<PAGE>

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

                                   FORM 10-K
                           _________________________
(Mark One)
     [X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
          EXCHANGE ACT OF 1934
             FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

      OR

     [ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
          EXCHANGE ACT OF 1934
             FOR THE TRANSITION PERIOD FROM _________________ TO _______________

                      COMMISSION FILE NUMBER:  000-21843

                            TITAN EXPLORATION, INC.
            (Exact name of Registrant as Specified in its Charter)


            DELAWARE                                       75-2671582
  (State or other jurisdiction of                      (I.R.S. Employer
   incorporation or organization)                     Identification No.)
     500 WEST TEXAS, SUITE 500
          MIDLAND, TEXAS                                     79701
(Address of principal executive offices)                  (Zip Code)

                                (915) 498-8600
             (Registrant's telephone number, including area code)

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

                                                  NAME OF EACH EXCHANGE ON
        TITLE OF EACH CLASS                           WHICH REGISTERED
--------------------------------------     -------------------------------------

              None                                          None

          Securities registered pursuant to Section 12(g) of the Act:
                         COMMON STOCK, $.01 PAR VALUE

                               (Title of Class)

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

  Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K 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.  [   ]

  As of March 10, 1998, the Registrant had outstanding 39,654,675 shares of
Common Stock.  The aggregate market value of the Common Stock held by non-
affiliates of the Registrant, based upon the closing sale price of the Common
Stock on March 10, 1998, as reported on the Nasdaq National Market, was
approximately $113,380,000.

                      DOCUMENTS INCORPORATED BY REFERENCE

  Portions of the definitive proxy statement for the Registrant's 1998 Annual
Meeting of Stockholders to be held on or about May 28, 1998, are incorporated by
reference in Part III of this Form 10-K.  Such definitive proxy statement will
be filed with the Securities and Exchange Commission not later than 120 days
subsequent to December 31, 1997.

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<PAGE>

                               TABLE OF CONTENTS
                               -----------------

                                                                          PAGE
                                                                          ----
                                     PART I

Item 1.    Business......................................................    1

Item 2.    Properties....................................................    7

Item 3.    Legal Proceedings.............................................    9

Item 4.    Submission of Matters to a Vote of Security Holders...........   10

Executive Officers of the Registrant.....................................   11

                                    PART II

Item 5.    Market for Registrant's Common Equity and Related
           Stockholder Matters...........................................   12

Item 6.    Selected Financial Data.......................................   13

Item 7.    Management's Discussion and Analysis of Financial
            Condition and Results of Operations..........................   14

Item 8.    Financial Statements and Supplementary Data...................   25

Item 9.    Changes in and Disagreements with Accountants on
            Accounting and Financial Disclosure..........................   25

                                    PART III

Item 10.   Directors and Executive Officers of the Registrant............   26

Item 11.   Executive Compensation........................................   26

Item 12.   Security Ownership of Certain Beneficial Owners and
            Management...................................................   26

Item 13.   Certain Relationships and Related Party Transaction...........   26

                                    PART IV

Item 14.   Exhibits, Financial Statement Schedules and
            Reports on Form 8-k .........................................   26

Glossary of Oil and Gas Terms.............................................  31

Signatures................................................................  34

Index to Consolidated Financial Statements................................ F-1


                                      -i-
<PAGE>

                            TITAN EXPLORATION, INC.

                        1997 ANNUAL REPORT ON FORM 10-K

                                     PART I

ITEM 1.  BUSINESS

OVERVIEW

  Titan Exploration, Inc. (the "Company") is an independent energy company
engaged in the exploration, development and acquisition of oil and gas
properties.  Since its inception in March 1995, the Company has experienced
significant growth in reserves, production and cash flow by acquiring and
exploiting producing properties primarily in the Permian Basin of west Texas and
southeastern New Mexico, the Gulf Coast region and the Gulf of Mexico.

  In December 1995, the Company acquired a concentrated group of Permian Basin
producing oil and gas properties from a large independent company for
approximately $40.6 million (the "1995 Acquisition").  On October 31, 1996, the
Company acquired additional Permian Basin producing properties from a major
integrated company for approximately $135.7 million (the "1996 Acquisition").
In December 1996, the Company completed an initial public offering of 14,391,500
shares of Common Stock of the Company at $11.00 per share, resulting in net
proceeds of $147.2 million.  The shares are traded on the Nasdaq National Market
under the symbol "TEXP."  The proceeds were used to repay bank debt.

  In December 1997, the Company issued 5,486,734 shares of Common Stock in
connection with its acquisition of all of the issued and outstanding shares of
common stock of Offshore Energy Development Corporation ("OEDC"), an independent
energy company that focuses on the acquisition, exploration, development and
production of natural gas and on natural gas gathering, processing and marketing
activities (the "OEDC Acquisition").  OEDC's integrated operations are conducted
in the Gulf of Mexico, where OEDC has interests in 24 lease blocks, all of which
are operated by OEDC.

  In December 1997, the Company issued 899,965 shares of Common Stock in
connection with its acquisition of all of the issued and outstanding units of
membership interests in Carrollton Resources, L.L.C., a small independent energy
company engaged in the exploration, development and acquisition of onshore oil
and gas properties located primarily in the Gulf Coast region (the "Carrollton
Acquisition").

  In December 1997, the Company completed the acquisition of certain oil and gas
producing properties from Pioneer Natural Resources USA, Inc., a wholly-owned
subsidiary of Pioneer Natural Resources Company ("Pioneer"), for approximately
$54.4 million (the "Pioneer Acquisition").

  As of December 31, 1997, the Company had estimated net proved reserves of
approximately 30.3 MMBbls of oil and 345.4 Bcf of natural gas, or an aggregate
of 527.0 Bcfe with a PV-10 of $435 million.  Approximately 68% of these
reserves were classified as proved developed.  The Company acquired, explored
for and developed its reserves for an average reserve replacement cost of
approximately $.65 per Mcfe from inception of the Company through December 31,
1997.

  The Company prefers to acquire properties over which it can exercise operating
control.  The Company operated 797 gross productive wells (710 net productive
wells) at December 31, 1997, and these operated properties represented
approximately 84% of its proved developed producing PV-10 and 82% of the
Company's PV-10 attributable to proved reserves at December 31, 1997.  The
Company's emphasis on controlling the operation of its properties enables the
Company to better manage expenses, capital allocation and other aspects of
development and exploration.

  The Company's proved oil and gas properties are located in approximately 100
fields in the Permian Basin and in 24 lease blocks in the Gulf of Mexico and, to
a lesser extent, in North and South Louisiana.  Approximately 61% of the
Company's PV-10 of total proved reserves is concentrated in 12 principal fields
located in the Permian Basin.  The

                                      -1-
<PAGE>

Permian Basin is characterized by complex geology with numerous known producing
horizons and provides significant opportunities to increase reserves, production
and ultimate recoveries through development, exploratory and horizontal
drilling, recompletions, secondary and tertiary recovery methods, and use of 3-D
seismic and other advanced technologies.

  The Company's strategy is to grow reserves, production and net income per
share through (i) the acquisition of producing properties that provide
development and exploratory drilling potential, (ii) the exploitation and
development of its reserve base, (iii) the exploration for oil and gas reserves
and (iv) the implementation and maintenance of a low operating and overhead cost
structure.

  The Company was formed in 1996 for the purpose of becoming the holding company
for Titan Resources, L.P. ("TRLP") pursuant to the terms of an exchange
agreement dated September 30, 1996.  TRLP was formed in March 1995 and grew
primarily through acquisitions of oil and gas properties and the exploitation of
those properties.  Under the exchange agreement, effective September 30, 1996,
(i) the limited partners of TRLP transferred all their limited partnership
interests to the Company in exchange for an aggregate of 19,318,199 shares of
Common Stock, and (ii) the shareholders of Titan Resources I, Inc., a Texas
corporation that is the general partner of TRLP, transferred all the issued and
outstanding stock of that corporation to the Company in exchange for an
aggregate of 231,814 shares of Common Stock.  These transactions are referred to
as the "Conversion."  As a result of the Conversion, Titan Exploration, Inc.
owns, directly or indirectly, all the partnership interests in TRLP and conducts
its active business operations through TRLP.  References to the "Company" are to
Titan Exploration, Inc. and its predecessors and subsidiaries, including TRLP.

  The Company is incorporated in the State of Delaware, its principal executive
offices are located at 500 West Texas, Suite 500, Midland, Texas 79701, and its
telephone number is 915/498-8600.

ACQUISITIONS

  The Company regularly pursues and evaluates acquisition opportunities
(including opportunities to acquire oil and gas properties or related assets or
entities owning oil and gas properties or related assets and opportunities to
engage in mergers, consolidations or other business combinations with entities
owning oil and gas properties or related assets) and at any given time may be in
various stages of evaluating these opportunities.  These stages may take the
form of internal financial and oil and gas property analysis, preliminary due
diligence, the submission of an indication of interest, preliminary
negotiations, negotiation of a letter of intent, or negotiation of a definitive
agreement.  While the Company is currently evaluating a number of potential
acquisition opportunities (some of which would be material in size to the
Company), it has not signed a letter of intent with respect to any material
acquisition and currently has no assurance of completing any particular material
acquisition or of entering into negotiations with respect to any particular
material acquisition.

OIL AND GAS MARKETING AND MAJOR CUSTOMERS

  The revenues generated by the Company's operations are highly dependent upon
the prices of, and demand for, oil and gas.  The price received by the Company
for its oil and gas production depends on numerous factors beyond the Company's
control, including seasonality, the condition of the United States and world
economy, particularly the manufacturing sector, foreign imports, political and
economic conditions in other oil-producing and gas-producing countries, the
actions of OPEC and domestic government regulation, legislation and policies.
Decreases in the prices of oil and natural gas could have a material adverse
effect on the carrying value of the Company's proved reserves and the Company's
revenues, profitability and cash flow.  Although the Company is not currently
experiencing any significant involuntary curtailment of its oil or gas
production, market, economic and regulatory factors may in the future materially
affect the Company's ability to sell its oil or gas production.

  For the year ended December 31, 1997, sales to Enron Corp., and its
subsidiaries and affiliates, and Western Gas Resources, Inc. were approximately
36% and 12% of the Company's oil and gas revenues, respectively.

  Due to the availability of other markets and pipeline connections, the Company
does not believe that the loss of any single crude oil or gas customer would
have a material adverse effect on the Company's results of operations.

                                      -2-
<PAGE>

COMPETITION

  The oil and gas industry is highly competitive.  The Company encounters
competition from other oil and gas companies in all areas of its operations,
including the acquisition of producing properties.  The Company's competitors
include major integrated oil and gas companies and numerous independent oil and
gas companies, individuals and drilling and income programs.  Many of its
competitors are large, well established companies with substantially larger
operating staffs and greater capital resources than the Company and which, in
many instances, have been engaged in the energy business for a much longer time
than the Company.  Such companies may be able to pay more for productive oil and
gas properties and exploratory prospects and to define, evaluate, bid for and
purchase a greater number of properties and prospects than the Company's
financial or human resources permit.  The Company's ability to acquire
additional properties and to discover reserves in the future will be dependent
upon its ability to evaluate and select suitable properties and to consummate
transactions in a highly competitive environment.

OPERATING HAZARDS AND UNINSURED RISKS

  Drilling activities are subject to many risks, including the risk that no
commercially productive reservoirs will be encountered.  There can be no
assurance that new wells drilled by the Company will be productive or that the
Company will recover all or any portion of its investment.  Drilling for oil and
gas may involve unprofitable efforts, not only from dry wells, but from wells
that are productive but do not produce sufficient net revenues to return a
profit after drilling, operating and other costs.  The cost of drilling,
completing and operating wells is often uncertain.  The Company's drilling
operations may be curtailed, delayed or canceled as a result of numerous
factors, many of which are beyond the Company's control, including title
problems, weather conditions, mechanical problems, compliance with governmental
requirements and shortages or delays in the delivery of equipment and services.
The Company's future drilling activities may not be successful and, if
unsuccessful, such failure may have a material adverse effect on the Company's
future results of operations and financial condition.

  In addition, the Company's use of 3-D seismic requires greater pre-drilling
expenditures than traditional drilling strategies.  Although the Company
believes that its use of 3-D seismic will increase the probability of success of
its exploratory wells and should reduce average finding costs through the
elimination of prospects that might otherwise be drilled solely on the basis of
2-D seismic data and other traditional methods, unsuccessful wells are likely to
occur.  There can be no assurance that the Company's drilling program will be
successful or that unsuccessful drilling efforts will not have a material
adverse effect on the Company.  Although the Company has identified numerous
potential drilling locations, there can be no assurance that they will ever be
drilled or that oil or gas will be produced from them.

  The Company's operations are subject to hazards and risks inherent in drilling
for and producing and transporting oil and gas, such as fires, natural
disasters, explosions, encountering formations with abnormal pressures,
blowouts, cratering, pipeline ruptures and spills, any of which can result in
the loss of hydrocarbons, environmental pollution, personal injury claims and
other damage to properties of the Company and others.  The Company's offshore
operations are also subject to the additional hazards of marine operations such
as severe weather, capsizing and collision.

  The Company expects to drill a number of deep vertical and horizontal wells in
the future.  The Company's deep and/or horizontal drilling activities involve
greater risk of mechanical problems than other drilling operations.  These wells
may be significantly more expensive to drill than those drilled to date.

  The Company maintains insurance against some, but not all, of the risks
described above.  The Company may elect to self-insure in circumstances in which
management believes that the cost of insurance, although available, is excessive
relative to the risks presented.  The occurrence of an event that is not
covered, or not fully covered, by insurance could have a material adverse effect
on the Company's financial condition and results of operations.

EMPLOYEES

  As of December 31, 1997, the Company had 94 full-time employees, none of whom
is represented by a labor union.  Included in the total were 29 administrative
employees located in the Company's office in Midland, Texas, eight of whom are
involved in the management of the Company.  The Company considers its relations
with its employees to be good.

                                      -3-
<PAGE>

OTHER FACILITIES

  The Company currently leases approximately 44,270 square feet of office space
in Midland, Texas, where its principal offices are located.  This office lease
is with an affiliate of Jack Hightower.  The Company's principal offices are
leased through March 15, 2002.  The Company currently leases approximately 8,433
and 3,420 square feet of office space in The Woodlands, Texas and Baton Rouge,
Louisiana, respectively, where division offices are located.

TITLE TO PROPERTIES

  The Company received title opinions relating to properties representing 80% of
the PV-10 of the 1995 Acquisition, 90% of the PV-10 of the 1996 Acquisition and
54% of the PV-10 of the Pioneer Acquisition.  The Company's land department and
contract land professionals have reviewed title records of substantially all its
producing properties.  The title investigation performed by the Company prior to
acquiring undeveloped properties is thorough but less rigorous than that
conducted prior to drilling, consistent with industry standards.  The Company
believes it has satisfactory title to all of its producing properties in
accordance with standards generally accepted in the oil and gas industry.  The
Company's properties are subject to customary royalty interests, liens incident
to operating agreements, liens for current taxes and other burdens which the
Company believes do not materially interfere with the use of or affect the value
of such properties.  The Company's Credit Agreement is secured by a first lien
on properties that represented at least 80% of the value of the Company's proved
oil and gas properties (based on PV-10 as of December 31, 1997).  Presently, the
Company keeps in force its leaseholds for 37% of its net acreage by virtue of
production on that acreage in paying quantities.  The remaining acreage is held
by lease rentals and similar provisions and requires production in paying
quantities prior to expiration of various time periods to avoid lease
termination.

GOVERNMENTAL REGULATION

  The Company's oil and gas exploration, production and related operations are
subject to extensive rules and regulations promulgated by federal and state
agencies.  Failure to comply with such rules and regulations can result in
substantial penalties.  The regulatory burden on the oil and gas industry
increases the Company's cost of doing business and affects its profitability.
Although the Company believes it is in substantial compliance with all
applicable laws and regulations, because such rules and regulations are
frequently amended or reinterpreted, the Company is unable to predict the future
cost or impact of complying with such laws.  Significant expenditures may be
required to comply with governmental laws and regulations and may have a
material adverse effect on the Company's financial condition and results of
operations.

  Such regulation requires permits for drilling operations, drilling bonds and
reports concerning operations and imposes other requirements relating to the
exploration and production of oil and gas.  Such state and federal agencies have
statutes or regulations addressing conservation matters, including provisions
for the unitization or pooling of oil and gas properties, the establishment of
maximum rates of production from wells, and the regulation of spacing, plugging
and abandonment of such wells.

  The Federal Energy Regulatory Commission ("FERC") regulates interstate natural
gas transportation rates and service conditions, which affect the marketing of
gas produced by the Company, as well as the revenues received by the Company for
sales of such production.  Since the mid-1980s, FERC has issued a series of
orders, culminating in Order Nos. 636, 636-A and 636-B ("Order 636"), that have
significantly altered the marketing and transportation of gas.  Order 636
mandated a fundamental restructuring of interstate pipeline sales and
transportation service, including the unbundling by interstate pipelines of the
sale, transportation, storage and other components of the city-gate sales
services such pipelines previously performed.  One of FERC's purposes in issuing
the orders is to increase competition within all phases of the gas industry. The
United States Court of Appeals for the District of Columbia Circuit largely
upheld Order 636, and the Supreme Court has declined to hear the appeal.
Generally, Order 636 has eliminated or substantially reduced the interstate
pipelines' traditional role as wholesalers of natural gas, and has substantially
increased competition and volatility in natural gas markets.

  The price the Company receives from the sale of oil and natural gas liquids is
affected by, among other things, the cost of transporting products to market.
Effective January 1, 1995, FERC implemented regulations establishing an indexing
system for transportation rates for oil pipelines, which, generally, would index
such rates to inflation, subject

                                      -4-
<PAGE>

to certain conditions and limitations. The Company is not able to predict with
certainty the effect, if any, of these regulations on its operations. However,
the regulations may increase transportation costs or reduce wellhead prices for
oil and natural gas liquids.

ENVIRONMENTAL MATTERS

  The Company's operations and properties are subject to extensive and changing
federal, state and local laws and regulations relating to environmental
protection, including the generation, storage, handling, emission,
transportation and discharge of materials into the environment, and relating to
safety and health.  The recent trend in environmental legislation and regulation
generally is toward stricter standards, and this trend will likely continue.
These laws and regulations may require the acquisition of a permit or other
authorization before construction or drilling commences and for certain other
activities; limit or prohibit construction, drilling and other activities on
certain lands lying within wilderness and other protected areas; and impose
substantial liabilities for pollution resulting from the Company's operations.
The permits required for various of the Company's operations are subject to
revocation, modification and renewal by issuing authorities.  Governmental
authorities have the power to enforce compliance with their regulations, and
violators are subject to fines or injunction, or both.  In the opinion of
management, the Company is in substantial compliance with current applicable
environmental laws and regulations, and the Company has no material commitments
for capital expenditures to comply with existing environmental requirements.
Nevertheless, changes in existing environmental laws and regulations or in
interpretations thereof could have a significant material impact on the Company,
as well as the oil and gas industry in general.  CERCLA and comparable state
statutes impose strict, joint and several liability on owners and operators of
sites and on persons who disposed of or arranged for the disposal of "hazardous
substances" found at such sites.  It is not uncommon for neighboring landowners
and other third parties to file claims for personal injury and property damage
allegedly caused by the hazardous substances released into the environment.
RCRA and comparable state statutes govern the disposal of "solid waste" and
"hazardous waste" and authorize the imposition of substantial fines and
penalties for noncompliance.  Although CERCLA currently excludes petroleum from
its definition of "hazardous substance," state laws affecting the Company's
operations impose clean-up liability relating to petroleum and petroleum related
products.  In addition, although RCRA classifies certain oil field wastes as
"nonhazardous," such exploration and production wastes could be reclassified as
hazardous wastes thereby making such wastes subject to more stringent handling
and disposal requirements.

  Federal regulations require certain owners or operators of facilities that
store or otherwise handle oil, such as the Company, to prepare and implement
spill prevention, control countermeasure and response plans relating to the
possible discharge of oil into surface waters.  The Oil Pollution Act of 1990,
as amended ("OPA"), contains numerous requirements relating to the prevention of
and response to oil spills into waters of the United States.  For onshore
facilities that may affect waters of the United States, the OPA requires an
operator to demonstrate $10 million in financial responsibility.  In addition,
the OPA currently requires persons responsible for "offshore facilities" to
establish $150 million in financial responsibility to cover environmental
cleanup and restoration costs likely to be incurred in connection with an oil
spill in the waters of the United States. On September 10, 1996, Congress passed
legislation that would lower the financial responsibility requirement under OPA
to $35 million, subject to increase to $150 million if a formal risk assessment
indicates the increase is warranted. The impact of any legislation is not
expected to be any more burdensome to the Company than it will be to other
similarly situated companies involved in oil and gas exploration and production.

  OPA imposes a variety of additional requirements on "responsible parties" for
vessels or oil and gas facilities related to the prevention of oil spills and
liability for damages resulting from such spills in waters of the United States.
The "responsible parties" include the owner or operator of an onshore facility,
pipeline, or vessel or the lessee or permittee of the area in which an offshore
facility is located. OPA assigns liability to each responsible party for oil
spill removal costs and a variety of public and private damages from oil spills.
While liability limits apply in some circumstances, a party cannot take
advantage of liability limits if the spill is caused by gross negligence or
willful misconduct or resulted from violation of a federal safety, construction
or operating regulation. If a party fails to report a spill or to cooperate
fully in the cleanup, liability limits likewise do not apply. OPA establishes a
liability limit for offshore facilities (including pipelines) of all removal
costs plus $75 million. Few defenses exist to the liability for oil spills
imposed by OPA. OPA also imposes other requirements on facility operators, such
as the preparation of an oil spill contingency plan. Failure to comply with
ongoing requirements or inadequate cooperation in a spill event may subject a
responsible party to civil or criminal enforcement actions.

