<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549

                                  FORM 10-KSB

     [X]  ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
                  for the fiscal year ended December  31, 1999

                                       OR

     [ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
            for the transition period from __________ to __________

                        Commission file number:  0-22076

                              Zydeco Energy, Inc.

             (Exact name of registrant as specified in its charter)

                                    Delaware
         (State or other jurisdiction of incorporation or organization)

                                   76-0404904
                      (I.R.S. Employer Identification No.)

                2170 Plaza of the Americas, 700 N. Pearl Street
                                 Dallas, Texas
                    (Address of principal executive offices)

                                     75201
                                   (Zip Code)

                                 (214) 999-9300
              (Registrant's telephone number, including area code)

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

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                         Common Stock, $.001 par value
                 Warrants to Purchase One Share of Common Stock
         Units Consisting of One Share of Common Stock and Two Warrants
                                (Title of Class)

     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 ((S) 229.405 under the Securities Exchange Act of 1934) 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-KSB or any amendment to this
Form 10-KSB. [_]


     As of March 22, 2000, there were 10,039,096 shares of Zydeco Energy, Inc.
Common Stock, $.001 par value, issued and outstanding, of which 6,814,978
shares, having an aggregate market value of approximately $19,593,062 were held
by non-affiliates of the registrant (affiliates being, for these purposes only,
directors, executive officers, and holders of more than 5% of the registrant's
Common Stock).
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                               TABLE OF CONTENTS



<TABLE>
<CAPTION>


<S>                                                                                                  <C>
Item 1. Business..................................................................................     1
     The Company..................................................................................     1
     Seismic Technology...........................................................................     1
     West Cameron Seismic Project.................................................................     2
     Competition and Markets......................................................................     3
     Governmental Regulation......................................................................     4
     Risk Factors.................................................................................     7
     Employees....................................................................................     9
Item 2  Properties................................................................................     9
     Prospects and Leases.........................................................................     9
     Oil and Gas Reserves.........................................................................    10
     Statistical Information - Oil and Gas Properties.............................................    11
Item 3.  Legal Proceedings........................................................................    12
Item 4.  Submission of Matters to a Vote of Security Holders......................................    13

                                    Part II
Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters...................    14
     Dividend Policy..............................................................................    14
Item 6.  Management's Discussion and Analysis of Financial Condition and
          Results of Operations...................................................................    14
     Overview.....................................................................................    14
     Results of Operations........................................................................    16
     Year Ended December 31, 1999 Compared to Year Ended December 31, 1998........................    16
     Year Ended December 31, 1998 Compared to Year Ended December 31, 1997........................    17
     Liquidity and Capital Resources..............................................................    18
Item 7.  Financial Statements and Supplementary Data..............................................    20
Item 8.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.....    20

                                    Part III
Item 9.  Directors and Executive Officers of the Registrant.......................................    21
Item 10. Executive Compensation...................................................................    21
Item 11. Security Ownership of Certain Beneficial Owners and Management...........................    22
Item 12. Certain Relationships and Related Transactions...........................................    22
Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K .........................    23
SIGNATURES........................................................................................    24
EXHIBIT INDEX.....................................................................................   E-1
Index to Consolidated Financial...................................................................   F-1
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                                     PART I

     When used in this document, the words "anticipate," "believe," "expect,"
"estimate," "project," and similar expressions are intended to identify forward-
looking statements.  Such statements are subject to certain risks,
uncertainties, and assumptions.  Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, believed, expected,
estimated, or projected.  For additional discussion of such risks,
uncertainties, and assumptions, see "Item 1. Business--Risk Factors" included
elsewhere in this report.

ITEM 1. BUSINESS

THE COMPANY

     Zydeco Energy, Inc. (the "Company"), a Delaware corporation incorporated in
1993, is an independent energy company engaged in the exploration for oil and
gas.  The Company's "Wavefield Imaging Technology" is a patented data processing
technique designed to substantially reduce the cost of 3D seismic data
acquisition for certain surveys without significantly sacrificing the quality of
the 3D subsurface image.

     Until the second quarter of 1999, the Company's primary business objective
has been to discover and develop oil and gas reserves and thereby increase
revenues, net income and cash flows.  In April 1999, the Company altered its
business plan in response to changed market conditions.  Prior to that time the
Company sought to pursue exploration and development alliances with industry
participants in order to spread funding requirements and exploration risks.

     The Company secured lease positions or other drilling rights for potential
prospects through private landowner negotiations, state and federal public lease
sales or negotiations with other industry participants.  Upon securing drilling
rights, the prospects could then be drilled by contracting with industry
participants. Generally, the Company intended to retain nonoperating interests
in its drilling prospects through "farmout" arrangements and prospect sales with
retained interests, while permitting a more experienced operator to manage the
drilling and production activities.

  During 1998, the Company completed all the stages of interpretation on its
West Cameron Seismic Project (the "Project") and initiated the marketing of its
interests in various Project prospects to industry participants.  This Project
has recently been the principal focus of the Company's exploration efforts and
is located in southern Cameron Parish, Louisiana in an area known as the
Louisiana Transition Zone. The Louisiana Transition Zone is an area of
shoreline, near shore and within shallow coastal and bay waters where the
combination of marine and land seismic and processing techniques are difficult
and expensive.  See "Louisiana Transition Zone".  However, due mostly to
potential prospect buyers' concerns over uncertainties of ownership interests in
Project prospects prior to the arbitration ruling described in "Legal
Proceedings - Cheniere Litigation" and market conditions thereafter, the Company
has not generated sufficient sales of Project prospects and, therefore, has not
produced adequate levels of cash inflows during the near term.  Because market
conditions for selling interests in prospects have significantly deteriorated,
the Company has recently altered its business plan to focus its efforts on (1)
conserving cash resources, (2) concentrating exploration efforts strictly on
marketing the West Cameron Project  (3) marketing its Wavefield Imaging
Technology, and (4) seeking merger partners to utilize the Company's cash and
company status.  The Company may find a merger partner that may or may not
operate in the oil and gas business.  The Company believes that this strategy
will permit it to operate with existing cash resources into the year 2001.

SEISMIC TECHNOLOGY

     The Company believes that its Wavefield Imaging Technology represents
advancement of 3D seismic survey design, processing and analysis.  Wavefield
Imaging Technology permits the Company to use more broadly spaced seismic
receivers in its surveys thereby reducing the cost of data acquisition for
certain

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<PAGE>

surveys. In its West Cameron seismic survey, the Company estimates that it
acquired the survey for approximately one half the cost of a conventional
transition zone survey. Under the survey configuration used by the Company in
its West Cameron Seismic Survey, the Wavefield Imaging Technology is limited to
analysis of seismic objectives below 8,000 feet. The technology may also be
applied in the analysis of shallower objectives by increasing receiver and sound
source densities, although with diminishing cost advantages.

     On July 1, 1997, the Company acquired all of the outstanding capital stock
of Wavefield Image, Inc. ("Wavefield").  As a result of this acquisition, the
Company owns the Wavefield Imaging Technology and a related United States patent
subject to licenses granted previously by Wavefield.  Prior to its acquisition,
Wavefield granted partial or restricted licenses for the Wavefield Imaging
Technology to one major oil company and one foreign company.  One of these
licenses has expired for failure to pay yearly fees.  Currently, the Company is
not aware of any other company, including the licensees, employing Wavefield
Imaging Technology in the design of its seismic surveys and processing of its
seismic data.

WEST CAMERON SEISMIC PROJECT

     In August 1996, the Company commenced the Project, an extensive 3D seismic
exploration program conducted over approximately 230 square miles in a part of
the Louisiana Transition Zone in western Cameron Parish, Louisiana.

     Options, Permits and Leases.  In connection with the Project, the Company
negotiated seismic options covering approximately 36,718 gross acres (33,225 net
acres) and secured seismic permits covering approximately 119,557 gross acres
(119,075 net acres).  One of the permits was an exclusive permit obtained from
the State of Louisiana that covered 51,000 non-leased acres in state waters.  In
connection with the exclusive seismic permit, for eighteen months, commencing
February 1996, the Company had the exclusive right to acquire seismic data on
the State's acreage and nominate any of the acreage for competitive lease bids.
On August 11, 1997, the Company paid $391,877 to the State of Louisiana to
extend the deadline for delivery of the survey to February 18, 1998.  Prior to
the February 18, 1998 deadline, the Company nominated certain properties for
bid.  In Louisiana, a public auction of leases is held approximately 120 days
after the property is nominated for bid and the auction is generally announced
approximately 45 days prior to the auction date.  A bidder at the auction may
bid on all or only a portion of the property nominated for bid.  Under the
Company's seismic permit, the State of Louisiana is required to keep the
information obtained from the survey confidential for a period of ten years.
The Company timely delivered seismic data to the State of Louisiana in January
1998 in compliance with the terms of the exclusive seismic permit.

     In connection with the Project during the first half of 1998, the Company
acquired approximately 12,000 gross acres on nine separate prospects through
State of Louisiana lease sales, private land negotiations and a Federal lease
sale. The Company's Project leases have expiration dates ranging from 2001 to
2003.  The one Federal offshore lease provides for a minimum royalty of 16.667%,
has a primary lease term of five years that covers approximately 3,000 acres,
and is administered by the Minerals Management Service.  The annual rental on
this Federal lease is $5.00 per acre.  Louisiana state leases are administered
by the State Mineral Board of the State of Louisiana and generally provide for:
(i) a minimum royalty of 23%; (ii) a five year primary term; and (iii) annual
rentals in an amount equal to 50% of the original lease acquisition cost.
Generally, title to state and Federal leases is merchantable in all respects and
operations thereon are not normally subject to litigation resulting from the
legal doctrine of adverse possession or any other similar challenge to title.
Leases obtained from private landowners are on three year terms. Delay rental
obligations vary pursuant to the terms of such leases.

     Data Acquisition and Analysis. Advanced seismic processing techniques,
including initial iterations of pre-stack migration, amplitude variation with
offset (AVO) and seismic inversion were applied to the data by year-end 1997.  A
preliminary effort was made to further improve the imaging of the data by
performing pre-stack depth migration.  Interpretation of the data to identify
potential drilling prospects began in late 1997 and continued until early 1999.
These interpretations led to the acquisition of oil and gas leases within the
Project.

                                       2
<PAGE>

     Cheniere Exploration Agreement and Litigation. In April 1996, the Company
executed an Exploration Agreement (the "Cheniere Agreement") with Cheniere
Energy Operating Co., Inc., a wholly owned subsidiary of Cheniere Energy, Inc.
and formerly known as FX Energy, Inc., (collectively "Cheniere") covering the
area of Project land and waters in western Cameron Parish, Louisiana.  In
exchange for earning a 50% interest, Cheniere agreed to fund certain Project
costs including, but not limited to, 3D seismic acquisition costs, including the
purchase of seismic rights or lease options on the related onshore acreage of
the Project, the purchase of other 3D seismic data, and processing of seismic
data over the Project area.

     On April 17, 1998, Zydeco Exploration, Inc., a wholly owned subsidiary of
the Company, filed a petition with the American Arbitration Association for
arbitration in order to resolve certain disputes that arose with Cheniere.  The
arbitration claim sought to resolve differences over Cheniere's funding
obligations, the parties' ownership in various leases and prospects, the scope
of pre-drilling activities that Cheniere can conduct within the Project area,
the dissemination by Cheniere of confidential seismic data covering the Project
area, and a variety of related issues.  Cheniere filed a counterclaim in the
arbitration action, and the pleadings were amended to include the Company as
well as Zydeco Exploration, Inc (collectively "Zydeco").

     On December 9, 1998 the three-member arbitration panel issued its decision
in the arbitration proceedings brought by Zydeco against Cheniere.  In its
ruling, the panel confirmed Zydeco's position as program manager but recognized
Cheniere's independent right to identify prospects and acquire leases in the
West Cameron Seismic Project area.  The arbitration panel directed that Cheniere
has the right to participate with a 50% working interest in most of the leases
acquired by Zydeco or in prospects designated by Zydeco.  Cheniere, however,
must exercise its right of participation and pay its share of such costs within
a thirty-day period following Zydeco's formal notice of prospect designation.
For each prospect, Zydeco has the sole right to undertake the management and
control of all prospect development for a reasonable period not to exceed 90
days following such formal notice.  The arbitration panel also ruled that
project seismic costs generally incurred after December 31, 1997, are not
reimbursable to Zydeco as seismic costs.  The Company believed that such costs,
either in part or in whole, should be recouped from Cheniere as prospect costs.
In addition, if certain criteria are met, then sale proceeds from certain
marketing activities would be paid to Cheniere until Cheniere recoups $13.5
million of its investment in the project.  Zydeco and Cheniere would share any
such sales above that amount equally.  Neither party received any damage awards
or recovery of legal costs.

     As a result of the arbitration panel's decision, Zydeco and Cheniere
tentatively agreed to share responsibilities and ownership for certain
activities incurred in the maintenance, marketing and sale of prospects
generated and assembled by the parties.  Except for the costs of one prospect
and certain other activities, neither party would seek reimbursement from the
other for seismic and prospect costs generally incurred prior to the arbitration
ruling.  After considering the arbitration panel's ruling and the two parties'
tentative agreement, Cheniere's and Zydeco's shares of third party and
processing costs incurred pursuant to the terms of the Cheniere Agreement were
approximately $16,423,398 and $5,216,773, respectively, from inception to
December 31, 1998.  Project seismic costs amounting to $1,146,688 that
previously had been attributable to Cheniere were charged to exploration
expense.  In addition, the Company acquired approximately $5,753,010 of unproved
leases during 1998.

COMPETITION AND MARKETS

     Competition for the acquisition of proved undeveloped acreage, as well as
producing properties, is intense.  During 1999 competition for selling drillable
prospects also became intense.  The Company competes with many other entities
including major integrated oil and gas companies as well as numerous independent
oil and gas companies and other producers of energy sources and fuels.  Should
the Company decide and have the resources to acquire additional leases within
the Project, a substantial portion of acreage is subject to competitive closed
bidding at federal and state lease sales.  Currently, the Company has very
limited resources to compete in such sales.  Many of the Company's competitors
have substantially greater financial resources and other competitive advantages
over the Company, and therefore may be better able to compete and bid for
leases, particularly in regions other than the Gulf Coast.  In addition, such
competitors may have financial resources and other competitive advantages that
may make them better able to market prospects or offer more advantageous sale
terms than the Company.

                                       3
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     The availability of a ready market for hydrocarbons and the price of any
hydrocarbons produced will depend on many factors beyond the control of the
Company, including the extent of domestic production and imports of foreign oil,
the marketing of competitive fuels, the proximity and capacity of natural gas
pipelines, the availability of transportation and other market facilities, the
demand for hydrocarbons, the political conditions in the Middle East, the effect
of federal and state regulation of allowable rates of production, taxation and
the conduct of drilling operations, and federal regulation of natural gas. In
the past, as a result of excess deliverability of natural gas, many pipeline
companies curtailed the amount of natural gas taken from producing wells, shut-
in some producing wells, significantly reduced gas taken under existing
contracts, refused to make payments under applicable "take-or-pay" provisions,
and refused to contract for gas available from some newly completed wells.  The
Company can give no assurance that such problems will not affect these markets
again.  In addition, the ongoing restructuring of the natural gas pipeline
industry will eliminate the gas purchasing activity of traditional interstate
gas transmission pipeline buyers.  See "--Governmental Regulation" and " Risk
Factors--Competitive Industry."

     The Company's principal oil and gas exploration assets consist of interests
in oil and gas prospects in its West Cameron Seismic Project and associated
seismic data.  The Company's business plan has been to market interests in these
prospects to industry participants.  Due primarily to reductions in funds
available for drilling exploratory prospects as well as changed industry outlook
on projected returns from oil and gas exploratory drilling, the demand for
participations in independently generated oil and gas prospects in the Gulf
Coast region has been adversely affected.  The Company's efforts to market its
West Cameron prospects have been similarly adversely affected.  This situation
will not likely substantially recover until the industry outlook on oil and gas
drilling changes favorably.

     Producers of natural gas, therefore, will be required to develop new
markets among gas marketing companies, end users of natural gas, and local
distribution companies.  All of these factors, together with economic factors in
the marketing area, generally may affect the supply and/or demand for oil and
gas and thus the prices available for sales of oil and gas.

GOVERNMENTAL REGULATION

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

     Production.  In most, if not all, areas where the Company may conduct
activities, there may be statutory provisions regulating the production of oil
and natural gas under which administrative agencies may promulgate rules in
connection with the operation and production of both oil and gas wells,
determine the reasonable market demand for oil and gas, and establish allowable
rates of production.  Such regulations may restrict the rate at which the
Company's wells produce oil or gas at levels below the rate at which such wells
would be produced in the absence of such regulations, with the result that the
amount or timing of the Company's revenues could be adversely affected.

