<PAGE>   1

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

Annual Report under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended September 30, 1999

Commission File Number: 0-9116

                            PANHANDLE ROYALTY COMPANY
            (Exact name of small business registrant in its charter)

            OKLAHOMA                                             73-1055775
(State or other jurisdiction of                               (I.R.S. Employer
 incorporation or organization)                              Identification No.)

Grand Centre Suite 210, 5400 N Grand Blvd., Okla. City, OK 73112

(Address of principal executive offices)                 (Zip code)

Registrant's telephone number (405) 948-1560

Securities registered under Section 12(B) of the Exchange Act: NONE

Securities registered under Section 12(g) of the Exchange Act:

               (Title of Class)
        CLASS A COMMON STOCK (VOTING)          .0333 par value
               (Title of Class)
        CLASS B COMMON STOCK (NON-VOTING)      $1.00 par value

Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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.
[X] Yes [ ] No

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation SB contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]

Registrant's revenues for fiscal year-end September 30, 1999, were $5,117,475.

The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by using the closing price of registrant's common stock, at
November 30,1999, was $14,555,940. As of November 30,1999, 2,056,986 class A
common shares were outstanding.

Documents Incorporated By Reference ..... NONE
<PAGE>   2



                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
PART I                                                                      PAGE
                                                                            ----
<S>     <C>                                                                <C>
Item 1. Description of Business .......................................      1-4

Item 2. Description of Properties .....................................     4-10

Item 3. Legal Proceedings .............................................       10

Item 4. Submission of Matters to a Vote of
           Security Holders ...........................................       10

PART II

Item 5. Market for Common Equity and
           Related Stockholder Matters ................................    10-11

Item 6. Management's Discussion and Analysis
           or Plan of Operations ......................................    11-14

Item 7. Financial Statements ..........................................    14-32

Item 8. Changes in and Disagreements with
           Accountants on Accounting and
           Financial Disclosure .......................................       33

PART III

Item 9. Directors, Executive Officers, Promoters
           and Control Persons; Compliance with
           Section 16(a) of the Exchange Act ..........................    33-35

Item 10. Executive Compensation .......................................    35-36

Item 11. Security Ownership of Certain Beneficial
           Owners and Management ......................................    36-37

Item 12. Certain Relationships and Related
           Transactions ...............................................       37

Item 13. Exhibits and Reports on Form 8-K .............................    37-38

Exhibit 21 ............................................................       38

Signature Page ........................................................       39
</TABLE>


                                       (I)


<PAGE>   3
                                     PART I

ITEM 1.         DESCRIPTION OF BUSINESS

                FORWARD-LOOKING STATEMENTS

                Forward-looking statements for 2000 and later periods are made
throughout this document. Such statements represent estimates of management
based on the Company's historical operating trends, its proved oil and gas
reserves and other information currently available to management. The Company
cautions that the forward-looking statements provided herein are subject to all
the risks and uncertainties incident to the acquisition, development and
marketing of, and exploration for oil and gas reserves. These risks include, but
are not limited to oil and natural gas price risk, environmental risk, drilling
risk, reserve quantity risk and operations and production risks. For all the
above reasons, actual results may vary materially from the forward-looking
statements and there is no assurance that the assumptions used are necessarily
the most likely to occur.

                BUSINESS DEVELOPMENT

                Panhandle Royalty Company ("Panhandle" or the "Company") is an
Oklahoma Corporation, organized in 1926 as Panhandle Cooperative Royalty
Company. In 1979, Panhandle Cooperative Royalty Company was merged into
Panhandle Royalty Company. Panhandle's authorized and registered stock consisted
of 100,000 shares of $1.00 par value class A common stock. In 1982, the Company
split the stock on a 10-for-1 basis and reduced the par value to $.10, resulting
in 1,000,000 shares of authorized class A common stock. In May 1999, the
Company's shareholders voted to increase the authorized Class A Common shares of
the Company to 6,000,000 and to split the shares on a three-for-one basis. In
addition, voting rights for the shares were changed from one vote per
shareholder to one vote per share. Since its formation, the Company has been
involved in the acquisition and management of mineral interests and the
exploration for, and development of, oil and gas properties, principally
involving wells located on the Company's mineral interests. Panhandle's mineral
properties and other oil and gas interests are located primarily in Oklahoma,
New Mexico and Texas. Properties are also located in twelve other states. The
majority of the Company's oil and gas production is from wells located in the
Anadarko Basin of western Oklahoma and the Dagger Draw Field in Eddy County, New
Mexico. In 1988, the Company merged with New Mexico Osage Royalty Company, thus
acquiring most of its New Mexico mineral interests. The Company's offices are
located at Grand Centre Suite 210, 5400 N. Grand Blvd., Oklahoma City, OK 73112
(405)948-1560, FAX (405)948-2038.

                BUSINESS OF ISSUER

                The majority of Panhandle's revenues are derived from the
production and sale of oil and natural gas. See "Item 7 - Financial Statements".
The Company's oil and gas holdings, including its mineral interests and its
interests in producing wells, both working interests and royalty interests, are
centered in Oklahoma with activity, in recent years, in New Mexico and Texas.
See "Item 2 - Description of Properties". Exploration and development of the
Company's oil and gas properties is conducted in association with operating oil
and gas companies, including major and independent companies. The


                                      (1)
<PAGE>   4

Company does not operate any of its oil and gas properties. The Company has been
an active participant for several years in wells drilled on the Company's
mineral properties and in third party drilling prospects. A large percentage of
the Company's recent drilling participations have been on properties in which
the Company has mineral interests and in many cases already owns an interest in
a producing well in the unit. This "increased density" drilling has accounted
for a majority of the successful oil and gas wells completed during these years
and has added significant reserves for the Company. The Company continues to
acquire additional mineral interest properties, both producing and
non-producing. Several of the mineral properties purchased have been in areas
where the Company had no mineral holdings, thus expanding the Company's area of
interest.

                PRINCIPAL PRODUCTS AND MARKETS

                The Company's principal products are crude oil and natural gas.
These products are sold to various purchasers, including pipeline companies,
which are generally located in and service the areas where the Company's
producing wells are located. The Company does not act as operator for any of the
properties in which it owns an interest, thus it relies on the operating
expertise of numerous companies that operate in the area where the Company owns
mineral interests. This expertise includes drilling operations and completions,
producing well operations and, in some cases, the marketing or purchasing of the
well's production. Natural gas sales are contracted by either the Company or the
well operator and are contracted principally on a monthly basis with third party
gas marketers and pipeline companies. Payment for gas sold is received either
from the contracted purchasers or the well operator. Crude oil sales are
generally handled by the well operator and payment for oil sold is received from
the well operator or from the crude oil purchaser.


                COMPETITIVE BUSINESS CONDITIONS

                The oil and gas industry is highly competitive, particularly in
the search for new oil and gas reserves, and to some extent, in the marketing of
the production from wells. There are many factors affecting Panhandle's
competitive position and the market for its products which are beyond its
control. Some of these factors are quantity and price of foreign oil imports,
changes in prices received for its oil and gas production, business and consumer
demand for refined oil products and natural gas, and the effects of federal and
state regulation of the exploration, production and sales of oil and natural
gas. Changes in existing economic conditions, weather patterns and actions taken
by OPEC and other oil- producing countries have dramatic influence on the price
Panhandle receives for its oil and gas production. The Company relies heavily on
companies with greater resources, staff, equipment, research, and experience for
operation of wells and the development and drilling of subsurface prospects. The
Company uses its strong financial base and its mineral property ownership,
coupled with it's own geologic and economic evaluation to participate in
drilling operations with these larger companies. This method allows the Company
to effectively compete in drilling operations it could not undertake on its own
due to financial and personnel limits and allows it to maintain low overhead
costs.


                                      (2)
<PAGE>   5

                SOURCES AND AVAILABILITY OF RAW MATERIALS

                The existence of commercial oil and gas reserves is essential to
the ultimate realization of value from the Company's mineral properties and
these mineral properties may be considered a raw material to its business. The
production and sale of oil and natural gas from the Company's oil and gas
properties is essential to provide the cash flow necessary to sustain the
ongoing viability of the Company. The Company continues to reinvest a portion of
its cash flow in the purchase of additional mineral properties to assure the
continued availability of acreage with which to participate in exploration,
drilling, and development operations and subsequently the production and sale of
oil and gas. This participation in exploration and production and the purchasing
of additional mineral interests will continue to supply the Company with the raw
materials with which to generate additional cash flow. Mineral purchases are
made from varied owners, and the Company does not rely on any particular
companies or individuals for these acquisitions.

                MAJOR CUSTOMERS

                The Company's oil and gas production is sold by the well
operators, in most cases, to many different purchasers on a well-by-well basis.
No one purchaser accounts for a major percentage of the Company's revenues.
Generally, if one purchaser declines to continue purchasing the Company's oil
and/or natural gas, several other purchasers can be located. Pricing is usually
reasonably consistent from purchaser to purchaser.

                PATENTS, TRADEMARKS, LICENSES, FRANCHISES AND ROYALTY AGREEMENTS

                The Company does not own any patents, trademarks, licenses or
franchises. Royalty agreements on producing oil and gas wells stemming from the
Company's ownership of mineral interests generate a substantial portion of the
Company's revenues. These royalties are tied to the ownership of the mineral
interests and this ownership is perpetual, unless sold by the Company. Royalties
are due and payable to the Company whenever oil and/or gas is produced from
wells located on the Company's mineral properties.

                GOVERNMENTAL REGULATION

                Oil and gas production is subject to various taxes, such as
gross production taxes and, in some cases, ad valorem taxes.

                The State of Oklahoma and other states require permits for
drilling operations, drilling bonds and reports concerning operations and impose
other requirements relating to the exploration and production of oil and gas.
Such states also have regulations addressing conservation matters, including
provisions for the unitization or pooling of oil and gas properties, the
establishment of maximum rates of production from oil and gas wells and the
regulation of spacing, plugging and abandonment of such wells. These statutes
and regulations currently limit the rate at which oil and gas can be produced
from certain of the Company's properties. As previously discussed, the well
operators are relied upon by Panhandle to comply with governmental regulations.


                                      (3)
<PAGE>   6

                Federal tax law allows producers of "tight gas" to utilize an
approximate $.52/MMBTU tax credit for gas produced from approved wells. The
credit is a direct reduction of regular federal income tax. Panhandle began
receiving revenues from "tight gas" wells during fiscal 1992. This credit will
be available for all tight gas sold prior to January 1, 2003, and is expected to
reduce the Company's cash outlay for income taxes.

