<PAGE>   1
================================================================================

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

                                   ----------

                                    FORM 10-K

               [x] Annual Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934
                   FOR THE FISCAL YEAR ENDED 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 NO. 0-21411

                                   ----------

                              COSTILLA ENERGY, INC.
             (Exact name of registrant as specified in its charter)

                                   ----------

           DELAWARE                                             75-2658940
(State or other jurisdiction of                              (I.R.S. Employer
incorporation or organization)                              Identification No.)

                400 WEST ILLINOIS, SUITE 900 MIDLAND, TEXAS 79701
               (Address of principal executive offices)    (Zip code)

                                 (915) 683-3092
              (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:

<TABLE>
<CAPTION>
          Common Stock, $0.10 Par Value      10 1/4% Senior Notes due 2006
          -----------------------------      -----------------------------
<S>                                          <C>
                 (Title of Class)                  (Title of Class)
</TABLE>

                                   ----------

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          NO    X
                                                 --------    --------


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

There is no current public market for the registrant's Common Stock.

There are zero shares of registrant's Common Stock currently outstanding. All
such shares were canceled as of the effective date of the registrant's Chapter
11 Bankruptcy Plan as described herein.

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

<PAGE>   2


                              COSTILLA ENERGY, INC.

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                 Page
                                                                                                 ----
<S>                   <C>                                                                        <C>
PART I.

Items 1 and 2.        Business and Properties.                                                      1

Item 3.               Legal Proceedings.                                                            6

Item 4.               Submission of Matters to a Vote of Security Holders.                          7

PART II.

Item 5.               Market for the Registrant's Common Equity and
                      Related Stockholder Matters.                                                  8

Item 6.               Selected Financial Data.                                                      9

Item 7.               Management's Discussion and Analysis of Financial
                      Condition and Results of Operations.                                         10

Item 8.               Financial Statements and Supplementary Data.                                 17

Item 9.               Changes in and Disagreements with Accountants on Accounting and
                      Financial Disclosure.                                                        17

PART III.

Item 10.              Directors and Executive Officers of the Registrant.                          18

Item 11.              Executive Compensation.                                                      18

Item 12.              Security Ownership of Certain Beneficial Owners and Management.              18

Item 13.              Certain Relationships and Related Transactions.                              18

PART IV.

Item 14.              Exhibits, Financial Statement Schedules and Reports on Form 8-K.             19

SIGNATURES                                                                                         22
</TABLE>


<PAGE>   3


                                     PART I


                SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

         Certain statements in this Form 10-K may be deemed to be
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"), and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). All
statements, other than statements of historical facts, included in this Form
10-K that address activities, events or developments that Costilla Energy, Inc.
("Costilla" or the "Company") expects, projects, believes or anticipates will or
may occur in the future are forward-looking statements. These statements are
based on certain assumptions and analysis made by the Liquidating Trustee (as
defined herein) in light of his perception of current conditions, expected
future developments, advice of professionals and other factors it believes are
appropriate in the circumstances. Such statements are subject to a number of
assumptions, risks and uncertainties, including the outcome of litigation,
changes in laws or regulations and other factors, many of which are beyond the
control of the Company.

ITEMS 1 AND 2. BUSINESS AND PROPERTIES.

BACKGROUND AND RECENT DEVELOPMENTS

         Costilla filed a voluntary petition under Chapter 11 of the United
States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy
Court for the Western District of Texas, Midland Division (the "Bankruptcy
Court") on September 3, 1999. After that time, the Company operated its business
as a debtor in possession under the Bankruptcy Code, including the filing of
monthly operating reports containing unaudited financial information with the
Bankruptcy Court.

         In February, 2000, the Company filed an initial plan of reorganization
and disclosure statement. The disclosure statement contained certain unaudited
financial information for the year ended December 31, 1999. The Company filed
with the Securities and Exchange Commission (the "Commission") a Current Report
on Form 8-K on March 3, 2000 attaching as an exhibit a copy of its operating
report that it filed with the Bankruptcy Court for the period ended December 31,
1999, which set forth the unaudited financial information that was contained in
the initial disclosure statement. Unaudited financial statements for the period
ended December 31, 1999 are also included in this Form 10-K.

         On June 9, 2000, the Bankruptcy Court entered an order approving the
sale of substantially all of the Company's oil and gas properties to Louis
Dreyfus Natural Gas Corp. (the "Dreyfus Sale"). The base price for such
properties was $133,250,000, subject to certain price adjustments pursuant to
the asset purchase agreement between the parties. The sale was closed on June
15, 2000. As a result of the transaction, the Company received approximately
$129,000,000 in cash at closing, and has received an additional sum of
approximately $1,600,000 from approximately $2,000,000 which was escrowed with
respect to asserted title defects.

         Following the sale of substantially all of its oil and gas properties,
the Company took steps to reduce its general administrative and overhead costs
in light of its reduced operations by, among other things, reducing its office
space and number of employees to a level necessary to conduct post-closing sale
matters and other continuing business operations in the bankruptcy.

         On September 15, 2000, the Bankruptcy Court approved and confirmed the
Company's Plan of Reorganization (Liquidation) as Restated to Reflect All
Amendments and Modifications (the "Plan"), effective October 1, 2000. The Plan
provides, among other things, for the distribution of certain of the net
proceeds from the Dreyfus Sale to the creditors, for the creation of certain
trusts to liquidate and distribute the remaining assets of the Company and for
the cancellation of all of the Company's common stock, preferred stock and other
equity interests. These material features of the Plan may be summarized as
follows:


                                       1
<PAGE>   4

         o        With respect to the distribution of the Dreyfus Sale proceeds,
                  the estimated recovery for the various classes of claims under
                  the Chapter 11 Plan as set forth in the Disclosure Statement
                  With Respect to Debtor's Plan of Reorganization (Liquidation),
                  as Amended, dated July 28, 2000 (the "Disclosure Statement"),
                  are as follows (assuming net proceeds available for
                  distribution of approximately $116,000,000 as provided in the
                  Disclosure Statement and other assumptions provided therein):
                  secured claims, 100%; administrative and priority claims,
                  100%; administrative convenience unsecured claims, 100%;
                  general unsecured claims including the Company's 10 1/4%
                  Senior Notes due 2006, 44%; and equity interests, 0. The
                  amount available for distribution is subject to adjustments
                  related to post-confirmation liquidation expenses and
                  activities and reserves established therefore. Two
                  distributions aggregating approximately 46% of the claim
                  amounts have been made to the holders of general unsecured
                  claims. See "Item 7. Management Discussion and Analysis of
                  Financial Condition and Results of Operations."

         o        The Plan creates The Costilla Liquidating Trust (the
                  "Liquidating Trust"), and by operation of the confirmation
                  order, approving the Plan, the Liquidating Trust has
                  possession of and title to all of the Company's property. A
                  trustee of the Liquidating Trust (the "Liquidating Trustee")
                  has been appointed as provided in the Bankruptcy Court's order
                  approving and confirming the Plan and has the power and
                  authority to complete the liquidation of the remaining assets
                  of the Company, including without limitation, the prosecution
                  of claims, objections, preferential transfer claims and other
                  lawsuits. The Liquidating Trustee is further authorized to
                  take any action on behalf of the Company that would otherwise
                  require the approval of shareholders, directors or officers of
                  the Company without obtaining such approval. All of the
                  officers and directors of the Company resigned prior to the
                  effective date of the Plan (October 1, 2000). The Plan also
                  provides for the creation of a separate directors' and
                  officers' litigation trust with a separate trustee to
                  investigate and pursue, if appropriate, any claims that the
                  Company believes it may have against its former directors and
                  officers.

         o        All of the outstanding equity interests of the Company,
                  including the Company's common stock and preferred stock and
                  any options or other rights related thereto, were canceled
                  pursuant to the terms of the Plan as of its effective date.
                  Holders of equity interests are not entitled to any
                  distributions under the Plan, unless all of the creditors are
                  paid in full, with interest, and all of the costs and expenses
                  of the trusts have been paid. Any such distribution would be
                  made to the shareholders of the Company as of the effective
                  date of the Plan in the order of the rights of such
                  shareholders (i.e., first, to the preferred shareholders, and
                  then, to the common shareholders). There were 50,000 shares of
                  the Company's preferred stock and 14,101,580 shares of the
                  Company's common stock outstanding on October 1, 2000, the
                  effective date of the Plan. The Company believes that it is
                  highly unlikely that any distributions will be made to the
                  holders of equity interests of the Company.

         As a result of the foregoing, the Company will not have any future
business operations other than with respect to the liquidation, distribution and
related activities of the Liquidating Trustee under the Plan. In addition, the
Company no longer has any shareholders.

PRINCIPAL PROPERTIES

         The following information relates to the properties owned by the
Company as of December 31, 1999, substantially all of which were sold in the
Dreyfus Sale. Substantially similar information concerning the Company's
business and properties was included in the initial disclosure statement filed
with the Bankruptcy Court in February 2000 and made available to interested
parties.

         The following table sets forth certain information, as of January 1,
2000, which relates to the principal oil and gas properties then owned by the
Company.


                                       2
<PAGE>   5
<TABLE>
<CAPTION>
                                         PROVED RESERVES
                       -----------------------------------------------------
                                                      TOTAL GAS   PERCENT OF
                        GROSS      OIL       GAS     EQUIVALENT    TOTAL GAS
                        WELLS    (Mbbls)    (Mmcf)    (Mmcfe)     EQUIVALENT
                       -------   -------   -------   ----------   ----------
<S>                    <C>       <C>       <C>       <C>          <C>
    REGION
    ------
South/East Texas           466       954    65,949       71,674         72.3%

Permian Basin              387     2,524    11,486       26,630         26.9%
Other                       37        27       601          763          0.8%
                       -------   -------   -------   ----------   ----------

Total                      890     3,505    78,036       99,067       100.00%
                       =======   =======   =======   ==========   ==========
</TABLE>

OIL AND GAS RESERVES

         The Company's estimated total proved reserves of oil and gas as of
January 1, 2000 were as follows:

<TABLE>
<CAPTION>
                                                    OIL         GAS
                                                  (Mbbls)      (Mmcf)      Mmcfe
                                                 ---------    --------    --------
<S>                                              <C>          <C>         <C>
         Proved developed producing                  3,083      45,284      63,782
         Proved developed non-producing                119      12,924      13,638
         Proved undeveloped                            303      19,828      21,647
                                                 ---------    --------    --------

            Total proved                             3,505      78,036      99,067
                                                 =========    ========    ========
</TABLE>

         The future net cash flows from the Company's estimated proved reserves
as of January 1, 2000 were as follows (in thousands):

<TABLE>
<S>                                                                                   <C>
Future net cash flows before income taxes.......................................      $   140,127
Future net cash flows before income taxes, discounted at 10%....................      $    93,248
</TABLE>

         The reserve estimates at January 1, 2000 are provided by the Debtor.

         There are numerous uncertainties in estimating quantities of proved
reserves and in projecting future rates of production and the timing of
development expenditures, including many factors beyond the control of the
Company. The reserve data set forth in this Form 10-K are estimates only.
Although the Company believes such estimates were reasonable, reserve estimates
are imprecise and should be expected to change as additional information becomes
available. Furthermore, estimates of oil and gas reserves, of necessity, are
projections based on engineering data, and there are uncertainties inherent in
the interpretation of such data as well as the projection of future rates of
production and the timing of development expenditures. Reserve engineering is a
subjective process of estimating underground accumulations of oil and gas that
cannot be exactly measured, and the accuracy of any reserve estimate is a
function of the quality of available data and of engineering and geological
interpretation and judgment. Accordingly, estimates of the economically
recoverable quantities of oil and gas attributable to any particular group of
properties, classifications of such reserves based on risk of recovery, and
estimates of the future net cash flows expected therefrom prepared by different
engineers or by the same engineers at different times may vary substantially.
Moreover, there can be no assurance that the reserves set forth herein will
ultimately be produced or that the proved undeveloped reserves will be developed
within the periods anticipated. Variances from the estimates contained herein
could be material. In addition, the estimates of future net revenues from proved
reserves and the present value thereof are based upon certain assumptions about
production levels, prices and costs, which may not be correct. The Company
emphasizes with respect to


                                       3
<PAGE>   6


such estimates that the discounted future net cash flows should not be construed
as representative of the fair market value of the proved oil and gas properties
that belonged to the Company, because discounted future net cash flows are based
upon projected cash flows that do not provide for changes in oil and gas prices
or for escalation of expenses and capital costs. The meaningfulness of such
estimates is highly dependent upon the accuracy of the assumptions upon which
they were based. Actual results may differ materially from the results
estimated.

         In accordance with applicable requirements of the Commission, the
estimated discounted future net revenues from estimated proved reserves are
based on prices and costs as of the date of the estimate unless such prices or
costs are contractually determined at such date.

         Subsequent to January 1, 2000 and prior to the Dreyfus Sale, the Debtor
successfully drilled and completed an additional well in the Southwest Speaks
Field. Based upon initial tests and results from this new well, additional
proved reserves were estimated by the Company for the Southwest Speaks Field
attributable to the new well representing proved developed reserves and two
additional future drilling locations representing proved undeveloped reserves.
If these additional reserves were included in the reserve estimates described
above, the total proved reserves of the Company at January 1, 2000 and the
future net cash flow attributable thereto would have been as follows:


<TABLE>
<CAPTION>
                                                    OIL         GAS
                                                  (Mbbls)      (Mmcf)      Mmcfe
                                                 ---------    --------    --------
<S>                                              <C>          <C>         <C>
         Proved developed producing                  3,083      51,963      70,461
         Proved developed non-producing                119      12,924      13,638
         Proved undeveloped                            303      24,627      26,447
                                                 ---------    --------    --------

            Total proved                             3,505      89,514     110,546
                                                 =========    ========    ========

Future net cash flows before income taxes.........................             $  154,336
Future net cash flows before income taxes, discounted at 10%......             $  103,815
</TABLE>

PRODUCTION VOLUMES, PRICES AND COSTS

         The following table sets forth certain information regarding the
Company's production volumes, average sales price and costs for the periods
presented:


                                       4
<PAGE>   7


<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31,
                                                      ------------------------------------
                                                         1999         1998         1997
                                                      ----------   ----------   ----------
<S>                                                   <C>          <C>          <C>
PRODUCTION:
   Oil (Mbbls)                                               830        1,938        2,175
   Gas (Mmcf)                                             17,218       17,140       14,698
   Total (Mmcfe)                                          22,201       28,768       27,748

AVERAGE SALES PRICE:
   Oil (per Bbl)                                      $    13.24   $    14.31   $    17.77
   Gas (per Mcf)                                            2.08         2.05         2.29

COSTS PER MCFE:
   Production costs, including severance taxes        $     0.80   $     0.95   $     1.08
   Depreciation, depletion and amortization                 0.81         1.13         0.95
</TABLE>

EXPLORATION AND DEVELOPMENT ACTIVITIES

         The Company drilled, or participated in the drilling of, the following
number of wells during the periods indicated. At December 31, 1999, the Company
was in the process of completing one gross (one net) well which is not reflected
in the following table.

<TABLE>
<CAPTION>
                              1999             1998             1997
                          -------------   --------------   --------------
                          GROSS    NET    GROSS    NET     GROSS    NET
                          -----   -----   -----   ------   -----   ------
<S>                       <C>     <C>     <C>     <C>      <C>     <C>
EXPLORATORY:
   Productive                --      --      13     9.46      15     8.38
   Dry                        2    2.00      12     8.63      10     5.81
                          -----   -----   -----   ------   -----   ------
   Total                      2    2.00      25    18.09      25    14.19
                          =====   =====   =====   ======   =====   ======

DEVELOPMENT:
   Productive                 1    1.00      35    17.78      86    58.72
   Dry                        1    1.00       6     4.62      11     8.54
                          -----   -----   -----   ------   -----   ------
   Total                      2    2.00      41    22.40      97    67.26
                          =====   =====   =====   ======   =====   ======

TOTAL:
   Productive                 1    1.00      48    27.24     101    67.11
   Dry                        3    3.00      18    13.25      21    14.35
                          -----   -----   -----   ------   -----   ------
   Total                      4    4.00      66    40.49     122    81.46
                          =====   =====   =====   ======   =====   ======
</TABLE>

         The Company did not own any drilling rigs and all of its drilling
activities were conducted by independent contractors under standard drilling
contracts.