     Louisiana State Regulation.  The State of Louisiana imposes numerous
requirements relating to the exploration and production of oil and gas,
including permits for seismic or drilling operations, drilling bonds, and
reports concerning operations.  The State of Louisiana also has statutes or
regulations addressing conservation matters, including provisions for the
unitization or pooling of oil and gas properties, the establishment of maximum
rates of production from wells, and the U.S. Department of Interior Minerals
Management Service's (the "MMS") regulations of spacing, plugging, and
abandonment of such wells.

     Offshore Leasing.  The Company has acquired oil and gas leases in the Gulf
of Mexico, which have been granted by the Federal government and are
administered by the MMS.  Such leases were issued through competitive bidding,
contain relatively standardized terms, and require compliance with detailed MMS
regulations and orders pursuant to the Outer Continental Shelf Lands Act  (the
"OCSLA") (which are subject

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to change by the MMS). For offshore operations, lessees must obtain the MMS's
approval for exploration plans and development and production plans prior to the
commencement of such operations. In addition to permits required from other
agencies such as the Coast Guard, the Army Corps of Engineers, and the
Environmental Protection Agency (the "EPA"), lessees must obtain a permit from
the MMS prior to the commencement of drilling. The MMS has promulgated
regulations requiring offshore production facilities located on the Outer
Continental Shelf to meet stringent engineering and construction specifications.
Similarly, the MMS has promulgated other regulations governing the plugging and
abandoning of wells located offshore and the removal of all production
facilities. With respect to any Company operations conducted on offshore federal
leases, liability may generally be imposed under the OCSLA for the costs of
clean-up and damages caused by pollution resulting from such operations, other
than damages caused by acts of war or the negligence of third parties. Under
certain circumstances, including but not limited to, conditions deemed a threat
or harm to the environment, the MMS may also require any Company operations on
federal leases to be suspended or terminated in the affected area.

     Under the OCSLA, all oil and natural gas pipelines operating on the Outer
Continental Shelf must provide "open and non-discriminatory" access to both
owner and non-owner shippers.  Consequently, the Company's gathering and
transportation facilities located on the Outer Continental Shelf must be made
available to third parties.

     Bonding and Financial Responsibility Requirements.  The Company is required
to obtain bonding, or otherwise demonstrate financial responsibility, at varying
levels by governmental agencies in connection with obtaining state or federal
leases or acting as operator on such leases.  These bonds may cover such
obligations as plugging and abandonment of nonproductive wells, removal of
related production facilities, and pollution liabilities on federal and state
leases.  A substantially larger bond than the current $50,000 bond currently
issued on behalf of the Company is required in order to act as operator on
Federal offshore leases.  The Company will have to satisfy these increased
bonding requirements in the event that it elects to operate any wells on Federal
leases.  The Company expects to be able to enter into participation arrangements
on its prospects with industry participants who are qualified to act as
operators on Federal leases.  However, no such arrangements can be assured of
occurring.  In addition, the State of Louisiana recently adopted financial
responsibility requirements with respect to plugging and abandonment liabilities
on Louisiana leases.

  Natural Gas Marketing and Transportation.  The interstate transportation of
natural gas is regulated by the Federal Regulatory Commission (the "FERC") under
the Natural Gas Act of 1938 and, to a lesser extent, the Natural Gas Policy Act
of 1978. Since the early 1990s, FERC's regulatory efforts have centered largely
around its generic rulemaking proceeding, Order No. 636. Through Order No. 636
and successor orders, FERC has undertaken to restructure the interstate pipeline
industry with the goal of providing enhanced access to, and competition among,
alternative gas suppliers.  By requiring interstate pipelines to "unbundle"
their sales services and to  provide their customers with direct access to any
upstream pipeline capacity held by pipelines, Order No. 636 has enabled pipeline
customers to choose the levels of transportation and storage service they
require, as well as gas directly from third-party merchants other than the
pipelines. In general, Order No. 636 has facilitated the transportation of gas
and the direct access to end-user markets.

     With the completion of the Order No. 636 implementation process on the FERC
level, FERC's natural gas regulatory efforts have turned towards a number of
other important policies, all of which could significantly affect the marketing
of gas. Some of the more notable of these regulatory initiatives include (i) two
new generic initiatives seeking industry input regarding the pricing,
availability, and terms of service for both the short-term and long-term natural
gas capacity markets, (ii) FERC's ongoing efforts, aided by the participation of
various industry segments through the rulemaking process that resulted in Order
No. 587 and its successor orders, to implement uniform standards for pipeline
electronic bulletin boards, electronic data exchange, and basic business and
operational practices of the pipelines, (iii) the issuance of a merger policy
statement, as well as the consideration and relatively expedient approval of a
surge in merger applications (especially a number of so called "convergence"
mergers between electric utilities and gas companies), (iv) increased acceptance
of market and other non-cost-based rates, such as negotiated rates, for
interstate pipeline transmission and storage capacity, (v) a newly modified
rate-of-return on equity policy for interstate pipelines, and (vi) the
examination, through a  number of formal  rulemaking proceedings, of certain
general

                                       5
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topics affecting the current energy industry (including a review of regulations
governing communications, a proposed collaborative process for energy facility
applications, an updated landowner notification procedure for pipeline
environmental assessments, and the proposed elimination of a number of outdated
filing and reporting requirements for pipeline certification applications).

     In addition to natural gas regulatory concerns, the FERC's unbundling of
the wholesale electric industry through generic rulemaking proceedings in Order
Nos. 888 and 889 and their successor orders may impact the natural gas industry.
The unbundling of the wholesale electric industry, along with the recent trend
toward the implementation of regional system operators and associated power
exchanges, have already been recognized as forcing electric utilities to seek
out more competitive sources of (or alternatives to) supplies for their gas-
fired generation units.

     Oil Sales and Transportation Rates. FERC regulates the transportation of
oil in interstate commerce pursuant to the Interstate Commerce Act. Sales of
crude oil, condensate, and gas liquids by the Company are not regulated and are
made at market prices.  However, the price a company receives from the sale of
these products is affected by the cost of transporting the products to market.
Effective as of January 1, 1995, FERC implemented regulations establishing an
indexing system for transportation rates for oil pipelines, which would
generally index such rates to inflation, subject to certain conditions and
limitations.  Under the new regulations petroleum pipelines are able to change
their rates within prescribed ceiling levels that are tied to the Producer Price
Index for Finished Goods, minus one percent.  Rate increases made pursuant to
the index will be subject to protest, but such protests must show that the
portion of the rate increase resulting from application of the index is
substantially in excess of the pipeline's increase in costs.  The new indexing
methodology can be applied to any existing rate, even if the rate is under
investigation.  If such rate is subsequently adjusted, the ceiling level
established under the index must be likewise adjusted.

     In the order adopting the new regulations, FERC said that as a general rule
pipelines must utilize the indexing methodology to change their rates. FERC
indicated, however, that it was retaining cost-of-service ratemaking, market-
based rates, and settlements as alternatives to the indexing approach.  A cost-
of-service proceeding will be instituted to determine just and reasonable
initial rates for new services.  A pipeline can also follow a cost-of-service
approach when seeking to increase its rates above index levels for
uncontrollable circumstances.  A pipeline can seek to charge market-based rates
if it can establish that it lacks market power.  Finally, a pipeline can
establish rates pursuant to settlement if agreed upon by all current shippers.

     On May 10, 1996, the D.C. Circuit affirmed the new regulations.  The Court
held that by establishing a general indexing methodology along with limited
exceptions to indexed rates, FERC had reasonably balanced its dual
responsibilities of ensuring just and reasonable rates and streamlining
ratemaking through generally applicable procedures.  Because of the novelty and
uncertainty surrounding the indexing methodology, as well as the possibility of
the use of cost-of-service ratemaking and market-based rates, the Company is not
able to predict with certainty what effect, if any, these regulations will have
on it.  However, other factors being equal, the regulations may tend to increase
transportation costs or reduce wellhead prices for such commodities.

     Environmental.  The Company's operations are subject to numerous laws and
regulations governing the discharge of materials into the environment or
otherwise relating to environmental protection.  These laws and regulations may
require the acquisition of a permit before drilling commences, restrict the
types, quantities, and concentration of various substances that can be released
into the environment in connection with drilling and production activities,
limit or prohibit drilling activities on certain lands lying within wilderness,
wetlands, and other protected areas, and impose substantial liabilities for
pollution resulting from the Company's operations.  Moreover, the recent trend
toward stricter standards in environmental legislation and regulation is likely
to continue.  For instance, legislation has been proposed in Congress from time
to time that would reclassify certain oil and gas exploration and production
wastes as "hazardous wastes" which would make the reclassified wastes subject to
much more stringent handling, disposal, and clean-up requirements.  If such
legislation were to be enacted, it could have a significant impact on the
operating costs of the Company, as well as the oil and gas industry in general.
Initiatives to further regulate the disposal of oil and gas wastes are also
pending in certain states, and these various initiatives could have a similar
impact on the Company.

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     The Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without regard
to fault or the legality of the original conduct, on certain classes of persons
that are considered to have contributed to the release of a "hazardous
substance" into the environment.  These persons include the owner or operator of
the disposal site or sites where the release occurred and companies that
disposed of or arranged for the disposal of the hazardous substances found at
the site.  Persons who are or were responsible for releases of hazardous
substances under CERCLA may be subject to joint and several liability for the
costs of cleaning up the hazardous substances that have been released into the
environment and for damages to natural resources.  It is not uncommon for
neighboring landowners and other third parties to file claims for personal
injury and property damage.

RISK FACTORS

  Limited Production and High Dependence on 3D Seismic and Exploratory Drilling
Activities. The Company's producing activities to date have been limited.  Such
activities presently consist of a working interest in one well and an overriding
royalty interest in another well.  Both wells are located offshore Louisiana.
No oil and gas reserves have been assigned by the Company at December 31, 1999
to the well in which it has a working interest.  There is no assurance that 3D
seismic methods will identify potential hydrocarbon accumulations or that
drilling will successfully test any prospects.  The use of 3D seismic technology
involves numerous risks in the acquisition, processing and interpretive phases
including, but not necessarily limited to, acquiring seismic shooting rights
over a prospective area, availability of trained seismic crews, subsurface
conditions which may affect the quality of the acquisition of data, surface
conditions, and availability of data from any nearby previously drilled wells.
Drilling involves numerous risks, including the risk that no commercially
productive oil or gas reservoirs will be encountered.  The cost of drilling,
completing, and operating wells is often uncertain and drilling operations may
be curtailed, delayed, or abandoned as a result of a variety of factors,
including unexpected drilling conditions, excessive pressure or irregularities
in formations, equipment failures or accidents, weather conditions, and
shortages or delays in the delivery of equipment.

  High Dependence on Sales of Prospects.  Recently, the Company has experienced
difficulty in selling prospects developed and assembled from its Project.  It
believes that the lack of sales has been caused by market conditions within the
oil and gas industry as well as initial uncertainties with respect to ownership
interests.  There can be no assurance that the Company will be successful in
selling significant interests or in receiving sufficient funds for continuing
operations.

  Each non-producing oil and gas lease acquired by the Company requires annual
delay rental payments to maintain lease ownership rights.  In addition, the
Company and Cheniere Energy, Inc. have agreed to share the responsibilities of
marketing and maintaining Project leases.  There is no assurance that, absent
negotiated prospect sales agreements that provide for a buyer to pay rentals,
the Company and/or Cheniere will make some or all of such delay rental payments.
The Company cannot determine at this time what leases, if any, that it and/or
Cheniere may decide to relinquish through non-payment of a delay rental, the
impact of such action on the marketability of the prospect in which the lease
was held or the cost of reacquiring such lease.

  Lack of Diversification; Oil and Gas Industry Conditions; and Volatility of
Prices for Oil and Gas.  As an independent energy company, the Company's
revenues and profits will be substantially dependent on the oil and gas industry
in general and the prevailing prices for oil and gas in particular.
Historically, the markets for oil and gas have been volatile and are likely to
continue to be volatile in the future.  Prices for oil and gas are subject to
wide fluctuations in response to relatively minor changes in supply of and
demand for oil and gas, market uncertainty, and a variety of additional factors
that are beyond the control of the Company.  These factors include political
conditions in the Middle East, the domestic and foreign supply of oil and gas,
the price of foreign imports, the level of consumer demand, weather conditions,
domestic and foreign government regulations, the price and availability of
alternative fuels, and overall economic conditions.  Accordingly, it is
impossible to predict future oil and gas price movements with any certainty.  In
addition, various factors, including the availability and capacity of gas
gathering systems and pipelines,

                                       7
<PAGE>

the effect of federal regulations on production and transportation, general
economic conditions, and changes in supply and demand, may adversely affect the
Company's ability to market its oil and gas production.

  High Dependence upon Lease Acquisition Activities.  Due to a lack of available
capital resources, the Company does not expect to acquire any new leases in the
near term. However, its business demands that it continually evaluate its lease
holdings and potential new lease acquisitions.  Should the Company seek
additional lease holdings, then such activities may include attempts to acquire
leases from federal agencies, state agencies or private individuals and
companies.  Both the United States Department of the Interior and the State of
Louisiana award oil and gas leases on a competitive bidding basis.  It is
expected that other major and independent oil and gas companies having financial
resources significantly greater than those of the Company will bid against the
Company for the purchase of oil and gas leases.  Accordingly, there can be no
assurance that the Company will be successful in acquiring any leases on which
it bids.

  Limited Operating Revenues; Need for Additional Financing.  The Company
presently has limited operating revenues and does not expect to generate
substantial operating revenues in the immediate future.  The Company expects
that it will need substantial additional capital if it chooses to expand
operations and to acquire additional oil and gas leases, producing properties,
or to participate in the drilling of wells on prospects.  Additional capital may
be secured from a combination of funding sources that may include borrowings
from financial institutions, vendor financings, production payment financings,
debt offerings, additional offerings of the Company's stock and alliances with
other industry participants.  The Company's ability to access additional capital
may depend on a variety of factors including, but not limited to, sales of its
existing project, favorable drilling results on its prospects and the status of
various capital markets at the time such additional capital is sought. There can
be no assurances that capital will be available to the Company from any source,
at the time required or that, if available, it will be on terms acceptable to
the Company.  Should sufficient financing not be available because costs are
higher than estimated or otherwise, the Company would have to consider
alternatives such as a sale or merger of the Company or liquidation of its
assets.  The Company believes it has sufficient capital to sustain its reduced
level of operations into the year 2001.

  Competitive Industry.  The Company operates in a highly competitive industry.
The Company competes with major and independent oil and gas companies for the
acquisition of oil and gas leases as well as for the equipment and labor
required to explore, develop and operate such properties.  Many of these
competitors have financial, technical, human, and other resources greater than
those of the Company.

  Operating Risks.  The Company's oil and gas operations are subject to all of
the risks and hazards typically associated with the exploration for, and the
development and production of, oil and gas in the Gulf of Mexico and any other
areas in which the Company may, in the future, conduct such activities.  Risks
in drilling operations include blowouts, oil spills, fires, and offshore risks
such as capsizing, collision, hurricanes, and other adverse weather and sea
conditions.  Such risks can result in personal injury and loss of life and
substantial damage to or destruction of oil and gas wells, platforms, production
facilities, or other property, suspension of operations, and liabilities to
third parties, any and all of which could adversely affect the Company.  In
addition, the Company's operations could result in liability for oil spills,
discharge of hazardous materials, and other environmental damages.

  In accordance with customary industry practices, the Company may maintain
insurance against some, but not all, of such risks and some, but not all, of
such losses.  There can be no assurance, however, that any insurance the Company
intends to carry will be available to the Company when applied for or, if
available and carried, will be adequate to cover the Company's liability in all
circumstances.  The occurrence of an event not fully covered by insurance could
have a material and adverse effect on the financial position and results of
operations of the Company.  In addition, the Company may be liable for
environmental damages caused by previous owners of any property which may be
purchased by the Company, which liabilities would not be covered by insurance.

  Many of the oil and gas leases the Company has acquired are located offshore
in water depths of less than 130 feet.  Drilling operations offshore in such
water depths are by their nature more remote, exposed, and, consequently, more
difficult than typical drilling operations conducted on land, and, as a result,
could result in significantly higher drilling, completion, and connection costs.

                                       8
<PAGE>

  Risks of Turnkey Contracts.  The Company intends to have other industry
participants operate its wells and will  attempt to obtain, wherever possible
and desirable, turnkey contracts, subject to availability, for the drilling of
wells on any of its prospects. In the event a turnkey contract is not
economically beneficial to the Company or is otherwise unobtainable from proven
industry participants, the Company may contract for drilling operations on
either a footage or day rate basis. The recent increase in exploration activity
in the Gulf Coast region may result in the inability to negotiate turnkey
contracts. In this instance, the Company may be liable for significant cost
overruns attributable to downhole drilling problems that otherwise would have
been covered by a turnkey contract had one been negotiated.

