<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-K

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


                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

                                       OR

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

              FOR THE TRANSITION PERIOD FROM _________ TO ________

                         COMMISSION FILE NUMBER 0-26444

                                 FORCENERGY INC
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

                DELAWARE                                  65-0429338
     (State of other jurisdiction of                   (I.R.S. Employer
     incorporation or organization)                   Identification No.)

          2730 S.W. 3RD AVENUE
               SUITE 800
             MIAMI, FLORIDA                                33129-2356
     (Address of principal executive offices)              (Zip Code)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (305) 856-8500

                              --------------------

          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

           Title of each class                  Name of each exchange on
           -------------------                       which registered
                                                ------------------------
              Common Stock                      New York Stock Exchange*

* The shares of common stock were delisted by the New York Stock Exchange on
March 22, 1999.

        SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE

         Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes      No X
    ---    ---

         Indicate by checkmark if disclosure of delinquent filings pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.

         As of May 31, 1999, there were outstanding 24,755,241 shares of common
stock of the Registrant. The aggregate market value on June 7, 1999 of the
voting stock of the Registrant held by non-affiliates was an estimated $
___________ million.

<PAGE>   2

                                   FORM 10-K
                                 FORCENERGY INC
                               TABLE OF CONTENTS


<TABLE>
<CAPTION>
 ITEM                                               PART I                                                  PAGE
                                                    ------                                                  ----
 <S>    <C>                                                                                                 <C>
   1    BUSINESS.........................................................................................     1
   2    PROPERTIES.......................................................................................    10
   3    LEGAL PROCEEDINGS................................................................................    12
   4    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............................................    12

                                                    PART II
                                                    -------

   5    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
        MATTERS..........................................................................................    12
   6    SELECTED FINANCIAL DATA..........................................................................    13
   7    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS.........................................................................    14
  7A    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS......................................    19
   8    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................................................    19
   9    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
           FINANCIAL DISCLOSURE..........................................................................    19

                                                    PART III
                                                    --------

  10    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...............................................    19
  11    EXECUTIVE COMPENSATION...........................................................................    19
  12    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...................................    19
  13    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................................................    19

                                                     PART IV
                                                     -------

  14    EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.................................    20

        GLOSSARY OF OIL AND GAS TERMS....................................................................    24
</TABLE>

<PAGE>   3

                DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS


         This Annual Report on Form 10-K includes "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended
(the "Securities Act") and Section 21E of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). All statements other than statements of
historical fact included in this Form 10-K, including without limitation,
statements under "Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" regarding the planned capital
expenditures, increases in oil and gas production, the number of anticipated
wells to be drilled in 1999 and thereafter, Forcenergy's financial position,
business strategy and other plans and objectives for future operations, are
forward-looking statements. Although Forcenergy believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct. There are
numerous uncertainties inherent in estimating quantities of proved oil and
natural gas reserves and in projecting future rates of production and timing of
development expenditures, including many factors beyond the control of
Forcenergy. Reserve engineering is a subjective process of estimating
underground accumulations of oil and natural gas that cannot be measured in an
exact way, and the accuracy of any reserve estimate is a function of the
quality of available data and of engineering and geological interpretation and
judgment. As a result, estimates made by different engineers often vary from
one another. In addition, results of drilling, testing and production
subsequent to the date of an estimate may justify revisions of such estimates
and such revisions, if significant, would change the schedule of any further
production and development drilling. Accordingly, reserve estimates are
generally different from the quantities of oil and natural gas that are
ultimately recovered. All subsequent written and oral forward-looking
statements attributable to Forcenergy or persons acting on its behalf are
expressly qualified in their entirety by such factors.


<PAGE>   4

                                     PART I

ITEM 1.  BUSINESS

OVERVIEW

         Forcenergy Inc, a Delaware corporation (the "Company" or
"Forcenergy"), formerly Forcenergy Gas Exploration, Inc., is an independent oil
and gas company engaged in the exploration, acquisition, development,
exploitation and production of oil and natural gas. Forcenergy and its
predecessors have been engaged in the oil and gas exploration and production
business since 1982, the year in which it was founded by its current President
and Chief Executive Officer, Stig Wennerstrom.

         Forcenergy has experienced significant growth in the last eight years,
primarily through the exploitation, enhancement and development of acquired
producing properties in the Gulf of Mexico and the 1996 acquisition of
producing properties in the Cook Inlet, Alaska area. At December 31, 1998,
Forcenergy had net proved reserves of approximately 111.0 MMBOE, 64% of which
were located in the Gulf of Mexico and 18% of which were located in Alaska.
Approximately 44% of the Company's net proved reserves on such date were oil
and approximately 73% of proved reserves were classified as proved developed.
The Company currently operates approximately 63% of its Gulf of Mexico
production. The Company's primary focus is its Gulf of Mexico and Alaska
activities. However, the Company has also acquired interests in certain
undeveloped international leasehold acreage in Gabon, Africa and Australia.

         On March 21, 1999 (the "Petition Date"), the Company and its
wholly-owned subsidiary, Forcenergy Resources Inc., filed a voluntary petition
for relief under Chapter 11 of the U.S. Bankruptcy Code in order to facilitate
the restructuring of the Company's long-term debt, revolving credit, trade and
other obligations. The filing was made in the U.S. District Court for the
Eastern District of Louisiana in New Orleans (the "Bankruptcy Court"). The
Company continues to operate as a debtor-in-possession subject to the
Bankruptcy Court's supervision and orders.

         The bankruptcy petitions were filed in order to preserve cash and to
give the Company the opportunity to restructure its debt. The consummation of a
plan of reorganization is the primary objective of the Company. The plan of
reorganization will set forth the means for satisfying claims, including
liabilities subject to compromise, and interests in the Company. A plan of
reorganization may result in, among other things, material dilution or
elimination of existing security holders as a result of the issuance of
securities to creditors or new investors. The consummation of a plan of
reorganization will require approval of the Bankruptcy Court.

         At this time, it is not possible to predict the outcome of the
bankruptcy proceedings, in general, or the effect on the business of the
Company or on the interests of creditors, royalty owners or stockholders. As a
result of the bankruptcy filing, all of the Company's liabilities, including
certain secured debt, are subject to compromise.

STRATEGY

         The Company's strategy has generally been to increase reserves and
cash flows through continuing development of existing properties while
selectively acquiring additional properties with upside potential. The Company
has historically focused these efforts primarily in the Gulf of Mexico and more
recently, the Cook Inlet, Alaska. The Company has also pursued exploratory
activities in Gabon, Africa and New South Wales, Australia.

         The Company's continued pursuit of its business strategy is subject to
Bankruptcy Court supervision. In conjunction with the Chapter 11 filing, the
Company's common stock was delisted by the New York Stock Exchange. Shortly
after delisting from the New York Stock Exchange, the Company's common stock
began trading on the OTC Bulletin Board under the symbol "FENYQ". On May 21,
1999, the symbol was changed to FENYE, the symbol under which the Company's
stock currently trades. Although some market for the Company's common stock
exists, liquidity and access to debt and equity capital markets has been
severely limited. Additionally, the Company is fully drawn under its existing
senior credit facility and is currently in violation of various covenants
thereunder. The Company is


                                       1
<PAGE>   5

currently continuing to maintain and maximize the operations of its producing
properties by utilizing cash accumulated subsequent to the Chapter 11 filing.
The use of that cash is governed by provisions of a court-approved cash
collateral order. The Company is also negotiating with potential lenders to
provide additional debtor-in-possession financing. The Company is currently
preparing a plan of reorganization as yet not submitted to the Bankruptcy
Court. Considering the above factors, the Company cannot anticipate or predict
the adequacy of working capital or liquidity from which to fund future
operations and the continued pursuit of its business strategy.


                                       2
<PAGE>   6


         Gulf of Mexico. The Company's business strategy is to increase
reserves and cash flows primarily through the exploration, exploitation and
development of its producing properties while also selectively acquiring
additional properties with the same type of upside potential. Management
believes it has assembled a three to five year inventory of development,
exploitation and exploratory drilling opportunities in the Gulf of Mexico
predominantly on acreage currently held by production. Most of the prospects
comprising this inventory are located in fields which have prolific production
histories and which the Company believes, based on the past success of
Forcenergy and other industry participants in applying 3-D technology to mature
producing properties, will yield additional reserves through the application of
modern exploration and development technologies. Forcenergy believes that its
high quality asset base positions it for future growth through a continuing
program of further development through selective exploitation and exploratory
drilling and through the enhancement of production through workovers and
recompletions. Forcenergy emphasizes the use of 3-D seismic and computer-aided
exploration technology, together with geologic and engineering studies of its
properties, to evaluate and prioritize drilling prospects. Focusing drilling
activities on producing properties in a relatively concentrated area in the
Gulf of Mexico permits Forcenergy to utilize its base of geological,
engineering and production experience in the region to maximize its drilling
success and to minimize finding and development costs. Furthermore,
Forcenergy's concentration of drilling activities on its producing properties
allows the utilization of existing infrastructure which greatly reduces
incremental lease operating expenses and capital costs associated with new
production facilities and minimizes timing delays in commencing production.

         Forcenergy prefers to operate its Gulf of Mexico properties because
functioning in that capacity positions it to more effectively manage production
performance and operating expenses and allows it to control the timing and
amount of capital expenditures. As of December 31, 1998, Forcenergy operated
115 structures and 546 wells in the Gulf of Mexico. Forcenergy believes that
the operating expertise and experience of its personnel have been instrumental
in its ability to enhance and improve production rates and cash flows. Of
particular importance, a significant portion of the drilling prospects
Forcenergy may pursue during the next three to five years are accessible from
existing production facilities operated by the Company.

         Cook Inlet, Alaska. Since its discovery, oil and gas activities in the
Cook Inlet area have been dominated by major oil companies, which have reduced
their activity in the region in recent years as they have refocused their
Alaskan efforts mainly to the North Slope (Prudhoe Bay). Forcenergy's business
strategy in the Cook Inlet area is to increase production and cash flow through
the exploitation of existing producing properties as well as expanding its
presence in the Cook Inlet area through selective exploration on undeveloped
leases. Forcenergy believes that it has assembled a high quality, producing
asset base with exploitation potential as well as the fifth largest exploratory
lease position in the State of Alaska, both of which will give Forcenergy an
opportunity to add significant new reserves through drilling. Forcenergy
recently completed the largest proprietary 3-D seismic survey in Cook Inlet and
additional 3-D seismic data is being acquired to identify additional drilling
prospects. Forcenergy believes that its strategy, given capital availability,
will allow it to economically exploit opportunities previously not pursued by
the major oil companies by utilizing proprietary 3-D seismic data, smaller,
less capital intensive offshore production facilities and other methods that
have proven successful in the Company's operations in the Gulf of Mexico.

         International. Forcenergy's international business strategy has
historically been aimed at achieving significant reserve growth through
participation in selected high risk, high reward exploration projects. The
Company also reviews international producing property acquisition opportunities
that might provide an operating base from which it could apply its corporate
strategy of finding and developing additional reserves on producing properties
through the use of advanced technologies. Forcenergy presently holds
exploratory acreage offshore Gabon, West Africa and onshore and offshore
Australia. The Company is currently in the drilling and testing stage of a
pilot project on its coal bed methane gas prospect in New South Wales,
Australia. Immediate plans for both areas will be determined, in large part, by
the availability of capital during and after the bankruptcy process.

TECHNOLOGY

         Forcenergy utilizes advanced technology in its exploration and
development activities in order to reduce drilling risks and finding costs and
to more effectively prioritize drilling prospects based on return potential.
The Company currently has acquired 1,525 square miles of 3-D seismic surveys on
188 of its 217 offshore Gulf of Mexico


                                       3
<PAGE>   7

lease blocks and 1,700 square miles on other Gulf of Mexico blocks in which it
currently does not own an interest. Forcenergy also owns approximately 140,000
linear miles of high quality 2-D seismic data on Gulf of Mexico blocks.
Approximately 240 square miles of 3-D seismic data has been recently acquired
in the Cook Inlet, Alaska. Additionally, the Company has acquired 973 square
miles of 3-D seismic on its exploratory Gryphon Marin concession in Gabon,
Africa. The use of the 3-D seismic data has enabled the Company to identify
multiple development and exploratory prospects in mature producing fields which
were not identified through earlier technologies. Forcenergy's professional
staff includes 15 geoscientists experienced in interpreting 3-D data.

1998 DRILLING ACTIVITY

         During 1998, Forcenergy continued to focus on increasing reserves and
cash flow by targeting development, and exploration prospects on recently
acquired properties, with the opportunities developed in most cases through the
use of 3-D seismic data. During 1998, Forcenergy spent $271.0 million on
capital drilling expenditures, including $14.6 million in capitalized internal
costs, $17.6 million in undeveloped leasehold costs and $26.5 million on
geological and geophysical costs.

         Gulf of Mexico. The Company spent approximately $150.2 million for
capital drilling expenditures in the Gulf of Mexico during 1998. Three of four
development wells and thirteen of twenty exploratory wells drilled proved
successful. The most significant activity centered around the exploitation and
development of producing properties. Three successful exploratory wells were
drilled at the High Island A-552 field (100% working interest). One development
well and three exploratory wells in the Mississippi Canyon 148 field (28.5%
working interest) were successfully completed. Additionally, four exploratory
wells were completed in the West Cameron 630 field (100% working interest). In
the South Timbalier 148 field (15.5% working interest), one development well
and one exploratory well were successfully completed. Forcenergy's Gulf of
Mexico drilling program added an estimated 8.7 MMBOE to the proved reserve base
during 1998.

         Cook Inlet, Alaska. Forcenergy completed a successful development well
in the 100% owned West McArthur River Field that increased field production by
approximately 1,950 BOPD, net to the Company, and added 1,500 MBOE to the
proved reserve base by extending the field boundaries. During 1998, the Company
spent approximately $10.9 million on 3-D seismic data to better delineate the
West McArthur River Field and the Redoubt Shoal prospect, and incurred
approximately $15.1 million on the construction of the drilling platform and
facilities for the Redoubt Shoal prospect.

         Onshore Properties. Approximately $39.4 million in total capital was
spent on onshore properties during 1998, $10.7 million of which was primarily
incurred on unproved leases primarily in East Texas, and $9.1 million for the
acquisition of producing properties in southeastern New Mexico and West Texas.

         International. In December 1997 and January 1998, the Company drilled
two exploratory dry holes on its Phenix Marin concession located offshore
Gabon, West Africa. Additional exploratory opportunities in deeper waters have
been identified within the Phenix Marin concession and Forcenergy is currently
evaluating future plans for that concession. Forcenergy and its 50% partner on
the Gryphon Marin concession acquired during 1998 a large-scale proprietary 3-D
seismic survey over the southern portion of the offshore concession that is
north of the Phenix Marin concession. Forcenergy believes that numerous
drilling opportunities will be generated from the information obtained through
this 3-D survey. The Company also believes that there is potential in the
northern portion of the Gryphon Marin concession where a recent discovery
approximately 5-7 miles from Forcenergy's concession was announced. In May
1999, Forcenergy acquired the remaining 50% of the Gryphon Marin concession it
did not already own for $442,000.


                                       4
<PAGE>   8

         In Australia, the Company drilled or reentered 11 wells on its 2.4
million acre PEL 238 concession in New South Wales, a coal bed methane gas
prospect. Early indications on this project are that it could develop into a
significant find for Forcenergy, however, a more definitive evaluation of the
economics of the project will be made after more wells are drilled and the
dewatering process is completed.

ADDITIONAL FUTURE PROJECTS

         In addition to the activity described above, Forcenergy has identified
a substantial inventory of more exploitation, development, exploratory,
workover and recompletion projects on its existing Gulf of Mexico and Alaska
properties which could be undertaken over the next three to five years after
the Company emerges from the Chapter 11 bankruptcy proceedings. Many of these
projects are currently being reviewed by Forcenergy's geoscientists utilizing
3-D seismic data acquired in the last three years. The uncertainty of capital
availability while the Company operates as a debtor-in-possession subject to
Bankruptcy Court supervision and orders, will dictate how many wells the
Company will be able to drill in 1999.

GULF OF MEXICO PROPERTIES

         Forcenergy currently holds working interests in 217 federal offshore
and state lease blocks located in the Gulf of Mexico and Gulf Coast, including
a 100% working interest in 51 of these blocks and a 50% or greater working
interest in 38 other blocks, and operates 60 of the producing blocks
representing 63% of its current Gulf of Mexico/Gulf Coast production. The
following table lists the average working interest, net proved reserves and the
operator for Forcenergy's nineteen largest offshore Gulf of Mexico properties,
comprising approximately 75% of Forcenergy's net proved reserves in the Gulf of
Mexico and 48% of Forcenergy's total net proved reserves, as of December 31,
1998:

<TABLE>
<CAPTION>
                                                               ESTIMATED NET PROVED RESERVES AT
                                                                      DECEMBER 31, 1998
                                                               --------------------------------
                                                  AVERAGE         OIL    NATURAL GAS    TOTAL
                                             WORKING INTEREST   (MMBLS)     (MMCF)     (MMBOE)      OPERATOR
                                             ----------------    -----   -----------    -----      -----------
<S>                                          <C>                 <C>     <C>            <C>        <C>
South Marsh Island
     6/10/11/19/285 Complex: .............         100%          2,119      37,787      8,417      Forcenergy
South Pass 24 Field ......................          71%          5,716      12,955      7,875      Third Party
South Marsh Island 137 Field,
     Block 136/137 .......................         100%          1,152      19,387      4,883      Forcenergy
High Island A-552 Field ..................         100%            988      17,127      3,843      Forcenergy
West Cameron 630 Field ...................         100%             42      22,476      3,788      Forcenergy
East Cameron 14 Field ....................          50%            523      17,350      3,415      Forcenergy
West Cameron 205 Field ...................         100%            148      19,534      3,404      Forcenergy
High Island A-467 Field ..................         100%             27      15,895      2,676      Forcenergy
South Marsh Island Block 106 North
     And Block 106 South/Block 115 .......         100%            695       8,966      2,189      Forcenergy
High Island 195 Field ....................          24%             45      10,491      1,794      Third Party
Ship Shoal 230 Field, Block 219 ..........         100%          1,365       2,169      1,727      Forcenergy
South Timbalier 176 Field, Block 148 .....          16%            259       8,697      1,709      Third Party
High Island A-280 Field ..................         100%             35       9,047      1,543      Forcenergy
Chandeleur 25 Field ......................         100%             --       8,058      1,343      Forcenergy
Main Pass 69 Field .......................          24%            327       5,241      1,200      Third Party
Ship Shoal 26 Field ......................         100%            237       5,761      1,197      Forcenergy
Grand Isle 76 Field ......................         100%             92       6,254      1,134      Forcenergy
Mississippi Canyon 148 Field .............          29%             --       6,148      1,025      Third Party
Mustang Island 754 Field .................         100%              2       6,024      1,006      Forcenergy
</TABLE>

ALASKA PROPERTIES

         Forcenergy currently holds an average 48% working interest in the
McArthur River Field (Trading Bay Unit) and a 50% working interest in the
Trading Bay Field located in the Cook Inlet area, both non-operated properties
purchased from Marathon Oil Company in 1996. Forcenergy also owns a 100%
working interest in the operated West McArthur River Field located in the Cook
Inlet purchased from Stewart Petroleum Company in June 1997. These fields had
estimated net proved reserves of 20.4 million barrels of oil and comprised
approximately 18% of


                                       5
<PAGE>   9

Forcenergy's total estimated net proved reserves at December 31, 1998.

         Through leases sales, the Marathon and Stewart acquisitions and
several other smaller property acquisitions, Forcenergy has assembled one of
the largest exploratory lease acreage positions in the State of Alaska.

ONSHORE PROPERTIES

         Forcenergy owns working and royalty interests in approximately 3,000
producing oil and gas wells in 1,064 fields in the Rocky Mountain, Gulf Coast,
Permian Basin and Appalachian regions of the United States. Management believes
that Forcenergy's stable reserve base of long-lived, primarily non-operated,
onshore properties complements the Gulf of Mexico and Alaska operations by
providing an additional source of cash flow that requires limited management
involvement. Forcenergy's onshore properties accounted for approximately 17% of
estimated net proved reserves at December 31, 1998.

TITLE TO PROPERTIES

         As is customary in the oil and natural gas industry, the Company makes
only a cursory review of title to farmout acreage and to onshore undeveloped
oil and natural gas leases upon execution of the contracts. Prior to the
commencement of drilling operations, a thorough title examination is conducted
and curative work is performed with respect to significant defects. The Company
performs complete reviews of title to federal and state offshore lease blocks
prior to acquisition. To the extent title opinions or other investigations
reflect material title defects, the seller of the property, rather than the
Company, is typically responsible for curing any such title defects at its
expense. If the Company were unable to remedy or cure any title defect of a
nature such that it would not be prudent to commence drilling operations on
undeveloped properties, the Company could suffer a loss of its entire
investment in the leasehold. The Company has obtained title opinions on
substantially all of its producing properties and believes that it has
satisfactory title to such properties in accordance with standards generally
accepted in the oil and gas industry. Substantially all of the Company's oil
and natural gas properties are mortgaged to secure borrowings under the
Company's bank loan agreement (the "Senior Credit Facility").