                                      -5-
<PAGE>

  In addition, the OCSLA authorizes regulations relating to safety and
environmental protection applicable to lessees and permittees operating in the
OCS. Specific design and operational standards may apply to OCS vessels, rigs,
platforms, pipelines, vehicles and structures. Violations of lease conditions or
regulations issued pursuant to OCSLA can result in substantial civil and
criminal penalties, as well as potential court injunctions curtailing operations
and the cancellation of leases. Such enforcement liabilities can result from
either governmental or private prosecution.

  The Federal Water Pollution Control Act ("FWPCA") imposes restrictions and
strict controls regarding the discharge of produced waters and other oil and gas
wastes into navigable waters. Permits must be obtained to discharge pollutants
into state and federal waters. The FWPCA and analogous state laws provide for
civil, criminal and administrative penalties for any unauthorized discharges of
oil and other hazardous substances in reportable quantities and, along with the
OPA, may impose substantial potential liability for the costs of removal,
remediation and damages. State water discharge regulations and the federal
(NPDES) permits prohibit or are expected to prohibit within the next year the
discharge of produced water and sand, and some other substances related to the
oil and gas industry, into coastal waters. Although the costs to comply with
zero discharge mandates under federal or state law may be significant, the
entire industry will experience similar costs and the Company believes that
these costs will not have a material adverse impact on the Company's financial
conditions and operations. Some oil and gas exploration and production
facilities are required to obtain permits for their storm water discharges.
Costs may be incurred in connection with treatment of wastewater or developing
storm water pollution prevention plans.

  Regulations are currently being developed under federal and state laws
concerning oil pollution prevention and other matters that may impose additional
regulatory burdens on the Company.  In addition, the Clean Water Act and
analogous state laws require permits to be obtained to authorize discharge into
surface waters or to construct facilities in wetland areas.  With respect to
certain of its operations, the Company is required to maintain such permits or
meet general permit requirements.  The EPA recently adopted regulations
concerning discharges of storm water runoff.  This program requires covered
facilities to obtain individual permits, participate in a group or seek coverage
under an EPA general permit.  The Company believes that it will be able to
obtain, or be included under, such permits, where necessary, and to make minor
modifications to existing facilities and operations that would not have a
material effect on the Company.

  The implementation of new, or the modification of existing, laws or
regulations could have a material adverse effect on the Company.  The discharge
of oil, gas or other pollutants into the air, soil or water may give rise to
significant liabilities on the part of the Company to the government and third
parties and may require the Company to incur substantial costs of remediation.
Moreover, the Company has agreed to indemnify sellers of producing properties
purchased in each of its substantial acquisitions against environmental claims
associated with such properties.  No assurance can be given that existing
environmental laws or regulations, as currently interpreted or reinterpreted in
the future, or future laws or regulations will not materially adversely affect
the Company's results of operations and financial condition or that material
indemnity claims will not arise against the Company with respect to properties
acquired by the Company.

  The Company has acquired leasehold interests in numerous properties that for
many years have produced oil and gas.  Although the previous owners of these
interests may have used operating and disposal practices that were standard in
the industry at the time, hydrocarbons or other wastes may have been disposed of
or released on or under the properties.  In addition, some of the Company's
properties are operated by third parties over whom the Company has no control.
Notwithstanding the Company's lack of control over properties operated by
others, the failure of the operator to comply with applicable environmental
regulations may, in certain circumstances, materially adversely impact the
Company.

ABANDONMENT COSTS

  The Company is responsible for payment of plugging and abandonment costs on
the oil and gas properties pro rata to its working interest.  Based on its
experience, with the exception of its offshore oil and gas properties, the
Company anticipates that the ultimate aggregate salvage value of lease and well
equipment located on its properties will exceed the costs of abandoning such
properties.  There can be no assurance, however, that the Company will be
successful in avoiding additional expenses in connection with the abandonment of
any of its properties.  In addition, abandonment costs and their timing may
change due to many factors including actual production results, inflation rates
and changes in environmental laws and regulations.

                                      -6-
<PAGE>

ITEM 2.  PROPERTIES

OIL AND NATURAL GAS RESERVES

  The following table summarizes the estimates of the Company's historical net
proved reserves as of December 31, 1997 and 1996, and the present values
attributable to these reserves at such dates.  The reserve and present value
data of the Company were prepared by the Company's independent petroleum
consultants.

<TABLE>
<CAPTION>
                                                                   AS OF DECEMBER 31,
                                                                ------------------------
                                                                   1997         1996
                                                                -----------  -----------
<S>                                                             <C>          <C>
                                                                 (dollars in thousands)
ESTIMATED PROVED RESERVES:
   Oil (MBbls)................................................      30,275       19,456
   Gas (MMcf).................................................     345,372      301,378
   MMcfe (6 Mcf per Bbl)......................................     527,022      418,114
Proved developed reserves as a percentage of proved reserves..          68%          66%
PV-10(a)......................................................    $435,127     $537,366
Standardized Measure of Discounted Future Net Cash Flows(b)...    $349,050     $387,863
</TABLE>
------------------

(a) The present value of future net revenue attributable to the Company's
    reserves was prepared using prices in effect at the end of the respective
    periods presented, discounted at 10% per annum on a pre-tax basis.  These
    amounts reflect the effects of the Company's hedging activities.

(b) The Standardized Measure of Discounted Future Net Cash Flows prepared by the
    Company represents the present value of future net revenues after income
    taxes discounted at 10%.  These amounts reflect the effects of the Company's
    hedging activities.

  In accordance with applicable requirements of the Commission, estimates of the
Company's proved reserves and future net revenues are made using sales prices
estimated to be in effect as of the date of such reserve estimates and are held
constant throughout the life of the properties (except to the extent a contract
specifically provides for escalation).  The average realized prices for the
Company's reserves as of December 31, 1997 were $16.11 per Bbl of oil and $1.83
per Mcf of natural gas, compared to average realized prices for the Company's
reserves as of December 31, 1996 of $25.09 per Bbl of oil and $2.70 per Mcf of
natural gas.

  Estimated quantities of proved reserves and future net revenues therefrom are
affected by natural gas prices, which have fluctuated widely in recent years.
There are numerous uncertainties inherent in estimating oil and gas reserves and
their estimated values, including many factors beyond the control of the
producer. The reserve data set forth in this report represents only estimates.
Reservoir engineering is a subjective process of estimating underground
accumulations of oil and gas that cannot be measured in an exact manner. The
accuracy of any reserve estimate is a function of the quality of available data
and of engineering and geological interpretation and judgment. As a result,
estimates of different engineers, including those used by the Company, may vary.
In addition, estimates of reserves are subject to revision based upon actual
production, results of future development and exploration activities, prevailing
oil and gas prices, operating costs and other factors, which revisions may be
material. Accordingly, reserve estimates are often different from the quantities
of oil and gas that are ultimately recovered and are highly dependent upon the
accuracy of the assumptions upon which they are based. The Company's estimated
proved reserves have not been filed with or included in reports to any federal
agency.

  Estimates with respect to proved reserves that may be developed and produced
in the future are often based upon volumetric calculations and upon analogy to
similar types of reserves rather than actual production history.  Estimates
based on these methods are generally less reliable than those based on actual
production history.  Subsequent evaluation

                                      -7-
<PAGE>

of the same reserves based upon production history will result in variations,
which may be substantial, in the estimated reserves.

PRODUCTIVE WELLS AND ACREAGE

 Productive Wells

  The following table sets forth the Company's productive wells as of December
31, 1997:

                                                            ACTUAL
                                                        --------------
                                                         GROSS      NET
                                                        ------    -----
Oil...................................................   2,138      767
Gas...................................................     392      115
                                                        ------    -----
   Total Productive Wells.............................   2,530      882
                                                        ======    =====

  Productive wells consist of producing wells and wells capable of production,
including gas wells awaiting pipeline connections.  Wells that are completed in
more than one producing horizon are counted as one well.

 Acreage Data

  Undeveloped acreage includes leased acres on which wells have not been drilled
or completed to a point that would permit the production of commercial
quantities of oil and gas, regardless of whether or not such acreage contains
proved reserves.  A gross acre is an acre in which an interest is owned.  A net
acre is deemed to exist when the sum of fractional ownership interests in gross
acres equals one.  The number of net acres is the sum of the fractional
interests owned in gross acres expressed as whole numbers and fractions thereof.
The following table sets forth the approximate developed and undeveloped acreage
in which the Company held a leasehold mineral or other interest as of December
31, 1997.

                   DEVELOPED ACRES   UNDEVELOPED ACRES    TOTAL ACRES
                   ----------------  -----------------  ----------------
                    GROSS     NET     GROSS      NET     GROSS     NET
                   -------  -------  --------  -------  -------  -------
Total............  270,662  124,468   427,773  208,645  698,435  333,113

DRILLING ACTIVITIES

  The following table sets forth the drilling activity of the Company on its
properties for the years ended December 31, 1997 and 1996 and for the period
from March 31, 1995 (inception) through December 31, 1995.


                      YEAR ENDED DECEMBER 31,
                     ------------------------   PERIOD ENDED
                        1997         1996     DECEMBER 31, 1995
                     -----------  ----------  -----------------
                     GROSS  NET   GROSS  NET    GROSS     NET
                     -----  ----  -----  ---  ---------  ------
Exploratory Wells
  Productive.......    2.0   1.0      -    -        1.0     0.5
  Nonproductive....    2.0   1.8    1.0  0.2        2.0     1.3
                      ----  ----    ---  ---        ---     ---
    Total..........    4.0   2.8    1.0  0.2        3.0     1.8
                      ====  ====    ===  ===        ===     ===
Development Wells
  Productive.......   48.0  17.2    7.0  3.9          -       -
  Nonproductive....    6.0   4.5    1.0  0.2          -       -
                      ----  ----    ---  ---        ---     ---
    Total..........   54.0  21.7    8.0  4.1          -       -
                      ====  ====    ===  ===        ===     ===

                                      -8-
<PAGE>

NET PRODUCTION, UNIT PRICES AND COSTS

  The following table presents certain information with respect to oil and gas
production, prices and costs attributable to all oil and gas property interests
owned by the Company for the years ended December 31, 1997 and  1996 and for the
period from March 31, 1995 (inception) through December 31, 1995.

<TABLE>
<CAPTION>
                                                          YEAR ENDED
                                                         DECEMBER 31,      PERIOD ENDED
                                                       ----------------     DECEMBER 31,
                                                        1997     1996           1995
                                                       -------  -------    -------------
<S>                                                    <C>      <C>        <C>
Production
  Oil (MBbls)........................................    1,880      714            30
  Gas (MMcf).........................................   22,104    5,787           245
  Total (MMcfe)......................................   33,385   10,071           425
Average sales price (a):
  Oil (per Bbl)......................................  $ 18.67  $ 19.16        $16.80
  Gas (per Mcf)......................................  $  1.75  $  1.75        $  .97
  Per Mcfe...........................................  $  2.21  $  2.37        $ 1.75

Production costs, including
  production taxes (per Mcfe) (b)....................  $   .65  $   .91        $  .72
General and administrative costs (per Mcfe)..........  $   .16  $   .23        $ 3.64
Depletion, depreciation and amortization
  expenses (per Mcfe)................................  $   .60  $   .57        $  .70
</TABLE>
----------------------
(a) Reflects results of hedging activities in 1997 and 1996.
(b) Includes approximately $.09 and $.22 per Mcfe of production costs primarily
    attributable to necessary rework operations on the 1995 Acquisition and the
    1996 Acquisition for the years ended December 31, 1997 and 1996,
    respectively.

ITEM 3.  LEGAL PROCEEDINGS

  The following is a brief description of certain litigation to which the
Company is subject, as a result of assuming the obligations of OEDC.  The
Company believes it has meritorious defenses to the claims and intends to
vigorously defend against such claims.  The Company does not believe that it has
a probable and estimable loss with respect to any such litigation in excess of
currently provided reserves, if any.  If such loss becomes probable and
estimable, the amount of any recorded liability could have a material adverse
effect on the Company's (i) results of operations for the period in which such
liability is recorded, (ii) consolidated financial position as a whole and (iii)
liquidity and capital resources.  However, the Company does not expect that any
such liability will have a material adverse effect on its consolidated financial
position as a whole or on its liquidity or capital resources.  Due to
uncertainties inherent in litigation, no assurance can be given to the ultimate
outcome of these matters.

  OEDC and certain of its officers and directors, as well as Natural Gas
Partners, L.P. ("NGP"), the managing underwriters of OEDC's initial public
offering and an analyst from each of the managing underwriters, have been named
as defendants in a suit styled Eric Barron and Edward C. Allen, On Behalf of
Themselves and all Others Similarly Situated, v. David B. Strassner, Douglas H.
Kiesewetter, David R. Albin, Natural Gas Partners, L.P., David Garcia, John J.
Myers, Offshore Energy Development Corporation, Morgan Keegan & Company, Inc.
and Principal Securities, Inc., which was filed October 20, 1997, in the Texas
State District Court of Harris County, Texas, 270th Judicial District.  The
defendants removed plaintiffs' claims to federal court in the United States
Southern District of Texas.  Plaintiffs have sought to have the case remanded to
the state court.  As of March 15, 1998, the federal judge had not decided
whether to deny plaintiffs' request for remand. The suit seeks class
certification on behalf of certain holders of common stock of OEDC, excluding
the defendants and holders related to or affiliated with the defendants. The
suit alleges generally that the defendants wrongfully made false or misleading
statements or omissions relating to OEDC's business and

                                      -9-
<PAGE>

prospects in the course of OEDC's initial public offering and subsequent
thereto. The suit seeks rescission of sales of common stock of OEDC and
unspecified monetary damages, including punitive damages.

  OEDC and certain of its officers and directors, as well as NGP, have also been
named as defendants in a suit styled John W. Robertson, et al. v. David B.
Strassner, Douglas H. Kiesewetter, David R. Albin, Natural Gas Partners, L.P.
and Offshore Energy Development Corporation, which was filed February 6, 1998,
in the United States Southern District of Texas, Houston Division.  This suit
mirrors the allegations of the foregoing matter, but adds request for relief
under federal securities laws.  It, too, seeks certification of a class of
certain purchasers of common stock of OEDC.  The suit seeks compensatory
damages, including rescissory damages, where applicable.

  The Company is seeking to consolidate both of these lawsuits, as the Company
believes the claims are connected.   Plaintiffs in both lawsuits are represented
by the same lawyers.

  The Company is involved in other various claims and legal actions arising in
the ordinary course of business.  In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.


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

  (a) A special meeting of the stockholders of the Company was held in Midland,
Texas, at 10:00 a.m., local time, on December 12, 1997.

  (b) The meeting did not involve the election of directors.

  (c) A total of 33,945,798 shares of common stock of the Company were
outstanding and entitled to vote at the meeting.  Stockholders voted on a
proposal to approve the Amended and Restated Agreement and Plan of Merger dated
November 6, 1997 among the Company, a subsidiary of the Company and OEDC.  The
results of the voting were as follows:

                                                    BROKER
              FOR          AGAINST      ABSTAIN    NONVOTES
         ------------      --------     -------   ----------
          30,834,030        11,150       9,800        --

  (d)  Inapplicable.

                                      -10-
<PAGE>

EXECUTIVE OFFICERS OF THE REGISTRANT

  Pursuant to Instruction 3 to Item 401(b) of the Regulation S-K and General
Instruction G(3) to Form 10-K, the following information is included in Part I
of this report.

  The following table sets forth certain information concerning the executive
officers of the Company as of December 31, 1997:

       NAME          AGE                       POSITION
       ----          ---                       --------

Jack D. Hightower..   49  President and Chief Executive Officer
George G. Staley...   63  Executive Vice President, Exploration
Rodney L. Woodard..   42  Vice President, Engineering
Thomas H. Moore....   53  Vice President, Business Development
Dan P. Colwell.....   53  Vice President, Land
William K. White...   55  Vice President, Finance and Chief Financial Officer
John L. Benfatti...   52  Vice President, Accounting and Controller
Susan D. Rowland...   37  Vice President, Administration and Corporate Secretary

  Set forth below is a description of the backgrounds of each executive officer
of the Company, including employment history for at least the last five years.

  Jack D. Hightower has served as President, Chief Executive Officer and
Chairman of the Board of Directors of the Company since he founded the Company
in March 1995.  Prior to forming the Company, from 1986 to January 1996, Mr.
Hightower served as Chairman of the Board and Chief Executive Officer of United
Oil Services, Inc., a complete oil field service company serving customers in
the Permian Basin.  From 1978 to 1995, Mr. Hightower served as Chairman of the
Board and President of Amber Energy, Inc., a company formed to identify oil and
gas exploration prospects.  From 1991 to 1994, Mr. Hightower served as Chairman
of the Board, Chief Executive Officer and President of Enertex, Inc., which
served as the operator of record for several oil and gas properties involving
Mr. Hightower and other nonoperators, including Selma International Investment
Limited.  Since 1990, Mr. Hightower has served on the Board of Directors of
Texas Commerce Bank, N.A., Midland.

  George G. Staley has served as Executive Vice President, Exploration and
Director of the Company since its formation.  From 1975 until 1995, Mr. Staley
served as President and Chief Executive Officer of Staley Gas Co., Inc. and
Staley Operating Co., which are oil and gas exploration and operating companies.

  Rodney L. Woodard has served as Vice President, Engineering for the Company
since its formation.  From 1985 to 1995, Mr. Woodard served as Vice President of
Selma International Investment Limited.

  Thomas H. Moore has served as Vice President, Business Development of the
Company since its formation.  From 1992 to 1995, Mr. Moore served as Managing
Partner of Magnum Energy Corporation, L.L.C.  From 1991 until 1992, Mr. Moore
served as Executive Vice President -- Exploration and Production, Chief
Operating Officer and Director of Clayton Williams Energy, Inc.  From 1985 to
1991, Mr. Moore served as President, Chief Operating Officer and Director of
Clayton W. Williams, Jr. Inc.

  Dan P. Colwell has served as Vice President, Land for the Company since its
formation.  From 1993 to 1995, Mr. Colwell served as Vice President of Land for
Enertex, Inc.  Mr. Colwell was employed by ARCO as Director of Business
Development from 1991 to 1993 and Area Land Manager from 1987 to 1991.

   William K. White has served as Vice President, Finance and Chief Financial
Officer of the Company since September 1996.  From 1994 to September 1996, Mr.
White was Senior Vice President of the Energy Investment Group of Trust Company
of The West.  From 1991 to 1994, Mr. White was President of the Odessa
Associates, a private firm engaged in the practice of providing financial
consulting services to the oil and gas industry.

                                      -11-
<PAGE>

  John L. Benfatti has served as Vice President, Accounting and Controller of
the Company since its formation.  From 1980 to 1995, Mr. Benfatti served as
Controller and Treasurer of Staley Gas Co., Inc.

  Susan D. Rowland has served as Vice President, Administration and Corporate
Secretary of the Company since its formation.  From 1986 to 1996, Ms. Rowland
served as a corporate officer and administrative manager of a number of
companies, including Amber Energy, Inc., Enertex, Inc., Haley Properties, Inc.
and United Oil Services, Inc.


                                    PART II

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

  The Company's Common Stock has been publicly traded on the Nasdaq National
Market under the symbol "TEXP" since the Company's initial public offering
effective December 16, 1996.  The following table summarizes the high and low
last reported sales prices on Nasdaq for each quarterly period since the
Company's initial public offering:

                                                COMMON STOCK
                                              ----------------
                                               HIGH      LOW
                                              -------  -------
1996
   Fourth Quarter (from December 16, 1996)..  $ 12.75   $11.25

1997
   First Quarter............................  $ 14.75   $8.125
   Second Quarter.............. ............    12.125   6.75
   Third Quarter............................    13.00    9.50
   Fourth Quarter...........................    13.875   8.875


  As of March 10, 1998, the Company had 166 registered stockholders and
estimates that there were more than 2,000 stockholders (including brokerage
firms and other nominees) of the Company's Common Stock.

  No dividends have been declared or paid on the Company's Common Stock to date.
The Company intends to retain all future earnings for the development of its
business.

                                      -12-
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

  The following selected consolidated financial data should be read in
conjunction with "Item 7.  Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's consolidated financial
statements and related notes included in "Item 8.  Consolidated Financial
Statements and Supplementary Data."


