<PAGE>   1
 
================================================================================
 
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
 
                                   FORM 10-K
 
      [X]        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
 
                   For the fiscal year ended January 31, 1998
 
                                       OR
 
      [ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
 
                             ---------------------
 
                          REGISTRATION NUMBER 33-85930
 
                       TRANSAMERICAN REFINING CORPORATION
 
             (Exact name of registrant as specified in its charter)
 
<TABLE>
<S>                                            <C>
                    TEXAS                                       76-0229632
       (State or other jurisdiction of                       (I.R.S. employer
       incorporation or organization)                       identification no.)
 
     1300 NORTH SAM HOUSTON PARKWAY EAST
                  SUITE 320
               HOUSTON, TEXAS                                      77032
  (Address of principal executive offices)                      (Zip code)
</TABLE>
 
       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (281) 986-8811
 
                             ---------------------
 
       Securities registered pursuant to Section 12(b) of the Act:  None
 
       Securities registered pursuant to Section 12(g) of the Act:  None
 
     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 number of shares of common stock of the registrant outstanding on April
30, 1998, was 30,000,000. None of the registrant's common stock is owned by
non-affiliates.
 
================================================================================
<PAGE>   2
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                                                        PAGE
                                                                        ----
<S>       <C>                                                           <C>
                                   PART I
Item 1.   Business....................................................      1
Item 2.   Properties..................................................      9
Item 3.   Legal Proceedings...........................................      9
Item 4.   Submission of Matters to a Vote of Security Holders.........      9
                                   PART II
Item 5.   Market for Registrant's Common Equity and Related                 9
          Stockholder Matters.........................................
Item 6.   Selected Financial Data.....................................     10
Item 7.   Management's Discussion and Analysis of Financial Condition      11
          and Results of
          Operations..................................................
Item 7A.  Quantitative and Qualitative Disclosures About Market            18
          Risk........................................................
Item 8.   Financial Statements and Supplementary Data.................     19
Item 9.   Changes in and Disagreements With Accountants on Accounting      47
          and Financial Disclosure....................................
                                  PART III
Item 10.  Directors and Executive Officers of the Registrant..........     47
Item 11.  Executive Compensation......................................     48
Item 12.  Security Ownership of Certain Beneficial Owners and              50
          Management..................................................
Item 13.  Certain Relationships and Related Transactions..............     50
                                   PART IV
Item 14.  Exhibits, Financial Statement Schedules and Reports on Form      52
          8-K.........................................................
Signatures............................................................     57
</TABLE>
<PAGE>   3
 
                                     PART I
 
ITEM 1. BUSINESS
 
GENERAL
 
     TransAmerican Refining Corporation (the "Company" or "TARC") was formed in
1987 to hold and operate the refinery assets of TransAmerican Natural Gas
Corporation (together with its predecessors, "TransAmerican") and owns
facilities for the refining and storage of crude oil and petroleum products.
TARC's refinery is located in the Gulf Coast region along the Mississippi River,
approximately 20 miles from New Orleans, Louisiana. TARC's business strategy is
to modify, expand and reactivate its refinery and to maximize its gross refining
margins by converting low-cost, heavy, sour crude oils into high-value, light
petroleum products, including primarily gasoline and heating oil. TARC is a
wholly-owned subsidiary of TransAmerican Energy Corporation ("TEC"). TEC was
formed in 1994 to hold certain shares of common stock of TransTexas Gas
Corporation ("TransTexas") and all of the outstanding capital stock of TARC.
TARC, TransTexas and TEC are all direct or indirect subsidiaries of
TransAmerican. The address of TARC's principal executive offices is 1300 North
Sam Houston Parkway East, Suite 320, Houston, Texas 77032, and its telephone
number at that address is (281) 986-8811.
 
     In February 1995, TARC began a construction and expansion program (the
"1995 Program") designed to reactivate the refinery and increase its complexity.
From February 1, 1995 through May 1997, TARC spent approximately $251 million on
the 1995 Program, procured a majority of the essential equipment required and
completed substantially all of the process design engineering and a substantial
portion of the remaining engineering necessary for its completion.
 
     In order to capitalize on the progress on the refinery made through its
expenditures on the 1995 Program, in June 1997 TARC commenced a modified
two-phase construction and expansion program (the "Capital Improvement
Program"). TARC spent approximately $215 million on the Capital Improvement
Program during the period between June 1997 and January 31, 1998. The design and
estimated timing and cost of the Capital Improvement Program are based on
substantial input from several engineering and construction firms which have
been engaged to perform design engineering and construction management services.
 
     Phase I of the Capital Improvement Program includes the completion and
start-up of several units, including the Delayed Coking Unit, one of the
refinery's major conversion units. Phase II of the Capital Improvement Program
includes the completion and start-up of the Fluid Catalytic Cracking Unit
utilizing state-of-the-art MSCC(SM) technology and the installation of
additional equipment expected to further improve operating margins by allowing
for a significant increase in the refinery's capacity to produce gasoline. After
completion of the Capital Improvement Program, TARC will own and operate one of
the largest independent refineries in the Gulf Coast region, with a replacement
cost estimated by management to be approximately $1.4 billion. TARC currently
believes that the costs of construction of the refinery will exceed the budget
established in June 1997, but that sufficient cash will be available to fund
such costs. See "-- Capital Improvement Program -- Capital Budget Status" and
"-- Completion Status." The foregoing estimates, as well as other estimates and
projections herein, are subject to substantial revision upon the occurrence of
future events, such as unavailability of financing, engineering problems, work
stoppages and cost overruns, over which TARC may not have any control, and there
can be no assurance that any such projections or estimates will prove accurate.
 
 INDUSTRY OVERVIEW
 
     Total growth in United States refining capacity has remained very low over
the past several years. Over the same period, however, demand for refined
products has increased. As a result, capacity utilization has increased to
approximately 95.0% in 1997 from approximately 83.1% in 1987. The refinery
utilization rate is an important factor in achieving and maintaining refining
profitability. Management of TARC believes that over the next several years
domestic demand for refined products will continue to increase while refining
capacity growth will remain slow, causing United States refining utilization
rates to remain high. These factors, if sustained, would likely result in an
increased demand for product imports into the United States. Management
 
                                        1
<PAGE>   4
 
believes that these factors, together with relatively low prices expected by it
for heavy, sour crude oil, should have a positive effect on TARC's refining
margins.
 
                           DOMESTIC REFINING CAPACITY
               UTILIZATION RATES, AND DEMAND FOR REFINED PRODUCTS
 
<TABLE>
<CAPTION>
                                               1987   1988   1989   1990   1991   1992   1993   1994   1995   1996   1997
                                               ----   ----   ----   ----   ----   ----   ----   ----   ----   ----   ----
<S>                                            <C>    <C>    <C>    <C>    <C>    <C>    <C>    <C>    <C>    <C>    <C>
Capacity MMBpd)..............................  15.6   15.9   15.6   15.6   15.7   15.7   15.1   15.0   15.4   15.3   15.5
Utilization..................................  83.1%  84.7%  86.6%  87.1%  86.0%  87.9%  91.5%  92.6%  91.9%  93.5%  95.0%
Demand for refined products (MMBpd)..........  16.7   17.3   17.3   17.0   16.7   17.0   17.2   17.7   17.7   18.2   18.6
</TABLE>
 
---------------
 
Source: Energy Information Administration.
 
CURRENT OPERATIONS
 
     The No. 2 Vacuum Unit was operated intermittently between March 1994 and
January 1997. Modifications and tie-ins to the No. 2 Crude Unit have been
completed. Although both units are operational, TARC is not currently operating
these units due to low operating margins obtainable for these units on a
stand-alone basis.
 
     The following is a brief description of TARC's No. 2 Vacuum Unit and No. 2
Crude Unit:
 
     No. 2 Vacuum Unit. TARC believes that the No. 2 Vacuum Unit has a capacity
in excess of 200,000 Bpd. TARC reactivated the No. 2 Vacuum Unit in March 1994.
The No. 2 Vacuum Unit is designed to process atmospheric tower bottoms into VGO
and, with the addition of cutterstocks, into No. 6 residual fuel oil. When the
No. 2 Crude Unit is placed into operation, the No. 2 Vacuum Unit will process
bottoms from the No. 2 Crude Unit. When the Delayed Coking Unit is complete, the
No. 2 Vacuum Unit tower bottoms are expected to be processed through the Delayed
Coking Unit into lighter, more valuable products. Upon completion of Phase II,
VGO is expected to be upgraded in the Fluid Catalytic Cracking Unit to gasoline
and No. 2 fuel oil.
 
     No. 2 Crude Unit. The No. 2 Crude Unit was designed to process heavy, sour
crude oil and previously has demonstrated a capacity of 175,000 Bpd. Upon
completion of the Capital Improvement Program, the No. 2 Crude Unit is expected
to process up to 200,000 Bpd of a mix of crude oils into naphtha, kerosene, No.
2 fuel oil, atmospheric gas oil and atmospheric residual oil.
 
CAPITAL IMPROVEMENT PROGRAM
 
     The Capital Improvement Program is designed to increase the capacity and
complexity of the refinery. The most significant projects include: (i)
converting the visbreaker unit into a delayed coking unit to process vacuum
tower bottoms into lighter petroleum products, (ii) modernizing and upgrading a
fluid catalytic cracking unit to increase gasoline production capacity and allow
the direct processing of low cost atmospheric residual feedstocks and (iii)
upgrading and expanding hydrotreating, alkylation and sulfur recovery units to
increase sour crude processing capacity. In addition, TARC plans to expand,
modify and add other processing units, tankage and offsite facilities as part of
the Capital Improvement Program. The Capital Improvement Program includes
expenditures necessary to ensure that the refinery is in compliance with certain
existing air and water discharge regulations and that gasoline produced will
comply with federal standards. TARC is acting and will act as general
contractor, but has engaged a number of specialty consultants and engineering
and construction firms to assist TARC in completing the individual projects that
comprise the Capital Improvement Program. Each of these firms was selected
because of its specialized expertise in a particular process or unit integral to
the Capital Improvement Program.
 
                                        2
<PAGE>   5
 
     The Capital Improvement Program will be executed in two phases, described
as follows:
 
  Phase I
 
     Phase I includes the Delayed Coking Unit, the HDS Unit, the Naphtha
Pretreater, the No. 2 Reformer, the Sulfur Recovery System and the supporting
Offsite Facilities. Completion of Phase I, along with the Crude and Vacuum
Units, will enable the refinery to process heavy crude and other purchased
feedstocks into finished and intermediate products. Products from this phase are
expected to include NGLs, naphtha, conventional gasoline, No. 2 fuel oil, VGO,
sulfur and petroleum coke. The following is a brief description of the units and
offsite facilities that are scheduled to be added or improved during Phase I and
TARC's plans and expectations therefor:
 
     Delayed Coking Unit. TARC's Visbreaking Unit is being converted to a
Delayed Coking Unit. The process engineering for this conversion has been
completed by ABB Lummus Crest Inc. Detailed design engineering has been
completed and all major equipment has been purchased and installed. Fluor
Daniel, Inc. is managing the construction, which consists primarily of the
installation of piping and instrumentation systems. The Delayed Coking Unit is
expected to be able to process approximately 75,000 Bpd of vacuum tower bottoms
produced from the No. 2 Vacuum Unit. Products from this unit will include light
gas, naphtha, coker distillate, and coker gas oil, which can all be further
upgraded by TARC's refinery or sold to other refiners for upgrading. Petroleum
coke will be produced as a by-product of the coking process.
 
     Naphtha Pretreater. TARC has purchased a used naphtha pretreater, which it
has disassembled and moved to the refinery site. Recent inspection of the used
piping in the naphtha pretreater indicates that a majority of it will need to be
replaced. Upon re-assembly, this unit will produce desulfurized heavy naphtha,
to be processed by the No. 2 Reformer into reformate for blending into gasoline,
and light naphtha for gasoline blending or sales. The Naphtha Pretreater is
designed to process up to 30,000 Bpd of naphtha feedstock produced by the No. 2
Crude Unit and the Delayed Coking Unit.
 
     No. 2 Reformer. The No. 2 Reformer was purchased by TARC's predecessor and
relocated to the refinery during the 1980s expansion. Although re-assembly is
not complete, all major equipment is installed. Field construction will include
reconditioning of equipment plus installation of piping and instrumentation
systems. The No. 2 Reformer will process desulfurized heavy naphtha to raise its
octane level to that suitable for gasoline blending. The unit is designed to
process up to 12,000 Bpd of feedstock to produce high octane reformate for
gasoline blending. This unit will also provide a portion of the hydrogen
required for operation of the Naphtha Pretreater and the HDS Unit.
 
     Hydrodesulfurization (HDS) Unit. In the early 1980s, TARC's predecessor
designed and commenced construction of a two-train distillate HDS Unit with a
common fractionation section. During Phase I, TARC will install two new
reactors, both of which have been purchased and delivered, and add another
fractionation section to permit independent operation of both trains. Other
major equipment required is in place. When completed, each train will be capable
of treating either distillate or VGO depending on unit or product requirements.
 
     Sulfur Recovery System. Sulfur is captured in various refining processes,
primarily cracking and hydrodesulfurization, in the form of hydrogen sulfide
which is absorbed into an amine solution or into sour water streams. The
hydrogen sulfide is stripped from these streams and processed in a series of
reactors into elemental sulfur. TARC will reactivate and expand an existing
sulfur unit to a capacity of 150 LT/D and construct a 220 LT/D unit, and
construct ancillary facilities to support these units. These plants will have a
combined base capacity of 370 LT/D of sulfur, which can be increased to 510 LT/D
of sulfur with standard oxygen enrichment.
 
     Offsite Facilities/Tankage. TARC will add steam-generating capacity, air
compression equipment and new electrical equipment during Phase I. A marine
vapor recovery system will also be installed at the terminal docks. TARC is
adding equipment necessary to load petroleum coke at one of its docks. TARC is
performing the engineering on these facilities with support from specialty
engineering firms such as River Consulting Inc., Lanier and Associates, ABB
Combustion Engineering Systems and RPM Engineering Inc. TARC has
 
                                        3
<PAGE>   6
 
purchased an adjacent storage terminal to provide additional storage.
Pressurized tanks with a storage capacity of 127,500 barrels will be constructed
for LPG and butane.
 
     Other. Additional equipment will be installed to enhance waste water
treatment and reduce the generation of solid waste. TARC has commenced Hazardous
Operation ("HAZOP") analyses of the refinery process units as required by
Occupational Safety and Health Administration ("OSHA") regulations.
 
  Phase II
 
     Phase II includes the FCC Unit, FCC Upgrades, Alkylation Unit and some
additional Offsite Facilities. Startup of these facilities will increase the
refinery's output of higher margin finished products, primarily gasoline and No.
2 fuel oil. TARC anticipates that, following completion of Phase II, it will
have the capacity to process in excess of 200,000 Bpd of combined heavy, sour
crude oil and atmospheric residual oil. The following is a brief description of
the units and offsite facilities that are scheduled to be added or improved
during Phase II and TARC's plans and expectations therefor:
 
     Fluid Catalytic Cracking (FCC) Unit. TARC's FCC Unit will process gas oil
feedstocks directly from the No. 2 Crude Unit, the No. 2 Vacuum Unit, the
Delayed Coking Unit, or from outside purchases of VGO or atmospheric residual
oil. Before being fed to the FCC Unit, some of the VGO will be desulfurized in
the HDS Unit in order to meet environmental guidelines and improve product
quality from the FCC Unit. Modernization of the FCC Unit includes
reconfiguration of the fractionation plant.
 
     The FCC Unit will have an initial capacity of 100,000 Bpd and will
incorporate the state-of-the-art MSCC(SM) technology licensed by UOP, formerly
Universal Oil Products ("UOP"). The MSCC(SM) technology is currently being used
at a major U.S. refinery. TARC believes that this technology will improve
product yields and quality in comparison to conventional catalytic cracking
processes. TARC also plans to add a catalyst cooler, which will make the unit
capable of processing significant quantities of atmospheric residual feedstocks.
 
     The FCC Unit will produce refinery fuel, propane, butane, light olefins,
gasoline blendstock, No. 2 fuel oil, and a residual product (decant/slurry oil).
Light olefins will be processed in the Alkylation Unit for further upgrade.
Other materials will be blended to finished products or consumed in the
refinery.
 
     Process engineering for the MSCC(SM) technology has been completed by UOP.
Raytheon Engineers and Constructors Inc. ("Raytheon") is providing detailed
design engineering and is managing construction of the FCC Unit. All major
equipment has been procured, delivered and erected.
 
     FCC Flue Gas Scrubber. TARC plans to install a scrubber for the FCC flue
gases to reduce particulate and sulfur dioxide emissions. The flue gas scrubber
has been designed and fabricated by Belco Technologies Inc., and is being
erected under a fixed price contract.
 
     Alkylation Unit. Light olefins from the FCC Unit are converted to high
octane gasoline blendstock (alkylate) in the Alkylation Unit. Alkylate is a
relatively clean burning fuel component important in the production of
environmentally sensitive gasolines. The Alkylation Unit will be reactivated and
expanded to an ultimate capacity of approximately 26,000 Bpd of alkylate product
by installing four new contactors and two new settlers designed by Stratco Inc.
and a new refrigeration system. Remaining work includes inspection and testing
of the equipment in the existing unit and installation of a new electronic
instrumentation system. Fluor Daniel is providing engineering and construction
management services for this work.
 
     Offsite Facilities/Tankage. Additional capacity will be installed for
cooling water, steam, plant air, instrument air and electrical distribution.
Construction of nine tanks, with aggregate capacity of one million barrels, will
be completed. Other piping, electrical and instrumentation equipment will be
installed to connect the Phase II process units with the refinery and new
storage tanks.
 
     Other. TARC is required to perform HAZOP analysis of the refinery process
units added during Phase II as required by OSHA regulations.
 
                                        4
<PAGE>   7
 
  CAPITAL BUDGET AND EXPENDITURES
 
     The following table sets forth certain information with respect to the
Capital Improvement Program, including the budget as of June 13, 1997 and
expenditures as of January 31, 1998.
 
<TABLE>
<CAPTION>
                                                  BUDGET         EXPENDITURES TO      DAILY
                                              TO COMPLETE(1)   JANUARY 31, 1998(2)   CAPACITY
                                              --------------   -------------------   --------
                                               (DOLLARS IN         (DOLLARS IN
                                                MILLIONS)           MILLIONS)         (BPD)
<S>                                           <C>              <C>                   <C>
PHASE I:
  Crude Unit................................       $  3              $  3.7          200,000
  Delayed Coking Unit.......................         27                45.2           75,000
  Naphtha Pretreater........................         12                 7.1           30,000
  No. 2 Reformer............................          9                 0.7           12,000
  HDS Unit..................................         24                11.8           60,000
  Sulfur Recovery System....................         53                23.8              370(4)
  Offsite Facilities/Tankage................         46                33.3              N/A
  Other.....................................          3                 0.4              N/A
  Engineering and Administrative............          7                 8.0              N/A
  Contingencies(3)..........................         39                  --              N/A
                                                   ----              ------
          Total Phase I.....................        223               134.0
                                                   ----              ------
PHASE II:
  FCC Unit..................................        115                67.9          100,000
  FCC Flue Gas Scrubber.....................         14                 5.5              N/A
  Alkylation Unit...........................         24                 6.6           26,000
  Offsite Facilities/Tankage................         26                 1.0              N/A
  Other.....................................          2                  --              N/A
  Engineering and Administrative............          3                  --              N/A
  Contingencies(3)..........................         20                  --              N/A
                                                   ----              ------
          Total Phase II....................        204                81.0
                                                   ----              ------
          Total Phase I and Phase II........       $427              $215.0
                                                   ====              ======
</TABLE>
 
---------------
 
(1) Budget as of June 13, 1997 for estimated expenditures from June 13, 1997 to
    completion. See "-- Capital Budget Status"
 
(2) From June 13, 1997 through January 31, 1998.
 
(3) To the extent expenditures have exceeded or are expected to exceed the
    approved capital budget for a unit or units, the contingencies portion of
    the budget is allocated to specific units. As of January 31, 1998, the
    entire contingencies portion of the budget has been allocated to specific
    units.
 
(4) Units are LT/D. Capacity can be increased to 510 LT/D with oxygen
enrichment.
 
CAPITAL BUDGET STATUS
 
     As of April 30, 1998, TARC was in the process of preparing information for
the Construction Supervisor in connection with the Construction Supervisor's
bimonthly report, to be finalized by the Construction Supervisor in May. TARC
believes that the report will indicate the necessity for expenditures in excess
of the budget of up to approximately $45 million, of which approximately $30
million will be allocated to Phase I. These estimates are preliminary, and may
change in the May report. Cash available in the TARC Disbursement Account is
sufficient to fund the projected remaining costs of Phase I. Although there can
be no assurance, TARC believes that cash available in the TARC Disbursement
Account, other cash on hand (exclusive of any proceeds of the issuance of Port
Commission Bonds, discussed below), and anticipated cash flow from operation of
certain Phase I units will be sufficient to fund the projected remaining costs
of Phase II.
 
                                        5
<PAGE>   8
 
COMPLETION STATUS
 
     TARC anticipates Mechanical Completion of the Delayed Coking Unit, the HDS
Unit and the related portion of the Sulfur Recovery System in May 1998. Upon
Mechanical Completion of these units, TARC will be able to purchase feedstocks
using funds in the TARC Disbursement Account reserved for such purpose. TARC
believes that the remainder of Phase I (other than the No. 2 Reformer) will
reach Mechanical Completion during the second quarter of fiscal 1999. TARC
intends to defer additional expenditures on the No. 2 Reformer until the fourth
quarter of fiscal 1999, ending January 31, 1999. TARC expects to complete both
Phase I and Phase II in advance of the Phase I completion date required by the
TEC Indenture.
 
PORT COMMISSION BONDS
 
     TARC and the South Louisiana Port Commission ("Port Commission") have
entered into a preliminary agreement for the issuance of revenue bonds which, if
issued, are expected to provide net proceeds to TARC of approximately $50
million. Of such proceeds, TARC anticipates that approximately $35 million would
be available to fund construction of facilities included in the Capital
Improvement Program budget. The Port Commission would own a coke handling system
and certain tank storage and dock facilities. TARC would operate such facilities
pursuant to a long-term (25-year) lease. TARC is currently working with an
underwriter to structure an offering of revenue bonds pursuant to this
preliminary agreement. There can be no assurance, however, that the issuance of
an such tax-exempt bonds will occur.
 
FEEDSTOCK FINANCING ARRANGEMENTS AND PROCESSING AGREEMENTS
 
     During periods of limited operations, TARC has entered into financing
arrangements in order to maintain an available supply of feedstocks. Typically,
TARC entered into an agreement with a third party to acquire a cargo of
feedstock scheduled for delivery to TARC's refinery. TARC paid through the third
party all transportation costs, related taxes and duties and letter of credit
fees for the cargo, plus a negotiated commission. Prior to arrival at the
refinery, another third party purchased the cargo, and TARC committed to
purchase, at a later date, the cargo at an agreed priced plus commission and
costs. TARC also placed margin deposits with the third party to permit the third
party to hedge its price risk. TARC purchased these cargos in quantities
sufficient to maintain expected operations and was obligated to purchase all of
the cargos delivered pursuant to these arrangements. In the event the refinery
was not operating, these cargos could be sold on the spot market.
 
     In April 1996, TARC entered into a processing agreement with a third party
to process feedstocks. Under the terms of the agreement, the processing fee
earned by TARC is based on the margin, if any, earned by the third party from
product sales, after deducting all of its related costs such as feedstock
acquisition, hedging, transportation, processing and inspections plus a
commission for each barrel processed. As of January 31, 1998, TARC has processed
6.4 million barrels of feedstocks under this agreement. TARC also entered into
processing agreements with this third party to process approximately 1.1 million
barrels of the third party's feedstocks for a fixed price per barrel. For the
years ended January 31, 1998 and 1997, TARC recorded income (loss) from
processing agreements of $1.4 million and $(7.1) million, respectively. As of
January 31, 1998 and 1997, TARC was storing approximately 0.7 million and 1.0
million barrels, respectively, of feedstock and intermediate or refined products
pursuant to these processing agreements. Included in the 0.7 million barrels of
product stored at the refinery as of January 31, 1998, is approximately 0.6
million barrels of feedstock owned by a third party related to a purchase
commitment entered into in April 1997. For the year ended January 31, 1998, TARC
incurred a loss of approximately $7.8 million related to this purchase
commitment.
 
PRICE MANAGEMENT ACTIVITIES
 
     In order to mitigate the commodity price risks associated with the refining
business, TARC has previously entered, and may in the future enter, into futures
contracts, options on futures, swap agreements and forward sale agreements
commensurate with its inventory levels and feedstock requirements and as
permitted under TARC's debt instruments. If TARC believes it can capitalize on
favorable market conditions,
 
                                        6
<PAGE>   9
 
it will attempt to utilize the futures market to fix a portion of its crude oil
costs and refined products values. This hedging strategy is designed to retain
the value of a portion of its work-in-process inventory.
 