  Dependence on Key Personnel.  The Company believes that its success will be
highly dependent on its ability to retain key employees.  Should the Company
return to a mid-1998 level of operations, then it also believes that its success
will be highly dependent upon its ability to attract skilled managers and
employees.  In the event that the Company cannot obtain or retain the services
of such key personnel, there could be a material adverse effect on the Company's
business and prospects.

  Governmental Regulations.  The Company's business will be regulated by certain
federal, state, and local laws and regulations relating to the development,
production, marketing, and transportation of oil, gas, and related products as
well as certain environmental and safety matters.  These laws may be changed
from time to time in response to economic or political conditions.  Matters
subject to regulation include permits for drilling operations, drilling and
abandonment bonds, reports concerning operations, the spacing of wells,
unitization and pooling of properties, and taxation.  From time to time,
regulatory agencies have imposed price controls and limitations on production by
restricting the rate of flow of oil and gas wells below actual production
capacity in order to conserve supplies of oil and gas.  In addition, the
production, handling, storage, transportation, and disposal of oil and gas, by-
products therefrom, and other substances and materials produced or used in
connection with oil and gas operations are subject to regulation under federal,
state, and local laws and regulations primarily relating to protection of human
health and the environment.  These laws and regulations have continually imposed
increasingly strict requirements for water and air pollution control and solid
waste management.  The Company believes the trend of more expansive and stricter
environmental legislation and regulations will continue and such legislation may
result in costs to the Company in the future.  Amendments to laws regulating the
disposal of oil and gas exploration and production wastes have been considered
by Congress and may be adopted.  Moreover, from time to time new and additional
taxes, such as a BTU tax or a gasoline tax, have been proposed on energy
consumption.  Such legislation or taxes, if enacted, could have a significant
adverse impact on the Company's operating costs.

EMPLOYEES

     As of December 31, 1999, the Company has 3 full-time employees.  There are
no employment agreements with any employee.

ITEM 2.   PROPERTIES

PROSPECTS AND LEASES

     Undeveloped Properties.  The following table summarizes the Company's
working interest ownership of undeveloped acreage.  Undeveloped acreage is
considered to be those lease acres on which the Company has a working interest
but ownership in no wells that have been drilled or completed to a point that
would permit the production of commercial quantities of oil or gas.  Gross
acreage represents the total acreage under lease, while net acreage is the
Company's working interest share of such leased acreage.

                                       9
<PAGE>

                                 Gross
                              Undeveloped                   Net Acreage
State/Location                  Acreage                      To Zydeco
--------------              ----------------              ---------------
Louisiana                        1,139                          741

Gulf of Mexico                   5,275                        3,287

Total                            6,414                        4,028
                                 =====                        =====

       If Cheniere Energy, Inc. elects participation in each lease held in
       the West Cameron Seismic Project pursuant to the terms of the Cheniere
       Exploration Agreement and the arbitration ruling dated December 9, 1998
       by the arbitration panel convened to hear the Cheniere litigation
       matters, the above "Net Acreage to Zydeco", would total 2,098.

     Lease Terms.  Most of the leased acres currently held by the Company are
under federal or State of Louisiana offshore leases.  The Company's leases have
expiration dates ranging from 2000 to 2003.  Federal offshore leases provide for
minimum royalties of 16.67%, have a primary lease term of five years, and are
administered by the MMS.  Annual rentals on Federal leases are $5.00 per acre.
In general, the Company's federal lease consists of a portion of a 5,000 acre
lease block.  If production is not established or an extension is not obtained
during the primary term, the lease terminates.  Louisiana state leases are
administered by the State Mineral Board of the State of Louisiana and generally
provide for: (i) a minimum royalty of 20%; (ii) a five year primary term; and
(iii) annual rentals in an amount equal to 50% of the original lease acquisition
cost.  Generally, title to state and federal leases is merchantable in all
respects and operations thereon are not normally subject to litigation resulting
from the legal doctrine of adverse possession or any other similar challenge to
title.  Leases obtained from private landowners are on three-year terms.  Delay
rental obligations vary pursuant to the terms of such leases.

OIL AND GAS RESERVES

     The Company engaged Petroleum Professionals, International, LP ("PPI") to
estimate the proved oil and gas reserves of the Company's properties for the
years ended December 31, 1999 and 1998, respectively.  PPI is an independent oil
and gas reserve engineering firm.  This firm was also asked to estimate the
future net revenues to be derived from such properties. In preparing their
report, PPI reviewed and examined such geological, economic, engineering, and
other data provided by the Company as considered necessary under the
circumstances, and examined the reasonableness of certain economic assumptions
regarding estimated operating and development costs and recovery rates in light
of economic circumstances as of December 31, 1999 and 1998.  As of December 31,
1999, the proved oil reserves were estimated to be 1,260 Bbls and the proved gas
reserves were estimated to be  9,617 Mcf.

     There are numerous uncertainties inherent in estimating quantities of
reserves and in projecting future rates of production and timing of development
expenditures, including many factors beyond the control of the producer.  The
reserve data set forth in this Annual Report on Form 10-KSB represent only
estimates.  Reserve engineering is a subjective process of estimating
underground accumulations of oil and gas that cannot be measured in an exact
way, and the accuracy of any reserve estimate is a function of the quality and
quantity of available data and of engineering and geological interpretation and
judgment.  As a result, estimates of different engineers often vary.  In
addition, results of drilling, testing, and production subsequent to the date of
an estimate may justify revision of such estimate.  Accordingly, reserve
estimates at a specific point in time are often different from the quantities of
oil and gas that are ultimately recovered, which differences may be significant.
Additionally, the estimates of future net revenues from proved reserves of the
Company and the present value of future net revenues are based upon certain
assumptions about future production levels, prices, and costs that may not prove
correct over time.  The meaningfulness of such estimates is highly dependent
upon the accuracy of the assumptions upon which they were based.

                                       10
<PAGE>

STATISTICAL INFORMATION - OIL AND GAS PROPERTIES

     Production. The following table summarizes the sales volumes of the
Company's net oil and gas production in the United States in barrels of oil and
thousands of cubic feet of natural gas for each of the two years ended December
31, 1999 and 1998, respectively:

                                        YEAR ENDED DECEMBER 31,
                                -----------------------------------
                                       1999                1998
                                ---------------     ---------------
Sales Volumes
      Natural Gas (Mcf)                  59,608             165,762
      Crude Oil (Bbl)                     2,778               1,187
      NBOE(1)                            12,713              28,814
---------------------
     (1)  Net barrels of oil equivalent (NBOE) assuming natural gas converted at
          six Mcf per equivalent barrel.

          The sales volumes in the table represent sales of "net production",
i.e., production which is net to the Company and produced to its interest after
deducting royalty and other similar interests.

          AVERAGE PRICES AND PRODUCTION COSTS.  For each of the last two years,
average unit prices and unit production costs are set forth below with respect
to the Company's net share of production of oil and gas in the United States:

                                                      YEAR ENDED DECEMBER 31,
                                                     -------------------------
                                                        1999           1998
                                                     ---------       ---------
AVERAGE SALES PRICES
      Natural Gas ($/Mcf)                               $ 2.19        $ 2.25
      Crude Oil ($/Bbl)                                 $20.43        $13.71

Lease Operating Expense ($/NBOE)(1)                       1.45          0.60
Depletion, Depreciation, & Amortization ($/NBOE)(1)     $    -        $    -
--------------------
     (1)  Net barrels of oil equivalent (NBOE) assuming natural gas converted at
          six Mcf per equivalent barrel.

          ACREAGE AND WELL SUMMARY.  The information presented below relates to
properties in the United States in which the Company has "working interests"
which bear the cost of operations.  The Company's total gross and net interests
in productive wells and in developed acres at December 31, 1999, are summarized
as follows:

<TABLE>
<CAPTION>
                                               GROSS                               NET
                               -------------------------------     ------------------------------
                                   OIL                   GAS          OIL                  GAS
                               ---------             ---------     ---------            ---------
<S>                             <C>        <C>        <C>          <C>       <C>         <C>
Productive Wells(1)                 -                     1          -                    .08

Developed Acres(2)                           349                              28
------------------------
</TABLE>
     (1)  "Productive Wells" are producing wells and wells capable of
          production, and include gas wells awaiting pipeline connections or
          necessary governmental certifications to commence deliveries and oil
          wells to be connected to production facilities.  No oil and gas
          reserves have been assigned by the Company at December 31, 1999 to the
          well in which it has a working interest.

                                       11
<PAGE>

     (2)  "Developed Acres" include all acreage (on a leasehold basis in the
          United States) as to which proved reserves are attributed, whether or
          not currently producing, but exclude all producing acreage as to which
          the Company's interest is limited to royalty, overriding royalty, and
          other similar interests.


          DRILLING AND PRESENT ACTIVITIES.  The following table summarizes the
oil and gas drilling activities of the Company in the United States for each of
the two years ended December 31, 1999 and 1998, respectively:

<TABLE>
<CAPTION>
                                                  Year Ended December 31,
                                   ---------------------------------------------------
                                           1999                         1998
                                   ----------------------     ------------------------
                                      Gross        Net             Gross        Net
                                    ---------   ---------        ---------   ---------
<S>                                 <C>         <C>              <C>         <C>
Development Wells Drilled (1)(2):
 Productive                              -           -                -           -
 Dry                                     -           -                -           -

Exploratory Wells Drilled (1)(2):
 Productive                              -           -                -           -
 Dry                                   1.0       0.394                -           -
                                      ----------------             ----------------
      Total                            1.0       0.394                -           -
                                      ================             ================
</TABLE>
---------------------------------
     (1)  "Wells Drilled" refers to the number of wells completed at any time
          during the fiscal year, regardless of when drilling was initiated.
          The term "completed" refers to the installation of permanent equipment
          for the production of oil or gas, or, in the case of a dry hole, to
          the reporting of abandonment to the appropriate agency.
     (2)  A dry hole is an exploratory or a development well found to be
          incapable of producing either oil or gas in sufficient quantities to
          justify completion as an oil or gas well.  A productive well is an
          exploratory or a development well that is not a dry hole.

          In addition to the above drilling results, the Company had a carried
working interest in two exploratory wells drilled in 1999 that resulted in dry
holes.  As of December 31, 1999, the Company was not conducting any drilling or
maintenance operations.

FACILITIES

     The Company leases its office space on a month to month basis for $2,200
per month.

ITEM 3. LEGAL PROCEEDINGS

     Cheniere Litigation - On April 17, 1998, Zydeco Exploration, Inc. filed a
petition with the American Arbitration Association for arbitration in order to
resolve certain disputes that arose with Cheniere.  The arbitration claim sought
to resolve differences over Cheniere's funding obligations, the parties'
ownership in various leases and prospects, the scope of pre-drilling activities
that Cheniere can conduct within the Project area, the dissemination by Cheniere
of confidential seismic data covering the Project area, and a variety of related
issues.  Cheniere filed a counterclaim in the arbitration action, and the
pleadings were amended to include the Company as well as Zydeco Exploration, Inc
(together "Zydeco").  The parties sought conflicting declaratory and injunctive
relief and damages from each other.  In addition, on April 22, 1998, Zydeco
initiated a civil suit in state district court in Harris County, Texas against
two individuals who are parties to confidentiality agreements with Zydeco and
who are employees of Cheniere.  Through this litigation, Zydeco sought and
obtained a Temporary Restraining Order on April 22, 1998, restraining the
individuals from breaching the terms of their confidentiality agreements with
Zydeco.  Cheniere intervened in the litigation on April 27, 1998.  On May 4,
1998, Zydeco, Cheniere and the two individuals agreed to the entry of an Agreed
Temporary Injunction.  The agreed Temporary Injunction expired on June 15, 1998,
and

                                       12
<PAGE>

the dispute, which led to the filing of the civil suit, was included in the
arbitration action by agreement of the parties.

     On December 9, 1998 the three-member arbitration panel seated to rule in
this matter issued its decision in the arbitration proceedings brought by Zydeco
against Cheniere. In its ruling, the panel confirmed Zydeco's position as
program manager but recognized Cheniere's independent right to identify
prospects and acquire leases in the Project area. The arbitration panel directed
that Cheniere has the right to participate with a 50% working interest in most
of the leases acquired by Zydeco or in prospects designated by Zydeco. Cheniere,
however, must exercise its right of participation and pay its share of such
costs within a thirty-day period following Zydeco's formal notice of prospect
designation. For each prospect, Zydeco has the sole right to undertake the
management and control of all prospect development for a reasonable period not
to exceed 90 days following such formal notice. The arbitration panel also ruled
that project seismic costs generally incurred after December 31, 1997 are not
reimbursable to Zydeco as seismic costs. The Company believed that such costs,
either in part or in whole, should be recouped from Cheniere as prospect costs.
In addition, if certain criteria are met, then sale proceeds from certain
marketing activities would be paid to Cheniere until Cheniere recoups $13.5
million of its investment in the project. Zydeco and Cheniere would share any
such sales above that amount equally. Neither party received any damage awards
or recovery of legal costs.

     As a result of the arbitration panel's decision, Zydeco and Cheniere
informally agreed to share responsibilities and ownership for certain activities
incurred in the maintenance, marketing and sale of prospects generated and
assembled by the parties.  Except for the costs of one prospect and certain
other activities, neither party would seek reimbursement from the other for
seismic and prospect costs generally incurred prior to the arbitration ruling.

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

     No matters were submitted to a vote of the stockholders of the Company
during the fourth quarter of 1999.

                                       13
<PAGE>

                                    PART II


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

     The Company's common stock, par value $.001 (the "Common Stock") and the
Warrants have traded on the NASD OTC Bulletin Board since May 25, 1999, The
Nasdaq National Market from August 19, 1997 to May 24, 1999, and on the Nasdaq
SmallCap Market from December 23, 1995 to August 19, 1997 under the symbols
"ZNRG" and "ZNRGW".  Prior to December 23, 1995, they were quoted on the OTC
Bulletin Board under the symbols "TNER" and "TNERW", respectively.  Prior to
December 23, 1995, the Units were quoted on the OTC Bulletin Board under the
symbol "TNERU"; the Units are no longer quoted on the OTC Bulletin Board.  There
is very limited trading of the Units and pricing information is not readily
available.  The high and low sales prices of the Common Stock, the Warrants, and
the Units during each quarter are presented in the table below.  The quotes
represent "inter-dealer" prices without retail markups, markdown, or commissions
and may not necessarily represent actual transactions.

                              Common Stock                Warrants
                          ----------------------   ----------------------
                             High        Low          High         Low
Three Months Ended
   March 31, 1998           3.250       1.938        1.188       0.688
   June 30, 1998            2.875       1.500        1.000       0.250
   September 30, 1998       2.750       0.750        0.969       0.125
   December 31, 1998        1.297       0.500        0.391       0.047

Three Months Ended
   March 31, 1999           1.313       0.282        0.438       0.063
   June 30, 1999            0.250       0.125        0.125       0.010
   September 30, 1999       0.188       0.130        0.105       0.015
   December 31, 1999        0.160       0.063        0.030       0.001

     As of March 22, 2000, there were 10,039,096 shares of the Company's Common
Stock outstanding held by approximately 75 holders of record.  The Company
believes there are approximately 1,800 beneficial owners of the Common Stock.
The Company purchased 318,000 shares of treasury stock during the period
November 1999 to January 2000 in the open market.

DIVIDEND POLICY

     The Company has never paid a cash dividend on its Preferred Stock (prior to
its conversion) or its Common Stock.  The Company currently intends to retain
its existing working capital and potential future earnings to finance the growth
and development of its business and does not anticipate paying any cash
dividends on the Common Stock in the foreseeable future.  Any future change in
the Company's dividend policy will be made at the discretion of the Company's
Board of Directors in light of the financial condition, capital requirements,
earnings, and prospects of the Company and any restrictions under any credit
agreements, as well as other factors the Board of Directors may deem relevant.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

OVERVIEW

     The Company was incorporated in December 1993 and commenced activities in
1994, as an independent oil and gas exploration company engaged in acquiring
leases, drilling and producing reserves utilizing focused geologic concepts and
advanced 3D seismic and computer-aided exploration ("CAEX")

                                       14
<PAGE>

technology, including enhanced structural and stratigraphic depth imaging and
attribute analysis. Currently, the Company's efforts are focused primarily on
marketing its interest in its Cameron Parish Project, seeking markets for its
Wavefield Imaging Technology and looking for corporate acquisitions which could
use its cash, net operating tax loss and its public market. Any such merger may
or may not be in the oil and gas industry.

