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                   U.S. SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                  FORM 10-K

For   Annual  and  Transition Reports  pursuant  to  Section  13 or 15(d) of the
Securities Exchange Act of 1934

(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, 1998

                                      OR

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

                         Commission File No. 0-21841

                            3DX TECHNOLOGIES INC.
            (Exact name of registrant as specified in its charter)

   DELAWARE                                                    76-0386601
(State of Incorporation)                          (IRS Employer Identification
                                                   Number)

12012 WICKCHESTER, SUITE 250, HOUSTON, TEXAS                      77079
 (Address of principal executive office)                       ( Zip Code)

      Registrant's telephone number, including area code: (281) 579-3398

     Securities registered pursuant to Section 12(b) of the Exchange Act:
                                    (None)

     Securities registered pursuant to Section 12(g) of the Exchange Act:
                        Common Stock, $0.01 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. [X]

     The aggregate  market value of the common stock held by  non-affiliates  of
the  registrant  was  approximately  $2,604,000 on March 12, 1999 based upon the
closing  sale  price of common  stock on such  date of  $0.406  per share on the
NASDAQ  National  Market.  As of March 12, 1999,  the  registrant  had 9,379,209
shares of common stock issued and outstanding.

                     DOCUMENTS INCORPORATED BY REFERENCE

      The  information  required by Part III is  incorporated  by reference to
the   Registrant's   definitive  Proxy  Statement  for  the  Annual  Meeting  of
Stockholders which will be filed with the Securities and Exchange  Commission on
or before April 30, 1999.
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                              TABLE OF CONTENTS

PART I

      ITEM 1.    BUSINESS................................................1

      ITEM 2.    PROPERTIES..............................................7

      ITEM 3.    LEGAL PROCEEDINGS......................................11

      ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....11

PART II

      ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
                 STOCKHOLDER MATTERS....................................11

      ITEM 6.    SELECTED FINANCIAL DATA................................11

      ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS..........13

      ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
                 MARKET RISK............................................19

      ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............19

      ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH
                 ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.....19

PART III

      ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.....19

      ITEM 11.   EXECUTIVE COMPENSATION.................................19

      ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                 MANAGEMENT.............................................19

      ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.........19


PART IV

      ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
                 REPORTS ON FORM 8-K....................................20


SIGNATURES..............................................................22

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          CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

THIS ANNUAL REPORT ON FORM 10-K CONTAINS  FORWARD-LOOKING  STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE  SECURITIES  ACT OF 1933, AS AMENDED,  AND SECTION
21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.  BECAUSE SUCH STATEMENTS
INCLUDE RISKS AND UNCERTAINTIES,  ACTUAL RESULTS, EVENTS AND CIRCUMSTANCES COULD
DIFFER  MATERIALLY  FROM THOSE EXPRESSED IN OR IMPLIED BY SUCH STATEMENTS DUE TO
VARIOUS FACTORS. SUCH FACTORS INCLUDE THE POSSIBILITY THAT THE DRILLING OF WELLS
IN  PROJECTS  IN WHICH THE  COMPANY  HAS A WORKING  INTEREST  MAY BE  DELAYED OR
ABANDONED,  ACTUAL  RATES OF  PRODUCTION  MAY NOT REACH  ANTICIPATED  LEVELS AND
OPPORTUNITIES  FOR THE COMPANY TO ACQUIRE FUTURE WORKING INTERESTS IN ADDITIONAL
PROJECTS  MAY BE LIMITED  OR  UNAVAILABLE,  CHANGING  ECONOMIC,  REGULATORY  AND
COMPETITIVE  CONDITIONS,  OTHER  TECHNOLOGICAL  DEVELOPMENTS AND OTHER RISKS AND
UNCERTAINTIES,  INCLUDING THOSE SET FORTH HEREIN. THE COMPANY'S FUTURE FINANCIAL
RESULTS  WILL  DEPEND  PRIMARILY  ON: (I) THE  COMPANY'S  ABILITY TO CONTINUE TO
SOURCE AND SCREEN  POTENTIAL  PROJECTS;  (II) THE COMPANY'S  ABILITY TO DISCOVER
COMMERCIAL  QUANTITIES OF HYDROCARBONS;  (III) THE MARKET PRICE FOR OIL AND GAS;
AND (IV) THE COMPANY'S ABILITY TO OBTAIN ADDITIONAL  SOURCES OF FUNDING TO FULLY
IMPLEMENT ITS  EXPLORATION AND  DEVELOPMENT  PROGRAM.  THERE CAN BE NO ASSURANCE
THAT THE COMPANY WILL BE SUCCESSFUL IN ANY OF THESE  RESPECTS OR THAT THE PRICES
OF OIL AND GAS PREVAILING AT THE TIME OF PRODUCTION  WILL BE AT A LEVEL ALLOWING
FOR PROFITABLE PRODUCTION.


                                    PART I


ITEM 1.     BUSINESS.

THE COMPANY

      3DX  Technologies  Inc.  ("the  Company")  is an  independent  oil and gas
company  that  explores,  develops and produces oil and gas from the onshore and
offshore Gulf Coast region of the United States. Started in 1993, 3DX recognized
a niche for technical  expertise due to the  increasing use of 3-D seismic as an
exploration tool for the onshore areas of the United States. The Company focuses
on technically  advanced  reservoir imaging and applied technology in the search
of  commercial  hydrocarbons  with a core  competency  in  the  application  and
utilization of 3-D seismic.  The Company  participates  in selected  exploration
projects as a non-operating  working  interest owner,  sharing both the risk and
rewards with its  partners.  By reducing  drilling  risk through 3-D imaging and
analysis,  the  Company  expects  its return on  investment  to exceed  industry
standards.

STRATEGY

      The Company's  goal is to grow with an "educated  drill bit" by increasing
the proven reserve base and production rate to generate additional cash flow. To
realize its goal, 3DX's business strategy includes:

FOCUS ON THE EXPERTISE OF 3D IMAGING AND ANALYSIS

      The Company  focuses all of its technical  resources on obtaining the best
possible  subsurface  image to reduce  exploration  risk and  identify  the most
effective  location and target for each  prospect.  By focusing on the technical
issues of a 3-D project, the Company relies on the strategic  relationships with
its partners to provide other core needs, such as drilling operations.

MAINTAIN AND SUPPORT TECHNOLOGICALLY ADVANCED EXPLORATIONISTS

      The quality and interpretation of information  derived from 3-D imaging is
often  dependent  on the  Company's  ability  to retain  and  develop  creative,
experienced   geoscientists  and  engineers.  In  order  to  capitalize  on  the

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intellectual resources, the Company is committed to motivate the technical staff
by providing and utilizing the most advanced  imaging and analytical  technology
available  on the  market.  Additionally,  the Company  offers each  employee an
incentive with options to purchase common stock.

EMPHASIZE TECHNICAL ADVANTAGES AND NICHES

      The Company's internal seismic  processing  capabilities are a competitive
advantage over similar size companies. With internal processing, the Company has
developed the process of 3DXPRESS.  3DXPRESS is an innovative  technique used in
exploration  that  improves  the  quality  of  seismic  data  and  significantly
compresses the traditional  time frame for acquisition  through  interpretation.
This process  allows  analysis of 3-D data while the survey is being  conducted,
giving the  Company's  explorationists  the ability to ensure  data  quality and
steer data  collection  toward areas where  prospects  are more likely to exist.
Utilizing  this  technology,  the Company has proven its capability to image and
analyze  projects for potential  drilling sites more rapidly and accurately than
with traditional methods.

FOCUS EXPLORATION PROJECTS IN THE UNITED STATES GULF COAST

      The  Company  has  been  involved  in  projects  both   domestically   and
internationally,  spreading its technical  expertise to many parts of the world.
3DX  re-directed  its focus to the Gulf Coast area of the United  States  during
1998.  By focusing on the Gulf Coast,  the Company  participates  in projects in
which they have an established  knowledge  base and track record.  Additionally,
these  opportunities  can lead to core  areas for the  Company.  With a focus on
knowledge  based areas,  the Company also believes the probability of success in
its program will be higher.  Finally,  with an emphasis on the U.S.  Gulf Coast,
the Company will have a focus on projects  that can deliver a shorter cycle time
to positive cash flow.

SELECTIVE PROJECT PARTICIPATION, PARTNERING AND DRILLING EFFORTS

      The Company's project screening process continually adapts the criteria to
select  projects  that  are  likely  to  maximize  the  return  on  its  capital
investments and continually builds a balanced portfolio. The Company's selection
criteria  favor  projects  which (i) are  managed  by  reliable  and  successful
operating  partners;  (ii) are located on properties to which 3-D imaging can be
effectively  applied to evaluate the primary  geologic risk; (iii) have prospect
repeatability  or upside  potential;  (iv) have projected  rates of return which
make the production of hydrocarbons economically attractive.

BALANCE BETWEEN GROWTH AND CASH FLOW

      The Company believes that a key to achieving long-term viability is growth
based on an expanding  cash flow.  By  committing  its talents and  resources to
expanding the proven reserve base and hydrocarbon  production  rate, the Company
will develop the cash flow necessary to sustain future growth.

PROJECTS, BUSINESS RELATIONSHIPS AND TECHNOLOGY


PROJECT GENERATION AND BUSINESS RELATIONSHIPS

      By its participation in multiple  projects,  many with multiple  partners,
the Company has been able to build upon a knowledge base outside of 3DX,  create
a  resource  for future  opportunities  and  generate  a partner  base for 3DX's
internal generated  projects.  The Company has also undertaken the initiative to
bring geologic  consultants into the Company to support the geophysical  skills.
This has already proven beneficial with the Hall Ranch Project in Karnes County,
Texas,  providing an integrated  interpretation and better  understanding of the
remaining drilling opportunities.

                                       2
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TECHNOLOGY

      The  Company  maintains  an  extensive  computer  facility  to support its
oil-finding  activities.   A  Silicon  Graphics  Power  Challenge  provides  the
large-scale computing capacity to support real-time data processing and imaging.
A network of nine  workstations,  functioning  in a  client-server  environment,
provides  the  framework  for  synthesis  of  the  geological,  geophysical  and
engineering  data into an  integrated  image of the  subsurface.  The  principal
supplier  of the  software  used by the  Company  for both data  processing  and
interpretation  is  Landmark  Graphics  Corporation  and  its  subsidiaries.  In
addition,  the Company owns  licenses  for certain  geological  and  geophysical
applications  including  Hampson-Russell  Software,  Inc., Paradigm Geophysical,
Inc., Interpretative Imaging and Petrosoft Inc.

SIGNIFICANT PROPERTIES AND ACTIVITIES

      During 1998, 3DX undertook an evaluation of its core producing  properties
and the focus of its exploration activities.  Some of the exploration plays were
located  outside  the Gulf Coast of the United  States  including  international
plays in offshore West Africa, carbonate plays in Florida and deepwater plays in
the Gulf of Mexico.  In some cases, the prospect  opportunities  were associated
with high drilling and operating  costs, a long cycle time to positive cash flow
or limited  technical  knowledge in the area. The Company  undertook the task of
reducing its exposure in the high cost  projects  and non-core  properties.  The
results of this effort were two-fold. First, it provided the Company with needed
cash.   Second,  it  allowed  the  Company  to  participate  in  seven  drilling
opportunities at no cost to 3DX. This was accomplished by selling and converting
working  interest to a carried  interest on selected  projects while  preserving
significant interest for upside potential.

HALL RANCH PROJECT, KARNES COUNTY, TEXAS

      The Hall Ranch  Project has become one of the core areas for the  Company.
After two drilling  successes in the area, the Company looks forward to drilling
an additional key prospect in 1999. 3DX has a twenty-five  percent (25%) working
interest in Hall Ranch.

GILLOCK PROJECT, GALVESTON COUNTY, TEXAS

      In 1998, the Company  participated  in the Gillock  Project,  a sixty (60)
mile shoot in the area of southern Galveston County. This project covers several
prolific Frio fields and is in the vicinity of the recent Eagle Point  Vicksburg
discovery in Galveston  Bay. The Company took a fifteen (15%)  working  interest
and applied the 3DXPRESS process to the project. Results from the interpretation
have added sixteen (16) new prospects to 3DX's inventory with drilling beginning
in the second quarter of 1999.

FOUR ISLE DOME PROJECT, TERREBONNE PARISH, LOUISIANA

      The impact and  integration of 3-D seismic on an existing field is clearly
demonstrated  by the Four Isle Dome Project.  A proprietary  3-D was shot on the
dome in  1996,  which  identified  new  fault  blocks  and  updip  potential  to
production. 3DX participated in two successful wells during 1998 with a combined
production  rate of 33 million  cubic feet of gas per day (MMCFG/D) and over 700
barrels of condensate per day (BC/D).  This is the highest  production  rate for
the field since  1982.  3DX own a five-  percent  (5%)  working  interest in the
project.

SMITH POINT 3-D PROJECT, CHAMBERS COUNTY, TEXAS

      The drilling  evaluation  phase on the Smith Point 3-D Project in Chambers
County,  Texas was started in 1998. In April 1998,  3DX elected to farmout fifty
percent  (50%) of its working  interest  in the  project.  This  resulted in 3DX

                                       3
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retaining  a 7.5%  working  interest  (after  payout)  of the  first  three  (3)
prospects drilled. During 1998, two of the three prospects were drilled with one
success and the third well will spud in the second quarter of 1999.

RAMROD 3-D PROJECT, MATAGORDA COUNTY, TEXAS

      By late  1997,  3DX  established  a  significant  discovery  on its Ramrod
property in Matagorda  County,  Texas. The St. George #1 well had sustained flow
rates of 8 MMCFG/D and 140 BC/D. Deeper potential was recognized on the property
and in November  1998, 3DX elected to sell one half (50%) of its interest in the
property  for  cash  and  a  one  hundred  percent  (100%)  carry  on a  15,500'
exploration  well.  Based on the drilling  results from the new well (St. Andrew
#1), 3DX elected to sell its remaining interest in the project.

REPUBLIC OF COTE D'IVOIRE

      Through a partnership for technical  services,  3DX established a position
in two offshore  blocks in offshore Cote d'Ivoire.  This area is located off the
West Coast of Africa.  In August 1998, 3DX converted a ten percent (10%) working
interest to a two and one half percent  (2.5%) carried  interest  through a sale
transaction  and stock trade with the  operator.  The result of the  transaction
gives 3DX a carry on all drilling costs for two wells,  one in Block 24 (drilled
during 1998) and the remaining  test well on Block 202 which is  anticipated  to
spud in 1999.

SUNNILAND TREND PROJECT, FLORIDA

      In 1996,  through a joint  partnership with the operator,  3DX acquired an
eight  percent (8%) working  interest in exchange for  technical  expertise  and
support  on the  Sunniland  Trend.  One well was  drilled in the  Raccoon  Point
prospect area during 1998 and was  non-economic.  Due to poor drilling  results,
high operating and development costs and low oil prices,  the Company elected to
sell its interest and exit the play at the end of 1998.  This sale  represents a
continuing divestment of non-core properties in the 3DX portfolio.

REGULATION

      The Company's operations are subject to numerous federal,  state and local
laws and  regulations  governing the discharge of materials into the environment
or  otherwise  relating  to  environmental  protection.  Public  interest in the
protection  of the  environment  has  increased  dramatically  in recent  years.
Offshore drilling in certain areas has been opposed by environmental groups and,
in certain areas,  has been  restricted.  The Company believes that the trend of
more  expansive and stricter  environmental  legislation  and  regulations  will
continue.  To the extent laws are enacted or other governmental  action is taken
which prohibit or restrict onshore and offshore drilling or impose environmental
protection  requirements  that  result  in  increased  costs  to the oil and gas
industry  in  general,  the  business  and  prospects  of the  Company  could be
adversely affected.