CRUDE OIL AND FEEDSTOCK SUPPLY
 
     TARC has no crude oil reserves and is not engaged in the exploration for
crude oil. TARC plans to obtain all its crude oil requirements from unaffiliated
sources. Although TARC currently has no long-term supply contracts, it has
entered into negotiations with a major supplier of heavy, sour crude oil and is
in discussions with two other suppliers. TARC expects to be able to purchase
feedstocks on the spot market as needed and believes that it will have access to
adequate supplies of crude oil it intends to process; however, there can be no
assurance that such supplies will be available on favorable terms.
 
     Crude oil prices are affected by a variety of factors that are beyond the
control of TARC. The principal factors currently influencing prices include the
pricing and production policies of members of the Organization of Petroleum
Exporting Countries, the availability to world markets of production from
Kuwait, Iraq and Russia and the worldwide and domestic demand for oil and
refined products. Oil pricing will continue to be unpredictable and greatly
influenced by governmental and political forces.
 
     The refinery has a variety of available options for the receipt of
feedstocks. The Mississippi River permits delivery of feedstocks from both barge
and ocean-going vessels. TARC has four ship docks and a barge dock on the
Mississippi River. TARC's title to and continued use of these facilities is
subject to the rights of the government and public use. TARC's ship dock can
accommodate 100,000 deadweight ton ("dwt") tankers that draw less than 45 feet
of water, or up to 200,000 dwt tankers that have been partially offloaded and
draw less than 45 feet of water. The barge dock provides access to smaller
cargos of intermediate feedstocks such as VGOs or atmospheric residuals.
Additionally, TARC is connected to a Shell Oil Company ("Shell") crude pipeline
that provides access to Louisiana Offshore Oil Port's 24-inch pipeline network,
thereby permitting TARC to receive large quantities of foreign crude oil. This
pipeline also provides access to Louisiana and other domestic crudes.
 
PRODUCT DISTRIBUTION
 
     TARC currently has no long-term sales contracts. Major market areas for
TARC's refined products will include the Gulf Coast region, the Mississippi
River Valley and the East Coast of the United States, as well as foreign
markets. TARC's refined products will be transported by pipeline, rail tanker,
ocean-going vessel and tank truck. TARC's refinery is connected, through
third-party pipelines, to two major Gulf Coast common carrier pipelines, the
Colonial and the Plantation, which will permit transportation of the refinery's
products to East Coast markets. Products can be discharged into these pipelines
at rates of up to 15,000 Bbls per hour. TARC is also connected to several
pipelines designed to transfer refined products to a nearby refinery operated by
Shell. Railroad lines serve the refinery and adjacent industries. TARC's barge
and ship docks provide access to the Mississippi River and the intracoastal
waterway.
 
TANK STORAGE ACQUISITION
 
     On September 9, 1997, TARC acquired tank storage facilities and property
located adjacent to TARC's refinery for $40 million. The acquired assets
included approximately 5.5 million barrels of tank storage capacity for crude
oil, feedstocks and finished products, and three docks on the Mississippi River,
as well as almost 500 acres of undeveloped wetlands. TARC is integrating the
tank storage and terminal facilities with its refinery offsites systems and is
leasing to other persons storage that is not needed for its own operations.
 
FOREIGN TRADE ZONE
 
     The refinery is approved for purposes of processing foreign crude to
operate as a foreign trade zone. This allows the refinery to realize the
benefits of processing foreign crude and exporting the products duty free or
deferring the duty on products sold domestically.
 
                                        7
<PAGE>   10
 
INSURANCE
 
     TARC maintains insurance in accordance with customary industry practices to
cover some, but not all, risks. TARC currently maintains property insurance for
the refinery in an amount and with deductibles that management believes will
allow TARC to survive damage to the refinery. TARC plans to increase insurance
coverage amounts from time to time as it completes certain portions of the
Capital Improvement Program.
 
SEASONALITY
 
     TARC anticipates that its operations will be subject to significant
fluctuations in seasonal demand. In TARC's markets, demand for gasoline is
typically higher during the first and second quarters of TARC's fiscal year.
During winter months, demand for heating oil increases. The refinery is
designed, upon completion of the Capital Improvement Program, to change its
product yields to take advantage of seasonal demands.
 
FLUCTUATION IN PRICES
 
     Factors that are beyond the control of TARC may cause the cost of crude oil
purchased by TARC and the price of refined products sold by TARC to fluctuate
widely. Although prices of crude oil and refined petroleum products generally
move in the same direction, prices of refined products often do not respond
immediately to changes in crude oil costs. An increase in market prices for
crude oil or a decrease in market prices for refined products could have an
adverse impact on TARC's earnings and cash flow.
 
COMPETITION
 
     The industry in which TARC operates is highly competitive. TARC primarily
competes with refiners in the Gulf Coast region, many of which are owned by
large, integrated oil companies which, because of their more diverse operations,
stronger capitalizations or crude oil supply arrangements, are better able than
TARC to withstand volatile industry conditions, including shortages or excesses
of crude oil or refined products or intense price competition. The principal
competitive factors affecting TARC's refining operations are the quality,
quantity and delivered costs of crude oil and other refinery feedstocks,
refinery processing efficiency, mix of refined products, refined product prices
and the cost of delivering refined products to markets. Competition also exists
between the petroleum refining industry and other industries supplying energy
and fuel to industrial, commercial and individual consumers.
 
EMPLOYEES
 
     As of January 31, 1998, TARC had approximately 450 employees and will
employ additional personnel as required by its operations and may engage the
services of engineering and other consultants from time to time. Currently, none
of TARC's employees is a party to a collective bargaining agreement.
 
     Since July 1994, Southeast Louisiana Contractors of Norco, Inc. ("Southeast
Contractors"), a subsidiary of TransAmerican, has provided construction
personnel to TARC in connection with construction at the refinery. Southeast
Contractors will continue to provide construction personnel to TARC as required
to implement the Capital Improvement Program. These construction workers are
temporary employees, and the number and composition of the workforce will vary
throughout the reactivation of the refinery during the Capital Improvement
Program. Southeast Contractors charges TARC for the direct costs it incurs,
which consist solely of employee payroll and benefits plus administrative costs
and fees. Such administrative costs and fees charged to TARC may be up to $2
million per year. As of January 31, 1998, Southeast Contractors was providing
approximately 2,500 construction workers to TARC. The Equal Employment
Opportunity Commission (the "EEOC") has initiated an investigation into the
employment practices of TARC and Southeast Contractors alleging discriminatory
hiring and promotion practices. See "-- Legal Proceedings."
 
ENVIRONMENTAL MATTERS
 
     See Note 14 of Notes to Financial Statements for a discussion of
environmental matters affecting TARC.
 
                                        8
<PAGE>   11
 
OTHER GOVERNMENTAL REGULATIONS
 
     TARC must also comply with federal and state laws and regulations
promulgated by the Department of Transportation for the movement of volatile and
flammable materials, the U.S. Coast Guard for marine operations and oil spill
prevention and the Occupational Safety and Health Administration ("OSHA") for
worker and job site safety. To comply with OSHA regulations, TARC must conduct
extensive Process Safety Management and Hazardous Operations reviews prior to
placing units into service. TARC has budgeted funds in the Capital Improvement
Program to comply with all of these requirements.
 
ITEM 2. PROPERTIES
 
     TARC owns the approximately 457-acre site on which the refinery and tank
storage facility are located. TARC also owns approximately 500 acres of wetlands
adjacent to the refinery site. TARC leases office space in Houston, Texas from
TransTexas.
 
TITLE INSURANCE
 
     TARC has obtained a lender's title insurance policy in the amount of $859
million for the benefit of the Trustee under the TEC Notes Indenture (the
"Trustee") to insure against certain claims made against title to the refinery
parcel site. The title insurance policy is reinsured through various title
insurance companies in the United States. The ability to successfully recover
under the policy is dependent on the creditworthiness of the title company and
its reinsurers at the time of the claim and any defenses that the title insurers
and its reinsurers may have. The title insurance policy does not insure TARC or
the Trustee for defects, liens, encumbrances, adverse claims or other matters
known to TARC that affect the validity of the mortgage or title to the refinery.
There can be no assurance that the amount of title insurance will be sufficient
to cover any losses incurred by TARC or the Trustee as a result of a title
defect impairing the ability to use the refinery site or that the title insurers
will be able to fulfill their financial obligations under the title insurance
policy. The title insurance policy contains customary exceptions to coverage,
including taxes not yet due and payable, riparian rights and numerous
servitudes, rights of way, rights of access and other encroachments in favor of
utilities, railroads, pipelines and adjacent refineries and tank farms, as well
as exceptions for (i) government claims with respect to, and public rights to
use, TARC's property located between the Mississippi River and the road upon
which pipe racks and TARC's docking facilities are located, (ii) a right of
first refusal in favor of an adjacent landowner with respect to a certain
portion of property which, in the event exercised, may require TARC to relocate
at its expense certain pipelines that connect various refinery parcels, (iii)
tax benefits that have been conveyed to certain tax lessors, (iv) the priority
of liens that may be filed by materialmen and mechanics in connection with the
Capital Improvement Program and (v) any rights of creditors pursuant to federal
or state bankruptcy and insolvency laws, which rights may affect the
enforceability of the mortgage securing the TARC Intercompany Loan.
 
ITEM 3. LEGAL PROCEEDINGS
 
     See Note 14 of Notes to Financial Statements for a discussion of TARC's
legal proceedings.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     There were no matters submitted to a vote of TARC's security holders during
the three months ended January 31, 1998.
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
     There is no established public trading market for TARC's common stock. On
April 30, 1998, there was one holder of TARC's common stock.
 
                                        9
<PAGE>   12
 
     TARC has not paid any cash dividends on its capital stock since inception.
TARC's ability to pay dividends is restricted by TARC's debt instruments and
will depend in part upon TARC's debt levels. In determining whether to declare
and pay a dividend, the Board of Directors will consider various other factors,
including TARC's capital requirements and financial condition.
 
ITEM 6. SELECTED FINANCIAL DATA
 
     On January 29, 1996, TARC changed its fiscal year end for financial
reporting purposes from July 31 to January 31. The following table sets forth
selected financial data of TARC as of and for each of the three years ended
January 31, 1998, the six months ended January 31, 1996 and 1995 and each of the
three years ended July 31, 1995. This data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes thereto. The financial data
for fiscal year ended July 31, 1993 represent the results of operations and
financial position of TARC prior to the reactivation of the refinery. During
this period, TARC had only maintenance expenses and lease income from storage
facilities. The data for the year ended July 31, 1994 reflects limited
operations of the refinery and expenses related to reactivation of portions of
the refinery. The No. 2 Vacuum Unit was operated intermittently between March
1994 and January 1997. TARC does not consider its historical results to be
indicative of future results.
 
<TABLE>
<CAPTION>
                                                                       SIX MONTHS ENDED
                                       YEAR ENDED JANUARY 31,             JANUARY 31,            YEAR ENDED JULY 31,
                                 ----------------------------------   -------------------   ------------------------------
                                   1998        1997          1996       1996       1995       1995       1994       1993
                                 ---------   --------      --------   --------   --------   --------   --------   --------
                                                    (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<S>                              <C>         <C>           <C>        <C>        <C>        <C>        <C>        <C>
STATEMENT OF OPERATIONS DATA:
  Product sales................  $      --   $ 10,857      $176,229   $107,237   $ 71,035   $140,027   $174,143   $     --
  Other........................      2,828         --             1         --        551        552      3,035      5,178
                                 ---------   --------      --------   --------   --------   --------   --------   --------
        Total revenues.........      2,828     10,857       176,230    107,237     71,586    140,579    177,178      5,178
  Operating costs and
    expenses...................     30,030     54,004       206,798    121,770     86,383    171,411    187,208     13,238
  General and administrative
    expenses(1)................     19,196     11,848        12,610      7,438      8,442     13,614      4,496     11,341
                                 ---------   --------      --------   --------   --------   --------   --------   --------
  Operating loss...............    (46,398)   (54,995)      (43,178)   (21,971)   (23,239)   (44,446)   (14,526)   (19,401)
  Equity in income (loss)
    before extraordinary item
    of TransTexas..............     44,552     12,325        (2,584)      (156)        --     (2,428)        --         --
  Other income (expense).......    (15,251)    52,076(4)     (9,999)    (3,944)        89     (5,966)    (2,827)        28
  Extraordinary items (2)......    (94,911)        --       (11,497)        --         --    (11,497)        --         --
  Net income (loss)............   (112,008)     9,406       (67,258)   (26,071)   (23,150)   (64,337)   (17,353)   (19,373)
  Net income (loss) per common
    share:(3)
    Basic......................      (3.73)      0.31         (2.24)     (0.87)     (0.77)     (2.14)     (0.58)     (0.65)
    Diluted....................      (3.73)      0.25         (2.24)     (0.87)     (0.77)     (2.14)     (0.58)     (0.65)
  Dividends declared per common
    share(5)...................         --         --            --         --         --         --         --         --
</TABLE>
 
<TABLE>
<CAPTION>
                                                          JANUARY 31,                             JULY 31,
                                          -------------------------------------------   -----------------------------
                                             1998        1997       1996       1995       1995       1994      1993
                                          ----------   --------   --------   --------   --------   --------   -------
<S>                                       <C>          <C>        <C>        <C>        <C>        <C>        <C>
BALANCE SHEET DATA:
  Working capital (deficit).............  $   70,501   $(40,814)  $(17,707)  $(35,509)  $  5,965   $(16,838)  $(1,494)
  Total assets..........................   1,195,449    564,241    518,323    229,462    499,879    176,327    70,900
  Total long-term liabilities...........     979,805    440,775    368,091    112,719    352,696     45,373    64,512
  Stockholder's equity..................     160,408     81,363     71,957     77,250     87,837    100,400     4,253
</TABLE>
 
---------------
 
(1) Includes a charge to operations of approximately $2.2 million of intangible
    costs for the year ended January 31, 1998 and litigation accruals of $2.0
    million, $4.5 million and $9.0 million for the six months ended January 31,
    1996, and the years ended July 31, 1995 and 1993, respectively.
 
(2) Represents loss on early extinguishment of debt for the year ended January
    31, 1998 and TARC's equity in the early extinguishment of debt at TransTexas
    for the years ended January 31, 1998 and 1996 and July 31, 1995.
 
                                       10
<PAGE>   13
 
(3) Gives retroactive effect to a 30,000-for-1 stock split effected in July
    1994.
 
(4) Includes a gain of $56.2 million related to the sale of 4.55 million shares
    of TransTexas stock in March 1996.
 
(5) TARC's debt instruments contain certain restrictions with respect to the
    payment of dividends on TARC's common stock.
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
 
     The following discussion should be read in conjunction with TARC's
financial statements and notes thereto.
 
RESULTS OF OPERATIONS
 
  General
 
     TARC's refinery was inoperative from January 1983 through February 1994.
During this period, TARC's revenues were derived primarily from tank rentals and
its expenses consisted of maintenance and repairs, tank rentals, general and
administrative expenses and property taxes. The No. 2 Vacuum Unit was operated
intermittently between March 1994 and January 1997. TARC may operate the No. 2
Crude Unit and the No. 2 Vacuum Unit if market conditions are favorable. TARC's
decision to commence or suspend operations will depend on the availability of
working capital, current operating margins and the need to tie-in units as they
are completed. TARC does not consider its historical results to be indicative of
future results.
 
     TARC's results of operations are dependent on the operating status of
certain units within its refinery, which determines the types of feedstocks
processed and refined product yields. The results are also affected by the unit
costs of purchased feedstocks and the unit prices of refined products, which can
vary significantly. The Capital Improvement Program is designed to significantly
change TARC's throughput capacity, the feedstocks processed, and refined product
yields.
 
     TARC believes, based on current estimates of refining margins and costs of
the expansion and modification of the refinery, that future undiscounted cash
flows will be sufficient to recover the cost of the refinery over its estimated
useful life. Management believes there have been no events or changes in
circumstances that would require the recognition of an impairment loss. However,
due to the inherent uncertainties in estimating future refining margins, and in
constructing and operating a large-scale refinery, there can be no assurance
that TARC will ultimately recover the cost of the refinery. Management believes
that the book value of the refinery is in excess of its current estimated fair
market value.
 
  Year Ended January 31, 1998, Compared with the Year Ended January 31, 1997
 
     There were no product sales for the year ended January 31, 1998 as compared
to $10.9 million for the year ended January 31, 1997, due primarily to TARC not
operating the No. 2 Vacuum Unit since January 1997 and TARC's use during fiscal
1998 of processing arrangements pursuant to which TARC processed feedstocks
owned by third parties (as opposed to TARC's purchase of feedstock and sale of
refined product).
 
     Other revenues of $2.8 million for the year ended January 31, 1998 resulted
primarily from rental income from TARC's tank storage facility acquired in
September 1997.
 
     There were no costs of products sold for the year ended January 31, 1998 as
compared to $11.5 million for the year ended January 31, 1997, due primarily to
TARC not operating the No. 2 Vacuum Unit since January 1997 and TARC's use
during fiscal 1998 of processing arrangements pursuant to which TARC processed
feedstocks owned by third parties (as opposed to TARC's purchase of feedstock
and sale of refined product).
 
     During 1997 and 1998, TARC entered into other processing arrangements
whereby TARC did not take title to feedstocks or refined products but received a
fee based on margins, if any, realized by the counterparty to the arrangement.
TARC retained all market and production risks related to barrels processed.
These
 
                                       11
<PAGE>   14
 
arrangements, which are recorded net in the statement of operations, resulted in
income of $1.4 million and a loss of $7.1 million for the years ended January
31, 1998 and 1997, respectively. Income and losses were primarily due to
unfavorable prices for refined products and unfavorable results of price
management activities.
 
     Operations and maintenance expense for the year ended January 31, 1998
decreased $12.1 million to $11.8 million from $23.9 million for the year ended
January 31, 1997, primarily due to TARC not operating the No. 2 Vacuum Unit
since January 1997, a $1.9 million decrease in labor costs, and a decrease of
$1.9 million in tank rentals due to the acquisition of a tank storage facility
adjacent to the refinery and the settlement of a tank rental dispute during
1996.
 
     Depreciation and amortization expense for the year ended January 31, 1998
increased $1.2 million to $8.4 million from $7.2 million for the year ended
January 31, 1997, primarily due to depreciation related to the tank storage
facility acquired in September 1997.
 
     General and administrative expenses increased $7.4 million to $19.2 million
for the year ended January 31, 1998 from $11.8 million for the year ended
January 31, 1997, primarily due to a charge to operations of approximately $2.2
million of certain intangible costs, increased fees of approximately $3.7
million related to a new services agreement entered into among TransAmerican,
TEC, TARC and TransTexas and increased professional fees related to the
modification and issuance of debt.
 
     Taxes other than income taxes for the year ended January 31, 1998 decreased
$0.8 million to $3.4 million from $4.2 million for the year ended January 31,
1997, primarily due to decreased property tax expense.
 
     Loss on purchase commitments for the year ended January 31, 1998 consists
of a $7.8 million loss related to a commitment to purchase 0.6 million barrels
of feedstock. These barrels have been sold to a third party and the Company
intends to subject them to a processing agreement with the third party. TARC
remains subject to market risk related to these barrels.
 
     Interest income for the year ended January 31, 1998 increased $5.0 million
as compared to the year ended January 31, 1997, primarily due to the investment
of proceeds from the TARC Intercompany Loan and Senior Subordinated Notes.
Interest expense for the year ended January 31, 1998 increased $39.9 million,
primarily due to interest on the TARC Intercompany Loan and Senior Subordinated
Notes. During the year ended January 31, 1998, TARC capitalized approximately
$93.0 million of interest related to property and equipment additions at TARC's
refinery compared to $68.8 million for the year ended January 31, 1997. The
increase was primarily due to higher capital spending.
 
     Equity in income of TransTexas before extraordinary item for the year ended
January 31, 1998 increased to $44.6 million as compared to $12.3 million for the
year ended January 31, 1997, due primarily to a $543 million gain on the sale by
TransTexas of a subsidiary. In September 1997, TARC sold approximately 8.5
million shares of TransTexas common stock pursuant to the TransTexas share
repurchase program. TARC received $136.2 million in connection with the
repurchase, of which $124.5 million (representing the excess of the cash
received over TARC's carrying value of the stock) was recorded as a capital
contribution. TARC recognized equity in an extraordinary item of TransTexas of
$(10.2) million for the year ended January 31, 1998. The extraordinary loss of
TransTexas is attributable to a loss on the early extinguishment of debt as a
result of the repurchase by TransTexas of its Senior Secured Notes and an
exchange offer by TransTexas for its Subordinated Notes. The gain on the sale of
TransTexas stock of $56.2 million for the year ended January 31, 1997 was a
result of TARC's sale of 4.55 million shares of TransTexas common stock to third
parties in March 1996. In April 1998, TARC distributed its remaining shares of
TransTexas common stock to TEC.
 
     The additional loss on the early extinguishment of debt of $84.8 million
for the year ended January 31, 1998 is a result of the completion of the TARC
Notes Tender Offer as described in Note 8 of Notes to Financial Statements.
 
                                       12
<PAGE>   15
 
  Year Ended January 31, 1997, Compared with the Year Ended January 31, 1996
 
     Total revenues for the year ended January 31, 1997 decreased to $10.9
million from $176.2 million for the same period in 1996, due primarily to a
significant decrease in the purchase and processing of feedstocks for third
parties compared to the prior year. During fiscal 1997, the refinery's principal
activity was the processing of feedstocks pursuant to third party processing
arrangements.
 
     Cost of products sold for the year ended January 31, 1997 decreased to
$11.5 million from $185.3 million for the same period in 1996, due primarily to
a significant decrease in the purchase and processing of feedstocks for third
parties compared to the prior year.
 
     Losses from processing arrangements were $7.1 million for the year ended
January 31, 1997, primarily due to price management activities. See "Liquidity
and Capital Resources."
 
     Operations and maintenance expense for the year ended January 31, 1997
increased to $23.9 million from $12.5 million for the same period in 1996,
primarily due to a write-off of approximately $6.5 million for assets included
in construction work in process and not intended for use in the 1995 Program, an
increase in fuel costs during the first six months of fiscal 1997, and higher
contract labor costs.
 
     Depreciation and amortization expense for the year ended January 31, 1997
increased $0.9 million to $7.2 million from $6.3 million for the same period in
1996, primarily due to the reclassification of construction work in process to
depreciable assets during 1997.
 
     Taxes other than income taxes for the year ended January 31, 1997 increased
to $4.2 million from $2.7 million for the same period in 1996, primarily due to
increased property tax expense.
 
     General and administrative expense for the year ended January 31, 1997
decreased to $11.8 million from $12.6 million for the same period in 1996,
primarily due to decreased litigation expense.
 
     Interest income for the year ended January 31, 1997 decreased by $6.1
million as compared to the same period in 1996, primarily due to interest earned
in 1996 on a higher balance held in a disbursement account. Interest expense,
net, for the year ended January 31, 1997 decreased $13.8 million, primarily due
to a larger portion of interest capitalized as well as a reduction of product
financing costs in 1997 versus 1996. During the year ended January 31, 1997,
TARC capitalized approximately $68.8 million of interest related to construction
activities at TARC's refinery, compared to $41.5 million for the year ended
January 31, 1996.
 
     The equity in income of TransTexas for the year ended January 31, 1997 of
$12.3 million reflects TARC's 20.3% equity interest in TransTexas until TARC's
sale of 4.55 million shares of TransTexas stock in March 1996 (which reduced
TARC's interest in TransTexas to 14.1%). The increase of $14.9 million in the
equity in income of TransTexas is primarily the result of higher gas prices and
a favorable litigation settlement.
 
     Other income for the year ended January 31, 1997 was $56.5 million, which
was primarily a result of the $56.2 million gain on the sale of 4.55 million
shares of TransTexas stock in March 1996. Other income for the year ended
January 31, 1996 was $2.1 million, primarily resulting from trading gains on
futures contracts.
 
  Six Months Ended January 31, 1996, Compared with the Six Months Ended January
31, 1995
 
     Total revenues for the six months ended January 31, 1996 increased $35.6
million to $107.2 million from $71.6 million in the same period in 1995,
primarily due to an increase in the volume of products sold to 6.1 million
barrels in 1996 from 4.2 million barrels in 1995. In addition, $1.2 million of
the increase was due to an increase in the average product sales price of $0.19
per barrel in 1996 over 1995.
 
     Cost of products sold for the six months ended January 31, 1996 increased
$36.2 million to $110.1 million from $73.9 million for the same period in 1995,
primarily due to an increase in the volume of products sold, partially offset by
a decrease in the average price of feedstocks purchased.
 
     Operations and maintenance expense for the six months ended January 31,
1996 increased $0.2 million to $7.9 million from $7.7 million for the same
period in 1995, primarily due to an increase in the number of days the vacuum
unit was operating.
 
                                       13
<PAGE>   16
 
     Depreciation and amortization expense for the six months ended January 31,
1996 increased $0.5 million to $3.2 million from $2.7 million for the same
period in 1995, primarily due to the transfer of certain terminal facilities and
tankage equipment from construction in progress to depreciable assets during the
1996 period.
 