     During 1996, the Company negotiated seismic options covering approximately
37,000 gross acres (33,000 net acres) and secured other seismic permits covering
approximately 171,000 gross acres (170,000 net acres) in the Louisiana
Transition Zone.  At the core of the Project was a 51,000-acre exclusive seismic
permit obtained from the State of Louisiana. Pursuant to the terms of the State
of Louisiana permit, the state is required to keep the information obtained from
the survey confidential for a period of ten years.  The Company began onshore
leasing and permitting in February 1996.  Seismic data acquisition for the
Project commenced over approximately 230 square miles during the second half of
1996 and was completed in July 1997.  The Company timely delivered seismic data
to the State of Louisiana in January 1998 in compliance with the terms of the
exclusive seismic permit.  The seismic processing phase of the Project
immediately commenced during mid 1997 and was completed in October 1998.  The
interpretive phase commenced also during mid 1997 and continued throughout 1998.
The Company conducted a leasing program during the 1998 first half and
aggregated more than 12,000 gross acres through State of Louisiana lease sales,
private land negotiations and a federal lease sale.  During the  first half of
1999, the Company relinquished approximately 14,000 gross acres, including
approximately 8,000 gross acres relating to the Project, through the non payment
of delay rentals.

     In April 1996, the Company executed an Exploration Agreement (the "Cheniere
Agreement") with Cheniere Energy Operating Co., Inc., a wholly owned subsidiary
of Cheniere Energy, Inc. and formerly known as FX Energy, Inc., (collectively
"Cheniere") covering the area of Project land and waters in western Cameron
Parish, Louisiana.  In exchange for earning a 50% interest, Cheniere agreed to
fund certain Project costs including, but not limited to, 3D seismic acquisition
costs, including the purchase of seismic rights or lease options on the related
onshore acreage of the Project, the purchase of other 3D seismic data, and
processing of seismic data over the Project area.

     On April 17, 1998, Zydeco Exploration, Inc. filed a petition with the
American Arbitration Association for arbitration in order to resolve certain
disputes that arose with Cheniere.  The arbitration claim sought to resolve
differences over Cheniere's funding obligations, the parties' ownership in
various leases and prospects, the scope of pre-drilling activities that Cheniere
can conduct within the Project area, the dissemination by Cheniere of
confidential seismic data covering the Project area, and a variety of related
issues.  Cheniere filed a counterclaim in the arbitration action, and the
pleadings were amended to include the Company as well as Zydeco Exploration, Inc
(together "Zydeco").  The parties sought conflicting declaratory and injunctive
relief and damages from each other.  In addition, on April 22, 1998, Zydeco
initiated a civil suit in state district court in Harris County, Texas against
two individuals who are parties to confidentiality agreements with Zydeco and
who are employees of Cheniere.  Through this litigation, Zydeco sought and
obtained a Temporary Restraining Order on April 22, 1998, restraining the
individuals from breaching the terms of their confidentiality agreements with
Zydeco.  Cheniere intervened in the litigation on April 27, 1998.  On May 4,
1998, Zydeco, Cheniere and the two individuals agreed to the entry of an Agreed
Temporary Injunction.  The agreed Temporary Injunction expired on June 15, 1998,
and the dispute, which led to the filing of the civil suit, was included in the
arbitration action by agreement of the parties.

     On December 9, 1998 the three-member arbitration panel issued its decision
in the arbitration proceedings brought by Zydeco against Cheniere.  In its
ruling, the panel confirmed Zydeco's position as program manager but recognized
Cheniere's independent  right to identify prospects and acquire leases in the
Project area.  The arbitration panel directed that Cheniere have the right to
participate with a 50% working interest in most of the leases acquired by Zydeco
or in prospects designated by Zydeco.  Cheniere, however, must exercise its
right of participation and pay its share of such costs within a thirty-day
period following Zydeco's formal notice of prospect designation.  For each
prospect, Zydeco has the sole right to undertake the management and control of
all prospect development for a reasonable period not to exceed 90 days following
such formal notice.  The arbitration panel also ruled that project seismic costs
generally incurred after December 31, 1997, are not reimbursable to Zydeco as
seismic costs.  The Company believed that such costs, either in part or in
whole, should be recouped from Cheniere as prospect costs.  In addition, if
certain

                                       15
<PAGE>

criteria are met, then sale proceeds from certain marketing activities would be
paid to Cheniere until Cheniere recoups $13.5 million of its investment in the
project. Zydeco and Cheniere would share any such sales above that amount
equally. Neither party received any damage awards or recovery of legal costs.

     As a result of the arbitration panel's decision, Zydeco and Cheniere
informally agreed to share responsibilities and ownership for certain activities
incurred in the maintenance, marketing and sale of prospects generated and
assembled by the parties.  Except for the costs of one prospect and certain
other activities, neither party would seek reimbursement from the other for
seismic and prospect costs generally incurred prior to the arbitration ruling.
After considering the arbitration panel's ruling and the two parties' informal
agreement, Cheniere's and Zydeco's share of third party and processing costs
incurred pursuant to the terms of the Cheniere Agreement was approximately
$16,423,398 and $5,216,773, respectively, from inception to December 31, 1998.
Project costs incurred in 1999 were negligible.  The Company charged project
seismic costs amounting to $1,146,688 that previously had been attributable to
Cheniere to exploration expense in 1998.  In addition, the Company acquired
approximately $5,753,010 of unproved leases during 1998.

     In order to conserve its cash resources, the Company through terminations
and resignations reduced the number of its employees to three by October 11,
1999.

     The Company accounts for its oil and gas exploration and production
activities using the successful efforts method of accounting.  Under this
method, acquisition costs for proved and unproved properties are capitalized
when incurred.  Exploration costs, including geological and geophysical costs
and the costs of carrying and retaining unproved properties, are expensed.
Exploratory drilling costs are initially capitalized, but charged to expense if
and when the well is determined not to have found proved reserves.  Costs of
productive wells, developmental dry holes, and productive leases are capitalized
and amortized on a property-by-property basis using the units-of-production
method.  The estimated costs of future plugging, abandonment, restoration, and
dismantlement are considered as a component of the calculation of depreciation,
depletion, and amortization.  Unproved properties with significant acquisition
costs are assessed periodically on a property-by-property basis and any
impairment in value is charged to expense.

     On July 1, 1997, the Company acquired Wavefield Image, Inc., the owner and
licensor of the rights to the Wavefield Imaging Technology.  A patent in respect
of the Wavefield Imaging Technology was issued by the United States Patent and
Trademark Office on December 2, 1997, see "Business--Seismic Technology."  The
Company amortizes its investment in Wavefield Imaging Technology on the
straight-line basis over a 19-year period, the life of the patent.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

     The Company recorded a net loss of $2,835,318, or $.28 per share, for 1999
compared to a net loss of $9,611,738, or $.93 per share, in 1998.  The decline
of $6,776,420 in losses between the two periods is primarily attributable to a
combination of a decrease in costs associated with the Company's Project, a
lower level of charges made for the impairment of unproved properties and cost
reducing actions commenced in late 1998.

     During 1998, the Company's principal activities related to the Project
involved significant work in the processing and interpretive phases.  Coupled
with the impact of the December 1998 arbitration panel ruling by which the
Company expensed Project costs previously viewed as reimbursable from Cheniere,
the Company expensed Project geological and geophysical costs totaling
$1,975,892 in 1998.  Because such phases were substantially completed in 1998,
the Company had no comparable expense in 1999. In addition, as a result of the
Company's cost reducing actions, other geological and geophysical expenses
declined from $1,585,292 in 1998 to $168,326 in 1999.

     As of December 31, 1998, the Company recorded an impairmen of $3,000,000 in
order to recognize a decline in the value of oil and gas leases acquired in
association with the Project. During 1999, an additional expense for the
impairment of unproved properties in the amount of

                                       16
<PAGE>

$750,000 was recorded.  Partly offsetting this decline in the charge for the
impairment allowance, the Company recorded a write-off to exploration expense
amounting to $712,390 in 1999 for expired leases and dry hole expense of
$563,184 for its share of the one exploratory well in which it had a working
interest.  The Company did not have comparable lease write-offs and dry hole
expenses in 1998.  The Company expects that the overall level of exploration
expenses, including geological and geophysical expenses, will decline
significantly during the near term due mostly to the Company's restructured
activities.  However, because the Company utilizes the successful efforts method
of accounting, exploration expenses typically vary materially from period to
period based upon exploration program activities, the Company's cost
participation and other factors.

     General and administrative expenses decreased from $2,987,570 in 1998 to
$679,003 in 1999 mostly due to cost reducing actions and a decline in litigation
expenses.  In 1998, the Company recorded $1,171,243 in litigation expenses
associated with the Cheniere matter.  The Company had no comparable expense in
1999.  In addition, also as a result of cost reducing activities, research and
development expense declined from $409,240 in 1998 to $157,909 in 1999.  The
Company expects that general and administrative expenses and research and
development expenses will continue to decline in the near term compared to that
incurred in 1999.

     Depreciation and amortization expense decreased $252,315 from 1998 to 1999
due mostly to sales of nearly all its office equipment, computer equipment,
furniture and fixtures during mid-1999.  The Company expects such expense to
decrease sharply in the near term compared to 1999 as a result of the steep
decline in the carrying amounts of such assets from 1999 to 2000.

     Partly offsetting the above decreases, the Company recorded a $200,000
expense for the impairment of its investment in Wavefield Imaging Technology.
The Company did not have a comparable 1998 impairment of an investment in a
subsidiary.

     Oil and gas revenues decreased from $389,798 in 1998 to $187,366 due mostly
to a 64% decline in gas sales volumes.  Gas sales volumes fell from 165,762
thousand cubic feet ("Mcf") in 1998 to 59,608 Mcf in 1999.  Partly offsetting
this decline were increases in oil volumes and oil prices.  In addition, a
producing field in which the Company had a small overriding royalty interest was
brought on production during mid 1999.  The Company sold such interest in this
new producing field during late 1999.  The decline in gas sales volumes is
mostly due to natural production declines in the two producing wells in which
the Company has an interest. Although it expects that the production rates will
continue to decline during the near term, the Company cannot ascertain whether
the rates experienced in 1999 will continue throughout 2000.

     During 1999, the Company recorded gains on the sales of properties
amounting to $136,130 versus $346,321 in 1998.  In 1999, gains from the sales of
producing and non-producing leases amounted to $247,054 while losses from the
disposal of office equipment, computer equipment and other amounted to $111,054.
In the near term, the Company does not expect any significant sales of such
items.  For producing and non-producing oil and gas properties, the Company
typically experiences fluctuations in gains or losses on the sales of such
properties due to a number of factors such as, but not limited to, the timing
and cost of lease acquisitions, the availability of leaseholds in particular
prospect areas and market conditions, both generally and in the oil and gas
industry, at the time of sale.

     As a result of certain cost reducing activities, the Company was able to
negotiate concessions from some vendors.  The Company recorded an extraordinary
item amounting to a benefit of $439,208 for this activity.  The Company had no
comparable activity in 1998 and does not expect any similar activity in 2000.

YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997

     Compared to a loss of $6,152,127, or $.77 per share, in the year ended
December 31, 1997, the Company posted a loss of $9,611,738, or $.93 per share,
for the year ended December 31, 1998.  The $3,459,611 increase in the net loss
is mostly attributable to a combination of a charge for the impairment of
unproved leases, an increase in legal fees and a decline in geological and
geophysical expenses.

                                       17
<PAGE>

     The Company recorded an impairment of $3,000,000 in the 1998 fourth quarter
in order to recognize a decline in the value of unproved leases that it had
acquired mostly during the first half of 1998.  There was no comparable
impairment in 1997.

     Geological and geophysical expenses declined $1,396,876 from $4,958,060 in
1997 to $3,561,184 in 1998 due mostly to lower Project seismic costs.  This
decline was primarily due to the completion of the substantially more expensive
data acquisition phase during the 1997 third quarter.  The Company did not incur
any material expenses for data acquisition during 1998.  The significantly less
expensive seismic processing and interpretive phases commenced during mid 1997
with the processing phase completed during the 1998 fourth quarter and the
interpretive phase continuing into the first quarter of 1999.  Partly offsetting
the decline in levels of Project seismic expenses, the Company's share of such
expenses increased from 50% to 100% pursuant to the arbitration panel's ruling
for Project seismic costs generally incurred after December 31, 1997.  As a
result of such ruling the Company recognized a charge to exploration expense of
$1,146,688 that previously had been attributable to Cheniere.

     General and administrative expenses rose $1,426,709 from $1,560,861 in 1997
to $2,987,570 in 1998 principally due to increased legal expenses.  The Company
had no comparable legal expenses in 1997.  Most of the balance of the general
and administrative expense increase is attributable to increases in personnel
that were made during the second half of 1997.  Research and development
expenses also increased by $281,230 due to the commencement of research and
development activity during mid 1997.

     Oil and gas revenues decreased from $1,066,689 in 1997 to $389,798 in 1998
due mostly to a 51% decline in gas sales volumes and an 87% decline in oil sales
volumes.  Gas sales volumes fell from 336,730 thousand cubic feet ("Mcf") in
1997 to 165,762 Mcf in 1998.  In addition, oil sales volumes fell from 9,377
barrels of oil ("Bbls") to 1,187 Bbls in the respective periods. The decline in
such sales volumes is mostly due to natural production declines in the two
producing wells in which the Company has an interest.

     During 1998, the Company recorded gains on the sales of properties
amounting to $346,321 versus net losses of $108,385 in 1997.  The Company
typically experiences fluctuations in gains or losses on the sales of properties
due to a number of factors such as, but not limited to, the timing and cost of
lease acquisitions, the availability of leaseholds in particular prospect areas
and market conditions, both generally and in the oil and gas industry, at the
time of sale.

     The increase in the net loss per share from $.77 in 1997 to $.93 in 1998
was also affected by an increase in the weighted average number of the Company's
Common Shares (basic and diluted) due to the issuance of 3,680,000 shares in a
public offering in August 1997.

LIQUIDITY AND CAPITAL RESOURCES

     The Company has incurred net losses and negative cash flows from operations
since its inception in 1994.  In 1999 and 1998, the Company incurred net losses
of $2,835,318 and $9,611,738, respectively. The Company is principally engaged
in one industry and geographic segment, oil and gas exploration and production,
and concentrated its exploration efforts since early 1996 in an area of the
Louisiana Transition Zone, known as the Project.  Since inception of the
Project, the Company and Cheniere have expended approximately $21,640,171
pursuant to the terms of the Project's agreement.  In addition, during 1998 the
Company expended approximately $5,753,010 on unproved property costs, almost all
of which were on prospects within the Project.  Costs expended in 1999 on the
project were negligible.  The source of funding for these activities has come
from funds generated from public and private equity offerings, cash flow from
the Company's operations, and cash payments made to it under the Cheniere
Exploration Agreement.  Sources of funds include approximately $24.1 million
from the sale of securities in 1993, 1994, 1995 and 1997, and $16.4 million
provided under the Cheniere Exploration Agreement.  The Company does not
currently hold any funds advanced under that agreement.

     During 1998, the Company's near-term business strategy anticipated that its
cash needs would be satisfied from a combination of available cash, sales of
interests in Project prospects, sale(s) of interests in the Project itself and
reimbursements by Cheniere for Project costs which the Company believed it was
owed.  The Company expected a sequence of events including, but not limited to,
the above items as well as

                                       18
<PAGE>

successful well completions, equity offerings, exercise of warrants and options
on its common stock and debt placements, any combination of which could be
adequate sources of cash inflows. However, due mostly to potential buyers'
concerns over uncertainties of ownership interests before the arbitration ruling
and market conditions thereafter, the Company did not generate significant sales
of Project prospects and, therefore, did not produce sufficient levels of cash
inflows during the near term. From the last half of 1998 through the first half
of 1999, the Company believes that market conditions were not conducive for
selling interests in prospects. Furthermore, the arbitration ruling did not
mandate any immediate cash payments from Cheniere to the Company.

     During mid 1998 subsequent to the acquisition of most of its current
inventory of Project leases, the Company commenced marketing activities with a
view to selling interests in Project prospects that were ready for sale.  The
Company understands that during this period suitable buyers were available and
that such buyers were conducting exploration activities including the
acquisition of prospects and the drilling of wells on such prospects.  It
believes that its marketing efforts were unsuccessful mostly because of
uncertainties over the Cheniere litigation, primarily those matters relating to
the Company's and Cheniere's Project lease ownership interests.  Subsequent to
the arbitration ruling in December 1998, the Company and Cheniere informally
agreed to the resolution of certain matters in order that they could recommence
their prospect marketing activities.  However, market conditions considerably
deteriorated to the point that significantly fewer industry participants were
actively acquiring oil and gas prospect interests at that time.