      The Oil  Pollution  Act of 1990 (the  "OPA")  and  regulations  thereunder
impose a  variety  of  requirements  on  "responsible  parties"  related  to the
prevention of oil spills and liability for damages resulting from such spills in
United States waters. A "responsible  party" includes the owner or operator of a
facility or vessel,  or the lessee or permittee of the area in which an offshore
facility is located. The OPA assigns liability to each responsible party for oil
removal  costs and a variety of public and  private  damages  including  natural
resource damages.  While liability limits apply in some  circumstances,  a party
cannot  take  advantage  of  liability  limits if the spill was  caused by gross
negligence or willful misconduct or resulted from violation of a federal safety,
construction or operating regulation. If the party fails to report a spill or to
cooperate  fully in the cleanup,  liability  limits  likewise do not apply.  Few
defenses exist to the liability imposed by the OPA.

      Under the OPA and regulations promulgated thereunder, owners and operators
of "offshore  facilities" must satisfy certain financial assurance  requirements

                                       4
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to  evidence  their  ability  to  cover  potential   environmental  cleanup  and
restoration costs. In projects in which the Company has a participating  working
interest,  the  operator  partner  is  responsible  for  all  demonstrations  of
financial  responsibility including the posting of any indemnity bonds which are
required by applicable  governmental  regulations.  The expenses incurred in the
operator partner's demonstration of financial  responsibility are expenses which
are allocated to each project partner based on the respective  partner's working
interest.

      The OPA also imposes other requirements, such as the preparation of an oil
spill contingency plan. The Company has such a plan in place.  Failure to comply
with ongoing  requirements  or inadequate  cooperation  during a spill event may
subject a responsible party to civil or criminal enforcement actions.

      To complement the OPA, the State of Texas enacted the Oil Spill Prevention
and Response Act  ("OSPRA").  The Texas General Land Office  ("GLO") is the lead
agency  for  carrying  out  OSPRA,  and to that  end  the  GLO  has  promulgated
regulations  affecting  anyone who owns or  operates a vessel or  facility  that
stores or transfers oil in areas where a spill could reach Texas coastal waters.

      In addition,  the Outer Continental  Shelf Lands Act ("OCSLA")  authorizes
regulations  relating  to safety  and  environmental  protection  applicable  to
lessees and  permittees  operating on the Outer  Continental  Shelf (the "OCS").
Specific  design  and  operational  standards  may apply to OCS  vessels,  rigs,
platforms,   vehicles  and  structures.   Violations  of  lease   conditions  or
regulations  issued  pursuant to the 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 Comprehensive  Environmental Response,  Compensation and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without regard
to fault or the legality of the original conduct,  on certain classes of persons
that  are  considered  to  have  contributed  to  the  release  of a  "hazardous
substance" into the environment.  These persons include the owner or operator of
the  disposal  site or sites  where the  release  occurred  and  companies  that
disposed or arranged for the disposal of the hazardous  substances  found at the
site.  Persons who are or were responsible for releases of hazardous  substances
under  CERCLA  may be subject to joint and  several  liability  for the costs of
cleaning  up  the  hazardous   substances  that  have  been  released  into  the
environment  and for  damages  to  natural  resources.  Additionally,  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.  Further,  certain oilfield wastes are subject to
the  Resource  Conservation  &  Reservation  Act  ("RCRA")  with  respect to the
regulation   of  hazardous   wastes.   The  RCRA   regulates   the   generation,
transportation and disposal of hazardous wastes.

      The Texas  Railroad  Commission has issued rules for management of certain
types of hazardous waste generated in the oilfield. However, until delegation of
the RCRA program to the Railroad  Commission,  hazardous wastes generated in the
oilfield are regulated by the Texas Natural Resources  Conservation  Commission.
The Texas Railroad  Commission  regulates  pollution of groundwater  and surface
water resulting from exploration,  production and development of oil and natural
gas resources.

      The  Clean  Water  Act  ("CWA")  and  regulations  promulgated  thereunder
prohibit the discharge of pollutants  into waters of the United States without a
permit pursuant to the National Pollutant Discharge Elimination System ("NPDES")
provisions.  The CWA also  requires  reporting  of oil  spills  to the  National
Response Center. The United States  Environmental  Protection Agency ("EPA") has
issued  general  NPDES  permits for oil and gas platforms in the Gulf of Mexico,
which impose limits on discharges of such things as oil, grease,  produced water
and drilling  fluids.  Onshore  platforms may also be subject to the requirement
for  NPDES  permits  for  both  production  discharges  and  for  discharges  of
stormwater.  In Louisiana,  the NPDES permit program has recently been delegated
to the State of Louisiana. In Texas, the NPDES permit program is administered by
the TNRCC.  Failure  to obtain  the  proper  permit may result in both civil and
criminal  penalties as well as an order to cease discharges,  which in effect is
an order to shut down production.

                                       5
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      Management  believes that the Company is in  substantial  compliance  with
current applicable environmental laws and regulations. Compliance with such laws
and regulations has not historically  represented a significant  expense for the
Company and management  does not foresee the need for material  expenditures  to
ensure continued  compliance with currently existing laws and regulations.  Laws
and regulations in these areas are, however,  subject to change and there can be
no assurance  that future laws or regulations  will not have a material  adverse
effect on the Company.

OPERATING HAZARDS AND INSURANCE

      The oil and gas business involves a variety of operating risks,  including
the  risk  of  fire,  explosions,   blow-out,  pipe  failure,  casing  collapse,
abnormally  pressured  formations and environmental  hazards such as oil spills,
gas leaks,  ruptures and  discharges  of toxic gases,  the  occurrence of any of
which could result in substantial losses to the Company due to injury or loss of
life,  severe  damage to or  destruction  of  property,  natural  resources  and
equipment,  pollution or other environmental damage, clean-up  responsibilities,
regulatory investigation and penalties and suspension of operations. In addition
to the foregoing,  offshore  operations are subject to the additional hazards of
marine  operations,  such as capsizing,  collision  and adverse  weather and sea
conditions.

      The  Company  maintains  insurance  coverage  against  some,  but not all,
operating  risks.  The  insurance  maintained  generally  does not cover  claims
relating to failure of title to oil and gas leases,  trespass  during 3-D survey
acquisition  or surface  damage  attributable  to seismic  operations,  business
interruption  nor does it protect  against loss of revenues due to well failure.
There can be no assurance  that any insurance  obtained by the Company  covering
claims related to worker's  compensation,  comprehensive  general  liability for
bodily  injury and  property  damage,  comprehensive  automobile  liability  and
pollution, cleanup, underground blowout and evacuation will be adequate to cover
any losses or  liabilities  which may be incurred  within  projects in which the
Company participates.  The Company cannot predict the continued  availability of
insurance  coverage or the  availability  of  insurance  at premium  levels that
justify its  purchase.  If the Company  were unable to procure  insurance  at an
acceptable  cost with  respect  to each of the  projects  in which  the  Company
participates,  the occurrence of significant adverse events not fully insured or
indemnified   against  could  materially  and  adversely  affect  the  Company's
financial condition and operations.

COMPETITION

      Competition  in the oil and gas  industry  is intense,  particularly  with
respect to the acquisition of acreage and capital. The Company's  competitors in
the exploration  for oil and gas include  numerous major and independent oil and
gas  companies,   smaller,   technology-driven  service  companies,   individual
proprietors,  drilling  and  income  programs  and  partnerships.  Many  of  the
Company's  competitors  possess and employ  financial  and  personnel  resources
substantially in excess of those available to the Company and may, therefore, be
able to define, evaluate, bid for and participate in a greater number of oil and
gas  properties  than  the  Company.   The  Company  believes  that  technology,
experience  and  reliability  are the  primary  elements  upon which the Company
competes  in the  industry.  Although  the  Company  believes  that it  competes
effectively in each of these areas, there can be no assurance that the Company's
ability to attract and invest in high  quality  projects  will not be  adversely
affected  if its  current  competitors  or new  market  entrants  introduce  new
services with better quality technology than those available to the Company.

EMPLOYEES AND INDEPENDENT CONSULTANTS

      As of December 31, 1998, the Company had 7 full-time employees including 2
explorationists.  The Company believes that its relationship  with its employees
is good. None of the Company's  employees is covered by a collective  bargaining
agreement.

                                       6
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ITEM 2.     PROPERTIES

SIGNIFICANT PROJECTS AND PROPERTIES

      The Company's exploration activities are focused in the onshore Gulf Coast
region of the United States,  principally in Texas, but also include projects in
Louisiana,  Mississippi, and Alabama.  Additionally, the Company has exploration
projects offshore in the Gulf of Mexico and  internationally  in the Republic of
Cote d'Ivoire.

      3-D seismic  imaging is an effective  tool to identify the  structural and
stratigraphic features in the Gulf Coast region and provides the Company with an
ability to identify  hydrocarbon  potential in and around  existing  fields that
could not be detected with 2-D seismic and earlier exploration  techniques.  Due
to geologic  complexities  within the Gulf Coast, it may be possible to identify
multiple  prospects  within a single project.  These  prospects  typically offer
multiple  drilling  opportunities  with individual  wells capable of penetrating
multiple reservoirs.

      The  extensive  drilling  history  within  Gulf  Coast  trends  provides a
powerful  subsurface  and  production  database  to  which  seismic  data can be
calibrated.  This data  provides  the  foundation  required  to design a seismic
program  that  optimizes  resolution  at targeted  reservoirs.  This  subsurface
information,  when  combined  with 3-D seismic  data,  provides a more  accurate
assessment of reservoir  quality,  productivity,  reserve potential and, in some
instances, fluid type.

      The major  producing  areas in which the  Company  holds an  interest  are
reflected in the table below as of and for the year ended December 31, 1998:

                                      PROVED RESERVES      1998 PRODUCTION
                                      -----------------  ---------------------
                                          GAS    OIL           GAS      OIL
           AREA / TREND                  MMCF   MBBL          MMCF     MBBL
           ------------                  ----   ----          ----     ----
           Texas Frio Trend             1,482     27           830       24
           Texas Wilcox Trend           1,307     12           140        2
           Texas Miocene Trend            471      -           516        -
           Other Properties               625     23           392       12   
                                        -----    ---         -----      ---
                                        3,885     62         1,878       38
                                        =====    ===         =====      ===


GULF COAST AREA

      Of the 15 wells drilled in 1998, 14 were in the Gulf Coast area, including
10 in Texas, 2 in Louisiana, and 1 in Florida. All of the Company's 8 successful
wells in 1998 were in the Gulf Coast area.

TEXAS GULF COAST. This area includes both onshore and near-shore  properties and
generally  extends  along the Texas  coast for a distance of  approximately  100
miles  inland  from  the  coastline.   Prospective   geology  in  the  trend  is
characterized   by  numerous   stacked  sand   formations  that  were  deposited
continuously  by river  channels  and deltas.  The  trend's  primary oil and gas
producing formations include the Miocene,  Frio,  Vicksburg,  Yegua, and Wilcox.
The  Company  has  exploration  projects  targeting  each of  these  oil and gas
formations  from depths of 3,000' to 16,000'.  Of the  Company's 33  exploration
projects,  20 are in the Texas Gulf Coast area. The Company  acquired 120 square
miles of new 3-D seismic data in the Texas Gulf Coast region during 1998.  Below
is a discussion of certain of the active exploration projects in this area:

      TEXAS MIOCENE TREND.  The Company has  participated in six projects,  with
      over 200 square  miles of 3-D  seismic  data in this  trend.  The  Company
      currently has nine  producing gas wells in the Miocene  Trend,  in Calhoun

                                       7
<PAGE>


      and Matagorda  counties,  Texas, at depths between 3,000' and 6,000'.  The
      Company  owns  working  interests  ranging from 15% to 20% in these wells,
      which are operated by Prime Operating Company, a subsidiary of PrimeEnergy
      Corporation.  In  addition  to these  projects,  the  Company is  actively
      pursuing additional opportunities in this trend.

      TEXAS FRIO TREND. The Company has participated in nine projects, with over
      400 square  miles of 3-D seismic  data in this trend.  This  includes  120
      square miles  acquired  during 1998.  The 1998 new projects are located in
      Galveston and Chambers counties,  Texas, and have resulted in excess of 15
      new  exploration  prospects added to 3DX's drilling  inventory.  While the
      primary  target  for  these  new  projects  are  Frio  sands,  significant
      Vicksburg  potential  exists within the  projects.  The Company spud seven
      wells for Frio objectives in 1998, three of which were successful, and one
      was  drilling at December 31,  1998.  The Company  owns working  interests
      ranging from 7.5% to 22% in these projects.

      TEXAS  WILCOX  TREND.  The Company  has four active  projects in the Texas
      Wilcox Trend,  located in Karnes,  Lavaca,  Goliand,  and Dewitt counties,
      Texas. These projects cover  approximately 140 square miles of 3-D seismic
      data.  Wilcox  objectives  have been  identified  within these projects at
      depths of 10,000' to 15,000'. The Company drilled three wells in the trend
      during 1998,  two of which were  successful.  3DX owns  working  interests
      ranging from 12.5% to 25% in these projects.

OTHER PROJECTS

      LOUISIANA.  The Company has two active exploration  projects in Louisiana.
The Four  Isle  Dome  project  in  Terrebonne  Parish,  operated  by  Burlington
Resources,  targets  Miocene-age  sands at depths  up to  15,000'.  The  Company
participated  in the sidetrack of one well, and drilling of another during 1998.
Both  wells were  successful,  resulting  in a combined  rate of over 30 million
cubic feet of gas per day.  The Company  has a 5% working  interest in Four Isle
Dome.  The second  project  area is located in  Calcasieu  and  Jefferson  Davis
Parishes.  The Company participated in a 14,000' wildcat well during 1998, which
was unsuccessful. 3DX has a 10% working interest in this project.

      OFFSHORE GULF OF MEXICO. The Company had two producing properties offshore
in the  Gulf of  Mexico.  The two  producing  properties,  the Cove  project  at
Matagorda Island Block 487-L and the Hollywood project at East Cameron Block 42,
are considered to be fully developed. The Company elected to sell it's 7% in the
Cove  project  during 1998,  while  retaining  it's 5% working  interest in East
Cameron  Block 42. The Company also has a 1% carried  interest in 3  exploratory
projects  located in the deep  water  flex  trend of the Gulf of  Mexico.  These
projects have eight-year lease terms which expire in March 2005.

      WEST AFRICA.  The Company  joined its partner,  Santa Fe Energy  Resources
(Cote  d'Ivoire)  Ltd., in 1997 to evaluate Block CI-24 and Block CI-202 located
in the offshore  waters of The Republic of Cote  d'Ivoire,  and a 3 million acre
concession  offshore Ghana.  Late in 1997, the  partnership  began work on a 400
square  kilometer  3-D  seismic  survey,  which was  completed  during the first
quarter of 1998.  After  interpreting  the 3-D seismic data for the partnership,
the Company  converted it's 10% working interest in Block CI-202 and Block CI-24
to a 2.5% carried interest,  and elected to exit the offshore Ghana project. The
partnership  drilled one exploratory  well on Block CI-24 during 1998, which was
unsuccessful.

OIL AND GAS RESERVES

      All of the Company's  proved reserves  described below are located onshore
and offshore  Texas and in the Federal  waters  offshore  Louisiana.  All of the
Company's proved reserves reflected in the table are proved developed  reserves.
The reserve  estimates were prepared by the independent  engineering  consulting
firm Ryder Scott Company  Petroleum  Engineers.  In accordance  with  applicable
requirements of the Securities and Exchange Commission, the estimated discounted
future net revenues from estimated proved reserves are based on prices and costs
as of the date of the  estimate  unless such  prices or costs are  contractually
determined  at such date.  The Company has not provided  any  estimates of total
proved reserves, comparable to those disclosed herein, in any reports filed with
federal   authorities  or  agencies  other  than  the  Securities  and  Exchange
Commission.

                                       8
<PAGE>

                                                            DECEMBER 31,
                                                     ------------------------
                                                       1998     1997     1996
                                                       ----     ----     ----
Estimated Net Proved Reserves Data:
   Gas (Mmcf)                                         3,885    3,932    2,464
   Oil and condensate (Mbbl)                             62       89       32
   Total equivalent, converted at 6:1 (Mmcfe)         4,257    4,466    2,656
Pre-tax present value of proved reserves
   discounted at 10% (in thousands)                  $5,782   $7,048   $6,623
Standardized Measure of Discounted Future
   Net Cash Flows (in thousands) (1)                 $5,782   $7,048   $6,623
--------------

(1)   In accordance  with statutory  requirements of the Securities and Exchange
      Commission,  these amounts represent the present value of estimated future
      net  revenues  after  income taxes  discounted  at 10%. The present  value
      amounts are the same before  taxes and after  projected  income taxes as a
      result of the Company's substantial net operating loss carryforwards.