     General and administrative expense for the six months ended January 31,
1996, decreased $1.0 million to $7.4 million from $8.4 million for the same
period in 1995, primarily as a result of a $2.5 million reduction in litigation
accruals, partially offset by an increase in payroll of $1.1 million arising
from operations support requirements.
 
     Taxes other than income taxes for the six months ended January 31, 1996
decreased $1.4 million to $0.7 million from $2.1 million for the same period in
1995, primarily due to decreased property tax expense.
 
     Interest income for the six month period ended January 31, 1996 increased
$2.3 million compared to the same period in 1995 due primarily to interest
earned on long-term debt proceeds held in a disbursement account. Interest
expense for the six month period ended January 31, 1996 increased $28.6 million
due to interest accrued on long-term debt issued in February 1995, amortization
of debt issue costs and financing costs associated with product purchases.
During the six months ended January 31, 1996, TARC capitalized $26.2 million of
interest related to construction activities associated with the 1995 Program.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     Although TARC may operate the No. 2 Crude Unit and the No. 2 Vacuum Unit if
it obtains a favorable processing arrangement, TARC anticipates that, until
completion of the Delayed Coking Unit, its liquidity and capital needs will be
limited to expenditures for the Capital Improvement Program, general and
administrative expenses and refinery maintenance costs.
 
     TARC estimates that capital expenditures for the Capital Improvement
Program will be $256 million and $0, respectively, during the fiscal years
ending January 31, 1999 and 2000. TARC currently estimates that Capital
Improvement Program costs may increase by as much as $45 million over the $427
million originally estimated. Although there can be no assurance, TARC believes
that it will have cash sufficient to fund the remaining construction. See
"Business -- Capital Improvement Program -- Capital Budget Status" and
"-- Completion Status." If engineering problems, cost overruns or delays occur
and other financing sources are not available, TARC may not be able to complete
both phases of the Capital Improvement Program. TARC has historically incurred
losses and negative cash flow from operating activities as a result of limited
refinery operations that did not cover the fixed costs of maintaining the
refinery, increased working capital requirements (including debt service) and
losses on refined product sales and processing arrangements. There is no
assurance that TARC can complete the Capital Improvement Program, fund its
future working capital requirements or achieve positive cash flow from
operations. As a result, there is substantial doubt about TARC's ability to
continue as a going concern. The Financial Statements do not include any
adjustments that might result from the outcome of these uncertainties.
 
     On June 13, 1997, TEC completed a private offering (the "TEC Notes
Offering") of $475 million aggregate principal amount of 11 1/2% Senior Secured
Notes due 2002 (the "TEC Senior Secured Notes") and $1.13 billion aggregate
principal amount of 13% Senior Secured Discount Notes due 2002 (the "TEC Senior
Secured Discount Notes" and, together with the TEC Senior Secured Notes, the
"TEC Notes") for net proceeds of approximately $1.3 billion.
 
     With a portion of the proceeds of the TEC Notes Offering, TEC made an
intercompany loan to TARC in the original amount of $676 million (the "TARC
Intercompany Loan"). The TARC Intercompany Loan will accrete principal at the
rate of 16% per annum, compounded semi-annually until June 15, 1999 to a final
accreted value of $920 million, and cash interest will thereafter accrue at a
rate of 16% per annum, payable semi-annually. The TARC Intercompany Loan will
mature on June 1, 2002. The TARC Intercompany Loan Agreement contains certain
restrictive covenants including, among others, limitations on incurring
additional debt, asset sales, dividends and transactions with affiliates. If
TARC's cash flow from operations is insufficient to pay interest as it becomes
payable on the TARC Intercompany Loan, TARC may be required to attempt to sell
debt or equity securities of TARC. There can be no assurance that proceeds from
such sales would be
 
                                       14
<PAGE>   17
 
adequate to pay interest due. TARC used approximately $103 million of the
proceeds from the TARC Intercompany Loan to repay certain indebtedness,
including $36 million of senior secured notes issued in March 1997 and $66
million of advances and notes payable owed to an affiliate, and used
approximately $437 million to complete the TARC Notes Tender Offer described
below. Remaining proceeds have been or will be used for the Capital Improvement
Program described in Note 2 of Notes to Financial Statements and for general
corporate purposes.
 
     In June 1997, TransTexas implemented a share repurchase program pursuant to
which it repurchased approximately 3.9 million shares of common stock from
public stockholders for an aggregate purchase price of approximately $61.4
million, and approximately 12.6 million shares from TARC and TEC for an
aggregate purchase price of approximately $201 million. TARC received $136.2
million of the purchase price, of which $124.5 million (representing the excess
of the cash received over TARC's carrying value of the stock) was recorded as a
capital contribution. The amounts received by TEC and TARC were deposited in the
TARC Disbursement Account.
 
     As of January 31, 1998, TARC and TEC had deposited an aggregate of
approximately $529 million into accounts (collectively, the "TARC Disbursement
Account") from which disbursements are made pursuant to a disbursement
agreement, as amended (the "Disbursement Agreement") among TARC, TEC, the TEC
Indenture Trustee, Firstar Bank of Minnesota, N. A., as Disbursement Agent, and
Baker & O'Brien, Inc., as Construction Supervisor. See Note 3 of Notes to
Financial Statements. Of these funds, $427 million was designated for the
Capital Improvement Program, approximately $25.5 million was designated for
general and administrative expenses, $7 million was designated for outstanding
accounts payable, $50 million was designated for working capital upon completion
of the Delayed Coking Unit and certain supporting units and $19 million was
designated for the payment of interest on, or the redemption, purchase,
defeasance or other retirement of, the outstanding TARC Notes. There is no
assurance that the funds deposited in the TARC Disbursement Account will be
adequate for their designated purposes. As of January 31, 1998, $225 million had
been disbursed to TARC out of the TARC Disbursement Account for use in the
Capital Improvement Program, $18 million for accounts payable and general and
administrative expenses and $19 million for the payment of interest on, and the
redemption, repurchase and defeasance of the TARC Notes.
 
     On June 13, 1997, TARC completed a tender offer (the "TARC Notes Tender
Offer") for the (i) TARC Mortgage Notes for 112% of their principal amount (plus
accrued and unpaid interest) and (ii) TARC Discount Notes for 112% of their
accreted value. TARC Mortgage Notes and TARC Discount Notes with an aggregate
carrying value of $423 million were tendered and accepted by TARC at a cost to
TARC of approximately $437 million (including accrued interest, premiums and
other costs). As a result of the TARC Notes Tender Offer, $22.8 million in debt
issuance costs were written off and TARC recorded a total extraordinary charge
of $84.8 million during the year ended January 31, 1998. As of January 31, 1998,
TARC Mortgage Notes and TARC Discount Notes with a carrying value of
approximately $14.4 million remained outstanding.
 
     On January 14, 1998, TARC called for redemption on February 17, 1998
approximately $7 million in aggregate principal amount of TARC Notes pursuant to
the terms of the indenture governing the TARC Notes. On January 16, 1998, TARC
deposited pursuant to an irrevocable trust agreement approximately $9.8 million
for defeasance of the remaining TARC Notes outstanding after the redemption. The
deposited funds are sufficient to pay the principal of the remaining TARC Notes
and interest thereon from the date of deposit to and including the final
redemption date, as well as a call premium of 6%. The final redemption date is
February 15, 1999.
 
     On December 30, 1997, TARC issued in a private offering 175,000 Units
consisting of $175 million in aggregate principal amount of 16% Series A Senior
Subordinated Notes due 2003 (the "Series A Subordinated Notes") and 175,000
warrants (the "December 1997 Warrants") to purchase 2,335,245 shares of TARC
common stock. Net proceeds to TARC, after deducting fees and expenses of
approximately $8 million, were approximately $167 million. Net proceeds of $8.2
million from the sale of the Units was allocated to the December 1997 Warrants.
TARC deposited $119 million of the net proceeds into the TARC Disbursement
Account for use in the Capital Improvement Program and deposited $42 million
into an interest
 
                                       15
<PAGE>   18
 
reserve account for interest payments on the Series A Senior Subordinated Notes
through June 30, 1999. The remaining $6 million of net proceeds was used for
general corporate purposes including the redemption and defeasance of the TARC
Notes.
 
     On March 16, 1998, TARC issued in a private offering 25,000 Units
consisting of $25 million in aggregate principal amount of 16% Series C Senior
Subordinated Notes due 2003 (the "Series C Senior Subordinated Notes" and,
together with the Series A Senior Subordinated Notes, the "Senior Subordinated
Notes") and 25,000 warrants (the "March 1998 Warrants" and, together with the
December 1997 Warrants, the "Warrants") to purchase 333,606 shares of TARC
common stock. Net proceeds to TARC, after deducting fees and expenses of
approximately $1.2 million, were approximately $26.2 million. Net proceeds of
approximately $2.8 million from the sale of the Units was allocated to the March
1998 Warrants. TARC deposited $6.0 million into an interest reserve account for
interest payments on the Series C Senior Subordinated Notes from December 30,
1997 through June 30, 1999. The remaining $20.2 million of net proceeds has been
or will be used for general corporate purposes.
 
     In April 1996, TARC entered into a processing agreement with a third party
to process feedstocks. Under the terms of the agreement, the processing fee
earned by TARC is based on the margin, if any, earned by the third party from
product sales, after deducting all of its related costs such as feedstock
acquisition, hedging, transportation, processing and inspections plus a
commission for each barrel processed. As of January 31, 1998, TARC has processed
6.4 million barrels of feedstocks under this agreement. TARC also entered into
processing agreements with this third party to process approximately 1.1 million
barrels of the third party's feedstocks for a fixed price per barrel. For the
years ended January 31, 1998 and 1997, TARC recorded income (loss) from
processing agreements of $1.4 million and $(7.1) million, respectively. As of
January 31, 1998 and 1997, TARC was storing approximately 0.7 million and 1.0
million barrels, respectively, of feedstock and intermediate or refined products
pursuant to these processing agreements. Included in the 0.7 million barrels of
product stored at the refinery as of January 31, 1998, is approximately 0.6
million barrels of a feedstock owned by a third party related to a purchase
commitment entered into in April 1997. For the year ended January 31, 1998, TARC
incurred a loss of approximately $7.8 million related to this purchase
commitment and remains subject to market risk for these barrels.
 
     In July and September 1997, TARC received advances from TEC in the
aggregate amount of $46 million. In November and December 1997, TARC repaid
approximately $31 million in principal, and in December 1997 paid approximately
$2.9 million in interest to TEC. See Note 9 of Notes to Financial Statements.
 
     In September 1997, TARC purchased a tank storage facility adjacent to the
refinery for a cash purchase price of $40 million (which does not include a $3.1
million liability recorded for environmental remediation, as discussed below).
Environmental investigations conducted by the previous owner of the facilities
have indicated soil and groundwater contamination in several areas of the
property. As a result, the former owner submitted to the Louisiana Department of
Environmental Quality (the "LDEQ") plans for the remediation of any significant
indicated contamination in such areas. TARC has analyzed these investigations
and has carried out further Phase II Environmental Assessments to verify their
results. TARC intends to incorporate any required remediation into its ongoing
work at the refinery. In connection with the purchase of the facilities, TARC
agreed to indemnify the seller for all cleanup costs and certain other damages
resulting from contamination on the property, and created a $5 million escrow
account to fund required remediation costs and indemnification claims by the
seller. As a result of TARC's Phase II Environmental Assessments, TARC believes
that the amount in escrow should be sufficient to fund the remediation costs
associated with identified contamination; however, because the LDEQ has not yet
approved certain of the remediation plans, there can be no assurance that the
funds set aside in the escrow account will be sufficient to pay all required
remediation costs. As of January 31, 1998, TARC has recognized a liability of
$3.1 million for this contingency.
 
     On December 10, 1997, TARC issued to an unaffiliated third party a 13%
Senior Secured Note due 2002 (the "Acquisition Note") in the principal amount of
$36 million to finance a portion of the purchase price of the tank storage
facility purchased in September 1997. The Acquisition Note is secured by a
mortgage on the tank storage facility, and is governed by a Note Purchase
Agreement containing restrictive covenants
 
                                       16
<PAGE>   19
 
substantially similar to those contained in the TARC Intercompany Loan and TEC
Indenture. The Acquisition Note bears interest at 13%, payable semiannually on
June 15 and December 15, and matures on December 15, 2002. TARC deposited $7
million in an interest reserve account for interest payments on the Acquisition
Note through June 15, 1999.
 
     The TEC Notes Indenture permits TARC to obtain a revolving credit facility
but places certain limitations on TARC's ability to incur other indebtedness. In
order to operate the refinery at expected levels after the completion of Phase I
of the Capital Improvement Program, TARC will require additional working
capital. Although TARC and a lender have engaged in discussions concerning the
terms of a revolving credit facility, there can be no assurance TARC will be
able to obtain such a facility.
 
     Environmental compliance and permitting issues are an integral part of the
capital expenditures anticipated in connection with the expansion and
modification of the refinery. TARC does not expect to incur any additional
significant expenses for environmental compliance during fiscal 1998 or fiscal
1999 other than those budgeted for the Capital Improvement Program. There is no
assurance, however, that costs incurred to comply with environmental laws will
not have a material adverse effect on TARC's future financial condition, results
of operations or cash flow. TARC also has contingent liabilities with respect to
certain legal proceedings as more fully described in Note 14 of Notes to
Financial Statements.
 
INFLATION AND CHANGES IN PRICES
 
     TARC's revenues and feedstock costs have been, and will continue to be,
affected by changes in the prices of petroleum and petroleum products. TARC's
ability to obtain additional capital is also substantially dependent on refining
margins, which are subject to significant seasonal, cyclical and other
fluctuations that are beyond TARC's control.
 
     From time to time, TARC enters into futures contracts, options on futures,
swap agreements and forward sale agreements for crude and refined products
intended to protect against a portion of the price risk associated with price
declines from holding inventory of feedstocks and refined products, or for fixed
price purchase commitments. TARC's policy is not to enter into fixed price or
other purchase commitments in excess of anticipated processing requirements.
TARC believes that these current and anticipated futures transactions do not and
will not constitute speculative trading as specified under and prohibited by the
TEC Notes Indenture.
 
RECENTLY ISSUED PRONOUNCEMENTS
 
     In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which establishes
standards for reporting and display of comprehensive income and its components
in financial statements. This statement will be adopted by TARC effective
February 1, 1998. TARC believes that adoption of this statement will not have a
material impact on its financial statements.
 
     In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, "Reporting on the Costs of Start Up Activities,"
("SOP 98-5") which provides guidance on the financial reporting of start-up
costs and organization costs. This statement of position will be adopted by TARC
effective February 1, 1998. Implementation of the statement requires start-up
activities, such as those related to the Capital Improvement Program, to be
expensed as incurred.
 
IMPACT OF YEAR 2000 ISSUE
 
     The year 2000 issue relates to computer programs or computerized equipment
designed to use two digits rather than four digits to define the applicable
year. As a result, computer systems with time-sensitive software may not
accurately calculate, store or use a date subsequent to December 31, 1999. This
could result in system failures or miscalculations and disruptions of
operations, including among other things, a temporary inability to process
transactions or engage in other normal business activities.
 
     In June 1997, management began a Company-wide program to prepare its
computer systems for year 2000 compliance. In January 1998, TARC began
implementation of new client/server based systems which
                                       17
<PAGE>   20
 
are anticipated to be completed by January 1999. TARC estimates the cost of
upgrading its computer systems to be approximately $2 million. There can be no
assurance that TARC will timely complete the implementation of the new systems.
The year 2000 issue should not impact TARC's ability to continue refining,
storage or sales activities.
 
FORWARD-LOOKING STATEMENTS
 
     Forward-looking statements, within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
are included throughout this report. All statements, other than statements of
historical fact, included in this Annual Report on Form 10-K regarding TARC's
financial position, business strategy, plans and objectives of management for
future operations and expansion and modification of the refinery, including, but
not limited to, words such as "anticipates," "expects," "believes," "estimates,"
"intends," "projects" and "likely" indicate forward-looking statements. TARC's
management believes that its current views and expectations are based on
reasonable assumptions; however, there are significant risks and uncertainties
that could significantly affect expected results. Factors that could cause
actual results to differ materially from those in the forward-looking statements
include, without limitation, engineering problems, work stoppages, cost
overruns, personnel or materials shortages, fluctuations in commodity prices for
petroleum and refined products, casualty losses, conditions in the capital
markets and competition.
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
     Not applicable.
 
                                       18
<PAGE>   21
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Report of Independent Accountants...........................   20
Financial Statements:
  Balance Sheet.............................................   21
  Statement of Operations...................................   22
  Statement of Stockholder's Equity.........................   23
  Statement of Cash Flows...................................   24
  Notes to Financial Statements.............................   25
</TABLE>
 
                                       19
<PAGE>   22
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Stockholder and Board of Directors
TransAmerican Refining Corporation:
 
     We have audited the accompanying balance sheet of TransAmerican Refining
Corporation (the "Company" or "TARC") as of January 31, 1998 and 1997 and the
related statements of operations, stockholder's equity and cash flows for the
years ended January 31, 1998 and 1997, the six months ended January 31, 1996 and
the year ended July 31, 1995. These financial statements are the responsibility
of TARC'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 TransAmerican Refining
Corporation as of January 31, 1998 and 1997, and the results of its operations
and its cash flows for the years ended January 31, 1998 and 1997, the six months
ended January 31, 1996 and the year ended July 31, 1995, in conformity with
generally accepted accounting principles.
 
     The accompanying financial statements have been prepared assuming that TARC
will continue as a going concern. TARC has historically incurred losses and
negative cash flow from operating activities as a result of limited refinery
operations that did not cover the fixed costs of maintaining the refinery,
increased working capital requirements, including debt service and losses on
refinery product sales and processing arrangements. There is no assurance that
the Company can complete its refinery construction and expansion program, fund
its future working capital requirements and achieve positive cash flow from
operations. As a result, there is substantial doubt about TARC's ability to
continue as a going concern. Management's plans are described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
 
                                            COOPERS & LYBRAND L.L.P.
 
Houston, Texas
April 30, 1998
 
                                       20
<PAGE>   23
 
                       TRANSAMERICAN REFINING CORPORATION
 
                                 BALANCE SHEET
                (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                                    JANUARY 31,
                                                              -----------------------
                                                                 1998         1997
                                                              ----------    ---------
<S>                                                           <C>           <C>
Current assets:
  Cash and cash equivalents.................................  $   10,021    $     613
  Restricted cash held in disbursement accounts.............      71,563           --
  Cash restricted for interest..............................      32,823           --
  Investments held in trust.................................       9,114           --
  Accounts receivable.......................................         870           --
  Receivable from affiliates................................          --           22
  Other.....................................................       1,346          654
                                                              ----------    ---------
          Total current assets..............................     125,737        1,289
                                                              ----------    ---------
Property and equipment......................................     939,780      555,816
Less accumulated depreciation and amortization..............      25,257       16,930
                                                              ----------    ---------
          Net property and equipment........................     914,523      538,886
                                                              ----------    ---------
Restricted cash held in disbursement accounts...............      60,166           --
Cash restricted for interest................................      16,348           --
Investments held in trust...................................       8,591           --
Receivable from affiliates..................................       1,655          393
Other assets, net...........................................      68,429       23,673
                                                              ----------    ---------
                                                              $1,195,449    $ 564,241
                                                              ==========    =========
 
                        LIABILITIES AND STOCKHOLDER'S EQUITY
 
Current liabilities:
  Accounts payable..........................................  $   32,022    $  20,033
  Payable to affiliates.....................................       6,976        7,094
  Accrued liabilities.......................................       9,528       14,976
  Current maturities of long-term debt......................       6,710           --
                                                              ----------    ---------
          Total current liabilities.........................      55,236       42,103
                                                              ----------    ---------
Payable to affiliates.......................................       3,825        6,674
Long-term debt, less current maturities.....................     210,666      365,730
Notes payable to affiliate..................................     760,266       46,589
Investment in TransTexas....................................          --       20,706
Other.......................................................       5,048        1,076
Commitments and contingencies (Note 14).....................          --           --
Stockholder's equity:
  Common stock, $0.01 par value, 100,000,000 shares
     authorized, 30,000,000 shares issued and outstanding...         300          300
  Additional paid-in capital................................     439,566      248,513
  Accumulated deficit.......................................    (279,458)    (167,450)
                                                              ----------    ---------
          Total stockholder's equity........................     160,408       81,363
                                                              ----------    ---------
                                                              $1,195,449    $ 564,241
                                                              ==========    =========
</TABLE>
 
    The accompanying notes are an integral part of the financial statements.
 
                                       21
<PAGE>   24
 
                       TRANSAMERICAN REFINING CORPORATION
 
                            STATEMENT OF OPERATIONS
                (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                                   SIX MONTHS ENDED
                                                YEAR ENDED JANUARY 31,               JANUARY 31,          YEAR ENDED
                                          ----------------------------------    ----------------------     JULY 31,
                                            1998        1997        1996          1996        1995           1995
                                          ---------   --------   -----------    --------   -----------    ----------
                                                                 (UNAUDITED)               (UNAUDITED)
<S>                                       <C>         <C>        <C>            <C>        <C>            <C>
Revenues:
  Product sales.........................  $      --   $ 10,857    $176,229      $107,237    $ 71,035       $140,027
  Other.................................      2,828         --           1            --         551            552
                                          ---------   --------    --------      --------    --------       --------
        Total revenues..................      2,828     10,857     176,230       107,237      71,586        140,579
                                          ---------   --------    --------      --------    --------       --------
Costs and expenses:
  Cost of products sold.................         --     11,544     185,277       110,052      73,862        149,087
  Processing arrangements, net..........     (1,413)     7,090          --            --          --             --
  Operations and maintenance............     11,834     23,945      12,482         7,910       7,727         12,299
  Depreciation and amortization.........      8,416      7,225       6,308         3,159       2,706          5,855
  General and administrative............     19,196     11,848      12,610         7,438       8,442         13,614
  Taxes other than income taxes.........      3,369      4,200       2,731           649       2,088          4,170
  Loss on purchase commitment...........      7,824         --          --            --          --             --
                                          ---------   --------    --------      --------    --------       --------
        Total costs and expenses........     49,226     65,852     219,408       129,208      94,825        185,025
                                          ---------   --------    --------      --------    --------       --------
        Operating loss..................    (46,398)   (54,995)    (43,178)      (21,971)    (23,239)       (44,446)
                                          ---------   --------    --------      --------    --------       --------
Other income (expense):
  Interest income.......................      5,190        204       6,346         2,263           4          4,087
  Interest expense......................   (113,400)   (73,503)    (59,994)      (32,180)     (3,540)       (31,354)
  Interest capitalized..................     92,954     68,840      41,543        26,202       3,509         18,850
  Equity in income (loss) before
    extraordinary item of TransTexas....     44,552     12,325      (2,584)         (156)         --         (2,428)
  Other income (expense)................          5     56,535       2,106          (229)        116          2,451
                                          ---------   --------    --------      --------    --------       --------
        Total other income (expense)....     29,301     64,401     (12,583)       (4,100)         89         (8,394)
                                          ---------   --------    --------      --------    --------       --------
  Income (loss) before extraordinary
    items...............................    (17,097)     9,406     (55,761)      (26,071)    (23,150)       (52,840)
  Extraordinary items:
  Equity in extraordinary loss
    of TransTexas.......................    (10,158)        --     (11,497)           --          --        (11,497)
  Loss on the early extinguishment of
    debt................................    (84,753)        --          --            --          --             --
                                          ---------   --------    --------      --------    --------       --------
        Net income (loss)...............  $(112,008)  $  9,406    $(67,258)     $(26,071)   $(23,150)      $(64,337)
                                          =========   ========    ========      ========    ========       ========
Basic net income (loss) per share:
  Income (loss) before extraordinary
    items...............................  $   (0.57)  $   0.31    $  (1.86)     $  (0.87)   $  (0.77)      $  (1.76)
  Extraordinary items...................      (3.16)        --       (0.38)           --          --          (0.38)
                                          ---------   --------    --------      --------    --------       --------
                                          $   (3.73)  $   0.31    $  (2.24)     $  (0.87)   $  (0.77)      $  (2.14)
                                          =========   ========    ========      ========    ========       ========
Diluted net income (loss) per share:
  Income (loss) before extraordinary
    items...............................  $   (0.57)  $   0.25    $  (1.86)     $  (0.87)   $  (0.77)      $  (1.76)
  Extraordinary items...................      (3.16)        --       (0.38)           --          --          (0.38)
                                          ---------   --------    --------      --------    --------       --------
                                          $   (3.73)  $   0.25    $  (2.24)     $  (0.87)   $  (0.77)      $  (2.14)
                                          =========   ========    ========      ========    ========       ========
</TABLE>
 
    The accompanying notes are an integral part of the financial statements.
 
