TRANSAMERICAN REFINING CORP, 424B3, 1997-05-12

TRANSAMERICAN REFINING CORP
424B3, 1997-05-12
PETROLEUM REFINING

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<PAGE> 1

Prospectus Supplement filed pursuant
to Rule 424(b)(3), under the
Securities Act of 1933, as amended,
relating to Prospectus dated
August 9, 1996, filed as part of
Post-Effective Amendment No. 4 to
Form S-1 of TransAmerican Refining
Corporation and TransAmerican
Energy Corporation, Registration
No. 33-85930

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

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

FORM 10-K

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

FOR THE FISCAL YEAR ENDED JANUARY 31, 1997

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

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

REGISTRATION NUMBER 33-85930

TRANSAMERICAN REFINING CORPORATION
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
TEXAS 76-0229632
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)

1300 NORTH SAM HOUSTON PARKWAY EAST
SUITE 320
HOUSTON, TEXAS 77032
(Address of principal executive offices) (Zip code)
</TABLE>

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (281) 986-8811

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

The number of shares of common stock and common stock purchase warrants of
the registrant outstanding on April 30, 1997, was 30,000,000 and 7,495,313,
respectively.

================================================================================
<PAGE> 2

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 6
Item 3. Legal Proceedings........................................... 6
Item 4. Submission of Matters to a Vote of Security Holders......... 6
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 7
Item 6. Selected Financial Data..................................... 7
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 8
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 14
Item 8. Financial Statements and Supplementary Data................. 15
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................... 37
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 38
Item 11. Executive Compensation...................................... 39
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 40
Item 13. Certain Relationships and Related Transactions.............. 41
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 43
Signatures............................................................ 46
</TABLE>
<PAGE> 3

PART I

ITEM 1. BUSINESS

GENERAL

TransAmerican Refining Corporation (the "Company" or "TARC") was formed in
1987 to hold and operate the refinery assets of TransAmerican Natural Gas
Corporation (together with its predecessors, "TransAmerican") and is engaged in
the refining and storage of crude oil and petroleum products.

TransAmerican Energy Corporation ("TEC") is a limited-purpose holding
company formed in 1994 to hold certain shares of common stock of TransTexas Gas
Corporation ("TransTexas") and all of the outstanding capital stock of TARC.
TARC, TransTexas and TEC are all direct or indirect subsidiaries of
TransAmerican. The address of TARC's principal executive offices is 1300 North
Sam Houston Parkway East, Suite 320, Houston, Texas 77032, and its telephone
number at that address is (281) 986-8811.

BACKGROUND

Founded in 1958 by John R. Stanley with a single gas station, TransAmerican
grew rapidly and by the mid-1970s had developed into a chain of over 200
independent gasoline stations in New England and New York. In the early 1970s,
TransAmerican sought to vertically integrate its retail gasoline operations by
purchasing a refinery in Louisiana. During this period, TransAmerican also
entered the exploration and production business by acquiring certain oil and gas
properties in South Texas.

In 1974, TransAmerican began construction of a $140 million ammonia plant
that would use natural gas from its South Texas drilling operations as
feedstock. Primarily as a result of a collapse in ammonia prices, TransAmerican
was unable to obtain sufficient financing to complete construction of the plant.
Unable to meet its obligations, TransAmerican and its affiliates filed a
voluntary bankruptcy petition in October 1975. TransAmerican began operating
pursuant to a confirmed plan of reorganization in May 1980.

In 1979, TransAmerican began an expansion and modernization program at the
refinery. However, in January 1983, before completion of the construction
program and after expenditures of over $900 million, financial difficulties
prevented completion of certain units of the refinery and forced a shutdown of
operations. As a result, TransAmerican filed a voluntary bankruptcy petition.
TransAmerican emerged from bankruptcy in October 1987. As a condition of the
bankruptcy plan, TransAmerican formed TARC as a wholly owned subsidiary and
transferred its refinery's net assets to TARC. From 1983 to August 1993,
TransAmerican and TARC spent approximately $125 million on maintenance and
capital expenditures at the refinery.

In February 1995, TARC issued $340 million aggregate principal amount of
18 1/2% Guaranteed First Mortgage Discount Notes due 2002 and $100 million
aggregate principal amount of 16 1/2% Guaranteed First Mortgage Notes due 2002
(together with the First Mortgage Discount Notes, the "TARC Notes"). The net
proceeds from this offering were used to fund the expansion and upgrading of
TARC's refinery, for working capital requirements, including construction costs
incurred prior to the offering and repayment of intercompany debt to
TransAmerican.

The TARC Notes are unconditionally guaranteed on a senior secured basis
(the "Guarantee") by TEC. The Guarantee and the TARC Notes are currently
collateralized by TEC's only assets, which consist of 100% of the outstanding
capital stock of TARC and 40 million shares of common stock (54% of the
currently outstanding capital stock) of TransTexas held by TEC. In addition,
5.45 million shares of common stock (7.4% of the currently outstanding capital
stock) of TransTexas held by TARC are pledged to collateralize the TARC Notes
and the Guarantee. Under certain circumstances, shares of TransTexas common
stock pledged to collateralize the Guarantee may be released from such pledge.
If required to honor the Guarantee, TEC has no current ability to do so without
selling its shares of capital stock of TransTexas or TARC.

1
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BUSINESS OF TARC

TARC's refinery is located in the Gulf Coast region along the Mississippi
River, approximately 20 miles from New Orleans, Louisiana. TARC's business
strategy is to modify, expand and reactivate its refinery and to maximize
refining margins by converting low-cost, heavy, sour crude oils into high-value,
light petroleum products including primarily gasoline and heating oil.

In February 1995, TARC began a construction and expansion program designed
to reactivate the refinery and increase its complexity (the "Capital Improvement
Program"). From February 1995 through March 1997, TARC spent approximately $238
million on the Capital Improvement Program, procured a majority of the equipment
required and completed substantially all of the process design engineering and a
substantial portion of the remaining engineering necessary to complete this
project.

Primarily because additional financing was not available, TARC was unable
to meet the construction completion timetable for the Capital Improvement
Program as required under the TARC Notes Indenture. In February 1997, TARC
solicited and received from the holders of the TARC Notes consents to certain
waivers under and amendments to the Indenture governing the TARC Notes. Pursuant
to this consent solicitation, the holders of the TARC Notes waived, until July
15, 1997, the default under the TARC Notes Indenture which would have occurred
on February 15, 1997 as a result of TARC's failure to meet the required
completion timetable. The waiver of this default will cease to be effective on
July 15, 1997. Unless the default has been further waived, or the Company
completes a recapitalization that satisfies the holders of the TARC Notes, such
holders would then be entitled to pursue remedies available under the TARC Notes
Indenture, including acceleration of the maturity of the TARC Notes.

TARC must obtain substantial additional financing to fund any additional
expansion or modification of the refinery. It is likely that the scope,
completion schedule and other aspects of the Capital Improvement Program will be
modified in connection with obtaining additional financing. The scope,
completion schedule, amount of additional expenditures required and other
aspects of additional expansion and modification of the refinery will depend
upon, among other factors, the availability and timing of such financing. TEC
and its operating subsidiaries are considering various financing alternatives,
including a recapitalization of TEC, TARC and TransTexas. The Company expects
that these recapitalizations can be completed by July 15, 1997. However, there
can be no assurance that TARC will obtain the required additional financing.

CURRENT OPERATIONS

In March 1994, TARC commenced partial operations at the refinery with the
start up of the No. 2 Vacuum Unit and has operated this unit intermittently
since then based on operating margins. In addition, modifications and tie-ins to
the No. 2 Crude Unit have been completed. Although both units are operational,
TARC is not currently operating these units due to the low level of operating
margins obtainable for these units on a stand-alone basis.

TARC believes that the No. 2 Vacuum Unit has a capacity in excess of
200,000 BPD. TARC reactivated the No. 2 Vacuum Unit in March 1994. When the No.
2 Crude Unit is placed into operation, the No. 2 Vacuum Unit will process
bottoms from the No. 2 Crude Unit into vacuum gas oil ("VGO") and, with the
addition of cutterstocks, into No. 6 residual fuel oil. The No. 2 Crude Unit was
designed to process heavy, sour crude oil and, prior to the 1983 shutdown,
demonstrated a capacity of 175,000 BPD.

Subsequent to year end, TARC entered into a commitment to purchase 0.6
million barrels of feedstock at $24.68 per barrel plus interest at 8.25%,
demurrage, bank fees and other related costs. Based on a market value of
approximately $18.15 per barrel at April 29, 1997, the loss on the feedstock is
estimated to range between $4 and $5 million.

CAPITAL IMPROVEMENT PROGRAM

The Capital Improvement Program is designed to increase the capacity and
complexity of the refinery. From February 1995 through March 1997, TARC spent
approximately $238 million on the Capital

2
<PAGE> 5

Improvement Program, procured a majority of the equipment required and completed
substantially all of the process design engineering and a substantial portion of
the remaining engineering necessary to complete this project. Substantial
additional expenditures are necessary to complete the Capital Improvement
Program. TARC must obtain additional financing to fund any additional expansion
or modification of the refinery. TEC and its operating subsidiaries are
considering various financing alternatives, including a recapitalization of TEC,
TARC and TransTexas. The Company expects that these financing alternatives will
provide the funds necessary to complete construction and expansion of the
refinery. However, there can be no assurance that TARC will obtain additional
financing.

The expansion and modification of the refinery is expected to include the
following significant projects: (i) conversion of the visbreaker unit into a
delayed coking unit to process vacuum tower bottoms into lighter petroleum
products, (ii) modernization and upgrade of a fluid catalytic cracking unit to
increase gasoline production capacity and allow the direct processing of low
cost atmospheric residual feedstocks, and (iii) upgrading and expanding
hydrotreating, alkylation and sulfur recovery units to increase sour crude
processing capacity. The Capital Improvement Program includes expenditures which
TARC believes are necessary to ensure that the refinery is in compliance with
certain existing air and water discharge regulations and that gasoline produced
will comply with federal standards. It is likely that the scope and other
aspects of the Capital Improvement Program will be modified in connection with
obtaining additional financing for the refinery. The scope, completion schedule,
amount of additional expenditures required and other aspects of additional
expansion and modification of the refinery will depend upon, among other
factors, the availability and timing of such financing.

FINANCING ARRANGEMENTS AND PROCESSING AGREEMENTS

TARC historically has entered into financing arrangements in order to
maintain an available supply of feedstocks. Typically, TARC enters into an
agreement with a third party to acquire a cargo of feedstock which is scheduled
for delivery to TARC's refinery. TARC pays through the third party all
transportation costs, related taxes and duties and letter of credit fees for the
cargo, plus a negotiated commission. Prior to arrival at the refinery, another
third party purchases the cargo, and TARC commits to purchase, at a later date,
the cargo at an agreed price plus commission and costs. TARC also places margin
deposits with the third party to permit the third party to hedge its price risk.
TARC purchases these cargos in quantities sufficient to maintain expected
operations and is obligated to purchase all of the cargos delivered pursuant to
these arrangements. In the event the refinery is not operating, these cargos may
be sold on the spot market. During the year ended January 31, 1997,
approximately 1.1 million barrels of feedstocks with a cost of $23 million were
sold by a third party on the spot market prior to delivery to TARC without a
material gain or loss to TARC.

In March 1996, TARC entered into a processing agreement with a third party
for the processing of various feedstocks at the refinery. Under the terms of the
agreement, the processing fee earned by TARC is based on the margin earned by
the third party, if any, after deducting all of its related costs such as
feedstock acquisition, hedging, transportation, processing and inspections plus
a commission for each barrel processed. For the year ended January 31, 1997,
TARC processed approximately 1.1 million barrels of feedstock pursuant to this
agreement. TARC incurred a loss of approximately $2.6 million related to this
processing agreement primarily as a result of low margins and price management
activities.

In April 1996, TARC entered into a similar processing agreement with
another third party to process feedstocks. As of January 31, 1997, TARC had
completed processing approximately 6.4 million barrels of feedstocks and is
storing approximately 1.0 million barrels of intermediate and refined products
under this agreement. TARC also entered into a processing agreement with this
third party to process approximately 0.8 million barrels of the third party's
feedstocks for a fixed price per barrel. Under the terms of this fixed price
agreement, TARC met all quantity and quality yields earning the full price per
barrel. For the year ended January 31, 1997, TARC recorded a net loss of
approximately $4.5 million related to these processing arrangements primarily as
a result of low margins and price management activities.

3
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PRICE MANAGEMENT ACTIVITIES

In order to mitigate the commodity price risks associated with the refining
business, TARC has previously entered, and may in the future enter, into futures
contracts, options on futures, swap agreements and forward sale agreements
commensurate with its inventory levels and feedstock requirements and as
permitted under the Indenture. If TARC believes it can capitalize on favorable
market conditions, it will attempt to utilize the futures market to fix a
portion of its crude oil costs and refined products values. This hedging
strategy is designed to retain the value of a portion of its work-in-process
inventory.

CRUDE OIL AND FEEDSTOCK SUPPLY

TARC purchases feedstocks on the spot market but has no long-term supply
contracts. TARC believes that it will have access to adequate supplies of the
crude oil it intends to process. Upon completion of the expansion and
modification program, TARC expects to purchase heavy, sour crude oils produced
in countries such as Venezuela and Mexico. TARC also expects to be able to take
advantage of anticipated increases in production of sour crude oil from the Gulf
of Mexico or the Persian Gulf.

The refinery has a variety of supply channels. The Mississippi River
permits delivery of feedstocks from both barge and ocean-going vessels. TARC has
its own ship dock and barge dock. The ship dock can accommodate 100,000
deadweight ton ("dwt") tankers that draw less than 45 feet of water, or larger
vessels that have been partially offloaded and draw less than 45 feet of water.
The barge dock provides access to smaller cargos of intermediate feedstocks such
as vacuum gas oil or atmospheric residuals. An adjacent storage terminal has
four ship docks to which TARC has access for loading or unloading of feedstocks.
TARC has executed a letter agreement for the exclusive use of one of these docks
on a long-term basis for shipping petroleum coke and other refinery products.
Additionally, TARC is connected to a Shell Oil Company crude pipeline that
provides access to Louisiana Offshore Oil Port's 24-inch pipeline network,
thereby permitting TARC to receive large quantities of foreign crude oil. This
pipeline also provides access to domestic crudes.

TARC has no crude oil reserves and is not engaged in the exploration for
crude oil, and plans to obtain all its crude oil requirements from unaffiliated
sources. TARC believes that it will be able to obtain adequate supplies of crude
oil and feedstocks at generally competitive prices for the foreseeable future.
Crude oil prices are affected by a variety of factors beyond the control of
TARC. The principal factors currently influencing prices include the pricing and
production policies of members of the Organization of Petroleum Exporting
Countries, the availability to world markets of production from Kuwait, Iraq and
Russia and the worldwide and domestic demand for oil and refined products. Oil
pricing will continue to be unpredictable and greatly influenced by governmental
and political forces.

PRODUCT DISTRIBUTION

TARC previously sold its refined products pursuant to a processing
agreement with a third party, but currently has no long-term sales contracts.
Major market areas for TARC's refined products will include the Gulf Coast
region, the Mississippi River Valley and the East Coast of the United States as
well as foreign markets. TARC's refined products will be transported by
pipeline, train, ocean-going vessel and truck. TARC's refinery is connected,
through third-party pipelines, to two major Gulf Coast common carrier pipelines,
the Colonial and the Plantation, which will permit transportation of the
refinery's products to East Coast markets. TARC is also connected to several
pipelines designed to transfer refined products to a nearby refinery operated by
Shell Oil Company. Railroad lines serve the refinery and adjacent industries.
TARC's barge and ship docks, together and an adjacent terminal facility, provide
access to the Mississippi River and the intracoastal waterway.

FOREIGN TRADE ZONE

The refinery is approved for purposes of processing foreign crude to
operate as a foreign trade zone. This allows the refinery to realize the
benefits of processing foreign crude and exporting the products duty free or
deferring the duty on products sold domestically.

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INSURANCE

TARC maintains insurance in accordance with customary industry practices to
cover some, but not all, risks. TARC currently maintains property insurance for
the refinery in an amount and with deductibles that management believes will
allow TARC to survive damage to the refinery. TARC plans to increase insurance
coverage amounts from time to time as it completes certain portions of the
expansion and modification program.

SEASONALITY

TARC anticipates that its operations will be subject to significant
fluctuations in seasonal demand. In TARC's markets, demand for gasoline is
typically higher during the first and second quarters of TARC's fiscal year.
During winter months, demand for heating oil increases. The refinery is
designed, upon completion of the expansion and modification program, to change
its product yields to take advantage of seasonal demands.

