be entitled to retain
87.5% of the production.

In this Annual Report, natural gas volumes are stated at the legal pressure
base of the state or area in which the reserves are located and at 60 degrees
Fahrenheit.

15
<PAGE> 18

ITEM 3. LEGAL PROCEEDINGS

RIGCO North America, L.L.C. v. Schlumberger Technology Corporation, et
al., Cause No. 99-38082. On July 26, 1999, RIGCO sued Schlumberger
Technology Corporation and Schlumberger, Canada Ltd. (collectively,
"Schlumberger") in connection with the defendants' charters of the FPS
Laffit Pincay and the FPS Bill Shoemaker. RIGCO's suit alleges causes
of action for gross negligence, breach of contract, negligence, fraud,
and negligent misrepresentation arising from Defendants' management,
operation and marketing of both rigs as well as Schlumberger
Technology Corporation's agreement to renovate the Bill Shoemaker. In
early 2000, Defendants notified RIGCO that some or all of the assets
subject to this suit were transferred due to merger to two new
corporations, Sedco Forex Corporation ("SFC") and Sedco Forex Canada
Limited ("SFCL"). RIGCO has joined SFC and SFCL as defendants in the
pending action. Discovery has begun and is scheduled to continue
through April 2001. Trial is currently set for May 2001. RIGCO is
seeking approximately $51 million in actual damages plus an
unspecified amount of exemplary damages.

In re RIGCO North America, L.L.C., et al.; In the United States
Bankruptcy Court for the Southern District of Texas, Corpus Christi
Division; Case Nos. 99-22401-C-11 through 99-22404-C-11 (Jointly
Administered Under Case No. 99-22401-C-11). On August 9, 1999, RIGCO
North America, L.L.C., FPS VI, L.L.C., FPS III, Inc., and FPS V, Inc.
(collectively, the "Debtors") filed voluntary petitions for relief
under Chapter 11, Title 11 of the United States Code. The Debtors have
been operating their businesses and managing their property as
debtors-in-possession. On September 25, 2000, the Rig Subsidiaries
filed a motion to dismiss the Chapter 11 proceedings with the United
States Bankruptcy Court. If granted, the dismissal of the Chapter 11
proceedings would allow the Rig Subsidiaries to pay in full their
pre-petition unaffiliated unsecured creditors. Any funds remaining
would be paid to the affiliated unsecured creditors on a pro rata
basis.

RIGCO North America, L.L.C. v. Schlumberger Technology Corporation and
Schlumberger Canada Ltd.; In the United States Bankruptcy Court for
the Southern District of Texas, Corpus Christi Division; Adversary No.
99-2154-C. On September 3, 1999, RIGCO North America, L.L.C. filed a
complaint against STC and SCL to avoid a preferential transfer or
transfers pursuant to 11 U.S.C. Section 547 and to recover the
property transferred or its value pursuant to 11 U.S.C. Section 550.
The Defendants have answered the complaint. On September 21, 1999, the
Court entered a Comprehensive Discovery, Mediation and Scheduling
Order requiring, among other things, non-binding mediation. The
Court-ordered mediation was unsuccessful, and the parties are in the
process of conducting discovery. As with the Harris County Litigation,
RIGCO received notice that SFC and SFCL were the transferees of some
or all of the assets subject to the preference action. RIGCO
subsequently joined SFC and SFCL in the preference action. The Motion
to Dismiss pending in the main Chapter 11 case would also dismiss this
action. If not dismissed, discovery is expected to continue through
late October 2000 and trial is set for January 2001.

The Company is involved in certain legal proceedings which have arisen in
the ordinary course of business. Management believes that the outcome of such
proceedings will not have a material adverse effect on the Company's financial
position or results of operations.

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

None.

16
<PAGE> 19

PART II

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

As of August 31, 2000, there were approximately 160 holders of record of
the common stock. The following table sets forth the high and low sales prices
for the common stock as quoted on The Nasdaq National Market or the OTC Bulletin
Board for the periods indicated. On May 13, 1999, the Company's common stock was
delisted from the Nasdaq National Market and began trading on the OTC Bulletin
Board. In addition, the table is adjusted for the one for ten reverse common
stock split Tatham Offshore effected on November 24, 1997.

<TABLE>
<CAPTION>
Common Stock Price Range
------------------------
High Low
<S> <C> <C>
YEAR ENDED JUNE 30, 1998
First Quarter........................................................... 6.875 2.812
Second Quarter.......................................................... 5.625 2.500
Third Quarter .......................................................... 4.875 3.000
Fourth Quarter.......................................................... 4.250 3.000

YEAR ENDED JUNE 30, 1999
First Quarter........................................................... 3.750 1.375
Second Quarter.......................................................... 2.000 0.343
Third Quarter .......................................................... 0.750 0.312
Fourth Quarter.......................................................... 0.625 0.343

YEAR ENDED JUNE 30, 2000
First Quarter........................................................... 0.500 0.312
Second Quarter.......................................................... 0.437 0.281
Third Quarter........................................................... 0.406 0.218
Fourth Quarter.......................................................... 0.281 0.187
</TABLE>

Tatham Offshore has never declared or paid cash dividends on its common or
preferred stock. The Company intends to retain any future earnings to fund
growth and does not anticipate paying any cash dividends on its stock in the
foreseeable future. The payment of future dividends, if any, will be determined
by the Board of Directors in light of conditions then-existing, including the
Company's operating results, financial condition, capital requirements, general
business conditions and other factors the Board of Directors deems relevant. See
Item 7. "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources."

The following table summarizes the Company's outstanding equity at June 30,
2000:

<TABLE>
<CAPTION>
Conversion/
Shares Liquidation Dividend Dividends Exchange
Equity Outstanding Preference Rate In Arrears Features
<S> <C> <C> <C> <C> <C>
Series A Preferred Stock 17,178,626(a) $1.50 per share 12% $ 12,455,000 (b)(c)
Series B Preferred Stock 54,379 $1.00 per share 8% $ 21,000 (b)(c)
Series C Preferred Stock 321,205 $0.50 per share 4% $ 22,000 (b)(c)
Common Stock 26,079,625(a) N/A -- -- --
</TABLE>

----------
(a) In connection with the Rights Offering, Tatham Offshore purchased all of
the shares of Common Stock and Series A Preferred Stock that were not
acquired by the holders of Rights or TB Securities in the Rights Offering,
3,926,746 and 653,365, respectively, and the proceeds from such purchase by
Tatham Offshore were contributed by DeepTech to Tatham Offshore.

(b) At any time, the holder of any shares may convert the liquidation value and
unpaid dividends into shares of Tatham Offshore common stock at $6.53 per
share.

17
<PAGE> 20

RECENT SALES OF UNREGISTERED SECURITIES

The following information relates to sales and other issuances by Tatham
Offshore within the past three fiscal years of Tatham Offshore securities, the
sales or issuances of which were not registered pursuant to the Securities Act
of 1933 (the "Securities Act").

Tatham Offshore, Inc. issued a total of 90,000 shares of its common stock
to Offshore Drilling Consultants, Inc. from September 1997 through March 1998 as
compensation for consulting services related to its Atlantic Canada project.
Prior to January 1998, Offshore Drilling Consultants, Inc. was known as F-W Oil
Interests, Inc. Such transactions were completed without registration under the
Securities Act in reliance on the exemption provided by Section 4(2) of the
Securities Act.

In December 1997, Tatham Offshore issued 26,666,667 shares of its common
stock to DeepTech in exchange for $60 million of Subordinated Convertible
Promissory Notes held by DeepTech. Such transaction was completed without
registration under the Securities Act in reliance on the exemption provided by
Sections 4(2) and 3(a)(9) of the Securities Act.

ITEM 6. SELECTED FINANCIAL DATA

The selected financial data set forth below for the Company for each of the
three years ended June 30, 2000, 1999, and 1998 and at June 30, 2000 and 1999
have been derived from the consolidated financial statements and notes thereto
which are included elsewhere in this Annual Report. The selected financial data
at and for each of the two years ended June 30, 1996 and 1997 and at June 30,
1998 have been derived from the historical financial statements of the Company.
The information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements of the Company and the notes thereto which
are included elsewhere in this Annual Report.

The following selected financial data is included in this Annual Report due
to the requirements of the Securities Exchange Act. With the exception of the
North Atlantic Pipeline Partners' pipeline project, all of the historical
business and operations of Tatham Offshore prior to August 14, 1998 have been
transferred to DeepTech and Leviathan. Management believes that such
information, although important for an understanding of Tatham Offshore's
historical financial results and business, is of little relevance to the
Company's business and operations on a going forward basis.

18
<PAGE> 21

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:

REVENUE:
Oil and gas sales ............................................. $ -- $ -- $ 10,868 $ 20,723 $ 16,070
Drilling services ............................................. -- 39,846 672 -- --
-------- -------- -------- -------- --------

Total revenue ...................................... -- 39,846 11,540 20,723 16,070
-------- -------- -------- -------- --------

COSTS AND EXPENSES:
Production and operating expenses ............................. -- 22,234 5,666 8,465 13,203
Exploration expenses .......................................... -- -- 149 542 637
Depreciation, depletion and amortization ...................... 64 5,711 3,047 5,364 1,758
Impairment, abandonment and other ............................. -- -- -- 41,674 8,000
Management fee ................................................ -- 155 4,375 3,279 4,436
General and administrative expenses ........................... 2,488 6,861 1,371 1,567 1,839
-------- -------- -------- -------- --------

Total operating costs .............................. 2,552 34,961 14,608 60,891 29,873
-------- -------- -------- -------- --------

Operating income (loss) ....................................... (2,552) 4,885 (3,068) (40,168) (13,803)
Gain on sale of oil and gas properties ........................ -- -- -- -- 22,641
Gain (loss) from oil and gas operations ....................... 336 (221) -- -- --
Loss from drilling operations ................................. (72,910) -- -- -- --
Interest income and other ..................................... 358 969 223 571 113
Interest and other financing costs ............................ (5,802) (14,115) (1,966) (8,374) (8,161)
-------- -------- -------- -------- --------

Net (loss) income ............................................. $(80,570) $ (8,482) $ (4,811) (47,971) $ 790
======== ======== ======== ======== ========

Net (loss) income available to common stockholders ............ $(83,675) $(11,537) $ (8,581) $(51,891) $ 509
======== ======== ======== ======== ========

Basic net (loss) income per common share ...................... $ (3.21) $ (0.43) $ (0.50) $ (19.47) $ 0.20
======== ======== ======== ======== ========

Diluted net (loss) income per common share .................... $ (3.21) $ (0.43) $ (0.50) $ (19.47) $ 0.09
======== ======== ======== ======== ========
</TABLE>

<TABLE>
<CAPTION>
AT JUNE 30,
-----------------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:

Semisubmersible drilling rigs, net...... $ -- $ 134,283 $ 129,260 $ -- $ --
Oil and gas properties, net ............ -- -- 5,724 30,752 64,900
Total assets............................ 22,679 163,774 153,418 41,507 97,130
Notes payable .......................... 35,378 84,667 64,156 -- --
Long-term debt.......................... -- -- -- 60,000 60,000
Stockholders' equity (deficit).......... (19,647) 60,923 75,410 (27,696) 18,862
</TABLE>

19
<PAGE> 22

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

The following discussion should be read in conjunction with the Company's
consolidated financial statements and the notes thereto located elsewhere in
this Annual Report and the information set forth under the heading "Selected
Financial Data." This discussion is intended to assist in the understanding of
Tatham Offshore's financial position and results of operations for each of the
years ended June 30, 2000, 1999 and 1998. Effective June 25, 1998, Tatham
Offshore acquired DeepFlex which, through its subsidiaries, owns the Laffit
Pincay and the Bill Shoemaker. On August 14, 1998, Tatham Offshore transferred
all of its remaining oil and gas properties to Leviathan in connection with the
Merger and related transactions.

The following discussion of results of operations is included in this
Annual Report due to the requirements of the Securities Act. With the exception
of the North Atlantic Pipeline Partners' pipeline project, all of the historical
business and operations of Tatham Offshore prior to August 14, 1998 have been
transferred to DeepTech and Leviathan. In addition, all of the assets relating
to the semisubmersible drilling rig business were sold during the year ended
June 30, 2000. Management believes that such information, although important for
an understanding of Tatham Offshore's historical financial results and business,
is of little relevance to the Company's business and operations on a going
forward basis.

RESULTS OF OPERATIONS

YEAR ENDED JUNE 30, 2000 COMPARED WITH YEAR ENDED JUNE 30, 1999

Depreciation expense totaled $64,000 for the year ended June 30, 2000 as
compared at $49,000 for the year ended June 30, 1999. Depreciation expense for
both periods related to certain anchor chains owned by the Company.

General and administrative expense totaled $2.5 million for the year ended
June 30, 2000 as compared to $4.1 million for the year ended June 30, 1999. The
reduction in general and administrative costs resulted primarily from (i) a
reduction in travel related costs and (ii) a reduction in legal expenses
attributable to general corporate activities.

The operating loss for the year ended June 30, 2000 totaled $2.6 million as
compared to an operating loss of $4.1 million, primarily as a result of reduced
general and administrative expenses.

Interest and other income for the year ended June 30, 2000 totaled $358,000
and included interest income from available cash and revenue from the use of the
Company's anchor chains. Interest income and other for the year ended June 30,
1999 totaled $864,000 and included interest income from available cash plus
$618,000 related to a settlement with El Paso under certain merger related
agreements.

Interest and other financing costs for the year ended June 30, 2000 totaled
$350,000. Interest expense and other financing costs to affiliates for the year
ended June 30, 2000 totaled $5.5 million and related to borrowings from Tatham
Brothers and Tatham Investment Corp. For the year ended June 30, 1999, interest
expense and other financing costs to affiliates totaled $4.6 million and related
to borrowings from Tatham Brothers.

Net loss from continuing operations for the year ended June 30, 2000 and
1999 totaled $8.0 million and $7.8 million, respectively. The change was due to
the items discussed above.

On or before August 14, 1998, the Company transferred all of its oil and
gas properties in the Gulf to DeepTech and Leviathan in connection with the
Merger. For the year ended June 30, 2000, the Company reported earnings from
discontinued operations of its oil and gas operations of $336,000 due to the
reversal of oil and gas expense accruals. The Company reported a net loss from
discontinued operations of its oil and gas operations of $221,000 for the year
ended June 30, 1999. During the period from July 1, 1998 through August 14,
1998, the Company sold 479 million cubic feet of natural gas and 1,200 barrels
of oil at average prices of $1.86 per thousand cubic feet of natural gas and
$7.13 per barrel of oil, respectively.

20
<PAGE> 23

Since the Company's only drilling assets were sold during the year ended
June 30, 2000, the operations of the drilling subsidiaries are being presented
as discontinued operations. Revenue from drilling services totaled $13.3 million
for the year ended June 30, 2000. All of the revenue for the year ended June 30,
2000 was generated by the Bill Shoemaker. During this period, the Bill Shoemaker
was under contract for the period July 1, 1999 through November 15, 1999.
Revenue for the year ended June 30, 1999 totaled $39.8 million. The Bill
Shoemaker generated $37.6 million in revenue and the Laffit Pincay generated
$2.2 million in revenue during this period.

Operating expenses for the Rigs for the year ended June 30, 2000 totaled
$11.5 million and were attributable to the management fee and direct operating
expenses for the Rigs. During this period, the Bill Shoemaker's operating
expenses totaled $8.4 million and the Laffit Pincay's operating expenses totaled
$3.1 million. Operating expenses for the Laffit Pincay during this period
included the costs necessary to maintain the rig in a warm-stacked mode prior to
its sale in May 2000. Operating expenses for the Bill Shoemaker during this
period related to the management and direct operating expenses from July 1, 1999
through November 15, 1999 and costs necessary to maintain the rig in a
warm-stacked mode from November 1999 through the date of its sale in June 2000.
Operating expenses for the year ended June 30, 1999 totaled $22.2 million and
were attributable to the management fee and direct operating expenses for the
Rigs. During this period, the Bill Shoemaker's operating expenses totaled $13.6
million and the Laffit Pincay's operating expenses totaled $8.6 million.
Operating expense for the Laffit Pincay during this period were primarily the
costs to maintain the rig in a warm-stacked mode.

Depreciation expense for the year ended June 30, 2000 relating to the Rigs
totaled $63.0 million and included depreciation expense of $48.5 million and
$14.5 million for the Bill Shoemaker and Laffit Pincay, respectively.
Depreciation expense included $44.6 million and $12.9 million of impairment
expense for the Bill Shoemaker and Laffit Pincay, respectively. Depreciation
expense for the year ended June 30, 1999 totaled $5.7 million. Depreciation
expense for this period included $3.8 million and $1.9 million for the Bill
Shoemaker and Laffit Pincay, respectively.

General and administrative expense relating to the Rigs for the year ended
June 30, 2000 totaled $4.2 million as compared to $2.9 million for the year
ended June 30, 1999.

The operating loss relating to the Rigs for the year ended June 30, 2000
totaled $65.4 million as compared to operating income of $9.0 million for the
year ended June 30, 1999. The change was due to the items discussed above.

Interest income relating to the Rigs totaled $0.2 million for the year
ended June 30, 2000 as compared to $0.1 million for the year ended June 30,
1999.

Interest expense relating to the Rigs for the year ended June 30, 2000
totaled $7.3 million and primarily reflected interest incurred by RIGCO under
the Credit Facility. Interest expense relating to the Rigs for the year ended
June 30, 1999 totaled $7.7 million and related to interest incurred related to
the Credit Facility.

Interest expense to affiliates relating to the Rigs totaled $0.4 million
for the year ended June 30, 2000 and included interest expense relating to loans
to RIGCO from Tatham Investment Corp. and liquidated damages due to Thomas P.
Tatham under the Shoemaker make-ready collateral agreement. Interest expense to
affiliates relating to the Rigs totaled $1.3 million for the year ended June 30,
1999 and related to liquidated damages due to Thomas P. Tatham under the
Shoemaker make-ready collateral agreement.

The net loss from discontinued drilling operations for the year ended June
30, 2000 totaled $72.9 million as compared to a net loss from discontinued
drilling operations for the year ended June 30, 1999 of $0.4 million.

21
<PAGE> 24

operations for the year ended June 30, 2000 was $0.43 per share as compared with
$0.41 per share for the year ended June 30, 1999. Basic and diluted loss per
common share from discontinued operations for the year ended June 30, 2000 was
$2.78 per share as compared with $0.02 per share for the year ended June 30,
1999. Basic and diluted loss per common share for the year ended June 30, 2000
totaled $3.21 per share compared with $0.43 per share for the year ended June
30, 1999.

YEAR ENDED JUNE 30, 1999 COMPARED WITH YEAR ENDED JUNE 30, 1998

Depreciation expense totaled $49,000 for the year ended June 30, 1999 and
related to certain anchor chains owned by the Company. The Company did not have
any depreciation expense from continuing operations for the year ended June 30,
1998.

General and administrative expense totaled $4.1 million for the year ended
June 30, 1999 as compared to $0.9 million for the year ended June 30, 1998. The
increase in general and administrative costs resulted primarily from (i) an
increase in travel related costs, (ii) increased costs associated with the
start-up of stand alone corporate offices and (iii) an increase in legal
expenses attributable to general corporate activities.

The operating loss for the year ended June 30, 1999 totaled $4.1 million as
compared to an operating loss of $0.9 million, primarily as a result of
increased general and administrative expenses.

Interest and other income for the year ended June 30, 1999 totaled $864,000
and included interest income from available cash plus $618,000 related to a
settlement with El Paso under certain merger related agreements. Interest and
other income for the year ended June 30, 1998 totaled $384,000.

Interest expense and other financing costs to affiliates for the year ended
June 30, 1999 totaled $4.6 million and related to borrowings from Tatham
Brothers. For the year ended June 30, 1998 the Company did not have any interest
expense and other financing costs to affiliates from continuing operations.

Net loss from continuing operations for the year ended June 30, 1999 and
1998 totaled $7.8 million and $0.5 million, respectively. The change was due to
the items discussed above.

On or before August 14, 1998, the Company transferred all of its oil and
gas properties in the Gulf to DeepTech and Leviathan in connection with the
Merger. The Company reported a net loss from discontinued operations of its oil
and gas operations of $221,000 for the year ended June 30, 1999. During the
period from July 1, 1998 through August 14, 1998, the Company sold 479 million
cubic feet of natural gas and 1,200 barrels of oil at average prices of $1.86
per thousand cubic feet of natural gas and $7.13 per barrel of oil,
respectively. For the year ended June 30, 1998, the Company reported a net loss
from discontinued operations of its oil and gas operations of $4.3 million.
During the year ended June 30, 1998, the Company sold 4,532 million cubic feet
of natural gas and 16,295 barrels of oil at average prices of $2.34 per thousand
cubic feet of natural gas and $16.24 per barrel of oil, respectively.

Since the Company's only drilling assets were sold during the year ended
June 30, 2000, the operations of the drilling subsidiaries are being presented
as discontinued operations. Revenue from drilling services totaled $39.8 million
for the year ended June 30, 1999. The Bill Shoemaker generated $37.6 million in
revenue and the Laffit Pincay generated $2.2 million in revenue during this
period. Revenue from drilling services totaled $0.7 million for the year ended
June 30, 1998 and represented revenue from the Rigs for the period June 25, 1998
through June 30, 1998.

Operating expenses for the year ended June 30, 1999 totaled $22.2 million
and were attributable to the management fee and direct operating expenses for
the Rigs. During this period, the Bill Shoemaker's operating expenses totaled
$13.6 million and the Laffit Pincay's operating expenses totaled $8.6 million.
Operating expense for the Laffit Pincay during this period were primarily the
costs to maintain the rig in a warm-stacked mode. Operating expenses for the
year ended June 30, 1998 totaled $0.4 million and were attributable to the
management fee and direct operating expenses for the Rigs for the period June
25, 1998 through June 30, 1998.

22
<PAGE> 25

Depreciation expense for the year ended June 30, 1999 totaled $5.7 million.
Depreciation expense for this period included $3.8 million and $1.9 million for
the Bill Shoemaker and Laffit Pincay, respectively. Depreciation expense totaled
$91,000 for the year ended June 30, 1998.

General and administrative expense relating to the Rigs for the year ended
June 30, 1999 totaled $2.9 million. The rig operations did not incur any general
and administrative costs for the year ended June 30, 1998.

Operating income relating to the Rigs for the year ended June 30, 1999
totaled $9.0 million as compared to an operating loss of $8,000 for the year
ended June 30, 1998. The change was due to the items discussed above.

Interest income relating to the Rigs totaled $0.1 million for the year
ended June 30, 1999. The rig operations did not generate any interest income for
the year ended June 30, 1998.

Interest expense relating to the Rigs for the year ended June 30, 1999
totaled $7.7 million and primarily reflected interest incurred by RIGCO under
the Credit Facility. The rig operations did not incur any interest expense
relating to the Rigs for the year ended June 30, 1998.

Interest expense to affiliates relating to the Rigs totaled $1.8 million
for the year ended June 30, 1999 and related to the loan from Thomas P. Tatham
for the Shoemaker make-ready collateral agreement. The rig operations did not
incur any interest expense to affiliates for the year ended June 30, 1998.

The net loss from discontinued drilling operations for the year ended June
30, 1999 totaled $421,000 as compared to a net loss from discontinued drilling
operations for the year ended June 30, 1998 of $8,000.

Tatham Offshore eliminated all of its Senior Preferred Stock and the
associated preferred stock dividends in arrears as a result of certain Merger
related agreements and repurchased and cancelled 653,365 shares of its Series A
Preferred Stock in connection with the Rights Offering. Tatham Offshore's
remaining preferred stock dividends totaled $3.1 million for the year ended June
30, 1999 as compared to $3.8 million for the year ended June 30, 1998. After
taking preferred stock dividends into account, the Company's net loss allocable
to common shareholders for the year ended June 30, 1999 was $11.5 million as
compared with a net loss allocable to common shareholders for the year ended
June 30, 1998 of $8.6 million. Basic and diluted loss per common share from
continuing operations for the year ended June 30, 1999 was $0.41 per share as
compared with $0.25 per share for the year ended June 30, 1998. Basic and
diluted loss per common share from discontinued operations for the year ended
June 30, 1999 was $0.02 per share as compared with $0.25 per share for the year
ended June 30, 1998. Basic and diluted loss per common share for the year ended
June 30, 1999 totaled $0.43 per share compared with $0.50 per share for the year
ended June 30, 1998.

LIQUIDITY AND CAPITAL RESOURCES

Sources of Cash. The Company has no current cash flow from operations. The
Company expects to be dependent upon cash on hand and loans under a revolving
draw facility with Tatham Investment Corp. to pay its operating expenses and
satisfy its other obligations. The use of cash held or generated by the Rig
Subsidiaries is subject to approval of the Bankruptcy Court. As described below,
the Company will need to raise substantial capital (equity, debt or both) or
enter into other arrangements to allow the Company to implement its business
strategy in Atlantic Canada.

On August 9, 1999, RIGCO, FPS VI, FPS III and FPS V (the "Rig
Subsidiaries") filed voluntary petitions under Chapter 11 of the United States
Bankruptcy Code (the "Bankruptcy Filing"). At the time of the Bankruptcy Filing,
RIGCO owned a 100% interest in the Bill Shoemaker and a 25% undivided interest
in the Laffit Pincay and FPS VI owned a 75% undivided interest in the Laffit
Pincay. FPS III and FPS V are the owners of RIGCO and FPS VI with FPS III owning
a 50% interest in RIGCO and FPS V owning a 50% interest in RIGCO and a 100%
interest in FPS VI. The proceedings of the Rig Subsidiaries are administered
jointly. As a result of the Bankruptcy Filing, the Rigs were managed by the
Company's subsidiaries as debtors-in-possession. The syndicate of lenders under
the Credit Facility had a secured interest in substantially all of the assets of
RIGCO and FPS VI. Any cash received by RIGCO and FPS VI was considered
collateral for the secured lenders (the "Cash Collateral") under the Credit
Facility. RIGCO and FPS VI as debtors-in-possession were granted temporary
permission by the Bankruptcy Court

23
<PAGE> 26

for limited use of the Cash Collateral to pay operating and maintenance costs
for the Rigs and to pay certain limited general and administrative costs of
Tatham Offshore.

As of May 15, 2000, RIGCO's cash reserves were substantially depleted and
RIGCO required additional cash to continue to pay all obligations, including
payroll, operating and maintenance expenses, interest obligations, legal
expenses, lease obligations and general and administrative expenses to Tatham
Offshore. RIGCO and the secured lenders negotiated a short-term loan (the "DIP
Loan") which provided RIGCO with cash to fund its operations through June 30,
2000. Effective May 25, 2000, RIGCO and the secured lenders entered into the DIP
Loan agreement which provided a short-term loan of up to $2.3 million. On May
31, 2000, RIGCO borrowed $1.5 million under this facility. The DIP Loan plus
accrued interest was repaid from proceeds from the sale of the Bill Shoemaker on
June 28, 2000. See "--Liquidity Outlook."