PRODUCTIVE WELL SUMMARY

         The following table sets forth the Company's gross and net interests in
productive oil and gas wells as of December 31, 1999. Productive wells are
producing wells and wells capable of production.

<TABLE>
<CAPTION>
                                  GROSS        NET
                                 -------      ------
<S>                              <C>          <C>
Oil Wells                            506         266
Gas Wells                            454         141
                                 -------      ------
Total                                960         407
                                 =======      ======
</TABLE>


                                       5
<PAGE>   8


ACREAGE

         The following table sets forth certain information regarding the
Company's developed and undeveloped leasehold acreage as of December 31, 1999.
Acreage in which the Company's interest is limited to royalty, overriding
royalty, mineral and similar interests is excluded.

<TABLE>
<CAPTION>
                                    DEVELOPED                  UNDEVELOPED                    TOTAL
                            --------------------------  --------------------------  -------------------------
   REGION                      GROSS         NET           GROSS         NET           GROSS          NET
 ----------                 ------------  ------------  ------------  ------------  ------------  -----------
<S>                         <C>           <C>           <C>           <C>           <C>           <C>
South/East Texas                 136,614        49,720        90,592        42,373       227,206       92,093
Permian Basin                     40,456        19,677        41,574        28,727        82,030       49,404
Other                             13,785         2,263         7,910         7,050        21,695        9,313
                            ------------  ------------  ------------  ------------  ------------  -----------

Total                            190,855        71,660       140,076        78,150       330,931      150,810
                            ============  ============  ============  ============  ============  ===========
</TABLE>

EMPLOYEES

         At December 31, 1999, the Company had 68 full time employees. As the
Company's operations were reduced through 2000, particularly after the Dreyfus
Sale, the number of employees was significantly reduced. To encourage necessary
employees to stay with the Company through the bankruptcy and liquidation
process, certain retention payments were made as approved by the Bankruptcy
Court. See "Item 11. Executive Compensation." Certain former employees of the
Company have been employed by the Liquidating Trust.

CURRENT STATUS

         As previously discussed, the Company sold substantially all of its
assets, including the oil and gas properties referred to in the foregoing
information, in the Dreyfus Sale. In addition, the Plan provides that the
remaining assets of the Company were assigned to the Liquidating Trust on the
effective date of the Plan, October 1, 2000, and all of the shares of common and
preferred stock of the Company were canceled. As a result, the Company no longer
has any properties or business operations. The Liquidating Trustee will
liquidate the remaining assets for the benefit of the Company's creditors
pursuant to the Plan, and any operations, litigation or other actions will be
directed by the Liquidating Trustee under the supervision of the Bankruptcy
Court.

ITEM 3.  LEGAL PROCEEDINGS.

         The Company and the Liquidating Trust continue to be under the
supervision of the Bankruptcy Court in the Company's bankruptcy proceeding. The
Bankruptcy Court will supervise the liquidation of the remaining Company assets,
the use of cash to fund such liquidation (including potential lawsuits), the
determination of the amount and validity of creditors' claims, the distribution
of liquidation proceeds to the creditors, and all other matters related to
consummation of the Plan.

         GNK, Inc. v. Graham D. Williford, Carl Ed Williford, Harriette
Williford-Whatley, Homer Paul Bonner, in his capacity as Trustee of Eric Wayne
Wilson Trust No. 1 and the Harriette Williford-Whatley 1987 Trust and Costilla
Energy, Inc., Cause No. 97-311-B, in the District Court of Freestone County,
Texas, 87th Judicial District. On August 18, 1999, a judgment was entered
against the Company and the other defendants in this case. All of the defendants
were found jointly and severally liable for actual damages in a total amount of
$562,248.36. In addition, the Company was also found liable for additional
actual damages of $2.00 and exemplary damages in the sum of $5,000,000. This
proceeding was resolved by a Settlement Agreement entered into by and between
the Company and GNK and approved by the Bankruptcy Court in September 2000. GNK
was allowed a general unsecured claim in the amount of $737,995 and, among other
things, the remainder of the GNK claim was disallowed in its entirety.


                                       6
<PAGE>   9


         Thomas L. Jones v. Costilla Energy, Inc., Cause No. 99-02515-00-O-C,
originally styled in the 94th Judicial District, Nueces County, Texas. This
lawsuit has been removed to the United States Bankruptcy Court for the Western
District of Texas, Midland Division. However, the case was heard in San Antonio
Division for convenience of the Court and parties involved. The case involves
plaintiff's claim for breach of contract, conversion and declaratory relief
associated to alleged overriding royalty interest. The court granted the
plaintiff's motion on summary judgment, determining that the plaintiff is
entitled to a two percent overriding royalty interest in the subject property.
Jones had filed a claim for $8.0 million in the Bankruptcy proceeding. This
lawsuit was settled in August 2000 by agreement between the parties and approved
by the Bankruptcy Court. Among other things, Mr. Jones was awarded an overriding
royalty in an area of mutual interest and received a payment of $100,000 in full
satisfaction of his claim.

         In addition to the foregoing, the Company is a defendant or codefendant
in less significant lawsuits that arose in the ordinary course of business, most
of which are identified in the Disclosure Statement. While the outcome of these
lawsuits cannot be predicted with certainty, the Liquidating Trustee does not
expect any of these to have a material adverse effect on the liquidation of the
remaining assets or distribution to creditors. However, certain funds may be
reserved from distribution by the Liquidating Trustee pending the outcome of
these cases. The Liquidating Trustee may also initiate lawsuits on behalf of the
Liquidating Trust in an effort to liquidate claims formerly held by the Company,
in the sole discretion of the Liquidating Trustee.

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

         No matters were submitted to a vote of the Company's stockholders
during the fourth quarter of the year ended December 31, 1999 or during 2000
through the time the Company's common stock was canceled under the Plan on
October 1, 2000.


                                       7
<PAGE>   10


                                     PART II


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

         The Company completed its initial public offering of Common Stock on
October 2, 1996. On October 3, 1996 the Common Stock commenced trading on the
Nasdaq Stock Market's National Market under the trading symbol "COSE". In August
1999, the Company's Common Stock was delisted from the Nasdaq National Market,
and was subsequently quoted on the OTC Bulletin Board under the symbol "COSE" or
"COSE.OB". The following table sets forth the high and low sales prices for the
periods presented (all information presented on or before August 16, 1999 is
from Nasdaq; information presented after August 16, 1999 is from Bloomberg).
There are no shares of the Company's Common Stock outstanding, all such shares
having been canceled under the Plan on October 1, 2000, and therefore there is
no current market for the Common Stock.

<TABLE>
<CAPTION>
         1998                                         HIGH              LOW
                                                     -------           ------
<S>                                                  <C>               <C>
         First Quarter                               $ 12.75           $ 9.13
         Second Quarter                              $ 11.50           $ 8.50
         Third Quarter                               $ 10.50           $ 5.88
         Fourth Quarter                              $  7.55           $ 2.75
</TABLE>


<TABLE>
<CAPTION>
         1999                                          HIGH             LOW
                                                     -------           ------
<S>                                                  <C>               <C>
         First Quarter                               $  4.75           $ 2.06
         Second Quarter                              $  2.63           $ 0.13
         Third Quarter (through 8/16/99)             $  0.22           $ 0.13
         Third Quarter (after 8/16/99)               $  0.25           $ 0.06
         Fourth Quarter                              $  0.12           $ 0.04
</TABLE>



                                       8
<PAGE>   11


ITEM 6.  SELECTED FINANCIAL DATA.

         The following table sets forth selected financial data of Costilla
Energy, Inc. and its predecessors. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The historical information
should be read in conjunction with the Consolidated Financial Statements and the
Notes thereto included elsewhere herein. Costilla Energy, Inc. and its
predecessors acquired significant producing oil and gas properties in certain of
the periods presented which affect the comparability of the historical financial
and operating information.

<TABLE>
<CAPTION>
                                                                               YEAR ENDED DECEMBER 31,
                                                        ------------------------------------------------------------------
                                                           1999          1998          1997          1996          1995
                                                        ----------    ----------    ----------    ----------    ----------
<S>                                                     <C>           <C>           <C>           <C>           <C>
STATEMENT OF OPERATIONS DATA:
   Operating revenues ...............................   $   46,773    $   62,785    $   72,300    $   53,919    $   21,693
   Total revenues ...................................       47,887        63,602        76,501        55,026        21,816
   Expenses:
     Oil and gas production .........................       17,922        27,366        30,029        21,774        10,355
     General and administrative .....................        9,010        11,766         8,407         5,238         3,571
     Compensation related to option settlement ......           --            --            --            --           656
     Exploration and abandonments ...................       13,061        12,723         6,588         2,550         1,652
     Depreciation, depletion and amortization .......       18,336        32,447        26,409        12,430         5,958
     Loss on termination of purchase option .........       47,781            --            --            --            --
     Impairment of oil and gas properties ...........       11,863        59,678        28,189            --            --
     Loss on commodity transactions .................        4,000            --            --            --            --
     Interest .......................................       15,846        19,596        12,979        11,281         4,591
                                                        ----------    ----------    ----------    ----------    ----------
   Income (loss) before income taxes and
      extraordinary item ............................      (89,932)      (99,974)      (36,100)        1,753        (4,967)
   Net income (loss) ................................      (89,932)     (100,273)      (36,471)       (4,440)       (4,970)
   Net income (loss) applicable to common equity ....      (90,932)     (102,580)      (36,471)       (8,370)       (7,812)
   Net income (loss) per share applicable to
      common equity .................................   $    (6.61)   $   (10.24)   $    (3.51)   $    (1.29)   $    (1.50)
STATEMENT OF CASH FLOWS DATA:
   Net cash provided by (used in):
     Operating activities ...........................   $   (2,066)   $    2,379    $   25,032    $   12,350    $    6,366
     Investing activities ...........................       23,818       (98,462)      (92,597)      (64,129)      (62,467)
     Financing activities ...........................      (13,585)       97,719        58,562        61,531        58,830
OTHER FINANCIAL DATA:
   Capital expenditures .............................   $    7,371    $  121,578    $  113,924    $   70,017    $   62,220
   Adjusted EBITDA (1) ..............................       22,261        25,126        38,065        27,108         7,232
BALANCE SHEET DATA (AS OF PERIOD END):
   Working capital (deficit) ........................   $ (226,166)   $  (58,334)   $  (11,511)   $   10,320    $    2,654
   Total assets .....................................      111,896       210,954       194,088       162,790        87,367
   Total debt, less current maturities ..............           --       181,780       163,087       100,262        71,494
   Redeemable predecessor capital ...................           --            --            --            --        11,576
   Predecessor capital ..............................           --            --            --            --        (7,445)
   Stockholders' equity .............................     (133,934)      (46,452)          410        40,569            --
</TABLE>

----------
(1)  Adjusted EBITDA is presented because of its wide acceptance as a financial
     indicator of a company's ability to service or incur debt. Adjusted EBITDA
     (as used herein) is calculated by adding interest, income taxes,
     depreciation, depletion and amortization, impairment of oil and gas
     properties, exploration and abandonment costs and extraordinary items.
     Adjusted EBITDA should not be considered as an alternative to earnings
     (loss), or operating earnings (loss), as defined by generally accepted
     accounting principles, as indicators of the Company's financial performance
     or to cash flow as a measure of liquidity.


                                       9
<PAGE>   12


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

         Since the Company no longer has properties or business operations, the
following discussion presents certain historical comparisons of results of
operations and an analysis of the estimated liquidation of the Company and its
assets pursuant to the Plan.

RESULTS OF OPERATIONS

Year Ended December 31, 1999 Compared to Year Ended December 31, 1998

         The Company's total oil and gas revenues for the year ended December
31, 1999 were $46,773,000, representing a decrease of $16,012,000 (25.5%) over
revenues of $62,785,000 in 1998. The sale of predominantly oil producing
properties and the decrease in oil prices of 7.5% were the primary factors in
the decreased revenues. The average net oil price per barrel received in 1999
was $13.24 compared to $14.31 in 1998, a 7.5% decrease, and the average net gas
price received in 1999 was $2.08 compared to $2.05 in 1998, a 1.6%increase. Of
the above 1999 average net prices, hedging decreased revenue by $1.33 per Bbl
for oil and increased revenue $.07 per Mcf for gas. Total hedging revenue in
1999 was $97,000 compared to $8,221,000 for 1998.

         Oil and gas production was 22,200 Mmcfe in 1999 compared to 28,770
Mmcfe in 1998, a 22.8% decrease. The 6,570 Mmcfe decrease was due to the sale of
primarily oil producing properties during 1999. Gas production for 1999 was
approximately flat compared to 1998.

         Interest and other revenues were $291,000 for the year ended December
31, 1999 compared to $551,000 in 1998, representing a decrease of $260,000. Of
this decrease, $130,000 was related to a decrease in interest income due to a
reduction in funds earning interest.

         Gain on sale of assets was $824,000 for 1999 compared to $266,000 for
1998, representing a increase of $558,000 (209.8%), due to the sale of Rocky
Mountain properties in 1999 from which gains were recognized offset slightly by
losses from other miscellaneous sales of U. S. and foreign properties.

         Oil and gas production costs for the year ended December 31, 1999 were
$17,923,000 ($.81 per Mmcfe), compared to $27,366,000 in 1998 ($.95 per Mmcfe),
representing a decrease of $9,443,000 (34.5%). On a per Mmcfe basis production
costs decreased $0.14 (14.7%) due to a combination of lower production costs on
newly completed gas wells, the sale of higher cost Rocky Mountain properties and
the Company's continued cost containment efforts.

         General and administrative expenses for the year ended December 31,
1999 were $9,009,000, representing an decrease of $2,757,000 (23.4%) from 1998
of $11,766,000. The increase is primarily due to the reduction of personnel and
related costs due to workforce reductions in December 1998 and May 1999 offset
somewhat by costs related to the Company's workforce reductions and
reorganization efforts of approximately $1,925,000 since May 1999.

         Exploration and abandonment expense increased to $13,062,000 for the
year ended December 31, 1999 compared to $12,723,000 in 1998. The Company
incurred $518,000 of seismic costs for the year ended December 31, 1999,
compared to $2,361,000 in 1998. Dry hole and abandonment costs increased to
$11,825,000 in 1999 from $8,872,000 in 1998. The Company incurred $719,000 of
other geological and geophysical costs during the year as compared to $1,490,000
in 1998. Seismic and geological costs were significantly lower in 1999 as
compared to 1998 due to the reduction in drilling activity. Dry hole costs are
significantly reduced in 1999 compared to 1998 but were offset by a large
increase in abandonment expenses due to the write off of abandoned prospects and
expiring leases.


                                       10
<PAGE>   13


         Depreciation, depletion and amortization ("D D & A") expense for the
year ended December 31, 1999 was $18,336,000 compared to $32,447,000 for 1998,
representing a decrease of $14,111,000 (43.5%). During the 1999 period, D D & A
on oil and gas production was computed at an average rate of $.83 per Mcfe
compared to $1.13 per Mcfe for 1998. The decrease was a result of less basis in
remaining properties due to property sales, previous DD&A and impairments.

         Loss on termination of purchase option relates to the termination of
the Pioneer acquisition. The costs, none of which are recoverable, were
expensed. The $47,781,000 loss includes a cash payment of $25,000,000, the
relinquishment of Costilla's right to a property interest of $3,558,000,
4,000,000 shares of common stock valued at $13,700,000 and capitalized interest,
legal, accounting, engineering and due diligence costs of $5,523,000. There was
no comparable cost in 1998.

