FORM 10-Q/A
(AMENDMENT NO. 1)

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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

For the quarterly period ended September 30, 1999

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

For the transition period from ___________________ to ___________________

Commission file number 0-14334

Venus Exploration, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)

Delaware 13-3299127
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

1250 N.E. Loop 410, Suite 1000, San Antonio, Texas 78209
--------------------------------------------------------
(Address of principal executive offices) (Zip code)

(210) 930-4900
----------------------------------------------------
(Registrant's telephone number, including area code)

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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

Class Outstanding at November 12, 1999
----- --------------------------------

Common Stock $.01 par value 11,055,285 shares

VENUS EXPLORATION, INC. AND SUBSIDIARY

THIS FIRST AMENDMENT ON FORM 10-Q/A TO THE REGISTRANT'S FORM 10-Q FOR THE
QUARTER ENDED SEPTEMBER 30, 1999 IS BEING FILED TO RESTATE THE UNAUDITED
FINANCIAL STATEMENTS IN RESPONSE TO COMMENTS RECEIVED FROM THE SEC STAFF IN
CONNECTION WITH VENUS EXPLORATION, INC.'S REGISTRATION STATEMENT ON FORM S-3 AND
THE FIRST AMENDMENT TO THE FORM S-3 FILED ON MARCH 5, 1999, AND SEPTEMBER 8,
1999, RESPECTIVELY, AND PROXY STATEMENT FILED ON SEPTEMBER 8, 1999, AND
AMENDMENTS FILED ON NOVEMBER 19, 1999, AND DECEMBER 6, 1999. THE FINANCIAL
STATEMENTS HAVE BEEN RESTATED TO REFLECT REVISED NON-CASH IMPAIRMENT ESTIMATES
FOR THE YEAR ENDED DECEMBER 31, 1998, AND RELATED REVISED PROVISIONS FOR
DEPRECIATION, DEPLETION AND AMORTIZATION AND GAIN AND LOSS ON SALE OF ASSETS IN
THE CURRENT PERIODS.

INDEX

PAGE
----

PART I. - FINANCIAL INFORMATION

Item 1. - Financial Statements (Unaudited)

(a) Consolidated Balance Sheets as of 3
September 30, 1999 and December 31, 1998

(b) Consolidated Statements of Operations for 4
the three-month periods ended September 30,
1999 and 1998

(d) Consolidated Statements of Cash Flows 6
for the nine-month periods ended
September 30, 1999 and 1998

(e) Notes to Consolidated Financial Statements 7

Item 2. - Management's Discussion and Analysis of Financial 16
Condition and Results of Operations

Item 3. - Quantitative and Qualitative Disclosures About 23
Market Risk

PART II. - OTHER INFORMATION

Item 2. - Changes in Securities and Use of Proceeds 24

Item 5. - Other Information 24

Item 6. - Exhibits and Reports on Form 8-K 24

Signatures 25

2
3

PART I - FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

VENUS EXPLORATION, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

September 30, December 31,
1999 1998
(Unaudited)
-------- --------
(In thousands)

ASSETS
CURRENT ASSETS
Cash and equivalents $ 187 $ 126
Trade accounts receivable and other 822 492
-------- --------
TOTAL CURRENT ASSETS 1,009 618

OIL AND GAS PROPERTIES AND EQUIPMENT,
net (successful efforts method), at cost 5,048 7,139

OTHER PROPERTY AND EQUIPMENT, net 159 238

INVESTMENT IN EXUS Energy, LLC 7,224 --

DEFERRED FINANCING COSTS, at cost less
accumulated amortization 13 19

OTHER ASSETS, at cost less accumulated amortization 99 122
-------- --------
TOTAL ASSETS $ 13,552 $ 8,136
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 1,583 $ 1,269
Other liabilities 519 433
Revolving credit agreement 3,847 5,540
-------- --------
TOTAL CURRENT LIABILITIES 5,949 7,242

LONG-TERM DEBT 8,000 --

OTHER LONG-TERM LIABILITIES 55 23
-------- --------
TOTAL LIABILITIES 14,004 7,265
-------- --------

SHAREHOLDERS' EQUITY (DEFICIT)
Preferred stock, par value of $0.01;
5,000,000 shares authorized; none issued -- --
Common stock, par value of $0.01;
30,000,000 shares authorized;
11,042,823 and 10,971,325 shares
issued and outstanding as of September 30, 1999
and December 31,1998, respectively 110 110
Additional paid-in capital 17,301 17,209
Retained earnings (deficit) (17,704) (16,204)
Unearned compensation - restricted stock (159) (244)
-------- --------

TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (452) 871
-------- --------

$ 13,552 $ 8,136
======== ========

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4
VENUS EXPLORATION, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

Three Months Ended September 30,
--------------------------------
1999 1998
-------- --------
(In thousands,
except per share data)

OIL AND GAS REVENUES $ 644 $ 659
-------- --------
EXPENSES
Production expense 297 311
Exploration expense, including dry holes 97 222
Depreciation, depletion and amortization 153 229
General and administrative 533 814
-------- --------
Total expenses 1,080 1,576
-------- --------
Operating profit (loss) (436) (917)
-------- --------

OTHER INCOME (EXPENSE)
Interest expense (331) (184)
Equity in net earnings from EXUS Energy, LLC 278 --
Gain (loss) on sale of assets (308) (5)
Interest and other income, net 2 8
-------- --------
(359) (181)
-------- --------

Net earnings (loss) $ (795) $ (1,098)
======== ========

Earnings (loss) per share,
Basic and diluted $ ( 0.07) $ (0.11)
======== ========

Common shares and equivalents outstanding,
Basic and diluted 11,026 9,860
======== ========

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

VENUS EXPLORATION, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

Nine Months Ended September 30,
-------------------------------
1999 1998
-------- --------
(In thousands,
except per share data)

OIL AND GAS REVENUES $ 1,463 $ 2,323
-------- --------
EXPENSES
Production expense 710 1,148
Exploration expense, including dry holes 458 1,037
Impairment of oil and gas properties -- 1,915
Depreciation, depletion and amortization 426 851
General and administrative 1,602 2,302
-------- --------
Total expenses 3,196 7,253
-------- --------
Operating profit (loss) (1,733) (4,930)
-------- --------

OTHER INCOME (EXPENSE)
Interest expense (551) (411)
Equity in net earnings from EXUS Energy, LLC 278 --
Gain (loss) on sale of assets 496 5
Interest and other income, net 10 30
-------- --------
233 (376)
-------- --------

Net earnings (loss) $ (1,500) $ (5,306)
======== ========

Earnings (loss) per share
Basic and diluted $ (0.14) $ (0.54)
======== ========

Common shares and equivalents outstanding,
Basic and diluted 10,997 9,827
======== ========

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6
VENUS EXPLORATION, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

Nine Months Ended September 30,
-------------------------------
1999 1998
------- -------
(In thousands)

OPERATING ACTIVITIES
Net earnings (loss) $(1,500) $(5,306)
Adjustments to reconcile net loss to net cash
used in operating activities:
Equity in net earnings from EXUS Energy, LLC (278) --
Depreciation, depletion and amortization 549 1,018
Impairments, abandoned leases and dry hole costs 19 2,440
Gain on sale of property and equipment (496) (5)
Compensation expense for restricted stock,
stock options and stock granted 150 133
Interest expense paid with common stock 27 --
Deferred interest expense on EXCO Note 35 --