On June 28, 2000, RIGCO sold all of its interest in the Bill Shoemaker to
Fred Olsen Energy ASA for $43.6 million in cash. Expenses associated with the
sale totaled $0.4 million. By order of the Bankruptcy Court, RIGCO established
separate debtor-in-possession bank accounts for (i) $2.0 million to secure
payment to Tatham Offshore for their interest in four of the anchor chains
located on the Bill Shoemaker, (ii) $0.6 million for administrative expenses
incurred in the Bankruptcy proceedings and (iii) $0.4 million for uncontested
claims of unaffiliated unsecured creditors. The secured lenders under the Credit
Facility and the DIP Loan received a total of $36.6 million in final payment of
all principal, interest and expenses associated with the Credit Facility and DIP
Loan. Pursuant to a Bankruptcy Court Order, RIGCO paid $2.0 million to Tatham
Offshore for Tatham Offshore's interest in the four anchor chains on June 29,
2000. On September 25, 2000 the Rig Subsidiaries filed a motion to dismiss the
Chapter 11 proceedings with the United States Bankruptcy Court. If granted, the
dismissal of the Chapter 11 proceedings would allow the Rig Subsidiaries to pay
in full their pre-petition unaffiliated unsecured creditors. Any funds remaining
would be paid to the affiliated unsecured creditors on a pro rata basis.

In December 1999, North Atlantic Pipeline Partners, L.P. borrowed $4.0
million from an unrelated party. The $4.0 million loan is evidenced by a demand
note bearing interest at the rate of 15% per annum.

On July 1, 1999, RIGCO entered into a committed draw facility with Tatham
Investment Corp., which is 100% owned by Mr. Thomas P. Tatham, Chairman of the
Board and Chief Executive Officer of the Company. Tatham Investment Corp. agreed
to loan up to $750,000 to RIGCO for working capital purposes. Loans under this
agreement bear interest at the prime rate plus 3% (on June 30, 2000, the
interest rate under this facility was 12.5%) and were due on September 30, 1999.
As of the date of the Bankruptcy Filing, and as of June 30, 2000, Tatham
Investment Corp. had an unsecured claim of $338,303 under this agreement.

Effective July 1, 1999, Tatham Offshore entered into a revolving draw
facility with Tatham Investment Corp. The revolving draw facility provides for
loans, at the lender's sole discretion, by Tatham Investment Corp. to Tatham
Offshore in amounts up to $5.0 million. The revolving draw facility bears
interest at the rate of 15% per annum and is payable upon demand by the lender.
Through June 30, 2000, the Company had borrowed $4.2 million under this
facility. The Company pledged all of its equity ownership in certain
wholly-owned subsidiaries of the Company as well as a certain promissory note
issued by Tatham Offshore Canada, Limited.

In August 1998, both El Paso Energy and the Company were required to post
letters of credit in connection with certain Merger related agreements. In March
1999, the Company entered into an agreement with El Paso Energy under which (i)
each company was released of its obligation to maintain letters of credit in
favor of one another, (ii) El Paso Energy paid the Company $618,000 and (iii)
the Company released its rights to certain potential pre-merger tax attributes
of the DeepTech group. As a result of this agreement, the Company's $6.1

24
<PAGE> 27

million cash collateral which secured its letter of credit in favor of El Paso
Energy was released and became available for general corporate purposes.

Uses of Cash. The Company expects that its primary uses of cash will
consist of amounts necessary to pay general and administrative and other
operational expenses. The use of cash held by the Rig Subsidiaries required
approval by the Bankruptcy Court. As a result of an agreement with the secured
lenders, the Rig Subsidiaries had interim use of such cash through April 14,
2000 and limited use for payroll through May 15, 2000. See "--Liquidity
Outlook". On June 28, 2000, the secured lenders claims were paid and they no
longer had a lien on the Rig Subsidiaries' cash. Effective June 28, 2000, the
Rig Subsidiaries, as debtors-in-possession, had use of their cash assets to
satisfy their cash requirements, subject to certain amounts segregated by
Bankruptcy Court orders.

In addition, the Company will use available cash to fund the pursuit of its
business strategy in Atlantic Canada. Such uses will include funding initial
expenditures related to the North Atlantic Pipeline Partners' pipeline project,
the remainder of the Company's Atlantic Canada strategy and any of the Company's
other potential capital expenditures.

North Atlantic Pipeline Partners is the sponsor of a proposal to construct
a natural gas pipeline from offshore Newfoundland and Nova Scotia to Seabrook,
New Hampshire. As of June 30, 2000, Tatham Offshore Canada Limited, the Canadian
representative of North Atlantic Pipeline Partners, had incurred $14.3 million
in developmental costs related to regulatory approval and pipeline
infrastructure design in connection with such project and related infrastructure
projects. The Company anticipates that the ultimate capital costs of the
pipeline and related projects, if approved, could be in excess of several
billion dollars. The Company plans to obtain debt and equity financing and/or
secure joint venture partners to satisfy the capital requirements for the
Atlantic Canada projects, as required.

Liquidity Outlook. The Company intends to fund its immediate cash
requirements with cash on hand and loans under the revolving draw facility with
Tatham Investment Corp. At June 30, 2000, Tatham Offshore had $1.7 million of
cash and cash equivalents. In addition, RIGCO had $4.9 million of cash and cash
equivalents at June 30, 2000. The use of cash held by or generated from
operations of the Rig Subsidiaries is subject to approval of the Bankruptcy
Court. However, to meet its debt obligations and future capital needs with
respect to Atlantic Canada, the Company will need to raise substantial capital
(equity, debt or both) or enter into other joint venture arrangements.

Drilling Operations

On September 30, 1996, RIGCO entered into a $65 million senior secured
credit facility with a syndicate of lenders (as amended, the "Credit Facility").
Proceeds from the Credit Facility were used to acquire the Bill Shoemaker, to
fund significant upgrades to the Bill Shoemaker, and to retire $30.3 million of
other rig related indebtedness. In April 1997, the Credit Facility was amended
to provide for an additional $12 million to fund the remaining refurbishments
and upgrades to the Bill Shoemaker. The Credit Facility (i) originally matured
on September 30, 1998, (ii) provided for interest at the prime rate plus 3% per
annum, payable quarterly, and (iii) was secured by the two semisubmersible
drilling rigs and all of the related assets. On September 25, 1998, the parties
to the Credit Facility amended the agreement to (i) extend the maturity date
from September 30, 1998 to March 31, 1999, (ii) waive all principal payments
until the maturity date, and (iii) extend the expiration date on the warrants
issued to the lenders under the original Credit Facility to March 31, 1999.
RIGCO paid a total of 0.5% of the outstanding principal balance to the lenders
in connection with the amendment.

25
<PAGE> 28

in accrued interest. On June 28, 2000, all amounts outstanding under the Credit
Facility were repaid from proceeds from the sale of the Bill Shoemaker. See "--
Subsidiary Bankruptcy Court Proceedings".

Effective January 25, 1998, Sedco Forex entered into a one-year contract
with Shell Offshore Inc. ("Shell") for the use of the Bill Shoemaker in the
Gulf. RIGCO was notified by Sedco Forex that as of November 18, 1998, Shell
would cease using the Bill Shoemaker to conduct drilling operations in the Gulf.
RIGCO has been paid for drilling services performed by the Bill Shoemaker for
Shell through November 18, 1998, but has not been paid for any period since that
time. RIGCO is seeking to recover its damages resulting from this early
termination, along with damages unrelated to the Shell contract, in the Harris
County Litigation against Schlumberger Technology Corporation, Schlumberger
Canada, Ltd., Sedco Forex Corporation, and Sedco Forex Canada Limited
(collectively "Sedco Forex") discussed hereafter.

On July 26, 1999, RIGCO filed a petition in the 165th Judicial District
Court in Harris County, Texas, seeking both actual and exemplary damages from
Schlumberger for claims arising out of Schlumberger's Sedco Forex Division's
marketing, manning, management and operation of the Bill Shoemaker and Laffit
Pincay pursuant to certain charter, make-ready and other agreements and
arrangements. The allegations include claims of gross negligence, breach of
contract, fraud, negligent misrepresentation and negligence. Additionally, RIGCO
and FPS VI have alleged in bankruptcy court proceedings that the manner in which
Schlumberger performed its duties with respect to the Bill Shoemaker and Laffit
Pincay during the course of the management and charter agreements resulted in
RIGCO's financial difficulties and caused it to default on its secured debt
obligations.

Following the early release of the rig by Shell, the Bill Shoemaker was
towed to a shipyard in Galveston, Texas where it underwent significant
unanticipated refurbishments in preparation for mobilization to the Grand Banks
area in Atlantic Canada. Capital costs, including crew costs while in the
shipyard, for the make-ready totaled approximately $8.5 million. Following the
make-ready, the Bill Shoemaker was mobilized to the Grand Banks area in Atlantic
Canada to conduct a two-well program (with three options permitting up to seven
additional wells) at predetermined rates for Husky Oil Operations Limited. In
connection with the Bill Shoemaker make-ready agreement with Sedco Forex, RIGCO
obtained a letter of credit for $6.5 million to secure payment to Sedco Forex.
The letter of credit was secured with funds provided by Mr. Tatham. In exchange
for providing the funds to secure the letter of credit, RIGCO paid a fee of
$500,000 to Mr. Tatham. RIGCO agreed to pay Mr. Tatham, as liquidated damages,
$10,000 per day from February 15, 1999 until such funds were returned. The
liquidated damages payment would be in the form of a promissory note bearing
interest at the rate of 18% per annum. All of the funds securing the letter of
credit were drawn by Sedco Forex for payments under the make-ready agreement. As
of June 30, 2000, Mr. Tatham had a claim against RIGCO for liquidated damages of
$1.8 million.

Subsidiary Bankruptcy Court Proceedings

On or about February 9, 2000, RIGCO, FPS III, FPS IV and FPS V, as
debtors-in-possession, and the secured lenders under the Credit Facility filed a
Stipulation and Order Authorizing Continued Use of Cash Collateral and Adequate
Protection with the Bankruptcy Court (the "February 2000 Stipulation"). The
February 2000 Stipulation provided that (i) the debtors-in-possession would
accept an offer to purchase the Laffit Pincay at the best commercial offer above
a stated minimum, (ii) within five business days of the acceptance of the offer,
debtors-in-possession would file with the Bankruptcy Court a motion seeking
approval of reasonable and customary proposed bankruptcy sale procedures
including the establishment of an overbid period and approval of topping fees,
(iii) within five business days of the acceptance of the offer,
debtors-in-possession would retain a certain broker to market the Laffit Pincay,
(iv) the debtors-in-possession would enter into a definitive Purchase Agreement
which is acceptable to the secured lenders for the sale of the Laffit Pincay
within 21 days after the acceptance of the offer and would file a motion seeking
approval of the proposed sale pursuant to the terms of the Purchase Agreement
with the Bankruptcy Court, (v) the debtors-in-possession would use their best
efforts to obtain a hearing on the proposed sales procedures on February 17,
2000, a hearing on the proposed sale on March 20, 2000 and the closing of the
sale of the Laffit Pincay on or before March 31, 2000, (vi) the terms of the
Purchase Agreement or any subsequent purchase agreement approved by the
Bankruptcy Court would provide that the sale of the Laffit Pincay would close on
or before March 31, 2000, assuming all conditions precedent to the closing have
been satisfied, (vii) upon the sale of the Laffit Pincay, the secured lenders
would receive all of the net proceeds from the sale after deduction of customary
and reasonable expenses, costs and fees associated with the sale, (viii) on or
before March

26
<PAGE> 29

31, 2000, the debtors-in-possession would accept an offer to purchase the Bill
Shoemaker for an amount exceeding all remaining amounts owing to the secured
lenders and that the sale of the Bill Shoemaker would close no later than June
30, 2000, (ix) if the debtors-in-possession fulfill the conditions for the sale
of the Bill Shoemaker as set forth in (viii) above, some or all of the secured
lenders would make a post-petition loan to RIGCO up to $1.6 million (the "DIP
Loan"), (x) proceeds from the sale of the Bill Shoemaker will be used to first
pay off the obligations under the DIP Loan and second to pay off all secured
obligations owed to the secured lenders under the Credit Facility, (xi) upon
approval of the Bankruptcy Court of the February 2000 Stipulation, the
debtors-in-possession would pay the secured lenders $2.0 million in partial
payment of the secured lenders' claim and (xii) debtors-in-possession would be
allowed continued use of the cash collateral through March 31, 2000 in
accordance with an agreed budget.

In February 2000, RIGCO made a $2.0 million payment to the secured lenders
as provided in the February 9, 2000 stipulation. The secured lenders allowed
continued use of the cash collateral through April 14, 2000 and limited use of
cash collateral for payroll through May 15, 2000. On May 1, 2000, RIGCO and FPS
VI sold all of their interest in the Laffit Pincay to Odin Millennium
Partnership Ltd. for $28.5 million in cash. Expenses associated with the sale
totaled $0.3 million and $175,000 of the net proceeds is being held by RIGCO, in
a separate debtor-in-possession bank account, pending the resolution of a
maritime lien claim by one of RIGCO's pre-petition creditors. The balance of the
proceeds from the sale of the Laffit Pincay, $28.0 million, was paid to RIGCO's
secured lenders in partial payment of their secured claim under the Credit
Facility.

On June 28, 2000, RIGCO sold all of its interest in the Bill Shoemaker to
Fred Olsen Energy ASA for $43.6 million in cash. Expenses associated with the
sale totaled $0.4 million. By order of the Bankruptcy Court, RIGCO established
separate debtor-in-possession bank accounts for (i) $2.0 million to secure
payment to Tatham Offshore for their interest in four of the anchor chains
located on the Bill Shoemaker, (ii) $0.6 million for administrative expenses
incurred in the Bankruptcy proceedings and (iii) $0.4 million for uncontested
claims of unaffiliated unsecured creditors. The secured lenders under the Credit
Facility and the DIP Loan received a total of $36.6 million in final payment of
all principal, interest and expenses associated with the Credit Facility and DIP
Loan. Pursuant to a Bankruptcy Court Order, RIGCO paid $2.0 million to Tatham
Offshore for Tatham Offshore's interest in the four anchor chains on June 29,
2000. The remaining $3.5 million is available to RIGCO as debtor-in-possession
pending the approval of the Bankruptcy Court of RIGCO's plan of reorganization
or a dismissal of the Chapter 11 proceedings.

On September 25, 2000, the Rig Subsidiaries filed a motion to dismiss the
Chapter 11 proceedings with the United States Bankruptcy Court. If granted, the
dismissal of the Chapter 11 proceedings would allow the Rig Subsidiaries to pay
in full their pre-petition unaffiliated unsecured creditors. Any funds remaining
would be paid to the affiliated unsecured creditors on a pro rata basis.

Atlantic Canada

The Company has refocused its business from the development, exploration
and production of oil and gas in the Gulf to an integrated frontier investment
strategy targeting Atlantic Canada. The Company believes that the Atlantic
Canada region offers significant investment opportunities and the Company plans
to diversify its business to include the North Atlantic pipeline project,
related gas processing facilities, a facility for the generation of electricity
and other related investments including upstream exploration and production
activities and the acquisition of oil and gas concessions or license interests.
The Company has incurred approximately $14.3 million in costs associated with
its Atlantic Canada strategy.

The ability of the Company to satisfy its future capital needs with respect
to its planned Atlantic Canada strategy, particularly its ability to obtain
regulatory approval and financing for the North Atlantic Pipeline Partners'
pipeline project, will depend upon its ability to raise substantial amounts of
additional capital and to implement its business strategy successfully. With
respect to the Company's Atlantic Canada strategy, (i) the Company does not
currently possess the capital necessary to implement its business strategy
completely and there can be no assurances that the Company will be able to
obtain sufficient capital for any or all of the projects, (ii) there can be no
assurances that these projects and other opportunities will prove to be
economical or that they will occur, and (iii) many of these projects will
require governmental approvals, almost all of which the Company has yet to
receive.

27
<PAGE> 30

Moreover, if there are developments that the Company determines to be indicative
of a lack of reasonable opportunity to realize benefits for the Company's
stockholders, then the Company will pursue other opportunities, wherever
located, as the Company determines to be in the Company's best interests. The
Company or its Canadian subsidiaries may seek to obtain additional equity
capital to assist in the funding of the ongoing day-to-day operations of its
planned Atlantic Canada strategy.

Other

In connection with the Merger, the Company entered into a $22.9 million
short-term financing arrangement with Tatham Brothers (as amended, the
"Short-Term Facility") to provide for funds to (i) satisfy approximately $1.6
million of cash requirements with respect to the redemption agreement with
Leviathan, (ii) pay $1.4 million to DeepTech in connection with the management
agreement between Tatham Offshore and DeepTech, (iii) pay approximately $6.9
million to TB Securities with respect to obligations under the Rights Offering,
(iv) fund a $7.5 million letter of credit for potential tax liabilities, (v)
refinance $5.1 million in existing loans to DeepFlex and (vi) pay fees and
expenses associated with the Short-Term Facility. Tatham Brothers is an
affiliate of Thomas P. Tatham and the parent company of TB Securities. The
Short-Term Facility accrued interest at the rate of 12% per annum and was due on
January 15, 1999. On January 15, 1999, the Company and Tatham Brothers agreed to
refinance the original $22.9 million principal plus $1.1 million of accrued
interest into a new short-term loan which bears interest at the rate of 15% per
annum and was due March 31, 1999. In connection with the refinancing, the
Company paid Tatham Brothers a fee of $1.0 million in the form of a 15%
subordinated convertible note (the "Subordinated Convertible Note"). The
Subordinated Convertible Note bears interest at the rate of 15% per annum and is
due on August 15, 2001. Tatham Brothers may convert the principal amount of the
Subordinated Convertible Note and accrued unpaid interest into shares of Common
Stock of the Company based on the average market price for the five trading days
prior to the end of the previous calendar quarter. The Short-Term Facility is
secured by a pledge of DeepFlex of its interest in certain payment-in-kind
Subordinated Promissory Notes issued by RIGCO and FPS V, both subsidiaries of
the Company, which had an outstanding balance of approximately $81.0 million at
June 30, 2000. On March 31, 1999, the Company and Tatham Brothers extended the
Short-Term Facility until April 30, 1999. Pursuant to the terms of the
Short-Term Facility, Tatham Offshore was required to pay $24.1 million in
principal and $0.3 million in interest on April 30, 1999. Tatham Offshore did
not make payment of such amount; as a result, an Event of Default has occurred
and is continuing under the Short-Term Facility.

Tatham Offshore is a guarantor of $5.0 million of a $9.0 million loan from
Bank of America, N.A. to Tatham Brothers, which proceeds were loaned to DeepFlex
to fund certain improvements to the Rigs. The loan bore interest at LIBOR plus
2% and was due on November 30, 1999 or upon demand. On December 1, 1999, Tatham
Brothers made a principal reduction of $2.6 million and extended the note until
September 30, 2000 or upon demand. Effective February 1, 2000, the loan bears
interest at the rate of 6.5% per annum. The loan from Tatham Brothers to
DeepFlex, plus accrued interest, was included in the amount payable under the
Short-Term Facility discussed above.

Since the Nasdaq National Market has delisted Tatham Offshore's common
stock, the holders thereof have suffered a decrease in marketability of their
shares and the liquidity of their investment in Tatham Offshore's common stock
and its preferred stocks which are convertible into common stock. This decrease
in the marketability and liquidity of the Company's common and preferred stock
may have a material adverse effect on Tatham Offshore's ability to access equity
markets in the future.

Tatham Offshore has never declared or paid dividends on its common or
preferred stock. Tatham Offshore expects to retain all available earnings
generated by its operations for the growth and development of its business.

UNCERTAINTY OF FORWARD LOOKING STATEMENTS AND INFORMATION

This annual report contains certain forward looking statements and
information that are based on management's beliefs as well as assumptions made
by and information currently available to management. Such statements are
typically punctuated by words or phrases such as "anticipate," "estimate,"
"project," "should," "may," "management believes," and words or phrases of
similar import. Although management believes that such statements and
expressions are reasonable and made in good faith, it can give no assurance that
such expectations will prove to have been correct. Such statements are subject
to certain risks, uncertainties and assumptions. Should one or more

28
<PAGE> 31

of these risks or uncertainties materialize, or should underlying assumptions
prove incorrect, actual results may vary materially from those anticipated,
estimated or projected. Among the key factors that may have a direct bearing on
the Company's results of operations and financial condition are: (i) competitive
practices in the industry in which the Company competes, (ii) the impact of
current and future laws and government regulations affecting the industry in
general and the Company's operations in particular, (iii) environmental
liabilities to which the Company may become subject in the future that are not
covered by an indemnity or insurance, (iv) the impact of oil and natural gas
price fluctuations and (v) significant changes from expectations of capital
expenditures and operating expenses and unanticipated project delays. The
Company disclaims any obligation to update any forward-looking statements to
reflect events or circumstances after the date hereof.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk inherent in financial instruments outside the financial
statements is considered immaterial.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Financial Statements and Supplementary Data required hereunder are
included in this Annual Report as set forth in Item 14(a) hereof.

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

None.

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<PAGE> 32

PART III

ITEMS 10, 11, 12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT,
EXECUTIVE COMPENSATION, SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS

The following table sets forth certain information as of August 31, 2000,
regarding the executive officers and directors of Tatham Offshore. Each
executive officer named in the following table has been elected to serve until
his successor is duly appointed or elected or until his earlier removal or
resignation from office.

There is no family relationship among any of the executive officers of
directors of Tatham Offshore, and no arrangement or understanding exists between
any executive officer or director of Tatham Offshore and any other person
pursuant to which he or she was or is to be selected as an officer or director.

<TABLE>
<CAPTION>
Name Age Position(s)
---- --- -----------
<S> <C> <C>
Thomas P. Tatham 54 Chairman of the Board,
Chief Executive Officer

Dennis A. Kunetka 51 Chief Financial Officer,
Senior Vice President and Secretary

Harvey O. Fleisher 54 Senior Vice President - Marine Services

Ira Gervais 54 Senior Vice President - Operations
RIGCO North America, L.L.C.

Philip German 47 Vice President - Engineering
Tatham Offshore Canada Limited

Kenneth L. Hamilton 53 Vice President, Treasurer
and Assistant Secretary

Dennis J. Lubojacky 47 Vice President - Controller
and Financial Planning

Kenneth E. Beeney 41 Director

James G. Niven 54 Director

Roger B. Vincent, Sr. 55 Director

Don W. Wilson 53 Director
</TABLE>

Thomas P. Tatham has served as Chairman of the Board and a Director of the
Company since its inception in 1988. In addition, Mr. Tatham served as Chairman
of the Board, Chief Executive Officer and a Director of DeepTech International
Inc. ("DeepTech") and Chairman of the Board of Leviathan Gas Pipeline Company
("Leviathan"), affiliates of Tatham Offshore, since October 1989 and February
1989, respectively, through August 14, 1998. In addition, Mr. Tatham served as
Chief Executive Officer of Leviathan from February 1989 until June 1995. Mr.
Tatham sold all of his interests in DeepTech and Leviathan to El Paso Energy in
August 1998. Mr. Tatham has over 29 years experience in the oil and gas
industry. He founded Mid American Oil Company in 1970 and served as Chairman of
the Board and Chief Executive Officer until he sold his interest therein to
Centex Corporation in 1979. In 1979, Mr. Tatham founded Tatham Corporation to
acquire Sugar Bowl Gas Corporation ("Sugar Bowl"), the second largest intrastate
pipeline system in Louisiana. He served as

30
<PAGE> 33

Chairman of the Board of Tatham Corporation from 1979 to December 1983, at which
time it sold the assets of Sugar Bowl to a joint venture between MidCon Corp.
and Texas Oil and Gas, Inc. From 1984 to 1988, Mr. Tatham pursued personal
investments in various industries, including the oil and gas industry. Mr.
Tatham served as a director of J. Ray McDermott, S.A. from its inception in
February 1995 through August 1997.

Dennis A. Kunetka has served as Senior Vice President - Corporate Finance
of the Company since October 1993 and as Chief Financial Officer and Secretary
since January 1998. Mr. Kunetka served as Senior Vice President - Corporate
Finance and Investor Relations of DeepTech and Leviathan from August 1993
through August 14, 1998. Prior to joining DeepTech, Mr. Kunetka served as Vice
President and Controller of United Gas Pipe Line Company and its parent company,
United Gas Holding Corporation. Prior to joining United in 1984, Mr. Kunetka
spent 11 years with Getty Oil Company in various tax, financial and regulatory
positions. Mr. Kunetka holds B.B.A. and M.S.A. degrees from the University of
Houston, a J.D. degree from South Texas College of Law and is a certified public
accountant.

Harvey O. Fleisher has served as Senior Vice President of Marine Services
of the Company since August 1998. Mr. Fleisher has served as Executive Vice
President of DeepFlex since April 1995. From June 1988 to April 1995, Mr.
Fleisher held various engineering and operations positions with DeepTech
entities. Mr. Fleisher has over 27 years experience in the offshore oil and gas
industry primarily in the floating drilling and production areas. Prior to
joining DeepTech in 1988, Mr. Fleisher worked for two years as an independent
consultant and 14 years with Sonat Offshore Drilling, Inc. (formerly The
Offshore Company). Mr. Fleisher is a Registered Professional Engineer and holds
M.S. and B.S. degrees in Industrial Engineering from Texas A&M University.

Ira Gervais has served as Senior Vice President of Operations of RIGCO
North America, L.L.C. since April 1999. Prior to joining the Company, Mr.
Gervais was employed with Sedco Forex, a division of Schlumberger Technology
Corporation, and was in charge of rig operations. Mr. Gervais has over 25 years
of experience in the offshore oil and gas industry and held various positions
throughout the world in engineering, operations, and rig management until his
recent retirement from Schlumberger. During his tenure with Schlumberger, Mr.
Gervais was also assigned to many Research and Engineering projects and new rig
building projects for Sedco. Prior to joining Sedco, Mr. Gervais worked for
eight years for Avondale shipyards in various ship and rig building projects.
Mr. Gervais holds a B.S. degree from the University of Texas at Arlington and an
ASEE from Delgado Junior College. Mr. Gervais also holds a Liberian Chief
Engineers Marine license and is a certified DNV Quality Lead Auditor. Mr.
Gervais resigned his office effective July 31, 2000.