         Impairment of oil and gas properties for the year ended December 31,
1999 was $11,863,000 compared to $59,678,000 for 1998. The FAS 121 impairment in
1999 was $1,766,000 for U.S. producing properties and an additional impairment
of $10,097,000 due to near term expiration of acreage located in east Texas to
which proved undeveloped reserves had been attributed.

         The loss on commodity transactions for the year ended December 31,
1999, was $4,000,000 compared to none for the same period in 1998. The loss was
due to recording a liability in the amount of $1,226,000 for a gas call contract
and $1,593,000 for the portion of the oil contract which did not qualify as
hedges. An additional $1,140,000 of loss was due to the premiums on the
non-hedge contracts being accounted for as losses on commodity transactions. On
September 10, 1999, the counterparty to the hedging transactions elected an
early termination of the contracts due to Costilla's bankruptcy filing. The
cash-out values of these contracts have been capitalized on the Balance Sheet as
deferred charges, and they will be amortized over the applicable period of such
contract. In 1999, $41,000 was amortized as a loss on commodity transactions
compared to none in 1998.

         Interest expense was $15,846,000 for the year ended December 31, 1999,
compared to $19,596,000 for the comparable period in 1998. The $3,750,000
(19.1%) decrease was partially attributable to the Company's filing Chapter 11,
discontinuing the accrual of interest on the 10 1/4% Senior Notes as of the
Petition Date, which resulted in a savings of $6,047,000. Such savings were
offset by additional interest expense on the secured debt due to higher
outstanding balances in 1999 as compared to 1998. The average amounts of
applicable interest-bearing debt in 1999 and 1998 were $210,928,000 and
$195,863,000, respectively. The effective annualized interest rate in 1999 and
1998 was 10.0%.

Year Ended December 31, 1998 Compared to Year Ended December 31, 1997

         The Company's total oil and gas revenues for the year ended December
31, 1998 were $62,785,000, representing a decrease of $9,515,000 (13%) over
revenues of $72,300,000 in 1997. Lower commodity prices accounted for a decrease
in revenues of approximately $10,900,000, which was partially offset by an
increase of approximately $1,400,000 due to an increase in production. The
average net oil price per barrel received in 1998 was $14.31 compared to $17.77
in 1997, a 19% decrease, and the average net gas price received in 1998 was
$2.05 compared to $2.29 in 1997, a 10% decrease. Of the above average net price,
hedging increased revenue by $3.27 per Bbl for oil and $.11 per Mcf for gas.
Total hedging revenue in 1998 was $8,221,000 compared to a loss of $1,225,000
for 1997.

         Oil and gas production was 28,768 Mmcfe in 1998 compared to 27,748
Mmcfe in 1997, a 4% increase. Of the 1,020 Mmcfe increase, approximately 6,468
Mmcfe was due to successful drilling activities and 3,156 Mmcfe was due to the
Manti and Ballard acquisitions, less a loss of 3,630 Mmcfe on properties sold in
1997, and less 4,974 Mmce due to decline.

         Interest and other revenues were $551,000 for the year ended December
31, 1998 compared to $940,000 in 1997, representing a decrease of $389,000. Of
this decrease, $48,000 was related to a decrease in interest income due to a
reduction in funds earning interest. Gains on investment transactions related to
the


                                       11
<PAGE>   14


interest rate swap also decreased from the year ended December 31, 1997 by
$341,000 which was due to the reduced amount of time that the swap was accounted
for as an investment.

         Gain on sale of assets was $266,000 for 1998 compared to $3,261,000 for
1997, representing a decrease of $2,995,000 (92%), due to no significant sales
in 1998 from which gains were recognized.

         Oil and gas production costs for the year ended December 31, 1998 were
$27,366,000 ($0.95 per Mmcfe), compared to $30,029,000 in 1997 ($1.08 per
Mmcfe), representing a decrease of $2,663,000 (9%). On a per Mmcfe basis
production costs decreased $0.13 (12%) due to a combination of lower production
costs on newly completed gas wells, the sale of certain properties and the
Company's continued cost containment efforts.

         General and administrative expenses for the year ended December 31,
1998 were $11,766,000, representing an increase of $3,359,000 (40%) from 1997 of
$8,407,000. The increase is primarily due to additional personnel and related
costs necessary to accommodate the Company's oil and gas activities, costs
associated with the obligations of the Company to Ballard following the Ballard
Acquisition and an increase in June 1998 from 50% to 100% ownership in Redeco.
Also, increases in property taxes, bad debt expense and reduced administrative
fees from the operation of wells sold in 1997 contributed to increased general
and administrative expenses in 1998. The bad debt expense included a $476,000
charge for a note receivable due from a non-consolidated affiliate that is
primarily owned by certain officers of the Company.

         Exploration and abandonment expense increased to $12,723,000 for the
year ended December 31, 1998 compared to $6,588,000 in 1997. The Company
incurred $2,361,000 of seismic costs for the year ended December 31, 1998,
compared to $2,117,000 in 1997. The Company incurred $1,490,000 of other
geological and geophysical costs during the year as compared to $887,000 in
1997. The increase in exploration and abandonments expense was primarily related
to a decrease in the Company's success rate on exploratory wells to 52% in 1998
from 60% in 1997.

         Depreciation, depletion and amortization ("D D & A") expense for the
year ended December 31, 1998 was $32,447,000 compared to $26,409,000 for 1997,
representing an increase of $6,038,000 (23%). During the 1998 period, D D & A on
oil and gas production was computed at an average rate of $1.13 per Mmcfe
compared to $0.95 per Mmcfe for 1997. Approximately $7,297,000 and $3,562,000 of
this increase was due to increased production on successful drilling activities
in 1998 and acquisitions, respectively. These increases were partially offset by
$4,390,000 of D D & A resulting from lower commodity prices that is reflected in
impairment. The remainder of the increase was due primarily to the effect of
lower oil and gas prices at December 31, 1998 than those experienced at December
31, 1997.

         Impairment of oil and gas properties for the year ended December 31,
1998 was $59,678,000 compared to $28,189,000 for 1997. The SFAS 121 impairment
in 1998 was $23,548,000 for U.S. producing properties and $4,597,000 for Moldova
properties. In addition, there was $433,000 of impairment for unproved
properties, $26,710,000 for properties held for resale and $4,390,000 of
additional D D & A due to lower commodity prices on U. S. properties reflected
as impairment.

         Interest expense was $19,596,000 for the year ended December 31, 1998,
compared to $12,979,000 for the comparable period in 1997. The $6,617,000 (51%)
increase was attributable to increased levels of debt, offset slightly by a
decrease in the effective interest rate. The average amounts of applicable
interest-bearing debt in 1998 and 1997 were $195,863,000 and $128,207,000,
respectively. The effective annualized interest rate in 1998 was 10.0%, as
compared to 10.1% in 1997.

         Results of operations for the year ended December 31, 1998 included an
extraordinary charge of $299,000 compared to $219,000 for the comparable period
in 1997. These extraordinary charges related to the early extinguishments of the
Company's bank credit facilities and consisted of the unamortized balance of
previously capitalized debt issuance costs.


                                       12
<PAGE>   15


Year Ended December 31, 1997 Compared to Year Ended December 31, 1996

         The Company's total oil and gas revenues for the year ended December
31, 1997 were $72,300,000, representing an increase of $18,381,000 (34%) over
revenues of $53,919,000 in 1996. This increase was primarily due to successful
drilling activities and the 1996 Acquisition, which accounted for approximately
$11,099,000 and $9,214,000 of increased revenue, respectively. The Ballard
Acquisition accounted for approximately $3,372,000 of the increase. Gas
imbalances accounted for approximately $2,340,000 of the increase, with an
average price of $1.56 per Mcf. Approximately 50% of the gas imbalance relates
to production in prior periods against which a valuation allowance had been
recorded due to uncertainty of ultimate collection. During the year ended
December 31, 1997, uncertainties related to these imbalances were substantially
reduced and the related valuation allowance reversed. Management does not expect
similar effects from gas imbalances in future periods. These increases were
partially offset by the $2,152,000 net effect of lower commodity prices. The
average oil price per barrel received in 1997 was $17.77 compared to $19.87 in
1996, an 11% decrease, and the average gas price received in 1997 was $2.29
compared to $2.13 in 1996, a 7% increase. The sale of certain properties in
April 97 and December 31, 1996 also partially offset the increased revenues in
the amount of $3,607,000.

         Oil and gas production was 4,625 MBOE in 1997 compared to 3,260 MBOE in
1996, a 42% increase. Of the 1,365 MBOE increase, approximately 657 MBOE was due
to successful drilling activities and 539 MBOE was due to the properties
acquired in the 1996 Acquisition. Gas imbalances accounted for approximately 249
MBOE of the increase. The Ballard Acquisition properties accounted for
approximately 219 MBOE of the increase. The sale of certain properties in April,
1997 and December 1996 partially offset the increased production volumes.

          Interest and other revenues were $940,000 for the year ended December
31, 1997 compared to $40,000 in 1996, representing an increase of $900,000.
$223,000 of this increase was related to increased interest income due to
increased funds earning interest. Gains on investment transactions of $510,000
were recorded for the year ended December 31, 1997 related to an interest rate
swap contract which was marked-to-market. In the year ended December 31, 1996
losses of $195,000 were recognized on certain investment transactions. Losses of
$146,000 related to an oil collar which was marked-to-market. No comparable
transactions existed in 1996.

         Other income was $3,261,000 for the year ended December 31, 1997
compared to $1,067,000 for 1996, representing an increase of $2,194,000 (206%).
Gains from the sale of certain oil and gas properties increased by approximately
$2,118,000. The remainder of the increase was due primarily to a gain of
approximately $70,000 recognized on the sale of the Company's interest in a
partnership which owned the Independence Plaza Building in Midland, Texas.

         Oil and gas production costs for the year ended December 31, 1997 were
$30,029,000 ($6.49 per BOE), compared to $21,774,000 in 1996 ($6.68 per BOE),
representing an increase of $8,255,000 (38%), with approximately $4,026,000 of
the increase relating to the 1996 Acquisition and $1,583,000 to successful
drilling activities. The remainder of the increase was due primarily to
increased treating and transportation costs due to increased gas production and,
to a lesser extent, the Ballard Acquisition, offset in part by the sale of
certain high operating cost properties in April 1997. On a per BOE basis,
production costs decreased $0.19 (3%) due to a combination of the sale of
certain high operating cost properties in April 1997, the gas imbalance volumes
and lower production costs on newly completed wells.

         General and administrative expenses for the year ended December 31,
1997 were $8,407,000, representing an increase of $3,169,000 (66%) from 1996 of
$5,238,000. The increase is primarily due to additional personnel and related
costs necessary to accommodate the acceleration of the Company's oil and gas
activities, the Ballard Acquisition, increased insurance costs and other costs
for a full twelve month period related to becoming a public company in October,
1996.

         Exploration and abandonment expense increased to $6,588,000 for the
year ended December 31, 1997 compared to $2,550,000 in 1996. The Company
incurred $2,117,000 of seismic costs for the year ended December 31, 1997,
compared to $913,000 in 1996. Dry hole and abandonment costs increased to
$3,584,000


                                       13
<PAGE>   16


in 1997 from $1,524,000 in 1996. The Company incurred $887,000 of other
geological and geophysical costs during the year ended December 31, 1997,
compared to $113,000 in 1996. The increase in exploration and abandonments
expense was primarily related to the Company's increased drilling activities in
1997 compared to a very low level of activity in 1996.

         D D & A expense for the year ended December 31, 1997 was $26,409,000
compared to $12,430,000 for 1996, representing an increase of $13,979,000
(112%). During the 1997 period, D D & A on oil and gas production was provided
at an average rate of $5.71 per BOE compared to $3.81 per BOE for 1996.
Approximately $3,751,000 of this increase was due to successful drilling
activities, $3,078,000 related to the 1996 Acquisition and an additional
$1,018,000 of the increase was due to the recording of gas imbalances. The
remainder of the increase was due primarily to the effect of lower oil and gas
prices at December 31, 1997 than those experienced at December 31, 1996.

         Impairment of oil and gas properties for the year ended December 31,
1997 was $28,189,000. No comparable expense was recorded in 1996. This
impairment expense was determined under the guidelines of FAS 121 (Impairment of
Long-Lived Assets) using estimates of net undiscounted cash flow and estimated
present values for the Company's oil and gas reserves based upon the
non-escalated prices used in the Company's December 31, 1997 reserve report.

         Interest expense was $12,979,000 for the year ended December 31, 1997,
compared to $11,281,000 for the comparable period in 1996. The $1,698,000 (15%)
increase was attributable primarily to increased levels of debt offset in part
by a decrease in the effective interest rate. The average amounts of applicable
interest-bearing debt in 1997 and 1996 were $128,207,000 and $95,671,000,
respectively. The effective annualized interest rate in 1997 was 10.1%, as
compared to 11.8% in 1996.

         Results of operations for the year ended December 31, 1997 include an
extraordinary charge of $219,000 compared to $4,975,000 for the comparable
period in 1996. These extraordinary charges related to the early extinguishment
of the Company's prior bank credit facilities and consisted of the unamortized
balance of previously capitalized debt issuance costs.


                                       14
<PAGE>   17


LIQUIDATION


         All of the Company's oil and gas properties were sold in the Dreyfus
Sale. The remaining assets of the Company, which consisted principally of office
furniture and equipment and potential claims against third parties, were
transferred to the Liquidating Trust pursuant to the Plan as of the Plan's
effective date, October 1, 2000. The Liquidating Trustee will liquidate the
remaining assets and distribute the proceeds of liquidation (less costs and
expenses related to the liquidation and the bankruptcy) in the discretion of the
Liquidating Trustee under supervision of the Bankruptcy Court. Such liquidation
may include liquidating claims formerly held by the Company by litigation or
otherwise, as well as the sale of the remaining physical assets. In addition,
the Bankruptcy Court will determine the validity and amount of certain claims
against the Company in the bankruptcy as a result of disputes regarding and
objections to such claims. The Liquidating Trustee intends to reserve certain
funds from the proceeds of the Dreyfus Sale to cover the amount of certain
disputed and contingent claims and to fund the costs of liquidation, claim
resolution and similar matters, including attorney's fees. Such reserved amounts
has reduced the amount available for distribution to creditors. The activities
to be funded by the reserved amounts may result in additional amounts becoming
available for distribution to creditors, but no assurances can be made as to the
timing or amount of any future distributions. The following is a brief summary
of the anticipated liquidation and distribution (based upon the assumptions and
qualifications set forth in the Disclosure Statement):

                              COSTILLA ENERGY INC.
                   Distribution of Estimated Proceeds Per Plan

<TABLE>
<CAPTION>
                 STATEMENT OF ASSETS                    Preliminary            %             Plan
                    (in thousands)                     Balance Sheet        Recovery      Liquidation
                                                       June 30, 2000
                                                        (unaudited)
<S>                                                    <C>                     <C>       <C>
    Cash and cash equivalents                          $     114,884            100%      $   114,884
    Accounts Receivable-Trade, net                               582             40%              233
    Accounts Receivable-Oil & Gas Sales                           --              0%               --
    Prepaids                                                     370              0%               --
    Total Current Assets                                     115,836                          115,117

    Oil & Gas Properties, net                                     --              0%               --
    Other Property & Equipment, net                            1,800             10%              180
    Gas Balancing Receivable                                      --              0%               --
    Other Assets, net                                         12,580              0%               --
    Title Defects Escrow                                       2,020             32%              646

    Total Assets                                       $     132,236                       $  115,943