                                       22
<PAGE>   25
 
                       TRANSAMERICAN REFINING CORPORATION
 
                       STATEMENT OF STOCKHOLDER'S EQUITY
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                             COMMON STOCK                                         TOTAL
                                            ---------------     ADDITIONAL      ACCUMULATED   STOCKHOLDER'S
                                            SHARES   AMOUNT   PAID-IN CAPITAL     DEFICIT        EQUITY
                                            ------   ------   ---------------   -----------   -------------
<S>                                         <C>      <C>      <C>               <C>           <C>
Balance at July 31, 1994..................  30,000    $300       $186,548        $ (86,448)     $ 100,400
  Net loss................................      --      --             --          (64,337)       (64,337)
  Issuance of warrants....................      --      --         23,300               --         23,300
  Equity contribution by TransAmerican....      --      --         71,170               --         71,170
  Contribution of TransTexas stock by
     TEC..................................      --      --        (32,505)              --        (32,505)
                                            ------    ----       --------        ---------      ---------
Balance at July 31, 1995..................  30,000     300        248,513         (150,785)        98,028
  Net loss................................      --      --             --          (26,071)       (26,071)
                                            ------    ----       --------        ---------      ---------
Balance at January 31, 1996...............  30,000     300        248,513         (176,856)        71,957
  Net income..............................      --      --             --            9,406          9,406
                                            ------    ----       --------        ---------      ---------
Balance at January 31,1997................  30,000     300        248,513         (167,450)        81,363
  Net loss................................      --      --             --         (112,008)      (112,008)
  Stock repurchase by TransTexas..........      --      --        124,485               --        124,485
  Purchase of warrants by parent..........      --      --         10,398               --         10,398
  Allocation of debt issue costs by TEC...      --      --         30,768               --         30,768
  Contributions by TEC....................      --      --         13,726               --         13,726
  Issuance of warrants....................      --      --         11,676               --         11,676
                                            ------    ----       --------        ---------      ---------
Balance at January 31, 1998...............  30,000    $300       $439,566        $(279,458)     $ 160,408
                                            ======    ====       ========        =========      =========
</TABLE>
 
    The accompanying notes are an integral part of the financial statements.
 
                                       23
<PAGE>   26
 
                       TRANSAMERICAN REFINING CORPORATION
 
                            STATEMENT OF CASH FLOWS
                           (IN THOUSANDS OF DOLLARS)
 
<TABLE>
<CAPTION>
                                                                                   SIX MONTHS ENDED
                                                 YEAR ENDED JANUARY 31,               JANUARY 31,         YEAR ENDED
                                           ----------------------------------   -----------------------    JULY 31,
                                             1998        1997        1996         1996         1995          1995
                                           ---------   --------   -----------   ---------   -----------   ----------
                                                                  (UNAUDITED)               (UNAUDITED)
<S>                                        <C>         <C>        <C>           <C>         <C>           <C>
Operating activities:
  Net income (loss)......................  $(112,008)  $  9,406    $ (67,258)   $ (26,071)   $(23,150)    $ (64,337)
  Adjustments to reconcile net income
    (loss) to net cash used by operating
    activities:
    Loss on the early extinguishment
      of debt............................     84,753         --           --           --          --            --
    Depreciation and amortization........      8,416      7,225        6,308        3,159       2,706         5,855
    Litigation...........................         --         --        2,000        2,000       4,500         4,500
    Amortization of discount on long-term
      debt...............................     16,345         83       11,062        3,389          --         7,673
    Amortization of debt issue costs.....      1,108          6          790          238          --           552
    Equity in net (income) loss of
      TransTexas.........................    (34,394)   (12,325)      14,081          156          --        13,925
    Inventory write-down.................         --         --        5,671        4,406          --         1,265
    Gain on the sale of TransTexas
      stock..............................         --    (56,162)          --           --          --            --
    Loss on disposition of equipment.....         --      6,513           --           --          --            --
    Changes in assets and liabilities:
      Accounts receivable................       (870)       121        1,340        3,671       6,901         4,570
      Inventories........................         --         25       (4,070)       7,242       3,063        (8,249)
      Other current assets...............       (692)     4,825       (5,258)       1,765        (221)       (7,244)
      Accounts payable...................      2,631      4,000       (4,260)      (1,675)       (105)       (2,690)
      Payable to affiliate, net..........        203      6,077        1,530        1,979        (765)       (1,214)
      Accrued liabilities................     (5,350)       953         (886)      (3,132)     (4,871)       (2,625)
      Other assets.......................     (3,533)        63       (2,818)        (130)        562        (2,126)
      Other liabilities..................      3,366        474         (157)          --        (102)         (259)
                                           ---------   --------    ---------    ---------    --------     ---------
        Net cash used by operating
          activities.....................    (40,025)   (28,716)     (41,925)      (3,003)    (11,482)      (50,404)
                                           ---------   --------    ---------    ---------    --------     ---------
Investing activities:
  Capital expenditures...................   (284,458)   (86,581)    (174,633)    (119,565)    (52,306)     (107,374)
  Prepaid capital expenditures...........    (24,216)        --           --           --          --            --
  Proceeds from the sale of
    TransTexas stock.....................    136,158     42,607           --           --          --            --
  Increase in investments held in
    trust................................    (17,706)        --           --           --          --            --
                                           ---------   --------    ---------    ---------    --------     ---------
        Net cash used by investing
          activities.....................   (172,516)   (43,974)    (174,633)    (119,565)    (52,306)     (107,374)
                                           ---------   --------    ---------    ---------    --------     ---------
Financing activities:
  Issuance of long-term debt.............    247,000         --      300,750           --          --       300,750
  Issuance of notes payable to
    affiliate............................    725,649         --           --           --          --            --
  Retirement of long-term debt...........   (470,583)        --           --           --          --            --
  Increase in debt proceeds held in
    disbursement accounts................   (425,404)   (26,549)    (173,000)          --          --      (173,000)
  Withdrawals from disbursement
    accounts.............................    293,675     50,949      148,595      116,452          --        32,143
  Increase in cash restricted for
    interest.............................    (49,171)        --           --           --          --            --
  Advances from affiliates...............     15,026     49,152       17,333       16,698      86,925        87,560
  Repayment of advances and notes payable
    to affiliates........................   (100,990)    (1,925)     (53,450)     (13,450)    (20,000)      (60,000)
  Capital contributions from affiliate...     13,726         --           --           --          --            --
  Debt issue costs.......................     (7,981)        --      (20,479)          --      (3,126)      (23,605)
  Principal payments on capital lease and
    seller financed obligations..........     (1,292)    (1,103)        (458)        (458)         --            --
                                           ---------   --------    ---------    ---------    --------     ---------
        Net cash provided by financing
          activities.....................    221,949     70,524      219,291      119,242      63,799       163,848
                                           ---------   --------    ---------    ---------    --------     ---------
        Increase (decrease) in cash and
          cash equivalents...............      9,408     (2,166)       2,733       (3,326)         11         6,070
Beginning cash and cash equivalents......        613      2,779           46        6,105          35            35
                                           ---------   --------    ---------    ---------    --------     ---------
Ending cash and cash equivalents.........  $  10,021   $    613    $   2,779    $   2,779    $     46     $   6,105
                                           =========   ========    =========    =========    ========     =========
</TABLE>
 
    The accompanying notes are an integral part of the financial statements.
 
                                       24
<PAGE>   27
 
                       TRANSAMERICAN REFINING CORPORATION
 
                         NOTES TO FINANCIAL STATEMENTS
        (INFORMATION WITH RESPECT TO THE YEAR ENDED JANUARY 31, 1996 AND
              INTERIM PERIOD ENDED JANUARY 31, 1995 IS UNAUDITED)
 
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  Formation of TARC
 
     TransAmerican Refining Corporation, a Texas corporation (the "Company" or
"TARC"), owns facilities for the refining and storage of crude oil and petroleum
products. TARC's refinery is located in the Gulf Coast region along the
Mississippi River approximately 20 miles from New Orleans, Louisiana. TARC was
incorporated in September 1987 for the purpose of holding and eventually
operating certain refinery assets previously held by TransAmerican Natural Gas
Corporation ("TransAmerican") and its subsidiaries. In 1987, TransAmerican
transferred substantially all of its refinery assets at net book value to TARC.
 
     From 1987 through 1993, TARC incurred operating losses principally as a
result of maintaining its idled refinery. The refinery was operated
intermittently between March 1994 and January 1997 based on operating margins
and has continued to incur operating losses. In June 1997, TARC commenced a
two-phase construction and expansion program on its refinery designed to
increase the capacity and complexity of the refinery (the "Capital Improvement
Program"). See Note 2.
 
     TARC is a wholly owned subsidiary of TransAmerican Energy Corporation
("TEC") which is a wholly owned subsidiary of TransAmerican. In 1994,
TransAmerican formed TEC to hold certain shares of common stock of TransTexas
Gas Corporation ("TransTexas") and all of TARC's capital stock.
 
  Change in Fiscal Year
 
     On January 29, 1996, the Board of Directors approved a change in TARC's
fiscal year end for financial reporting purposes from July 31 to January 31. The
financial statements include presentation of the year ended January 31, 1997,
the six months ended January 31, 1996 (the "Transition Period") and the
comparable prior year periods which are unaudited.
 
  Cash and Cash Equivalents
 
     TARC considers all highly liquid investments purchased with an original
maturity of three months or less to be a cash equivalent. Cash equivalents in
restricted accounts are excluded from cash and are classified in accordance with
the terms of the restrictions.
 
  Inventories
 
     TARC's inventories consist primarily of feedstocks and refined products and
are stated at the lower of average cost or market. TARC wrote down the value of
its inventories by approximately $4.4 million and $1.3 million at January 31,
1996 and July 31, 1995, respectively, to reflect existing market prices.
 
  Price Management Activities
 
     TARC's revenues and feedstock costs have been and will continue to be
affected by changes in the prices of petroleum and petroleum products. TARC's
ability to obtain additional capital is also substantially dependent on refined
product prices and refining margins, which are subject to significant seasonal,
cyclical and other fluctuations that are beyond TARC's control.
 
     From time to time, TARC enters into futures contracts, options on futures,
swap agreements and forward sale agreements with the intent to protect against a
portion of the price risk associated with price declines from holding inventory,
or fixed price purchase commitments. Commitments involving future settlement
give rise to market risk, which represents the potential loss that can be caused
by a change in the market value of a particular instrument and credit risk,
which represents the potential loss if a counterparty is unable to perform.
 
                                       25
<PAGE>   28
                       TRANSAMERICAN REFINING CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
Under the guidelines of Statement of Financial Accounting Standards No. 80,
"Accounting for Futures Contracts" ("SFAS 80"), gains and losses associated with
such transactions that meet the hedge criteria in SFAS 80 will be deferred and
recognized when the related products are sold. Those transactions which do not
meet the hedging criteria in SFAS 80 are recorded at market value and marked to
market each period resulting in a gain or a loss which is recorded in other
income in the period in which a change in market value occurs.
 
  Investments
 
     Investments in fixed income securities are classified as held to maturity
and are carried at amortized cost. Short-term investments are carried at cost,
which approximates market value. The realized gain or loss on investment
transactions is determined on the basis of specific identification and is
included in earnings on the trade date.
 
  Property and Equipment
 
     Property and equipment acquired subsequent to 1983, including assets
transferred from TransAmerican in 1994, are stated at TransAmerican's or TARC's
historical cost. During the period from 1987 through August 1993, property and
equipment acquired prior to 1983 were carried at estimated net realizable value
and no depreciation expense was charged. New or refurbished units are
depreciated as placed in service. Depreciation of refinery equipment and other
buildings and equipment, including assets acquired under capital leases, is
computed using the straight-line method over the estimated useful lives of the
assets. Costs of improving leased property are amortized over the estimated
useful lives of the assets or the terms of the leases, whichever is shorter.
 
     The cost of repairs and minor replacements is charged to operating expense.
The cost of renewals and improvements are capitalized. At the time depreciable
assets are retired or otherwise disposed of, the cost and related accumulated
depreciation or amortization are removed from the accounts. Gains or losses on
dispositions in the ordinary course of business are included in the statement of
operations. Impairment of property and equipment is reviewed whenever events or
changes in circumstances indicate that the carrying amount of assets may not be
recoverable. Events or circumstances that may indicate impairment may include,
among others, a prolonged shutdown of the refinery or a prolonged period of
negative or low refining margins.
 
  Maintenance Turnaround Costs
 
     A turnaround consists of a complete shutdown, inspection and maintenance of
a unit. The estimated costs of turnarounds are accrued over the period to the
next scheduled turnaround, which is generally greater than one year.
 
  Environmental Remediation Costs
 
     Environmental expenditures are expensed or capitalized as appropriate,
depending on their future economic benefit. Expenditures relating to an existing
condition caused by past operations that do not have future economic benefits
are expensed. Liabilities for these expenditures are provided when the
responsibility to remediate is probable and the amount of associated costs is
reasonably estimable.
 
  Debt Issue Costs
 
     Debt issue costs are deferred and amortized to interest expense over the
scheduled maturity of the debt utilizing the interest method.
 
                                       26
<PAGE>   29
                       TRANSAMERICAN REFINING CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
  Stockholder's Equity
 
     Stockholder's equity was retroactively adjusted to reflect a 30,000-for-1
stock split which was effective in July 1994. In July 1994, TARC increased its
authorized capital to 100,000,000 shares and decreased the par value of its
common stock from $1.00 to $0.01.
 
  Defined Contribution Plan
 
     TARC, through its parent company, TransAmerican, maintains a defined
contribution plan, which incorporates a "401(k) feature" as allowed under the
Internal Revenue Code. All investments are made through Massachusetts Mutual
Life Insurance Company. Employees who are at least 21 years of age and have
completed one year of credited service are eligible to participate on the next
semiannual entry date. TARC matches 10%, 20% or 50% of employee contributions up
to a maximum of 3% of the participant's compensation, based on years of plan
participation. All contributions are currently funded. TARC recognized
approximately $83,000, $75,000, $32,000, and $41,000 of expenses related to the
Defined Contribution Plan for the years ended January 31, 1998 and 1997, the six
months ended January 31, 1996 and the year ended July 31, 1995.
 
  Revenue Recognition
 
     TARC recognizes revenue from sales of refined products in the period of
delivery and other revenue in the period in which the service has been provided.
 
  Concentration of Credit Risk
 
     Financial instruments which potentially expose TARC to credit risk consist
principally of cash, trade receivables and forward contracts. TARC selects
depository banks based on management's review of the stability of the
institution. Balances periodically exceed the $100,000 level covered by federal
deposit insurance. To date, there have been no losses incurred due to excess
deposits in any financial institution. Trade accounts receivable are generally
from companies with significant petroleum activities, who would be impacted by
conditions or occurrences affecting that industry. All futures contracts were
with major brokerage firms and, in the opinion of management, did not expose
TARC to any undue credit risks. See Note 14.
 
     TARC performs ongoing credit evaluations and, generally, requires no
collateral from its customers. For the year ended January 31, 1998, TARC
processed feedstocks from one customer which accounted for 100% of the net
processing arrangement income, and three customers accounted for 76% of storage
revenues. For the year ended January 31, 1997, TARC had two customers which
accounted for 96% of total revenues. For the six months ended January 31, 1996,
TARC had three customers which accounted for 41% of total revenues. For the year
ended July 31, 1995, TARC had two customers which accounted for 56% of total
revenues.
 
  Income Taxes
 
     TARC files a consolidated tax return with TransAmerican. Income taxes are
due from or payable to TransAmerican in accordance with a tax allocation
agreement. It is TARC's policy to record income tax expense as though TARC had
filed separately. Deferred income taxes are recognized, at enacted tax rates, to
reflect the future effects of tax carryforwards and temporary differences
arising between the tax bases of assets and liabilities and their financial
reporting amounts in accordance with Statement of Financial Accounting Standards
No. 109 and the Tax Allocation Agreement between TARC, TNGC Holdings Corporation
'("TNGC"), TransAmerican, and TransAmerican's other direct and indirect
subsidiaries. Income taxes include federal and state income taxes.
 
                                       27
<PAGE>   30
                       TRANSAMERICAN REFINING CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
  Fair Value of Financial Instruments
 
     TARC includes fair value information in the notes to the financial
statements when the fair value of its financial instruments is different from
the book value. TARC uses quoted market prices or, to the extent that there are
no available quoted market prices, market prices for similar instruments. When
the book value approximates fair value, no additional disclosure is made.
 
  Net Income (Loss) Per Share
 
     As of January 31, 1998, TARC had implemented Statement of Financial
Accounting Standards No. 128, "Earnings per Share." Net income (loss) per share
has been restated for all periods presented to the extent applicable. Basic net
income per share is calculated by dividing net income available to common
shareholders by the weighted average number of shares of common stock. Diluted
net income per share is calculated by dividing net income available to common
shareholders by the weighted average number of shares of common stock and
potential shares of common stock. Warrants, if dilutive, are considered to be
potential shares of common stock for the purpose of diluted net income per
share. The treasury method is used to determine the potential shares of common
stock.
 
     Weighted average shares outstanding used in calculating basic and diluted
net income (loss) per share ("EPS") are as follows in thousands:
 
<TABLE>
<CAPTION>
                                                                   SIX MONTHS ENDED
                                      YEAR ENDED JANUARY 31,          JANUARY 31,       YEAR ENDED
                                    ---------------------------   -------------------    JULY 31,
                                     1998    1997      1996        1996      1995          1995
                                    ------  ------  -----------   ------  -----------   ----------
                                                    (UNAUDITED)           (UNAUDITED)
<S>                                 <C>     <C>     <C>           <C>     <C>           <C>
Common shares outstanding for
  basic EPS.......................  30,000  30,000    30,000      30,000    30,000        30,000
Dilutive effect of warrants.......      --   7,458        --          --        --            --
                                    ------  ------    ------      ------    ------        ------
Common shares and potential common
  shares outstanding for diluted
  EPS.............................  30,000  37,458    30,000      30,000    30,000        30,000
                                    ======  ======    ======      ======    ======        ======
</TABLE>
 
     Weighted average shares outstanding exclude potential common shares of
approximately 2,352,000 for the year ended January 31, 1998 and approximately
7,458,000 for the year ended January 31, 1996, the six months ended January 31,
1996 and the year ended July 31, 1995 because they are anti-dilutive.
 
  Use of Estimates and Reclassifications
 
     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 the
disclosure of contingent assets and liabilities at the date(s) of the financial
statements and the reported amounts of revenues and expenses during the
reporting period(s). Actual results could differ from those estimates. Certain
previously reported financial information has been reclassified to conform with
the current presentation. The reclassifications did not affect net income (loss)
or stockholder's equity.
 
  Recently Issued Pronouncements
 
     In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which establishes
standards for reporting and display of comprehensive income and its components
in financial statements. This statement will be adopted by TARC effective
February 1, 1998. TARC does not believe that adoption of this statement will
have a material impact on its financial statements.
 
                                       28
<PAGE>   31
                       TRANSAMERICAN REFINING CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, "Reporting on the Costs of Start Up Activities,"
("SOP 98-5"), which provides guidance on the financial reporting of start-up
costs and organization costs. This statement of position will be adopted by TARC
effective February 1, 1998. Implementation of the statement requires start-up
activities, such as those related to the Capital Improvement Program, to be
expensed as incurred.
 
2. CAPITAL IMPROVEMENT PROGRAM
 
     TARC's refinery is located in the Gulf Coast region along the Mississippi
River, approximately 20 miles from New Orleans, Louisiana. TARC's business
strategy is to modify, expand and reactivate its refinery and to maximize
refining margins by converting low-cost, heavy, sour crude oils into high-value,
light petroleum products including primarily gasoline and heating oil.
 
     In February 1995, TARC began a construction and expansion program (the
"1995 Program") designed to reactivate the refinery and increase its complexity.
From February 1995 through May 1997, TARC spent approximately $251 million on
the 1995 Program, procured a majority of the equipment required and completed
substantially all of the process design engineering and a substantial portion of
the remaining engineering necessary for its completion.
 
     In June 1997, in connection with the TEC Notes Offering, the TARC
Intercompany Loan and the TARC Notes Tender Offer, TARC adopted the Capital
Improvement Program. The most significant projects include: (i) converting the
visbreaker unit into a delayed coking unit to process vacuum tower bottoms into
lighter petroleum products, (ii) modernizing and upgrading a fluid catalytic
cracking unit to increase gasoline production capacity and allow the direct
processing of low-cost atmospheric residual feedstocks, and (iii) upgrading and
expanding hydrotreating, alkylation and sulfur recovery units to increase sour
crude processing capacity. In addition, TARC plans to expand, modify and add
other processing units, tankage and offsite facilities as part of the Capital
Improvement Program. The Capital Improvement Program includes expenditures
necessary to ensure that the refinery is in compliance with certain existing air
and water discharge regulations and that gasoline produced will comply with
federal standards. TARC will act as general contractor, but has engaged a number
of specialty consultants and engineering and construction firms to assist TARC
in completing the individual projects that comprise the Capital Improvement
Program. Each of these firms was selected because of its specialized expertise
in a particular process or unit integral to the Capital Improvement Program.
 
     The Capital Improvement Program will be executed in two phases. In June
1997, TARC estimated that Phase I would be completed at a cost of $223 million,
would be tested and operational by September 30, 1998 and would result in the
refinery having the capacity to process up to 200,000 Bpd of sour crude oil.
Phase II of the Capital Improvement Program includes the completion and start-up
of the Fluid Catalytic Cracking Unit utilizing state-of-the-art MSCC(SM)
technology and the installation of additional equipment expected to further
improve operating margins by allowing for a significant increase in the
refinery's capacity to produce gasoline. In June 1997, TARC estimated that Phase
II would be completed at a cost of $204 million and would be tested and
operational by July 31, 1999. TARC currently believes that actual expenditures
may exceed the budget by as much as $45 million (of which $30 million is
allocated to Phase I). Although there can be no assurance, TARC believes that it
will have cash sufficient to fund the remaining construction, and that both
Phase I and Phase II will be completed in advance of the Phase I completion date
required by the TEC Indenture (as defined in Note 9). TARC anticipates
Mechanical Completion of the Delayed Coking Unit, the HDS Unit and the related
portion of the Sulfur Recovery System in May 1998. Upon Mechanical Completion of
these units, TARC will be able to purchase feedstocks using funds in the TARC
Disbursement Account reserved for such purpose. TARC believes that the remainder
of Phase I (other than the No. 2 Reformer) will reach Mechanical Completion
during the second quarter of fiscal 1999. TARC intends to defer additional
expenditures on the No. 2 Reformer until the fourth quarter of fiscal 1999,
ending January 31, 1999. TARC
 
                                       29
<PAGE>   32
                       TRANSAMERICAN REFINING CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
expects to complete both Phase I and Phase II in advance of the Phase I
completion date required by the TEC Indenture. TARC spent approximately $215
million on the Capital Improvement Program during the period between June 1997
and January 31, 1998. As of January 31, 1998, TARC had commitments to spend
another $83.3 million. The foregoing estimates, as well as other estimates and
projections herein, are subject to substantial revision upon the occurrence of
future events, such as unavailability of financing, engineering problems, work
stoppages and cost overruns, over which TARC may not have any control, and there
can be no assurance that any such projections or estimates will prove accurate.
 
     TARC believes, based on current estimates of refining margins and costs of
the expansion and modification of the refinery, that future undiscounted cash
flows will be sufficient to recover the cost of the refinery over its estimated
useful life. Management believes there have been no events or changes in
circumstances that would require the recognition of an impairment loss. However,
due to the inherent uncertainties in estimating future refining margins, and in
constructing and operating a large scale refinery, there can be no assurance
that TARC will ultimately recover the cost of the refinery. Management believes
that the book value of the refinery is in excess of its current estimated fair
market value.
 
     TARC has historically incurred losses and negative cash flow from operating
activities as a result of limited refinery operations that did not cover the
fixed costs of maintaining the refinery, increased working capital requirements
(including debt service) and losses on refined product sales and processing
arrangements. There is no assurance that TARC can complete the Capital
Improvement Program, fund its future working capital requirements or achieve
positive cash flow from operations. As a result, there is substantial doubt
about TARC's ability to continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of these
uncertainties.
 
3. DISBURSEMENT ACCOUNTS
 
     Pursuant to a disbursement agreement dated June 13, 1997, as amended
December 30, 1997 (the "Disbursement Agreement") among TARC, TEC, Firstar Bank
of Minnesota, N.A., as trustee (the "TEC Indenture Trustee"), Firstar Bank of
Minnesota, N.A., as disbursement agent (the "Disbursement Agent"), and Baker &
O'Brien, Inc., as construction supervisor (the "Construction Supervisor"), $208
million of the net proceeds from the sale of the TEC Notes (as defined in Note
9) was placed into accounts (collectively, the "TARC Disbursement Account") to
be held and invested by the Disbursement Agent until disbursed. TEC
disbursements for TARC expenditures will be treated as capital contributions. In
addition, proceeds to TEC and TARC of approximately $201 million from the
TransTexas share repurchase program have been deposited in the TARC Disbursement
Account. On December 30, 1997, TARC deposited $119 million of the net proceeds
from the issuance of its Series A Senior Subordinated Notes (defined in Note 8)
into the TARC Disbursement Account for use in the Capital Improvement Program.
All funds in the TARC Disbursement Account are pledged as security for the
repayment of the TEC Notes.
 