Philip German has served as Vice President - Engineering of Tatham Offshore
Canada Limited since August 1998. From July 1997 through August 1998, Mr. German
served as a consultant to the Company. From July 1995 through July 1997, Mr.
German served as the Chief Pipeline Engineer for Intec Engineering, Inc. From
June 1990 through July 1995, Mr. German served as Vice President of J.P. Kenny
Inc. of Houston. From 1981 through 1990, Mr. German was associated with J.P.
Kenny and Partners, Ltd., London. Mr. German has been actively involved in
offshore pipeline and onshore pipeline and facilities projects in the U.K.,
Norway, Australia, North Africa, East Africa and China. In addition to his work
with engineering companies, Mr. German has also spent extended periods acting on
behalf of oil and gas companies, most notably Statoil and Conoco. Mr. German
holds a Bachelor of Science degree in Mechanical Engineering from Thames
Polytechnic, London.

Kenneth L. Hamilton has served as Vice President - Treasurer and Assistant
Secretary of the Company since August 1998. Mr. Hamilton served as Corporate Tax
Director of DeepTech from August 1997 through August 14, 1998. Prior to joining
DeepTech, Mr. Hamilton was a shareholder in Verne Sanders & Associates, a
certified public accounting firm for 11 years. Mr. Hamilton served as Vice
President-Controller of Tatham Corporation from 1981 to 1986 and as Tax Manager
with Price Waterhouse LLP in Houston from 1974 to 1981. Mr. Hamilton holds a
B.A. degree from the University of Texas at El Paso and is a certified public
accountant.

Dennis J. Lubojacky has served as Vice President - Controller and Financial
Planning of the Company since August 1998. Mr. Lubojacky served as Controller of
DeepFlex from August 1996 through August 1998. Prior to joining DeepTech, Mr.
Lubojacky worked for two years as an independent consultant after serving as
Vice President - Controller for Nabors Yemen Ltd. from 1991 to 1994. Mr.
Lubojacky has over 24 years of experience in the oil and gas industry, primarily
with offshore and onshore drilling contractors in various

31
<PAGE> 34

accounting and financial management positions. Mr. Lubojacky holds a B.B.A.
degree from Sam Houston State University and is a certified public accountant.
Mr. Lubojacky resigned his office effective May 19, 2000.

Kenneth E. Beeney has served as a Director of the Company since August
1993. In addition, Mr. Beeney served as Vice President - Chief Geophysicist of
the Company from August 1993 through August 14, 1998. Since August 17, 1998, Mr.
Beeney has served as Exploration Manager - Deepwater for Pennzoil Exploration
and Production. Mr. Beeney has 16 years of exploration experience, with a
primary focus in the Gulf of Mexico. Prior to joining Tatham Offshore in 1989,
Mr. Beeney worked for Tenneco Oil Company for eight years and Anadarko Petroleum
Corporation on a variety of exploration assignments. Mr. Beeney received a B.S.
in Geophysics from the Colorado School of Mines.

James G. Niven has served as a Director of the Company since June 1994 and
as a General Partner of Pioneer Associates, a venture capital investment
company, since 1982. Mr. Niven has been a Senior Vice President of Sotheby's
Inc. since November 1996 and is currently a Director of The Lynton Group, Inc.
and HealthPlan Services, Inc. He served as Chairman of the Board of Global
Natural Resources from 1989 to 1995 and is a member of the Board of Managers of
Memorial Sloan-Kettering Cancer Center, and a Trustee of the Museum of Modern
Art, and the National Center for Learning Disabilities, Inc. Mr. Niven resigned
as Director of the Company effective July 28, 2000.

Roger B. Vincent, Sr. has served as a Director of the Company since January
1996. Mr. Vincent is President of Springwell Corporation, a corporate finance
advisory firm located in New York. Prior to founding Springwell, Mr. Vincent
spent 18 years with Bankers Trust Company where he was a Managing Director of
the firm as well as in charge of the firm's Client Group. Mr. Vincent is a
director of AmeriGas Propane, Inc., a general partner of AmeriGas Partners, L.P.
(NYSE listed), and a Trustee of the GCG Trust of the Golden American Life
Insurance Company (a subsidiary of the ING Group). Mr. Vincent is a graduate of
Yale University and Harvard Business School. Mr. Vincent resigned as a Director
of the Company effective July 31, 2000.

Don W. Wilson has served as Director of Tatham Offshore, Inc. since
December 1998 and is currently President and Chief Operating Officer of Odyssea
Marine, Inc. From January 1998 through September 1998, Mr. Wilson served as
President and Chief Operating Officer of Prime Natural Resources, Inc. Mr.
Wilson served as President and Chief Executive Officer of FW Oil Interests, Inc.
from 1996 through 1997. During 1995, Mr. Wilson served as Executive Vice
President of J. Ray McDermott, S.A. From 1993 to 1995, Mr. Wilson served as
President of O.P.I. International, Inc., prior to its merger with J. Ray
McDermott, S.A. From 1975 through 1993, Mr. Wilson was employed by Brown & Root,
Inc., and served in various operational and managerial positions. During his
employment with Brown & Root, Inc., Mr. Wilson was Vice President of Global
Operations from 1990 to 1993. Mr. Wilson has been involved in the construction
of most of the world's large diameter hostile environment offshore pipeline
projects. Presently, along with Mr. Wilson's position with Odyssea Marine, Inc.,
he is Chairman of the Board of Grant Geophysical, Inc. and director of Prime
Natural Resources, Inc.

SUMMARY COMPENSATION TABLE

Through August 14, 1998, the executive officers of the Company were
compensated by DeepTech and did not receive compensation from the Company for
their services as such. Accordingly, DeepTech provided these personnel and other
resources to the Company pursuant to a management agreement during that period.
Effective August 14, 1998, DeepTech was acquired by an affiliate of El Paso
Natural Gas Company and divested all equity ownership in Tatham Offshore through
a rights offering. Under the management agreement, the Company was charged an
annual management fee in exchange for operational, financial, accounting and
administrative services. The management fee was intended to reimburse DeepTech
for the estimated costs of the services provided to each affiliate. The
management agreement between DeepTech and the Company was terminated in
connection with the merger of DeepTech and El Paso. Effective August 14, 1998,
Tatham Offshore hired a management team and support personnel to implement its
business strategy. The Company's executive officer compensation program is
administered and reviewed by the Incentive Plan Compensation Committee.

32
<PAGE> 35

The following table sets forth the compensation paid by the Company to the
Chief Executive Officer and each of the Company's four other most highly
compensated executive officers for the fiscal year ended June 30, 2000
(collectively, the "Named Officers"). The compensation set forth in the table
represents amounts paid to the Named Officers for their services rendered in all
capacities to DeepTech and its subsidiaries for the fiscal year ended June 30,
1998 and a portion of the fiscal year ended June 30, 1999. Therefore, the
amounts shown do not reflect amounts earned solely as compensation for services
to the Company. As noted below, in addition to serving as executive officers of
the Company, each of Messrs. Tatham, Fleisher and Kunetka also served as
officers of DeepTech and one or more of its affiliates for the indicated periods
prior to August 14, 1998.

33
<PAGE> 36

<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------ LONG-TERM
COMPENSATION
NAME/PRINCIPAL OTHER ANNUAL AWARDS ALL OTHER
POSITION WITH FISCAL SALARY BONUS COMPENSATION(1) OPTIONS COMPENSATION
TATHAM OFFSHORE YEAR ($) ($) ($) (#) ($)
<S> <C> <C> <C> <C> <C> <C>
Thomas P. Tatham (2) 2000 -- -- -- -- --
Chief Executive Officer 1999 $ 125,001(3) -- $ 233,332(3) -- --
1998 $1,000,000(3) -- $1,400,000(3) -- $272,500(4)

Dennis A. Kunetka (5) 2000 $ 180,000 -- -- -- --
Senior Vice President and 1999 $ 193,743(6) -- -- 150,000(7) --
Chief Financial Officer 1998 $ 161,450(8) -- -- 100,000(12) --

Harvey O. Fleisher (9) 2000 $ 162,000 -- -- -- --
Senior Vice President - 1999 $ 176,250(6) -- -- 150,000(7) --
Marine Services 1998 $ 150,000(8) -- -- -- --

Phillip German (10) 2000 $ 180,000 -- -- -- --
Vice President - 1999 $ 157,500 -- -- 150,000(7) --
Engineering 1998 -- -- -- -- --

Kenneth L. Hamilton (11) 2000 $ 135,000 -- -- -- --
Vice President - Treasurer 1999 $ 146,874(6) -- -- 150,000(7) --
and Assistant Secretary 1998 $ 151,038(8) -- -- -- --
</TABLE>

----------

(1) Other Annual Compensation excludes the aggregate value of perquisites when
such value is less than the lesser of $50,000 or 10% of total annual Salary
and Bonus for each Named Officer.

(2) Mr. Tatham also served as Chairman of the Board and Chief Executive Officer
of DeepTech and Chairman of the Board of Leviathan until August 14, 1998.

(3) Effective July 1, 1996, the Compensation Committee of DeepTech's Board of
Directors established a compensation plan for Mr. Tatham for the years
ended June 30, 1997 and 1998. Under the compensation plan, Mr. Tatham
received a base salary of $1,000,000 per annum plus $1,400,000 per annum to
be credited against incentive bonuses as they are earned. The base salary
and bonus are payable at the rate of $200,000 per month. The Compensation
Committee of DeepTech's Board of Directors detailed certain performance
goals for DeepTech and its subsidiaries and affiliates, including the
Company, and Mr. Tatham which would allow him to earn the incentive bonus
payments over the two year period. Mr. Tatham has not received a salary or
bonus from the Company since August 14, 1998, the effective date of the
Merger and related transactions.

(4) Represents the excess of the fair market value of DeepTech options over the
exercise price on the date such options were exercised.

(5) Mr. Kunetka also served as Senior Vice President - Corporate Finance and
Investor Relations for DeepTech and Leviathan until August 14, 1998.

(6) Includes amounts paid by DeepTech from July 1, 1998 through August 14, 1998
and amounts paid by the Company from August 15, 1998 through June 30, 1999.

(7) Includes an option to purchase 100,000 shares of Common Stock and the grant
of 50,000 shares of restricted Series A 12% Cumulative Convertible
Preferred Stock under Tatham Offshore's Incentive Plan.

(8) Amounts paid by DeepTech.

(9) Mr. Fleisher also served as Executive Vice President of DeepFlex Production
Services.

(10) Mr. German joined the Company on August 15, 1999.

(11) Mr. Hamilton served as Corporate Tax Director of DeepTech from August 1997
to August 14, 1998.

(12) Options granted under Tatham Offshore's Incentive Plan to purchase Common
Stock.

34
<PAGE> 37

OPTION EXERCISES AND YEAR-END VALUE TABLES

The following table sets forth certain information regarding the outstanding
options and warrants to purchase Tatham Offshore Common Stock held by the Named
Officers at June 30, 2000.

<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
VALUE UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
SHARES ACQUIRED ON REALIZED AT FISCAL YEAR-END (#) FISCAL YEAR-END ($)
NAME EXERCISE (#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
<S> <C> <C> <C> <C>
Thomas P. Tatham -- -- -- / -- -- / --

Dennis A. Kunetka -- -- 50,000 / 50,000(1) -- / --
100,000(2)

Harvey O. Fleisher -- -- -- / 100,000(2) -- / --

Philip German -- -- -- / 100,000(2) -- / --

Kenneth L. Hamilton -- -- -- / 100,000(2) -- / --
</TABLE>

----------

(1) Options granted pursuant to Tatham Offshore's Incentive Plan on January 15,
1998 which vest 25% each year beginning January 15, 1999.

(2) Options granted pursuant to Tatham Offshore's Incentive Plan on December
31, 1998 which vest 33-1/3% each year beginning December 31, 2001.

REPORT ON EXECUTIVE COMPENSATION

The Compensation Committee of the Board of Directors determines the
compensation of the executive officers named in the Summary Compensation Table.
The Compensation Committee has furnished the following report on executive
compensation.

COMPENSATION PHILOSOPHY

As members of the Compensation Committee, it is our duty to administer the
executive compensation program for the Company. The Compensation Committee is
responsible for establishing appropriate compensation goals for the executive
officers of the Company, evaluating the performance of such executive officers
in meeting such goals and making recommendations to the Board of Directors with
regard to executive compensation.

The Company's compensation philosophy is to ensure that executive
compensation be directly linked to continuous improvements in corporate
performance, achievement of specific operations, financial and strategic
objectives and increases in stockholder value. The Compensation Committee
regularly reviews the compensation packages of the Company's executive officers,
taking into account factors which it considers relevant, such as business
conditions within and outside the industry, the Company's financial performance,
the market composition for executives of similar background and experience and
the performance of the executive officer under consideration. The particular
elements of the Company's compensation programs for executive officers are
described below.

COMPENSATION STRUCTURE

The executive base compensation for the executive officers of the Company
named in the Summary Compensation Table is intended to be competitive with that
paid in comparable situated industries, taking into

35
<PAGE> 38

account the scope of responsibilities and internal relationships. The goals of
the Compensation Committee in establishing the Company's executive compensation
program are:

(1) To fairly compensate the executive officers of the Company and its
subsidiaries for their contributions to the Company's short-term and
long-term performance. The elements of the Company's executive
compensation program are (a) annual base salaries, (b) annual bonuses
and (c) equity incentives.

(2) To allow the Company to attract, motivate and retain the management
personnel necessary to the Company's success by providing an executive
compensation program comparable to that offered by companies with
which the Company competes for management personnel.

Individual's base salaries are determined by the Compensation Committee
based on the scope of the executive's responsibilities, a subjective evaluation
of the executive's performance and the length of time the executive has been in
the position.

EXECUTIVE COMPENSATION DEDUCTIBILITY

It is the Company's intent that amounts paid pursuant to the Company's
compensation plans will generally be deductible compensation expenses. The
Compensation Committee does not currently anticipate that the amount of
compensation paid to executive officers will exceed the amounts specified as
deductible pursuant to Section 162(m) of the Internal Revenue Code of 1986, as
amended.

COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS

Kenneth E. Beeney
Don W. Wilson

INCENTIVE PLAN

In 1995, Tatham Offshore adopted the Incentive Plan. The Incentive Plan was
effected to provide Tatham Offshore with the ability of making a variety of
awards pursuant to the Incentive Plan including stock options, restricted stock
and stock value equivalent awards.

Under the Incentive Plan, Tatham Offshore may grant to employees,
consultants or agents of Tatham Offshore or any of its parents or subsidiaries
one or more options (each, a "Stock Option") to purchase shares of Common Stock
as hereinafter set forth. Stock Options granted under the Incentive Plan may be
either incentive stock options ("Incentive Stock Options") within the meaning of
Section 422(b) of the Code, or options that do not qualify as Incentive Stock
Options ("Non-Qualified Stock Options"). Pursuant to the Incentive Plan, Tatham
Offshore may grant awards of Common Stock subject to restrictions on sale or
other disposition of such shares ("Restricted Stock Grant"), and such other
requirements as the Compensation Committee deems appropriate including the
requirement that such shares be forfeited upon termination of employment for
certain reasons within a specified period of time. Pursuant to the Incentive
Plan, Tatham Offshore may also grant rights to receive an amount equal to the
fair market value of shares of Common Stock or rights to receive an amount equal
to any appreciation or increase in the fair market value of Common Stock over a
specified period of time (SARs). Stock Options, Restricted Stock Grants and SARs
are referred to collectively herein as "Awards."

Except with respect to outstanding Awards, and unless sooner terminated by
action of Tatham Offshore's Board of Directors or the committee thereof charged
with administration of the Incentive Plan, the Incentive Plan will terminate on
December 31, 2005. The maximum number of shares of Common Stock with respect to
which Awards may be granted under the Incentive Plan is 4,000,000.

The Board of Directors may terminate or suspend the Incentive Plan (or any
portion thereof) at any time with respect to any shares for which Awards have
not previously been granted and remain outstanding. The Board of Directors has
the right to alter or amend the Incentive Plan or any part thereof from time to
time; provided, however, that no change in any Award theretofore granted may be
made which would materially

36
<PAGE> 39

adversely affect the rights and obligations of the holder of any such Award
without the written consent of such Incentive Plan participant; and provided,
further, that the Board of Directors may not, without stockholder approval as
required under the Incentive Plan, (i) materially increase the number of shares
of Common Stock which may be issued under the Incentive Plan (other than in
connection with adjustments permitted by the Incentive Plan), (ii) materially
modify the requirements as to eligibility for participation in the Incentive
Plan, (iii) materially increase the benefits accruing to participants under the
Incentive Plan, or (iv) extend the termination date of the Incentive Plan. In
addition, no amendment, suspension or termination can be adopted which would
disqualify the Incentive Plan from (i) the exemption provided by Rule 16b-3,
promulgated under the Exchange Act, or any successor rule or regulation to such
Rule 16b-3, as such rule is applicable from time to time, or (ii) the benefits
provided under Section 422 of the Code, or any successor thereto.

The Incentive Plan is not subject to any provisions of the Employee
Retirement Income Security Act of 1974, as amended, or the qualification
requirements of Section 401 of the Code.

The Incentive Plan is to be administered by the Compensation Committee.
Each member of the Compensation Committee is a disinterested person within the
meaning of Rule 16b-3 of the Exchange Act and qualifies as an "outside
director", as such term is used for the purposes of Section 162(m) of the Code
and any rules and regulations promulgated thereunder.

Subject to the provisions of the Incentive Plan, the Compensation Committee
has sole authority to select the individuals who are to be granted Awards from
among those persons who are eligible and to determine the restrictions, terms
and conditions of each Award granted under the Incentive Plan (subject to the
terms of the Incentive Plan). The Compensation Committee is authorized to
interpret the Incentive Plan and may, from time to time, adopt, amend or rescind
rules and regulations relating to the implementation, administration and
maintenance of the Incentive Plan.

A total of 700,000 Awards issued pursuant to the Incentive Plan are
currently outstanding.

DIRECTOR PLAN

In 1995, Tatham Offshore adopted the Director Plan. The purpose of the
Director Plan is to allow Tatham Offshore to attract the best available
individuals to serve as outside directors of Tatham Offshore.

All non-employee directors of Tatham Offshore are eligible to participate
in the Director Plan. The Director Plan provides for both automatic one time
grants of Stock Options to Tatham Offshore's non-employee directors and for the
issuance and exercise of Stock Options in lieu of standard cash director
compensation upon the election of non-employee directors. All Stock Options
granted under the Director Plan are Non-Qualified Stock Options.

Except with respect to outstanding Stock Options, and unless sooner
terminated by action of the Board of Directors, the Director Plan will terminate
on December 31, 2005. The maximum number of shares of Common Stock with respect
to which Stock Options may be granted under the Director Plan is 1,000,000,
subject to adjustments for stock splits, stock dividends and certain other
changes in capitalization.

Under the Director Plan, grants of Stock Options to purchase 30,000 shares
of Common Stock were automatically made to all non-employee directors of Tatham
Offshore provided that such non-employee directors had not already received
stock options to purchase 30,000 shares of Common Stock in connection with their
service as a director of Tatham Offshore. In addition, after the effective date
of the Director Plan, any newly elected non-employee director will automatically
receive Stock Options to purchase 30,000 shares of Common Stock. The exercise
price for the Stock Options to purchase 30,000 shares of Common Stock will be
100% of the fair market value of the Common Stock on the later to occur of (i)
the effectiveness of the Director Plan, or (ii) the election of a participant as
a Director of Tatham Offshore. The Stock Options issued pursuant to these
provisions can be immediately exercisable and, unless terminated sooner in
accordance with the Director Plan, shall expire on a date which is ten (10)
years after the date of grant of the option.

37
<PAGE> 40

In connection with his agreement to serve on the Board of Directors, Mr.
Niven was originally granted stock options to purchase 30,000 shares of Common
Stock of Tatham Offshore at $10.00 per share, the initial public offering price.
The stock options vested at the rate of 10,000 per year beginning June 30, 1995
and were subject to shareholder approval. During the year ended June 30, 1996,
these stock options were canceled and Mr. Niven was granted Stock Options to
purchase 30,000 shares of Common Stock at $0.8125 per share pursuant to the
Director Plan which included 10,000 Stock Options, which vested immediately, and
10,000 Stock Options, which vested annually on June 30, 1996 and 1997. In
connection with his appointment to the Board, Mr. Vincent was issued Stock
Options to purchase 30,000 shares of Common Stock at $0.8125 per share pursuant
to the Director Plan. These Stock Options vested at the rate of 10,000 per year
beginning January 31, 1997.

The Board of Directors may terminate or suspend the Director Plan (or any
portion thereof) at any time with respect to any shares for which Stock Options
have not previously been granted and remain outstanding. The Board of Directors
has the right to alter or amend the Director Plan or any part thereof from time
to time; provided, however, that no change in any Stock Option theretofore
granted may be made which would materially adversely affect the rights and
obligations of the holder of any such Stock Option without the written consent
of such Director Plan participant; and provided, further, that the Board of
Directors may not, without stockholder approval as required under the Director
Plan, (i) materially increase the number of shares of Common Stock which may be
issued under the Director Plan (other than in connection with adjustments
permitted by the Director Plan), (ii) materially modify the requirements as to
eligibility for participation in the Director Plan, (iii) materially increase
the benefits accruing to participants under the Director Plan, or (iv) extend
the termination date of the Director Plan. In addition, no amendment, suspension
or termination may be adopted which would disqualify the Director Plan from (i)
the exemption provided by Rule 16b-3, promulgated under the Exchange Act, or any
successor rule or regulation to such Rule 16b-3, as such rule is applicable from
time to time, or (ii) the benefits provided under Section 422 of the Code, or
any successor thereto.

ADDITIONAL DIRECTOR OPTIONS

On December 31, 1998, each of Messrs. Beeney, Niven, Vincent and Wilson,
the outside directors of the Company at the time, were granted options to
purchase 100,000 shares of the Company's Common Stock for $0.40625 per share,
the trading price for the Company's Common Stock on that date. The options vest
33-1/3% each year beginning December 31, 1999.

38
<PAGE> 41

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth as of August 31, 2000 the beneficial
ownership of the outstanding Common Stock of Tatham Offshore by (i) each person
who is known to Tatham Offshore to beneficially own more than 5% of the
outstanding Common Stock of Tatham Offshore, (ii) each director and director
nominee of Tatham Offshore, (iii) each executive officer named in the Summary
Compensation Table (see "Executive Compensation") and (iv) all executive
officers and directors of Tatham Offshore as a group.

<TABLE>
<CAPTION>
SHARES OF CLASS BENEFICIALLY OWNED(1)
TATHAM OFFSHORE
COMMON STOCK(2)
-------------------------------------
NUMBER PERCENT
----------- ------------
<S> <C> <C>
Kenneth E. Beeney ................... 41,833(3) *
Harvey O. Fleisher .................. 27,000(4) *
Phillip German ...................... 15,620(4) *
Kenneth L. Hamilton ................. 17,255(4) *
Dennis A. Kunetka ................... 68,250(5) *
James G. Niven ...................... 42,711(6) *
Thomas P. Tatham .................... 665,010(7) 2.7%
4400 Post Oak Parkway
Suite 1550
Houston, Texas 77027
Roger B. Vincent, Sr ................ 36,673(8) *
Don W. Wilson ....................... 22,500(3) *
Tatham Brothers Securities, LLC ..... 21,847,492(9) 80.5%
4400 Post Oak Parkway
Suite 1550
Houston, Texas 77027
Elliott Associates, L.P. ............ 1,886,204(10) 6.8%
712 5th Avenue, 36th Floor
New York, New York 10019
Martley International, L.P. ......... 1,886,204(10) 6.8%
1086 Teaneck Road
Teaneck, New Jersey 07666
Westgate International, L.P. ........ 1,886,204(10) 6.8%
c/o Midland Bank Trust
Corporation (Cayman) Limited
P.O. Box 1109, Mary Street
Grand Cayman, Cayman Islands
British West Indies
Lehman Commercial Paper, Inc. ....... 1,467,660(11) 5.6%
3 World Financial Center
9th Floor
New York, New York 10285
Executive officers and directors
as a group (9 persons) ............ 817,212(12) 3.0%
</TABLE>

----------
*Less than 1%.

(1) Shares of Common Stock that are not outstanding but that may be acquired by
a person upon exercise of options or warrants within 60 days of the above
date are deemed outstanding for the purpose of computing the percentage of
outstanding shares beneficially owned by such person. However, such shares
are not deemed to be outstanding for the purpose of computing the
percentage of outstanding shares beneficially owned by any other person.

39
<PAGE> 42

(2) Shares of Series A 12% Convertible Exchangeable Preferred Stock ("Series A
Preferred Stock"), Series B 8% Convertible Exchangeable Preferred Stock
("Series B Preferred Stock") and Series C 4% Convertible Exchangeable
Preferred Stock ("Series C Preferred Stock") held by each named person are
assumed converted into shares of Common Stock for the purpose of computing
the number of shares of Common Stock beneficially owned by such person. See
"--Certain Relationships and Related Transactions--Convertible Exchangeable
Preferred Stock."

(3) Includes options to purchase 33,333 shares of Common Stock.

(4) Includes 17,000 shares of Common Stock assumed acquired as a result of
conversion of 50,000 shares of Series A Preferred Stock into Common Stock.

(5) Includes options to purchase 50,000 shares of Common Stock. Also includes
17,000 shares of Common Stock assumed acquired as a result of conversion of
50,000 shares of Series A Preferred Stock into Common Stock.

(6) Includes options to purchase 36,333 shares of Common Stock.

(7) Includes 526,524 shares assumed acquired as a result of conversion of
1,548,600 shares of Series A Preferred Stock into Common Stock. Also
includes 1,833 shares assumed acquired as a result of conversion of 21,000
shares of Series C Preferred Stock into Common Stock. Mr. Tatham owns 9.0%
of the Series A Preferred Stock outstanding.

(8) Includes 340 shares assumed acquired as a result of conversion of 1,000
shares of Series A Preferred Stock into Common Stock. Also includes options
to purchase 33,333 shares of Common Stock.

(9) Includes 1,174,851 shares of Common Stock assumed acquired as a result of
conversion of 3,455,444 shares of Series A Preferred Stock. Tatham Brothers
Securities, LLC owns 20.1% of the Series A Preferred Stock outstanding.

