<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                 ______________

                                   FORM 10-Q

(Mark One)
   X        Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
 -----                        Exchange Act of 1934
                      For the quarter ended March 31, 1999

                                       or

 -----      Transition Report Pursuant to Section 13 or 15 (d) of the Securities
                              Exchange Act of 1934

                  For the Transition Period From __________ to ________

                         Commission file number 0-9498



                         BELLWETHER EXPLORATION COMPANY
             (Exact name of registrant as specified in its charter)



      Delaware                                         74-0437769
(State of incorporation)                 (IRS Employer Identification Number)

1331 Lamar, Suite 1455  Houston, Texas                 77010-3039
(Address of principal executive offices)               (ZIP Code)


       Registrant's telephone number, including area code: (713) 650-1025

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
                                       ---    ---

As of May 3, 1999, 13,853,791 shares of common stock of Bellwether Exploration
Company were outstanding.

                                       1
<PAGE>
 
                         BELLWETHER EXPLORATION COMPANY


                                     INDEX
<TABLE> 
<CAPTION> 


PART I.   FINANCIAL INFORMATION                                                     Page #
 
     ITEM 1.  Financial Statements
         <S>                                                                           <C>  
         Condensed Consolidated Balance Sheets:
              March 31, 1999 (Unaudited) and December 31, 1998......................   3
         Condensed Consolidated Statements of Operations (Unaudited):
              Three months ended March 31, 1999 and March 31, 1998..................   5
         Condensed Consolidated Statements of Cash Flows (Unaudited):
              Three months ended March 31, 1999 and March 31, 1998..................   6
         Notes to Condensed Consolidated Financial Statements (Unaudited)...........   8
 
  ITEM 2.  Management's Discussion and Analysis of Financial
             Condition and Results of Operations....................................  12
 
  ITEM 3.  Quantitative and Qualitative Disclosures About Market Risk...............  20
 
PART II.  OTHER INFORMATION.........................................................  21
</TABLE>

                                       2
<PAGE>
 
                         PART I.  FINANCIAL INFORMATION

ITEM 1.  Financial Statements


                         BELLWETHER EXPLORATION COMPANY

                     CONDENSED CONSOLIDATED BALANCE SHEETS

                             (Amounts in thousands)

                                     ASSETS

<TABLE>
<CAPTION>
                                                                        March 31,              December 31,
                                                                          1999                     1998
                                                                      ------------              -----------
                                                                      (Unaudited)
<S>                                                                    <C>                      <C>
CURRENT ASSETS:
Cash and cash equivalents.......................................        $       752               $       10
Accounts receivable and accrued revenues........................             14,689                   15,602
Due from related parties........................................              1,701                      853
Prepaid expenses and other......................................                796                    1,719
                                                                        -----------               ----------
   Total current assets.........................................             17,938                   18,184
                                                                        -----------               ----------
PROPERTY AND EQUIPMENT, at cost:
 
Oil and gas properties (full cost method).......................            297,017                  289,231
Gas plant facilities............................................             17,411                   17,406
                                                                        -----------               ----------
                                                                            314,428                  306,637
Accumulated depreciation, depletion, amortization and
   impairments..................................................           (202,943)                (198,421)
                                                                        -----------               ----------
                                                                            111,485                  108,216
                                                                        -----------               ----------

OTHER ASSETS....................................................              4,562                    4,796
                                                                        -----------               ---------- 
                                                                        $   133,985               $  131,196
                                                                        ===========               ==========
</TABLE>



     See accompanying notes to condensed consolidated financial statements

                                       3
<PAGE>
 
                         BELLWETHER EXPLORATION COMPANY

                     CONDENSED CONSOLIDATED BALANCE SHEETS

                (Amounts in thousands, except share information)

                      LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                            March 31,                December 31,
                                                                               1999                      1998
                                                                            -----------              ------------  
                                                                            (Unaudited)
<S>                                                                         <C>                       <C>
CURRENT LIABILITIES:
Accounts payable and accrued liabilities.......................             $    11,681                 $  11,982
Due to related parties.........................................                      --                       125
                                                                            -----------                 ---------
 Total current liabilities.....................................                  11,681                    12,107
                                                                            -----------                 ---------
 
LONG-TERM DEBT.................................................                 108,900                   104,400
 
 
OTHER LIABILITIES..............................................                     200                       200
 
STOCKHOLDERS' EQUITY:
 
Preferred stock, $0.01 par value, 1,000,000 shares authorized;    
 none issued or outstanding at March 31, 1999 and
 December 31, 1998.............................................                     ---                       ---
Common stock, $0.01 par value, 30,000,000 shares authorized,
 13,853,791 and 13,853,991 shares issued at
 March 31, 1999 and December 31, 1998, respectively............                     142                       142
Additional paid-in capital.....................................                  80,442                    80,442
Retained earnings..............................................                 (65,475)                  (64,191)
Treasury stock, at cost, 311,000 shares........................                  (1,905)                   (1,904)
                                                                            -----------                 ---------
  Total stockholders' equity...................................                  13,204                    14,489
                                                                            -----------                 --------- 
                                                                            $   133,985                 $ 131,196
                                                                            ===========                 =========
</TABLE>