                ENVIRONMENTAL MATTERS

                As the Company is directly involved in the extraction and use of
natural resources, it is subject to various federal, state and local provisions
regarding environmental and ecological matters. Compliance with these laws may
necessitate significant capital outlays, however, to date the Company's cost of
compliance has been insignificant. The Company does not feel the existence of
these environmental laws will materially hinder or adversely affect the
Company's business operations; however, there can be no assurances of future
events. Since the Company does not operate any wells where it owns an interest,
actual compliance with environmental laws is controlled by others, with
Panhandle being responsible for its proportionate share of the costs involved.
Panhandle carries liability insurance and to the extent available at reasonable
cost, pollution control coverage. However, all risks are not insured due to
insurance availability and/or cost thereof.

                EMPLOYEES

                At September 30, 1999, Panhandle employed ten persons on a
full-time basis and has no part-time employees. Three of the employees are
executive officers and one is also a director of the Company.


ITEM 2.         DESCRIPTION OF PROPERTIES

                As of September 30, 1999, Panhandle's principal properties
consisted of perpetual ownership of 183,177 net mineral acres, held in tracts in
Alabama, Arkansas, Colorado, Idaho, Kansas, Illinois, Indiana, Montana,
Nebraska, New Mexico, North Dakota, Oklahoma, Tennessee and Texas. The Company
also held leases on 6,340 net acres of minerals in Louisiana, Oklahoma and
Texas. At September 30, 1999, Panhandle held royalty and/or working interests in
1,528 producing oil or gas wells, 54 successfully completed but not yet
producing wells, and 18 wells in the process of being drilled or completed.


                                      (4)
<PAGE>   7

                Panhandle does not have current abstracts or title opinions on
all mineral properties owned and, therefore, cannot warrant that it has
unencumbered title to all of its properties. In the period from 1927 through
1937, the Company lost title to a number of its then owned mineral acres through
foreclosures and tax sales of the surface acreage overlying its minerals. In
recent years, few challenges have been made against the Company's fee title to
its properties.

                Panhandle pays ad valorem taxes on its minerals owned in
Arkansas, Colorado, Idaho, Indiana, Illinois, Kansas, Tennessee and Texas.

                ACREAGE

                The following table of mineral interests owned reflects, as of
September 30, 1999, in each respective state, the number of net and gross acres,
net and gross producing acres, net and gross acres leased, and net and gross
acres open (unleased).

                                MINERAL INTERESTS

<TABLE>
<CAPTION>
                            Net     Gross       Net      Gross       Net       Gross
                           Acres    Acres      Acres     Acres      Acres      Acres
        Net      Gross     Prod'g   Prod'g     Leased    Leased     Open       Open
St.    Acres     Acres      (1)      (1)        (2)       (2)        (3)        (3)
---   -------  ---------   ------   -------    ------    ------    -------    -------
<S>   <C>      <C>         <C>      <C>         <C>      <C>       <C>        <C>
AL          5        479                                                 5        479
AR      7,546     38,579       64       220       119       400      7,363     37,959
CO      8,176     38,600                                             8,176     38,600
ID         30        880                                                30        880
IL      1,018      4,393                                             1,018      4,393
IN         27        262                                                27        262
KS        620      5,360       60       480                            560      4,880
MT        422      7,960                                               422      7,960
NE        439      5,960                                               439      5,960
ND        292      5,036                           37       320        255      4,716
NM     53,324    153,073    1,150     4,949     2,042     5,542     50,132    142,582
OK     86,960    663,104   16,517    87,545     1,846    21,551     68,597    554,008
TN      1,543      3,087                                             1,543      3,087
TX     22,775    213,021    1,096    34,391       256     3,081     21,423    175,549
      -------  ---------   ------   -------    ------    ------    -------    -------
TOT:  183,177  1,139,794   18,887   127,585     4,300    30,894    159,990    981,315
</TABLE>

(1)     "Producing" represents the mineral acres in which Panhandle owns a
        royalty or working interest in a producing well.
(2)     "Leased" represents the mineral acres, owned by Panhandle, that are
        leased to third parties but not producing.
(3)     "Open" represents mineral acres owned by Panhandle that are not leased
        or in production.

                This table reflects net mineral acres leased from others, lease
expiration dates, and net leased acres held by production.

                                     LEASES

<TABLE>
<CAPTION>
                                Net Acres Leases
                                    Expiring                   Net Acres
                 Net    ----------------------------------      Held By
     State      Acres    2000     2001     2002      2003     Production
     -----      -----   ------    ----     -----     -----    ----------
<S>             <C>     <C>       <C>      <C>       <C>      <C>
     LA           271                                              271
     OK         6,007    2,387     718       602        71       2,229
     TX            62       20                                      42
                -----   ------    ----     -----     -----       -----
     TOT:       6,340    2,407     718       602        71       2,542
</TABLE>


                                      (5)
<PAGE>   8

                PROVED RESERVES

                The following table summarizes estimates of the proved reserves
of oil and gas held by Panhandle. All reserves are located within the United
States. Because the Company's nonproducing mineral and leasehold interests
consist of various small interests in numerous tracts located primarily in
Oklahoma, New Mexico and Texas and because the Company is a non-operator and
must rely on third parties to propose and drill wells, it is not feasible to
provide estimates of all proved undeveloped reserves and associated future net
revenues. Prior to fiscal 1995, the Company did not provide estimates of any
proved undeveloped reserves. Since 1995 the Company has provided estimates of
proved undeveloped reserves for certain areas of western Oklahoma where a large
amount of increased density gas drilling has taken place during the prior few
years. In 1996 estimates of certain proved undeveloped reserves in the Dagger
Draw field in southeastern New Mexico were added. Production in this field has
grown rapidly over the last five years and numerous undrilled well locations are
situated on minerals owned by Panhandle. Due to field production allowable rules
in Dagger Draw, only those proved undeveloped reserves which the Company felt
could be drilled, under existing allowable rules, have been included. Should the
allowable rules be amended and/or production volumes change significantly,
additional proved undeveloped reserves may be added in the future. The Company,
in both cases, expects drilling to continue for the next several years, and thus
made the decision to provide proved undeveloped reserve estimates for these
areas. All reserve quantity estimates were prepared by Campbell & Associates,
Inc., an independent petroleum engineering firm. The Company's reserve estimates
were not filed with any other federal agency.

<TABLE>
<CAPTION>
    Proved Developed Reserves       Barrels of Oil      MCF of Gas
    -------------------------       --------------      ----------
<S>                                 <C>                 <C>
    September 30, 1996                 641,213           8,200,957
    September 30, 1997                 625,370           9,707,242
    September 30, 1998                 497,263          10,103,355
    September 30, 1999                 433,263          11,519,071

    Proved Undeveloped Reserves
    September 30, 1996                 297,582           1,638,104
    September 30, 1997                 278,438           1,559,860
    September 30, 1998                 279,824           1,557,965
    September 30, 1999                 287,940           1,596,149

    Total Proved Reserves
    September 30, 1996                 938,795           9,839,061
    September 30, 1997                 903,808          11,267,102
    September 30, 1998                 777,087          11,661,320
    September 30, 1999                 721,203          13,115,220
</TABLE>

         Because the determination of reserves is a function of testing,
evaluating, developing oil and gas reservoirs and establishing a production
decline history, along with product price fluctuations, it would be expected
that estimates will change as future information concerning those reservoirs is
developed and as market conditions change. Estimated reserve quantities and
future net revenues are affected by changes in product prices, and


                                      (6)
<PAGE>   9

these prices have varied substantially in recent years. Proved developed
reserves are those expected to be recovered through existing well bores under
existing economic and operating conditions. Proved undeveloped reserves are
reserves that may be recovered from undrilled acreage, but are usually limited
to those sites directly offsetting established production units and have
sufficient geological data to indicate a reasonable expectation of commercial
success.

         ESTIMATED FUTURE NET CASH FLOWS

         Set forth below are estimated future net cash flows with respect to
Panhandle's proved reserves (based on the estimated units set forth in the
immediately preceding table) as of year ends, and the present value of such
estimated future net cash flows, computed by applying a ten (10) percent
discount factor as required by the rules and regulations of the Securities and
Exchange Commission. Estimated future net cash flows have been computed by
applying current year-end prices to future production of proved reserves less
estimated future expenditures (based on costs as of year end) to be incurred
with respect to the development and production of such reserves. Such pricing is
based on SEC guidelines. No federal income taxes are included in estimated
costs. However, the amounts are net of production taxes levied by respective
states. Prices used for determining future cash flows from oil and natural gas
for the periods ended September 30, 1999, 1998 and 1997 were as follows: 1999 -
$23.29, $2.70; 1998 - $14.45, $1.63; 1997 - $19.12, $2.48. These future net cash
flows should not be construed as the fair market value of the Company's
reserves. A market value determination would need to include many additional
factors, including anticipated oil and gas price increases or decreases.

Estimated Future Net Cash Flows

<TABLE>
<CAPTION>
                                           9-30-99       9-30-98       9-30-97
                                         -----------   -----------   -----------
<S>                                      <C>           <C>           <C>
Proved Developed                         $33,049,035   $18,256,510   $29,186,367
Proved Undeveloped                       $ 8,942,345   $ 4,868,946   $ 7,188,163
Total Proved (1)                         $41,991,380   $23,125,456   $36,374,530
</TABLE>

10% Discounted Present Value of Estimated Future Net Cash Flows

<TABLE>
<CAPTION>
                                           9-30-99       9-30-98       9-30-97
                                         -----------   -----------   -----------
<S>                                      <C>           <C>           <C>
Proved Developed                         $22,066,753   $12,469,019   $19,890,600
Proved Undeveloped                       $ 5,566,777   $ 2,929,190   $ 4,430,870
Total Proved (1)                         $27,633,530   $15,398,209   $24,321,470
</TABLE>

     (1)  The decrease in value from September 30, 1997 to September 30, 1998
          was attributable to the lower oil and gas prices used in the 1998
          reserve report versus the prices used in the 1997 reserve report. A
          major portion of the increase from September 30, 1998, to September
          30, 1999, is attributable to the increased oil and gas prices used in
          the 1999 reserve report versus the prices used in the 1998 reserve
          report.