      The process of estimating proved developed and proved  undeveloped oil and
gas reserves is very complex,  requiring significant subjective decisions in the
evaluation  of  available  geologic,  engineering  and  economic  data  for each
reservoir.  The data for a given  reservoir  may change over time as a result of
additional development activity,  production history and viability of production
under varying economic conditions.  The actual production,  revenues,  severance
taxes,  development  and  operating  expenditures  with respect to the Company's
reserves  will  likely vary from such  estimates,  and such  variances  could be
material.

PRODUCTIVE WELLS

      At December 31,  1998,  1997 and 1996,  the Company held  interests in the
following productive wells:


                                        AT DECEMBER 31,
                      ---------------------------------------------------
                           1998              1997             1996
                      ----------------  ---------------  ---------------
                       GROSS    NET      GROSS   NET      GROSS   NET
       Oil Wells           4   0.66          9   0.54         8   0.31
       Gas Wells          22   3.34         21   4.49        11   1.71
         Total Wells      26   4.00         30   5.03        19   2.02
                          ==   ====         ==   ====        ==   ====


      The number of gross  wells  equals the total  number of wells in which the
Company owns a working  interest.  The number of net wells equals the sum of the
Company's fractional working interests owned in gross wells.

                                       9
<PAGE>

OIL AND GAS DRILLING ACTIVITIES

      The following table sets forth the gross and net number of productive, dry
and total  exploratory and development wells that the Company drilled in each of
1998, 1997, and 1996:

<TABLE>
<CAPTION>

                                           GROSS WELLS                  NET WELLS
                                       ----------------------     -------------------------
                                       PRODUCTIVE  DRY  TOTAL     PRODUCTIVE  DRY     TOTAL

      EXPLORATORY WELLS
      <S>                                 <C>     <C>   <C>       <C>       <C>     <C> 
      Year ended December 31, 1998          3       6     9         0.49      0.56    1.05
      Year ended December 31, 1997         11       9    20         2.98      1.83    4.81
      Year ended December 31, 1996          7       7    14         0.74      0.84    1.58
      DEVELOPMENT WELLS
      Year ended December 31, 1998          5       -     5         0.36        -     0.36
      Year ended December 31, 1997          -       3     3           -       0.48    0.48
      Year ended December 31, 1996          3       -     3         0.60        -     0.60

</TABLE>

      As of December 31, 1998,  the Company was  participating  in 1 gross (0.20
      net) exploratory wells.

PRODUCTION

      The following table summarizes the net volumes of oil and gas produced and
sold and the  average  prices  received  with  respect  to such  sales  from all
properties  in which the Company held an interest  during  1998,  1997 and 1996,
respectively.

                                             GAS                    OIL
                                   ----------------------  ---------------------
                                       NET       AVERAGE      NET        AVERAGE
                                   PRODUCTION     SALES    PRODUCTION     SALES
                                     (MMCF)     PRICE/MCF    (MMCF)    PRICE/BBL
                                   ----------   ---------  ----------  ---------
  Year ended December 31, 1998      1,877.9      $2.17        37.8      $ 12.20
  Year ended December 31, 1997      1,131.8       2.46        14.1        18.54
  Year ended December 31, 1996        271.2       2.50         8.5        20.43


      Average oil and gas operating expenses per Mcfe including severance and ad
valorem  taxes,  were  $0.35,   $0.36,  and  $0.33  for  1998,  1997  and  1996,
respectively.

ACREAGE

      The following  table sets forth the developed and  undeveloped oil and gas
acreage  in  which  the  Company  held an  interest  as of  December  31,  1998.
Undeveloped  acreage  consists of those lease acres on which wells have not been
drilled or completed to a point that would permit the  production  of commercial
quantities of oil and gas,  regardless  of whether or not such acreage  contains
proved reserves.

                                     DEVELOPED               UNDEVELOPED
                              ------------------------   --------------------
                                GROSS         NET         GROSS       NET
                              ----------   -----------   --------- ----------
       Texas...............       9,221         1,441      97,193     22,967
       Louisiana...........         325            16      20,081      1,122
       Mississippi/Alabama.          82            19         107         44
       Offshore Federal....       1,440            72           -          -
       International.......           -             -     162,842      4,071
                                 ------         -----     -------     ------
          Total............      11,068         1,548     280,223     28,204
                                 ======         =====     =======     ======

                                       10
<PAGE>

ITEM 3.     LEGAL PROCEEDINGS

      The Company has not been the  subject of any legal  proceedings  since its
organization.  There can be no assurance,  however, that the Company will not in
the future be involved in litigation incidental to the conduct of its business.

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

      There were no matters  submitted to a vote of security  holders during the
fourth quarter of 1998.

                                    PART II


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

        The  Company's  common stock was traded  through March 23, 1999 on the
NASDAQ  National  Market under the symbol  "TDXT".  Effective  March 24, 1999,
the Company's  common stock was traded on the NASDAQ SmallCap Market under the
symbol  "TDXTC".  The following table sets forth, on a per share basis for the
periods  indicated,  the high and low prices as quoted by the NASDAQ  National
Market since the shares  became  publicly  traded on December 26, 1996.  As of
February  17, 1999 there were  approximately  70 record  holders of the common
stock.  See Note 10 in Notes  for  Financial  Statements  contained  elsewhere
herein  regarding  the  transfer  of the  Company's  securities  to The NASDAQ
SmallCap Market.

                                                          HIGH    LOW
                                                          ----    ---
         1998
            Fourth Quarter ended December 31, 1998        $0.72   $0.25
            Third Quarter ended September 30, 1998         1.50    0.56
            Second Quarter ended June 30, 1998             1.88    1.38
            First Quarter ended March 31, 1998             3.72    1.50

         1997
            Fourth Quarter ended December 31, 1997        $9.25   $2.25
            Third Quarter ended September 30, 1997        12.50    8.00
            Second Quarter ended June 30, 1997            10.50    7.75
            First Quarter ended March 31, 1997            13.13   10.00


DIVIDEND POLICY

      The Company  has not  declared  or paid any cash  dividends  on its common
stock since its formation.  The Company's current credit agreement prohibits the
payment of cash dividends. The Company does not anticipate paying cash dividends
on its common stock in the foreseeable  future. The Company currently intends to
retain any future earnings to finance the expansion and continued development of
its business.


ITEM 6.     SELECTED FINANCIAL DATA

      The financial information set forth below for the years ended December 31,
1998, 1997, 1996, 1995 and 1994 is derived from the financial  statements of the
Company,  which were audited by Arthur Andersen LLP. This information  should be
read in  conjunction  with  "Management's  Discussion  and Analysis of Financial
Condition and Results of Operations,"  the financial  statements of the Company,
the notes related  thereto and other  financial data included  elsewhere in this
Form 10-K.

                                       11
<PAGE>

<TABLE>
<CAPTION>

STATEMENT OF OPERATIONS DATA:                                 YEAR ENDED DECEMBER 31,
                                               ---------------------------------------------------------
                                                 1998          1997         1996        1995        1994
                                                 ----          ----         ----        ----        ----
                                                        (IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues (a):
<S>                                            <C>         <C>          <C>         <C>         <C>   
   Oil and gas.............................    $ 4,545     $  3,046     $   852     $   275     $  304
   Interest and other......................         54          585         248         236         53
                                               -------      -------      ------     -------     ------
        Total revenues.....................      4,599        3,631       1,100         511        357
Costs and expenses:
   Total lease operating...................        732          437         107          79         34
   Impairment of oil and gas properties          7,864        9,061       1,477       1,627          -
   Depletion, depreciation & amortization..      3,545        2,636         423         158         91
   General and administrative and other (a)      2,047        2,533       1,828       1,135        617
                                               -------      -------     -------     -------     ------
    Total costs and expenses...............     14,188       14,667       3,835       2,999        742
 Net loss .................................     (9,589)     (11,036)     (2,735)     (2,488)      (385)
 Dividends and accretion on preferred stock          -            -        (941)     (1,108)      (452) 
                                               -------     --------     -------     -------     ------ 
 Net loss applicable to common
   stockholders............................   $(9,589)     $(11,036)    $(3,676)    $(3,596)    $ (837)
                                              =======      ========     =======     =======     ======
 Basic and diluted net loss per
   common share as previously reported.....   $ (1.15)     $  (1.53)    $ (1.16)    $ (1.14)    $(0.33)
 Retroactive effect of change in accounting
   principle (b)...........................        -             -        (0.05)      (0.06)     (0.02)   
                                              -------     --------      -------     -------     ------
 Basic and diluted net loss per common
   share...................................   $ (1.15)     $  (1.53)    $ (1.21)    $ (1.20)    $(0.35)
                                              =======      ========     =======     =======      ======
 Weighted average number of common
   shares outstanding......................     8,328         7,194       3,042       2,988      2,373
                                              =======      ========     =======     =======     =======


 STATEMENT OF CASH-FLOW DATA
 Net cash provided by (used in) operating
   activities..............................   $ 2,484      $  1,430     $   615     $  (503)    $   16
 Net cash used in investing activities.....     5,960        21,187       5,022        4,113     2,018
 Net cash provided by financing activities.     3,356         3,803      16,225        7,876     2,515
   activities..............................


 BALANCE SHEET DATA:                                              AS OF DECEMBER 31,
                                              ---------------------------------------------------------
                                               1998          1997         1996        1995        1994
                                               ----          ----         ----        ----        ----
                                                                   (IN THOUSANDS)

 Working capital...........................   $   801      $   (632)    $15,987      $ 7,265    $2,103
 Property and equipment, net...............    10,866        18,372       8,576        2,935     2,669
 Total assets..............................    13,501        21,310      26,827       10,451     5,197
 Series B preferred stock..................         -             -           -        6,278     5,452
 Series C preferred stock..................         -             -           -        7,904         -
 Stockholders' equity (deficit)............   $10,531      $17,818      $24,574      $(4,240)   $ (674)

</TABLE>


(a)As discussed in Note 2 to the  financial  statements,  rental income has been
   reflected  as a  reduction  of general  and  administrative  expenses  in all
   periods presented.
(b)As discussed in Note 2 to the  financial  statements,  earnings per share for
   periods prior to the Company's  initial public offering have been restated to
   retroactively reflect the effect of SAB No. 98.

                                       12
<PAGE>

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

      The following is a discussion  of the  financial  condition and results of
operations  of the Company for the three years ended  December  31,  1998.  This
discussion  should be read in conjunction  with the financial  statements of the
Company,  the notes thereto and the other  financial data included  elsewhere in
this Annual Report on Form 10-K.

OVERVIEW

      The Company is a  knowledge-based  oil and gas  exploration  company whose
core  competence and strategic focus is the utilization of 3-D imaging and other
advanced  technologies in the search for commercial  quantities of hydrocarbons.
The Company enters into arrangements that enable it to combine its expertise and
exploration  capabilities  with  the  operating  skills  of  other  oil  and gas
companies.  The  Company  participates  in  selected  exploration  projects as a
non-operating  working  interest owner,  sharing both risks and rewards with its
partners.  The Company commenced operations in January 1993 to take advantage of
perceived  opportunities  emerging  from  changes  in the  domestic  oil and gas
industry, including the divestiture of domestic oil and gas properties, advances
in technology  and the  outsourcing of specialized  technical  capabilities.  By
reducing  drilling risk through 3-D imaging and  analysis,  the Company seeks to
improve the expected return on investment in its oil and gas projects.

      As a working  interest  partner,  the Company  shares all project costs in
proportion to its working interest percentage. In instances in which exploration
and development activities are unsuccessful, the Company incurs an economic loss
equal to its proportionate  share of project costs prior to the time the project
is abandoned.  Similarly,  the Company  incurs an economic loss if the Company's
proportionate  share of revenues  generated from  production is  insufficient to
cover the Company's share of project costs.

      The Company's future  financial  results will depend primarily on: (i) the
Company's ability to continue to source and screen potential projects;  (ii) the
Company's ability to discover commercial  quantities of hydrocarbons;  (iii) the
market price for oil and gas; and (iv) the Company's  ability to fully implement
its exploration and development program,  which is dependent on the availability
of  capital  resources.  There  can be no  assurance  that the  Company  will be
successful in any of these  respects,  that the prices of oil and gas prevailing
at the time of production will be at a level allowing for profitable production,
or that the Company  will be able to obtain  additional  funding to increase its
currently limited capital resources.

                                       13
<PAGE>

RESULTS OF OPERATIONS

      The  following  table  sets forth  certain  operating  information  of the
Company during the periods indicated:

                                                        YEAR ENDED DECEMBER 31,
                                                       -------------------------
                                                         1998     1997     1996
                                                         ----     ----     ----
      PRODUCTION:
         Gas (MMcf)                                    1,877.9   1,131.8   271.2
         Oil and condensate (Mbbls)                       37.8      14.1     8.5
         Total equivalent, converted at 6:1 (Mmcfe)    2,104.8   1,216.2   322.2
         6:1 (Mmcfe)
      AVERAGE SALES PRICE:
         Gas (per Mcf)                                  $ 2.17     $2.46  $ 2.50
         Oil and condensate (per Bbl)                    12.20     18.54   20.43
      AVERAGE EXPENSES (PER MCFE):
         Lease operating (1)                            $ 0.35     $0.36  $ 0.33
         Depletion of oil and gas properties              1.68      2.17    1.31
-------------

(1)   Includes  all  lease  operating  expenses  and taxes  attributable  to the
      Company's properties, including production and ad valorem taxes.

OIL AND GAS REVENUES.  Oil and gas revenues increased to $4,544,690 for the year
ended December 31, 1998 (the "1998  period") from  $3,045,447 for the year ended
December 31, 1997 (the "1997 period").  This increase was attributable to higher
oil and gas production levels. Production increased by over 73% to 2,104.8 Mmcfe
for the 1998 period,  from  1,216.2  Mmcfe for the 1997  period.  The  increased
production resulted from successful wells drilled during the latter part of 1997
and  throughout the year in 1998. The average sales price for natural gas, which
accounted for 89% of equivalent production during the 1998 period,  decreased by
12% to $2.17 per Mcf from $2.46 per Mcf for the 1997 period.  The average  sales
price for oil  decreased  to $12.20 per barrel  during  the 1998  period  versus
$18.54 per barrel for the 1997 period.

      Oil and gas  revenues  increased  to  $3,045,447  for the 1997 period from
$851,827 for the year ended December 31, 1996 (the "1996 period"). This increase
was primarily  attributable to higher oil and gas production levels.  Production
increased by over 277% to 1,216.2  Mmcfe for the 1997  period,  from 322.2 Mmcfe
for the 1996 period.  The increased  production  resulted from successful  wells
drilled  during the last three months of 1996 and  throughout  the year in 1997.
The number of productive wells in which the Company owned an interest  increased
to 30 (5.03 net) at the end of the 1997  period from 19 (2.02 net) at the end of
the 1996 period.  The average sales price for natural gas,  which  accounted for
93% of equivalent  production  during the 1997 period,  decreased by 2% to $2.46
per Mcf from $2.50 per Mcf for the 1996 period.  The average sales price for oil
decreased to $18.54 per barrel  during the 1997 period  versus $20.43 per barrel
for the 1996 period.

LEASE OPERATING EXPENSES.  Total lease operating expenses,  including production
taxes,  increased  to $731,749  for the 1998 period from  $436,243  for the 1997
period.  This increase was primarily  attributable  to the  additional  costs of
operating new producing  wells  drilled  throughout  the latter part of 1997 and
into the 1998 period and is comparable to the increase in production  during the
corresponding periods. Lease operating expenses per Mcfe of production decreased
to $0.35 per Mcfe for the 1998 period from $0.36 per Mcfe for the 1997 period.