CEILING LIMITATION WRITEDOWNS

         The Company reports its operations using the full cost method of
accounting for oil and gas properties. Under the full cost accounting rules,
the net capitalized costs of oil and gas properties may not exceed a "ceiling
limit", calculated at the end of each quarter, which is based upon the present
value of estimated future net cash flows from proved reserves, discounted at
10%, plus the lower of cost or fair market value of unproved properties, net of
related tax effects. If net capitalized costs of oil and gas properties exceed
the ceiling limit, the Company is subject to a ceiling limitation writedown to
the extent of such excess. A ceiling limitation writedown is a charge to
earnings which does not impact cash flows. However, such writedowns permanently
impact the amount of the Company's stockholders' equity. The risk that the
Company will be required to write down the carrying value of its oil and gas
properties increases when oil and gas prices are depressed or volatile.
Application of these rules during periods of relatively low oil or gas prices,
even if temporary, may result in a ceiling writedown. In addition, writedowns
may occur if the Company has substantial downward revisions in its estimated
proved reserves or adds significant costs to the full cost pool without adding
significant value to its reserve base. Higher operating costs and lower price
realizations on production in Alaska make the Company's Alaska reserves more
sensitive to price changes and potential writedowns than reserves in the Gulf
of Mexico. Based on prices being received as of December 31, 1998 and 1997, the
Company recorded in the fourth quarters ended December 31, 1998 and 1997
non-cash impairments of $275 million and $200 million ($162.8 million after
tax), respectively pursuant to full cost accounting rules. Though oil and gas
prices are currently higher than those at year end, if prices were to decrease
again , the Company's capitalized costs could again exceed the present values of
estimated future net revenue, which if not offset by other factors, could result
in additional writedowns of oil and gas properties. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."


                                       6
<PAGE>   10

ABANDONMENT COSTS

         Forcenergy is responsible for the costs associated with the plugging
of wells, the removal of facilities and equipment and site restoration on its
oil and gas properties, pro rata to its working interest. The Company provides
for expected future abandonment liabilities by accruing for such costs as a
component of depletion, depreciation and amortization as production occurs. As
of December 31, 1998, total undiscounted abandonment costs estimated to be
incurred were approximately $118.7 million (undiscounted) for properties in
offshore Gulf of Mexico and Alaska waters. For onshore properties, salvage
values received for equipment are usually sufficient to offset the abandonment
costs. Estimates of abandonment costs and their timing may change due to many
factors, including actual drilling and production results, inflation rates,
changes in abandonment techniques and technology and changes in environmental
laws and regulations. Approximately $2 million in abandonment costs are
anticipated to be incurred in 1999.

         The Minerals Management Service ("MMS") requires lessees of Outer
Continental Shelf ("OCS") properties to post performance bonds in connection
with the plugging and abandonment of wells located offshore and the removal of
all production facilities. Operators in the OCS waters of the Gulf of Mexico
are also currently required to post an area wide bond for the lesser of $3
million, or $500,000 per producing lease. The Company currently has additional
supplemental bonding on its offshore leases as required by the MMS. Under
certain circumstances, the MMS has the authority to suspend or terminate
operations on federal leases for failure to comply with applicable bonding
requirements or other regulations applicable to plugging and abandonment. Any
such suspensions or terminations of the Company's operations could have a
material adverse effect on the Company's financial condition and results of
operations. To the best of its knowledge, the Company is currently in
compliance with all MMS requirements.

COMPETITION

         Forcenergy encounters competition from other oil and gas companies in
all phases of its operations, including the acquisition of producing
properties. Competitors include major integrated oil and natural gas companies,
numerous independent oil and natural gas companies, individuals and drilling
and income programs. Many competitors are large, well-established companies
with substantially larger operating staffs and greater capital resources than
the Company's and which, in many instances, have been engaged in the energy
business for a much longer time. Such companies may be able to pay more for
productive oil and natural gas properties and exploratory prospects and to
define, evaluate, bid for and purchase a greater number of properties and
prospects than the Company's financial or human resources permit. Forcenergy's
ability to acquire additional properties and to discover reserves in the future
will be dependent upon its ability to evaluate and select suitable properties
and to consummate transactions in a highly competitive environment.

MARKETING AND CUSTOMERS

         Forcenergy sells substantially all of its natural gas under short-term
contracts (maximum of one year in duration) at pricing based on current spot
market indexes. A minor portion of the Company's gas production is committed to
be processed through gas plants. Crude oil and condensate from Gulf of Mexico
and onshore properties is typically sold at the wellhead under short-term
contracts at posted market-based field prices.

         Most of the Company's production is transported through gas gathering
systems and oil and gas pipelines that are not owned by the Company.
Transportation space on such gathering systems and pipelines is occasionally
limited and at times unavailable due to repairs or improvements being made to
such facilities or due to such space being utilized by other companies with
priority transportation agreements. Forcenergy's access to transportation
options can also be affected by regulation of intrastate and interstate gas
transportation. In an attempt to promote competition, the Federal Energy
Regulatory Commission ("FERC") has issued a series of orders which have altered
significantly the marketing and transportation of natural gas, see "Government
Regulation". The effect of these orders to date has been to enable producers
such as the Company to market their natural gas production to purchasers other
than the interstate pipelines located in the vicinity of their producing
properties. While the Company has not experienced any inability to market its
production, if transportation space is restricted or is unavailable, the
Company's cash flow could be adversely affected.


                                       7
<PAGE>   11

         During 1999, two purchasers of the Company's production individually
accounted for more than 10% of the value of oil and gas sold by the Company.
Based on current demand for oil and natural gas sold, the Company does not
believe the loss of these purchasers would have a material adverse effect on
the Company's results of operations or cash flow. The Company currently relies
on one purchaser for its Alaska production. The contract with this purchaser
runs through December 1999 at which time a new contract must be negotiated or
another purchaser found. The net price provided for under this contract is at a
slight discount to the posted price for Alaskan North Slope (ANS)-Valdez
delivery, after allowance for transportation costs. The inability to negotiate
a new contract or to find a new purchaser could materially impact the Company's
results of operations and cash flows. (See Note 11 to the Company's Financial
Statements).

         The Company historically has utilized various financial instruments to
hedge portions of its current oil and gas production to achieve more
predictable cash flows and to reduce its exposure to fluctuations in oil and
gas prices. The remaining portion of current production was not hedged so as to
provide the Company the opportunity to benefit from increases in prices on that
portion of the production, should price increases materialize. All commodity
price hedging contracts in place were cancelled at the option of the
counterparty subsequent to the Company's filing under Chapter 11 of the
Bankruptcy Code on March 21, 1999. The aggregate fair market value of the
cancelled contracts, approximately $5.5 million, was remitted to the Company in
April 1999. See Note 8 to the Company's Financial Statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations".

OPERATING RISKS OF OIL AND GAS OPERATIONS

         The oil and gas business involves certain operating hazards such as
well blowouts, cratering, explosions, uncontrollable flows of oil, natural gas
or well fluids, fires, formations with abnormal pressures, pollution, releases
of toxic gas and other environmental hazards and risks, any of which could
result in substantial losses to the Company through the loss of hydrocarbons,
pollution claims, personal injury suits and damage to properties of the Company
and others. The Company's offshore operations also are subject to the
additional hazards of marine operations, such as severe weather, capsizing and
collision that can cause substantial damage to facilities, and possible
business interruption. The availability of a ready market for the Company's oil
and natural gas production also depends on the proximity of reserves to, and
the capacity of, oil and gas gathering systems, pipelines and trucking or
terminal facilities. Additionally, the Company may be liable for environmental
damages caused by previous owners of property purchased or leased by the
Company. As a result, substantial liabilities to third parties or governmental
entities may be incurred, the payment of which could reduce or eliminate the
funds available for drilling or acquisitions, or result in the loss of the
Company's properties. In accordance with customary industry practices,
Forcenergy maintains insurance against some, but not all, of such risks and
losses. The Company does not carry business interruption insurance. The
occurrence of an event not fully covered by insurance could have a material
adverse effect on the financial condition, results of operations and cash flow
of the Company.

ENVIRONMENTAL MATTERS

         The Company, as an owner or lessee and operator of oil and gas
properties, is subject to federal, state and local laws and regulations
governing the discharge of materials into, and the protection of, the
environment. These laws and regulations may require the acquisition of a permit
before drilling commences, restrict the types, quantities and concentration of
various substances that can be released into the environment in connection with
drilling and production activities, limit or prohibit drilling activities on
certain lands lying within wilderness, wetlands and other protected areas, and
impose substantial liabilities for pollution resulting from the Company's
operations. Stricter standards in environmental legislation may be imposed in
the oil and gas industry in the future, such as proposals made in Congress and
at the state level from time to time that would reclassify certain oil and
natural gas exploration and production wastes as "hazardous wastes" and make
the reclassified wastes subject to more stringent and costly handling, disposal
and clean-up requirements. The impact of any such changes, however, would not
likely be any more burdensome to the Company than to any other similarly
situated company involved in oil and gas exploration and production.

         The Comprehensive Environmental Response, Compensation and Liability
Act ("CERCLA"), also known as the "Superfund" law, imposes liability, without
regard to fault or the legality of the original conduct, on certain classes


                                       8
<PAGE>   12

of persons who are considered to be responsible for the release of a "hazardous
substance" into the environment. These persons include the owner or operator of
the disposal site or sites where the release occurred and companies that
disposed or arranged for disposal of the hazardous substances found at the
site. Under CERCLA, such persons may be subject to joint and several liability
for the costs of cleaning up the hazardous substances, for damages to natural
resources, and for the costs of certain health studies. Furthermore, it is not
uncommon for neighboring landowners and other third parties to file claims for
personal injury and property damage allegedly caused by hazardous substances or
other pollutants released into the environment.

         The Oil Pollution Act of 1990 and regulations promulgated pursuant
thereto ("OPA") impose a variety of obligations on "responsible parties" with
respect to the prevention of oil spills and liability for damages resulting
from such spills. A "responsible party" includes the owner or operator of a
facility or vessel that could be the source of an oil spill. For offshore
facilities, the responsible party is the lessee or permittee or holder of a
right of use and easement (granted under applicable state law or the Outer
Continental Shelf Lands Act "OCSLA") of the area in which the offshore facility
is located. OPA assigns liability to each responsible part for oil removal
costs and a variety of public and private damages, including natural resource
damages. While liability limits apply in some circumstances, a responsible
party for an OCS facility must pay all spill removal costs incurred by a
federal, state or local government. OPA establishes a liability limit (subject
to indexing) for offshore facilities of all removal costs plus $75,000,000. A
party cannot take advantage of liability limits if the spill was caused by
gross negligence or willful misconduct or resulted from violation of a federal
safety, construction, or operating regulation. If the party fails to report a
spill or to cooperate fully in the cleanup, liability limits likewise do not
apply. Few defenses exist to the liability imposed by OPA.

         The OPA also imposes ongoing requirements on a responsible party,
including proof of financial responsibility to cover a substantial portion of
environmental clean-up and restoration costs that could be incurred by
governmental entities in connection with an oil spill. Other requirements
imposed by the OPA include the preparation of an oil spill contingency plan. A
failure to comply with ongoing requirements or inadequate cooperation in a
spill event may subject a responsible party to civil or criminal enforcement
action. In short, the OPA places a burden on offshore lease holders to conduct
safe operations and take other measures to prevent oil spills; if one occurs,
the OPA then imposes liability for resulting damages.

         In addition, the OCSLA authorizes regulations relating to safety and
environmental protection applicable to lessees and permittees operating on the
OCS. Specific design and operational standards may apply to OCS vessels, rigs,
platforms, vehicles and structures. Violations of environmental related lease
condition or regulations issued pursuant to the OCSLA can result in substantial
civil and criminal penalties as well as potential court injunctions curtailing
operations and the cancellation of leases. Such enforcement liabilities can
result from either governmental prosecution or citizen initiated legal actions.

         The Company maintains insurance coverages which it believes are
customary in the industry, although it is not fully insured against many
environmental risks. Although the Company has not experienced any material
adverse effect from compliance with environmental requirements, nor is it aware
of any material environmental claims existing at December 31, 1998, there is no
assurance that material costs relating to environmental matters will not be
incurred in the future.

GOVERNMENT REGULATION

         Forcenergy's drilling, production and transportation and marketing
operations are subject to various types of regulation at the federal, state and
local levels. Such regulation includes requiring permits for the drilling of
wells, maintaining bonding requirements in order to drill or operate wells, and
regulating the location of wells, the surface use and restoration of properties
upon which wells are drilling and the plugging and abandonment of wells.
Regulations also can limit production rates, require capital for environmental
compliance and affect the transportation and marketing of hydrocarbons.

         Certain operations the Company conducts are on federal oil and gas
leases, which the MMS administers. The


                                       9
<PAGE>   13

MMS issues such leases through competitive bidding. These leases contain
relatively standardized terms and require compliance with detailed MMS
regulations and orders pursuant to the OCSLA (which are subject to change by
the MMS). For offshore operations, lessees must obtain MMS approval for
exploration plans and development and production plans prior to the
commencement of such operations. In addition to permits required from other
agencies (such as the Coast Guard, Army Corps of Engineers and Environmental
Protection Agency), lessees must obtain a permit from the MMS prior to the
commencement of drilling. The MMS has promulgated regulations requiring
offshore production facilities located on the OCS to meet stringent engineering
and construction specifications. The MMS also has issued regulations
restricting the flaring or venting of natural gas, and proposed to amend such
regulations to prohibit the flaring of liquid hydrocarbons and oil without
prior authorization.

         In December 1995, the MMS issued an advance notice of proposed
rulemaking in which it proposed to amend its regulations governing the
calculation of royalties and the valuation of natural gas produced from federal
leases. The principle feature in the amendments, as proposed, would establish
an alternative market-index based method to calculate royalties on certain
natural gas production sold to affiliates or pursuant to non-arm's-length sales
contracts. The MMS proposed this rulemaking to facilitate royalty valuation in
light of changes in the gas marketing environment. The MMS also proposed a rule
describing the types of transportation components that are deductible for
calculating and reporting royalties, as well as various cost components
associated with marketing functions that are not deductible. In addition, the
MMS has recently issued a notice of proposed rulemaking in which it proposes to
amend its regulations governing the calculation of royalties and the valuation
of crude oil produced from federal leases. This proposed rule would modify the
valuation procedures for both arm's-length and non-arm's-length crude oil
transactions to decrease reliance on crude oil posted prices and assign a value
to crude oil that better reflects market value, establish a new MMS form for
collecting value differential data, and amend the valuation procedure for the
sale of federal royalty oil. These new regulations, as proposed, would have a
minimal effect on the Company's past royalty payment practices as the Company's
production has been sold solely to non-affiliates. The Company cannot predict
what additional action the MMS will take on these matters, nor can it predict
at this stage of the rulemaking proceeding how the Company might be affected if
amendments to the regulations are adopted.

         In addition, the MMS is conducting an inquiry (not specifically
directed at the Company) into certain contractual agreements from which
producers on MMS leases have received settlement proceeds that are royalty
bearing and the extent to which producers have paid the appropriate royalties
on those proceeds. The Company believes that this inquiry will not have a
material impact on its financial condition, liquidity or results of operations.

         The FERC regulates interstate natural gas transportation rates and
service conditions, which affect the marketing of natural gas produced by the
Company, as well as the revenues received by the Company for sales of such
production. Since the mid-1980s, the FERC has issued a series of orders,
culminating in Order Nos. 636, 636-A, 636-B, and 636-C ("Order 636"), that have
significantly altered the marketing and transportation of natural gas. Order
636 mandates a fundamental restructuring of interstate pipeline sales and
transportation service, including the unbundling by interstate pipelines of the
sales, transportation, storage and other components of the city-gate sales
services such pipelines previously performed. One of FERC's purposes in issuing
the orders is to increase competition within all phases of the natural gas
industry. Generally, Order 636 has eliminated or substantially reduced the
interstate pipelines' traditional role as wholesalers of natural gas, and has
substantially increased competition and volatility in natural gas markets.
While significant regulatory uncertainty remains, Order 636 may ultimately
enhance the Company's ability to market and transport its natural gas, although
it may also subject the Company to greater competition and more restrictive
pipeline imbalance tolerances and greater associated penalties for violation of
such tolerances. The FERC has issued final orders in all Order No. 636
individual pipeline restructuring proceedings. The United States Court of
Appeals for the District of Columbia Circuit ("D.C. Circuit") has generally
affirmed Order No. 636 and remanded certain issues for further explanation or
clarification. The issues remanded for further action do not appear to
materially affect the Company. A number of parties have appealed the D.C.
Circuit's ruling to the United States Supreme Court and proceedings on the
remanded issues are currently ongoing before FERC following its issuance of
Order No. 636-C in February 1997. Numerous petitions for review of the
individual pipeline restructuring orders are currently pending in that court.
Although it is difficult to predict when all appeals of pipeline restructuring
order will be completed or their impact on the Company, the Company does not
believe that it will be affected by the restructuring rule and orders any
differently than other natural gas producers and markets with which it
competes.


                                      10
<PAGE>   14

         The FERC has announced several important transportation-related policy
statements and proposed rule changes, including the appropriate manner in which
interstate pipelines release capacity under Order No. 636 and, more recently,
the price that shippers can charge for their released capacity. In addition, in
1995, the FERC issued a policy statement on how interstate natural gas
pipelines can recover the costs of new pipeline facilities. In January 1996,
the FERC issued a policy statement and a request for comments concerning
alternatives to its traditional cost-of-service ratemaking methodology. A
number of pipelines have obtained FERC authorization to charge negotiated rates
as one such alternative. While any additional FERC action on these matters
would affect the Company only indirectly, any new rules and policy statements
may have the effect of enhancing competition in natural gas markets, by among
other things, encouraging non-producer natural gas marketers to engage in
certain purchase and sale transactions.

         The FERC also regulates rates and service conditions for interstate
transportation of crude oil, liquids and condensate, which can affect the
amount the Company receives from the sale of these products. Sales of crude
oil, condensate and gas liquids by the Company are not currently regulated and
are made at negotiated prices. Effective January 1, 1995, the FERC adopted
regulations establishing an indexing system for transportation rates for oil
pipelines, which generally indexes such rates to inflation. The Company is not
able to predict what effect, if any, these regulations will have on it however,
these regulations, or any amendments to these regulations, could increase the
cost of transporting crude oil, liquids and condensate by pipeline.

         Cook Inlet Pipeline Company is an interstate common carrier and as
such is subject to rate regulation by the FERC under the Interstate Commerce
Act ("ICA"). The ICA requires that petroleum pipeline rates be just and
reasonable and non-discriminatory. The ICA permits interest parties to
challenge proposed new or changes rates and authorizes the FERC to suspend ad
to investigate such rates. If upon completion of an investigation, the FERC
finds that a proposed new or changed rate is unlawful, it is authorized to
require the carrier to refund the revenues collected during the pendency of the
investigation in excess of those that would have been collected under the prior
rate. In addition, the FERC, upon complaint or on its own motion and after
investigation, may order a carrier to change its rate prospectively. Upon an
appropriate showing, a shipper may obtain reparations for damages sustained for
a period of up to two years prior to the filing of a complaint. Cook Inlet
Pipeline Company is also subject to regulation by the Alaska Public Utilities
Commission with respect to any intrastate transportation Cook Inlet Pipeline
Company provides.

         Legislation affecting the oil and gas industry is under constant
review for amendment or expansion by Congress, the FERC, state regulatory
bodies and the courts. The Company cannot predict when or if any such proposals
might become effective, or their effect, if any, on the Company's operations.
The natural gas industry historically has been very heavily regulated;
therefore, there is no assurance that the less stringent regulatory approach
recently pursued by the FERC and Congress will continue indefinitely into the
future. The regulatory burden on the oil and natural gas industry increases the
Company's cost of doing business and, consequently, affects its profitability
and cash flow. In as much as such laws and regulations are frequently expanded,
amended or reinterpreted, the Company is unable to predict the future cost or
impact of complying with such regulations.

ASSUMPTION OR REJECTION OF CONTRACTS

         Pursuant to Section 365 of Chapter 11 of the U.S. Bankruptcy Code, the
Company has the right to assume or reject executory contracts. The Company is
currently reviewing all such contracts.

OFFICES

         Forcenergy currently leases approximately 12,600 square feet of office
space in Miami, Florida, where its principal offices are located, approximately
44,000 square feet in Metairie, Louisiana, approximately 8,500 square feet in
Anchorage, Alaska, and approximately 851 square feet in Lafayette, Louisiana.

EMPLOYEES

         As of April 30, 1999, Forcenergy had 250 full time employees, 21 of
whom are located at the Company's headquarters in Miami, Florida and 94 of whom
are located at the Company's regional offices in Metairie, Lafayette and
Intracoastal City, Louisiana, and Anchorage, Alaska. One hundred and twenty-one
employees work offshore in the


                                      11
<PAGE>   15

Gulf of Mexico and fourteen work in other field locations. None of Forcenergy's
employees are represented by a labor union.


                                      12
<PAGE>   16

ITEM 2.   PROPERTIES

ACREAGE DATA

         The following table sets forth the approximate developed and
undeveloped acreage in which the Company held a leasehold, mineral or other
interest at December 31, 1998. Undeveloped acreage includes leased acres on
which wells have not been drilled or completed to a point that would permit the
production of commercial quantities of oil and gas, regardless of whether or
not such acreage contains proved reserves.

<TABLE>
<CAPTION>
                                                          DEVELOPED ACRES             UNDEVELOPED ACRES
                                                      ----------------------      --------------------------
                                                        GROSS          NET          GROSS            NET
                                                      ---------      -------      ----------      ----------
         <S>                                          <C>            <C>          <C>             <C>
         Offshore - Gulf of Mexico .............        728,854      304,181         216,481         135,207
         Offshore - Cook Inlet, Alaska .........        149,866       92,903          69,380          33,072
         Onshore - United States ...............        387,731      116,532       1,046,711         205,495
         Australia (1) .........................          1,000          500      32,786,623      15,314,356
         Offshore - Gabon, Africa (1) ..........             --           --       3,082,428       1,882,428
                                                      ---------      -------      ----------      ----------
           Total ...............................      1,267,451      514,116      37,201,623      17,570,558
                                                      =========      =======      ==========      ==========
</TABLE>

(1)      The Company has various work/financial commitments that must be met on
these concessions over the next two to three years in order to extend the life
of each concession. These commitments vary by concession and could include
either, or both, of geological studies or seismic operations or the drilling of
a well. Should the Company fail to timely meet these commitments, or be granted
an extension of time, it could be forced to relinquish its rights to that
particular concession.