     See accompanying notes to condensed consolidated financial statements

                                       4
<PAGE>
 
                         BELLWETHER EXPLORATION COMPANY

                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (Unaudited)

              (Amounts in thousands, except per share information)

                                                         Three Months Ended
                                                              March 31,
                                                       ----------------------
                                                         1999           1998
                                                       -------        -------
REVENUES:
 Oil and gas revenues..........................        $12,727        $19,424
 Gas plant operations, net.....................            221            226
 Interest and other income.....................            283            187
                                                       -------        -------
                                                        13,231         19,837
                                                       -------        -------

 
COST AND EXPENSES:
 Production expenses...........................          5,612          6,133
 Depreciation, depletion and amortization......          4,680          8,738
 General and administrative expenses...........          1,394          2,611
 Interest expense..............................          2,829          2,979
                                                       -------        -------
                                                        14,515         20,461
                                                       -------        -------
 
Loss before income taxes.......................         (1,284)          (624)
 
Benefit for income taxes.......................             --           (232)
                                                       -------        -------

 
NET LOSS.......................................        $(1,284)       $  (392)
                                                       =======        =======
 
 
Net loss per share.............................        $  (.09)       $  (.03)
                                                       =======        =======

 
Net loss per share-diluted.....................        $  (.09)       $  (.03)
                                                       =======        =======
Weighted average common shares
 outstanding...................................         13,854         14,049
                                                       =======        =======
Weighted average common shares outstanding
 diluted.......................................         13,854         14,049
                                                       =======        =======



     See accompanying notes to condensed consolidated financial statements

                                       5
<PAGE>
 
                         BELLWETHER EXPLORATION COMPANY

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (Unaudited)

                             (Amounts in thousands)

<TABLE>
<CAPTION>
                                                                                Three Months Ended
                                                                                      March 31,
                                                                          -----------------------------
                                                                                1999            1998
                                                                          -----------        ----------
<S>                                                                        <C>                <C>
Cash flows from operating activities:
Net loss.............................................................     $    (1,284)       $     (392)
Adjustments to reconcile net loss to net cash
 provided by operating activities:
     Depreciation, depletion and amortization........................           4,886             8,958
     Deferred income taxes...........................................              --              (563)
                                                                          -----------        ----------
                                                                                3,602             8,003
Change in assets and liabilities:
 Accounts receivable and accrued revenue.............................             913             3,911
 Accounts payable and other liabilities..............................            (301)            5,503
 Due from (to) related parties.......................................            (973)            2,793
 Other...............................................................             878               628
                                                                          -----------        ----------
 Net cash flows provided by operating activities.....................           4,119            20,838
                                                                          -----------        ----------
 
Cash flows from investing activities:
 
 Additions to properties and facilities..............................          (7,796)           (9,874)
 Proceeds from sales of properties...................................             (80)              289
                                                                          -----------        ---------- 
 Net cash flows used in investing activities.........................          (7,876)           (9,585)
                                                                          -----------        ---------- 
Cash flows from financing activities:
 Proceeds from borrowings............................................           4,500                --
 Exercise of stock options...........................................              --             1,492
 Purchase of treasury shares.........................................              (1)               --
                                                                          -----------        ----------
 Net cash flows provided by financing activities.....................           4,499             1,492
                                                                          -----------        ----------
 
 Net increase in cash and cash equivalents...........................             742            12,745
 Cash and cash equivalents at beginning of period....................              10             2,699
                                                                          -----------        ----------
Cash and cash equivalents at end of period...........................     $       752        $   15,444
                                                                          ===========        ==========
</TABLE>

     See accompanying notes to condensed consolidated financial statements

                                       6
<PAGE>
 
                         BELLWETHER EXPLORATION COMPANY

          CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
                                  (Unaudited)

                             (Amounts in thousands)


                                                           Three Months Ended
                                                                 March 31,
                                                           ------------------
                                                             1999       1998
                                                           -------     ------

Supplemental disclosures of cash flow  information:         
 
Cash paid during the period for:
 Interest..............................................      $  87     $  58
 
 Income taxes..........................................      $  --     $ 864








     See accompanying notes to condensed consolidated financial statements

                                       7
<PAGE>
 
                         BELLWETHER EXPLORATION COMPANY

              Notes to Condensed Consolidated Financial Statements
                                  (Unaudited)

1.   Summary of Significant Accounting Policies

     The accompanying unaudited condensed consolidated financial statements have
     been prepared in accordance with instructions to Form 10-Q and, therefore,
     do not include all disclosures required by generally accepted accounting
     principles.  However, in the opinion of management, these statements
     include all adjustments, which are of a normal recurring nature, necessary
     to present fairly the financial position at March 31, 1999 and December 31,
     1998, and the results of operations and changes in cash flows for the
     periods ended March 31, 1999 and 1998.  These financial statements should
     be read in conjunction with the consolidated financial statements and notes
     to the consolidated financial statements in the December 31, 1998 Form 10-K
     of Bellwether Exploration Company ("the Company") that was filed with the
     Securities and Exchange Commission on March 22, 1999.