Change in operating assets and liabilities:
Decrease (increase) in trade accounts
receivable and other (329) 1,539
Increase (decrease) in trade accounts payable 314 (2,054)
Increase in advances from interest
owners -- 8
Increase (decrease) in other liabilities 85 (141)
------- -------

Net cash (used in) operating activities (1,424) (2,368)
------- -------

INVESTING ACTIVITIES
Capital expenditures (468) (2,876)
Investment in EXUS Energy, LLC (6,946) --
Net proceeds from sales of property and equipment 2,616 51
------- -------

Net cash (used in) investing activities (4,798) (2,825)
------- -------

FINANCING ACTIVITIES
Net proceeds from issuance of long-term debt
and revolving credit agreement 8,200 4,812
Proceeds from options exercised -- 21
Principal payments on long-term debt (1,896) (68)
Deferred financing costs (21) (51)
------- -------

Net cash provided by financing activities 6,283 4,714
------- -------

INCREASE (DECREASE) IN CASH AND EQUIVALENTS 61 (479)

CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 126 682
------- -------

CASH AND EQUIVALENTS AT END OF PERIOD $ 187 $ 203
======= =======

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

VENUS EXPLORATION, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Three Months And Nine Months Ended September 30, 1999 and 1998

1. Organization

Venus Exploration, Inc. (the "Company") is a Delaware Corporation primarily
engaged in the business of exploring for, acquiring, developing and operating
on-shore oil and gas properties in the United States. The Company presently has
oil and gas properties and production in nine states.

2. Basis of Presentation

Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The consolidated financial statements presented
should be read in connection with the audited financial statements included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1998.

In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position of the
Company as of September 30, 1999 and the results of its operations for the three
and nine months ended September 30, 1999 and 1998. The accompanying consolidated
financial statements have been prepared assuming that the Company will continue
as a going concern. As discussed in note 10 to the unaudited consolidated
financial statements, the Company has suffered recurring losses from operations
and has an accumulated deficit that raises substantial doubt about its ability
to continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.

The results of operations for the three and nine month periods ended
September 30, 1999 are not necessarily indicative of the results to be expected
for the full year.

3. Summary of Significant Accounting Policies

For a description of the accounting policies followed by the Company, refer
to the notes to the 1998 consolidated financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998. The
Company had previously reported that it expected to account for its investment
in EXUS Energy, LLC (EXUS) under the proportional consolidation method of
accounting. Under proportional consolidation the Company would have reported its
50% share of EXUS' assets, liabilities, revenues, and expenses. The Company is
now actually reporting its investment in EXUS under the equity method of
accounting. Under the equity method the Company reports its net investment in
EXUS on the Consolidated Balance Sheet, (the Company's share of EXUS assets are
netted with the Company's share of EXUS liabilities), and its share of the net
earnings of EXUS is reported in Other Income (Expense) in the Statement of
Operations.

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8

4. Investment in EXUS Energy, LLC

On June 30, 1999, EXUS Energy, LLC, a Delaware limited liability company
("EXUS"), owned 50% by the Company and 50% by EXCO Resources, Inc.("EXCO")
completed the acquisition from Apache Corporation of oil and natural gas
properties located in Jackson Parish, Louisiana (the "Jackson Parish
Properties"). EXCO is a publicly-held oil and gas company based in Dallas,
Texas. The Jackson Parish Properties include 17 gross (14.25 net) producing
wells. EXCO is the named operator of the Jackson Parish Properties and assumed
operations of all 17 wells acquired in the transaction. The Jackson Parish
Properties include 6,411 gross (5,672 net) developed acres and 1,532 gross
(1,148 net) undeveloped acres. As of April 1, 1999, the Jackson Parish
Properties were estimated to contain proved reserves of 2,815 barrels of oil
("Bbls") and 66.5 billion cubic feet ("Bcf") of gas. The purchase price, before
closing adjustments, was $28.5 million, and after adjustments (the adjustments
principally reflect production since March 1, 1999, the effective date of the
acquisition), was $27.6 million cash. The purchase price was funded with $14
million drawn under a new credit facility established by EXUS and $14 million of
EXUS equity capital. Of the initial $14 million of EXUS equity capital, $7
million was provided by EXCO from its cash on hand, and $7 million was provided
by Venus from borrowed funds. On June 30, 1999, Venus borrowed $7 million from
EXCO under the terms of an $8 million Convertible Promissory Note (see note 6).

The following table reflects the pro forma results of operations as though
the Company's investment in EXUS and the related borrowings (see note 6) had
occurred on January 1, 1998.

PRO FORMA
NINE MONTHS ENDED
September 30,
-------------------------
1999 1998
---- ----
(In thousands, except
per share data)
(Unaudited)

Net loss $ (1,654) $ (5,206)
Basic and diluted loss per share $ (0.15) $ (0.53)

5. Earnings (loss) Per Share

Basic net loss per common share is computed by dividing net loss by the
weighted average number of common shares outstanding. Diluted loss per share is
computed by assuming the issuance of common shares for all dilutive potential
common shares outstanding.

Loss per share for the three month periods ended September 30, 1999 and 1998
are calculated based on 11,026,048 and 9,859,815 weighted average shares
outstanding, respectively, and the nine month periods ended September 30, 1999
and 1998 are calculated based on 10,996,641 and 9,826,790 shares outstanding,
respectively.

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9

6. Long-Term Debt

Long-term debt consists of the following:

September 30, December 31,
1999 1998
------- -------
(In thousands)

Wells Fargo Bank-Revolving Credit
Due June 30, 2000 $ 3,847 $ 5,540
Exco Resources, Inc. Convertible Note
Due on July 1, 2004 7,000 --
7% Convertible Subordinated Notes
Due March through June 2004 1,000 --
------- -------
11,847 5,540
Less: Current maturities of long-term debt 3,847 5,540
------- -------
Long-term debt excluding current installments $ 8,000 $ --
======= =======

Wells Fargo Bank Revolving Credit

In 1997, the Company entered into a loan agreement establishing a
$20,000,000 revolving line of credit. In December 1997 this agreement was
restated and amended to increase the credit facility to $50,000,000 subject to a
borrowing base determined every six months (April 1 and October 1) by the bank
based on the Company's oil and gas reserves which are pledged as collateral for
the loan. On August 19, 1998, the credit facility was amended resulting in the
applicable interest rate becoming the bank's prime lending rate plus one
percent. For balances outstanding at September 30, 1999, the interest rate was
9.25 percent.

A commitment fee of 3/8 of one percent of the undrawn balance is payable
quarterly. Interest is payable monthly, and principal payments are required only
when the balance outstanding exceeds or is projected to exceed, prior to the
next borrowing base redetermination date, the borrowing base. As of September
30, 1999, the borrowing base was $3,870,000 and the amount drawn by the Company
was $3,847,000 resulting in an unused borrowing base of $23,000.

Among other matters, the credit facility contains covenants which limit the
Company's ability to incur additional indebtedness and restrict payments of
dividends. Under the terms of the credit facility, the Company is required to
maintain a current ratio of 1:1 and tangible net worth (as defined) of at least
$5,250,000.