OIL AND GAS RESERVES

         The following table summarizes the estimates of the Company's
historical net proved reserves as of January 1, 1999 and the present values
attributable to those reserves on such date using constant prices and operating
costs as of the valuation date, discounted at a rate of 10% per annum, in
accordance with Securities and Exchange Commission ("Commission") guidelines.
The reserve data and present values as of January 1, 1999 for the onshore
properties have been estimated by Netherland, Sewell & Associates, Inc.,
independent petroleum engineering consultants. The reserve data and present
values as of January 1, 1999 for the offshore and Alaska properties have been
estimated by the Company and the reserve data has been audited by Collarini
Engineering Inc., independent petroleum engineering consultants.

<TABLE>
<CAPTION>
                                                                                                AS  OF  JANUARY  1, 1999
                                                                                                ------------------------
<S>                                                                                             <C>
NET PROVED RESERVES:
Liquids(MBbls) (1)...........................................................................             49,389
Natural gas (Mmcf)...........................................................................            369,943
         Total (MBOE)........................................................................            111,046
Present value of future net revenues before income taxes (thousands).........................          $ 545,987
Standardized measure of discounted future net cash flows (thousands) (2).....................          $ 436,689
</TABLE>

------------
         (1) Includes crude oil, condensate and natural gas liquids.
         (2) The standardized measure of discounted future net cash flows
represents the present value of future net revenues after income taxes
discounted at 10% in accordance with Statement of Financial Accounting
Standards No. 69.

         Since January 1, 1998, the Company has not filed any estimates of
proved oil and gas reserves with any federal authority or agency other than
with the Commission.


                                      13
<PAGE>   17

DRILLING ACTIVITY

         The following table sets forth the completed drilling activity of the
Company on its properties for the twelve month periods ended December 31, 1998,
1997 and 1996.

<TABLE>
<CAPTION>
                                                                               YEAR ENDED DECEMBER 31,
                                                             -------------------------------------------------------
                                                                  1998                1997                 1996
                                                             -------------------------------------------------------
                                                             GROSS     NET       GROSS      NET      GROSS       NET
                                                             -----     ---       -----      ---      -----       ---
<S>                                                          <C>      <C>        <C>        <C>      <C>         <C>
         GULF OF MEXICO DRILLING ACTIVITY:
Development:
    Oil ...........................................            1       0.1         5         3.7       11        10.4
    Gas ...........................................            2       0.4         6         4.1        8         5.7
    Non productive ................................            1       0.3        --          --        1          .2
                                                              --      ----        --        ----       --        ----
         Total ....................................            4       0.8        11         7.8       20        16.3
                                                              ==      ====        ==        ====       ==        ====

Exploratory:
    Oil ...........................................            1       1.0        --          --        5         4.4
    Gas ...........................................           12       7.4        21        13.2        2         1.3
    Non productive ................................            7       4.7        15        12.2        4         1.4
                                                              --      ----        --        ----       --        ----
         Total ....................................           20      13.1        36        25.4       11         7.1
                                                              ==      ====        ==        ====       ==        ====

         ONSHORE DRILLING ACTIVITY:
Development:
    Oil ...........................................           14       1.6        10         4.5        4         2.0
    Gas ...........................................            3       0.6         2          .8       --          --
    Non productive ................................            3       1.7         2          .8       --          --
                                                              --      ----        --        ----       --        ----
         Total ....................................           20       3.9        14         6.1        4         2.0
                                                              ==      ====        ==        ====       ==        ====

Exploratory:
    Oil ...........................................            1       0.4         3         2.4       --          --
    Gas ...........................................           --        --         3         1.0       --          --
    Non productive ................................            2       0.6         7         4.0        1          .2
                                                              --      ----        --        ----       --        ----
         Total ....................................            3       1.0        13         7.4        1          .2
                                                              ==      ====        ==        ====       ==        ====

         ALASKA DRILLING ACTIVITY:
Development:
    Oil ...........................................            1       1.0        --          --       --          --
    Gas ...........................................           --        --        --          --       --          --
    Non productive ................................           --        --        --          --       --          --
                                                              --      ----        --        ----       --        ----
    Total .........................................            1       1.0        --          --       --          --
                                                              ==      ====        ==        ====       ==        ====

Exploratory:
    Oil ...........................................           --        --        --          --       --          --
    Gas ...........................................           --        --        --          --       --          --
    Non productive ................................            2       1.5        --          --       --          --
                                                              --      ----        --        ----       --        ----
         Total ....................................            2       1.5        --          --       --          --
                                                              ==      ====        ==        ====       ==        ====

         INTERNATIONAL DRILLING ACTIVITY:
Development:
    Oil ...........................................           --        --        --          --       --          --
    Gas ...........................................           --        --        --          --       --          --
    Non productive ................................           --        --        --          --       --          --
                                                              --      ----        --        ----       --        ----
         Total ....................................           --        --        --          --       --          --
                                                              ==      ====        ==        ====       ==        ====

Exploratory:
    Oil ...........................................           --        --        --          --       --          --
    Gas ...........................................            2       1.6        --          --       --          --
    Non productive ................................            5       3.0        --          --       --          --
                                                              --      ----        --        ----       --        ----
         Total ....................................            7       4.6        --          --       --          --
                                                              ==      ====        ==        ====       ==        ====
</TABLE>


                                      14
<PAGE>   18

PRODUCTIVE WELLS

         The following table sets forth the number of productive oil and gas
wells in which the Company owned a working interest at December 31, 1998:

<TABLE>
<CAPTION>
                                                                                 TOTAL PRODUCTIVE WELLS
                                                                                 ----------------------
                                                                                  GROSS            NET
                                                                                 -------        -------
                         <S>                                                     <C>            <C>
                         Oil............................................           2,503          1,003
                         Gas............................................             895            274
                                                                                 -------        -------
                            Total.......................................           3,398          1,277
                                                                                 =======        =======
</TABLE>

         Productive wells consist of producing wells and wells capable of
production, including gas wells awaiting pipeline connections. The Company has
only 21 wells that are completed in more than one producing horizon; those
wells have been counted as single wells.

ITEM 3.   LEGAL PROCEEDINGS

         On March 21, 1999, the Company and its wholly owned subsidiary,
Forcenergy Resources Inc., filed voluntarily under Chapter 11 of the U.S.
Bankruptcy Code in order to facilitate the restructuring of the Company's
long-term debt, revolving credit, trade and other obligations. The Company
continues to operate as a debtor-in-possession subject to the Bankruptcy
Court's supervision and orders. The filing was made in the U.S.
District Court for the Eastern District of Louisiana in New Orleans.

         Forcenergy is not a party to, nor are any of its properties subject
to, any other pending legal proceedings that in the opinion of management, are
likely to have a material adverse effect on its financial condition or results
of operations.

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

         There were no matters submitted to a vote of security holders during
the fourth quarter of the Company's fiscal year ended December 31, 1998.


                                      15
<PAGE>   19

                                    PART II

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
         STOCKHOLDER MATTERS

         Prior to the Petition Date, the Company's common stock was listed on
the New York Stock Exchange (the "NYSE") under the symbol "FEN". Prior to June
18, 1997, the Company's stock was quoted on the NASDAQ National Market (the
"NASDAQ") under the symbol "FGAS". The following table sets forth, for the
periods indicated, the range of closing high and low prices of the common stock
as reported by the NYSE and the NASDAQ.

<TABLE>
<CAPTION>
                                                                                          High          Low
                                                                                         -------      -------

         <S>                                                                             <C>          <C>
         1997 First Quarter.........................................................     $ 37.13      $ 25.38
               Second Quarter.......................................................     $ 35.13      $ 27.13
               Third Quarter........................................................     $ 38.81      $ 26.75
               Fourth Quarter.......................................................     $ 39.00      $ 25.19

         1998 First Quarter.........................................................     $ 27.13      $ 21.25
               Second Quarter.......................................................     $ 27.06      $ 15.25
               Third Quarter........................................................     $ 17.63      $  5.19
               Fourth Quarter.......................................................     $  7.25      $  2.63
</TABLE>

         At May 31, 1999, the Company had approximately 4,300 shareholders of
record of its common stock. The Company estimates that an additional 10,000
shareholders hold Forcenergy's common stock in street name. On March 22, 1999,
the New York Stock Exchange suspended trading in the Company's common stock
because of the Chapter 11 bankruptcy filing. The Company was then delisted.
Forcenergy's common stock was then quoted on the NASD OTC Bulletin Board under
the trading symbol "FENYQ", until May 21, 1999 when the symbol was changed to
"FENYE."

FORCENERGY AB ACQUISITION

         On December 19, 1997 Forcenergy made a public tender offer for all of
the outstanding shares of Forcenergy AB ("FAB"), a Swedish public company that
owned approximately 34% of Forcenergy's common stock. FAB was formed in 1990 to
provide capital for Forcenergy's oil and gas operations in the United States
and currently owns 8,740,486 shares of Forcenergy common stock, its only
significant asset. The issuance of the Forcenergy shares pursuant to the terms
of the tender offer was approved by Forcenergy Inc shareholder vote on March
17, 1998. On March 31, 1998, 97% of the outstanding common shares of FAB had
been tendered in connection with the offer and all conditions of the offer were
met. As of December 1998, 99.3% of the outstanding FAB shares had been tendered
and Forcenergy had issued approximately 7.9 million new shares valued at $27
per share (the price of the Company's common stock on the date the tender offer
was initiated) in exchange for the tendered shares. The 8,740,486 Forcenergy
shares owned by FAB are now controlled by Forcenergy, therefore for accounting
and voting purposes are no longer considered outstanding. The acquisition was
accounted for as a purchase.

DIVIDEND POLICY

         Certain covenants set forth in the Company's Senior Credit Facility
and the 9 1/2% and 8 1/2% Senior Subordinated Notes restrict and/or limit the
ability of the Company to pay cash dividends. The Company is also prohibited
from paying cash dividends without approval of the Bankruptcy Court. Forcenergy
does not contemplate the payment of any cash dividends in the near future.


                                      16
<PAGE>   20

ITEM 6.   SELECTED FINANCIAL INFORMATION

         The following table sets forth selected historical financial data for
the Company as of and for each of the periods indicated. The following data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's financial
statements included elsewhere in this report.

<TABLE>
<CAPTION>
                                                                              FOR THE YEARS ENDED DECEMBER 31,
                                                           ----------------------------------------------------------------------
                                                             1998            1997           1996            1995           1994
                                                           ---------      ---------       ---------       --------       --------
                                                                         (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                                        <C>            <C>             <C>             <C>            <C>
INCOME STATEMENT DATA:
REVENUES:
     Oil and gas sales (1) .......................         $ 272,410      $ 281,690       $ 138,698       $ 72,147       $ 58,354
     Other (1) ...................................             1,139          2,495             683            494            388
                                                           ---------      ---------       ---------       --------       --------
                                                             273,549        284,185         139,381         72,641         58,742
                                                           ---------      ---------       ---------       --------       --------
EXPENSES:
     Lease operating .............................            99,242         77,174          38,786         24,507         23,744
     Depletion, depreciation and amortization ....           145,856        113,347          58,464         31,295         24,572
     Production taxes ............................             4,218          4,791           3,454          1,868          1,701
     General and administrative ..................            17,222         15,244           7,971          5,670          6,463
     Impairment of oil and gas properties ........           275,000        200,000              --             --             --
                                                           ---------      ---------       ---------       --------       --------
                                                             541,538        410,556         108,675         63,340         56,480
                                                           ---------      ---------       ---------       --------       --------

INCOME (LOSS) FROM OPERATIONS ....................          (267,989)      (126,371)         30,706          9,301          2,262
Interest and other income (loss) .................             1,572          3,354             650           (561)           789
Interest expense, net of amounts capitalized .....           (48,077)       (32,422)        (13,367)       (11,668)        (9,529)
                                                           ---------      ---------       ---------       --------       --------
Income (loss) before income taxes ................          (314,494)      (155,439)         17,989         (2,928)        (6,478)
Income tax benefit (provision) ...................                --         20,621          (6,711)         1,075          2,403
                                                           ---------      ---------       ---------       --------       --------
Net income (loss) ................................         $(314,494)     $(134,818)      $  11,278       $ (1,853)      $ (4,075)
                                                           =========      =========       =========       ========       ========
NET INCOME (LOSS) PER SHARE:
    Basic ........................................         $  (12.65)     $   (5.83)      $     .60       $   (.14)      $   (.50)
                                                           =========      =========       =========       ========       ========
    Diluted ......................................         $  (12.65)     $   (5.83)      $     .57       $   (.14)      $   (.50)
                                                           =========      =========       =========       ========       ========
WEIGHTED AVERAGE SHARES OUTSTANDING:
    Basic ........................................            24,856         23,142          18,934         12,910          8,188
    Diluted ......................................            24,856         23,142          19,672         12,910          8,188
</TABLE>

-----------------
(1)      Natural gas liquid revenues for 1994 have been reclassified from other
revenues to oil and gas sales for consistent presentation with 1998, 1997, 1996
and 1995 revenues.

<TABLE>
<CAPTION>
                                                                                  AS OF DECEMBER 31,
                                                      -------------------------------------------------------------------------
                                                         1998            1997            1996           1995             1994
                                                      ---------       ---------        --------       ---------        --------
                                                                                    (IN THOUSANDS)

<S>                                                   <C>             <C>              <C>            <C>              <C>
BALANCE SHEET DATA:
Working capital (deficit) .....................       $  49,791       $ (12,894)       $  8,035       $ (11,775)       $  5,445
Total assets ..................................         678,468         824,230         585,925         335,090         220,287
Total liabilities subject to compromise .......         778,720              --              --              --              --
Total liabilities not subject to compromise ...              --         609,239         336,989         180,129         149,226
Long-term debt ................................              --         506,564         272,932         130,729         131,646
Stockholders' equity (deficit) ................        (100,252)        214,991         248,936         154,961          71,061
</TABLE>


                                      17
<PAGE>   21

ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS

         The following discussion is intended to assist in an understanding of
the Company's historical financial position and results of operations for each
of the three years ended December 31, 1998 and should be read in conjunction
with the financial statements of the Company appearing elsewhere in this
report.

RESULTS OF OPERATIONS

OPERATIONS

         The following table sets forth the Company's historical operations
data during the periods indicated:

<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31,
                                                             -----------------------------------
                                                               1998          1997         1996
                                                             --------      --------     --------
         <S>                                                 <C>           <C>          <C>
         PRODUCTION:
           Liquids (MBbls) (1) ........................         8,513         8,210        4,006
           Natural gas (MMcf) .........................        76,799        57,737       32,738
           Total (MBOE) ...............................        21,313        17,833        9,462
         AVERAGE REALIZED SALES PRICES (2):
           Oil (per Bbl) ..............................      $  12.72      $  17.57     $  17.07
           Plant products (per Bbl) ...................          8.78         13.57        14.96
           Liquids (per Bbl)(1) .......................         12.54         17.34        16.93
           Natural gas (per Mcf) ......................          2.16          2.41         2.16
         EXPENSES (PER BOE):
           Lease operating ............................      $   4.66      $   4.33     $   4.08
           Depletion, depreciation and amortization (3)          6.84          6.36         6.18
           General and administrative, net ............           .81           .85          .84
</TABLE>

-------------
(1)      Includes crude oil, condensate and natural gas liquids.
(2)      Net of effects of hedging.
(3)      Excludes $275 million and $200 million impairment provisions recorded
         in the fourth quarters of 1998 and 1997, respectively.


                                      18
<PAGE>   22

COMPARISON OF THE YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997

           Operating and Net Income/Loss. The Company reported an operating
loss of $268.0 million for the year ended December 31, 1998, compared to the
$126.4 million operating loss recorded for the prior year. Net loss for 1998
was $314.5 million compared to a net loss of $134.8 million in 1997. The
decrease in operating income and net income is mainly attributable to lower oil
and gas prices, incremental lease operating expenses from new properties
acquired, higher depletion, depreciation and amortization associated with
higher production volumes, a larger non-cash impairment of oil and gas assets
recorded in 1998 pursuant to full cost accounting rules mandated by the
Commission and higher interest expense, all of which are discussed below.
Excluding the impairment provisions, operating income for 1998 and 1997 would
have been $7.0 million and $73.6 million, respectively.

           Production. The Company's net liquids production rose to 8,513 MBbls
in 1998 from 8,210 MBbls in 1997, a 4% improvement. Net gas production
increased to 76,799 MMcf for the year ended December 31, 1998, a 33% increase
over the 57,737 MMcf produced in 1997. On an equivalent unit basis, 1998
production increased to 21,313 MBOE, 20% more than the 17,833 MBOE produced
during 1997. The increase in equivalent production resulted from producing
properties in the Gulf of Mexico acquired late 1997 and early 1998 and from the
success of the Company's late 1997 and 1998 drilling and workover programs.

           Revenues. Revenues were $273.5 million for the year ended December
31, 1998, compared to $284.2 million reported last year, as lower net realized
prices only partially offset by higher production volumes. Average net realized
liquid prices declined to $12.54 per Bbl in 1998, a 28% decrease compared with
$17.34 per Bbl received in 1997. Average net realized gas prices declined to
$2.16 per Mcf in 1998, a 10% decrease compared with $2.41 per Mcf reported in
1997.

           Average prices received for field production for 1998 were $11.59
per Bbl and $2.06 per Mcf for liquids and natural gas, respectively. After
taking into account the effects of 1998 hedging activities entered into in
order to guarantee a certain level of cash flow from production, specifically
an $8.0 million increase in liquids revenue and a $7.7 million increase in gas
revenue, net realized prices were $12.54 per Bbl and $2.16 per Mcf for liquids
and natural gas, respectively. All commodity price hedging contracts in place
were cancelled at the option of the counterparty pursuant to the filing under
Chapter 11 of the U.S. Bankruptcy Code on March 21, 1999. The aggregate fair
market value of the cancelled contracts, approximately $5.5 million, was
remitted to the Company in April 1999. Average field prices for 1997 were
$17.70 per Bbl and $2.55 per Mcf for liquids and natural gas, respectively.
After taking into account the effects of 1997 hedging activities, specifically
a $2.9 million reduction in liquids revenue and a $7.9 million reduction in gas
revenue, net realized prices were reduced to $17.34 per Bbl and $2.41 per Mcf
for liquids and natural gas, respectively.

           Lease Operating Expenses. Lease operating expenses were $99.2
million in 1998 compared to $77.2 million in 1997. The increase related
primarily to new oil and gas properties acquired in late 1997 and early 1998.
On an equivalent unit of production basis, lease operating expenses increased
to $4.66 per BOE in 1998 from $4.33 per BOE in 1997, an increase attributable
to slightly higher lease operating expenses associated with new properties
acquired and higher 1998 workover costs.

           Depletion, Depreciation and Amortization ("DD&A"). DD&A expense
increased to $420.9 million in 1998 from $313.3 million for 1997. DD&A expense,
not including impairment provisions, was $145.9 million in 1998 compared to
$113.3 million in 1997. The increase was principally attributable to higher
production volumes and an increase in the rate from $6.36 per BOE in 1997 to
$6.84 per BOE in 1998. In addition, the Company recorded non-cash impairments
of oil and gas assets in the fourth quarter of 1998 for $275 million and $200
million in the fourth quarter of 1997.

           General and Administrative Expense. General and administrative
expense, net of overhead reimbursements and capitalized internal costs, was
$17.2 million in 1998 compared with $15.2 million in 1997. This increase was
attributable to the overall growth of the Company. On a barrel equivalent
basis, general and administrative expenses decreased by 5% to $.81 per BOE in
1998 from $.85 per BOE in 1997.


                                      19
<PAGE>   23

           Interest and Other Income. Interest and other income decreased to
$1.6 million in 1998 from $3.4 million in 1997. The decrease was primarily
attributable to a decline in the Company's equity in the earnings of Cook Inlet
Pipeline Company, a 30% owned affiliate acquired in early 1997.

           Interest Expense. Interest expense, net of amounts capitalized,
increased to $48.1 million in 1998, compared to the $32.4 million recorded in
1997. The increase in interest expense was due primarily to increased long-term
debt levels.

           Income Tax Provision/Benefit. Due to net losses incurred during
1998, an income tax provision was not recorded during 1998. The $20.6 million
income tax benefit reported in 1997 resulted from the $200 million non-cash
impairment of oil and gas properties recorded in the fourth quarter of 1997.

COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996

         Operating and Net Income/Loss. The Company recorded an operating loss
of $126.4 million for the year ended December 31, 1997, compared to the $30.7
million operating income reported for the prior year. Net loss for 1997 was
$134.8 million compared to net income of $11.3 million in 1996. The decline in
operating income and net income is attributable to a $162.8 million ($200
million pre-tax) non-cash impairment of oil and gas assets recorded pursuant to
full cost accounting rules mandated by the Commission. Excluding the impairment
provision, operating income would have been $73.6 million, a 140% increase over
1996, that was attributable to higher production volumes and higher commodity
prices received during 1997.

         Production. The Company's net liquids production rose to 8,210 MBbls
for the year ended December 31, 1997 from 4,006 MBbls in 1996, a 105%
improvement. Net gas production increased to 57,737 MMcf in 1997, a 76%
increase over the 32,738 MMcf produced last year. On an equivalent unit basis,
1997 liquids and gas production increased to 17,833 MBOE, 88% more than the
9,462 MBOE produced during 1996. The increase in equivalent production resulted
from new oil production in the Cook Inlet, Alaska area acquired in December
1996, from producing properties in the Gulf of Mexico acquired late 1996 and
1997, and from the success of the Company's late 1996 and 1997 drilling and
workover programs.

         Revenues. Revenues for 1997 increased to $284.2 million, a 104%
improvement over $139.4 million in 1996, primarily because of higher production
volumes and higher net realized prices. Average net realized liquid prices rose
to $17.34 per Bbl in 1997, a 1% increase over the $16.93 per Bbl received in
1996. Average net realized gas prices rose to $2.41 per Mcf in 1997, a 12%
increase over the $2.16 per Mcf reported in 1996.