FLUCTUATION IN PRICES

Factors that are beyond the control of TARC may cause the cost of crude oil
purchased by TARC and the price of refined products sold by TARC to fluctuate
widely. Although prices of crude oil and refined petroleum products generally
move in the same direction, prices of refined products often do not respond
immediately to changes in crude oil costs. An increase in market prices for
crude oil or a decrease in market prices for refined products could have an
adverse impact on TARC's earnings and cash flow.

COMPETITION

The industry in which TARC operates is highly competitive. TARC primarily
competes with refiners in the Gulf Coast region, many of which are owned by
large, integrated oil companies which, because of their more diverse operations,
stronger capitalizations or crude oil supply arrangements, are better able than
TARC to withstand volatile industry conditions, including shortages or excesses
of crude oil or refined products or intense price competition. The principal
competitive factors affecting TARC's refining operations are the quality,
quantity and delivered costs of crude oil and other refinery feedstocks,
refinery processing efficiency, mix of refined products, refined product prices
and the cost of delivering refined products to markets. Competition also exists
between the petroleum refining industry and other industries supplying energy
and fuel to industrial, commercial and individual consumers.

EMPLOYEES

As of April 1, 1997, TARC had approximately 150 employees and will employ
additional personnel as required by its operations and may engage the services
of engineering and other consultants from time to time. Currently, none of
TARC's employees is a party to a collective bargaining agreement. The Equal
Employment Opportunity Commission ("EEOC") has initiated an investigation into
the employment practices of TARC and Southeast Contractors (as defined),
alleging discriminatory hiring and promotion practices. See Note 11 to the Notes
to Financial Statements included elsewhere herein.

Since July 1994, Southeast Louisiana Contractors of Norco, Inc. ("Southeast
Contractors"), a subsidiary of TransAmerican, has provided construction
personnel to TARC in connection with TARC's expansion and modification program.
Southeast Contractors will provide construction personnel to TARC as required to
expand and modify the refinery. These construction workers are temporary
employees, and the number and composition of the workforce will vary throughout
the reactivation at the refinery during the expansion and modification program.
Southeast Contractors charges TARC for the direct costs it incurs, which consist
solely of employee payroll and benefits, plus administrative costs and fees;
such administrative costs and fees charged to TARC are $1.2 million per year.

5
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ENVIRONMENTAL MATTERS

For a discussion of environmental matters affecting TARC, see Note 11 of
Notes to Financial Statements included elsewhere herein.

OTHER GOVERNMENTAL REGULATIONS

TARC must also comply with federal and state laws and regulations
promulgated by the Department of Transportation for the movement of volatile and
flammable materials, the U.S. Coast Guard for marine operations and oil spill
prevention and the Occupational Safety and Health Administration ("OSHA") for
worker and job site safety. To comply with OSHA regulations, TARC must conduct
extensive Process Safety Management and Hazardous Operations reviews prior to
placing units into service.

ITEM 2. PROPERTIES

TARC owns the approximately 215-acre site on which the refinery is located.
TARC also has available, through ownership, lease agreement or other appropriate
arrangements, the use of storage tanks, loading racks and other related
facilities at the refinery site. TARC leases office space in Houston, Texas from
TransTexas.

TITLE INSURANCE

The title insurance policy to insure against certain claims made against
title to the refinery parcel site currently consists of a $440 million lender's
title insurance policy for the benefit of the trustee under the TARC Notes
Indenture. The title insurance policy has been reinsured through various title
insurance companies in the United States. The ability to successfully recover
under the policies is dependent on the creditworthiness of the title company and
its reinsurers at the time of the claim and any defenses that the title insurers
and its reinsurers may have. There can be no assurance that the amount of title
insurance will be sufficient to cover any losses incurred by TARC or the trustee
under the TARC Notes Indenture as a result of a title defect impairing the
ability to use the refinery site or that the title insurers will be able to
fulfill their financial obligations under the title insurance policy. The title
policy contains customary exceptions to coverage, including taxes not yet due
and payable, riparian rights and numerous servitudes, rights of way, rights of
access and other encroachments in favor of utilities, railroads, pipelines and
adjacent refineries and tank farms, as well as exceptions for (i) government
claims with respect to, and public rights to use, TARC's property located
between the Mississippi River and the road upon which pipe racks and TARC's
docking facilities are located, (ii) a right of first refusal in favor of an
adjacent landowner with respect to a certain portion of property which, in the
event exercised, may require TARC to relocate at its expense certain pipelines
that connect various refinery parcels, (iii) tax benefits that have been
conveyed to certain tax lessors, (iv) the priority of liens that may be filed by
materialmen and mechanics in connection with the expansion and modification
program, and (v) certain rights of creditors pursuant to Federal or state
bankruptcy and insolvency laws, which rights may affect the enforceability of
the mortgage securing the TARC Notes.

ITEM 3. LEGAL PROCEEDINGS

See Note 11 and Note 12 of Notes to Financial Statements included elsewhere
herein for a discussion of TARC's legal proceedings.

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

There were no matters submitted to a vote of TARC's security holders during
the fourth quarter of the fiscal year ended January 31, 1997.

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PART II

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

There is no established public trading market for TARC's common stock or
its common stock purchase warrants. On April 30, 1997, there was one record
holder of TARC's common stock purchase warrants and one holder of TARC's common
stock.

TARC has not paid any cash dividends on its capital stock since inception.
TARC's ability to pay dividends is restricted by the TARC Notes Indenture and
will depend in part upon TARC's debt levels. In determining whether to declare
and pay a dividend, the Board of Directors will consider various other factors,
including TARC's capital requirements and financial condition.

ITEM 6. SELECTED FINANCIAL DATA

On January 29, 1996, TARC changed its fiscal year end for financial
reporting purposes from July 31 to January 31. The following table sets forth
selected financial data of TARC as of and for each of the four years ended July
31, 1995, the six months ended January 31, 1995 and 1996 and each of the two
years ended January 31, 1997. This data has been derived from the financial
statements of TARC and should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and notes thereto. The financial data for fiscal years
ended July 31, 1992 and 1993 represent the results of operations and financial
position of TARC prior to the partial reactivation of the refinery and
initiation of the Capital Improvement Program. During these periods, TARC had
only maintenance expenses and lease income from storage facilities. The data for
the year ended July 31, 1994 reflects the limited operations of the refinery
since March 1994 and expenses related to reactivation of portions of the
refinery. Subsequent to March 1994, TARC has operated the No. 2 Vacuum Unit
intermittently. TARC does not consider its historical results to be indicative
of future results.

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
JANUARY 31, JANUARY 31, YEAR ENDED JULY 31,
--------------------- ------------------- -----------------------------------------
1997 1996 1996 1995 1995 1994 1993 1992
--------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS OF DOLLARS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Refining revenues................. $ 10,857 $176,229 $107,237 $ 71,035 $140,027 $174,143 $ -- $ --
Storage and other income.......... -- -- -- 551 552 3,035 5,178 3,179
Operating expenses................ 54,004 206,798 121,770 86,383 171,411 187,208 13,238 11,693
General and administrative
expenses(1)..................... 11,848 12,610 7,438 8,442 13,614 4,496 11,341 7,057
Equity in income (loss) before
extraordinary item of
TransTexas...................... 12,325 (2,584) (156) -- (2,428) -- -- --
Other income (expense)(7)......... 52,076(5) (9,998) (3,944) 89 (5,966) (2,827) 28 666
Extraordinary item(2)............. -- (11,497) -- -- (11,497) -- -- --
Net income (loss)................. 9,406 (67,258) (26,071) (23,150) (64,337) (17,353) (19,373) (14,905)
Net income (loss) per common
share(3)........................ 0.25 (2.24) (0.87) (0.77) (2.14) (0.58) (0.65) (0.50)
Weighted average number of common
shares outstanding (in
thousands)(3)................... 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000
BALANCE SHEET DATA:
Working capital (deficit)(6)...... $(407,018) $(17,707) $(17,707) $(35,509) $ 5,965 $(16,838) $ (1,494) $ (949)
Long-term debt proceeds held in
collateral account(4)........... -- 24,405 24,405 -- 140,857 -- -- --
Total assets...................... 564,241 518,323 518,323 229,462 499,879 176,327 70,900 70,579
Total long-term liabilities(6).... 74,571 368,091 368,091 112,719 352,696 45,373 64,512 45,636
Stockholder's equity.............. 81,363 71,957 71,957 77,250 87,837 100,400 4,253 23,626
</TABLE>

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

(1) Includes litigation accruals of $2.0 million for the six months ended
January 31, 1996, and $4.5 million and $9.0 million for the years ended July
31, 1995 and 1993, respectively.

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(2) Represents TARC's equity in the early extinguishment of debt at TransTexas.

(3) Gives retroactive effect to a 30,000-for-1 stock split effected in July
1994.

(4) Includes $14.7 million and $7.9 million at January 31, 1996 and July 31,
1995, respectively, which is classified as a current asset.

(5) Includes a gain of $56.2 million related to the sale of 4.55 million shares
of TransTexas common stock in March 1996.

(6) The TARC Notes are classified as a current liability at January 31, 1997.
The working capital deficit would have been $41,288 at January 31, 1997 if
the TARC Notes had not been reclassified as of such date.

(7) Net of capitalized interest of $68.8 million, $41.5 million, $26.2 million,
$3.5 million and $18.9 million for the years ended January 31, 1997 and
1996, the six months ended January 31, 1996 and 1995 and the year ended July
31, 1995, respectively.

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

The following discussion should be read in conjunction with TARC's
financial statements and notes thereto.

RESULTS OF OPERATIONS

General

TARC's refinery was inoperative from January 1983 through February 1994.
During this period, TARC's revenues were derived primarily from tank rentals and
its expenses consisted of maintenance and repairs, tank rentals, general and
administrative expenses and property taxes. TARC commenced partial operations at
the refinery in March 1994 and has operated the No. 2 Vacuum Unit intermittently
since that time. TARC could operate the No. 2 Crude Unit and/or the No. 2 Vacuum
Unit if market conditions become favorable. TARC's decision to commence or
suspend operations is based on the availability of financing, current operating
margins and the need to tie-in units as they are completed. TARC does not
consider its historical results to be indicative of future results.

TARC's results of operations are dependent on the operating status of
certain units within its refinery, which determines the types of feedstocks
processed and refined product yields. The results are also affected by the unit
costs of purchased feedstocks and the unit prices of refined products, which can
vary significantly. The Capital Improvement Program is designed to significantly
change TARC's throughput capacity, the feedstocks processed, and refined product
yields.

In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets to be Disposed Of ("SFAS 121"). As of February 1, 1996, TARC
adopted the requirements of SFAS No. 121. TARC currently believes, based on
estimates of refining margins and current estimates for costs of the expansion
and modification of the refinery, that future undiscounted cash flows will be
sufficient to recover the cost of the refinery over its estimated useful life as
well as the costs of related identifiable intangible assets. Management believes
there have been no events or changes in circumstances that would require the
recognition of an impairment loss. However, due to the inherent uncertainties in
estimating future refining margins, in constructing and operating a large scale
refinery and the uncertainty regarding TARC's ability to complete the Capital
Improvement Program, there can be no assurance that TARC will ultimately recover
the cost of the refinery. Management believes that the book value of the
refinery is in excess of its current estimated fair market value. See Note 4 to
Financial Statements.

Year Ended January 31, 1997, Compared with the Year Ended January 31, 1996

Total revenues for the year ended January 31, 1997 decreased to $10.9
million from $176.2 million for the same period in 1996, due primarily to a
significant drop in the processing of purchased feedstocks for sale to third
parties compared to the prior year.

8
<PAGE> 11

Cost of products sold for the year ended January 31, 1997 decreased to
$11.5 million from $185.3 million for the same period in 1996, due primarily to
a significant drop in the purchase of feedstocks for processing compared to the
prior year.

Losses from processing arrangements of $7.1 million, discussed below in
"Liquidity and Capital Resources," for the year ended January 31, 1997, were
primarily due to price management activities.

Operations and maintenance expense for the year ended January 31, 1997
increased to $23.9 million from $12.5 million for the same period in 1996,
primarily due to a write-off of approximately $6.5 million for assets included
in construction work in process that will not be used in the overall Capital
Improvement Program, an increase in fuel costs during the first six months of
fiscal 1997, and higher contract labor costs.

Depreciation and amortization expense for the year ended January 31, 1997
increased $0.9 million to $7.2 million from $6.3 million for the same period in
1996, primarily due to the reclassification of construction work in process to
depreciable assets during 1997.

Taxes other than income taxes for the year ended January 31, 1997 increased
to $4.2 million from $2.7 million for the same period in 1996, primarily due to
increased property tax expense.

General and administrative expense for the year ended January 31, 1997
decreased to $11.8 million from $12.6 million for the same period in 1996,
primarily due to decreased litigation expense.

Interest income for the year ended January 31, 1997 decreased by $6.1
million as compared to the same period in 1996, primarily due to interest earned
in 1996 on a higher balance held in the Collateral Account. Interest expense,
net, for the year ended January 31, 1997 decreased $13.8 million, primarily due
to a larger portion of interest being capitalized as well as a reduction of
product financing costs in 1997 versus 1996 due to lower volumes of feedstock
purchases. During the year ended January 31, 1997, TARC capitalized
approximately $68.8 million of interest related to construction activities at
TARC's refinery, compared to $41.5 million for the year ended January 31, 1996.

The equity in income of TransTexas for the year ended January 31, 1997 of
$12.3 million reflects TARC's 20.3% equity interest in TransTexas until TARC's
sale of 4.55 million shares of TransTexas stock in March 1996 and its 14.1%
interest thereafter. This compares to $2.6 million equity in loss of TransTexas
for the year ended January 31, 1996. The increase is a result of higher gas
prices and a favorable litigation settlement at TransTexas.

Other income for the year ended January 31, 1997 was $56.5 million, which
was primarily a result of the $56.2 million gain on the sale of 4.55 million
shares of TransTexas stock in March 1996. Other income for the year ended
January 31, 1996 was $2.1 million, primarily resulting from trading gains on
futures contracts.

Six Months Ended January 31, 1996, Compared with the Six Months Ended January
31, 1995

Total revenues for the six months ended January 31, 1996 increased $35.6
million to $107.2 million from $71.6 million in the same period in 1995,
primarily due to an increase in the volume of products sold to 6.1 million
barrels in 1996 from 4.2 million barrels in 1995. In addition, $1.2 million of
the increase was due to an increase in the average product sales price of $0.19
per barrel in 1996 over 1995.

Cost of products sold for the six months ended January 31, 1996 increased
$36.2 million to $110.1 million from $73.9 million for the same period in 1995,
primarily due to an increase in the volume of products sold, partially offset by
a decrease in the average price of feedstocks purchased.

Operations and maintenance expense for the six months ended January 31,
1996 increased $0.2 million to $7.9 million from $7.7 million for the same
period in 1995, primarily due to an increase in the number of days the vacuum
unit was operating.

Depreciation and amortization expense for the six months ended January 31,
1996 increased $0.5 million to $3.2 million from $2.7 million for the same
period in 1995, primarily due to the transfer of certain terminal facilities and
tankage equipment from construction in progress to depreciable assets during the
1996 period.

9
<PAGE> 12

General and administrative expense for the six months ended January 31,
1996, decreased $1.0 million to $7.4 million from $8.4 million for the same
period in 1995, primarily as a result of a $2.5 million reduction in litigation
accruals, partially offset by an increase in payroll of $1.1 million arising
from operations support requirements.

Taxes other than income taxes for the six months ended January 31, 1996
decreased $1.4 million to $0.7 million from $2.1 million for the same period in
1995, primarily due to lower property tax expense for the six months ended
January 31, 1996.

Interest income for the six month period ended January 31, 1996 increased
$2.3 million compared to the same period in 1995 due primarily to interest
earned on long-term debt proceeds held in the Collateral Account. Interest
expense for the six month period ended January 31, 1996 increased $28.6 million
due to interest accrued on long-term debt issued in February 1995, amortization
of debt issue costs and financing costs associated with product purchases.
During the six months ended January 31, 1996, TARC capitalized $26.2 million of
interest related to construction activities associated with the Capital
Improvement Program.

Year Ended July 31, 1995, Compared with the Year Ended July 31, 1994

Total revenues for the year ended July 31, 1995 decreased $36.6 million to
$140.6 million from $177.2 million in the same period in 1994, primarily due to
a decrease in the volume of products sold which was partially offset by an
increase in the average price of products sold.