      Total lease operating expenses,  including production taxes,  increased to
$436,243 for the 1997 period from  $107,676 for the 1996 period.  This  increase
was primarily  attributable  to the additional  costs of operating new producing
wells drilled  during the last three months of 1996 and  throughout  the year in

                                       14
<PAGE>


1997 and is comparable to the increase in  production  during the  corresponding
periods.  Lease operating expenses per Mcfe of production  increased slightly to
$0.36 per Mcfe for the 1997 period from $0.33 per Mcfe for the 1996 period.

DEPLETION,  DEPRECIATION  AND  AMORTIZATION  EXPENSE.  Depletion  of oil and gas
properties for the 1998 period  increased to $3,545,328  from $2,636,305 for the
1997  period.  The  increase in  depletion  of oil and gas  properties  resulted
primarily from the increase in oil and gas production during the 1998 period, as
discussed  above.  Depletion  of oil and gas  properties  per  Mcfe for the 1998
period  decreased to $1.68 per Mcfe,  or 23%, from the rate of $2.17 per Mcfe in
the corresponding period in 1997. The decrease in the rate resulted from greater
net  additions to oil and gas reserves  than the net  additions to evaluated oil
and gas property costs relative to the existing depletion rate per Mcfe.

      Depletion  of oil and gas  properties  for the 1997  period  increased  to
$2,636,305  from $422,839 for the 1996 period.  The increase in depletion of oil
and gas  properties  resulted  from both the increase in oil and gas  production
during the 1997 period,  as discussed  above,  and an increase in the  depletion
rate for this period.  Depletion of oil and gas properties per Mcfe for the 1997
period  increased to $2.17 per Mcfe,  or 66%, from the rate of $1.31 per Mcfe in
the corresponding period in 1996. The increase in the rate resulted from greater
additions to evaluated oil and gas property  costs than the additions to oil and
gas  reserves  relative  to the  existing  depletion  rate  per  Mcfe.  This was
principally the result of the costs of unsuccessful wells drilled in 1997.

IMPAIRMENT  OF OIL  AND  GAS  PROPERTIES.  Under  the  rules  of  the  full-cost
accounting method as prescribed by the Securities and Exchange  Commission,  the
Company is required to compare the net costs of its evaluated  properties to the
net present  value of its proved  reserves,  using prices and costs in effect at
the end of each quarterly  period.  If such evaluated  costs, net of accumulated
depreciation,  depletion  and  amortization,  exceed the present value of proved
reserves,  an impairment charge is required to writedown those excess costs. Oil
and gas impairment charges recorded during 1998 were $7,863,536. The impairments
recorded  were  principally  the  result of  increased  additions  to  evaluated
property  costs and the  decline in oil and gas  prices  being  received  by the
Company on December 31, 1998 as compared to December 31, 1997.

      Oil and gas impairment  charges recorded during 1997 were $9,061,240,  all
of which were  attributable  to the fourth quarter ended December 31, 1997. This
writedown results principally from the significant decline in oil and gas prices
being  received by the Company on December 31, 1997 as compared to September 30,
1997, and a relatively large investment in three unsuccessful exploratory wells,
all of which were evaluated in the fourth quarter of 1997.

GENERAL AND ADMINISTRATIVE  EXPENSE.  General and administrative expense, net of
costs  capitalized to exploration  and  development  projects,  decreased 20% to
$2,033,756  for the  1998  period  from  $2,532,474  for the 1997  period.  This
decrease was primarily  attributable  to a downsizing in personnel that occurred
during the second quarter of 1998.  The downsizing had the following  effects on
total  general and  administrative  expenses:  (1) an  increase in  compensation
expense  due  to  severance  pay  recorded,  (2) a  decrease  in the  amount  of
capitalized  overhead,  as the majority of the  terminated  personnel  were from
technical departments,  and (3) a decrease in stock option expense to adjust the
amortization of deferred  compensation  recorded for these employees relating to
stock options  issued within one year of the initial public  offering.  The 1997
amount represented a 39% increase from $1,827,946 incurred during the year ended
December 31,  1996.  The  increase  was  primarily a result of  personnel  costs
associated  with hiring which  occurred  during 1997 and increased  professional
fees and  other  costs  associated  with  being a public  company,  offset  by a
decrease in the amount of  $390,616  relating  to the  amortization  of deferred
compensation expense.

INTEREST AND OTHER  INCOME.  Interest and other income  decreased 91% to $53,984
for the 1998 period from $585,154 for the  comparable  period during 1997.  This
decrease is primarily a result of a  substantially  lower  balance of short-term
investments  during the 1998 period.  The 1997 amount represents a 136% increase
from the  $247,960  earned  during the  comparable  1996 period.  This  increase
reflects  interest income on the higher level of short-term  investments  during
1997 as a result of investment of the proceeds of the Company's  initial  public
offering.

                                       15
<PAGE>

NET LOSS. As a result of the  foregoing,  the  Company's  net loss  decreased to
$9,588,542  for the  1998  period  from  $11,036,144  for the 1997  period.  The
significant  factors  which caused the decrease in net loss were the increase in
revenues and the decrease in impairment of oil and gas properties, with a slight
offset from the increase in depletion,  depreciation and amortization of oil and
gas properties.  The net loss for the 1997 period increased from the net loss of
$3,676,411  in the 1996  period.  The most  significant  factor which caused the
increase in net loss was the impairment of oil and gas properties recorded under
full-cost accounting rules.

INCOME TAXES. The Company recorded a valuation  allowance  against the estimated
amount of deferred tax assets for which  realization  is uncertain.  The Company
reviews  the  valuation   allowance  at  the  end  of  each  quarter  and  makes
adjustments,  as necessary,  if it is determined that it is more likely than not
that the  deferred tax assets will be  realized.  As of December  31, 1998,  the
Company had tax net  operating  loss  carryforwards  ("NOL's") of  approximately
$11.7  million  which begin to expire in 2008.  As a result of the recent  stock
transactions,   including  the  initial  public  offering,  there  is  a  yearly
limitation placed on the Company's utilization of its NOL's under Section 382 of
the  Internal  Revenue  Code of 1986,  as amended.  See Note 5 to the  financial
statements of the Company included elsewhere herein.

LIQUIDITY AND CAPITAL RESOURCES

      See further  discussion  of these issues under Note 3, "Going  Concern" in
Notes to Financial Statements contained elsewhere herein.

      To date,  net cash provided by operating  activities  has been limited and
the  Company  has  funded  its oil and gas  exploration  activities  principally
through cash  provided by the sale of equity  securities.  On December 26, 1996,
the  Company  consummated  an initial  public  offering  of common  stock  which
provided  approximately $23.6 million in proceeds,  net of offering expenses. In
January 1997, the Company's  underwriters  exercised their over-allotment option
to purchase 375,000  additional shares of common stock,  resulting in additional
net proceeds to the Company of approximately  $3.8 million.  Approximately  $7.5
million of the  proceeds of the initial  public  offering was used to redeem all
the issued and  outstanding  shares of the Series B  preferred  stock and to pay
accrued  dividends on the issued and outstanding  Series C preferred  stock. The
balance of the net proceeds was designated to fund the Company's exploration and
development capital  expenditures and for general corporate purposes,  including
expenses associated with hiring additional personnel.

      The  Company  has made and will be  required  to make oil and gas  capital
expenditures  substantially  in excess of its net cash flow from  operations  in
order to complete the exploration  and  development of its existing  properties.
The company will also need to acquire exploration  prospects and find additional
oil and gas  reserves  in order for its asset base not to be depleted by current
oil and gas production.  Cash outlays for capital  expenditures  for oil and gas
exploration  and  development  activities for the years ended December 31, 1998,
1997, and 1996 were $8.7 million, $19.9 million, and $6.2 million, respectively.
The level of capital  spending in 1999 and thereafter  will be highly  dependent
upon the Company's  ability to obtain  additional  capital.  The Company expects
that its projected net cash flows from currently  producing  properties  will be
sufficient to fund its general and administrative  expenditures through December
31, 1999,  including  technical employee and related costs which are capitalized
under  full-cost  accounting.  However,  such  projected  cash  flows  could  be
adversely affected by declines in oil and gas prices and unanticipated  declines
in oil and gas  production  from existing  properties.  This raises  substantial
doubt about the Company's ability to pay its obligations as they become due.

      On December  18,  1997,  the Company  executed a credit  agreement  with a
commercial  bank,  the  borrowing  capacity of which was set at $2.0  million in
April 1998.  During the quarter  ended June 30, 1998 the Company  borrowed  $2.0
million  under the credit  agreement and made payments of $200,000 and $600,000,
during the third and fourth  quarters of 1998,  respectively,  and an additional
payment of $450,000 in the first quarter of 1999. The maximum  amount  currently

                                       16
<PAGE>



available for  borrowing  under the credit  facility is $750,000.  The borrowing
capacity  is a  function  of the  value  of the  Company's  proved  oil  and gas
reserves,  and is redetermined on a semi-annual  basis.  The credit agreement is
secured  by  substantially  all of the  Company's  oil  and gas  properties  and
contains  restrictions on dividends and additional  liens and  indebtedness  and
requires  the  maintenance  of a minimum  current  ratio and net worth,  each as
defined in the credit agreement.

      As a result of the  Company's  periodic  review of each of its oil and gas
exploration and development  properties and its available  capital,  the Company
has  occasionally  sold  partial  interests  in specific oil and gas projects to
other investors to reduce its total investment  commitment to such projects.  No
gain or loss has been recognized on these  transactions.  In September 1998, the
Company  sold  one  of  its  properties   located  in  Cove  Field,   Texas  for
approximately  $440,000  (of which  $200,000  was used to reduce the  balance of
borrowings on the  company's  bank credit  agreement).  In November,  1998,  the
Company  closed a sale of 50% of its working  interest in the Ramrod  project in
Matagorda county,  Texas. Proceeds to the Company from this sale were $2 million
and were used to reduce  accounts  payable and the bank loan. In accordance with
full-cost  accounting rules, no gain or loss was recorded from the sales. In the
first  quarter of 1999,  the Company sold all of the  remaining  interest in the
Ramrod  project for $600,000.  As of December 31, 1998,  the Company had working
capital of approximately $801,000.

      The Company will require  additional sources of financing to fund drilling
expenditures on properties  currently owned by the Company and to fund leasehold
costs and geological and geophysical costs on its active  exploration  projects.
The Company's 1999 expenditure plans currently include up to eleven  exploratory
and  development  wells and various  lease and seismic  data  acquisitions.  The
Company generally has the right, but not the obligation,  to participate for its
percentage  interest in drilling wells and can decline to participate if it does
not have sufficient  capital resources at the time such drilling  operations are
proposed.  The Company can also potentially transfer its right to participate in
drilling  wells  in  exchange  for  cash,  a  reversionary   interest,  or  some
combination thereof. To recover its investment in unevaluated properties,  it is
necessary  for the  Company  to  either  participate  in  drilling  which  finds
commercial  oil  and  gas  production  and  produce  such  reserves  or  receive
sufficient  value  through  the  sale or  transfer  of all or a  portion  of its
interests.

      Management  of the Company  continues  to seek  financing  for its capital
program from a variety of sources. The Company is actively soliciting new common
or  preferred  equity  investors,  which  could  lead  to a  sale  of  all  or a
substantial  portion of the Company's equity interests to a merger partner.  The
Company could also seek additional debt financing, although it has no additional
borrowings  currently  available  under its credit  agreement.  The Company also
recently  sold  interests  in oil and gas  properties  to help fund its  capital
program, and will consider additional property sales, although no such sales are
imminent.  No  assurance  can be given that the  Company  will be able to obtain
additional  financing by these or other means on terms that would be  acceptable
to the Company.  The Company's  inability to obtain  additional  financing would
have a  material  adverse  effect on the  Company.  Without  raising  additional
capital,  the Company anticipates that it will be required to limit or defer its
planned oil and gas exploration and development  program,  which could adversely
affect  the  recoverability  and  ultimate  value of the  Company's  oil and gas
properties.  The  Company  may  also  be  required  to  pursue  other  financial
alternatives, which could include a sale or merger of the Company.

       Management intends to pursue exploration and development opportunities to
the extent  additional  capital  becomes  available  in the  current oil and gas
environment.  However,  the uncertainties  about the Company's future cash flows
and the lack of firm  commitments  to  attract  additional  capital at this time
raise  substantial doubt about the ability of the Company to continue as a going
concern.  The accompanying  financial  statements do not include any adjustments
relating to the  recoverability  and classification of asset carrying amounts or
the amount and  classification  of  liabilities  that  might  result  should the
Company be unable to continue as a going concern.

                                       17
<PAGE>

EFFECTS OF INFLATION AND CHANGES IN PRICE

      The  Company's  results  of  operations  and cash  flows are  affected  by
changing oil and gas prices. If the price of oil and gas increases  (decreases),
there could be a  corresponding  increase  (decrease) in the operating cost that
the  Company  is  required  to bear  for  operations,  as  well  as an  increase
(decrease) in revenues. Historically,  general price inflation has had a minimal
effect on the Company.

YEAR 2000

      Many computer  software  systems were  structured to use a two-digit  date
field meaning that they will not be able to properly recognize dates in the Year
2000.  As a result,  computer  systems and  software  may need to be upgraded to
comply  with such  "Year  2000"  requirements.  Significant  uncertainty  exists
concerning the potential effects associated with such compliance as systems that
do not properly  recognize such  information  could  generate  erroneous data or
cause a system to fail.

      As of December 31, 1998,  the Company has assessed the expected  impact of
the  date  change  in  the  Year  2000  on the  software  programs  used  in its
operations.  The majority of the Company's  technical  applications are not date
sensitive.  The applications that do have date sensitive aspects,  including the
Company's  accounting  software,  have either been updated to compensate for the
date  change in the Year 2000 or are  currently  being  updated by the  software
vendors.  The Company  believes that any disruption  caused from a third party's
inability to be Year 2000 compliant will not be material to its operations.

      The Company  believes  that it will not be  required to make any  material
expenditures  to address  the Year 2000  problem  as it relates to its  existing
systems.  To date,  costs  incurred to address  Year 2000  compliance  have been
internal in nature and have been charged to income as incurred.  Such costs have
been funded from cash  provided by operating  activities.  However,  uncertainty
exists concerning the potential costs and effects  associated with any Year 2000
compliance,  and the Company  intends to continue to make efforts to ensure that
third  parties  with  whom it has  relationships  are Year 2000  compliant.  The
Company  is not  aware of any  information  technology  projects  that have been
delayed due to the Year 2000 compliance program.

      The Company's goal has been to ensure that all of the critical systems and
processes  which are under the direct control of the Company remain  functional.
However,  because certain systems and processes may be interrelated with systems
outside  of the  control  of the  Company,  there can be no  assurance  that all
implementations will be successful.  The Company believes that most, if not all,
of the Year 2000 risk to the Company will come from third parties, primarily oil
and gas  operators,  pipelines,  banking  institutions,  governmental  entities,
communications  systems  providers  and similar  entities.  The Company does not
operate any oil and gas properties and relies minimally on the software of third
parties,  which  consists  primarily of purchased  or leased  operating  system,
analysis,  accounting and seismic programs.  These programs have been determined
to be either Year 2000 compliant or capable of Year 2000  compliance with little
cost to the Company.

      There can be no assurance that unexpected Year 2000 compliance problems of
either the Company or its vendors,  customers  and service  providers  would not
materially and adversely affect the Company's  business,  financial condition or
operating  results.  The Company will continue  throughout  1999 to consider the
likelihood of a material business interruption due to the Year 2000 issue.

OTHER

      In  connection  with stock  options  granted  within one year prior to the
initial  filing of the  registration  statement  relating to the initial  public
offering,  the  Company  recorded  deferred  compensation  expense  based on the
difference between the option exercise price and the fair value of the Company's
common  stock at the date of grant,  using the $11.00 per share  initial  public

                                       18
<PAGE>


offering price as an estimate of the fair value.  Such deferred  compensation is
being amortized as additional  compensation  expense over the vesting period for
the  options.  As of December  31, 1998,  the Company had  unamortized  deferred
compensation  of $136,304 which will be charged to expense during the next three
years.  The  Company  has  elected  not to adopt the fair  value  accounting  of
Statement of Financial Accounting Standards No. 123, "Accounting For Stock Based
Compensation",  for  employees  and  continues  to account for these plans under
Accounting  Principles  Board  Opinion No. 25,  "Accounting  for Stock Issued to
Employees".


ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      Not applicable.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

      The  financial  statements  required by this item are  incorporated  under
Item14 in Part IV of this report.


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

      None.

                                   PART III


ITEMS 10 TO 13 INCLUSIVE.

           These  items  have  been  omitted  in  accordance  with  the  general
instructions  to Form 10-K  Annual  Report.  The  Registrant  will file with the
Securities and Exchange  Commission in April 1999, pursuant to Regulation 14A, a
definitive  proxy  statement  that will involve the election of  directors.  The
information required by these items will be included in such proxy statement and
are incorporated herein by reference.

                                       19
<PAGE>

                                    PART IV


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

   (A)(1) FINANCIAL STATEMENTS:

INDEX TO FINANCIAL STATEMENTS                                   PAGE

   Report of Independent Public Accountants.................    F-1

     Balance Sheets as of December 31, 1998 and 1997........    F-2

     Statements of Operations for the three years ended         F-3
  December 31, 1998.........................................

     Statements of Changes in Stockholders' Equity for the
  three
          years ended December 31, 1998.....................    F-4

     Statements of Cash Flows for the three years ended         F-5
  December 31, 1998.........................................

     Notes to Financial Statements..........................    F-6

     Supplementary Information - Unaudited..................    F-19

   (A)(2) FINANCIAL STATEMENT SCHEDULES:

        Not applicable

   (A)(3)   EXHIBITS:

   INDEX TO EXHIBITS

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

   11.1*   Computation of Earnings per Share

   23.1*   Consent of Arthur Andersen LLP

   23.2*   Consent of Ryder Scott Company

   24.1*   Power of Attorney (included on signature page)

   27.1*   Financial Data Schedule for December 31, 1998 (for SEC use only)

   27.2*   Financial Data Schedule for December 31, 1997 (restated) (for SEC use
           only)

   27.3*   Financial Data Schedule for December 31, 1996 (restated) (for
           SEC use only)
-------------
*  filed herewith

                                       20
<PAGE>

(B)   REPORTS ON FORM 8-K:

        Current  Report on Form 8-K filed  with the  Securities  and  Exchange
        Commission on September 9, 1998.

        Current  Report on Form 8-K filed  with the  Securities  and  Exchange
        Commission on November 10, 1998.















                                       21
<PAGE>


                                  SIGNATURES

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

                                          3DX TECHNOLOGIES INC.



                                          By:       /s/ Russell L. Allen
                                          ------------------------------------
                                          Vice President, Finance, Chief
                                          Financial Officer and Secretary

      Know All Men By These  Presents,  that  each  individual  whose  signature
appears  below hereby  constitutes  and appoints  Ronald P. Nowak and Russell L.
Allen  and each of them  individually,  his true and  lawful  agent,  proxy  and
attorney-in-fact, with full power of substitution and resubstitution, for him in
his name,  place and stead, in any and all  capacities,  to (i) act on, sign and
file with the Securities and Exchange  Commission any and all amendments to this
report together with all schedules and exhibits  thereto,  (ii) act on, sign and
file with the  Securities  and Exchange  Commission any exhibits to this report,
(iii) act on, sign and file such certificates, instruments, agreements and other
documents as may be necessary or  appropriate  in connection  therewith and (iv)
take any and all actions  which may be necessary or  appropriate  in  connection
therewith,  granting unto such agents, proxies and attorneys-in-fact and each of
them individually, full power and authority to do and perform each and every act
and thing  necessary  or  appropriate  to be done,  as fully for all intents and
purposes  as he might or could do in person,  hereby  approving,  ratifying  and
confirming all that such agents, proxies and  attorneys-in-fact,  any of them or
any of his or their  substitute  or  substitutes  may lawfully do or cause to be
done by virtue hereof.

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


        DATE              SIGNATURE                     TITLE(S)
        ----              ---------                     --------

 March 23, 1999      /s/ Ronald P. Nowak           President and Chief Executive
                     --------------------------    Officer (Principal Executive
                     Ronald P. Nowak               Officer)


 March 23, 1999      /s/ Russell L. Allen          Vice President, Finance and
                     --------------------------    Chief Financial Officer
                     Russell L. Allen              (Principal Financial and
                                                   Accounting Officer)

 March 23, 1999      /s/ Jon W. Bayless            Director
                     --------------------------
                     Jon W. Bayless 

                                       22
<PAGE>


 March 23, 1999      /s/ Charles E. Edwards        Director
                     --------------------------
                     Charles E. Edwards 


 March 23, 1999      /s/ C. Eugene Ennis           Chairman of the Board
                     --------------------------
                     C. Eugene Ennis


 March 23, 1999      /s/ C.D. Gray                 Director
                     --------------------------
                     C.D. Gray


 March 23, 1999       /s/ Douglas C. Williamson    Director
                     --------------------------
                     Douglas C. Williamson 












                                       23
<PAGE>



                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS




To the Stockholders and the Board
of Directors of 3DX Technologies Inc.:

We have audited the  accompanying  balance  sheets of 3DX  Technologies  Inc. (a
Delaware  corporation)  as of  December  31,  1998  and  1997,  and the  related
statements of  operations,  changes in  stockholders'  equity and cash flows for
each of the three years in the period ended December 31, 1998.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the financial  position of 3DX Technologies  Inc. as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  Note 3 to the
financial  statements,  the uncertainties about the Company's ability to pay its
obligations  when they  become due and the lack of firm  commitments  to attract
additional  capital raise  substantial doubt about the ability of the Company to
continue as a going concern.  Management's  plans in regard to these matters are
also described in Note 3. The accompanying  financial  statements do not include
any  adjustments  relating to the  recoverability  and  classification  of asset
carrying  amounts or the amount and  classification  of  liabilities  that might
result should the Company be unable to continue as a going concern


Houston, Texas
March 22, 1999                            ARTHUR ANDERSEN LLP


                                      F-1

<PAGE>



                            3DX TECHNOLOGIES INC.

                                BALANCE SHEETS


                                                          DECEMBER 31,
                                                    --------------------------
                                                        1998         1997
                                    ASSETS

Current assets:
  Cash and cash equivalents........................ $ 1,447,756   $ 1,568,091
  Accounts receivable..............................   1,039,331     1,181,083
  Prepaid expenses.................................      83,892       110,681
                                                    -----------   -----------
   Total current assets............................   2,570,979     2,859,855
                                                    -----------   -----------

Property and equipment:
  Oil and gas properties, full-cost method:
   Evaluated.......................................  32,664,307    22,521,673
   Unevaluated.....................................   4,450,731    10,098,698
  Technical interpretation equipment...............   2,734,149     2,605,439
  Other property and equipment.....................     273,780       273,780
                                                    -----------   -----------
                                                     40,122,967    35,499,590
  Less accumulated depletion, depreciation and
    amortization................................... (29,256,556)  (17,127,846)
                                                    ------------  -----------
                                                     10,866,411    18,371,744
  Other assets.....................................      63,771        78,041
                                                    -----------   -----------
                                                    $13,501,161   $21,309,640
                                                    ===========   ===========


                    LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable................................. $ 1,301,828   $ 1,713,209
  Accrued liabilities..............................     468,028     1,778,543
                                                    -----------   ----------- 
   Total current liabilities.......................   1,769,856     3,491,752
                                                    -----------   -----------

  Borrowings on credit agreement ..................   1,200,000            -
                                                    -----------   -----------
       Total liabilities ..........................   2,969,856     3,491,752

Stockholders' equity:
  Preferred stock, $.01 par value, 1,000,000
   shares authorized, none issued..................           -             -
  Common stock, $.01 par value, 20,000,000 shares
   authorized, 9,379,209 and 7,225,462 shares
   issued and outstanding, respectively............      93,792        72,255
  Paid-in capital..................................  39,989,951    38,085,357
  Deferred compensation............................    (136,304)     (512,132)
  Accumulated deficit.............................. (29,416,134)  (19,827,592)
                                                    -----------   -----------
   Total stockholders' equity......................  10,531,305    17,817,888
                                                    -----------   -----------
                                                    $13,501,161   $21,309,640
                                                    ===========   ===========




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

                                      F-2

<PAGE>



                            3DX TECHNOLOGIES INC.

                           STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

                                                     YEARS ENDED DECEMBER 31,
                                               -------------------------------------
                                                  1998          1997         1996
                                                  ----          ----         ----

<S>                                            <C>           <C>          <C>        
   Revenues:
     Oil and gas.............................  $ 4,544,690   $ 3,045,447  $   851,827
     Interest and other......................       53,984       585,154      247,960
                                               -----------   -----------  -----------
       Total revenues........................    4,598,674     3,630,601    1,099,787
                                               -----------   -----------  -----------

   Costs and expenses:
     Lease operating.........................      411,875       257,291       49,016
     Production taxes........................      319,874       178,952       58,660
     Impairment of oil and gas properties....    7,863,536     9,061,240    1,476,690
     Depletion, depreciation, and
        amortization of oil and gas properties   3,545,328     2,636,305      422,839
     Interest expense .......................       12,847           483            -
     General and administrative..............    2,033,756     2,532,474    1,827,946
                                               -----------   -----------  -----------
       Total costs and expenses..............   14,187,216    14,666,745    3,835,151
                                               -----------   -----------  -----------

   Net loss..................................   (9,588,542)  (11,036,144)  (2,735,364)
   Dividends on preferred stock..............            -             -     (520,393)
   Redemption premium on Series B preferred              
     stock...................................            -             -     (365,810)
   Accretion on preferred stock..............            -             -      (54,844)
                                               -----------   -----------  -----------

   Net loss applicable to common stockholders  $(9,588,542) $(11,036,144) $(3,676,411)
                                               ===========  ============= ===========

   Basic and diluted net loss per common share      $(1.15)       $(1.53)     $(1.21)
                                                    =======       ======      ======


   Weighted average number of common shares      8,328,429     7,193,837  3,042,466
     outstanding.............................    =========     =========  =========


</TABLE>





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

                                      F-3


<PAGE>



                               3DX TECHNOLOGIES INC.

                  STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>

                            COMMON STOCK                                                   STOCK
                          -----------------      PAID-IN      DEFERRED     ACCUMULATED  SUBSCRIPTIONS
                          SHARES     AMOUNT      CAPITAL    COMPENSATION     DEFICIT     RECEIVABLE       TOTAL
                          ------     ------      -------    ------------   -----------  -------------     -----   

<S>                     <C>          <C>        <C>           <C>           <C>            <C>         <C>         
Balance at December     
  31, 1995............  2,987,908    29,879     1,730,459     (837,864)     (5,115,037)    (47,756)    (4,240,319)
Principal collections.          -         -             -            -               -      47,756         47,756
Shares issued upon
  exercise of stock
  options.............      3,124        31           573            -               -           -            604
Accrual of dividends..          -         -             -            -        (520,393)          -       (520,393)
Accretion on preferred
  stock...............          -         -             -            -         (54,844)          -        (54,844)
Deferred compensation
  related to certain
  stock options.......          -         -       922,806     (922,806)              -           -              -
Compensation expense
  related to certain
  stock options.......          -         -             -      867,630               -           -        867,630
Shares issued in
  Initial Public
  Offering (net of
  offering costs).....  2,400,000    24,000    23,539,064            -               -           -     23,563,064
Conversion of Series C
  preferred to common
  stock...............  1,450,145    14,502     7,996,798            -               -           -      8,011,300
Redemption of Series B
  preferred stock.....          -         -             -            -        (365,810)          -       (365,810)
Net loss..............          -         -             -            -      (2,735,364)          -     (2,735,364)
                        ---------   -------   -----------    ---------    ------------    --------    -----------
Balance at December     
  31, 1996............  6,841,177    68,412    34,189,700     (893,040)     (8,791,448)          -     24,573,624
Shares issued for       
  over-allotment......    375,000     3,750     3,796,396            -               -           -      3,800,146
Shares issued for
  exercise of stock
  options.............      9,285        93         3,155                            -           -          3,248
Deferred compensation
  related to certain   
  stock options.......          -         -        96,106      (96,106)              -           -              -
Compensation expense
  related to certain
  stock options.......          -         -             -      477,014               -           -        477,014
Net loss..............          -         -             -            -     (11,036,144)               (11,036,144)
                        ---------   -------   -----------    ---------    ------------    --------    -----------

Balance at December
  31, 1997............  7,225,462    72,255    38,085,357     (512,132)    (19,827,592)          -     17,817,888
Shares issued for
  exercise of stock
  options.............    401,703     4,017       127,226            -               -           -        131,243
Deferred compensation
  related to
  restricted stock
  award...............     50,000       500        97,938      (98,438)              -           -              -
Compensation expense
  related to
  restricted stock
  award...............          -         -             -       41,016               -           -         41,016
Compensation expense
  related to certain
  stock options.......          -         -             -      180,905               -           -        180,905
Reversal of
  compensation expense
  for former employees
  related to certain
  stock options ......          -         -      (628,488)     252,345               -           -       (376,143)
Shares issued (net of
  offering costs) ....  1,702,044    17,020     2,307,918            -               -           -      2,324,938
Net loss .............          -         -             -            -      (9,588,542)          -     (9,588,542)
                        ---------   -------   -----------    ---------    ------------    --------    -----------
Balance at December
  31, 1998............  9,379,209   $93,792   $39,989,951    $(136,304)   $(29,416,134)   $      -    $10,531,305
                        =========   =======   ===========    =========    ============    ========    ===========


</TABLE>



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


                                      F-4


<PAGE>



                            3DX TECHNOLOGIES INC.

                           STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                  YEARS ENDED DECEMBER 31,
                                            --------------------------------------
                                                1998          1997        1996
                                                ----          ----        ----
                                            
<S>                                         <C>           <C>            <C>         
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss................................  $(9,588,542)  $(11,036,144)  $(2,735,364)
  Adjustments to reconcile net loss to
   net cash provided by operating
   activities:
     Depletion, depreciation and
       amortization.......................    4,265,174      3,366,242       883,962
     Compensation related to certain
        stock options.....................     (154,222)       477,014       867,630
     Impairment of oil and gas properties.    7,863,536      9,061,240     1,476,690
     (Increase) decrease in accounts
        receivable........................      141,752       (626,873)     (440,506)
     (Increase) decrease in prepaid
        expenses..........................       26,789         54,414       (79,309)
     Increase (decrease) in accounts
        payable...........................       (5,460)      (107,291)      388,767
     Increase (decrease) in accrued                                    
        liabilities.......................      (65,516)       240,963       253,415
                                            -----------   ------------   -----------
  Net cash provided by operating
    activities............................   2,483,511       1,429,565       615,285
                                            -----------   ------------   -----------


CASH FLOWS FROM INVESTING ACTIVITIES:
  Additions to oil and gas properties.....  (8,414,172)    (19,948,293)   (6,166,219)
  Sales of oil and gas properties.........   2,568,585               -             -
  Purchases of technical and other
   equipment..............................    (128,710)     (1,168,154)     (456,264)
  Proceeds from securities held to
    maturity .............................           -               -     1,595,167
  Other assets ...........................      14,270         (70,166)        5,000
                                            -----------   ------------   -----------
  Net cash used in investing activities...  (5,960,027)    (21,186,613)   (5,022,316)
                                            -----------   ------------   -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Borrowings on credit agreement .......   2,000,000               -             -
    Payment on borrowings on credit
      agreement ..........................    (800,000)              -             -
  Common stock proceeds, net of issuance
   costs..................................   2,024,938       3,800,146    23,563,064
    Proceeds from exercise of stock
      options ............................     131,243           3,248           604
  Series C preferred stock proceeds, net
    of issuance costs.....................           -               -       143,843
  Redemption of Series B preferred stock..           -               -    (6,687,100)
  Payment of Series C preferred stock       
    dividends.............................           -               -      (795,649)
                                            -----------   ------------   -----------
  Net cash provided by financing             
    activities............................   3,356,181       3,803,394    16,224,762
                                            -----------   ------------   -----------
Net change in cash and cash equivalents...    (120,335)    (15,953,654)   11,817,731
Cash and cash equivalents at beginning of
  year....................................   1,568,091      17,521,745     5,704,014
                                            -----------   ------------   -----------
Cash and cash equivalents at end of the
  year.................................... $ 1,447,756     $ 1,568,091   $17,521,745
                                            ===========   ============   ===========

SUPPLEMENTAL CASH FLOW INFORMATION
NON-CASH TRANSACTIONS:
    Accretion on preferred stock..........           -               -        54,844
    Redemption    premium on  Series  B
       preferred stock....................           -               -       365,810
    Issuance of common stock for reduction
       of accounts payable ...............     300,000               -             -
    Transfer of property interest for
       reduction of accounts payable .....     655,407               -             -

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

</TABLE>

                                      F-5

<PAGE>


                            3DX TECHNOLOGIES INC.