(10) The total number of shares credited to each of Elliott Associates, a
Delaware limited partnership, Westgate International, L.P., a Cayman
Islands Limited Partnership ("Westgate") and Martley International, Inc., a
Delaware corporation ("Martley") as beneficial ownership interest includes
(a) 1,620,664 shares beneficially owned by Elliott Associates ("Elliott
Shares") and (b) 265,540 shares beneficially owned by Westgate ("Westgate
Shares"). The Westgate Shares are credited to Martley because Westgate and
Martley share the power to vote, direct the vote of, and to dispose or
direct the disposition of the Westgate Shares. The Westgate Shares are
credited to Elliott Associates, the Elliott Shares credited to Westgate,
and the Elliott Shares credited to Martley as a result of Elliott
Associates, Martley and Westgate's actions as a shareholder group under
Rule 13D-3 of the Exchange Act. The Elliott Shares include 1,763,847 shares
that may be acquired by Elliott Associates by conversion of 5,187,784
shares of Series A Preferred Stock owned by Elliott Associates into Common
Stock; the Westgate Shares include 289,000 shares of Common Stock that may
be acquired by Westgate as a result of the conversion of 850,000 shares of
Series A Preferred Stock owned by Westgate into Common Stock. Each of
Elliott Associates, Westgate and Martley beneficially owns 35.1% of the
Series A Preferred Stock outstanding.

(11) Includes 78,924 shares of Common Stock assumed acquired as a result of
conversion of 232,128 shares of Series A Preferred Stock.

(12) Includes 595,119 shares of Common Stock assumed acquired as a result of
conversion of 1,750,350 shares of Series A Preferred Stock. Also includes
1,833 shares of Common Stock assumed acquired as a result of conversion of
21,000 shares of Series C Preferred Stock. Also includes options to
purchase 189,332 shares of Common Stock. The executive officers and
directors as a group beneficially own 10.2% of the Series A Preferred Stock
outstanding.

40
<PAGE> 43

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

A discussion of certain agreements, arrangements and transactions between
or among the Company, Leviathan, DeepTech and certain other related parties is
summarized in the Company's "Notes to Consolidated Financial Statements -- Note
2 -- DeepTech Merger and Related Transactions", "-- Note 4 -- Property and
Equipment --", "-- Note 5 -- Indebtedness --", "-- Note 7 -- Related Party
Transactions --" and "-- Note 11 -- Subsequent Events" locatED elsewhere in this
Annual Report.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Exchange Act requires Tatham Offshore's officers and
directors, and persons who beneficially own more than 10% of Common Stock ("10%
Stockholders"), to file reports of ownership and changes in ownership with the
Securities and Exchange Commission ("the Commission") and the regulations of the
Securities and Exchange Commission require such officers, directors and 10%
Stockholders to furnish the Company with copies of all such reports that they
file. Based solely upon a review of the Forms 3, 4 and 5 and amendments thereto
provided to the Company, and certain written representations furnished to the
Company, the Company believes that, during the fiscal year ended June 30, 2000,
its executive officers, directors and greater than 10% beneficial owners
complied with all applicable filing requirements.

41
<PAGE> 44

COMPARATIVE STOCK PERFORMANCE

As required by applicable rules of the Commission, the performance graph
was prepared based upon the following assumptions:

1. $100 was invested in Common Stock, the Standard & Poor's 500 Stock
Index (the "S&P 500 Index") and the Dow Jones Oil -- Secondary Index
(the "Peer Group") on June 30, 1995.

2. Dividends are reinvested on the ex-dividend dates.

COMPARATIVE TOTAL RETURNS

TATHAM OFFSHORE, INC., THE S&P 500 INDEX AND THE PEER GROUP
(PERFORMANCE RESULTS FOR THE FIVE YEAR PERIOD ENDING JUNE 30, 2000)

[GRAPH]

<TABLE>
<CAPTION>
30-JUN-95 30-JUN-96 30-JUNE-97 30-JUN-98 30-JUN-99 30-JUN-00
-------------- ------------ ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
TATHAM OFFSHORE 100.00 25.00 14.29 8.57 1.34 0.54

S&P 500 INDEX 100.00 126.00 169.72 220.91 271.18 290.84

PEER GROUP 100.00 120.57 127.21 123.74 109.56 135.54
</TABLE>

42
<PAGE> 45

PART IV

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

(a) The following documents are filed as part of this Annual Report or
incorporated by reference:

1. Financial Statements

As to financial statements and supplementary information, reference is
made to "Index to Consolidated Financial Statements" on page F-1 of
this Annual Report.

2. Financial Statement Schedules

None. All financial statement schedules are omitted because the
information is not required, is not material or is otherwise included
in the consolidated financial statements or notes thereto included
elsewhere in this Annual Report.

3. (a) Exhibits

Exhibit
Number Description

3.1 Restated Certificate of Incorporation of Tatham Offshore
(filed as exhibit 3.1 in Tatham Offshore's Annual Report
on Form 10-K for the fiscal year ended June 30, 1994,
and incorporated herein by reference).

3.2 By-laws of Tatham Offshore (filed as exhibit 3.2 in
Tatham Offshore's Annual Report on Form 10-K for the
fiscal year ended June 30, 1994, and incorporated herein
by reference).

3.3 Certificate of Amendment of Certificate of Incorporation
of Tatham Offshore (filed as Exhibit 3.1 to Tatham
Offshore's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1996, Commission File No. 0-22892 and
incorporated herein by reference).

3.4 Certificate of Amendment of Certificate of Incorporation
of Tatham Offshore (filed as Exhibit 3.2 to Tatham
Offshore's Registration Statement on Form S-1 Commission
File No. 333-49859 and incorporated herein by
reference).

4.1 Certificate of Designation Establishing the Series A
Convertible Exchangeable Preferred Stock of Tatham
Offshore (filed as Exhibit 4.1 to Tatham Offshore's
Quarterly Report on Form 10-Q for the quarter ended
December 31, 1995, Commission File No. 0-22892 and
incorporated herein by reference).

4.2 Certificate of Designation Establishing the Series B
Convertible Exchangeable Preferred Stock (filed as
Exhibit 4.2 to Tatham Offshore's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1995,
Commission File No. 0-22892 and incorporated herein by
reference).

4.3 Certificate of Designation Establishing the Series C
Convertible Exchangeable Preferred Stock (filed as
Exhibit 4.3 to Tatham Offshore's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1995,
Commission File No. 0-22892 and incorporated herein by
reference).

4.4 Certificate of Designation Establishing the Mandatory
Redeemable Preferred Stock (filed as Exhibit 4.4 to
Tatham Offshore's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1995, Commission File No.
0-22892 and incorporated herein by reference).

4.5 Certificate of Designation Establishing the Series B
Convertible Preferred Stock (filed as Exhibit 4.1 to
Tatham Offshore's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998, Commission File No.
0-22892 and incorporated herein by reference).

43
<PAGE> 46

4.6 Warrant Agreement relating to the warrants entitling the
holder thereof to purchase shares of Convertible
Exchangeable Preferred Stock (filed as Exhibit 4.5 to
Tatham Offshore's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1995, Commission File No.
0-22892 and incorporated herein by reference).

4.7 Exchange Warrant Agreement relating to the warrants
entitling the holder thereof to purchase shares of
Tatham Offshore's Common Stock (filed as Exhibit 4.6 to
Tatham Offshore's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1995, Commission File No.
0-22892 and incorporated herein by reference).

10.1 Registration Rights Agreement dated March 21, 1994,
between Tatham Offshore and First Interstate Bank of
Texas, N.A., as Trustee (filed as Exhibit 10.17 to
DeepTech's Registration Statement on Form S-1,
Commission File No. 33-76999, and incorporated herein by
reference).

10.2 Farmout Agreement, dated October 1, 1994, between Tatham
Offshore, F-W Oil Interests, Inc., O.P.I. International,
Inc., and J. Ray McDermott Properties, Inc. (filed as
Exhibit 10.48 to DeepTech's Annual Report on Form 10-K
for the fiscal year ended June 30, 1995, Commission File
No. 0-23934 and incorporated herein by reference).

10.3 Agreement dated July 2, 1993 and amended on December 6,
1993 between Fina Oil and Chemical Company and Petrofina
Delaware, Incorporated and Tatham Offshore covering
Viosca Knoll Blocks 772/773, 774, 817, 818 and 861
(filed as Exhibit 10.20 to Tatham Offshore's
Registration Statement on Form S-1, Commission File No.
33-70120, and incorporated herein by reference).

10.4 Unit Agreement for Outer Continental Shelf Exploration,
Development and Production Operations for the Ewing Bank
Blocks 871, 914, 915, 916, 958 and 959, Ewing Bank Area,
Offshore Louisiana, dated May 13, 1988 by and among
Mobil-X, Sohio, Kerr-McGee and Kerr-McGee Federal
Limited Partnership I-1981 (filed as Exhibit 10.22 to
Tatham Offshore's Registration Statement on Form S-1,
Commission File No. 33-70120, and incorporated herein by
reference).

10.5 Unit Agreement for Outer Continental Shelf Exploration,
Development and Production Operations for the Viosca
Knoll Blocks 772, 773, 774, 817, 818 and 861, Viosca
Knoll Area Offshore Louisiana, dated July 7, 1993 by and
among Tatham Offshore, Petrofina Delaware, Incorporated
and Fina Oil & Chemical Company (filed as Exhibit 10.23
to Tatham Offshore's Registration Statement on Form S-1,
Commission File No. 33-70120, and incorporated herein by
reference).

10.6 DeepTech Registration Rights Agreement by and between
Tatham Offshore and DeepTech (filed as Exhibit 10.25 to
Tatham Offshore's Registration Statement on Form S-1,
Commission File No. 33-70120, and incorporated herein by
reference).

10.7 Indemnification Agreement dated as of October 16, 1993
between Tatham Offshore and its directors (filed as
Exhibit 10.26 to Tatham Offshore's Registration
Statement on Form S-1, Commission File No. 33-70120, and
incorporated herein by reference).

10.8 Subordinated Convertible Note Purchase Agreement between
Tatham Offshore and DeepTech, as amended (filed as
exhibit 10.30 in Tatham Offshore's Annual Report on Form
10-K for the fiscal year ended June 30, 1994, and
incorporated herein by reference).

10.9 11 3/4% Subordinated Convertible Promissory Note made
payable by the Company to the order of the holder
thereof (filed as exhibit 10.31 in Tatham Offshore's
Annual Report on Form 10-K for the fiscal year ended
June 30, 1994, and incorporated herein by reference).

10.10 Form of Stock Option Agreement by and between the
Optionee and Tatham Offshore (filed as exhibit 10.35 in
Tatham Offshore's Annual Report on Form 10-K for the
fiscal year ended June 30, 1994, and incorporated herein
by reference).

44
<PAGE> 47

10.11 Agreement for Purchase and Sale by and between Tatham
Offshore, Inc., as Seller, and Flextrend Development
Company, L.L.C., as Buyer, dated June 30, 1995 (filed as
Exhibit 6(a) to the Leviathan Gas Pipeline Partners,
L.P. Quarterly Report on Form 10-Q for the quarter ended
June 30, 1995, Commission File Number 1-11680 and
incorporated herein by reference).

10.12 Production Payment Agreement dated as of September 19,
1995 by Tatham Offshore in favor of F-W Oil Interests,
Inc. (filed as Exhibit 10.91 to DeepTech's Annual Report
on Form 10-K for the fiscal year ended June 30, 1995,
Commission File No. 0-23934 and incorporated herein by
reference).

10.13 Production Payment Agreement dated as of September 19,
1995 by Tatham Offshore in favor of J. Ray McDermott
Properties, Inc. (filed as Exhibit 10.92 to DeepTech's
Annual Report on Form 10-K for the fiscal year ended
June 30, 1995, Commission File No. 0-23934 and
incorporated herein by reference).

10.14 Tatham Offshore, Inc. Employee Equity Incentive Plan
(filed as Exhibit 10.47 to Tatham Offshore's Annual
Report on Form 10-K for the fiscal year ended June 30,
1995, and incorporated herein by reference).

10.15 Tatham Offshore, Inc. Non-Employee Director Stock Option
Plan (filed as Exhibit 10.48 to Tatham Offshore's Annual
Report on Form 10-K for the fiscal year ended June 30,
1995, and incorporated herein by reference).

10.16 Master Drilling Agreement and Drilling Order between
Tatham Offshore, Inc. and Sedco Forex Division,
Schlumberger Technology Corporation dated September 19,
1996 (filed as Exhibit 10.50 to Tatham Offshore's Annual
Report on Form 10-K for the fiscal year ended June 30,
1996, and incorporated herein by reference).

10.17 Redemption Agreement dated February 27, 1998 between
Tatham Offshore, Inc. and Flextrend Development Company,
L.L.C. (filed as Exhibit 10.1 to Tatham Offshore's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998, Commission File No. 0-22892 and
incorporated herein by reference).

10.18 Purchase Commitment Agreement dated February 27, 1998 by
and between Tatham Offshore, Inc. and Tatham Brothers,
LLC (filed as Exhibit 10.2 to Tatham Offshore's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998, Commission File No. 0-22892 and
incorporated herein by reference).

10.19 Master Agreement, dated as of November 29, 1995, by and
among Highwood Partners, L.P., DeepTech International
Inc., DeepFlex Production Services, Inc., FPS III, Inc.
and Deepwater Drillers, L.L.C. (filed as Exhibit 10.1 to
DeepTech's Current Report on Form 8-K dated May 2, 1996
and incorporated herein by reference).

10.20 Limited Liability Company Agreement of Deepwater
Drillers, L.L.C. (filed as Exhibit 10.2 to DeepTech's
Current Report on Form 8-K dated May 2, 1996 and
incorporated herein by reference).

10.21 First Amended and Restated Drilling Make-Ready Agreement
dated November 29, 1996 between RIGCO North America,
L.L.C. and Schlumberger Technology Corporation (Sedco
Forex Division) (filed as Exhibit 10.1 to DeepTech's
Quarterly Report on Form 10-Q for the quarter ended
December 31, 1996, Commission File No. 0-23934 and
incorporated herein by reference).

10.22 Contribution and Distribution Agreement dated February
27, 1998, between DeepTech International Inc., Tatham
Offshore, Inc., DeepFlex Production Services, Inc., and
El Paso Natural Gas Company (filed as Exhibit 10.26 to
Tatham Offshore's Registration Statement on Form S-1,
Commission File No. 333-49859 and incorporated herein by
reference).

45
<PAGE> 48

10.23 Standby Agreement dated February 27, 1998, between
DeepTech International Inc., Tatham Offshore, Inc.,
Thomas P. Tatham, Tatham Brothers, LLC, and El Paso
Natural Gas Company (filed as Exhibit 10.27 to Tatham
Offshore's Registration Statement on Form S-1,
Commission File No. 333-49859 and incorporated herein by
reference).

10.24 Form of Tax Sharing Agreement among Tatham Offshore,
Inc., DeepTech International Inc. and DeepFlex
Production Services, Inc. (filed as Exhibit 10.28 to
Tatham Offshore's Registration Statement on Form S-1,
Commission File No. 333-49859 and incorporated herein by
reference).

10.25 First Amended and Restated Charter between RIGCO North
America, L.L.C. and Sedco Forex Division, Schlumberger
Technology Corporation dated November 29, 1996 (filed as
Exhibit 10.25 to Tatham Offshore's Annual Report on Form
10-K for the fiscal year ended June 30, 1998, and
incorporated herein by reference).

10.26 Second Amended and Restated Charter between RIGCO North
America, L.L.C. and Sedco Forex Division, Schlumberger
Technology Corporation dated August 14, 1997 (filed as
Exhibit 10.26 to Tatham Offshore's Annual Report on Form
10-K for the fiscal year ended June 30, 1998, and
incorporated herein by reference).

10.27 Credit Agreement, dated September 30, 1996 among RIGCO
North America, L.L.C., Lehman Commercial Paper, Inc., as
Advisor, Syndication Agent, Arranger, Collateral and
Documentation Agent and Administrative Agent, and the
banks and other financial institutions from time to time
party thereto (filed as Exhibit 10.3 to DeepTech's
Quarterly Report on Form 10-Q for the quarter ended
December 31, 1996, Commission File Number 0-23934 and
incorporated herein by reference).

10.28 Global Amendment and Assignment and Acceptance dated
October 9, 1996 to the Credit Agreement among RIGCO
North America, L.L.C., Lehman Commercial Paper, Inc., as
Advisor, Syndication Agent and Arranger, Hibernia
National Bank, as Collateral and Documentation Agent and
BHF-Bank Aktrengesellschaft, as Administrative Agent.
(filed as Exhibit 10.28 to Tatham Offshore's Annual
Report on Form 10-K for the fiscal year ended June 30,
1998, and incorporated herein by reference).

10.29 Second Amendment dated as of April 23, 1997 to the
Credit Agreement among RIGCO North America, L.L.C.,
Lehman Commercial Paper, Inc., as Advisor, Syndication
Agent and Arranger, Hibernia National Bank, as
Collateral and Documentation Agent and BHF-Bank
Aktiengesellschaft, as Administrative Agent (filed as
Exhibit 10.40 to DeepTech's Annual Report on Form 10-K/A
for the fiscal year ended June 30, 1997, Commission File
No. 0-23934 and incorporated herein by reference).

10.30 Third Amendment dated May 13, 1997 to the Credit
Agreement among RIGCO North America, L.L.C., Lehman
Commercial Paper, Inc., as Advisor, Syndication Agent
and Arranger, Hibernia National Bank, as Collateral and
Documentation Agent and BHF-Bank Aktrengesellschaft, as
Administrative Agent (filed as Exhibit 10.30 to Tatham
Offshore's Annual Report on Form 10-K for the fiscal
year ended June 30, 1998, and incorporated herein by
reference).

10.31 Fourth Amendment dated July 31, 1997 to the Credit
Agreement among RIGCO North America, L.L.C., Lehman
Commercial Paper, Inc., as Advisor, Syndication Agent
and Arranger, Hibernia National Bank, as Collateral and
Documentation Agent and BHF-Bank Aktrengesellschaft, as
Administrative Agent (filed as Exhibit 10.31 to Tatham
Offshore's Annual Report on Form 10-K for the fiscal
year ended June 30, 1998, and incorporated herein by
reference).

46
<PAGE> 49

10.32 Fifth Amendment dated June 16, 1998 to the Credit
Agreement among RIGCO North America, L.L.C., Lehman
Commercial Paper, Inc., as Advisor, Syndication Agent
and Arranger, Hibernia National Bank, as Collateral and
Documentation Agent and BHF-Bank Aktrengesellschaft, as
Administrative Agent (filed as Exhibit 10.32 to Tatham
Offshore's Annual Report on Form 10-K for the fiscal
year ended June 30, 1998, and incorporated herein by
reference).

10.33 Sixth Amendment dated September 25, 1998 to the Credit
Agreement among RIGCO North America, L.L.C., Lehman
Commercial Paper, Inc., as Advisor, Syndication Agent
and Arranger, Hibernia National Bank, as Collateral and
Documentation Agent and BHF-Bank Aktrengesellschaft, as
Administrative Agent (filed as Exhibit 10.33 to Tatham
Offshore's Annual Report on Form 10-K for the fiscal
year ended June 30, 1998, and incorporated herein by
reference).

10.34 Management Agreement dated June 16, 1998 between
DeepFlex Production Services, Inc. and RIGCO North
America, L.L.C. (filed as Exhibit 10.34 to Tatham
Offshore's Annual Report on Form 10-K for the fiscal
year ended June 30, 1998, and incorporated herein by
reference).

10.35 Restructuring Agreement dated September 22, 1997,
between DeepTech and Tatham Offshore (filed as Exhibit
10.35 to Tatham Offshore's Annual Report on Form 10-K
for the fiscal year ended June 30, 1998, and
incorporated herein by reference).

10.36 Amended and Restated Management Agreement, effective as
of July 1, 1992, between DeepTech and Tatham Offshore
(filed as Exhibit 10.1 to Amendment No. 4 to Tatham
Offshore's Registration Statement on Form S-1,
Commission File No. 33-70120, and incorporated herein by
reference.)

10.37 First Amendment to Amended and Restated Management
Agreement, dated as of January 1, 1995, between DeepTech
and Tatham Offshore (filed as Exhibit 10.71 to
DeepTech's Registration Statement on Form S-1,
Commission File No. 33-88688, and incorporated herein by
reference).

10.38 Fourth Amendment to First Amended and Restated
Management Agreement dated as of May 1, 1997 between
DeepTech and Tatham Offshore (filed as Exhibit 10.6 to
DeepTech's Annual Report on Form 10-K/A for the fiscal
year ended June 30, 1997, Commission File No. 0-23934,
and incorporated herein by reference).

10.39 Letter Agreement dated March 22, 1995 between Tatham
Offshore and Ewing Bank Gathering Company, L.L.C.
amending the Gathering Agreement dated July 1, 1992
(filed as Exhibit 10.44 to DeepTech's Annual Report on
Form 10-K for the fiscal year ended June 30, 1995,
Commission File No. 0-23934 and incorporated herein by
reference).

10.40 Gas Purchase Agreement dated July 26, 1993 between
Offshore Marketing and Tatham Offshore (filed as Exhibit
10.17 to Tatham Offshore's Registration Statement on
Form S-1, Commission File No. 33-70120, and incorporated
herein by reference).

10.41 Condensate Purchase Agreement dated July 26, 1993
between Offshore Marketing and Tatham Offshore (filed as
Exhibit 10.18 to Tatham Offshore's Registration
Statement on Form S-1, Commission File No. 33-70120, and
incorporated herein by reference).

10.42 Credit Agreement, dated as of February 16, 1996 among
DeepFlex Production Services, Inc., Citicorp USA, Inc.,
as Administrative Agent, and the several lenders from
time to time parties thereto (filed as Exhibit 10.3 to
DeepTech's Current Report on Form 8-K dated May 2, 1996
and incorporated herein by reference).

10.43 Fourth Amendment to Management Agreement between
DeepTech International Inc. and DeepFlex Production
Services, Inc. dated as of May 1, 1997 (filed as Exhibit
10.38 to DeepTech's Annual Report on Form 10-K/A for the
fiscal year ended June 30, 1997, Commission File No.
0-23934 and incorporated herein by reference).

47
<PAGE> 50

10.44 First Amendment to Management Agreement between RIGCO
North America, L.L.C. and DeepTech dated as of May 1,
1997 (filed as Exhibit 10.39 to DeepTech's Annual Report
on Form 10-K/A for the fiscal year ended June 30, 1997,
Commission File No. 0-23934 and incorporated herein by
reference).

10.45 Promissory Note from Tatham Offshore, Inc. to Tatham
Brothers, LLC for $22,889,102 dated August 14, 1998
(filed as Exhibit 10.45 to Tatham Offshore's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1998, Commission File No. 0-22892 and incorporated
herein by reference).

10.46 Promissory Note from Tatham Offshore, Inc. to Tatham
Brothers, LLC in the amount of $24,097,107 dated January
15, 1999 (filed as Exhibit 10.46 to Tatham Offshore's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1999, Commission File No. 0-22892 and
incorporated herein by reference).

10.47 Convertible Subordinated Note from Tatham Offshore, Inc.
to Tatham Brothers, LLC in the amount of $1,000,000
dated January 15, 1999 (filed as Exhibit 10.47 to Tatham
Offshore's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999, Commission File No. 0-22892 and
incorporated herein by reference).

10.48 Seventh Amendment dated March 30, 1999 to the Credit
Agreement among RIGCO North America, L.L.C., Lehman
Commercial Paper, Inc., as Advisor, Syndication Agent
and Arranger, Hibernia National Bank, as Collateral and
Documentation Agent and BHF-Bank Aktrengesellschaft, as
Administrative Agent (filed as Exhibit 10.48 to Tatham
Offshore's Annual Report on Form 10-K for the fiscal
year ended June 30, 1999, Commission File No. 0-22892
and incorporated herein by reference).

10.49 Promissory Note from RIGCO North America, L.L.C. to
Tatham Investment Corp. dated June 30, 1999 for the
lesser of (i) $750,000 and (ii) the total unpaid
principal amount of all loans made thereunder, with
interest (filed as Exhibit 10.49 to Tatham Offshore's
Annual Report on Form 10-K for the fiscal year ended
June 30, 1999, Commission File No. 0-22892 and
incorporated herein by reference).

10.50 Revolving Demand Promissory Note from Tatham Offshore,
Inc. to Tatham Investment Corp. dated July 1, 1999 for
the lesser of (i) $5,000,000 and (ii) the aggregate
unpaid principal amount of all loans made thereunder,
with interest (filed as Exhibit 10.50 to Tatham
Offshore's Annual Report on Form 10-K for the fiscal
year ended June 30, 1999, Commission File No. 0-22892
and incorporated herein by reference).

10.51 Stipulation and Order Authorizing Continued Use of Cash
Collateral and Adequate Protection (filed as Exhibit
99.1 to Tatham Offshore's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1999, Commission File
No. 0-22892 and incorporated herein by reference).

10.52 Supplement to Stipulation and Order Authorizing
Continued Use of Cash Collateral and Adequate Protection
(filed as Exhibit 99.2 to Tatham Offshore's Quarterly
Report on Form 10-Q for the quarter ended March 31,
2000, Commission File No. 0-22892 and incorporated
herein by reference).

10.53 Second Supplement to Stipulation and Order Authorizing
Continued Use of Cash Collateral and Adequate Protection
(filed as Exhibit 99.3 to Tatham Offshore's Quarterly
Report on Form 10-Q for the quarter ended March 31,
2000, Commission File No. 0-22892 and incorporated
herein by reference).

21.1 List of Subsidiaries of Tatham Offshore, Inc. (filed as
Exhibit 21.1 to Tatham Offshore's Annual Report on Form
10-K for the fiscal year ended June 30, 1999, Commission
File No. 0-22892 and incorporated herein by reference).

23.1* Consent of Independent Accountants,
PricewaterhouseCoopers LLP.

48
<PAGE> 51

24.1 Powers of Attorney (included on the signature page on
this Annual Report on Form 10-K).

27.1* Financial Data Schedule.

----------

* Filed herewith

(b) Reports on Form 8-K

None.

49
<PAGE> 52

POWERS OF ATTORNEY

Each person whose signature appears below hereby appoints Thomas P. Tatham
and Dennis A. Kunetka and each of them, any one of whom may act without the
joinder of the others, as his attorney-in-fact to sign on his behalf and in the
capacity stated below and to file all amendments to this Annual Report, which
amendment or amendments may make such changes and additions thereto as such
attorney-in-fact may deem necessary or appropriate.

SIGNATURES

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

TATHAM OFFSHORE, INC.
(Registrant)

By: /s/ Thomas P. Tatham
-------------------------------
Thomas P. Tatham
Chairman of the Board
and Chief Executive Officer
September 28, 2000

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date(s) indicated.