Cost of products sold for the year ended July 31,1995 decreased $19.8
million to $149.1 million from $168.9 million for the same period in 1994,
primarily as a result of a decrease in volume of products sold, partially offset
by an increase in the average price of feedstocks purchased, and a contract
cancellation loss of approximately $3.8 million.

Operations and maintenance expense for the year ended July 31, 1995
increased $0.2 million to $12.3 million from $12.1 million for the same period
in 1994, primarily as a result of an increase in the number of days the No. 2
Vacuum Unit was operating.

Depreciation and amortization expense for the year ended July 31, 1995
increased $3.3 million to $5.9 million from $2.6 million for the same period in
1994, primarily as a result of increased depreciation expense being recorded for
refinery assets which were taken out of discontinued operations during 1994.

General and administrative expense for the year ended July 31, 1995
increased $9.1 million to $13.6 million from $4.5 million in the same period in
1994, primarily as a result of a litigation accrual of $4.5 million and
increases in legal and consulting fees and insurance costs as a result of
expanded refinery operations.

Taxes other than income taxes for the year ended July 31, 1995 increased
$0.5 million to $4.2 million from $3.7 million for the same period in 1994,
primarily as a result of an increase in property taxes assessed.

Interest income for the year ended July 31, 1995 increased $4.1 million
compared to the same period in 1994 due primarily to interest earned on
long-term debt proceeds held in the Collateral Account. Interest expense for the
year ended July 31, 1995 increased $31.3 million due to interest accrued on
long-term debt issued during 1995, amortization of debt issue costs and
financing costs associated with product purchases. During the year ended July
31, 1995, TARC capitalized $18.9 million of interest related to construction
activities associated with TARC's Capital Improvement Program.

Other income for the year ended July 31, 1995 was $2.5 million compared to
other expense of $2.9 million for the same period in 1994 primarily as a result
of trading gains on futures contracts in 1995.

For the year ended July 31, 1995, the loss before an extraordinary item
increased $35.5 million over the same period in 1994, primarily due to interest
associated with TARC's long-term debt and amortization of debt issue costs.

In February 1995, TransAmerican contributed 55 million shares of TransTexas
common stock to TEC. TEC then contributed 15 million of these shares of
TransTexas common stock to TARC. The equity in loss of

10
<PAGE> 13

TransTexas for the year ended July 31, 1995 reflects TARC's 20.3% equity
interest in TransTexas' loss before an extraordinary item from the date of
acquisition. The equity in extraordinary loss of TransTexas represents TARC's
equity in a charge recorded by TransTexas in the fourth quarter for the early
retirement of $500 million of its 10 1/2% Senior Secured Notes due 2000 from the
proceeds of the issuance by TransTexas in June 1995 of $800 million in 11 1/2%
Senior Secured Notes due 2002.

LIQUIDITY AND CAPITAL RESOURCES

In connection with the issuance of the TARC Notes in February 1995,
proceeds of $173 million were deposited into a cash collateral account,
designated for use in the Capital Improvement Program. TARC sold 4.55 million
shares of TransTexas common stock in March 1996, and deposited approximately
$26.6 million in proceeds into the cash collateral account in accordance with
the requirements of the TARC Notes Indenture. As of January 31, 1997, TARC had
spent all amounts deposited in the cash collateral account. As of January 31,
1997, TARC had commitments for refinery construction and maintenance of
approximately $53.0 million.

In March 1997, TARC issued $36 million principal amount of 15% senior
secured notes due 1998 to unaffiliated third parties. These notes are secured by
a pledge of 5 million shares of TransTexas common stock, which were released
from the lien securing the TARC Notes. Proceeds from the issuance of these notes
have been or will be used for construction at the refinery and general corporate
purposes.

Primarily because additional financing was not available, TARC was unable
to meet the construction completion timetable for the Capital Improvement
Program as required under the TARC Notes Indenture. In February 1997, TARC
solicited and received from the holders of the TARC Notes consents to certain
waivers under and amendments to the TARC Notes Indenture. Pursuant to this
consent solicitation, the holders of the TARC Notes waived, until July 15, 1997,
the default under the TARC Notes Indenture which would have occurred on February
15, 1997 as a result of TARC's failure to meet the required completion
timetable. The waiver of this default will cease to be effective on July 15,
1997. Unless the default has been further waived, or the Company completes a
recapitalization that satisfies the holders of the TARC Notes, such holders
would then be entitled to pursue remedies available under the TARC Notes
Indenture, including acceleration of the maturity of the TARC Notes.

TARC has incurred losses and negative cash flow from operations as a result
of limited refining operations that did not cover the fixed costs of maintaining
the refinery, increased working capital requirements and losses on refined
product sales and processing arrangements. Such losses are due to financing
costs, low margins and price management activities. In addition the TARC Notes
are classified as a current liability as of January 31, 1997. Primarily as a
result of these factors and accounts payable related to the Capital Improvement
Program, TARC had negative working capital of $407.0 million at January 31,
1997. In order to operate the refinery at expected levels after completion of
expansion and modification of the refinery, TARC will require additional working
capital and ultimately must achieve profitable operations.

TARC is not currently operating the completed units of the refinery because
market conditions make limited operations uneconomic. If market conditions
become favorable, TARC could resume limited processing operations. TARC,
however, anticipates that in the near term and until additional operating units
come on line, its capital needs will be limited to expenditures for the
expansion and modification of the refinery, and for general and administrative
and refinery maintenance costs.

11
<PAGE> 14

operations, TARC's investment in the refinery may not be recovered. Without
additional funding to complete expansion and modification of the refinery, and
to provide working capital for operations and debt service, there is substantial
doubt about TARC's continuation as a going concern. The financial statements do
not include any adjustments for such uncertainties.

Under certain circumstances, TransAmerican, TransAmerican Exploration
Corporation, TARC or TEC may sell or otherwise dispose of shares of common stock
of TransTexas. If, as a result of any sale or other disposition of TransTexas
common stock, the aggregate ownership of TransTexas by TransAmerican and certain
of its affiliates (the "TNGC Consolidated Group") is less than 80% (measured by
voting power and value), TransTexas will no longer be a member of the TNGC
Consolidated Group and, with certain exceptions, will no longer be obligated
under the terms and conditions of, or entitled to the benefits of, the Tax
Allocation Agreement among TransAmerican and certain of its affiliates,
including TEC, TARC and TransTexas. Further, if TEC or TARC sells or otherwise
transfers any stock of TARC, or issues any options, warrants or other similar
rights relating to such stock, outside of the TNGC Consolidated Group, which
when aggregated with the outstanding TARC Warrants represents more than 20% of
the voting power or equity value of TARC, then a deconsolidation of both TARC
and TransTexas from the TNGC Consolidated Group would occur. An event that
results in deconsolidation of TARC from the TNGC Consolidated Group for federal
income tax purposes could result in the acceleration of payment of a substantial
amount of federal income taxes by TransAmerican. The tax liability to
TransAmerican that would result from deconsolidation is estimated to be
approximately $15 million at January 31, 1997. Each member of a consolidated
group filing a consolidated federal income tax return is severally liable for
the consolidated federal income tax liability of the consolidated group. There
can be no assurance that TransAmerican will have the ability to satisfy the
above tax obligation at the time due and, therefore, TARC, or other members of
the group may be required to pay the tax.

In July 1996, TARC executed a promissory note to TransAmerican for up to
$25 million. The note bears interest at a rate of 15% per annum, payable
quarterly beginning October 31, 1996, and matures on July 31, 1998. As of
January 31, 1997, the entire $25 million was outstanding under the note. On
November 1, 1996, TARC executed an additional $25 million promissory note to
TransAmerican which bears interest at 15% per annum, payable quarterly beginning
December 31, 1996, and which matures on September 30, 1998 (together with the
first promissory note, the "TransAmerican Notes"). At January 31, 1997, TARC had
approximately $44.4 million outstanding under both of these notes. TransAmerican
has waived any defaults arising from TARC's failure to make the scheduled
interest payments provided for in these notes. In February 1997, the November
1996 promissory note was replaced with a $50 million note bearing interest at an
annual rate of 15% and which matures on July 31, 2002. Interest payments are due
quarterly commencing on April 30, 1997. The debt represented by the new note is
subordinate in right of payment to the TARC Notes. As of April 25, 1997,
approximately $31.4 million had been advanced under the new note. These and
additional borrowings have been used by TARC to fund construction at the
refinery, as well as working capital needs, pending additional financing from
other sources. There can be no assurance that TransAmerican will make additional
advances to TARC.

TARC enters into financing arrangements in order to maintain an available
supply of feedstocks. Typically, TARC enters into an agreement with a third
party to acquire a cargo of feedstock which is scheduled for delivery to TARC's
refinery. TARC pays through the third party all transportation costs, related
taxes and duties and letter of credit fees for the cargo, plus a negotiated
commission. Prior to arrival at the refinery, another third party purchases the
cargo, and TARC commits to purchase, at a later date, the cargo at an agreed
price plus commission and costs. TARC also places margin deposits with the third
party to permit the third party to hedge its price risk. TARC purchases these
cargos in quantities sufficient to maintain expected operations and is obligated
to purchase all of the cargos delivered pursuant to these arrangements. In the
event the refinery is not operating, these cargos may be sold on the spot
market. During the year ended January 31, 1997, approximately 1.1 million
barrels of feedstocks with a cost of $23 million were sold by a third party on
the spot market prior to delivery to TARC without a material gain or loss to
TARC.

12
<PAGE> 15

based on the margin earned by the third party, if any, after deducting all of
its related costs such as feedstock acquisition, hedging, transportation,
processing and inspections plus a commission for each barrel processed. For the
year ended January 31, 1997, TARC processed approximately 1.1 million barrels of
feedstock pursuant to this agreement. TARC incurred a loss of approximately $2.6
million related to this processing agreement primarily as a result of low
margins and price management activities.

Environmental compliance and permitting issues are an integral part of the
capital expenditures anticipated in connection with the expansion and
modification of the refinery. TARC does not expect to incur any additional
significant expenses for environmental compliance during fiscal 1998 or fiscal
1999 other than those budgeted for the Capital Improvement Program. There is no
assurance, however, that costs incurred to comply with environmental laws will
not have a material adverse effect on TARC's future results of operations, cash
flows or financial condition. TARC also has contingent liabilities with respect
to litigation matters as more fully described in Note 11 of Notes to Financial
Statements.

INFLATION AND CHANGES IN PRICES

TARC's revenues and feedstock costs have been, and will continue to be,
affected by changes in the prices of petroleum and petroleum products. TARC's
ability to obtain additional capital is also substantially dependent on refined
product prices and refining margins, which are subject to significant seasonal,
cyclical and other fluctuations beyond TARC's control.

From time to time, TARC enters into futures contracts, options on futures,
swap agreements and forward sale agreements for crude and refined products
intended to protect against a portion of the price risk associated with price
declines from holding inventory of feedstocks and refined products, or for fixed
price purchase commitments. TARC's policy is not to enter into fixed price or
other purchase commitments in excess of anticipated processing requirements.
TARC believes that these current and anticipated futures transactions do not and
will not constitute speculative trading as specified under and prohibited by the
Indenture.

RECENTLY ISSUED PRONOUNCEMENTS

In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings per Share ("SFAS 128") and
Statement of Financial Accounting Standards No. 129, Disclosure of Information
about Capital Structure ("SFAS 129"). These statements will be adopted by the
Company effective January 31, 1998. SFAS 128 simplifies the computation of
earnings per share by replacing primary and fully diluted presentations with the
new basic and diluted disclosures. SFAS 129 establishes standards for disclosing
information about an entity's capital structure. The Company has not determined
the impact of these pronouncements on its financial statements.

In October 1996, the American Institute of Certified Public Accountants
issued Statement of Position 96-1, Environmental Remediation Liabilities ("SOP
96-1"), which establishes new accounting and reporting standards for the
recognition and disclosure of environmental remediation liabilities. The Company
does not believe the effect of adoption of SOP 96-1 in 1998 will have a material
impact on the Company's financial position, results of operations or cash flows.

13
<PAGE> 16

FORWARD-LOOKING STATEMENTS

Forward-looking statements, within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
are included throughout this report. All statements other than statements of
historical facts included in this Annual Report on Form 10-K regarding the
Company's financial position, business strategy, plans and objectives of
management for future operations and expansion and modification of the refinery,
including but not limited to words such as "anticipates," "expects," "believes,"
"estimates," "intends," "projects" and "likely" indicate forward-looking
statements. TARC's management believes that its current views and expectations
are based on reasonable assumptions; however, there are significant risks and
uncertainties that could significantly affect expected results. Factors that
could cause actual results to differ materially from those in the
forward-looking statements include, without limitation, TARC's success in
raising additional capital to complete expansion and modification of the
refinery, engineering problems, work stoppages, cost overruns, personnel or
materials shortages, fluctuations in commodity prices for petroleum and refined
products, casualty losses, conditions in the capital markets and competition.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

14
<PAGE> 17

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants....... 16
Financial Statements:
Balance Sheet......................... 17
Statement of Operations............... 18
Statement of Stockholder's Equity..... 19
Statement of Cash Flows............... 20
Notes to Financial Statements......... 21
</TABLE>

15
<PAGE> 18

REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholder and Board of Directors
TransAmerican Refining Corporation:

We have audited the accompanying balance sheet of TransAmerican Refining
Corporation ("TARC") as of January 31, 1997 and 1996 and the related statements
of operations, stockholder's equity and cash flows for the year ended January
31, 1997, the six months ended January 31, 1996 and each of the two years in the
period ended July 31, 1995. These financial statements are the responsibility of
TARC's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of TransAmerican Refining
Corporation as of January 31, 1997 and 1996, and the results of its operations
and its cash flows for the year ended January 31, 1997, the six months ended
January 31, 1996 and each of the two years in the period ended July 31, 1995, in
conformity with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that TARC
will continue as a going concern. TARC is required to obtain additional funds to
amend or refinance the TARC Notes, expand its refinery and to fund its ongoing
working capital requirements. There is no assurance that the TARC Notes can be
amended or refinanced or that the necessary additional funding for the refinery
expansion and working capital can be obtained or that profitable operations will
be ultimately achieved. As a result there is substantial doubt about TARC's
ability to continue as a going concern. Management's plans are described in Note
2. The financial statements do not contain any adjustments that might result
from the outcome of this uncertainty.

COOPERS & LYBRAND L.L.P.