     Certain reclassifications of prior period statements have been made to
     conform with current reporting practices.

     In order to prepare these financial statements in conformity with generally
     accepted accounting principles, management of the Company has made a number
     of estimates and assumptions relating to the reporting of assets and
     liabilities, the disclosure of contingent assets and liabilities, and
     reserve information.  Actual results could differ from those estimates.

                                       8
<PAGE>
 
                         BELLWETHER EXPLORATION COMPANY

        Notes to Condensed Consolidated Financial Statements (Continued)
                                  (Unaudited)


2.  Stockholders' Equity

     SFAS No. 128 requires a reconciliation of the numerator and denominator of
     the basic EPS computation to the numerator and denominator of the diluted
     EPS computation. For the three months ended March 31, 1999 and 1998,
     diluted earnings per common share are not calculated since the issuance or
     conversion of additional securities would have an antidilutive effect.

 SFAS No. 128 reconciliation  (amounts in thousands except per share amounts):

<TABLE>
<CAPTION>
                                               For the Three Months Ended                 For the Three Months Ended
                                                     March 31, 1999                             March 31, 1998
                                       -----------------------------------------     -------------------------------------
                                         Loss          Shares         Per Share         Loss        Shares      Per Share
                                      (Numerator)    (Denominator)      Amount       (Numerator) (Denominator)    Amount
                                      ----------     ------------    -----------     ----------- ------------   ----------
<S>                                   <C>             <C>             <C>             <C>         <C>           <C> 
Loss per Common Share:
Loss available to common
 stockholders...................      $  1,284           13,854       $      .09        $    392       14,049    $     .03 
                                                                      ==========                                 =========
 
Effect of Dilutive Securities:
Options and Warrants............      $     --               --                         $     --           --     
                                      --------           -------                        --------    ---------
 
Loss per Common Share-Diluted:
Loss available to common
 stockholders and assumed
 conversions....................      $  1,284            13,854      $      .09        $    392       14,049    $     .03
                                      ========           =======      ==========        ========    =========    =========
</TABLE>

     Securities that could potentially dilute basic earnings per share in the
     future, that were not included in the computation of diluted earnings per
     share because to do so would have been antidiluted are as follows:

                                        For the Periods Ended March 31,
                                    ---------------------------------------
                                      1999 (shares)          1998 (shares)
                                    --------------------------------------- 
 
Options and Warrants                      1,000                 347,000
                                          =====                 =======      

                                       9
<PAGE>
 
                         BELLWETHER EXPLORATION COMPANY

        Notes to Condensed Consolidated Financial Statements (Continued)
                                  (Unaudited)

     In September 1998, the Company's Board of Directors authorized the
     repurchase of up to $5 million of the Company's common stock.  As of March
     31, 1999, 311,000 shares had been acquired at an aggregate price of
     $1,905,000.  These treasury shares are reported at cost as a reduction to
     Stockholder's Equity.

3.   Long Term Debt

     In April 1997, the Company entered into a senior unsecured revolving
     credit facility ("Senior Credit Facility") which currently has a borrowing
     base of $60.0 million and a maturity date of March 31, 2002.  The Company
     may elect an interest rate based either on a margin plus LIBOR or the
     higher of the prime rate or the sum of  1/2 of 1% plus the Federal Funds
     Rate.  For LIBOR borrowings, the interest rate will vary from LIBOR plus
     0.875% to LIBOR plus 1.25% based upon the borrowing base usage. As of March
     31, 1999 there were $8.9 million borrowings outstanding under the Senior
     Credit Facility.

     The Senior Credit Facility contains various covenants including certain
     required financial measurements for current ratio, consolidated tangible
     net worth and interest coverage ratio.  In addition, the Senior Credit
     Facility includes certain limitations on restricted payments, dividends,
     incurrence of additional funded indebtedness and asset sales.

     In April 1997, the Company issued $100.0 million of 10-7/8% senior
     subordinated notes ("Notes") that mature April 1, 2007.  Interest on the
     Notes is payable semi-annually on April 1 and October 1. The Notes contain
     certain covenants, including limitations on indebtedness, liens, dividends
     and other payment restrictions affecting restricted subsidiaries, issuance
     and sales of restricted subsidiary stock, dispositions of proceeds of asset
     sales and restrictions on mergers and consolidations or sales of assets.

     Effective September 22, 1998, the Company entered into an eight and a half
     year interest rate swap agreement with a notional value of $80 million.
     Under the agreement, the Company receives a fixed interest rate and pays a
     floating interest rate based on the simple average of three foreign LIBOR
     rates.  Floating rates are redetermined for a six month period each April 1
     and October 1.  The floating rate for the period from April 1, 1999 to
     October 1, 1999 is 9.39%.  Through  April 1, 2002 the  floating rate is
     capped at 10.875% and capped at 12.875% thereafter.