At September 30, 1999, the Company was not in compliance with these
covenants. The Company has obtained waivers of these events of non-compliance
from the lender through December 31, 1999; however, because of uncertainty
regarding the Company's ability to be in compliance with the covenants after
December 31, 1999, or to obtain additional waivers, the outstanding balance has
been classified as a current liability in the accompanying consolidated balance
sheet. If the lender elects, subsequent to the period waived, to declare all
amounts borrowed under the credit agreement to be due and payable, the Company's
assets could be adversely affected.

Under the current waiver the Company must apply any excess cash received in
the sale of its interest in EXUS (see note 11, Subsequent Events, Sale of
Investment in EXUS) to pay down the outstanding balance of the credit facility.
Excess cash would be any cash received in excess of paying all obligations
related to the Company's investment in EXUS including the EXCO Note (see below),
and repayment of the $750,000 Subordinated Debenture.

9
10

7% Convertible Subordinated Promissory Notes

In the second quarter of 1999 the Company completed the private placement to
six investors(including one director of the Company and one person who was later
appointed a director of the Company) of six unsecured convertible subordinated
promissory notes (the "Subordinated Notes") totaling $1,000,000. The net
proceeds to the Company were $975,000 after legal fees associated with the
transaction. The Company used the proceeds to fund working capital. The
Company's obligations to the noteholders are unsecured and subordinated to the
rights of the Company's bank and other lenders unless those lenders agree
otherwise. Interest payments under the Subordinated Notes may be paid, at the
Company's election, with its common stock. The convertibility feature may be
invoked by the noteholders at any time and by the Company under circumstances
described below.

The Subordinated Notes bear interest at a rate of 7% per annum, or 10% in
the event of default. If interest is paid in common stock, the number of shares
to be issued is determined by dividing the interest payment due by the market
price of one share of the Company's common stock on the last trading day
preceding the interest payment date. Interest is payable quarterly beginning on
June 30, 1999. The interest due on September 30, 1999 was paid with 13,440
shares of the Company's common stock.

The Subordinated Notes mature in 2004, at which time all of the unpaid
principal is due and payable. The noteholders can convert the debt to the
Company's common stock at any time, at a conversion rate of $1.15 per share, the
market value of the common stock on the date the terms were agreed to. The
conversion price will be adjusted proportionately in cases where the number of
the outstanding shares of common stock is changed on a pro rata basis; e.g.,
stock dividends and stock splits. In addition, the conversion price will be
reduced if the Company issues common stock, or securities convertible into
common stock, at a price lower that the $1.15 conversion price, as adjusted. In
such a case the conversion price will be reduced to the conversion price of the
convertible security or the price of the common stock sold.

If the Company issues other subordinated notes or other similar securities
with superior terms to the new noteholders, the holders of the Subordinated
Notes also have the right to receive replacement notes that include those
superior terms, at least with regard to a higher stated interest rate, a higher
premium upon early redemption by the Company, a lower per-share conversion
price, or a longer period before the Company can cause a mandatory redemption.

The Company has a conditional option of converting the outstanding balance
of each Subordinated Note to shares of its common stock. That option does not
mature until thirty-six months after the original issuance of the Subordinated
Notes, and the condition to the Company's option to convert is that the closing
market price for the shares of the Company's common stock must have exceeded
$3.60 per share for at least 25 out of the preceding 30 trading days. The
conversion is based on the same $1.15 price per share.

The Subordinated Notes allow the Company to redeem them for cash and the
payment of a redemption premium. That right begins on the second anniversary of
the original issuance. The redemption premium begins at 18% and decreases 1% per
month after that, and there is a credit against the premium for all accrued
interest on the Subordinated Notes to the date of the redemption. The Company
also has a preferential right to buy the notes if the holders decide to sell
them.

10
11
If an event of default occurs, the noteholders may demand immediate
repayment of the principal amount and any accrued but unpaid interest. They will
also have all other rights generally allowed by contract and applicable law.
Events of default include, among other conditions, a default under other
indebtedness or securities.

The Subordinated Notes were issued in a private placement exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933. Common
stock issued on conversion or in lieu of cash interest payments under the
Subordinated Notes has been and will be issued in the same manner. As a result,
the transfers of such securities are restricted.

Concurrently with the execution of the Subordinated Notes, the Company
entered into a registration rights agreement with each noteholder that gives
that noteholder the option to register for resale under the Securities Act of
1933 any of their shares of the Company's common stock on a registration
statement otherwise being filed by the Company for sales on its own behalf. The
Company also agreed not to grant any new registration rights to third parties if
those rights would adversely impact the rights of the holders.

EXCO Resources, Inc. Convertible Note

On June 30, 1999, the Company borrowed $7 million from EXCO under the terms
of an $8 million convertible promissory note (the "EXCO Note") in conjunction
with the Company's investment in EXUS (see note 4). The EXCO Note provides for
borrowings up to $8 million subject to restrictions on the use of proceeds. The
Company drew $7 million under the EXCO Note to fund its capital contribution to
EXUS. The EXCO Note provides for additional draws beginning after January 1,
2000 not to exceed $1 million which may be used solely to fund additional
capital contributions to EXUS and/or to fund the expenses of one equity
issuance. The Company is not permitted to draw any of the $1 million until it
has obtained stockholder approval for the issuance of the EXCO Note. All
borrowings under the EXCO Note are secured by a first priority lien providing a
security interest in the membership interest of the Company in EXUS along with
distribution and income rights. The EXCO Note provides that advances will bear
interest, which can be paid in cash or, at the Company's election, the Company's
common stock, at a rate of 10% from June 30, 1999 through June 30, 2000, with
interest increasing 1% per year through June 30, 2004. Advances will bear
interest at a rate of 15% after an event of default. If interest is paid in the
Company's common stock, the number of shares to be issued shall be determined by
dividing the interest payment due by the average market price of one share of
the Company's common stock for the twenty trading days immediately preceding the
interest payment date. Interest is payable semi-annually commencing on January
1, 2000. The EXCO Note matures on July 1, 2004 at which time all of the unpaid
principal is due and payable.

Beginning on July 1, 2000 and continuing until the payment in full of the
EXCO Note, EXCO, at its option, may convert all or any portion of the
outstanding principal balance and accrued interest into shares of the Company's
common stock for $1.50 per share, subject to adjustment in certain events. On or
before November 1, 1999, the Company was required to provide each stockholder
entitled to vote at the next annual meeting a proxy statement. On or before
December 15, 1999, the Company is required to obtain approval of its
stockholders (as required by the rules of the NASDAQ SmallCap Market) of the
issuance of the Company's common stock which may be issued upon the conversion
of principal or accrued interest under the terms of the EXCO Note. In the event
the Company is unable to obtain such stockholder approval by December 31, 1999,
the Company would be required to prepay $3 million of the EXCO Note plus accrued
interest thereon. (The Company is

11
12

currently authorized to issue shares of its common stock upon conversion of up
to $4 million of the principal of the EXCO Note without such stockholder
approval; accordingly the $3 million mandatory prepayment equates to the
principal amount EXCO would not be able to convert to the Company's common stock
if stockholder approval was not obtained.) Alternatively, the Company may elect
to transfer membership interests in EXUS held by the Company equal to 21.43% of
the aggregate outstanding interests of EXUS (this approximates 3/7 of the
Company's equity interest in EXUS) in exchange for a cancellation of $3 million
of principal owed under the EXCO Note. The Company was unable to meet the
November 1, 1999 deadline for providing stockholders with a proxy statement
because, as discussed in note 9, the Company's proxy statement is currently
being reviewed by the Securities and Exchange Commission. However, the Company
still expects to obtain stockholder approval by December 31, 1999.