Houston, Texas
April 25, 1997

16
<PAGE> 19

TRANSAMERICAN REFINING CORPORATION

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

<TABLE>
<CAPTION>
JANUARY 31,
----------------------
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............. $ 613 $ 2,779
Long-term debt proceeds held in
collateral account................. -- 14,840
Accounts receivable................... -- 121
Receivable from affiliates............ 22 118
Inventories........................... -- 37,231
Other................................. 654 5,479
--------- ---------
Total current assets.......... 1,289 60,568
--------- ---------
Property and equipment.................. 555,816 430,858
Less accumulated depreciation and
amortization.......................... 16,930 10,244
--------- ---------
Net property and equipment.... 538,886 420,614
--------- ---------
Long-term debt proceeds held in
collateral account.................... -- 9,565
Receivable from affiliates.............. 393 --
Other assets, net....................... 23,673 27,576
--------- ---------
$ 564,241 $ 518,323
========= =========

LIABILITIES AND STOCKHOLDER'S EQUITY

Current liabilities:
Accounts payable...................... $ 20,033 $ 23,552
Payable to affiliates................. 7,094 2,957
Accrued liabilities................... 15,450 14,560
Product financing arrangements........ -- 37,206
Long-term debt........................ 365,730 --
--------- ---------
Total current liabilities..... 408,307 78,275
--------- ---------
Payable to affiliates................... 6,674 3,799
Notes payable to affiliate.............. 46,589 --
Long-term debt.......................... -- 316,538
Investment in TransTexas................ 20,706 46,586
Other................................... 602 1,168
Commitments and contingencies (Note
11)................................... -- --
Stockholder's equity:
Common stock, $0.01 par value,
100,000,000 shares authorized,
30,000,000 shares issued and
outstanding........................ 300 300
Additional paid-in capital............ 248,513 248,513
Accumulated deficit................... (167,450) (176,856)
--------- ---------
Total stockholder's equity.... 81,363 71,957
--------- ---------
$ 564,241 $ 518,323
========= =========
</TABLE>

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

17
<PAGE> 20

TRANSAMERICAN REFINING CORPORATION

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

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JANUARY 31, JANUARY 31, JULY 31,
---------------------- ---------------------- -------------------
1997 1996 1996 1995 1995 1994
-------- ----------- -------- ----------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Product sales.................. $ 10,857 $176,229 $107,237 $ 71,035 $140,027 $174,143
Tank rentals................... -- 1 -- 551 552 3,035
-------- -------- -------- -------- -------- --------
Total revenues......... 10,857 176,230 107,237 71,586 140,579 177,178
-------- -------- -------- -------- -------- --------
Costs and expenses:
Cost of products sold.......... 11,544 185,277 110,052 73,862 149,087 168,855
Processing arrangements, net... 7,090 -- -- -- -- --
Operations and maintenance..... 23,945 12,482 7,910 7,727 12,299 12,103
Depreciation and
amortization................ 7,225 6,308 3,159 2,706 5,855 2,589
General and administrative..... 11,848 12,610 7,438 8,442 13,614 4,496
Taxes other than income
taxes....................... 4,200 2,731 649 2,088 4,170 3,661
-------- -------- -------- -------- -------- --------
Total costs and
expenses............. 65,852 219,408 129,208 94,825 185,025 191,704
-------- -------- -------- -------- -------- --------
Operating loss................. (54,995) (43,178) (21,971) (23,239) (44,446) (14,526)
-------- -------- -------- -------- -------- --------
Other income (expense):
Interest income................ 204 6,346 2,263 4 4,087 37
Interest expense............... (73,503) (59,994) (32,180) (3,540) (31,354) (13)
Interest capitalized........... 68,840 41,543 26,202 3,509 18,850 --
Equity in income (loss) before
extraordinary item of
TransTexas.................. 12,325 (2,584) (156) -- (2,428) --
Other income (expense)......... 56,535 2,106 (229) 116 2,451 (2,851)
-------- -------- -------- -------- -------- --------
Total other income
(expense)............ 64,401 (12,583) (4,100) 89 (8,394) (2,827)
-------- -------- -------- -------- -------- --------
Income (loss) before
extraordinary item.......... 9,406 (55,761) (26,071) (23,150) (52,840) (17,353)
Extraordinary item:
Equity in extraordinary loss of
TransTexas.................. -- (11,497) -- -- (11,497) --
-------- -------- -------- -------- -------- --------
Net income (loss)................ $ 9,406 $(67,258) $(26,071) $(23,150) $(64,337) $(17,353)
======== ======== ======== ======== ======== ========
Net income (loss) per share:
Income (loss) before
extraordinary item.......... $ 0.25 $ (1.86) $ (0.87) $ (0.77) $ (1.76) $ (0.58)
Extraordinary item............. -- (0.38) -- -- (0.38) --
-------- -------- -------- -------- -------- --------
$ 0.25 $ (2.24) $ (0.87) $ (0.77) $ (2.14) $ (0.58)
======== ======== ======== ======== ======== ========
</TABLE>

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

18
<PAGE> 21

TRANSAMERICAN REFINING CORPORATION

STATEMENT OF STOCKHOLDER'S EQUITY
(IN THOUSANDS)

<TABLE>
<CAPTION>
COMMON STOCK TOTAL
---------------- ADDITIONAL ACCUMULATED STOCKHOLDER'S
SHARES AMOUNT PAID-IN CAPITAL DEFICIT EQUITY
------ ------ --------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, July 31, 1993........... 30,000 $300 $ 73,048 $ (69,095) $ 4,253
Net loss......................... -- -- -- (17,353) (17,353)
Equity contribution by
TransAmerican.................. -- -- 113,500 -- 113,500
------ ---- -------- --------- ---------
Balance, July 31, 1994........... 30,000 300 186,548 (86,448) 100,400
Net loss......................... -- -- -- (64,337) (64,337)
Issuance of warrants............. -- -- 23,300 -- 23,300
Equity contribution by
TransAmerican.................. -- -- 71,170 -- 71,170
Contribution of TransTexas stock
by TEC......................... -- -- (32,505) -- (32,505)
------ ---- -------- --------- ---------
Balance, July 31, 1995........... 30,000 300 248,513 (150,785) 98,028
Net loss......................... -- -- -- (26,071) (26,071)
------ ---- -------- --------- ---------
Balance, January 31, 1996........ 30,000 300 248,513 (176,856) 71,957
Net income....................... -- -- -- 9,406 9,406
------ ---- -------- --------- ---------
Balance, January 31, 1997........ 30,000 $300 $248,513 $(167,450) $ 81,363
====== ==== ======== ========= =========
</TABLE>

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

19
<PAGE> 22

TRANSAMERICAN REFINING CORPORATION

STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JANUARY 31, JANUARY 31, JULY 31,
---------------------- ----------------------- --------------------
1997 1996 1996 1995 1995 1994
-------- ----------- --------- ----------- --------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)..................... $ 9,406 $(67,258) $ (26,071) $(23,150) $ (64,337) $(17,353)
Adjustments to reconcile net income
(loss) to net cash used by operating
activities:
Depreciation and amortization....... 7,225... 6,308 3,159 2,706 5,855 2,694
Litigation.......................... -- 2,000 2,000 4,500 4,500 --
Amortization of discount on
long-term debt.................... 83 11,062 3,389 -- 7,673 --
Amortization of debt issue costs.... 6 790 238 -- 552 --
Equity in net (income) loss of
TransTexas........................ (12,325) 14,081 156 -- 13,925 --
Inventory write down................ -- 5,671 4,406 -- 1,265 79
Gain on sale of TransTexas stock.... (56,162) -- -- -- -- --
Loss on disposition of equipment.... 6,513 -- -- -- -- --
Changes in assets and liabilities:
Accounts receivable............... 121 1,340 3,671 6,901 4,570 (8,558)
Inventories....................... 25 (4,070) 7,242 3,063 (8,249) (4,577)
Prepayments and other............. 4,825 (5,258) 1,765 (221) (7,244) --
Accounts payable.................. 4,000 (4,260) (1,675) (105) (2,690) 5,194
Payable to affiliate, net......... 6,077 1,530 1,979 (765) (1,214) 1,239
Accrued liabilities............... 1,427 (886) (3,132) (4,871) (2,625) 11,391
Other assets...................... 63 (2,818) (130) 562 (2,126) (1,088)
Other liabilities................. -- (157) -- (102) (259) (96)
-------- -------- --------- -------- --------- --------
Net cash used by operating
activities...................... (28,716) (41,925) (3,003) (11,482) (50,404) (11,075)
-------- -------- --------- -------- --------- --------
Investing activities:
Capital expenditures.................. (86,581) (174,633) (119,565) (52,306) (107,374) (57,209)
Proceeds from sale of TransTexas
stock............................... 42,607 -- -- -- -- --
-------- -------- --------- -------- --------- --------
Net cash used by investing
activities...................... (43,974) (174,633) (119,565) (52,306) (107,374) (57,209)
-------- -------- --------- -------- --------- --------
Financing activities:
Issuance of long-term debt and
warrants............................ -- 300,750 -- -- 300,750 --
Advances from TransAmerican and
affiliates.......................... 49,152 17,333 16,698 86,925 87,560 68,523
Repayment of advances from
TransAmerican and affiliates........ (1,925) (53,450) (13,450) (20,000) (60,000) --
Long-term debt proceeds held in
collateral account.................. (26,549) (173,000) -- -- (173,000) --
Withdrawals from collateral account... 50,949 148,595 116,452 -- 32,143 --
Debt issue costs...................... -- (20,479) -- (3,126) (23,605) (220)
Principal payments on capital lease
obligations......................... (1,103) (458) (458) -- -- --
-------- -------- --------- -------- --------- --------
Net cash provided by financing
activities...................... 70,524 219,291 119,242 63,799 163,848 68,303
-------- -------- --------- -------- --------- --------
Increase (decrease) in cash and
cash equivalents................ (2,166) 2,733 (3,326) 11 6,070 19
Beginning cash and cash equivalents..... 2,779 46 6,105 35 35 16
-------- -------- --------- -------- --------- --------
Ending cash and cash equivalents........ $ 613 $ 2,779 $ 2,779 $ 46 $ 6,105 $ 35
======== ======== ========= ======== ========= ========
Cash paid for:
Interest, net of amounts
capitalized......................... 2,426 1,365 836 -- 1,282 --
Noncash financing and investing
activities:
Forgiveness of advances from
TransAmerican (including $25.0
million for property, plant and
equipment transferred from
TransAmerican at net book value in
1994)............................... -- 71,170 -- -- 71,170 100,000
Contribution of TransTexas stock...... -- 37,176 -- -- 37,176 --
TransTexas assumption of litigation
liabilities......................... -- -- -- -- -- 13,500
Accounts payable for property and
equipment........................... (7,519) 14,082 10,591 8,293 11,784 10,429
Capital lease obligations and other
liabilities incurred for property
and equipment....................... -- 2,544 1,643 66 967 1,336
Interest accretion on notes and
discount notes capitalized in
property and equipment.............. 49,109 29,306 18,186 -- 11,120 --
Product financing arrangements........ (37,206) 37,206 37,206 -- 27,671 --
</TABLE>

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

20
<PAGE> 23

TRANSAMERICAN REFINING CORPORATION

NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO THE YEAR ENDED JANUARY 31, 1996 AND
INTERIM PERIOD ENDED JANUARY 31, 1995 IS UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Formation of TARC

TransAmerican Refining Corporation (the "Company" or "TARC") is engaged in
the refining and storage of crude oil and petroleum products. TARC's refinery is
located in the Gulf Coast region along the Mississippi River approximately 20
miles from New Orleans, Louisiana. TARC was incorporated in September 1987 for
the purpose of holding and eventually operating certain refinery assets
previously held by TransAmerican Natural Gas Corporation ("TransAmerican") and
its subsidiaries. TransAmerican emerged from a proceeding under Chapter 11 of
the Bankruptcy Code on October 19, 1987, pursuant to a confirmed plan of
reorganization. In 1987, TransAmerican transferred substantially all of its
refinery assets at net book value to TARC.

From 1987 through 1993, TARC incurred operating losses principally as a
result of maintaining its idled refinery. TARC recommenced partial operations of
the refinery in March 1994. The refinery has operated intermittently since then
based on operating margins and has continued to incur operating losses. TARC
plans major expansion and modifications which would significantly change the
refinery's throughput capacity, feedstocks used and refined product yields.
Funds for construction have historically been provided by TransAmerican;
however, as more fully described in Note 7, TARC's issuance of long-term debt
during 1995 provided $173 million for refinery construction. As discussed in
Note 2, additional financing is required to complete the refinery expansion.

In 1994, TransAmerican formed TransAmerican Energy Corporation ("TEC"), a
limited-purpose holding company, to hold 55 million shares of common stock
(74.3% of outstanding shares) of TransTexas Gas Corporation ("TransTexas") and
all of TARC's capital stock. In February 1995, in connection with a public
offering of debt securities by TARC, TransAmerican transferred 55 million shares
of TransTexas' common stock to TEC. TEC then transferred 15 million of the
shares (20.3% of the total outstanding) to TARC. In March 1996, TARC sold 4.55
million shares of TransTexas common stock (6.2% of the total outstanding) in a
public offering, for proceeds of $42.7 million, $26.6 million of which were
deposited in the cash collateral account. TARC recognized a $56.2 million gain
on the March 1996 sale of TransTexas stock. An aggregate of 50.45 million shares
of TransTexas common stock held by TEC and TARC are currently pledged as
collateral for TARC's debt securities.

Change in Fiscal Year

On January 29, 1996, the Board of Directors approved a change in TARC's
fiscal year end for financial reporting purposes from July 31 to January 31. The
financial statements include presentation of the year ended January 31, 1997,
the six months ended January 31, 1996 (the "Transition Period") and the
comparable prior year and six month periods which are unaudited.

Cash and Cash Equivalents

TARC considers all highly liquid investments purchased with an original
maturity of three months or less to be a cash equivalent.

Inventories

TARC's inventories, consisting primarily of feedstocks and refined
products, are stated at the lower of average cost or market. TARC wrote down the
value of its inventories by approximately $4.4 million and $1.3 million at
January 31, 1996 and July 31, 1995, respectively, to reflect existing market
prices.

21
<PAGE> 24

TRANSAMERICAN REFINING CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Price Management Activities

From time to time, TARC enters into commonly traded refinery feedstocks and
finished goods related futures contracts, options on futures, swap agreements
and forward sale agreements with the intent to protect against a portion of the
price risk associated with price declines from holding inventory, or fixed price
purchase commitments. Commitments involving future settlement give rise to
market risk, which represents the potential loss that can be caused by a change
in the market value of a particular instrument and credit risk, which represents
the potential loss if a counterparty is unable to perform. Under the guidelines
of Statement of Financial Accounting Standards No. 80 ("SFAS 80"), gains and
losses associated with such transactions that meet the hedge criteria in SFAS 80
will be deferred until realized. Those transactions which do not meet the
hedging criteria in SFAS 80 are recorded at market value resulting in a gain or
a loss which is recorded in other income in the period in which a change in
market value occurs.

Property and Equipment

Property and equipment acquired subsequent to 1983, including assets
transferred from TransAmerican in 1994, are stated at TransAmerican's or TARC's
historical cost. During the period from 1987 through August 1993, property and
equipment acquired prior to 1983 were carried at estimated net realizable value
and no depreciation expense was charged. New or refurbished units are
depreciated as placed in service. Depreciation of refinery equipment and other
buildings and equipment is computed by the straight-line method at rates which
will amortize the unrecovered cost of depreciable property and equipment
including assets acquired under capital leases, over their estimated useful
lives. Costs of improving leased property are amortized over the estimated
useful lives of the assets or the terms of the leases, whichever is shorter.

The cost of repairs and minor replacements is charged to operating expense
while the cost of renewals and improvements is capitalized. At the time
depreciable assets are retired, or otherwise disposed of, the cost and related
accumulated depreciation or amortization are removed from the accounts. Gains or
losses on dispositions in the ordinary course of business are included in the
statement of operations. Impairment of property and equipment is reviewed
whenever events or changes in circumstances indicate that the carrying amount of
assets may not be recoverable. Events or circumstances that may indicate
impairment may include, among others, a prolonged shutdown of the refinery or a
prolonged period of negative or low refining margins.

Turnarounds

A turnaround consists of a complete shutdown, inspection and maintenance of
a unit. The estimated costs of turnarounds are accrued over the period to the
next scheduled turnaround, which is generally greater than one year.

Environmental Remediation Costs

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

22
<PAGE> 25

TRANSAMERICAN REFINING CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Stockholder's Equity

Stockholder's equity was retroactively adjusted to reflect a 30,000-for-1
stock split which was effective in July 1994. In July 1994, TARC increased its
authorized capital to 100,000,000 shares and decreased the par value of its
common stock from $1.00 to $0.01.

Defined Contribution Plan

TARC, through its parent company, TransAmerican, maintains a defined
contribution plan, which incorporates a "401(k) feature" as allowed under the
Internal Revenue Code. All investments are made through Massachusetts Mutual
Life Insurance Company. Employees who are at least 21 years of age and have
completed one year of credited service are eligible to participate on the next
semiannual entry date. TARC matches 10%, 20% or 50% of employee contributions up
to a maximum of 3% of the participant's compensation, based on years of plan
participation. All contributions are currently funded. TARC recognized
approximately $75,000, $32,000, $41,000 and $43,000 of expense related to the
Defined Contribution Plan for the year ended January 31, 1997, the six months
ended January 31, 1996 and the years ended July 31, 1995 and 1994, respectively.

Revenue Recognition

TARC recognizes revenue from sales of refined products in the period of
delivery.

Concentration of Credit Risk

Financial instruments which potentially expose TARC to credit risk consist
principally of cash, trade receivables and forward contracts. TARC selects
depository banks based upon management's review of the financial stability of
the institution. Balances periodically exceed the $100,000 level covered by
federal deposit insurance. To date, there have been no losses incurred due to
excess deposits in any financial institution. Trade accounts receivable are
generally from companies with significant petroleum activities, who would be
impacted by conditions or occurrences affecting that industry. All futures
contracts were with major brokerage firms and, in the opinion of management, did
not expose TARC to any undue credit risks. In addition, as of January 31, 1996,
TARC had deposited cash totaling $5.1 million with two third parties to permit
the third parties to hedge their price risk in connection with TARC's product
financing arrangements. See Note 11.

TARC performs ongoing credit evaluations and, generally, requires no
collateral from its customers. For the year ended January 31, 1997, TARC had two
customers which accounted for 96% of total revenues. For the six months ended
January 31, 1996, TARC had three customers which accounted for 41% of total
revenues. For the year ended July 31, 1995, TARC had two customers which
accounted for 56% of total revenues. For the year ended July 31, 1994, TARC had
two customers which accounted for 46% of total revenues.