                                      (7)
<PAGE>   10

         OIL AND GAS PRODUCTION

         The following table sets forth the Company's net production of oil and
gas for the fiscal periods indicated.

<TABLE>
<CAPTION>
                                               Year         Year         Year
                                               Ended        Ended        Ended
                                              9-30-99      9-30-98      9-30-97
                                             ---------    ---------    ---------
<S>                                          <C>          <C>          <C>
Bbls - Oil                                      75,891      103,989      147,734
MCF - Gas                                    1,888,890    1,710,264    1,600,247
</TABLE>

Average Sales Prices and Production Costs

         The following table sets forth unit price and cost data for the fiscal
periods indicated.

<TABLE>
<CAPTION>
                                               Year         Year         Year
                                               Ended        Ended        Ended
Average Sales Price                           9-30-99      9-30-98      9-30-97
-------------------                          ---------    ---------    ---------
<S>                                          <C>          <C>          <C>
Per Bbl. Oil                                   $15.53       $15.16       $21.21
Per MCF Gas                                    $ 2.06       $ 2.20       $ 2.39

Average Production (Lifting Cost)

Per Equivalent
Bbl. Oil(1)(2)                                 $ 2.47       $ 2.47       $ 2.54
</TABLE>

(1)  Gas production is converted to barrel equivalents at the rate of 6 MCF per
     barrel, representing the estimated relative energy content of natural gas
     and oil.
(2)  Includes well operating costs and production taxes.

         Average production costs are influenced by the fact that the Company
bears no cost of production on many of its well interests, as a large part of
the Company's producing well interests are royalty interests, which bear no
share of the operating costs.

         GROSS AND NET PRODUCTIVE WELLS AND DEVELOPED ACRES

         The following table sets forth Panhandle's gross and net productive oil
and gas wells as of September 30, 1999. Panhandle owns fractional royalty
interests or fractional working interests in these wells. The Company does not
operate any wells.

<TABLE>
<CAPTION>
                           Gross Wells          Net Wells
                           -----------          ---------
<S>                        <C>                  <C>
            Oil                435              14.834550
            Gas              1,093              20.210819
                             -----              ---------
            TOTAL            1,528              35.045369
</TABLE>

         Information on multiple completions is not available from Panhandle's
records, but the number of such is insignificant.


                                      (8)
<PAGE>   11

         As of September 30, 1999, Panhandle owned 127,585 gross developed
mineral acres and 18,887 net developed mineral acres. Panhandle has also leased
from others 48,782 gross developed acres which contain 2,542 net developed
acres.

         UNDEVELOPED ACREAGE

         As of September 30, 1999, Panhandle owned 1,012,209 gross and 164,290
net undeveloped mineral acres, and leases on 19,911 gross and 3,798 net acres.

         DRILLING ACTIVITY

         The following net productive development and exploratory wells and net
dry development and exploratory wells, in which the Company had a fractional
royalty or working interest, were drilled and completed during the fiscal years
indicated. Also shown are the net wells purchased during these periods.

<TABLE>
<CAPTION>
                              Net Productive        Net Dry
Development Wells                 Wells              Wells
-----------------             --------------        -------
<S>                           <C>                   <C>
     Fiscal year ending
       September 30, 1997        2.630851           .659734

     Fiscal year ending
       September 30, 1998        1.548498           .608732

     Fiscal year ending
       September 30, 1999        1.813871           .582417

Exploratory Wells

     Fiscal year ending
       September 30, 1997         .627670           .477731

     Fiscal year ending
       September 30, 1998         .953696           .566764

     Fiscal year ending
       September 30, 1999         .497868           .270698

Purchased Wells

     Fiscal year ending
       September 30, 1997         .798765                 0

     Fiscal year ending
       September 30, 1998         .174667                 0

     Fiscal year ending
       September 30, 1999         .178395                 0
</TABLE>


                                      (9)
<PAGE>   12

         PRESENT ACTIVITIES

         The following table sets forth the gross and net oil and gas wells
drilling or testing as of September 30, 1999, in which Panhandle owns a royalty
or working interest.

<TABLE>
<CAPTION>
                           Gross Wells          Net Wells
                           -----------          ---------
<S>                        <C>                  <C>
            Oil                  5               .3531864
            Gas                 13               .569591
</TABLE>

         The Company has very small interests in three waterflood operations in
Oklahoma and Texas which have neglible revenues and expenses to the Company. No
additional purchases or start-ups of waterflood, pressure maintenance or other
related operations are currently planned.

ITEM 3.         LEGAL PROCEEDINGS

         There were no material legal proceedings involving Panhandle or its
subsidiary, PHC, Inc., as of the date of this report.

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

         No matters were submitted to a vote of Panhandle's security holders
during the fourth quarter of the fiscal year ended September 30, 1999.

                                     PART II

ITEM 5.         MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         The Company's common stock is listed on the NASDAQ Small-Cap Market
(symbol PANRA). The following table sets forth the high and low trade prices of
the Company's common stock during the periods indicated: (all share or per share
amounts, are adjusted for the effect of the 3-for-1 stock split effective May 7,
1999).

<TABLE>
<CAPTION>
              Quarter Ended            HIGH             LOW
              -------------            ----             ---
<S>           <C>                     <C>              <C>
              December 31, 1997       14-3/16          9-5/16
              March 31, 1998          11-3/16          8-11/16
              June 30, 1998           11-3/8           9-5/16
              September 30, 1998      9-11/16          8-9/16
              December 31, 1998       8-3/4            5-5/16
              March 31, 1999          8-5/8            6-5/8
              June 30, 1999           10-11/16         7-5/16
              September 30, 1999      9-1/2            7-5/8
</TABLE>

         As of November 30, 1999, the approximate number of holders of shares of
Panhandle stock were:

<TABLE>
<CAPTION>
              Title of Class                         Number of Holders
              --------------                         -----------------
<S>                                                  <C>
              Class A Common (Voting)..............        2,520
</TABLE>


                                      (10)
<PAGE>   13

         During the past two years, cash dividends have been paid as follows on
the class A common stock:

<TABLE>
<CAPTION>
                     DATE                  RATE PER SHARE
                     ----                  --------------
<S>             <C>                        <C>
                December 1997                   $ .07
                March 1998                      $ .10
                June 1998                       $ .07
                September 1998                  $ .07
                December 1998                   $ .06
                March 1999                      $ .07
                June 1999                       $ .07
                September 1999                  $ .07
</TABLE>

         The Company's line of credit loan agreement contains a provision
limiting the paying or declaring of a cash dividend to fifty percent of cash
flow, as defined, of the preceding twelve-month period. See Note 3 to the
consolidated financial statements contained herein at "Item 7 - Financial
Statements", for a further discussion of the loan agreement.

ITEM 6.         MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

                LIQUIDITY AND CAPITAL RESOURCES

         At September 30, 1999, the Company had positive working capital of
$612,219, an increase of $159,949, compared to year end September 30, 1998.
However, cash flow from operating activities in fiscal 1999, decreased $621,738,
to $2,836,783, from the fiscal 1998 amount. This decrease was principally a
result of a decline in oil and gas sales revenues during fiscal 1999. The
decrease in revenues is discussed in detail in "Results of Operations."

         Capital expenditures on oil and gas activities in fiscal 1999 amounted
to $2,360,168, a decrease of $1,007,684, as compared to the 1998 amount. This
reduction was principally a result of the low market price of crude oil in the
first two quarters of fiscal 1999. Several wells projected to be drilled during
this period were postponed due to the low oil price. Crude oil and natural gas
market prices began increasing and continued to increase during the third and
fourth fiscal quarters of 1999. As the prices increased late in the fiscal year
the pace of drilling picked up with expenditures for drilling in September and
October being at extremely high levels.

         The Company has historically funded drilling and other capital
expenditures as well as overhead costs and dividend payments from operating cash
flow. However, in December 1998, the Company borrowed $300,000 under it's bank
line of credit to help fund these costs. As of August 10, 1999, the Company had
repaid the $300,000.

         The Company expects to continue its business strategy of aggressive
drilling participation through fiscal 2000, and well into the future. At
September 30, 1999, the Company had projected costs of $1,501,949, for its share
of drilling and equipment costs on working interest wells which have been
proposed or were in the process of being drilled or


                                      (11)
<PAGE>   14

completed. Management currently expects to spend a total of approximately
$3,000,000, for exploration and development well costs in fiscal 2000. In
addition , the Company is aggressively seeking acquisitions of producing, and to
a lessor extent non-producing, mineral properties, or working interests in
wells. These capital costs along with overhead expenses and dividend payments
are expected to be funded by cash flow and from borrowings, if needed, under the
Company's bank line-of-credit. In addition, the Company has available
approximately 4,000,000 shares of authorized but unissued common stock, which
could be used in an asset purchase. The line-of-credit and expected cash flows
are more than sufficient to meet all expected capital obligations. Capital
expenditures amounts can vary due to many factors, including drilling results,
oil and gas prices, industry conditions and acquisition opportunities among
others. A significant acquisition of producing properties would increase capital
expenditures and would need to be financed by additional debt or possibly debt
and equity.

RESULTS OF OPERATIONS

         Revenues decreased $322,707 or 6% in fiscal 1999 as compared to fiscal
1998. The reduction in revenues was mainly attributable to a $260,592 reduction
in oil and gas sales revenue. The oil and gas sales revenue decline was a result
of a decreased average sales price for natural gas, decreased sales volumes of
oil, and were partially offset by an increase in sales volumes of natural gas.
The chart below summarizes the Company's sales volumes and average sales prices
for oil and natural gas in fiscal 1999 and 1998.

                                OIL AND GAS SALES

<TABLE>
<CAPTION>
                                     OIL                         GAS
                            -----------------------     -----------------------
                             Total         Average        Total        Average
                             BBLS         Price/BBL        MCF        Price/MCF
                            -------       ---------     ---------     ---------
<S>                         <C>           <C>           <C>           <C>
Year Ended 9/30/99           75,891        $ 15.53      1,888,890      $ 2.06
Year Ended 9/30/98          103,989        $ 15.16      1,710,264      $ 2.20
</TABLE>

         The 27% decrease in sales volumes of oil was a result of one operator
in the Company's principal oil producing filed, Dagger Draw, New Mexico,
shutting in production for approximately 60% of the year, as a result of low
market prices for crude oil. As oil prices increased in the last months of the
year these wells began the process of going back on line, but several of the
wells experienced mechanical difficulties, delaying their start up. When these
wells did start producing, late in the fiscal year, production volumes were
significantly reduced as compared to pre-shut-in volumes. This condition is
expected to continue for some time in fiscal 2000, and will adversely affect oil
production volumes again in fiscal 2000. The gas sales volume increase in fiscal
1999 was principally due to new gas produced in the Potato Hills field in
southeast Oklahoma. The Company has an interest in several new wells in this
prolific gas production area with expectations of additional wells to be drilled
in fiscal 2000. In addition, several new gas wells in western Oklahoma began
production in fiscal 1999. The new gas production from these areas is expected
to increase year 2000 gas production volumes over 1999 levels.