The EXCO Note also requires a mandatory prepayment of principal equal to 50%
of the net proceeds of each equity issuance by the Company on or after June 30,
1999 (excluding the first $5 million of aggregate net proceeds of all equity
issuances after June 30, 1999). The Company may also voluntarily prepay any or
all of the EXCO Note (subject to a prepayment penalty of 3.57% of the principal
prepaid for any prepayment occurring on or prior to July 1, 2000).

The EXCO Note contains other customary terms including certain
representations, affirmative covenants (such as conduct of the Company business,
reports to EXCO, compliance with laws), negative covenants (including no
purchase or redemption of the Company's common stock and no sale, transfer,
mortgage or pledge of the collateral securing the EXCO Note), and events of
default (including failure to pay principal or interest as required, violation
of covenants in the EXCO Note, bankruptcy, change of control of the Company or
default under the Company's secured credit facility). An event of default would
also occur if the Company is unable to obtain stockholder approval, and if the
Company is in default under its revolving credit agreement. As discussed above
under Wells Fargo Bank Revolving Credit, the Company is not in compliance with
two financial covenants under the revolving credit agreement but has received a
waiver to December 31, 1999. If the Company fails to be in compliance by
December 31, 1999, or fails to obtain an extension of the waiver, it would
constitute an event of default under the EXCO note.

The shares which may be issued under the terms of the EXCO Note are subject
to a Registration Rights Agreement dated June 30, 1999. The Registration Rights
Agreement requires the Company to register with the Securities and Exchange
Commission 10,133,333 shares of the Company's common stock that may be issuable
to EXCO under the EXCO Note for resale by EXCO from time to time. The 10,133,333
shares represent (i) 5,333,333 shares that would be issued if EXCO were to
convert $8 million of principal under the EXCO Note at $1.50 per share and (ii)
4,800,000 shares assuming the Company were to elect to pay all interest accruing
on $8 million principal of the EXCO Note at an assumed market price of $1.00 per
share. The Registration Rights Agreement provides that a registration statement
must be filed with the SEC by September 28, 1999 and effective on or prior to
the 120th day following the first issuance of any shares under the EXCO Note
(which 120 day period may be extended to 210 days if the Company has timely
complied with its covenants under the Registration Rights Agreement, but the
registration statement is still under review by the Securities and Exchange
Commission). The Registration Rights Agreement contains other customary terms
and provisions including indemnification for certain liabilities under
applicable securities laws. A breach of the agreement would constitute an event
of default under the EXCO Note.

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13
The EXCO Note was issued in a private placement exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933. Common stock issued on
conversion or in lieu of cash interest payments under the Subordinated Notes has
been and will be issued in the same manner. As a result, the transfers of such
securities are restricted.

7. Shareholders' Equity

Effective March 1, 1998 the Company awarded, under its existing incentive
plan, qualified stock options and restricted stock grants that vest over a
three-year period. The qualified stock options were issued to all employees. The
restricted stock grants (100,000 shares) were issued at no charge to two key
employees who are not officers of the Company. The two key employees are
geoscientists who are central to the Company's business of using advanced
geoscience technology to explore for oil and gas reserves. The Company believes
that these grants, issued during the first year it became publicly traded, is an
incentive that aligns the key employees' interest with that of the Company's
shareholders. The Company is recognizing compensation expense of $9,375 per
month for the value of the restricted stock grants over the vesting period.

Effective March 1, 1999, the Compensation Committee of the Board of
Directors of the Company approved the issuance of stock options to all employees
and certain consultants to offset the impact of mandatory temporary salary
reductions which took effect on that date. The Company has granted 250,000 stock
options at fair market value exercise price to offset the salary reductions
through August 1, 1999. The stock options vest ratably over the period March 15,
1999 through August 1, 1999. Employees and consultants have vested in 248,262
options through August 1, 1999. The terms of these stock options are the same as
the terms of the stock options granted on March 1, 1998, except for the exercise
price, which is equal to the fair value of the Company's stock on date of grant.
During the nine month period ended September 30, 1999, the Company expensed
$13,000 related to stock options granted consultants.

With certain exceptions, the exercise price for the options is $1.1191, and
the term of the options is ten years. The exceptions apply to 91,888 options
granted to E. L. Ames, Jr., John Y. Ames, and Eugene L. Ames III, and the
exercise price for their options is $1.231, and their term is five years.

During the fourth quarter of 1998, management expects to recommend to the
Compensation Committee of the Board of Directors that approximately 100,000
stock options be granted to fund employee salary reductions for the period
August 1, 1999 through September 30, 1999. In addition, management will
recommend granting, subject to shareholder approval, approximately 150,000 stock
options to fund employee salary reductions for the period October 1, 1999,
through December 31, 1999. Management's recommendation will be that (i) the
stock options would be granted at an exercise price equal to the market price of
the stock as of the date of grant, and (ii) the terms of the stock options will
be similar to the options granted on March 1, 1999.

8. Accounting for Income Taxes

No provision for income taxes has been recorded for the periods ended
September 30, 1999 and 1998 due to the losses recorded by the Company.

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9. Commitments and Contingencies

The Company is not involved in any claims or legal proceedings.

10. Liquidity

The Company has incurred significant losses over the past three years. In
addition, the Company has incurred significant indebtedness, and at September
30, 1999, was not in compliance with the tangible net worth and current ratio
requirements of the revolving credit agreement (see "Wells Fargo Bank Revolving
Credit" under note 6). Those requirements have been waived by the lender through
December 31, 1999. If those events of non-compliance are not cured, the lender
could elect, subsequent to the period waived, to declare all amounts borrowed
under the credit agreement, together with accrued interest, to be due and
payable. The lender could then proceed to foreclose against any collateral
securing the payment of the debt. This collateral represents a significant
portion, if not all, of the Company's assets (excluding the Company's equity
interest in EXUS, which interest secures the EXCO note; EXUS' assets secures its
credit facility). Given the Company's diminished cash resources, lack of
borrowing capacity under its credit agreement, losses incurred over the past
three years, and non-compliance with the financial covenants of the revolving
credit agreement, there is doubt about the Company's ability to continue as a
going concern. The Company's independent auditors' report dated April 7, 1999,
on the Company's year-end financial statements for 1998 indicated that there was
substantial doubt about the Company's ability to continue as a going concern;
however, the accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The financial statements do not
include adjustments that might result from the outcome of this uncertainty.

The Company's assets, whether owned directly or indirectly, are
predominately real property rights and intellectual information that the Company
has developed regarding those properties and other geographical areas that the
Company is studying for oil and gas exploration and development. The market for
those types of properties fluctuates and can be very small. Therefore, the
Company's assets can be very illiquid and not easily converted to cash. Even if
a sale can be arranged, the price may be significantly less than what the
Company believes the properties are worth. That lack of liquidity can have
materially adverse effects on strategic plans, normal operations and credit
facilities. In addition, issuance of indebtedness or preferred stock could be
costly and dilutive to stockholders.