Income Taxes

TARC files a consolidated tax return with TransAmerican. Income taxes are
due from or payable to TransAmerican in accordance with a tax allocation
agreement. It is TARC's policy to record income tax expense as though TARC had
filed separately. Deferred income taxes are recognized, at enacted tax rates, to
reflect the future effects of tax carryforwards and temporary differences
arising between the tax bases of assets and liabilities and their financial
reporting amounts in accordance with Statement of Financial Accounting Standards
No. 109 and the Tax Allocation Agreement between TARC, TransAmerican, and
TransAmerican's other direct and indirect subsidiaries. Income taxes include
federal and state income taxes.

23
<PAGE> 26

TRANSAMERICAN REFINING CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Fair Value of Financial Instruments

TARC includes fair value information in the notes to the financial
statements when the fair value of its financial instruments is different from
the book value. TARC uses quoted market prices or, to the extent that there are
no available quoted market prices, market prices for similar instruments. When
the book value approximates fair value, no additional disclosure is made.

Net Income (Loss) Per Share

Net income (loss) per share is calculated by dividing net income available
for common shareholders by the weighted average number of shares of common stock
and common stock equivalents. Warrants are regarded as common stock equivalents
and are therefore considered in net income (loss) per share calculations, if
dilutive. The number of common stock equivalents is determined using the
treasury stock method.

Reclassifications

Certain reclassifications have been made in the prior years' financial
statements to conform to the current year's presentation. The reclassifications
did not affect net loss or stockholder's equity.

Debt Issue Costs

TARC defers costs associated with issuing long-term debt. Capitalized debt
costs are amortized to interest expense over the scheduled maturity of the debt
utilizing the interest method.

Management Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Recently Issued Pronouncements

2. ADDITIONAL FINANCING REQUIREMENTS

24
<PAGE> 27

TRANSAMERICAN REFINING CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

February 1997, TARC solicited and received from the holders of the TARC Notes
consents to certain waivers under and amendments to the TARC Notes Indenture.
Pursuant to this consent solicitation, the holders of the TARC Notes waived,
until July 15, 1997, the default under the TARC Notes Indenture which would have
occurred on February 15, 1997 as a result of TARC's failure to meet the required
completion timetable. The waiver of this default will cease to be effective on
July 15, 1997. Unless the default has been further waived, or the Company
completes a recapitalization that satisfies the holders of the TARC Notes, such
holders would then be entitled to pursue remedies available under the TARC Notes
Indenture, including acceleration of the maturity of the TARC Notes.

TARC has incurred losses and negative cash flow from operations as a result
of limited refinery operations which did not cover the fixed costs of
maintaining the refinery, increased working capital requirements including debt
service and losses on refined product sales and processing arrangements. In
order to operate the refinery at expected levels after completion of expansion
and modification of the refinery, TARC will require additional working capital
and ultimately must achieve profitable operations.

If TARC (i) does not obtain additional financing, (ii) does not complete a
recapitalization that satisfies the holders of the TARC Notes, or (iii) does not
complete construction of a refinery capable of profitable operations, TARC's
investment in the refinery may not be recovered (See Note 4). Without additional
funding to complete expansion and modification of the refinery and to provide
working capital for operations and debt service, there is substantial doubt
about TARC's continuation as a going concern. The financial statements do not
include any adjustments as a result of such uncertainties.

3. INVENTORIES AND OTHER CURRENT ASSETS

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

<TABLE>
<CAPTION>
JANUARY 31,
------------------
1997 1996
------- -------
<S> <C> <C>
Refinery feedstocks and blendstocks......................... $ -- $ 4,395
Intermediate and refined products........................... -- 32,836
------- -------
$ -- $37,231
======= =======
</TABLE>

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

<TABLE>
<CAPTION>
JANUARY 31,
--------------
1997 1996
---- ------
<S> <C> <C>
Insurance prepayments....................................... $603 $1,027
Prepaid product charges..................................... 51 4,452
---- ------
$654 $5,479
==== ======
</TABLE>

25
<PAGE> 28

TRANSAMERICAN REFINING CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

4. PROPERTY AND EQUIPMENT

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

<TABLE>
<CAPTION>
ESTIMATED JANUARY 31,
USEFUL LIFE --------------------
(YEARS) 1997 1996
----------- -------- --------
<S> <C> <C> <C>
Land....................................................... $ 9,362 $ 9,362
Refinery................................................... 20 to 30 532,428 411,650
Other...................................................... 3 to 10 14,026 9,846
-------- --------
$555,816 $430,858
======== ========
</TABLE>

Approximately $45 million of refinery assets were being depreciated at
January 31, 1997 and 1996. The remaining refinery and other assets are
considered construction in process. Approximately $90.4 million of property,
plant and equipment represents assets transferred by TransAmerican at net
realizable value and $465.4 million represents additions recorded at historical
cost. As of January 31, 1997, the Company changed the estimated useful lives of
the refinery equipment currently under construction from 10 years to a range of
20 to 30 years. The change in estimate was not material to 1997 net income. TARC
recognized $6.7 million, $2.9 million, $5.9 million and $2.7 million in
depreciation expense for the year ended January 31, 1997, the six months ended
January 31, 1996 and the years ended July 31, 1995 and 1994, respectively.

In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ("SFAS 121"). As
of February 1, 1996, TARC adopted the requirements of SFAS No. 121. TARC
currently believes, based on estimates of refining margins and current estimates
for costs of the Capital Improvement Program, that future undiscounted cash
flows will be sufficient to recover the cost of the refinery over its estimated
useful life as well as the costs of related identifiable intangible assets.
Management believes there have been no events or changes in circumstances that
would require the recognition of an impairment loss. However, due to the
inherent uncertainties in estimating future refining margins, in constructing
and operating a large scale refinery and the uncertainty regarding TARC's
ability to complete the Capital Improvement Program, there can be no assurance
that TARC will ultimately recover the cost of the refinery. Management believes
that the book value of the refinery is in excess of its current estimated fair
market value.

5. OTHER ASSETS

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

<TABLE>
<CAPTION>
JANUARY 31,
------------------
1997 1996
------- -------
<S> <C> <C>
Debt issue costs, net of accumulated amortization of $6,445
at January 31, 1997 and $2,819 at January 31, 1996........ $17,482 $20,786
Contractual rights and licenses, net of accumulated
amortization of $992 at January 31, 1997 and $1,464 at
January 31, 1996.......................................... 5,979 6,516
Other....................................................... 212 274
------- -------
$23,673 $27,576
======= =======
</TABLE>

TARC uses the straight-line method to amortize intangibles over the periods
estimated to be benefited.

To the extent that TARC's participation in the recapitalization described
in Note 2 results in extinguishment of the TARC Notes, the debt issue costs
relating thereto will be charged to income in the period of the extinguishment.

26
<PAGE> 29

TRANSAMERICAN REFINING CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

6. ACCRUED LIABILITIES

The major components of accrued liabilities are as follows (in thousands of
dollars):

<TABLE>
<CAPTION>
JANUARY 31,
------------------
1997 1996
------- -------
<S> <C> <C>
Interest.................................................... $ 7,608 $ 7,609
Litigation accrual.......................................... -- 2,500
Taxes other than income taxes............................... 3,365 321
Maintenance turnarounds..................................... 1,909 1,145
Payroll..................................................... 599 1,321
Insurance................................................... 1,222 380
Other....................................................... 747 1,284
------- -------
$15,450 $14,560
======= =======
</TABLE>

7. LONG-TERM DEBT

TARC's long-term debt is as follows (in thousands of dollars):

<TABLE>
<CAPTION>
JANUARY 31, JANUARY 31,
1997 1996
----------- -----------
<S> <C> <C>
Guaranteed First Mortgage Discount Notes due 2002........... $269,606 $221,155
Guaranteed First Mortgage Notes due 2002.................... 96,124 95,383
-------- --------
$365,730 $316,538
======== ========
</TABLE>

On February 23, 1995, TARC issued 340,000 A Units consisting of $340
million aggregate principal amount of Guaranteed First Mortgage Discount Notes
due 2002 ("Discount Mortgage Notes") and 5,811,773 Common Stock Purchase
Warrants ("Warrants"), and 100,000 B Units consisting of $100 million aggregate
principal amount of Guaranteed First Mortgage Notes due 2002 ("Mortgage Notes"
and, together with the Discount Mortgage Notes, the "TARC Notes") and 1,683,540
Warrants. The TARC Notes are senior obligations of TARC, collateralized as of
January 31, 1997 by a first priority lien on substantially all of TARC's
property and assets and pledges of 50.45 million shares of common stock of
TransTexas and all of TARC's outstanding common stock. The Warrants entitle
holders to purchase in the aggregate 7,495,313 shares of TARC's common stock,
representing 19.99% of TARC's common stock assuming the exercise of all of the
Warrants, at an exercise price of $0.01 per share. The Warrants are immediately
exercisable and expire on February 15, 2002. TARC allocated $23.3 million of the
proceeds from the issuance of the TARC Notes to the Warrants based on their
estimated fair value.

The Discount Mortgage Notes and the Mortgage Notes initially bear interest
at rates of 18 1/2% and 16 1/2%, respectively. Interest is payable semi-annually
with the first interest payment on the Discount Mortgage Notes due August 15,
1998. Interest payments on the Mortgage Notes began August 15, 1995. TARC is
required to redeem $110 million of the principal amount of the TARC Notes on
each of February 15, 2000 and 2001. The TARC Notes mature on February 15, 2002.
Upon the occurrence of a change of control, TARC is required to offer to
purchase all outstanding TARC Notes at a price equal to 101% of the principal
amount thereof plus accrued and unpaid interest. In addition, TARC is required,
subject to certain conditions, to make an offer to purchase the TARC Notes with
the net proceeds of certain asset sales or dispositions of assets, with a
percentage of excess cash (as defined), or if, at the end of each of any two
consecutive quarters, commencing with the quarter ending January 31, 1998,
TARC's Net Worth is less than $75 million and TARC's Consolidated Fixed Charge
Coverage Ratio as of the end of each of such quarters is less than 1.25 to 1.
TARC

27
<PAGE> 30

TRANSAMERICAN REFINING CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

will be required to generate net income or increase its present capital before
January 1998, to comply with certain of these covenants. The indenture governing
the TARC Notes ("TARC Notes Indenture") contains certain covenants which limit
TARC's ability to incur additional indebtedness, transfer or sell assets, pay
dividends or make certain other restricted payments, enter into certain
transactions with affiliates, or consummate a merger, consolidation or sale of
all or substantially all of its assets.

TARC received approximately $301 million from the sale of A Units and B
Units. Net proceeds received by TARC approximated $92 million after deducting
approximately $16 million for underwriting discounts, commissions, fees and
expenses, approximately $20 million for the repayment of the balance of a loan
from TransAmerican ("TransAmerican Loan"), and $173 million which was deposited
into a cash collateral account ("Collateral Account") to fund the expansion and
upgrading of TARC's refinery.

Pursuant to a Disbursement Agreement, funds in the Collateral Account are
held and invested by the Disbursement Agent until needed from time to time to
fund the Capital Improvement Program. The Disbursement Agent disburses funds
from the Collateral Account in accordance with a budget prepared by TARC and
approved by the Construction Supervisor, a third party approved by the trustee
and compensated by TARC. The Construction Supervisor is required to review each
request by TARC for a disbursement from the Collateral Account to pay for the
Capital Improvement Program. All funds in the Collateral Account are pledged as
security for the repayment of the TARC Notes and are classified as "long-term
debt proceeds held in collateral account" in the financial statements. To the
extent TARC has current liabilities related to the Capital Improvement Program,
the corresponding amount in the Collateral Account is classified as a current
asset. As of January 31, 1997, TARC had expended all amounts deposited in the
Collateral Account.

In March 1997, TARC issued $36 million principal amount of 15% senior
secured notes due 1998 to unaffiliated third parties. These notes are secured by
a pledge of the 5 million shares of TransTexas common stock, which were released
from the lien securing the TARC Notes. Proceeds from the issuance of these notes
were deposited in a cash collateral account to be used for refinery construction
and general corporate purposes.

TARC's capitalized lease obligations were approximately $1.3 million and
$2.4 million at January 31, 1997 and 1996, respectively. Maturities of such
obligations are approximately $0.8 million, $0.3 million and $0.2 million in the
years ending January 31, 1998, 1999 and 2000, respectively. The fair value of
the TARC Notes, based on quoted market prices, was approximately $404 million
and $295 million as of January 31, 1997 and 1996, respectively.

8. INCOME TAXES

Long-term deferred tax assets and liabilities are comprised of the
following (in thousands of dollars):

<TABLE>
<CAPTION>
JANUARY 31,
---------------------
1997 1996
--------- --------
<S> <C> <C>
Deferred tax assets:
Receivable from TransAmerican in lieu of Federal net
operating loss carryforwards........................... $ 72,268 $ 63,997
Safe harbor leases........................................ 81,976 85,283
Other..................................................... 355 10,897
--------- --------
Gross deferred tax assets.............................. 154,599 160,177
Deferred tax liabilities:
Depreciation.............................................. 4,331 6,617
--------- --------
Net deferred tax assets................................... 150,268 153,560
Valuation allowance....................................... (150,268) (153,360)
--------- --------
$ -- $ --
========= ========
</TABLE>

28
<PAGE> 31

TRANSAMERICAN REFINING CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The net deferred tax asset valuation allowance for each respective period
represents the amounts for which utilization is not assured due to the
uncertainty of realizing deferred tax assets. Changes in the net deferred tax
asset valuation allowance were primarily attributable to increases in tax loss
carryforwards.

On a separate return basis, TARC has incurred approximately $206.5 million
of regular tax net operating losses from inception through January 31, 1997.
TARC's regular tax net operating losses incurred from inception through January
31, 1997 would generally expire from 2004 through 2013. Under TARC's tax
allocation agreement with TransAmerican and TransAmerican's other subsidiaries,
as long as TARC remains in the consolidated group for tax purposes, TARC may
receive benefits in the future for loss carryforwards in the form of reduced
current taxes payable to the extent (i) its losses incurred are available for
and utilized by TransAmerican and (ii) TransAmerican has the ability to pay its
taxes without contributions from TARC. As of January 31, 1996, all of TARC's
NOLs had been used by TransAmerican's consolidated group. At January 31, 1997,
TARC had NOL carryforwards of approximately $32.6 million which have not been
used by TransAmerican which would expire in 2013.

A change of control or other event that results in deconsolidation of TARC
from TransAmerican's consolidated group for federal income tax purposes could
result in the acceleration of payment of a substantial amount of federal income
taxes by TransAmerican. The tax liability to TransAmerican that would result
from deconsolidation is estimated to be approximately $15 million at January 31,
1997. Each member of a consolidated group filing a consolidated federal income
tax return is severally liable for the consolidated federal income tax liability
of the consolidated group. There can be no assurance that TransAmerican will
have the ability to satisfy the above tax obligation at the time due and,
therefore, TARC, or other members may be required to pay all or a portion of the
tax. A decision by TEC or TARC to sell TransTexas shares could result in
deconsolidation of TransTexas for tax purposes.

In the event TARC is not allowed to file a consolidated return with
TransAmerican, the receivable in lieu of federal net operating loss
carryforwards would not be available and the related valuation allowance would
decrease by $72.3 million.

Total income tax expense differs from amounts computed by applying the
statutory federal income tax rate to income before income taxes as follows (in
thousands of dollars):

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JANUARY 31, JANUARY 31, JULY 31,
-------------------- --------------------- ------------------
1997 1996 1996 1995 1995 1994
------ ----------- ------- ----------- -------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Federal income tax expense (benefit)
at the statutory rate............. $3,292 $(23,540) $(9,125) $(8,103) $(22,518) $(6,074)
Increase (decrease) in tax resulting
from:
Net operating losses (utilized)
not utilizable................. (3,292) 23,540 9,125 8,103 22,518 6,074
------ -------- ------- ------- -------- -------
$ -- $ -- $ -- $ -- $ -- $ --
====== ======== ======= ======= ======== =======
</TABLE>

9. INVESTMENT IN TRANSTEXAS

TARC uses the equity method to account for its investment in TransTexas and
initially recorded this investment at TransAmerican's historical basis. The sale
of TransTexas stock in March 1996 by TARC reduced TARC's interest in TransTexas
from 20.3% to 14.1%. TARC recognized a gain of $56.2 million on the sale of
TransTexas stock in March 1996. TARC continues to record its pro rata share of
losses due to the common control of TransTexas and TARC by TransAmerican and
TEC. The equity in extraordinary loss of TransTexas for the year ended July 31,
1995 represents TARC's equity in a charge by TransTexas for the early retirement
of $500 million of its 10 1/2% Senior Secured Notes due 2000 from the proceeds
of the issuance by

29
<PAGE> 32

TRANSAMERICAN REFINING CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

TransTexas in June 1995 of $800 million in 11 1/2% Senior Secured Notes due
2002. The closing price of TransTexas' common stock on January 31, 1997 was
$17.00.