<TABLE>
<CAPTION>
                                                                                            PERIOD MARCH 31, 1995
                                                           YEAR ENDED DECEMBER 31,           (DATE OF INCEPTION)
                                                      --------------------------------             THROUGH
                                                            1997            1996 (a)        DECEMBER 31, 1995 (a)
                                                      -----------------  -------------    --------------------------
<S>                                                   <C>                <C>              <C>
                                                       (in thousands, except per share amounts and operating data)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
  Revenues-
    Operating revenues..............................         $  73,827        $  23,824                    $    743
  Expenses:
    Oil and gas production..........................            21,846            9,199                         304
    General and administrative......................             5,372            2,270                       1,546
    Amortization of stock option awards.............             5,053            1,839                         576
    Exploration and abandonment.....................             3,055              184                         490
    Depletion, depreciation and amortization........            19,972            5,789                         299
    Impairment of long-lived assets.................            68,997               --                          --
    Interest........................................             1,524            2,965                          97
    Other...........................................              (258)            (503)                     (1,038)
                                                             ---------        ---------                    --------
        Total expenses..............................           125,561           21,743                       2,274
                                                             ---------        ---------                    --------
    Income (loss) before income taxes...............           (51,734)           2,081                      (1,531)
    Income tax expense (benefit)....................           (18,267)           3,484                          --
                                                             ---------        ---------                    --------
    Net loss........................................         $ (33,467)       $  (1,403)                   $ (1,531)
                                                             =========        =========                    ========
    Net loss per common share (b)...................         $    (.99)       $    (.07)                   $   (.11)
    Net loss per common share -                              $    (.99)       $    (.07)                   $   (.11)
        assuming dilution (b).......................
    Weighted average common shares outstanding......            33,942           19,605                      14,066
CONSOLIDATED STATEMENT OF CASH FLOWS DATA:
  Net cash provided by (used in):
    Operating activities............................         $  46,563        $   7,710                    $ (1,805)
    Investing activities............................          (114,302)        (144,998)                    (47,522)
    Financing activities............................            63,052          137,365                      55,540
OTHER CONSOLIDATED FINANCIAL DATA:
  Capital expenditures..............................         $ 114,377        $ 150,119                    $ 43,770
CONSOLIDATED OPERATING DATA:
Production:
  Oil (MBbls).......................................             1,880              714                          30
  Gas (MMcf)........................................            22,104            5,787                         245
  Total (MMcfe).....................................            33,385           10,071                         425
Average Sales Prices Per Unit (c):
  Oil (per Bbl).....................................         $   18.67        $   19.16                    $  16.80
  Gas (per Mcf).....................................              1.75             1.75                         .97
  Mcfe..............................................              2.21             2.37                        1.75
Expenses per Mcfe:
  Production costs, including production taxes (d)..         $     .65        $     .91                    $    .72
  General and administrative........................               .16              .23                        3.64
  Depletion, depreciation and amortization..........               .60              .57                         .70
</TABLE>

                                      -13-
<PAGE>

<TABLE>
<CAPTION>
                                                                                            PERIOD MARCH 31, 1995
                                                           YEAR ENDED DECEMBER 31,           (DATE OF INCEPTION)
                                                      -----------------------------------          THROUGH
                                                            1997             1996 (a)        DECEMBER 31, 1995 (a)
                                                      -----------------  ---------------  --------------------------
<S>                                                   <C>                <C>              <C>
                                                       (in thousands, except per share amounts and operating data)
CONSOLIDATED BALANCE SHEET DATA:
  Cash and cash equivalents.........................         $   1,603        $   6,290                    $  6,213
  Working capital...................................                28            8,124                      11,946
  Oil and gas assets, net...........................           271,920          190,062                      42,861
  Total assets......................................           352,583          207,179                      57,487
  Total debt........................................            85,450            6,500                      20,000
  Stockholders' equity and predecessor capital......           232,421          187,186                      34,585
</TABLE>


(a) Certain reclassifications have been made to the 1995 and 1996 amounts to
    conform to the 1997 presentation.

(b) The net income (loss) per common share amounts prior to 1997 have been
    restated as required to comply with Statement of Financial Accounting
    Standards No. 128, "Earnings Per Share."  For further discussion of earnings
    per share impact of Statement No. 128, see notes to the consolidated
    financial statements.

(c) Reflects results of hedging activities.  See "Item 7. Management's
    Discussion and Analysis of Financial Condition and Results of Operations."

(d) Includes approximately $.09 and $.22 per Mcfe of production costs primarily
    attributable to necessary rework operations on the 1995 Acquisition and the
    1996 Acquisition for 1997 and 1996, respectively.


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

GENERAL

  The Company is an independent energy company engaged in the exploration,
development and acquisition of oil and gas properties. The Company's strategy is
to grow reserves, production and net income per share through (i) the
acquisition of producing properties that provide significant development and
exploratory drilling potential, (ii) the exploitation and development of its
reserve base, (iii) the exploration for oil and gas reserves, (iv) a low
operating and overhead structure, and (v) acquiring companies which provide the
previously mentioned opportunities. The Company has grown rapidly through the
acquisition and exploitation of oil and gas properties, consummating the 1995
Acquisition for a purchase price of approximately $40.6 million, the 1996
Acquisition for approximately $135.7 million and the Pioneer Acquisition for
approximately $54.4 million. In addition, the Company issued 5,486,734 shares
and 899,965 shares of the Company's common stock in connection with the OEDC
acquisition and the Carrollton acquisition, respectively.

  The Company's growth from acquisitions has impacted its financial results in a
number of ways.  Acquired properties may not have received focused attention
prior to sale.  After acquisition, certain of these properties required
extensive maintenance, workovers, recompletions and other remedial activity that
while not constituting capital expenditures may initially increase lease
operating expenses.  The Company may dispose of certain of the properties it
determines are outside the Company's strategic focus.  The increased production
and revenue resulting from the rapid growth of the Company has required it to
recruit and develop operating, accounting and administrative personnel
compatible with its increased size.  As a result, the Company has incurred and
anticipates future increases in its general and administrative expense levels.
The Company believes that with its current inventory of drilling locations and
the anticipated additional staff it will be well positioned to follow a more
balanced program of exploration and exploitation activities to complement its
acquisition efforts.

  Titan uses the successful efforts method of accounting for its oil and gas
producing activities.  Costs to acquire mineral interests in oil and gas
properties, to drill

                                      -14-
<PAGE>

and equip exploratory wells that result in proved reserves, and to drill and
equip development wells are capitalized. Costs to drill exploratory wells that
do not result in proved reserves, and geological and geophysical costs are
expensed. Costs of significant nonproducing properties, wells in the process of
being drilled and significant development projects are excluded from depletion
until such time as the related project is developed and proved reserves are
established or impairment is determined.

  The Company's predecessor was classified as a partnership for federal income
tax purposes.  Therefore, no income taxes were paid by the Company prior to the
Conversion.  Future tax amounts, if any, will be dependent upon several factors,
including, but not limited to, the Company's results of operations.

IMPACT OF DECLINING CRUDE OIL PRICES

  During the quarter ended December 31, 1997, the posted price of West Texas
intermediate crude oil (the "West Texas Crude Oil Price") fell from prices in
excess of $20 per barrel to prices of less than $17 per barrel.  From December
31, 1997 through March 10, 1998, the West Texas Crude Oil Price ranged from
$15.50 to $12.00 per barrel.  This decline in prices is thought to be caused
primarily by an oversupply of crude oil inventory created, in part, by an
unusually warm winter in the United States and Europe, an announced increase in
crude oil production quotas for OPEC countries and a possible decline in demand
in certain Asian markets.

  If such a decline in the West Texas Crude Oil Price worsens or persists for a
protracted period, it could adversely affect the Company's revenues, net income
and cash flows from operations.  Also, if these prices maintain their present
level for an extended time period or decline further the Company may delay or
postpone certain of its capital projects.

  If the posted price for West Texas Crude Oil Price remains at current levels
or continues to decline, the Company would expect that it may be required to
record an additional impairment of its oil and gas properties in 1998.  The
extent of an impairment, if any, cannot be determined.

YEAR 2000 ISSUES

  The Company has reviewed the effect of the year 2000 issues relating to its
information systems.  The Company has determined that the year 2000 issues
directly related to its information systems will not have a material impact on
its business, operations nor its financial position.  However, the Company
cannot determine what effect, if any, the year 2000 issues affecting its
vendors, customers, other businesses and the numerous local, state, federal and
other U.S. and foreign governmental entities with which it conducts business or
which it is regulated or governed or taxed will have on its business or
financial position.

                                      -15-
<PAGE>

OPERATING DATA

  The following sets forth the Company's historical operating data for the
periods indicated:
<TABLE>
<CAPTION>
                                                                                                   PERIOD
                                                                                                MARCH 31, 1995
                                                                                             (DATE OF INCEPTION)
                                                                                                    THROUGH
                                                                YEAR ENDED DECEMBER 31,           DECEMBER 31,
                                                                ----------------------        ------------------
                                                                  1997          1996                1995
                                                                --------     ---------        ------------------
<S>                                                             <C>          <C>              <C>
Production:
   Oil (MBbls)..............................................        1,880         714                  30
   Gas (MMcf)...............................................       22,104       5,787                 245
   Total (MMcfe)............................................       33,385      10,071                 425

Average sales price per unit (a):
   Oil (per Bbl)............................................      $ 18.67     $ 19.16              $16.80
   Gas (per Mcf)............................................      $  1.75     $  1.75              $  .97
   Mcfe.....................................................      $  2.21     $  2.37              $ 1.75

Expenses per Mcfe:
   Production costs, including production taxes.............      $   .65     $   .91              $  .72
   General and administrative...............................      $   .16     $   .23              $ 3.64
   Depletion, depreciation and amortization.................      $   .60     $   .57              $  .70
</TABLE>

-----------------------
(a)  Reflects results of hedging activities.

RESULTS OF OPERATIONS

  The financial statements of the Company, which began operations on March 31,
1995, include the results of the years ended December 31, 1997 and 1996, and the
nine months ended December 31, 1995.  As a result of the Company's limited
operating history and rapid growth, its financial statements are not readily
comparable and may not be indicative of future results. The OEDC Acquisition,
the Carrollton Acquisition and the Pioneer Acquisition did not contribute to the
1997 operating results of the Company as the transactions did not close until
the end of December 1997.

  Year Ended December 31, 1997

  For the year ended December 31, 1997, the Company's revenues from the sale of
oil and gas (excluding the effects of hedging activities) were $34.6 million and
$38.7 million, respectively.  During the year, the Company produced 1,880 MBbls
of oil and 22,104 MMcf of gas, with total oil and gas production of 33,385
MMcfe.  The revenues and production are primarily attributable to the 1995
Acquisition, the 1996 Acquisition, and the continued exploitation of the
Company's proved properties.

  As a result of hedging activities in the year ended December 31, 1997, oil
revenues were increased $551,000 ($.29 per Bbl) and gas revenues were reduced
$62,000 ($.003 per Mcf) for a total increase of $489,000.

  Oil and gas production costs, including production taxes, were $21.8 million
($.65 per Mcfe) for the year ended December 31, 1997.  These costs included $2.8
million ($.09 per Mcfe) of rework expenses primarily related to the 1995
Acquisition and 1996 Acquisition.

                                      -16-
<PAGE>

  Exploration and abandonment costs were $3.1 million for the year ended
December 31,1997.  The costs primarily relate to $1.4 million for the
acquisition of seismic data and $1.1 million related to unsuccessful exploratory
projects.

  General and administrative expenses were $5.4 million ($.16 per Mcfe) for the
year ended December 31, 1997.  The Company expects its 1998 general and
administrative expenses to increase primarily as the result of the OEDC
Acquisition and Carrollton Acquisition.

  For the year ended December 1997, depletion, depreciation and amortization
expense was $20.0 million ($.60 per Mcfe).  This represents a full year of
depletion relating to production for the 1996 Acquisition and depletion related
to the exploitation and development expenditures.

  For the year ended December 31, 1997, the Company recognized a pretax
impairment related to its long-lived assets of approximately $69 million.  The
impairment is primarily the result of (i) significantly lower commodity prices
as compared to the economics on which the Company acquired certain properties
and (ii) downward adjustments of initially expected reserves on acquired and
developed properties.

  Interest expense was $1,524,000 for the year ended December 31, 1997.  The
interest expense was attributable to bank financing incurred to fund capital
expenditures.

  Year Ended December 31, 1996

  For the year ended December 31, 1996, the Company's revenues from the sale of
oil and gas (excluding the effects of hedging activities) were $15.1 million and
$11.1 million, respectively.  Of total gross oil and gas revenues, $16.2 million
and $9.5 million are attributable to the 1995 Acquisition and the 1996
Acquisition, respectively.  During the year, the Company produced 714 MBbls of
oil (514 MBbls attributable to the 1995 Acquisition and 186 MBbls attributable
to the 1996 Acquisition) and 5,787 MMcf of gas (3,401 MMcf attributable to the
1995 Acquisition and 2,124 MMcf attributable to the 1996 Acquisition), with
total oil and gas production of 10,071 MMcfe.  The revenues and production are
primarily attributable to the 1995 Acquisition since the 1996 Acquisition did
not close until October 31, 1996.

  As a result of hedging activities in the year ended December 31, 1996, oil
revenues were reduced $1.5 million ($2.10 per Bbl) and gas revenues were reduced
$995,000 ($.17 per Mcf) for a total reduction of $2,495,000.

  Oil and gas production costs, including production taxes, were $9.2 million
($.91 per Mcfe) for the year ended December 31, 1996.  These costs included $2.2
million ($.22 per Mcfe) of rework expenses of which $945,000 were attributable
to the 1995 Acquisition and $1.2 million were attributable to the 1996
Acquisition.

  Exploration and abandonment costs were $184,000 for the year ended December
31, 1996.

  General and administrative expenses were $2.3 million ($.23 per Mcfe) for the
year ended December 31, 1996.

  For the year ended December 31, 1996, depletion, depreciation and amortization
expense was $5.8 million ($.57 per Mcfe).  This represents a full year of
depletion, depreciation and amortization relating to production for the 1995
Acquisition and two months of depletion, depreciation and amortization relating
to production for the 1996 Acquisition.

  Interest expense was $2,965,000 for the year ended December 31, 1996.  The
interest expense was attributable to bank financing incurred primarily to fund
the 1995 Acquisition and the 1996 Acquisition.

  Nine Months Ended December 31, 1995

  For the nine months ended December 31, 1995, the Company's revenues from the
sale of oil and gas were $504,000 and $239,000, respectively.  During the
period, the Company produced 30 MBbls of oil and 245 MMcf of gas, for a total
production of 425 MMcfe.  The revenues and production are primarily attributable
to the 1995 Acquisition which was consummated December 11, 1995.

                                      -17-
<PAGE>

   Oil and gas production costs including production taxes, were $304,000 ($.72
per Mcfe) for the nine months ended December 31, 1995.

  Exploration and abandonment costs were $490,000 for the nine months ended
December 31, 1995.

  General and administrative expenses were $1.5 million ($3.64 per Mcfe) for the
nine months ended December 31, 1995.

  For the nine months ended December 31, 1995, depletion, depreciation and
amortization expense was $299,000 ($.70 per Mcfe).

LIQUIDITY AND CAPITAL RESOURCES

  The Company's primary sources of capital have been its initial capitalization,
private equity sales, bank financing, cash flow from operations and the
Company's initial public offering.  The 1995 Acquisition was funded with cash
from the Company's initial capitalization, additional private equity sales and
bank financing.  The 1996 Acquisition was principally funded with bank
financing, which was repaid with the proceeds from the Company's initial public
offering.  The OEDC Acquisition and the Carrollton Acquisition were completed by
issuing Common Stock in exchange for the equity interest in each entity.  The
Pioneer Acquisition was funded with bank financing.

  The Company requires capital primarily for the exploration, development and
acquisition of oil and gas properties, the repayment of indebtedness and general
working capital needs.

  Net Cash Provided by Operating Activities. Net cash provided by operating
activities, before changes in operating assets and liabilities, was $43.3
million for the year ended December 31, 1997, compared to $9.8 million for the
year ended December 31,1996. The increase was primarily attributable to the cash
flow generated by the 1996 Acquisition and from continued exploitation of the
Company's proved properties.

  Capital Expenditures.  Apart from the Company's expenditure for the Pioneer
Acquisition, the Company budgeted for 1997 approximately $27 million for the
drilling and recompletion of oil and gas wells and workover projects on its
proved properties and approximately $25.2 million for expenditures for
geological and geophysical costs, drilling costs and lease acquisition costs on
the Company's unproved properties.

  Cash expenditures for additions to oil gas properties were $57.6 million for
the year ended December 31, 1997.  This includes $11.7 million for the
acquisition of oil and gas leases and $45.9 million for development and
exploratory drilling.

  The Company requires capital primarily for the exploration, development and
acquisition of oil and gas properties, the repayment of indebtedness and general
working capital needs.

  The following table sets forth costs incurred by the Company in its
exploration, development and acquisition activities during the periods
indicated.

                                                Nine Months Ended
                       Year Ended December 31,    December 31,
                       -----------------------  -----------------
                          1997         1996           1995
                       -----------  ----------  -----------------
Development costs....     $ 44,896    $ 12,468            $ 1,580
Exploration costs....        2,856         129                448
Acquisition costs:
Unproved properties..       24,532         802              1,040
Proved properties....      100,871     139,110             40,873
                          --------    --------            -------
Total................     $173,155    $152,509            $43,941
                          ========    ========            =======

                                      -18-
<PAGE>

  For 1998, the Company expects to spend (i) approximately $25.1 million to
drill proved undeveloped properties, (ii) approximately $3.6 million on probable
projects, (iii) approximately $9.6 million to explore unproven locations, (iv)
approxmiately $15.3 million on development projects following successful
exploratory efforts, (v) approximately $10.4 million to acquire additional
acreage and seismic, (vi) $16.0 million to fund development of pipeline and
processing project investments and (vii) $3.8 million on other items. The final
determination with respect to the drilling of any well, including those
currently budgeted, will depend on a number of factors, including (i) the
results of exploration efforts and the review and analysis of the seismic data,
(ii) the availability of sufficient capital resources by the Company and other
participants for drilling prospects, (iii) economic and industry conditions at
the time of drilling, including prevailing and anticipated prices for natural
gas and oil and the availability and costs of drilling rigs and crews, (iv) the
financial resources and results of the Company, and (v) the availability of
leases on reasonable terms and permitting for the potential drilling location.
There can be no assurance that the budgeted wells will encounter, if drilled,
recompleted or worked over reservoirs of commercial quantities of natural gas or
oil.

  While the Company regularly engages in discussions  relating to potential
acquisitions of oil and gas properties, the Company has no present agreement,
commitment or understanding with respect to any such acquisition, other than the
acquisition of oil and gas properties and interests in its normal course
business.  Any future acquisitions may require additional financing and will be
dependent upon financing which may be required in the future to fund the
Company's acquisition and drilling programs.

  Capital Resources.  The Company's primary capital resources are net cash
provided by operating activities and the availability under the Credit
Agreement, of which $80.6 million was available at December 31, 1997.  The
Pioneer Acquisition of $54.4 million was funded with proceeds from the Credit
Agreement.

  Credit Agreement.  The Credit Agreement established a four year revolving
credit facility, up to the maximum amount of $250 million, subject to a
borrowing base to be redetermined semi-annually by the lenders based on certain
proved oil and gas reserves and other assets of the Company.  The borrowing base
at December 31, 1997 was $165 million.  To the extent that the borrowing base is
less than the aggregate principal amount of all outstanding loans and letters of
credit under the Credit Agreement, such deficiency must be cured by the Company
ratably within 180 days, by either prepaying a portion of the outstanding
amounts under the Credit Agreement or pledging additional collateral to the
lenders.  A portion of the credit facility is available for the issuance of up
to $15.0 million of letters of credit, of which $275,000 was outstanding at
December 31, 1997.  All outstanding amounts under the Credit Agreement are due
and payable in full on January 1, 2001.  The Company's outstanding long-term
debt under the Credit Agreement was $84.1 million on December 31, 1997.

  At the Company's option, borrowings under the Credit Agreement bear interest
at either the "Base Rate" (i.e., the higher of the applicable prime commercial
lending rate, or the federal funds rate plus .5% per annum) or the Eurodollar
rate, plus 1% to 1.50% per annum, depending on the level of the Company's
aggregate outstanding borrowings. In addition, the Company is committed to pay
quarterly in arrears a fee of .30% to .375% of the unused borrowing base.

  The Credit Agreement contains certain covenants and restrictions that are
customary in the oil and gas industry.  In addition, the line of credit is
secured by substantially all of the Company's oil and gas properties.

  Liquidity and Working Capital.  At December 31, 1997, the Company had $1.6
million of cash and cash equivalents as compared to $6.3 million at December 31,
1996.  The Company's ratio of current assets to current liabilities was 1.00 at
December 31, 1997, compared to 2.03 at December 31, 1996.  Due principally to a
reduction in cash as a result of an intentional change in the way the Company
manages its operating accounts, the Company's working capital decreased $8.1
million from $8.1 million at December 31, 1996 to $28,000 at December 31, 1997.

  Unsecured Credit Agreement.  In April 1997, the Company entered into a credit
agreement (the "Unsecured Credit Agreement") with Texas Commerce Bank National
Association (the "Bank"), which establishes a revolving credit facility, up to
the maximum of $5 million.  All outstanding amounts pursuant to the Unsecured
Credit Agreement are due and payable in full on or before December 31, 1999.
Proceeds of the Unsecured Credit Agreement are utilized to fund

                                      -19-
<PAGE>

short-term needs (less than thirty days). The Company had no outstanding debt
under the Unsecured Credit Agreement at December 31, 1997.

  The interest rate of amounts outstanding under the Unsecured Credit Agreement
is at a rate determined by agreement between the Company and the Bank.  The rate
shall not exceed the maximum interest rate permitted under applicable laws.
Interest rates generally are the bank's cost of funds plus 1% per annum.

OTHER MATTERS

  Stock Options and Compensation Expense

  In connection with the Conversion, the Company issued options to purchase
3,631,350 shares of Common Stock to certain of its officers and employees in
substitution for options issued by Titan Resources, L.P.  Of the options issued
by the partnership approximately 93% were issued on March 31, 1995, the date of
inception, and approximately 7% were issued as of September 30, 1996.  The
options issued by the Company have an exercise price of $2.08 per share.
Options to purchase 1,991,627 shares of Common Stock are currently vested and an
additional 1,208,557 and 426,881 shares will vest on March 31 of each of 1998
and 1999, respectively.  Based in part on selling prices of interests in the
partnership in December 1995 and September 1996, the Company expected to record
a noncash compensation expense of approximately $421,000 per month for a period
of 39 months beginning in October of 1996 to reflect the estimated value of the
revised option plan on September 30, 1996.  Noncash compensation expense
recorded for the years ended December 31, 1997 and 1996 was $5,053,000 and
$1,839,000, respectively, and $576,000 for the period ended December 31, 1995.
During the years ended December 31, 1997 and 1996 the Company issued additional
stock options of 259,000 and 85,000, respectively, for which no deferred
compensation was recorded as these options had no implicit value when issued.