For the medium and longer terms, the Company is working on a number of
alternatives that it believes will address its credit agreement requirements and
future liquidity and financing needs if it successfully completes various
combinations of those alternatives. The alternatives include merger, sales of
assets, farmouts or other partnering arrangements on selected properties, and
issuance of indebtedness or equity capital. There can be no assurance that the
Company will be successful in its efforts.

The Company has made some progress in pursuing these alternatives. During
the first quarter of 1999 the Company sold non-core properties for $2,597,000 in
cash, which allowed the Company to repay debt of $1,670,000. As discussed in
note 4, on June 30, 1999 the Company acquired a 50% interest in

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EXUS, which acquired an interest in the Jackson Parish Properties. As discussed
in Note 11, on November 2, 1999, the Company signed a non-binding letter of
intent to sell its investment in EXUS. If the sale is completed in December
1999, the Company expects to record a gain in the fourth quarter of 1999. As
discussed in note 6, during the quarter ended June 30, 1999, the Company issued
Subordinated Notes in the principal amount of $1,000,000 for net proceeds of
$975,000, and it issued the EXCO Note. As discussed in note 11, in October 1999
the Company issued a $750,000 Subordinated Debenture. Finally, increases in oil
and gas prices, and the continuation of cost reduction measures, which are
discussed in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, are expected to improve the Company's cash flow.

11. Subsequent Events

Subordinated Debenture

During October 1999, the chief executive officer of the Company advanced the
Company $750,000 in the exchange for a Subordinated Debenture (the "Debenture")
issued by the Company. The net proceeds to the Company were approximately
$730,000 after legal and other costs associated with the transaction. The
Company used the proceeds to fund working capital. The Company's obligations to
the debenture holder is unsecured and subordinated to the rights of the
Company's bank and other lenders (except for the subordinated note holders who
have equal priority) unless those lenders agree otherwise. Interest is payable
monthly, in cash, at a rate equal to Frost National Bank prime rate plus 1%. On
November 12, 1999, the interest rate was 9.25%.

If an event of default occurs, the Debenture holder may demand immediate
repayment of the principal amount and any accrued but unpaid interest. The
Debenture holder will also have all other rights generally allowed by contract
and applicable law. Events of default include, among other conditions, a default
under other indebtedness or securities.

The Debenture matures in 2004, at which time all the unpaid principal is due
and payable. The Company is obligated to redeem the Debenture if it raises
enough cash to do so by either selling its investment in EXUS or selling equity
securities. The cash raised by selling EXUS is after repayment of all debt and
obligations incurred in connection with the acquisition of the interest.

The Subordinated Debenture was issued in a private placement exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933. As a
result, the transfers of such securities are restricted.

Potential Sale of Investment in EXUS

On November 2, 1999, the Company signed a non-binding letter of intent to
sell its investment in EXUS. If the sale is completed in December 1999, the
Company expects to record a gain in the fourth quarter of 1999. On April 27,
1999 the Company was notified that it was not in compliance with NASDAQ SmallCap
Market listing requirements because the Company's tangible net assets are below
the minimum required for a NASDAQ SmallCap listing. On November 12, 1999, the
NASDAQ Hearing Review Panel granted the Company a conditional extension until
December 31, 1999, to achieve compliance with the tangible net worth
requirement. The panel granted the extension because Venus' anticipated gain
from selling its interest in EXUS, if realized, is

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expected to put the Company in compliance with the Nasdaq SmallCap tangible net
worth requirement.

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the unaudited
consolidated financial statements and the related notes thereto included
elsewhere and with Management's Discussion and Analysis of Financial Condition
and Results of Operations included in the Company's Annual Report on Form 10-K
for the year ended December 31, 1998. Certain statements contained herein are
"Forward Looking Statements" and are thus prospective. As discussed in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998, such
forward-looking statements are subject to risks, uncertainties and other factors
that could cause actual results to differ materially from future results
expressed or implied by such forward-looking statements.

The financial statements as of and for the three and nine months ended
September 30, 1999, have been restated to give effect to revised impairment
provisions as of December 31, 1998, and the related revised provisions for
depreciation, depletion and amortization and gain and loss on sale of assets in
the current periods.

Overview

The Company explores for oil and gas reserves in horizons that have no
history of production, and uses advanced geoscience technology to do so. The
Company participates in such high-risk projects because they provide
opportunities for the discovery of new and substantial oil and gas reserves and
rapid growth in asset values. Because of the inherent uncertainty and high
financial risk associated with the outcome of individual drilling prospects, the
Company attempts to maintain an inventory of many exploratory prospect leads
from which drilling prospects are confirmed and generated. The Company obtains
financing for a large portion of the exploration costs through sale to oil and
gas industry co-venturers of working interest in prospects originated by the
Company.

Because of the decline in oil prices in 1998 and the reduction of capital
available for exploration budgets, both for the oil and gas industry in general
and for the Company specifically, the Company has reduced exploration activity
and will work only selected prospects believed to have extraordinary merit
(lower degree of geological and engineering risk relative to the net expected
value) during this period of low availability of exploration capital.

In addition to exploring for new oil and gas reserves in previously
undiscovered fields, the Company also uses advanced geoscience technology to
exploit and to develop oil and gas reserves in currently producing fields. The
fields being exploited or developed consist of fields discovered by the Company
or fields discovered by others but that the Company believes are not fully
developed. The Company conducts active exploitation and development activities
in 10 different fields in Texas and Oklahoma. The Company's working interest in
those fields varies in size from 2.5% to 100%, and the Company operates the
wells in 9 of the 10 active fields. During this period of reduced availability
of capital, the Company will concentrate its drilling budget on drilling field
exploitation wells.

The Company continues to seek strategic producing property acquisitions that
offer near-term production and longer-term development and exploration
opportunities that can be investigated through the application of advanced
technology by the Company's exploration team. The Company seeks to accomplish

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strategic acquisitions of producing assets with development and exploratory
potential through strategic alliances with other oil and gas companies. An
example of such an alliance is the Company's origination and participation in
the recent acquisition by EXUS of the properties in Jackson Parish, Louisiana
"Jackson Parish Properties". The Company may also sell non-strategic properties
as a part of its effort to concentrate on its focus areas.

Liquidity and Capital Resources

(a) Liquidity

At September 30, 1999, the Company had a working capital deficit of $4.9
million compared with a deficit of $6.6 million at December 31, 1998, an
increase in working capital of $1.7 million. This increase in working capital is
due to an increase in long-term debt of $8.0 million plus $2.6 million in net
proceeds from the sale of oil and gas properties offset by capital expenditures
of $7.7 million and the operating deficit (before changes in operating assets
and liabilities) of $1.2 million.