Summary financial information of TransTexas is as follows (in thousands of
dollars):

<TABLE>
<CAPTION>
JANUARY 31,
-----------------------
1997 1996
---------- ---------
<S> <C> <C>
ASSETS
Total current assets........................................ $ 188,934 $ 159,438
Property and equipment, net................................. 846,393 715,340
Other assets................................................ 17,825 64,049
---------- ---------
$1,053,152 $ 938,827
========== =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Total current liabilities................................... $ 117,348 $ 115,836
Total noncurrent liabilities................................ 1,086,599 977,431
Total stockholders' deficit................................. (150,795) (154,440)
---------- ---------
$1,053,152 $ 938,827
========== =========
</TABLE>

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JANUARY 31, JANUARY 31, YEAR ENDED JULY 31,
----------------------- ------------------- -------------------
1997 1996 1996 1995 1995 1994
---------- ---------- -------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues........................... $406,347 $291,338 $141,156 $162,517 $312,699 $335,919
Operating costs and expenses....... 219,068 229,284 101,908 133,833 261,209 256,628
-------- -------- -------- -------- -------- --------
Operating income................. 187,279 62,054 39,248 28,684 51,490 79,291
Other expense...................... (91,463) (77,174) (40,436) (29,059) (65,797) (50,155)
Income tax (expense) benefit....... (12,491) 2,700 416 131 2,415 (5,380)
-------- -------- -------- -------- -------- --------
Income (loss) before
extraordinary item............ 83,325 (12,420) (772) (244) (11,892) 23,756
Extraordinary item................. -- (56,637) -- -- (56,637) --
-------- -------- -------- -------- -------- --------
Net income (loss)................ $ 83,325 $(69,057) $ (772) $ (244) $(68,529) $ 23,756
======== ======== ======== ======== ======== ========
</TABLE>

10. TRANSACTIONS WITH AFFILIATES

TransAmerican and its affiliates have provided TARC with substantially all
of its corporate services requirements, including insurance, legal, accounting
and treasury functions pursuant to a Services Agreement. TransAmerican and
TransTexas charged TARC approximately $0.3 million, $0.2 million, $0.2 million
and $0.1 million for the year ended January 31, 1997, the six months ended
January 31, 1996 and the years ended July 31, 1995 and 1994, respectively, to
cover its costs of providing these services, which management believes to be
reasonable based on the limited services provided. Pursuant to this agreement,
TARC is currently charged $26,000 per month for additional corporate services.
In addition, third party charges incurred by TransAmerican and its affiliates
have been charged directly or allocated to TARC on usage or other methods that
management believes are reasonable. All significant transactions with affiliates
are recorded in the payable to affiliates account.

30
<PAGE> 33

TRANSAMERICAN REFINING CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

TARC for the direct costs it incurs (which consist solely of employee payroll
and benefits) plus administrative costs and fees of $1.2 million per year. Total
labor costs charged by Southeast Contractors were approximately $14.1 million,
$20.2 million and $15.5 million for the year ended January 31, 1997, the six
months ended January 31, 1996 and the year ended July 31, 1995, respectively.
Amounts payable to Southeast Contractors were $1.8 million and $2.3 million at
January 31, 1997 and 1996, respectively. No labor costs were charged by
Southeast Contractors in prior years.

TARC purchases natural gas from TransTexas on an interruptible basis. The
total cost of natural gas purchased for the year ended January 31, 1997, the six
months ended January 31, 1996 and years end July 31, 1995 and 1994 was
approximately $2.7 million, $1.4 million, $2.5 million and $2.3 million,
respectively, of which approximately $2.7 million and $0.1 million was payable
at January 31, 1997 and 1996.

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

In July 1996, TARC executed a promissory note to TransAmerican for up to
$25 million. The note bears interest at a rate of 15% per annum, payable
quarterly beginning October 31, 1996, and matures on July 31, 1998. As of
January 31, 1997, the entire $25 million was outstanding under the note. On
November 1, 1996, TARC executed an additional $25 million promissory note to
TransAmerican which bears interest at 15% per annum, payable quarterly beginning
December 31, 1996, and which matures on September 30, 1998 (together with the
first promissory note, the "TransAmerican Notes"). At January 31, 1997, TARC had
approximately $44.4 million outstanding under both of these notes. TransAmerican
has waived any default occurring as a result of TARC's failure to make the
scheduled interest payment provided for in the notes. In February 1997, the
November 1996 promissory note was replaced with a $50 million note bearing
interest at an annual rate of 15% and which matures on July 31, 2002. Interest
payments are due quarterly commencing on April 30, 1997. The debt represented by
the new note is subordinate in right of payment to the TARC Notes. As of April
25, 1997, approximately $31.4 million had been advanced under the new note.

Prior to the sale of the TARC Notes, TARC participated in TransAmerican's
centralized cash management program. Funds required by TARC for daily operations
and capital expenditures were advanced by TransAmerican. In October 1994,
TransAmerican sold 5.25 million shares of TransTexas common stock. TransAmerican
advanced approximately $50 million of the proceeds from these stock sales to
TARC, of which approximately $20 million was used by TARC to repay a portion of
the intercompany debt owed to TransAmerican, and the remaining $30 million was
used for working capital and general corporate purposes. TARC used approximately
$30 million of the net proceeds of the sale of the TARC Notes to repay
additional intercompany debt to TransAmerican. TransAmerican contributed to the
capital of TARC (through TEC) all but $10 million of the remainder of TARC's
intercompany debt owed to TransAmerican. In April 1995, TARC repaid the
remaining $10 million of intercompany indebtedness owed to TransAmerican. In
August 1995, TARC received an advance of $3 million from TransTexas which TARC
used to settle its remaining portion of certain litigation. In September 1995,
TARC received an advance of $1.7 million from TransAmerican which TARC used to
purchase feedstock. In October 1995, TARC repaid these advances without
interest. Additionally in October 1995, TARC received an advance of
approximately $4 million from TransAmerican for working capital, which has not
been repaid.

In September 1995, TARC received an advance of $1 million from TransTexas
which TARC used to purchase feedstock. This advance was repaid by TARC without
interest. In December 1995, TARC advanced $1 million to TransTexas. This advance
was repaid to TARC with interest.

TransAmerican, its existing subsidiaries, including TARC, TEC, and
TransTexas, entered into a Tax Allocation Agreement, the general terms of which
require TransAmerican and all of its subsidiaries to file federal income tax
returns as members of a consolidated group to the extent permitted by law.
Filing on a

31
<PAGE> 34

TRANSAMERICAN REFINING CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

consolidated basis allows income and tax of one member to be offset by losses
and credits of another and allows deferral of certain intercompany gains;
however, each member is severally liable for the consolidated federal income tax
liability of the consolidated group.

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

Under the Tax Allocation Agreement, each subsidiary's Allocable Share for
each tax year will generally equal the amount of federal income tax it would
have owed had it filed a separate federal income tax return for each year except
that each subsidiary will be able to utilize net operating losses and credits of
TransAmerican and the other members of the TransAmerican consolidated group
effectively to defer payment of tax liabilities that it would have otherwise
owed had it filed a separate federal income tax return. Each subsidiary will
essentially pay the deferred taxes at the time TransAmerican (or the member
whose losses or credits are utilized by such subsidiary) begins generating
taxable income or tax. This will have the effect of deferring a portion of such
subsidiary's tax liability to future years.

The TARC Notes Indenture requires that, with certain exceptions,
transactions between TARC and certain related parties be on terms no less
favorable to TARC than would be available from an unrelated party and that are
fair and reasonable to TARC. This standard will apply to future transactions, if
any, with entities in which Mr. Stanley or members of his family may have an
interest. A similar covenant is in the indentures governing notes issued by
TransTexas.

11. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

The following is a description of the legal proceedings of TARC.

EEOC. On August 31, 1995, the U.S. Equal Employment Opportunity Commission
("EEOC") issued a Commissioner's Charge against TARC and Southeast Contractors
(the "Commissioner's Charge") pursuant to Sections 706 and 707 of Title VII of
the Civil Rights Act of 1964, as amended, 42 U.S.C. sec. 2000e et seq. ("Title
VII"). In the Commissioner's Charge, the EEOC charged TARC and Southeast
Contractors with engaging in unlawful discriminatory hiring and promotion
practices based on race and gender. Each violation of Title VII, if proven,
potentially could subject TARC and/or Southeast Contractors to liability for (i)
monetary damages for backpay and/or front pay in an undetermined amount, and for
compensatory damages and/or punitive damages in an amount that should not exceed
$300,000, (ii) injunctive relief, (iii) attorney's fees, and/or (iv) interest.
During the period covered by the Commissioner's Charge, TARC and Southeast
Contractors estimate that they received a combined total of approximately 15,000
to 22,000 employment applications and hired (or rehired) a combined total of
approximately 1,500 to 2,200 workers. TARC and Southeast Contractors have
responded to the Commissioner's Charge and have denied engaging in any unlawful
employment practices. TARC and Southeast Contractors have been cooperating fully
with the EEOC in connection with its investigation. TARC and Southeast
Contractors intend to vigorously defend against the allegations contained in the
Commissioner's Charge in all proceedings before the EEOC and in any subsequent
litigation. If TARC and/or Southeast Contractors are found liable for violations
of Title VII based on the matters asserted in the Commissioner's Charge, TARC
can make no assurance that such liability

32
<PAGE> 35

TRANSAMERICAN REFINING CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

would not have a material adverse effect on the financial condition of TARC or
TARC's ability to pay interest or principal on the TARC Notes or the
TransAmerican Notes.

Rineheart. On October 8, 1996, Carlton Gene Rineheart, et al., and as
representative of a class of persons similarly situated, filed suit against
eighty-four individuals and corporations, including TARC, in the U.S. District
Court, Middle District of Louisiana alleging negligent and improper storage,
handling, treatment, and disposal of hazardous materials from 1976 to the
present at two sites in Iberville Parish, Louisiana. The suit claims damages for
physical, mental, and property damage in the communities of Bayou Sorrel, Bayou
Pigeon and Indian Village. TARC intends to vigorously defend this claim.

Shell Oil. On September 27, 1996, Shell Oil Company filed a third party
suit against TARC in the U.S. District Court, Eastern District of Louisiana for
contribution and/or indemnity relating to alleged contamination of the waters
and water bottoms of Bayou Trepagnier. Shell dismissed this suit without
prejudice.

General. TARC is also named a defendant in other ordinary course, routine
litigation incidental to its business. While the outcome of these other lawsuits
cannot be predicted with certainty, TARC does not expect these matters to have a
material adverse effect on its financial position, operations or cash flow.

Environmental Matters

Compliance Matters. TARC is subject to federal, state, and local laws,
regulations, and ordinances ("Pollution Control Laws"), which regulate
activities such as discharges to air and water, as well as handling and disposal
practices for solid and hazardous wastes. TARC believes that it is in
substantial compliance with applicable Pollution Control Laws. However, newly
enacted Pollution Control Laws, as well as increasingly strict enforcement of
existing Pollution Control Laws, may require TARC to make capital expenditures
in order to comply with such laws and regulations. To ensure continuing
compliance, TARC has made environmental compliance and permitting issues an
integral part of its refinery's start-up plans and has budgeted for such capital
expenditures in the Capital Improvement Program.

TARC uses (and in the past has used) certain materials, and generates (and
in the past has generated) certain substances or wastes that are or may be
deemed hazardous substances or wastes. In the past, the refinery has been the
subject of certain environmental enforcement actions, and incurred certain
fines, as a result of certain of TARC's operations. TARC also was previously
subject to enforcement proceedings relating to its prior production of leaded
gasoline and air emissions. TARC believes that, with minor exception, all of
these past matters were resolved prior to or in connection with the resolution
of the bankruptcy proceedings of its predecessor in interest, TransAmerican, or
are no longer applicable to TARC's operations. As a result, TARC believes that
such matters will not have a material adverse effect on TARC's future results of
operations, cash flows or financial position.

Requirements Under the Federal Clean Air Act. The National Emission
Standards for Hazardous Air Pollutants for Benzene Waste Operations (the
"Benzene Waste NESHAPS"), promulgated in January 1993 pursuant to the Clean Air
Act, regulate benzene emissions from numerous industries, including petroleum
refineries. The Benzene Waste NESHAPS require all existing, new, modified, or
reconstructed sources to reduce benzene emissions to a level that will provide
an ample margin of safety to protect public health. TARC will be required to
comply with the Benzene Waste NESHAPS as its refinery operations start up. TARC
believes that compliance with the Benzene Waste NESHAPS will not have a material
adverse effect on TARC's financial position, results of operations or cash flow.
However, until the refinery is in full operation, there can be no assurance that
the regulations will not have such an effect.

In addition, the Environmental Protection Agency ("EPA") promulgated
National Emission Standards for Hazardous Air Pollutants for Hazardous Organics
(the "Hazardous Organics NESHAPS") regulations for petroleum refineries under
the Clean Air Act in 1995, and subsequently has amended such regulations. These
regulations set "Maximum Achievable Control Technology" ("MACT") standards for
petroleum

33
<PAGE> 36

TRANSAMERICAN REFINING CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

refineries. The Louisiana Department of Environmental Quality (the "LDEQ") has
incorporated MACT Standards into TARC's air permits under federal and state air
pollution prevention laws. TARC believes that compliance with the Hazardous
Organics NESHAPS will not have a material adverse effect on TARC's financial
position, results of operations or cash flow. However, until the refinery is in
full operation, there can be no assurance that the regulations will not have
such an effect.

The EPA recently promulgated federal regulations pursuant to the Clean Air
Act to control fuels and fuel additives (the "Gasoline Standards") that could
have a material adverse effect on TARC. Under the new regulations, only
reformulated gasoline can be sold in certain domestic geographic areas in which
the EPA has mandated or approved its use. Reformulated gasoline must contain a
minimum amount of oxygen, have a lower vapor pressure, and have reduced sulfur,
olefins, benzene and aromatics compared to the average 1990 gasoline. The number
and extent of the areas subject to reformulated gasoline standards may increase
in the future if the EPA's National Ambient Air Quality Standards ("NAAQS")
proposals for particulate matter and ozone are implemented Conventional gasoline
may be used in all other domestic markets; however, a refiner's post-1994
average conventional gasoline must not be more polluting than it was in 1990.
With limited exceptions, to determine its compliance as of January 1, 1995, a
refiner must compare its post-1994 and 1990 average values of controlled fuel
parameters and emissions. The Gasoline Standards recognize that many gasoline
producers may not be able to develop an individual 1990 baseline for a number of
reasons, including, for example, lack of adequate data or the absence or limited
scope of operations in 1990. Under such circumstances, the refiner must use a
statutory baseline reflecting the 1990 industry average. The EPA has authority,
upon a showing of extenuating circumstances by a refiner, to grant an individual
adjusted baseline or other appropriate regulatory relief to that refiner.

TARC filed a petition with the EPA requesting an individual baseline
adjustment or other appropriate regulatory relief based on extenuating
circumstances. The extenuating circumstances upon which TARC relied in its
petition include the fact that the refinery was not in operation in 1990 (and
thus there is no 1990 average for purposes of the necessary comparison) and the
fact that the start-up of the refinery is to occur on a phased-in basis. The EPA
has denied TARC's request for an individual baseline adjustment and other
appropriate regulatory relief. TARC will continue to pursue regulatory relief
with the EPA. There can be no assurance that any action taken by the EPA will
not have a material adverse effect on TARC's future results of operations, cash
flows or financial position.

Title V of the Clean Air Act requires states to implement an Operating
Permit Program that codifies all federally enforceable limitations that are
applicable to a particular source. The EPA has approved Louisiana's Title V
Operating Permit Program. The deadline for a refinery to submit an Operating
Permit Application under the Louisiana program was October 12, 1996. TARC timely
submitted its Title V Operating Permit application and the LDEQ has designated
the application as being administratively complete. As yet, the LDEQ has not
responded further regarding the status of TARC's Title V Operating Permit. TARC
believes that its application will be approved. However, there can be no
assurance that additional expenditures required pursuant to Title V Operating
Permit obligations will not have a material adverse effect on TARC's financial
position, results of operations or cash flow.

Cleanup Matters. TARC also is subject to federal, state and local laws,
regulations and ordinances that impose liability for the costs of clean up
relating to, and certain damages resulting from, past spills, disposals or other
releases of hazardous substances ("Hazardous Substance Cleanup Laws"). Over the
past several years, TARC has been, and to a limited extent continues to be,
engaged in environmental cleanup or remedial work relating to or arising out of
operations or activities at the refinery. In addition, TARC has been engaged in
upgrading its solid waste facilities, including the closure of several waste
management units. Similar to numerous other industrial sites in the state, the
refinery has been listed by the LDEQ on the Federal Comprehensive Environmental
Response, Compensation and Liability Information System, as a result of TARC's
prior waste management activities (as discussed below).