                                       10
<PAGE>
 
                         BELLWETHER EXPLORATION COMPANY

        Notes to Condensed Consolidated Financial Statements (Continued)
                                  (Unaudited)

4.   New Accounting Pronouncements

     In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
     Instruments and Hedging Activities."  This statement establishes standards
     of accounting for and disclosures of derivative instruments and hedging
     activities.  This statement is effective for fiscal years beginning after
     June 15, 1999.  The Company has not yet determined the impact of this
     statement on the Company's financial condition or results of operations.

5.   Natural Gas and Crude Oil Hedging

     Oil and gas revenues decreased $13,000 in the three months ended March 31,
     1999, and increased $525,000 in the three month period ended March 31,
     1998, as a result of hedging activity.

     Since year end 1998, the Company has entered into current swap contracts to
     hedge a total of 2,295,000 MMBTU of gas during the months of May through
     June 1999 at a weighted average NYMEX quoted price of $2.04 per MMBTU and a
     collar contract to hedge 30,000 MMBTU per day for July 1, 1999 through
     October 31, 1999 which establishes a floor NYMEX quoted price of $2.20 per
     MMBTU and a ceiling NYMEX quoted price of $2.61 per MMBTU.  In addition,
     the Company has current contracts to hedge a total of 640 MBBLS of oil
     during the months of April through September 1999 at a weighted average
     NYMEX quoted price of $15.30 per barrel.  The fair value at March 31, 1999
     of these swap agreements was a loss of  $238,000.

                                       11
<PAGE>
 
                         BELLWETHER EXPLORATION COMPANY

ITEM 2.         Management's Discussion and Analysis of Financial
                       Condition and Results of Operations

Liquidity and Capital Resources

The Company strives to maximize long-term shareholder value through aggressive
growth in reserves and cash flow using advanced technologies, implementation of
a low cost structure and maintenance of a capital structure supportive of
growth.  The Company employs an integrated interdisciplinary team approach to a
balanced program of strategic acquisitions of producing oil and gas properties
and technology driven development and exploration activities.  The funding of
these activities has historically been provided by operating cash flows, bank
financing, equity placements and sale of non-core assets. The Company invested
$7.8 million in oil and gas properties for the three months ended March 31, 1999
versus $9.9 million for the same period in 1998. Cash flows from operations
before changes in assets and liabilities were $3.6 million for the three months
ended March 31, 1999 compared to $8.0 million provided by operating activities
in the same period of 1998. At March 31, 1999, the Company had $51.1 million of
available debt capacity under the Senior Credit Facility.

1999 Capital Expenditures

During 1999, the Company anticipates investing approximately $27.5 million,
primarily for development and exploratory drilling activities and leasehold and
seismic acquisitions.  The Company believes its cash flow provided by operating
activities and borrowings under its  credit facilities will be sufficient to
meet these projected capital investments (See Note 3 of the Notes to Condensed
Consolidated Financial Statements). The Company continues to review acquisition
opportunities and the consummation of such a transaction  will directly impact
anticipated capital expenditures.

Gas Balancing

It is customary in the industry for working interest partners to sell more or
less than their entitled share of natural gas.  The settlement or disposition of
existing gas balancing positions is not anticipated to materially impact the
financial condition of the Company.

                                       12
<PAGE>
 
                         BELLWETHER EXPLORATION COMPANY

               Management's Discussion and Analysis of Financial
                Condition and Results of Operations (Continued)

Oil and Gas Property Accounting

The Company utilizes the full cost method of accounting for its investment in
oil and gas properties.  Under this method of accounting, all costs of
acquisition, exploration and development of oil and gas reserves are capitalized
as incurred.  To the extent that capitalized costs of oil and gas properties,
net of accumulated depreciation, depletion and amortization, exceed the
discounted future net revenues of proved oil and gas reserves net of deferred
taxes, such excess capitalized costs would be charged to operations.  Due to
declines in oil and gas prices at year end, and to a lesser extent, downward
revisions in estimated proved reserves, the Company recorded a $73.9 million
pretax impairment charge in the fiscal year ended December 31, 1998. No such
charges to operations were required during the three month periods ending March
31, 1999 or 1998.

Results of Operations

The following table sets forth certain operating information for the Company for
the periods presented:


                                                         Three Months Ended
                                                              March 31,
                                                       --------------------
                                                        1999         1998
                                                       -------      -------
Production:
  Oil and condensate (MBBLs)......................         520          572
  Natural gas (MMCF)..............................       4,785        5,731
 
Average sales price: (1)
  Oil and condensate (per BBL)....................      $ 9.35      $ 12.62
  Natural gas  (per MCF)..........................      $ 1.65      $  2.04
 
Average costs:
  Production expenses (per MCFE)..................      $  .71      $   .67
  General and administrative expense
     (per MCFE)...................................      $  .18      $   .28
  Depreciation, depletion and amortization
     (per MCFE)(2)................................      $  .55      $   .90


(1)  Average sales prices exclude the effect of hedges, which decreased revenues
     by $13,000 in the three month period in 1999, and increased revenues by
     $525,000 in the three month period in 1998.
(2)  Excludes depreciation, depletion and amortization on gas plants and other
     assets of $306,000 in the three month period in 1999, and of $466,000 in
     the three month period ended in 1998.