  Hedging Activities

  The Company uses swap agreements and other financial instruments in an attempt
to reduce the risk of fluctuating oil and gas prices and interest rates.  The
Company is party to various agreements with numerous counterparties for purposes
of utilizing financial instruments, of which the Company assesses the
creditworthiness of its counterparties.  Among other counterparties, the Company
has utilized Enron Capital & Trade Resources Corp. (an affiliate of a
significant stockholder of the Company) as a counterparty.  Settlement of gains
or losses on the hedging transactions was generally based on the difference
between the contract price and a formula using New York Mercantile Exchange
("NYMEX") or other major indices related prices and was reported as a component
of oil and gas revenues as the associated production occurs.  The Company, at
December 31, 1997, had entered into hedging transactions with respect to
approximately 6,196 MMcfe of its 1998 estimated production.  Subsequent to
December 31, 1997 and through March 10, 1998, the Company has entered into
additional hedging transactions, relating to its 1998 estimated production, of
approximately 4,265 MMcfe at prices ranging from $2.08 to $2.35 per Mcf.  See
"Risk Factors-Risk of Hedging Activities."

  Crude Oil.  The Company reports average oil prices per Bbl including the net
effect of oil hedges.  During the year ended December 31, 1997, the Company
reported average oil prices of $18.67 per Bbl, while realizing average prices,
excluding hedging results, of $18.38 per Bbl.  The Company recorded net
increases to oil revenues of $551,000 ($.29 per Bbl) for the year ended December
31, 1997, as a result of its commodity hedges.

  During the year ended December 31, 1996, the Company reported average oil
prices of $19.16 per Bbl, while realizing average prices, excluding hedging
results, of $21.26 per Bbl.  The Company recorded a reduction to oil revenues of
$1.5 million ($2.10 per Bbl) for the year ended December 31, 1996, as a result
of its commodity hedges.

  Natural Gas.  The Company reports average gas prices per Mcf including the net
effect of gas hedges.  During the year ended December 31, 1997, the Company
reported average gas prices of $1.75 per Mcf.  The Company recorded a reduction
of $62,000 to gas revenues, which had no significant effect on the average gas
price, for the year ended December 31, 1997, as a result of its commodity
hedges.

                                      -20-
<PAGE>

  During the year ended December 31, 1996, the Company reported average gas
prices of $1.75 per Mcf, while realizing average prices, excluding hedging
results, of $1.92 per Mcf.  The Company recorded net decreases to gas revenues
of $995,000 ($.17 per Mcf) for the year ended December 31, 1996, as a result of
its commodity hedges.

  Natural Gas Balancing

  In the natural gas industry, various working interest partners produce more or
less than their entitlement share of natural gas from time to time.  The
Company's net overproduced position at December 31, 1997 was 32,863 Mcf.  Under
terms of typical natural gas balancing agreements, the underproduced party can
take a certain percentage, typically 25% to 50% of the overproduced party's
entitled share of gas sales in future months, to eliminate such imbalances.
During the make-up period, the overproduced party's cash flow will be adversely
affected.  The Company recognizes revenue and imbalance obligations under the
entitlements method of accounting, which means that the Company recognizes the
revenue to which it is entitled and records a liability with respect to the
value of the overproduced gas.

  Environmental and Other Laws and Regulations

  The Company's business is subject to certain federal, state and local laws and
regulations relating to the exploration for and the development, production and
transportation of oil and gas, as well as environmental and safety matters.
Many of these laws and regulations have become more stringent in recent years,
often imposing greater liability on a larger number of potentially responsible
parties.  Although the Company believes it is in substantial compliance with all
applicable laws and regulations, the requirements imposed by such laws and
regulations are frequently changed and subject to interpretation, and the
Company is unable to predict the ultimate cost of compliance with these
requirements or their effect on its operations.  The Company has no material
commitments for capital expenditures to comply with existing environmental
requirements.

  Nevertheless, changes in existing environmental laws or in interpretations
thereof could have a significant adverse impact on the operating costs of the
Company, as well as the oil and gas industry in general.  See "Risk Factors-
Compliance with Environmental Regulations," "Business and Properties-
Environmental Matters" and "Business and Properties-Abandonment Costs."

  Recently Issued Accounting Standards

  In June 1997, FASB issued FAS No. 130, "Reporting Comprehensive Income" which
requires that all items required to be recognized under accounting standards as
components of comprehensive income be reported as a part of the basic financial
statements.  FAS No. 130 is effective for both interim and annual periods
beginning after December 15, 1997.  The Company plans to adopt FAS No. 130 for
the period ended March 31, 1998 and does not expect FAS No. 130 to have a
material effect on reported results.

  In June 1997, FASB issued FAS No. 131, "Disclosures about Segments of
Enterprise and Related Information" which established standards for reporting
information about operating segments in annual financial statements and requires
selected information about operating segments in interim financial reports
issued to stockholders.  It also establishes standards for related disclosures
about products and services, geographic areas and major customers.  FAS No. 131
is effective for financial statements for periods beginning after December 15,
1997 but the statement need not be applied to interim financial statements in
the initial year of application.  Titan does not expect FAS No. 131 to
materially affect its reporting practices.

CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

  The Company or its representatives may make forward looking statements, oral
or written, including statements in this report, press releases, public and
private forums and filings with the SEC, regarding estimated future net revenues
from oil and natural gas reserves and the present value thereof, planned capital
expenditures (including the amount and nature thereof), increases in oil and gas
production, the number of wells the Company anticipates drilling through 1998 in
connection with its capital expenditure plans and the Company's financial
position, business strategy and other plans and objectives for future
operations. Although the Company believes that the expectations reflected in
these forward

                                      -21-
<PAGE>

looking statements are reasonable, there can be no assurance that the actual
results or developments anticipated by the Company will be realized or, even if
substantially realized, that they will have the expected effects on its business
or operations. Among the factors that could cause actual results to differ
materially from the Company's expectations are general economic conditions,
inherent uncertainties in interpreting engineering data, operating hazards,
delays or cancellations of drilling operations for a variety of reasons,
competition, fluctuations in oil and gas prices, the ability of the Company to
successfully integrate the business and operations of acquired companies,
government regulations and other factors including but not limited to those set
forth among the risk factors noted below or in the description of the Company's
business in Item 1 of this report. All subsequent oral and written forward
looking statements attributable to the Company or persons acting on its behalf
are expressly qualified in their entirety by these factors. The Company assumes
no obligation to update any of these statements.

RISK FACTORS

  Volatility of Oil and Gas Prices.  The Company's revenues, operating results
and future rate of growth are highly dependent upon the prices received for the
Company's oil and gas.  Historically, the markets for oil and gas have been
volatile and may continue to be volatile in the future.  Revenues generated from
the oil and gas operations of the Company will be highly dependent on the future
prices of oil and gas.  Various factors beyond the control of the Company will
affect prices of oil and gas, including but not limited to the worldwide and
domestic supplies of oil and gas, the ability of the members of the Organization
of  Petroleum Exporting Countries to agree to and maintain oil price and
production controls, political instability or armed conflict in oil-producing
regions, the price and level of foreign imports, the level of consumer demand,
the price and availability of alternative fuels, the availability of pipeline
capacity, weather conditions,  domestic and foreign governmental regulations and
taxes and the overall economic environment.  On March 10, 1998, the posted price
for West Texas Intermediate Crude was $12.00 per Bbl, as posted by the Company's
major purchaser.  On December 31, 1997, the posted price for West Texas
Intermediate Crude was $15.50 per Bbl, as posted by the Company's major
purchaser.  The Company is unable to predict the long-term effects of these and
other conditions on the prices of oil.  Moreover, it is possible that prices for
any oil the Company produces will be lower than current prices received by the
Company.  Historically, the market for natural gas has been volatile and is
likely to continue to be volatile in the future.  Prices for natural gas are
subject to wide fluctuation in response to market uncertainty, changes in supply
and demand and a variety of additional factors, all of which are beyond the
Company's control.  On March 10, 1998, estimated natural gas prices received by
the Company at the wellhead averaged $1.52 per Mcf.  On December 31, 1997,
natural gas prices received by the Company at the wellhead averaged $1.84 per
Mcf.  Lower oil and gas prices may reduce the amount of oil and gas the Company
can produce economically.  Any significant decline in the price of oil or gas
would adversely affect the Company's revenues and operating income and may
require a reduction in the carrying value of the Company's oil and gas
properties.

  Uncertainty of Reserve Information and Future Net Revenue Estimates.  There
are numerous uncertainties inherent in estimating quantities of proved reserves
and their values, including many factors beyond the Company's control.  The
reserve information set forth in this report represents estimates only.
Although the Company believes such estimates to be reasonable, reserve estimates
are imprecise and should be expected to change as additional information becomes
available.

  Estimates of oil and gas reserves, by 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 are difficult to
measure.  The accuracy of any reserve estimate is a function of the quality of
available data, engineering and geological interpretation and judgment.
Estimates of economically recoverable oil and gas reserves and of future net
cash flows necessarily depend upon a number of variable factors and assumptions,
such as historical production from the area compared with production from other
producing areas, the assumed effects of regulations by governmental agencies and
assumptions concerning future oil and gas prices, future operating costs,
severance and excise taxes, development costs and workover and remedial costs,
all of which may in fact vary considerably from actual results.  For these
reasons, 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 may vary substantially.
Moreover, there can be no assurance that the Company's reserves will ultimately
be produced or that the Company's proved undeveloped reserves will be developed
within the periods anticipated. Any significant variance in the assumptions
could materially affect the estimated quantity

                                      -22-
<PAGE>

and value of the Company's reserves. Actual production, revenues and
expenditures with respect to the Company's reserves will likely vary from
estimates, and such variances may be material.

  The PV-10 referred to in this report should not be construed as the current
market value of the estimated oil and gas reserves attributable to the Company's
properties.  In accordance with applicable requirements, the estimated
discounted future net cash flows from proved reserves are generally based on
prices and costs as of the date of the estimate, whereas actual future prices
and costs may be materially higher or lower.  Actual future net cash flows also
will be affected by factors such as the amount and timing of actual production,
supply and demand for oil and gas, curtailments or increases in consumption by
gas purchasers and changes in governmental regulations or taxation.  The timing
of actual future net cash flows from proved reserves, and thus their actual
present value, will be affected by the timing of both the production and the
incurrence of expenses in connection with development and production of oil and
gas properties.  In addition, the 10% discount factor, which is required to be
used to calculate discounted future net cash flows for reporting purposes, is
not necessarily the most appropriate discount factor based on interest rates in
effect from time to time and risks associated with the Company or the oil and
gas industry in general.

  Limited Operating History; Rapid Growth.  The Company, which began operations
in March 1995, has a brief operating history upon which the Company's
stockholders may base their evaluation of the Company's performance.  As a
result of its brief operating history and rapid growth, the operating results
from the Company's historical periods are not readily comparable and may not be
indicative of future results.  There can be no assurance that the Company will
continue to experience growth in, or maintain its current level of, revenues,
oil and gas reserves or production.

  The Company's rapid growth has placed significant demands on its
administrative, operational and financial resources.  Any future growth of the
Company's oil and gas reserves, production and operations would place
significant further demands on the Company's financial, operational and
administrative resources.  The Company's future performance and profitability
will depend in part on its ability to successfully integrate the administrative
and financial functions of acquired properties and companies into the Company's
operations, to hire additional personnel and to implement necessary enhancements
to its management systems to respond to changes in its business.  There can be
no assurance that the Company will be successful in these efforts.  The
inability of the Company to integrate acquired properties and companies, to hire
additional personnel or to enhance its management systems could have a material
adverse effect on the Company's results of operations.

  Substantial Capital Requirements.  The Company makes, and will continue to
make, substantial capital expenditures for the exploration, development,
acquisition and production of its oil and gas reserves.  The Company intends to
finance such capital expenditures primarily with funds provided by operations
and borrowings under its $250 million Credit Agreement, which currently has a
borrowing base of $165 million, against which $92.6 million had been drawn as of
March 10, 1998.  In 1995, the Company spent approximately $40.6 million on its
first large property acquisition, in 1996, approximately $135.7 million on its
second large property acquisition, and in 1997, approximately $54.4 million on
its third large property acquisition.  In 1997, the Company issued (i) 5,486,734
shares of Common Stock in connection with the acquisition of OEDC, which focuses
on the exploration, development and production of natural gas and on natural gas
gathering, processing and marketing activities, primarily in the Gulf of Mexico,
and (ii) 899,965 shares of Common Stock in connection with the acquisition of
Carrollton Resources, L.L.C., a small independent energy company engaged in the
exploration and development of onshore oil and gas properties located primarily
in the Gulf Coast region.  The Company's direct capital expenditures for oil and
gas producing activities, excluding property acquisitions, were $46.1 million
and $12.6 million for the years ended December 31, 1997 and 1996, respectively,
and $2.0 million for the nine months ended December 31, 1995.

  If revenues decrease as a result of lower oil or gas prices or otherwise, the
Company may have limited ability to expend the capital necessary to replace its
reserves or to maintain production at current levels, resulting in a decrease in
production over time.  If the Company's cash flow from operations and
availability under the Credit Agreement are not sufficient to satisfy its
capital expenditure requirements, there can be no assurance that additional debt
or equity financing will be available to meet these requirements.

                                      -23-
<PAGE>

   Reserve Replacement Risk.  The Company's future success depends upon its
ability to find, develop or acquire additional oil and gas reserves that are
economically recoverable.  The proved reserves of the Company will generally
decline as reserves are depleted, except to the extent that the Company conducts
successful exploration or development activities or acquires properties
containing proved reserves, or both.  In order to increase reserves and
production, the Company must continue its development and exploration drilling
and recompletion programs or undertake other replacement activities.  The
Company's current strategy includes increasing its reserve base through
acquisitions of producing properties, continued exploitation of its existing
properties and exploration of new and existing properties.  There can be no
assurance, however, that the Company's planned development and exploration
projects and acquisition activities will result in significant additional
reserves or that the Company will have continuing success drilling productive
wells at low finding and development costs.  Furthermore, while the Company's
revenues may increase if prevailing oil and gas prices increase significantly,
the Company's finding costs for additional reserves could also increase.

  Drilling and Operating Risks.  Drilling activities are subject to many risks,
including well blow outs, cratering, uncontrollable flows of oil, natural gas or
well fluids, fires, formations with abnormal pressures, pollution, releases of
toxic gases and other environmental hazards and risks, any of which could result
in substantial losses to the Company.  The Company's offshore operations are
also subject to the additional hazards of marine operations such as severe
weather, capsizing and collision.  In addition, the Company incurs the risk that
no commercially productive reservoirs will be encountered through its drilling
operations.  There can be no assurance that new wells drilled by the Company
will be productive or that the Company will recover all or any portion of its
investment in wells drilled.  Drilling for oil and gas may involve unprofitable
efforts, not only from dry wells, but from wells that are productive but do not
produce net reserves to return a profit after drilling, operating and other
costs.  The cost of drilling, completing and operating wells is often uncertain.
The Company's drilling operations may be curtailed, delayed or canceled as a
result of numerous factors, many of which are beyond its control, including
economic conditions, mechanical problems, title problems, weather conditions,
compliance with governmental requirements and shortages and delays in the
delivery of equipment and services.

  Acquisition Risks.  The Company's rapid growth since its inception in March
1995 has been largely the result of acquisitions of producing properties.  The
Company expects to continue to evaluate and pursue acquisition opportunities
available on terms management considers favorable to the Company.  The
successful acquisition of producing properties involves an assessment of
recoverable reserves, future oil and gas prices, operating costs, potential
environmental and other liabilities and other factors beyond the Company's
control.  This assessment is necessarily inexact and its accuracy is inherently
uncertain.  In connection with such an assessment of the subject properties, the
Company performs a review it believes to be generally consistent with industry
practices.  This review, however, will not reveal all existing or potential
problems, nor will it permit a buyer to become sufficiently familiar with the
properties to assess fully their deficiencies and capabilities.  Inspections may
not be performed on every well, and structural and environmental problems are
not necessarily observable even when an inspection is undertaken.  The Company
generally assumes preclosing liabilities, including environmental liabilities,
and generally acquires interests in the properties on an "as is" basis.  With
respect to its acquisitions to date, the Company has no material commitments for
capital expenditures to comply with existing environmental requirements.  There
can be no assurance that the Company's acquisitions will be successful.  Any
unsuccessful acquisition could have a material adverse effect on the Company.

  Risk of Hedging Activities.  The Company's use of energy swap arrangements and
other financial instruments to reduce its sensitivity to oil and gas price
volatility is subject to a number of risks.  If the Company's reserves are not
produced at the rates estimated by the Company due to inaccuracies in the
reserve estimation process, operational difficulties or regulatory limitations,
the Company would be required to satisfy obligations it may have under fixed
price sales and hedging contracts on potentially unfavorable terms without the
ability to hedge that risk through sales of comparable quantities of its own
production.  Further, the terms under which the Company enters into fixed price
sales and hedging contracts are based on assumptions and estimates of numerous
factors such as cost of production and pipeline and other transportation costs
to delivery points.  Substantial variations between the assumptions and
estimates used by the Company and actual results experienced could materially
adversely affect the Company's anticipated profit margins and its ability to
manage the risk associated with fluctuations in oil and gas prices.
Additionally, fixed price sales and hedging contracts limit the benefits the
Company will realize if actual prices rise above the contract prices. In
addition, fixed price sales and hedging contracts are subject to the risk that
the counter-party may prove unable or unwilling to perform its obligations under
such contracts. Any significant nonperformance could have a material adverse

                                      -24-
<PAGE>

financial effect on the Company. As of December 31, 1997, 6,196 MMcfe of the
Company's 1998 production was subject to hedging contracts.

  Marketability of Production.  The marketability of the Company's production
depends in part upon the availability, proximity and capacity  of natural gas
gathering systems, pipelines and processing facilities.  Most of the Company's
natural gas is delivered through gas gathering systems and gas pipelines that
are not owned by the Company.  Federal and state regulation of oil and gas
production and transportation, tax and energy policies, changes in supply and
demand and general economic conditions all could adversely affect the Company's
ability to produce and market its oil and gas.  Any dramatic change in market
factors could have a material adverse effect on the Company.

  Compliance with Environmental Regulations.  The Company's operations are
subject to complex and constantly changing environmental laws and regulations
adopted by federal, state and local governmental authorities.  The
implementation of new, or the modification of existing, laws or regulations
could have a material adverse affect on the Company.  Discharge of oil, gas or
other pollutants into the air, soil or water may give rise to significant
liabilities on the part of the Company to the government and third parties and
may require the Company to incur substantial costs of remediation.  Moreover,
the Company has agreed to indemnify sellers of producing properties purchased in
each of its substantial acquisitions against environmental claims associated
with such properties.  No assurance can be given that existing environmental
laws or regulations, as currently interpreted or reinterpreted in the future, or
future laws or regulations will not materially adversely affect the results of
operations or financial condition of Company or that material indemnity claims
will not arise against the Company with respect to properties acquired by it.

  Dependance on Key Personnel.  The Company's success has been and will continue
to be highly dependent on Jack Hightower, its Chairman of the Board and Chief
Executive Officer, and a limited number of other senior management personnel.
Loss of the services of Mr. Hightower or any of those other individuals could
have a material adverse effect on the Company's operations.  The Company
maintains a $3.0 million key man life insurance policy on the life of Mr.
Hightower, but no other senior management personnel.  In addition, as a result
of the Company's acquisitions, the Company has significantly increased its
number of employees and employed 94 employees at December 31, 1997.  As the
Company increases its workforce, it will face competition for such personnel
from other companies.  There can be no assurance that the Company will be
successful in hiring or retaining key personnel.  The Company's failure to hire
additional personnel or retain its key personnel could have a material adverse
effect on the Company.

  Competition.  The Company operates in the highly competitive areas of oil and
gas exploration, development, acquisition and production with other companies,
many of which have substantially larger financial resources, staffs and
facilities.  In seeking to acquire desirable producing properties or new leases
for future exploration and in marketing its oil and gas production, the Company
faces intense competition from both major and independent oil and gas companies.
Many of these competitors have financial and other resources substantially in
excess of those available to the Company.  This highly competitive environment
could have a material adverse affect on the Company.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

  The Company's Consolidated Financial Statements required by this item are
included on the pages immediately following the Index to Consolidated Financial
Statements appearing on page F-1.


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

  None.

                                      -25-
<PAGE>

                                   PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

  The information required by this item is incorporated by reference to
information under the caption "Proposal 1 - Election of Directors" and to the
information under the caption "Compliance with Section 16(a) of the Securities
Exchange Act of 1934" in the Company's definitive Proxy Statement (the "1998
Proxy Statement") for its annual meeting of stockholders to be held on or about
May 28, 1998.  The 1998 Proxy Statement will be filed with the Securities and
Exchange Commission (the "Commission") not later than 120 days subsequent to
December 31, 1997.

  Pursuant to Item 401(b) of Regulation S-K, the information required by this
item with respect to executive officers of the Company is set forth in Part I of
this report.


ITEM 11.  EXECUTIVE COMPENSATION

  The information required by this item is incorporated herein by reference to
the 1998 Proxy Statement, which will be filed with the Commission not later than
120 days subsequent to December 31, 1997.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

  The information required by this item is incorporated herein by reference to
the 1998 Proxy Statement, which will be filed with the Commission not later than
120 days subsequent to December 31, 1997.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTION

  The information required by this item is incorporated herein by reference to
the 1998 Proxy Statement, which will be filed with the Commission not later than
120 days subsequent to December 31, 1997.


                                    PART IV

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

(a)  1.  Consolidated Financial Statements:

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

     2.  Financial Statement Schedules:

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

     3.  Exhibits:  The following documents are filed as exhibits to this
         report:

                                      -26-
<PAGE>

EXHIBIT
NUMBER                         DESCRIPTION OF DOCUMENT
-------

    2.1  -- Exchange Agreement and Plan of Reorganization (filed as Exhibit 2.1
            to the Company's Registration Statement on Form S-1, Registration
            No. 333-14029, and incorporated herein by reference).