                                      (12)
<PAGE>   15

         These increased gas production volumes and the current high prices
being received for gas and oil should increase 2000 oil and gas revenues over
1999 levels. However, should product prices drop dramatically in fiscal 2000,
oil and gas sales revenues would still be adversely affected.


Costs and Expenses increased $435,029 or 11% as compared to fiscal 1998. The
increase was principally due to a $300,040 increase in depreciation, depletion,
amortization and impairment costs (DD&A) along with minor increases in
exploration costs and general and administrative costs.

         The increase in depletion, amortization and impairment costs (DD&A) was
the result of the Company recognizing a SFAS No.121 impairment provision (see
Note 1, Summary of Significant Accounting Policies, to the Financial Statements
contained herein at Item 7.) of $357,891 in fiscal 1999, an increase of $208,040
over the amount recognized in fiscal 1998. In addition, several newer wells had
large DD&A rates in 1999, as either reserves were lower than the previous year,
or initial production volumes were large compared to total expected reserves
volumes.

         Exploration costs increased $54,187 or 11% as compared to fiscal 1998.
These costs are primarily dry hole costs and seismic costs and vary from year to
year, principally as a result of dry hole costs. The Company utilizes the
successful effort's method of accounting for oil and gas operations, thus, dry
holes are a result of drilling unsuccessful exploratory wells. There is no way
to accurately estimate exploration costs, and as the Company will continue
exploratory well participations, future exploration costs can be expected.

         General and administrative costs increased $65,109 in fiscal 1999,
primarily as a result of the addition of one new employee in fiscal 1999, and
the costs associated with a special shareholders meeting held in May 7, 1999, to
vote on changes to the Company's Articles of Incorporation.

         The benefit for income taxes in fiscal 1999 is a result of a lower
income before taxes than in 1998 and the Company continuing to be able to
utilize tax credits from production of "tight gas sands" natural gas and from
excess percentage depletion on it's oil and gas properties.

         As discussed above, the decline in net income is principally
attributable to decreased oil and gas sales revenues, and increased DD&A
expense. Management currently expects fiscal 2000 financial results to improve
as a result of oil and natural gas sales prices improving over fiscal 1999 and
gas sales volumes continuing to increase. However, management has no control
over market prices of oil and natural gas and substantial price reductions could
drastically affect year 2000 results. Also, continued investments in exploratory
drilling carries certain risk, principally dry hole costs discussed above, which
could adversely affect 2000 earnings.


                                      (13)
<PAGE>   16

YEAR 2000 ISSUES

         Much of the computer software in use today may not be able to
accurately process data beyond the year 1999. The majority of computer systems
process data using two digits for the year of transaction, rather than the full
four digits. This may cause many systems to be unable to accurately process year
2000 transactions.

         The Company has completed its replacement of both its computer ("IT
systems") and operational equipment ("non-IT systems") as of September 30, 1999.
The Company has replaced its computer system hardware with new hardware which
has operating systems which are represented as being year 2000 compliant and the
Company's software has been replaced with software represented to be year 2000
compliant. The system software currently being used is the year 2000 compliant
software. It has been used to process all business for fiscal 2000 to date and
no material problems have developed. Tests have been successfully run on post
dated year 2000 data. The Company has no non-IT systems which are expected to be
impacted in any material manner by year 2000.

         The cost of replacement of the Company's IT systems noted above was
less than $30,000. Any additional costs to assess the year 2000 matter or become
compliant therewith are not expected to be significant.

         Management currently feels the most likely worst case scenario of a
year 2000 effect on the Company would be that the operators of the oil and gas
properties in which the Company has an interest, purchasers who buy oil and gas
from the Company's properties or financial institutions ("External Agents") used
by the Company have not properly addressed the year 2000 matter, there could be
some delay in the Company receiving payment for the sale of oil and gas. Should
this occur, the Company may be required to borrow additional amounts on its
available line of credit, thus incurring additional interest expense over that
otherwise anticipated. However, the Company does not expect the year 2000 will
have a material impact on its financial position or results of operations. The
Company has no systems which directly interface with External Agents.

ITEM 7.         FINANCIAL STATEMENTS

<TABLE>
<S>                                                                       <C>
                Report of Independent Auditors ..........................    15

                Consolidated Balance Sheets
                   As of September 30, 1999 and 1998 ....................    16

                Consolidated Statements of Income For The
                   Years Ended September 30, 1999 and 1998 ..............    17

                Consolidated Statements of Stockholders' Equity For
                   The Years Ended September 30, 1999 and 1998 ..........    18

                Consolidated Statements of Cash Flows For
                   The Years Ended September 30, 1999 and 1998 ..........    19

                Notes To Consolidated Financial Statements .............. 20-32
</TABLE>


                                      (14)
<PAGE>   17

                         Report of Independent Auditors

Board of Directors and Stockholders
Panhandle Royalty Company

We have audited the accompanying consolidated balance sheets of Panhandle
Royalty Company as of September 30, 1999 and 1998, and the related consolidated
statements of income, stockholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Panhandle Royalty
Company at September 30, 1999 and 1998, and the consolidated results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.



                                                 ERNST & YOUNG LLP

Oklahoma City, Oklahoma
November 24, 1999


                                      (15)
<PAGE>   18


                            Panhandle Royalty Company

                           Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                                        SEPTEMBER 30,
                                                                                    1999          1998
                                                                                 -----------   -----------
<S>                                                                              <C>           <C>
ASSETS
Current assets:
   Cash and cash equivalents                                                     $   213,207   $   320,210
   Oil and gas sales receivable                                                    1,134,153       716,648
   Income taxes receivable                                                                --       152,090
   Prepaid expenses                                                                    4,132        27,391
                                                                                 -----------   -----------
Total current assets                                                               1,351,492     1,216,339

Property and equipment, at cost, based on successful efforts accounting:
     Producing oil and gas properties                                             24,074,383    22,360,790
     Nonproducing oil and gas properties                                           5,804,543     5,693,399
     Furniture and fixtures                                                          263,695       241,567
                                                                                 -----------   -----------
                                                                                  30,142,621    28,295,756
     Less accumulated depreciation, depletion and amortization                    18,337,952    16,600,499
                                                                                 -----------   -----------
Net properties and equipment                                                      11,804,669    11,695,257

Other assets                                                                         107,716       107,716
                                                                                 -----------   -----------
                                                                                 $13,263,877   $13,019,312
                                                                                 ===========   ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable and accrued liabilities (Note 8)                             $   522,269   $   576,033
   Gas imbalance liability                                                            44,380        44,380
   Dividends payable                                                                  33,296        31,656
   Income taxes payable                                                               46,328            --
   Deferred income taxes                                                              93,000       112,000
                                                                                 -----------   -----------
Total current liabilities                                                            739,273       764,069

Deferred income taxes                                                              1,476,000     1,451,000

Stockholders' equity:
   Class A voting common stock, $.0333 par value; 6,000,000 shares authorized,
     2,056,990 issued and outstanding (2,047,602 in 1998)
                                                                                      68,566        68,254
   Capital in excess of par value                                                    587,058       515,823
   Retained earnings                                                              10,392,980    10,220,166
                                                                                 -----------   -----------
Total stockholders' equity                                                        11,048,604    10,804,243
                                                                                 -----------   -----------
                                                                                 $13,263,877   $13,019,312
                                                                                 ===========   ===========
</TABLE>


See accompanying notes.


                                      (16)
<PAGE>   19

                            Panhandle Royalty Company

                        Consolidated Statements of Income


<TABLE>
<CAPTION>
                                                           YEAR ENDED SEPTEMBER 30,
                                                              1999           1998
                                                          -----------    -----------
<S>                                                       <C>            <C>
Revenues:
   Oil and gas sales                                      $ 5,077,240    $ 5,337,832
   Lease bonuses and rentals                                   10,773         44,269
   Interest                                                    10,253         45,929
   Other                                                       19,209         12,152
                                                          -----------    -----------
                                                            5,117,475      5,440,182

Costs and expenses:
   Lease operating expenses and production taxes              963,804        961,929
   Exploration costs                                          535,431        481,244
   Depreciation, depletion, amortization and impairment     1,737,453      1,437,413
   General and administrative                               1,164,745      1,099,636
   Interest expense                                            16,943          3,125
                                                          -----------    -----------
                                                            4,418,376      3,983,347
                                                          -----------    -----------
Income before provision (benefit) for income taxes            699,099      1,456,835

Provision (benefit) for income taxes                          (35,000)       142,000
                                                          -----------    -----------
Net income                                                $   734,099    $ 1,314,835
                                                          ===========    ===========

Basic and diluted earnings per share                      $       .36    $       .64
                                                          ===========    ===========
</TABLE>


See accompanying notes.


                                      (17)
<PAGE>   20

                            Panhandle Royalty Company

                 Consolidated Statements of Stockholders' Equity

<TABLE>
<CAPTION>
                                                COMMON STOCK           CAPITAL IN
                                         -------------------------      EXCESS OF       RETAINED
                                           SHARES         AMOUNT        PAR VALUE       EARNINGS         TOTAL
                                         ---------    ------------    ------------    ------------    ------------
<S>                                      <C>          <C>             <C>             <C>             <C>
Balances at September 30, 1997           2,039,460    $     67,982    $    445,306    $  9,518,925    $ 10,032,213

Purchase and cancellation of common
   shares                                     (333)            (11)         (3,358)             --          (3,369)
Issuance of common shares to ESOP            8,475             283          73,875              --          74,158
Dividends declared ($.30 per share)             --              --              --        (613,594)       (613,594)
Net income                                      --              --              --       1,314,835       1,314,835
                                         ---------    ------------    ------------    ------------    ------------
Balances at September 30, 1998           2,047,602          68,254         515,823      10,220,166      10,804,243

Purchase and cancellation of common
   shares                                     (237)             (9)         (1,835)             --          (1,844)
Issuance of common shares to ESOP            9,625             321          73,070              --          73,391
Dividends declared ($.27 per share)             --              --              --        (561,285)       (561,285)
Net income                                      --              --              --         734,099         734,099
                                         ---------    ------------    ------------    ------------    ------------
Balances at September 30, 1999           2,056,990    $     68,566    $    587,058    $ 10,392,980    $ 11,048,604
                                         =========    ============    ============    ============    ============
</TABLE>


See accompanying notes.