    NET PROCEEDS AVAILABLE FOR DISTRIBUTION                                                $  115,943
</TABLE>


                                       15
<PAGE>   18


ALLOCATION OF NET ESTIMATED LIQUIDATION PROCEEDS TO SECURED, ADMINISTRATIVE,
PRIORITY AND UNSECURED CLAIMANTS SUBJECT TO RESERVES

                  (in thousands)

<TABLE>
<CAPTION>
                                                      Allowable            %             Plan
                                                       Claims           Recovery      Liquidation
<S>                                                                     <C>           <C>
Secured Creditor Claims:
   Class 1:  Banker's Trust Revolver                  $     845          100.00%      $       845
   Class 2:  Banker's Trust Hedging Obligation           19,462          100.00%           19,462
   Class 3:  Dawson                                         525          100.00%              525
   Class 4:  Other Secured Claims                           749          100.00%              749
   Non-default interest at 6-30-00                        1,020          100.00%            1,020
   Default interest at 6-30-00                              655          100.00%              655
                                                      ---------                       -----------
      Subtotal                                        $  23,256                       $    23,256

Estimated Amounts After Secured Claims:                                               $    92,687

Administrative & Priority Claims:
   Trust Professional Fees                            $   1,800          100.00%      $     1,800
   Chapter 11 Professional Fees                           1,200          100.00%            1,200
   Transaction Fee on Sale                                1,250          100.00%            1,250
   Post-Petition Creditors                                2,500          100.00%            2,500
   General and Administrative                             1,200          100.00%            1,200
   Priority Tax Claims                                      -0-          100.00%              -0-
                                                      ---------                       -----------
      Subtotal                                        $   7,950                       $     7,950

Estimated Amounts After Administrative and                                            $    84,737
  Priority Claims:

Unsecured Claims:
   Class 5:  Allowed Priority Non-Tax Claims          $     -0-          100.00%      $       -0-
   Class 6:  Administrative Convenience Claims              354          100.00%              354
   Class 7:  General Unsecured including Bonds          189,346           44.57%           84,383
   Class 8:  Disallowed Claims, etc.                     15,601            0.00%              -0-
                                                      ---------                       -----------
      Subtotal                                        $ 205,301                       $    84,737

   Class 9 Equity                                     $     -0-                       $       -0-
</TABLE>

The foregoing information is based on certain assumptions and subject to
qualifications set forth in the Disclosure Statement. It is likely that such
assumptions may differ from actual circumstances and actual results may differ
materially from the foregoing anticipated results. The initial distributions
were subject to reduction to provide the above-described reserves. Certain of
the reserves will be utilized to liquidate remaining assets, including potential
lawsuits. No assurances can be made that the funds used to pay such expenditures
will result in any additional amounts being available for distribution and may
result in the loss of such funds.

SUBSEQUENT DISTRIBUTIONS

         In November 2000 a distribution was made to Class 7 General Unsecured
Creditors in the amount of $82.5 million, which represented approximately 43% of
the total of Class 7 Claims.

         Also, in November 2000 all principal and non-default interest due to
Bankers Trust pursuant to their Class 2 hedging claim was paid in the amount of
approximately $21.1 million, including certain expenses and subject to repayment
of any amount disallowed subsequent to the payment. A repayment of $.5 million
was received by Costilla from Bankers Trust in January 2001.

         In March 2001 another distribution was made to Class 7 General
Unsecured Creditors in the amount of $5.0 million, which brought the aggregate
payments to approximately 46% of the total of Class 7 Claims.


                                       16
<PAGE>   19


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         For the financial statements and supplementary data required by this
Item 8, see the Index to Consolidated Financial Statements on page F-1 in this
Form 10-K.

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

None.


                                       17
<PAGE>   20


                                    PART III.


ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         The Company no longer has any officers or directors, the last of whom
resigned on or about September 26, 2000. Under the Plan, the Liquidating Trustee
has all of the management functions of the officers and directors of the Company
and may cause the Company to take any action that might otherwise require the
approval of the shareholders, officers or directors of the Company without
obtaining such approval.

ITEM 11.  EXECUTIVE COMPENSATION.

         During the pending of the Company's bankruptcy proceeding prior to
confirmation of the Plan, various officers and employees of the Company received
compensation from the Company, including certain retention bonuses for remaining
with the Company through specified periods or specified events such as the
Dreyfus Sale or confirmation of the Plan. All such compensation arrangements
were approved by the Bankruptcy Court and terminated and superceded all prior
employment, termination and severance contracts and arrangements. All stock
options held by officers, directors and employees were canceled under the terms
of the Plan canceling all equity interests. The Compensation Committee of the
Company's Board of Directors did not make any compensation decisions after those
disclosed in prior filings. All other information relative to this Item has been
rendered moot due to the bankruptcy and liquidation of the Company.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         Under the terms of the Plan, all of the shares of the Company's common
stock were canceled and there are currently zero shares of common stock
outstanding.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         Since all of the officers and directors have resigned, there is no
disclosure required under this Item.


                                       18
<PAGE>   21


                                     PART IV


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

FINANCIAL STATEMENT SCHEDULES

         No Financial Statement Schedules are required with this report. For a
         list of the consolidated financial statements filed as a part of this
         report, see the Index to Consolidated Financial Statements on Page F-1.

REPORTS ON FORM 8-K

         The Company has filed the following reports on Form 8-K since September
30, 1999:

         1. Form 8-K reporting the filing of a plan of reorganization in the
Company's bankruptcy proceeding, filed February 14, 2000.

         2. Form 8-K reporting the filing of a disclosure statement in the
Company's bankruptcy proceeding filed March 3, 2000.

         3. Form 8-K reporting the Dreyfus Sale, filed June 22, 2000.

         4. Form 8-K reporting confirmation of the Plan, filed October 13, 2000.

EXHIBITS

<TABLE>
<CAPTION>
            EXHIBIT
            NUMBER      DESCRIPTION OF EXHIBIT
            -------     ----------------------
<S>                     <C>
              2.1          Debtor's Plan of Reorganization (Liquidation)
                           Restated to Reflect All Amendments and Modifications
                           dated September 15, 2000; incorporated by reference
                           to the Company's Current Report on Form 8-K filed on
                           October 13, 2000

             *2.2          Disclosure Statement With Respect to Debtor's Plan of
                           Reorganization (Liquidation), as Amended, dated July
                           28, 2000

              2.3          Order Confirming Debtor's Plan of Reorganization
                           (Liquidation), as Restated to Reflect All Amendments
                           and Modifications, filed September 15, 2000;
                           incorporated by reference to the Company's Current
                           Report on Form 8-K filed October 13, 2000

              3.1          Certificate of Incorporation of the Company;
                           incorporated by reference to Registration Statement
                           on Form S-1, File No. 333-08909

              3.2          Bylaws of the Company; incorporated by reference to
                           Registration Statement on Form S-1, File No.
                           333-08909

              4.1          Form of Notes or Global Certificate (included as
                           Exhibit A to Exhibit 4.2); incorporated by reference
                           to Registration Statement on Form S-1, File No.
                           333-08909
</TABLE>


                                       19
<PAGE>   22


<TABLE>
<S>                        <C>
              4.2          Indenture dated as of October 1, 1996 by and between
                           State Street Bank and Trust Company, as Trustee, and
                           the Company, as Issuer; incorporated by reference to
                           Registration Statement on Form S-1, File No.
                           333-08909

              4.3          First Supplemental Indenture dated January 16, 1998
                           by and between State Street Bank and Trust Company,
                           as Trustee, and the Company, as Issuer (including
                           form of Global Certificate); incorporated by
                           reference to the Company's Annual Report on Form 10-K
                           for the year ended December 31, 1997

              4.4          Form of Note; incorporated by reference to the
                           Company's Annual Report on Form 10-K for the year
                           ended December 31, 1997

              4.5          Form of Stock Certificate; incorporated by reference
                           to Registration Statement on Form S-1, File No.
                           333-08913

              10.1         Option to Purchase Agreement dated December 16, 1998
                           between Pioneer Natural Resources USA, Inc., Pioneer
                           Resources Producing, L.P. and the Company;
                           incorporated by reference to the Company's Annual
                           Report on Form 10-K for the year ended December 31,
                           1998

              10.2         Purchase and Sale Agreement dated December 16, 1998
                           between Pioneer Natural Resources USA, Inc., Pioneer
                           Resources Producing, L.P. and the Company;
                           incorporated by reference to the Company's Annual
                           Report on Form 10-K for the year ended December 31,
                           1998

              10.3         Sixth Amendment to Amended and Restated Credit
                           Agreement dated as of November 19, 1998 between
                           Bankers Trust Company, as Agent, Union Bank of
                           California, N.A., as Co-Agent, and the Company;
                           incorporated by reference to the Company's Annual
                           Report on Form 10-K for the year ended December 31,
                           1998

              10.4         Purchase and Sale Agreement dated April 1, 1999 by
                           and between Costilla Energy, Inc. and Pioneer Natural
                           Resources USA, Inc. and Pioneer Resources Producing,
                           L.P.; incorporated by reference to the Company's
                           Quarterly Report on Form 10-Q for the quarter ended
                           March 31, 1999

              10.5         Seventh Amendment to Amended and Restated Credit
                           Agreement dated as of March 9, 1999 between Bankers
                           Trust Company, as Agent, Union Bank of California,
                           N.A., as Co-Agent and Costilla Energy, Inc.;
                           incorporated by reference to the Company's Quarterly
                           Report on Form 10-Q for the quarter ended March 31,
                           1999

              10.6         Eighth Amendment to Amended and Restated Credit
                           Agreement dated as of March 9, 1999 between Bankers
                           Trust Company, as Agent, Union Bank of California,
                           N.A., as Co-Agent and Costilla Energy, Inc.;
                           incorporated by reference to the Company's Quarterly
                           Report on Form 10-Q for the quarter ended March 31,
                           1999

              10.7         Purchase and Sale Agreement dated February 2, 1999
                           between Costilla Energy, Inc. and Ballard Petroleum
                           LLC; incorporated by reference to the Company's
                           Quarterly Report on Form 10-Q for the quarter ended
                           March 31, 1999
</TABLE>


                                       20
<PAGE>   23


<TABLE>
<S>                        <C>
              10.8         Ninth Amendment to Amended and Restated Credit
                           Agreement dated as of May 12, 1999 between Bankers
                           Trust Company, as Agent, Union Bank of California,
                           N.A., as Co-Agent and Costilla Energy, Inc.;
                           incorporated by reference to the Company's Quarterly
                           Report on Form 10-Q for the quarter ended June 30,
                           1999

              10.9         Tenth Amendment to Amended and Restated Credit
                           Agreement dated as of May 27, 1999 between Bankers
                           Trust Company, as Agent, Union Bank of California,
                           N.A., as Co-Agent and Costilla Energy, Inc.;
                           incorporated by reference to the Company's Quarterly
                           Report on Form 10-Q for the quarter ended June 30,
                           1999

              10.10        Eleventh Amendment to Amended and Restated Credit
                           Agreement dated as of June 17, 1999 between Bankers
                           Trust Company, as Agent, Union Bank of California,
                           N.A., as Co-Agent and Costilla Energy, Inc.;
                           incorporated by reference to the Company's Quarterly
                           Report on Form 10-Q for the quarter ended June 30,
                           1999

              10.11        Twelfth Amendment to Amended and Restated Credit
                           Agreement dated as of August 16, 1999 between Bankers
                           Trust Company, as Agent, and the Company;
                           incorporated by reference to the Company's Quarterly
                           Report on Form 10-Q for the quarter ended September,
                           1999

              10.12        Asset Purchase Agreement by and between Costilla
                           Energy, Inc. and Louis Dreyfus Natural Gas Corp.
                           dated April 20, 2000; incorporated by reference to
                           the Company's Current Report on Form 8-K filed June
                           22, 2000
</TABLE>


----------
  *Filed herewith. All other exhibits are incorporated by reference to the
   filing indicated.


                                       21
<PAGE>   24


                                   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.

                                COSTILLA ENERGY, INC.


Date:  March 30, 2001           By:  /s/ Bobby W. Page
                                    --------------------------------------------
                                    Bobby W. Page, Plan Trustee of the Costilla
                                    Liquidating Trust


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

         The registrant does not have any officers or directors, and the
undersigned Trustee is fully and duly authorized by Bankruptcy Court Order to
take action on behalf of the Company in place of and with all authority of the
Company's officers and directors.


Date:  March 30, 2001           By:  /s/ Bobby W. Page
                                    --------------------------------------------
                                    Bobby W. Page, Plan Trustee of the Costilla
                                    Liquidating Trust



                                       22

<PAGE>   25

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited) Consolidated Financial Statements of Costilla Energy, Inc.:

<TABLE>
<S>                                                                                                         <C>
       Consolidated Balance Sheets as of December 31, 1999 and 1998.......................................  F - 2
       Consolidated Statements of Operations for the years ended December 31, 1999,
          1998 and 1997...................................................................................  F - 3
       Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1999,
          1998 and 1997...................................................................................  F - 4
       Consolidated Statements of Cash Flows for the years ended December 31, 1999,
          1998 and 1997...................................................................................  F - 5
       Notes to (Unaudited)  Consolidated Financial Statements............................................  F - 7
</TABLE>




                                      F-1
<PAGE>   26


                              COSTILLA ENERGY, INC.
                             (DEBTOR-IN-POSSESSION)
                           CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                          DECEMBER 31,    DECEMBER 31,
                                                                              1999            1998
                                                                          ------------    ------------
                                                                          (UNAUDITED)
<S>                                                                       <C>             <C>
                               ASSETS
CURRENT ASSETS:
     Cash and cash equivalents                                            $     13,418    $      5,251
     Accounts receivable:
         Trade, net of allowance of $180 and $0,
         respectively                                                            1,254           4,547
         Oil and gas sales                                                       4,558           5,673
     Prepaid and other current assets                                              434           1,821
                                                                          ------------    ------------
             Total current assets                                               19,664          17,292
                                                                          ------------    ------------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
     Oil and gas properties, using the successful
     efforts method of accounting:
         Proved properties                                                     154,158         275,972
         Unproved properties                                                     5,956          38,941
     Accumulated depletion, depreciation and
     amortization                                                              (88,749)       (133,612)
                                                                          ------------    ------------
                                                                                71,365         181,301
     Other property and equipment, net                                           2,413           4,252
                                                                          ------------    ------------
             Total property, plant and equipment                                73,778         185,553
                                                                          ------------    ------------
OTHER ASSETS:
     Deferred charges                                                            5,590           6,447
     Deferred hedge charges                                                     10,895              --
     Other                                                                       1,969           1,662
                                                                          ------------    ------------
             Total other assets                                                 18,454           8,109
                                                                          ------------    ------------
                                                                          $    111,896    $    210,954
                                                                          ============    ============
         LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
LIABILITIES NOT SUBJECT TO COMPROMISE:
     Long-term debt                                                       $     45,940    $     40,101
     Trade accounts payable                                                      3,142              --
     Undistributed revenue                                                       2,477           3,419
     Other current liabilities                                                   2,160              --
                                                                          ------------    ------------
             Total liabilities not subject to
             compromise                                                         53,719          43,520
                                                                          ------------    ------------
LIABILITIES SUBJECT TO COMPROMISE:
     Trade accounts payable                                                      2,771          26,183
     Other current liabilities                                                   7,790           5,923
     Long-term debt                                                            181,550         181,780
                                                                          ------------    ------------
             Total liabilities subject to compromise                           192,111         213,886
                                                                          ------------    ------------
STOCKHOLDERS' EQUITY (DEFICIT):
     Preferred stock, $.10 par value (3,000,000 shares authorized;
       50,000 shares outstanding at December 31, 1999 and
       at December 31, 1998)                                                         5               5
     Common stock, $.10 par value (100,000,000 shares authorized;
       14,101,580 shares outstanding at December 31, 1999 and
       12,751,930 shares outstanding at December 31, 1998)                       1,410           1,275
     Additional paid-in capital                                                 96,030          92,715
     Retained deficit                                                         (231,379)       (140,447)
                                                                          ------------    ------------
             Total stockholders' equity (deficit)                             (133,934)        (46,452)
                                                                          ------------    ------------
COMMITMENTS AND CONTINGENCIES                                                       --              --
                                                                          $    111,896    $    210,954
                                                                          ============    ============
</TABLE>

See accompanying notes to consolidated financial statements.