    2.2  -- Amended and Restated Agreement and Plan of Merger, dated as of
            November 6, 1997, among Titan Exploration, Inc., Titan Offshore,
            Inc. and Offshore Energy Development Corporation (included as
            Appendix I to the Joint Proxy Statement/Prospectus forming a part of
            the Company's Registration Statement on S-4, Registration No. 333-
            40215, and incorporated herein by reference).

    2.3  -- Agreement and Plan of Merger, dated as of November 4, 1997, among
            Titan Exploration, Inc., Titan Bayou Bengal Holdings, Inc. and
            Carrollton Resources, L.L.C. (filed as Exhibit 2.3 to the Company's
            Registration Statement on S-4 Registration No. 333-40215
            incorporated herein by reference).

    3.1  -- Certificate of Incorporation (filed as Exhibit 3.1 to the Company's
            Registration Statement on Form S-1, Registration No. 333-14029, and
            incorporated herein by reference).

  3.1.1  -- Certificate of Amendment of Certificate of Incorporation (filed as
            Exhibit 3.1.1 to the Company's Registration Statement on Form S-1,
            Registration No. 333-14029, and incorporated herein by reference).

    3.2  -- Bylaws (filed as Exhibit 3.2 to the Company's Registration Statement
            on Form S-1, Registration No. 333-14029, and incorporated herein by
            reference).

   10.1  -- Agreement of Limited Partnership, dated March 31, 1995, between
            Titan Resources I, Inc., as general partner, and Natural Gas
            Partners, L.P., Natural Gas Partners II, L.P. and Jack Hightower, as
            limited partners (filed as Exhibit 10.1 to the Company's
            Registration Statement on Form S-1, Registration No. 333-14029, and
            incorporated herein by reference).

 10.1.1  -- Amendment No. 1 to the Agreement of Limited Partnership of Titan
            Resources, L.P., dated December 11, 1995, by and among Titan
            Resources I, Inc., as the general partner, and a Majority Interest
            of the Limited Partners (filed as Exhibit 10.1.1 to the Company's
            Registration Statement on Form S-1, Registration No. 333-14029, and
            incorporated herein by reference).

 10.1.2  -- Amendment No. 2 to the Agreement of Limited Partnership of Titan
            Resources, L.P., dated September 27, 1996, by and among Titan
            Resources I, Inc., as the general partner, and a Majority Interest
            of the Limited Partners (filed as Exhibit 10.1.2 to the Company's
            Registration Statement on Form S-1, Registration No. 333-14029, and
            incorporated herein by reference).

 10.1.3  -- Amendment No. 3 to the Agreement of Limited Partnership of Titan
            Resources, L.P., dated September 30, 1996, by and among Titan
            Resources I, Inc., as the general partner, and a Majority Interest
            of the Limited Partners (filed as Exhibit 10.1.3 to the Company's
            Registration Statement on Form S-1, Registration No. 333-14029, and
            incorporated herein by reference).

   10.2  -- Amended and Restated Voting and Shareholders Agreement, dated
            December 11, 1995, by and among Titan Resources I, Inc., Jack
            Hightower, Natural Gas Partners, L.P., Natural Gas Partners II,
            L.P., Joint Energy Development Investments Limited Partnership and
            First Union Corporation (filed as Exhibit 10.2 to the Company's
            Registration Statement on Form S-1, Registration No. 333-14029, and
            incorporated herein by reference).

   10.3  -- Amended and Restated Registration Rights Agreement, dated September
            30, 1996, by and among Titan Exploration, Inc., Jack Hightower,
            Natural Gas Partners, L.P., Natural Gas Partners II, L.P., Joint
            Energy Development Investments Limited Partnership, First Union
            Corporation and Selma International Investment Limited (filed as
            Exhibit 10.3 to the Company's Registration Statement on Form S-1,
            Registration No. 333-14029, and incorporated herein by reference).

   10.4  -- Financial Advisory Services Contract, dated March 31, 1995, by and
            between Titan Resources, L.P. and Natural Gas Partners, L.P. and
            Natural Gas Partners II, L.P. (filed as Exhibit 10.4 to the
            Company's Registration Statement on Form S-1, Registration No. 333-
            14029, and incorporated herein by reference).

 10.4.1  -- First Amendment to Financial Advisory Services Contract, dated
            December 11, 1995, between Titan Resources, L.P., Natural Gas
            Partners, L.P. and Natural Gas Partners II, L.P. (filed as Exhibit
            10.4.1 to the Company's Registration Statement on Form S-1,
            Registration No. 333-14029, and incorporated herein by reference).

                                      -27-
<PAGE>

EXHIBIT
NUMBER                         DESCRIPTION OF DOCUMENT
-------

   10.5  -- Employment Agreement, dated September 30, 1996, by and between Titan
            Exploration, Inc., Titan Resources I, Inc. and Jack Hightower (filed
            as Exhibit 10.5 to the Company's Registration Statement on Form S-1,
            Registration No. 333-14029, and incorporated herein by reference).

 10.6.1  -- Form of Confidentiality and Non-compete Agreement among Titan
            Resources, L.P., Titan Resources I, Inc. and certain of the
            Registrant's executive officers (filed as Exhibit 10.6.1 to the
            Company's Registration Statement on Form S-1, Registration No. 333-
            14029, and incorporated herein by reference).

 10.6.2  -- Form of Confidentiality and Non-compete Agreement among the
            Registrant, Titan Resources I, Inc. and certain of the Registrant's
            executive officers (filed as Exhibit 10.6.2 to the Company's
            Registration Statement on Form S-1, Registration No. 333-14029, and
            incorporated herein by reference).

   10.7  -- Titan Resources, L.P. Option Plan (filed as Exhibit 10.7 to the
            Company's Registration Statement on Form S-1, Registration No. 333-
            14029, and incorporated herein by reference).

 10.7.1  -- Form of Option Agreement (A Option) (filed as Exhibit 10.7.1 to the
            Company's Registration Statement on Form S-1, Registration No. 333-
            14029, and incorporated herein by reference).

 10.7.2  -- Form of Option Agreement (B Option) (filed as Exhibit 10.7.2 to the
            Company's Registration Statement on Form S-1, Registration No. 333-
            14029, and incorporated herein by reference).

 10.7.3  -- Form of Option Agreement (C Option) (filed as Exhibit 10.7.3 to the
            Company's Registration Statement on Form S-1, Registration No. 333-
            14029, and incorporated herein by reference).

 10.7.4  -- Form of Option Agreement (D Option) (filed as Exhibit 10.7.4 to the
            Company's Registration Statement on Form S-1, Registration No. 333-
            14029, and incorporated herein by reference).

   10.8  -- Titan Exploration, Inc., Option Plan (filed as Exhibit 10.8 to the
            Company's Registration Statement on Form S-1, Registration No. 333-
            14029, and incorporated herein by reference).

 10.8.1  -- Form of Option Agreement (A Option) (filed as Exhibit 10.8.1 to the
            Company's Registration Statement on Form S-1, Registration No. 333-
            14029, and incorporated herein by reference).

 10.8.2  -- Form of Option Agreement (B Option) (filed as Exhibit 10.8.2 to the
            Company's Registration Statement on Form S-1, Registration No. 333-
            14029, and incorporated herein by reference).

 10.8.3  -- Form of Option Agreement (C Option) (filed as Exhibit 10.8.3 to the
            Company's Registration Statement on Form S-1, Registration No. 333-
            14029, and incorporated herein by reference).

 10.8.4  -- Form of Option Agreement (D Option) (filed as Exhibit 10.8.4 to the
            Company's Registration Statement on Form S-1, Registration No. 333-
            14029, and incorporated herein by reference).

   10.9  -- 1996 Incentive Plan (filed as Exhibit 10.9 to the Company's
            Registration Statement on Form S-1, Registration No. 333-14029, and
            incorporated herein by reference).

  10.10  -- Stock and Unit Purchase Agreement, dated December 11, 1995, by and
            among Joint Energy Development Investments Limited Partnership,
            Titan Resources I, Inc. and Titan Resources, L.P. (filed as Exhibit
            10.10 to the Company's Registration Statement on Form S-1,
            Registration No. 333-14029, and incorporated herein by reference).

10.10.1  -- Designation Agreement, dated December 11, 1995, by and between Titan
            Resources, L.P. and Joint Energy Development Investments Limited
            Partnership (filed as Exhibit 10.10.1 to the Company's Registration
            Statement on Form S-1, Registration No. 333-14029, and incorporated
            herein by reference).

  10.11  -- Stock and Unit Purchase Agreement, dated December 11, 1995, by and
            among First Union Corporation, Titan Resources I, Inc. and Titan
            Resources, L.P. (filed as Exhibit 10.11 to the Company's
            Registration Statement on Form S-1, Registration No. 333-14029, and
            incorporated herein by reference).

                                      -28-
<PAGE>

EXHIBIT
NUMBER                         DESCRIPTION OF DOCUMENT
-------

10.11.1  -- Designation Agreement, dated December 11, 1995, by and between Titan
            Resources, L.P. and First Union Corporation (filed as Exhibit
            10.11.1 to the Company's Registration Statement on Form S-1,
            Registration No. 333-14029, and incorporated herein by reference).

  10.12  -- Advisory Services Contract, dated December 11, 1995, between Titan
            Resources, L.P. and ECT Securities Corp. (filed as Exhibit 10.12 to
            the Company's Registration Statement on Form S-1, Registration No.
            333-14029, and incorporated herein by reference).

  10.13  -- Amended and Restated Credit Agreement, dated October 31, 1996, among
            Titan Resources, L.P. and Texas Commerce Bank National Association,
            as Agent, and Financial Institutions now or hereafter parties hereto
            (filed as Exhibit 10.13 to the Company's Registration Statement on
            Form S-1, Registration No. 333-14029, and incorporated herein by
            reference).

  10.14  -- Agreement of Sale and Purchase, dated April 19, 1995, between
            Enertex, Inc. and Titan Resources, L.P. (filed as Exhibit 10.14 to
            the Company's Registration Statement on Form S-1, Registration No.
            333-14029, and incorporated herein by reference).

  10.15  -- Agreement of Sale and Purchase, dated April 19, 1995, between Staley
            Gas Co., Inc. and Titan Resources, L.P. (filed as Exhibit 10.15 to
            the Company's Registration Statement on Form S-1, Registration No.
            333-14029, and incorporated herein by reference).

  10.16  -- Administrative Services Contract, dated March 31, 1995, between
            Staley Operating Co. and Titan Resources, L.P. (filed as Exhibit
            10.16 to the Company's Registration Statement on Form S-1,
            Registration No. 333-14029, and incorporated herein by reference).

  10.17  -- Services Agreement, dated April 1, 1995, between Titan Resources I,
            Inc. and Titan Resources, L.P. (filed as Exhibit 10.17 to the
            Company's Registration Statement on Form S-1, Registration No. 333-
            14029, and incorporated herein by reference).

  10.18  -- Office Lease, dated April 10, 1997, between Fasken Center, Ltd. and
            Titan Exploration, Inc. (filed as Exhibit 10.17 to the Company's
            Registration Statement on Form S-4, Registration No. 333-40215
            incorporated herein by reference).

  10.19  -- Purchase and Sale Agreement, dated October 12, 1995, by and between
            Anadarko Petroleum Corporation and Titan Resources, L.P. (filed as
            Exhibit 10.19 to the Company's Registration Statement on Form S-1,
            Registration No. 333-14029, and incorporated herein by reference).

  10.20  -- Amendment No. 1 to Purchase and Sale Agreement, dated December 11,
            1995, by and between Anadarko Petroleum Corporation and Titan
            Resources, L.P. (filed as Exhibit 10.20 to the Company's
            Registration Statement on Form S-1, Registration No. 333-14029, and
            incorporated herein by reference).

  10.21  -- Purchase and Sale Agreement, dated July 12, 1996, by and between
            Mobil Producing Texas & New Mexico Inc. and Titan Resources, L.P.
            (filed as Exhibit 10.21 to the Company's Registration Statement on
            Form S-1, Registration No. 333-14029, and incorporated herein by
            reference).

  10.22  -- Unit Purchase and Exchange Agreement, dated September 27, 1996, by
            and between Selma International Investment Limited and Titan
            Resources, L.P. (filed as Exhibit 10.22 to the Company's
            Registration Statement on Form S-1, Registration No. 333-14029, and
            incorporated herein by reference).

  10.23  -- Form of Indemnity Agreement between the Registrant and each of its
            executive officers (filed as Exhibit 10.23 to the Company's
            Registration Statement on Form S-1, Registration No. 333-14029, and
            incorporated herein by reference).

  10.24  -- Advisory Director Agreement, dated September 30, 1996, by and
            between Titan Exploration, Inc. and Joint Energy Development
            Investments Limited Partnership (filed as Exhibit 10.24 to the
            Company's Registration Statement on Form S-1, Registration No. 333-
            14029, and incorporated herein by reference).

                                      -29-
<PAGE>

EXHIBIT
NUMBER                         DESCRIPTION OF DOCUMENT
-------

  10.25  -- First Amendment to Amended and Restated Credit Agreement, dated May
            12, 1997, among Titan Resources, L.P., The Chase Manhattan Bank, as
            Administrative Agent, and Financial Institutions now or thereafter
            parties thereto (filed as Exhibit 10.13.1 to the Company's Form 10-Q
            for the quarterly period ended June 30, 1997 and incorporated herein
            by reference).

  10.26  -- Form of Guaranty Agreement among The Chase Manhattan Bank, as
            Administrative Agent, Financial Institutions now or thereafter
            parties thereto and Titan Exploration, Inc., Titan Resources I, Inc.
            and Titan Resources Holdings, Inc. (filed as Exhibit 10.13.2 to the
            Company's Form 10-Q for the quarterly period ended June 30, 1997 and
            incorporated herein by reference).

  10.27  -- Second Amendment to Amended and Restated Credit Agreement, dated
            August 12, 1997, effective as of April 1, 1997, by and among Titan
            Resources, L.P., The Chase Manhattan Bank, as Administrative Agent,
            and Financial Institutions now or thereafter parties thereto (filed
            as Exhibit 10.13.3 to the Company's Form 10-Q for the quarterly
            period ended September 30, 1997 and incorporated herein by
            reference).

  10.28  -- Form of Stockholders Voting Agreement, dated November 6, 1997,
            between Titan Exploration, Inc. and the executive officers and
            directors of Offshore Energy Development Corporation (filed as
            Exhibit 10.24 to the Company's Registration Statement on S-4,
            Registration No. 333-40215, and incorporated herein by reference).

  10.29  -- Stockholders Voting Agreement, dated November 6, 1997, between Titan
            Exploration, Inc. and Natural Gas Partners, L.P. (filed as Exhibit
            10.25 to the Company's Registration Statement on S-4, Registration
            No. 333-40215, and incorporated herein by reference).

  10.30  -- Master Promissory Note, dated March 6, 1997, between Titan
            Resources, L.P. and Texas Commerce Bank National Association (filed
            as Exhibit 10.25 to the Company's Form 10-Q for the quarterly period
            ended June 30, 1997 and incorporated herein by reference).

  10.31  -- Letter Agreement, dated November 6, 1997, among Titan Exploration,
            Inc. and certain stockholders of Titan Exploration, Inc. (filed as
            Exhibit 10.29 to the Company's Registration Statement on S-4,
            Registration No. 333-40215, and incorporated herein by reference).

     21  -- Subsidiaries of the Registrant.

   27.1  -- Financial Data Schedule.

   27.2  -- Restated Financial Data Schedule.

   27.3  -- Restated Financial Data Schedule.

(b)  The following reports on Form 8-K were filed by the Company during the last
     quarter of the period covered by this Annual Report on Form 10-K:

         Form 8-K dated December 29, 1997 (Date of Event: December 12, 1997),
         which reported the consummation of the OEDC Acquisition, the Carrollton
         Acquisition and the Pioneer Acquisition.

                                      -30-
<PAGE>

                         GLOSSARY OF OIL AND GAS TERMS


  The following are abbreviations and definitions of terms commonly used in the
oil and gas industry and this report.  Unless otherwise indicated in this
report, natural gas volumes are stated at the legal pressure base of the state
or area in which the reserves are located and at 60 degrees Fahrenheit and in
most instances are rounded to the nearest major multiple.  BOEs are determined
using the ratio of six Mcf of natural gas to one Bbl of oil.

  "Bbl" means a barrel of 42 U.S. gallons of oil.

  "Bcf" means billion cubic feet of natural gas.

  "Bcfe" means billion cubic feet equivalent, determined using the ratio of six
Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids.

  "BOE" means barrels of oil equivalent.

  "Completion" means the installation of permanent equipment for the production
of oil or gas.

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

  "Exploratory well" means a well drilled to find and produce oil or gas in an
unproved area, to find a new reservoir in a field previously found to be
productive of oil or gas in another reservoir, or to extend a known reservoir.

  "Gross," when used with respect to acres or wells, refers to the total acres
or wells in which the Company has a working interest.

  "Horizontal drilling" means a drilling technique that permits the operator to
contact and intersect a larger portion of the producing horizon than
conventional vertical drilling techniques and can result in both increased
production rates and greater ultimate recoveries of hydrocarbons.

  "MBbls" means thousands of barrels of oil.

  "Mcf" means thousand cubic feet of natural gas.

  "Mcfe" means 1,000 cubic feet equivalent, determined using the ratio of six
Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids.

  "MMBbls" means millions of barrels of oil.

  "MMBOE" means millions of barrels of oil equivalent on a 6:1 basis.

  "MMcf" means million cubic feet of natural gas.

  "MMcfe" means million cubic feet equivalent, determined using the ratio of six
Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids.

  "Net," when used with respect to acres or wells, refers to gross acres of
wells multiplied, in each case, by the percentage working interest owned by the
Company.

  "Net production" means production that is owned by the Company less royalties
and production due others.

  "Oil" means crude oil or condensate.

                                      -31-
<PAGE>

   "Operator" means the individual or company responsible for the exploration,
development, and production of an oil or gas well or lease.

  "Present Value of Future Revenues" or "PV-10" means the pretax present value
of estimated future revenues to be generated from the production of proved
reserves calculated in accordance with SEC guidelines, net of estimated
production and future development costs, using prices and costs as of the date
of estimation without future escalation, without giving effect to non-property
related expenses such as general and administrative expenses, debt service and
depreciation, depletion and amortization, and discounted using an annual
discount rate of 10%.

  "Proved developed reserves" means reserves that can be expected to be
recovered through existing wells with existing equipment and operating methods.
Additional oil and gas expected to be obtained through the application of fluid
injection or other improved recovery techniques for supplementing the natural
forces and mechanisms of primary recovery will be included as "proved developed
reserves" only after testing by a pilot project or after the operation of an
installed program has confirmed through production response that increased
recovery will be achieved.

  "Proved reserves" means the estimated quantities of crude oil, natural gas,
and natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions, i.e., prices and costs as of
the date the estimate is made.  Prices include consideration of changes in
existing prices provided only by contractual arrangements, but not on
escalations based upon future conditions.

     i.  Reservoirs are considered proved if economic producibility is supported
   by either actual production or conclusive formation test.  The area of a
   reservoir considered proved includes (A) that portion delineated by drilling
   and defined by gas-oil and/or oil-water contacts, if any; and (B) the
   immediately adjoining portions not yet drilled, but which can be reasonably
   judged as economically productive on the basis of available geological and
   engineering data.  In the absence of information on fluid contacts, the
   lowest known structural occurrence of hydrocarbons controls the lower proved
   limit of the reservoir.

     ii.  Reserves which can be produced economically through application of
   improved recovery techniques (such as fluid injection) are included in the
   "proved" classification when successful testing by a pilot project, or the
   operation of an installed program in the reservoir, provides support for the
   engineering analysis on which the project or program was based.

     iii.  Estimates of proved reserves do not include the following:  (A) oil
   that may become available from known reservoirs but is classified separately
   as "indicated additional reserves"; (B) crude oil, natural gas, and natural
   gas liquids, the recovery of which is subject to reasonable doubt because of
   uncertainty as to geology, reservoir characteristics, or economic factors;
   (C) crude oil, natural gas, and natural gas liquids that may occur in
   undrilled prospects; and (D) crude oil, natural gas, and natural gas liquids
   that may be recovered from oil shales, coal, gilsonite and other such
   sources.

  "Proved undeveloped reserves" means reserves that are expected to be recovered
from new wells on undrilled acreage, or from existing wells where a relatively
major expenditure is required for recompletion.  Reserves on undrilled acreage
shall be limited to those drilling units offsetting productive units that are
reasonably certain of production when drilled.  Proved reserves for other
undrilled units can be claimed only where it can be demonstrated with certainty
that there is continuity of production from the existing productive formation.
Under no circumstances should estimates for proved undeveloped reserves be
attributable to any acreage for which an application of fluid injection or other
improved recovery technique is contemplated, unless such techniques have been
proved effective by actual tests in the area and in the same reservoir.

  "Recompletion" means the completion for production of an existing well bore in
another formation from that in which the well has been previously completed.

  "Reserves" means proved reserves.

                                      -32-
<PAGE>

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

  "3-D seismic" means seismic data that are acquired and processed to yield a
three-dimensional picture of the subsurface.

  "Tertiary recovery" means enhanced recovery methods for the production of oil
or gas.  Enhanced recovery of crude oil requires a means for displacing oil from
the reservoir rock, modifying the properties of the fluids in the reservoir
and/or the reservoir rock to cause movement of oil in an efficient manner, and
providing the energy and drive mechanism to force its flow to a production well.
The Company injects chemicals or energy as required for displacement and for the
control of flow rate and flow pattern in the reservoir, and a fluid drive is
provided to force the oil toward a production well.