                                      (18)
<PAGE>   21

                            Panhandle Royalty Company

                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                          YEAR ENDED SEPTEMBER 30,
                                                                            1999           1998
                                                                        -----------    -----------
<S>                                                                     <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income                                                              $   734,099    $ 1,314,835
Adjustments to reconcile net income to net cash provided by operating
   activities:
     Depreciation, depletion, amortization, and impairment                1,737,454      1,437,413
     Deferred income taxes, net of transfer in 1999 of $105,000               6,000         36,000
     Exploration costs                                                      535,431        481,244
     Common stock issued to Employee Stock Ownership Plan                    73,391         74,158
     Cash provided (used) by changes in assets and liabilities:
       Oil and gas sales and other receivables                             (417,505)       177,131
       Income taxes receivable                                              152,090       (152,090)
       Prepaid expenses                                                      23,259        (22,462)
       Accounts payable and accrued liabilities                             (53,764)       224,628
       Income taxes payable                                                  46,328       (112,336)
                                                                        -----------    -----------
Total adjustments                                                         2,102,684      2,143,686
                                                                        -----------    -----------
Net cash provided by operating activities                                 2,836,783      3,458,521

CASH FLOWS FROM INVESTING ACTIVITIES OF PROPERTY AND EQUIPMENT
Capital expenditures, including dry hole costs                           (2,382,296)    (3,395,945)
                                                                        -----------    -----------
Net cash used in investing activities                                    (2,382,296)    (3,395,945)

CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under line of credit                                             300,000             --
Payments of loan principal                                                 (300,000)            --
Purchase and cancellation of common shares                                   (1,844)        (3,369)
Payments of dividends                                                      (559,646)      (611,794)
                                                                        -----------    -----------
Net cash used in financing activities                                      (561,490)      (615,163)
                                                                        -----------    -----------
Decrease in cash and cash equivalents                                      (107,003)      (552,587)

Cash and cash equivalents at beginning of year                              320,210        872,797
                                                                        -----------    -----------
Cash and cash equivalents at end of year                                $   213,207    $   320,210
                                                                        ===========    ===========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid                                                           $    16,943    $     3,125
Income taxes paid (received), net of refunds                               (239,418)       370,426
</TABLE>


See accompanying notes.


                                      (19)
<PAGE>   22

                            Panhandle Royalty Company

                   Notes to Consolidated Financial Statements

                           September 30, 1999 and 1998


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Panhandle Royalty
Company and its wholly-owned subsidiary, P.H.C., Inc. All material intercompany
transactions have been eliminated in the accompanying consolidated financial
statements.

CASH EQUIVALENTS

All highly liquid short-term investments with original maturities of three
months or less at the date of purchase by the Company are considered to be cash
equivalents.

OIL AND GAS SALES RECEIVABLE

The Company sells oil and natural gas to various customers. Substantially all of
the Company's accounts receivable are due from purchasers of oil and natural
gas. Oil and natural gas sales are generally unsecured. The Company has not
experienced significant credit losses in prior years and is not aware of any
significant uncollectible accounts at September 30, 1999.

OIL AND GAS PRODUCING ACTIVITIES

The Company follows the successful efforts method of accounting for oil and gas
producing activities. Intangible drilling and other costs of successful wells
and development dry holes are capitalized and amortized. The costs of
exploratory wells are initially capitalized, but charged against income if and
when the well is determined to be nonproductive. Oil and gas mineral and
leasehold costs are capitalized when incurred. Impairment of unproved properties
is generally assessed on a property-by-property basis.

DEPRECIATION, DEPLETION, AMORTIZATION AND IMPAIRMENT

Depreciation, depletion and amortization of the costs of producing oil and gas
properties are computed using the units of production method primarily on a
separate-property basis using proved reserves as estimated annually by an
independent petroleum engineer. Depreciation of furniture and fixtures is
computed using the straight-line method over estimated productive lives of five
to eight years.


                                      (20)
<PAGE>   23

                            Panhandle Royalty Company

             Notes to Consolidated Financial Statements (continued)


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The Company has significant royalty interests in wells for which the Company
does not share in the costs associated with the wells. Estimated costs of future
dismantlement, restoration and abandonment of wells in which the Company owns a
working interest are not expected to differ significantly from the estimated
salvage value of equipment from such wells and, accordingly, no accrual of such
costs is included in the accompanying consolidated financial statements.

Nonproducing oil and gas properties include nonproducing minerals, which have a
net book value of $4,158,013 at September 30, 1999, consisting of perpetual
ownership of mineral interests in several states, including Oklahoma, Texas and
New Mexico. These costs are being amortized over a thirty-three year period
using the straight-line method. An ultimate determination of whether these
properties contain recoverable reserves in economical quantities is expected to
be made within this time frame. Impairment of nonproducing oil and gas
properties is recognized based on experience and management judgment.

In accordance with the provisions of Financial Accounting Standards (SFAS) No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," the Company recognizes impairment losses for
long-lived assets when indicators of impairment are present and the undiscounted
cash flows are not sufficient to recover the assets' carrying amount. The
impairment loss is measured by comparing the fair value of the asset to its
carrying amount. Fair values are based on discounted future cash flows. The
Company's oil and gas properties were reviewed for indicators of impairment on a
field-by-field basis, resulting in the recognition of impairment provisions of
$357,891 and $149,851, respectively, for 1999 and 1998, which are included in
depreciation, depletion, amortization and impairment expense.

ENVIRONMENTAL COSTS

Environmental liabilities, which historically have not been material, are
recognized when it is probable that a loss has been incurred and the amount of
that loss is reasonably estimable. Environmental liabilities, when accrued, are
based upon estimates of expected future costs. At September 30, 1999, there were
no such costs accrued.

In December 1998, the Company was notified by an operator of a claim on a
producing property in which the Company owns a 4.7% working interest. The
operator has indicated the claim to be without merit. While the Company believes
this claim will not have a material impact on the Company's financial position
or results of operations, the ultimate outcome cannot presently be determined.


                                      (21)
<PAGE>   24

                            Panhandle Royalty Company

             Notes to Consolidated Financial Statements (continued)


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.

PRODUCTION IMBALANCES

During the course of normal production operations, joint interest owners will,
from time to time, take more or less than their ownership share of natural gas
volumes from jointly-owned wells. These volumetric imbalances are monitored over
the life of the well to achieve balancing, or to minimize imbalances, by the
time reserves are depleted, with final cash settlements made under a variety of
arrangements at that time. The Company follows the sales method of accounting
for imbalances. A liability is recorded only if takes of natural gas volumes
from jointly-owned wells exceed the Company's interest in the well's remaining
estimated natural gas reserves. At September 30, 1999 and 1998, the Company's
net liability for production imbalances of approximately 28,500 mcf of natural
gas was $44,380.

EARNINGS PER SHARE OF COMMON STOCK

Basic earnings per share ("EPS") is calculated using income available to common
stockholders divided by the weighted average of common shares outstanding during
the year. Diluted EPS is similar to Basic EPS except that the weighted average
of common shares outstanding is increased to include the number of additional
common shares that would have been outstanding if the dilutive potential common
shares, such as options, had been issued. The treasury stock method is used to
calculate dilutive shares which reduces the gross number of dilutive shares by
the number of shares purchasable from the proceeds of the options assumed to be
exercised (Note 6).

FAIR VALUES OF FINANCIAL INSTRUMENTS

The following information is provided regarding the estimated fair value of the
Company's financial instruments at September 30, 1999 and 1998:

         Cash and cash equivalents, receivables, prepaid expenses, accounts
         payable and accrued liabilities are each estimated to have a fair value
         approximating the carrying amount due to the short maturity of those
         instruments.


                                      (22)
<PAGE>   25
                            Panhandle Royalty Company

             Notes to Consolidated Financial Statements (continued)


2. INCOME TAXES

The Company's provision (benefit) for income taxes is detailed as follows:

<TABLE>
<CAPTION>

                                                                                   1999                1998
                                                                            ----------------------------------------

<S>                                                                          <C>                   <C>
                 Current:
                    Federal                                                    $     59,000        $     91,000
                    State                                                             5,000              15,000
                                                                            ----------------------------------------
                                                                                     64,000             106,000

                 Deferred:
                    Federal                                                         (87,000)             46,000
                    State                                                           (12,000)            (10,000)
                                                                            ----------------------------------------
                                                                                    (99,000)             36,000
                                                                            ----------------------------------------
                                                                               $    (35,000)       $    142,000
                                                                            ========================================
</TABLE>


The difference between the provision (benefit) for income taxes and the amount
which would result from the application of the federal statutory rate to income
before provision (benefit) for income taxes is analyzed below:

<TABLE>
<CAPTION>

                                                                                    1999                1998
                                                                             ----------------------------------------

<S>                                                                             <C>                 <C>
Provision for income taxes at statutory rate                                    $    244,685        $    509,892
Percentage depletion                                                                (196,401)           (298,167)
Tight-sands gas credits                                                              (69,959)            (63,838)
State income taxes, net of federal benefit                                            (4,550)              2,948
Other                                                                                 (8,775)             (8,835)
                                                                             ----------------------------------------
                                                                                $    (35,000)       $    142,000
                                                                             ========================================
</TABLE>

                                      (23)

<PAGE>   26

                            Panhandle Royalty Company

             Notes to Consolidated Financial Statements (continued)

2.INCOME TAXES (CONTINUED)

Deferred tax assets and liabilities, resulting from differences between the
financial statement carrying amounts and the tax bases of assets and
liabilities, consist of the following:

<TABLE>
<CAPTION>

                                                                                    1999                1998
                                                                             ----------------------------------------

<S>                                                                            <C>                 <C>
Deferred tax liabilities:
   Capitalized costs and related depreciation, depletion,
     amortization and impairment                                               $    1,505,000      $    1,509,000
   Cash basis of accounting for income tax purposes                                    93,000             112,000
                                                                             ----------------------------------------
                                                                                    1,598,000           1,621,000

Deferred tax assets:
   Percentage depletion carryforward                                                   17,000              58,000
   Alternative minimum tax credit carryforwards                                        12,000                   -
                                                                             ----------------------------------------
                                                                                       29,000              58,000
                                                                             ----------------------------------------
Net deferred tax liabilities                                                   $    1,569,000      $    1,563,000
                                                                             ========================================
</TABLE>

3. LONG-TERM DEBT

The Company has a revolving line of credit agreement with a bank, which extends
through January 3, 2001, for borrowings, which bear interest at the bank's base
rate plus .2% (8.45% at September 30, 1999), of up to $2,500,000. Any
outstanding borrowings are unsecured but subject to a negative pledge on all of
the Company's oil and gas properties and are payable in full, with accrued and
unpaid interest, January 3, 2001. The Company is required to pay an annual fee
of .125% for the unused portion of the line of credit. There was no balance
outstanding at September 30, 1999 and 1998.