                                      F-2
<PAGE>   27

                              COSTILLA ENERGY, INC.
                             (DEBTOR-IN-POSSESSION)
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)



<TABLE>
<CAPTION>
                                                                                    YEARS ENDED DECEMBER 31,
                                                                             --------------------------------------
                                                                                1999          1998          1997
                                                                             ----------    ----------    ----------
                                                                             (UNAUDITED)
<S>                                                                          <C>           <C>           <C>
REVENUES:
  Oil and gas sales                                                          $   46,773    $   62,785    $   72,300
  Interest and other                                                                291           551           940
  Gain on sale of assets                                                            823           266         3,261
                                                                             ----------    ----------    ----------
                                                                                 47,887        63,602        76,501
                                                                             ----------    ----------    ----------

EXPENSES:

  Oil and gas production                                                         17,922        27,366        30,029
  General and administrative                                                      9,010        11,766         8,407
  Exploration and abandonments                                                   13,061        12,723         6,588
  Depreciation, depletion and amortization                                       18,336        32,447        26,409
  Loss on termination of purchase option                                         47,781            --            --
  Impairment of oil and gas properties                                           11,863        59,678        28,189
  Loss on commodity transactions                                                  4,000            --            --
  Interest                                                                       15,846        19,596        12,979
                                                                             ----------    ----------    ----------
                                                                                137,819       163,576       112,601
                                                                             ----------    ----------    ----------

     Income (loss) before federal income taxes and extraordinary item           (89,932)     (999,974)      (36,100)

PROVISION FOR FEDERAL INCOME TAXES
  Current                                                                            --            --            62
  Deferred                                                                           --            --            90
                                                                             ----------    ----------    ----------
     Income (loss) before extraordinary item                                    (89,932)      (99,974)      (36,252)

     Extraordinary loss resulting from early extinguishment of debt,
      net of deferred tax benefit of $0, $0 and $129, respectively                   --          (299)         (219)
                                                                             ----------    ----------    ----------

NET LOSS                                                                     $  (89,932)   $ (100,273)   $  (36,471)
                                                                             ==========    ==========    ==========

CUMULATIVE, PREFERRED STOCK DIVIDENDS ACCRUED                                $    1,000    $    2,307    $       --
                                                                             ==========    ==========    ==========

LOSS BEFORE EXTRAORDINARY ITEM
  APPLICABLE TO COMMON EQUITY                                                $  (90,932)   $ (102,281)   $  (36,252)
                                                                             ==========    ==========    ==========

NET LOSS APPLICABLE TO COMMON EQUITY                                         $  (90,932)   $ (102,580)   $  (36,471)
                                                                             ==========    ==========    ==========

LOSS PER SHARE:
  Loss before extraordinary item                                             $    (6.61)   $   (10.21)   $    (3.49)

  Extraordinary loss resulting from early extinguishment of debt,
   net of deferred tax benefit                                                       --         (0.03)        (0.02)
                                                                             ----------    ----------    ----------

  NET LOSS                                                                   $    (6.61)   $   (10.24)   $    (3.51)
                                                                             ==========    ==========    ==========

WEIGHTED AVERAGE SHARES OUTSTANDING                                              13,765        10,015        10,383
                                                                             ==========    ==========    ==========
</TABLE>

See accompanying notes to consolidated financial statements.


                                      F-3
<PAGE>   28


                             COSTILLA ENERGY, INC.
                             (DEBTOR-IN-POSSESSION)
           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                                 (IN THOUSANDS)



<TABLE>
<CAPTION>
                                                                         ADDITIONAL      RETAINED
                                                 PREFERRED    COMMON      PAID-IN        EARNINGS        STOCKHOLDERS'
                                                   STOCK       STOCK      CAPITAL        (DEFICIT)     EQUITY (DEFICIT)
                                                 ---------   --------    ----------    ------------    ----------------
<S>                                              <C>         <C>         <C>           <C>             <C>
BALANCE AT DECEMBER 31, 1996                     $      --   $  1,047    $   41,081    $     (1,559)   $         40,569


  Net Loss                                              --         --            --         (36,471)            (36,471)
  Common stock issued, net                              --          1            74              --                  75
  Common stock repurchased and retired                  --        (33)       (3,730)             --              (3,763)
                                                 ---------   --------    ----------    ------------    ----------------

BALANCE AT DECEMBER 31, 1997                            --      1,015        37,425         (38,030)                410

  Net loss                                              --         --            --        (100,273)           (100,273)
  Common stock repurchased and retired                  --        (67)       (5,699)             --              (5,766)
  Preferred stock issued, net                            5         --        47,922              --              47,927
  Preferred stock dividends paid in kind                --         27         2,117          (2,144)                 --
  Common stock issued for pending Pioneer
     acquisition                                        --        300        10,950              --              11,250
                                                 ---------   --------    ----------    ------------    ----------------

BALANCE AT DECEMBER 31, 1998                             5      1,275        92,715        (140,447)            (46,452)

  Net Loss                                              --         --            --         (90,932)            (90,932)
  Preferred stock dividends paid in kind                --         35           965              --               1,000
  Common stock issued for pending Pioneer
     acquisition                                        --        100         2,350              --               2,450
                                                 ---------   --------    ----------    ------------    ----------------

BALANCE AT DECEMBER 31, 1999 (UNAUDITED)         $       5   $  1,410    $   96,030    $   (231,379)   $       (133,934)
                                                 =========   ========    ==========    ============    ================
</TABLE>


See accompanying notes to consolidated financial statements.

                                      F-4
<PAGE>   29
                              COSTILLA ENERGY, INC.
                             (DEBTOR-IN-POSSESSION)
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                                 YEARS ENDED DECEMBER 31,
                                                                         --------------------------------------
                                                                            1999          1998          1997
                                                                         ----------    ----------    ----------
                                                                         (UNAUDITED)
<S>                                                                      <C>           <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:

NET LOSS                                                                 $  (89,932)   $ (100,273)   $  (36,471)

ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
   PROVIDED BY OPERATING ACTIVITIES:
    Depreciation, depletion and amortization                                 18,336        32,447        26,409
    Impairment of oil and gas properties                                     11,863        59,678        28,189
    Exploration and abandonments                                             11,656           242           262
    Amortization of deferred charges                                            627           794         1,517
    Amortization of deferred hedge charges                                    2,101            --            --
    Deferred income tax expense                                                  --            --           (39)
    Allowance for doubtful accounts                                              --           656           208
    Loss on termination of purchase option                                   46,985            --            --
    Gain on sale of oil and gas properties                                     (824)         (266)       (3,261)
    Extraordinary loss resulting from early extinguishment of debt               --           299           348
    Gain on investment transactions                                           4,000            21          (534)
                                                                         ----------    ----------    ----------
                                                                              4,812        (6,402)       16,628

    Changes in operating assets and liabilities:
      Decrease (increase) in accounts receivable                              4,396         4,152         1,485
      Decrease (increase) in other assets                                       360          (403)       (3,585)
      Increase (decrease) in accounts payable                               (17,429)        2,546        10,822
      Increase (decrease) in other liabilities                                5,796         2,486          (318)
                                                                         ----------    ----------    ----------
        Net cash provided by (used in) operating activities                  (2,006)        2,379        25,032
                                                                         ----------    ----------    ----------

CASH FLOWS FROM INVESTING ACTIVITIES:

    Additions to oil and gas properties                                      (7,317)     (108,874)     (111,580)
    Proceeds from sale of oil and gas properties                             31,189        11,866        21,327
    Additions to other property and equipment                                   (54)       (1,454)       (2,344)
                                                                         ----------    ----------    ----------
        Net cash provided by (used in) investing activities                  23,818       (98,462)      (92,597)
                                                                         ----------    ----------    ----------

CASH FLOWS FROM FINANCING ACTIVITIES:

    Borrowings under long-term debt                                           8,000       150,500        96,304
    Payments of long-term debt                                              (21,585)      (91,583)      (33,480)
    Proceeds from issuance of preferred stock, net                               --        47,927            --
    Proceeds from issuance of common stock, net                                  --            --            75

    Purchase of the Company's common stock                                       --        (5,766)       (3,763)
    Deferred loan and financing costs                                            --        (3,359)         (574)
             Net cash provided by (used in) financing activities            (13,585)       97,719        58,562
                                                                         ----------    ----------    ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                          8,167         1,636        (9,003)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                5,251         3,615        12,618
                                                                         ----------    ----------    ----------

CASH AND CASH EQUIVALENTS, END OF PERIOD                                 $   13,418    $    5,251    $    3,615
                                                                         ==========    ==========    ==========
</TABLE>

See accompanying notes to consolidated financial statements.


                                      F-5


<PAGE>   30


                              COSTILLA ENERGY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              (THE INFORMATION AND AMOUNTS FOR 1999 ARE UNAUDITED)

<TABLE>
<CAPTION>
                                                                                 YEARS ENDED DECEMBER 31,
                                                                         --------------------------------------
                                                                            1999          1998          1997
                                                                         ----------    ----------    ----------
                                                                         (UNAUDITED)
<S>                                                                      <C>           <C>           <C>
Supplemental schedule of noncash
  investing and financing activities:

Common stock issued for pending
  acquisition                                                            $    2,450    $   11,250    $       --
</TABLE>








                                      F-6
<PAGE>   31


                              COSTILLA ENERGY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              (THE INFORMATION AND AMOUNTS FOR 1999 ARE UNAUDITED)


(1)      ORGANIZATION AND NATURE OF OPERATIONS

         Costilla Energy, Inc. ("Costilla" or the "Company") was incorporated in
Delaware in June 1996 to consolidate and continue the activities previously
conducted by Costilla Energy, L.L.C., a Texas limited liability company, and its
wholly owned subsidiaries, to acquire the assets of CSL Management Corporation
("CSL") (which owned certain office equipment used by the Company), and to
acquire the stock of Valley Gathering Company ("Valley"). Costilla was formed
for the purpose of conducting a $60 million initial public offering of common
stock and a $100 million senior notes offering (the "Offerings"), which
Offerings were completed in early October 1996.

         The Company is an oil and gas exploration and production concern with
properties located principally in South and East Texas, the Rocky Mountains and
the Permian Basin regions of the United States.

(2)      BANKRUPTCY PROCEEDINGS

         On September 3, 1999 (the "Petition Date"), the Company filed a
voluntary petition for relief under Chapter 11 of U. S. Bankruptcy Code
("Chapter 11"). The filing was made in the U. S. Bankruptcy Court in Midland,
Texas (the "Bankruptcy Court"). At December 31, 1999, the Company continued to
operate as a debtor-in-possession subject to the supervision and orders of the
Bankruptcy Court.

         The accompanying financial statements have been prepared on a going
concern basis, which contemplates continuity of operations, realization of
assets and liquidation of liabilities in the normal course of business. As a
result of the bankruptcy filing, the sale of all of the Company's oil and gas
assets in June 2000 and the confirmation of a plan of reorganization
(liquidation) in September 2000, the carrying amounts of all assets may not be
realized and certain liabilities will be settled for less than the amounts
recorded. In addition, the common and preferred stock of the Company was
cancelled effective October 1, 2000 pursuant to the confirmed plan.


(3)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         Principles of Consolidation

         As of December 31, 1999 and 1998, the consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries. The
Company proportionately consolidates less than 100%-owned oil and gas
partnerships and joint ventures in accordance with industry practice. All
significant accounts and transactions between the Company and its subsidiaries
have been eliminated.

         At December 31, 1996 Costilla had three wholly owned subsidiaries: (i)
Costilla Petroleum Corporation, a Texas corporation ("CPC"), which operated
properties owned by Costilla and owned minor interests in the same properties,
(ii) Statewide Minerals, Inc., a Texas corporation ("Statewide"), which had
engaged in the purchase of small royalty and mineral interests; and (iii)
Valley, which owned several small gas gathering systems, a small gas processing
plant, certain salt water disposal systems and gas compressors. Costilla and CPC
were the sole members of two Texas limited liability companies through which the
Company's Moldova operations are conducted.

         On January 1, 1997 CPC was merged into its parent and Costilla assumed
the business, assets and liabilities of CPC. On March 1, 1997 Valley was merged
into its parent and Costilla assumed the business, assets and liabilities of
Valley. On March 5, 1997 Statewide was dissolved. This dissolution was effected
for administrative purposes subsequent to the sale on December 31, 1996 of
substantially all of the assets of Statewide for net


                                      F-7
<PAGE>   32


                              COSTILLA ENERGY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              (THE INFORMATION AND AMOUNTS FOR 1999 ARE UNAUDITED)


proceeds of approximately $3.0 million. The remaining unsold producing oil and
gas properties were transferred to Costilla on December 31, 1996.

         Use of Estimates

         Preparation of the accompanying consolidated 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.

         Cash and Cash Equivalents

         For purposes of the statements of cash flows, cash and cash equivalents
include cash on hand and depository accounts held by banks. The Company
considers all highly liquid investments with a remaining maturity of three
months or less to be cash equivalents.

         Concentrations of Credit Risk

         Financial instruments that potentially expose the Company to
concentrations of credit risk consist primarily of unsecured accounts receivable
from unaffiliated working interest owners and crude oil and natural gas
purchasers. For the year ended December 31, 1999, Costilla had sales to one
purchaser which totaled in excess of 10% of total revenues. During the year
ended December 31, 1998, the Company had sales to one purchaser which totaled
16% of total revenues.

         Trade Receivables

         Trade receivables generally consist of amounts due from outside working
interest owners for their proportionate share of drilling and operating costs
incurred by the Company, as operator of the related properties. These accounts
are from a large number of major and independent oil companies, individuals and
others who own interests in the properties operated by the Company. The oil and
gas sales receivables are primarily from large oil and gas purchasers.

         Hedging and Derivative Financial Instruments

         Costilla used derivative financial instruments to reduce the Company's
exposure to changes in the market price of natural gas and crude oil, to fix the
price for natural gas and crude oil independently of the physical purchase or
sale, and to manage interest rates. The types of commodity derivative financial
instruments used by the Company were futures, swaps and options.

         The financial instruments that the Company accounts for as hedging
contracts must meet the following criteria: the underlying asset or liability
must expose the Company to price or interest rate risk that is not offset in
another asset or liability, the hedging contract must reduce that price or
interest rate risk, and the instrument must be designated as a hedge at the
inception of the contract and throughout the contract period. In order to
qualify as a hedge, there must be clear correlation between changes in the fair
value of the financial instrument and the fair value of the underlying asset or
liability such that changes in the market value of the financial instrument will
be offset by the effect of price or interest rate changes on the exposed items.

         Premiums paid for commodity option contracts and interest rate swap
agreements which qualify as hedges are amortized to oil and gas sales and
interest expense, respectively, over the terms of the agreements. Unamortized
premiums are included in other assets in the consolidated balance sheet. Amounts
receivable under


                                      F-8
<PAGE>   33


                              COSTILLA ENERGY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              (THE INFORMATION AND AMOUNTS FOR 1999 ARE UNAUDITED)


the commodity option contracts and interest rate swap agreements are accrued as
an increase in oil and gas sales and a reduction of interest expense,
respectively, for the applicable periods. When these derivative financial
instruments cease to qualify as hedges, these instruments are classified as
investments held for trading purposes. Investments held for trading purposes are
marked to market at the end of each reporting period and the net balance change
is recorded as other income (loss) in the consolidated statement of operations
for the applicable period.

         In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. SFAS No. 133
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement. Companies must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting.