34
<PAGE> 37

TRANSAMERICAN REFINING CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

In 1991, the EPA performed a facility assessment at the refinery pursuant
to the Federal Resource Conservation and Recovery Act ("RCRA"). The EPA
performed a follow up assessment in March 1996, but has not yet issued a report
of its investigations. In July 1996, the EPA and LDEQ agreed that the LDEQ would
serve as the lead agency with respect to the investigation and remediation of
areas of concern identified in the investigations. TARC, under a voluntary
initiative approved by the LDEQ, has submitted a work plan to the LDEQ to
determine which areas may require further investigation and remediation. The
LDEQ has not yet responded to TARC's submission or issued any further requests
relating to this matter. As a result, TARC is unable at this time to estimate
what the costs, if any, will be if the LDEQ does require further investigation
or remediation of the areas identified.

TARC has been identified as a potentially responsible party ("PRP") under
the Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended ("CERCLA" or "Superfund"), for the cleanup of contamination
from hazardous substances at three Superfund sites (i.e. sites on the National
Priorities List ("NPL")), to which it has been alleged that TARC, or its
predecessors, sent hazardous substances in the past. CERCLA requires cleanup of
sites from which there has been a "release" or threatened release of "hazardous
substances" (as such terms are defined under CERCLA). CERCLA requires the EPA to
include sites needing long-term study and cleanup on the NPL based on their
potential effect on public health or the environment. CERCLA authorizes the EPA
to take any necessary response actions at NPL sites and, in certain
circumstances, to order PRPs liable for the release to take such actions. PRPs
are broadly defined under CERCLA to include past and present owners and
operators of a site, as well as generators and transporters of wastes to a site
from which hazardous substances are released.

The EPA may seek reimbursement of expenditures of federal funds from PRPs
under Superfund. Courts have interpreted CERCLA to impose strict, joint and
several liability upon all persons liable for the entire amount of necessary
cleanup costs. As a practical matter, at sites where there are multiple PRPs for
a cleanup, the costs of cleanup typically are allocated according to a
volumetric or other standard among the parties. CERCLA also provides that
responsible parties generally may recover a portion of the costs of cleaning up
a site from other responsible parties. Thus, if one party is required to clean
up an entire site, that party can seek contribution or recovery of such costs
from other responsible parties. A number of states have laws similar to
Superfund, pursuant to which cleanup obligations, or the costs thereof, also may
be imposed.

At one Superfund site, TARC has submitted information to the EPA indicating
that it should have no liability for this matter, and negotiations with the EPA
are continuing. With respect to the remaining two sites, TARC's liability for
each such matter has not been determined, and TARC anticipates that it may incur
costs related to the cleanup (and possibly including additional costs arising in
connection with any recovery action brought pursuant to such matters) at each
such site. After a review of the data available to TARC regarding the basis of
TARC's alleged liability at each site, and based on various factors, which
depend on the circumstances of the particular Superfund site (including, for
example, the relationship of TARC to each such site, the volume of wastes TARC
is alleged to have contributed to each such site in comparison to other PRPs
without giving effect to the ability of any other PRPs to contribute to or pay
for any liabilities incurred and the range of likely cleanup costs at each such
site) TARC does not believe its ultimate liability will be significant; however,
it is not possible to determine the ultimate environmental liabilities, if any,
that may arise from the matters discussed above.

Purchase Commitments

TARC has various purchase commitments for materials, supplies and services
incidental to the ordinary course of business and for the Capital Improvement
Program. As of January 31, 1997, TARC had commitments for refinery construction
and maintenance of approximately $53.0 million. TARC is acting as general
contractor and can generally cancel or postpone capital projects.

35
<PAGE> 38

TRANSAMERICAN REFINING CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Price Management Activities

TARC enters into futures contracts, options on future, swap agreements and
forward sales agreements with the intent to protect against a portion of the
price risk associated with price declines from holding inventory of feedstocks
and refined products or fixed price purchase commitments. At January 31, 1997,
TARC's position in open futures contracts, options on futures, swap agreements
and forward sales agreements was not significant. A net trading gain of
approximately $2.3 million and a trading loss of approximately $3.1 million were
reflected in other income (expense) for the years ended July 31, 1995 and 1994,
respectively. These transactions did not qualify for hedge accounting treatment
under the guidelines of SFAS 80; therefore, gains or losses associated with
these futures contracts were not deferred.

Financing Arrangements and Processing Agreements

36
<PAGE> 39

TRANSAMERICAN REFINING CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Operating Leases

As of January 31, 1997, TARC has long-term leases covering land and other
property and equipment. Rental expense was approximately $4.2 million, $1.9
million, $4 million and $3 million for the year ended January 31, 1997, the six
months ended January 31, 1996, and the years ended July 31, 1995 and 1994.
Future minimum rental payments required under operating leases that have initial
or remaining noncancellable lease terms in excess of one year as of January 31,
1997, are as follows (in thousands of dollars):

<TABLE>
<S> <C>
1998........................................................ $3,236
1999........................................................ 2,969
2000........................................................ 183
2001........................................................ 183
2002........................................................ 183
Later years................................................. 522
------
$7,276
======
</TABLE>

12. LITIGATION SETTLEMENTS

GATX. On May 14, 1996, GATX Terminals Corporation ("GATX") filed suit
against TARC in the U.S. District Court, Eastern District of Louisiana alleging
breach of an operating agreement to pay GATX $122,500 per month during 1996.
TARC settled this litigation in November 1996.

NLRB Proceeding. On July 13, 1994, the Oil, Chemical and Atomic Workers
International Union ("OCAW") filed unfair labor practices charges against TARC
with the New Orleans Regional Office of the National Labor Relations Board
("NLRB"). These charges allege that TARC refused to reinstate 22 former
employees because of their union membership. The NLRB refused to issue a
complaint and the OCAW appealed the decision to the NLRB General Counsel. The
decision of the NLRB was upheld in November 1996.

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

Not applicable

37
<PAGE> 40

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

TARC's directors and executive officers are as follows:

<TABLE>
<CAPTION>
NAME POSITION AGE
---- -------- ---
<S> <C> <C>
Donald B. Henderson.................. Director 46
Thomas B. McDade..................... Director 73
John R. Stanley...................... Director, Chairman of the Board, President and 58
Chief Executive Officer
Gary L. Karr......................... Vice President of Refining 48
R. Glenn McGinnis.................... Vice President of Manufacturing 48
John R. Stanley, Jr.................. Vice President of Administration 35
Ed Donahue........................... Vice President and Secretary 46
</TABLE>

Set forth below is a description of the backgrounds of the directors and
executive officers of TARC.

Donald B. Henderson has been a director of TARC and of TEC since July 1994.
Mr. Henderson is a partner in the law firm of Blackburn & Henderson and is a
director of Colonial Casualty Insurance Co. From 1972 to 1978, Mr. Henderson was
a member of the Texas House of Representatives. Mr. Henderson was a member of
the Texas Senate from 1982 through 1986. Mr. Henderson has been a director of
TransAmerican from 1985 until his resignation in February 1995.

Thomas B. McDade has been a director of TARC and of TEC since July 1994. He
is also a director of TransTexas. Mr. McDade is primarily engaged in managing
his personal investments and in providing consulting services in Houston, Texas.
Mr. McDade served as a director of TransAmerican from 1985 until his resignation
in February 1995. Prior to 1989, he served as a consultant to Texas Commerce
Bancshares, Inc. and prior to July 1985 he served as Vice Chairman and Director
of Texas Commerce Bancshares, Inc. and Vice Chairman and Advisory Director of
Texas Commerce Bank. Mr. McDade is a former director and trustee of eleven
registered investment companies for which John Hancock Funds serves as
investment advisor in Boston, Massachusetts. Mr. McDade is a former director of
Houston Industries, Inc. and Houston Lighting & Power Company. He is also a
former member of the Board of Managers of the Harris County Hospital District
and former Chairman of the State Securities Board of Texas.

John R. Stanley has been a director and Chief Executive Officer of TARC
since September 1987 and a director and Chief Executive Officer of TEC since
July 1994. Mr. Stanley is the founder, Chairman of the Board, Chief Executive
Officer, and sole stockholder of TNGC Holdings Corporation, which is the sole
stockholder of TransAmerican. He has operated TransAmerican since 1958. Mr.
Stanley is the father of John R. Stanley, Jr.

Gary L. Karr has been the Vice President of Refining of TARC since January
1994 and served as Refinery Manager for approximately eight years prior thereto.
Mr. Karr has been with TransAmerican or a subsidiary of TransAmerican since 1971
in various positions.

R. Glenn McGinnis has been the Vice President of Manufacturing of TARC
since July 1995. Prior to joining TARC, Mr. McGinnis held senior refining and
supply positions in Canada with Imperial Oil Limited, an affiliate of Exxon
Corporation. Mr. McGinnis was with Imperial Oil Limited for 23 years.

John R. Stanley, Jr. has served as Vice President of Administration of TARC
since October 1995. From May 1992 until October 1995, he served as Manager of
Audit and Security for TARC. Mr. Stanley is the son of John R. Stanley.

Edwin B. Donahue has served as Vice President and Secretary of TARC since
February 1997. Mr. Donahue also serves as Vice President, Chief Financial
Officer and Secretary of TransTexas and TTC and

38
<PAGE> 41

as Vice President and Secretary of TransAmerican and TEC. Mr. Donahue has been
employed in various positions with TransAmerican for over 20 years.

COMMITTEES OF THE BOARD OF DIRECTORS

TARC has an Audit Committee and a Compensation Committee. The Audit
Committee is composed of Messrs. Henderson and McDade. The Audit Committee
reviews the scope of the independent auditors' examinations of TARC's financial
statements and receives and reviews their reports. The Audit Committee meets
with the independent auditors, receives recommendations or suggestions for
changes in accounting procedures, and initiates or supervises any special
investigations it may choose to undertake.

The Compensation Committee is composed of Messrs. Henderson and McDade. The
Compensation Committee determines the nature and amount of compensation of
TARC's executive officers.

DIRECTOR COMPENSATION

Each director, other than John R. Stanley, receives an annual director's
fee of $75,000, plus $750 for each board meeting and committee meeting attended
(other than committee meetings held on the same day as board meetings).

ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth the compensation paid during the fiscal
years ended July 31, 1994 and 1995, the transition period ended January 31,
1996, and the fiscal year ended January 31, 1997 to TARC's Chief Executive
Officer and each other executive officer of TARC whose total annual salary and
bonus exceeded $100,000 in the fiscal year ended January 31, 1997:

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION FISCAL ANNUAL COMPENSATION ALL OTHER
IN TARC YEAR SALARY COMPENSATION(A)(B)
--------------------------- ------ ------------------- -------------------
<S> <C> <C> <C>
John R. Stanley(c)......................... 1997 $397,117 $5,154
Chief Executive Officer 1996* 175,000 807
1995 350,000 4,620
1994 350,000 4,620
Gary L. Karr............................... 1997 $140,192 $3,348
Vice President of Refining 1996* 67,500 311
1995 140,192 2,312
1994 125,577 4,228
R. Glenn McGinnis.......................... 1997 $233,653 $ 727
Vice President of Manufacturing 1996* 116,937 --
1995 8,654 --
John R. Stanley, Jr........................ 1997 $117,308 $3,519
Vice President of Administration 1996* 63,750 2,231
1995 94,058 2,270
1994 75,162 2,255
</TABLE>

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

* Six months ended January 31, 1996 (Transition Period)

(a) Certain of TARC's executive officers receive personal benefits in addition
to salary and cash bonuses. The aggregate amount of the personal benefits,
however, does not exceed the lesser of $50,000 or 10% of the total of the
annual salary and bonus reported for the named executive officer and
accordingly has been excluded from the table.

(b) Reflects the amount contributed under the Savings Plan (as defined below).

39
<PAGE> 42

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

TARC's compensation committee is composed of Messrs. Henderson and McDade.
During the year ended January 31, 1997, none of the members of the compensation
committee was an officer or employee of TARC, and none had any relationship with
TARC requiring disclosure under Item 404 of Regulation S-K. The TARC Notes
Indenture prohibits TARC and any Guarantor under the TARC Notes from paying
compensation to Mr. Stanley in excess of $1 million per year, in the aggregate.

SAVINGS PLAN

TransAmerican maintains a long-term savings plan (the "Savings Plan") in
which eligible employees of TARC and certain of its affiliates may elect to
participate. Each employee becomes eligible to participate in the Savings Plan
on January 1 or July 1 following the completion of one year of service with TARC
or its participating affiliates and attainment of age 21. The Savings Plan is
intended to constitute a qualified plan under Section 401(a) of the Internal
Revenue Code of 1986, as amended (the "Code") and contains a salary reduction
arrangement described in Section 401(k) of the Code.

Each participant may elect to reduce his compensation by a percentage equal
to 2% to 15% and TARC will contribute that amount to the Savings Plan on a
pre-tax basis on behalf of the participant. The Code limits the annual amount
that a participant may elect to have contributed on his behalf on a pre-tax
basis to the Savings Plan. For 1997, this limit is $9,500. TARC presently makes
a matching contribution in an amount equal to 10%, 20%, or 50% of the amount
elected to be contributed by each participant on a pre-tax basis, up to a
maximum of 3% of each participant's compensation, depending on whether the
employee has been a participant in the Savings Plan for one year, two years or
three years. Each participant also may elect to contribute up to 10% of his
compensation to the Savings Plan on an after-tax basis. The Code imposes
nondiscrimination tests on contributions made to the Savings Plan pursuant to
participant elections and on TARC's matching contributions, and limits amounts
which may be allocated to a participant's Savings Plan account each year. In
order to satisfy the nondiscrimination tests, contributions made on behalf of
certain highly compensated employees (as defined in the Code) may be limited.
Contributions made to the Savings Plan pursuant to participant elections and
matching contributions are at all times 100% vested. Contributions to the
Savings Plan are invested, according to specified investment options selected by
the participants, in investment funds maintained by the trustee of the Savings
Plan. Generally, a participant's vested benefits will be distributed from the
Savings Plan as soon as administratively practicable following a participant's
retirement, death, disability or other termination of employment. In addition, a
participant may elect to withdraw his after-tax contributions from the Savings
Plan prior to his termination of employment, and subject to certain strict
limitations and exceptions, the Savings Plan provides for withdrawals of a
participant's pre-tax contributions prior to a participant's termination of
employment in the event of the participant's severe financial hardship or
attainment of age 59 1/2. The Savings Plan may be amended or terminated by the
Board of Directors of TARC. As of January 31, 1997, approximately 194 employees
were eligible to participate in the Savings Plan, including Messrs. Karr,
McGinnis and Stanley.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

TEC owns 30 million shares (100%) of TARC's outstanding shares of common
stock. TEC's address is 1300 North Sam Houston Parkway East, Suite 200, Houston,
Texas 77032. Pursuant to the TARC Notes Indenture, all shares of TARC's common
stock are pledged as collateral and are held by the trustee under the TARC Notes
Indenture, First Union National Bank.

A foreclosure by the holders of TARC's debt securities on the shares of
TARC's common stock, under certain circumstances, constitutes a "change of
control" of TARC under the TARC Notes Indenture, which allows the holders
thereof to require TARC to repurchase the TARC Notes at a price equal to 101% of
the principal amount thereof plus accrued and unpaid interest.

40
<PAGE> 43

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Southeast Louisiana Contractors of NORCO, Inc. ("Southeast Contractors"), a
subsidiary of TransAmerican, provides construction personnel to TARC in
connection with TARC's expansion and construction program. These construction
workers are temporary employees, and the number and composition of the workforce
will vary throughout TARC's expansion and construction program. Southeast
Contractors charges TARC for the direct costs it incurs (which consist solely of
employee payroll and benefits) plus administrative costs and fees of $1.2
million per year. Total labor costs charged by Southeast Contractors were
approximately $14.1 million, $20.2 million and $15.5 million for the year ended
January 31, 1997, the six months ended January 31, 1996 and the year ended July
31, 1995, respectively. Amounts payable to Southeast Contractors were $1.8
million and $2.3 million at January 31, 1997 and 1996, respectively. No labor
costs were charged by Southeast Contractors in prior years.