         Average prices received for field production for the 1997 year were
$17.70 per Bbl and $2.55 per Mcf for liquids and natural gas, respectively.
After taking into account the effects of 1997 hedging activities entered into
to guarantee a certain level of cash flow from production, specifically a $4.9
million reduction in liquids revenue and a $5.8 million reduction in gas
revenue, net realized prices were reduced to $17.34 per Bbl and $2.41 per Mcf
for liquids and natural gas, respectively. Average field prices for 1996 were
$20.13 per Bbl of liquids and $2.40 per Mcf of gas. After taking into account
the effects of 1996 hedging activities entered into to guarantee a certain
level of cash flow from production, specifically a $12.8 million reduction in
liquids revenue and a $7.7 million reduction in gas revenue, net realized
prices were reduced to $16.93 per Bbl and $2.16 per Mcf for liquids and natural
gas, respectively.

         Lease Operating Expenses. Lease operating expenses were $77.2 million
in 1997 compared to $38.8 million in 1996. On an equivalent unit of production
basis, lease operating expenses increased to $4.33 per BOE in 1997 from $4.08
per BOE in 1996 an increase attributable t the higher costs in the non-operated
Cook Inlet, Alaska fields. For the Gulf of Mexico properties, which are
primarily operated fields, lease operating expenses per BOE were reduced by 16%
to $3.22 in 1997 compared with $3.84 in 1996, due to increased production and
to operating improvements.

         Depletion, Depreciation and Amortization. DD&A expense increased to
$313.3 million in 1997 from $58.5 million reported for 1996, an increase
primarily attributable to a $200 million non-cash impairment of oil and gas

                                      20
<PAGE>   24

assets in the fourth quarter of 1997. Excluding the impairment provision, DD&A
would have been $113.3 million compared to the $58.5 million in 1996, or $6.36
and $6.18 per BOE, respectively.

         General and Administrative Costs. General and administrative expense,
net of overhead reimbursements and capitalized internal costs, was $15.2
million in 1997 compared with $8.0 million reported in 1996. This increase was
attributable to the overall growth of the Company, including the opening of an
Anchorage, Alaska office. On a barrel equivalent basis, general and
administrative expenses remained flat at $.85 per BOE and $.84 per BOE for 1997
and 1996, respectively.

         Interest and Other Income. Interest and other income increased to $3.4
million in 1997 from $650,000 in 1996. The increase resulted primarily from
$1.5 million attributable to the Company's equity in the earnings of Cook Inlet
Pipeline Company, a 30% owned affiliate acquired in January 1997 as part of the
acquisition of producing oil properties in the Cook Inlet area of Alaska.

         Interest Expense. Interest expense, net of amounts capitalized,
increased to $32.4 million in 1997, compared to $13.4 million in 1996. The
increase in interest expense was due primarily to increased debt levels.
Interest rates were slightly higher in 1997 as borrowings under the Senior
Credit Facility were repaid through issuance of fixed rate, long-term
subordinated debt issued in late 1996 and early 1997.

         Income Tax Provision/Benefit. The Company recorded an income tax
benefit in 1997 of $20.6 million compared to an income tax expense of $6.7
million in 1996. The benefit resulted from the $200 million non-cash impairment
of oil and gas assets recorded in 1997. The recording of a valuation allowance
for a portion of the deferred tax asset created by the year end impairment
provision resulted in a reduction in the effective tax rate to 13.3% in 1997,
from 37.3% in 1996.

LIQUIDITY AND CAPITAL RESOURCES

         On March 21, 1999, the Company and its wholly-owned subsidiary,
Forcenergy Resources Inc., filed a voluntary petition for relief under Chapter
11 of the U.S. Bankruptcy Code in order to facilitate the restructuring of the
Company's long-term debt, revolving credit, trade and other obligations. The
filing was made in the U.S. District Court for the Eastern District of
Louisiana in New Orleans. The Company continues to operate as a
debtor-in-possession subject to the Bankruptcy Court's supervision and orders.

         The bankruptcy petitions were filed in order to preserve cash and to
give the Company the opportunity to restructure its debt. The consummation of a
plan of reorganization is the primary objective of the Company. The plan of
reorganization will set forth the means for satisfying claims, including
liabilities subject to compromise, and interests in the Company. A plan of
reorganization may result in, among other things, material dilution or
elimination of existing security holders as a result of the issuance of
securities to creditors or new investors. The consummation of a plan of
reorganization will require approval of the Bankruptcy Court.

         At this time, it is not possible to predict the outcome of the
bankruptcy proceedings, in general, or the effect on the business of the
Company or on the interests of creditors, royalty owners or stockholders. There
can be no assurance that the plan of reorganization to be submitted by the
Company will be approved or that the Bankruptcy Court will permit the Company
to continue to operate as a debtor-in-possession. As a result, there is
substantial doubt about the Company's ability to continue as a going concern.
See the Consolidated Financial Statements of the Company included under Item 8
of this report.

         In the ordinary course of business, the Company makes substantial
capital expenditures for the exploration and development of oil and natural gas
reserves. Historically, the Company has financed its capital expenditures, debt
service and working capital requirements with cash flow from operations, public
offerings of equity, private offerings of debt, asset sales, a senior credit
facility and other financings. Cash flow from operations is sensitive to the
prices the Company receives for its oil and natural gas. A reduction in planned
capital spending or an extended decline in oil and gas prices could result in
less than anticipated cash flow from operations in the current fiscal year


                                      21
<PAGE>   25

and in later years which could have a material adverse effect on the Company.
Proceeds from oil and natural gas sales are received at approximately the same
time that production-related burdens, such as royalties, production taxes and
drilling program obligations, are payable.

         After the bankruptcy Petition Date, Forcenergy and Resources filed an
Emergency Motion for Interim Order Authorizing Use of Cash Collateral (the
"Cash Collateral Motion"), pursuant to which Forcenergy and Resources sought
the use of various purported secured parties' cash collateral in on-going
operations. On March 22, 1999, the Bankruptcy Court signed a Preliminary Order
Authorizing Use of Cash Collateral, thereby authorizing Forcenergy's and
Resource's use of cash collateral in accordance with a budget attached thereto.
Since the Preliminary Order, the Bankruptcy Court has conducted several
hearings on Forcenergy's and Resource's continued use of cash collateral and on
May 14, 1999, the final order (the Order Authorizing the Use of Cash
Collateral) was signed.

         Forcenergy is presently in negotiations for debtor-in-possession
financing.

         Presently, Forcenergy and Resources are operating pursuant to the
Order Authorizing the Use of Cash Collateral and the budget attached thereto.
To the extent that on-going expenses are for post petition goods and services
(after March 21, 1999), are within the ordinary course of business and are
reflected on the court-approved budget, Forcenergy and Resources are permitted
to make such expenditures without further Bankruptcy Court order. Any
expenditure, however, that is outside the ordinary course of business or that
is not reflected on the budget, must be specifically authorized by the
Bankruptcy Court. The procedures for payment of such expenses may be further
specified in a debtor-in-possession financing facility. The Company had
approximately $42 million in cash on hand on May 31, 1999 that can be used for
such operations pursuant to the terms of the Cash Collateral Order.

         The Company has historically funded its operations, acquisitions,
capital expenditures and working capital requirements from cash flow from
operations, bank borrowings and private and public placements of debt and
equity securities. The Company's primary sources of funds for each of the past
three years were as follows:

<TABLE>
<CAPTION>
                                                                                  (in thousands)
                                                                        1998            1997            1996
                                                                     ---------       ---------       ---------
<S>                                                                  <C>             <C>             <C>
Net cash provided by operating activities .....................      $ 141,853       $ 177,621       $  65,228
Borrowings under the Senior Credit Facility ...................        315,500         287,144         255,968
Repayments under the Senior Credit Facility ...................       (150,364)       (253,512)       (250,091)
Net proceeds from issuance of common stock ....................            361           2,661          46,318
Issuance of long-term debt, net of expenses ...................             --         193,414         169,114
</TABLE>


           Cash flow from operations, before changes in operating assets and
liabilities, was $107.4 million for the year ended December 31, 1998, compared
with $157.7 million in 1997. The decrease in cash flow resulted primarily from
the lower oil and gas prices and higher interest expense.

           Capital expenditures were $337.4 million, including $54.0 million
for acquisitions, for the year ended December 31, 1998, compared with $406.7
million in 1997. Capital expenditures were funded by the Company's existing
Senior Credit Facility and cash generated from operations. As a result, the
Company's long-term debt increased from $506.6 million at the end of 1997 to
$671.7 million (all reclassified as liabilities subject to compromise) at
December 31, 1998. The Company was fully drawn under the Senior Credit Facility
at March 21, 1999.

         The Company's capital expenditures for 1999 will remain subject to the
approval and supervision of the Bankruptcy Court and may vary significantly due
to a variety of factors, including drilling results, oil and gas prices,
industry conditions and outlook, future acquisitions of properties and the
availability of capital.


                                      22
<PAGE>   26

YEAR 2000 COMPLIANCE

         Forcenergy has established a "Year 2000" project (the "Project") to
assess, to the extent possible, its Year 2000 risk exposure, to take remedial
actions necessary to minimize the Year 2000 risk exposure to Forcenergy and to
test its systems and processes once remedial actions have been taken. Because
of the importance of occurrence dates in the oil and gas industry, the
consequences of not pursuing Year 2000 modifications could be critical to
Forcenergy's ability to manage and report operating activities. The costs to
the Company associated with the Project are not expected to have a material
financial impact on the Company.

         The assessment phase of the Project is 90% complete as of December 31,
1998, with the remainder being the assessment of risk related to year 2000
failure on the part of the Company's customers and vendors. This phase
included, among other procedures, the assessment of information technology
applications and systems; the assessment of non-information technology
exposures; the initiation of inquiry and dialogue with significant third party
business partners, customers and suppliers in an effort to understand their
Year 2000 readiness and its potential impact on Forcenergy; and, the
formulation of contingency plans for mission-critical information technology
systems. Forcenergy expects to complete the assessment phase of its Year 2000
project by the end of the second quarter of 1999 but is being delayed by
limited responses to inquiries made to third party businesses. The Company does
believe, however, that any equipment failure at the customer/vendor level could
be overcome by a change in provider or by the implementation of manual
procedures. The remedial phase of the Project was approximately 80% complete as
of December 31, 1998, subject to the results of third party inquiry
assessments. The remediation of non-information technology is expected to be
completed by mid-1999. The testing phase of the Project is expected to by
completed by mid-1999, subject to the Company's assessment of customer and
vendor inquiries.

         Although Forcenergy is making every effort to mitigate the risks
associated with the Year 2000 problem, and currently believes that no material
risk exists that has not been mitigated, there can be no assurance that the
Project or resulting contingency plans will have anticipated all Year 2000
scenarios. A failure to remedy a critical Year 2000 problem could result in
information and non-information technology failures, the receipt or
transmission of erroneous data, lost data or a combination of similar problems
of a magnitude that cannot be accurately assessed at this time.

NEW ACCOUNTING PRONOUNCEMENTS

         In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). The statement requires
companies to report the fair market value of derivatives on the balance sheet
and record in income or other comprehensive income, as appropriate, any changes
in the fair value of the derivative. Statement No. 133 will become effective
with respect to the Company on January 1, 2000. The Company is currently
evaluating the impact, if any, of SFAS No. 133.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

         Revenues generated from operations are highly dependent upon the price
of, and demand for, oil and natural gas. Historically, the markets for oil and
natural gas have been volatile and are likely to continue to be volatile in the
future as prices are subject to wide fluctuations in response to relatively
minor changes in the supply of and demand for oil and natural gas, market
uncertainty and a variety of additional factors that are beyond the control of
the Company. These uncontrollable factors include the level of consumer product
demand, weather conditions, domestic and foreign governmental regulations, the
price and availability of alternative fuels and political and economic
conditions in the Middle East, Russia, Mexico and Canada that can affect the
supply and price of foreign oil and natural gas. It is impossible to predict
future oil and natural gas price movements with any certainty. Declines in oil
and natural gas prices may adversely affect the Company's financial condition,
liquidity and results of operations. Lower prices also may reduce the amount of
reserves that can be produced economically, as well as limit the ability to
continue to exploit and develop the existing reserve base.


                                      23
<PAGE>   27

         Forcenergy has utilized from time to time various financial
instruments to hedge portions of its current oil and gas production to achieve
more predictable cash flows and to reduce its exposure to fluctuations in oil
and gas prices. The remaining portion of current production was not hedged so
as to provide Forcenergy the opportunity to benefit from oil and natural gas
price increases, should they occur. Specifically, Forcenergy utilized, from
time to time, forward sales contracts and commodity swaps. All commodity
hedging contracts were cancelled at the option of the counterparty as a result
of the Company's filing under Chapter 11 of the U.S. Bankruptcy Code on March
21, 1999. Future hedging activities may be undertaken by the Company.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The financial statements and supplementary financial information
required to be filed under this item are presented on pages F-1 through F-26
of this Form 10-K, and are incorporated herein by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

CHANGES IN ACCOUNTANTS

         None.

DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

         None.


                                      24
<PAGE>   28

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

         DIRECTORS

         Messrs. Eric Forss, Robert Issal, Stig Wennerstrom and Bruce L.
Burnham are currently directors of the Company.

         Stig Wennerstrom, age 56, has been President and Chief Executive
Officer and a director of the Company since its inception in September 1993. In
March 1998 Mr. Wennerstrom was chosen to serve as Chairman of the Board of
Directors of the Company. From 1982 until the formation of the Company, Mr.
Wennerstrom was the President and Chief Executive Officer of the Company's
predecessors.

         Bruce L. Burnham, age 65, has served as a director of the Company
since 1996. Mr. Burnham has served as President of The Burnham Group, a
privately-held consulting and marketing firm formed by Mr. Burnham shortly
after retiring from Dayton's Department Stores in 1984. From 1981 to 1984, Mr.
Burnham served as Chairman and Chief Executive Officer of Dayton's Department
Stores in Minneapolis, Minnesota. From 1979 to 1980, Mr. Burnham was President
and Chief Executive Officer of Bonwit Teller in New York City. From 1978 to
1979, Mr. Burnham was President and Chief Operating Officer of Jordan Marsh. He
serves on the Board of Directors of Paxson Communications Corporation,
Financial Benefit Group, Inc. and J.B. Rudolph, Inc.

         Eric Forss, age 33, has been a director of the Company since June
1994. Mr. Forss has served as Chief Executive Officer of Forsinvest AB, a
private Swedish holding company and stockholder of the Company, since June
1998. Mr. Forss was also President of Forcenergy AB, a Swedish public
corporation ("FAB") from May 1991 to June 1998 (on March 31, 1998, the Company
acquired approximately 97% of the shares of FAB through a public exchange
offer of Forcenergy Inc shares for the outstanding shares of FAB). Prior to
serving as President of FAB, Mr. Forss was Vice President of FAB from May 1990
through April 1991. Mr. Forss served on the Board of Directors of FAB from May
1994 to March 1998.

         Robert Issal, age 53, served as Chairman of the Board of Directors of
the Company from May 1994 until March 1998 and has been a director since the
Company's inception in September 1993. In March 1998 Mr. Issal was chosen to
serve as Vice Chairman of the Board of Directors of the Company. Mr. Issal
served as Chairman of FAB from May 1994 to June 1998 and served as Vice
Chairman of FAB from April 1992 to April 1994. Mr. Issal served as President
and Chief Executive Officer of Forsheda AB, a Swedish public company, from 1988
through 1991. From 1991 through 1994, Mr. Issal was the Chairman and President
of Abstracta Group. Since 1994, Mr. Issal has served as Chairman and President
of Rejmyre Belysning AB Sweden and its predecessor Rejmyre Light AB, a Swedish
lighting manufacturer.

COMPENSATION ARRANGEMENTS FOR MEMBERS OF THE BOARD OF DIRECTORS

         Fees paid Directors are in line with that paid by comparable
companies. The fees are an annual retainer of $10,000 per year and $3,000 per
meeting attended ($250 per telephonic meeting), capped at $25,000 per Director
per year. In addition, prior to Mr. Wennerstrom being elected Chairman in March
1999, the Chairman of the Board of Directors received a fee of $3,000 per
month. These fees are not paid to Directors who are employees of the Company.
The Company also compensates Directors through the issuance of periodic stock
option grants. These grants are made under the Company's Stock Option Plan
typically on a formula basis. (See "Forcenergy Inc 1995 Stock Incentive Plan").

EXECUTIVE OFFICERS

         The executive officers of the Company are Stig Wennerstrom, President
and Chief Executive Officer and those officers listed below. Biographical
information on Mr. Wennerstrom is included under the caption "Directors" above.


                                      25
<PAGE>   29

         J. Russell Porter, age 37, is Executive Vice President. Prior to his
promotion to Executive Vice President in July 1997, Mr. Porter served as Vice
President - Corporate Development from October 1995 to June 1997 and as Vice
President - Financial Planning & Analysis from April 1994 to October 1995. From
January 1992 until joining the Company, Mr. Porter held the position of Vice
President in the Natural Resources Group of Internationale Nederlanden (U.S.)
Capital Corporation in New York. From July 1990 to December 1991, Mr. Porter
was an Associate in the Energy Group of Manufacturers Hanover and Chemical
Bank.

         Gary Carlson, age 52, is Vice President - Alaska Division and has
responsibility for all Alaskan operations. Prior to joining the Company in
March 1997, Mr. Carlson held various positions during a tenure of 29 years with
Unocal Corporation, most recently serving as Unocal's General Manager for
Health, Environmental and Safety Support from 1995 until joining the Company.
Mr. Carlson also served as President and Managing Director of Unocal Indonesia
from 1992 to 1995 and as Managing Director for Unocal Netherlands N.V. from
1989 to 1992.

         Robert G. Gerdes, age 42, is Vice President - Geoscience with
responsibility for technical overview of company-wide geoscience, as well as
technical evaluation of all drilling prospects and all acquisitions and new
ventures. Prior to his promotion to Vice President - Geoscience in October
1997, Mr. Gerdes served as Geologist and Evaluations Manager from January 1994
to October 1997. Mr. Gerdes worked as an independent consulting geologist from
September 1993 until joining the Company in January 1994. Mr. Gerdes served as
Senior Geologist Corporate Staff for Graham Resources from August 1987 to
September 1993. Prior to joining Graham Resources, Mr. Gerdes held various
geological positions with Crescent Exploration Company and Unocal Corporation.

         Thomas F. Getten, age 51, is Vice President, General Counsel and
Secretary. Prior to joining the Company in January 1997, Mr. Getten was in
private law practice in New Orleans. From January 1996 until joining the
Company, Mr. Getten was a partner with Nesser, King & LeBlanc, a New Orleans
law firm, and from May 1974 until December 1995, Mr. Getten was a partner and
stockholder with Liskow & Lewis, also a New Orleans law firm.

         E. Joseph Grady, age 46, is Vice President, Treasurer and Chief
Financial Officer. From 1980 until joining the Company in October 1995, Mr.
Grady held various financial management positions with Southdown, Inc. and its
subsidiaries, including Pelto Oil Company from 1980 through 1989, serving as
Vice President - Finance during 1988 and 1989. Most recently Mr. Grady was
Director of Finance for Southdown Environmental Systems, Inc.
from January 1991 until joining the Company.

         Percy A. Payne, age 57, was Vice President - Gulf of Mexico Division
and had responsibility for all Gulf of Mexico and Gulf coast operations until
his resignation effective February 28, 1999. Prior to joining the Company in
August 1996, Mr. Payne served as President of Payne Energy Associates, Inc., a
privately held consulting group formed by Mr. Payne in September 1994 serving
the international oil industry. Prior to establishing his consulting business,
Mr. Payne held various positions during a tenure of 27 years with Shell Oil
Company USA, most recently serving as Vice President of Pecten International,
Shell Oil Company USA's international subsidiary. Mr. Payne also served as
General Manager of Operations for the lower 48 states (excluding California)
and Alaska for Shell Western E&P from April 1986 to September 1991.

         Mark Yelverton, age 43, is Vice President - International Operations
and is responsible for all international operational activities. Additionally,
upon the resignation of Mr. Payne, Mr. Yelverton assumed responsibility for
managing the drilling and production operations for the Gulf of Mexico
Division. Mr. Yelverton joined the Company in April 1997 and served as Manager
- International Operations, until his promotion to his current position in
October 1997. Before joining the Company, Mr. Yelverton served in various
positions, culminating in an appointment as Director General for Phibro Energy
(White Nights Joint Enterprise, Russia) from 1991 to 1997. Prior to joining
Phibro, Mr. Yelverton was employed by Chevron Corporation serving in various
petroleum engineering and geological positions.


                                      26
<PAGE>   30

ITEM 11. EXECUTIVE COMPENSATION

COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

         The Compensation Committee, consisting of Robert Issal and Bruce L.
Burnham, believes that its policies are reflected in the Company's executive
compensation program which aims to: (i) motivate executives toward effective
long-term management of Company operations; (ii) reward effective, efficient
ongoing management of Company operations; and (iii) provide the ability to
attract and retain executives through competitive salary levels and benefit
programs.

Executive Compensation. The Company's executive compensation program includes,
separately or through any combination, base salary, annual incentives and
various stock and stock option programs.

Base Salary and Annual Incentives. The Company's policy, as implemented by the
Compensation Committee, is to compensate executives to reflect performance and
be competitive in the market. The Compensation Committee considers the
executive's individual performance and that of the Company as a whole along
with other relevant factors in setting compensation, including discretionary
bonuses. The Compensation Committee considers the scope of each executive's
responsibilities in selecting the performance measures to apply to that
executive's compensation, and does not apply any specific weight to any
particular measure of performance. These criteria, the performance of the
executive officers and the performance of the Company were considered in the
determination of bonuses for 1998. Because of a difficult industry business
environment during 1998, the Company failed to meet its performance goals,
therefore no cash bonuses were paid to the executive officers for the 1998 year
other than those contractually mandated under employment agreements.