         SFAS No. 133 is effective for fiscal years beginning after June 15,
1999; however, beginning June 16, 1998, companies may implement the statement as
of the beginning of any fiscal quarter. SFAS No. 133 cannot be applied
retroactively and must be applied to (a) derivative instruments and (b) certain
derivative instruments embedded in hybrid contracts that were issued, acquired,
or substantively modified after December 31, 1997 (and, at the Company's
election, before January 1, 1998.) The Company has not yet quantified the impact
of adopting SFAS No. 133 on its financial statements and has not determined the
timing of or method of adoption of SFAS No. 133.

         Oil and Gas Properties

         The Company uses the successful efforts method of accounting for oil
and gas producing activities. Costs to acquire mineral interests in oil and gas
properties, to drill and equip exploratory wells that find proved reserves, and
to drill and equip development wells are capitalized. Costs to drill exploratory
wells that do not find proved reserves, geological and geophysical costs, and
costs of carrying and retaining unproved properties are expensed.

         Unproved oil and gas properties that are individually significant are
periodically assessed for impairment of value, and a loss is recognized at the
time of impairment by providing an impairment allowance. Other unproved
properties are amortized based on the Company's experience of successful
drilling and average holding period. Capitalized costs of producing oil and gas
properties, after considering estimated dismantlement and abandonment costs and
estimated salvage values, are depreciated and depleted by the unit-of-production
method. Support equipment and other property and equipment are depreciated over
their estimated useful lives of the assets, which range from 5 to 7 years.

         On sale or retirement of a complete unit of a proved property, the cost
and related accumulated depreciation, depletion, and amortization are eliminated
from the property accounts, and the resultant gain or loss is recognized. On
retirement or sale of a partial unit of proved property, the amount received is
treated as a reduction of the cost of the interest retained.

         On sale of an entire interest in an unproved property for cash or cash
equivalent, gain or loss on the sale is recognized, taking into consideration
the amount of any recorded impairment if the property had been assessed
individually. If a partial interest in an unproved property is sold, the amount
received is treated as a reduction of the cost of the interest retained.


                                      F-9
<PAGE>   34


                              COSTILLA ENERGY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              (THE INFORMATION AND AMOUNTS FOR 1999 ARE UNAUDITED)


         Impairment of Long-Lived Assets

         As of January 1, 1995, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 121 - Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of ("SFAS 121").
Consequently, the Company reviews its long-lived assets to be held and used,
including oil and gas properties accounted for under the successful efforts
method of accounting, whenever events or circumstances indicate that the
carrying value of those assets may not be recoverable. An impairment loss is
indicated if the sum of the expected undiscounted future cash flows, on a
depletable unit basis, is less than the carrying amount of such assets. In this
circumstance, the Company recognizes an impairment loss for the amount by which
the carrying amount of the asset exceeds the fair value of the asset, as
determined, based upon discounted future net cash flows.

         Long-lived assets and certain identifiable intangibles to be disposed
of are recorded at the lower of their carrying amount or fair value less cost to
sell. The fair value of the asset is determined based upon the related
discounted future net cash flows or their estimated market values, in the case
of non-producing properties.

         Deferred Charges

         The Company capitalized certain costs incurred in connection with the
issuance of $180 million of senior notes and with obtaining the Revolving Credit
Facility (see Note 8 for definitions and descriptions of each). These costs are
being amortized over the lives of the related instruments.

         Revenue Recognition

         The Company uses the sales method of accounting for crude oil revenues.
Under this method, revenues are recognized based on actual volumes of oil sold
to purchasers.

         The Company uses the entitlements method of accounting for natural gas
revenues. Under this method, revenues are recognized based on actual production
of natural gas. As of December 31, 1999, the Company has recorded a net gas
imbalance receivable for gas previously produced of approximately $1,879,000,
comprised of approximately 1,144,000 Mcf at a net price of $1.64 per Mcf. As of
December 31, 1998, the Company had recorded a net gas imbalance receivable for
gas previously produced of approximately $1,532,227, comprised of approximately
974,296 Mcf at a net price of $1.58 per Mcf.

         Stock-based Compensation

         The Company accounts for employee stock-based compensation using the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). Accordingly, the Company
has only adopted the disclosure provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). See
Note 14 for the pro forma disclosures of compensation expense determined under
the fair-value provisions of SFAS 123.

         Income Taxes

         The Company accounts for income taxes in accordance with the provisions
of Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"). Under the asset and liability method of SFAS 109, deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rate is recognized in income in the period that
includes the enactment date.


                                      F-10
<PAGE>   35


                              COSTILLA ENERGY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              (THE INFORMATION AND AMOUNTS FOR 1999 ARE UNAUDITED)


         Loss Per Share

         In February, 1997 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
128") which simplifies the existing standards for computing earnings per share
("EPS") and makes them comparable to international standards. In accordance with
the provisions of SFAS 128, the Company adopted SFAS 128 in its year ended
December 31, 1997 financial statements, although no restatement of prior period
EPS information was necessary. Under SFAS 128, primary EPS is replaced by
"basic" EPS, which excludes dilution and is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. "Diluted" EPS, which is computed similarly to
fully-diluted EPS, reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. For the years ended December 31, 1999, 1998 and
1997, the computation of diluted net loss per share was antidilutive; therefore,
the amounts reported for basic and diluted net loss per share were the same.

         Environmental

         The Company is subject to extensive Federal, state and local
environmental laws and regulations. These laws, which are constantly changing,
regulate the discharge of materials into the environment and may require the
Company to remove or mitigate the environmental effects of the disposal or
release of petroleum or chemical substances at various sites. Environmental
expenditures are expensed or capitalized depending on their future economic
benefit. Expenditures that relate to an existing condition caused by past
operations and that have no future economic benefits are expensed. Liabilities
for expenditures of a noncapital nature are recorded when environmental
assessment and/or remediation is probable, and the costs can be reasonably
estimated. Such liabilities are generally recorded at their undiscounted amounts
unless the amount and timing of payments is fixed or reliably determinable.

         Reporting Comprehensive Income

         In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130") which
establishes standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. Specifically,
SFAS 130 requires that an enterprise (i) classify items of other comprehensive
income by their nature in a financial statement and (ii) display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of a statement of financial
position. This statement currently has no effect on the Company.

         Segment Reporting

         In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131 "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131") which establishes standards for public business
enterprises for reporting information about operating segments in annual
financial statements and requires that such enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. This statement also establishes standards for related disclosures
about products and services, geographic areas and major customers. The Company
implemented SFAS 131 during 1998.


                                      F-11
<PAGE>   36
                             COSTILLA ENERGY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              (THE INFORMATION AND AMOUNTS FOR 1999 ARE UNAUDITED)


(4)     ACQUISITIONS AND DISPOSITIONS OF OIL AND GAS PROPERTIES


        On August 28, 1997, the Company consummated the purchase from Ballard
Petroleum LLC ("Ballard") of certain oil and gas properties for an adjusted
purchase price of approximately $41.2 million (the "Ballard Acquisition"). The
properties are located primarily in the Rocky Mountain region of the United
States. The transaction was accounted for using the purchase method. The results
of operations of the acquired properties are included in the Consolidated
Statements of Operations as of the acquisition closing date, August 28, 1997. In
addition, the Company and Ballard entered into an agreement that established an
area of mutual interest in the Rocky Mountain region in which the parties would
jointly own, acquire, explore and develop oil and gas properties. This agreement
was terminated in connection with the Ballard Sale (as defined below).

        In March 1999 the Company closed a sale to Ballard (the "Ballard Sale")
of substantially all of the assets the Company acquired from Ballard in the
Ballard Acquisition. The oil and gas properties included in the sale are located
primarily in the Rocky Mountain Region. The unadjusted cash purchase price for
the sale was $14,150,000, of which $12,000,000 was utilized to reduce the Credit
Facility. In addition to the sale of assets, the transaction relieved the
Company of certain ongoing obligations to Ballard which the Company assumed in
the Ballard Acquisition.

        In May and June 1999 the Company sold its remaining Rocky Mountain oil
and gas properties for an adjusted purchase price of approximately $15.5
million, of which approximately $9.1 million was utilized to reduce the credit
facility.


        Pro Forma Results of Operations (unaudited)

        The following table reflects the pro forma results of operations as
though the Ballard Acquisition had occurred on January 1, 1997. The pro forma
amounts are not necessarily indicative of the results that may be reported in
the future.

<TABLE>
<CAPTION>
                                                                YEARS ENDED
                                                                DECEMBER 31,
                                                                    1997
                                                               --------------
                                                               (IN THOUSANDS)
<S>                                                            <C>
        Revenues ...........................................   $      82,189
        Net loss before extraordinary item .................         (39,029)
        Net loss per share before extraordinary item .......           (3.76)
</TABLE>

        Concho 1998 Sale. In November 1998, the Company consummated the sale of
oil and gas properties to Concho Resources, Inc. for $8.1 million (the "Concho
1998 Sale"). These properties had assigned proved reserves of 16.7 Bcfe at
October 1, 1998. Proceeds were used for general corporate purposes.


(5)     IMPAIRMENT OF LONG-LIVED ASSETS

        In order to determine whether an impairment had occurred at December 31,
1999 and 1998, the Company estimated the expected undiscounted future cash flows
of its oil and gas properties on a depletable unit basis and compared such
future cash flows to the carrying amount of the related oil and gas properties
to determine if the carrying amount was recoverable. If the costs of a
depletable unit did not appear to be recoverable, impairment on the depletable
unit was recorded equal to the difference between the estimated present value
and the costs. These estimates of net undiscounted cash flow and estimated
present values for the Company's total proved and probable



                                      F-12
<PAGE>   37
                              COSTILLA ENERGY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              (THE INFORMATION AND AMOUNTS FOR 1999 ARE UNAUDITED)


oil and gas reserves were based upon the escalated prices. Based on this
process, a noncash pre-tax writedown of $11,863,000 compared to $59,678,000 for
1998, in the carrying amount of the Company's proved properties was recorded at
December 31, 1999.





(6)     DERIVATIVE FINANCIAL INSTRUMENTS

        The Company utilizes derivative financial instruments to manage
well-defined interest rate and commodity price risks. The Company is exposed to
credit losses in the event of nonperformance by the counterparties to its
interest rate swap agreements and its commodity hedges. The Company only deals
with reputable financial institutions as counterparties and anticipates that
such counterparties will be able to fully satisfy their obligations under the
contracts. The Company does not obtain collateral or other security to support
financial instruments subject to credit risk but monitors the credit standing of
the counterparties.

        Commodity Hedges. The Company utilizes swap agreements to hedge the
effect of price changes on future oil and gas production. The objective of its
hedging activities is to achieve more predictable revenues and cash flows. In a
typical swap arrangement, the Company receives the difference between a fixed
price per unit of production and a price based upon a higher agreed to third
party index. However, should the fixed price exceed the agreed third party
index, the Company has to pay the difference. In the past, the Company utilized
option contracts to hedge its production. In this case, if market prices of oil
and gas exceeded the strike price of put options, the options would expire
unexercised, therefore reducing the effective price received for oil and gas
sales by the cost of the related option. If the market prices of oil and gas
exceeded the strike price of call options, the Company would be obligated to pay
the contracting counterparty an amount equal to the contracted volumes times the
difference between the market price and the strike price, therefore reducing the
effective price received for oil and gas sales by the amount paid to the
counterparty.

        Gains or losses on swap agreements are recognized as an adjustment to
sales revenue when the related transactions being hedged are finalized. Gains or
losses from swap agreements that do not qualify for accounting treatment as
hedges are recognized currently as other income or expense. The cash flows from
such agreements are included in operating activities in the consolidated
statements of cash flows.

        The net effect of the Company's commodity hedging activities increased
oil and gas revenues for 1999 by $96,000 and $8.2 million in 1998. Revenues were
reduced by $1.2 for the year ended December 31, 1997.

        The following table sets forth the future volumes hedged by year and the
weighted-average strike price of the option contracts at December 31, 1998.
There were no hedge contracts outstanding at December 31, 1999:


                                      F-13
<PAGE>   38
                              COSTILLA ENERGY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              (THE INFORMATION AND AMOUNTS FOR 1999 ARE UNAUDITED)


<TABLE>
<CAPTION>
                              OIL            GAS
                          DAILY VOLUME    DAILY VOLUME                            STRIKE PRICE
                            (Bbls)          (MMbtu)            TERM               PER Bbl/MMbtu
                          ------------    -------------        ----               -------------
<S>                       <C>             <C>              <C>                 <C>
At December 31, 1998:
     Oil: ..............      5,000              --        Jan 99              $13.50 - $16.40(a)
                              5,000              --        Feb 99 - Dec 99     $12.00 - $15.00(a)
                              5,000              --        Jan 00 - June 00    $13.50 - $16.40
     Gas: ..............         --          25,000        Jan 99 - Dec 01          $2.40(b)

At December 31, 1997:
     Oil: ..............      6,500              --        Jan 98 - Aug 98     $18.50 - $22.55(c)
     Gas: ..............         --           5,000        Jan 98 - Oct 98          $2.00(d)
</TABLE>

----------

(a)         The lower price is the threshold level for the buyer, when the NYMEX
            falls below this price, the contract provides for no hedge. When the
            NYMEX is above the threshold level but below the fixed price, the
            buyer pays the seller (Costilla). If the NYMEX is above the fixed
            price, the seller pays the buyer. In February 1999, the terms of the
            1999 contract was amended to provide for a fixed price of $15.00 per
            Bbl covering 5,000 Bbls of oil per day for February 1999 through
            December 1999, with no hedge provided for each trading day during
            the period covered on which the NYMEX price for WTI closes at less
            than $12.00 per Bbl.

(b)         In February 1999, the three year fixed price swap contract was
            amended for a new period of March 1999 through December 2000
            covering 45,000 Mmbtu of gas per day at a fixed price of $2.20 per
            Mmbtu. In March 1999 the contract for the period March 1999 through
            December 1999 was liquidated resulting in cash proceeds to the
            Company of $3.2 million. In addition, a new contract was entered
            into covering 20,000 Mmbtu of gas per day at a fixed price of $1.96
            per Mmbtu for the period March 1999 through December 1999. The
            referenced gas prices are based upon the price at which gas trades
            on the NYMEX.



(7)     FAIR VALUE OF FINANCIAL INSTRUMENTS

        The following table presents the carrying amounts and estimated fair
values of the Company's financial instruments at December 31, 1999 and 1998.
SFASB Statement No. 107, Disclosures about Fair Value of Financial Instruments,
defines the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing parties.


                                      F-14
<PAGE>   39

                              COSTILLA ENERGY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              (THE INFORMATION AND AMOUNTS FOR 1999 ARE UNAUDITED)

<TABLE>
<CAPTION>

                                                                  1999                         1998
                                                       ------------------------      ------------------------
                                                       CARRYING         FAIR         CARRYING         FAIR
                                                        AMOUNT          VALUE         AMOUNT          VALUE
                                                       ---------      ---------      ---------      ---------
                                                                           (IN THOUSANDS)
<S>                                                    <C>            <C>            <C>            <C>
Financial Assets:
     Cash, cash equivalents and restricted cash ....   $  13,418      $  13,418      $   5,251      $   5,251
     Receivables (trade) ...........................       1,150          1,150          4,484          4,484
     Receivables (oil and gas sales) ...............       4,558          4,558          5,673          5,673
     Commodity swap and option contracts ...........          --             --             --           (297)
     Gas imbalances receivable .....................       1,879          2,322          1,532          1,871
     Notes receivable - affiliate ..................         104            104             63             63

Financial liabilities:
     Payable (trade) ...............................       5,913          5,913         26,183         26,183
     Long-term debt ................................     227,490        227,490        221,881        175,101
     Interest rate swap ............................          --             --             47            138
</TABLE>

        The carrying amounts shown in the table are included in the statement of
consolidated balance sheets under the indicated captions.