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

  "Workover" means operations on a producing well to restore or increase
production.

                                      -33-
<PAGE>

                                   SIGNATURES

  Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, hereunder duly authorized, as of March 10, 1998.


                                        TITAN EXPLORATION, INC.

                                        Registrant


                                        By:     /s/ Jack Hightower
                                           -------------------------------------
                                           Jack Hightower
                                           President and Chief Executive Officer


  Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below as of March 10, 1998, by the following persons on
behalf of the Registrant and in the capacity indicated.


 /s/ Jack Hightower
------------------------------------------------------------
Jack Hightower
President, Chief Executive Officer and Chairman of the Board



 /s/ George G. Staley
------------------------------------------------------------
George G. Staley
Executive Vice President, Exploration and Director



 /s/ William K. White
------------------------------------------------------------
William K. White
Vice President, Finance and Chief Financial Officer



 /s/ David R. Albin
------------------------------------------------------------
David R. Albin
Director



 /s/ Kenneth A. Hersh
------------------------------------------------------------
Kenneth A. Hersh
Director



 /s/ William J. Vaughn, Jr.
------------------------------------------------------------
William J. Vaughn, Jr.
Director

                                      -34-
<PAGE>

       ITEM 8.  CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                                                                            Page
                                                                            ----
Consolidated Financial Statements of Titan Exploration, Inc.

  Independent Auditors' Report                                              F-2

  Consolidated Balance Sheets as of December 31, 1997 and 1996              F-3

  Consolidated Statements of Operations for the years ended December 31,
       1997 and 1996 and the period March 31, 1995 (date of inception)
       through December 31, 1995                                            F-4

  Consolidated Statements of Stockholders' Equity and Predecessor
       Capital for the year ended December 31, 1997 and 1996 and the
       period March 31, 1995 (date of inception) through December 31,
       1995                                                                 F-5

  Consolidated Statements of Cash Flows for the year ended December 31,
       1997 and 1996 and the period March 31, 1995 (date of inception)
       through December 31, 1995                                            F-6

  Notes to Consolidated Financial Statements                                F-7



All schedules are omitted, as the required information is inapplicable or the
information is presented in the financial statements or related notes.

                                      F-1
<PAGE>

                          INDEPENDENT AUDITORS' REPORT


The Board of Directors and Stockholders
Titan Exploration, Inc.


We have audited the consolidated financial statements of Titan Exploration, Inc.
(the "Company") as listed in the accompanying index.  These consolidated
financial statements are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Titan Exploration,
Inc. as of December 31, 1997 and 1996, and the results of their operations and
their cash flows for the years ended December 31, 1997 and 1996 and the period
from March 31, 1995 (date of inception) through December 31, 1995, in conformity
with generally accepted accounting principles.



                                     KPMG PEAT MARWICK LLP

Midland, Texas
March 6, 1998

                                      F-2
<PAGE>

                            TITAN EXPLORATION, INC.

                          Consolidated Balance Sheets
                       (in thousands, except share data)

<TABLE>
<CAPTION>
                                                                                                   December 31,
                                                                                              -----------------------
                                      ASSETS                                                      1997        1996
                                                                                              ----------    ---------
<S>                                                                                           <C>           <C>
Current assets:
  Cash and cash equivalents                                                                     $  1,603    $  6,290
  Restricted investment                                                                            2,331         -
  Accounts receivable:
     Oil and gas                                                                                  13,663       8,533
     Other                                                                                         2,900         931
  Prepaid expenses and other current assets                                                        1,155         266
                                                                                                --------    --------
           Total current assets                                                                   21,652      16,020
                                                                                                --------    --------
 Property, plant and equipment, at cost:
  Oil and gas properties, using the successful efforts method of accounting                      366,105     195,686
  Other property and equipment                                                                     2,421         319
  Accumulated depletion, depreciation and amortization                                           (94,387)     (5,666)
                                                                                                --------    --------
                                                                                                 274,139     190,339
Investments in affiliates and others                                                              55,900         -

Other assets, net of accumulated amortization of $413 in 1997 and $203 in 1996                       892         820
                                                                                                --------    --------
                                                                                                $352,583    $207,179
                                                                                                ========    ========
                        LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable and accrued liabilities:
     Trade                                                                                      $ 16,421    $  7,112
     Accrued interest                                                                                307         -
     Other                                                                                         4,896         784
                                                                                                --------    --------
           Total current liabilities                                                              21,624       7,896
                                                                                                --------    --------
Long-term debt                                                                                    85,450       6,500
Other liabilities                                                                                  2,720       1,772
Deferred income tax payable                                                                       10,368       3,825
Stockholders' equity:
  Preferred Stock, $.01 par value, 10,000,000 shares authorized; none issued and outstanding         -           -
  Common Stock, $.01 par value, 60,000,000 shares authorized; 40,332,497 and 33,941,513
   shares issued and outstanding at December 31, 1997 and 1996, respectively                         403         339
  Additional paid-in capital                                                                     277,500     203,411
  Treasury stock, at cost; 55,000 shares at December 31, 1997                                       (504)        -
  Deferred compensation                                                                          (10,108)    (15,161)
  Retained deficit                                                                               (34,870)     (1,403)
                                                                                                --------    --------
          Total stockholders' equity                                                             232,421     187,186
                                                                                                --------    --------
Commitments and contingencies (Note 7)
                                                                                                $352,583    $207,179
                                                                                                ========    ========

</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-3
<PAGE>

                            TITAN EXPLORATION, INC.

                     Consolidated Statements of Operations
                (in thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                                                           Period
                                                                                                       March 31, 1995
                                                                                                     (date of inception)
                                                                           Year ended December 31,         through
                                                                          -------------------------     December 31,
                                                                              1997         1996             1995
                                                                          ------------  -----------  -------------------
<S>                                                                       <C>           <C>          <C>
Revenues -
  Oil and gas sales                                                          $ 73,827     $ 23,824        $   743
                                                                             --------     --------        -------
Expenses:
  Oil and gas production                                                       21,846        9,199            304
  General and administrative                                                    5,372        2,270          1,546
  Amortization of stock option awards                                           5,053        1,839            576
  Exploration and abandonment                                                   3,055          184            490
  Depletion, depreciation and amortization                                     19,972        5,789            299
  Impairment of long-lived assets                                              68,997          -              -
                                                                             --------     --------        -------
        Total expenses                                                         124,295       19,281         3,215
                                                                             --------     --------        -------
        Operating income (loss)                                                (50,468)       4,543        (2,472)
                                                                             --------     --------        -------
Other income (expense):
  Interest income                                                                 190          424            699
  Interest expense                                                             (1,524)      (2,965)           (97)
  Gain (loss) on sale of assets                                                    58          (65)           244
  Management fees - affiliate                                                      10          144            242
  Loss on commodity derivative contracts                                          -            -             (147)
                                                                             --------      -------        -------
       Income (loss) before income taxes                                      (51,734)       2,081         (1,531)
                                                                             --------     --------        -------
 Income tax expense (benefit)                                                 (18,267)       3,484            -
                                                                             --------     --------        -------
       Net loss                                                              $(33,467)    $ (1,403)       $(1,531)
                                                                             ========     ========        =======
       Net loss per common share                                                $(.99)       $(.07)       $  (.11)
                                                                             ========     ========        =======
       Net loss per common share - assuming dilution                            $(.99)       $(.07)       $  (.11)
                                                                             ========     ========        =======
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-4
<PAGE>

                            TITAN EXPLORATION, INC.

    Consolidated Statements of Stockholders' Equity and Predecessor Capital
                                 (in thousands)


<TABLE>
<CAPTION>
                                                             Additional                                             Total
                                       Predecessor   Common    Paid-in    Treasury     Deferred      Retained   Stockholders'
                                         Capital     Stock     Capital      Stock    Compensation    Deficit        Equity
                                       ------------  ------  -----------  ---------  -------------  ----------  --------------
<S>                                    <C>           <C>     <C>          <C>        <C>            <C>         <C>
Balance at March 31, 1995               $      -      $ -     $     -     $   -      $      -        $    -        $    -
  Capital contributions                     35,540      -           -         -             -             -          35,540
  Deferred compensation                      3,072      -           -         -          (2,496)          -             576
  Net loss                                  (1,531)     -           -         -             -             -          (1,531)
                                          --------    ----     --------     -----      --------      --------      --------
Balance at December 31, 1995                37,081      -           -         -          (2,496)          -          34,585
  Sale of interest in predecessor            5,000      -           -         -             -             -           5,000
  September 30, 1996 stock plan                -        -        14,504       -         (14,504)          -             -
  Common stock issued                                  144      147,021       -             -             -         147,165
  Deferred compensation                        -        -           -         -           1,839           -           1,839
  Net loss                                     -        -           -         -             -          (1,403)       (1,403)
  Transfer of predecessor capital
   and issuance of common stock
   pursuant to the Offering                (42,081)    195       41,886       -             -             -             -
                                          --------    ----     --------     -----      --------      --------      --------
Balance at December 31,1996                    -       339      203,411       -         (15,161)       (1,403)      187,186
  Stock options exercised                      -        -             9       -             -             -               9
  Tax benefit of stock options
   exercised                                   -        -             6       -             -             -               6
  Common stock issued                          -        -           (41)      -             -             -             (41)
  Acquisitions for common stock                -        64       74,115       -             -             -          74,179
  Purchase of treasury stock                   -        -           -       (504)           -             -            (504)
  Deferred compensation                        -        -           -         -           5,053           -           5,053
  Net loss                                     -        -           -         -             -         (33,467)      (33,467)
                                          --------    ----     --------    -----       --------      --------      --------
Balance at December 31, 1997              $    -      $403     $277,500    $(504)      $(10,108)     $(34,870)     $232,421
                                          ========    ====     ========    =====       ========      ========      ========
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-5
<PAGE>

                            TITAN EXPLORATION, INC.

                     Consolidated Statements of Cash Flows
                                 (in thousands)

<TABLE>
<CAPTION>

                                                                                                           Period
                                                                                                       March 31, 1995
                                                                                                     (date of inception)
                                                                           Year ended December 31,         through
                                                                          -------------------------     December 31,
                                                                              1997          1996            1995
                                                                          -----------    ---------   -------------------
<S>                                                                       <C>            <C>          <C>
Cash flows from operating activities:
  Net loss                                                                  $ (33,467)   $  (1,403)       $ (1,531)
  Adjustments to reconcile net loss to net cash provided by (used in)
   operating activities:
       Depletion, depreciation and amortization                                19,972        5,789             299
       Impairment of long-lived assets                                         68,997          -               -
       Amortization of stock option awards                                      5,053        1,839             576
       Dry holes and abandonments                                               1,053           21             434
       (Gain) loss on sale of assets                                              (58)          65            (244)
       Deferred income taxes                                                  (18,267)       3,484             -
     Changes in assets and liabilities, excluding acquisitions:
       Increase in accounts receivable                                         (1,595)      (7,311)         (2,153)
       Increase in prepaid expenses and other current assets                     (463)        (145)           (121)
       Increase in other assets                                                   (96)        (516)           (724)
       Increase in accounts payable and accrued liabilities                     5,434        5,887           1,659
                                                                            ---------    ---------        --------
            Total adjustments                                                  80,030        9,113            (274)
                                                                            ---------    ---------        --------
            Net cash provided by (used in) operating activities                46,563        7,710          (1,805)
                                                                            ---------    ---------        --------
Cash flows from investing activities:
  Purchase of short-term investment                                               -            -            (5,000)
  Redemption of short-term investment                                             -          5,000             -
  Acquisition of oil and gas properties                                       (54,733)    (134,413)        (39,881)
  Payments for acquisition, net of cash acquired                                 (715)         -               -
  Additions to oil and gas properties                                         (57,568)     (15,488)         (3,788)
  Additions to other property and equipment                                    (1,361)        (218)           (101)
  Proceeds from sale of assets                                                     75          121           1,248
                                                                            ---------    ---------        --------
           Net cash used in investing activities                             (114,302)    (144,998)        (47,522)
Cash flows from financing activities:
  Proceeds from the issuance of long-term debt                                156,038      162,500          28,000
  Payments of long-term debt                                                  (92,450)    (176,000)         (8,000)
  Capital contributions                                                           -          3,700          35,540
  Proceeds from initial common stock offering                                     -        148,376             -
  Direct costs of initial common stock offering                                   (41)      (1,211)            -
  Exercise of stock options                                                         9          -               -
  Purchase of treasury stock                                                     (504)         -               -
                                                                            ---------    ---------        --------
           Net cash provided by financing activities                           63,052      137,365          55,540
                                                                            ---------    ---------        --------
           Net increase (decrease) in cash and cash equivalents                (4,687)          77           6,213
Cash and cash equivalents, beginning of period                                  6,290        6,213             -
                                                                            ---------    ---------        --------
Cash and cash equivalents, end of period                                    $   1,603    $   6,290        $  6,213
                                                                            =========    =========        ========
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-6


<PAGE>

                            TITAN EXPLORATION, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 1997, 1996 and 1995


(1)  ORGANIZATION AND NATURE OF OPERATIONS

   Titan Exploration, Inc. (the "Company") a Delaware corporation, was organized
on September 27, 1996 and began operations on September 30, 1996 with the
combination, pursuant to the terms of an Exchange Agreement and Plan of
Reorganization (the "Exchange Agreement"), of Titan Resources I, Inc. (the
"General Partner"), a Texas corporation, and Titan Resources, L.P. (the
"Partnership").  Under the exchange agreement, the limited partners of the
Partnership transferred all of their limited partnership interests to the
Company in exchange for 19,318,199 shares of common stock, and the shareholders
of the General Partner transferred all of the issued and outstanding stock of
that corporation to the Company in exchange for an aggregate of 231,814 shares
of common stock.  These transactions are referred to as the "Conversion."

   Prior to the Conversion, the Company had no issued or outstanding shares of
common stock and there was no public market for the General Partner's common
stock. All shares of the Company issued in the Conversion were issued to the
shareholders of the General Partner or to the limited partners of the
Partnership. The combination of the Company, the General Partner and the
Partnership is treated as a combination of entities under common control because
of the 100% commonality of control between the Company subsequent to the
Conversion and the Partnership prior to the Conversion. All partners of the
Partnership were party to the exchange of shares in the Conversion.
Consequently, the accompanying consolidated financial statements have given
effect to the Conversion as if it were a pooling of interests. Revenues and
costs arising from transactions between the two predecessor entities (the
General Partner and the Partnership) have been eliminated. The following table
sets forth revenues and net income with respect to the two predecessor entities
(in thousands):

<TABLE>
<CAPTION>
                                                                                              Period
                                                                                          March 31, 1995
                                                                                        (date of inception)
                                                                     Year ended               through
                                                                    December 31,           December 31,
                                                                        1996                   1995
                                                                    ------------        -------------------
<S>                                                                 <C>                 <C>
       Revenues:
        General Partner                                                $   -                  $   680
        Partnership                                                     23,968                    985
        Intercompany eliminations                                          -                     (680)
                                                                       -------                -------
                                                                       $23,968                $   985
                                                                       =======                =======
       Net income (loss):
        General Partner                                                $   (66)               $    (9)
        Partnership                                                      1,502                 (1,522)
        The Company                                                     (2,839)                   -
                                                                       -------                -------
                                                                       $(1,403)               $(1,531)
                                                                       =======                =======
</TABLE>

                                      F-7
<PAGE>

                            TITAN EXPLORATION, INC.

            Notes to Consolidated Financial Statements (Continued)

   The Company is an independent energy company engaged primarily in the
exploration, development and acquisition of oil and gas properties.  Since its
inception in March 1995, the Company has experienced significant growth,
primarily through the acquisition of companies and oil and gas properties and
the exploitation of these properties in the Permian Basin region of west Texas
and southeastern New Mexico, Gulf Coast region and the Gulf of Mexico.

(2)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   Principles of Consolidation

   The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries.  Investments in corporate joint ventures and
partnerships where the Company has ownership interest of less than 50% are
accounted for on the equity method.  All investments with an ownership interest
of less than 20% and no significant control are accounted for on the cost
method.  All material intercompany accounts and transactions have been
eliminated in the consolidation.

   Use of Estimates in the Preparation of Financial Statements

   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 consolidated 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, the Company considers all
demand deposits, money market accounts and certificates of deposit purchased
with an original maturity of three months or less to be cash equivalents.

   Inventories

   Inventories consist of lease and well equipment not currently being used in
production and are accounted for at the lower of cost (first-in, first-out) or
market.

   Oil and Gas Properties

   The Company utilizes the successful efforts method of accounting for its oil
and gas properties.  Under this method of accounting, all costs associated with
productive wells and nonproductive development wells are capitalized.
Exploration costs are capitalized pending determination of whether proved
reserves have been found.  If no proved reserves are found, previously
capitalized exploration costs are charged to expense.

   Costs of significant nonproducing properties, wells in the process of being
drilled and development projects are excluded from depletion until such time as
the related project is developed and proved reserves are established or
impairment is determined.  The Company capitalizes interest on expenditures for
significant development projects until such time as significant operations
commence.

                                      F-8
<PAGE>

                            TITAN EXPLORATION, INC.

            Notes to Consolidated Financial Statements (Continued)

   Capitalized costs of individual properties abandoned or retired are charged
to accumulated depletion, depreciation and amortization.  Sales proceeds from
sales of individual properties are credited to property costs.  No gain or loss
is recognized until the entire amortization base is sold or abandoned.

   Other property and equipment are recorded at cost.  Major renewals and
betterments are capitalized while the costs of repairs and maintenance are
charged to operating expenses in the period incurred.  With respect to
dispositions of assets other than oil and gas properties, the cost of assets
retired or otherwise disposed of, and the applicable accumulated depreciation
are removed from the accounts, and the resulting gains or losses, if any, are
reflected in operations.

   Depletion, Depreciation and Amortization

   Provision for depletion of oil and gas properties is calculated using the
unit-of-production method on the basis of an aggregation of properties with a
common geologic structural feature or stratigraphic condition, typically a field
or reservoir.  In addition, estimated costs of future dismantlement, restoration
and abandonment, if any, are accrued as a part of depletion, depreciation and
amortization expense on a unit of production basis; actual costs are charged to
the accrual.  Other property and equipment is depreciated using the straight-
line method over the estimated useful lives of the assets.  Organization costs
are amortized over five years, while loan costs are amortized over the life of
the related loan.

   Impairment of Long-Lived Assets

   The Company follows 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" ("FAS 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 and
other identifiable intangible assets, 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 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.

   The Company accounts for long-lived assets to be disposed of at the lower of
their carrying amount or fair value less cost to sell once management has
committed to a plan to dispose of the assets.

   Net Income (Loss) per Common Share

   In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share" ("FAS 128").  FAS 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities.  Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share.  All earnings per share amounts for all periods have been
presented, and when appropriate, restated to conform to the FAS 128
requirements.  For the periods prior to the Offering, the weighted average
shares outstanding attributable to predecessor capital are the shares issued to
the predecessor members upon Conversion.

                                      F-9
<PAGE>

                            TITAN EXPLORATION, INC.

            Notes to Consolidated Financial Statements (Continued)

   Income Taxes

   The Company follows the provisions of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("FAS 109").  Under the asset and liability method
of FAS 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 FAS 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.

   Upon Conversion, the Company recorded the tax effect of the differences
between the book and tax basis of its assets and liabilities as a deferred tax
liability and a corresponding charge to deferred income tax expense.

   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.

   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 the Company's
proportionate share of actual sales of natural gas.  Natural gas revenues would
not have been significantly altered in any period had the sales method of
recognizing natural gas revenues been utilized.  The Company has a net asset of
approximately $318,000 recorded in other assets and a net liability of
approximately $508,000 in other liabilities at December 31, 1997 and December
31, 1996, respectively, associated with gas balancing recorded.

   The Company recognizes marketing revenue net of the cost of gas and third-
party delivery fees as service is provided.

   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" ("FAS 123").  See
Note 13 for the pro forma disclosures of compensation expense determined under
the fair-value provisions of FAS 123.

                                     F-10
<PAGE>

                            TITAN EXPLORATION, INC.

            Notes to Consolidated Financial Statements (Continued)

   Treasury Stock

   Treasury stock purchases are recorded at cost.  Upon reissuance, the cost of
treasury shares held is reduced by the average purchase price per share of the
aggregate treasury shares held.

   Commodity Hedging

   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
at the inception of the contract and throughout the contract period, and the
instrument must be designated as a hedge.  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.

   The Company periodically enters into commodity derivative contracts in order
to hedge the effect of price changes on commodities the Company produces and
sells.  Gains and losses on contracts that are designed to hedge commodities are
included in income recognized from the sale of those commodities.  Gains and
losses on derivative contracts which do not qualify as hedges are recognized in
each period based on the market value of the related instrument.

   Interest Rate Swap Agreements

   The Company enters into interest rate swap agreements to effectively convert
a portion of its floating-rate borrowings into fixed rate obligations.  The
interest rate differential to be received or paid is recognized over the lives
of the agreements as an adjustment to interest expense.  At December 31, 1997,
the Company was not subject to any interest rate swap agreements.

   Reclassifications

   Certain reclassifications have been made to the 1995 and 1996 amounts to
conform to the 1997 presentation.

                                     F-11
<PAGE>

                            TITAN EXPLORATION, INC.