In July 1996, TARC executed a promissory note to Trans American for up to
$25 million. The note bears interest at a rate of 15% per annum, payable
quarterly beginning October 31, 1996, and mature on July 31, 1998. As of January
31, 1997, the entire $25 million was outstanding under the note. On November 1,
1996, TARC executed an additional $25 million promissory note to TransAmerican
which bears interest at 15% per annum, payable quarterly beginning December 31,
1996, and which matures on September 30, 1998 (together with the first
promissory note, the "TransAmerican Notes"). At January 1, 1997, TARC had
approximately $44.4 million outstanding under the TransAmerican Notes.
TransAmerican has waived any default occurring as a result of TARC's failure to
make the scheduled interest payment provided for in these notes. In February
1997, the November 1996 promissory note was replaced with a $50 million note
bearing interest at an annual rate of 15% and which matures on July 31, 2002.
Interest payments are due quarterly commencing on April 30, 1997. The debt
represented by the new note is subordinate in right of payment to the TARC
Notes. As of April 25, 1997, approximately $31.4 million had been advanced under
the new note.

41
<PAGE> 44

In August 1995, TARC received an advance of $3 million from TransTexas which
TARC used to settle its remaining portion of certain litigation. In September
1995, TARC received an advance of $1.7 million from TransAmerican which TARC
used to purchase feedstock. In October 1995, TARC repaid these advances without
interest. Additionally in October 1995, TARC received an advance of
approximately $4 million from TransAmerican for working capital, which has not
been repaid.

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

42
<PAGE> 45

PART IV

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

(A) FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
(1) Report of Independent Accountants....................... 16
Balance Sheet........................................... 17
Statement of Operations................................. 18
Statement of Stockholder's Equity....................... 19
Statement of Cash Flows................................. 20
Notes to Financial Statements........................... 21
</TABLE>

(2) All schedules have been omitted because the information is either not
required or is set forth in the financial statements or the notes
thereto.

(3) Exhibits

The following instruments are included as exhibits to this Annual Report on
Form 10-K and are filed herewith unless otherwise indicated. Exhibits
incorporated by reference are so indicated by parenthetical information.

<TABLE>
<C> <S>
2.1 -- Stock Transfer Agreement dated as of February 23, 1995,
between TARC, TEC and TransAmerican (previously filed as
Exhibit 2 to TARC's and TEC's Current Report on Form 8-K
dated March 14, 1995 and incorporated herein by
reference)
3.1 -- Articles of Incorporation of TARC (previously filed as
Exhibit 3.1(i) to TARC's and TEC's Registration Statement
on Form S-1 (Registration No. 33-82200) and incorporated
herein by reference)
3.2 -- By-laws of TARC (previously filed as Exhibit 3.1(ii) to
TARC's and TEC's Registration Statement on Form S-1
(Registration No. 33-82200) and incorporated herein by
reference)
4.1 -- Indenture dated as of February 15, 1995, between TARC,
First Fidelity Bank, National Association, as Trustee and
TEC, with respect to the Guaranteed First Mortgage
Discount Notes and the Guaranteed First Mortgage Notes
(together, the "Notes"), including the forms of Notes as
exhibits (previously filed as Exhibit 3 to TARC's and
TEC's Current Report on Form 8-K dated March 14, 1995 and
incorporated herein by reference)
4.2 -- Warrant Agreement dated as of February 23, 1995, among
the Company, TEC and First Fidelity Bank, National
Association, as Warrant Trustee, with respect to the
Common Stock Purchase Warrants including the form of
Warrant as an exhibit (previously filed as Exhibit 4 to
TARC's and TEC's Current Report on Form 8-K dated March
14, 1995 and incorporated herein by reference)
4.3 -- Pledge Agreement dated as of February 23, 1995, from TARC
to First Fidelity Bank, National Association, as Trustee
(previously filed as Exhibit 5 to TARC's and TEC's
Current Report on Form 8-K dated March 14, 1995 and
incorporated herein by reference)
4.4 -- Security Agreement dated as of February 23, 1995, from
TARC to First Fidelity Bank, National Association, as
Trustee (previously filed as Exhibit 6 to TARC's and
TEC's Current Report on Form 8-K dated March 14, 1995 and
incorporated herein by reference)
</TABLE>

43
<PAGE> 46
<TABLE>
<S> <C>

4.5 -- Cash Collateral and Disbursement Agreement dated as of
February 23, 1995, among TARC, First Fidelity Bank,
National Association, as Trustee, First Fidelity Bank,
N.A., as Disbursement Agent, and Baker & O'Brien, Inc.,
as Construction Supervisor (previously filed as Exhibit 7
to TARC's and TEC's Current Report on Form 8-K dated
March 14, 1995 and incorporated herein by reference)
4.6 -- Mortgage, Assignment of Leases and Rents, Security
Agreement and Financing Statement from TARC in favor of
First Fidelity Bank, National Association, as Trustee
(previously filed as Exhibit 8 to TARC's and TEC's
Current Report on Form 8-K dated March 14, 1995 and
incorporated herein by reference)
4.7 -- Registration Rights Agreement dated as of February 23,
1995, between TransTexas, TARC, and TEC (previously filed
as Exhibit 10 to TARC's and TEC's Current Report on Form
8-K dated March 14, 1995 and incorporated herein by
reference)
*4.8 -- First Supplemental Indenture dated as of February 24,
1997 among the Company, TEC and First Union National
Bank, f/k/a First Fidelity Bank, N.A.
*4.9 -- Indenture dated as of March 14, 1997, between TARC and
First Union National Bank, as Trustee, with respect to
the $36 million Senior Secured Notes due 1998, including
the form of Note as an exhibit.
*4.10 -- Pledge Agreement dated as of March 14, 1997, from TARC to
First Union National Bank, as Trustee.
*4.11 -- Security Agreement dated as of March 14, 1997, from TARC
to First Union National Bank, as Trustee.
*4.12 -- Cash Collateral and Disbursement Agreement dated as of
March 14, 1997, between TARC and First Union National
Bank, as Trustee and Disbursement Agent.
*4.13 -- First Amendment to Cash Collateral and Disbursement
Agreement dated as of April 3, 1997, between TARC and
First Union National Bank, as Trustee and Disbursement
Agent.
10.1 -- Services Agreement dated August 24, 1993, by and among
TARC, TEC, TransTexas and TransAmerican, as amended
(previously filed as Exhibit 10.1 to TARC's and TEC's
Registration Statement on Form S-1 (Registration No.
33-82200) and incorporated herein by reference)
10.2 -- Tax Allocation Agreement dated August 24, 1993, by and
among TransAmerican, TEC, TARC, TransTexas and the other
subsidiaries of TransAmerican, as amended (previously
filed as Exhibit 10.2 to TARC's and TEC's Registration
Statement on Form S-1 (Registration No. 33-82200) and
incorporated herein by reference)
10.3 -- Indemnification Agreement by and between TARC and each of
its directors (previously filed as Exhibit 10.3 to TARC's
and TEC's Registration Statement on Form S-1
(Registration No. 33-82200) and incorporated herein by
reference)
10.4 -- Interruptible Gas Sales Terms and Conditions dated
between TARC and TransTexas, as amended (previously filed
as Exhibit 10.4 to TARC's and TEC's Registration
Statement on Form S-1 (Registration No. 33-82200) and
incorporated herein by reference)
10.5 -- Intercompany Note dated as of August 12, 1994, executed
by TARC for the benefit of TransAmerican (previously
filed as Exhibit 10.5 to TARC's and TEC's Registration
Statement on Form S-1 (Registration No. 33-82200) and
incorporated herein by reference)
</TABLE>
44
<PAGE> 47

<TABLE>
<C> <S>
10.6 -- Processing Agreement dated March 20, 1996 by and between
TARC and J. Aron & Company (previously filed as an
exhibit to TARC's Form 10-K for the transition period
ended January 31, 1996, and incorporated herein by
reference)
10.7 -- Employment Agreement dated June 12, 1995, between TARC
and R. Glenn McGinnis (previously filed as an exhibit to
TARC's Form 10-K for the transition period ended January
31, 1996, and incorporated herein by reference)
10.8 -- Processing Agreement dated April 22, 1996 between TARC
and Glencore Ltd. (previously filed as an exhibit to
TARC's Form 10-Q for the quarter ended April 30, 1996,
and incorporated herein by reference)
*11.1 -- Statement of Computation of Net Income (Loss) Per Share.
21.1 -- Schedule of Subsidiaries (previously filed as Exhibit
21.1 to TARC's and TEC's Registration Statement on Form
S-1 (Registration No. 33-82200) and incorporated herein
by reference)
*27.1 -- Financial Data Schedule.
</TABLE>

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

* Filed herewith.

(b) Reports on Form 8-K.

There were no current reports on Form 8-K filed during the fourth quarter
of the fiscal year ended January 31, 1997.

45
<PAGE> 48

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on May 1, 1997.

TRANSAMERICAN REFINING CORPORATION

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

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities indicated on May 1, 1997.

<TABLE>
<CAPTION>
NAME TITLE
---- -----
<C> <S>

/s/ JOHN R. STANLEY Director, Chairman of the Board, President,
- ----------------------------------------------------- and Chief Executive Officer (Principal
John R. Stanley Executive Officer)

/s/ DONALD B. HENDERSON Director
- -----------------------------------------------------
Donald B. Henderson

/s/ THOMAS B. MCDADE Director
- -----------------------------------------------------
Thomas B. McDade

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

46
<PAGE> 49

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

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

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

FOR THE FISCAL YEAR ENDED JANUARY 31, 1997

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

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

REGISTRATION NUMBER 33-85930

TRANSAMERICAN REFINING CORPORATION
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
TEXAS 76-0229632
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)

1300 NORTH SAM HOUSTON PARKWAY EAST
SUITE 320
HOUSTON, TEXAS 77032
(Address of principal executive offices) (Zip code)
</TABLE>

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (281) 986-8811

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

The number of shares of common stock and common stock purchase warrants of
the registrant outstanding on April 30, 1997, was 30,000,000 and 7,495,313,
respectively.

================================================================================
<PAGE> 50

PART IV

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

(A) FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
(1) Report of Independent Accountants....................... 16
Balance Sheet.......................................... 17
Statement of Operations................................ 18
Statement of Stockholder's Equity...................... 19
Statement of Cash Flows................................ 20
Notes to Financial Statements.......................... 21
</TABLE>

(2) All schedules have been omitted because the information is either not
required or is set forth in the financial statements or the notes
thereto.

(3) Exhibits

1
<PAGE> 51
<TABLE>
<S> <C>
4.5 -- Cash Collateral and Disbursement Agreement dated as of
February 23, 1995, among TARC, First Fidelity Bank,
National Association, as Trustee, First Fidelity Bank,
N.A., as Disbursement Agent, and Baker & O'Brien, Inc.,
as Construction Supervisor (previously filed as Exhibit 7
to TARC's and TEC's Current Report on Form 8-K dated
March 14, 1995 and incorporated herein by reference)
4.6 -- Mortgage, Assignment of Leases and Rents, Security
Agreement and Financing Statement from TARC in favor of
First Fidelity Bank, National Association, as Trustee
(previously filed as Exhibit 8 to TARC's and TEC's
Current Report on Form 8-K dated March 14, 1995 and
incorporated herein by reference)
4.7 -- Registration Rights Agreement dated as of February 23,
1995, between TransTexas, TARC, and TEC (previously filed
as Exhibit 10 to TARC's and TEC's Current Report on Form
8-K dated March 14, 1995 and incorporated herein by
reference)
4.8 -- First Supplemental Indenture dated as of February 24,
1997 among the Company, TEC and First Union National
Bank, f/k/a First Fidelity Bank, N.A. (previously filed
as an exhibit to TARC's Annual Report on Form 10-K for
the fiscal year ended January 31, 1997 and incorporated
herein by reference).
4.9 -- Indenture dated as of March 14, 1997, between TARC and
First Union National Bank, as Trustee, with respect to
the $36 million Senior Secured Notes due 1998, including
the form of Note as an exhibit (previously filed as an
exhibit to TARC's Annual Report on Form 10-K for the
fiscal year ended January 31, 1997 and incorporated
herein by reference).
4.10 -- Pledge Agreement dated as of March 14, 1997, from TARC to
First Union National Bank, as Trustee (previously filed
as an exhibit to TARC's Annual Report on Form 10-K for
the fiscal year ended January 31, 1997 and incorporated
herein by reference).
4.11 -- Security Agreement dated as of March 14, 1997, from TARC
to First Union National Bank, as Trustee (previously
filed as an exhibit to TARC's Annual Report on Form 10-K
for the fiscal year ended January 31, 1997 and
incorporated herein by reference).
4.12 -- Cash Collateral and Disbursement Agreement dated as of
March 14, 1997, between TARC and First Union National
Bank, as Trustee and Disbursement Agent (previously filed
as an exhibit to TARC's Annual Report on Form 10-K for
the fiscal year ended January 31, 1997 and incorporated
herein by reference).
4.13 -- First Amendment to Cash Collateral and Disbursement
Agreement dated as of April 3, 1997, between TARC and
First Union National Bank, as Trustee and Disbursement
Agent (previously filed as an exhibit to TARC's Annual
Report on Form 10-K for the fiscal year ended January 31,
1997 and incorporated herein by reference).
10.1 -- Services Agreement dated August 24, 1993, by and among
TARC, TEC, TransTexas and TransAmerican, as amended
(previously filed as Exhibit 10.1 to TARC's and TEC's
Registration Statement on Form S-1 (Registration No.
33-82200) and incorporated herein by reference)
10.2 -- Tax Allocation Agreement dated August 24, 1993, by and
among TransAmerican, TEC, TARC, TransTexas and the other
subsidiaries of TransAmerican, as amended (previously
filed as Exhibit 10.2 to TARC's and TEC's Registration
Statement on Form S-1 (Registration No. 33-82200) and
incorporated herein by reference)
10.3 -- Indemnification Agreement by and between TARC and each of
its directors (previously filed as Exhibit 10.3 to TARC's
and TEC's Registration Statement on Form S-1
(Registration No. 33-82200) and incorporated herein by
reference)
</TABLE>

2
<PAGE> 52
<TABLE>
<S> <C>
10.4 -- Interruptible Gas Sales Terms and Conditions dated
between TARC and TransTexas, as amended (previously filed
as Exhibit 10.4 to TARC's and TEC's Registration
Statement on Form S-1 (Registration No. 33-82200) and
incorporated herein by reference)
10.5 -- Intercompany Note dated as of August 12, 1994, executed
by TARC for the benefit of TransAmerican (previously
filed as Exhibit 10.5 to TARC's and TEC's Registration
Statement on Form S-1 (Registration No. 33-82200) and
incorporated herein by reference)
10.6 -- Processing Agreement dated March 20, 1996 by and between
TARC and J. Aron & Company (previously filed as an
exhibit to TARC's Form 10-K for the transition period
ended January 31, 1996, and incorporated herein by
reference)
10.7 -- Employment Agreement dated June 12, 1995, between TARC
and R. Glenn McGinnis (previously filed as an exhibit to
TARC's Form 10-K for the transition period ended January
31, 1996, and incorporated herein by reference)
10.8 -- Processing Agreement dated April 22, 1996 between TARC
and Glencore Ltd. (previously filed as an exhibit to
TARC's Form 10-Q for the quarter ended April 30, 1996,
and incorporated herein by reference)
11.1 -- Statement of Computation of Net Income (Loss) Per Share
(previously filed as an exhibit to TARC's Annual Report
on Form 10-K for the fiscal year ended January 31, 1997
and incorporated herein by reference).
21.1 -- Schedule of Subsidiaries (previously filed as Exhibit
21.1 to TARC's and TEC's Registration Statement on Form
S-1 (Registration No. 33-82200) and incorporated herein
by reference)
27.1 -- Financial Data Schedule.
*99.1 -- Financial Statements of TransTexas Gas Corporation as
filed as a part of the Annual Report on Form 10-K of
TransTexas Gas Corporation for the fiscal year ended
January 31, 1997.
</TABLE>

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

* Filed herewith.

(b) Reports on Form 8-K.

There were no current reports on Form 8-K filed during the fourth quarter
of the fiscal year ended January 31, 1997.

3
<PAGE> 53

SIGNATURES

TRANSAMERICAN REFINING CORPORATION

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

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities indicated on May 1, 1997.

<TABLE>
<CAPTION>
NAME TITLE
---- -----
<C> <S>

/s/ JOHN R. STANLEY Director, Chairman of the Board, President,
- ----------------------------------------------------- and Chief Executive Officer (Principal
John R. Stanley Executive Officer)

/s/ DONALD B. HENDERSON Director
- -----------------------------------------------------
Donald B. Henderson

/s/ THOMAS B. MCDADE Director
- -----------------------------------------------------
Thomas B. McDade

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