                        NOTES TO FINANCIAL STATEMENTS



1. ORGANIZATION AND BASIS OF PRESENTATION

      3DX Technologies Inc. ("3DX" or the "Company") began operations in January
1993 to offer 3-D seismic imaging and computer-aided exploration capabilities as
a partner to  experienced  oil and gas operators.  The Company  combines its 3-D
imaging  capabilities with the operator's local knowledge and  infrastructure to
evaluate and exploit drilling  opportunities.  The Company  primarily invests in
prospects in the Gulf Coast region of the U.S., where 3-D seismic evaluation and
interpretation  is expected to reduce drilling risk.  Working interests in major
prospects  have  ranged  from 5% to 40% in  property  investments  to date.  The
Company's interests in oil and gas ventures are proportionately consolidated.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

OIL AND GAS PROPERTIES

      3DX accounts for its oil and gas  properties  using the full-cost  method.
All costs  associated with the  acquisition,  exploration and development of oil
and gas  properties,  including  such  costs  as  leasehold  acquisition  costs,
geological  and  geophysical  expenditures,  dry hole  costs  and  tangible  and
intangible   development  costs,  are  capitalized  as  incurred.   Included  in
capitalized  costs  for  1998,  1997 and 1996 are  $1,253,906,  $1,962,691,  and
$1,146,722,  respectively of payroll and related costs of exploration department
personnel which are directly  attributable to the Company's current  exploration
and development  activities.  Other costs,  such as office and facilities costs,
technical  equipment  maintenance,  depreciation and support,  and communication
costs are also  capitalized  to the extent they are  attributed to the Company's
oil and gas  property  acquisition  and  exploration  activities  and  would not
otherwise be incurred if such activities were not being undertaken. The internal
costs  capitalized  do not  include  any costs  related to  production,  general
corporate overhead, or similar activities.

      Dispositions  of proved oil and gas properties are reported as adjustments
to  capitalized  costs,  with  gains  and  losses  not  recognized  unless  such
adjustments would significantly alter the relationship between capitalized costs
and  estimated  proved  oil and gas  reserves.  In 1998,  the  Company  sold its
interests in certain properties for total cash proceeds of $2,568,585.  In March
1999.  The Company  sold its  remaining  interest in a property  for proceeds of
$450,000.

      The  evaluated  costs  of oil and gas  properties  plus  estimated  future
development  and  dismantlement  costs are charged to  operations  as depletion,
depreciation and amortization using the  unit-of-production  method based on the
ratio  of  current  production  to  estimated  proved  recoverable  oil  and gas
reserves.  The Company excludes  unevaluated  property costs from the depletion,
depreciation,  and  amortization  calculations  until proved  reserves have been
discovered  or  a  determination  of  impairment  has  been  made.   Unevaluated
properties are assessed for impairment on a property-by-property basis.

      Impairment of  capitalized  costs of oil and gas  properties is determined
for each cost center on a country-by-country basis. For each cost center, to the
extent  that  capitalized  costs  of oil  and  gas  properties,  net of  related
accumulated  depreciation,  depletion and  amortization and any related deferred
income  taxes,  exceed the future net revenues of  estimated  proved oil and gas
reserves, discounted at 10% and net of any income tax effects, plus the lower of
cost or fair value of unevaluated  properties,  such excess costs are charged to
operations as an impairment of oil and gas  properties.  Oil and gas  impairment
charges  recorded during 1998 were  $7,863,536.  The  impairments  recorded were
principally  the result of increased  additions to evaluated  property costs and
the decline in oil and gas prices being  received by the Company on December 31,
1998.

                                      F-6


<PAGE>

                            3DX TECHNOLOGIES INC.

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)




 Oil and gas impairment  charges recorded during 1997 were $9,061,240,  all
of which were  attributable  to the fourth quarter ended December 31, 1997. This
writedown results principally from the significant decline in oil and gas prices
being  received  by the  Company on December  31,  1997 and a  relatively  large
investment in three  unsuccessful  exploratory wells all of which were evaluated
in the fourth quarter of 1997.

      Technical interpretation equipment and related software and other property
and  equipment,   consisting  of  office  furniture,   equipment  and  leasehold
improvements are recorded at cost. Depreciation is determined on a straight-line
basis over the estimated  useful lives of the assets,  which range from three to
five years.  Depreciation  of other  property and  equipment  totaled  $719,846,
$728,005, and $459,189 for 1998, 1997 and 1996, respectively, and is included in
general and administrative expenses.

ACCOUNTING FOR INCOME TAXES

      The Company  provides  deferred income taxes at the balance sheet date for
the  estimated  tax  effects  of  differences  in the tax  basis of  assets  and
liabilities and their financial statement carrying amounts.

NATURAL GAS REVENUES

      Natural gas  revenues  are recorded  using the sales  method,  whereby the
Company  recognizes  natural  gas  revenues  based on the  amount of gas sold to
product purchasers on its behalf. The Company has no material gas imbalances.

RENTAL INCOME

      The  Company  has an informal  income-sharing  arrangement  with a seismic
processing  company  whereby the Company  receives a  percentage  of the seismic
processing  company's gross billings in exchange for office space and the use of
technical  equipment  provided by the Company.  The Company's  share of billings
under this  arrangement  amounted to $301,304,  $264,651,  and $229,556 in 1998,
1997 and 1996,  respectively,  and is reflected as a reduction of the  Company's
general and administrative expenses.

NET LOSS PER COMMON SHARE

      In February 1997, the Financial  Accounting  Standards Board (FASB) issued
Statement  of  Financial  Accounting  Standards  (SFAS) No. 128,  "Earnings  Per
Share,"  which  establishes  new  computation,   presentation,   and  disclosure
requirements  for  earnings  per share for public  companies.  The  statement is
effective for financial  statements issued for periods ending after December 15,
1997.  In  connection  with this new  statement,  the  Securities  and  Exchange
Commission issued Staff Accounting Bulletin (SAB) No. 98, which prescribes a new
accounting treatment for the impact on earnings per share of "nominal issuances"
of common stock and common  stock  options  issued  within one year prior to the
filing of a  registration  statement  for an initial  public  offering of common
stock.  Under the prior rules,  common stock options  having a nominal  exercise
price issued within one year of an initial  public  offering were required to be
reflected retroactively in the computation of earnings per share for all periods
even if the  effect  was  antidilutive.  Under SAB No. 98,  these  common  stock
options are only required to be reflected in earnings per share if the effect is
dilutive.  The Company has restated all prior  periods to reflect this change in
accounting  principle.  The effect of this change is presented in the  following
table:

                                      F-7


<PAGE>

                            3DX TECHNOLOGIES INC.

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)


                                               YEARS ENDED DECEMBER 31,
                                               ------------------------
                                                1998     1997    1996
                                                ----     ----    ---- 
 Basic and diluted net loss per common
   share, as previously reported ..........   $(1.15)  $(1.53)  $(1.16)
 Retroactive effect of change in
   accounting principle....................        -        -    (0.05)
                                              ------   ------   ------
 Basic and diluted net loss per common
   share .............................        $(1.15)  $(1.53)  $(1.21)
                                              ======   ======   ======

      The  computation  of basic and diluted net loss per common share was based
entirely on the weighted average common shares outstanding.  Stock options which
are  potentially  dilutive  were  excluded  from the net loss per  common  share
calculation  in each of the  years  presented  as the  effect  would  have  been
antidilutive. See Note 9 for the number of stock options outstanding.

STATEMENTS OF CASH FLOWS

      For the purposes of the  statements of cash flows,  the Company  considers
all highly liquid investments purchased with original maturities of three months
or less to be cash equivalents.

CONCENTRATION OF CREDIT RISK

      All of the  Company's  receivables  are due  from  oil  and gas  producing
companies  located in the United  States.  The Company has not  experienced  any
significant credit losses related to its receivables.

MAJOR CUSTOMERS

      Operators  for  producing  oil and gas  wells in which the  Company  holds
working  interests  sold the  Company's  share of gas  production  to four major
customers during 1998 with one customer accounting for 31% of the Company's 1998
oil and gas revenues and the remaining  three  customers each accounting for 13%
to 15% of 1998 oil and gas revenues.  Sales to one customer  represented 63% and
58% of oil and gas revenues in 1997 and 1996, respectively.

FAIR VALUE OF FINANCIAL INSTRUMENTS

      The carrying amounts of cash and cash  equivalents,  accounts  receivable,
accounts   payable  and  accrued   liabilities  are  short-term  in  nature  and
approximate fair value.

USE OF ESTIMATES

      The  preparation  of financial  statements  in conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure  of  contingent  assets and  liabilities,  if any, at the date of the
financial  statements,  and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.  Oil and
gas reserve estimates, which are the basis for units-of-production depletion and
impairment of oil and gas properties,  are inherently imprecise and are expected
to change as future information becomes available.

                                      F-8

<PAGE>

                            3DX TECHNOLOGIES INC.

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)


PRIOR YEAR RECLASSIFICATIONS

      Certain  prior year  amounts  have been  reclassified  to conform with the
current presentation.

ACCOUNTING PRONOUNCEMENTS

      SFAS No. 130, "Reporting  Comprehensive  Income", was issued in June 1997,
with the adoption  required for fiscal years  beginning after December 31, 1997.
SFAS No. 130 requires the  presentation of an additional  income measure (termed
"comprehensive  income"), which adjusts traditional net income for certain items
that previously  were only reflected as direct charges to equity.  For the years
ended  December  31,  1998,  1997 and 1996  there  is not a  difference  between
"traditional" net income and comprehensive net income.

      SFAS No. 131,  "Disclosures  About  Segments of an Enterprise  and Related
Information",  was  issued  in June  1997,  establishing  standards  for  public
business  enterprises to report information about operating segments and related
information  in  interim  and  annual  financial  statements.  The  Company  has
evaluated the  applicability  of SFAS No. 131 and has concluded that the Company
does not meet the criteria  which require  segment  reporting as the Company has
only one operating segment.

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

      SFAS No. 133 is effective for fiscal years  beginning after June 15, 1999.
A company  may also  implement  SFAS No. 133 as of the  beginning  of any fiscal
quarter after issuance.  SFAS No. 133 cannot be applied retroactively.  SFAS No.
133 must be applied to (a)  derivative  instruments  and (b) certain  derivative
instruments  embedded  in  hybrid  contracts  that  were  issued,  acquired,  or
substantively  modified after December 31, 1997 and, at the company's  election,
before January 1, 1998. Based on the Company's current operations,  SFAS No. 133
will not impact the Company's disclosure or reporting.

3. GOING CONCERN

      The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company expects that its projected
net cash flows from currently  producing  properties  will be sufficient to fund
its projected minimum levels of general and administrative  expenditures through
December  31, 1999,  including  technical  employee and related  costs which are
capitalized  under  full-cost  accounting.  However,  these  projections  do not
consider any cash expenditures  which could be required by the Company's planned
capital and exploration  program  discussed below.  Available cash could also be
limited by declines in oil and gas prices and unanticipated  declines in oil and
gas production from existing  properties.  These matters could adversely  affect
the Company's ability to pay its obligations as they become due.

                                      F-9


<PAGE>

                            3DX TECHNOLOGIES INC.

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

      The  Company  has made and will be  required  to make oil and gas  capital
expenditures  substantially  in excess of its net cash flow from  operations  in
order to complete the exploration  and  development of its existing  properties.
The company will also need to acquire exploration  prospects and find additional
oil and gas  reserves  in order for its asset base not to be depleted by current
oil and gas  production.  The level of capital  spending in 1999 and  thereafter
will be  highly  dependent  upon the  Company's  ability  to  obtain  additional
capital.

      The Company will require  additional sources of financing to fund drilling
expenditures on properties  currently owned by the Company and to fund leasehold
costs and geological and geophysical costs on its active  exploration  projects.
The Company's 1999 expenditure plans currently include up to eleven  exploratory
and  development  wells and various  lease and seismic  data  acquisitions.  The
Company generally has the right, but not the obligation,  to participate for its
percentage  interest in drilling wells and can decline to participate if it does
not have sufficient  capital resources at the time such drilling  operations are
proposed.  The Company can also potentially transfer its right to participate in
drilling  wells  in  exchange  for  cash,  a  reversionary   interest,  or  some
combination thereof. To recover its investment in unevaluated properties,  it is
necessary  for the  Company  to  either  participate  in  drilling  which  finds
commercial  oil  and  gas  production  and  produce  such  reserves  or  receive
sufficient  value  through  the  sale or  transfer  of all or a  portion  of its
interests.

      Management  of the Company  continues  to seek  financing  for its capital
program from a variety of sources. The Company is actively soliciting new common
or  preferred  equity  investors,  which  could  lead  to a  sale  of  all  or a
substantial  portion of the Company's equity interests to a merger partner.  The
Company could also seek additional debt financing, although it has no additional
borrowings  currently  available  under its credit  agreement.  The Company also
recently  sold  interests  in oil and gas  properties  to help fund its  capital
program, and will consider additional property sales, although no such sales are
imminent.  No  assurance  can be given that the  Company  will be able to obtain
additional  financing by these or other means on terms that would be  acceptable
to the Company.  The Company's  inability to obtain  additional  financing would
have a  material  adverse  effect on the  Company.  Without  raising  additional
capital,  the Company anticipates that it will be required to limit or defer its
planned oil and gas exploration and development  program,  which could adversely
affect  the  recoverability  and  ultimate  value of the  Company's  oil and gas
properties.  The  Company  may  also  be  required  to  pursue  other  financial
alternatives, which could include a sale or merger of the Company.

       Management intends to pursue exploration and development opportunities to
the extent  additional  capital  becomes  available  in the  current oil and gas
environment.  However,  the uncertainties  about the Company's future cash flows
and the lack of firm  commitments  to  attract  additional  capital at this time
raise  substantial doubt about the ability of the Company to continue as a going
concern.  The accompanying  financial  statements do not include any adjustments
relating to the  recoverability  and classification of asset carrying amounts or
the amount and  classification  of  liabilities  that  might  result  should the
Company be unable to continue as a going concern.


4. LISTING ON NASDAQ

      In  September  1998,  the Company  received a letter from The Nasdaq Stock
Market,  Inc.  notifying  the  Company  that it failed to maintain a closing bid
price of  greater  than or equal to $1.00 and that the  Company's  common  stock
failed to maintain a market  value of public  float  greater than or equal to $5
million,  as required by Nasdaq rules.  The Company met with  officials from The
Nasdaq  Stock  Market,  Inc. on  February  12,  1999,  at which time the Company

                                      F-10

<PAGE>

                            3DX TECHNOLOGIES INC.

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)


presented  several  alternatives to regain compliance with the minimum bid price
and market value of public  float  requirements.  On March 22, 1999,  The Nasdaq
Stock  Market Inc.  responded  to the meeting  with the decision to transfer the
listing of the Company's  securities to The Nasdaq  SmallCap  Market,  effective
with  the  open of  business  on  March  24,  1999,  pursuant  to the  following
exception.  On or before  April 5, 1999,  the  Company  must  evidence a minimum
closing  bid price of $1.00 per share for a minimum of ten  consecutive  trading
days.  In order to fully  comply with the terms of this  exception,  the Company
must be able to  demonstrate  compliance  with all  requirements  for  continued
listing on The Nasdaq SmallCap Market.  Accordingly,  effective, March 24, 1999,
the trading  symbol of the Company's  securities was changed from TDXT to TDXTC.
The "C" will be removed  from the symbol when The Nasdaq  Stock  Market Inc. has
confirmed  compliance  with the terms of the  exception  and all other  criteria
necessary for continued listing.  In the event the Company is unable to meet the
terms of this  exception,  the  Company's  securities  will be delisted from The
Nasdaq Stock Market. If delisted, trading of the common stock would be conducted
in the over-the-counter  market or in what are commonly referred to as the "pink
sheets".  As a result, a holder of the common stock could find it more difficult
to dispose of or to obtain accurate quotations of the price of the common stock.
Such  delisting  could have an adverse  effect on the market  price and  overall
marketability of the common stock.