The agreement contains various restrictions which, among other things, require
the Company to maintain, at the end of each quarter, positive net income for the
preceding twelve-month period. Additionally, the Company is restricted from
incurring certain indebtedness, selling oil and gas properties for which the
proceeds received exceed $100,000, acquiring treasury stock in any one year in
excess of $150,000 and paying or declaring cash dividends exceeding fifty
percent of the cash flow from operations, as defined, of the preceding
twelve-month period.

                                      (24)

<PAGE>   27

                            Panhandle Royalty Company

             Notes to Consolidated Financial Statements (continued)

4. DIVIDENDS PAYABLE

Dividends payable represent accrued dividends which are due and payable, but
have not been paid for various reasons, including questions concerning estates
of deceased stockholders, unlocatable shareholders or questions of ownership of
the underlying shares.

5. STOCKHOLDERS' EQUITY

On February 26, 1999, the Company's Board of Directors approved a proposal to
(1) amend the Company's duration from fifty years to perpetuity; (2) amend the
Company's Articles of Incorporation to increase the number of authorized shares
of Class A Common Stock from 1,000,000 shares to 6,000,000 shares; (3) effect a
3-for-1 stock split of the outstanding Class A Common Stock and a corresponding
reduction of the par value per share from $.10 to $.03-1/3; (4) adopt amendments
to the Articles of Incorporation to change voting rights from one vote per
stockholder to one vote per share; and (5) amend the Articles of Incorporation
to provide that generally any merger, consolidation, liquidation or dissolution
of the Company or sale of substantially all of the assets of the Company require
the affirmative vote of the holders of 66-2/3% or more of the Company's
outstanding Class A Common Stock. On May 7, 1999, these proposals were put forth
to a vote of the stockholders, for which a majority of the stockholders voted in
favor of each proposal, causing these proposals to become effective on such
date. The Class A Common Stock split was effected in the form of a stock
dividend, distributed on June 1, 1999, to stockholders of record on May 7, 1999.

All agreements concerning Common Stock of the Company, including the Company's
Employee Stock Ownership Plan and the Company's commitment under the Deferred
Compensation Plan for Non-Employee Directors, provide for the issuance or
commitment, respectively, of additional shares of the Company's stock due to the
declaration of the stock split. All references to number of shares, per share,
and authorized share information in the accompanying consolidated financial
statements have been adjusted to reflect the stock split and increase in
authorized shares approved on May 7, 1999, at the Special Meeting of the
Stockholders of the Company.

6. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per
share. The Company's diluted earnings per share calculation takes into account
certain shares that may be issued under the Non-Employee Directors' Deferred
Compensation Plan (Note 8). The weighted

                                      (25)

<PAGE>   28

                            Panhandle Royalty Company

             Notes to Consolidated Financial Statements (continued)

6. EARNINGS PER SHARE (CONTINUED)

average shares outstanding, potentially dilutive shares, and earnings per share
for 1998 have been restated to affect the 3-for-1 stock split discussed in Note
5.

<TABLE>
<CAPTION>

                                                                           YEAR ENDED SEPTEMBER 30,
                                                                           1999                1998
                                                                     ---------------- -------------------

<S>                                                                  <C>                       <C>
Numerator for primary and diluted earnings per share:
   Net income                                                        $     734,099             $1,314,835
                                                                     =============             ==========

Denominator:
   For basic earnings per share--weighted average shares                 2,047,507              2,039,292
   Effect of potential diluted shares:
     Directors' deferred compensation shares                                16,399                 13,074
                                                                     -------------             ----------
Denominator for diluted earnings per share--adjusted
   weighted average shares and potential shares                          2,063,906              2,052,366
                                                                     =============             ==========

Basic earnings per share                                             $         .36             $      .64
                                                                     =============             ==========

Diluted earnings per share                                           $         .36             $      .64
                                                                     =============             ==========
</TABLE>

7. EMPLOYEE STOCK OWNERSHIP PLAN

The Company has an employee stock ownership plan that covers substantially all
employees and is established to provide such employees with a retirement
benefit. These benefits become fully vested after three years of employment.
Contributions to the plan are at the discretion of the Board of Directors and
can be made in cash (none in 1999 or 1998) or the Company's common stock. For
contributions of common stock, the Company records as expense, the fair market
value of the stock at the time of contribution. The 101,625 shares of the
Company's common stock held by the plan as of September 30, 1999, are allocated
to individual participant accounts, are included in the weighted average shares
outstanding for purposes of earnings per share computations and receive
dividends.
Contributions to the plan consisted of:

<TABLE>
<CAPTION>

                 YEAR                                                  SHARES          AMOUNT
                 ---------------------------------------------------------------------------------

<S>                                                                    <C>          <C>
                 1999                                                   9,625        $  73,391
                 1998                                                   8,475        $  74,158
</TABLE>

                                      (26)

<PAGE>   29
                            Panhandle Royalty Company

             Notes to Consolidated Financial Statements (continued)


8. DEFERRED COMPENSATION PLAN FOR DIRECTORS

Effective November 1, 1994, the Company formed the Panhandle Royalty Company
Deferred Compensation Plan for Non-Employee Directors (the "Plan"). The Plan
provides that each eligible director can individually elect to receive shares of
Company stock rather than cash for board meeting fees and board committee
meeting fees. These shares are unissued and vest at the date of grant. The
shares are credited to each director's deferred fee account at the fair market
value of the stock at the date of grant and are adjusted for changes in market
value subsequent thereto. Upon retirement, termination or death of the director,
or upon change in control of the Company, the shares accrued under the Plan will
be either issued to the director or may be converted to cash, at the director's
discretion, for the fair market value of the shares on the conversion date as
defined by the Plan. As of September 30, 1999, 16,399 shares (13,074 shares at
September 30, 1998) are included in the Plan. The Company has accrued $132,727
at September 30, 1999 ($123,655 at September 30, 1998) in connection with the
Plan which is included in accrued liabilities in the accompanying consolidated
balance sheet.

9. INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES

All oil and gas producing activities of the Company are conducted within the
United States (principally Oklahoma and New Mexico) and represent substantially
all of the business activities of the Company.

AGGREGATE CAPITALIZED COSTS

The aggregate amount of capitalized costs of oil and gas properties and related
accumulated depreciation, depletion and amortization is as follows:

<TABLE>
<CAPTION>

                                                                                          SEPTEMBER 30,
                                                                                    1999                1998
                                                                             ----------------------------------------

<S>                                                                            <C>                     <C>
Producing properties                                                           $    24,074,385         $22,360,790
Nonproducing properties                                                              5,804,543           5,693,399
                                                                             ----------------------------------------
                                                                                    29,878,928          28,054,189
Accumulated depreciation, depletion and amortization                               (18,133,674)        (16,416,872)
                                                                             ----------------------------------------
Net capitalized costs                                                          $    11,745,254         $11,637,317
                                                                             ========================================
</TABLE>

                                      (27)

<PAGE>   30

                            Panhandle Royalty Company

             Notes to Consolidated Financial Statements (continued)

9. INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (CONTINUED)

COSTS INCURRED

During the reporting period, the Company incurred the following costs in oil and
gas producing activities:

<TABLE>
<CAPTION>

                                                                                    1999                1998
                                                                             ----------------------------------------

<S>                                                                            <C>                 <C>
Property acquisition costs                                                     $      445,827      $      739,164
Exploration costs                                                                     514,546           1,181,110
Development costs                                                                   1,399,795           1,447,578
                                                                             ----------------------------------------
                                                                               $    2,360,168      $    3,367,852
                                                                             ========================================
</TABLE>

10. SUPPLEMENTARY INFORMATION ON OIL AND GAS RESERVES (UNAUDITED)

The following unaudited information regarding the Company's oil and natural gas
reserves is presented pursuant to the disclosure requirements promulgated by the
Securities and Exchange Commission (OSECO) and SFAS No. 69, "Disclosures About
Oil and Gas Producing Activities."

Proved reserves are estimated quantities of crude oil and natural gas which
geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and
operating conditions. Proved developed reserves are those proved reserves that
can be expected to be recovered through existing wells with existing equipment
and operating methods. Because the Company's nonproducing mineral and leasehold
interests consist of various small interests in numerous tracts located
primarily in Oklahoma, New Mexico, Louisiana and Texas, it is not economically
feasible for the Company to provide estimates of all proved undeveloped
reserves. However, in 1995 the Company directed its independent petroleum
engineering firm to include proved undeveloped reserves in certain areas of
Western Oklahoma in the scope of properties which they evaluate for the Company
and, in 1996, the Company included certain proved undeveloped reserves in areas
of New Mexico within the scope of evaluated properties. Due to field production
allowable rules in the Dagger Draw field of New Mexico only those proved
undeveloped reserves which the Company felt could be drilled, under existing
allowable rules, have been included. Should the allowable rules be amended
and/or production volumes change significantly, additional proved undeveloped
reserves in the Dagger Draw field of New Mexico may be added in the future.