        The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:

        Cash, trade receivables, notes receivable-other and trade payables: The
carrying amounts approximate fair value because of the short maturity of those
instruments.

        Commodity swap and option contracts: The carrying amount of the
commodity option contracts comprises the unamortized premiums paid for the
option contracts. The fair value of the commodity option contracts is estimated
using option pricing models and essentially values the potential for the option
contracts to become in-the-money through changes in commodity prices during the
remaining terms. The fair value of the commodity swap contracts is based on
quotes received from the counterparties to the swap contracts.

        Gas imbalances receivable: The carrying amount reflects the net quantity
of gas imbalances receivable based upon current prices at December 31, 1999 and
1998. The fair value is comprised of the volumes of natural gas overproduced or
underproduced valued at the average spot prices in effect at December 31, 1999
and 1998.

        Notes receivable-affiliate: The amounts reported relate to notes
receivable from an affiliated company. The carrying amount at December 31, 1997
reflects an estimate of net present value using an assumed annual interest rate
of 9% based upon the anticipated note payment schedule. At December 31, 1998,
the Company has recorded a provision for the entire unpaid balance of the note
receivable, to reflect the uncertainty of collection.

        Long-term debt: The fair value of the Company's long-term debt is based
upon the quoted market price for the senior notes at December 31, 1999 and 1998,
and the carrying amounts outstanding under the credit facilities at December 31,
1999 and 1998 (see Note 8 for a complete discussion of long-term debt).


                                      F-15
<PAGE>   40

                              COSTILLA ENERGY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              (THE INFORMATION AND AMOUNTS FOR 1999 ARE UNAUDITED)

         Interest rate swap agreements: At December 31, 1998 and 1997, the
Company had an interest rate swap agreement outstanding with a notional amount
of $24 million. The carrying amount is equal to the sum of the unamortized
premiums paid for the agreement and the fair value. The fair value of the
interest rate swap agreement was obtained from bank quotes and represents the
estimated amount the Company would pay upon termination of the agreement at
December 31, 1998 and 1997, taking into consideration interest rates at that
date.


(8)     LONG-TERM DEBT

        Long-term debt consists of the following (thousands):

<TABLE>
<CAPTION>
                                                           DECEMBER 31,
                                                      ----------------------
                                                        1999          1998
                                                      --------      --------
<S>                                                   <C>           <C>
        10.25% Senior Notes due 2006 ...........      $181,550      $181,780
        Revolving Credit Facility ..............        26,453        40,000
        Other ..................................        19,487           101
                                                      --------      --------
                                                       227,490       221,881
                  Less current maturities ......        45,940        40,101
                                                      --------      --------
                                                      $181,550      $181,780
                                                      ========      ========
</TABLE>

        REVOLVING CREDIT FACILITY

        In August 1997, the Company entered into a credit agreement (the
"Revolving Credit Facility") with Bankers Trust Company, as agent, to refinance
its prior bank indebtedness and to finance a portion of the Ballard Acquisition
purchase price. The Revolving Credit Facility provides for a maximum
availability of $75.0 million, $40.0 million of which was borrowed at December
31, 1998, against an available borrowing base of $40.0 million at such date.
Borrowings under the Revolving Credit Facility bear interest, at the Company's
option, at a floating rate which is at or above the Lender's prime rate or above
the applicable Eurodollar rate, depending on the percentage of committed funds
which have been borrowed. Interest is payable quarterly as to base rate loans,
and at the end of the applicable interest period as to Eurodollar loans. The
borrowing base of the Revolving Credit Facility is automatically reduced by 5%
each quarter beginning in September 1999, and payments of principal are required
in each quarter in which the outstanding principal balance is greater than the
reduced borrowing base. The remaining balance is payable on August 28, 2002, the
maturity date of the Revolving Credit Facility. Under the Revolving Credit
Facility, the Company is obligated to pay certain fees to the lender, including
a commitment fee based on the unused portion of the commitment. The Revolving
Credit Facility contains customary restrictive covenants (including restrictions
on the payment of dividends and the incurrence of additional indebtedness) and
requires the Company to maintain certain specified financial ratios. Borrowings
under the Revolving Credit Facility are secured by substantially all of the
assets of the Company.

        At December 31, 1999, the Company was in violation of certain covenant
requirements of its Revolving Credit Facility. Due to this non-compliance in
1999, the Company has continued to classify the balance of its long-term debt
under the Revolving Credit Facility as a current liability at December 31, 1999.


                                      F-16
<PAGE>   41

                              COSTILLA ENERGY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              (THE INFORMATION AND AMOUNTS FOR 1999 ARE UNAUDITED)

         Additionally, the amendment to the Revolving Credit Facility requires
the Company to establish, on or before May 1, 1999, a lockbox arrangement with
the lenders and cause the proceeds from its production to be deposited pursuant
to such arrangement. So long as no Event of Default exists under the Revolving
Credit Facility, the Company can use such funds for its general corporate
purposes.

       In August 1997, the Company also entered into a second credit agreement
(the "Acquisition Credit Facility") with Bankers Trust Company, as agent, to
provide funds for a substantial portion of the Ballard Acquisition purchase
price. The Acquisition Credit Facility was a term loan in the amount of $30.0
million and was paid in full from the proceeds of the sale of the 1998 Notes (as
defined below).

        10.25% SENIOR NOTES

        In October 1996, the Company issued $100 million aggregate principal
amount of 10.25% Senior Notes due October 1, 2006 (the "Notes"). The Notes were
sold at par and interest is payable April 1 and October 1, commencing April 1,
1997. The Notes may not be redeemed prior to October 1, 2001, and thereafter at
a premium reducing to par, plus interest, by maturity. There is no mandatory
redemption of the Notes required prior to maturity. The Notes are general
unsecured senior obligations of the Company and rank equally in right of payment
with all other senior indebtedness of the Company. The Notes are subject to an
Indenture between the Company and a trustee. The Indenture restricts, among
other things, the Company's ability to incur additional indebtedness, pay
dividends or make certain other restricted payments, incur liens, engage in any
sale and leaseback transactions, sell stock of subsidiaries, apply net proceeds
from certain assets sales, merge or consolidate with any other person, sell,
assign, transfer, lease, convey or otherwise dispose of substantially all of the
assets of the Company, or enter into certain transactions with affiliates. Net
proceeds from the sale of the Notes of approximately $96.1 million were used to
repay existing indebtedness.

        In January 1998, the Company issued an additional $80 million aggregate
principal amount of 10.25% Senior Notes due October 1, 2006 (the "1998 Notes").
The notes were sold at a premium (102.5%) and interest is payable April 1 and
October 1, commencing April 1, 1998. The 1998 Notes may not be redeemed prior to
October 1, 2001, and thereafter at a premium reducing to par, plus interest, by
maturity. The 1998 Notes are subject to the same terms and conditions as the
Notes. Net proceeds from the sale of the 1998 Notes of approximately $80.2
million were used to repay the Acquisition Credit Facility in full, all but
$500,000 of the Revolving Credit Facility and the remainder was used for general
corporate working capital needs.

        The Company paid interest on long-term debt of $15,443,958, $17,915,404,
$12,198,937 in 1999, 1998 and 1997, respectively.

(9)     INCOME TAXES

        Concurrent with the Offerings, the Company became a tax paying entity
for U.S. Federal income tax purposes. At that date, the tax basis of the
Company's assets and liabilities exceeded the book basis by approximately
$3,500,000, resulting in a deferred tax asset of approximately $1,200,000. A
valuation allowance was provided for 100% of this deferred tax asset.


                                      F-17
<PAGE>   42

                              COSTILLA ENERGY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              (THE INFORMATION AND AMOUNTS FOR 1999 ARE UNAUDITED)

        Income tax provision (benefit) and amounts separately allocated were as
follows (thousands):

<TABLE>
<CAPTION>
                                                 YEAR ENDED DECEMBER 31,
                                                 -----------------------
                                                  1998              1997
                                                 -----             -----
<S>                                              <C>               <C>
Income (loss) before extraordinary item          $  --             $ 152
Extraordinary loss resulting from early
     extinguishment of debt                         --              (129)
                                                 -----             -----
                                                 $  --             $  23
                                                 =====             =====
</TABLE>

        In 1998 and 1997, the Company's effective tax rate differs from the U.S.
Federal statutory rate primarily because of a valuation allowance established
for net operating loss carryforwards, as discussed below.

        The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities are as follows:

<TABLE>
<CAPTION>
                                                                    DECEMBER 31,
                                                            ---------------------------
                                                              1998               1997
                                                            --------           --------
<S>                                                         <C>                <C>
Deferred tax assets (liabilities):
     Net operating loss carryforwards                       $ 25,594           $ 15,331
     Accounts receivable and notes receivable                    302                 73
     Interest rate swap agreements                               (16)               (16)
     Oil and gas properties, principally due
       to differences in depletion impairment
       and the deduction of intangible drilling
       costs for tax purposes                                 20,135              1,253
     Other                                                       477              1,292
                                                            --------           --------
Net deferred tax asset                                        46,492             18,065
Valuation allowance of net deferred tax asset                (46,492)           (18,065)
                                                            --------           --------
Net deferred tax asset, net of valuation allowance                --                 --
                                                            ========           ========
</TABLE>

        A valuation is provided for when it is more likely than not that some
portion of the deferred tax assets will not be realized. Due to uncertainties
arising from a lack of earnings history, it does not appear more likely than not
that the Company will be able to utilize all the available carryforwards prior
to their ultimate expiration.

        At December 31, 1999, the Company has net operating loss carryforwards
of approximately $195.5 million, which are available to offset future regular
taxable income, if any. The carryforwards expire December 31, 2011 through 2014.
On December 17, 1998, concurrent with the issuance of common stock to Pioneer
(as discussed in Note 18), the Company incurred a change of control under Sec.
382 of the Internal Revenue Code. As such, utilization of the net operating loss
carryforwards in the amount of $79.0 million is limited to approximately $4.9
million per year through 2013. Any unused portion of the yearly limitation may
be carried forward and added to the subsequent years limitation.


                                      F-18
<PAGE>   43

                              COSTILLA ENERGY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              (THE INFORMATION AND AMOUNTS FOR 1999 ARE UNAUDITED)

(10)    COMMITMENTS AND CONTINGENCIES

        Leases

        The Company leases equipment and office facilities under operating
leases on which rental expense for the years ended December 31, 1999, 1998, and
1997 was $573,832, $617,680 and $376,978, respectively. Future minimum lease
commitments under noncancellable operating leases at December 31, 1999 are as
follows (thousands):

<TABLE>
<S>                                                         <C>
      2000 ............................................     526,436
      2001 ............................................      32,103
      2002 ............................................          --
      2003 ............................................          --
Thereafter ............................................          --
</TABLE>

        Employment Agreements

        In 1996, the Company entered into employment agreements with three of
its executive officers. The employment agreements are each for three years and
each will automatically renew for successive one-year periods thereafter unless
the employee is notified to the contrary. These employment agreements provide
for base annual salary levels totaling $735,000 for 1999.

        Each employee would receive his salary for the remaining term of the
applicable employment agreement if the Company were to terminate such person's
employment other than for cause. With the exception of one of the Company's
executive officers, if a voluntary termination were to occur after the second
anniversary of the employee agreement, such person would be entitled to one
year's salary from the date of termination. With the exception of one of the
Company's executive officers, the employee agreements provide that the covered
employee will not compete with the Company for a one year period following his
voluntary cessation of employment or termination of employment for cause, in
either case if such event occurs within the initial three-year term of the
employee agreement.

        Exploration and Development

        In July 1995, the Republic of Moldova (located in Eastern Europe between
Romania and the Ukraine) granted a Concession Agreement to Resource Development
Company Limited, L.L.C. ("Redeco"), an entity not then affiliated with the
Company. The Company paid Redeco $90,000 and bore the first $2.0 million of
concession expenses in return for a 50.0% interest in Redeco. In June 1998 the
Company purchased the 50% interest from the other member of Redeco for $350,000,
forgiveness of $1.9 million of accounts payable to the Company and the
conveyance to the other member of a net profit interest. Effective October 1,
1998, the Company acquired additional assets from affiliates of Redeco primarily
consisting of Concession Agreements owned by such affiliates covering three
areas in the Republic of Romania (the "Romanian Concessions"). Costilla paid
$350,000, with an


                                      F-19
<PAGE>   44
                              COSTILLA ENERGY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              (THE INFORMATION AND AMOUNTS FOR 1999 ARE UNAUDITED)

additional $206,250 due upon closing, for such assets and granted the Seller a
net profits interest of 12 1/2% and 25% in both revenues from the Moldovan
Concession arrangements and the Romanian Concessions, respectively.

        Subsequent to December 31, 1998, management of the Company has decided
to discontinue its activities in Moldova and Romania and is presently seeking to
dispose of these assets. The Company recorded an impairment of $4,597,000 at
December 31, 1998, related to these investments.

        Letters of Credit

        As a result of certain bonding requirements, the Company has caused an
irrevocable letter of credit to be issued by a bank totaling $96,000. As of
December 31, 1999, no amount had been drawn on this letter of credit.


(11)    401(k) PLAN

        The Company has established a qualified cash or deferred arrangement
under IRS code section 401(k) covering substantially all employees. Under the
plan, the employees have an option to make elective contributions of a portion
of their eligible compensation, not to exceed specified annual limitations, to
the plan and the Company has an option to match a percentage of the employee's
contribution. The Company has made matching contributions to the plan totaling
$111,903, $153,676, and $122,336, in 1999, 1998 and 19967, respectively.


(12)    CONVERTIBLE PREFERRED STOCK

        On June 3, 1998 the Company closed a private placement of 50,000 shares
of its 7% (8% paid in kind) Series A Cumulative Convertible Preferred Stock (the
"Preferred Stock") to Enron Capital & Trade Resources Corp. and Joint Energy
Development Investments II Limited Partnership for a purchase price of $50.0
million (the "Convertible Preferred Stock Offering"). Dividends accrue and are
payable quarterly, commencing September 15, 1998, in cash, or in certain
instances in shares of the Company's common stock. The dividend rate is 7% for
dividends paid in cash and 8% for dividends paid in shares of common stock. The
holders of the Preferred Stock may, at any time, convert shares of Preferred
Stock into shares of the Company's common stock at a current conversion price of
$12.39, subject to future adjustments. The Registrant may, at its option, redeem
the shares of Preferred stock after June 15, 2001, if the current common stock
price exceeds the conversion price by 150%. The preferred may be redeemed on
June 15, 2001, at a price of 107% which reduces to par by the year 2004. Net
proceeds from the Convertible Preferred Stock Offering were $48.0 million, of
which $29.0 million was used to repay all but $0.5 million of the Revolving
Credit Facility and the remainder was used for general corporate purposes.


(13)    STOCK-BASED COMPENSATION

        Outside Directors Stock Option Plan

        The Outside Directors Stock Option Plan provides for the issuance of
stock options to the outside directors of the Company. A total of 100,000 shares
has been authorized and reserved for issuance under the plan, subject to
adjustments to reflect changes in the Company's capitalization resulting from
stock splits, stock dividends and similar events. Only outside directors are
eligible to participate in the plan. Outside directors are those directors of
the Company who are not executive officers or regular salaried employees of the
Company as of the date the Option is granted. Under the plan, an option for
5,000 shares of Common Stock will be granted to each person who qualifies as an
outside director each year that such person is elected as a director of the
Company. The exercise


                                      F-20
<PAGE>   45

                              COSTILLA ENERGY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              (THE INFORMATION AND AMOUNTS FOR 1999 ARE UNAUDITED)

price of each option granted under the plan will be the fair market value (as
reported on the Nasdaq National Market) of the Common Stock at the time the
option is granted and may be paid either in cash, shares of Common Stock or a
broker-assisted cashless transaction. Each option will be exercisable
immediately, and will expire ten years from the date of grant.