     Due to the adverse factors presented above, the Company had to rely
principally on its available cash to continue its operations.  However, in order
to conserve its remaining cash resources, the Company instituted certain cost
reducing actions, including, but not limited to, employee terminations and
office lease reductions.  By restructuring its operations, the Company narrowed
its business strategy to focus its activities almost entirely on the marketing
of the West Cameron project, marketing the Wavefield Imaging Technology, and
seeking merger partners in order to achieve sufficient liquidity to maintain
levels of operations.  Coupled with these initiatives and because marketing
activities did not result in sales of prospects where significant delay rental
obligations were due in mid-1999, the Company relinquished various leases by
electing not to pay such delay rental commitments.  The Company recorded a
$3,000,000 impairment in 1998 due to the recognition at that time of these
potential events. During 1999, the Company expensed an additional $712,390 in
direct write-offs of Project leases and recorded an additional $750,000
impairment allowance for the recognition of a decline in value of its remaining
leases.

     The Company does not expect to generate operating cash flow or net income
in 2000 unless it sells substantial interests in the Project itself.  The
Company contemplates that a sale of such interests would include prospect
development commitments and financing provided by the purchasers coupled with
retained interests and back-in rights to the Company, and additional cash
consideration to the Company for recoupment of costs incurred in identifying
such prospective interests.  As generally required by the successful efforts
method of accounting, the Company has expensed all of its costs in the Project
as of December 31, 1999, and accordingly, any payments for the recoupment of
non-capitalized costs would be treated as income to the Company.  There can be
no assurance that the Company will be successful in the selling of significant
interests or in receiving payments for the recoupment of the Company's costs
incurred to date on this Project.  In addition, there can be no assurance that
the Company will have sufficient cash available or be able to acquire new cash
resources if the Company is not successful in selling its desired level of
interests in the Project or on terms that require little or no cash resources
for prospect commitments.  The Company does not presently maintain any credit
facilities.

     As an alternative strategy, the Company is actively seeking merger partners
that could utilize its remaining cash, net operating tax loss and its public
market.  Such merger may or may not be in the oil and gas industry.  There can
be no assurance that the Company will be successful in consummating a merger.

     As of December 31, 1999, the Company maintained a $300,000 bond that was
required to hold its federal oil and gas leases.  A United States Treasury Note
collateralized this bond.  Subsequent to December 31, 1999, the bond and the
collateralized United States Treasury Note were reduced to $50,000.  The
$250,000 difference was returned to the Company.  In the event that the Company
would act as operator on a federal offshore lease or is otherwise required to
increase its bonding by federal or state authorities, significant amounts of
capital may be required for additional collateral to satisfy bonding
requirements.

                                       19
<PAGE>

     The Company is unaware of any possible exposure from actual or potential
claims or lawsuits involving environmental matters.  As such, no liability is
accrued at December 31, 1999.

ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The financial statements required by this Item are incorporated under Item
13 in Part III of this report.


ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

     In December, 1999, the Company determined to replace Arthur Andersen LLP
("Andersen") as its independent accountants to audit its financial statements
for economic reasons.

     The decision to change accountants was approved by Zydeco's Board of
Directors on December 31, 1999.

     Zydeco has engaged the firm of Hein + Associates LLP ("Hein") as of January
21, 2000.  Hein was not consulted during the two most recent fiscal years or any
subsequent interim period on any matters relating to accounting principles or a
specific transaction, either completed or proposed.

                                       20
<PAGE>

                                    Part III

ITEM 9. DIRECTORS, EXECUTIVE OFFICER, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
        WITH SECTION 16(a) OF THE EXCHANGE ACT

  Set Forth below is information concerning the director of the Company who was
serving on the Board of Directors at December 31, 1999.  Mr. Myers' term as sole
director will continue until the next Annual Meeting of Stockholders or until
his successor has been duly elected and qualified.

  SAM B. MYERS, JR., age 61, has served since December 1995 as Director,
Chairman of the Board of Directors, and Chief Executive Officer and, until
October 1996, President of the Company and in the same capacity for Zydeco
Exploration, Inc. ("Zydeco Exploration"), the Company's subsidiary, since its
formation in March 1994. Mr. Myers is also Director and President of Wavefield
Image, Inc. ("Wavefield"), the Company's other subsidiary. Mr. Myers has been an
independent oil and gas operator and private investor since 1961. In addition,
Mr. Myers has served as Chairman of the Board of Directors of Search Capital
Group, Inc. ("Search"), a publicly held specialty financial services company,
from August 1985 until May 1995 when he voluntarily resigned and as President
and Chief Executive Officer from August 1985 until August 1993 and from November
1994 to January 1995.

            SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

  Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's executive officers and directors, and persons who beneficially own
more than the percent of the Company's Common Stock, to file reports of their
beneficial ownership (Forms 3, 4 and 5, and any amendment thereto) with the
Securities and Exchange Commission.  Executive officers, directors, and greater-
than-ten percent holders are required to furnish the Company with copies of the
forms that they file.

  Based solely on a review of the copies of such forms furnished to the Company
and written representations from the executive officer and director, the Company
believes that all Section 16(a) filing requirements applicable to its executive
officers and officers were complied with during its fiscal year 1999.

ITEM 10. EXECUTIVE COMPENSATION

  The following table reflects all forms of compensation for services to the
Company and its subsidiaries for the years ended December 31, 1999, 1998, and
1997, for the Company's only officer, Mr. Myers.

                                ANNUAL COMPENSATION
                                                             OTHER ANNUAL
NAME AND POSITION              YEAR   SALARY(S)   BONUS ($)  COMPENSATION ($)
-----------------              ----   --------    -------    -----------------
Sam B. Myers, Jr.              1999   $150,000    $  -            $  -
   Chief Executive Officer     1998   $150,000    $  -            $  -
                               1997   $150,000    $  -            $  -

                                       21
<PAGE>

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

                              BENEFICIAL OWNERSHIP

          The following table sets forth certain information, as of December 31,
1999, regarding beneficial ownership of Common Stock of each shareholder who is
known by the Company to beneficially own more than 5% of Common Stock, each
Director, each Named Executive, and all directors and executive officers as a
group.

                                                             COMMON STOCK
                                                         BENEFICIAL OWNERSHIP
                                                        ----------------------
                                                        NUMBER OF   PERCENTAGE
NAME AND ADDRESS (IF REQUIRED) OF BENEFICIAL OWNER       SHARES      OF TOTAL
--------------------------------------------------      ----------  ----------
Richard L. Morgan                                       1,562,510(1)  15.57%
 700 North Pearl Street, Suite 2170
 Dallas, Texas 75201

David M. Fender                                         1,558,393(2)  15.52%
 116 East Front Street
 Tyler, Texas 75702

Sam B. Myers, Jr.                                         133,215      1.3%

Directors and Officers as a Group (1 Person)              133,215      1.3%
---------------
(1)  Includes 781,255 shares owned by The SBM III Trust and 781,255 shares owned
     by The MFM Trust; Mr. Morgan is trustee of both trusts.  The SBM III Trust
     is a trust established for the benefit of the children of Sam B. Myers,
     III.  The MFM Trust is a trust established for the benefit of the children
     of Melanie F. Myers.  Mr. Morgan has sole voting and dispositive power with
     respect to such shares.  Mr. Sam B. Myers, Jr. does not have and disclaims
     any beneficial ownership of the shares owned by the trusts.
(2)  Includes 30,000 shares owned personally by Mr. Fender and 1,528,393 shares
     owned by The Bon Temps Trust for which Mr. Fender is trustee.  The Bon
     Temps Trust is a trust established for the benefit of the Children of Sam
     B. Myers, Jr.  Mr. Fender has sole voting and dispositive power with
     respect to such shares.  Mr. Myers does not have and disclaims any
     beneficial ownership of the shares owned by the trust.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     On December 30, 1998, the Company sold a 6.25% working interest
participation in a prospect to a limited partnership whose general partners are
the president and a vice president of a company who are the children of the
Company's Chairman and CEO. The agreement provides that the limited partnership
pay to the Company a total consideration of $204,000 for this interest which
included the turnkey cost of drilling this prospect's first well.  Pursuant to
the terms of the agreement with such limited partnership, the basis of this
partnership's participation in this prospect is on comparable terms of
participation by an unrelated party.  In connection with the tentative agreement
with Cheniere discussed in Note 3 - "Exploration Agreements, Cheniere
Exploration Agreement and Litigation", the Company and Cheniere agreed to share
all proceeds attributable to the sale of Project prospects, including cash and
promoted interests.  Cheniere's estimated share of the total consideration paid
by the limited partnership was approximately  $64,000.  During 1999, this
prospect's first well was drilled and amounts related to the turnkey portion
were earned by the Company. The Company and the limited partnership did not
participate in a completion attempt on this well.  The Company expensed
approximately $563,000 as dry hole expense in 1999, which was net of the
Company's share of the turnkey contribution. The agreement also provides that
the limited partnership has a one-time option to acquire a 6.25% working
interest participation in an adjacent prospect for $62,500 and to pay its pro-
rata share of the second prospect's drilling costs on a promoted basis.  The
leases under the second prospect have expired.

                                       22
<PAGE>

     The Company engaged the services of a law firm, including the services of a
partner in the firm who is a relative of an officer and director of the Company.
The Company incurred costs of $48,501 and $176,505 to this firm during the years
ended December 31, 1999 and 1998, respectively.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a)(1) FINANCIAL STATEMENTS

       See "Index to Consolidated Financial Statements" set forth on page F-1.

(a)(2) FINANCIAL STATEMENT SCHEDULES

       Not applicable.

(a)(3) EXHIBITS

       See pages E-1 through E-3 for a listing of exhibits.

      The exhibits to this report have been included only with the copies of
      this report filed with the Securities and Exchange Commission. Copies of
      individual exhibits will be furnished to stockholders upon written request
      to Chief Executive Officer, Zydeco Energy, Inc., 2170 Plaza of the
      Americas, 700 N. Pearl Street, Dallas, Texas 75201 with payment of a
      reasonable fee.

(b)   REPORTS ON FORM 8-K

      The Company filed a Current Report on Form 8-K dated January 21, 2000 that
      announced a change in its independent accountants.

                                       23
<PAGE>

                                   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, in the City of Dallas,
State of Texas.

                                                ZYDECO ENERGY, INC.
                                                   (Registrant)



Date:  March 28, 2000                       By: /s/ SAM B. MYERS JR.
                                               --------------------------------
                                                       Sam B. Myers, Jr.
                                               Chairman of the Board, President
                                                          CEO and COO

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

Signature                           Title                            Date
---------                          -------                           ----

/s/ SAM B. MYERS, JR.     Chairman of the Board, President, CEO  March 28, 2000
---------------------     And COO (Principal Executive and
Sam B. Myers, Jr.         Financial Officer)

                                       24
<PAGE>

                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>


                                                                                  Page
                                                                                  ----
<S>                                                                         <C>
REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS................................   F-2 and F-3
CONSOLIDATED FINANCIAL STATEMENTS
     Consolidated Balance Sheets as of December 31, 1999 and 1998........           F-4
     Consolidated Statements of Operations for the Two Years
          Ended December 31, 1999........................................           F-5
     Consolidated Statements of Stockholders' Equity for the Two Years
          Ended December 31, 1999........................................           F-6
     Consolidated Statements of Cash Flows for the Two Years
          Ended December 31, 1999........................................           F-7
     Notes to Consolidated Financial Statements..........................           F-8
</TABLE>

                                      F-1
<PAGE>

                          INDEPENDENT AUDITOR'S REPORT

The Stockholders and Board of Directors
Zydeco Energy, Inc.
Dallas, Texas

We have audited the accompanying consolidated balance sheet of Zydeco Energy,
Inc. and subsidiaries as of December 31, 1999, and the related consolidated
statements of operations, stockholders' equity and cash flows for the year then
ended.  These financial statements are the responsibility of the Company's
management.  Our responsibility is to express an opinion on these financial
statements based on our audit.

We conducted our audit 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 audit provides 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 Zydeco Energy, Inc. and
subsidiaries as of December 31, 1999, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.



Hein + Associates LLP

Dallas, Texas
March 8, 2000

                                      F-2
<PAGE>

                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders and the Board of Directors of Zydeco Energy Inc.:

We have audited the accompanying consolidated balance sheet of Zydeco Energy,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1998, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States. 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 audit provides 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 Zydeco Energy, Inc. and
subsidiaries as of December 31, 1998 and the results of its operations and its
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has substantially used most of its capital resources which
raises substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2. The
financial statement do not include any adjustments relating to the
recoverability or classification of asset carrying amounts or the amount or
classification of liabilities that might result should the Company be unable to
continue as a going concern.


                              ARTHUR ANDERSEN LLP











                                      F-3
Houston, Texas
March 21, 1999
<PAGE>

                     ZYDECO ENERGY, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                                   December 31,
                                                                                        -----------------------------------
                                                                                             1999                1998
                                                                                        ----------------    ---------------
                                           ASSETS
<S>                                                                                     <C>                  <C>
Current Assets
      Cash and Cash Equivalents                                                         $    500,876          $  1,912,970
      Oil and Gas Revenue Receivables                                                         26,020                47,916
      Prepaid Expenses                                                                         9,494                50,235
      Other Current Assets                                                                    75,777               141,664
                                                                                        ------------          ------------
          Total Current Assets                                                               612,167             2,152,785

Oil and Gas Properties, Using Successful Efforts Method of Accounting
      Proved Properties                                                                      334,972               334,972
      Unproved Properties                                                                  1,643,324             2,796,471
Equipment and Software, at Cost                                                               41,896             2,331,361
                                                                                        ------------          ------------
                                                                                           2,020,192             5,462,804
Less: Accumulated Depreciation, Depletion, Amortization and Impairment                    (1,118,791)           (2,167,489)
                                                                                        ------------          ------------
                                                                                             901,401             3,295,315
Investment in Wavefield Imaging Technology, net                                              671,206               928,229
Common Stock Investment                                                                       69,244                    --
Operating Bond and Other Assets                                                              300,994               313,329
                                                                                        ------------          ------------
TOTAL ASSETS                                                                            $  2,555,012          $  6,689,658
                                                                                        ============          ============

                            LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities
      Accounts Payable                                                                  $    225,044          $  1,181,387
      Accrued Liabilities                                                                     28,401               330,041
                                                                                        ------------          ------------
          Total Current Liabilities                                                          253,445             1,511,428

Commitments and Contingencies (Note 3)

Stockholders' Equity
      Common Stock, Par Value $.001 Per Share; 50,000,000 Shares
          Authorized; 11,338,351 Shares Issued; 10,069,096
          and 10,357,096 Shares Outstanding, Respectively                                     11,338                11,338
      Additional Paid-In Capital                                                          24,531,668            24,531,668
      Unrealized Loss on Stock Investment                                                    (16,256)                   --
      Accumulated Deficit                                                                (21,763,842)          (18,928,524)
      Less Treasury Stock, at Cost; 1,269,255 and 981,255
          Shares, Respectively                                                              (461,341)             (436,252)
                                                                                        ------------          ------------
          Total Stockholders' Equity                                                       2,301,567             5,178,230
                                                                                        ------------          ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                              $  2,555,012          $  6,689,658
                                                                                        ============          ============
</TABLE>

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

                                      F-4
<PAGE>

                     ZYDECO ENERGY, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

                                                     Years Ended December 31,
                                                 ---------------------------------
                                                     1999                1998
                                                 ---------------------------------
<S>                                              <C>               <C>
Revenues
      Oil and Gas Sales                            $    187,366    $    389,798
      Gain/(Loss) on Sales of Properties                136,130         346,321
      Other                                              14,625          47,382
                                                   ------------    ------------
                                                        338,121         783,501
                                                   ------------    ------------
Expenses
      Exploration Expenses
               Geological and Geophysical               170,885       3,561,184
               Impairment of Unproved Properties        750,000       3,000,000
               Dry Hole and Other Costs               1,369,053         148,285
      Production Costs                                   18,453          17,170
      Research and Development Costs                    157,909         409,240
      Impairment of Investment in
               Wavefield Imaging Technology             200,000              --
      Depreciation, Depletion, and Amortization         316,705         569,020
      General and Administrative                        679,003       2,987,570
                                                   ------------    ------------
                                                      3,662,008      10,692,469
                                                   ------------    ------------
Operating Loss                                       (3,323,887)     (9,908,968)
                                                   ------------    ------------
Other Income (Expense)
      Interest Income                                    49,485         297,352
      Interest Expense                                     (124)           (122)
                                                   ------------    ------------
                                                         49,361         297,230
                                                   ------------    ------------
Loss Before Extraordinary Item                       (3,274,526)     (9,611,738)

Extraordinary Gain from Reduction of Liabilities        439,208              --
                                                   ------------    ------------
Net Loss                                           $ (2,835,318)   $ (9,611,738)
                                                   ============    ============
Per Common Share-
      Weighted Average Number of
      Common Shares Outstanding
      (Basic and Diluted)                            10,345,096      10,365,106
                                                   ============    ============
Net Loss Per Common Share (Basic and Diluted)-
      Net Loss Before Extraordinary Item           $      (0.32)   $      (0.93)
      Extraordinary Item                           $      (0.04)   $         --
      Net Loss                                     $      (0.28)   $      (0.93)
</TABLE>