/s/ Thomas P. Tatham
----------------------------------------------
Thomas P. Tatham, Chairman of the Board
and Chief Executive Officer
September 28, 2000

/s/ Dennis A. Kunetka
----------------------------------------------
Dennis A. Kunetka, Chief Financial Officer,
Senior Vice President and Secretary
(Principal Accounting Officer)
September 28, 2000

/s/ Kenneth E. Beeney
----------------------------------------------
Kenneth E. Beeney, Director
September 28, 2000

/s/ Don W. Wilson
----------------------------------------------
Don W. Wilson, Director
September 28, 2000

50
<PAGE> 53

TATHAM OFFSHORE, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Tatham Offshore, Inc. and Subsidiaries:
Report of Independent Accountants.................................................... F-2
Consolidated Balance Sheet as of June 30, 2000 and 1999.............................. F-3
Consolidated Statement of Operations for the Years Ended
June 30, 2000, 1999, and 1998.................................................... F-4
Consolidated Statement of Cash Flows for the Years Ended
June 30, 2000, 1999, and 1998.................................................... F-5
Consolidated Statement of Stockholders' Equity for the Years
Ended June 30, 2000, 1999, and 1998.............................................. F-6
Notes to Consolidated Financial Statements........................................... F-7

RIGCO North America, L.L.C., FPS III, Inc., FPS V, Inc.,
FPS VI, L.L.C., Debtors-in-Possession:
Report of Independent Accountants.................................................... F-29
Combined Balance Sheet as of June 30, 2000 and 1999.................................. F-30
Combined Statement of Operations and Accumulated Deficit
for the Years Ended June 30, 2000, 1999 and 1998................................. F-31
Combined Statement of Cash Flows for the Years Ended
June 30, 2000, 1999 and 1998..................................................... F-32
Notes to Combined Financial Statements............................................... F-33
</TABLE>

F-1
<PAGE> 54

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Tatham Offshore, Inc.

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of cash flows and of stockholders' equity
present fairly, in all material respects, the financial position of Tatham
Offshore, Inc. and its subsidiaries (the Company) at June 30, 2000 and 1999, and
the results of their operations and their cash flows for each of the three years
in the period ended June 30, 2000 in conformity with accounting principles
generally accepted in the United States of America. 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 auditing standards
generally accepted in the United States of America, 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 consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Notes 1 and 5
to the consolidated financial statements, as of April 30, 1999, a wholly-owned
subsidiary of the Company was in default under the terms of its senior secured
credit facility and on August 9, 1999, four wholly-owned subsidiaries of the
Company filed voluntary petitions for relief under Chapter 11, Title 11 of the
United States Bankruptcy Code. Additionally, as of April 30, 1999, the Company
was in default under the terms of its short-term credit facility with an
affiliate. In May and June 2000, the four subsidiaries sold the drilling rigs
and paid the secured lenders all principal, interest and expenses associated
with the senior secured credit facility. At June 30, 2000, the Company remains
in default under the terms of its short-term credit facility with an affiliate
and does not have the ability to repay this borrowing. With the sale of the
drilling rigs, the Company currently has no operating assets and no operating
cash flow. These factors raise substantial doubt about the Company's ability to
continue as a going concern. The accompanying consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.

PricewaterhouseCoopers LLP

Houston, Texas
September 28, 2000

F-2
<PAGE> 55

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)

<TABLE>
<CAPTION>
June 30,
----------------------
2000 1999
<S> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents $ 1,731 $ 486
Accounts receivable 10 16,076
Notes receivable 2,069 --
Prepaid expenses 11 168
--------- ---------
Total current assets 3,821 16,730
--------- ---------

Property and equipment:
Semisubmersible drilling rigs -- 146,487
Other 449 --
--------- ---------
449 146,487
Less - accumulated depreciation -- 12,204
--------- ---------
Property and equipment, net 449 134,283
--------- ---------

Restricted cash 170 170
Deferred costs 14,253 12,591
Equity investment 3,986 --
--------- ---------
Total assets $ 22,679 $ 163,774
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable and accrued liabilities $ 908 $ 10,102
Accounts payable to affiliates 6,040 8,082
Long-term debt currently payable 4,350 58,148
Long-term debt to affiliate currently payable 31,028 26,519
--------- ---------
Total current liabilities 42,326 102,851
--------- ---------

Commitments and contingencies (Note 9)

Stockholders' equity (deficit) (Note 6):
Preferred stock, $0.01 par value, 110,000,000 shares authorized
as of June 30, 2000 and 1999, respectively, 17,554,210 and
17,579,717 shares issued and outstanding at June 30, 2000
and 1999, respectively 176 176
Common stock, $0.01 par value, 250,000,000 shares authorized
as of June 30, 2000 and 1999, respectively, 26,079,625 and
26,074,321 shares issued and outstanding as of June 30, 2000
and 1999, respectively 261 261
Additional paid-in capital 186,217 186,217
Accumulated deficit (206,301) (125,731)
--------- ---------
(19,647) 60,923
--------- ---------
Total liabilities and stockholders' equity (deficit) $ 22,679 $ 163,774
========= =========
</TABLE>

The accompanying notes are an integral part of this financial statement.

F-3
<PAGE> 56

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)

<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------------------
2000 1999 1998
<S> <C> <C> <C>
Revenue $ -- $ -- $ --
----------- ---------- -----------
-- -- --
----------- ---------- -----------

Costs and expenses:
Depreciation 64 49 --
General and administrative expenses 2,488 4,077 862
----------- ---------- -----------
2,552 4,126 862
----------- ---------- -----------

Operating income (loss) (2,552) (4,126) (862)

Interest and other income 358 864 384
Interest expense and other financing costs (350) -- --
Interest expense and other financing costs - affiliates (5,452) (4,578) --
----------- ---------- -----------

Net loss from continuing operations $ (7,996) $ (7,840) $ (478)

Discontinued operations (Note 1)
Gain (loss) from oil and gas operations 336 (221) (4,325)
Loss from equity investment (72,910) (421) (8)
----------- ---------- -----------
Total loss from discontinued operations (72,574) (642) (4,333)
----------- ---------- -----------

Net loss (80,570) (8,482) (4,811)
----------- ---------- -----------

Preferred stock dividends (3,105) (3,055) (3,770)
----------- ---------- -----------

Net loss allocable to common shareholders $ (83,675) $ (11,537) $ (8,581)
=========== ========== ===========

Weighted average number of shares 26,076 26,558 17,300
=========== ========== ===========

Basic and diluted loss per common share
from continuing operations (Note 3) $ (0.43) $ (0.41) $ (0.25)
========== =========== ===========

Basic and diluted loss per common share
from discontinued operations (Note 3) $ (2.78) $ (0.02) $ (0.25)
========== =========== ===========

Basic and diluted loss per common share (Note 3) $ (3.21) $ (0.43) $ (0.50)
========== =========== ===========
</TABLE>

The accompanying notes are an integral part of this financial statement.

F-4
<PAGE> 57

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)

<TABLE>
<CAPTION>
Year ended June 30,
--------------------------------
2000 1999 1998
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(80,570) $ (8,482) $ (4,811)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 64 5,968 3,047
Amortization of debt issue costs -- 3,079 39
Costs and expenses settled by issuance of common stock -- -- 389
Noncash interest expense 5,299 3,607 1,709
Loss from equity investment 72,910 -- --
Other (249) -- --
Changes in operating working capital (net of effect of
deconsolidating and conveyance):
(Increase) decrease in accounts receivable 22 (13,119) (668)
(Increase) decrease in receivable from affiliates (847) 488 837
Increase in notes receivable (2,069) -- --
(Increase) decrease in prepaid expenses 1 (1) (116)
Increase (decrease) in accounts payable and accrued liabilities (786) 7,046 (3,369)
Increase (decrease) in accounts payable to affiliates (243) 3,935 4,819
-------- -------- --------
Net cash provided by (used in) operating activities (6,468) 2,521 1,876
-------- -------- --------

Cash flows from investing activities:
Additions to property and equipment (449) (10,733) (352)
Deferred costs (1,662) (1,036) (10,212)
Proceeds from sale of anchor chain 2,000 -- --
Reduction in cash from deconsolidating Rig Subsidiaries (382) -- --
Cash received from conveyance of DeepFlex to Tatham Offshore -- -- 3,580
Conveyance of oil and gas properties -- (1,605) --
-------- -------- --------
Net cash used in investing activities (493) (13,374) (6,984)
-------- -------- --------

Cash flows from financing activities:
Repayment of notes payable -- (1,008) (250)
Proceeds from notes payable to affiliate 4,206 14,579 --
Proceeds from demand note 4,000 -- --
Repayment of notes payable to affiliate -- (2,250) --
Proceeds from the issuance of common stock related to the
exercise of Exchange Warrants -- -- 2,656
Redemption of Mandatory Redeemable Preferred Stock -- -- (2,496)
Increase in restricted cash -- (170) --
Debt issue costs -- (2,501) --
-------- -------- --------
Net cash provided by (used in) financing activities 8,206 8,650 (90)
-------- -------- --------

Net increase (decrease) in cash and cash equivalents 1,245 (2,203) (5,198)
Cash and cash equivalents at beginning of year 486 2,689 7,887
-------- -------- --------
Cash and cash equivalents at end of year $ 1,731 $ 486 $ 2,689
======== ======== ========
</TABLE>

Supplemental disclosures to the statement of cash flows - see Note 10.

The accompanying notes are an integral part of this financial statement.

F-5
<PAGE> 58

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)

<TABLE>
<CAPTION>
Warrants
outstanding
to purchase shares
Preferred Stock Common Stock of Convertible
----------------------- ----------------------- Exchangeable Additional
Number of Number of Preferred paid-in Accumulated
Shares Par value Shares Par value Stock capital deficit Total
--------- ---------- ---------- ---------- ------------------ ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1997 24,344 243 27,356 274 -- 84,225 (112,438) (27,696)

Reverse stock split -- -- (24,620) (246) -- 246 -- --

Conversion of debt into
common stock -- -- 26,667 266 -- 61,443 -- 61,709

Contribution by DeepTech
of all of the outstand-
ing capital stock of
DeepFlex -- -- -- -- -- 59,279 -- 59,279

Conveyance of all of the
outstanding capital
stock of Tatham
Development to DeepTech -- -- -- -- -- (13,620) -- (13,620)

Issuance of common stock -- -- 90 1 -- 388 -- 389

Conversion of Series A
Preferred Stock into
common stock (375) (3) 101 1 -- 2 -- --

Conversion of Series C
Preferred Stock into
Exchange Warrants (1,017) (10) -- -- 1,474 (1,464) -- --

Issuance of common stock
related to the exercise
of Exchange Warrants -- -- 407 4 (1,474) 4,126 -- 2,656

Redemption of Mandatory
Redeemable Preferred
Stock (4,991) (50) -- -- -- (2,446) -- (2,496)

Net loss for the year
ended June 30, 1998 -- -- -- -- -- -- (4,811) (4,811)
---------- ---------- ---------- ---------- --------------- ----------- --------- -------

Balance, June 30, 1998 17,961 180 30,001 300 -- 192,179 (117,249) 75,410

Merger related trans-
actions (Note 2) (661) (7) (3,927) (39) -- (6,235) -- (6,281)

Expiration of minority
interest in consoli-
dated subsidiary -- -- -- -- -- 250 -- 250

Issuance of restricted
stock 280 3 -- -- -- 23 -- 26

Net loss for the year
ended June 30, 1999 -- -- -- -- -- -- (8,482) (8,482)
---------- ---------- ---------- ---------- --------------- ----------- --------- --------

Balance, June 30, 1999 17,580 176 26,074 261 -- 186,217 (125,731) 60,923

Conversion of Series A
Preferred Stock into
common stock (6) -- 2 -- -- -- -- --

Conversion of Series B
Preferred Stock into
common stock (20) -- 4 -- -- -- -- --

Net loss for the year
ended June 30, 2000 -- -- -- -- -- -- (80,570) (80,570)
---------- ---------- ---------- ---------- --------------- ----------- --------- --------

Balance, June 30, 2000 17,554 176 26,080 261 -- 186,217 (206,301) (19,647)
</TABLE>

The accompanying notes are an integral part of this financial statement.

F-6
<PAGE> 59

TATHAM OFFSHORE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION:

Tatham Offshore, Inc. ("Tatham Offshore" or the "Company"), a Delaware
corporation, is currently pursuing, through its subsidiaries, energy related
opportunities in Atlantic Canada, including substantial natural gas gathering
and transmission facilities and related energy infrastructure (see "Bankruptcy
Filing by Subsidiaries" and "Discontinued Operations" below). Historically,
Tatham Offshore was engaged in the development, exploration and production of
oil and gas reserves located primarily offshore the United States in the Gulf of
Mexico (the "Gulf"). Prior to August 14, 1998, Tatham Offshore was an
approximately 94%-owned subsidiary of DeepTech International Inc. ("DeepTech"),
a diversified energy company. In connection with the merger of DeepTech with a
subsidiary of El Paso Energy Corporation ("El Paso Energy") and related
transactions completed on or before August 14, 1998 (the "Merger"), (i) Tatham
Offshore transferred its ownership of Tatham Offshore Development, Inc. ("Tatham
Development"), a Delaware corporation and former wholly-owned subsidiary of
Tatham Offshore which held interests in Ewing Bank Blocks 958, 959, 1002 and
1003, the Sunday Silence prospect, to DeepTech, (ii) Tatham Offshore conveyed
its remaining oil and gas properties to Leviathan Gas Pipeline Partners, L.P.
("Leviathan"), (iii) DeepTech contributed all of the outstanding shares of
capital stock of DeepFlex Production Services, Inc. ("DeepFlex") to Tatham
Offshore and (iv) DeepTech divested itself of its equity ownership interest in
Tatham Offshore pursuant to a spin-off transaction effected by a Rights Offering
(the "Rights Offering"). DeepFlex, a Delaware corporation and wholly-owned
subsidiary of Tatham Offshore, was formed in January 1995 and, through its
subsidiaries, focused on the acquisition and deployment of semisubmersible
drilling rigs for contract drilling. RIGCO North America, L.L.C. ("RIGCO") and
FPS VI, L.L.C. ("FPS VI"), wholly-owned subsidiaries of DeepFlex, owned
interests in the FPS Laffit Pincay (the "Laffit Pincay") and the FPS Bill
Shoemaker (the "Bill Shoemaker", together with the Laffit Pincay, the "Rigs"),
both second generation semisubmersible drilling rigs.

Pursuant to management and charter agreements, Sedco Forex Division of
Schlumberger Technology Corporation ("Sedco Forex") marketed, managed, and
operated the Rigs. On two occasions, Sedco Forex assigned its responsibilities
under the Bill Shoemaker management and charter agreement to an affiliate, Sedco
Canada Limited ("SCL"), while the Bill Shoemaker was operating in Canada. On
January 22, 1999, RIGCO gave Sedco Forex a written termination notice of the
management and charter agreements for the Laffit Pincay. Effective March 23,
1999, RIGCO took over the marketing, management and operational responsibilities
for the Laffit Pincay. On April 20, 1999, RIGCO gave Sedco Forex a written
termination notice of the management and charter agreement for the Bill
Shoemaker. Under the Bill Shoemaker management and charter agreement, SCL
continued to man and operate the rig through the conclusion of its drilling
contract with Husky Oil Operations Limited. At the conclusion of the Husky Oil
Operations Limited drilling contract on November 15, 1999, RIGCO assumed the
marketing, management and operational responsibilities for the Bill Shoemaker.

Tatham Offshore Canada Limited, a wholly-owned subsidiary of Tatham Offshore,
pursues certain opportunities offshore eastern Canada and is the Canadian
representative of North Atlantic Pipeline Partners, L.P. ("North Atlantic
Pipeline Partners"). North Atlantic Pipeline Partners is the sponsor of a
proposal to construct a natural gas pipeline and related infrastructure in the
Grand Banks area offshore Newfoundland and Nova Scotia to the eastern seaboard
of the United States. Through June 30, 2000, Tatham Offshore Canada Limited has
incurred approximately $16.1 million in costs associated with the North Atlantic
project and related infrastructure projects. Such costs include engineering,
survey, legal, regulatory and other costs associated with the project.

Bankruptcy Filing by Subsidiaries

F-7
<PAGE> 60

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Rigs were managed by the Company's rig related subsidiaries as
debtors-in-possession. The syndicate of lenders under the Credit Facility had a
secured interest in substantially all of the assets of RIGCO and FPS VI.

On May 1, 2000, RIGCO and FPS VI sold all of their interest in the Laffit Pincay
to Odin Millennium Partnership Ltd. for $28.5 million in cash. Expenses
associated with the sale totaled $0.3 million and $175,000 of the net proceeds
is being held by RIGCO, in a separate debtor-in-possession bank account, pending
the resolution of a maritime lien claim by one of RIGCO's pre-petition
creditors. The balance of the proceeds from the sale of the Laffit Pincay, $28.0
million, was paid to RIGCO's secured lenders in partial payment of their secured
claim under the Credit Facility. Loss from discontinued operations includes an
impairment provision of $12.9 million related to the sale of this rig.

On June 28, 2000, RIGCO sold all of its interest in the Bill Shoemaker to Fred
Olsen Energy ASA for $43.6 million in cash. Expenses associated with the sale
totaled $0.4 million. By order of the Bankruptcy Court, RIGCO established
separate debtor-in-possession bank accounts for (i) $2.0 million to secure
payment to Tatham Offshore for their interest in four of the anchor chains
located on the Bill Shoemaker, (ii) $0.6 million for administrative expenses
incurred in the Bankruptcy proceedings and (iii) $0.4 million for uncontested
claims of unaffiliated unsecured creditors. The secured lenders under the Credit
Facility and the DIP Loan (See "Liquidity and Capital Resources") received a
total of $36.6 million in final payment of all principal, interest and expenses
associated with the Credit Facility and DIP Loan. Pursuant to a Bankruptcy Court
Order, RIGCO paid $2.0 million to Tatham Offshore for Tatham Offshore's interest
in the four anchor chains on June 29, 2000. The remaining cash received will be
used for general corporate purposes. Loss from discontinued operations includes
an impairment provision of $44.6 million related to the sale of this rig.

As a result of the Bankruptcy Filing, financial statements presented after the
date of the Bankruptcy Filing reflect the investment in and advances to and the
results of operations of the Rig Subsidiaries on the equity method of accounting
(see "Discontinued Operations" below). Equity investment on the consolidated
balance sheet includes the Company's investment in the Rig Subsidiaries at June
30, 2000 of $77.0 million and an advance to the Rig Subsidiaries of $81.0
million which relates to certain payment-in-kind subordinated promissory notes
owed by the Rig Subsidiaries to DeepFlex, a wholly-owned subsidiary of the
Company. Tatham Offshore's remaining 50% or more owned subsidiaries controlled
by the Company are included in the accompanying consolidated financial
statements.

Discontinued Operations

Drilling Rig Operations

In order to pay its secured creditors, RIGCO and FPS VI sold all of their
interests in the Laffit Pincay and the Bill Shoemaker. Since all operating
assets of RIGCO were sold, Tatham Offshore's Rig Subsidiaries are being
presented as discontinued operations.

Revenue from drilling services for the year ended June 30, 1999 totaled $39.8
million. The Laffit Pincay was stacked without a drilling contract for the year
ended June 30, 2000 and therefore did not generate any revenue from drilling
services for this period. The Bill Shoemaker drilled three wells for Husky Oil
Operations, Limited and generated $13.3 million in revenue for the year ended
June 30, 2000. Operating expenses for the Rigs for the year ended June 30, 2000
totaled $11.5 million compared to operating expenses for the year ended June 30,
1999 of $22.2 million. Depreciation expense for the Rigs totaled $63.0 million
for the year ended June 30, 2000 and included an impairment provision of $12.9
million for the Laffit Pincay and $44.6 million for the Bill Shoemaker.
Depreciation expense for the year ended June 30, 1999 totaled $5.7 million.
General and administrative expense relating to the rigs for the year ended June
30, 2000 totaled $4.2 million as compared with $2.9 million for the year ended
June 30, 1999. Interest expense relating to the Rigs for the year ended June 30,
2000 totaled $7.3 million as compared to $7.7 million for the year ended

F-8
<PAGE> 61

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

June 30, 1999. Interest expense to affiliates relating to the Rigs totaled $0.4
million for the year ended June 30, 2000 as compared to $1.3 million for the
year ended June 30, 1999.

Oil and Gas Operations

Discontinued operations from oil and gas operations represent Tatham Offshore's
oil and gas exploration and development business transferred to DeepTech and
Leviathan as discussed in Note 2. These operations were accounted for using the
successful efforts method of accounting. Net sales from discontinued oil and gas
operations were $0.9 million and $10.9 million for fiscal years 1999 and 1998,
respectively. General and administrative expenses were allocated to discontinued
operations based on the percentage of employees' time related to the
discontinued operations and were $0.3 million and $4.9 million for fiscal years
1999 and 1998, respectively. Interest expense for the year 1998 was allocated
100% to discontinued operations from oil and gas operations.

NOTE 2 - DEEPTECH MERGER AND RELATED TRANSACTIONS:

On August 14, 1998, DeepTech merged with a subsidiary of El Paso (the "Merger").
As a result of the Merger and related transactions, some of the assets of Tatham
Offshore and DeepTech were restructured so that DeepFlex became a wholly-owned
subsidiary of Tatham Offshore and Tatham Offshore transferred its interest in
the Sunday Silence prospect to DeepTech. In addition, Tatham Offshore agreed to
transfer all of its remaining assets located in the Gulf to Leviathan, a former
affiliate. As such, all of the Company's oil and gas operations in the Gulf are
reflected as discontinued operations in the financial statements. Further,
DeepTech divested itself of its equity ownership interest in Tatham Offshore by
offering all of the shares of Tatham Offshore common stock and Series A
Preferred Stock held by DeepTech to the stockholders of DeepTech in a Rights
Offering (discussed below).

On July 16, 1998, the Securities and Exchange Commission declared effective
Tatham Offshore's Registration Statement on Form S-1 relating to the offering of
rights to the DeepTech stockholders to purchase DeepTech's 28,073,450 shares of
Tatham Offshore common stock and 4,670,957 shares of Tatham Offshore's Series A
Preferred Stock (the "Rights Offering"). As a result of the Rights Offering,
unaffiliated parties purchased 3,378,693 shares of common stock and 562,148
shares of Series A Preferred Stock. Tatham Brothers Securities, LLC ("TB
Securities"), an affiliate of Mr. Thomas P. Tatham, Chairman of the Board and
Chief Executive Officer of Tatham Offshore and DeepFlex, purchased 20,768,011
shares of common stock and 3,455,444 shares of Series A Preferred Stock which
resulted in DeepTech receiving net proceeds from the Rights Offering of $75.0
million. In exchange for committing to purchase a specified portion of the stock
underlying any unexercised rights, TB Securities received a fee of $6.9 million.
In connection with the Rights Offering, Tatham Offshore purchased and cancelled
all of the shares of Common Stock and Series A Preferred Stock that were not
acquired by the holders of rights or TB Securities in the Rights Offering,
3,926,746 shares of Common Stock and 653,365 shares of Series A Preferred Stock,
respectively, and the proceeds from such purchase by Tatham Offshore were
contributed by DeepTech to Tatham Offshore. DeepTech no longer owns any of
Tatham Offshore's capital stock as a result of the Rights Offering.

Following the asset restructuring, Tatham Offshore's marine services business
included the operation of two semisubmersible drilling rigs, the Bill Shoemaker
and the Laffit Pincay, and were owned by wholly-owned subsidiaries of DeepFlex.
In addition, Tatham Offshore will continue to pursue energy related
opportunities in Atlantic Canada, including the North Atlantic pipeline project,
related gas processing facilities, a facility for the generation of electricity
and other related investments.

Release of Tax Letter of Credit

F-9
<PAGE> 62

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES:

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
Tatham Offshore and those 50% or more owned subsidiaries controlled by Tatham
Offshore (collectively referred to as the "Company"). All of Tatham Offshore's
subsidiaries are currently 100% owned. All significant intercompany balances and
transactions have been eliminated in consolidation.

Cash and Cash Equivalents

All highly liquid investments with an original maturity of three months or less
are considered to be cash equivalents. The Company's restricted cash is cash
held in deposit to collateralize a letter of credit issued to the
Canada-Newfoundland Offshore Petroleum Board for an exploration license
commitment, offshore Newfoundland.

Demand Note Receivable

The Company's demand note receivable is a $2.0 million demand note payable to
North Atlantic Pipeline Partners, L.P. dated December 1, 1999 which bears
interest at a rate equal to the Royal Bank of Canada's prime interest rate.

Semisubmersible Drilling Rigs

The cost of the semisubmersible drilling rigs is capitalized and depreciated
using the straight-line method over the drilling rigs' estimated useful lives of
25 years. Repair and maintenance costs are charged to expense as incurred;
additions, improvements and replacements are capitalized.

The Company recognizes impairment losses on long-lived assets (including
semisubmersible drilling rigs) if the carrying amount of such assets, grouped at
the lowest level for which there are identifiable cash flows that are largely
independent of the cash flows from other assets, exceeds the estimated
undiscounted future cash flows of such assets. Measurement of any impairment
loss is based on the fair value of the assets.

Capitalization of Interest

Interest and other financing costs are capitalized in connection with
construction projects as part of the cost of the asset and amortized over the
related asset's estimated useful life.

Debt Issue Costs

Debt issue costs are capitalized and amortized over the life of the related
indebtedness. Any unamortized debt issue costs are expensed at the time the
related indebtedness is repaid or otherwise terminated.

Deferred Costs

Deferred costs primarily consist of costs related to advisory, legal and other
direct project costs of pending transactions. At June 30, 2000 and 1999, the
Company had capitalized $14.3 million and $12.6 million, respectively, of
development costs related to regulatory approval and design of a pipeline to be
constructed offshore eastern Canada as discussed in Note 1.

Revenue Recognition

Revenue from oil and gas sales was recognized upon delivery in the period of
production. Revenue from drilling services was recognized in the period
rendered.

Income Taxes

The Company utilizes an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the carrying amounts and the tax
bases of assets and liabilities.

F-10
<PAGE> 63

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Earnings per Share

Basic EPS excludes dilution and is computed by dividing net income (loss)
available to common shareholders by the weighted average number of common shares
outstanding during the period. Diluted EPS reflects potential dilution and is
computed by dividing net income (loss) available to common shareholders by the
weighted average number of common shares outstanding during the period increased
by the number of additional common shares that would have been outstanding if
the dilutive potential common shares had been issued.

Tatham Offshore excluded from its computation of diluted EPS the effect of
antidilutive securities related to its outstanding convertible exchangeable
preferred stocks discussed in Note 2 and its convertible production payment
related to 25% of the net operating cash flow from Viosca Knoll Block 817.

Basic net loss per share equals diluted net loss per share for the years ended
June 30, 2000, 1999 and 1998.