     The Disbursement Agent will make disbursements for the Capital Improvement
Program out of the TARC Disbursement Account in accordance with requests made by
TARC and approved by the Construction Supervisor. The Construction Supervisor is
required to review each such disbursement request by TARC. No disbursements may
be made from the TARC Disbursement Account for purposes other than the Capital
Improvement Program other than (i) up to $1.5 million per month (except for
December 1997, in which disbursements may be up to $4.5 million) to fund
administrative costs and certain taxes and insurance payments, not in excess of
$25.5 million in the aggregate; provided, that if less than $1.5 million is
spent in any month (or less than $4.5 million is spent in December 1997) the
amounts that may be disbursed in one or more subsequent months will be increased
by the amount of such difference, (ii) up to $50 million for feedstock upon
certification by the Construction Supervisor of the Mechanical Completion (as
defined in the TEC Notes Indenture) of the Delayed Coking Unit and associated
facilities, (iii) up to $19 million to pay interest on, and to redeem,
repurchase, defease, or otherwise retire the remaining TARC Notes and (iv) up to
 
                                       30
<PAGE>   33
                       TRANSAMERICAN REFINING CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
$7 million for outstanding accounts payable. In addition, interest income from
the TARC Disbursement Account may be used for the Capital Improvement Program or
disbursed to fund administrative and other costs of TARC and TEC. As of January
31, 1998, $225 million had been disbursed to TARC out of the TARC Disbursement
Account for use in the Capital Improvement Program, $18 million for accounts
payable and general and administrative expenses and $19 million for payments of
interest on, and the redemption, repurchase and defeasance of the TARC Notes.
 
4. OTHER CURRENT ASSETS
 
     The major components of other current assets are as follows (in thousands
of dollars):
 
<TABLE>
<CAPTION>
                                                                  JANUARY 31,
                                                              --------------------
                                                               1998          1997
                                                              ------        ------
<S>                                                           <C>           <C>
Insurance prepayments.......................................  $  949        $  603
Tax prepayments.............................................     335            --
Other.......................................................      62            51
                                                              ------        ------
                                                              $1,346        $  654
                                                              ======        ======
</TABLE>
 
5. PROPERTY AND EQUIPMENT
 
     The major components of property and equipment are as follows (in thousands
of dollars):
 
<TABLE>
<CAPTION>
                                                      ESTIMATED         JANUARY 31,
                                                     USEFUL LIFE    --------------------
                                                       (YEARS)        1998        1997
                                                     -----------    --------    --------
<S>                                                  <C>            <C>         <C>
Land...............................................                 $ 18,435    $  9,362
Refinery...........................................   20 to 30       898,835     532,428
Other..............................................    3 to 10        22,510      14,026
                                                                    --------    --------
                                                                    $939,780    $555,816
                                                                    ========    ========
</TABLE>
 
     Approximately $97 million and $45 million of refinery assets were being
depreciated at January 31, 1998 and 1997, respectively. The remaining refinery
and other assets are considered construction in process. Approximately $90.4
million of property, plant and equipment represents assets transferred by
TransAmerican at net realizable value and $465.4 million represents additions
recorded at historical cost. As of January 31, 1997, TARC changed the estimated
useful lives of the refinery equipment currently under construction from 10
years to a range of 20 to 30 years. The change in estimate was not material to
1997 net income. TARC recognized $7.8 million, $6.7 million, $2.9 million and
$5.9 million in depreciation expense for the years ended January 31, 1998 and
1997, the six months ended January 31, 1996 and the year ended July 31, 1995,
respectively.
 
     TARC believes, based on current estimates of refining margins and projected
costs of the Capital Improvement Program, that future undiscounted cash flows
will be sufficient to recover the cost of the refinery over its estimated useful
life as well as the costs of related identifiable intangible assets. Management
believes there have been no events or changes in circumstances that would
require the recognition of an impairment loss. However, due to the inherent
uncertainties in estimating future refining margins, in constructing and
operating a large scale refinery and the uncertainty regarding TARC's ability to
complete the Capital Improvement Program, there can be no assurance that TARC
will ultimately recover the cost of the refinery. Management believes that the
book value of the refinery is in excess of its current estimated fair market
value.
 
                                       31
<PAGE>   34
                       TRANSAMERICAN REFINING CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
6. OTHER ASSETS
 
     The major components of other assets are as follows (in thousands of
dollars):
 
<TABLE>
<CAPTION>
                                                                 JANUARY 31,
                                                              ------------------
                                                               1998       1997
                                                              -------    -------
<S>                                                           <C>        <C>
Debt issue costs, net of accumulated amortization of $2,477
  and $6,445 at January 31, 1998 and 1997, respectively.....  $32,473    $17,482
Prepaid capital expenditures................................   24,217         --
Contractual rights and licenses, net of accumulated
  amortization of $0 and $992 at January 31, 1998 and
  1997......................................................    3,500      5,979
Environmental escrow........................................    5,062         --
Investment in TransTexas....................................    2,015         --
Other.......................................................    1,162        212
                                                              -------    -------
                                                              $68,429    $23,673
                                                              =======    =======
</TABLE>
 
     TARC uses the straight-line method to amortize intangibles over the periods
estimated to be benefited.
 
     During fiscal 1998, TARC charged to income $22.8 million in debt issue
costs (see Note 8) and $2.2 million of intangible costs in connection with the
acquisition of a tank storage facility.
 
7. ACCRUED LIABILITIES
 
     The major components of accrued liabilities are as follows (in thousands of
dollars):
 
<TABLE>
<CAPTION>
                                                                 JANUARY 31,
                                                              -----------------
                                                               1998      1997
                                                              ------    -------
<S>                                                           <C>       <C>
Interest....................................................  $3,665    $ 7,608
Taxes other than income taxes...............................     584      3,365
Maintenance turnarounds.....................................   2,673      1,909
Payroll.....................................................   1,343        599
Insurance...................................................     641        748
Other.......................................................     622        747
                                                              ------    -------
                                                              $9,528    $14,976
                                                              ======    =======
</TABLE>
 
8. LONG-TERM DEBT
 
     TARC's long-term debt is as follows (in thousands of dollars):
 
<TABLE>
<CAPTION>
                                                                  JANUARY 31,
                                                              --------------------
                                                                1998        1997
                                                              --------    --------
<S>                                                           <C>         <C>
Guaranteed First Mortgage Discount Notes due 2002...........  $  6,890    $269,606
Guaranteed First Mortgage Notes due 2002....................     7,531      96,124
Acquisition Note............................................    36,000          --
Subordinated Notes due 2003.................................   166,955          --
                                                              --------    --------
          Total long-term debt..............................   217,376     365,730
Less current maturities.....................................     6,710          --
                                                              --------    --------
                                                              $210,666    $365,730
                                                              ========    ========
</TABLE>
 
                                       32
<PAGE>   35
                       TRANSAMERICAN REFINING CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     On February 23, 1995, TARC issued 340,000 A Units consisting of $340
million aggregate principal amount of 18 1/2% Guaranteed First Mortgage Discount
Notes due 2002 ("Discount Mortgage Notes") and 5,811,773 Common Stock Purchase
Warrants ("1995 Warrants"), and 100,000 B Units consisting of $100 million
aggregate principal amount of 16 1/2% Guaranteed First Mortgage Notes due 2002
("Mortgage Notes" and, together with the Discount Mortgage Notes, the "TARC
Notes") and 1,683,540 1995 Warrants. Interest is payable semi-annually with the
first interest payment on the Discount Mortgage Notes due August 15, 1998.
Interest payments on the Mortgage Notes began August 15, 1995. The TARC Notes
are senior obligations of TARC, collateralized as of January 31, 1998 by a first
priority lien on substantially all of TARC's property and assets and pledges of
1.9 million shares of common stock of TransTexas and all of TARC's outstanding
common stock. The 1995 Warrants are exercisable at a price of $0.01 per share
and expire on February 15, 2002. TARC allocated $23.3 million of the proceeds
from the issuance of the TARC Notes to the 1995 Warrants based on their
estimated fair value.
 
     TARC received approximately $301 million from the sale of A Units and B
Units. Net proceeds to TARC were approximately $92 million after deducting
approximately $16 million for underwriting discounts, commissions, fees and
expenses, approximately $20 million for the repayment of the balance of a loan
from TransAmerican ("TransAmerican Loan"), and $173 million which was deposited
into a cash collateral account to fund the 1995 Program.
 
     On June 13, 1997, TEC completed a tender offer for all of the outstanding
1995 Warrants at a price of $4.50 per warrant. Pursuant to the tender offer, TEC
purchased 7,320,552 1995 Warrants for an aggregate purchase price of
approximately $33 million. TransAmerican subsequently purchased 163,679 1995
Warrants for an aggregate purchase price of approximately $0.7 million. In
December 1997, TransAmerican sold 11,100 1995 Warrants to an unaffiliated third
party. The remaining 1995 Warrants owned by TransAmerican, as well as the 1995
Warrants purchased by TEC in the tender offer, were contributed to TARC and
cancelled. As of January 31, 1998, there were 22,119 1995 Warrants outstanding.
 
     On June 13, 1997, TARC completed a tender offer (the "TARC Notes Tender
Offer") for the (i) TARC Mortgage Notes for 112% of their principal amount (plus
accrued and unpaid interest) and (ii) TARC Discount Notes for 112% of their
accreted value. In connection with the TARC Notes Tender Offer, TARC obtained
consents from holders of the TARC Notes to certain waivers under, and amendments
to, the indenture governing the TARC Notes (the "TARC Notes Indenture"), which
eliminated or modified certain of the covenants and other provisions contained
in the TARC Notes Indenture. TARC Mortgage Notes and TARC Discount Notes with an
aggregate carrying value of $423 million were tendered and accepted by TARC at a
cost to TARC of approximately $437 million (including accrued interest, premiums
and other costs). As a result of the TARC Notes Tender Offer, $22.8 million of
debt issuance costs were written off and TARC recorded a total extraordinary
charge of $84.8 million during the year ended January 31, 1998. On January 14,
1998, TARC called for redemption on February 17, 1998 approximately $7 million
in aggregate principal amount of TARC Notes. On January 16, 1998, TARC
deposited, pursuant to an irrevocable trust agreement, approximately $9.8
million in order to defease the remaining TARC Notes. The amount deposited was
invested in U.S. Treasury strip securities which will yield on maturity amounts
sufficient to pay the principal of the remaining TARC Notes and interest thereon
from the date of deposit to and including the final redemption date, as well as
a call premium of 6%. The maturity dates of the strip securities coincide with
the final redemption date of February 15, 1999 and all scheduled interest
payment dates occurring during the period ending on such final redemption date.
As of January 31, 1998, the amortized cost of these investments approximated
fair value. As of January 31, 1998, TARC Mortgage Notes and TARC Discount Notes
with an aggregate carrying value of approximately $14.4 million remained
outstanding. On April 17, 1998, the TARC Notes were defeased and the collateral
securing the TARC Notes was released.
 
     On December 10, 1997, TARC issued to an unaffiliated third party a 13%
Senior Secured Note due 2002 (the "Acquisition Note") in the principal amount of
$36 million to finance a portion of the purchase price of a
 
                                       33
<PAGE>   36
                       TRANSAMERICAN REFINING CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
tank storage facility purchased in September 1997. The Acquisition Note is
secured by a mortgage on the tank storage facility, and is governed by a Note
Purchase Agreement containing restrictive covenants substantially similar to
those contained in the TARC Intercompany Loan and the TEC Indenture. The
Acquisition Note bears interest at 13%, payable semiannually on June 15 and
December 15, and matures on December 15, 2002.
 
     On December 30, 1997, TARC issued in a private offering 175,000 Units
consisting of $175 million in aggregate principal amount of 16% Series A Senior
Subordinated Notes due 2003 (the "Series A Senior Subordinated Notes") and
175,000 common stock purchase warrants (the "December 1997 Warrants"). The
Series A Senior Subordinated Notes bear interest at 16%, payable semi-annually
on June 30 and December 30 and mature on June 30, 2003. The December 1997
Warrants will be exercisable on or after December 30, 1998 at a price of $0.01
per share and expire on June 20, 2003. Net proceeds to TARC, after deducting
fees and expenses of approximately $8 million, were approximately $167 million.
Net proceeds of $8.2 million from the sale of the Units was allocated to the
December 1997 Warrants. TARC deposited $119 million of the net proceeds into the
TARC Disbursement Account for use in the Capital Improvement Program and
deposited $42 million into an interest reserve account for interest payments on
the Series A Senior Subordinated Notes through June 30, 1999. The remaining $6
million of net proceeds was used for general corporate purposes including the
redemption and defeasance of the TARC Notes. The indenture governing the Series
A Senior Subordinated Notes contains certain restrictive covenants, including,
among others, limitations on incurring additional debt, asset sales, dividends
and transactions with affiliates.
 
     On March 16, 1998, TARC issued in a private offering 25,000 Units
consisting of $25 million in aggregate principal amount of 16% Series C Senior
Subordinated Notes due 2003 (the "Series C Senior Subordinated Notes" and,
together with the Series A Senior Subordinated Notes, the "Senior Subordinated
Notes") and 25,000 warrants (the "March 1998 Warrants" and, together with the
December 1997 Warrants, the "Warrants") to purchase 333,606 shares of TARC
common stock. The Series C Subordinated Notes bear interest at 16%, payable
semiannually on June 30 and December 30, and mature on June 30, 2003. The March
1998 Warrants will be exercisable on or after December 30, 1998 at a price of
$0.01 per share and expire on June 20, 2003. Net proceeds to TARC, after
deducting fees and expenses of approximately $1.2 million, were approximately
$26.2 million. Net proceeds of approximately $2.8 million from the sale of the
Units was allocated to the March 1998 Warrants. TARC deposited $6 million into
an interest reserve account for interest payments on the Series C Senior
Subordinated Notes from December 30, 1997 through June 30, 1999. The remaining
$20.2 million of net proceeds has been or will be used for general corporate
purposes. The indenture governing the Series C Senior Subordinated Notes
contains certain restrictive covenants, including, among others, limitations on
incurring additional debt, asset sales, dividends and transactions with
affiliates.
 
     The fair value of the TARC Notes was approximately $16 million and $404
million as of January 31, 1998 and 1997, respectively. The fair value of the
Series A Subordinated Notes was approximately $182 million as of January 31,
1998. Fair value is based on quoted market prices. Aggregate maturities of long-
term debt for the next five years are (in millions): fiscal year 1999 -- $7,
2000 -- $8, 2001 -- $0, 2002 -- $0 and 2003 -- $36.
 
                                       34
<PAGE>   37
                       TRANSAMERICAN REFINING CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
9. NOTES PAYABLE TO AFFILIATES
 
     TARC's notes payable to affiliates are as follows (in thousands of
dollars):
 
<TABLE>
<CAPTION>
                                                                  JANUARY 31,
                                                              --------------------
                                                                1998        1997
                                                              --------    --------
<S>                                                           <C>         <C>
TARC Intercompany Loan......................................  $745,257    $    --
Note payable to affiliate...................................    15,009     46,589
                                                              --------    -------
                                                              $760,266    $46,589
                                                              ========    =======
</TABLE>
 
     On June 13, 1997, TEC completed a private offering (the "TEC Notes
Offering") of $475 million aggregate principal amount of its 11 1/2% Senior
Secured Notes due 2002 (the "Senior Secured Notes") and $1.13 billion aggregate
principal amount of its 13% Senior Secured Discount Notes due 2002 (the "Senior
Secured Discount Notes" and, together with the Senior Secured Notes, the "TEC
Notes") for net proceeds of approximately $1.3 billion. The TEC Notes are senior
obligations of TEC, secured by a lien on substantially all of its existing and
future assets, including intercompany loans made to TransTexas and TARC. The
indenture governing the TEC Notes (the "TEC Indenture") contains certain
restrictive covenants, including, among others, limitations on incurring
additional debt, asset sales, dividends and transactions with affiliates.
 
     On June 13, 1997, with proceeds from the TEC Notes Offering, TEC made an
intercompany loan to TARC (the "TARC Intercompany Loan"). The TARC Intercompany
Loan (i) is in the original amount of $676 million, (ii) accretes principal at
16% per annum, compounded semi-annually, until June 15, 1999, to a final
accreted value of $920 million, and thereafter pays interest semi-annually in
cash in arrears on the accreted value thereof, at a rate of 16% per annum and
(iii) is currently secured by a security interest in substantially all of TARC's
assets other than Inventory, Receivables and Equipment. The TARC Intercompany
Loan will mature on June 1, 2002. The agreement governing the TARC Intercompany
Loan (the "Intercompany Loan Agreement") contains certain restrictive covenants,
including, among others, limitations on incurring additional debt, asset sales,
dividends and transactions with affiliates. TARC used approximately $103 million
of the proceeds of the TARC Intercompany Loan to repay certain indebtedness,
including $36 million of senior secured notes of TARC that were issued in March
1997 and $66 million of advances and notes payable owed to an affiliate, and
used approximately $437 million to complete the TARC Notes Tender Offer.
Remaining proceeds will be used for the Capital Improvement Program and for
general corporate purposes. TEC allocated $30.8 million of debt issuance costs
to TARC which are reflected as a contribution of capital. Such costs are being
amortized over the term of the TARC Intercompany Loan using the interest method.
Upon the occurrence of a Change of Control (as defined), TEC will be required to
make an offer to purchase all of the outstanding Notes at a price equal to 101%
of the principal amount thereof, together with accrued and unpaid interest, if
any, or, in the case of any such offer to purchase the Senior Secured Discount
Notes prior to June 15, 1999, at a price equal to 101% of the accreted value
thereof, in each case, to and including the date of purchase. Pursuant to the
terms of the TARC Intercompany Loan, TEC may require TARC to pay a pro rata
share of the purchase price paid by TEC in an offer to purchase pursuant to a
Change of Control.
 
     In July and September 1997, TEC advanced an aggregate of $46 million to
TARC. All of the advances are governed by the terms of a promissory note that is
due June 14, 2002 bearing interest at a rate that, when added to the interest
paid by TransTexas on the TransTexas Intercompany Loan, will equal the amount of
interest payable on the TEC Notes. As of January 31, 1998, the amount payable
pursuant to the advances was approximately $15 million.
 
                                       35
<PAGE>   38
                       TRANSAMERICAN REFINING CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
10. INCOME TAXES
 
     Long-term deferred tax assets and liabilities are comprised of the
following (in thousands of dollars):
 
<TABLE>
<CAPTION>
                                                                   JANUARY 31,
                                                              ----------------------
                                                                1998         1997
                                                              ---------    ---------
<S>                                                           <C>          <C>
Deferred tax assets:
  Receivable from TransAmerican in lieu of federal net
     operating loss carryforwards...........................  $ 125,097    $  72,268
  Safe harbor leases........................................     78,026       81,976
  Other.....................................................      6,117          355
                                                              ---------    ---------
     Gross deferred tax assets..............................    209,240      154,599
Deferred tax liabilities:
  Depreciation..............................................      3,954        4,331
                                                              ---------    ---------
Net deferred tax assets.....................................    205,286      150,268
Valuation allowance.........................................   (205,286)    (150,268)
                                                              ---------    ---------
                                                              $      --    $      --
                                                              =========    =========
</TABLE>
 
     A net deferred tax asset valuation allowance was recorded for each
respective period because it is unlikely that TARC will realize such deferred
tax assets. Changes in the net deferred tax asset valuation allowance were
primarily attributable to increases in tax loss carryforwards.
 
     TNGC Holdings Corporation, TransAmerican, and its existing subsidiaries,
including TARC, TEC and TransTexas, entered into a tax allocation agreement (the
"Tax Allocation Agreement"), the general terms of which require TransAmerican
and all of its subsidiaries to file federal income tax returns as members of a
consolidated group to the extent permitted by law. Filing on a consolidated
basis allows income and tax of one member to be offset by losses and credits of
another and allows deferral of certain intercompany gains; however, each member
is severally liable for the consolidated federal income tax liability of the
consolidated group.
 
     The Tax Allocation Agreement requires each of TransAmerican's subsidiaries
to pay to TransAmerican each year its allocable share of the federal income tax
liabilities of the consolidated group ("Allocable Share"). The Tax Allocation
Agreement provides for a reallocation of the group's consolidated federal income
tax liabilities among the members if the IRS or the courts ultimately
re-determine the group's regular tax or alternative minimum tax liability. In
the event of an IRS audit or examination, the Tax Allocation Agreement generally
gives TransAmerican the authority to compromise or settle disputes and to
control litigation, subject to the approval of TARC, TEC or TransTexas, as the
case may be, where such compromise or settlement affects the determination of
the separate tax liability of that company.
 
     Under the Tax Allocation Agreement, each subsidiary's Allocable Share for
each tax year will generally equal the amount of federal income tax it would
have owed had it filed a separate federal income tax return for each year except
that each subsidiary will be able to utilize net operating losses and credits of
TransAmerican and the other members of the consolidated group effectively to
defer payment of tax liabilities that it would have otherwise owed had it filed
a separate federal income tax return. Each subsidiary will essentially pay the
deferred taxes at the time TransAmerican (or the member whose losses or credits
are utilized by such subsidiary) begins generating taxable income or tax. This
will have the effect of deferring a portion of such subsidiary's tax liability
to future years. The parties to the Tax Allocation Agreement amended such
agreement in May 1997 to include additional affiliates as parties, and further
amended the Tax Allocation Agreement in connection with the transactions
consummated in June 1997 to allocate to TransAmerican, as among the parties, any
tax liability associated with the sale by TransTexas of its Lobo Trend
subsidiary.
 
                                       36
<PAGE>   39
                       TRANSAMERICAN REFINING CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     On a separate return basis, TARC has incurred approximately $357.4 million
of regular tax net operating losses from inception through January 31, 1998.
TARC's regular tax net operating losses incurred from inception through January
31, 1998 would generally expire from 2004 through 2014. Under the Tax Allocation
Agreement, as long as TARC remains in the consolidated group for tax purposes,
TARC may receive benefits in the future for loss carryforwards in the form of
reduced current taxes payable to the extent (i) its losses incurred are
available for and utilized by TransAmerican and (ii) TransAmerican has the
ability to pay its taxes without contributions from TARC. At January 31, 1998,
TARC had generated NOL carryforwards of approximately $183.5 million which have
not been used by TransAmerican and which would expire in 2014.
 
     A change of control or other event that results in deconsolidation of TARC
from TransAmerican's consolidated group for federal income tax purposes could
result in the acceleration of payment of a substantial amount of federal income
taxes by TransAmerican. The tax liability to TransAmerican that would result
from deconsolidation is estimated to be approximately $100 million at January
31, 1998. Each member of a consolidated group filing a consolidated federal
income tax return is severally liable for the consolidated federal income tax
liability of the consolidated group. There can be no assurance that
TransAmerican will have the ability to satisfy the above tax obligation at the
time due and, therefore, TARC or other members may be required to pay all or a
portion of the tax. A decision by TEC or TARC to sell TransTexas shares could
result in deconsolidation of TransTexas for tax purposes.
 
     Total income tax expense (benefit) differs from amounts computed by
applying the statutory federal income tax rate to income (loss) before income
taxes as follows (in thousands of dollars):
 
<TABLE>
<CAPTION>
                                        YEAR ENDED                SIX MONTHS ENDED        YEAR
                                       JANUARY 31,                   JANUARY 31,         ENDED
                             --------------------------------   ---------------------   JULY 31,
                               1998      1997        1996        1996        1995         1995
                             --------   -------   -----------   -------   -----------   --------
                                                  (UNAUDITED)             (UNAUDITED)
<S>                          <C>        <C>       <C>           <C>       <C>           <C>
Federal income tax expense
  (benefit) at the
  statutory rate...........  $(39,203)  $ 3,292    $(23,540)    $(9,125)    $(8,103)    $(22,518)
Increase (decrease) in tax
  resulting from:
  Net operating losses
     (utilized) not
     utilizable............    39,203    (3,292)     23,540       9,125       8,103       22,518
                             --------   -------    --------     -------     -------     --------
                             $     --   $    --    $     --     $    --     $    --     $     --
                             ========   =======    ========     =======     =======     ========
</TABLE>
 
11. INVESTMENT IN TRANSTEXAS
 
     TARC uses the equity method to account for its investment in TransTexas and
initially recorded this investment at TransAmerican's historical basis. During
1996, TARC's original interest of 20.3% decreased to 14.1% when TARC sold 4.55
million shares to unaffiliated third parties and recognized a gain of $56.2
million on the sale of TransTexas Stock. During 1997, TARC's interest decreased
to 3.4% when TransTexas repurchased approximately 12.6 million shares from TARC
and TEC for an aggregate purchase price of approximately $201 million. TARC
received $136.2 million of the purchase price, of which $124.5 million
(representing the excess of cash received over TARC's carrying value of the
stock sold) was recorded as a capital contribution. In April 1998, TARC
distributed its remaining shares of TransTexas common stock to TEC. The equity
in extraordinary loss of TransTexas for the year ended January 31, 1998
represents TARC's equity in a charge by TransTexas for the early retirement of
its $800 million 11 1/2% Senior Secured Notes due 2002 and an exchange offer by
TransTexas for its Subordinated Notes. The equity in extraordinary loss of
TransTexas for the year ended July 31, 1995, represents TARC's equity in a
charge by TransTexas for the early retirement of $500 million of its 10 1/2%
Senior Secured Notes due 2000 from the proceeds of the issuance by TransTexas in
June 1995 of $800 million in 11 1/2% Senior Secured Notes due 2002.
 