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

                                      F-5
<PAGE>

                     ZYDECO ENERGY, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>

                                                               For the Years Ended December 31, 1999 and 1998
                                -------------------------------------------------------------------------------------------------
                                                                           Unrealized
                                                             Additional     Loss on                                   Total
                                         Common Stock          Paid-in        Stock      Accumulated   Treasury    Stockholders'
                                     Shares       Amount       Capital     Investment      Deficit       Stock         Equity
                                  -------------  ---------   ------------  ------------  ------------  ----------  --------------
<S>                                <C>           <C>         <C>           <C>           <C>           <C>         <C>
Balance at December 31, 1997       10,537,096     11,318      24,499,688           --     (9,316,786)     (7,252)    15,186,968
Net Loss                                   --         --              --           --     (9,611,738)         --     (9,611,738)
Options Exercised for Common Stock     20,000         20          31,980           --             --          --         32,000
Acquisition of Treasury Stock        (200,000)        --              --           --             --    (429,000)      (429,000)
                                   ----------    -------     ------------   ---------   ------------   ---------  -------------
Balance at December 31, 1998       10,357,096    $11,338     $24,531,668           --   $(18,928,524)  $(436,252)  $  5,178,230

Net Loss                                   --         --              --           --     (2,835,318)         --     (2,835,318)
Unrealized Loss on Investment              --         --              --      (16,256)            --          --        (16,256)
Acquisition of Treasury Stock        (288,000)        --              --           --             --     (25,089)       (25,089)
                                   ----------    -------     ------------   ---------   ------------  ----------  -------------
Balance at December 31, 1999       10,069,096    $11,338     $24,531,668   $  (16,256)  $(21,763,842)  $(461,341)   $ 2,301,567
                                   ==========    =======     ===========   ==========   ============   =========    ===========
</TABLE>

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

                                      F-6

<PAGE>

                     ZYDECO ENERGY, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

                                                                        Years Ended December 31,
                                                                   ------------------------------------
                                                                        1999                 1998
                                                                   ----------------    ----------------
<S>                                                                <C>                  <C>
Cash Flows from Operating Activities:
Net Loss                                                              $(2,835,318)      $(9,611,738)
Adjustments to Reconcile Net Loss to Net Cash
   Used in Operating Activities:
       Depreciation, Depletion, and Amortization                          316,705           569,020
       Impairment of Unproved Leases                                      750,000         3,000,000
       Impairment of Investment in Wavefield Imaging Technology           200,000                 -
       (Gain)/Loss on Sales of Properties                                (136,130)         (346,321)
       Exploration and Dry Hole Costs                                   2,119,053         3,709,469
       Extraordinary Gain from Reduction of Liabilities                  (439,208)                -
    Changes in Operating Assets and Liabilities
       Decrease in Oil and Gas Revenue Receivables                         21,896           104,041
       (Increase) Decrease in Other Current Assets                         65,888           (67,003)
       Increase (Decrease) in Accounts Payable                           (365,619)          790,568
       Decrease in Accrued Liabilities                                   (299,482)           39,978
       Other                                                               27,440            (6,721)
                                                                      -----------       -----------
    Net Cash Used in Operating Activities                                (574,775)       (1,818,707)
                                                                      -----------       -----------
Cash Flows from Investing Activities:
    Additions to Oil and Gas Properties                                   (33,836)       (5,753,010)
    Exploration and Dry Hole Costs                                     (1,404,009)       (2,557,121)
    Proceeds from the Sale of Properties                                  686,499           365,944
    Net Change in Exploration Obligation                                    6,597           280,741
    Investment in Securities                                              (85,500)                -
    Purchases of Equipment and Software                                    (4,823)         (418,313)
    Other                                                                  25,000            12,972
                                                                      -----------       -----------
    Net Cash Used in Investing Activities                                (810,072)       (8,068,787)
                                                                      -----------       -----------
Cash Flows from Financing Activities:
    Treasury Stock Purchase                                               (25,089)         (429,000)
    Other                                                                  (2,158)           29,158
                                                                      -----------       -----------
    Net Cash Used in Financing Activities                                 (27,247)         (399,842)
                                                                      -----------       -----------
Net (Decrease) in Cash and Cash Equivalents                            (1,412,094)      (10,287,336)
Cash and Cash Equivalents at Beginning of Year                          1,912,970        12,200,306
                                                                      -----------       -----------
Cash and Cash Equivalents at End of Year                               $  500,876       $ 1,912,970
                                                                      ===========       ===========
Cash Paid/(Received) during the Year for:
    Interest                                                           $      124       $       122
</TABLE>

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

                                      F-7
<PAGE>

                     ZYDECO ENERGY, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  ORGANIZATION AND  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.

     Organization.  Zydeco Energy, Inc. was incorporated in Delaware in June
     1993, as a "special purpose acquisition corporation" under the name TN
     Energy Services Acquisition Corp. ("TN Energy"), for the purpose of raising
     funds and acquiring an operating business engaged in the energy services
     industry.  Other than its efforts to acquire an energy services business,
     TN Energy did not engage in any business activities prior to December 1995.
     On December 20, 1995, TN Energy acquired all the outstanding common stock
     and preferred stock of Zydeco Exploration, Inc. ("Zydeco") pursuant to a
     merger (the "TN Acquisition") and changed its name to Zydeco Energy, Inc.
     As used herein, unless the context indicates otherwise, the term "Company"
     refers to Zydeco Energy, Inc., and its wholly-owned subsidiaries, Zydeco
     Exploration, Inc. and Wavefield Image, Inc.  Eastern Energy, Inc., a
     wholly-owned subsidiary was dissolved in 1999.

     The Company has been engaged in the identification of drilling prospects,
     acquiring leases, drilling and producing reserves from those properties
     utilizing advanced 3D seismic technology.  The Company's operations have
     been curtailed in 1999, as described in Note 2.

     SIGNIFICANT ACCOUNTING POLICIES

     Basis of Presentation.  For accounting purposes, the TN Acquisition has
     been treated as a recapitalization of Zydeco with Zydeco as the acquiror
     (reverse acquisition).  The consolidated financial statements include the
     accounts of the Company, and its wholly-owned subsidiaries, Zydeco
     Exploration, Inc., Wavefield Image, Inc. (since July 1, 1997) and Eastern
     Energy, Inc. (since March 4, 1998).  However, Eastern Energy, Inc. was
     dissolved effective June 25, 1999.  (see "Note 4 - Acquisitions").  All
     significant intercompany transactions have been eliminated in
     consolidation.

     In connection with the Company's exploration agreements (See "Note 3 -
     Exploration Agreements"), advances to the Company are treated as
     exploration obligations and expenditures made by the Company pursuant to
     the exploration agreement are charged against the related exploration
     obligation.  No costs or expenses incurred pursuant to the exploration
     agreement is recognized by the Company until the Company begins sharing in
     such costs.

     Cash and Cash Equivalents.  The Company considers all highly liquid
     investments purchased with original maturities of three months or less to
     be cash equivalents.

     Oil and Gas Properties.  The Company accounts for its oil and gas
     exploration and production activities using the successful efforts method
     of accounting.  Under this method, acquisition costs for proved and
     unproved properties are capitalized when incurred.  Exploration costs,
     including geological and geophysical costs and the costs of carrying and
     retaining unproved properties, are expensed.  Exploratory drilling costs
     are initially capitalized, but charged to expense if and when the well is
     determined not to have found proved reserves.  Costs of productive wells,
     developmental dry holes and productive leases are capitalized and amortized
     on a property-by-property basis using the units-of-production method.  The
     estimated costs of future plugging, abandonment, restoration and
     dismantlement are considered as a component of the calculation of
     depreciation, depletion, and amortization.  Unproved properties with
     significant acquisition costs are assessed periodically, as conditions
     warrant, on a property-by-property basis and any impairment in value is
     charged to expense.  The Company recorded impairment allowances in 1999 and
     1998 as described in Note 2.

     Equipment.  Hardware and software associated with the 3D seismic technology
     equipment, office furniture and equipment, and leasehold improvements are
     recorded at cost, and the

                                      F-8
<PAGE>

                     ZYDECO ENERGY, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     related depreciation and amortization is calculated on a straight-line
     basis over the shorter of the estimated useful lives of the assets, which
     range from 2 to 7 years, or the lease period.

     Impairment of Long-Lived Assets.  In accordance with the provisions of
     Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for
     the Impairment of Long-Lived Assets and for Long-Lived Assets to be
     Disposed of", management reviews its long-lived assets (i.e., oil and gas
     properties and Investment in Wavefield Imaging Technology.) whenever events
     or changes in circumstances indicate that the carrying amounts of such
     assets may not be recoverable.  If the carrying amounts of any of the
     Company's long-lived assets are greater than their projected undiscounted
     future cash flows, an impairment loss to adjust such assets to fair value
     is recognized.  The determination of future cash flows may be based on a
     variety of items including, but not limited to, current proved oil and gas
     reserve estimates and current oil and gas prices and costs.  Management's
     estimates of fair value may also reflect a discount factor on future cash
     flows consistent with the rate used by the Company in other fair-value
     determinations.  Through December 31, 1999, an impairment allowance of
     $200,000 has been recognized on the Company's investment in Wavefield
     Imaging Technology.

     Income Taxes.  The Company follows SFAS No. 109 which requires the asset
     and liability approach to accounting for income taxes.  Under this
     approach, deferred income taxes are determined based upon differences
     between the financial statement and tax basis of the Company's assets and
     liabilities and operating loss carryforwards using enacted tax rates in
     effect for the years in which the differences are expected to reverse.
     Deferred tax assets are recognized if it is more likely than not that the
     future tax benefit will be realized.

     Oil and Gas Revenues.  Oil and gas revenues are recorded using the
     entitlements method of accounting, whereby the Company recognizes oil and
     gas revenues as its entitled share is produced.  Individually and in the
     aggregate, the Company has no material gas imbalances as of December 31,
     1999 and 1998.

     Earnings Per Share.  Basic earnings per common share is based on the
     weighted average number of shares of common stock outstanding during the
     period.  Diluted earnings per share is computed based on the weighted
     average shares of common stock plus the assumed issuance of common stock
     for all potentially dilutive securities.  The Company's common stock
     options, common stock warrants, and convertible preferred stock are
     potential common shares but were anti-dilutive in all periods presented.

     Use of Estimates.  The preparation of financial statements in conformity
     with generally accepted accounting principles requires management to make
     estimates and assumptions that affect the reported amounts of assets and
     liabilities and disclosure of contingent assets and liabilities at the date
     of the financial statements and the reported amounts of revenues and
     expenses during the reporting period.  Actual results could differ from
     those estimates.  Significant estimates with regard to these financial
     statements include the estimate of proved oil and gas reserve volumes and
     the related discounted future net cash flows therefrom.  See "Note 11 - Oil
     and Gas Producing Activities".

     Reclassifications.  Certain reclassifications of prior period amounts have
     been made to conform with current year presentation.

2.   FINANCIAL RESULTS AND LIQUIDITY

     The Company has incurred net losses of $2,835,318 and $9,611,738 in 1999
     and 1998, respectively. The Company is principally engaged in one industry
     and geographic segment, oil

                                      F-9
<PAGE>

                     ZYDECO ENERGY, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     and gas exploration and production, and until recently had concentrated its
     exploration efforts in an area of the Louisiana Transition Zone, known as
     the West Cameron Seismic Project ("Project").  From the inception of the
     Project in 1996 until late 1998, the Company and Cheniere expended
     approximately $21.6 million pursuant to the terms of that Project's
     agreement.  In addition, during 1998 the Company expended approximately
     $5.8 million on unproved property costs, almost all of which were on
     prospects within the Project. See Note 3 - "Cheniere Exploration Agreement
     and Litigation" for a description of that activity.  The source of funding
     for these activities has come from funds generated from public and private
     equity offerings, cash flow from the Company's operations, and cash
     payments made to it under the Cheniere Exploration Agreement.  Sources of
     funds include approximately $24.1 million from the sale of securities in
     1993, 1994, 1995 and 1997, and $16.4 million provided under the Cheniere
     Exploration Agreement.

     From 1998 until early 1999, the Company believed that its near term cash
     needs would be satisfied from a combination of available cash, sales of
     interests in Project prospects, sale(s) of interests in the Project itself,
     oil and gas production and payments by Cheniere mandated by the arbitration
     panel convened to rule in the Cheniere litigation matters.  However, due
     mostly to potential buyers' concerns over uncertainties of ownership
     interests before the arbitration ruling and market conditions thereafter,
     the Company did not generate significant sales of Project prospects and,
     therefore, did not produce sufficient levels of cash inflows during that
     period.  From the last half of 1998 and well into 1999, market conditions
     for selling interests in prospects had significantly deteriorated.
     Furthermore, the arbitration ruling did not mandate any immediate cash
     payments from Cheniere to the Company.

     Subsequent to the arbitration ruling in December 1998, the Company and
     Cheniere informally agreed to the resolution of certain matters in order
     that they could recommence their prospect marketing activities. However,
     market conditions had considerably deteriorated to the point that a
     significantly fewer number of industry participants were actively acquiring
     oil and gas prospect interests. Thus, the market for selling prospects was
     very difficult, and, as a result, proceeds from the sales of interests in
     prospects during the 1999 first half were insufficient to sustain the
     Company's previous levels of operations and provide an adequate source of
     funds to finance the Company's share of oil and gas lease rentals due in
     mid 1999. The Company relinquished its share of a majority of its leases
     due to such non-payment of delay rentals. The Company recorded an
     impairment of $3,000,000 as of December 31, 1998, expensed approximately
     $722,000 due to the write off of leases in 1999 and recorded an additional
     impairment amounting to $750,000 as of December 31, 1999.

     Due to the adverse factors presented above, the Company has had to rely
     principally on available cash to continue its operations.  However, in
     order to conserve its remaining cash resources, the Company instituted
     certain actions, including, but not limited to, employee terminations,
     reductions in vendor obligations and sales of non-essential furniture,
     office equipment and computer equipment.  By restructuring its operations,
     the Company altered its business strategy.  It more narrowly focused its
     exploration activities almost entirely on the marketing of interests in the
     Project itself.  In addition, it sought merger partners to utilize its cash
     and public market and attempted to market its Wavefield Imaging Technology.

     Should the Company be successful in selling interests in its Project in the
     near term, sufficient capital may need to be raised to quickly expand its
     operations.  In addition, the Company will continue to seek other sources
     of capital including, but not limited to, merger partners and the issuance
     of equity securities.  There can be no assurance that the Company will be
     successful in selling interests in its Project, issuing equity securities,
     obtaining any other form of financing, merge the Company or market its
     Wavefield Imaging Technology.  However, management believes the Company has
     sufficient working capital to fund the Company's routine activities through
     the year 2000.

                                      F-10
<PAGE>

                     ZYDECO ENERGY, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3.  CHENIERE EXPLORATION AGREEMENT AND LITIGATION.

     In April 1996, the Company executed an Exploration Agreement (the "Cheniere
     Agreement") with Cheniere Energy Operating Co., Inc., a wholly owned
     subsidiary of Cheniere Energy, Inc. and formerly known as FX Energy, Inc.,
     (collectively "Cheniere") covering an area of land and waters in western
     Cameron Parish, Louisiana ("Project"). The Cheniere Agreement, as amended,
     provided for Cheniere to fund the first $13.5 million of costs plus 50% of
     costs in excess of $13.5 million of the Project. The costs covered by the
     Cheniere Agreement included, but were not limited to, 3D seismic
     acquisition costs, including the purchase of seismic rights or lease
     options on the related onshore acreage of the Project, the purchase of
     other 3D seismic data, and processing of seismic data over the Project
     area.

     On April 17, 1998, Zydeco Exploration, Inc. filed a petition with the
     American Arbitration Association for arbitration in order to resolve
     certain disputes that arose with Cheniere.  The arbitration claim sought to
     resolve differences over Cheniere's funding obligations, the parties'
     ownership in various leases and prospects, the scope of pre-drilling
     activities that Cheniere can conduct within the Project area, the
     dissemination by Cheniere of confidential seismic data covering the Project
     area, and a variety of related issues.  Cheniere filed a counterclaim in
     the arbitration action, and the pleadings were amended to include Zydeco
     Energy, Inc. as well as Zydeco Exploration, Inc (collectively "Zydeco").
     The parties sought conflicting declaratory and injunctive relief and
     damages from each other.  In addition, on April 22, 1998, Zydeco initiated
     a civil suit in state district court in Harris County, Texas against two
     individuals who are parties to confidentiality agreements with Zydeco and
     who are employees of Cheniere.  Through this litigation, Zydeco sought and
     obtained a Temporary Restraining Order on April 22, 1998, restraining the
     individuals from breaching the terms of their confidentiality agreements
     with Zydeco.  Cheniere intervened in the litigation on April 27, 1998.  On
     May 4, 1998, Zydeco, Cheniere and the two individuals agreed to the entry
     of an Agreed Temporary Injunction.  The agreed Temporary Injunction expired
     on June 15, 1998, and the dispute, which led to the filing of the civil
     suit, was included in the arbitration action by agreement of the parties.