Stock Options. The Company believes that stock options are important in
motivating executives to increase long term shareholder value because the
options focus executive attention on stock price as a measure of performance
and align the executive's financial interests with those of the Company's
stockholders. Accordingly, prior to the Company's Initial Public Offering in
1995, the Company adopted, with stockholder approval, the Forcenergy Inc 1995
Stock Incentive Plan. (See "Forcenergy Inc 1995 Stock Incentive Plan") The
Compensation Committee administers the Forcenergy Inc 1995 Stock Incentive Plan
and grants options to employees based on the performance of the employee and
the Company and other relevant factors. Since the options vest over a number of
years, they enhance the Company's ability to retain option holders and motivate
them to take a long-term view of the Company's interests in their decisions.

Grants of options to executive officers during 1998 were made based upon
individual efforts and performance.

Chief Executive Officer Compensation. Mr. Wennerstrom entered into an
employment agreement with the Company as President and Chief Executive Officer
for an initial term of three years effective September 14, 1993. See
"Employment Agreement of Certain Executive Officers". In May 1995, the Company
amended this employment agreement in connection with the Initial Public
Offering and in recognition of the Company's rapid growth in financial
performance. Mr. Wennerstrom's compensation for 1998 was limited to that
provided for in his employment agreement.



                                        Robert Issal



                                        Bruce L. Burnham


                                      27
<PAGE>   31

SUMMARY COMPENSATION TABLE

         The following table sets forth information concerning cash and
non-cash compensation paid or accrued for services in all capacities to the
Company during the three years ended December 31, 1998 for each of the five
most highly compensated executive officers of the Company ("Named Officers"):

<TABLE>
<CAPTION>
                                                      ANNUAL COMPENSATION(1)
                                                     -----------------------        LONG TERM              ALL OTHER
NAME, POSITION & AGE                  YEAR             SALARY          BONUS       COMPENSATION          COMPENSATION
                                      ----           --------       --------       ------------          ------------
                                                                              SECURITIES UNDERLYING
                                                                                  STOCK OPTIONS
                                                                                 (NUMBER OF SHARES)
                                                                              ---------------------
<S>                                   <C>            <C>            <C>       <C>                        <C>
Stig Wennerstrom (56)                 1998           $600,000       $150,000                   -0-         $89,566(2)
Chairman, President & Chief           1997            566,664        500,000               300,000          89,374(2)
Executive Officer                     1996            533,333        500,000               334,839          91,344(2)


J. Russell Porter (37)                1998            350,000            -0-                   -0-           5,000(4)
Executive Vice President(3)           1997            300,300        225,000               150,000           4,763(4)
                                      1996            225,300        125,000                75,000           1,692(4)

Thomas F. Getten (51)                 1998            300,300            -0-                50,000           5,000(4)
Vice President, General Counsel       1997            270,000        100,000               150,000          90,385(6)
& Secretary(5)

E. Joseph Grady (46)                  1998            295,300            -0-                   -0-           5,000(4)
Vice President, Treasurer &           1997            240,000         85,000                50,000          60,070(7)
Chief Financial Officer               1996            203,333         75,000               120,000           1,979(4)

Gary E. Carlson (52)                  1998            275,300            -0-                   -0-           5,000(4)
Vice President-Exploration            1997            229,167            -0-               175,000           4,750(4)
& Production (Alaska
Division)(8)
</TABLE>


-------------------

(1)      Amounts exclude perquisites and other personal benefits because such
         compensation, if any, is included in All Other Compensation.

(2)      Includes $71,373 in annual premiums paid by the Company for life
         insurance policies on the life of, and payable to a beneficiary
         selected by, Mr. Wennerstrom for 1995 through 1998. Also includes
         employer matching contributions of $2,375, $4,750 and $5,000 under the
         Company's 401(k) Plan for 1996, 1997 and 1998, respectively, and for
         other non-cash benefits of $17,596, $13,251 and $13,193 received in
         1996, 1997 and 1998, respectively.

(3)      Mr. Porter joined the Company in April 1994 as Vice President -
         Financial Planning and Analysis, was promoted to Vice President -
         Corporate Development in November 1995 and was promoted to his current
         position in July 1997.

(4)      Represents employer matching contributions under the Company's 401(k)
         Plan.

(5)      Mr. Getten joined the Company in his current position in January 1997.

(6)      Includes $85,600 in relocation reimbursement and $4,750 in employer
         matching contributions under the Company's 401(k) Plan.

(7)      Includes $55,320 in relocation reimbursement and $4,750 in employer
         matching contributions under the Company's 401(k) Plan.

(8)      Mr. Carlson joined the Company in his current position in March 1997.


                                      28
<PAGE>   32

EMPLOYMENT AGREEMENTS OF CERTAIN EXECUTIVE OFFICERS

           The following is a description of employment agreements between the
Company and its executive officers as of December 31, 1998. Current employment
agreements and payments to executive officers are currently subject to the
approval of the Bankruptcy Court.

         Chief Executive Officer. In connection with the formation of the
Company, Mr. Wennerstrom and the Company entered into an employment agreement
effective as of September 14, 1993, and amended as of May 18, 1995 (the
"Employment Agreement") pursuant to which Mr. Wennerstrom serves as President
and Chief Executive Officer of the Company.

         Under the Employment Agreement, Mr. Wennerstrom is entitled to an
annual salary and fixed bonus. Mr. Wennerstrom received an annual salary of
$533,333, $566,664 and $600,000 for 1996, 1997 and 1998, respectively. Mr.
Wennerstrom's salary is subject to annual cost of living increases. In
addition, Mr. Wennerstrom was entitled to receive a $150,000 bonus for 1997 and
for each subsequent year, provided that the Company may require him to return
this bonus, or a portion thereof, for any year in which the Company fails to
attain pre-determined cash flow targets. The Employment Agreement also provides
that the Company will maintain certain life insurance policies on the life of
Mr. Wennerstrom, payable to a beneficiary selected by Mr. Wennerstrom. The term
of the Employment Agreement extends to December 31, 1998, automatically renewed
annually thereafter until December 31, 2001 for "rolling" three-year periods
that can be terminated upon 36 months' prior notice, provided that the term can
be ended upon 12 months' notice given after January 1, 2002.

         The Employment Agreement is subject to early termination by the
Company for cause or upon the death or incapacity of Mr. Wennerstrom. The
Employment Agreement is subject to early termination by Mr. Wennerstrom for
cause. If the Employment Agreement is terminated without cause by the Company
or with cause (including certain changes in control of the Company) by Mr.
Wennerstrom, the Company is obligated to pay Mr. Wennerstrom a termination fee
of three times the amount of Mr. Wennerstrom's annual includible compensation.

         Other. The Company has entered into employment agreements with J.
Russell Porter, E. Joseph Grady and Thomas F. Getten as of the end of 1998.
These employment agreements are for "rolling" periods of one year, provided
that the automatic annual renewal can be terminated upon 60 days written
notice. If the employment agreement is terminated without cause by the Company,
the Company is obligated to pay such officers a severance payment provided for
in such employment agreement equal to two years base salary and in the case of
certain changes in control two and one-half years base salary.

TAX DEDUCTIBILITY OF EXECUTIVE COMPENSATION

         The Company is subject to U.S. tax legislation enacted in 1993 that
could limit the deductibility of certain compensation payments to its executive
officers. The Company believes that any compensation realized in connection
with the exercise of stock options granted by the Company will continue to be
deductible as performance-based compensation. The Compensation Committee will
continue to monitor the impact of this legislation on the Company's
compensation policies.

FORCENERGY INC 1995 STOCK INCENTIVE PLAN

         In May 1997, pursuant to a vote of the Company's stockholders, the
Company's three existing stock option plans were consolidated to form the
Forcenergy Inc 1995 Stock Incentive Plan (the "Stock Option Plan"). The Stock
Option Plan is intended to provide officers and key employees with an
opportunity to acquire a proprietary interest in the Company and additional
incentive and reward opportunities based on the profitable growth of the
Company and to aid the Company in attracting and retaining outstanding
personnel. The Stock Option Plan provides for the granting of options (either
incentive stock options within the meaning of Section 422(b) of the Internal
Revenue Code of 1986, as amended ("Code"), or non-qualified stock options),
restricted stock awards, stock appreciation rights, performance awards, and
phantom stock awards, or any combination thereof.


                                      29
<PAGE>   33

         The Stock Option Plan is administered by the Compensation Committee,
which is composed of at least two Directors who are "outside directors" within
the meaning of Section 162(m) of the Code and "non-employee directors" within
the meaning of Rule 16b-3 of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). The Stock Option Plan was amended in May 1998, pursuant
to a vote of the Company's stockholders at the 1998 Annual Meeting, to permit
awards of up to an aggregate of 6,000,000 shares of Common Stock. As of
December 31, 1998, 6,000,000 shares of Common Stock had an aggregate market
value of $15.75 million. The number of, and in some cases, types of, shares
covered by the Stock Option Plan are subject to adjustments in the event of
stock dividends, stock splits and certain other events. As of December 31,
1998, options covering up to an aggregate of 3,637,441 shares of Common Stock
were outstanding under the Stock Option Plan, and 2,121,293 options were
available for future grants after December 31, 1998.

         All employees and Directors of the Company are eligible to participate
in the Stock Option Plan. The Compensation Committee has the power to determine
which employees receive awards under the Stock Option Plan and the terms of
each award, except that awards to non-employee Directors are made upon
unanimous consent of the entire Board of Directors.

         No more than 500,000 shares of Common Stock, subject to adjustments,
may be subject to grants to any one employee in any one year under the Stock
Option Plan. This limitation will be applied so that compensation realized from
awards under the Stock Option Plan will qualify as "performance based"
compensation for purposes of Section 162(m) of the Code.

         Upon initial appointment to the Board, a non-employee Director
typically receives options to buy 10,000 shares of Common Stock, vesting
annually over three years subject to their continued service as a Director.
Upon their re-election to the Board at subsequent annual meetings of
stockholders, these Directors receive options to buy 5,000 shares of Common
Stock, vesting in six months after such annual meeting. All of these options
are exercisable at the fair market value of Common Stock at the date of grant,
and expire 10 years after grant. Incentive stock options granted under the
Stock Option Plan cannot be exercisable at less than the fair market value of
Common Stock on the date of grant (subject to adjustments), nor for more than
10 years after grant, provided that options granted to a holder of securities
representing more than 10% of the total combined voting power of all classes of
the Company's stock or of its subsidiary cannot be exercisable at less than
110% of the fair market value of Common Stock at the date of grant (subject to
adjustments) or for longer than five years from grant. The Committee can
determine how the exercise price of options will be paid. The Board of
Directors may also grant options on a discretionary basis to individual
directors.

         The Compensation Committee has the authority, in its discretion, to
amend the Stock Option Plan, unless approval of the Company's stockholders is
required for the Stock Option Plan to meet the stockholder approval
requirements of Sections 422 and 162(m) of the Code. Therefore, the Company's
stockholders would need to approve any amendment that is "material" for
purposes of Section 162(m) or required by Section 422, including any amendment
(a) increasing the number of shares available in the aggregate for awards, (b)
increasing the number of shares that may be granted to an employee, or (c)
changing eligibility requirements for participation in the Stock Option Plan.

         No grants of Restricted Stock Awards, Stock Appreciation Rights,
Performance Awards or Phantom Stock Awards have been made under the Stock
Option Plan. See "Stock Option Grants in 1998".


                                      30
<PAGE>   34

401(K) PLAN

         The Company has adopted a 401(k) Profit Sharing Plan (the "401(k)
Plan") for its employees. Under the 401(k) Plan, eligible employees are
permitted to defer receipt of up to 15% of their cash compensation (subject to
certain limitations imposed under the Code). The 401(k) Plan provides that a
discretionary match of employee deferrals may be made by the Company in cash.
Pursuant to the 401(k) Plan, the Company has currently elected to match $.50
for each $1.00 contributed by the employee through salary deferral, said
deferral not to exceed 5% of an employee's salary, subject to limitations
imposed by the Internal Revenue Service. The amounts held under the 401(k) Plan
are invested among various investment funds maintained under the 401(k) Plan in
accordance with the directions of each participant. Salary deferral
contributions under the 401(k) Plan are 100% vested. Matching contributions
vest immediately upon a participants attainment of a minimum of one year of
service with the Company. Participants or their beneficiaries are entitled to
payment of vested benefits upon termination of employment.

EMPLOYEE STOCK PURCHASE PLAN

         The Company has adopted the Forcenergy Gas Exploration, Inc. Employee
Stock Purchase Plan (the "Stock Purchase Plan"), which permits all Company
employees (other than the Chief Executive Officer) who work full time (or part
time for at least 20 hours per week and more than five months per year) to
acquire Common Stock at a minor discount from its fair market value through
payroll deductions.

         For each six-month period beginning on January 1 or July 1 during the
term of the Stock Purchase Plan, unless the Board determines otherwise, the
Company will offer to each eligible employee the opportunity to purchase Common
Stock. Employees may elect to participate prior to the start of a period and
may elect to have from two to ten percent of their compensation withheld. The
Stock Purchase Plan allows withdrawals, termination and changes in the level of
participation. The purchase price will be 85% of the lesser of the fair market
value of Common Stock on (i) the first day of the period or (ii) the last day
of the period. No employee may purchase Common Stock under the Stock Purchase
Plan valued at more than $25,000 (or such other maximum as may be prescribed
from time to time under the Code) for each calendar year in accordance with the
provisions of the Code.

         Up to 100,000 shares of Common Stock are currently authorized for
purchase under the Stock Purchase Plan. Employees purchased 50,866 shares of
Common Stock under the Stock Purchase Plan during 1998 thereby resulting in all
100,000 shares of Common Stock authorized for purchases under the Stock
Purchase Plan having been purchased. No additional shares of Common Stock are
currently available for purchase under the Stock Purchase Plan unless
additional shares are authorized by the Stockholders for purchase under the
Stock Purchase Plan.

STOCK PRICE PERFORMANCE INCENTIVE PLAN FOR EMPLOYEES OF THE COMPANY

         Effective January 1, 1997, the Company adopted the 1997 Stock Price
Performance Incentive Plan for Employees of the Company (the "$60 a Share Plan"
or "Plan"). All of the Company's employees are eligible to receive awards of
the Company's Common Stock under the Plan without being required to pay any
purchase price if (1) the closing price of the Company's Common Stock reaches
$60 a share before January 1, 2000, and (2) the employee remains employed by
the Company through the date that the shares are actually distributed under the
Plan. If the Common Stock reaches $60 per share on any date (the "$60 Price
Date") on or before December 31, 1999, then all employees would receive Common
Stock worth 500% of their annual base compensation, distributed in equal
installments on the first, second and third anniversaries of the $60 Price
Date, if they are still employed by the Company. For purposes of determining
the value of Common Stock to be distributed, the Common Stock will be valued at
its closing price on the $60 Price Date. The Plan also provides for reduced
compensation if the Common Stock does not reach $60 a share during the plan
period but does reach $50 a share (but not $60) prior to December 31, 1999
(with December 31, 1999 representing the "$50 Price Date"). In such case, all
employees would receive Common Stock worth 250% of their annual base
compensation, distributed in equal installments on December 31, 2000, 2001 and
2002.

         The Compensation Committee of the Company's Board of Directors
administers the Plan. The Compensation Committee has the sole and exclusive
right to interpret and administer the Plan, including determining the employees

                                      31
<PAGE>   35

eligible to receive awards under the Plan, calculating the employees' annual
base pay and the number of shares of Common Stock issuable and reducing the
number of shares issuable to particular employees.

         The Plan is intended to qualify under Section 162 (m) of the Code so
that the Company may deduct the value of the shares issuable under the Plan
regardless of the amount thereof. Therefore, changes to the Plan will require
stockholder approval if they are "material" for purposes of Section 162(m) of
the Code. "Material" changes would include an increase in the aggregate number
of shares issuable under the Plan or to a particular employee or a change in
the eligibility criteria for participation in the Plan.

STOCK OPTION GRANTS IN 1998

<TABLE>
<CAPTION>
                                   OPTION GRANTS TO NAMED OFFICERS IN 1998
                                   ---------------------------------------

                                                                               POTENTIAL REALIZABLE VALUE
                      NUMBER OF       % OF TOTAL                               AT ASSUMED ANNUAL RATES OF
                      SECURITIES     OPTIONS/SARS                             STOCK PRICE APPRECIATION FOR
                      UNDERLYING      GRANTED TO     EXERCISE                         OPTION TERM(1)
                       OPTIONS       EMPLOYEES IN    PRICE PER   EXPIRATION   ----------------------------
       NAME            GRANTED       FISCAL YEAR       SHARE        DATE         5%                10%
       ----           ----------     ------------    ---------   ----------   --------          ----------

 <S>                  <C>            <C>             <C>         <C>          <C>               <C>
 Thomas F. Getten     50,000(2)          7.2%         $21.50        2008      $676,062          $1,713,273
</TABLE>

There were no options exercised by a Named Officer in 1998.

---------------------

(1)      Potential realizable value was reported net of the option exercise
         price, but before taxes, associated with the exercise. These amounts
         represent the theoretical realizable value on the option expiration
         date, assuming that the stock price appreciates annually at the rates
         shown from the date of grant through expiration. Actual values
         realized, if any, on stock option exercises are dependent on the
         future performance of the Common Stock and the officer's continued
         employment throughout the vesting period. Accordingly, the amounts
         reflected in this table may not necessarily be achieved. All options
         granted to the Named Officers in 1998 reflected the market price of
         the common stock on the date of grant.

(2)      Options were granted to Mr. Getten on January 22, 1998 under the Stock
         Option Plan and such options vest 33.33% on each of the third through
         fifth anniversaries of the date of grant.


<TABLE>
<CAPTION>
                                     UNEXERCISED OPTIONS AT DECEMBER 31, 1998
                                     ----------------------------------------
                                                                      VALUE OF UNEXERCISED
                                          NUMBER OF OPTIONS          IN-THE-MONEY OPTIONS(1)
                                    -----------------------------  --------------------------
                 NAME               EXERCISABLE     UNEXERCISABLE  EXERCISABLE  UNEXERCISABLE
                                    -----------     -------------  -----------  -------------

         <S>                        <C>             <C>            <C>          <C>
         Stig Wennerstrom            1,498,215              --       $   --       $    --

         J. Russell Porter             147,280         251,057           --            --

         Thomas F. Getten                   --         200,000           --            --

         E. Joseph Grady                45,000         200,000           --            --

         Gary E. Carlson                    --         175,000           --            --
</TABLE>


-----------
(1)      Value based on the last trade on the New York Stock Exchange on
         December 31, 1998 ($2.625 per share), less the applicable exercise
         price of the outstanding options.


                                      32
<PAGE>   36

         Pursuant to a repricing of stock options held by non-executives of the
Company on March 4, 1998, options held by Mr. Robert Gerdes, a Vice President
of the Company, to purchase 20,000 shares at $26.875 per share were canceled
and replaced with new options to purchase 18,186 shares at $22.00 per share. On
the same date, options held by Mr. Mark Yelverton, a Vice President of the
Company, to purchase 25,700 shares at $30.50 per share were canceled and
replaced with new options to purchase 22,124 shares at $22.00 per share. The
options repriced were options granted to each prior to their promotion to their
positions as an officer of the Company. In both cases, the exercise price of
each newly issued option represents the market price of the common stock on the
date of grant and the vesting provisions are consistent with the original grant.
The original remaining option terms at the date of repricing were 7 years and
302 days and 9 years and 55 days in the cases of Mr. Gerdes and Mr. Yelverton,
respectively.

         In January 1999 the Board of Directors authorized a repricing of stock
options held by all optionholders of the Company. This was deemed necessary
because of the precipitous decline in the Company's stock price and the need to
maintain the incentive nature of the option plan. On February 1, 1999, all
stock options currently outstanding were cancelled and reissued with an
exercise price of $1.275 per share (the fair market value of the stock on that
date plus 20%). All other terms of options previously granted to non-executives
remained unchanged. The number of options held by executives and directors was
reduced by approximately 114,000 shares.


                                      33
<PAGE>   37

STOCK PERFORMANCE GRAPH

         The following graph compares total return of the Company's Common
Stock against the S&P 500 Index and a peer group index consisting of public
independent oil and gas companies.* The graph assumes that $100 was invested on
August 2, 1995 (the date of the closing of the Initial Public Offering) in the
Company's Common Stock, the S&P 500 Index and the peer group and that dividends
thereon were reinvested quarterly.

                    [CHART: COMPARE CUMULATIVE TOTAL RETURN
                             AMONG FORCENERGY INC,
                      S&P 500 INDEX AND PEER GROUP INDEX]


*The peer group consists of Ocean Energy Inc., Hugoton Energy Inc., Louis
Dreyfus natural Gas Company, Inc., Newfield Exploration Company, PetroCorp,
Inc. and Stone Energy Corp. Hugoton Energy Inc. was acquired by Chesapeake
Energy Corporation in March 1998.


                                      34
<PAGE>   38

ITEM 12. BENEFICIAL OWNERSHIP OF COMMON STOCK

         The following table is furnished as of March 31, 1999 to indicate
beneficial ownership of shares of the Common Stock by persons owning more than
5% of the Common Stock and all executive officers and Directors individually
and the executive officers and Directors as a group. The information in the
following table is provided by such persons.