      If the common stock is not listed on Nasdaq and has a market price of less
than $5.00 per share,  it may be classified as a "penny stock".  SEC regulations
define a "penny stock" to be any  non-Nasdaq  equity  security that has a market
price of less than $5.00 per  share,  subject  to  certain  exceptions.  For any
transaction  involving a penny stock, unless exempt, the rules require delivery,
prior to any transaction in a penny stock, of a disclosure  schedule prepared by
the  Securities  and  Exchange  Commission  ("SEC")  relating to the penny stock
market. Disclosure is also required to be made about commissions payable to both
the  broker-dealer  and the  registered  representative  and to provide  current
quotations for the securities.  Finally,  monthly  statements are required to be
sent disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stocks.

      The  foregoing  required  penny stock  restrictions  will not apply to the
common stock if such  securities are quoted on Nasdaq and have certain price and
volume  information  provided on a current and continuing  basis or meet certain
minimum  net  tangible  assets  or  average  revenue  criteria.  There can be no
assurance   that  the  common  stock  will  qualify  for  exemption  from  these
restrictions.  In any event, even if shares of the common stock were exempt from
such  restrictions,  they  would  remain  subject  to  Section  15(b)(6)  of the
Securities  Exchange Act of 1934, as amended (the "Exchange  Act"),  which gives
the SEC the authority to prohibit any person that is engaged in unlawful conduct
while  participating  in a distribution of a penny stock from associating with a
broker-dealer  or  participating  in a distribution of a penny stock, if the SEC
finds that such a  restriction  would be in the public  interest.  If the common
stock were subject to the rules on penny  stocks,  the market  liquidity for the
common stock could be severely adversely affected.


                                      F-11


<PAGE>


                            3DX TECHNOLOGIES INC.

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)


5. INCOME TAXES

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


                                                            DECEMBER 31,
                                                      ------------------------
                                                          1998          1997
Deferred tax liability:
  Exploration and development expenditures 
    deducted for tax and capitalized for books......  $(2,016,743   $ (981,479)
  Other items, net..................................     (173,101)     (70,968)
                                                      -----------   ----------
      Total deferred tax liability                     (2,189,844)  (1,052,447)
                                    
Deferred tax assets:
  Net operating loss carryforwards                      3,979,073    3,803,419
  Other items, net................                      2,330,587      836,151
                                                       ----------   ----------
      Total deferred tax assets...                      6,309,660    4,639,570
  Less: Valuation allowance.......                     (4,119,816)  (3,587,123)
Net deferred tax assets...........                      2,189,844    1,052,447
                                                       ----------   ----------
Net deferred tax liability........                     $        -   $        -
                                                       ==========   ==========

            The  Company  did not record  any  current  or  deferred  income tax
provision or benefit in any of the periods  presented.  The Company's  provision
for income taxes differs from the amount computed by applying the statutory rate
due  principally to the valuation  allowance  recorded  against its deferred tax
asset  account  relating to net  operating  tax loss  carryforwards.  Management
believes that such allowance is necessary until there is greater  assurance that
the net operating tax loss carryforwards can be utilized.

      The Company has  recorded a valuation  allowance  against its deferred tax
assets in each year to reflect the estimated  portion for which  realization  is
uncertain.  As of December  31,  1998,  the Company had tax net  operating  loss
carryforwards of approximately  $11,703,000  which begin to expire in 2008. As a
result of recent stock transactions,  including the initial public offering, the
Company's  utilization of its net operating  losses is limited under Section 382
of the Internal Revenue Code.

6. CREDIT AGREEMENT

      On December  18,  1997,  the Company  executed a credit  agreement  with a
commercial bank which provides for advances under a borrowing base  periodically
determined  by the Bank and set  initially at $5 million.  The credit  agreement
expires on December  31,  2000.  During April 1998,  the bank  redetermined  the
borrowing base and  established an  availability of $2 million which was reduced
to  $1.2  million  in  November  1998.  The  credit   agreement  is  secured  by
substantially  all of the Company's  producing oil and gas properties.  Advances
carry an interest rate, at the Company's  option, of either the London Interbank
Offered Rate ("LIBOR")  plus 2% or the lender's base rate. The credit  agreement
contains  restrictions on dividends and additional  liens and  indebtedness  and
requires  the  maintenance  of a minimum  current  ratio and net worth,  each as
defined in the credit agreement.  At December 31, 1998, the outstanding  balance
under this credit agreement was $1.2 million at a weighted average interest rate
of 7.3 percent.  There were no borrowings  under the credit agreement during the
year ended  December 31, 1997. In March 1999, the Company used the proceeds from
a sale of an  interest  in oil and gas  properties  to pay down its  outstanding
balance to $750,000.

                                      F-12


<PAGE>

                            3DX TECHNOLOGIES INC.

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

7. MANDATORILY REDEEMABLE PREFERRED STOCK

SERIES B

      In November  1993, the Company issued 29,000 Series B equity units at $100
per unit, for total  proceeds  before  offering costs of $2,900,000.  In October
1994,  the Company  issued 25,000  additional  Series B equity units at $100 per
unit, for total proceeds before  offering costs of $2,500,000.  Each equity unit
consisted of one share of redeemable  Series B preferred  stock,  par value $.01
per share ("Series B Preferred Stock"),  at $94.1558 per share and 30.215 shares
of common  stock,  par value  $.01 per share,  at $0.19 per share.  The Series B
Preferred  Stock carried a redemption  value of $100 per share.  The  difference
between  the  sales  price and the  redemption  value was  subject  to  pro-rata
accretion  which was charged to retained  earnings,  such that the book value of
each  share  of  Series B  Preferred  Stock  would  equal  $100 at the  required
mandatory redemption in two installments commencing in November 2002. The Series
B Preferred Stock also carried a cumulative annual dividend, payable on December
31 of each year,  of $12.50 per share if paid in cash or .13276 shares of Series
B Preferred Stock if paid in stock. All dividends were paid in additional shares
of Series B Preferred Stock. Series B equity units totaling  $1,025,000,  or 19%
of the total proceeds of the offering, were sold to related parties,  consisting
of  officers of the  Company,  consultants  and  Landmark.  Additionally,  units
totaling  $3,032,000,  or 56%, were sold to two investors and their  affiliates,
each of which  required  the  right to  designate  one  member  of the  Board of
Directors of the Company.

      In  connection  with the initial  public  offering  which was completed on
December  26,  1996 (see Note 8), all of the issued  and  outstanding  shares of
Series B Preferred Stock were redeemed.  The unamortized  redemption  premium of
$365,810 was charged to the Company's accumulated deficit.

SERIES C

      During the period from July 26,  1995  through  September  25,  1995,  the
Company sold a total of 2,662,241 shares of senior redeemable convertible Series
C preferred  stock,  par value $.01 per share ("Series C Preferred  Stock"),  at
$3.00 per share,  for total proceeds  before  offering costs of $7,986,723.  The
Series C Preferred Stock carried a cumulative dividend at an annual rate of $.24
per share if paid in cash or .08 shares of Series C  Preferred  Stock if paid in
stock,  payable or accruing  quarterly,  commencing on December 31, 1995. Unpaid
dividends  earned  interest at an annual  interest  rate of 8%.  During the year
ended  December  31,  1996,  the  Company  paid  accrued  dividends  on Series C
Preferred  Stock of  $795,649.  Shares  totaling  $925,515,  or 12% of the total
proceeds, were sold to related parties, including consultants to and officers of
the Company,  as well as two directors and their affiliates.  Additionally,  one
investor purchased shares totaling  $3,999,999,  or 50% of the offering,  on the
condition  that it be given the right to designate  one member of the  Company's
Board of Directors.

      Each share of Series C Preferred Stock was  convertible  into one share of
common stock.  Subsequent to the reverse stock split in October 1996, each share
was convertible  into .517 shares of common stock.  The Series C Preferred Stock
could be automatically  converted to common stock upon the occurrence of certain
conversion  events,  including the  successful  completion of an initial  public
offering of the  Company's  common stock if certain  pricing and other  criteria
were met.  The Series C preferred  stock also  contained a  mandatory-redemption
feature  under which the stock could be redeemed,  at the option of at least 67%
of the holders,  at the $3.00 per share  liquidation  value in two  installments
commencing in November 2002.

      In October 1995,  the Board of Directors  granted the holder of each share
of Series C Preferred Stock a warrant to purchase additional shares equal to 10%

                                      F-13

<PAGE>
                            3DX TECHNOLOGIES INC.

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)


of the shares  owned by such  holder,  at an exercise  price of $3.00 per share.
Such  shares  were  exercisable  at any time until the earlier of (a) five years
from  the date of  issuance  and (b) the  effective  date of an  initial  public
offering of the Company's securities. No value was assigned to these warrants as
the computed value of the warrants using the Black-Scholes model was zero.

      In  connection  with the initial  public  offering  which was completed on
December  26,  1996,  all of the  issued  and  outstanding  shares  of  Series C
Preferred  Stock,  and all  outstanding  Series C Preferred  Stock warrants were
converted into common stock.

STOCK SUBSCRIPTIONS RECEIVABLE

      Certain  officers and directors of the Company  purchased  Series B equity
units and Series C Preferred Stock for promissory notes,  which are reflected as
an offset to equity in the  accompanying  financial  statements.  The promissory
notes were full  recourse and carried  interest at a fixed rate of 6% per annum.
The notes from the Company's  officers  were  collateralized  by certain  vested
stock options the individuals held from their former employer. The principal and
accrued  interest  on all notes for the  purchase  of equity  securities  of the
Company were paid off as of December 31, 1996.

      The following table  summarizes the 1996 activity of Series B and Series C
Preferred Stock:

                                          REDEEMABLE PREFERRED STOCK
                                    -------------------------------------------
                                        SERIES B               SERIES C
                                    -------------------    ---------------------
                                    SHARES      AMOUNT     SHARES      AMOUNT

Balance at December 31, 1995..      66,871   $6,277,826   2,662,241   $7,903,833
Accretion to redemption value.           -       43,464           -       11,380
Redemption premium............           -      365,810
Redemption of Series B             
  preferred...................     (66,871)  (6,687,100)          -           -
Exercise of outstanding
  warrants
    For cash..................           -            -      32,029      96,087
    Under cashless tender.....           -            -     110,653           -
Conversion to common stock....           -            -  (2,804,923) (8,011,300)
                                   -------    ---------  ----------  ----------
Balance at December 31, 1996..           -    $       -           -  $        -
                                   =======    =========  ==========  ==========


8. STOCKHOLDERS' EQUITY

      In May 1995,  the  stockholders  approved  a 10-for-1  stock  split of the
Company's  common stock.  In October 1996, the  stockholders  approved a reverse
stock split whereby holders of common stock received .517 shares of common stock
for every share  previously  owned.  All  references in this report to number of
common shares outstanding reflect stock splits retroactively to inception of the
Company.

      On December 26, 1996, the Company completed an initial public offering for
the sale of 2,400,000 shares of common stock at $11.00 per share,  less offering
costs.  In January  1997,  the  Company's  underwriters  exercised  their 30-day
over-allotment  option to purchase 375,000  additional shares of common stock at
the  offering  price of  $11.00  per  share,  less  underwriting  discounts  and
commissions. Total proceeds to the Company from the initial public offering, net
of offering costs, were approximately $27.4 million.

                                      F-14


<PAGE>

                            3DX TECHNOLOGIES INC.

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

      On June 10, 1998,  the Company  entered  into a common stock  subscription
agreement dated as of June 3, 1998,  with certain  purchasers that provides for,
among other  things,  the purchase of an  aggregate  of 1,462,044  shares of the
Company's  common stock at $1.50 per share.  Net  proceeds  from the issuance of
shares on June 10,  1998  amounted to $2.1  million.  The  agreement,  which was
approved by the stockholders of the Company at a special meeting of stockholders
held on August 7, 1998,  also granted to the  purchasers  an option to purchase,
subject to  stockholder  approval,  up to an aggregate  of 1,871,290  additional
shares of common  stock at a purchase  price of $1.50 per  share.  On August 10,
1998, the option expired unexercised.

      The  agreement  also  grants  the  purchasers  the  right  (1) to  receive
additional shares of common stock in the event of certain dilutive  issuances at
less than $1.50 per share which may be made by the Company (dilution shares) and
(2) to receive  additional shares in the event the Company fails to meet certain
timing  requirements  with respect to the filing and  effectiveness  of a resale
registration  statement (penalty shares). A potentially  dilutive issuance under
this  agreement  occurred in the last  quarter of 1998 which could  result in an
additional  292,408 shares of the Company's  common stock being issued under the
anti-dilution provisions of the agreement.

      Under the terms of the June 3, 1998 agreement,  the Company's stockholders
approved a proposal for the adoption of a one-for-five  reverse stock split with
respect to all of the  outstanding  common  stock of the  Company.  Such reverse
stock  split  will not be  effective  until it is  implemented  by the  Board of
Directors of the Company.

      In August 1998,  the Company  issued  240,000 shares of common stock to an
operating  partner in  satisfaction of an account payable on the Company's books
to that operating partner.

      Included in accrued  liabilities at December 31, 1998 is $137,880 due to a
consultant to the Company.  Under the terms of the  consulting  agreement,  this
amount is to be paid in the Company's  common stock at the average closing price
in effect when the services  were  performed.  The amount of common shares to be
issued to satisfy the liability at December 31, 1988 is 225,000 shares.

9. STOCK OPTIONS

      In June 1994,  the Board of Directors  approved the 1994 Stock Option Plan
(the "Plan") for employees,  officers,  directors and certain consultants of the
Company. The ten-year options vest over four years for employees (25% at the end
of each of the  first  two  years  and  monthly  over the last 24  months).  For
directors and consultants, the options vest 50% at the end of the first year and
25% at the end of the  second and third  years.  Certain  of these  options  are
eligible for  accelerated  vesting upon a change of control of the Company.  The
Company has  reserved a total of  1,700,783  shares of common stock for issuance
under this Plan, of which 764,421 shares were available for grant as of December
31, 1998. The following  table  summarizes  option balances and activity for the
Plan:


                                      F-15


<PAGE>

                            3DX TECHNOLOGIES INC.

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

                                                           WEIGHTED
                                                  NUMBER    AVERAGE
                                                      OF   EXERCISE
                                                  SHARES      PRICE
            --------------------------------------------------------
            Options  outstanding,  December 31,
              1995...........................     686,943     $0.34
            Granted..........................     267,806      1.52
            Exercised........................      (3,124)     0.19
            Canceled.........................    (157,146)     0.57
            --------------------------------------------------------
            Options  outstanding,  December 31,
              1996...........................     794,479     $0.70
            Granted..........................     628,656     10.33
            Exercised........................      (9,285)     0.35
            Canceled.........................     (33,100)     5.03
            --------------------------------------------------------
            Options  outstanding,  December 31, 
              1997...........................   1,380,750     $4.98
            Granted..........................   1,598,251      2.00
            Exercised........................    (401,703)     0.33
            Canceled.........................   (1,750,894)    4.97
            --------------------------------------------------------
            Options  outstanding,  December 31,   
              1998...........................     826,404     $1.27
            --------------------------------------------------------

            --------------------------------------------------------
            Exercisable options -
               December 31, 1996.............     344,396    $ 0.28
               December 31, 1997.............     554,183      0.56
               December 31, 1998.............     210,844      0.40
            --------------------------------------------------------




                                WEIGHTED   WEIGHTED                  WEIGHTED
      RANGE OF       OPTIONS     AVERAGE    AVERAGE       OPTIONS     AVERAGE
      EXERCISE   OUTSTANDING   REMAINING   EXERCISE   EXERCISABLE    EXERCISE
        PRICES   AT 12/31/98  LIFE (YRS)      PRICE   AT 12/31/98       PRICE
  --------------------------------------------------------------------------
  $0.19 to $0.58     234,163        6.12      $0.36      210,844     $0.40
      $1.62          592,241        9.30      $1.63                      -
                     -------                             -------
      Total          826,404        8.40      $1.27      210,844     $0.40

      In connection  with stock options  granted  within one year of the initial
public offering,  the Company recorded deferred  compensation as paid-in capital
with a  corresponding  offset to  stockholders'  equity.  The amount of deferred
compensation  is based on the difference  between the option  exercise price and
the  $11.00 per share  initial  public  offering  common  stock  price for those
options.  Deferred  compensation is being amortized as compensation expense over
the option vesting period,  and totaled  $180,905,  $477,014 and $867,630 during
the years ended December 31, 1998, 1997 and 1996, respectively. During the third
quarter of 1998,  the Company  reversed  approximately  $376,000 of stock option
expense  previously  recorded for employees who were  terminated as of September
30,  1998  and  whose  stock  options  were  cancelled.   Unamortized   deferred
compensation as of December 31, 1998 amounted to $136,304.