     On December 9, 1998 the three-member arbitration panel issued its decision
     in the arbitration proceedings brought by Zydeco against Cheniere. In its
     ruling, the panel confirmed Zydeco's position as program manager but
     recognized Cheniere's independent right to identify prospects and acquire
     leases in the West Cameron Seismic Project area.  The arbitration panel
     directed that Cheniere has the right to participate with a 50% working
     interest in most of the leases acquired by Zydeco or in prospects
     designated by Zydeco.  Cheniere, however, must exercise its right of
     participation and pay its share of such costs within a thirty-day period
     following Zydeco's formal notice of prospect designation.  For each
     prospect, Zydeco has the sole right to undertake the management and control
     of all prospect development for a reasonable period not to exceed 90 days
     following such formal notice.  The arbitration panel also ruled that
     project seismic costs generally incurred after December 31, 1997, are not
     reimbursable to Zydeco as seismic costs.  The Company believed that such
     costs, either in part or in whole, should be recouped from Cheniere as
     prospect costs.  In addition, if certain criteria are met, then sale
     proceeds from certain marketing activities would be paid to Cheniere until
     Cheniere recoups $13.5 million of its investment in the project.  Zydeco
     and Cheniere would share any such sales above that amount equally.  Neither
     party received any damage awards or recovery of legal costs.

     As a result of the arbitration panel's decision, Zydeco and Cheniere
     informally agreed to share responsibilities and ownership for certain
     activities incurred in the maintenance, marketing and sale of prospects
     generated and assembled by the parties.  Except for the costs of one
     prospect and certain other activities, neither party would seek
     reimbursement from the other for seismic and prospect costs generally
     incurred prior to the arbitration ruling.  After considering the
     arbitration panel's ruling and the two parties' tentative agreement,
     Cheniere's

                                     F-11

<PAGE>

                     ZYDECO ENERGY, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     and Zydeco's share of third party and processing costs incurred pursuant to
     the terms of the Cheniere Agreement was approximately $16,423,398 and
     $5,216,773, respectively, from inception to December 31, 1998. Project
     seismic costs amounting to $1,146,688 that previously had been attributable
     to Cheniere were charged to exploration expense in 1998. In addition, the
     Company paid approximately $5,753,010 for unproved leases during 1998.

4.   ACQUISITIONS.

     On July 1, 1997, the Company acquired all of the outstanding capital stock
     of Wavefield Image, Inc. ("Wavefield"), a privately held company that
     develops and licenses a seismic data processing technique known as
     Wavefield Imaging Technology.  This technology and associated patent are
     the principal asset of Wavefield. The Company is amortizing this investment
     over approximately 19 years (the life of the patent).  Amortization expense
     for 1999 and 1998 was $46,389 in each year. In addition, the Company
     recorded an impairment allowance of $200,000 to its Investment in Wavefield
     Imaging Technology during 1999.

5.   INCOME TAXES.

     Significant components of the Company's deferred tax liabilities and assets
     are as follows:

                                                     December 31,
                                              ---------------------------
                                                  1999           1998
                                              ------------   ------------
      Deferred Tax Liability                  $         -    $         -
                                              ===========    ===========
      Deferred Tax Assets
         Carryforwards                        $ 6,266,427    $ 2,522,586
         Book/Tax Differences in Bases
          of Oil and Gas Assets                   816,276      3,881,934
         Less Valuation Allowance              (7,082,703)    (6,404,520)
      Total Deferred Tax Assets               $         -    $         -
                                              ===========    ===========
      Net Deferred Tax Liability              $         -    $         -
                                              ===========    ===========

     As of December 31, 1999, the Company had a net operating loss carryforward
     for federal income tax purposes of approximately $18,400,000, which will be
     available to reduce future taxable income.  The full realization of the tax
     benefit associated with the carryforward depends predominantly upon the
     Company's ability to generate taxable income during the carryforward
     period.  Because of the current uncertainty of realizing such tax asset in
     the future, a valuation allowance has been recorded equal to the amount of
     the net deferred tax asset.  The net operating loss carryforward, if not
     utilized, will begin to expire in the year 2009.  In addition, the company
     has available $365,000 of statutory depletion as carryforward to apply
     against future taxable income.

6.   OPERATING LEASES.

     The Company incurred rental expense of $50,676 and $247,164 in 1999 and
     1998, respectively, in connection with its office leases. See "Note 8 -
     Related-Party Transactions".   At December 31, 1999, future minimum lease
     payments for leases having initial or remaining noncancelable lease terms
     in excess of one year were not material.



                                     F-12
<PAGE>

                     ZYDECO ENERGY, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7.   COMMON STOCK, CONVERTIBLE PREFERRED STOCK, AND WARRANTS.

     Common Stock Offering.  On August 26, 1997, the Company completed an
     offering of 3,680,000 shares of Common Stock and warrants to purchase
     320,000 shares of Common Stock (the "Offering").  Proceeds from the
     Offering were $14,056,189, net of Offering expenses of $1,583,911.

     In connection with the Offering, the Company sold to the Underwriters, for
     nominal consideration, warrants to purchase 320,000 shares of Common Stock
     from the Company ("1997 Underwriter Warrants").  The 1997 Underwriter
     Warrants are exercisable, in whole or in part, at an exercise price of
     $5.10 (120% of the Offering price) at any time during the four-year period
     commencing August 26, 1998.  The warrant agreement pursuant to which the
     1997 Underwriter Warrants were issued contains provisions providing for
     adjustment of the exercise price and the number and type of securities
     issuable upon exercise of the 1997 Underwriter Warrants should any one or
     more of certain specified events occur.  The 1997 Underwriter Warrants
     grant to the holders demand and piggy-back registration rights for the
     securities issuable upon exercise of the 1997 Underwriter Warrants.

     Placement Warrants.  In connection with a 1994 Private Placement Zydeco
     issued 72,268 Common Stock purchase warrants ("Placement Warrants") to the
     participating placement agents, each of which entitled the holder to
     purchase one share of Common Stock at an exercise price of $1.60 per share
     at any time prior to their expiration on December 2, 1999.  These warrants
     were subject to a cashless exercise provision (i.e., the exercise price may
     be satisfied by canceling a number of unexercised warrants valued by the
     difference between the exercise price and the market value of the shares).
     The initial value of such warrants issued in connection with the private
     placement was immaterial.  In 1997 and 1996, Placement Warrants were
     exercised for 1,888 and 29,592 shares of Common Stock, respectively, net of
     573 and 9,575 warrant shares, respectively, tendered in satisfaction of the
     exercise price.  At December 31, 1999, the remaining 30,640 unexercised
     Placement Warrants expired.

     Redeemable Warrants.  On December 26, 1993, the Company sold 1,500,000
     units ("Units") in its initial public offering ("IPO").  Each Unit consists
     of one share of the Company's Common Stock, $.001 par value, and two
     redeemable Common Stock Purchase Warrants ("Redeemable Warrants").  Each
     Redeemable Warrant entitles the holder to purchase from the Company one
     share of Common Stock at an exercise price of $5.50, during the period
     commencing on the later of the consummation by the Company of a Business
     Combination or one year from the effective date of the IPO, or December 20,
     1995, and ending seven years from the effective date of the IPO, or
     December 13, 2000. The Redeemable Warrants will be redeemable at a price of
     $.01 per warrant upon 30 days' notice at any time, only in the event that
     the last sale price of the Common Stock is at least $10.00 per share for 20
     consecutive trading days ending on the third day prior to the date on which
     notice of redemption is given.

     The Company also issued promissory notes to certain accredited investors,
     in connection with the IPO.  These notes were repaid on the consummation of
     the Public Offering.  In addition, the investors were issued 300,000
     Redeemable Warrants valued at a nominal amount.  At December 31, 1999, no
     Redeemable Warrants had been exercised and the Redeemable Warrants expired
     on December 13, 1998.

     Unit Purchase Options.  Also in December 1993, the Company sold to the
     underwriters in the IPO and their designees, for nominal consideration, the
     right to purchase up to 195,652 units ("Unit Purchase Options") as adjusted
     for the Offering completed on August 26, 1997.  Each Unit Purchase Option
     consists of one share of Common Stock and two Common Stock Purchase
     Warrants.  Each Common Stock Purchase Warrant entitled the holder to
     purchase one share of Common Stock under terms similar to the terms of the
     Redeemable Warrants

                                     F-13
<PAGE>

                     ZYDECO ENERGY, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     except that the Common Stock Purchase Warrants are not redeemable. The Unit
     Purchase Options were exercisable at $5.06 per unit ("Option Exercise
     Price"), as adjusted, until December 13, 1998, when they expired. In
     addition, the Common Stock Purchase Warrants were exercisable at $5.50 per
     warrant, and expired. The Unit Purchase Options contained anti-dilution
     provisions providing for adjustment of the Option Exercise Price upon the
     occurrence of certain events, including the issuance of shares of Common
     Stock or other securities convertible into or exercisable for shares of
     Common Stock at a price per share less than the Option Exercise Price or
     the market price of the Common Stock, or in the event of any
     recapitalization, reclassification, stock dividend, stock split, stock
     combination, or similar transaction. No Unit Purchase Options were
     exercised prior to their expiration on December 13, 1998.

     Non-Redeemable Bridge Warrants.  In December 1995, in connection with
     arranging the Bridge Financing, the Company issued to the Bridge Lenders
     warrants to purchase 225,028 shares of Common Stock ("Non-Redeemable Bridge
     Warrants"), at an exercise price of $5.33 per share.  The terms of the Non-
     Redeemable Bridge Warrants are identical to the terms of the Redeemable
     Warrants, except that they are not redeemable and are subject to a cashless
     exercise provision.  On December 13, 2000, the Non-Redeemable Bridge
     Warrants expire.  None of these Warrants had been exercised as of December
     31, 1999.

8.   RELATED-PARTY TRANSACTIONS.

     On December 30, 1998, the Company sold a 6.25% working interest
     participation in a prospect to a limited partnership whose general partners
     are the president and a vice president of a company who are the children of
     the Company's Chairman and CEO. The agreement provided that the limited
     partnership pay to the Company a total consideration of $204,000 for this
     interest which included the turnkey cost of drilling this prospect's first
     well.  Pursuant to the terms of the agreement with such limited
     partnership, the basis of this partnership's participation in this prospect
     is on comparable terms of participation by an unrelated party.  In
     connection with the informal agreement with Cheniere discussed in Note 3 -
     "Cheniere Exploration Agreement and Litigation", the Company and Cheniere
     agreed to share all proceeds attributable to the sale of Project prospects,
     including cash and promoted interests.  Cheniere's estimated share of the
     total consideration paid by the limited partnership amounted to
     approximately $64,000.  During 1999, this prospect's first well was drilled
     and amounts related to the turnkey portion were earned by the Company.  The
     Company and the limited partnership did not participate in a completion
     attempt on this well.  The Company expensed approximately $563,000 as dry
     hole expense during 1999, which was net of the Company's share of the
     turnkey contribution.  The agreement also provided that the limited
     partnership had a one-time option to acquire a 6.25% working interest
     participation in an adjacent prospect for $62,500 and to pay its pro-rata
     share of the second prospect's drilling costs on a promoted basis.
     However, the leases under the second prospect were relinquished and such
     option was not exercised.

     In connection with the acquisition of Wavefield, the Company agreed to
     assume the remaining lease obligation of  Wavefield.  Wavefield had used
     the offices prior to its acquisition by the Company.  The term of this
     lease expired in October 1999.  The Company expensed $50,676 and $66,367 on
     this lease in 1999 and 1998, respectively.

     The Company engaged the services of a law firm, including the services of a
     partner in the firm who is a relative of an officer and director of the
     Company that passed away in May 1999. The Company incurred costs of $48,501
     and $176,505 to this firm during the years ended December 31, 1999 and
     1998, respectively.

                                     F-14
<PAGE>

                     ZYDECO ENERGY, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 9.  STOCK OPTION PLANS.

     At December 31, 1999, the Company had three stock-based compensation plans,
     which are described below.  Each plan calls for the granting of options
     generally at not less than the per share market price on the date of grant.
     The Company applies APB Opinion 25 and the related Interpretations in
     accounting for its plans.  Accordingly, no compensation cost has been
     recognized for its fixed stock option plans.  No grants were issued by the
     Company in 1999.  Had compensation cost for the Company's three stock-based
     compensation plans been determined on the fair value at the grant dates for
     awards under those plans consistent with the method of SFAS No. 123
     "Accounting for Stock-Based Compensation", the Company's net loss per
     common share would have been increased to the pro forma amounts indicated
     below:
A
                                                       1999           1998
                                                   ------------   -------------
     RESULTS
     -------
     As Reported
       Net Loss Before Extraordinary Item          $(3,274,526)   $ (9,611,738)
       Extraordinary Item                              439,208               -
                                                   -----------    ------------
       Net Loss                                    $(2,835,318)   $ (9,611,738)
                                                   ===========    ============
     Pro Forma
       Net Loss Before Extraordinary Item          $(3,274,526)   $(10,482,914)
       Extraordinary Item                              439,208               -
                                                   -----------    ------------
       Net Loss                                    $(2,835,318)   $(10,482,914)
                                                   ===========    ============
     NET LOSS PER COMMON  SHARE
      (BASIC AND DILUTED)
     --------------------------
     As Reported
       Net Loss Before Extraordinary Item          $     (0.32)   $      (0.93)
       Extraordinary Item                          $      0.04    $
                                                                  -
       Net Loss                                    $     (0.28)   $      (0.93)

     Pro Forma
       Net Loss Before Extraordinary Item          $     (0.32)   $      (1.01)
       Extraordinary Item                          $      0.04    $          -
       Net Loss                                    $     (0.28)   $      (1.01)

     For purposes of the above proforma disclosure, the fair value of each
     option grant is estimated on the date of grant using the Black-Scholes
     option-pricing model with the following weighted average assumptions used
     for grants in 1998: no dividend yield for 1998, expected volatility of .43,
     a risk-free interest rate of 5.9%, and expected lives of 10 years for all
     options.  In connection with the above assumptions, the estimated weighted
     average fair value of options granted in 1998 is $1.69 per share.

     In February 1995, Zydeco's Board of Directors approved the 1995 Employee
     Stock Option Plan (the "Zydeco Plan") for certain employees of the Company
     and any subsequently incorporated subsidiaries of the Company.  Options to
     purchase 1,006,256 shares of stock at a price of $1.60 per share, as
     adjusted, were granted in March 1995.  Such options are non-compensatory,
     vest over a four-year period and terminate no later than March 2005.
     345,002 options remain outstanding as of December 31, 1999. On November 10,
     1999, the Company repriced an employee's option of 52,500 shares to $.125.








                                     F-15
<PAGE>

                     ZYDECO ENERGY, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     On January 4, 1996, the Board of Directors approved and adopted the Zydeco
     Energy, Inc. 1996 Incentive Equity Plan (the "1996 Incentive Plan") and
     amended such plan on March 3, 1997.  The 1996 Incentive Plan authorizes the
     grant of various stock and stock-related awards to key management and other
     personnel on the basis of individual and corporate performance.  The 1996
     Incentive Plan, as amended, provides for the granting of stock options to
     purchase an aggregate of 950,000 shares of Common Stock, which are reserved
     for such purpose. Options under the 1996 Incentive Plan are non-
     compensatory, vest over a four-year period and terminate no later than ten
     years after the date of grant unless otherwise determined by the
     Compensation Committee. All but options for 2,000 shares previously granted
     pursuant to this plan have expired as of December 31, 1999. The option for
     2,000 shares expired on January 31, 2000.

     Also on January 4, 1996, the Board of Directors adopted the 1996 Non-
     employee Director Stock Option Plan (the "1996 Director Plan") and
     authorized and granted an aggregate of 45,000 shares of Common Stock to
     three non-employee directors.  The options vest one third on April 1, 1997,
     1998, and 1999, and have an exercise price of $6.69 per share.  The options
     terminate no later than ten years after the date of grant.  As of December
     31, 1999, 45,000 options remain outstanding and expire as follows:  30,000
     on March 18, 2000 and 15,000 on March 26, 2000.