                                      (28)

<PAGE>   31

                            Panhandle Royalty Company

             Notes to Consolidated Financial Statements (continued)

10. SUPPLEMENTARY INFORMATION ON OIL AND GAS RESERVES (UNAUDITED) (CONTINUED)

The Company's net proved (including certain undeveloped reserves described
above) oil and gas reserves as of September 30, 1999 and 1998 have been
estimated by Campbell & Associates, Inc., an independent petroleum engineering
firm. All studies have been prepared in accordance with regulations prescribed
by the Securities and Exchange Commission. The reserve estimates were based on
economic and operating conditions existing at September 30, 1999 and 1998. Since
the determination and valuation of proved reserves is a function of testing and
estimation, the reserves presented should be expected to change as future
information becomes available.

ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES

The following table presents the Company's net proved (including certain
undeveloped reserves described above) oil and gas reserve quantities as
estimated by Campbell & Associates, Inc., an independent petroleum engineering
firm, as of September 30, 1999 and 1998, and the changes in reserves for the
years then ended:

<TABLE>
<CAPTION>

                                                                                          PROVED RESERVES
                                                                               --------------------------------------
                                                                                      OIL                GAS
                                                                                   (MBARRELS)           (MMCF)
                                                                               --------------------------------------

<S>                                                                             <C>                     <C>
September 30, 1997                                                                      904             11,267

Revisions of previous estimates (1)                                                    (102)              (746)
Purchases of reserves in place                                                           13                 33
Extensions and discoveries                                                               66              2,817
Production                                                                             (104)            (1,710)
                                                                               --------------------------------------
September 30, 1998                                                                      777             11,661

Revisions of previous estimates (2)                                                     (32)               709
Purchases of reserves in place                                                           11                181
Extensions and discoveries                                                               41              2,453
Production                                                                              (76)            (1,889)
                                                                               --------------------------------------
September 30, 1999                                                                      721             13,115
                                                                               ======================================
</TABLE>

(1)      Oil and gas revisions are primarily related to those reserves which
         were economically recoverable at the higher prices which existed at
         September 30, 1997 which are not economically recoverable at prices
         existing at September 30, 1998.

                                      (29)

<PAGE>   32

                            Panhandle Royalty Company

             Notes to Consolidated Financial Statements (continued)


10. SUPPLEMENTARY INFORMATION ON OIL AND GAS RESERVES (UNAUDITED) (CONTINUED)

(2)      Oil and gas revisions are primarily related to those reserves which
         were economically recoverable at the higher prices which existed at
         September 30, 1999 which were not economically recoverable at prices
         existing at September 30, 1998. In 1999, oil reserves were also revised
         downward from 1998 due to a decline in production of certain New Mexico
         properties after being shut-in for several months in 1999 due to
         depressed oil prices.

<TABLE>
<CAPTION>

                                            PROVED DEVELOPED RESERVES          PROVED UNDEVELOPED RESERVES
                                              OIL            GAS                 OIL                 GAS
                                            (MBARRELS)      (MMCF)            (MBARRELS)            (MMCF)
---------------------------------------------------------------------------------------------------------------------

<S>                                      <C>               <C>                  <C>               <C>
September 30, 1997                             625               9,707                279               1,560
                                      ===============================================================================

September 30, 1998                             498              10,103                279               1,558
                                      ===============================================================================

September 30, 1999                             433              11,519                288               1,596
                                      ===============================================================================
</TABLE>

STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS

Estimates of future cash flows from proved oil and gas reserves, based on
current prices and costs, are shown in the following table. Estimated income
taxes are calculated by (i) applying the appropriate year-end tax rates to the
estimated future pretax net cash flows less depreciation of the tax basis of
properties and statutory depletion allowances and (ii) reducing the amount in
(i) for estimated tax credits to be realized in the future for gas produced from
"tight-sands."

<TABLE>
<CAPTION>

                                                                                          SEPTEMBER 30,
                                                                                    1999                1998
                                                                             ----------------------------------------

<S>                                                                            <C>                 <C>
Future cash inflows                                                            $    52,222,440     $    30,120,490
Future production costs                                                              9,047,782           5,815,190
Future development costs                                                             1,183,278           1,179,844
                                                                             ----------------------------------------
Future net cash inflows before future income tax expenses                           41,991,380          23,125,456

Future income tax expense                                                           11,570,726           5,945,839
                                                                             ----------------------------------------
Future net cash flows                                                               30,420,654          17,179,617

10% annual discount                                                                 10,348,756           5,846,105
                                                                             ----------------------------------------
Standardized measure of discounted future net cash flows                       $    20,071,898     $    11,333,512
                                                                             ========================================
</TABLE>
                                      (30)


<PAGE>   33

                            Panhandle Royalty Company

             Notes to Consolidated Financial Statements (continued)


10. SUPPLEMENTARY INFORMATION ON OIL AND GAS RESERVES (UNAUDITED) (CONTINUED)

Changes in the standardized measure of discounted future net cash flows are as
follows:

<TABLE>
<CAPTION>

                                                                                    1999                1998
                                                                             ----------------------------------------
<S>                                                                            <C>                 <C>
Beginning of year                                                              $    11,333,512     $    18,742,363
Changes resulting from:
   Sales of oil and gas, net of production costs                                    (4,113,436)         (4,375,903)
   Net change in sales prices and production costs                                   9,872,435          (8,305,058)
   Net change in future development costs                                               (2,287)            (13,875)
   Extensions and discoveries                                                        4,447,477           3,186,652
   Revisions of quantity estimates                                                     797,470          (1,451,226)
   Purchases of minerals-in-place                                                      406,875             111,795
   Accretion of discount                                                             1,133,351           1,874,236
   Net change in income taxes                                                       (3,806,471)          2,281,936
   Change in timing and other, net                                                       2,972            (717,408)
                                                                             ----------------------------------------
End of year                                                                    $    20,071,898     $    11,333,512
                                                                             ========================================
</TABLE>

11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following is a summary of the Company's unaudited quarterly results of
operations. The fiscal 1998 earnings per share amounts have been restated for
the effect of the 3-for-1 stock split as discussed in Note 5.

<TABLE>
<CAPTION>

                                                                  FISCAL 1999
                                       -------------------------------------------------------------------------
                                                                QUARTER ENDED
                                       -------------------------------------------------------------------------
                                       DECEMBER 31      MARCH 31         JUNE 30       SEPTEMBER 30
                                       -------------------------------------------------------------------------

<S>                                    <C>             <C>              <C>             <C>
Revenues                               $1,042,473      $  941,670       $1,542,780      $1,590,552
Income (loss) before provision
   (benefit) for income taxes (A)           6,097        (119,745)         489,624         323,123
Net income (B)                              6,097         (75,745)         408,624         395,123
Basic earnings (loss) per share                $-      $     (.04)      $      .20      $      .20
Diluted earnings (loss) per share              $-      $     (.04)      $      .20      $      .20
</TABLE>

                                      (31)

<PAGE>   34
                            Panhandle Royalty Company

             Notes to Consolidated Financial Statements (continued)


11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED)

<TABLE>
<CAPTION>

                                                             FISCAL 1998
                                    ------------------------------------------------------------------
                                                            QUARTER ENDED
                                    ------------------------------------------------------------------
                                     DECEMBER 31       MARCH 31        JUNE 30        SEPTEMBER 30
                                    ------------------------------------------------------------------

<S>                                 <C>              <C>              <C>              <C>
Revenues                            $ 1,826,939      $ 1,335,664      $ 1,199,739      $ 1,077,840
Income (loss) before provision
   for income taxes (A)                 751,541          369,716          341,193           (5,615)
Net income (B)                          586,541          299,716          296,193          132,385
Basic earnings per share            $       .29      $       .15      $       .14      $       .06
Diluted earnings per share          $       .29      $       .15      $       .14      $       .06
</TABLE>

(A)      Fourth quarter income before provision for income taxes includes an
         SFAS 121 charge of $267,891 and $59,851 for 1999 and 1998,
         respectively.

(B)      Year-end adjustments to the Company's provision for income taxes caused
         the effective rate for 1999 and 1998 to be less than that estimated
         during the previous three quarters. The effect of this difference is
         reflected in the fourth quarter net income above.

                                      (32)
<PAGE>   35
ITEM 8.         CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                ACCOUNTING AND FINANCIAL DISCLOSURE

                                      NONE



                                    PART III

ITEM 9.         DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
                CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)
                OF THE EXCHANGE ACT

                Listed below are the names, ages and positions, as of December
1, 1999, of the directors and executive officers of the Company. The Company's
bylaws provide for seven directors who are elected for staggered three-year
terms. Executive officers are appointed by the board of directors to serve in
their respective capacities until their successors are duly appointed by the
directors.

                                    DIRECTORS

<TABLE>
<CAPTION>
                                                                Served As
                                                      Term      Director
Name                      Age   Position & Offices   Expires      Since
----                      ---   ------------------   -------    ---------
<S>                       <C>   <C>                  <C>        <C>
Michael A. Cawley(b)       52   Director              2001        1991

Sam J. Cerny(a)            67   Director              2000        1993

E. Chris Kauffman(b)(c)    59   Director              2000        1991

H W Peace II(b)            64   Director, Chief       2002        1991
                                Executive Officer,
                                President

Ray H. Potts(c)            67   Director              2001        1997

Robert A. Reece(a)(c)      55   Director              2002        1986

Jerry L. Smith(a)          59   Director, Chairman    2002        1987
                                of the Board
</TABLE>

    (a)   Member of Audit Committee
    (b)   Member of Compensation Committee
    (c)   Member of Retirement Committee


                                      (33)
<PAGE>   36

                               EXECUTIVE OFFICERS

<TABLE>
<CAPTION>
                                                                   Held Office
Name                             Age      Position & Offices           Since
----                             ---      ------------------       -----------
<S>                              <C>      <C>                      <C>
Jerry L. Smith                    59      Chairman of the              1997
                                          Board, Director

H W Peace II                      64      Director, Chief              1991
                                          Executive Officer,
                                          President

Michael C. Coffman                46      Vice President,              1990
                                          Chief Financial Officer,
                                          Secretary/Treasurer

Wanda C. Tucker                   62      Vice President of            1990
                                          Land
</TABLE>

                BUSINESS EXPERIENCE

                Michael A. Cawley is an attorney and is the president and chief
executive officer of the Samuel Roberts Noble Foundation, Inc. He has been
employed by the Noble Foundation for the last seven years. Prior to joining the
Noble Foundation, he was engaged in the practice of law in Ardmore, Oklahoma
with the firm of Thompson & Cawley. He is also a director of Noble Drilling
Corporation and Noble Affiliates Inc.