                                      F-16


<PAGE>

                            3DX TECHNOLOGIES INC.

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

      In October 1995, the FASB issued SFAS No. 123  "Accounting for Stock-Based
Compensation".  SFAS No. 123 is a new  standard of  accounting  for  stock-based
compensation  and  establishes  a fair  value  method of  accounting  for awards
granted after December 31, 1995 under stock compensation  plans. The Company has
elected to continue  accounting  for employee  stock  options  under  Accounting
Principles Board Opinion No. 25 "Accounting For Stock Issued to Employees".  Had
the Company  elected to apply SFAS No. 123, the estimated  effects on net income
and earnings per share  resulting from grants made after December 31, 1994 would
have been as follows:

                                           1998         1997          1996
                                           ----         ----          ----
     Net loss attributable to common
      stock:
        As reported................... $(9,588,542) $(11,036,144) $(3,676,411)
        Pro forma.....................  (9,797,089)  (11,587,856)  (3,391,345)

     Basic and diluted earnings per
       share:
        As reported...................     $ (1.15)      $ (1.53)     $ (1.21)
        Pro forma.....................       (1.18)        (1.61)       (1.11)

     -------------------------------------------------------------------------
     Pro forma assumptions:
        Risk free interest rate:
           Maximum....................        5.63%         6.72%        6.68%
           Minimum....................        4.18%         5.91%        5.35%
        Expected option life:.........
           Maximum....................    4.5 years     4.5 years    4.5 years
           Minimum....................    3.7 years     3.7 years    3.7 years

     -------------------------------------------------------------------------
     Weighted average fair value of
        options granted during the
        year.........................         $1.51         $6.39        $8.95

     -------------------------------------------------------------------------
     Volatility factor................         1.02          .703            -
     -------------------------------------------------------------------------

      Volatility was not considered in the calculation of option values prior to
December 26, 1996, as the Company's common stock was not publicly traded.

10. GENERAL AND ADMINISTRATIVE EXPENSES

      During the second quarter of 1998, the Company experienced a downsizing of
its work force. All severence pay, approximately  $86,000,  associated with this
downsizing  was recorded as of June 30, 1998. In addition,  stock option expense
was decreased by approximately  $376,000 to reverse the amortization of deferred
compensation  previously  recorded for these employees relating to stock options
issued within one year of the initial public offering.


                                      F-17


<PAGE>


                            3DX TECHNOLOGIES INC.

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)


11. COMMITMENTS

      In March 1995, the Company  entered into a 5-year office lease  agreement.
Future minimum payments under this non-cancelable office lease are as follows at
December 31, 1998:

 1999....................................     $94,633
 2000....................................      15,772
                                             --------
 Total minimum lease payments............    $110,405
                                             ========

      Rental expense under this office lease amounted to $99,206,  $94,633,  and
$94,633 during the years ended December 31, 1998, 1997 and 1996, respectively.


                                      F-18

<PAGE>



                            3DX TECHNOLOGIES INC.

                    SUPPLEMENTARY INFORMATION - UNAUDITED

QUARTERLY FINANCIAL DATA (UNAUDITED)

      The  table  below  sets  forth  selected  unaudited   quarterly  financial
information for 1998 and 1997:

 ---------------------------------------------------------------------------
                                            QUARTER ENDED:
 ---------------------------------------------------------------------------
                             MARCH 31    JUNE 30    SEPTEMBER    DECEMBER 31
                             --------    -------    ----------   -----------
 1998:
 Revenues (a)...........   $   871,839  $ 1,218,533  $ 1,442,430  $ 1,065,872
 Net loss (b)...........    (1,536,761)  (4,854,001)  (2,495,375)    (702,405)
 Net loss applicable to
   common stockholders..    (1,536,761)  (4,854,001)  (2,495,375)    (702,405)
 Basic and diluted net
   loss per common 
    share(c)............         (0.21)       (0.63)       (0.28)       (0.08)

 1997:
 Revenues (a)...........   $  839,273   $   890,846  $   840,705  $ 1,059,777
 Net loss (b)...........      (40,458)     (460,474)    (590,225)  (9,944,987)
 Net loss applicable to
    common stockholders.      (40,458)     (460,474)    (590,225)  (9,944,987)
 Basic and diluted net
    loss per common 
     share(c)                   (0.01)        (0.06)       (0.08)       (1.38)

(a)  As discussed in Note 2, rental income has been  reflected as a reduction of
     general and administrative expense in all periods presented.
(b)  As  discussed  in Note 2, the Company  recorded a writedown  of oil and gas
     properties totaling $7,863,536 in 1998, including $4,329,687 and $2,157,003
     in the second and third quarters of 1998,  respectively,  and $9,061,240 in
     the fourth quarter of 1997.
(c)  Net  loss per  common  share  are  computed  independently  for each of the
     quarters presented and therefore may not sum to the totals for the year.


                                      F-19


<PAGE>

                            3DX TECHNOLOGIES INC.

                    SUPPLEMENTARY INFORMATION - UNAUDITED


CAPITALIZED COSTS RELATING TO OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)

      The aggregate  amounts of capitalized  costs relating to the Company's oil
and  gas   producing   activities   and  the  related   accumulated   depletion,
depreciation,  and  amortization  and impairment at December 31, 1998,  1997 and
1996 were as follows:


                                                  1998       1997        1996
                                                  ----       ----        ----

   Evaluated oil and gas properties....... $32,664,307  $22,521,673  $7,164,397
    Unevaluated oil and gas properties....   4,450,731   10,098,698   4,403,165
                                           -----------  -----------  ----------
    Total capitalized costs...............  37,115,038   32,620,371  11,567,562
       Less-accumulated depletion,
       depreciation and amortization and                            
       impairments........................ (26,882,267) (15,473,403) (3,775,858)
                                           -----------  -----------  ----------
                                           $10,232,771  $17,146,968  $7,791,704
                                           ===========  ===========  ==========

      The costs of unevaluated oil and gas properties consists of projects which
at each date were  undergoing  exploration  or  development  activities  or were
projects on which the Company planned to commence such exploration activities in
the future.  The Company will begin to amortize these costs when proved reserves
are  established  or  impairment  is  determined.   The  Company  believes  that
substantially  all of the  unevaluated  properties  at December 31, 1998 will be
fully evaluated within the succeeding two-year period.

      The following  table  represents an analysis of remaining  unevaluated oil
and gas property costs at December 31, 1998 according to the years in which they
were incurred:

                                            YEARS ENDED DECEMBER 31,
                                         1998       1997        1996
                                         ----       ----        ----
Acquisition costs................    $ 573,841   $1,250,392   $14,161
Exploration costs................    1,038,090      460,105   107,636
Capitalized Interest.............       78,957            -         -
Capitalized Overhead.............      837,278      90,271          -
                                    ----------   ----------  --------
      Total......................   $2,528,166   $1,800,768  $121,797
                                    ==========   ==========  ========


      The following table sets forth the costs incurred in the Company's oil and
gas property acquisition,  exploration and development  activities for the years
presented:

                                           YEARS ENDED DECEMBER 31,
                                        1998         1997      1996
                                        ----         ----      ----
Property acquisition costs-
   Proved........................   $   25,000   $    70,000  $        -
   Unproved......................      633,112     4,794,238   1,171,217
Exploration costs................    5,137,353    15,654,152   6,269,266
Development costs................    1,923,195       534,419     103,210
                                    ----------   -----------  ----------
                                   $ 7,718,660   $21,052,809  $7,543,693
                                   ===========   ===========  ==========


                                      F-20

<PAGE>

                            3DX TECHNOLOGIES INC.

                    SUPPLEMENTARY INFORMATION - UNAUDITED


OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)

RESERVES

      The process of estimating proved developed and proved  undeveloped oil and
gas reserves is very complex,  requiring significant subjective decisions in the
evaluation  of  available  geologic,  engineering  and  economic  data  for each
reservoir.  The data for a given  reservoir may change over time as a result of,
among other things,  additional  development  activity,  production  history and
viability  of  production  under  varying  economic  conditions.   Consequently,
material  revisions  to  existing  reserve  estimates  may occur in the  future.
Although every  reasonable  effort is made to ensure that reserve  estimates are
based on the most accurate and complete information  possible,  the significance
of the subjective decisions required and variances in available data for various
reservoirs  make these  estimates  generally  less precise than other  estimates
presented in connection with financial statement disclosures.

      The following  information regarding estimates of the Company's proved oil
and gas reserves, all located in the United States, is based on reports prepared
on behalf of the Company by the Company's independent  petroleum engineers.  The
following  table sets forth the changes in the Company's  total proved  reserves
for the  years  ended  December  31,  1998,  1997 and 1996.  All of the  reserve
quantities reflected in the table below are proved developed reserves.

                                              YEAR ENDED DECEMBER 31,
                                        -----------------------------------
                                          1998          1997         1996
                                          ----          ----         ----

                                                   OIL (BBLS)
                                        -----------------------------------
Proved  reserves  at the  beginning  of   
  the year.............................     88,751      32,428       41,193
Extensions,   discoveries,   and  other   
  additions............................     36,887      43,497        9,797
Revisions of previous estimates........    (16,530)      5,489      (10,079)
Purchases of reserves in place.........          -      21,405            -
Sales of reserves in place ............     (9,492)          -            -
Production.............................    (37,802)    (14,068)      (8,483)
                                           -------     -------      -------
Proved reserves at the end of the year      61,814      88,751       32,428
                                           =======     =======      =======

                                                     GAS (MCF)
                                        -----------------------------------
Proved  reserves at the  beginning  of 
  the year.............................  3,932,109    2,463,736    442,795
Extensions,   discoveries,  and  other 
  additions............................  2,238,515    2,546,337   2,284,482
Revisions of previous estimates........    463,552       53,855       7,661
Purchases of reserves in place.........          -            -           -
Sales of reserves in place.............   (870,789)           -           -
Production............................. (1,877,938)  (1,131,819)   (271,202)
                                        ----------   ----------   ---------
Proved reserves at the end of the year.  3,885,449    3,932,109   2,463,736
                                        ==========   ==========   =========

                                      F-21


<PAGE>

                            3DX TECHNOLOGIES INC.

                    SUPPLEMENTARY INFORMATION - UNAUDITED


STANDARDIZED MEASURES OF DISCOUNTED FUTURE NET CASH FLOWS

      The Company's  standardized  measure of discounted  future net cash flows,
and changes  therein,  related to proved oil and gas reserves are as follows (in
thousands):

                                                       DECEMBER 31,
                                              -------------------------------
                                                  1998      1997      1996
                                                  ----      ----      ----
  Future cash inflow........................   $ 9,000    $10,427  $ 9,354
  Future production, development and            
     abandonment costs......................    (1,781)    (2,195)  (1,430)
                                                -------    ------   ------
  Future cash flows before income taxes.....     7,219      8,232    7,924
  Future income taxes.......................         -          -        -
  Future net cash flows.....................     7,219      8,232    7,924
  10% Discount factor.......................    (1,437)    (1,184)  (1,301)
                                                -------    ------   ------
  Standardized measure of discounted future    
     net cash flow..........................   $ 5,782    $ 7,048  $ 6,623
                                               =======    =======  =======

  CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS:

  Sales of oil, gas and natural gas liquids,
     net of production costs.................  $(3,813)  $(2,609)  $  (744)
  Extensions, discoveries and other additions    3,113     4,737     6,594
  Revisions of previous quantity estimates...      621       124      (200)
  Net changes in prices and production costs.     (469)   (2,468)      173
  Accretion of discount......................      705       662        77
  Changes in future development costs........      (24)       60       (82)
  Purchases of reserves in place.............        -       109         -
  Sales of reserves in place.................   (1,499)        -         -
  Changes in production rates (timing) and
     other...................................      100      (190)       34
                                               -------   -------   -------
  Net change.................................  $(1,266)  $   425   $ 5,852
                                               ========  =======   =======


      Estimated future cash inflows are computed by applying  year-end prices of
oil and gas to year-end quantities of proved reserves.  Future price changes are
considered  only to the extent provided by contractual  arrangements.  Estimated
future  development  and  production  costs are  determined  by  estimating  the
expenditures  to be incurred in developing  and producing the proved oil and gas
reserves  at the  end  of  the  year,  based  on  year-end  costs  and  assuming
continuation  of  existing  economic  conditions.  Estimated  future  income tax
expense is  calculated  by applying  year-end  statutory  tax rates to estimated
future pretax net cash flows  related to proved oil and gas  reserves,  less the
tax basis (including net operating loss carryforwards projected to be usable) of
the properties involved.

      These   estimates  were   determined  in  accordance   with  SFAS  No.  69
"Disclosures About Oil and Gas Producing  Activities".  Because of unpredictable
variances  in expenses and capital  forecasts,  crude oil and gas prices and oil
and  gas  reserve  volume  estimates,  as  well  as the  statutory  pricing  and
discounting  assumptions used in these cash flow estimates,  management believes
the usefulness of this data is limited. These estimates of future net cash flows
do not necessarily  represent  management's  assessment of estimated fair market
value,  future  profitability  or future cash flow to the Company.  Management's
investment and operating decisions are based upon reserve estimates that include
proved  as  well  as  probable  reserves  and  upon  different  price  and  cost
assumptions from those used herein.

      The  future  cash  flows  presented  in  the  "Standardized   Measures  of
Discounted  Future Net Cash Flows" are based on year-end  oil and gas prices for
oil and gas reserves which as of December 31, 1998 were approximately  $9.65 per
barrel of oil and approximately  $2.16 per Mcf of gas. The Company does not have
oil and gas reserves  which are committed  under  long-term oil and gas sales or
hedging contracts.

                                      F-22


<PAGE>

                            3DX TECHNOLOGIES INC.

                    SUPPLEMENTARY INFORMATION - UNAUDITED

      The  standardized  measure  table as of December  31, 1998  reflects  zero
future  income taxes  because the  existing  tax basis in  evaluated  properties
(which  approximates  $10.7  million)  as of that date  offsets  the entire $7.2
million estimate of undiscounted future net cash inflows before income taxes. As
of December 31, 1998, the Company also had tax net operating loss  carryforwards
(which  represent  additional  tax  deductions  against  future  cash  flows) of
approximately $11.7 million.  Accordingly,  in total there were more than enough
tax basis and tax loss carryforwards to offset any potential future income taxes
in the standardized measure calculation.

                                      F-23

<PAGE>

                                INDEX TO EXHIBITS

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

   11.1   Computation of Earnings per Share

   23.1   Consent of Arthur Andersen LLP

   23.2   Consent of Ryder Scott Company

   24.1   Power of Attorney (included on signature page)

   27.1   Financial Data Schedule for December 31, 1998 (for SEC use only)

   27.2   Financial Data Schedule for December 31, 1997 (restated) (for SEC use
           only)

   27.3   Financial Data Schedule for December 31, 1996 (restated) (for
           SEC use only)