                                       13
<PAGE>
 
                        BELLWETHER EXPLORATION COMPANY

               Management's Discussion and Analysis of Financial
                Condition and Results of Operations (Continued)

Three Months Ended March 31, 1999 and 1998

Net loss for the quarters ended March 31, 1999 and 1998 was $1.3 million or $.09
per share, and $.4 million or $.03 per share,  respectively.  The increased loss
is due to lower oil and gas prices in 1999 and lower oil and gas production as
compared to the quarter ended March 31, 1998.

Oil and gas revenues for the three months ended March 31, 1999 were $12.7
million, as compared to $19.4 million for the respective period in 1998.  The
35% decrease in oil and gas revenues is partially due to the decline in oil and
gas prices.  Oil prices averaged $9.35 per barrel in the three month period
ended March 31, 1999 as compared to $12.62 per barrel in the comparable period
of 1998.  This represents a 26% decline in oil prices and translates into a $1.7
million decrease in oil revenues.  Gas prices averaged $1.65 per mcf in the
three month period ended March 31, 1999 as compared to $2.04 per mcf in the
comparable period of 1998.  This represents a 19% decline in gas prices and
translates into a $1.9 million decrease in oil revenues. Also, gas hedges in
place in 1998 resulted in $525,000 of additional gas revenues in the period
ended March 31, 1998 while a decrease in revenues of $13,000 was reflected in
the same period of 1999.

Production volumes reflect normal declines from primarily the offshore Gulf of
Mexico properties.  Oil production was down 9% compared to the same quarter of
1998 with 520,000 and 572,000 barrels for the three month periods ended March
31, 1999 and 1998, respectively.  Gas production was down 17% compared to the
same quarter of 1998 with 4,785 and 5,731 million cubic feet (MMcf) for the
three month periods ended March 31, 1999 and 1998, respectively.

Net gas plant operating profit was $221,000 in the three months ended March 31,
1999 and $226,000 in the same period of 1998.

Interest and Other Income increased from $187,000 at March 31, 1998 to $283,000
at March 31, 1999 primarily as a result of of the reversal of fee income in 1998
erroneously received in prior periods.  The major components of Interest and
Other Income remained at consistent levels.

Production expenses for the three months ended March 31, 1999 totaled $5.6
million, or 8% below the $6.1 million for the three months March 31, 1998.  On
an Mcf equivalency  basis (Mcfe), production expenses for the  quarter ended
March 31, 1999 increased to $.71 per Mcfe as compared to $.67 per Mcfe in the
period ended March 31, 1998.  The decreased oil and gas volumes mentioned above
resulted in the increased production costs on an equivalency basis.

Depreciation, depletion and amortization was $4.7 million for the three months
ended March 31, 1999 and $8.7 million for the three month period ended March 31,
1998.  The decline resulted from the $73.9 million impairment charge made at
December 31, 1998 as well as decreased production volumes.  Depreciation,
depletion and amortization  per Mcfe has declined from $.90 per Mcfe in 1998 to
$.55 per Mcfe in 1999.

                                       14
<PAGE>
 
                         BELLWETHER EXPLORATION COMPANY

               Management's Discussion and Analysis of Financial
                Condition and Results of Operations (Continued)


General and administrative expenses totaled $1.4 million in the three months
ended March 31, 1999 as compared to $2.6 million for the comparable period of
fiscal 1998.   A decrease in outsourcing costs from $1.3 million to $.4 million
was the major contribution to the decline.   The Company is charged a management
fee under its current outsourcing contract which is based upon a specified
percentage of the average book value of the Company's total assets, excluding
cash, plus a percentage of operating cash flows. Due to the $73.9 million
impairment charge described above, the Company's total assets and resulting
percentage of such assets was reduced.  Additionally, the 1998 period included
costs related to the closing of the Company's Dallas exploration office in March
1998 and certain transition costs related to the change of the Company's 1997
fiscal year.  On an Mcf equivalency basis, general and administrative expenses
were $.18 per Mcfe in the period ended March 31, 1999 and $.28 per Mcfe in the
period ended March 31, 1998.

Interest expense remained relatively flat at $2.8 million for the three months
ended March 31, 1999 and $3.0 million in the same period of 1998 even though the
Company had higher average balances outstanding in 1999.  Savings of $229,000
realized as an interest rate swap accounted for the decline.

The provision for federal and state income taxes for the three months ended
March 31, 1999 and 1998 are based upon a 0%, and 37% effective tax rate,
respectively.   No tax accrual has been made in 1999 because of an increase in
the Company's tax valuation allowance for the benefit for the current period's
net loss from operations.