                                       37
<PAGE>   40
                       TRANSAMERICAN REFINING CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     Summary financial information of TransTexas is as follows (in thousands of
dollars):
 
<TABLE>
<CAPTION>
                                                                   JANUARY 31,
                                                              ----------------------
                                                                1998         1997
                                                              --------    ----------
<S>                                                           <C>         <C>
ASSETS
Total current assets........................................  $ 82,714    $  188,934
Property and equipment, net.................................   701,598       846,393
Other assets................................................    32,323        17,825
                                                              --------    ----------
                                                              $816,635    $1,053,152
                                                              ========    ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Total current liabilities...................................  $104,836    $  117,348
Total noncurrent liabilities................................   687,162     1,086,599
Total stockholders' equity (deficit)........................    24,637      (150,795)
                                                              --------    ----------
                                                              $816,635    $1,053,152
                                                              ========    ==========
</TABLE>
 
<TABLE>
<CAPTION>
                                                                   SIX MONTHS ENDED
                                 YEAR ENDED JANUARY 31,              JANUARY 31,         YEAR ENDED
                            ---------------------------------   ----------------------    JULY 31,
                              1998       1997        1996         1996        1995          1995
                            --------   --------   -----------   --------   -----------   ----------
                                                  (UNAUDITED)              (UNAUDITED)
<S>                         <C>        <C>        <C>           <C>        <C>           <C>
Revenues..................  $723,271   $406,347    $291,338     $141,156    $162,517      $312,699
Operating costs and
  expenses................   193,171    219,068     229,284      101,908     133,833       261,209
                            --------   --------    --------     --------    --------      --------
  Operating income........   530,100    187,279      62,054       39,248      28,684        51,490
Other expense.............   (68,187)   (91,463)    (77,174)     (40,436)    (29,059)      (65,797)
Income tax (expense)
  benefit.................  (161,669)   (12,491)      2,700          416         131         2,415
                            --------   --------    --------     --------    --------      --------
  Income (loss) before
     extraordinary item...   300,244     83,325     (12,420)        (772)       (244)      (11,892)
Extraordinary item........   (72,043)        --     (56,637)          --          --       (56,637)
                            --------   --------    --------     --------    --------      --------
  Net income (loss).......  $228,201   $ 83,325    $(69,057)    $   (772)   $   (244)     $(68,529)
                            ========   ========    ========     ========    ========      ========
</TABLE>
 
12. TRANSACTIONS WITH AFFILIATES
 
     Pursuant to the stock transfer agreement dated February 23, 1995 (the
"Stock Transfer Agreement") among TransAmerican, TEC and TARC, TransAmerican
contributed to the capital of TEC (the "Stock Transfer") (i) all of the
outstanding capital stock of TARC, and (ii) 55 million shares of common stock of
TransTexas. TEC subsequently contributed 15 million of its shares of TransTexas
common stock to TARC.
 
     Prior to the sale of the TARC Notes, TARC participated in TransAmerican's
centralized cash management program. Funds required by TARC for daily operations
and capital expenditures were advanced by TransAmerican. In October 1994,
TransAmerican sold 5.25 million shares of TransTexas common stock. TransAmerican
advanced approximately $50 million of the proceeds from these stock sales to
TARC, of which approximately $20 million was used by TARC to repay a portion of
the intercompany debt owed to TransAmerican, and the remaining $30 million of
the net proceeds was used for working capital and general corporate purposes.
TARC used approximately $30 million of the net proceeds of the sale of the TARC
Notes to repay additional intercompany debt to TransAmerican. TransAmerican
contributed to the capital of TARC (through TEC) all but $10 million of the
remainder of TARC's intercompany debt owed to TransAmerican. In April 1995, TARC
repaid the remaining $10 million of intercompany indebtedness owed to
TransAmerican. In August 1995, TARC received an advance of $3 million from
TransTexas, which TARC used to settle
 
                                       38
<PAGE>   41
                       TRANSAMERICAN REFINING CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
its remaining portion of certain litigation. In September 1995, TARC received an
advance of $1.7 million from TransAmerican, which TARC used to purchase
feedstock. In October 1995, TARC repaid these advances without interest.
Additionally in October 1995, TARC received an advance of approximately $4
million from TransAmerican for working capital which it repaid in June 1997.
 
     In September 1995, TARC received an advance of $1 million from TransTexas,
which TARC used to purchase feedstock. This advance was repaid by TARC without
interest. In December 1995, TARC advanced $1 million to TransTexas. This advance
was repaid to TARC with interest in December 1995.
 
     During 1995, TransAmerican acquired an office building which it
subsequently sold to TransTexas in February 1996 for $4 million. In February
1996, TransAmerican advanced $4 million of the proceeds from this sale to TARC
for working capital. TransTexas charges TARC approximately $61,000 in rent
annually, of which approximately $117,000 was payable to TransTexas at January
31, 1998.
 
     In July 1996, TARC executed a promissory note to TransAmerican for up to
$25 million. The note bore interest at a rate of 15% per annum, payable
quarterly beginning October 31, 1996. On November 1, 1996, TARC executed an
additional $25 million promissory note to TransAmerican which bore interest at
15% per annum, payable quarterly beginning December 31, 1996 (together with the
first promissory note, the "TransAmerican Notes"). As of January 31, 1997, TARC
had approximately $44.4 million outstanding under the TransAmerican Notes. In
February 1997, the November 1996 promissory note was replaced with a $50 million
note bearing interest at an annual rate of 15% and which matures on July 31,
2002. All amounts outstanding under the TransAmerican Notes were repaid on June
13, 1997.
 
     From August 1993 to June 1997, TransTexas provided general commercial legal
services and certain accounting services (including payroll, tax, and treasury
services) to TARC and TEC for a fee of $26,000 per month pursuant to a services
agreement. In June 1997, the services agreement was terminated.
 
     On June 13, 1997, a new services agreement was entered into among
TransAmerican, TEC, TARC and TransTexas. Under the new services agreement,
TransTexas provides accounting, legal, administrative and other services to
TARC, TEC and TransAmerican and its affiliates. TransAmerican provides advisory
services to TransTexas, TARC and TEC. TARC will pay to TransTexas approximately
$300,000 per month for services rendered to, and for allocated expenses paid by
TransTexas on behalf of, TARC and TEC. TEC and its subsidiaries will pay $2.5
million in the aggregate per year to TransAmerican for advisory services and
benefits provided by TransAmerican. Pursuant to these agreements, TARC has
recognized $4.0 million in service agreement expenses during the year ended
January 31, 1998. As of January 31, 1998, $1.2 million and $1.6 million was
payable to TransTexas and TransAmerican, respectively, pursuant to the services
agreement.
 
     Southeast Contractors, a subsidiary of TransAmerican, provides construction
personnel to TARC in connection with the Capital Improvement Program. These
construction workers are temporary employees, and the number and composition of
the workforce will vary throughout the Capital Improvement Program. Southeast
Contractors charges TARC for the direct costs it incurs (which consist solely of
employee payroll and benefits) plus administrative costs and fees of up to $2.0
million per year. Total labor costs charged by Southeast Contractors for the
years ended January 31, 1998 and 1997, the six months ended January 31, 1996 and
the year ended July 31, 1995 were $50.7 million, $14.1 million, $20.2 million
and $15.5 million, respectively, of which $5.3 million and $1.8 million was
payable at January 31, 1998 and 1997, respectively.
 
     TARC purchases natural gas from TransTexas on an interruptible basis. The
total cost of natural gas purchased for the years ended January 31, 1998 and
1997, the six months ended January 31, 1996 and the year ended July 31, 1995 was
approximately $0.4 million, $2.7 million, $1.4 million and $2.5 million,
respectively. The payable to TransTexas for natural gas purchases at January 31,
1997 was $2.7 million.
 
     In July and September 1997, TEC advanced an aggregate of $46 million to
TARC. All of the advances are governed by the terms of a promissory note that is
due June 14, 2002 bearing interest at a rate that, when
 
                                       39
<PAGE>   42
                       TRANSAMERICAN REFINING CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
added to the interest paid by TransTexas on the TransTexas Intercompany Loan,
will equal the amount of interest payable on the TEC Notes through December 15,
1997. Thereafter, the amount of fixed interest payable to TEC of $5.7 million
per year will be proportioned semi-annually between TARC and TransTexas based on
the average outstanding balance of TARC's note to TEC and the average
outstanding balance of all notes between TransTexas and TEC. As of January 31,
1998, the principal amount payable by TARC to TEC pursuant to the advances was
$15 million. During the year ended January 31, 1998, TARC recognized $3.1
million in interest expense pursuant to the advances of which approximately $0.2
million was payable to TEC at January 31, 1998. Included in the $3.1 million of
interest expense is approximately $0.3 million paid to TEC for advances made to
TransTexas during fiscal 1998.
 
     During the year ended January 31, 1998, TEC contributed $13.5 million to
TARC for general corporate purposes pursuant to the Disbursement Agreement.
 
     On December 30, 1997, TEC and TARC entered into an expense reimbursement
agreement pursuant to which TARC will reimburse TEC for certain administrative,
legal and accounting expenses and directors fees and will also reimburse TEC for
other expenses in an amount not to exceed $200,000 per year. Since December 30,
1997, no such expenses were reimbursed to TEC.
 
     Blackburn & Henderson, a law firm of which Mr. Henderson, a director of
TARC and TEC, is a partner, provides legal and other services to TransAmerican
and its affiliates for an annual fee of $96,000 plus expenses.
 
                                       40
<PAGE>   43
                       TRANSAMERICAN REFINING CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
13. SUPPLEMENTAL CASH FLOW INFORMATION
 
     The following information reflects TARC's cash paid for interest and
noncash investing and financing activities (in thousands of dollars):
 
<TABLE>
<CAPTION>
                                                                         SIX MONTHS ENDED
                                         YEAR ENDED JANUARY 31,             JANUARY 31,        YEAR ENDED
                                    --------------------------------   ---------------------    JULY 31,
                                     1998       1997        1996        1996        1995          1995
                                    -------   --------   -----------   -------   -----------   ----------
                                                         (UNAUDITED)             (UNAUDITED)
<S>                                 <C>       <C>        <C>           <C>       <C>           <C>
Interest paid, net of amounts
  capitalized.....................  $37,238   $  2,426     $ 1,365     $   836     $   --       $ 1,282
Noncash financing and investing
  activities:
  Accretion on long-term debt
     capitalized in property and
     equipment....................   74,716     49,109      29,306      18,186         --        11,120
  Accounts payable for property
     and equipment................   24,214     14,856      14,082      10,591      8,293        11,784
  Debt issue costs from
     affiliate....................   30,768         --          --          --         --            --
  Cost in excess of warrants
     redeemed by affiliates.......   10,398         --          --          --         --            --
  Capital lease and seller
     financed obligations incurred
     for property and equipment...    1,775         --       2,544       1,643         66           967
  Product financing
     arrangements.................       --    (37,206)     37,206      37,206         --        27,671
  Forgiveness of advances from
     TransAmerican (including
     $25.0 million for property
     and equipment transferred
     from TransAmerican at net
     book value in 1994)..........       --         --      71,170          --         --        71,170
  Contribution of TransTexas
     stock........................       --         --      37,176          --         --        37,176
  Issuance of Warrants for
     professional fees............    3,503         --          --          --         --            --
</TABLE>
 
14. COMMITMENTS AND CONTINGENCIES
 
  Legal Proceedings
 
     EEOC. On September 30, 1997, the U.S. Equal Employment Opportunity
Commission ("EEOC") issued a Determination (the "Determination") as a result of
the Commissioner's Charge that had been filed in August 1995 against TARC and
Southeast Louisiana Contractors of Norco, Inc. ("Southeast Contractors")
pursuant to Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C.
sec. 2000e et seq. ("Title VII"). In the Determination, the EEOC stated that it
found reasonable cause to believe that each of TARC and Southeast Contractors
had discriminated based on race and gender in its hiring and promotion
practices. Each violation of Title VII (for each individual allegedly
aggrieved), if proven, potentially could subject TARC and Southeast Contractors
to liability for (i) monetary damages for backpay and front pay in an
undetermined amount, and for compensatory damages and punitive damages in an
amount not to exceed $300,000 per plaintiff, (ii) injunctive relief, (iii)
attorney's fees and (iv) interest. During the period covered by the
Commissioner's Charge and the Determination, TARC and Southeast Contractors
estimate that they received a combined total of approximately 23,000 to 30,000
employment applications and hired (or rehired) a combined total of approximately
3,400 to 4,100 workers, although the total number of individuals who
 
                                       41
<PAGE>   44
                       TRANSAMERICAN REFINING CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
ultimately are covered in any conciliation proposal or any subsequent lawsuit
may be higher. TARC and Southeast Contractors deny engaging in any unlawful
employment practices. TARC and Southeast Contractors intend vigorously to defend
against the allegations contained in the Commissioner's Charge and the findings
set forth in the Determination in any proceedings in state or federal court,
regardless of whether any such lawsuit is brought by the EEOC or any individual
or groups of individuals. If TARC or Southeast Contractors is found liable for
violations of Title VII based on the matters asserted in the Determination, TARC
can make no assurance that such liability would not have a material adverse
effect on its financial position, results of operations or cash flow.
 
     Rineheart. On October 8, 1996, Carlton Gene Rineheart, et al., and as
representative of a class of persons similarly situated, filed suit against 84
individuals and corporations, including TARC, in the U.S. District Court, Middle
District of Louisiana alleging negligent and improper storage, handling,
treatment, and disposal of hazardous materials from 1976 to the present at two
sites in Iberville Parish, Louisiana. The suit claims damages for physical,
mental, and property damage in the communities of Bayou Sorrel, Bayou Pigeon and
Indian Village. TARC intends to vigorously defend this claim.
 
     Shell Oil. On September 27, 1996, Shell Oil filed a third party suit
against TARC in the U.S. District Court, Eastern District of Louisiana for
contribution and/or indemnity relating to alleged environmental contamination of
Bayou Trapagnier and surrounding lands near Norco, Louisiana. In March 1997,
TARC obtained a voluntary dismissal from Shell. Shell proceeded to trial on the
main case and settled with the plaintiffs during trial by purchasing their land
for $5 million. On June 27, 1997, Shell amended its third party action to bring
TARC back into the case. However, TARC has not yet been served in the case. If
TARC is served, it will defend the case vigorously.
 
     General. The litigation matters discussed above amount to significant
potential liability which, if adjudicated in a manner adverse to TARC in one
reporting period, could have a material adverse effect on TARC's financial
position, results of operations or cash flow for that period. TARC is also a
named defendant in other ordinary course, routine litigation incidental to its
business. Although the outcome of these lawsuits cannot be predicted with
certainty, TARC does not expect these matters to have a material adverse effect
on its financial position, results of operations or cash flow.
 
  Environmental Matters
 
     Compliance Matters. TARC is subject to federal, state and local laws,
regulations and ordinances ("Pollution Control Laws"), which regulate activities
such as discharges to air and water, as well as handling and disposal practices
for solid and hazardous wastes. TARC believes that it is now, and has included
in the Capital Improvement Program sufficient capital additions to remain, in
substantial compliance with applicable Pollution Control Laws. However,
Pollution Control Laws that may be enacted in the future, as well as
increasingly strict enforcement of existing Pollution Control Laws, may require
TARC to make additional capital expenditures in order to comply with such laws
and regulations. To ensure continuing compliance, TARC has made environmental
compliance and permitting issues an integral part of its refinery's start-up
plans and has budgeted for such capital expenditures in the Capital Improvement
Program. However, there is no assurance that TARC will remain in compliance with
environmental regulations.
 
     TARC uses (and in the past has used) certain materials, and generates (and
in the past has generated) certain substances or wastes, that are or may be
deemed hazardous substances or wastes. In the past, the refinery has been the
subject of certain environmental enforcement actions, and has incurred certain
fines, as a result of certain of TARC's operations. TARC also was previously
subject to enforcement proceedings relating to its prior production of leaded
gasoline and air emissions. TARC believes that, with minor exception, all of
these past matters were resolved prior to or in connection with the resolution
of the bankruptcy proceedings of its predecessor in interest, TransAmerican, or
are no longer applicable to TARC's operations. As a result,
 
                                       42
<PAGE>   45
                       TRANSAMERICAN REFINING CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
TARC believes that such matters will not have a material adverse effect on
TARC's future financial position, results of operations or cash flow.
 
     In September 1997, TARC purchased a tank storage facility located adjacent
to the refinery for a cash purchase price of $40 million (which does not include
a $3.1 million liability recorded for environmental remediation, as discussed
below). Environmental investigations conducted by the previous owner of the
facilities have indicated soil and groundwater contamination in several areas on
the property. As a result, the former owner submitted to the Louisiana
Department of Environmental Quality (the "LDEQ") plans for the remediation of
any significant indicated contamination in such areas. TARC has analyzed these
investigations and has carried out further Phase II Environmental Assessments to
verify their results. TARC intends to incorporate any required remediation into
its ongoing work at the refinery. In connection with the purchase of the
facilities, TARC agreed to indemnify the seller for all cleanup costs and
certain other damages resulting from contamination of the property, and created
a $5 million escrow account to fund required remediation costs and
indemnification claims by the seller. As a result of TARC's Phase II
Environmental Assessment, TARC believes that the amount in escrow should be
sufficient to fund the remediation costs associated with identified
contamination; however, because the LDEQ has not yet approved certain of the
remediation plans, there can be no assurance that the funds set aside in the
escrow account will be sufficient to pay all required remediation costs. As of
January 31, 1998, TARC has recognized a liability of $3.1 million for this
contingency.
 
     Requirements Under the Federal Clean Air Act. The National Emission
Standards for Hazardous Air Pollutants for Benzene Waste Operations (the
"Benzene Waste NESHAPS"), promulgated in January 1993 pursuant to the Clean Air
Act, regulate benzene emissions from numerous industries, including petroleum
refineries. The Benzene Waste NESHAPS require all existing, new, modified, or
reconstructed sources to reduce benzene emissions to a level that will provide
an ample margin of safety to protect public health. TARC will be required to
comply with the Benzene Waste NESHAPS as its refinery operations start up. TARC
believes that compliance with the Benzene Waste NESHAPS will not have a material
adverse effect on TARC's financial position, results of operations or cash flow.
Until the refinery is in full operation, however, there can be no assurance that
the regulations will not have such an effect.
 
     In addition, the EPA promulgated National Emission Standards for Hazardous
Air Pollutants for Hazardous Organics (the "Hazardous Organic NESHAPS")
regulations for petroleum refineries under the Clean Air Act in 1995, and
subsequently has amended such regulations. These regulations set Maximum
Achievable Control Technology ("MACT") standards for petroleum refineries. The
Louisiana Department of Environmental Quality (the "LDEQ") has incorporated MACT
standards into TARC's air permits under federal and state air pollution
prevention laws. TARC believes that compliance with the Hazardous Organics
NESHAPS will not have a material adverse effect on TARC's financial position,
results of operations or cash flow. Until the refinery is in full operation,
however, there can be no assurance that the regulations will not have such an
effect.
 
     The EPA has promulgated federal regulations pursuant to the Clean Air Act
to control fuels and fuel additives (the "Gasoline Standards") that could have a
material adverse effect on TARC. Under these regulations, only reformulated
gasoline can be sold in certain domestic geographic areas in which the EPA has
mandated or approved its use. Reformulated gasoline must contain a minimum
amount of oxygen, have a lower vapor pressure, and have reduced sulfur, olefins,
benzene and aromatics compared to the average 1990 gasoline. The EPA recently
promulgated final National Ambient Air Quality Standards ("NAAQS") that revise
the standards for particulate matter and ozone. The number and extent of the
areas subject to reformulated gasoline standards may increase in the future
after the NAAQS are implemented. Conventional gasoline may be used in all other
domestic markets; however, a refiner's post-1994 average conventional gasoline
must not be more polluting than it was in 1990. With limited exceptions, to
determine its compliance as of January 1, 1995, a refiner must compare its
post-1994 and 1990 average values of controlled fuel
 
                                       43
<PAGE>   46
                       TRANSAMERICAN REFINING CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
parameters and emissions. The Gasoline Standards recognize that many gasoline
refiners may not be able to develop an individual 1990 baseline for a number of
reasons, including, for example, lack of adequate data or the absence or limited
scope of operations in 1990. Under such circumstances, the refiner must use a
statutory baseline reflecting the 1990 industry average. The EPA has authority,
upon a showing of extenuating circumstances by a refiner, to grant an individual
adjusted baseline or other appropriate regulatory relief to that refiner.
 
     TARC filed a petition with the EPA requesting an individual baseline
adjustment or other appropriate regulatory relief based on extenuating
circumstances. The extenuating circumstances upon which TARC relied in its
petition include the fact that the refinery was not in operation in 1990 (and
thus there is no 1990 average for purposes of the necessary comparison) and the
fact that the start-up of the refinery is to occur on a phased-in basis. The EPA
has denied TARC's request for an individual baseline adjustment and other
regulatory relief. TARC will continue to pursue regulatory relief with the EPA.
However, there can be no assurance that regulatory relief will be granted. There
can be no assurance that any action taken by the EPA will not have a material
adverse effect on TARC's future financial position, results of operations or
cash flow.
 
     Title V of the Clean Air Act requires states to implement an Operating
Permit Program that codifies all federally enforceable limitations that are
applicable to a particular source. The EPA has approved Louisiana's Title V
Operating Permit Program. The Title V Operating Permit is necessary for TARC to
produce at projected levels upon completion of the Capital Improvement Program.
TARC has submitted its Title V Operating Permit Application and the LDEQ has
designated the application as being administratively complete. However, the LDEQ
has not responded further regarding the status of TARC's Title V Operating
Permit. TARC believes that its application will be approved. However, there can
be no assurance that it will be approved as submitted or that additional
expenditures required pursuant to Title V Operating Permit obligations will not
have a material adverse effect on TARC's financial position, results of
operations or cash flow.
 
     Cleanup Matters. TARC also is subject to federal, state and local laws,
regulations and ordinances that impose liability for the costs of clean up
related to, and certain damages resulting from, past spills, disposals or other
releases of hazardous substances ("Hazardous Substance Cleanup Laws"). Over the
past several years, TARC has been, and to a limited extent continues to be,
engaged in environmental cleanup or remedial work relating to or arising out of
operations or activities at the refinery. In addition, TARC has been engaged in
upgrading its solid waste facilities, including the closure of several waste
management units. Similar to numerous other industrial sites in the state, the
refinery has been listed by the LDEQ on the Federal Comprehensive Environmental
Response, Compensation and Liability Information System, as a result of TARC's
prior waste management activities (as discussed below).
 
     In 1991, the EPA performed a facility assessment at the refinery pursuant
to the Federal Resource Conservation and Recovery Act ("RCRA"). The EPA
performed a follow up assessment in March 1996, but has not yet issued a report
of its investigations. In July 1996, the EPA and the LDEQ agreed that the LDEQ
would serve as the lead agency with respect to the investigation and remediation
of areas of concern identified in the investigations. TARC, under a voluntary
initiative approved by the LDEQ, submitted a work plan to the LDEQ to determine
which areas may require further investigation and remediation. TARC submitted
further information in January 1998 which was requested by the LDEQ. Based on
the workplan submitted and additional requests by the LDEQ, TARC believes that
any further action will not have a material adverse effect on its financial
position, results of operations or cash flow.
 
     TARC has been identified as a potentially responsible party ("PRP") under
the Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended ("CERCLA" or "Superfund"), for the cleanup of contamination
from hazardous substances at three Superfund sites (i.e. sites on the National
Priorities List ("NPL")) to which it has been alleged that TARC, or its
predecessors, sent hazardous substances in the past. CERCLA requires cleanup of
sites from which there has been a "release" or
                                       44
<PAGE>   47
                       TRANSAMERICAN REFINING CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
threatened release of "hazardous substances" (as such terms are defined under
CERCLA). CERCLA requires the EPA to include sites needing long-term study and
cleanup on the NPL based on their potential effect on public health or the
environment. CERCLA authorizes the EPA to take any necessary response actions at
NPL sites and, in certain circumstances, to order PRPs liable for the release to
take such actions. PRPs are broadly defined under CERCLA to include past and
present owners and operators of a site, as well as generators and transporters
of wastes to a site from which hazardous substances are released.
 
     The EPA may seek reimbursement of expenditures of federal funds from PRPs
under Superfund. Courts have interpreted CERCLA to impose strict, joint and
several liability upon all persons liable for the entire amount of necessary
cleanup costs. As a practical matter, at sites where there are multiple PRPs for
a cleanup, the costs of cleanup typically are allocated according to a
volumetric or other standard among the parties. CERCLA also provides that
responsible parties generally may recover a portion of the costs of cleaning up
a site from other responsible parties. Thus, if one party is required to clean
up an entire site, that party can seek contribution or recovery of such costs
from other responsible parties. A number of states have laws similar to
Superfund, pursuant to which cleanup obligations, or the costs thereof, also may
be imposed.
 