            Notes to Consolidated Financial Statements (Continued)

(3)  DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

   The following table presents the carrying amounts and estimated fair values
of the Company's financial instruments (in thousands):

<TABLE>
<CAPTION>
                                                                                December 31,
                                                   ----------------------------------------------------------------------
                                                                  1997                                1996
                                                   ----------------------------------  ----------------------------------
                                                       Carrying            Fair            Carrying            Fair
                                                        Amount            Value             Amount            Value
                                                   ----------------  ----------------  ----------------  ----------------
<S>                                                <C>               <C>               <C>               <C>
Financial assets:
 Cash and cash equivalents                                  $ 1,603           $ 1,603            $6,290            $6,290
 Restricted investments                                       2,331             2,331               -                 -

Financial liabilities:
 Debt:
   Line of credit                                            84,100            84,100             6,500             6,500
   Other                                                      1,350             1,350               -                 -

 Off-balance sheet financial instruments (see
   Note 17):
     Commodity price hedges                                     -               1,683               -                 -
</TABLE>

   Cash and cash equivalents, restricted cash, accounts receivable, other
current assets, accounts payable and other current liabilities.  The carrying
amounts approximate fair value due to the short maturity of these instruments.

   Restricted investments.  The fair value of noncurrent investments is based on
quoted market prices.

   Debt.  The carrying amount of long-term debt approximates fair value because
the Company's current borrowing rate does not materially differ from market
rates for similar bank borrowings.

   Commodity price hedges.  The fair market values of commodity derivative
instruments are estimated based upon the current market price of the respective
commodities at the date of valuation.  It represents the amount which the
Company would be required to pay or able to receive based upon the differential
between a fixed and a variable commodity price as specified in the hedge
contracts.

                                     F-12
<PAGE>

                            TITAN EXPLORATION, INC.

            Notes to Consolidated Financial Statements (Continued)

(4) DEBT

    Debt consists of the following (in thousands):

                                                  December 31,
                                           --------------------------
                                             1997               1996
                                           -------             ------
       Line of credit                      $84,100             $6,500
       Unsecured line of credit                -                  -
       Other                                 1,350                -
                                           -------             ------
                                           $85,450             $6,500
                                           =======             ======
   Line of Credit

   On October 31, 1996, the Company entered into a credit agreement (the "Credit
Agreement") with Chase Securities, Inc. which establishes a four year revolving
credit facility, up to the maximum amount of $250 million subject to a borrowing
base.  All amounts outstanding are due and payable in full by January 1, 2001.
The borrowing base, which was $165 million at December 31, 1997, is subject to
redetermination semiannually by the lenders based on certain proved oil and gas
reserves and other assets of the Company with the next redetermination date
scheduled for April 1, 1998.

   The Credit Agreement, which is secured by the Company's proved oil and gas
reserves, is subject to mandatory prepayments.  To the extent that the borrowing
base is less than the aggregate principal amount of all outstanding loans and
letters of credit under the Credit Agreement, such deficiency must be cured by
the Company within 180 days, by either prepaying a portion of the outstanding
amounts or pledging additional collateral.  Commitment fees are due quarterly
and range from .300% to .375% per annum on the difference between the commitment
and the average daily amount outstanding.

   At the Company's option, borrowings under the Credit Agreement bear interest
at either (i) the "Base Rate" (i.e. the higher of the agent's prime commercial
lending rate, or the federal funds rate plus 0.5% per annum), or (ii) the
Eurodollar rate plus a margin ranging from 1% to 1.50% per annum, which margin
increases as the level of the Company's aggregate outstanding borrowings under
the Credit Agreement increases.  The interest rates in effect at December 31,
1997 ranged from 6.97% to 8.50%.

   The credit agreement contains various restrictive covenants and compliance
requirements, which include (1) limiting the incurrence of additional
indebtedness, (2) restrictions as to merger, sale or transfer of assets and
transactions with affiliates without the lenders' consent, and (3) prohibition
of any return of capital payments or distributions to any of its partners other
than for taxes due as a result of their partnership interest.

   Unsecured Credit Agreement

   In April 1997, the Company entered into a credit agreement, as amended, (the
"Unsecured Credit Agreement") with Texas Commerce Bank National Association (the
"Bank"), an affiliate of Chase Securities, Inc., which establishes a revolving
credit facility, up to the maximum of $5 million.  All outstanding amounts
pursuant to the Unsecured Credit Agreement are due and payable in full on or
before December 31, 1999.  The interest rate of each loan under the Unsecured
Credit Agreement is at a rate determined by agreement between the Company and

                                     F-13
<PAGE>

                            TITAN EXPLORATION, INC.

            Notes to Consolidated Financial Statements (Continued)

the Bank.  The rate shall not exceed the maximum interest rate permitted under
applicable laws.  Interest rates generally are at the bank's cost of funds plus
1% per annum.

   Maturities of debt are as follows (in thousands):

      1997                                          $     -
      1998                                                -
      1999                                                -
      2000                                                -
      2001                                            85,450

(5)  ACQUISITIONS

   On December 12,1997, the Company completed the acquisitions of all the
outstanding stock of Offshore Energy Development Corporation ("OEDC") and
Carrollton Resources, L.L.C. ("Carrollton").  The acquisitions were made by the
issuance of 5,486,734 and 899,965 shares of the Company's common stock to the
stockholders of OEDC and Carrollton, respectively.  The results of operations of
OEDC and Carrollton from the closing date are not included in the Company's 1997
results of operations as the acquisitions closed in late December 1997, and the
amounts are not material.

   The acquisitions, accounted for on the purchase method, resulted in the
following noncash investing activities:

<TABLE>
<CAPTION>
                                            OEDC              Carrollton
                                           -------            ----------
                                                 (in thousands)
 <S>                                       <C>                 <C>
   Recorded amount of assets acquired      $104,818            $ 19,494
   Liabilities assumed                      (22,383)             (2,219)
   Deferred income tax liability            (19,040)             (5,776)
   Common stock issued                      (62,849)            (11,330)
                                           --------            --------
   Cash costs, net of cash acquired        $    546            $    169
                                           ========            ========
</TABLE>

   The liabilities assumed include amounts recorded for preacquisition
contingencies and bank debt of OEDC and Carrollton.

                                     F-14
<PAGE>

                            TITAN EXPLORATION, INC.

            Notes to Consolidated Financial Statements (Continued)

   On December 16, 1997, the Company completed the acquisition of certain oil
and gas properties from Pioneer Natural Resources Company (the "Pioneer
Acquisition").  The Company funded the acquisition from its debt facilities.
The results of operations from the Pioneer Acquisition from the closing date are
not included in the Company's 1997 results of operations as the amounts are not
material.  The acquisition of these oil and gas properties, accounted for using
the purchase method, resulted in the following noncash investing activities:

      Recorded amount of assets acquired, including
       receivables of $2,760,683                         $55,794,243
      Liabilities assumed                                 (1,061,330)
                                                         -----------
       Cash paid                                         $54,732,913
                                                         ===========

   Included in assets recorded is a $224,785 long-term receivable recorded as a
purchase price adjustment related to the Pioneer Acquisition for a gas imbalance
receivable.

   On October 31, 1996, the Company completed the acquisition of certain oil and
gas properties from a major integrated company (the "1996 Acquisition").  The
Company funded the acquisition from its debt facilities.  The acquisition of
these oil and gas properties, accounted for using the purchase method, resulted
in the following noncash investing activities:

      Recorded amount of assets acquired, including
       receivables of $300,187                           $135,983,556
      Liabilities assumed                                  (1,570,490)
                                                         ------------
       Cash paid                                         $134,413,066
                                                         ============

   Included in receivables assumed is a $300,187 long-term receivable recorded
as a purchase price adjustment related to the 1996 Acquisition for a gas
imbalance.  It is shown net of other gas imbalance liabilities in the
consolidated financial statements.  Liabilities assumed are amounts recorded as
purchase price adjustments related to the 1996 Acquisition for potential
environmental remediation.

   On December 11, 1995, the Company completed the acquisition of certain oil
and gas properties from a large independent oil and gas company (the "1995
Acquisition"). The Company funded the acquisition from its debt facilities.
The total consideration paid for the properties was $39,881,094.  The
acquisition of these oil and gas properties, accounted for using the purchase
method, resulted in the following noncash investing activities:

      Recorded amount of assets acquired, including
        receivables of $396,719                          $40,992,065
      Liabilities assumed                                 (1,110,971)
                                                         -----------
      Cash paid                                          $39,881,094
                                                         ===========

   Included in liabilities assumed is a $963,898 long-term liability recorded as
a purchase price adjustment related to the 1995 Acquisition for a gas imbalance
liability.

   Pro Forma Results of Operations (Unaudited)

   The following table reflects the pro forma results of operations for the
years ended December 31, 1997 and 1996 as though the 1996 Acquisition, the
Pioneer Acquisition and the OEDC and Carrollton acquisitions had

                                     F-15
<PAGE>

                            TITAN EXPLORATION, INC.

            Notes to Consolidated Financial Statements (Continued)

occurred as of January 1, 1996 and as if the Conversion had taken place on
January 1, 1996.  The pro forma amounts are not necessarily indicative of the
results that may be reported in the future (in thousands).

                                                 Year ended December 31,
                                             --------------------------------
                                                1997                   1996
                                             ----------              --------
      Revenues                               $105,016               $102,975
      Net income (loss)                       (40,897)                17,125
      Net income (loss) per common share        (1.01)                   .43
      Net income (loss) per common share -
        assuming dilution                       (1.01)                   .41

(6)    INVESTMENTS

   Dauphin Island Gathering Partners

   The Company has a one percent investment in Dauphin Island Gathering Partners
("DIGP"), which owns a natural gas gathering system in the Gulf of Mexico, that
is accounted for using the equity method.  The Company's investment in DIGP is
the result of the acquisition of OEDC.  The Company has been delegated, by the
operator of DIGP, to manage the commercial development and construction
activities of DIGP through November 1999, and the Company will be paid $22,910
per month plus .5% of all construction costs of DIGP.

   The Company's interest in DIGP will increase up to a maximum of 11.15% when
its DIGP partners receive the return of their investment plus a 10% rate of
return, subject to certain other conditions.

   The Company's cost basis in DIGP exceeds the underlying historical net assets
of DIGP by approximately $18,964,000 at December 31, 1997.  The excess basis
will be amortized over 30 years and included in the equity in income (loss) from
DIGP.

   Mobile Bay Processing Partners

   The Company owns a 1% general partnership interest in Mobile Bay Processing
Partners ("MBPP") which was formed for the purpose of constructing, owning and
operating, or providing financing for one or more natural gas processing
facilities onshore in Mobile County, Alabama.  The Company's investment in MBPP
is the result of the acquisition of OEDC.  The Company accounts for its
investment in MBPP on the equity method.  According to estimates of the managing
partner of MBPP the operations of the first construction in MBPP is expected to
commence in the fourth quarter of 1998.  The Company has an option to buy up to
an additional 24.3% interest in MBPP, exercisable until the third anniversary of
the commencement of commercial operations at MBPP's initial processing facility.
The costs of the additional partnership interest will be equal to the historical
book value of the plant reduced for depreciation on the date the option is
exercised and increased by 12% per year.

   The Company's cost basis in MBPP exceeds the underlying historical net assets
of MBPP by approximately $32,591,000 at December 31, 1997.  The excess basis
will be amortized over 25 years, upon commencement of the first operations of
MBPP, and included in the equity in income (loss) from MBPP.

                                     F-16
<PAGE>

                            TITAN EXPLORATION, INC.

                  Notes to Consolidated Financial Statements


     Other

     The Company has a 13.33% limited partnership interest in Asia-Pacific
Refinery Investment, L.P. ("APRI"),  which is carried at cost.  APRI is involved
in the construction and operation of a refinery unit.  The Company has no
responsibility to provide additional funds to APRI.

(7)  COMMITMENTS AND CONTINGENCIES

     Operating Leases

     The Company has non-cancelable operating leases for office facilities.  The
Company's non-cancellable operating lease for its Midland, Texas offices is with
an entity controlled by an officer of the Company.  Future minimum lease
commitments under non-cancellable operating leases at December 31, 1997 are as
follows (in thousands):

<TABLE>
<CAPTION>
                              Total              Affiliate
                            --------             ---------
<S>                         <C>                   <C>
   1998                     $501,219              $376,295
   1999                      376,295               376,295
   2000                      376,295               376,295
   2001                      376,295               376,295
   2002                       94,231                94,231
</TABLE>

     Lease expense during 1997 and 1996 was $200,474 and $110,625, respectively,
all incurred with an affiliate.

     Litigation

     The following is a brief description of certain litigation to which the
Company is subject, as a result of assuming the obligations of OEDC.  The
Company believes it has meritorious defenses to the claims and intends to
vigorously defend against such claims.  The Company does not believe that it has
a probable and estimable loss with respect to any such litigation in excess of
currently provided reserves, if any.  If such loss becomes probable and
estimable, the amount of any recorded liability could have a material adverse
effect on the Company's (i) results of operations for the period in which such
liability is recorded, (ii) consolidated financial position as a whole and (iii)
liquidity and capital resources.  However, the Company does not expect that any
such liability will have a material adverse effect on its consolidated financial
position as a whole or on its liquidity or capital resources.  Due to the
uncertainties inherent in litigation, no assurance can be given to the ultimate
outcome of these matters.

     OEDC and certain of its officers and directors, as well as Natural Gas
Partners, L.P. ("NGP"), the managing underwriters of OEDC's initial public
offering and an analyst from each of the managing underwriters, have been named
as defendants in a suit styled Eric Barron and Edward C. Allen, On behalf of
Themselves and all Others Similarly Situated, v. David B. Strassner, Douglas H.
Kiesewetter, David R. Albin, Natural Gas Partners, L.P., David Garcia, John J.
Myers, Offshore Energy Development Corporation, Morgan Keegan & Company, Inc.
and Principal Securities Inc., which was filed October 20, 1997, in the Texas
State District Court of Harris County, Texas 270th Judicial District.  The
defendants removed plaintiffs' claims to federal court in the United States
Southern District of Texas.  Plaintiffs have sought to have the case remanded to
the state court.  As of this date, the federal judge has not decided whether to
deny plaintiffs' request for remand.  The suit seeks class certification on
behalf of certain holders of common stock of OEDC, excluding the defendants and
holders related to or affiliated


                                                                     (Continued)

                                      F-17
<PAGE>

                            TITAN EXPLORATION, INC.

                  Notes to Consolidated Financial Statements

with the defendants. The suit alleges generally that the defendants wrongfully
made false or misleading statements or omissions relating to OEDC's business and
prospects in the course of OEDC's initial public offering and subsequent
thereto. The suit seeks rescission of sales of common stock of OEDC and
unspecified monetary damages, including punitive damages.

     OEDC and certain of its officers and directors, as well as NGP, have also
been named defendants in a suit styled John W. Robertson, et al. v. David B.
Strassner, Douglas H. Kiesewetter, David R. Albin, Natural Gas Partners, L.P.
and Offshore Energy Development Corporation, which was filed February 6, 1998,
in the United States Southern District of Texas, Houston Division.  This suit
mirrors the allegations of the foregoing matter, but adds request for relief
under federal securities laws.  It, too, seeks certification of a class of
certain purchasers of common stock of OEDC.  The suit seeks compensatory
damages, including rescissory damages, where applicable.

     The Company is seeking to consolidate both of these lawsuits as the Company
believes the claims are connected.  Plaintiffs in both lawsuits are represented
by the same lawyers.

     The Company is involved in other various claims and legal actions arising
in the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.

     Letters of Credit

     At December 31, 1997, the Company had outstanding letters of credit of
$275,000, which are issued through the Credit Agreement.

(8)  STATEMENTS OF CASH FLOWS

     Interest expense of $1,524,576 and $3,062,656 was paid as of December 31,
1997 and 1996, respectively.  No interest was paid in 1995.

     During 1996, a $1,300,000 noncash contribution of interests in oil and gas
properties was made in exchange for interest in the Company.  Also at December
31, 1996, a $341,250 noncash property addition was recorded as a purchase price
adjustment related to the Conversion.

(9)  Restricted Investments

     The Company carries a $3.0 million Gulf of Mexico area-wide abandonment
bond with the Minerals Management Service, which is secured by cash balances
currently invested in certificates of deposit at a commercial bank. The sum on
deposit related to this area-wide abandonment bond is approximately $2.3 million
at December 31, 1997. The deposit was released to the Company in February 1998.

(10) Common Stock

     On December 16, 1996, the Company completed an initial public offering (the
"Offering") of 14,391,500 shares of common stock at a price of $11.00 per share.
Proceeds received, net of related expenses, were approximately $148,376,365.



                                                                     (Continued)

                                      F-18
<PAGE>

                            TITAN EXPLORATION, INC.

                  Notes to Consolidated Financial Statements



     In May 1997, the Company announced a plan to repurchase up to $25 million
of the Company's common stock. The repurchase will be made periodically,
depending on market conditions, and will be funded with cash flow from
operations and, as necessary, borrowings under the Credit Agreement. At December
31, 1997, the Company had purchased 55,000 shares of its common stock for
approximately $504,000. Subsequent to December 31, 1997 and through March 10,
1998, the Company purchased an additional 630,000 shares of its common stock for
approximately $5.3 million.

(11) INCOME TAXES

     Upon Conversion, the Company became a tax paying entity for U.S. Federal
income tax purposes.  At the date of Conversion, the book basis of the Company's
assets and liabilities exceeded the tax basis by approximately $8,566,000,
resulting in a deferred tax liability of approximately $2,998,000.

     The reconciliation between the tax expense computed by multiplying pretax
income (loss) by the U.S. federal statutory rate and the reporting amounts of
income tax expense (benefit) is as follows:

<TABLE>
<CAPTION>
                                                                                                          Period
                                                                                                      March 31, 1995
                                                                                                    (date of inception)
                                                                                                          through
                                                                  Year ended December 31,              December 31,
                                                           ------------------------------------    ---------------------
                                                                  1997                1996                 1995
                                                           ------------------  ------------------  ---------------------
<S>                                                        <C>                 <C>                 <C>
                                                                                  (in thousands)

Income (loss) at statutory rate                                    $(18,107)             $   728              $  (536)
Operations of related partnerships taxable to the
    respective partners, prior to the Conversion                         --                 (242)                 536
Deferred income tax expense to record difference
    between book and tax basis of net assets upon
    Conversion                                                           --                2,998                   --
State income taxes, net of Federal benefit                             (167)                  --                   --
Other                                                                     7                   --                   --
                                                                    -------              -------              -------

Income tax expense (benefit)                                       $(18,267)             $ 3,484              $    --
                                                                   ========              =======              =======
</TABLE>


                                                                     (Continued)

                                      F-19
<PAGE>

                            TITAN EXPLORATION, INC.

                  Notes to Consolidated Financial Statements

     The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1997 and 1996 are as follows:

<TABLE>
<CAPTION>
                                                                                December 31,
                                                                    ------------------------------------
                                                                           1997               1996
                                                                    -----------------   ----------------
<S>                                                                   <C>                 <C>
                                                                               (in thousands)
      Deferred tax assets:
         Net operating loss                                                $12,953             $1,458
         Compensation, principally due to accrual for financial
          reporting purposes                                                 2,405                644
                                                                           -------             ------

              Total gross deferred tax assets                               15,358              2,102
                                                                           -------             ------

      Deferred tax liabilities:
         Oil and gas properties, principally due to differences in
          basis upon acquisition, depletion, and the deduction of
          intangible drilling costs for tax purposes                        25,726              5,927
                                                                           -------             ------


              Total gross deferred tax liabilities                          25,726              5,927
                                                                           -------             ------

              Net deferred tax liability                                   $10,368             $3,825
                                                                           =======             ======
</TABLE>

     A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax assets will not be realized.  Based on expectations
for the future and the availability of certain tax planning strategies that
would generate taxable income to realize the net tax benefits, if implemented,
management has determined that taxable income of the Company will more likely
than not be sufficient to fully utilize available carryforwards prior to their
ultimate expiration.

     At December 31, 1997, the Company has net operating loss carryforwards
("NOLs") for U.S. federal income tax purposes of approximately $37,000,000,
which are available to offset future regular taxable income, if any.  Of the
Company's NOLs approximately $16,500,000 related to pre-acquisition NOLs which
are subject to annual limitations on their utilization.  The carryforwards begin
to expire in 2011.

(12) RELATED PARTY TRANSACTIONS

     For the years ended December 31, 1997 and 1996, the Company received $9,656
and $144,167, respectively, for administrative services from a related party.
During 1995 revenue received was $241,563.

     Financial advisory service fees of $185,854 were paid to two shareholders
during 1996.  For the period March 31, 1995 (date of inception) through December
31, 1996, $428,958 were paid to two shareholders and two affiliates of
shareholders.  The contracts underlying the financial advisory service fees were
terminated December 16, 1996 pursuant to the contracts.

     Director's fees of $45,000, $10,000 and $20,833 were paid during 1997, 1996
and 1995, respectively.

     The Company, in 1995, has recorded in other assets approximately $425,000
of organization costs which were paid to related parties for consulting and
advisory fees. These costs are being amortized over a period of five years.

                                                                     (Continued)

                                      F-20
<PAGE>

                            TITAN EXPLORATION, INC.

                  Notes to Consolidated Financial Statements


     Certain properties that were owned or controlled by certain shareholders
were acquired by the Company for $100,000, $21,708 and $1,142,000 in 1997, 1996
and 1995, respectively, which approximates the predecessor cost of the
properties.

     During 1997, 1996 and 1995, the Company received (paid) approximately
$551,000, ($635,000) and ($147,000) from (to) Enron Capital and Trade Corp., an
affiliate of a significant stockholder of the Company relating to financial
instruments associated, primarily, with the Company's hedging activities.

     The Company regularly uses certain aircraft owned by an affiliate.  The
Company is billed for any use of such aircraft by Company personnel.  Payments
made for the use of such aircraft were $3,371 and $17,348 for the years ended
December 31, 1997 and 1996, respectively, and $4,140 for the period ended March
31, 1995 (date of inception) through December 31, 1995.