Net cash used in operating activities during the nine months ended September
30, 1999, was $1,424,000, whereas $2,368,000 was used in operating activities
for the same nine-month period in 1998. Of the $944,000 decrease in net cash
used in operating activities, $718,000 is due to routine net changes in
operating assets and liabilities. The remaining $494,000 is due to a $422,000
reduction in revenue net of production expense, and a net increase in other
income and expense of $217,000 which were offset by reductions in general and
administrative expense of $699,000 (see "Results of Operations" below). During
the first nine months of 1999, the Company realized a net loss of $1,500,000.
This compares with a net loss of $5,306,000 for the first nine months of 1998.
These losses include non-cash expenses (impairments, depreciation, depletion and
amortization, compensation expense for restricted stock and stock options,
interest expense for common stock and deferred interest expense) totaling
$780,000 in 1999 and $3,591,000 in 1998. The 1999 loss is net of equity of net
earnings from EXUS, and a gain from the sale of long term assets of $496,000 in
1999 and $5,000 in 1998.

During the first nine months of 1999 the Company incurred capital
expenditures on oil and gas properties of $468,000, an investment in EXUS
Energy, LLC of $6,946,000 and received proceeds from the sale of property and
equipment of $2,616,000. During the same period in 1998, the Company had capital
expenditures of $2,876,000 and received proceeds of $51,000 from the sale of
property and equipment.

For the nine months ended September 30, 1999, $6,283,000 was provided by
financing activities consisting of $8,200,000 from issuance of long-term debt
less $1,917,000 of repayments and deferred financing costs. This compares with
$4,714,000 provided by financing activities for the nine-month period ended
September 30, 1998 from the issuance of $4,812,000 in long-term debt offset by
repayments and deferred financing costs of $119,000. Of the $8,200,000 issuance
of long-term debt, $7,000,000 is attributable to the Company's investment in
EXUS Energy, LLC.

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agreement, together with accrued interest, to be due and payable. The lender
could then proceed to foreclose against any collateral securing the payment of
the debt. This collateral represents a significant portion, if not all, of the
Company's assets (excluding the Company's equity interest in EXUS, which
interest secures the EXCO Note; EXUS' assets secure EXUS' credit facility).
Given the Company's diminished cash resources, lack of borrowing capacity under
its credit agreement, losses incurred over the past three years, and
non-compliance with the financial covenants of the credit agreement, there is
doubt about the Company's ability to continue as a going concern. The Company's
independent auditors' report dated April 7, 1999, on the Company's year-end
financial statements for 1998 indicates that there was substantial doubt about
the Company's ability to continue as a going concern; however, the accompanying
financial statements have been prepared assuming the Company will continue as a
going concern. The financial statements do not include adjustments that might
result from the outcome of this uncertainty.

The Company has made some progress in pursuing these alternatives. During
the first quarter of 1999 the Company sold non-core properties for $2,586,000 in
cash, which allowed the Company to repay debt of $1,670,000. As discussed in the
overview of this Item 2, on June 30, 1999 the Company acquired an equity
interest in EXUS. On November 2, 1999, the Company signed a non-binding letter
of intent to sell its investment in EXUS. If the sale is completed in December
1999, the Company expects to record a gain in the fourth quarter 1999. If the
sale is completed, the Company expects the EXCO Note would be repaid in full,
and to the extent excess funds are available, they will be used to repay first,
the Subordinated Debenture and secondly, the Wells Fargo Bank credit facility.
To the extent the outstanding balance under the credit facility is reduced,
unused borrowing base could become available to fund the company's budget.

During the three month period ended September 30, 1999, the Company received
a $200,000 distribution from EXUS. Under the terms of the EXUS agreement with
its lender, EXUS may distribute an additional $100,000 ($50,000 net to Venus'
50% interest) by December 31, 1999 and during calendar year 2000, another
$1,050,000 ($525,000 net to Venus' 50% interest) provided funds are available.

On April 27, 1999 the Company was notified that it was not in compliance
with NASDAQ SmallCap Market listing requirements because the Company's tangible
net assets are below the minimum required for a NASDAQ SmallCap

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listing. On November 12, 1999, the NASDAQ Hearing Review Panel granted the
Company an extension until December 31, 1999, to achieve compliance with the
tangible net worth requirement. The panel granted the extension because Venus'
anticipated gain from selling its interest in EXUS, if completed, is expected to
put it in compliance with the Nasdaq SmallCap tangible net worth requirement.
During the quarter ended June 30, 1999, the Company issued 7% convertible
subordinated notes in the principal amount of $1,000,000 for net proceeds of
$975,000. Finally, increases in oil and gas prices and cost reduction measures
(see "Results of Operations" below), which are discussed in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998, have improved the
Company's cash flow.

(b) Capital Resources

The Company's capital expenditure budget is continually reviewed and revised
as necessary, based on perceived opportunities and business conditions. Capital
expenditures for the nine month period ended June 30, 2000, are budgeted at
approximately $1.5 million. Funding is not currently available for budgeted
expenditures, and as a result, the Company may elect to reduce its interest
through sales, farmouts or other transactions in certain wells or seismic
projects or to include those wells or projects in a joint venture with industry
participants, in which event the Company's capital investment and upside
potential would be lower.

The Company's credit facility, among other matters, contains covenants which
limit the Company's ability to incur additional indebtedness and restrict
payments of dividends. Under the terms of the credit facility, the Company is
required to maintain specified levels of current ratio and tangible net worth,
and as mentioned above, as of September 30, 1999, the Company was not in
compliance with these two covenants. The Company has obtained a waiver through
September 30, 1999. The Company's ability to obtain future waivers will depend
on progress on its plans to raise additional capital through a placement of
convertible debt or issuance of equity securities or a sale of properties.
During the quarter ended June 30, 1999, the Company issued 7% Convertible
Subordinated Promissory Notes in the principal amount of $1,000,000 for net
proceeds of $975,000. The notes bear interest at 7 percent per annum and are
convertible into the Company's common stock at a rate of $1.15 per share (870
shares of common stock for each $1,000 principal amount). For a more detailed
description of the Promissory Notes see note 6 to the accompanying financial
statements.

The EXCO Note and the EXUS credit facility, both discussed in note 6 to Item
1, also provide direct and indirect capital resources.

Revenues and expenses were lower during 1999 due to the sale of properties,
lower oil and gas production, various cost cutting measures offset by increasing
oil and gas prices. The variances are addressed in the following paragraphs by
significant operating caption.

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As reflected in the following table, oil and gas volumes decreased while
average prices increased in 1999, compared with 1998. The divestiture of
properties and decline in production from existing wells significantly impacted
the 1999 periods.

1999 1998
---- ----
Sales Average Sales Average
Volume Prices Volume Prices
------ ------ ------ ------

Nine Months Ended September 30,
Gas (Mcf) 236,902 $ 2.05 426,246 $ 2.20
Oil (Bbls) 63,410 $15.32 98,169 $13.77

Three Months Ended September 30,
Gas (Mcf) 77,908 $ 2.56 140,693 $ 2.12
Oil (Bbls) 22,981 $19.25 30,764 $11.51

In addition to the above, Venus's share of production attributable to its
equity interest in EXUS totaled 279,217 mcf at an average price of $2.43 per mcf
for the three month and nine month periods ended September 30, 1999.

For 1998 average oil and gas prices reflect the effect of price hedging. The
Company only hedged oil and gas volumes as required under a term loan agreement,
which is no longer in effect. Volumes for the nine month period ended September
30, 1999 include 21,400 Mcf and 210 Barrels attributable to the properties sold
during the same period.