     At one Superfund site, TARC has submitted information to the EPA indicating
that it should have no liability for this matter, and negotiations with the EPA
in this regard are continuing. With respect to the remaining two sites, TARC's
liability for each such matter has not been determined, and TARC anticipates
that it may incur costs related to the cleanup (and possibly including
additional costs arising in connection with any recovery or other actions
brought pursuant or relating to such matters) at each such site. After a review
of the data available to TARC regarding the basis of TARC's alleged liability at
each site, and based on various factors, which depend on the circumstances of
the particular Superfund site (including, for example, the relationship of TARC
to each such site, the volume of wastes TARC is alleged to have contributed to
each such site in comparison to other PRPs without giving effect to the ability
of any other PRPs to contribute to or pay for any liabilities incurred, and the
range of likely cleanup costs at each such site), TARC believes that its
ultimate environmental liabilities will not be significant; however, it is not
possible to determine the ultimate environmental liabilities, if any, that may
arise from the matters discussed above.
 
  Purchase Commitments
 
     TARC has various purchase commitments for materials, supplies and services
incidental to the ordinary course of business and for the Capital Improvement
Program. As of January 31, 1998, TARC had commitments for refinery construction
and maintenance of approximately $83.3 million. TARC is acting as general
contractor and can generally cancel or postpone capital projects.
 
  Price Management Activities
 
     TARC enters into futures contracts, options on future, swap agreements and
forward sales agreements with the intent to protect against a portion of the
price risk associated with price declines from holding inventory of feedstocks
and refined products or fixed price purchase commitments. At January 31, 1998
and 1997, TARC had no significant positions in open futures contracts, options
on futures, swap agreements or forward sales agreements. A net trading gain of
approximately $2.3 million was reflected in other income (expense) for the year
ended July 31, 1995. These transactions did not qualify for hedge accounting
treatment under the guidelines of SFAS 80; therefore, gains or losses associated
with these futures contracts have not been deferred.
 
  Processing Agreements
 
     In April 1996, TARC entered into a processing agreement with a third party
to process feedstocks. Under the terms of the agreement, the processing fee
earned from the third party is based on the margin earned by the third party, if
any, after deducting all of its related costs such as feedstock acquisition,
hedging,
                                       45
<PAGE>   48
                       TRANSAMERICAN REFINING CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
transportation, processing and inspections plus a commission for each barrel
processed. As of January 31, 1998, TARC has processed 6.4 million barrels of
feedstocks under this agreement. TARC also entered into processing agreements
with this third party to process approximately 1.1 million barrels of the third
party's feedstocks for a fixed price per barrel. For the years ended January 31,
1998 and 1997, TARC recorded income (loss) from processing agreements of $1.4
million and $(7.1) million, respectively. As of January 31, 1998, TARC was
storing approximately 0.7 million barrels of feedstock and intermediate or
refined products pursuant to these processing agreements. Included in the 0.7
million barrels of product stored at the refinery as of January 31, 1998, is
approximately 0.6 million barrels of feedstock owned by a third party related to
a purchase commitment entered into in April 1997. For the year ended January 31,
1998, TARC incurred a loss of approximately $7.8 million related to this
purchase commitment and remains subject to market risk for these barrels.
 
  Operating Leases
 
     As of January 31, 1998, TARC has long-term leases covering land and other
property and equipment. Rental expense was approximately $2.2 million, $4.2
million, $1.9 million and $4 million, respectively, for the years ended January
31, 1998 and 1997, the six months ended January 31, 1996 and the year ended July
31, 1995. Future minimum rental payments required under operating leases that
have initial or remaining noncancellable lease terms in excess of one year as of
January 31, 1998, are as follows (in thousands of dollars):
 
<TABLE>
<S>                                                           <C>
1999........................................................  $  309
2000........................................................     309
2001........................................................     281
2002........................................................     258
2003........................................................     200
Later years.................................................   1,163
                                                              ------
                                                              $2,520
                                                              ======
</TABLE>
 
                                       46
<PAGE>   49
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE
 
     Not applicable.
 
                                    PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
     TARC's directors and executive officers are as follows:
 
<TABLE>
<CAPTION>
          NAME                                OFFICE                         AGE
          ----                                ------                         ---
<S>                       <C>                                                <C>
John R. Stanley.........  Director, Chairman of the Board, President and
                          Chief Executive Officer                            59
R. Glenn McGinnis.......  Vice President of Manufacturing                    49
Gary L. Karr............  Vice President of Refining                         49
John R. Stanley, Jr. ...  Vice President of Administration                   36
Ed Donahue..............  Vice President and Secretary                       47
Donald B. Henderson.....  Director                                           48
Thomas B. McDade........  Director                                           74
</TABLE>
 
     Set forth below is a description of the backgrounds of the directors and
executive officers of TARC.
 
     John R. Stanley has been a director and Chief Executive Officer of TARC
since September 1987 and a director and Chief Executive Officer of TEC since
July 1994. Mr. Stanley is the founder, Chairman of the Board, Chief Executive
Officer, and sole stockholder of TNGC Holdings Corporation, which is the sole
stockholder of TransAmerican. He has operated TransAmerican since 1958. Mr.
Stanley is the father of John R. Stanley, Jr.
 
     R. Glenn McGinnis has been the Vice President of Manufacturing of TARC
since July 1995. Prior to joining TARC, Mr. McGinnis held senior refining and
supply positions in Canada with Imperial Oil Limited, an affiliate of Exxon
Corporation. Mr. McGinnis was with Imperial Oil Limited for 23 years.
 
     Gary L. Karr has been the Vice President of Refining of TARC since January
1994 and served as Refinery Manager for approximately eight years prior thereto.
Mr. Karr has been with TransAmerican or a subsidiary of TransAmerican since 1971
in various positions.
 
     John R. Stanley, Jr. has served as Vice President of Administration of TARC
since October 1995. From May 1992 until October 1995, he served as Manager of
Audit and Security for TARC. Mr. Stanley is the son of John R. Stanley.
 
     Edwin B. Donahue has served as Vice President and Secretary of TARC since
February 1997. Mr. Donahue also serves as Vice President, Chief Financial
Officer and Secretary of TransTexas and TEC and as Vice President and Secretary
of TransAmerican. Mr. Donahue has been employed in various positions with
TransAmerican for over 21 years.
 
     Donald B. Henderson has been a director of TARC and of TEC since July 1994.
Mr. Henderson is a partner in the law firm of Blackburn & Henderson. From 1972
to 1978, Mr. Henderson was a member of the Texas House of Representatives. Mr.
Henderson was a member of the Texas Senate from 1982 to 1996. Mr. Henderson
served as a director of TransAmerican from 1985 until his resignation in
February 1995. In April 1998, Mr. Henderson was charged with intoxication
assault in connection with a traffic accident. Mr. Henderson has pleaded
innocent and intends to vigorously defend these charges.
 
     Thomas B. McDade has been a director of TARC and of TEC since July 1994. He
is also a director of TransTexas. Mr. McDade is primarily engaged in managing
his personal investments and in providing consulting services in Houston, Texas.
Mr. McDade served as a director of TransAmerican from 1985 until his resignation
in February 1995. Prior to 1989, he served as a consultant to Texas Commerce
Bancshares, Inc. and prior to July 1985, he served as Vice Chairman and Director
of Texas Commerce Bancshares, Inc. and
 
                                       47
<PAGE>   50
 
Vice Chairman and Advisory Director of Texas Commerce Bank. From 1985 to 1995,
Mr. McDade served as a director and trustee of eleven registered investment
companies for which John Hancock Funds now serves as investment advisor in
Boston, Massachusetts. Mr. McDade is a former director of Houston Industries,
Inc. and Houston Lighting & Power Company. He is also a former member of the
Board of Managers of the Harris County Hospital District and former Chairman of
the State Securities Board of Texas. Mr. McDade serves as a director of Group
Maintenance America Corp.
 
COMMITTEES OF THE BOARD OF DIRECTORS
 
     TARC has an Audit Committee and a Compensation Committee. The Audit
Committee is composed of Messrs. Henderson and McDade. The purpose of the Audit
Committee is to review the scope of the independent auditors' examinations of
TARC's financial statements and review their reports.
 
     The Compensation Committee is composed of Messrs. Henderson and McDade. The
purpose of the Compensation Committee is to determine the nature and amount of
compensation of TARC's executive officers.
 
DIRECTOR COMPENSATION
 
     Each director, other than John R. Stanley, receives an annual director's
fee of $75,000, plus $750 for each board and committee meeting attended (other
than committee meetings held on the same day as board meetings).
 
ITEM 11. EXECUTIVE COMPENSATION
 
     The following table sets forth the compensation paid during the fiscal
years ended January 31, 1998 and 1997, the six months ended January 31, 1996,
and the fiscal year ended July 31, 1995 to TARC's Chief Executive Officer and
each other executive officer of TARC whose total annual salary and bonus
exceeded $100,000 in the fiscal year ended January 31, 1998 (the "Named
Executive Officers"):
 
                           SUMMARY COMPENSATION TABLE
 
<TABLE>
<CAPTION>
                                                                  ANNUAL COMPENSATION
                                                              ---------------------------
                                                   FISCAL                  OTHER ANNUAL
       NAME AND PRINCIPAL POSITION IN TARC          YEAR       SALARY     COMPENSATION(A)
       -----------------------------------         ------     --------    ---------------
<S>                                                <C>        <C>         <C>
John R. Stanley (b)..............................   1998      $400,483        $4,346
  Chief Executive Officer                           1997       397,117         5,170
                                                    1996*      175,001           807
                                                    1995       369,521         4,500
 
R. Glenn McGinnis................................   1998      $235,038        $  950
  Vice President of Manufacturing                   1997       233,654           727
                                                    1996*      116,937            --
                                                    1995         9,904            --
 
Gary L. Karr.....................................   1998      $145,904        $4,377
  Vice President of Refining                        1997       140,192         3,348
                                                    1996*       67,500           311
                                                    1995       140,192         2,310
 
John R. Stanley, Jr..............................   1998      $114,461        $3,376
  Vice President of Administration                  1997       117,308         3,519
                                                    1996*       63,750         1,913
                                                    1995        93,693         2,259
</TABLE>
 
                                       48
<PAGE>   51
 
---------------
 
*   Six months ended January 31, 1996 ("Transition Period")
 
(a) Reflects the amount contributed under the Savings Plan (as defined below).
    Certain of TARC's executive officers receive personal benefits in addition
    to salary and cash bonuses. The aggregate amount of the personal benefits,
    however, does not exceed the lesser of $50,000 or 10% of the total of the
    annual salary and bonus reported for the named executive officer and
    accordingly has been excluded from the table.
 
(b) All amounts shown were paid by TransTexas.
 
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
 
     TARC's compensation committee is composed of Messrs. McDade and Henderson.
During the year ended January 31, 1998, none of the members of the compensation
committee was an officer or employee of TARC. Blackburn & Henderson, a law firm
of which Mr. Henderson is a partner, provides legal and other services to
TransAmerican and its affiliates for an annual fee of $96,000 plus expenses. The
TEC Notes Indenture prohibits TEC and its subsidiaries from paying compensation
to Mr. Stanley in excess of $1.0 million per year, in the aggregate, from TEC
and TransTexas and, following completion of Phase II, $1.0 million per year from
TARC.
 
SAVINGS PLAN
 
     TransAmerican maintains a long-term savings plan (the "Savings Plan") in
which eligible employees of TARC and certain of its affiliates may elect to
participate. Each employee becomes eligible to participate in the Savings Plan
on January 1 or July 1 following the completion of one year of service with TARC
or its participating affiliates and attainment of age 21. The Savings Plan is
intended to constitute a qualified plan under Section 401(a) of the Internal
Revenue Code of 1986, as amended (the "Code") and contains a salary reduction
arrangement described in Section 401(k) of the Code.
 
     Each participant may elect to reduce his compensation by a percentage equal
to 2% to 15% and TARC will contribute that amount to the Savings Plan on a
pre-tax basis on behalf of the participant. The Code limits the annual amount
that a participant may elect to have contributed on his behalf on a pre-tax
basis to the Savings Plan. For 1998, this limit is $10,000. TARC presently makes
a matching contribution in an amount equal to 10%, 20% or 50% of the amount
elected to be contributed by each participant on a pre-tax basis, up to a
maximum of 3% of each participant's compensation, depending on whether the
employee has been a participant in the Savings Plan for one year, two years or
three years. Each participant also may elect to contribute up to 10% of his
compensation to the Savings Plan on an after-tax basis. The Code imposes
nondiscrimination tests on contributions made to the Savings Plan pursuant to
participant elections and on TARC's matching contributions, and limits amounts
which may be allocated to a participant's Savings Plan account each year. In
order to satisfy the nondiscrimination tests, contributions made on behalf of
certain highly compensated employees (as defined in the Code) may be limited.
Contributions made to the Savings Plan pursuant to participant elections and
matching contributions are at all times 100% vested. Contributions to the
Savings Plan are invested, according to specified investment options selected by
the participants, in investment funds maintained by the trustee of the Savings
Plan. Generally, a participant's vested benefits will be distributed from the
Savings Plan as soon as administratively practicable following a participant's
retirement, death, disability or other termination of employment. In addition, a
participant may elect to withdraw his after-tax contributions from the Savings
Plan prior to his termination of employment, and subject to certain strict
limitations and exceptions, the Savings Plan provides for withdrawals of a
participant's pre-tax contributions prior to a participant's termination of
employment in the event of the participant's severe financial hardship or
attainment of age 59 1/2. The Savings Plan may be amended or terminated by the
Board of Directors of TransAmerican. As of January 31, 1998, approximately 178
employees of TARC were eligible to participate in the Savings Plan, including
the Named Executive Officers.
 
                                       49
<PAGE>   52
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     TEC owns 30 million shares (100%) of TARC's outstanding common stock. TEC's
address is 1300 North Sam Houston Parkway East, Suite 200, Houston, Texas 77032.
Pursuant to the TARC Notes Indenture, all shares of TARC's common stock were
pledged as of January 31, 1998 as collateral and were held by the trustee under
the TARC Notes Indenture, First Union National Bank. On April 17, 1998, these
shares of TARC common stock were released from the security interest under the
TARC Notes Indenture in connection with the defeasance of the TARC Notes and are
currently pledged as security for payment of the TEC Notes.
 
     A foreclosure by the holders of the TEC Notes on the shares of TARC's
common stock, under certain circumstances, constitutes a "change of control" of
TEC under the TEC Notes Indenture, which allows the holders thereof to require
TEC to repurchase the TEC Notes at a price equal to 101% of the principal amount
thereof plus accrued and unpaid interest.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     Pursuant to the stock transfer agreement dated February 23, 1995 (the
"Stock Transfer Agreement") among TransAmerican, TEC and TARC, TransAmerican
contributed to the capital of TEC (the "Stock Transfer") (i) all of the
outstanding capital stock of TARC, and (ii) 55 million shares of common stock of
TransTexas. TEC subsequently contributed 15 million of its shares of TransTexas
common stock to TARC.
 
     Prior to the sale of the TARC Notes, TARC participated in TransAmerican's
centralized cash management program. Funds required by TARC for daily operations
and capital expenditures were advanced by TransAmerican. In October 1994,
TransAmerican sold 5.25 million shares of TransTexas common stock. TransAmerican
advanced approximately $50 million of the proceeds from these stock sales to
TARC, of which approximately $20 million was used by TARC to repay a portion of
the intercompany debt owed to TransAmerican, and the remaining $30 million of
the net proceeds was used for working capital and general corporate purposes.
TARC used approximately $30 million of the net proceeds of the sale of the TARC
Notes to repay additional intercompany debt to TransAmerican. TransAmerican
contributed to the capital of TARC (through TEC) all but $10 million of the
remainder of TARC's intercompany debt owed to TransAmerican. In April 1995, TARC
repaid the remaining $10 million of intercompany indebtedness owed to
TransAmerican. In August 1995, TARC received an advance of $3 million from
TransTexas, which TARC used to settle its remaining portion of certain
litigation. In September 1995, TARC received an advance of $1.7 million from
TransAmerican, which TARC used to purchase feedstock. In October 1995, TARC
repaid these advances without interest. Additionally in October 1995, TARC
received an advance of approximately $4 million from TransAmerican for working
capital which it repaid in June 1997.
 
     In September 1995, TARC received an advance of $1 million from TransTexas,
which TARC used to purchase feedstock. This advance was repaid by TARC without
interest. In December 1995, TARC advanced $1 million to TransTexas. This advance
was repaid to TARC with interest in December 1995.
 
     During 1995, TransAmerican acquired an office building which it
subsequently sold to TransTexas in February 1996 for $4 million. In February
1996, TransAmerican advanced $4 million of the proceeds from this sale to TARC
for working capital. TransTexas charges TARC approximately $61,000 in rent
annually, of which approximately $117,000 was payable to TransTexas at January
31, 1998.
 
     In July 1996, TARC executed a promissory note to TransAmerican for up to
$25 million. The note bore interest at a rate of 15% per annum, payable
quarterly beginning October 31, 1996. On November 1, 1996, TARC executed an
additional $25 million promissory note to TransAmerican which bore interest at
15% per annum, payable quarterly beginning December 31, 1996 (together with the
first promissory note, the "TransAmerican Notes"). As of January 31, 1997, TARC
had approximately $44.4 million outstanding under the TransAmerican Notes. In
February 1997, the November 1996 promissory note was replaced with a $50 million
note bearing interest at an annual rate of 15% and which matures on July 31,
2002. All amounts outstanding under the TransAmerican Notes were repaid on June
13, 1997.
 
                                       50
<PAGE>   53
 
     From August 1993 to June 1997, TransTexas provided general commercial legal
services and certain accounting services (including payroll, tax, and treasury
services) to TARC and TEC for a fee of $26,000 per month pursuant to a services
agreement. In June 1997, the services agreement was terminated.
 
     On June 13, 1997, a new services agreement was entered into among
TransAmerican, TEC, TARC and TransTexas. Under the new services agreement,
TransTexas provides accounting, legal, administrative and other services to
TARC, TEC and TransAmerican and its affiliates. TransAmerican provides advisory
services to TransTexas, TARC and TEC. TARC will pay to TransTexas approximately
$300,000 per month for services rendered to, and for allocated expenses paid by
TransTexas on behalf of, TARC and TEC. TEC and its subsidiaries will pay $2.5
million in the aggregate per year to TransAmerican for advisory services and
benefits provided by TransAmerican. Pursuant to these agreements, TARC has
recognized $4.0 million in service agreement expenses during the year ended
January 31, 1998. As of January 31, 1998, $1.2 million and $1.6 million was
payable to TransTexas and TransAmerican, respectively, pursuant to the services
agreement.
 
     Southeast Contractors, a subsidiary of TransAmerican, provides construction
personnel to TARC in connection with the Capital Improvement Program. These
construction workers are temporary employees, and the number and composition of
the workforce will vary throughout the Capital Improvement Program. Southeast
Contractors charges TARC for the direct costs it incurs (which consist solely of
employee payroll and benefits) plus administrative costs and fees of up to $2.0
million per year. Total labor costs charged by Southeast Contractors for the
years ended January 31, 1998 and 1997, the six months ended January 31, 1996 and
the year ended July 31, 1995 were $50.7 million, $14.1 million, $20.2 million
and $15.5 million, respectively, of which $5.3 million and $1.8 million was
payable at January 31, 1998 and 1997, respectively.
 
     TARC purchases natural gas from TransTexas on an interruptible basis. The
total cost of natural gas purchased for the years ended January 31, 1998 and
1997, the six months ended January 31, 1996 and the year ended July 31, 1995 was
approximately $0.4 million, $2.7 million, $1.4 million and $2.5 million,
respectively. The payable to TransTexas for natural gas purchases at January 31,
1997 was $2.7 million.
 
     In July and September 1997, TEC advanced an aggregate of $46 million to
TARC. All of the advances are governed by the terms of a promissory note that is
due June 14, 2002 bearing interest at a rate that, when added to the interest
paid by TransTexas on the TransTexas Intercompany Loan, will equal the amount of
interest payable on the TEC Notes through December 15, 1997. Thereafter, the
amount of fixed interest payable to TEC of $5.7 million per year will be
proportioned semi-annually between TARC and TransTexas based on the average
outstanding balance of TARC's note to TEC and the average outstanding balance of
all notes between TransTexas and TEC. As of January 31, 1998, the principal
amount payable by TARC to TEC pursuant to the advances was $15 million. During
the year ended January 31, 1998, TARC recognized $3.1 million in interest
expense pursuant to the advances of which approximately $0.2 million was payable
to TEC at January 31, 1998. Included in the $3.1 million of interest expense is
approximately $0.3 million paid to TEC for advances made to TransTexas during
fiscal 1998.
 
     During the year ended January 31, 1998, TEC contributed $13.5 million to
TARC for general corporate purposes pursuant to the Disbursement Agreement.
 
     On December 30, 1997, TEC and TARC entered into an expense reimbursement
agreement pursuant to which TARC will reimburse TEC for certain administrative,
legal and accounting expenses and directors fees and will also reimburse TEC for
other expenses in an amount not to exceed $200,000 per year. Since December 30,
1997, no such expenses were reimbursed to TEC.
 
     Blackburn & Henderson, a law firm of which Mr. Henderson, a director of
TARC and TEC, is a partner, provides legal and other services to TransAmerican
and its affiliates for which he is paid an annual fee of $96,000 plus expenses.
 
     TNGC Holdings Corporation, TransAmerican, and its existing subsidiaries,
including TARC, TEC and TransTexas, entered into a tax allocation agreement (the
"Tax Allocation Agreement"), the general terms of which require TransAmerican
and all of its subsidiaries to file federal income tax returns as members of a
consolidated group to the extent permitted by law. Filing on a consolidated
basis allows income and tax of one member to be offset by losses and credits of
another and allows deferral of certain intercompany gains;
                                       51
<PAGE>   54
 
however, each member is severally liable for the consolidated federal income tax
liability of the consolidated group.
 
     The Tax Allocation Agreement requires each of TransAmerican's subsidiaries
to pay to TransAmerican each year its allocable share of the federal income tax
liabilities of the consolidated group ("Allocable Share"). The Tax Allocation
Agreement provides for a reallocation of the group's consolidated federal income
tax liabilities among the members if the IRS or the courts ultimately
re-determine the group's regular tax or alternative minimum tax liability. In
the event of an IRS audit or examination, the Tax Allocation Agreement generally
gives TransAmerican the authority to compromise or settle disputes and to
control litigation, subject to the approval of TARC, TEC or TransTexas, as the
case may be, where such compromise or settlement affects the determination of
the separate tax liability of that company.
 
     Under the Tax Allocation Agreement, each subsidiary's Allocable Share for
each tax year will generally equal the amount of federal income tax it would
have owed had it filed a separate federal income tax return for each year except
that each subsidiary will be able to utilize net operating losses and credits of
TransAmerican and the other members of the consolidated group effectively to
defer payment of tax liabilities that it would have otherwise owed had it filed
a separate federal income tax return. Each subsidiary will essentially pay the
deferred taxes at the time TransAmerican (or the member whose losses or credits
are utilized by such subsidiary) begins generating taxable income or tax. This
will have the effect of deferring a portion of such subsidiary's tax liability
to future years. The parties to the Tax Allocation Agreement amended such
agreement in connection with the Lobo Sale to include additional affiliates as
parties, and further amended the Tax Allocation Agreement in connection with the
transactions consummated in June 1997 to allocate to TransAmerican, as among the
parties, any tax liability associated with the Lobo Sale.
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
 
(a) FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS
 
<TABLE>
<CAPTION>
                                                                       PAGE
                                                                       ----
    <S>  <C>                                                           <C>
    (1)  Report of Independent Accountants...........................   20
         Balance Sheet...............................................   21
         Statement of Operations.....................................   22
         Statement of Stockholder's Equity...........................   23
         Statement of Cash Flows.....................................   24
         Notes to Financial Statements...............................   25
</TABLE>
 
     (2) All schedules have been omitted because the information is either not
         required or is set forth in the financial statements or the notes
         thereto.
 