Year 2000 Issues

The Year 2000 problem ("Y2k") refers to the inability of computer and other
information technology systems to properly process date and time information.
The problem was caused, in part, by the outdated programming practice of using
two digits rather than four to represent the year in a date.  The consequence of
the Y2k problem is that information technology and embedded processing systems
are at risk of malfunction, particularly during the transition between 1999 to
2000.

The effects of the Y2k are exacerbated by the interdependence of computer and
telecommunication systems throughout the world.  This interdependence also
exists among the Company and its vendors, customers and business partners, as
well as with government agencies.

The risks of Y2k fall into three general areas:  1) Corporate Systems, 2) Field
Systems and 3) Third Party Exposure.  The Company is addressing each of these
areas through a readiness process that follows the steps below:

  a) Planning and Awareness
  b) Inventory and Assessment
  c) Identify Potential Problems and their Business Impact
  d) Identify/Approve Solutions
 

                                       15
<PAGE>
 
                        BELLWETHER EXPLORATION COMPANY

               Management's Discussion and Analysis of Financial
                Condition and Results of Operations (Continued)


  e)    Test and Implement Solutions
  f)    Contingency Planning

The Company outsources a substantial portion of its information technology and
field operations to Torch.  The Company and Torch have jointly developed a plan
to address the Company's Year 2000 issues.  (As used in the remainder of this
discussion, references to the Company include the Torch employees assisting the
Company in its Year 2000 compliance program.)

The Company has formed a Y2k Team comprised of representatives from senior
management, exploration, exploitation, accounting, legal and internal audit.
The continuing progress of this Y2k Team is reported regularly to the Company's
Board of Directors.

The estimated total costs for Y2k readiness has been nominal.  It is anticipated
that such costs for complete Y2k readiness will continue to be nominal as much
of these costs are borne by Torch under the terms of the existing outsourcing
agreement.  In addition, there have been no material capital expenditures for
Y2k and there is not anticipated to be material capital expenditures because
most major critical field operations do not have date sensitive equipment.
Remediation and testing is scheduled to be completed by June 30, 1999.

Corporate Systems

1. Planning and Awareness.  All employees have attended Y2k informational
   programs including a general discussion of what Y2k is and how it could
   affect the business.  Employees of all levels of the organization have been
   asked to participate in the identification of potential Y2k risks.

2. Inventory and Assessment.  The Company has completed an inventory of the
   traditional computing platforms including client/server systems, LAN systems
   and PC systems, as well as an inventory of all systems software and operating
   systems for each computing system.  In addition, third party service
   interfaces, banking/treasury interfaces and telecommunications have been
   cataloged.

   Assessment of component compliance (compliant, not-compliant, expected date
   of compliance, etc.) has been completed and included research of product
   information on the Internet, contacting peer group companies and accessing
   information that peer group companies have already found.

3. Identification.  The failure to identify and correct a material Y2k problem
   in the Corporate Systems could result in inaccurate or untimely financial
   information for management decision-making or financial reporting purposes.
   The severity of such problems may impact the duration during which quality
   information is available to management.  At this time, management believes
   that any Y2k disruptions associated with its financial and administration
   systems will not have a material effect on the Company.

4. Identify/Approve Solutions.  Based upon the assessments of components'
   compliance, solutions are determined.  These solutions include:  1) fix or
   replace the non-compliant component, 2) buy patches or

                                       16
<PAGE>
 
                         BELLWETHER EXPLORATION COMPANY

               Management's Discussion and Analysis of Financial
                Condition and Results of Operations (Continued)


  replacement items, 3) develop workarounds, 4) identify alternate automated
  processes, 5) design manual procedures and 6) develop business continuity
  plans for specific items or systems.

5. Test and Implement Solutions.  Since April 1998 Torch has been working on a
   upgrade to its accounting software and is expected to achieve full Y2k
   compliance in the first half of 1999. In addition, all network and desktop
   applications used by the Company have been inventoried and are generally Y2k
   compliant. The costs of all such risk assessments and remediation are borne
   by Torch under the terms of Bellwether's outsourcing agreements.

6. Contingency Planning.  Notwithstanding the foregoing, should there be
   significant unanticipated disruptions in the Company's financial and
   administrative systems, a number of accounting processes that are currently
   automated will need to be performed manually.  The Company is currently
   considering its options with respect to contingency arrangements for
   temporary staffing to accommodate such situations.

Field Systems

1. Planning and Awareness.  The Company's Y2k program has involved all levels of
   management of field and facility assets from production foremen and higher.
   Employees at all levels of the organization have been asked to participate in
   the identification of potential Y2k risk, which might otherwise go unnoticed
   by higher level employees and officers of Bellwether, and as a result, the
   Company believes that awareness of the issue is high.