Concentration of Credit Risk

The primary market for the Company's services is the offshore oil and gas
industry, and the Company's customers consist primarily of major oil companies
and independent oil and gas producers. The Company performs ongoing credit
evaluations of its customers and generally does not require material collateral.
The Company maintains reserves for potential credit losses when necessary.

Estimates

The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions, including those related
to oil and gas reserves and potential environmental liabilities, that affect the
reported amounts of certain assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and
the related reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates. Management believes
that its estimates are reasonable.

Other

The fair values of the financial instruments included in the Company's assets
and liabilities approximate their carrying values.

Tatham Offshore adopted SFAS No. 123, "Accounting for Stock Based Compensation",
effective July 1, 1996. While SFAS No. 123 encourages entities to adopt the fair
value method of accounting for their stock-based compensation plans, the Company
has elected to continue to utilize the intrinsic value method under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees".

In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"). SFAS 133 requires that, upon
adoption, all derivative instruments (including certain derivative instruments
embedded in other contracts) be recognized in the balance sheet at fair value,
and that changes in such fair values be recognized in earnings unless specific
hedging criteria are met. Changes in the values of derivatives that meet these
hedging criteria will ultimately offset related earnings effects of the hedged
items; effects of certain changes in fair value are recorded in Other
Comprehensive Income pending recognition in earnings. SFAS 133, as amended by
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities
Deferral of the Effective Date of SFAS No. 133 and SFAS No. 138, "Accounting for
Certain Derivative Instruments....an Amendment of FAS 133", is effective for
fiscal years beginning after June 15, 2000. The Company adopted SFAS No. 133 on
July 1, 2000. The adoption of SFAS No. 133 has not had a material effect on the
Company's results of operations, cash flows or financial position.

Certain amounts in prior years have been reclassified to conform to the current
year's presentation.

F-11
<PAGE> 64

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

The Company utilized an off-balance sheet financial instrument to manage the
interest rate associated with its borrowings. An interest rate cap was used to
lock in a maximum rate, but enabled the Company to otherwise pay lower market
rates. The cost of the interest rate cap was amortized to interest expense over
the life of the cap, and the unamortized cost was included in other assets. The
interest rate cap expired on September 30, 1998.

NOTE 4 - PROPERTY AND EQUIPMENT:

SEMISUBMERSIBLE DRILLING RIGS

At June 30, 1999, capitalized costs and related accumulated depreciation of
semisubmersible drilling rigs totaled $144,468,000 and $12,154,000 and
represented the Company's 100% interest in the Laffit Pincay and the Bill
Shoemaker. As discussed in Note 1, due to the bankruptcy proceedings for the
drilling subsidiaries, the drilling subsidiaries have been presented on the
equity method and as discontinued operations in 2000.

On May 1, 2000, RIGCO and FPS VI sold all of their interest in the Laffit Pincay
to Odin Millennium Partnership Ltd. for $28.5 million in cash. Expenses
associated with the sale totaled $0.3 million and $175,000 of the net proceeds
is being held by RIGCO, in a separate debtor-in-possession bank account, pending
the resolution of a maritime lien claim by one of RIGCO's pre-petition
creditors. The balance of the proceeds from the sale of the Laffit Pincay, $28.0
million, was paid to RIGCO's secured lenders in partial payment of their secured
claim under the Credit Facility. Loss from discontinued operations includes a
loss of $12.9 million related to the sale of this rig.

On June 28, 2000, RIGCO sold all of its interest in the Bill Shoemaker to Fred
Olsen Energy ASA for $43.6 million in cash. Expenses associated with the sale
totaled $0.4 million. By order of the Bankruptcy Court, RIGCO established
separate debtor-in-possession bank accounts for (i) $2.0 million to secure
payment to Tatham Offshore for their interest in four of the anchor chains
located on the Bill Shoemaker, (ii) $0.6 million for administrative expenses
incurred in the Bankruptcy proceedings and (iii) $0.4 million for uncontested
claims of unaffiliated unsecured creditors. The secured lenders under the Credit
Facility and the DIP Loan (See "Liquidity and Capital Resources") received a
total of $36.6 million in final payment of all principal, interest and expenses
associated with the Credit Facility and DIP Loan. Pursuant to a Bankruptcy Court
Order, RIGCO paid $2.0 million to Tatham Offshore for Tatham Offshore's interest
in the four anchor chains on June 29, 2000. Loss from discontinued operations
includes a loss of $44.6 million related to the sale of this rig.

OIL AND GAS PROPERTIES - DISCONTINUED OPERATIONS

All of the Company's oil and gas properties were transferred as of August 14,
1998 (as discussed in Note 2) and are reflected as discontinued operations in
the statement of operations. The following reflects historical information.

Capitalized Costs

<TABLE>
<CAPTION>
Year ended
June 30,
1998
------------
(In thousands)
<S> <C>
Proved properties $ 4,099
Unproved properties --
Wells, equipment and related facilities 22,663
-----------
Total capitalized costs 26,762
Accumulated depreciation, depletion
amortization and impairment (21,038)
-----------
Net capitalized costs $ 5,724
===========
</TABLE>

F-12
<PAGE> 65

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Costs Incurred in Oil and Gas Acquisition, Exploration and Development
Activities

<TABLE>
<CAPTION>
Year ended
June 30,
1998
-----------
(In thousands)
<S> <C>
Acquisition of proved properties $ --
Exploration 149
Development 353
-----------
Total costs incurred $ 502
===========
</TABLE>

Results of Operations for Oil and Gas Producing Activities

<TABLE>
<CAPTION>
Year ended
June 30,
1998
-----------
(In thousands)
<S> <C>
Oil and gas sales $ 10,868
Production and operating expenses (5,238)
Exploration expenses (149)
Depreciation, depletion and amortization (4,099)
Impairment, abandonment and other --
-----------
Results of operations from oil and gas producing
activities (excluding corporate overhead,
interest costs and income tax benefits) $ 1,382
===========
</TABLE>

Sale of Properties to Leviathan

On June 30, 1995, Leviathan entered into a purchase and sale agreement (the
"Purchase and Sale Agreement") with Tatham Offshore. Pursuant to the Purchase
and Sale Agreement, Leviathan acquired, subject to certain reversionary
interests, a 75% working interest in Viosca Knoll Block 817, a 50% working
interest in Garden Banks Block 72 and a 50% working interest in Garden Banks
Block 117 (the "Assigned Properties") from Tatham Offshore for $30,000,000.
Tatham Offshore received $15,000,000 at closing and an additional $15,000,000 on
August 15, 1995. Leviathan was entitled to retain all of the revenue
attributable to the Assigned Properties until it received net revenue equal to
the Payout Amount (as defined below), whereupon Tatham Offshore was entitled to
receive a reassignment of the Assigned Properties, subject to reduction and
conditions as discussed below. Prior to December 10, 1996, "Payout Amount" was
defined as an amount equal to all costs incurred by Leviathan with respect to
the Assigned Properties (including the $30,000,000 acquisition cost paid to
Tatham Offshore) plus interest thereon at a rate of 15% per annum. Effective
February 1, 1996, Leviathan entered into an agreement with Tatham Offshore
regarding the restructuring of certain transportation agreements that increased
the amount recoverable from the Payout Amount by $7,500,000 plus interest (see
"Impairment, Abandonment and Other" discussion below).

Effective December 10, 1996, Leviathan exercised its option to permanently
retain 50% of the acquired working interest in the Assigned Properties in
exchange for forgiving 50% of the then-existing Payout Amount exclusive of the
$7,500,000 plus interest added to the Payout Amount in connection with the
restructuring of certain transportation agreements discussed above. Leviathan
remained obligated to fund any further development costs attributable to Tatham
Offshore's portion of the working interests, with such costs to be added to the
Payout Amount. Leviathan's election to retain 50% of the acquired working
interest in the Assigned Properties reduced the Payout Amount from $94,020,000
to $50,760,000. Subsequent to December 10, 1996, only 50% of the development and
operating costs attributable to the Assigned Properties were added to the Payout
Amount and 50% of the net revenue from the Assigned Properties reduce the

F-13
<PAGE> 66

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Payout Amount. See "Impairment, Abandonment and Other" discussion below and Note
2. As a result of the Merger and related transactions, the reversionary
interests were cancelled.

Viosca Knoll Block 817

In September 1995, Tatham Offshore reacquired an aggregate 25% working interest
in Viosca Knoll Block 817 and an approximate 12.5% working interest in the
remainder of Viosca Knoll Blocks 772/773, 774, 818 and 861 (collectively, the
"Viosca Knoll Properties") from two industry partners for a total of $16,000,000
in convertible production payments payable from 25% of the net cash flow from
the Viosca Knoll Properties so acquired. The estimated net present value of the
convertible production payments payable of $2,000,000 was recorded as oil and
gas properties on the date of acquisition. The unpaid portion of the production
payments was convertible into Tatham Offshore common stock at any time during
the first five years at $8.00 per share. At June 30, 1998, the unpaid portion of
the production payment obligation totaled $11,299,000. For the year ended June
30, 1998, production and operating expenses include $1,236,000 of production
payments made during the year. As part of the Redemption Agreement, this
property was transferred to Leviathan effective August 14, 1998.

Transportation and Processing Agreements

General. In December 1993, Tatham Offshore entered into a master gas dedication
arrangement with Leviathan (the "Master Dedication Agreement"). Under the Master
Dedication Agreement, Tatham Offshore dedicated all production from its Garden
Banks, Viosca Knoll, Ewing Bank and Ship Shoal leases as well as certain
adjoining areas of mutual interest to Leviathan for transportation. In exchange,
Leviathan agreed to install the pipeline facilities necessary to transport
production from the areas and certain related facilities and to provide
transportation services with respect to such production. Tatham Offshore agreed
to pay certain fees for transportation services and facilities access provided
under the Master Dedication Agreement. Pursuant to the terms of the Purchase and
Sale Agreement, Leviathan assumed all of Tatham Offshore's obligations under the
Master Dedication Agreement and certain ancillary agreements with respect to the
Assigned Properties.

Ewing Bank Gathering System. Pursuant to a gathering agreement (the "Ewing Bank
Agreement") among Tatham Offshore, DeepTech, and a subsidiary of Leviathan,
Tatham Offshore dedicated all natural gas and crude oil produced from eight of
its Ewing Bank leases for gathering and redelivery by Leviathan and was
obligated to pay a demand rate as well as a commodity charge equal to 4% of the
market price of production actually transported. Tatham Offshore's Ewing Bank
914 #2 well commenced production in August 1993. Production and operating
expenses on the accompanying consolidated statement of operations included
commodity fees of $1,493,000 for the year ended June 30, 1997, related to the
Ewing Bank Agreement. In March 1996, Leviathan settled all remaining unpaid
demand charge obligations under this agreement in exchange for certain
consideration as discussed below.

Ship Shoal. Tatham Offshore and Leviathan also entered into a gathering and
processing agreement (the "Ship Shoal Agreement") pursuant to which Leviathan
constructed a gathering line from Tatham Offshore's Ship Shoal Block 331 lease
to interconnect with a third-party pipeline at Leviathan's processing facilities
located on its Ship Shoal Block 332 platform. Pursuant to the terms of the Ship
Shoal Agreement, and in consideration for constructing the interconnect,
refurbishing the platform and providing access to the processing facilities,
Tatham Offshore was required to pay Leviathan demand charges and to dedicate all
production from its Ship Shoal 331 lease and eight additional surrounding leases
for gathering and processing by Leviathan for additional commodity fees.
Production and operating expenses on the accompanying consolidated statement of
operations included commodity fees of $638,000 for the year ended June 30, 1997,
related to the Ship Shoal Agreement. In March 1996, Leviathan settled all
remaining unpaid demand charge obligations under this agreement in exchange for
certain consideration as discussed below.

Transportation Agreements Settled. Effective February 1, 1996, Tatham Offshore
entered into an agreement with Leviathan to prepay its remaining demand charge
obligations under the Ewing Bank and Ship Shoal Agreements. Under the agreement,
Tatham Offshore's demand charge obligations relative to the Ewing Bank Gathering
System and the pipeline facilities constructed by Leviathan for its Ship Shoal
property were prepaid in full. In exchange, Tatham

F-14
<PAGE> 67

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Offshore (i) issued to Leviathan 7,500 shares of Senior Preferred Stock (as
defined in Note 6) with a liquidation preference of $1,000 per share, (ii) added
the sum of $7,500,000 to the Payout Amount under the Purchase and Sale Agreement
and (iii) granted to Leviathan certain rights to use and acquire the Ship Shoal
Block 331 platform. Leviathan had the right to utilize the Ship Shoal Block 331
platform and related facilities at a rental rate of $1.00 per annum for such
period as the platform is owned by Tatham Offshore and located on the Ship Shoal
Block 331, provided such use did not interfere with lease operations or other
activities of Tatham Offshore. In addition, Leviathan had a right of first
refusal relative to a sale of the platform. The agreement with Leviathan
resulted in a reduction in demand charge payments of $7,800,000 for the year
ended June 30, 1997. See "Impairment, Abandonment and Other" discussion below.
This agreement was transferred to Leviathan on August 14, 1998 as part of the
Redemption Agreement.

NOTE 5 - INDEBTEDNESS:

RIGCO Credit Facility

On September 30, 1996, RIGCO entered into a $65 million senior secured credit
facility with a syndicate of lenders (as amended, the "Credit Facility").
Proceeds from the Credit Facility were used to acquire the Bill Shoemaker, to
fund significant upgrades to the Bill Shoemaker, and to retire $30.3 million of
other rig related indebtedness. In April 1997, the Credit Facility was amended
to provide for an additional $12 million to fund the remaining refurbishments
and upgrades to the Bill Shoemaker. The Credit Facility (i) originally matured
on September 30, 1998, (ii) provided for interest at the prime rate plus 3% per
annum (which equaled 12.5% at June 30, 2000), payable quarterly, and (iii) was
secured by the two semisubmersible drilling rigs and all of the related assets.
On September 25, 1998, the parties to the Credit Facility amended the agreement
to (i) extend the maturity date from September 30, 1998 to March 31, 1999, (ii)
waive all principal payments until the maturity date, and (iii) extend the
expiration date on the warrants issued to the lenders under the original Credit
Facility to March 31, 1999. RIGCO paid a total of 0.5% of the outstanding
principal balance to the lenders in connection with the amendment.

On March 31, 1999, the parties to the Credit Facility amended the agreement to
(i) extend the maturity to April 30, 1999, (ii) waive all principal and interest
payments until the maturity date and (iii) extend the expiration date on the
warrants issued to the lenders under the original Credit Facility to April 30,
1999. RIGCO paid a total of $100,000 to the lenders in connection with the
amendment and agreed to increase the interest rate on the outstanding principal
to the default rate under the Credit Facility (the prime rate plus 5% per annum,
which equaled 14.5% at June 30, 2000) for the period of the extension. RIGCO did
not make the principal payment or interest payment due on April 30, 1999 and
subsequently filed voluntary petitions under Chapter 11 of the U.S. Bankruptcy
Code. As of June 30, 1999, amounts outstanding under the Credit Facility totaled
$58.1 million in principal and $3.4 million in accrued interest. The $3.4
million in accrued interest is included in accounts payable and accrued
liabilities on the consolidated balance sheet. As of the date of the Bankruptcy
Filing, amounts outstanding under the Credit Facility totaled $58.1 million in
principal and $4.1 million in accrued interest. On May 1, 2000, the balance of
the proceeds from the sale of the Laffit Pincay was used as partial payment of
the Credit Facility. On June 28, 2000, all amounts outstanding under the Credit
Facility were repaid from proceeds from the sale of the Bill Shoemaker. See
Note 1.

Long-Term Debt - Affiliates

In connection with the Merger, the Company entered into a short-term financing
arrangement with Tatham Brothers, LLC ("Tatham Brothers") (the "Short-Term
Facility") to provide for funds to (i) satisfy approximately $1.6 million of
cash requirements with respect to the redemption agreement with Leviathan, (ii)
pay $1.4 million to DeepTech in connection with the management agreement between
Tatham Offshore and DeepTech, (iii) pay approximately $6.9 million to Tatham
Brothers Securities, LLC ("TB Securities") with respect to obligations under the
Rights Offering, (iv) fund a $7.5 million letter of credit for potential tax
liabilities, (v) refinance $5.1 million in existing loans to DeepFlex and (vi)
pay fees and expenses associated with the Short-Term Facility. Tatham Brothers
is an affiliate of Mr. Thomas P. Tatham, Chairman of the Board and Chief
Executive Officer of the Company, and the parent company of TB Securities. The
original terms of the Short-Term Facility provided for an interest rate of 12%
per annum with principal and accrued interest due on January 15, 1999. On
January 15, 1999, the Company and Tatham Brothers agreed to refinance the
original $22.9 million principal plus $1.1 million accrued interest into a new
short-term loan which bears

F-15
<PAGE> 68

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

interest at the rate of 15% per annum and was due March 31, 1999. In connection
with the refinancing, the Company paid Tatham Brothers a fee of $1.0 million in
the form of a 15% subordinated convertible note (the "Subordinated Convertible
Note"). The Subordinated Convertible Note bears interest at the rate of 15% per
annum and is due on August 15, 2001. Tatham Brothers may convert the principal
amount of the Subordinated Convertible Note and accrued unpaid interest into
shares of Common Stock of the Company based on the average market price for the
five trading days prior to the end of the previous calendar quarter. The
Short-Term Facility is secured by a pledge of DeepFlex of its interest in
certain payment-in-kind Subordinated Promissory Notes issued by RIGCO and FPS V,
both subsidiaries of the Company, which had an outstanding balance of
approximately $80.8 million at March 31, 2000. On March 31, 1999, the Company
and Tatham Brothers extended the Short-Term Facility until April 30, 1999.
Pursuant to the terms of the Short-Term Facility, Tatham Offshore was required
to pay $24.1 million in principal and $0.3 million in interest on April 30,
1999. Tatham Offshore did not make payment of such amounts; as a result, an
event of default has occurred and is continuing under the Short-Term Facility.
The default interest rate under the Short-Term Facility is 19% per annum. The
principal balance and accrued interest under the Short-Term Facility and
Subordinated Convertible Note, which totaled $31.0 million at June 30, 2000 and
$26.1 million at June 30, 1999, are included in long-term debt to affiliate
currently payable on the consolidated balance sheet.

The Standby Agreement (the "Standby Agreement"), dated as of February 27, 1998,
was executed in connection with the Merger and related transactions and is by
and among Tatham Offshore, DeepTech, Mr. Thomas P. Tatham and El Paso Energy.
Pursuant to the Standby Agreement, to the extent that any of the Company's
Common Stock or Series A Preferred Stock was not subscribed for by holders of
DeepTech common stock in the Rights Offering, Tatham Brothers committed to
purchase such number of unsubscribed shares in order for DeepTech to receive net
proceeds from the Rights Offering of not less than $75 million (the "Standby
Commitment"). In addition, Tatham Brothers had the right to purchase any shares
which DeepTech held after the Rights Offering and the satisfaction of the
Standby Commitment. Mr. Tatham unconditionally guaranteed Tatham Brothers'
performance of the Standby Commitment, which guarantee was backed by a letter of
credit from NationsBank, N.A. In consideration of Mr. Tatham's guarantee of the
Standby Commitment, under the terms of a Repayment Agreement between Mr. Tatham
and Tatham Brothers, dated February 27, 1998, (i) Tatham Brothers granted to Mr.
Tatham an option to purchase up to a one-third membership interest in Tatham
Brothers for $1,000 through the issuance of new membership units, and (ii) Mr.
Tatham had the right, but not the obligation, to lend to Tatham Brothers all
sums necessary for Tatham Brothers to fulfill its obligations under the Standby
Commitment. In exchange for certain consideration, Tatham Brothers assigned all
of its rights and interest under the Standby Agreement and the Standby
Commitment to TB Securities.

Pursuant to the Purchase Commitment Agreement, dated as of February 27, 1998 by
and between Tatham Brothers and Tatham Offshore, in consideration of the Standby
Commitment, the Company paid Tatham Brothers a fee of $6.9 million, which amount
was included in the amount payable under the Short-Term Facility.

As of June 30, 1997, Tatham Offshore had $60,000,000 aggregate principal amount
of Subordinated Convertible Promissory Notes (the "Subordinated Notes")
outstanding, all of which were held by DeepTech. Interest expense related to the
Subordinated Notes totaled $1,709,000 from July 1, 1997 through September 18,
1997, the date on which the DeepTech Board of Directors approved entering into
an option agreement to restructure the Subordinated Notes (the "Restructuring
Agreement"). Pursuant to the Restructuring Agreement, DeepTech forgave the
scheduled interest payments due in September and December 1997 under the
Subordinated Notes and on December 17, 1997, converted the Subordinated Notes
into 26,666,667 shares of Tatham Offshore common stock at a conversion rate of
$2.25 per share, the average closing price of Tatham Offshore common stock for
the ten trading days immediately preceding the exercise of the option. As a
result of the conversion of the Subordinated Notes, Tatham Offshore eliminated
all of its then existing outstanding debt.

The Subordinated Notes bore interest at a rate of 11 3/4% per annum, payable
quarterly. Effective July 1, 1997, the interest rate increased to 13% per annum.
Interest expense related to this borrowing totaled $1,709,000 for the year ended
June 30, 1998.

F-16
<PAGE> 69

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Committed Draw Facility

On June 30, 1999, RIGCO entered into a committed draw facility with Tatham
Investment Corp., which is 100% owned by Mr. Thomas P. Tatham, Chairman of the
Board and Chief Executive Officer of the Company. Tatham Investment Corp. agreed
to loan up to $750,000 to RIGCO for working capital purposes. Loans under this
agreement bear interest at the prime rate plus 3% (on June 30, 2000, the
interest rate under this facility was 12.5%) and were due on September 30, 1999.
As of June 30, 1999, amounts outstanding under this agreement totaled $439,062
and are included in long-term debt to affiliates currently payable on the
consolidated balance sheet. As of the date of the Bankruptcy Filing, and as of
June 30, 2000, Tatham Investment Corp. had an unsecured claim of $338,303 under
this agreement.

RIGCO Make-ready Letter of Credit

Effective January 25, 1998, Sedco Forex entered into a one-year contract with
Shell Offshore Inc. ("Shell") for the use of the Bill Shoemaker in the Gulf.
RIGCO was notified by Sedco Forex that as of November 18, 1998, Shell would
cease using the Bill Shoemaker to conduct drilling operations in the Gulf. RIGCO
has been paid for drilling services performed by the Bill Shoemaker for Shell
through November 18, 1998, but has not been paid for any period since that time.
RIGCO is seeking to recover its damages resulting from this early termination,
along with damages unrelated to the Shell contract, in suit against Schlumberger
Technology Corporation, Schlumberger Canada, Ltd., Sedco Forex Corporation and
Sedco Forex Canada Limited (collectively "Sedco Forex") discussed hereafter.

Following the early release of the rig by Shell, the Bill Shoemaker was towed to
a shipyard in Galveston, Texas where it underwent significant unanticipated
refurbishments in preparation for mobilization to the Grand Banks area in
Atlantic Canada. Capital costs, including crew costs while in the shipyard, for
the make-ready totaled approximately $8.5 million. Following the make-ready, the
Bill Shoemaker was mobilized to the Grand Banks area in Atlantic Canada and
conducted a three-well program at predetermined rates for Husky Oil Operations
Limited. In connection with the Bill Shoemaker make-ready agreement with Sedco
Forex, RIGCO obtained a letter of credit for $6.5 million to secure payment to
Sedco Forex. The letter of credit was secured with funds provided by Mr. Thomas
P. Tatham. In exchange for providing the funds to secure the letter of credit,
RIGCO paid a fee of $500,000 to Mr. Tatham. RIGCO also agreed to pay Mr. Tatham,
as liquidated damages, $10,000 per day from February 15, 1999 until such funds
are returned. The liquidated damages payment would be in the form of a
promissory note bearing interest at the rate of 18% per annum. At June 30, 1999,
the $6.5 million in collateral funds plus accrued liquidated damages totaling
$1.3 million are included in accounts payable to affiliates on the consolidated
balance sheet. As of the date of the Bankruptcy Filing, and as of June 30, 2000,
Mr. Tatham had an unsecured claim of $8,240,000 for the funds securing the
letter of credit plus liquidated damages.

All of the funds securing the letter of credit were drawn by Sedco Forex for
payments under the make-ready agreement.

RIGCO Debtor-in-Possession Loan

On May 25, 2000, RIGCO entered into a Secured Super-Priority
Debtor-in-Possession Credit Agreement (the "DIP Loan") with a group of its
secured lenders with BHF (USA) Capital Corporation as agent for the creditor
group. Under the DIP Loan, RIGCO could borrow up to $2.4 million for working
capital purposes detailed in an approved budget. The DIP Loan bore interest at
the rate of prime plus 2% and matured on June 30, 2000.

On May 31, 2000, RIGCO borrowed $1,500,000 under this agreement. On June 28,
2000, RIGCO repaid $1,500,000 in principal from the proceeds from the sale of
the Bill Shoemaker and this agreement terminated. For the fiscal year ended June
30, 2000, RIGCO paid $13,000 in interest under the DIP Loan.

F-17
<PAGE> 70

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Anchor Chain Loan

On February 10, 1999, Tatham Offshore issued two promissory notes, each in the
original principal amount of $1.1 million, to Tatham Brothers and a foundation
associated with Mr. Thomas P. Tatham, respectively, to secure funds to purchase
new anchor chains in connection with the Bill Shoemaker make-ready. Effective
with the purchase of the anchor chains, RIGCO and Tatham Offshore entered into
an agreement whereby RIGCO had the option to either lease or purchase the anchor
chains from Tatham Offshore. In April 1999, Tatham Offshore Canada Limited
purchased the two promissory notes for their principal amount plus accrued
interest. As approved by the Bankruptcy Court, on June 29, 2000, RIGCO paid
Tatham Offshore Canada Limited $2.0 million in full satisfaction of these
promissory notes.

Tatham Offshore - Tatham Investment Corp. Facility

Effective July 1, 1999, Tatham Offshore entered into a revolving draw facility
with Tatham Investment Corp. The revolving draw facility provides for loans, at
the lender's sole discretion, by Tatham Investment Corp. to Tatham Offshore in
amounts up to $5.0 million. The revolving draw facility bears interest at the
rate of 15% per annum and is payable upon demand by the lender. Through June 30,
2000, the Company has borrowed $4.2 million under this facility, which is
included in accounts payable to affiliates on the consolidated balance sheet.
For the fiscal year ended June 30, 2000, Tatham Offshore paid $503,000 in
interest under this facility. The Company has pledged all of its equity
ownership in certain wholly-owned subsidiaries of the Company as well as a
certain promissory note issued by Tatham Offshore Canada, Limited as security
under this revolving draw facility.