<TABLE>
<CAPTION>
                                                                                                     PERCENT
                                                   COMMON         VESTED                               OF
                                                   STOCK(1)      OPTIONS(2)            TOTAL      COMMON STOCK
                                                  ---------      ----------          ---------    ------------

         <S>                                      <C>            <C>                 <C>          <C>
         Forsinvest AB(3) (9)                     1,614,089               -          1,614,089        6.5%
         Stridor Invest AB(3) (9)                    21,436               -             21,436          *
         Stig Wennerstrom(3) (4)                    327,698       1,461,602          1,789,300        6.8%
         J. Russell Porter(3) (5)                     5,574         145,013            150,587          *
         Gary Carlson(3) (6)                         10,694               -             10,694          *
         Robert Gerdes(3)(7)                          6,748           5,000             11,748          *
         Thomas F. Getten(3)                          1,653               -              1,653          *
         E. Joseph Grady(3)                           2,137          43,186             45,323          *
         Percy A. Payne(3)                            2,024           9,093             11,117          *
         Mark Yelverton(3)                                -               -                  -          *
         Bruce L. Burnham(3)                         22,663          23,093             45,756          *
         Eric Forss(3) (8)                        1,654,725          37,734          1,692,459        6.8%
         Robert Issal(3)                              3,751          37,816             41,567          *
         Directors and Officers, total as         2,037,667       1,762,537          3,850,162       14.3%
         a group
</TABLE>

* Less than 1%

------------------
(1)      Except as otherwise noted, each stockholder has sole voting and
         investment power with respect to the shares beneficially owned.
(2)      Represent shares of Common Stock issuable pursuant to stock option
         grants that are vested or that will be vested within 60 days of the
         effective date of this schedule.
(3)      The address of Forsinvest AB and Stridor Invest AB and Messrs. Forss
         and Issal is Birger Jarlsgatan, 73-75, Box 19040, S-10432 Stockholm,
         Sweden. The address of Messrs. Wennerstrom, Porter, Getten and Grady
         is 2730 SW 3rd Avenue, Suite 800, Miami, Florida 33129. The address of
         Mr. Burnham is 10 Haig Point Circle, Hilton Head, SC 29938. The
         address of Messrs. Gerdes, Payne and Yelverton is 3838 N. Causeway
         Boulevard, Lakeway Three, Suite 2300, Metairie, Louisiana 77002. The
         address of Mr. Carlson is 310 K Street, Suite 700, Anchorage, Alaska
         99501.
(4)      Of the shares listed as beneficially owned by Mr. Wennerstrom, 4,000
         shares are owned by each of his children, Linda Wennerstrom and Henrik
         Wennerstrom, for which Mr. Wennerstrom disclaims beneficial ownership.
(5)      Of the shares beneficially owned by Mr. Porter, 1,000 shares are owned
         by his wife, Deborah A. Porter.
(6)      Of the shares beneficially owned by Mr. Carlson, 4,600 shares are owned
         in trust for his children: Jurdis Carlson (1,400 shares), Nathan
         Carlson (600 shares), Amanda Carlson (600 shares), Gary Carlson (1,000
         shares) and Rachael Carlson (1,000 shares).
(7)      Of the shares beneficially owned by Mr. Gerdes, 1,000 shares are owned
         by each of his children, Julie Gerdes and Caroline Gerdes.
(8)      Includes 1,635,495 shares owned by Forsinvest AB (the "Forss
         Affiliates") acquired in connection with the Company's public tender
         offer for FAB hereinafter described (See "Certain Relationships and
         Related Transactions"). Eric Forss served as one of the directors of ,
         Forsinvest AB . Although Mr. Forss may be deemed to share investment
         control over securities held by the Forss Affiliates, Mr. Forss only
         had a pecuniary interest in the Forss Affiliates and their portfolio
         securities of only approximately 10%.
(9)      In connection with the public tender offer hereinafter described (See
         "Certain Relationships and Related Transactions"), Eric Forss,
         Forsinvest AB and Stridor Invest AB acquired 1,942,180 shares of
         Common Stock. Eric Forss is an owner, or empowered officer of
         Forsinvest AB and Stridor Invest AB. The shares of Common Stock held
         by Forsinvest AB and Stridor Invest AB are also included in the
         holdings of Eric Forss.


                                      35
<PAGE>   39

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The Company is currently a party to or has engaged in the following
transactions with its directors, officers and principal stockholders.

         The Company leases its principal offices in Miami, Florida from an
affiliate of the Forss family. The terms of the lease include current monthly
payments of approximately $23,000, expiring in October 2001. The Company made
payments under such lease of $292,000 in 1997 and $300,000 in 1998. The Company
believes that the lease terms are comparable to those terms which could be
obtained from an unaffiliated third party.

         In connection with Mr. Wennerstrom's currently outstanding stock
options, the Company has granted certain piggyback registration rights and a
put option on the value of all such options and the Common Stock acquired
through the exercise of such options.

         The Company has a consulting arrangement with Wictor Forss, the former
Chairman of the Board of the Company, whereby Mr. Forss receives $10,000 per
month in exchange for consulting services. The Company believes that Mr. Forss'
prior years of service to the Company as a Director enable him to provide
business and financial advice to the Company at a reasonable cost. This
consulting arrangement with Wictor Forss terminated March 31, 1999.

         In July 1997 the Company loaned J. Russell Porter, its Executive Vice
President, $200,000 pursuant to the terms of a promissory note executed and
delivered by Mr. Porter to the Company. The promissory note bears interest at
9% per annum and is payable upon demand. Mr. Porter granted the Company a
security interest in the stock options granted to him pursuant to the Stock
Option Plan. As of March 31, 1999 the outstanding principal and accrued
interest balance under the promissory note was $92,443.

         On December 19, 1997, the Company made a public stock-for-stock tender
offer for all of the outstanding shares of Forcenergy AB ("FAB"). FAB was a
Swedish public company that at the time of the tender offer owned approximately
34% of the outstanding Common Stock of the Company. Eric Forss, Director of the
Company, was President of FAB and directly or through indirect affiliations
owned approximately 22% of the equity interest and 52% of the voting interest
in FAB. As of December  , 1998, more than 99% of the outstanding common shares
of FAB were tendered in connection with the tender offer. The Company issued
approximately 7.9 million shares pursuant to the tender offer, including
1,904,560 shares to Forsinvest AB and 21,436 to Stridor Invest AB, companies in
which the Forss Affiliates owned a majority interest.

         The Company entered into a registration rights agreement with Eric
Forss and the Forss Affiliates in order to give Eric Forss and the Forss
Affiliates a demand right to require the Company to register all or part of the
shares of Common Stock received by Eric Forss and the Forss Affiliates in
connection with the tender offer under the Securities Act of 1933 as amended
(the "Securities Act"), unless (i) exemption for such proposed sale exists
under the Securities Act or (ii) the Company has given notice of its intention
to file a registration statement. The Company also granted Eric Forss and the
Forss Affiliates piggyback registration rights in any offering by the Company
of any of its securities to the public except a registration statement on Forms
S-4 or S-8. The Company also agreed to bear the expenses of all such
registrations.


                                      36
<PAGE>   40

                                    PART IV


ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(A)  DOCUMENTS INCLUDED IN THIS REPORT:

<TABLE>
<CAPTION>
     1.  FINANCIAL STATEMENTS
                                                                                                                PAGE
                                                                                                                ----
          <S>                                                                                                   <C>
          Report of independent certified public accountants ............................................        F-1
          Consolidated balance sheets as of December 31, 1998 and 1997 ..................................        F-2
          Consolidated statements of operations for each of the three years in the period ended
            December 31, 1998 ...........................................................................        F-3
          Consolidated statements of stockholders' equity (deficit) for each of the three years in the
            period ended December 31, 1998 ..............................................................        F-4
          Consolidated statements of cash flows for each of the three years in the period ended
            December 31, 1998 ...........................................................................        F-5
          Notes to consolidated financial statements ....................................................        F-6
</TABLE>

     2.  FINANCIAL STATEMENT SCHEDULES

                  All financial statement schedules have been omitted because
         they are either not required, not applicable or the information
         required to be presented is included in the Company's financial
         statements and related notes.

     3.  A. EXHIBITS:

<TABLE>
         <S>      <C>
         2.1      Agreement and Plan of Merger dated as of May 25, 1995 among
                  the Company, Ashlawn Energy, Inc., Jeannie M. Hines, William
                  A. Hines, Donna B. Hines, William M. Hines, Ann Gilbert and
                  Louis F. Gilbert. (Filed as Exhibit 10.34 to the Registration
                  Statement on Form S-1 filed on June 2, 1995, as amended on
                  July 6, 1995 and July 25, 1995 and is included herein by
                  reference (File No. 33-93020)).

         2.2      Purchase and Sale Agreement dated April 19, 1996 between
                  Amerada Hess Corporation and the Company. (Filed as Exhibit 2
                  to the Current Report on Form 8-K on July 15, 1996, as
                  subsequently amended, and is included herein by reference
                  (File No. 0-26444)).

         2.3      Purchase and Sale Agreement dated December 12, 1996 between
                  Marathon Oil Company and the Company. (Filed as Exhibit 2.1
                  to the Current Report on Form 8-K filed on January 14, 1997
                  and is included herein by reference (File No. 0-26444)).

         2.4      Agreement and Plan of Merger dated as of June 19, 1997, as
                  amended, by an among Forcenergy, EDI-Sub, Edisto and Convest
                  (Included as Exhibit 2.1 to the Company's Registration
                  Statement on Form S-4 (File No. 333-31675).

         2.5      Shareholder Agreement dated as of December 18, 1997 by and
                  among Forcenergy and Forsinvest AB (Filed as Exhibit 2.1 to
                  the Registration Statement on Form S-4 filed on February 11,
                  1998, and is included herein by reference (File No.
                  333-46099)).

         2.6      Amendment to the Forcenergy Inc Stockholder Rights Agreement
                  (Filed as Exhibit 6 to the Form 8-A 12B/A, Amendment No. 3,
                  filed on May 28, 1998, and included herein by reference (File
                  No. 001-13095)).

         3.1      Amended and Restated Certificate of Incorporation of the
                  Company dated July 25, 1995. (Filed as Exhibit 3.1 to the
                  Quarterly Form on 10-Q filed on November 14, 1995 for the
                  nine month period ending September 30, 1995 and is included
                  herein by reference (File No. 0-26444)) and Amendment No. 1
                  thereto filed with Amendment No. 2 to Form S-1 filed on June
                  6, 1996 and is included herein by reference (File No.
                  333-4600).
</TABLE>


                                      37
<PAGE>   41

<TABLE>
         <S>      <C>
          3.2     Bylaws of the Company. (Filed as Exhibit 3.2 to the
                  Registration Statement on Form S-1 filed on June 2, 1995, as
                  amended on July 6, 1995 and July 25, 1995 and is included
                  herein by reference (File No. 33-93020)).

          4.1     Specimen Common Stock certificate. (Filed as Exhibit 4.1 to
                  the Registration Statement on Form S-1 on June 2, 1995, as
                  amended on July 6, 1995 and July 25, 1995 and is included
                  herein by reference (File No. 33-93020)).

          4.2     Rights Agreement, dated as of November 26, 1997, between the
                  Company and American Stock Transfer & Trust Company, as
                  Rights Agent, specifying the terms of the Rights, including
                  the form of Certificate of Designation of Junior
                  Participating Preferred Stock as Exhibit A, the form of Right
                  Certificate as Exhibit B and the form of the Summary of
                  Rights to Purchase Preferred Shares as Exhibit C. ("Included
                  as Exhibit 2 to the Company's Form 8-A filed with the
                  Commission on December 5, 1997).

          4.3     Form of Certificate of Designation of Junior Participating
                  Preferred Stock setting forth the terms of the Junior
                  Participating Preferred Stock, par value $.01 per share.
                  (Included as Exhibit 2 to the Company's Form 8-A filed with
                  the Commission on December 5, 1997).

          4.5     Form of Indenture dated as of November 6, 1996 between
                  Forcenergy Inc, as Issuer, and Bankers Trust Company, as
                  Trustee. (Filed as Exhibit 4.2 to the Registration Statement
                  on Form S-3 on October 30, 1996, as subsequently amended, and
                  is included herein by reference (File No. 333-13657)).

          4.6     Form of Indenture dated as of February 14, 1997 between
                  Forcenergy Inc, as Issuer and Bankers Trust Company, as
                  Trustee (Filed as Exhibit 4.4 to the Company's Annual Report
                  on Form 10-K for the year ended December 31, 1996.)

         10.1     Employment Agreement, dated as of September 14, 1993 between
                  the Company and Stig Wennerstrom. (Filed as Exhibit 10.1 to
                  the Registration Statement on Form S-1 filed on June 2, 1995,
                  as amended on July 6, 1995 and July 25, 1995 and is included
                  herein by reference (File No. 33-93020)).

         10.2     First Amendment to Employment Agreement dated effective as of
                  May 18, 1995 between the Company and Stig Wennerstrom. (Filed
                  as Exhibit 10.2 to the Registration Statement on Form S-1
                  filed on June 2, 1995, as amended on July 6, 1995 and July
                  25, 1995 and is included herein by reference (File No.
                  33-93020)).

         10.3     Indemnification Agreement, dated as of September 14, 1993
                  between the Company and Stig Wennerstrom. (Filed as Exhibit
                  10.3 to the Registration Statement on Form S-1 filed on June
                  2, 1995, as amended on July 6, 1995 and July 25, 1995 and is
                  included herein by reference (File No. 33-93020)).

         10.4     Form of Indemnification Agreement between the Company and
                  certain officers and directors. (Filed as Exhibit 10.5 to the
                  Registration Statement on Form S-1 filed on June 2, 1995, as
                  amended on July 6, 1995 and July 25, 1995 and is included
                  herein by reference (File No. 33-93020)).

         10.5     Forcenergy Gas Exploration, Inc. 1993 Stock Option Plan for
                  Officers and Key Employees and forms of incentive and
                  nonqualified stock option agreements. (Filed as Exhibit 10.6
                  to the Registration Statement on Form S-1 filed on June 2,
                  1995, as amended on July 6, 1995 and July 25, 1995 and is
                  included herein by reference (File No. 33-93020)).

         10.6     Forcenergy Gas Exploration, Inc. 1995 Stock Option Plan and
                  forms of incentive and nonqualified stock option agreements.
                  (Filed as Exhibit 10.7 to the Registration Statement on Form
                  S-1 filed on June 2, 1995, as amended on July 6, 1995 and
                  July 25, 1995 and is included herein by reference (File
</TABLE>


                                      38
<PAGE>   42

<TABLE>
         <S>      <C>
                  No. 33-93020)).

         10.7     Forcenergy Gas Exploration, Inc. 1995 Non-Employee Director
                  Stock Option Plan and forms of nonqualified stock option
                  agreement. (Filed as Exhibit 10.8 to the Registration
                  Statement on Form S-1 filed on June 2, 1995, as amended on
                  July 6, 1995 and July 25, 1995 and is included herein by
                  reference (File No. 33-93020)).

         10.8     Forcenergy Gas Exploration, Inc. 1995 Employee Stock Purchase
                  Plan. (Filed as Exhibit 10.9 to the Registration Statement on
                  Form S-1 filed on June 2, 1995, as amended on July 6, 1995
                  and July 25, 1995 and is included herein by reference (File
                  No. 33-93020)).

         10.9     Deed of Trust, Mortgage, Assignment, Security Agreement and
                  Financing Statement dated September 15, 1993 between the
                  Company and Internationale Nederlanden (U.S.) Capital
                  Corporation, as Agent. (Filed as Exhibit 10.15 to the
                  Registration Statement on Form S-1 filed on June 2, 1995, as
                  amended on July 6, 1995 and July 25, 1995 and is included
                  herein by reference (File No. 33-93020)).

         10.10    Warrants to Purchase Common Stock of the Company dated
                  October 28, 1994 issued to Donaldson, Lufkin & Jenrette
                  Securities Corporation and DLJ First ESC L.L.C. (Filed as
                  Exhibit 10.24 to the Registration Statement on Form S-1 filed
                  on June 2, 1995, as amended on July 6, 1995 and July 25, 1995
                  and is included herein by reference (File No. 33-93020)).

         10.11    Consulting Agreement dated January 18, 1991 between the
                  Company and Wictor Forss. (Filed as Exhibit 10.25 to the
                  Registration Statement on Form S-1 filed on June 2, 1995, as
                  amended on July 6, 1995 and July 25, 1995 and is included
                  herein by reference (File No. 33-93020)).

         10.12    Incentive Stock Option Agreement dated September 14, 1993
                  between the Company and Stig Wennerstrom. (Filed as Exhibit
                  10.26 to the Registration Statement on Form S-1 filed on June
                  2, 1995, as amended on July 6, 1995 and July 25, 1995 and is
                  included herein by reference (File No. 33-93020)).

         10.13    Non-Qualified Stock Option Agreement dated September 14, 1993
                  and amendment dated November 23, 1993 between the Company and
                  Stig Wennerstrom. (Filed as Exhibit 10.27 to the Registration
                  Statement on Form S-1 filed on June 2, 1995, as amended on
                  July 6, 1995 and July 25, 1995 and is included herein by
                  reference (File No. 33-93020)).

         10.14    Form of Incentive Stock Option Agreement between the Company
                  and Stig Wennerstrom under the 1995 Stock Option Plan. (Filed
                  as Exhibit 10.28 to the Registration Statement on Form S-1
                  filed on June 2, 1995, as amended on July 6, 1995 and July
                  25, 1995 and is included herein by reference (File No.
                  33-93020)).

         10.15    Form of Non-Qualified Stock Option Agreement between the
                  Company and Stig Wennerstrom under the 1995 Stock Option
                  Plan. (Filed as Exhibit 10.29 to the Registration Statement
                  on Form S-1 filed on June 2, 1995, as amended on July 6, 1995
                  and July 25, 1995 and is included herein by reference (File
                  No. 33-93020)).

         10.16    Form of Incentive Stock Option Agreement between the Company
                  and its officers and directors excluding Stig Wennerstrom
                  under the 1995 Stock Option Plan or the 1995 Non-Employee
                  Director Plan. (Filed as Exhibit 10.30 to the Registration
                  Statement on Form S-1 filed on June 2, 1995, as amended on
                  July 6, 1995 and July 25, 1995 and is included herein by
                  reference (File No. 33-93020)).

         10.17    Form of Non-Qualified Stock Option Agreement between the
                  Company and its officers and directors excluding Stig
                  Wennerstrom under the 1995 Stock Option Plan or the 1995
                  Non-Employee Director Plan. (Filed as Exhibit 10.31 to the
                  Registration Statement on Form S-1 filed on June 2, 1995, as
                  amended on July 6, 1995 and July 25, 1995 and is included
                  herein by reference (File No. 33-93020)).
</TABLE>


                                      39
<PAGE>   43

<TABLE>
         <S>      <C>
         10.21    Amendment to the Forcenergy Inc 1995 Stock Option Plan.
                  (Filed as Exhibit 10.2 to the Quarterly Form on 10-Q filed on
                  November 7, 1996 and is included herein by reference (File
                  No. 0-26444)).

         10.22    Fourth Restatement of Credit Agreement by and among
                  Forcenergy Inc. and ING (U.S.) Capital Corporation and
                  certain financial institutions named therein as Lenders.
                  (Filed as Exhibit 10.1 to the Registration Statement on Form
                  S-4 filed on April 10, 1997, as amended on April 18, 1997,
                  and is included herein by reference (file No. 333-249227)).

         10.23    The 1997 $60 a share Stock Performance Plan for Employees of
                  Forcenergy Inc. filed as Appendix A to Schedule 14A filed on
                  April 21, 1997 and incorporated herein by reference.

         10.24    Amendment to the Forcenergy Inc. 1995 Stock Option Plan filed
                  as Appendix B to Schedule 14A filed on April 21, 1997 and
                  incorporated herein by reference.

         10.25    Fifth Restatement of Credit Agreement by and among Forcenergy
                  Inc and ING (U.S.) Capital Corporation and certain financial
                  institutions named therein as lenders (filed as Exhibit 10.1
                  to the Quarterly Form on 10-Q filed on May 14, 1998, and
                  included herein by reference (File No. 0-26444)).

         10.26    First Amendment to Fifth Restatement of Credit Agreement by
                  and among Forcenergy Inc and ING (U.S.) Capital Corporation
                  and certain financial institutions named therein as lenders
                  (filed as Exhibit 10.1 to the Quarterly Form on 10-Q filed on
                  August 14, 1998, and included herein by reference (File No.
                  0-26444)).

         10.27    Second Amendment to Fifth Restatement of Credit Agreement by
                  and among Forcenergy Inc and ING (U.S.) Capital Corporation
                  and certain financial institutions named therein as lenders
                  (filed as Exhibit 10.1 to the Quarterly Form on 10-Q filed on
                  August 14, 1998, and included herein by reference (File No.
                  0-26444)).

         10.28    Amendment Number 2 to the Forcenergy Inc 1995 Stock Incentive
                  Plan (filed as Exhibit 10.2 to the Quarterly Form on 10-Q
                  filed on August 14, 1998, and included herein by reference
                  (File No. 0-26444)).

         21.1*    Subsidiaries of the Company.

         23.1*    Consent of PricewaterhouseCoopers LLP

         23.2*    Consent of Netherland, Sewell & Associates, Inc.

         23.3*    Consent of Collarini Engineering Inc.

         27.1*    Financial Data Schedule (for SEC use only).
</TABLE>

         * Filed herewith.
         All other exhibits have been previously filed.

B.       REPORTS ON FORM 8-K

         On November 17, 1998, the Company filed a Current Report on Form 8-K
reporting that the Company had entered into a Stock Purchase Agreement with
certain prospective purchasers.


                                      40
<PAGE>   44

                         GLOSSARY OF OIL AND GAS TERMS

         The definitions set forth below shall apply to the indicated terms as
used herein. All volumes of natural gas referred to herein are stated at the
legal pressure base of the state or area where the reserves exist and at 60
degrees Fahrenheit and in most instances are rounded to the nearest major
multiple.

         Bcf.  Billion cubic feet.

         Bcfe. Billion cubic feet equivalent, determined using the ratio of six
Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids.

         Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used
herein in reference to crude oil or other liquid hydrocarbons.

         BOPD. Barrels of oil per day.

         BOE.  Barrel of oil equivalent.

         Btu. British thermal unit, which is the heat required to raise the
temperature of a one-pound mass of water from 58.5 to 59.5 degrees Fahrenheit.

         Completion. The installation of permanent equipment for the production
of oil or gas, or in the case of a dry hole, the reporting of abandonment to
the appropriate agency.

         Developed acreage. The number of acres which are allocated or
assignable to producing wells or wells capable of production.

         Development well. A well drilled within the proved area of an oil or
gas reservoir to the depth of a stratigraphic horizon known to be productive.