2. Inventory and Assessment.  This step entailed locating all embedded chip
   technology used in the field operations including safety systems, measurement
   devices, overflow valves, SCADA systems and other field processes that are
   date-or-time-sensitive.  It is estimated that there are less than a hundred
   embedded components residing in the computer systems within Bellwether's
   operated oil and natural gas fields and processing plants.  During the
   assessment stage a list of assets to be tested was assembled.  Consideration
   was given to 1) issues of health and safety, 2) environmental concerns, 3)
   economic factors and 4) other business risks as appropriate.  Vendors and
   manufacturers have been contacted as well as product research through the
   Internet and the use of peer group company shared information.  To date, the
   majority of embedded components researched have been deemed either date-
   insensitive or Y2k compliant.  However, the complexity of embedded systems is
   such that a small minority of non-compliant components, even a single non-
   compliant component, can corrupt an entire system.  Now that the component
   level evaluation is substantially complete, a broader evaluation at the
   system level has commenced.  Bellwether anticipates that the system level
   evaluation will be completed by the end of the second quarter 1999.

3. Identification.  The failure to identify and correct a material Y2k problem
   could result in outcomes ranging from errors in data reporting to
   curtailments or shutdowns in production or discharges of materials onto the
   environment.  The Company is actively engaged in a program to prioritize the

                                       17
<PAGE>
 
                         BELLWETHER EXPLORATION COMPANY

               Management's Discussion and Analysis of Financial
                Condition and Results of Operations (Continued)


  remediation of embedded components and systems which are either known to be
  Y2k non-compliant or which have higher risk of Y2k failures, and to further
  prioritize remediation targets by the anticipated financial impact of any such
  failures on the Company.

  To assist in this effort, Bellwether and Torch have retained consultants who
  are knowledgeable and experienced in the assessment of Y2k issues impacting
  field operations.  Bellwether intends to give extremely high priority to the
  remediation of any situation that impacts employee health and safety or
  environmental security. The cost of the assessment is not expected to be
  material to Bellwether's financial results.  Despite these efforts, it is
  possible that there will be production disruptions or other Y2k related
  problems associated with Y2k non-compliance.  Depending on the magnitude of
  any such disruptions or other problems, and the time and cost required to
  correct them, such failures could materially and adversely impact the
  Company's results of operations, liquidity and financial condition.

4. Identify/Approve Solutions.  Based upon the assessment of field systems,
   regarding compliance or non-compliance, solutions are determined.  These
   potential solutions include 1) fix or replace non-compliant items, 2) buy
   patches or replacement items, 3) develop workarounds, 4) identify alternative
   automated processes, 5) design manual procedures and 6) develop business
   continuity plans for specific items or systems.

5. Test and Implement Solutions.  Once identified, assessed and prioritized,
   Bellwether intends to test, upgrade and certify those embedded components and
   systems in field process control units deemed to pose the greatest risk of
   significant non-compliance.  It is important to note that in some
   circumstances, the procedures used to test embedded components for Y2k
   compliance themselves pose a risk of damaging the component or corrupting the
   system.  Accordingly, there may be situations in which a decision not to test
   may be deemed the most prudent.

  The Company does not expect the cost of testing and upgrading its embedded
  chips to be material due to the number of components and the low cost of such
  components.  If this assumption is incorrect, the Company may incur material
  costs in connection with testing and remedying Year 2000 problems.  In
  addition, if the Company is not successful and ultimately experiences Y2k
  related failures, the costs attributable to lost production, damages to
  facilities and environmental damages may be material. The effort to address
  the Y2k situation is dynamic and may likely not be fully completed by December
  31, 1999.


6. Contingency Planning.  Should material production disruptions occur as a
   result of Y2k failures in the field operations, Bellwether's operating cash
   flow will be impacted.  This contingency is being factored into deliberations
   on capital budgeting, liquidity and capital adequacy.  It is management's
   intention to maintain adequate financial flexibility to sustain the Company
   during any such period of cash flow disruption.

                                       18
<PAGE>
 
                         BELLWETHER EXPLORATION COMPANY

               Management's Discussion and Analysis of Financial
                Condition and Results of Operations (Continued)


Third Party Exposures
---------------------

1. Planning and Awareness.  The Company has been involved in informational
   programs with its employees and the employees of Torch who have significant
   interaction with outside vendors, customers and business partners of the
   Company. All levels of employees in the organization have been asked to
   participate in the identification of potential third party Y2k risk, which
   might otherwise go unnoticed by higher level employees and officers of
   Bellwether, and as a result, awareness of the issue is considered high.

2. Inventory and Assessment.  Surveys of general Y2k readiness have been sent to
   all vendors, customers and business partners of the Company.  An assessment
   is made regarding the priority of risk associated with each third party, and
   how the third party's level of compliance directly affects day-to-day
   business.  The Company's most critical customers are outside operators of
   wells, gas plants, refineries, natural gas marketers and pipelines.

3. Identification.  Refineries are extremely complex operations containing
   hundreds or thousands of computerized processes.  The failure on the part of
   a Bellwether refinery customer to identify and correct a material Y2k problem
   could result in material disruptions in the sale of Bellwether's production
   to that refinery.  In many cases, affected Bellwether production may not be
   easily shifted to other markets, and markets may have similar effects.
   Although the Company has made inquiries to key third parties on the subject
   of Y2k readiness and will continue to do so, it has no ability to require
   responses to such inquiries or to independently verify their accuracy.
   Accordingly, management is unable to express any view about whether there
   will be material production disruptions associated with third party Y2k non-
   compliance.  Depending on the magnitude of any such disruptions and the time
   required to correct them, such failures could materially and adversely impact
   the Company's results of operations, liquidity and financial condition.