Other

Tatham Offshore is a guarantor of $5.0 million of a $6.4 million loan from Bank
of America, N.A. to Tatham Brothers. The $5.0 million guaranteed by Tatham
Offshore was originally loaned to DeepFlex to fund certain improvements to the
Rigs. The Tatham Brothers loan bears interest at 6.5% and is due on September
30, 2000 or upon demand. The loan from Tatham Brothers to DeepFlex, plus accrued
interest, is included in the amount payable under "--Long-Term Debt--Affiliates"
as discussed above.

In December 1999, North Atlantic Pipeline Partners, L.P. borrowed $4.0 million
from an unrelated party. The loan is evidenced by a demand note bearing interest
at a rate of 15% per annum. The loan, plus accrued interest, is included in
long-term debt currently payable on the consolidated balance sheet.

NOTE 6 - STOCKHOLDERS' EQUITY:

The following table summarizes Tatham Offshore's outstanding equity:

----------

(a) In connection with the Rights Offering, Tatham Offshore purchased all of
the shares of Common Stock and Series A Preferred Stock that were not
acquired by the holders of Rights or TB Securities in the Rights Offering,
3,926,746 and 653,365, respectively, and the proceeds from such purchase
by Tatham Offshore were contributed by DeepTech to Tatham Offshore.

(b) At any time, the holder of any shares may convert the liquidation value
and unpaid dividends into shares of Tatham Offshore common stock at $6.53
per share.

F-18
<PAGE> 71

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Common Stock

Effective February 1996, an amendment to Tatham Offshore's Restated Certificate
of Incorporation increased the number of authorized shares of Tatham Offshore's
common stock, $0.01 par value per share, from 100,000,000 shares to 250,000,000
shares and the number of shares of preferred stock, $0.01 par value per share,
from 10,000,000 shares to 110,000,000 shares. This increase in authorized
capital was necessary in order for Tatham Offshore to effect the Rights
Offering, as discussed below.

During the year ended June 30, 1998, Tatham Offshore issued 90,000 shares of
common stock to a consultant for services rendered in connection with the
Company's activities in Atlantic Canada.

Preferred Stock

Tatham Offshore filed a registration statement (the "Offering") with the
Securities and Exchange Commission (the "Commission") which was declared
effective on December 26, 1995, relating to the granting to all holders of
Tatham Offshore's common stock, on the record date, December 26, 1995, rights
(the "Rights") to purchase up to 25,120,948 warrants (the "Warrants"). Each
Right entitled the holder to subscribe to purchase one Warrant at the purchase
price of $.50 per Warrant. In February 1996, Tatham Offshore issued 25,120,948
Warrants and received $12,560,000 in gross proceeds ($11,291,000 in net
proceeds) pursuant to the exercise of Rights. A total of 20,129,571 Warrants
were exercised to purchase 18,717,030 shares, 74,379 shares and 1,338,162 shares
of Series A, B and C Preferred Stock, respectively, at $1.00 per share which
generated an additional $15,459,000 in proceeds to Tatham Offshore. The
remaining 4,991,377 Warrants outstanding on January 1, 1997 were automatically
converted into an equal number of shares of Mandatory Redeemable Preferred
Stock.

In February 1998, DeepFlex exchanged its 1,016,957 shares of Tatham Offshore
Series C Preferred Stock for 406,783 Exchange Warrants and immediately converted
the Exchange Warrants into 406,783 shares of common stock at $6.53 per share for
a total of $2,656,000 in proceeds to Tatham Offshore. Tatham Offshore used
$2,496,000 of proceeds to redeem all of its 4,991,377 shares of Mandatory
Redeemable Preferred Stock outstanding at $0.50 per share as required under the
terms of the Mandatory Redeemable Preferred Stock issue. DeepFlex conveyed the
406,783 shares of common stock to DeepTech in March 1998.

Warrants to Acquire Subsidiary Stock

In connection with the Credit Facility, the lenders were granted warrants to
acquire a 5% minority equity interest in the subsidiaries which own the Rigs. On
April 30, 1999, the warrants expired unexercised.

Stock Compensation Plans

On August 28, 1995, Tatham Offshore filed a registration statement on Form S-8
with the Commission for the registration of 4,000,000 shares of common stock
authorized for issuance upon exercise of options under Tatham Offshore's Equity
Incentive Plan (the "Incentive Plan") and 1,000,000 shares of common stock
authorized for issuance upon exercise of options under Tatham Offshore's
Non-Employee Director Stock Option Plan (the "Director Option Plan" and
collectively with the Incentive Plan, the "Option Plans"). The Incentive Plan,
as amended, provides Tatham Offshore the ability to issue a variety of awards
pursuant to the plan including stock options, restricted stock, stock
appreciation rights and stock value equivalent awards. Options granted pursuant
to the Director Option Plan vest 33 1/3% each year beginning December 31, 1999.
Options issued under the Incentive Plan vest pursuant to the terms of the
individual option grants. Both plans terminate December 31, 2005. In January
1998, Tatham Offshore issued 100,000 options under the Incentive Plan. During
the year ended June 30, 1999, Tatham Offshore issued 600,000 options and 280,000
shares of restricted Series A Preferred Stock under the Incentive Plan. During
the years ended June 30, 1999 and 1998, Tatham Offshore issued 400,000 options
and 15,000 options, respectively, pursuant to the Director Option Plan. All
options issued under the Option Plans were issued at the current market price of
the underlying stock at the date of grant. Options outstanding under the Option
Plans at June 30, 2000 totaled 1,106,000 of which 189,332 options were
exercisable.

F-19
<PAGE> 72
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Tatham applies APB Opinion No. 25 and related interpretations in accounting for
its option plans, under which no compensation cost has been recognized. Had
compensation costs for the Option Plan been determined consistent with the
methodology prescribed under SFAS No. 123, the Company's net loss and loss per
share would have been adjusted to the pro forma amounts presented below:

<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------------------
2000 1999 1998
(In thousands)
<S> <C> <C> <C> <C>
Net loss As presented $ (83,675) $ (11,537) $ (8,581)
Pro forma (83,798) (11,747) (8,918)

Loss per share As presented $ (3.21) $ (0.43) $ (0.50)
Pro forma (3.21) (0.44) (0.52)
</TABLE>

The following table summarizes the Option Plans:

<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------------------------------
2000 1999 1998
------------------------ -------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,117,500 $ 0.89 136,500 $ 4.72 24,500 $ 13.90
Granted -- -- 1,000,000 .41 115,000 3.00
Exercised -- -- -- -- -- --
Canceled (11,500) 20.49 (19,000) 4.72 (3,000) 13.90
--------- --------- ---------- --------- --------- --------
Outstanding at end of year 1,106,000 $ 0.68 1,117,500 $ .89 136,500 4.72
========= ========= ========== ========= ========= ========

Options exercisable at June 30 189,332 $ 1.44 40,500 8.47 31,500 8.72
========= ========= ========== ========= ========= ========
Weighted average fair value of
options granted during the year $ -- $ .21 $ 2.93
========= ========= ========
</TABLE>

The following table summarizes information about stock options outstanding at
June 30, 2000:

<TABLE>
<CAPTION>
Options Outstanding
------------------------------------------------- Options Exercisable
Weighted Average --------------------------------
Number Remaining Number
Exercise Prices Outstanding Life (Years) Exercise Price Exercisable Exercise Price
--------------- ----------- ------------ -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
0.406 1,000,000 8.5 0.406 133,332 0.406
3.000 100,000 7.5 3.000 50,000 3.000
8.125 6,000 4.5 8.125 6,000 8.125
----------- ---- ----- ------- -----
1,106,000 8.4 0.683 189,332 1.336
</TABLE>

F-20
<PAGE> 73

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:

<TABLE>
<CAPTION>
Year ended June 30,
------------------------
1999 1998
<S> <C> <C>
Volatility 157% 132%
Risk-free interest rate 5.9% 5.5%
Dividend yield 0% 0%
Expected life 10 years 10 years
</TABLE>

Since no options were granted for the year ended June 30, 2000, information
relating to the Black-Scholes option-pricing model is not presented.

NOTE 7 - RELATED PARTY TRANSACTIONS:

Management Agreement

The management agreement between Tatham Offshore and DeepTech provided for an
annual management fee which was intended to reimburse DeepTech for the estimated
costs of its operational, financial, accounting and administrative services
provided to the Company. Effective July 1, 1997, the management agreement was
amended to provide for an annual management fee of 26% of DeepTech's overhead
expenses. During the twelve months ended June 30, 1999, DeepTech charged Tatham
Offshore $310,000 under this agreement. The management agreement was terminated
August 14, 1998 and Tatham Offshore hired and employed its management and
support personnel directly.

Tatham Aviation, Inc.

Tatham Aviation, Inc. ("Tatham Aviation"), whose sole shareholder is Thomas P.
Tatham, has provided the Company use of a corporate aircraft. The agreement
between the Company and Tatham Aviation provides for the Company's reimbursement
of operating costs, insurance and carrying costs in exchange for the use of the
corporate aircraft. During the twelve months ended June 30, 2000 and 1999, the
Company paid Tatham Aviation $2.2 million and $2.4 million, respectively, under
this agreement.

Leviathan Gas Pipeline Partners, L.P.

Leviathan charged Tatham Offshore $197,500 and $1,827,000 for the years ended
June 30, 1999 and 1998, respectively, for commodity and platform access fees
associated with the Viosca Knoll 817 lease in accordance with certain agreements
between the parties. Commodity charges are based on the volume of oil and gas
transported or processed.

Offshore Gas Marketing, Inc.

During the years ended June 30, 1999 and 1998, Tatham Offshore sold 99% of its
production to Offshore Gas Marketing, Inc. ("Offshore Marketing"), an 80%-owned
subsidiary of DeepTech. Tatham Offshore's agreement with Offshore Marketing
provided for fees to Offshore Marketing equal to 2% of the sales value of crude
oil and condensate and $0.015 per dekatherm of natural gas for selling the
Company's production.

See also Note 5 for other related party transactions.

F-21
<PAGE> 74

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NOTE 8 - INCOME TAXES:

The Company's deferred income tax liabilities (assets) at June 30, 2000 and 1999
consist of net operating loss ("NOL") carryforwards and the tax effect of
temporary differences between financial and tax reporting related to the
recognition of certain amounts as follows:

<TABLE>
<CAPTION>
June 30,
-------------------------------
2000 1999
(in thousands)
<S> <C> <C>
Depreciable assets $ -- $ 11,355
----------- -----------
Gross deferred liability -- 11,355

NOL carryforwards (73,333) (47,679)
----------- -----------
Gross deferred asset (73,333) (36,324)
----------- ------------

Net deferred tax asset (73,333) (36,324)
Valuation allowances 73,333 36,324
----------- -----------
$ -- $ --
=========== ===========
</TABLE>

Because of the Company's cumulative losses, valuation allowances of $73.3
million and $36.3 million at June 30, 2000 and 1999, respectively, were provided
against the net deferred tax assets. At June 30, 2000, the Company had
approximately $215,685,000 of regular tax NOL carryforwards and approximately
$213,940,000 of alternative minimum tax NOL carryforwards. These losses begin to
expire in the year 2005. Substantial changes in a company's ownership can result
in an annual limitation on the utilization of federal income tax NOL
carryforwards.

NOTE 9 - COMMITMENTS AND CONTINGENCIES:

Effective January 25, 1998, Sedco Forex entered into a one-year contract with
Shell Offshore Inc. ("Shell") for the use of the Bill Shoemaker in the Gulf. The
Company was notified by Sedco Forex that as of November 18, 1998, Shell would
cease using the Bill Shoemaker to conduct drilling operations in the Gulf. The
Company has been paid for drilling services performed by the Bill Shoemaker for
Shell through November 18, 1998 but has not been paid for any period since that
time. At June 30, 2000, RIGCO had recorded a $7.4 million account receivable
from Sedco Forex related to the unpaid portion of the Shell contract. On April
20, 1999, RIGCO gave Sedco Forex a written termination notice of the management
and charter agreement for the Bill Shoemaker.

On July 26, 1999, RIGCO filed a petition in the 165th Judicial District Court in
Harris County, Texas, against Schlumberger Technology Corporation and
Schlumberger Canada, Ltd. (collectively, "Schlumberger") for claims arising out
of Schlumberger's Sedco Forex Division's marketing, manning, management and
operation of the Shoemaker and Pincay pursuant to certain charter, make-ready
and other agreements and arrangements. Earlier this year, RIGCO joined the
newly-formed corporations Sedco Forex Corporation and Sedco Forex Canada Limited
as defendants in this suit. The allegations include claims of gross negligence,
breach of contract, fraud, negligent misrepresentation and negligence. RIGCO is
seeking approximately $51 million in actual damages plus an unspecified amount
of exemplary damages. RIGCO has alleged in this suit as well as in bankruptcy
court proceedings that the manner in which Sedco Forex performed its duties with
respect to the Bill Shoemaker and Laffit Pincay during the course of the
management and charter agreements resulted in RIGCO's financial difficulties and
caused it to default on its secured debt obligations.

In the ordinary course of business, the Company is subject to various laws and
regulations. In the opinion of management, compliance with existing laws and
regulations will not materially affect the financial position or operations of
the Company. Various legal actions have arisen in the ordinary course of
business. Management believes that the outcome of such proceedings will not have
a material adverse effect on the Company's results of operations, cash flows or
financial position.

F-22
<PAGE> 75

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

The Company anticipates substantial future capital expenditures associated with
the development and implementation of the North Atlantic pipeline project and
related opportunities in Atlantic Canada. Realization of the potential of the
North Atlantic pipeline project and related opportunities in Atlantic Canada is
dependent upon the ability of the Company to obtain sufficient additional
capital or project financing.

NOTE 10 - SUPPLEMENTAL DISCLOSURES TO THE STATEMENT OF CASH FLOWS:

<TABLE>
<CAPTION>
Year ended June 30,
--------------------------------------------------
2000 1999 1998
(In thousands)
<S> <C> <C> <C>
Cash paid for interest, net of
amounts capitalized $ 503 $ 3,985 $ 1,707
</TABLE>

Supplemental Disclosures of Noncash Investing and Financing Activities

<TABLE>
<CAPTION>
Year ended June 30,
--------------------------------------------------
2000 1999 1998
(In thousands)
<S> <C> <C> <C>
Conversion of long-term debt to
common stock $ -- $ -- $ 60,000
Conversion of preferred stock to
common stock -- -- 540
Assignment of oil and gas properties and
abandonment obligations to a third party -- -- 1,200
Conveyance of Tatham Development to DeepTech
(Notes 1 and 2):
Conveyance of oil and gas properties -- -- 22,079
Exchange of DeepFlex indebtedness -- -- (8,000)
Decrease in paid in capital -- -- (13,620)
Reduction in other current assets -- -- 116
Reduction in abandonment obligations -- -- (400)
Reduction in accounts payable -- -- (175)
Issuance of restricted senior preferred stock -- 26 --
Debt issued to refinance accounts payable
to affiliates -- 5,153 --
Senior Preferred Stock redeemed under
the Redemption Agreement -- 7,500 --
Debt issued to finance Rights Offering -- 6,923 --
Expiration of minority interest -- 250 --
</TABLE>

As discussed in Note 2, Tatham Offshore conveyed its remaining oil and gas
assets to Leviathan per the Redemption Agreement. The assets and liabilities
conveyed were as follows (in thousands):

<TABLE>
<S> <C>
Cash $ (1,605)
Oil and gas properties, net (5,466)
Accounts payable 755
Accounts payable to DeepTech 1,062
Accounts payable to Leviathan 2,480
Other noncurrent liabilities 3,416
-----------
Increase in paid in capital $ 642
===========
</TABLE>

F-23
<PAGE> 76

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NOTE 12 - SEGMENT INFORMATION:

The Financial Accounting Standards Board requires reporting of summarized
financial results for operating segments as well as establishes standards for
related disclosures about products and services, geographic areas and major
customers. Primary disclosure requirements include total segment revenues, total
segment profit or loss and total segment assets. The Statement did not have an
effect on the Company's financial position, results of operations or cash flows
but did affect the disclosure of segment information.

The Company previously operated in two segments, the offshore contract drilling
business and the pursuit of an integrated energy related investment strategy in
Atlantic Canada. The accounting policies of the reportable segments are the same
as those described in Note 3.

Summarized financial information of the Company's reportable segments for the
years ended June 30, 2000, 1999 and 1998 is shown in the following table. The
"Other" column includes results of oil and gas operations and corporate related
items.

<TABLE>
<CAPTION>
Canada
Investment
Drilling Strategy Other Total
-------- -------- ----- -----
(In thousands)
<S> <C> <C> <C> <C>
2000
Depreciation -- -- 64 64
Interest expense -- -- 5,802 5,802
Equity in net loss of equity investment (72,910) -- -- (72,910)
Segment profit (72,910) -- (7,660) (80,570)
Equity investment 3,986 -- -- 3,986
Total assets 3,986 17,555 1,138 22,679
Capital expenditures -- 2,111 -- 2,111

1999
Revenues 39,846 -- -- 39,846
Depreciation 5,711 -- -- 5,711
Interest expense 9,571 -- 4,534 14,105
Segment profit 11,901 -- (20,383) (8,482)
Total assets 150,527 12,735 512 163,774
Capital expenditures 10,733 1,036 -- 11,769

1998
Revenues 672 -- -- 672
Depreciation 91 -- -- 91
Interest expense -- -- -- --
Segment profit 153 -- (4,964) (4,811)
Total assets 134,395 12,213 6,810 (1) 153,418
Capital expenditures -- 10,212 352 10,564
</TABLE>

(1) In connection with the merger of DeepTech into El Paso and related
transactions, $5.7 million of oil and gas properties were transferred to
DeepTech and Leviathan.

(2) In connection with the merger of DeepTech into El Paso and related
transactions, $30.7 million of oil and gas properties were transferred to
DeepTech and Leviathan.

F-24
<PAGE> 77

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Following is a summary of revenues and identifiable assets by geographic areas
for offshore contract drilling segments. Revenues are attributed to countries
based on the location of service provided.

<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------
2000 1999 1998
(In thousands)
<S> <C> <C> <C>
Contract revenue
United States $ -- $ 25,110 $ 672
Canada -- 14,736 --
------------ ------------ ------------
$ -- $ 39,846 $ 672
============ ============ ============
</TABLE>

<TABLE>
<CAPTION>
June 30,
-----------------------------------------------
2000 1999 1998
(In thousands)
<S> <C> <C> <C>
Identifiable Assets
United States $ 5,124 $ 52,280 $ 141,889
Canada 17,555 111,494 11,529
------------ ------------ ------------
$ 22,679 $ 163,774 $ 153,418
============ ============ ============
</TABLE>

In fiscal year 1999, Shell accounted for $22.9 million and Husky Oil Operations
Limited accounted for $14.7 million of drilling services revenue. In fiscal year
1998, Shell accounted for $0.7 million of drilling services revenue. No other
customer accounted for more than 10 percent of consolidated revenue in 2000,
1999 or 1998.

NOTE 13 - SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED):

Oil and Gas Reserves

The following table represents the Company's net interest in estimated
quantities of developed and undeveloped reserves of crude oil, condensate and
natural gas and changes in such quantities at fiscal year end 2000, 1999, and
1998. On August 14, 1998 all of the Company's oil and gas operations were
transferred to Leviathan (See Note 2). Estimates of the Company's reserves at
June 30, 1998 have been made by the Company's reserve engineers. Estimates of
the Company's reserves at June 30, 1997 have been made by the independent
engineering consulting firm, Ryder Scott Company Petroleum Engineers. Net proved
reserves are the estimated quantities of crude oil and natural gas 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 proved reserve volumes that
can be expected to be recovered through existing wells with existing equipment
and operating methods. Proved undeveloped reserves are proved reserve volumes
that are expected to be recovered from new wells on undrilled acreage or from
existing wells where a significant expenditure is required for recompletion.

F-25
<PAGE> 78

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Estimates of reserve quantities are based on sound geological and engineering
principles, but, by their very nature, are still estimates that are subject to
substantial upward or downward revision as additional information regarding
producing fields and technology becomes available.

<TABLE>
<CAPTION>
Oil/Condensate Natural gas
(barrels) (Mcf)
--------------- -----------
(In thousands)
<S> <C> <C>
Proved reserves -- June 30, 1997 125 12,292
Revisions of previous estimates (47) (77)
Extensions, discoveries and other additions -- --
Production (16) (4,532)
--------------- -----------
Proved reserves -- June 30, 1998 62 7,683
Revisions of previous estimates -- --
Extensions, discoveries and other additions -- --
Production -- --
Sales of reserves in place (a) (62) (7,683)
--------------- -----------
Proved reserves - June 30, 1999 0 0
--------------- -----------

Proved developed reserves - June 30, 1998 62 7,683
=============== ===========
Proved developed reserves - June 30, 1999 0 0
=============== ===========
</TABLE>

----------
(a) In connection with the transfer of all the operating oil and gas
properties to Leviathan.

In general, estimates of economically recoverable oil and natural gas reserves
and of the future net revenue therefrom are based upon a number of variable
factors and assumptions, such as historical production from the subject
properties, the assumed effects of regulation by governmental agencies and
assumptions concerning future oil and gas prices, future operating costs and
future plugging and abandonment costs, all of which may vary considerably from
actual results. All such estimates are to some degree speculative, and
classifications of reserves are only attempts to define the degree of
speculation involved. For these reasons, estimates of the economically
recoverable oil and natural gas reserves attributable to any particular group of
properties, classifications of such reserves based on risk of recovery and
estimates of the future net revenues expected therefrom, prepared by different
engineers or by the same engineers at different sites, may vary substantially.
The meaningfulness of such estimates is highly dependent upon the assumptions
upon which they are based.

Furthermore, Tatham Offshore's wells have only been producing for a short period
of time and, accordingly, estimates of future production were based on this
limited history. Estimates with respect to proved reserves that may be developed
and produced in the future are often based upon volumetric calculations and upon
analogy to similar types of reserves rather than upon actual production history.
Estimates based on these methods are generally less reliable than those based on
actual production history. Subsequent evaluation of the same reserves based upon
production history will result in variations, which may be substantial, in the
estimated reserves. A significant portion of Tatham Offshore's reserves were
based upon volumetric calculations.

Future Net Cash Flows

The standardized measure of discounted future net cash flows relating to the
Company's proved oil and gas reserves is calculated and presented in accordance
with SFAS No. 69, "Disclosures About Oil and Gas Producing Activities."
Accordingly, future cash inflows were determined by applying year-end oil and
gas prices to the Company's estimated share of future production from proved oil
and gas reserves. The average prices utilized in the calculation of the
standardized measure of discounted future net cash flows at June 30, 1998 were
$12.28 per barrel of oil and $1.76 per Mcf of gas. Future production and
development costs were computed by applying year-end costs to future years.
Future income taxes were derived by applying year-end statutory tax rates to the
estimated net future cash flows taking into consideration the Company's NOL
carryforwards. A prescribed 10% discount factor was applied to the future net
cash flows.

F-26
<PAGE> 79

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

In the Company's opinion, this standardized measure is not a representative
measure of fair market value, and the standardized measure presented for the
Company's proved oil and gas reserves is not representative of the reserve
value. The standardized measure is intended only to assist financial statement
users in making comparisons between companies.

<TABLE>
<CAPTION>
June 30,
------------
1998
(In thousands)
<S> <C>
Future cash inflows $ 14,267
Future production costs 9,174
Future development costs 1,546
Future income tax expenses --
------------
Future net cash flows 3,547
Annual discount at 10% rate 138
------------
Standardized measure of discounted future
net cash flows $ 3,409
============
</TABLE>

The following are the principal sources of change in the standardized measure
(in thousands):

<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Beginning of year $ 3,409 $ 11,043
Sales and transfers of oil and gas produced,
net of production costs (3,409)(1) (5,699)
Net changes in prices and production costs -- (3,198)
Extensions, discoveries and improved
recovery, less related costs -- --
Changes in estimated future development costs -- 502
Previously estimated development costs
incurred during the year -- 5
Revisions of previous quantity estimates -- (198)
Purchase of reserves in place -- --
Sales of reserves in place -- --
Net change in income taxes -- --
Accretion of discount -- 1,104
Changes in production rates, timing and other -- (150)
------------ ------------
End of year $ 0 $ 3,409
============ ============
</TABLE>

----------
(1) In connection with the transfer of all of the Company's oil and gas
properties to Leviathan.

F-27
<PAGE> 80

RIGCO NORTH AMERICA, L.L.C.
FPS III, INC.
FPS V, INC.
FPS VI, L.L.C.
DEBTORS-IN-POSSESSION

COMBINED FINANCIAL STATEMENTS
JUNE 30, 2000, 1999 AND 1998

F-28
<PAGE> 81

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
RIGCO North America, L.L.C., FPS III, Inc.,
FPS V, Inc. and FPS VI, L.L.C.

In our opinion, the accompanying combined balance sheet and the related combined
statements of operations and accumulated deficit and of cash flows present
fairly, in all material respects, the financial position of RIGCO North America,
L.L.C., FPS III, Inc., FPS V, Inc. and FPS VI, L.L.C. (the Companies) at June
30, 2000 and 1999, and the results of their operations and their cash flows for
each of the three years in the period ended June 30, 2000 in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Companies' 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
auditing standards generally accepted in the United States of America, 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 consolidated financial statements have been prepared assuming
that the Companies will continue as a going concern. As discussed in Note 1 to
the combined financial statements, as of April 30, 1999, RIGCO North America
L.L.C. was in default under the terms of its senior secured credit facility and
on August 9, 1999, RIGCO North America, L.L.C., FPS III, Inc., FPS V, Inc. and
FPS VI, L.L.C. all filed voluntary petitions for relief under Chapter 11, Title
11 of the United States Bankruptcy Code. In May and June 2000, the Companies
sold the drilling rigs and paid the secured lenders all principal, interest and
expenses associated with the senior secured credit facility. With the sale of
the drilling rigs, the Companies currently have no operating assets and no
operating cash flow and remain in Chapter 11. These factors raise substantial
doubt about the Companies' ability to continue as a going concern. Management's
plans in regard to this matter are also described in Note 1. The accompanying
combined financial statements do not include any adjustments that might result
from the outcome of this uncertainty.