     (3) Exhibits
 
<TABLE>
<C>                      <S>
           2.1           -- Stock Transfer Agreement dated as of February 23, 1995,
                            between TARC, TEC and TransAmerican (filed as an exhibit
                            to TARC's and TEC's Current Report on Form 8-K dated
                            March 23, 1995, and incorporated herein by reference).
           3.1           -- Articles of Incorporation of TARC (filed as an exhibit to
                            TARC's and TEC's Registration Statement on Form S-1 [No.
                            33-82200], and incorporated herein by reference).
           3.2           -- By-laws of TARC (filed as an exhibit to TARC's and TEC's
                            Registration Statement on Form S-1 [No. 33-82200], and
                            incorporated herein by reference).
</TABLE>
 
                                       52
<PAGE>   55
<TABLE>
<C>                      <S>
           4.1           -- Indenture dated as of February 15, 1995, between TARC,
                            First Fidelity Bank, National Association, as Trustee and
                            TEC, with respect to the Guaranteed First Mortgage
                            Discount Notes and the Guaranteed First Mortgage Notes
                            (together, the "Notes"), including the forms of Notes as
                            exhibits (filed as an exhibit to TARC's and TEC's Current
                            Report on Form 8-K dated February 23, 1995, and
                            incorporated herein by reference).
           4.2           -- Warrant Agreement dated as of February 23, 1995, among
                            the Company, TEC and First Fidelity Bank, National
                            Association, as Warrant Trustee, with respect to the
                            Common Stock Purchase Warrants including the form of
                            Warrant as an exhibit (filed as an exhibit to TARC's and
                            TEC's Current Report on Form 8-K dated February 23, 1995,
                            and incorporated herein by reference).
           4.3           -- Pledge Agreement dated as of February 23, 1995, from TARC
                            to First Fidelity Bank, National Association, as Trustee
                            (filed as an exhibit to TARC's and TEC's Current Report
                            on Form 8-K dated February 23, 1995, and incorporated
                            herein by reference).
           4.4           -- Security Agreement dated as of February 23, 1995, from
                            TARC to First Fidelity Bank, National Association, as
                            Trustee (filed as an exhibit to TARC's and TEC's Current
                            Report on Form 8-K dated February 23, 1995, and
                            incorporated herein by reference).
           4.5           -- Cash Collateral and Disbursement Agreement dated as of
                            February 23, 1995, among TARC, First Fidelity Bank,
                            National Association, as Trustee, First Fidelity Bank,
                            N.A., as Disbursement Agent, and Baker & O'Brien, Inc.,
                            as Construction Supervisor (filed as an exhibit to TARC's
                            and TEC's Current Report on Form 8-K dated February 23,
                            1995, and incorporated herein by reference).
           4.6           -- Mortgage, Assignment of Leases and Rents, Security
                            Agreement and Financing Statement from TARC in favor of
                            First Fidelity Bank, National Association, as Trustee
                            (filed as an exhibit to TARC's and TEC's Current Report
                            on Form 8-K dated February 23, 1995, and incorporated
                            herein by reference).
           4.7           -- Registration Rights Agreement dated as of February 23,
                            1995, between TransTexas, TARC, and TEC (filed as an
                            exhibit to TARC's and TEC's Current Report on Form 8-K
                            dated February 23, 1995, and incorporated herein by
                            reference).
           4.8           -- First Supplemental Indenture dated as of February 24,
                            1997 among TARC, TEC and First Union National Bank, f/k/a
                            First Fidelity Bank, N.A. (filed as an exhibit to TARC's
                            Annual Report on Form 10-K for the year ended January 31,
                            1997, and incorporated herein by reference).
           4.9           -- Indenture dated as of March 14, 1997, between TARC and
                            First Union National Bank, as Trustee, with respect to
                            the $36 million Senior Secured Notes due 1998, including
                            the form of Note as an exhibit (filed as an exhibit to
                            TARC's Annual Report on Form 10-K for the year ended
                            January 31, 1997, and incorporated herein by reference).
           4.10          -- Pledge Agreement dated as of March 14, 1997, from TARC to
                            First Union National Bank, as Trustee (filed as an
                            exhibit to TARC's Annual Report on Form 10-K for the year
                            ended January 31, 1997, and incorporated herein by
                            reference).
           4.11          -- Security Agreement dated as of March 14, 1997, from TARC
                            to First Union National Bank, as Trustee (filed as an
                            exhibit to TARC's Annual Report on Form 10-K for the year
                            ended January 31, 1997, and incorporated herein by
                            reference).
</TABLE>
 
                                       53
<PAGE>   56
<TABLE>
<C>                      <S>
           4.12          -- Cash Collateral and Disbursement Agreement dated as of
                            March 14, 1997, between TARC and First Union National
                            Bank, as Trustee and Disbursement Agent (filed as an
                            exhibit to TARC's Annual Report on Form 10-K for the year
                            ended January 31, 1997, and incorporated herein by
                            reference).
           4.13          -- First Amendment to Cash Collateral and Disbursement
                            Agreement dated as of April 3, 1997, between TARC and
                            First Union National Bank, as Trustee and Disbursement
                            Agent (filed as an exhibit to TARC's Annual Report on
                            Form 10-K for the year ended January 31, 1997, and
                            incorporated herein by reference).
           4.14          -- Second Supplemental Indenture dated June 13, 1997 between
                            TARC, as issuer, TransAmerican Energy Corporation, as
                            guarantor, and First Union National Bank, as trustee
                            (filed as an exhibit to TARC's current report on Form 8-K
                            dated June 13, 1997, and incorporated herein by
                            reference).
           4.15          -- Loan Agreement dated June 13, 1997 between TARC and
                            TransAmerican Energy Corporation (filed as an exhibit to
                            TARC's current report on Form 8-K dated June 13, 1997,
                            and incorporated herein by reference).
           4.16          -- Security and Pledge Agreement dated June 13, 1997 by TARC
                            in favor of TransAmerican Energy Corporation (filed as an
                            exhibit to TARC's current report on Form 8-K dated June
                            13, 1997, and incorporated herein by reference).
           4.17          -- Disbursement Agreement dated June 13, 1997 among TARC,
                            TransAmerican Energy Corporation, Firstar Bank of
                            Minnesota, N.A., as disbursement agent and trustee, and
                            Baker & O'Brien, Inc., as construction supervisor (filed
                            as an exhibit to TARC's current report on Form 8-K dated
                            June 13, 1997, and incorporated herein by reference).
           4.18          -- Form of Mortgage dated June 13, 1997 between TARC and
                            TransAmerican Energy Corporation (filed as an exhibit to
                            TARC's quarterly report on Form 10-Q for the quarter
                            ended July 31, 1997, and incorporated herein by
                            reference).
          *4.19          -- First Amendment dated December 30, 1997 to Loan Agreement
                            between TARC and TEC.
          *4.20          -- First Amendment dated December 30, 1997 to Disbursement
                            Agreement among TARC, TEC, Firstar Bank of Minnesota,
                            N.A. and Baker & O'Brien.
          *4.21          -- Indenture dated December 30, 1997 between TARC and First
                            Union National Bank, as trustee, with respect to the $200
                            million Series A Senior Subordinated Notes, including the
                            form of Note as an exhibit.
          *4.22          -- Warrant Agreement dated December 30, 1997 between TARC
                            and First Union National Bank, as Warrant Agent, with
                            respect to 175,000 common stock purchase warrants (the
                            "December 1997 Warrants"), including the form of warrant
                            as an exhibit.
          *4.23          -- Registration Rights Agreement dated December 30, 1997
                            between TARC and the holders of the Series A Senior
                            Subordinated Notes.
          *4.24          -- Securityholders' and Registration Rights Agreement dated
                            December 30, 1997 between TARC, Jefferies & Company,
                            Inc., as the Purchaser, and the holders of the December
                            1997 Warrants.
          *4.25          -- Third Supplemental Indenture dated January 16, 1998
                            between TARC, TEC and First Union National Bank.
          *4.26          -- Irrevocable Trust and Security Agreement dated January
                            16, 1998 between TARC and First Union National Bank.
          *4.27          -- Indenture dated March 16, 1998 between TARC and First
                            Union National Bank, as trustee, with respect to the $25
                            million Series C Senior Subordinated Notes, including the
                            form of Note as an exhibit.
</TABLE>
 
                                       54
<PAGE>   57
<TABLE>
<C>                      <S>
          *4.28          -- Warrant Agreement dated March 16, 1998 between TARC and
                            First Union National Bank, as Warrant Agent, with respect
                            to 25,000 common stock purchase warrants (the "March 1998
                            Warrants"), including the form of warrant as an exhibit.
          *4.29          -- Registration Rights Agreement dated March 16, 1998
                            between TARC and the holders of the Series C Senior
                            Subordinated Notes.
          *4.30          -- Securityholders' and Registration Rights Agreement dated
                            March 16, 1998 between TARC, Jefferies & Company, Inc.,
                            as the Purchaser, and the holders of the March 1998
                            Warrants.
          *4.31          -- Note Purchase Agreement dated December 10, 1997 between
                            TARC and Merrill Lynch Corporate Bond Fund, Inc. -- High
                            Income Portfolio.
          10.1           -- Services Agreement dated August 24, 1993, by and among
                            TARC, TEC, TransTexas and TransAmerican, as amended
                            (filed as an exhibit to TARC's and TEC's Registration
                            Statement on Form S-1 [No. 33-82200], and incorporated
                            herein by reference).
          10.2           -- Tax Allocation Agreement dated August 24, 1993, by and
                            among TransAmerican, TEC, TARC, TransTexas and the other
                            subsidiaries of TransAmerican, as amended (filed as an
                            exhibit to TARC's and TEC's Registration Statement on
                            Form S-1 [No. 33-82200], and incorporated herein by
                            reference).
          10.3           -- Indemnification Agreement by and between TARC and each of
                            its directors (filed as an exhibit to TARC's and TEC's
                            Registration Statement on Form S-1 [No. 33-82200], and
                            incorporated herein by reference).
          10.4           -- Interruptible Gas Sales Terms and Conditions dated
                            between TARC and TransTexas, as amended (filed as an
                            exhibit to TARC's and TEC's Registration Statement on
                            Form S-1 [No. 33-82200], and incorporated herein by
                            reference).
          10.5           -- Intercompany Note dated as of August 12, 1994, executed
                            by TARC for the benefit of TransAmerican (filed as an
                            exhibit to TARC's and TEC's Registration Statement on
                            Form S-1 [No. 33-82200], and incorporated herein by
                            reference).
          10.6           -- Processing Agreement dated March 20, 1996 by and between
                            TARC and J. Aron & Company (filed as an exhibit to TARC's
                            Form 10-K for the transition period ended January 31,
                            1996, and incorporated herein by reference).
          10.7           -- Employment Agreement dated June 12, 1995, between TARC
                            and R. Glenn McGinnis (filed as an exhibit to TARC's Form
                            10-K for the transition period ended January 31, 1996,
                            and incorporated herein by reference).
          10.8           -- Processing Agreement dated April 22, 1996 between TARC
                            and Glencore Ltd. (filed as an exhibit to TARC's Form
                            10-Q for the quarter ended April 30, 1996, and
                            incorporated herein by reference).
          10.9           -- Services Agreement dated June 13, 1997 by and among TNGC
                            Holdings Corporation, TransAmerican Natural Gas
                            Corporation, TransAmerican Energy Corporation, TransTexas
                            Gas Corporation, TransTexas Drilling Services, Inc. and
                            TARC (filed as an exhibit to TARC's quarterly report on
                            Form 10-Q for the quarter ended July 31, 1997, and
                            incorporated herein by reference).
          10.10          -- Asset Purchase Agreement dated September 19, 1997 between
                            GATX Terminals Corporation and TARC (filed as an exhibit
                            to TARC's quarterly report on Form 10-Q for the quarter
                            ended October 31, 1997, and incorporated herein by
                            reference).
</TABLE>
 
                                       55
<PAGE>   58
<TABLE>
<C>                      <S>
          21.1           -- Schedule of Subsidiaries (filed as an exhibit to TARC's
                            and TEC's Registration Statement on Form S-1 [No.
                            33-82200], and incorporated herein by reference).
         *27.1           -- Financial Data Schedule.
         *27.2           -- Restated Financial Data Schedule.
          99.1           -- Financial Statements of TransTexas dated January 31, 1998
                            (filed as part of TransTexas' Form 10-K for the year
                            ended January 31, 1998, and incorporated herein by
                            reference).
</TABLE>
 
---------------
 
* Filed herewith.
 
(b) REPORTS ON FORM 8-K
 
     TARC did not file any current reports on Form 8-K during the three months
ended January 31, 1998.
 
                                       56
<PAGE>   59
 
                                   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, on April 30, 1998.
 
                                        TRANSAMERICAN REFINING CORPORATION
 
                                        By:       /s/ JOHN R. STANLEY
                                           -------------------------------------
                                             John R. Stanley, Chief Executive
                                                          Officer
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities indicated on April 30, 1998.
 
<TABLE>
<CAPTION>
                        NAME                                                TITLE
                        ----                                                -----
<C>                                                      <S>
 
                 /s/ JOHN R. STANLEY                     Director, Chairman of the Board, President
-----------------------------------------------------      and Chief Executive Officer (Principal
                   John R. Stanley                         Executive Officer)
 
               /s/ DONALD B. HENDERSON                   Director
-----------------------------------------------------
                 Donald B. Henderson
 
                /s/ THOMAS B. MCDADE                     Director
-----------------------------------------------------
                  Thomas B. McDade
 
                /s/ EDWIN B. DONAHUE                     Vice President and Secretary (Principal
-----------------------------------------------------      Financial Officer and Accounting Officer)
                  Edwin B. Donahue
</TABLE>
 
                                       57
<PAGE>   60
 
                               INDEX TO EXHIBITS
 
<TABLE>
<CAPTION>
        EXHIBITS
        --------
<C>                      <S>
 
           2.1           -- Stock Transfer Agreement dated as of February 23, 1995,
                            between TARC, TEC and TransAmerican (filed as an exhibit
                            to TARC's and TEC's Current Report on Form 8-K dated
                            March 23, 1995, and incorporated herein by reference).
           3.1           -- Articles of Incorporation of TARC (filed as an exhibit to
                            TARC's and TEC's Registration Statement on Form S-1 [No.
                            33-82200], and incorporated herein by reference).
           3.2           -- By-laws of TARC (filed as an exhibit to TARC's and TEC's
                            Registration Statement on Form S-1 [No. 33-82200], and
                            incorporated herein by reference).
           4.1           -- Indenture dated as of February 15, 1995, between TARC,
                            First Fidelity Bank, National Association, as Trustee and
                            TEC, with respect to the Guaranteed First Mortgage
                            Discount Notes and the Guaranteed First Mortgage Notes
                            (together, the "Notes"), including the forms of Notes as
                            exhibits (filed as an exhibit to TARC's and TEC's Current
                            Report on Form 8-K dated February 23, 1995, and
                            incorporated herein by reference).
           4.2           -- Warrant Agreement dated as of February 23, 1995, among
                            the Company, TEC and First Fidelity Bank, National
                            Association, as Warrant Trustee, with respect to the
                            Common Stock Purchase Warrants including the form of
                            Warrant as an exhibit (filed as an exhibit to TARC's and
                            TEC's Current Report on Form 8-K dated February 23, 1995,
                            and incorporated herein by reference).
           4.3           -- Pledge Agreement dated as of February 23, 1995, from TARC
                            to First Fidelity Bank, National Association, as Trustee
                            (filed as an exhibit to TARC's and TEC's Current Report
                            on Form 8-K dated February 23, 1995, and incorporated
                            herein by reference).
           4.4           -- Security Agreement dated as of February 23, 1995, from
                            TARC to First Fidelity Bank, National Association, as
                            Trustee (filed as an exhibit to TARC's and TEC's Current
                            Report on Form 8-K dated February 23, 1995, and
                            incorporated herein by reference).
           4.5           -- Cash Collateral and Disbursement Agreement dated as of
                            February 23, 1995, among TARC, First Fidelity Bank,
                            National Association, as Trustee, First Fidelity Bank,
                            N.A., as Disbursement Agent, and Baker & O'Brien, Inc.,
                            as Construction Supervisor (filed as an exhibit to TARC's
                            and TEC's Current Report on Form 8-K dated February 23,
                            1995, and incorporated herein by reference).
           4.6           -- Mortgage, Assignment of Leases and Rents, Security
                            Agreement and Financing Statement from TARC in favor of
                            First Fidelity Bank, National Association, as Trustee
                            (filed as an exhibit to TARC's and TEC's Current Report
                            on Form 8-K dated February 23, 1995, and incorporated
                            herein by reference).
           4.7           -- Registration Rights Agreement dated as of February 23,
                            1995, between TransTexas, TARC, and TEC (filed as an
                            exhibit to TARC's and TEC's Current Report on Form 8-K
                            dated February 23, 1995, and incorporated herein by
                            reference).
           4.8           -- First Supplemental Indenture dated as of February 24,
                            1997 among TARC, TEC and First Union National Bank, f/k/a
                            First Fidelity Bank, N.A. (filed as an exhibit to TARC's
                            Annual Report on Form 10-K for the year ended January 31,
                            1997, and incorporated herein by reference).
</TABLE>
<PAGE>   61
 
<TABLE>
<CAPTION>
        EXHIBITS
        --------
<C>                      <S>
           4.9           -- Indenture dated as of March 14, 1997, between TARC and
                            First Union National Bank, as Trustee, with respect to
                            the $36 million Senior Secured Notes due 1998, including
                            the form of Note as an exhibit (filed as an exhibit to
                            TARC's Annual Report on Form 10-K for the year ended
                            January 31, 1997, and incorporated herein by reference).
           4.10          -- Pledge Agreement dated as of March 14, 1997, from TARC to
                            First Union National Bank, as Trustee (filed as an
                            exhibit to TARC's Annual Report on Form 10-K for the year
                            ended January 31, 1997, and incorporated herein by
                            reference).
           4.11          -- Security Agreement dated as of March 14, 1997, from TARC
                            to First Union National Bank, as Trustee (filed as an
                            exhibit to TARC's Annual Report on Form 10-K for the year
                            ended January 31, 1997, and incorporated herein by
                            reference).
           4.12          -- Cash Collateral and Disbursement Agreement dated as of
                            March 14, 1997, between TARC and First Union National
                            Bank, as Trustee and Disbursement Agent (filed as an
                            exhibit to TARC's Annual Report on Form 10-K for the year
                            ended January 31, 1997, and incorporated herein by
                            reference).
           4.13          -- First Amendment to Cash Collateral and Disbursement
                            Agreement dated as of April 3, 1997, between TARC and
                            First Union National Bank, as Trustee and Disbursement
                            Agent (filed as an exhibit to TARC's Annual Report on
                            Form 10-K for the year ended January 31, 1997, and
                            incorporated herein by reference).
           4.14          -- Second Supplemental Indenture dated June 13, 1997 between
                            TARC, as issuer, TransAmerican Energy Corporation, as
                            guarantor, and First Union National Bank, as trustee
                            (filed as an exhibit to TARC's current report on Form 8-K
                            dated June 13, 1997, and incorporated herein by
                            reference).
           4.15          -- Loan Agreement dated June 13, 1997 between TARC and
                            TransAmerican Energy Corporation (filed as an exhibit to
                            TARC's current report on Form 8-K dated June 13, 1997,
                            and incorporated herein by reference).
           4.16          -- Security and Pledge Agreement dated June 13, 1997 by TARC
                            in favor of TransAmerican Energy Corporation (filed as an
                            exhibit to TARC's current report on Form 8-K dated June
                            13, 1997, and incorporated herein by reference).
           4.17          -- Disbursement Agreement dated June 13, 1997 among TARC,
                            TransAmerican Energy Corporation, Firstar Bank of
                            Minnesota, N.A., as disbursement agent and trustee, and
                            Baker & O'Brien, Inc., as construction supervisor (filed
                            as an exhibit to TARC's current report on Form 8-K dated
                            June 13, 1997, and incorporated herein by reference).
           4.18          -- Form of Mortgage dated June 13, 1997 between TARC and
                            TransAmerican Energy Corporation (filed as an exhibit to
                            TARC's quarterly report on Form 10-Q for the quarter
                            ended July 31, 1997, and incorporated herein by
                            reference).
          *4.19          -- First Amendment dated December 30, 1997 to Loan Agreement
                            between TARC and TEC.
          *4.20          -- First Amendment dated December 30, 1997 to Disbursement
                            Agreement among TARC, TEC, Firstar Bank of Minnesota,
                            N.A. and Baker & O'Brien.
          *4.21          -- Indenture dated December 30, 1997 between TARC and First
                            Union National Bank, as trustee, with respect to the $200
                            million Series A Senior Subordinated Notes, including the
                            form of Note as an exhibit.
</TABLE>
<PAGE>   62
 
<TABLE>
<CAPTION>
        EXHIBITS
        --------
<C>                      <S>
          *4.22          -- Warrant Agreement dated December 30, 1997 between TARC
                            and First Union National Bank, as Warrant Agent, with
                            respect to 175,000 common stock purchase warrants (the
                            "December 1997 Warrants"), including the form of warrant
                            as an exhibit.
          *4.23          -- Registration Rights Agreement dated December 30, 1997
                            between TARC and the holders of the Series A Senior
                            Subordinated Notes.
          *4.24          -- Securityholders' and Registration Rights Agreement dated
                            December 30, 1997 between TARC, Jefferies & Company,
                            Inc., as the Purchaser, and the holders of the December
                            1997 Warrants.
          *4.25          -- Third Supplemental Indenture dated January 16, 1998
                            between TARC, TEC and First Union National Bank.
          *4.26          -- Irrevocable Trust and Security Agreement dated January
                            16, 1998 between TARC and First Union National Bank.
          *4.27          -- Indenture dated March 16, 1998 between TARC and First
                            Union National Bank, as trustee, with respect to the $25
                            million Series C Senior Subordinated Notes, including the
                            form of Note as an exhibit.
          *4.28          -- Warrant Agreement dated March 16, 1998 between TARC and
                            First Union National Bank, as Warrant Agent, with respect
                            to 25,000 common stock purchase warrants (the "March 1998
                            Warrants"), including the form of warrant as an exhibit.
          *4.29          -- Registration Rights Agreement dated March 16, 1998
                            between TARC and the holders of the Series C Senior
                            Subordinated Notes.
          *4.30          -- Securityholders' and Registration Rights Agreement dated
                            March 16, 1998 between TARC, Jefferies & Company, Inc.,
                            as the Purchaser, and the holders of the March 1998
                            Warrants.
          *4.31          -- Note Purchase Agreement dated December 10, 1997 between
                            TARC and Merrill Lynch Corporate Bond Fund, Inc. -- High
                            Income Portfolio.
          10.1           -- Services Agreement dated August 24, 1993, by and among
                            TARC, TEC, TransTexas and TransAmerican, as amended
                            (filed as an exhibit to TARC's and TEC's Registration
                            Statement on Form S-1 [No. 33-82200], and incorporated
                            herein by reference).
          10.2           -- Tax Allocation Agreement dated August 24, 1993, by and
                            among TransAmerican, TEC, TARC, TransTexas and the other
                            subsidiaries of TransAmerican, as amended (filed as an
                            exhibit to TARC's and TEC's Registration Statement on
                            Form S-1 [No. 33-82200], and incorporated herein by
                            reference).
          10.3           -- Indemnification Agreement by and between TARC and each of
                            its directors (filed as an exhibit to TARC's and TEC's
                            Registration Statement on Form S-1 [No. 33-82200], and
                            incorporated herein by reference).
          10.4           -- Interruptible Gas Sales Terms and Conditions dated
                            between TARC and TransTexas, as amended (filed as an
                            exhibit to TARC's and TEC's Registration Statement on
                            Form S-1 [No. 33-82200], and incorporated herein by
                            reference).
          10.5           -- Intercompany Note dated as of August 12, 1994, executed
                            by TARC for the benefit of TransAmerican (filed as an
                            exhibit to TARC's and TEC's Registration Statement on
                            Form S-1 [No. 33-82200], and incorporated herein by
                            reference).
          10.6           -- Processing Agreement dated March 20, 1996 by and between
                            TARC and J. Aron & Company (filed as an exhibit to TARC's
                            Form 10-K for the transition period ended January 31,
                            1996, and incorporated herein by reference).
</TABLE>
<PAGE>   63
 
<TABLE>
<CAPTION>
        EXHIBITS
        --------
<C>                      <S>
          10.7           -- Employment Agreement dated June 12, 1995, between TARC
                            and R. Glenn McGinnis (filed as an exhibit to TARC's Form
                            10-K for the transition period ended January 31, 1996,
                            and incorporated herein by reference).
          10.8           -- Processing Agreement dated April 22, 1996 between TARC
                            and Glencore Ltd. (filed as an exhibit to TARC's Form
                            10-Q for the quarter ended April 30, 1996, and
                            incorporated herein by reference).
          10.9           -- Services Agreement dated June 13, 1997 by and among TNGC
                            Holdings Corporation, TransAmerican Natural Gas
                            Corporation, TransAmerican Energy Corporation, TransTexas
                            Gas Corporation, TransTexas Drilling Services, Inc. and
                            TARC (filed as an exhibit to TARC's quarterly report on
                            Form 10-Q for the quarter ended July 31, 1997, and
                            incorporated herein by reference).
          10.10          -- Asset Purchase Agreement dated September 19, 1997 between
                            GATX Terminals Corporation and TARC (filed as an exhibit
                            to TARC's quarterly report on Form 10-Q for the quarter
                            ended October 31, 1997, and incorporated herein by
                            reference).
          21.1           -- Schedule of Subsidiaries (filed as an exhibit to TARC's
                            and TEC's Registration Statement on Form S-1 [No.
                            33-82200], and incorporated herein by reference).
         *27.1           -- Financial Data Schedule.
         *27.2           -- Restated Financial Data Schedule.
          99.1           -- Financial Statements of TransTexas dated January 31, 1998
                            (filed as part of TransTexas' Form 10-K for the year
                            ended January 31, 1998, and incorporated herein by
                            reference).
</TABLE>
 
---------------
 
* Filed herewith.