   Other significant concerns include the integrity of global telecommunication
   systems, the readiness of commercial banks to execute electronic fund
   transfers and of the ability of the financial community to maintain an
   orderly market in Bellwether's securities.

4. Identify/Approve Solutions.  By prioritizing the various third party risks
   mentioned above, a list of most critical third party vendors, customers and
   business partners has been determined.  By cross-referencing the results of
   the Y2k readiness survey with the Company's priority list of third parties,
   solutions can be determined.  These may involve field and/or office visits
   and more detailed meetings to access the third party's Y2k compliance.

5. Test and Implement Solutions.  Where the Company perceives significant risk
   of Y2k non-compliance that may have a material impact on the Company, and
   where the relationship between the Company and a vendor, customer or business
   partner permits, joint testing may be undertaken during 1999.  Joint

                                       19
<PAGE>
 
                         BELLWETHER EXPLORATION COMPANY

               Management's Discussion and Analysis of Financial
                Condition and Results of Operations (Continued)


   testing would occur following upgrades and other remediation to hardware,
   software and communications links, as applicable, with the intent of
   determining that the remediated system being tested will perform as expected
   after December 31, 1999.

6. Contingency Planning.  Should material production disruptions occur as a
   result of Y2k failures of third parties, Bellwether's operating cash flow
   will be impacted.  This contingency is being factored into deliberations on
   capital budgeting, liquidity and capital adequacy.  It is management's
   intention to maintain adequate financial flexibility to sustain the Company
   during any such period of cash flow disruption.

Forward Look Statements

This Form 10-Q 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.  All statements other than
statements of historical facts included herein, including without limitation,
statements under "Management's Discussion and Analysis of  Financial Condition
and Results of Operations" and in the notes to the financial statements
regarding the Company's financial position, capital budget, intent to acquire
oil and gas properties, estimated quantities and net present values of reserves,
business strategy, plans and objectives of management of the Company for future
operations, and the effect of gas balancing and the Year 2000 problem, are
forward-looking statements.  There can be no assurances that such forward
looking statements will prove to have been correct.  Important factors that
could cause actual results to differ materially from the Company's expectations
("Cautionary Statements") include the volatility of oil and gas prices,
operating hazards, government regulations, exploration risks and other factors
described in the Company's Form 10-K filed with the Securities and Exchange
Commission.  All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified by the Cautionary Statements.

ITEM 3.  Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to market risk, including adverse changes in commodity
prices and interest rates.

Since year end 1998, the Company has entered into current swap contracts to
hedge a total of 2,295,000 MMBTU of gas during the months of May through June
1999 at a weighted average NYMEX quoted price of $2.04 per MMBTU and a collar
contract to hedge 30,000 MMBTU per day for July 1, 1999 through October 31, 1999
which establishes a floor NYMEX quoted price of $2.20 per MMBTU and a ceiling
NYMEX quoted price of $2.61 per MMBTU.  In addition, the Company has current
contracts to hedge a total of 640 MBBLS of oil during the months of April
through September 1999 at a weighted average NYMEX quoted price of $15.30 per
barrel.  The fair value at March 31, 1999 of these swap agreements was a loss of
$238,000.  Since March 31, 1999 oil and gas prices, for the periods included
under the swap contracts, have increased approximately $1.50 per barrel and $.30
per mcf, respectively, resulting in a significantly larger potential future loss
on swap agreements.   Accordingly, the deferred loss associated with the swap
contracts is currently approximately $2 million.

                                       20
<PAGE>
 
                         BELLWETHER EXPLORATION COMPANY

                          PART II.  OTHER INFORMATION

ITEM 1.   Legal Proceedings

              None.

ITEM 2.   Changes in Securities

              None.

ITEM 3.   Defaults Upon Senior Securities

              None.

ITEM 4.   Submission of Matters to a Vote of Security Holders

              None.

ITEM 5.   Other Information

              None.

ITEM 6.   Exhibits and Reports on Form 8-K

          a.  Exhibits
                  The following exhibits are filed with this Form 10-Q and they
                  are identified by the number indicated.

                    27  Financial Data Schedule

          b.  Reports on Form 8-K.
              None.

                                       21
<PAGE>
 
                                   SIGNATURES

Pursuant to the requirements 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.

                             BELLWETHER EXPLORATION COMPANY
                                     (Registrant)


Date:    May 13, 1999        By:    /s/ J. Darby Sere'
     ----------------------     -----------------------------        
                                J. Darby Sere'
                                Chairman and Chief Executive Officer



Date:    May 13, 1999        By:    /s/ William C. Rankin
     ----------------------     -----------------------------        
                                 William C. Rankin
                                 Senior Vice President and Chief Financial
                                  Officer

                                       22