     The President, Chief Executive Officer and Chairman of the Board of the
Company, and certain of his affiliates have a common ownership interest in oil
and gas properties that are operated by the Company and, in accordance with a
standard industry operating agreement, make payments to the Company of leasehold
costs and lease operating and supervision charges.  These payments were
approximately $88,473 and $229,332 for the years ended December 31, 1997 and
1996, respectively, and $12,000 for period March 31, 1995 (date of inception)
through December 31, 1995. Revenue received in connection with these oil and gas
properties was $16,098 and $6,868 for the years ended December 31, 1997 and
1996, respectively.  These interests were owned by the Chief Executive Officer
and his affiliates prior to the formation of the Company on March 31, 1995.

(13) COMPANY OPTION PLANS

     Stock Option Plan

     Prior to the consolidation of Titan Exploration, Inc., Titan Resources,
L.P. established a unit option plan (the "Plan") for certain officers and key
employees of the Partnership and the General Partner. On September 30, 1996,
upon the consolidation of Titan Exploration, Inc., the Plan was replaced by a
new stock option plan the ("Stock Plan"). The Stock Plan provides for the
issuance of 3,631,350 options to acquire common stock of the Company, in four
separate series with a fixed exercise price of $2.08. Option A series, covering
2,410,728 shares of common stock, was to vest at a rate of one-third of the
options at each of the dates of March 31, 1996, 1997 and 1998; Option B, C, and
D series cover 387,265, 406,390, and 426,967 shares of common stock,
respectively. Options B, C and D series each vest on March 31, 1997, 1998 and
1999, respectively. Deferred compensation was recorded based on the value of the
Company's common stock on September 30, 1996, and will be amortized to expense
over a 39 month period. Deferred compensation of approximately $17,576,000
(before reduction by amounts previously amortized to expense under the Plan, as
described above) was recorded at September 30, 1996. At December 31, 1997,
unamortized deferred compensation was $10,106,919.

     1996 Incentive Plan

     The Board of Directors and the stockholders of the Company approved the
adoption of the Company's 1996 Incentive Plan (the "1996 Incentive Plan") as of
October 1, 1996. The purpose of the 1996 Incentive Plan is to reward selected
officers and key employees of the Company and others who have been or may be in
a position to benefit the Company, compensate them for making significant
contributions to the success of the Company and provide them with a proprietary
interest in the growth and performance of the Company.

                                                                     (Continued)

                                      F-21
<PAGE>

                            TITAN EXPLORATION, INC.

                  Notes to Consolidated Financial Statements


     Participants in the 1996 Incentive Plan are selected by the Board of
Directors or such committee of the Board as is designated by the Board to
administer the 1996 Incentive Plan (the Compensation Committee of the Board of
Directors) from among those who hold positions of responsibility with the
Company and whose performance, in the judgment of the Compensation Committee,
can have a significant effect on the success of the Company.  An aggregate of
850,000 shares of Common Stock have been authorized and reserved for issuance
pursuant to the 1996 Incentive Plan.  These options vest ratable on each of the
first through fourth anniversaries of the grant date.

     Subject to the provisions of the 1996 Incentive Plan, the Compensation
Committee will be authorized to determine the type or types of awards made to
each participant and the terms, conditions and limitations applicable to each
award.  In addition, the Compensation Committee will have the exclusive power to
interpret the 1996 Incentive Plan and to adopt such rules and regulations as it
may deem necessary or appropriate in keeping with the objectives of the 1996
Incentive Plan.

     Pursuant to the 1996 Incentive Plan, participants will be eligible to
receive awards consisting of (i) stock options, (ii) stock appreciation rights,
(iii) stock, (iv) restricted stock, (v) cash or (vi) any combination of the
foregoing. Stock options may be either incentive stock options within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended, or
nonqualified stock options.

     OEDC Stock Awards Plan

     Pursuant to the OEDC merger agreement the Company converted the outstanding
stock options of OEDC to stock options of the Company at the agreed common stock
exchange rate. At December 31, 1997, there are 118,175 and 340,200 options to
purchase shares of the Company common stock at $5.73 and $19.05 per share,
respectively. All options were exercisable at December 31, 1997.



                                                                     (Continued)

                                      F-22
<PAGE>

                            TITAN EXPLORATION, INC.

                  Notes to Consolidated Financial Statements


     The Company applies APB 25 and related interpretations in accounting for
its stock option plans. If compensation expense for the stock option plans had
been determined consistent with Statement of Financial Accounting Standards 123,
"Accounting for Stock-Based Compensation ("FAS 123"), the Company's net loss and
net loss per share would have been adjusted to the pro forma amounts indicated
below :

<TABLE>
<CAPTION>
                                                                                                         Period
                                                                                                     March 31, 1995
                                                                                                   (date of inception)
                                                                  For the year ended                     through
                                                                     December 31,                     December 31,
                                                       ----------------------------------------  -----------------------
                                                              1997                 1996                   1995
                                                       -------------------  -------------------  -----------------------
<S>                                                    <C>                  <C>                  <C>
                                                                   (in thousands, except per share amounts)

     Net loss                                               $(39,123)             $(1,744)                $(1,454)
     Net loss per common share                                 (1.15)                (.09)                   (.10)
     Net loss per share - assuming dilution                    (1.15)                (.09)                   (.10)
</TABLE>

     The pro forma net loss and pro forma net loss per share amounts noted above
are not likely to be representative of the pro forma amounts to be reported in
future years. The pro forma amounts for 1996 and 1995 reflect the initial phase-
in of FAS 123. Pro forma adjustments in future years will include compensation
expense associated with the options granted in 1997, 1996 and 1995 plus
compensation expense associated with any options awarded in future years. As a
result, such pro forma compensation expense is likely to be higher than the
levels experienced in 1997, 1996 and 1995.

     Under FAS 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 1997, 1996 and 1995:

<TABLE>
<CAPTION>
                                                        1997                   1996                   1995
                                                ---------------------  ---------------------  ---------------------
<S>                                             <C>                    <C>                    <C>
     Risk-free interest rate                           5.25%                  6.15%                  6.00%
     Expected life                                        7                    3.0                    4.5
     Expected volatility                                 46%                    52%                    52%
     Expected dividend yield                              -                      -                      -
</TABLE>

                                                                     (Continued)

                                      F-23
<PAGE>

     A summary of the Company's stock option plans as of December 31, 1997, 1996
and 1995, and changes during the periods ended on those dates is presented
below:

<TABLE>
<CAPTION>
                                                                                            Period
                                                                                        March 31, 1995
                                                                                     (date of inception)
                                           Year ended              Year ended              through
                                        December 31, 1997      December 31, 1996      December 31, 1995
                                      ---------------------  ----------------------  --------------------
                                                   Weighted                Weighted              Weighted
                                        Number     Average      Number     Average     Number    Average
                                       of Shares    Price     of Shares     Price    of Shares    Price
                                      -----------  --------  -----------   --------  ---------   --------

Stock options:
<S>                                   <C>          <C>       <C>           <C>       <C>         <C>
 Outstanding at beginning
  of period                            3,716,350     $ 2.28    3,387,674      $1.50          --        --
   Options granted - initial plan             --         --      243,676      $1.50          --        --
   Options canceled/forfeited                 --         --   (3,631,350)     $1.50          --        --
   OEDC options assumed                  458,375     $15.61          --          --          --        --
   Options exercised                      (4,285)    $ 2.08          --          --          --        --
   Options granted                       259,000     $10.95    3,716,350      $2.28   3,387,674     $1.50
                                      ----------             -----------             ----------
 Outstanding at end of year            4,429,440               3,716,350              3,387,674
                                      ==========             ===========             ==========
 Exercisable at end of year            2,470,133                 803,576                     --
                                      ==========             ===========             ==========
Weighted average fair value of
 options granted during the year      $    10.95                   $5.27             $     0.75
                                      ==========             ===========             ==========
</TABLE>

     Options outstanding as of December 31, 1997 have expected lives ranging
from 2 to 9 years with exercise prices ranging from $2.08 to $19.05 per share.

                                                                     (Continued)

                                      F-24
<PAGE>

                            TITAN EXPLORATION, INC.

                  Notes to Consolidated Financial Statements


(14) NET LOSS PER COMMON SHARE

     The following table sets forth the computation of basic and diluted net
loss per common share :

<TABLE>
<CAPTION>

                                                                                                      Period
                                                                                                  March 31, 1995
                                                                                                (date of inception)
                                                                                                      through
                                                            Year ended December 31,                December 31,
                                                    ---------------------------------------   -----------------------
                                                            1997                 1996                   1995
                                                    -------------------  -------------------  -----------------------
<S>                                                 <C>                  <C>                  <C>
                                                                             (in thousands)
   Numerator:
     Net loss and numerator for basic and diluted
      net loss per common share - income
      available to common stockholders                   $  (33,467)           $ (1,403)              $ (1,531)
                                                         ==========            ========               ========
   Denominator:
     Denominator for basic net loss per common
      share - weighted average common shares                 33,942              19,605                 14,066
     Effect of dilutive securities - employee
        stock options                                           --                  --                     --
                                                         ----------            --------                --------
     Denominator for diluted net loss per common
        share - adjusted weighted average common
        shares and assumed conversions                       33,942              19,605                 14,066
                                                         ==========            ========               ========

   Basic net loss per common share                       $     (.99)           $   (.07)              $   (.11)
                                                         ==========            ========               ========

   Diluted net loss per common share                     $     (.99)           $   (.07)              $   (.11)
                                                         ==========            ========               ========
</TABLE>

     Employee stock options to purchase 4,429,440, 3,716,350 and 3,387,674
shares of common stock were outstanding during 1997, 1996 and 1995,
respectively, but were not included in the computation of diluted net loss per
common share because either (i) the employee stock options' exercise price was
greater than the average market price of the common stock of the Company or (ii)
the Company had a loss from continuing operations and, therefore, the effect
would be antidilutive.


                                                                     (Continued)

                                      F-25
<PAGE>

                            TITAN EXPLORATION, INC.

                  Notes to Consolidated Financial Statements


(15) 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 portion of the employee's
contribution.  The Company has made matching contributions to the plan totaling
$110,981, $23,034 and $8,199 in 1997, 1996 and 1995, respectively.

(16) MAJOR CUSTOMERS

     The following purchasers accounted for 10% or more of the Company's oil and
gas sales for the years ended December 31, 1997, 1996 and the period March 31,
1995 (date of inception) through December 31, 1995:

<TABLE>
<CAPTION>
                                                 1997          1996        1995
                                                 ----          ----        ----
<S>                                              <C>          <C>         <C>
   Purchaser A (a)                                36%           43%          --
   Purchaser B                                    12%            7%          --
</TABLE>
--------------------------------
(a)  Purchaser A is an affiliate of Enron Corp., a significant stockholder of
     the Company.

(17) DERIVATIVE FINANCIAL INSTRUMENTS

     The Company utilizes various swap contracts and other financial instruments
to hedge the effect of price changes on future oil and gas production.  The
following table sets forth the future volumes hedged by year and the range of
prices to be received based upon the fixed price of the individual swap
contracts and other financial instruments outstanding at December 31, 1997:


<TABLE>
<CAPTION>
                                                Oil                 Gas
                                               Volume              Volume            Price per
         Year                                 (MBbls)             (MMcfs)             Mcf/Bbl
         ----                                 -------             -------            ---------
<S>                                      <C>                 <C>                 <C>
   Oil production - 1998                         31                 --                 $23.36
   Gas production - 1998                         --               6,010            $1.95 to $2.75
</TABLE>

(18) IMPAIRMENT OF LONG-LIVED ASSETS

     The Company, in accordance with FAS 121, estimated expected future cash
flows of its oil and gas properties by amortization unit and compared the
amounts determined to the carrying amount of its oil and gas properties to
determine if the carrying amount was recoverable. For those oil and gas
properties for which the carrying amount exceeded the estimated future cash
flows, an impairment was determined to exist; therefore, the Company adjusted
the carrying amount of those oil and gas properties to their estimated fair
value as determined by discounting their expected future cash flows at a
discount rate commensurate with the risks involved in the industry. As a result
of this process, the Company recognized an impairment of approximately $69
million related to its oil and gas properties during 1997. No impairment was
determined to exist during the year ended December 31, 1996 or the period March
31, 1995 (date of inception) through December 31, 1995.

                                                                     (Continued)

                                      F-26
<PAGE>

                            TITAN EXPLORATION, INC.

                  Notes to Consolidated Financial Statements


(19) UNAUDITED SUPPLEMENTARY INFORMATION

     Capitalized Costs
<TABLE>
<CAPTION>
                                                                                  December 31,
                                                                  --------------------------------------------
                                                                          1997                   1996
                                                                  ---------------------  ---------------------
<S>                                                               <C>                    <C>
                                                                                (in thousands)

   Oil and gas properties:
      Proved oil and gas properties                                           $341,072               $194,699
      Unproved properties                                                       25,033                    987
                                                                              --------               --------
                                                                               366,105                195,686
      Accumulated depletion                                                    (94,185)                (5,624)
                                                                              --------               --------

      Net capitalized costs for oil and gas properties                        $271,920               $190,062
                                                                              ========               ========
</TABLE>

   Costs Incurred
<TABLE>
<CAPTION>
                                                                                                Period
                                                                                            March 31, 1995
                                                                                          (date of inception)
                                                                                                through
                                                         Year ended December 31,             December 31,
                                                 --------------------------------------  ---------------------
                                                      1997                  1996                  1995
                                                 ----------------  --------------------  ---------------------
<S>                                          <C>                   <C>                   <C>
                                                           (in thousands)
   Property acquisition costs:
      Proved                                             $100,871              $139,110               $40,873
      Unproved                                             24,532                   802                 1,040
   Exploration                                              2,856                   129                   448
   Development                                             44,896                12,468                 1,580
                                                         --------              --------               -------

                                                         $173,155              $152,509               $43,941
                                                         ========              ========               =======
</TABLE>

     Reserve Quantity Information

   The estimates of proved oil and gas reserves, which are located principally
in the United States and offshore Gulf of Mexico, were prepared by independent
petroleum consultants as of December 31, 1997 and 1996, and the Company as of
December 31, 1995.  Reserves were estimated in accordance with guidelines
established by the SEC and FASB which require that reserve estimates be prepared
under existing economic and operating conditions with no provision for price and
cost escalations except by contractual arrangements.  The Company has presented
the reserve estimates utilizing an oil price of $16.11, $25.09 and $17.66 per
Bbl and a gas price of $1.83, $2.70 and $1.38 per Mcf as of December 31, 1997,
1996 and 1995, respectively.

     Oil and gas reserve quantity estimates are subject to numerous
uncertainties inherent in the estimation of quantities of proved reserves and in
the projection of future rates of production and the timing of development
expenditures. The accuracy of such estimates is a function of the quality of
available data and of engineering and geological interpretation and judgment.
Results of subsequent drilling, testing and production may cause either upward
or downward revision of previous estimates. Further, the volumes considered to
be commercially

                                                                     (Continued)

                                      F-27
<PAGE>

                            TITAN EXPLORATION, INC.

                  Notes to Consolidated Financial Statements


recoverable fluctuate with changes in prices and operating costs. The Company
emphasizes that reserve estimates are inherently imprecise and that estimates of
new discoveries are more imprecise than those of currently producing oil and gas
properties. Accordingly, these estimates are expected to change as additional
information becomes available in the future.

   Oil And Gas Producing Activities
<TABLE>
<CAPTION>
                                                    Oil and                 Natural
                                                Condensate (MBbls)        Gas (MMcf)
                                                ------------------       ------------
<S>                                             <C>                      <C>
Total Proved Reserves:
   Balance, March 31, 1995                                 -                      -
       Extensions and discoveries                          108                 33,724
       Purchases of minerals-in-place                    6,068                101,516
       Production                                          (30)                  (245)
                                                        ------                -------

   Balance, December 31, 1995                            6,146                134,995
       Purchases of minerals-in-place                      704                    264
       Revision of previous estimates                      101                 47,031
       Production                                         (388)                (2,725)
                                                        ------                -------

   Balance, September 30, 1996                           6,563                179,565
       Purchases of minerals-in-place                   12,510                109,381
       Revision of previous estimates                      709                 15,494
       Production                                         (326)                (3,062)
                                                        ------                -------

   Balance, December 31, 1996                           19,456                301,378
       Purchases of minerals-in-place                    7,128                 43,501
       Extensions and discoveries                           20                 40,633
       Revision of previous estimates                    5,551                (18,036)
       Production                                       (1,880)               (22,104)
                                                        ------                -------

   Balance, December 31, 1997                           30,275                345,372
                                                        ======                =======
   Proved Developed Reserves:
       March 31, 1995                                      -                      -
       December 31, 1995                                 5,945                 45,470
       September 30, 1996                                6,252                 54,119
       December 31, 1996                                16,024                180,161
       December 31, 1997                                23,604                219,307
</TABLE>

     Standardized Measure Of Discounted Future Net Cash Flows

     The standardized measure of discounted future net cash flows is computed by
applying year-end prices of oil and gas (with consideration of price changes
only to the extent provided by contractual arrangements) to the estimated future
production of proved oil and gas reserves, less estimated future expenditures
(based on period-end costs) to be incurred in developing and producing the
proved reserves, less estimated future income tax expenses (based on period-end
statutory tax rates, with consideration of future tax rates already legislated)
to be incurred on


                                                                     (Continued)

                                      F-28
<PAGE>

                            TITAN EXPLORATION, INC.

                  Notes to Consolidated Financial Statements


pretax net cash flows less tax basis of the properties and available credits,
and assuming continuation of existing economic conditions. The estimated future
net cash flows are then discounted using a rate of 10% per year to reflect the
estimated timing of the future cash flows.

     Discounted future cash flow estimates like those shown below are not
intended to represent estimates of the fair value of oil and gas properties.
Estimates of fair value should also consider probable reserves, anticipated
future oil and gas prices, interest rates, changes in development and production
costs and risks associated with future production. Because of these and other
considerations, any estimate of fair value is necessarily subjective and
imprecise.

<TABLE>
<CAPTION>
                                                                                                   Period
                                                                                               March 31, 1995
                                                                                             (date of inception)
                                                                                                   through
                                                             Year ended December 31,            December 31,
                                                     ------------------------------------   ---------------------
                                                          1997                 1996                  1995
                                                     ----------------  -------------------  ---------------------
<S>                                               <C>                  <C>                  <C>
                                                                          (in thousands)
   Future:
      Cash inflows                                       $ 1,121,526          $ 1,300,863        $  270,965
      Production and development costs                      (392,475)            (348,705)          (95,490)
      Future income taxes                                   (153,100)            (264,904)          (45,754)
                                                          ----------          -----------        ----------
          Future net cash flows                              575,951              687,254           129,721
   10% annual discount for estimated timing of
    cash flows                                              (226,901)            (299,391)       $  (63,369)
                                                         -----------          -----------        ----------

   Standardized measure of discounted net cash
    flows                                                $   349,050          $   387,863        $   66,352
                                                         ===========          ===========        ==========
</TABLE>

                                      F-29
<PAGE>

                            TITAN EXPLORATION, INC.

                  Notes to Consolidated Financial Statements

<TABLE>
<CAPTION>
                                                                                                         Period
                                                                                                     March 31, 1995
                                                                                                   (date of inception)
                                                                                                         through
                                                                  Year ended December 31,             December 31,
                                                              ------------------------------       -------------------
                                                                  1997                1996                1995
                                                              ---------------  --------------      -------------------
<S>                                                        <C>                 <C>                 <C>
                                                                                 (in thousands)

   Standardized measure, beginning of period                       $ 387,863       $  66,352          $     --
      Extensions and discoveries and improved recovery,
       net of future production and development costs                 36,439             --               18,087

      Accretion of discount                                           38,786           6,635                 --
      Net change in sales prices, net of production,
       costs                                                        (180,281)         83,823                 --

      Net change in income taxes                                      40,115        (126,102)            (23,401)
      Purchase of minerals-in-place                                   72,241         298,867              71,561
      Revision of quantity estimates and revenues added
       by development drilling                                        11,615          70,755                 --

      Sales, net of production costs                                 (51,846)        (14,625)               (439)
      Changes in estimated future development costs                   (7,904)
      Other                                                            2,022           2,158                 544
                                                                   ---------       ---------            --------

   Standardized measure, end of period                             $ 349,050       $ 387,863            $ 66,352
                                                                   =========       =========            ========
</TABLE>

                                      F-30
<PAGE>

                            TITAN EXPLORATION, INC.

                  Notes to Consolidated Financial Statements


(20) SELECTED QUARTERLY FINANCIAL RESULTS (UNAUDITED)

<TABLE>
<CAPTION>
                                                                              Quarter
                                                --------------------------------------------------------------------
                                                     First           Second            Third             Fourth
                                                ---------------  ---------------  ----------------  ----------------
<S>                                             <C>              <C>              <C>               <C>
                                                               (in thousands, except per share data)

    1997:
      Total revenues                                    $18,048          $16,215          $17,883          $ 21,681
      Total expenses (a)                                 15,771           14,490           15,323            61,710
      Net income (loss)                                   2,277            1,725            2,560           (40,029)
      Net income (loss) per common share                    .07              .05              .08             (1.18)
      Net income (loss) per common share -
       assuming dilution                                    .06              .05              .07             (1.18)


    1996:
      Total revenues                                    $ 3,257          $ 3,439          $ 3,541          $ 13,587
      Total expenses                                      3,108            3,438            5,901            12,780
      Net income (loss)                                     149                1           (2,360)              807
      Net income (loss) per common share                    .01              .00             (.13)              .04
      Net income (loss) per common share -
       assuming dilution                                    .01              .00             (.13)              .03

</TABLE>
______________________
(a) The total expenses in the fourth quarter of 1997 include an impairment of
    long-lived assets of approximately $44.7 million after the income tax
    benefit of approximately $24.3 million.

   The 1996 and first three quarters of 1997 net income (loss) per common share
amounts have been restated to comply with FAS 128.

                                      F-31