PricewaterhouseCoopers LLP

Houston, Texas
September 28, 2000

F-29
<PAGE> 82

RIGCO NORTH AMERICA, L.L.C.
FPS III, INC.
FPS V, INC.
FPS VI, L.L.C.
DEBTORS-IN-POSSESSION

COMBINED BALANCE SHEET
(IN THOUSANDS)

<TABLE>
<CAPTION>
June 30,
----------------------
2000 1999
<S> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents $ 4,903 $ 382
Accounts receivable 7,515 16,034
Accounts receivable - affiliates 3,789 3,789
Prepaid expenses 130 156
--------- ---------
Total current assets 16,337 20,361
--------- ---------
Semisubmersible drilling rigs -- 144,468
Less - accumulated depreciation -- 12,154
--------- ---------
Semisubmersible drilling rigs, net -- 132,314
--------- ---------

Total assets $ 16,337 $ 152,675
========= =========

LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)

Current liabilities:
Accounts payable and accrued liabilities $ -- $ 8,408
Current portion of notes payable -- 58,148
Notes payable to affiliates -- 10,232
Payment-in-kind notes payable to affiliates -- 78,918
--------- ---------
Total current liabilities -- 155,706
--------- ---------

Liabilities subject to compromise:
Current liabilities:
Accounts payable and accrued liabilities $ 1,818 $ 0
Current portion of notes payable -- 0
Notes payable to affiliates 10,533 0
Payment-in-kind notes payable to affiliates 80,967 0
--------- ---------
Total current liabilities 93,318 0
--------- ---------
Total liabilities subject to compromise 93,318 0
--------- ---------

Minority interest in combined subsidiaries -- 250

Stockholder's equity (deficit):
Common stock -- --
Additional paid-in capital 38,789 38,539
Accumulated deficit (115,770) (41,820)
--------- ---------
(76,981) (3,281)
--------- ---------
Total liabilities and stockholder's equity (deficit) $ 16,337 $ 152,675
========= =========
</TABLE>

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

F-30
<PAGE> 83

RIGCO NORTH AMERICA, L.L.C.
FPS III, INC.
FPS V, INC.
FPS VI, L.L.C.
DEBTORS-IN-POSSESSION

COMBINED STATEMENT OF OPERATIONS
AND ACCUMULATED DEFICIT
(IN THOUSANDS)

<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------------------
2000 1999 1998
<S> <C> <C> <C>
Revenue $ 13,341 $ 39,846 $ 61,447
----------- ---------- -----------

Costs and expenses:
Operating expenses 11,537 22,234 31,447
Depreciation 63,011 5,661 5,275
General and administrative expenses 4,172 2,940 2,706
----------- ---------- -----------
Total costs and expenses 78,720 30,835 39,428
----------- ---------- -----------

Operating income (loss) (65,379) 9,011 22,019

Interest income 177 105 243
Interest expense (7,303) (7,697) (9,999)
Interest expense - affiliates (1,445) (10,610) (6,865)
----------- ---------- -----------

Net income (loss) (73,950) (9,191) 5,398

Accumulated deficit at beginning of year (41,820) (32,629) (38,027)
----------- ---------- -----------

Accumulated deficit at end of year $ (115,770) $ (41,820) $ (32,629)
=========== ========== ===========
</TABLE>

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

F-31
<PAGE> 84

RIGCO NORTH AMERICA, L.L.C.
FPS III, INC.
FPS V, INC.
FPS VI, L.L.C.
DEBTORS-IN-POSSESSION

COMBINED STATEMENT OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------------------
2000 1999 1998
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (73,950) $ (9,191) $ 5,398
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation, depletion & amortization 63,015 5,661 5,275
Amortization of debt issue costs -- 579 2,282
Noncash interest expense 1,445 13,552 6,865
(Increase) decrease in accounts receivable 8,519 (13,272) (2,348)
(Increase) decrease in other current assets 27 11 (167)
Increase (decrease) in accounts payable (6,590) 3,735 (5,036)
Increase in accounts payable - affiliates (2) 313 --
----------- ---------- -----------
Net cash provided by (used in) operating activities (7,536) 1,388 12,269
----------- ---------- -----------

Cash flows from investing activities:
Additions to semisubmersible drilling rigs (33) (8,715) (9,467)
Sale of semisubmersible drilling rigs 69,331 -- --
----------- ---------- -----------
Net cash provided by (used in) investing activities 69,298 (8,715) (9,467)
----------- ---------- -----------

Cash flows from financing activities:
Repayment of notes payable (58,148) (1,008) (17,094)
Proceeds from notes payable to affiliate 1,070 7,095 15,314
Repayment of notes payable to affiliate (163) -- --
----------- ---------- -----------
Net cash provided by (used in) financing activities (57,241) 6,087 (1,780)
----------- ---------- -----------

Net increase (decrease) in cash and cash equivalents 4,521 (1,240) 1,022
Cash and cash equivalents at beginning of year 382 1,622 600
----------- ---------- -----------
Cash and cash equivalents at end of year $ 4,903 $ 382 $ 1,622
=========== ========== ===========
</TABLE>

Supplemental disclosures to the statement of cash flows - see Note 8.

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

F-32
<PAGE> 85

RIGCO NORTH AMERICA, L.L.C.
FPS III, INC.
FPS V, INC.
FPS VI, L.L.C.
DEBTORS-IN-POSSESSION

NOTES TO COMBINED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION:

The accompanying financial statements are the combined statements of RIGCO North
America, L.L.C., ("RIGCO"), FPS III, Inc., ("FPS III"), FPS V, Inc. ("FPS V")
and FPS VI, L.L.C. ("FPS VI"), (combined, the "Companies"), which are indirect
wholly-owned subsidiaries of Tatham Offshore, Inc. ("Tatham Offshore"). DeepFlex
Production Services, Inc. ("DeepFlex"), a wholly-owned subsidiary of Tatham
Offshore, owns 100% of FPS III and FPS V. RIGCO and FPS VI owned two
semisubmersible drilling rigs, the FPS Laffit Pincay (the "Laffit Pincay") and
the FPS Bill Shoemaker (the "Bill Shoemaker") which were sold in May 2000 and
June 2000, respectively. Prior to June 25, 1998, DeepFlex was a wholly-owned
subsidiary of DeepTech International Inc. ("DeepTech").

Bankruptcy Filing by Subsidiaries

On August 9, 1999, RIGCO, FPS VI, FPS III, and FPS V filed voluntary petitions
under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Filing").
At the time of the Bankruptcy Filing, RIGCO owned a 100% interest in the Bill
Shoemaker and a 25% undivided interest in the Laffit Pincay and FPS VI owned a
75% undivided interest in the Laffit Pincay. FPS III and FPS V are the owners of
RIGCO and FPS VI with FPS III owning a 50% interest in RIGCO and FPS V owning a
50% interest in RIGCO and a 100% interest in FPS VI. The bankruptcy proceedings
of the Companies are administered jointly. As a result of the Bankruptcy Filing,
the Rigs were managed by the Companies as debtors-in-possession. The syndicate
of lenders under the Credit Facility had a secured interest in substantially all
of the assets of RIGCO and FPS VI.

On May 1, 2000, RIGCO and FPS VI sold all of their interest in the Laffit Pincay
to Odin Millennium Partnership Ltd. for $28.5 million in cash. Expenses
associated with the sale totaled $0.3 million and $175,000 of the net proceeds
is being held by RIGCO, in a separate debtor-in-possession bank account, pending
the resolution of a maritime lien claim by one of RIGCO's pre-petition
creditors. The balance of the proceeds from the sale of the Laffit Pincay, $28.0
million, was paid to RIGCO's secured lenders in partial payment of their secured
claim under the Credit Facility. Depreciation expense for the year ended June
30, 2000 includes an impairment of $12.9 million related to the sale of this
rig.

On June 28, 2000, RIGCO sold all of its interest in the Bill Shoemaker to Fred
Olsen Energy ASA for $43.6 million in cash. Expenses associated with the sale
totaled $0.4 million. By order of the Bankruptcy Court, RIGCO established
separate debtor-in-possession bank accounts for (i) $2.0 million to secure
payment to Tatham Offshore for their interest in four of the anchor chains
located on the Bill Shoemaker, (ii) $0.6 million for administrative expenses
incurred in the Bankruptcy proceedings and (iii) $0.4 million for uncontested
claims of unaffiliated unsecured creditors. The secured lenders under the Credit
Facility and the DIP Loan (See Note 4) received a total of $36.6 million in
final payment of all principal, interest and expenses associated with the Credit
Facility and DIP Loan. Pursuant to a Bankruptcy Court Order, RIGCO paid $2.0
million to Tatham Offshore for Tatham Offshore's interest in the four anchor
chains on June 29, 2000. The remaining cash received will be used for general
corporate purposes. Depreciation expense for the year ended June 30, 2000
includes an impairment of $44.6 million related to the sale of this rig.

On September 25, 2000, RIGCO, FPS VI, FPS III, and FPS V filed a motion to
dismiss the Chapter 11 proceedings with the United States Bankruptcy Court. If
granted, the dismissal of the Chapter 11 proceedings would allow the Debtors to
pay their pre-petition unaffiliated unsecured creditors in full. Any funds
remaining would be paid to the affiliated unsecured creditors on a pro rata
basis. Additionally, the unsecured creditors would share, again on a pro rata
basis, any proceeds recovered by RIGCO in its action against Sedco Forex.

F-33
<PAGE> 86

RIGCO NORTH AMERICA, L.L.C.
FPS III, INC.
FPS V, INC.
FPS VI, L.L.C.
DEBTORS-IN-POSSESSION

NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES:

Principles of Combination

All significant intercompany balances and transactions have been eliminated in
combination.

Cash and Cash Equivalents

All highly liquid investments with a maturity of three months or less when
purchased are considered to be cash equivalents.

Semisubmersible Drilling Rigs

The cost of the semisubmersible drilling rigs is capitalized and depreciated
using the straight-line method over the drilling rigs' estimated useful lives of
25 years.

Impairment losses on the semisubmersible drilling rigs are recognized if the
carrying amount of such assets, grouped at the lowest level for which there are
identifiable cash flows that are largely independent of the cash flows from
other assets, exceeds the estimated undiscounted future cash flows of such
assets. Measurement of any impairment loss is based on the fair value of the
assets.

Capitalization of Interest

Interest and other financing costs are capitalized in connection with
construction projects as part of the cost of the asset and amortized over the
related asset's estimated useful life.

Debt Issue Costs

Debt issue costs are capitalized and amortized over the life of the related
indebtedness.

Revenue Recognition

Revenue from services is recognized in the period rendered. All of the
Companies' operating revenues were generated from contract drilling services
related to the use of its two semisubmersible drilling rigs.

Income Taxes

The Companies' fiscal 1998 results were included in DeepTech's consolidated
federal income tax return. DeepTech and its subsidiaries, which were part of the
consolidated tax group including the Companies, were parties to intercompany tax
sharing agreements which described the method of determining the intercompany
charge for income taxes. Under its tax sharing agreement, the Companies
calculated a provision for income taxes equal to that which would be calculated
if the Companies filed a separate income tax return. Tax loss and other tax
benefit carryforwards were similarly calculated for the Companies on a separate
return basis. Such agreement terminated on June 25, 1998 when DeepTech
contributed its outstanding shares of capital stock in DeepFlex to Tatham
Offshore. This agreement was replaced with a similar tax sharing agreement
between DeepFlex and Tatham Offshore.

F-34
<PAGE> 87

RIGCO NORTH AMERICA, L.L.C.
FPS III, INC.
FPS V, INC.
FPS VI, L.L.C.
DEBTORS-IN-POSSESSION

NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)

Estimates

The preparation of combined financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amount of
certain assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the combined financial statements and the related
reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates. Management believes that its
estimates are reasonable.

Other

The fair values of the financial instruments included in the Companies' assets
and liabilities approximate their carrying values.

NOTE 3 - SEMISUBMERSIBLE DRILLING RIGS:

At June 30, 1999, capitalized costs and related accumulated depreciation of
semisubmersible drilling rigs totaled $144,468,000 and $12,154,000 and
represented the Companies' 100% interest in the Laffit Pincay and the Bill
Shoemaker.

On May 1, 2000, RIGCO and FPS VI sold all of their interest in the Laffit Pincay
to Odin Millennium Partnership Ltd. for $28.5 million in cash. Expenses
associated with the sale totaled $0.3 million and $175,000 of the net proceeds
is being held by RIGCO, in a separate debtor-in-possession bank account, pending
the resolution of a maritime lien claim by one of RIGCO's pre-petition
creditors. The balance of the proceeds from the sale of the Laffit Pincay, $28.0
million, was paid to RIGCO's secured lenders in partial payment of their secured
claim under the Credit Facility. Depreciation expense includes an impairment of
$12.9 million related to the sale of this rig.

On June 28, 2000, RIGCO sold all of its interest in the Bill Shoemaker to Fred
Olsen Energy ASA for $43.6 million in cash. Expenses associated with the sale
totaled $0.4 million. By order of the Bankruptcy Court, RIGCO established
separate debtor-in-possession bank accounts for (i) $2.0 million to secure
payment to Tatham Offshore for their interest in four of the anchor chains
located on the Bill Shoemaker, (ii) $0.6 million for administrative expenses
incurred in the Bankruptcy proceedings and (iii) $0.4 million for uncontested
claims of unaffiliated unsecured creditors. The secured lenders under the Credit
Facility and the DIP Loan (See "Liquidity and Capital Resources") received a
total of $36.6 million in final payment of all principal, interest and expenses
associated with the Credit Facility and DIP Loan. Pursuant to a Bankruptcy Court
Order, RIGCO paid $2.0 million to Tatham Offshore for Tatham Offshore's interest
in the four anchor chains on June 29, 2000. Depreciation expense includes an
impairment of $44.6 million related to the sale of this rig.

NOTE 4 - INDEBTEDNESS:

RIGCO Credit Facility

On September 30, 1996, RIGCO entered into a $65 million senior secured credit
facility with a syndicate of lenders (as amended, the "Credit Facility").
Proceeds from the Credit Facility were used to acquire the Bill Shoemaker, to
fund significant upgrades to the Bill Shoemaker, and to retire $30.3 million of
other rig related indebtedness. In April 1997, the Credit Facility was amended
to provide for an additional $12 million to fund the remaining refurbishments
and upgrades to the Bill Shoemaker. The Credit Facility (i) originally matured
on September 30, 1998, (ii) provided for interest at the prime rate plus 3% per
annum (which equaled 12.5% at June 30, 2000), payable quarterly, and (iii) was
secured by the two semisubmersible drilling rigs and all of the related assets.
On September 25, 1998, the parties to the Credit Facility amended the agreement
to (i) extend the maturity date from

F-35
<PAGE> 88

RIGCO NORTH AMERICA, L.L.C.
FPS III, INC.
FPS V, INC.
FPS VI, L.L.C.
DEBTORS-IN-POSSESSION

NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)

September 30, 1998 to March 31, 1999, (ii) waive all principal payments until
the maturity date, and (iii) extend the expiration date on the warrants issued
to the lenders under the original Credit Facility to March 31, 1999. RIGCO paid
a total of 0.5% of the outstanding principal balance to the lenders in
connection with the amendment.

On March 31, 1999, the parties to the Credit Facility amended the agreement to
(i) extend the maturity to April 30, 1999, (ii) waive all principal and interest
payments until the maturity date and (iii) extend the expiration date on the
warrants issued to the lenders under the original Credit Facility to April 30,
1999. RIGCO paid a total of $100,000 to the lenders in connection with the
amendment and agreed to increase the interest rate on the outstanding principal
to the default rate under the Credit Facility (the prime rate plus 5% per annum,
which equaled 14.5% at June 30, 2000) for the period of the extension. RIGCO did
not make the principal payment or interest payment due on April 30, 1999 and
subsequently filed voluntary petitions under Chapter 11 of the U.S. Bankruptcy
Code. As of the date of the Bankruptcy Filing, amounts outstanding under the
Credit Facility totaled $58.1 million in principal and $4.1 million in accrued
interest. On June 28, 2000, all amounts outstanding under the Credit Facility
were repaid from proceeds from the sale of the Bill Shoemaker. See Note 1. As
of June 30, 1999, amounts outstanding under the Credit Facility totaled $58.1
million in principal and $3.4 million in accrued interest. The $3.4 million in
accrued interest is included in accounts payable and accrued liabilities on the
combined balance sheet.

RIGCO Make-ready Letter of Credit

Effective January 25, 1998, Sedco Forex entered into a one-year contract with
Shell Offshore Inc. ("Shell") for the use of the Bill Shoemaker in the Gulf.
RIGCO was notified by Sedco Forex that as of November 18, 1998, Shell would
cease using the Bill Shoemaker to conduct drilling operations in the Gulf. RIGCO
has been paid for drilling services performed by the Bill Shoemaker for Shell
through November 18, 1998, but has not been paid for any period since that time.
RIGCO is seeking to recover its damages resulting from this early termination,
along with damages unrelated to the Shell contract, in the suit against Sedco
Forex discussed hereafter.

Following the early release of the rig by Shell, the Bill Shoemaker was towed to
a shipyard in Galveston, Texas where it underwent significant unanticipated
refurbishments in preparation for mobilization to the Grand Banks area in
Atlantic Canada. Capital costs, including crew costs while in the shipyard, for
the make-ready totaled approximately $8.5 million. Following the make-ready, the
Bill Shoemaker was mobilized to the Grand Banks area in Atlantic Canada to
conduct a two-well program (with three options permitting up to seven additional
wells) at predetermined rates for Husky Oil Operations Limited. In connection
with the Bill Shoemaker make-ready agreement with Sedco Forex, RIGCO obtained a
letter of credit for $6.5 million to secure payment to Sedco Forex. The letter
of credit was secured with funds provided by Mr. Thomas P. Tatham, Chairman of
the Board and Chief Executive Officer of the Company. In exchange for providing
the funds to secure the letter of credit, RIGCO paid a fee of $500,000 to Mr.
Tatham. RIGCO has agreed to pay Mr. Tatham, as liquidated damages, $10,000 per
day from February 15, 1999 until such funds are returned. The liquidated damages
payment would be in the form of a promissory note bearing interest at the rate
of 18% per annum. At June 30, 1999, the $6.5 million in collateral plus accrued
liquidated damages totaling $1.3 million are included in accounts payable to
affiliates on the combined balance sheet. As of the date of the Bankruptcy
Filing, and as of June 30, 2000, Mr. Tatham had an unsecured claim of $8,240,000
for the funds securing the letter of credit plus liquidated damages.

All of the funds securing the letter of credit were drawn by Sedco Forex for
payments under the make-ready agreement.

F-36
<PAGE> 89

RIGCO NORTH AMERICA, L.L.C.
FPS III, INC.
FPS V, INC.
FPS VI, L.L.C.
DEBTORS-IN-POSSESSION

NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)

Committed Draw Facility

On June 30, 1999, RIGCO entered into a committed draw facility with Tatham
Investment Corp., which is 100% owned by Mr. Thomas P. Tatham, Chairman of the
Board and Chief Executive Officer of the Company. Tatham Investment Corp. agreed
to loan up to $750,000 to RIGCO for working capital purposes. Loans under this
agreement bear interest at the prime rate plus 3% (on June 30, 2000, the
interest rate under this facility was 12.5%) and were due on September 30, 1999.
As of June 30, 1999, RIGCO had borrowed $439,062 under this facility, which was
included in notes payable to affiliates on the combined balance sheet. As of the
date of the Bankruptcy Filing, and as of June 30, 2000, Tatham Investment Corp.
had an unsecured claim of $338,303 under this agreement.

RIGCO Debtor-in-Possession Loan

Payment-in-kind Subordinated Promissory Notes

RIGCO and FPS V have issued payment-in-kind Subordinated Promissory Notes ("PIK
Notes") to DeepFlex. The PIK notes bear interest at 12% per annum. At June 30,
1999, the Company owed $78.9 million to DeepFlex which amount is included in PIK
notes payable on the combined balance sheet. At June 30, 2000, the Company owed
$81.0 million to DeepFlex which amount is included in PIK notes payable on the
combined balance sheet.

NOTE 6 - RELATED PARTY TRANSACTIONS:

DeepTech has entered into management agreements with each of its subsidiaries,
including DeepFlex, pursuant to which each affiliate is charged an annual
management fee in exchange for operational, financial, accounting and
administrative services. The management agreement with DeepTech terminated upon
the closing of the merger between DeepTech and El Paso Energy on August 14,
1998. Effective August 14, 1998, Tatham Offshore and DeepFlex entered into a
similar management agreement. Costs incurred by DeepFlex are allocated to the
combined companies as incurred.

Tatham Brothers Loan to Tatham Offshore

In connection with the Merger, Tatham Offshore entered into a short-term
financing arrangement with Tatham Brothers to provide for funds to (i) satisfy
approximately $1.6 million of cash requirements with respect to the Redemption
Agreement with the Partnership, (ii) pay $1.4 million to DeepTech in connection
with the Management Agreement between Tatham Offshore and DeepTech, (iii) pay
approximately $6.9 million to TB Securities with respect to obligations under
the Rights Offering, (iv) fund a $7.5 million letter of credit for potential tax
liabilities, (v) refinance $5.1 million in existing loans to DeepFlex and (vi)
pay fees and expenses associated with the short-term financing. Tatham Brothers
is an affiliate of Thomas P. Tatham and the parent company of TB Securities. The
short-term financing bears interest at the rate of 12% per annum and is due on
January 15, 1999. It is secured by a

F-37
<PAGE> 90

RIGCO NORTH AMERICA, L.L.C.
FPS III, INC.
FPS V, INC.
FPS VI, L.L.C.
DEBTORS-IN-POSSESSION

NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)

pledge of DeepFlex of its interest in a certain payment-in-kind Subordinated
Promissory Notes (see above) issued by RIGCO and FPS V, which has a current
outstanding balance of approximately $81.0 million.

NOTE 7 - INCOME TAXES:

The Companies were included in the consolidated federal income tax returns filed
by DeepTech for periods prior to June 25, 1998. DeepFlex and DeepTech have
entered into a tax sharing agreement providing for the manner of determining
payments with respect to federal income tax liabilities (Note 2). Such agreement
terminated on June 25, 1998 when DeepTech contributed its outstanding shares of
capital stock in DeepFlex to Tatham Offshore. This agreement has been replaced
with a tax sharing agreement between DeepFlex and Tatham Offshore.

There were no intercompany charges for federal income taxes for the period ended
June 30, 2000, 1999 and 1998.

No amounts were due for federal income taxes at June 30, 2000, 1999 or 1998.

NOTE 8 - SUPPLEMENTAL DISCLOSURES TO THE STATEMENT OF CASH FLOWS:

Cash paid, net of amounts capitalized, during each of the periods presented

<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Interest $ 10,761 $ 3,210 $ 7,692
</TABLE>

NOTE 9 - COMMITMENTS AND CONTINGENCIES:

In the ordinary course of business, the Companies are subject to various laws
and regulations. In the opinion of management, compliance with existing laws and
regulations will not materially affect the financial position or the results of
operations of the Companies.

Effective January 25, 1998, Sedco Forex entered into a one-year contract with
Shell Offshore Inc. ("Shell") for the use of the Bill Shoemaker in the Gulf. The
Companies were notified by Sedco Forex that as of November 18, 1998, Shell would
cease using the Bill Shoemaker to conduct drilling operations in the Gulf. The
Companies have been paid for drilling services performed by the Bill Shoemaker
for Shell through November 18, 1998 but has not been paid for any period since
that time. At June 30, 2000, RIGCO had recorded a $7.4 million account
receivable from Sedco Forex related to the unpaid portion of the Shell contract.
On April 20, 1999, RIGCO gave Sedco Forex a written termination notice of the
management and charter agreement for the Bill Shoemaker.

On July 26, 1999, RIGCO filed a petition in the 165th Judicial District Court in
Harris County, Texas, alleging more than $51 million in actual damages against
Schlumberger Technology Corporation and Schlumberger Canada, Ltd. (collectively,
"Schlumberger") for claims arising out of Schlumberger's Sedco Forex Division's
marketing, manning, management and operation of the Shoemaker and Pincay
pursuant to certain charter, make-ready and other agreements and arrangements.
The allegations include claims of gross negligence, breach of contract, fraud,
negligent misrepresentation and negligence. RIGCO is seeking an unspecified
amount of exemplary damages. RIGCO has alleged in bankruptcy court proceedings
that the manner in which Schlumberger performed its duties with respect to the
Bill Shoemaker and Laffit Pincay during the course of the management and charter
agreements resulted in RIGCO's financial difficulties and caused it to default
on its secured debt obligations. In May 2000,

F-38
<PAGE> 91

RIGCO NORTH AMERICA, L.L.C.
FPS III, INC.
FPS V, INC.
FPS VI, L.L.C.
DEBTORS-IN-POSSESSION

NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)

RIGCO joined Sedco Forex Corporation and Sedco Forex Canada Limited as
defendants in this action. Trial is currently set for May 2001.

NOTE 10 - SEGMENT INFORMATION:

The Company operates in one segment, the offshore contract drilling business.

Following is a summary of revenues by geographic areas for offshore contract
drilling segments. Revenues are attributed to countries based on the location of
service provided.

<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------
2000 1999 1998
-------- -------- --------
(In thousands)
Contract revenue
<S> <C> <C> <C>
United States $ -- $ 25,110 $ 37,854
Canada 13,341 14,736 23,593
-------- -------- --------
$ 13,341 $ 39,846 $ 61,447
======== ======== ========
</TABLE>

In fiscal year 2000, Husky Oil Operations Limited accounted for $13.4 million of
drilling services revenue. In fiscal year 1999, Shell accounted for $22.9
million and Husky Oil Operations Limited accounted for $14.7 million of drilling
services revenue. In fiscal year 1998, Amoco Canada Petroleum Company Ltd.
accounted for $23.6 million of drilling services revenue, Shell accounted for
$15.6 million of drilling services revenue, Pennzoil Exploration and Production
Company accounted for $14.4 million of drilling services revenue and Phillips
Petroleum Company accounted for $7.8 million of drilling services revenue. No
other customer accounted for more than 10 percent of consolidated revenue in
2000, 1999 or 1998.

F-39
<PAGE> 92

INDEX TO EXHIBITS

Exhibit
Number Description
------- -----------

3.2 By-laws of Tatham Offshore (filed as exhibit 3.2 in
Tatham Offshore's Annual Report on Form 10-K for the
fiscal year ended June 30, 1994, and incorporated herein
by reference).

<PAGE> 93

<PAGE> 94

10.20 Limited Liability Company Agreement of Deepwater
Drillers, L.L.C. (filed as Exhibit 10.2 to DeepTech's
Current Report on Form 8-K dated May 2, 1996 and
incorporated herein by reference).

<PAGE> 95

<PAGE> 96

<PAGE> 97

23.1* Consent of Independent Accountants,
PricewaterhouseCoopers LLP.

<PAGE> 98

24.1 Powers of Attorney (included on the signature page on
this Annual Report on Form 10-K).

27.1* Financial Data Schedule.

----------

* Filed herewith