        During the years ended December 31, 1998 and 1997, options on 15,000
shares were granted under this plan, leaving 70,000 options available for future
grant under the plan as of December 31, 1998. The options granted during 1998
and 1997 have a term of ten (10) years and an exercise price of $10.88 per
share, a price equal to the market price on the date of grant. The weighted
average fair value, as calculated under the provisions of FAS 123, of the
options granted in 1998 was $5.88 per share. No options were granted in 1999.




        Bonus Incentive Plan

        The Bonus Incentive Plan provides that the Compensation Committee of the
Board of Directors each year may award bonuses in cash, Common Stock, or some
combination thereof, to those officers, directors, employees and advisors of the
Company or a subsidiary of the Company, who the Committee determines have
contributed to the success of the Company. A total of 150,000 shares of Common
Stock has been authorized and reserved for issuance under the plan, subject to
adjustments to reflect changes in the Company's capitalization resulting from
stock splits, stock dividends and similar events. All officers, directors,
employees and advisors of the Company or a subsidiary of the Company who have
completed a minimum of 180 days of service and are employed or retained by the
Company or such subsidiary on the last day of the plan year, are eligible to
participate in the plan. Bonus awards will be determined based upon a number of
factors, including performance and salary level of the participant and the
financial performance of the Company and its subsidiaries. Bonuses, if any will
be awarded after review and upon approval of the Committee within 120 days after
the end of each fiscal year, subject to the terms and conditions of the plan. No
awards under the Bonus Incentive Plan were made during the year ended December
31, 1999.

        1996 Stock Option Plan

        The 1996 Stock Option Plan provides for the grant of both incentive
stock options and non-qualifying stock options, as well as limited stock
appreciation rights and supplemental bonuses, to the employees of the Company
and its subsidiaries, including officers and directors who are salaried
employees. A total of 4,000,000 shares of Common Stock has been authorized and
reserved for issuance under the plan, subject to adjustments to reflect changes
in the Company's capitalization resulting from stock splits, stock dividends and
similar events. The plan is administered by the Compensation Committee. The
Committee has the sole authority to interpret the plan, to determine the persons
to whom the options will be granted, to determine the basis upon which the
options will be granted, and to determine the exercise price, duration and other
terms of the options to be granted under the plan; provided that (a) the
exercise price of each option granted under the plan may not be less than the
fair market value of the Common Stock on the date the option is granted (and for
incentive stock options, 110% of fair market value if the employee is the
beneficial owner of 10% or more the Company's voting securities), (b) the
exercise price must be paid in cash, by surrendering previously owned shares of
Common Stock upon the exercise of the option or by a promissory note or
broker-assisted cashless exercise approved by the Compensation Committee, (c)
the term of the option may not exceed ten years, and (d) no option is
transferable other than by will, the laws of descent and distribution or
pursuant to a qualified domestic relations order. Limited stock appreciation
rights may be granted under the plan with respect to specified options, allowing
the option holder to receive, in cash, the difference between the exercise price
and the market value in the event of a change in control of the Company. The
Committee may also grant supplemental bonuses under the plan which are cash
bonuses not to exceed the amount of income tax liability incurred by a plan
participant upon the exercise of a non-qualifying stock option or a limited


                                      F-21
<PAGE>   46
                              COSTILLA ENERGY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              (THE INFORMATION AND AMOUNTS FOR 1999 ARE UNAUDITED)

stock appreciation right with respect to which the bonus was granted. The Board
of Directors may amend without stockholder approval, in any respect other than
any amendment that requires stockholder approval by law, and may modify any
outstanding option, including the repricing of non-qualifying options, with the
consent of the option holder.

        No options were issued under this plan during 1999, 1998 or 1997. During
1996, the Company granted 711,750 stock options pursuant to the 1996 Stock
Option Plan, of which 1,500 shares were exercised in 1997. There were 547,750
options available for future grant under the plan as of December 31, 1998. The
options granted during 1996 have a term of ten (10) years and an exercise price
of $12.50 per share, a price equal to the market price on the date of the grant.
The weighted average fair value, as calculated under the provision of SFAS 123,
of the options granted in 1996 was $6.73 per share.


        The Company applies APB 25 and related Interpretations in accounting for
its stock option awards. Accordingly, no compensation expense has been
recognized for its stock option awards. If compensation expense for the stock
option awards had been determined consistent with SFAS 123, the Company's net
loss and net loss per share, for the year ended December 31, 1998 and 1997 would
have been adjusted to the following pro forma amounts (in thousands, except per
share amounts):

<TABLE>
<CAPTION>
                               1998                 1997
                            ---------           ----------
<S>                         <C>                 <C>
Net loss                    $(100,331)          $  (37,740)
Net loss per share             (10.02)               (3.63)
</TABLE>

        Under SFAS 123, the fair value of each stock 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 and 1997:

<TABLE>
<CAPTION>
                                   1998         1997
                                 -------      -------
<S>                              <C>          <C>
Risk-free interest rate            5.50%        6.25%
Expected life                    5 years      5 years
Expected volatility                  56%          80%
Expected dividend yield               0%           0%
</TABLE>

(14)    RELATED PARTY TRANSACTIONS

        Certain members and officers of the Company have owned interests in and
held positions with A&P Meter Service and Supply, Inc. ("A&P"), CSL, 511 Tex
L.C. ("511 Tex"), and Valley.

        Advances from the Company to A&P have been consolidated into two
promissory notes. The first note, which was originally executed December 31,
1994, totals $390,000, including accrued interest. The note bears interest at a
floating rate equal to the "prime rate" plus 1.0%. No principal or interest
payments are due until the maturity of the note at December 31, 2004. The note
is secured by a second lien on A&P's accounts receivable, inventory and
equipment. The second note is in the amount of $294,000, including accrued
interest and is dated May 22, 1996. The note is unsecured and is payable upon
demand. During 1998, the Company recorded a provision for the remaining
unreserved balance of the notes receivable, to reflect the uncertainty of
collection. During 1999, 1998 and 1997, the Company paid $54,159, $574,971 and
$561,343, respectively, to A&P for goods and services provided.


                                      F-22
<PAGE>   47

                              COSTILLA ENERGY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              (THE INFORMATION AND AMOUNTS FOR 1999 ARE UNAUDITED)

(15)    OIL AND GAS EXPENDITURES

        The following table reflects costs incurred in oil and gas property
 acquisition, exploration and development activities:

<TABLE>
<CAPTION>
                                    YEARS ENDED DECEMBER 31,
                                   --------------------------
                                     1998              1997
                                   --------          --------
<S>                                <C>               <C>
Property acquisition costs:
     Proved                        $ 11,144          $ 25,731
     Unproved                         2,668            32,415
Exploration                          32,603            16,194
Development                          15,192            43,942
                                   --------          --------
                                     61,607           118,282
                                   ========          ========
</TABLE>

(16)    TERMINATION OF PIONEER ACQUISITION

        In September 1998, Costilla entered into an agreement with Pioneer
Natural Resources USA, Inc. ("Pioneer") to acquire certain oil and gas
properties (the Pioneer Acquisition Properties") for $410 million. As part of
this agreement, Costilla made a $25 million forfeitable deposit plus an
additional $26 million would be paid if the transaction did not close in
December 1998. In December 1998, the previous agreement was terminated and
replaced by a new agreement. Pioneer retained the $25 million deposit and
Costilla issued three million shares of its common stock and relinquished its
right to a property interest. In return, Costilla executed a new agreement to
purchase the Pioneer Acquisition Properties for $294 million. This agreement
terminated on March 31, 1999, and Costilla and Pioneer then entered into a new
agreement whereby Costilla would acquire certain of the Pioneer Acquisition
Properties for $250 million. In connection with the new agreement, the Company
issued to Pioneer one million shares of its common stock. The new agreement
terminated by its terms on April 15, 1999 and the related costs, none of which
are recoverable, were expensed. The Company is reviewing potential causes of
action against Pioneer related to this transaction.

         The loss on the termination of the Pioneer acquisition consists of the
following:


<TABLE>
<CAPTION>
                                                        (in thousands)
                                                         ------------
<S>                                                      <C>
Cash Deposits                                              $25,000
Four million shares of Costilla common stock                13,700
Oil & gas property assigned to Pioneer                       3,558
Interest capitalized for acquisition                         1,012
Due diligence, legal, accounting and engineering             4,511
                                                           -------
         Total loss on termination of acquisition          $47,781
                                                           -------
</TABLE>


                                      F-23
<PAGE>   48


                              COSTILLA ENERGY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              (THE INFORMATION AND AMOUNTS FOR 1999 ARE UNAUDITED)

(17)    SUBSEQUENT EVENTS

        Debtor's Plan of Reorganization (Liquidation), Restated to Reflect All
Amendments and Modifications (the "Chapter 11 Plan") of Costilla Energy, Inc.
(the "Company") in its bankruptcy proceeding became effective on October 1, 2000
(the "Effective Date"). The Bankruptcy Court approved the Chapter 11 Plan by its
Order Confirming Debtor's Plan of Reorganization (Liquidation), as Restated to
Reflect All Amendments and Modifications entered on September 15, 2000.

        Substantially all of the oil and gas assets of the Company were sold on
June 15, 2000. Accordingly, the material feature of the Chapter 11 Plan relate
to the distribution of the proceeds from that sale, the creation of a
liquidating trust, and the cancellation of all of the equity interests of the
Company. With respect to the distribution of the sale proceeds, the estimated
recovery for various classes of claims under the Chapter 11 Plan as set forth
in the Disclosure Statement with respect to Debtor's Plan of Reorganization
(Liquidation), as Amended (the "Disclosure Statement"), are as follows (assuming
net proceeds available for distribution of approximately $116,000,000 as provide
in the Disclosure Statement and other assumptions provided therein): secured
claims, 100%; administrative and priority claims, 100%; administrative
convenience unsecured claims, 100%; general unsecured claims including the
Company's 10 1/4% Senior Notes due 2006, 44%; and equity interests, 0. The
amount available for distribution is subject to adjustment related to
post-confirmation liquidation expenses and activities.




                                      F-24


<PAGE>   49

                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER         DESCRIPTION
-------        -----------
<S>            <C>
 2.1           Debtor's Plan of Reorganization (Liquidation) Restated to Reflect
               All Amendments and Modifications dated September 15, 2000;
               incorporated by reference to the Company's Current Report on Form
               8-K filed on October 13, 2000

*2.2           Disclosure Statement With Respect to Debtor's Plan of
               Reorganization (Liquidation), as Amended, dated July 28, 2000

 2.3           Order Confirming Debtor's Plan of Reorganization (Liquidation),
               as Restated to Reflect All Amendments and Modifications, filed
               September 15, 2000; incorporated by reference to the Company's
               Current Report on Form 8-K filed October 13, 2000

 3.1           Certificate of Incorporation of the Company; incorporated by
               reference to Registration Statement on Form S-1, File No.
               333-08909

 3.2           Bylaws of the Company; incorporated by reference to Registration
               Statement on Form S-1, File No. 333-08909

 4.1           Form of Notes or Global Certificate (included as Exhibit A to
               Exhibit 4.2); incorporated by reference to Registration Statement
               on Form S-1, File No. 333-08909
</TABLE>

<PAGE>   50



<TABLE>
<S>            <C>
4.2            Indenture dated as of October 1, 1996 by and between State Street
               Bank and Trust Company, as Trustee, and the Company, as Issuer;
               incorporated by reference to Registration Statement on Form S-1,
               File No. 333-08909

4.3            First Supplemental Indenture dated January 16, 1998 by and
               between State Street Bank and Trust Company, as Trustee, and the
               Company, as Issuer (including form of Global Certificate);
               incorporated by reference to the Company's Annual Report on Form
               10-K for the year ended December 31, 1997

4.4            Form of Note; incorporated by reference to the Company's Annual
               Report on Form 10-K for the year ended December 31, 1997

4.5            Form of Stock Certificate; incorporated by reference to
               Registration Statement on Form S-1, File No. 333-08913

10.1           Option to Purchase Agreement dated December 16, 1998 between
               Pioneer Natural Resources USA, Inc., Pioneer Resources Producing,
               L.P. and the Company; incorporated by reference to the Company's
               Annual Report on Form 10-K for the year ended December 31, 1998

10.2           Purchase and Sale Agreement dated December 16, 1998 between
               Pioneer Natural Resources USA, Inc., Pioneer Resources Producing,
               L.P. and the Company; incorporated by reference to the Company's
               Annual Report on Form 10-K for the year ended December 31, 1998

10.3           Sixth Amendment to Amended and Restated Credit Agreement dated as
               of November 19, 1998 between Bankers Trust Company, as Agent,
               Union Bank of California, N.A., as Co-Agent, and the Company;
               incorporated by reference to the Company's Annual Report on Form
               10-K for the year ended December 31, 1998

10.4           Purchase and Sale Agreement dated April 1, 1999 by and between
               Costilla Energy, Inc. and Pioneer Natural Resources USA, Inc. and
               Pioneer Resources Producing, L.P.; incorporated by reference to
               the Company's Quarterly Report on Form 10-Q for the quarter ended
               March 31, 1999

10.5           Seventh Amendment to Amended and Restated Credit Agreement dated
               as of March 9, 1999 between Bankers Trust Company, as Agent,
               Union Bank of California, N.A., as Co-Agent and Costilla Energy,
               Inc.; incorporated by reference to the Company's Quarterly Report
               on Form 10-Q for the quarter ended March 31, 1999

10.6           Eighth Amendment to Amended and Restated Credit Agreement dated
               as of March 9, 1999 between Bankers Trust Company, as Agent,
               Union Bank of California, N.A., as Co-Agent and Costilla Energy,
               Inc.; incorporated by reference to the Company's Quarterly Report
               on Form 10-Q for the quarter ended March 31, 1999

10.7           Purchase and Sale Agreement dated February 2, 1999 between
               Costilla Energy, Inc. and Ballard Petroleum LLC; incorporated by
               reference to the Company's Quarterly Report on Form 10-Q for the
               quarter ended March 31, 1999
</TABLE>

<PAGE>   51

<TABLE>
<CAPTION>
EXHIBIT
NUMBER         DESCRIPTION
-------        -----------
<S>            <C>
10.8           Ninth Amendment to Amended and Restated Credit Agreement dated as
               of May 12, 1999 between Bankers Trust Company, as Agent, Union
               Bank of California, N.A., as Co-Agent and Costilla Energy, Inc.;
               incorporated by reference to the Company's Quarterly Report on
               Form 10-Q for the quarter ended June 30, 1999

10.9           Tenth Amendment to Amended and Restated Credit Agreement dated as
               of May 27, 1999 between Bankers Trust Company, as Agent, Union
               Bank of California, N.A., as Co-Agent and Costilla Energy, Inc.;
               incorporated by reference to the Company's Quarterly Report on
               Form 10-Q for the quarter ended June 30, 1999

10.10          Eleventh Amendment to Amended and Restated Credit Agreement dated
               as of June 17, 1999 between Bankers Trust Company, as Agent,
               Union Bank of California, N.A., as Co-Agent and Costilla Energy,
               Inc.; incorporated by reference to the Company's Quarterly Report
               on Form 10-Q for the quarter ended June 30, 1999

10.11          Twelfth Amendment to Amended and Restated Credit Agreement dated
               as of August 16, 1999 between Bankers Trust Company, as Agent,
               and the Company; incorporated by reference to the Company's
               Quarterly Report on Form 10-Q for the quarter ended September,
               1999

10.12          Asset Purchase Agreement by and between Costilla Energy, Inc. and
               Louis Dreyfus Natural Gas Corp. dated April 20, 2000;
               incorporated by reference to the Company's Current Report on Form
               8-K filed June 22, 2000
</TABLE>

----------

*   Filed herewith. All other exhibits are incorporated by reference to the
    filing indicated.