Three Months Ended September 30, 1999 and 1998

The Company reported a net loss of $795,000 for the quarter ended September
30, 1999, compared to a net loss of $1,098,000 in the same quarter in 1998. The
1999 loss reflects a $303,000 non-cash loss on the sales of oil and gas
properties. The decrease in the loss is due to decreases in production expense
($14,000), exploration expense ($125,000), depreciation, depletion, and
amortization (DDA) ($76,000), general and administrative expenses ($281,000),
reduced by an increase of interest expense ($147,000). Also contributing to the
decrease in the loss is income from EXUS Energy ($278,000) reduced by decreases
in oil and gas revenues ($15,000).

For the third quarter of 1999, oil and gas revenues decreased by $15,000.
The decrease is due to the sale of properties that resulted in a decrease in
revenue of $143,000, and a decline in production rates in the remaining
properties resulted in a decrease of $85,000. Improvement in oil and gas prices
had a $212,000 positive impact on revenues. The decline in production rates was
caused by normal depletion and falling production on marginal wells as
maintenance and repair operations were deferred.

Production expense decreased by $14,000 due to the sale of properties
($36,000) offset by increased operating costs ($22,000) as a result of increased
severance taxes, due to higher prices, along with an increase in maintenance and
repair operations. Production expense average $1.38 per mcfe during the three
month period ended September 30, 1999, compared to $.96 per mcfe for the same
period in 1998.

Exploration expense decreased by $125,000. A decrease in dry holes expenses
accounted for $15,000 of the decrease, employee costs decreased by

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$13,000 due to reductions in staff, and the balance of the decrease ($97,000) is
due to reduced exploration activities.

Depreciation, depletion and amortization decreased by $76,000 due to the
sale of properties ($33,000) and the decline in production rates ($43,000).

General and administrative expense decreased by $281,000. The reduction of
office personnel in the fourth quarter of 1998 and the first quarter of 1999,
along with mandatory temporary salary reductions that were in force during the
quarter, contributed $165,000 to the decrease. The reduction in office
personnel, originally estimated to reduce cost by $38,000 per month has actually
reduced cost by over $40,000 per month. Accounting services decreased by $73,000
due to the accounting function being performed entirely in-house whereas a
portion had been outsourced in the prior year. Other expense reductions resulted
from the cost reductions instituted in the first quarter.

Interest expense increased by $147,000 due to a higher average loan balance
outstanding of $11,895,200 during the third quarter of 1999, as compared to
$6,299,800 during the third quarter of 1998. The higher debt is due to the
Company's investment in EXUS and the related EXCO Note. This was reduced by a
decrease in deferred loan costs $21,000 during the current quarter as a result
of the early extinguishment of debt during the fourth quarter of 1998.

Nine Months Ended September 30, 1999 and 1998

The Company reported a net loss of $1,500,000 for the nine months ended
September 30, 1999, compared to last year's net loss of $5,306,000. The
$3,806,000 decrease is attributable to the gain from the sale of properties
($491,000), increase in net income from EXUS Energy ($278,000), decreases in
production expense ($438,000), exploration expense ($579,000), oil and gas
impairments ($1,915,000), DDA ($425,000), general and administrative expenses
($700,000). These decreases in expenses were offset by a reduction in interest
and other income ($20,000), oil and gas revenues ($860,000) and an increase in
interest expense ($140,000).

For the first nine months of 1999, oil and gas revenues decreased by
$860,000. The decrease is due to the following: the decline in production rates
resulted in a decrease in revenue of $712,000 while the sale of properties
resulted in a decrease in revenue of $400,000. Improvement in oil and gas prices
had a $252,000 positive impact on revenue.

Production expense decreased by $438,000 due to the sale of properties
($194,000) and reduced operating costs ($224,000) as a result of reduced
maintenance and repair operations on marginal wells and lower workover
operations (plugging back wells in an attempt to establish production in a
shallower zone, stimulating formations, and repairing down hole equipment).
Production expense average $1.15 per mcfe during the nine month period ended
September 30, 1999, compared to $1.13 per mcfe for the same period in 1998.

Exploration expense decreased by $579,000. Dry holes expenses accounted for
$509,000 of the decrease and the balance of the decrease ($70,000)is due to
reduced exploration activities.

Impairment of oil and gas properties decreased by $1,915,000. The decline is
a result of rising product prices during the current nine month period as
opposed to falling prices during the comparable 1998 period.

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Depreciation, depletion and amortization decreased by $425,000 due to the
sale of properties ($60,300), the decline in production rates ($273,400), and
the lower cost basis in the properties due to the impairments recorded in 1998
($91,300).

General and administrative expense decreased by $700,000. The reduction of
office personnel in the fourth quarter of 1998 and the first quarter of 1999,
along with mandatory temporary salary reductions that were in force during the
quarter, contributed $407,000 to the decrease. Accounting services decreased by
$144,000 due to the accounting function being performed entirely in-house. Other
expense reductions resulted from the cost reductions instituted in the first
quarter.

Interest expense increased by $140,000 due to increase in interest expense
of $201,000 as a result of a higher average loan balance outstanding of
$6,872,000 during the first nine months of 1999, as compared to $4,444,000
during the same period of 1998. The higher debt is due to the Company's
investment and the related EXCO Note. This was offset by a decrease in deferred
loan costs of $61,000 as the result of the early extinguishment of debt during
the fourth quarter of 1998.

YEAR 2000 COMPLIANCE

The following information on Year 2000 compliance contains forward-looking
statements and should be read in conjunction with the Company's disclosures
under the heading "Forward-Looking Statements." The disclosures also constitute
a "Year 2000 Readiness Disclosure" and "Year 2000 Statement" within the meaning
of the Year 2000 Information and Readiness Disclosure Act of 1998.

The "Year 2000 problem" arises because some computer systems and programs
were designed to handle only a two-digit year, not a four-digit year. When the
year 2000 begins, these computers may interpret "00" as the year 1900 (e.g.,
1998 is seen as "98") and either stop processing date-related computations or
will process them incorrectly.

The potential issues include:

(1) Hardware -- An outside computer consultant has certified computers
at the Company's headquarters as being Y2K complaint.

(2) Software -- An internal survey has been conducted of the Company's
software and information systems critical to the Company's operations. Based on
certifications by its software information vendors, the Company believes that
the Year 2000 issues directly related to computers, software and information
systems will not have a material impact on the Company's business or financial
position.

(3) Third parties -- With respect to its major vendors, purchasers of
products, well operators, customers and service providers, the Company mailed
more than 500 questionnaires to assist in an assessment of whether they will be
Year 2000 compliant. The Company has evaluated those questionnaires, and that
evaluation indicates the third parties are, or will be, compliant by the end of
the year.

(4) Field Operations -- As an operator of oil and gas properties, the
Company has conducted an analysis of the operational issues that would result
from a failure caused by a Year 2000 event. Only one well has a
computer-operated flow meter that has not been certified as Year 2000 compliant.
However, the company has two independent, non-computer back-up systems on that
well, a chart device and a sales meter. If the computer flow meter were

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to fail, the company believes the back-up systems would continue to provide
necessary production and sales data.

