<PAGE>
 
(4) On February 6, 2001, the Company sold its interest in non-investment grade
    debt of Davel Communications, Inc. for approximately $1.6 million. As such,
    at December 31, 2000 the Company recorded an impairment charge of
    approximately $3.7 million to adjust the investment to market value. See
    Note 8 to the Company's Consolidated Financial Statements included in Item 8
    of this Report. In addition, Management deemed the decline in the fair value
    of the Company's investment in Decora Industries to be "other than
    temporary" following Decora's announcement that it had filed for protection
    under Chapter 11 of the U.S. Bankruptcy Code. In connection with this
    impairment, the Company recognized a loss of approximately $9.5 million
    during 2000.
 
(5) During 2000, Omega Protein recorded inventory write-downs of $18.1 million
    for market declines in the inventory values of Omega Protein's fish meal and
    fish oil.
 
(6) On December 21, 1998, Zapata's Board of Directors approved a change in the
    Company's fiscal year end from September 30 to December 31, which became
    effective January 1, 1999.
 
(7) In November 1997, Omega Protein closed the two acquisitions in which it
    acquired two processing plants and related assets. Omega Protein accounted
    for both acquisitions as purchases.
 
(8) Zapata's former wholly-owned subsidiary, Omega Protein, completed its
    initial public offering on April 8, 1998 and listed its stock on the NYSE.
    Income from continuing operations includes $86.7 million of pre-tax gain on
    Zapata's sale of Omega Protein stock in the offering and a charge of
    approximately $5.0 million representing the minority interest in Omega
    Protein's net income subsequent to the offering.
 
(9) In September 1997, Omega Protein disposed of its Venture Milling animal
    blending protein business.
 

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS
 
     The following is a discussion of the Company's financial condition and
results of operations. This discussion should be read in conjunction with the
Company's Consolidated Financial Statements included in Item 8 of this Report.
This discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed below in "Significant Factors
That Could Affect Future Performance and Forward-Looking Statements," as well as
those discussed in this section and elsewhere in this report.
 
GENERAL
 
     Zapata is a holding company which has operated primarily in two industry
segments: the food segment and the Internet segment. Zapata operates its food
related businesses through its 61% owned subsidiary, Omega Protein and through
Viskase until the Company sold its Viskase stock in September 2001. Zapata
operated its Internet related businesses through its 98% owned subsidiary,
Zap.Com and its wholly owned subsidiary Charged Productions, Inc. until the
Company exited the Internet businesses in December 2000. Zapata's consolidated
financial statements represent the combination of the financial statements of
Zapata, Omega Protein, Zap.Com, and until April 2001, Charged Productions.
 
     During 1998, Omega Protein, Zapata's then wholly owned subsidiary,
completed its initial public offering raising $144.6 million in net proceeds, of
which $76.6 million was paid directly to Zapata for shares it sold in the
offering. Zapata reports Omega Protein's results of operations on a consolidated
basis.
 
     In August 1995, Zapata acquired 4,189,298 shares of Viskase common stock,
representing 31% of the then outstanding common stock of Viskase, for $18.8
million. In June and July 1996, Zapata purchased 1,688,006 additional shares of
Viskase common stock. In September 2001, Zapata sold its Viskase stock for an
aggregate price of approximately $59,000 in a private transaction through a
broker. As a result of the sale, the Company expects to receive a tax refund of
approximately $8.4 million during 2002.
 
     In April 1998, the Company acquired the Internet based magazines Word and
Charged. Subsequently, these webzines were consolidated into Charged
Productions, Inc., a multi-media production company which operated
www.charged.com, www.sissyfight.com and www.pixeltime.com. During December 2000,
the Company made a strategic decision to cease the operations of Charged
Productions. During April 2001, the
 
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