                Sam J. Cerny is a geological engineer and has been employed by
Shell Oil Company, Cleary Petroleum Corporation and its successor company, Grace
Petroleum Corporation, where he served as President/CEO from 1976 to 1991. He is
a past president of the Oklahoma Independent Petroleum Association and for the
last five years has been active as a petroleum management consultant.

                E. Chris Kauffman is a vice-president of Campbell-Kauffman,
Inc., an independent insurance agency in Oklahoma City. He has been involved
with the agency since it was formed in 1981. In addition, he is the chief
financial officer and treasurer of The Insurance Center Agency, Inc. He is also
a director of First State Bank in Oklahoma City and a trustee of the Central
Oklahoma Transportation & Parking Authority.

                Robert A. Reece is an attorney, and for the last five years has
been of counsel with the firm of Crowe & Dunlevy. He is active in the management
of his family's investments. He is also a director of National Bank of Commerce.

                H W Peace II holds bachelors and masters degrees in geology. For
thirty-five years he has been employed as a geologist, in management or as an
officer and/or director in the petroleum industry. He has been employed by Union
Oil Company of California, Cotton Petroleum and Hadson Petroleum Corporation. He
has been president of the Company since 1991.


                                      (34)
<PAGE>   37

                Ray H. Potts holds a master's degree in geology from the
University of Missouri. He was employed for six years as an exploration
geologist for the Pure Oil Company and in 1967 formed Potts- Stephenson
Exploration Company, later changed to PSEC, Inc. In 1997 PSEC, Inc. was sold to
ONEOK Resources Company. Mr. Potts is currently active in the oil and gas
industry and has been involved in several national and state trade associations,
geological societies and numerous civic activities.

                Jerry L. Smith for the last nine years has been the owner of
Smith Capital Corporation in Dallas. This corporation is a private investment
firm focusing on commercial real estate and securities. Mr. Smith also is
immediate past Treasurer and Director of the Association of Graduates of the
United States Air Force Academy.

                Michael C. Coffman is a certified public accountant. Since 1975,
he has worked in public accounting and as a financial officer of three publicly
owned companies involved in the oil and gas industry. He has been employed by
the Company since 1990.

                Wanda C. Tucker has been a full-time employee of the Company
since 1978, has served in various positions with the Company and is currently
vice president of land.

                None of the organizations described in the business experiences
of company directors and officers are parents, subsidiaries or affiliates of
Panhandle Royalty Company.

ITEM 10.        EXECUTIVE COMPENSATION

Summary Compensation Table

<TABLE>
<CAPTION>
Name and                               Annual Compensation
Principal                     ----------------------------------------
Position           Year        Salary          Bonus         All Other
--------           ----       --------        -------       ----------
<S>                <C>        <C>             <C>           <C>
H W Peace II       1999       $125,000        $13,100       $20,715(1)
President &        1998       $122,500        $25,600       $22,215(1)
Chief Exec.        1997       $113,750        $25,600       $20,903(1)
Officer
</TABLE>

     (1)  Represents the value of 2,717 shares for 1999, 2,538 shares for 1998,
          and 2,106 shares for 1997, of Company stock contributed to the
          Panhandle Employee Stock Ownership Plan (ESOP) on Mr. Peace's behalf.
          The ESOP is a defined contribution plan, non-voluntary and
          non-contributory and serves as the retirement plan for the Company's
          employees. Contributions are at the discretion of the board of
          directors and, to date, all contributions have been made in shares of
          Company stock. Contributions are allocated to all participants in
          proportion to their salaries for the plan year and 100% vesting occurs
          after three years' of service.


                                      (35)
<PAGE>   38

                DIRECTORS FEES

                Outside directors of the Company are paid $1,000 plus travel
expenses for attending each meeting of the board of directors and $200 for
attending each committee meeting of the board. Any director who travels in
excess of 50 miles to attend a meeting receives an additional $100 for each
meeting. Outside directors can elect to be included in the Panhandle Royalty
Company Deferred Compensation Plan For Non-Employee Directors (the "Plan"). The
Plan provides that each eligible director can individually elect to receive
shares of Company stock rather than cash for board meeting fees and board
committee meeting fees. These unissued shares are credited to each director's
deferred fee account at the fair market value of the shares on the date of the
meeting. Upon retirement, termination or death of the director, or upon a change
in control of the Company, the shares accrued under the Plan will be either
issued to the director or may be converted to cash, at the directors'
discretion, at the fair market value of the shares on the conversion date, as
defined. All outside directors are participating in this Plan.

                In addition to the above, Jerry Smith, chairman of the board of
directors, who is not an employee of the Company, is entitled to receive a $100
per hour fee for time spent, other than board or committee meetings, on Company
business. During fiscal 1999 and 1998, no payments were made to Mr. Smith under
this arrangement.

ITEM 11.        SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

                SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

                As of December 1, 1999, no person or "group" as that term is
used in Section 13(d)(3) of the Securities Exchange Act of 1934, was known to
Panhandle to be the beneficial owner of more than five percent of the
outstanding shares of Panhandle's class A common stock.

                SECURITY OWNERSHIP OF MANAGEMENT

                The following table sets forth, as of September 30, 1999, all
shares of class A common stock held beneficially, directly or indirectly by each
director and by all directors and officers as a group.

<TABLE>
<CAPTION>
                           Amount And Nature Of            Percent Of
        Name               Beneficial Ownership               Class
        ----               --------------------            ----------
<S>                        <C>                             <C>
Michael A. Cawley(A)       300 shares, sole voting              *
                            and investment powers

Sam J. Cerny(B)            5,100 shares, sole voting            *
                            and investment powers

E. Chris Kauffman(C)       9,300 shares, shared voting          *
                            and investment powers
</TABLE>


                                      (36)
<PAGE>   39

<TABLE>
<S>                        <C>                             <C>
H W Peace II(D)            27,702 shares, shared voting         1.3%
                            and investment powers

Ray H. Potts(E)            480 shares, sole voting              *
                            and investment powers

Robert A. Reece(F)         17,544 shares, sole voting           *
                            and investment powers

Jerry L. Smith(G)          21,072 shares, sole voting           1.0%
                            and investment powers

All directors and          32,665 shares, shared                1.6%
officers as a               voting and investment
group (9 persons)           powers

                           83,529 shares, sole voting           4.0%
                            and investment powers

                           116,194 shares total                 5.6%

                                                           * less than 1.0%
</TABLE>

(A)  P.O. Box 2180, Ardmore, OK 73402
(B)  3330 Liberty Twr, 100 N. Broadway, Okla. City, OK 73102
(C)  9705 North Broadway Ext. - Suite #200, Okla. City, OK 73114
(D)  5400 N.W. Grand Blvd - Suite #210, Okla. City, OK 73112
(E)  100 N. Broadway - Suite #3200, Okla. City, OK 73102
(F)  6403 N. Grand Blvd. - Suite #204, Okla. City, OK 73116
(G)  5944 Luther Lane - Suite #401, Dallas, TX 75225


ITEM 12.        CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

                                      NONE

ITEM 13.        EXHIBITS AND REPORTS ON FORM 8-K

                (3)  Articles of Incorporation (Incorporated by reference to
                     Exhibit attached to Form 10 filed January 27, 1980, and to
                     Forms 8-K dated June 1, 1982 and December 3, 1982)

                     By-Laws as amended (Incorporated by reference to Form 8-K
                     dated October 31, 1994)

                (4)  Instruments defining the rights of security holders
                     (Incorporated by reference to Articles of Incorporation and
                     By-Laws listed above)


                                      (37)
<PAGE>   40

                (10) Agreement indemnifying directors and officers (Incorporated
                     by reference to Form 10-K dated September 30, 1989)

                (21) Subsidiaries of the Registrant

                (27) Financial Data Schedule


                REPORTS ON FORM 8-K

                No reports on Form 8-K were filed during the quarter ended
September 30, 1999.



                                   EXHIBIT 21

                    SUBSIDIARIES OF PANHANDLE ROYALTY COMPANY
                              AT SEPTEMBER 30, 1999

                The following table sets forth certain information with respect
to Panhandle's subsidiary:

                                   CORPORATION

                                    PHC, INC.

                PHC, Inc. was incorporated in Oklahoma and is included in
Panhandle's consolidated financial statements. PHC, Inc. is inactive, and has
never done any business.


                                      (38)
<PAGE>   41

                                   SIGNATURES

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

                                       PANHANDLE ROYALTY COMPANY


                                       By: /s/ H W Peace II
                                           -------------------------------------
                                           H W Peace II, Chief
                                           Executive Officer,
                                           President, Director

                                       Date: December 14, 1999

                In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.

      /s/ Jerry L. Smith                               /s/ E. Chris Kauffman
------------------------------------                ----------------------------
Jerry L. Smith, Chairman of Board                   E. Chris Kauffman, Director

Date    December 14, 1999                           Date   December 14, 1999
     -------------------------------                     -----------------------


      /s/ Robert A. Reece                                /s/ Ray H. Potts
------------------------------------                ---------------------------
Robert A. Reece, Director                           Ray H. Potts, Director

Date    December 14 1999                            Date   December 14, 1999
     -------------------------------                     -----------------------


     /s/ Sam J. Cerny                                  /s/ Michael A. Cawley
------------------------------------                ---------------------------
Sam J. Cerny, Director                              Michael A. Cawley, Director

Date    December 14, 1999                           Date   December 14, 1999
     -------------------------------                     -----------------------


      /s/ Michael C. Coffman
-----------------------------------
Michael C. Coffman, Vice President
Treasurer and Secretary
(Principal Financial and Accounting
 Officer)

Date    December 14, 1999
     ----------------------------


                                      (39)
<PAGE>   42
                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER    DESCRIPTION
------    -----------
<S>       <C>
  (3)     Articles of Incorporation (Incorporated by reference to Exhibit
          attached to Form 10 filed January 27, 1980, and to Forms 8-K dated
          June 1, 1982 and December 3, 1982)

          By-Laws as amended (Incorporated by reference to Form 8-K dated
          October 31, 1994)

  (4)     Instruments defining the rights of security holders (Incorporated by
          reference to Articles of Incorporation and By-Laws listed above)

  (10)    Agreement indemnifying directors and officers (Incorporated by
          reference to Form 10-K dated September 30, 1989)

  (21)    Subsidiaries of the Registrant (Included in Item 13)

  (27)    Financial Data Schedule
</TABLE>