         Discounted Present Value. A method of determining the present value of
proved reserves. Under the SEC method, the future net revenues before income
taxes from proved reserves are estimated assuming that oil and natural gas
prices and production costs remain constant. The resulting stream of revenues
is then discounted at the rate of 10% per year to obtain the present value.

         Dry hole or well. A well found to be incapable of producing
hydrocarbons in sufficient quantities such that proceeds from the sale of such
production exceed production expenses and taxes.

         Exploratory well. A well drilled to find and produce oil or gas
reserves not classified as proved, to find a new reservoir in a field
previously found to be productive of oil or gas in another reservoir or to
extend a known reservoir.

         Farm-in or farm-out. An agreement whereupon the owner of a working
interest in an oil and gas lease assigns the working interest or a portion
thereof to another party who desires to drill on the leased acreage. Generally,
the assignee is required to drill one or more wells in order to earn its
interest in the acreage. The assignor usually retains a royalty or reversionary
interest in the lease. The interest received by an assignee is a "farm-in"
while the interest transferred by the assignor is a "farm-out."

         Field. An area consisting of single reservoir or multiple reservoirs
all grouped on or related to the same individual geological structural feature
and/or stratigraphic condition.

         Gross acres or gross wells. The total acres or wells, as the case may
be, in which a working interest is owned.

         MBbls. One thousand barrels of crude oil or other liquid hydrocarbons.

         MBbls/d. One thousand barrels of crude oil or other liquid
hydrocarbons per day.


                                      41
<PAGE>   45

         Mcf.  One thousand cubic feet.

         Mcfe. One thousand cubic feet equivalent, determined using the ratio
of six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas
liquids.

         MMBbls. One million barrels of crude oil or other liquid hydrocarbons.

         MMBtu. One million Btus.

         MMcf. One million cubic feet.

         MCFPD.  One million cubic feet per day.

         Mmcfe. One million cubic feet equivalent, determined using the ratio
of six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas
liquids.

         Net acres or net wells. The sum of the fractional working interests
owned in gross acres or gross wells.

         Oil. Crude oil and condensate.

         Present value. When used with respect to oil and gas reserves, the
estimated future gross revenue to be generated from the production of proved
reserves, net of estimated production and future development costs, using
prices and costs in effect at the date indicated, without giving effect to
non-property related expenses such as general and administrative expenses, debt
service and future income tax expenses or to depreciation, depletion and
amortization, discounted using an annual discount rate of 10%.

         Productive well. A well that is found to be capable of producing
hydrocarbons in sufficient quantities such that proceeds from the sale of such
production exceed production expenses and taxes.

         Proved developed producing reserves. Proved developed reserves that
are expected to be recovered from completion intervals currently open in
existing wells and able to produce to market.

         Proved developed nonproducing reserves. Proved developed reserves
expected to be recovered from zones behind casing in existing wells.

         Proved reserves. The estimated quantities of crude oil, natural gas
and natural gas liquids 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 undeveloped location. A site on which a development well can be
drilled consistent with spacing rules for purposes of recovering proved
undeveloped reserves.

         Proved undeveloped reserves. Proved reserves that are expected to be
recovered from new wells on undrilled acreage or from existing wells where a
relatively major expenditure is required from recompletion.

         Recompletion. The completion for production of an existing well bore
in another formation from that in which the well has been previously completed.

         Reservoir. A porous and permeable underground formation containing a
natural accumulation of producible oil and/or gas that is confined by
impermeable rock or water barriers and is individual and separate from other
reservoirs.

         Royalty interest. An interest in an oil and gas property entitling the
owner to a share of oil or gas production free of costs of production.

         Undeveloped acreage. Lease acreage on which wells have not been
drilled or completed to a point that would


                                      42
<PAGE>   46

permit the production of commercial quantities of oil and gas regardless of
whether such acreage contains proved reserves.

         Updip. A higher point in the reservoir.

         Working interest. The operating interest which gives the owner the
right to drill, produce and conduct operating activities on the property and a
share of production, subject to all royalties, overriding royalties and other
burdens and to all costs of exploration, development and operations and all
risks in connection therewith.

         Workover. Operations on a producing well to restore or increase
production.


                                      43
<PAGE>   47

                                   SIGNATURES


         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

                                     FORCENERGY INC


Dated:                               By:
                                        ----------------------------------------
                                                     E. Joseph Grady
                                        Vice President - Chief Financial Officer

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities
and on the dates indicated:

<TABLE>
<S>                                                                                       <C>
By:                                                                                       Date:  May _____, 1999
     ------------------------------------------------------------
               Stig Wennerstrom
               President, Chief Executive Officer and
               Chairman of the Board of Directors
               (Principal Executive Officer)


By:                                                                                       Date:  May _____, 1999
     ------------------------------------------------------------
               E. Joseph Grady
               Vice President - Chief Financial Officer
               (Principal Financial and Accounting Officer)


By:                                                                                       Date:  May _____, 1999
     ------------------------------------------------------------
               Bruce L. Burnham, Director



By:                                                                                       Date:  May _____, 1999
     ------------------------------------------------------------
               Eric Forss, Director


By:                                                                                       Date:  May ___, 1999
     ------------------------------------------------------------
               Robert Issal, Director
</TABLE>


                                      44
<PAGE>   48

                                     ITEM 8

                  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                           ANNUAL REPORT ON FORM 10-K

                      FOR THE YEAR ENDED DECEMBER 31, 1998

                                 FORCENERGY INC

                                 MIAMI, FLORIDA


<PAGE>   49

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



To the Board of Directors and Stockholders
of Forcenergy Inc (Debtor-in-Possession)

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders equity (deficit) and cash
flows present fairly, in all material respects, the financial position of
Forcenergy Inc (Debtor-in-Possession) (the "Company") at December 31, 1998 and
1997, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As described in Note 1 to the
financial statements, the Company has filed voluntarily under Chapter 11 of the
U.S. Bankruptcy Code and has incurred significant losses from operations in
1998 and 1997. These matters raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.



Miami, Florida
March 21, 1999


                                      F-1
<PAGE>   50

                                 FORCENERGY INC
                             (DEBTOR-IN-POSSESSION)
                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                    DECEMBER 31,
                                                                             -------------------------
                                                                               1998            1997
                                                                             ---------       ---------
                                                                                  (IN THOUSANDS)
<S>                                                                          <C>
ASSETS:
CURRENT ASSETS:
     Cash ............................................................       $   1,690       $  16,048
     Accounts receivable, net ........................................          28,433          43,502
     Other current assets ............................................          19,668          30,231
                                                                             ---------       ---------
         Total current assets ........................................          49,791          89,781
                                                                             ---------       ---------
PROPERTY, PLANT AND EQUIPMENT, at cost (full cost
     method) net of accumulated depletion, depreciation
     and amortization ................................................         610,948         713,983
                                                                             ---------       ---------
OTHER ASSETS .........................................................          17,729          20,466
                                                                             ---------       ---------
                                                                             $ 678,468       $ 824,230
                                                                             =========       =========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
LIABILITIES NOT SUBJECT TO COMPROMISE:
CURRENT LIABILITIES:
     Accounts payable ................................................       $      --       $  32,666
     Accrued liabilities .............................................              --          70,009
                                                                             ---------       ---------
         Total current liabilities ...................................              --         102,675
                                                                             ---------       ---------
LONG-TERM DEBT .......................................................              --         506,564
                                                                             ---------       ---------

LIABILITIES SUBJECT TO COMPROMISE:
     Accounts payable ................................................          42,183              --
     Accrued liabilities .............................................          64,837              --
     Long-term debt ..................................................         671,700              --
                                                                             ---------       ---------
         Total liabilities subject to compromise .....................         778,720              --
                                                                             ---------       ---------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY (DEFICIT):
     Preferred stock, $.01 par value; 5,000,000 shares
         authorized; none issued or  outstanding .....................              --              --
     Common stock, $.01 par value; 50,000,000 shares
         authorized; 24,747,445 and 25,504,617 issued
         and outstanding at December 31, 1998 and
         1997, respectively ..........................................             247             255
     Capital in excess of par value ..................................         346,135         346,876
     Accumulated deficit .............................................        (446,634)       (132,140)
                                                                             ---------       ---------
         Total stockholders' equity (deficit) ........................        (100,252)        214,991
                                                                             ---------       ---------
                                                                             $ 678,468       $ 824,230
                                                                             =========       =========
</TABLE>


   The accompanying notes are an integral part of these financial statements.


                                      F-2
<PAGE>   51

                                 FORCENERGY INC
                             (DEBTOR-IN-POSSESSION)
                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                  FOR THE YEAR ENDED DECEMBER 31,
                                                            -----------------------------------------
                                                               1998           1997             1996
                                                            ---------       ---------       ---------
                                                             (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<S>                                                         <C>             <C>             <C>
REVENUES:
   Oil and gas sales .................................      $ 272,410       $ 281,690       $ 138,698
   Other .............................................          1,139           2,495             683
                                                            ---------       ---------       ---------
                                                              273,549         284,185         139,381
                                                            ---------       ---------       ---------

EXPENSES:
   Lease operating ...................................         99,242          77,174          38,786
   Depletion, depreciation and amortization ..........        145,856         113,347          58,464
   Production taxes ..................................          4,218           4,791           3,454
   General and administrative ........................         17,222          15,244           7,971
   Impairment of oil and gas properties ..............        275,000         200,000              --
                                                            ---------       ---------       ---------
                                                              541,538         410,556         108,675
                                                            ---------       ---------       ---------

INCOME (LOSS) FROM OPERATIONS ........................       (267,989)       (126,371)         30,706
Interest and other income ............................          1,572           3,354             650
Interest expense, net of amounts capitalized .........        (48,077)        (32,422)        (13,367)
                                                            ---------       ---------       ---------
INCOME (LOSS) BEFORE INCOME TAXES ....................       (314,494)       (155,439)         17,989
Income tax benefit (provision) .......................             --          20,621          (6,711)
                                                            ---------       ---------       ---------
NET INCOME (LOSS) ....................................      $(314,494)      $(134,818)      $  11,278
                                                            =========       =========       =========

NET INCOME (LOSS) PER SHARE:
   Basic .............................................      $  (12.65)      $   (5.83)      $     .60
                                                            =========       =========       =========
   Diluted ...........................................      $  (12.65)      $   (5.83)      $     .57
                                                            =========       =========       =========

WEIGHTED AVERAGE SHARES OUTSTANDING:
   Basic .............................................         24,856          23,142          18,934
   Diluted ...........................................         24,856          23,142          19,672
</TABLE>





   The accompanying notes are an integral part of these financial statements.


                                      F-3
<PAGE>   52

                                 FORCENERGY INC
                             (DEBTOR-IN-POSSESSION)
           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)


<TABLE>
<CAPTION>
                                                                                                     RETAINED
                                                            COMMON STOCK            CAPITAL IN       EARNINGS
                                                       -----------------------       EXCESS OF     (ACCUMULATED
                                                         SHARES         AMOUNT       PAR VALUE        DEFICIT)         TOTAL
                                                       -----------      ------      ----------     ------------      ---------
                                                                            (IN THOUSANDS, EXCEPT SHARES)

<S>                                                     <C>             <C>         <C>            <C>               <C>
BALANCE, JANUARY 1, 1996 ........................       18,260,447       $ 183       $ 163,378       $  (8,600)      $ 154,961

Conversion of 7% Exchangeable
     Subordinated Notes .........................        2,343,047          23          35,813              --          35,836
Exercises of stock options and warrants .........          323,503           3           5,442              --           5,445
Issuance of common stock ........................        1,650,841          17          41,399              --          41,416
Net income ......................................               --          --              --          11,278          11,278
                                                       -----------       -----       ---------       ---------       ---------
BALANCE, DECEMBER 31, 1996 ......................       22,577,838         226         246,032           2,678         248,936
                                                       -----------       -----       ---------       ---------       ---------

Exercises of stock options and warrants .........          150,915           1           2,503              --           2,504
Issuance of common stock ........................        2,775,864          28          98,341              --          98,369
Net loss ........................................               --          --              --        (134,818)       (134,818)
                                                       -----------       -----       ---------       ---------       ---------
BALANCE, DECEMBER 31, 1997 ......................       25,504,617         255         346,876        (132,140)        214,991
                                                       -----------       -----       ---------       ---------       ---------

Exercises of stock options ......................            3,675          --             187              --             187
Issuance of common stock ........................        7,979,639          80         214,203              --         214,283
Subsidiary investment in parent
      common stock ..............................       (8,740,486)        (88)       (215,131)             --        (215,219)
Net loss ........................................               --          --              --        (314,494)       (314,494)
                                                       -----------       -----       ---------       ---------       ---------
BALANCE, DECEMBER 31, 1998 ......................       24,747,445       $ 247       $ 346,135       $(446,634)      $(100,252)
                                                       ===========       =====       =========       =========       =========
</TABLE>








   The accompanying notes are an integral part of these financial statements.


                                      F-4
<PAGE>   53

                                 FORCENERGY INC
                             (DEBTOR-IN-POSSESSION)
                     CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                 FOR THE YEAR ENDED DECEMBER 31,
                                                                           -----------------------------------------
                                                                             1998            1997             1996
                                                                           ---------       ---------       ---------
                                                                                        (IN THOUSANDS)
<S>                                                                        <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net income (loss) ..............................................      $(314,494)      $(134,818)      $  11,278
                                                                           ---------       ---------       ---------
     Adjustments to reconcile net income (loss) to net cash
       provided by operating activities:
     Depletion, depreciation and amortization .......................        145,856         113,347          59,518
     Impairment of oil and gas properties ...........................        275,000         200,000              --
     Deferred income taxes ..........................................             --         (20,621)          6,612
     Deferred interest ..............................................             --              --           2,107
     Other ..........................................................          1,000            (223)           (210)
     (Increase) decrease in accounts receivable .....................         15,069             496         (14,091)
     (Increase) decrease in other current assets ....................         10,563         (18,597)         (3,674)
     (Decrease) increase in accounts payable ........................          9,517          18,900          (4,859)
     (Decrease) increase in accrued liabilities .....................           (658)         19,137           8,547
                                                                           ---------       ---------       ---------

                                                                             456,347         312,439          53,950
                                                                           ---------       ---------       ---------
Net cash provided by operating activities: ..........................        141,853         177,621          65,228
                                                                           ---------       ---------       ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Acquisitions of oil and gas properties .........................        (53,956)       (119,503)       (152,478)
     Capital expenditures ...........................................       (283,475)       (287,229)       (130,269)
     Sale of surety bonds ...........................................             --           4,426           2,151
     Dividends from affiliate .......................................          1,806             900              --
     Proceeds from sale of assets ...................................         13,987              --           1,072
     Change in other assets .........................................            (70)            457            (340)
                                                                           ---------       ---------       ---------
Net cash used in investing activities ...............................       (321,708)       (400,949)       (279,864)
                                                                           ---------       ---------       ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
     Borrowings under senior credit facility ........................        315,500         287,144         255,968
     Repayments under senior credit facility ........................       (150,364)       (253,512)       (250,091)
     Issuance of long-term debt, net of expenses ....................             --         193,414         169,114
     Issuance of common stock, net ..................................            361           2,661          46,318
                                                                           ---------       ---------       ---------
Net cash provided by financing activities ...........................        165,497         229,707         221,309
                                                                           ---------       ---------       ---------

NET INCREASE (DECREASE) IN CASH .....................................        (14,358)          6,379           6,673
CASH AT BEGINNING OF YEAR ...........................................         16,048           9,669           2,996
                                                                           ---------       ---------       ---------
CASH AT END OF YEAR .................................................      $   1,690       $  16,048       $   9,669
                                                                           =========       =========       =========
</TABLE>




   The accompanying notes are an integral part of these financial statements.


                                      F-5
<PAGE>   54

                                 FORCENERGY INC
                             (DEBTOR-IN-POSSESSION)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

         Forcenergy Inc, formerly Forcenergy Gas Exploration, Inc., a Delaware
Corporation, and its subsidiaries ("Forcenergy" or the "Company"), is an
independent oil and gas company engaged in the exploration, acquisition,
development, exploitation and production of oil and natural gas properties.

         As an independent oil and gas producer, the Company's revenue,
profitability and future rate of growth are substantially dependent upon
prevailing prices for natural gas and oil and condensate, which are dependent
upon numerous factors beyond the Company's control, such as economic, political
and regulatory developments and competition from other sources of energy. The
energy markets have historically been very volatile, as evidenced by the recent
volatility of oil and gas prices, and there can be no assurance that oil and
gas prices will not be subject to wide fluctuations in the future. A
substantial or extended decline in oil and gas prices could have a material
adverse effect on the Company's financial position, results of operations,
quantities of oil and gas reserves that may be economically produced and access
to capital.

CHAPTER 11 FILING AND LIQUIDITY

         On March 21, 1999, the Company and its wholly-owned subsidiary,
Forcenergy Resources Inc., filed a voluntary petition for relief under Chapter
11 of the U.S. Bankruptcy Code in order to facilitate the restructuring of the
Company's long-term debt, revolving credit, trade and other obligations. The
filing was made in the U.S. District Court for the Eastern District of
Louisiana in New Orleans (the "Bankruptcy Court"). The Company continues to
operate as a debtor-in-possession subject to the Bankruptcy Court's supervision
and orders. The bankruptcy petitions were filed in order to preserve cash and
to give the Company the opportunity to restructure its debt. The consummation
of a plan of reorganization is the primary objective of the Company. The plan
of reorganization will set forth the means for satisfying claims, including
liabilities subject to compromise, and interests in the Company. A plan of
reorganization may result in, among other things, material dilution or
elimination of existing security holders as a result of the issuance of
securities to creditors or new investors. The consummation of a plan of
reorganization will require approval of the Bankruptcy Court.

         At this time, it is not possible to predict the outcome of the
bankruptcy proceedings, in general, or the effect on the business of the
Company or on the interests of creditors, royalty owners or stockholders. As a
result of the bankruptcy filing, all of the Company's liabilities, including
certain secured debt, are subject to compromise.

         The accompanying financial statements have been prepared on a going
concern basis which contemplates continuity of operations, realization of
assets and liquidation of liabilities in the ordinary course of business. As a
result of the bankruptcy filing and related events, there is no assurance that
the carrying amounts of assets will be realized or that liabilities will be
liquidated or settled for the amounts recorded. In addition, a plan of
reorganization, or rejection thereof, could change the amounts reported in the
financial statements. As a result, there is substantial doubt about the
Company's ability to continue as a going concern. The ability of the Company to
continue as a going concern is dependent upon confirmation of a plan of
reorganization, adequate sources of capital and the ability to sustain positive
results of operations and cash flows sufficient to continue to explore for and
develop oil and gas reserves.

         In the ordinary course of business, the Company makes substantial
capital expenditures for the exploration and development of oil and natural gas
reserves. Historically, the Company has financed its capital expenditures, debt
service and working capital requirements with cash flow from operations, public
offerings of equity, private offerings of debt, asset sales, a senior credit
facility and other financings. Cash flow from operations is sensitive to the
prices the Company receives for its oil and natural gas. A reduction in planned
capital spending or an extended


                                      F-6
<PAGE>   55

                                 FORCENERGY INC
                             (DEBTOR-IN-POSSESSION)
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

decline in oil and gas prices could result in less than anticipated cash flow
from operations in the current fiscal year and in later years which could have
a material adverse effect on the Company.

         Management's plans are to continue to incur capital expenditures with
the goal of increasing production and reserves. To finance these planned
capital expenditures, the Company will be required to supplement its
anticipated cash flow from operations with a combination of asset sales,
financings or other capital-raising transactions. The ability to incur capital
expenditures, sell properties and obtain additional financing is subject to the
approval and ongoing supervision of the Bankruptcy Court. There is no assurance
that adequate funds can be obtained on a timely basis or that the Bankruptcy
Court will approve such transactions.

PRINCIPLES OF CONSOLIDATION

         The accompanying consolidated financial statements include the
accounts of Forcenergy Inc, and it's subsidiaries after elimination of all
intercompany transactions and balances.

ACCOUNTING ESTIMATES

         The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses and disclosure of contingent assets and liabilities. Actual
results could differ from those estimates.

CASH/CASH EQUIVALENTS

         The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. The Company
maintains cash deposits with several financial institutions. At certain times,
these deposits may exceed federally insured limits.

ACCOUNTS RECEIVABLE

         Accounts receivable relate primarily to sales of oil and gas
production and amounts due from joint interest partners for expenditures made
by the Company on behalf of such partners. The Company reviews the financial
condition of potential purchasers and partners prior to signing sales or joint
interest agreements. At December 31, 1998 and 1997, the allowance for doubtful
accounts was $1,999,000 and $400,000, respectively. The Company requires
certain forms of financial assurance from its most significant customers.

OIL AND GAS PROPERTIES

         The Company follows the full cost method of accounting for oil and gas
properties whereby all productive and non-productive exploration, development
and acquisition costs incurred for the purpose of finding oil and gas reserves
are capitalized. Such capitalized costs include lease acquisition, geological
and geophysical work, delay rentals, drilling, completing and equipping oil and
gas wells, together with internal costs directly attributable to property
acquisition, exploration and development activities. No gains or losses are
recognized upon the sale or other disposition of oil and gas properties, except
in unusually significant transactions.

       Depreciation, depletion and amortization of oil and gas properties are
computed on a composite unit-of-production method based on estimated proved
reserves. All costs associated with evaluated oil and gas properties, including
an estimate of future development, restoration, dismantlement and abandonment
costs associated therewith, are included in the computation base. The Company
evaluates all unevaluated oil and gas properties on a quarterly basis to
determine if any impairment has occurred or if the property has been otherwise
evaluated. If a property has been evaluated, or if there is determined to be
any impairment, costs related to the particular unevaluated properties are
reclassified as an evaluated oil and gas property, and thus subject to
amortization if there are proved reserves associated


                                      F-7
<PAGE>   56

                                 FORCENERGY INC
                             (DEBTOR-IN-POSSESSION)
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

with the related cost center. Otherwise, such impairment will be recognized in
the period in which it occurs.