     Information about the Company's stock option plans for each of two years in
     the period ended December 31, 1999, is set forth below:

<TABLE>
<CAPTION>
                                                      1999                          1998
                                          -----------------------------    ------------------------
                                                            Average                       Average
                                               Shares     Grant Price        Shares     Grant Price
                                          -----------------------------    ------------------------
<S>                                          <C>          <C>              <C>          <C>

 Outstanding at January 1                    1,501,006          $1.70       1,768,632         $3.33
    Granted                                          -              -         221,000          2.21
    Exercised                                        -              -         (20,000)         1.60
    Forfeited and expired                   (1,109,000)          2.94        (468,626)         4.73
                                          ------------                     ----------
 Outstanding at December 31                    392,002           1.99       1,501,006          1.70
                                          ============                     ==========
 Shares Exercisable at December 31             391,002           1.98       1,218,506          2.40
                                          ============                     ==========
 Shares Available for Future Grant             948,000                        464,000
                                          ============                     ==========
 Average Fair Value of Shares
 Granted During Year                               N/A                          $1.69
                                          ============                     ==========
</TABLE>

                               Shares Outstanding and Exercisable
                          -------------------------------------------
                                             Weighted        Weighted
                                             Average         Average
        Range of                            Remaining         Grant
      Grant Prices        Shares               Life           Price
      ------------        ------            ---------        --------
     $.125 to $3.00       345,002            6 years          $1.38
      3.00 to  5.00         1,000            7 years           4.94
      5.00 to  7.00        45,000            7 years           6.69
                          -------
                          391,002            6 years           1.99
                          =======

10.  SEGMENT INFORMATION.

     In June 1997, the Financial and Accounting Standards Board issued SFAS No.
     131, "Disclosures About Segments of an Enterprise and Related Information."
     This standard

                                     F-16
<PAGE>

                     ZYDECO ENERGY, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     requires that companies report certain information about operating segments
     in complete sets of financial statements and in condensed financial
     statements of interim periods for fiscal years beginning after December 15,
     1997. The Company adopted this statement for the fiscal year ending
     December 31, 1998. The Company operates principally in one industry and
     geographic segment - oil and gas exploration and production and as such the
     adoption of SFAS No. 131 had no impact on the Company's financial
     statements.

     Major Customers.  The company had oil and gas sales to one customer of
     $140,794 and $348,636 in 1999 and 1998, respectively, which constituted
     more than 10% of consolidated revenue for such years.

11.  OIL AND GAS PRODUCING ACTIVITIES.

     Results of Operations from Oil and Gas Producing Activities

     The results of operations for oil and gas producing activities for the
     years indicated are presented below:

                                                    YEAR ENDED DECEMBER 31,
                                                ------------------------------
                                                    1999               1998
                                                -----------        -----------
Oil and Gas Sales                                   187,366        $   389,798
Production (Lifting) Costs                          (18,453)           (17,170)
Dry Hole and Other Costs                         (1,369,053)          (148,285)
Impairment of Unproved Properties                  (750,000)        (3,000,000)
Geological and Geophysical Expenses                (170,885)        (3,561,184)
Depreciation, Depletion, and Amortization (1)             -           (424,669)
                                                -----------        -----------
Results of Operations from Oil and Gas
  Producing  Activities                         $(2,121,025)       $(6,761,510)
                                                ===========        ===========

(1) Includes depreciation on seismic computer hardware and software. All oil and
    gas related assets were fully amortized as of December 31, 1998.

     CAPITALIZED COSTS RELATED TO OIL AND GAS PRODUCING ACTIVITIES

     The following table presents total capitalized costs of proved and unproved
     oil and gas properties and associated accumulated depreciation, depletion,
     and amortization:

                                                           DECEMBER 31,
                                                  ----------------------------
                                                      1999            1998
                                                  -----------      -----------
Proved Oil and Gas Properties, at Cost            $   334,972      $   334,972
Unproved Oil and Gas Properties                     1,643,324        2,796,471
Equipment and Software                                      -        1,974,028
Less - Accumulated Depreciation, Depletion,
      Amortization and Impairment                  (1,084,972)      (1,969,652)
                                                  -----------      -----------
Net Capitalized Costs                             $   893,324      $ 3,135,819
                                                  ===========      ===========

                                     F-17
<PAGE>

                     ZYDECO ENERGY, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     COSTS INCURRED IN OIL AND GAS PROPERTY ACQUISITION, EXPLORATION AND
     DEVELOPMENT ACTIVITIES

     Presented below are costs incurred in oil and gas property acquisition,
     exploration and development activities:

                                              YEAR ENDED DECEMBER 31,
                                             ------------------------
                                                 1999         1998
                                             ----------    ----------
Unproved Property Acquisition Costs            $      -    $5,753,010
Exploration Costs                               623,920     3,734,900
Equipment and Software Additions                      -        92,378
                                               --------    ----------
Total for Year                                 $623,920    $9,580,288
                                               ========    ==========

     RESERVE QUANTITY INFORMATION (UNAUDITED)

     The following unaudited information has been provided pursuant to SFAS No.
     69, "Disclosures about Oil and Gas Producing Activities".  There are
     numerous uncertainties inherent in estimating quantities of proved reserves
     and in projecting future rates of production, including many factors beyond
     the control of the Company.  The estimation of reserve quantities results
     from a process that cannot be measured in an exact way and employs
     judgements made by the Company's independent petroleum engineering firms.
     Accordingly, reserve estimates are often different from quantities of oil
     and gas that are ultimately recovered.  The Company's proved oil and gas
     reserves were estimated by Petroleum Professionals International, LP as of
     December 31, 1999 and 1998.

     PROVED DEVELOPED RESERVE QUANTITIES (UNAUDITED)

     The Company's oil and gas producing activities have been conducted solely
     in the United States.  The Company had no proved undeveloped reserves at
     December 31, 1999 and 1998.  The following table sets forth the changes in
     the Company's total proved reserves for the years ended December 31, 1999
     and 1998:

                                     F-18
<PAGE>

<TABLE>
<CAPTION>
                                                                               DECEMBER 31,
                                                                 -----------------------------------------
                                                                         1999                     1998
                                                                 ----------------          ---------------
                                                                                 Oil (Bbls)
Total Proved Reserves:
----------------------
<S>                                                                   <C>                      <C>
Proved Oil Reserves at the Beginning of the Year                          269                    2,614
Revisions of Previous Estimates                                         3,769                   (1,158)
Production                                                             (2,778)                  (1,187)
                                                                       ------                  -------
Proved Oil Reserves at the End of the Year                              1,260                      269
                                                                       ======                  =======
                                                                                 GAS (Mcf)
Proved Gas Reserves at the Beginning of the Year                      105,571                  104,000
Revisions of Previous Estimates                                       (36,346)                 167,333
Production                                                            (59,608)                (165,762)
                                                                      -------                 --------
Proved Gas Reserves at the End of the Year                              9,617                  105,571
                                                                      =======                 ========
Proved Developed Reserves:
--------------------------
End of Year - Oil (Bbls)                                                1,260                      269
                                                                      =======                 ========
              Gas (Mcf)                                                 9,617                  105,571
                                                                      =======                 ========
</TABLE>


     STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED
     OIL AND GAS RESERVE QUANTITIES (UNAUDITED)

     The information that follows has been developed by the Company pursuant to
     procedures prescribed by SFAS 69 and utilizes reserve data estimated by the
     Company's independent petroleum engineering firms.  In addition to the
     above discussion of uncertainties in reserve quantities, the following
     calculations are based on year-end prices, costs and statutory tax rates
     that relate to existing proved oil and gas reserves in which the Company
     has an interest and are discounted at 10%.  Because future projections are
     inherently imprecise, material revisions to reserve estimates may occur in
     the future.  Actual sales prices and costs incurred may vary from those
     used in the calculations due to a number of factors including, but not
     limited to, wide fluctuations in world and/or regional markets.  In
     addition, production of the oil and gas reserves may not occur in the
     periods assumed.  The standardized measure information may be useful for
     certain comparative purposes but is not intended to represent the market
     value of the Company's reserves or as an estimate of the Company's future
     cash flows.  See "Note 1 - Organization and Summary of Significant
     Accounting Policies".

                                     F-19
<PAGE>

     The following table sets forth the standardized measure of discounted
     future net cash flows from estimated future production of the Company's
     proved oil and gas reserves as of December 31:

<TABLE>
<CAPTION>
                                                         1999                 1998
                                                   ---------------       --------------
<S>          <C>                                   <C>                   <C>
Future Cash Inflows                                        $61,577             $224,307
Future Production and Development Costs(1)                       -                    -
Future Income Tax Expense                                        -                    -
                                                           -------             --------
Undiscounted Future Net Cash Flows                          61,577              224,307
Discount                                                    (3,164)             (14,627)
                                                           -------             --------
Standardized Measure of Discounted Future Net
    Cash Flows                                             $58,413             $209,680
                                                           =======             ========
</TABLE>
------------------------
     (1)    The Company maintains an overriding royalty interest in its only
     property with proved reserves at December 31, 1999 and 1998. Accordingly,
     there are no future costs associated with such an overriding royalty
     interest.

     PRINCIPAL SOURCES OF CHANGE IN THE STANDARDIZED MEASURE OF DISCOUNTED
     FUTURE NET CASH FLOWS (UNAUDITED)

     The following table sets forth changes in the standardized measure of
     discounted future net cash flows for the years ended December 31:

<TABLE>
<CAPTION>
                                                      1999               1998
                                                ---------------     --------------
<S>                                             <C>                 <C>
Standardized Measure - Beginning of Year              $ 209,680          $ 377,997
Sales, Net of Operating Costs                          (168,913)          (372,628)
Net Changes in Prices and Production Costs               37,437           (132,609)
Revisions of Quantity Estimates                         (46,014)           322,880
Accretion of Discount                                    20,968             37,800
Other                                                     5,255            (23,760)
                                                ---------------     --------------

Standardized Measure - End of the Year                $  58,413          $ 209,680
                                                ===============     ==============
</TABLE>

                                     F-20

<PAGE>

                                 EXHIBIT INDEX

EXHIBIT NO.                         DESCRIPTION
-----------                         -----------

3.1+         Certificate of Incorporation and Certificates of Amendment thereto
             (filed as Exhibit 3.1 to the Company's Annual Report on Form 10-K
             for the year ended December 31, 1995)

3.2+         Form of Amended and Restated Bylaws (filed as Exhibit 3.2 to the
             Company's Registration Statement on Form S-1 (Reg. No. 33-65286))

4.1+         Form of Certificate representing shares of Common Stock (filed as
             Exhibit 4.1 to the Company's Annual Report on Form 10-K for the
             year ended December 31, 1995)

4.2+         Form of Certificate evidencing Common Stock Purchase Warrants
             (filed as Exhibit 4.2 to the Company's Annual Report on Form 10-K
             for the year ended December 31, 1995)

4.3+         Unit Purchase Option Granted to Underwriters by the Company (filed
             as Exhibit 4.3 to the Company's Registration Statement on Form S-1
             (Reg. No. 33-65286))

4.4+         Warrant Agreement between Continental Stock Transfer & Trust
             Company and the Company (filed as Exhibit 4.4 to the Company's
             Registration Statement on Form S-1 (Reg. No. 33-65286))

4.5+         Certificate of Designation evidencing shares of Preferred Stock
             (filed as Exhibit 4.5 to the Company's Annual Report on Form 10-K
             for the year ended December 31, 1995)

4.6+         Form of Certificate evidencing shares of Preferred Stock (filed as
             Exhibit 4.6 to the Company's Annual Report on Form 10-K for the
             year ended December 31, 1995)

4.7+         Form of Stock Purchase Warrant granted by Zydeco and Letter to
             holders from the Company (filed as Exhibit 4.7 to the Company's
             Annual Report on Form 10-K for the year ended December 31, 1995)

4.8+         Form of Warrant Agreement by and among the Company and Brean Murray
             & Co., Inc. and Gaines, Berland Inc. (filed as Exhibit 4.8 to the
             Company's Registration Statement on Form S-1 (Reg. No. 333-27679))

10.2+        Warrant Agreement (filed as Exhibit 4.4 to the Company's
             Registration Statement on Form S-1 (Reg. No. 33-65286))

10.3+        Zydeco 1995 Employee Stock Option Plan and form of letter to
             Optionees from the Company (filed as Exhibit 10.3 to the Company's
             Annual Report on Form 10-K for the year ended December 31, 1995)

10.6+        Exploration Agreement between Zydeco and Lagniappe Exploration,
             Inc. (predecessor to Fortune Petroleum, Inc.) (filed as Exhibit
             10.6 to the Company's Annual Report on Form 10-K for the year ended
             December 31, 1995)

10.7+        Farmout Agreement between Zydeco and Bois D'Arc Exploration (filed
             as Exhibit 10.7 to the Company's Annual Report on Form 10-K for the
             year ended December 31, 1995)

                                      E-1
<PAGE>

10.8+      Farmout Agreement between Zydeco, Fortune and Southern Gas Company of
           Delaware (filed as Exhibit 10.8 to the Company's Annual Report on
           Form 10-K for the year ended December31, 1995)

10.9+      Option Agreement dated February 7, 1996, between the Company and
           Norman Neidell concerning certain Wavefield Imaging Technology (filed
           as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
           the three months ended March 31, 1996)

10.10+     Exploration Agreement between Zydeco Exploration, Inc. and Cheniere
           Energy Operating Co., Inc. (formerly FX Energy, Inc.) dated April 4,
           1996 (filed as Exhibit 10.10 to the Company's Quarterly Report on
           Form 10-Q for the three months ended June 30, 1996)

10.12+     Second Amendment to the Exploration Agreement between Zydeco
           Exploration, Inc. and Cheniere Energy Operating Co., Inc. (formerly
           FX Energy, Inc.) dated August 5, 1996 (filed as Exhibit 10.12 to the
           Company's Quarterly Report on Form 10-Q for the three months ended
           September 30, 1996)

10.13+     Third Amendment to the Exploration Agreement between Zydeco
           Exploration, Inc. and Cheniere Energy Operating Co., Inc. (formerly
           FX Energy, Inc.) dated October 31, 1996 (filed as Exhibit 10.13 to
           the Company's Quarterly Report on Form 10-Q for the three months
           ended September 30, 1996)

10.14+     Fourth Amendment to the Exploration Agreement between Zydeco
           Exploration, Inc. and Cheniere Energy Operating Co., Inc. (formerly
           FX Energy, Inc.) dated November 29, 1996 (filed as Exhibit 11.1 to
           the Company's Annual Report on Form 10-K for the year ended December
           31, 1996)

10.16+     1996 Incentive Equity Plan (filed on May 20, 1997, as Exhibit 99.1 to
           the Company's Registration Statement on Form S-8)

10.17+     1996 Non-employee Directors Stock Option Plan (filed on May 20, 1997,
           as Exhibit 99.1 to the Company's Registration Statement on Form S-8)

10.18+     Agreement and Plan of Merger dated July 1, 1997, by and between the
           Company, Wavefield Image, Inc. and certain stockholders of Wavefield
           Image, Inc. (filed on May 20, 1997, as Exhibit 99.1 to the Company's
           Registration Statement on Form S-8)

10.20+     Fifth Amendment to the Exploration Agreement between Zydeco
           Exploration, Inc. and Cheniere Energy Operating Co., Inc. (formerly
           FX Energy, Inc.) dated April 28, 1997 (filed on May 20, 1997, as
           Exhibit 99.1 to the Company's Registration Statement on Form S-8)

10.21+     Sixth Amendment to the Exploration Agreement between Zydeco
           Exploration, Inc. and Cheniere Energy Operating Co., Inc. (formerly
           FX Energy, Inc.) dated July 21, 1997 (filed on May 20, 1997, as
           Exhibit 99.1 to the Company's Registration Statement on Form S-8)

10.22+     Seventh Amendment to the Exploration Agreement between Zydeco
           Exploration, Inc. and Cheniere Energy Operating Co., Inc. (formerly
           FX Energy, Inc.) dated August 28, 1997 (filed as Exhibit 10.22 to the
           Company's Quarterly Report on Form 10-Q for the three months ended
           September 30, 1997)

10.23+     Eighth Amendment to the Exploration Agreement between Zydeco
           Exploration, Inc. and Cheniere Energy, Inc. (formerly FX Energy,
           Inc.) dated October 30, 1997 (filed as Exhibit 10.23 to the Company's
           Annual Report on Form 10-K for the year ended December 31, 1997)

11.1       Computation of per share earnings

                                      E-2
<PAGE>

21.1+      List of Subsidiaries (filed on August 12, 1999, as Exhibit 21.1 to
           the Company's Quarterly Report Form 10-QSB for the three months ended
           June 30, 1999)

23.1a      Consent of Hein + Associates LLP

23.1b      Consent of Arthur Andersen LLP

23.2       Consent of Petroleum Professionals, Inc.
27         Financial Data Schedule
-----------
+ Incorporated herein by reference to the indicated filing.

                                      E-3