(5) Worst Case Scenario - The failure of a material third party to
resolve critical Year 2000 issues could have a serious adverse impact on the
Company's ability to continue operations and meet obligations. The major issues
include: (i) the ability of customers to measure and pay for oil and gas
production delivered, (ii) the ability of vendors and suppliers to invoice for
services and products for payments received, (iii) the ability of non-operated
partners to process and pay their share of joint interest billings, and (iv) the
ability of operators to disburse net revenue and render joint interest billings
to the Company. The Company is developing a contingency plan to cover these
issues and expects to complete this plan prior to December 31, 1999.

The Company is expensing as incurred all costs related to the assessment and
remediation of the Year 2000 issue. These costs are being funded through
operating cash flow and are not expected to exceed $25,000 and are not material
to the Company's consolidated financial condition or results of operations.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes standards of accounting
and reporting for derivative instruments and for hedging activities. It requires
that all derivatives be recognized as either assets or liabilities in the
statement of financial position and measures these instruments at fair value.
This statement is effective for financial statements for periods beginning after
June 15, 2000. The Company believes that SFAS No. 133 will not have a material
impact on its financial statements and disclosures.

INFORMATION REGARDING FORWARD LOOKING STATEMENTS

The information contained in this Form 10-Q includes certain forward-looking
statements. When used in this document, such words as "expect", "believes",
"potential", and similar expressions are intended to identify forward-looking
statements. Although the Company believes that its expectations are based on
reasonable assumptions, it is important to note that actual results could differ
materially from those projected by such forward-looking statements. Important
factors that could cause actual results to differ materially from those in the
forward-looking statements include, but are not limited to, the timing and
extent of changes in commodity prices for oil and gas, the need to develop and
replace reserves, environmental risk, the substantial capital expenditures
required to fund its operations, drilling and operating risks, risks related to
exploration and development, uncertainties about the estimates of reserves,
competition, government regulation and the ability of the Company to implement
its business strategy and to raise the necessary capital for such
implementation. Also see "FORWARD-LOOKING STATEMENTS" under "Item 1. BUSINESS"
of the Company's Annual Report on Form 10-K for the year ended December 31,
1998, as amended.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Information regarding the Company's quantitative and qualitative disclosures
about market risk is contained in "Item 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT THE MARKET RISK" in the Company's Annual Report on Form 10-K
for the year ended December 31, 1998 and reference is made to the information
contained there. Since December 31, 1998, as discussed in

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notes 4 and 6 in the accompanying unaudited financial statements, debt subject
to floating market interest rates has increased significantly.

PART II - OTHER INFORMATION

Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

For discussion of the sale of certain promissory notes that are convertible
into the Company's common stock see note 6 to the unaudited consolidated
financial statements.

Item 5. OTHER INFORMATION

(a) NASDAQ Market Listing

The Company was notified that it is not in compliance with NASDAQ SmallCap
Market listing requirements because the Company's tangible net assets are below
the $2 million minimum. Failure to achieve compliance would result in the
Company's common stock being delisted and no longer eligible to trade on that
market. On November 12, 1999, the Company received from NASDAQ a conditional
extension To December 31, 1999 to achieve compliance. The NASDAQ Hearing Review
Panel granted the extension because the Company has entered into a non-binding
letter of intent to sell its investment in EXUS in December 1999, and if the
sale is completed Venus expects to report a gain which will increase its
tangible net assets above the minimum requirement. A condition to the extension
is the maintenance of the per-share bid price at $1.00 or higher.

(b) Increase in Number of Directors

The Board of Directors adopted a resolution in conformance with the bylaws
of the Company that increased the number of members of the Board of Directors to
eight (8). Subsequently the Board of Directors elected Mr. Michael E. Little to
fill the vacancy created by the increase in the size of the board.

Mr. Little, 44, has been employed as Chairman and Chief Executive Officer
of South Texas Drilling and Exploration, Inc., an oil and gas drilling company
based in San Antonio, Texas, since 1999. From 1982 until 1999 he was President
and Chairman of the Board of Dawson Production Services, Inc., a well servicing
company based in San Antonio, Texas. He has more than 23 years of experience in
oil and gas operations management, including six years as a drilling foreman and
engineer. He is a graduate of Texas Tech University with a B.S. Degree in
Petroleum Engineering. He became a director of Venus Exploration in 1999. Venus
Exploration also retains him as a consultant.

Eugene L. Ames, Jr., executed an employment agreement effective July 1,
1999. It is for a two-year term and is similar to his previous employment
agreement, which expired in the second quarter of 1999. His annual salary under
the agreement is $190,000 per year and other compensation, including the use of
an automobile. Since May 1998, Eugene L. Ames, Jr., has declined the use of the
automobile under his previous employment agreement and under the present one.
The employment agreement also included agreements by Eugene L. Ames, Jr. with
regard to confidentiality and noncompetition in order to protect Venus
Exploration's proprietary information.

Beginning on March 1, 1999, Mr. Ames, Jr. agreed to take a 21.5% salary
reduction, and on May 1, 1999, the salary reduction was increased to 35%. In
return for the salary reduction, Venus Exploration granted Mr. Ames, Jr.,
52,074 options to buy shares of Venus Exploration's common stock. The exercise
price is $1.28, which was 110% of the fair market value of a share of the common
stock on the date of grant of the option. The options expire on February 28,
2004, and they vested in semi-monthly increments beginning March 1, 1999.

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

10.1 Executive Employment Agreement dated July 1, 1999, between
Venus Exploration, Inc. and E. L. Ames, Jr., previously filed
as an exhibit to the Company's Form 10-Q filed November 22,
1999 and incorporated by reference herein.

10.2 Eighth Amendment to Second Amended and Restated Loan Agreement
dated effective September 30, 1999, between Venus Exploration,
Inc. and Wells Fargo Bank (Texas), N.A., previously filed
as an exhibit to the Company's Form 10-Q filed November 22,
1999 and incorporated by reference herein.

10.3 Subordinated Debenture Agreement dated October 26, 1999,
between Venus Exploration, Inc. and E. L. Ames, Jr.,
previously filed as an exhibit to the Company's Form 10-Q
filed November 22, 1999 and incorporated by reference herein.

27.1 Financial Data Schedule

(b) Reports on Form 8-K

None

24
25

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

VENUS EXPLORATION, INC.

Dated: December 20, 1999 BY: /S/ EUGENE L. AMES, JR.
----------------------------------
Eugene L. Ames, Jr.
(Chief Executive Officer)

Dated: December 20, 1999 BY: /S/ PATRICK A. GARCIA
---------------------------------
Patrick A. Garcia
(Principal Accounting Officer)

26
EXHIBIT INDEX

Exhibit
No. Description
- ------- -----------

10.1 Executive Employment Agreement dated July 1, 1999, between Venus
Exploration, Inc. and E. L. Ames, Jr., previously filed as an
exhibit to the Company's Form 10-Q filed November 22, 1999 and
incorporated by reference herein.

10.2 Eighth Amendment to Second Amended and Restated Loan Agreement dated
effective September 30, 1999, between Venus Exploration, Inc. and
Wells Fargo Bank (Texas), N.A., previously filed as an exhibit to
the Company's Form 10-Q filed November 22, 1999 and incorporated by
reference herein.

10.3 Subordinated Debenture Agreement dated October 26, 1999, between
Venus Exploration, Inc. and E. L. Ames, Jr., previously filed
as an exhibit to the Company's Form 10-Q filed November 22, 1999 and
incorporated by reference herein.

27.1 Financial Data Schedule