         Under the Securities and Exchange Commission's full cost accounting
rules, the Company reviews the carrying value of its oil and gas properties
each quarter. Under full cost accounting rules, capitalized costs of oil and
gas properties, net of deferred tax reserves, may not exceed the present value
of estimated future net revenues from proved reserves, discounted at 10
percent, plus the lower of cost or fair market value of unproved properties, as
adjusted for related tax effects. Application of this rule generally requires
pricing future production at the unescalated oil and gas prices in effect at
the end of each fiscal quarter and requires a permanent write-down of
capitalized costs if the "ceiling" is exceeded, even if prices declined for
only a short period of time.

         During the fourth quarter of 1998 and 1997 the Company recognized a
non-cash impairment of recorded oil and gas assets amounting to $275 million
and $200 million ($162.8 million after tax), respectively, pursuant to the
above discussed "ceiling test" provisions.

         The majority of the Company's oil and gas properties are located in
the Gulf of Mexico and Cook Inlet, Alaska.

DEFERRED FINANCING COSTS

         Deferred financing costs are amortized over the terms of the related
debt and amounted to $10,879,000 and $12,084,000 as of December 31, 1998 and
1997, respectively.

REVENUE RECOGNITION

         Revenues from oil and natural gas production are recorded using the
sales method, net of royalties and net profit interests. When the Company's
share of sales volumes differ from the Company's entitled share of production
based on the net revenue interest attributable to its working interest, an
imbalance occurs. Under the sales method of revenue recognition, the net
over/under-produced volumes are not recorded as a liability, or receivable,
respectively. The under-produced party later takes sales volumes in excess of
its entitled share of future production to eliminate the imbalance. To the
extent an imbalance exceeds the remaining estimated proved oil and natural gas
reserves for a given property, the Company records a liability or a receivable,
as appropriate. At December 31, 1998, the Company's net imbalance position was
not material.

         During 1998, 1997 and 1996 the Company maintained a hedging program on
a portion of its estimated future production to provide a certain minimum level
of cash flow from its sales of crude oil and natural gas (see Note 8). Any
hedging gains or losses under these contracts are recognized in revenue upon
monthly settlement of hedged production. All commodity price hedging contracts
in place at December 31, 1998 were cancelled at the option of the counterparties
subsequent to the aforementioned Chapter 11 bankruptcy filing (see Note 8).

STOCK-BASED COMPENSATION

         Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation," ("SFAS No.123") encourages, but does not require
companies to record compensation costs for stock-based employee compensation
plans at fair value. The Company has chosen to continue to account for
stock-based employee compensation using the intrinsic value method prescribed
in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees". Accordingly, compensation cost for stock options, awards and
warrants is measured as the excess, if any, of the quoted market price of the
Company's stock at the date of the grant over the amount an employee must pay
to acquire the stock (see Note 6).


                                      F-8
<PAGE>   57

                                 FORCENERGY INC
                             (DEBTOR-IN-POSSESSION)
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

INCOME TAXES

         The Company follows the asset and liability approach to account for
income taxes. Under this method, deferred taxes are recognized for temporary
differences between the book and tax basis of assets and liabilities. These
temporary differences are measured using applicable enacted tax rates and
provisions of enacted tax laws.

EARNINGS PER SHARE

         During 1997 the Company adopted Statement of Financial Accounting
Standards No. 128 "Earnings Per Share" ("SFAS No. 128") and has restated all
years presented in accordance therewith. SFAS No. 128 requires a dual
presentation of basic and diluted earnings per share ("EPS") on the face of the
statement of operations. Basic EPS is computed by dividing income available to
common stockholders by the weighted-average number of common shares for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that would then
share in earnings (see Note 7).

ENVIRONMENTAL EXPENDITURES

         Environmental expenditures relating to current operations are expensed
or capitalized, as appropriate, depending on whether such expenditures provide
future economic benefits. Liabilities are recognized when the expenditures are
considered probable and can be reasonably estimated. Measurement of liabilities
is based on currently enacted laws and regulations, existing technology and
undiscounted site-specific costs. Generally, such recognition coincides with
the Company's commitment to a formal plan of action.

FAIR VALUE OF FINANCIAL INSTRUMENTS

         The Company includes fair value information in the Notes to
Consolidated Financial Statements when the fair value of its financial
instruments can be determined and is different from the book value. The Company
generally assumes the book value of those financial instruments that are
classified as current approximate fair value because of the short maturity of
these instruments. For non-current financial instruments, the Company uses
quoted market prices or, to the extent that there are no available quoted
market prices, market prices for similar instruments. Due to the bankruptcy
filing (see Note 1), the Company is uncertain as to the timing and amount of
liquidation or settlement of liabilities subject to compromise. Accordingly,
except for debt which has quoted market prices, the Company does not believe it
is practicable to estimate the fair value of those liabilities.

NEW ACCOUNTING PRONOUNCEMENTS

         In June 1998, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standard No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"). The statement
requires companies to report the fair market value of derivatives on the
balance sheet and record in income or other comprehensive income, as
appropriate, any changes in the fair value of the derivative. Statement No. 133
will become effective with respect to the Company on January 1, 2000.
Management has not determined the effect, if any, of adopting SFAS No. 133.

RECLASSIFICATIONS

         Certain reclassifications have been made to the Company's financial
statements to conform them to classifications between years.


                                      F-9
<PAGE>   58

                                 FORCENERGY INC
                             (DEBTOR-IN-POSSESSION)
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NOTE 2 -- ACQUISITIONS AND MERGERS

1998 ACQUISITIONS

         The Company completed several acquisitions during 1998 at an aggregate
cost of approximately $54.0 million. The aggregate effect of these acquisitions
on the results of operations of the Company for the periods presented was not
material.

1997 ACQUISITIONS

         The Company completed several acquisitions during 1997 at an aggregate
cost of approximately $220.5 million. The three most significant acquisitions,
all of which were accounted for as purchases, are discussed below, including
pro forma results of operations for the Company assuming the acquisitions had
been completed on January 1, 1996. The aggregate effect of other acquisitions
on the results of operations of the Company for the periods presented was not
material.

         On January 21, 1997, Forcenergy acquired all of the outstanding stock
of Great Western Resources, Inc. ("Great Western") for approximately $48.3
million. The net assets acquired consisted primarily of producing oil and gas
properties. The results of operations of the acquired properties are included
in the Company's results of operations beginning January 21, 1997.

         On June 4, 1997, Forcenergy acquired a 97.75% working interest in
certain oil and gas properties located in the Cook Inlet, Alaska from Stewart
Petroleum Company ("Stewart") for $18.7 million and assumed operations of the
field. The results of operations for the acquired properties are included in
the Company's operations beginning June 4, 1997. In October 1997 the Company
increased it's interest in this field to 100%.

         On October 22, 1997, Forcenergy, in separate transactions, acquired
all of the outstanding common stock of Edisto Resources Corporation ("Edisto")
and Convest Energy Corporation ("Convest"). Forcenergy issued approximately 2.8
million shares of common stock valued at $34.96 per share, or approximately
$98.9 million. The shareholders of Edisto also received $69.3 million in cash
from balances Forcenergy received in the merger. Edisto owned 73% of the
outstanding common stock of Convest. The net assets acquired consisted
principally of producing oil and gas properties. The results of operations of
the acquired properties are included in the Company's operations beginning
October 22, 1997.

1996 ACQUISITIONS

         The Company completed several acquisitions during 1996 at an aggregate
cost of approximately $148.0 million. The two most significant acquisitions are
discussed below, including pro forma results of operations for the Company
assuming the acquisitions had been completed on January 1, 1995. The aggregate
effect of other acquisitions on the results of operations of the Company for
the periods presented was not material.

         On June 28, 1996, the Company acquired certain producing oil and gas
leasehold interest and related equipment from Amerada Hess Corporation
("Amerada Hess") for a net cash consideration of $6.9 million. The acquisition
has been accounted for as a purchase and the results of operations of the
properties acquired are included in the Company's results of operations
effective June 28, 1996.

         On December 30, 1996, the Company acquired Marathon Oil Company's
interests in certain crude oil properties in the Cook Inlet area and Prudhoe
Bay Unit, Alaska ("Marathon") for a net cash consideration of $107.8 million.
The acquisition has been accounted for as a purchase and the results of
operations of the properties acquired are included in the Company's results of
operations effective December 30, 1996.


                                     F-10
<PAGE>   59

                                 FORCENERGY INC
                             (DEBTOR-IN-POSSESSION)
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

         The following pro forma statements of operations have been prepared to
give effect to the Great Western, Stewart, Edisto, Convest, Amerada Hess,
Marathon, Conoco and Ashlawn acquisitions as if they had occurred on January 1,
1996. The historical results of operations have been adjusted to reflect (i)
revenues and expenses attributable to the properties, (ii) the difference
between the properties' historical depletion, depreciation, and amortization
and such expense calculated based on the value allocated to the acquired
assets, (iii) the increase in interest expense associated with the debt
incurred, and (iv) the increase in income taxes giving retroactive effect to
the transactions. Management does not believe the pro forma amounts purport to
be indicative of the results of operations that would have been reported had
the acquisitions occurred at the dates indicated below or that may be reported
in the future (in thousands, except per share amounts).

<TABLE>
<CAPTION>
                                                    PRO FORMA (UNAUDITED)
                                                  ------------------------
                                                     FOR THE YEARS ENDED
                                                  ------------------------
                                                    1997            1996
                                                  ---------       --------
     <S>                                          <C>             <C>
     Revenues ..............................      $ 330,717       $283,977
     Income (loss) from operations .........      $(113,954)      $ 68,266
     Net income (loss) .....................      $ (84,407)      $ 33,022
     Net income (loss) per share
         Basic .............................      $   (3.25)      $   1.27
         Diluted ...........................      $   (3.25)      $   1.24
</TABLE>

FORCENERGY AB ACQUISITION

         On December 19, 1997 Forcenergy made a public tender offer for all of
the outstanding shares of FAB. FAB was formed in 1990 to provide capital for
Forcenergy's oil and gas operations in the United States and currently owns
8,740,486 shares of Forcenergy common stock, its only significant asset. The
proposed issuance of the Forcenergy shares pursuant to the terms of the tender
offer was approved by Forcenergy Inc shareholder vote on March 17, 1998. On
March 31, 1998, 97% of the outstanding common shares of FAB had been tendered
in connection with the offer and all conditions of the offer were met. As of
December 1998, 99.3% of the outstanding FAB shares had been tendered and
Forcenergy had issued approximately 7.9 million shares valued at $27 per share
(the price of the Company's common stock on the date the tender offer was
initiated) in exchange for the tendered shares. The 8,740,486 Forcenergy shares
owned by FAB are controlled by Forcenergy, and for accounting and voting
purposes are no longer considered outstanding. The acquisition has been
accounted for as a purchase with results of operations included beginning March
31, 1998.

NOTE 3 -- PROPERTY, PLANT AND EQUIPMENT

         Investments in property, plant and equipment were as follows at
December 31, 1998 and 1997:

<TABLE>
<CAPTION>
                                                                                                1998               1997
                                                                                             -----------       -----------
                                                                                                    (IN THOUSANDS)
    <S>                                                                                      <C>               <C>
         Oil and Gas Properties:
                   Proved .........................................................          $ 1,313,824       $   999,126
                   Unevaluated ....................................................              165,885           165,480
                                                                                             -----------       -----------
                                                                                               1,479,709         1,164,606
         Office Equipment .........................................................                9,809             7,530
         Less: accumulated depletion, depreciation and amortization ...............             (878,570)         (458,153)
                                                                                             -----------       -----------
         Net Property, Plant and Equipment ........................................          $   610,948       $   713,983
                                                                                             ===========       ===========
</TABLE>

         Depletion, depreciation, and amortization for the years ended December
31, 1998, 1997 and 1996 was, $420.9 million including a $275 million impairment
(See Note 1), $313.3 million including a $200 million impairment (see Note 1)
and $58.5 million, respectively. Depletion, depreciation and amortization rates
per BOE of hydrocarbons produced (using a Mcf-to-Bbl conversion factor of 6 to
1) for the years ended December 31, 1998, 1997 and 1996 were


                                     F-11
<PAGE>   60

                                 FORCENERGY INC
                             (DEBTOR-IN-POSSESSION)
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

$6.84 (exclusive of impairment), $6.36 (exclusive of impairment) and $6.18,
respectively.

         Included in property, plant and equipment are capitalized internal
costs relating to oil and gas property acquisition, exploration and development
costs of $10.2 million, $7.9 million and $2.3 million for the years ended
December 31, 1998, 1997 and 1996, respectively.

         During the years ended December 31, 1998, 1997 and 1996 the Company
capitalized interest of $4.4 million, $4.2 million, and $2.2 million,
respectively, on expenditures made in connection with exploration and
development projects on significant unproved properties that are not subject to
current depletion, depreciation or amortization. Interest is capitalized only
for the period that activities to bring the properties to their intended use
are ongoing.

         The following sets forth the composition of capitalized costs excluded
from the depletion, depreciation, and amortization base at December 31, 1998,
1997 and 1996:

<TABLE>
<CAPTION>
                                                                           1998          1997            1996
                                                                        ---------     ----------     ----------
                                                                                    (IN THOUSANDS)
     <S>                                                                <C>           <C>            <C>
     Property Acquisition.........................................      $   38,458    $   75,669     $   44,941
     Development Costs............................................         121,983        83,892         13,567
     Interest Capitalized.........................................           5,444         5,919          4,569
                                                                        ----------    ----------     ----------
                                                                        $  165,885    $  165,480     $   63,077
                                                                        ==========    ==========     ==========
</TABLE>

         At December 31, 1998, approximately 37% of excluded costs relate to
offshore activities in the Gulf of Mexico, 34% relate to offshore activities in
Alaska and the remainder relates to domestic onshore and international
activities. The inclusion of these costs in the depletion, depreciation and
amortization computation will be at the point in time that it is determined,
through drilling activities, that proved reserves do or do not exist on the
applicable properties, typically within three to five years.

NOTE 4 -- DEBT

<TABLE>
<CAPTION>
         Long-term debt consists of the following:                                   DECEMBER 31,
                                                                           ---------------------------------
                                                                              1998                  1997
                                                                           -----------           -----------
              <S>                                                          <C>                   <C>
              Senior Credit Facility...............................        $   296,700           $   131,564
              9 1/2% Senior Subordinated Notes.....................            175,000               175,000
              8 1/2% Senior Subordinated Notes.....................            200,000               200,000
                                                                           -----------           -----------
                                                                           $   671,700           $   506,564
                                                                           ===========           ===========
</TABLE>

         As described in Note 1 and below, because of the Company's filing of
Chapter 11, all amounts are subject to compromise as of December 31, 1998.

SENIOR CREDIT FACILITY

         During 1997 the Company's Senior Credit Facility (the "Facility") was
amended to reduce the borrowing rates under the Facility, to extend the term of
the Facility and to revise various administrative provisions of the Facility.
Specifically, during 1997, advances under the Facility bore interest at either
the prime rate or LIBOR plus 1.0%, at the election of the Company. The
amendment also provided for borrowings on a revolving basis through January 1,
1999, at which time the amounts outstanding would have converted to a term loan
with quarterly payments of principal and accrued interest through June 30,
2002.


                                     F-12
<PAGE>   61

                                 FORCENERGY INC
                             (DEBTOR-IN-POSSESSION)
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

         During 1998 the Company renegotiated, and subsequently amended, the
Facility to increase both the maximum loan amount and the borrowing base to
$320 million with subsequent decreases to $300 million on May 1, 1999 and to
$275 million on September 1, 1999. The Facility provides for borrowings on a
revolving basis through March 31, 2002 at which time all outstanding amounts
under the Facility become due and payable. Advances under the Facility bear
interest at either the prime rate or a Fixed Rate (as defined in the Facility
agreement), at the election of the Company. Commitment fees on the unused
portion of the facility are due quarterly at an annual rate between .375% and
0.5%.

         The borrowing base is subject to redetermination semi-annually based
on revised reserve estimates. The loan is collateralized by substantially all
of the Company's oil and gas properties.

         At December 31, 1998 the Company had drawn down $296.7 million under
the Facility and an additional $5.5 million of availability was utilized for
outstanding letters of credit issued under the Facility. The Company had
availability under the Facility of $17.8 million at December 31, 1998.

         The Facility contains certain covenants which include maintenance of a
minimum tangible net worth, certain financial ratios, restrictions on asset
sales, affiliated transactions and compensation and certain limitations on
dividends and additional debt or liens. The Company was in violation of several
of the financial covenants as of December 31, 1998.

9 1/2% NOTES

         On November 6, 1996, the Company issued an aggregate principal amount
of $175 million of 9 1/2% Senior Subordinated Notes (the "9 1/2% Notes") which
mature on November 1, 2006. The 9 1/2% Notes were issued under an Indenture
(the "9 1/2% Notes Indenture") which provides that interest is payable
semiannually, in arrears, on May 1 and November 1 of each year, commencing May
1, 1997, with principal due at maturity.

         The 9 1/2% Notes are redeemable in whole or in part at the option of
the Company, at any time on or after November 1, 2001, at the redemption prices
(expressed as percentages of principal amount) set forth below, plus accrued
and unpaid interest, if any, thereon.

<TABLE>
<CAPTION>
                         YEAR                                                             PERCENTAGE
                         ----                                                             ----------
                         <S>                                                              <C>
                         2001...................................................           104.750%
                         2002...................................................           103.167%
                         2003...................................................           101.583%
                         2004 and thereafter....................................           100.000%
</TABLE>

         Prior to November 1, 2001, the Company may redeem the 9 1/2% Notes, in
whole or in part, at the Make-Whole Price, plus accrued and unpaid interest, if
any, through the date of redemption. The Make-Whole Price is defined as the
greater of (i) the sum of the outstanding principal amount and Make-Whole
Amount (defined below) of such 9 1/2% Notes, and (ii) the redemption price of
such 9 1/2% Notes on November 1, 2001, determined pursuant to the Indenture
(104.75% of the principal amount). The Make-Whole Amount is defined as the
excess, if any, of (i) the present value of the remaining interest premium and
principal payments due on such 9 1/2% Notes as if such 9 1/2% Notes were
redeemed on November 1, 2001, computed using a discount rate equal to the
Treasury Rate plus 50 basis points, over (ii) the outstanding principal amount
of such 9 1/2% Notes. In addition, during the first 36 months after October 31,
1996, the Company may redeem up to $61.25 million in aggregate principal amount
of the 9 1/2% Notes at a redemption price of 109.5% of the principal amount
thereof plus accrued and unpaid interest, if any, thereon to the redemption
date with the net proceeds of an offering of common equity; provided that at
least $113.75 million in aggregate principal amount of the 9 1/2% Notes remain
outstanding immediately after the occurrence of such redemption.


                                     F-13
<PAGE>   62

                                 FORCENERGY INC
                             (DEBTOR-IN-POSSESSION)
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

         The 9 1/2% Notes holders may, at their election, require that the
Company prepay the 9 1/2% Notes upon the occurrence of a "change of control" as
defined in the 9 1/2% Notes Indenture. Upon a "change of control", the holders
may require the Company to repurchase all or any part of the 9 1/2% Notes at a
repurchase price equal to 101% of the aggregate principal amount thereof plus
accrued and unpaid interest, if any, thereon. Furthermore, under certain
circumstances, the Company may become obligated to offer to purchase all or a
portion of the 9 1/2% Notes at 100% of the principal amount thereof, together
with accrued and unpaid interest, if any, with the net proceeds of certain
asset sales.

8 1/2% NOtes

         On February 14, 1997, the Company issued an aggregate principal amount
of $200 million in 8 1/2% Senior Subordinated Notes priced at $99.338, with an
effective yield to maturity of 8.6% (the 8 1/2% Notes), which mature on
February 15, 2007. The 8 1/2% Notes were issued under an Indenture (the "8 1/2%
Notes Indenture") which provides that interest on the 8 1/2% Notes will be
payable in cash in arrears semiannually on February 15 and August 15 of each
year, commencing August 15, 1997.

         The 8 1/2% Notes are redeemable in whole or in part at the option of
the Company, at any time on or after February 15, 2002, at the redemption
prices set forth below plus, in each case, accrued and unpaid interest, if any,
thereon.

<TABLE>
<CAPTION>
            YEAR                                                         PERCENTAGE
            ----                                                         ----------
            <S>                                                          <C>
            2002.................................................         104.250%
            2003.................................................         102.833%
            2004.................................................         101.417%
            2005 and thereafter..................................         100.000%
</TABLE>

         Prior to February 15, 2002, the Company may redeem the 8 1/2% Notes,
in whole or in part, at the Make-Whole Price, plus accrued and unpaid interest,
if any, through the date of redemption. The Make-Whole Price is defined as the
greater of (i) the sum of outstanding principal amount and Make-Whole Amount
(defined below) of such 8 1/2% Notes, and (ii) the redemption price of such 8
1/2% Notes on February 15, 2002, determined pursuant to the 8 1/2% Notes
Indenture (104.25% of the principal amount). The Make-Whole Amount is defined
as the excess, if any, of (i) the present value of the remaining interest
premium and principal payments due on such 8 1/2% Notes as if such 8 1/2% Notes
were redeemed on February 15, 2002, computed using a discount rate equal to the
Treasury Rate plus 50 basis points, over (ii) the outstanding principal amount
of such 8 1/2% Notes. In addition, during the first 36 months after February
11, 1997, the Company may redeem up to $70 million in aggregate principal
amount of the 8 1/2% Notes at a redemption price of 108.5% of the principal
amount thereof plus accrued and unpaid interest, if any, thereon to the
redemption date with the net proceeds of an offering of common equity of the
Company; provided that at least $130.0 million in aggregate principal amount of
the 8 1/2% Notes remain outstanding immediately after the occurrence of such
redemption. Any such redemption must occur within 60 days of the date of the
closing of such common equity offering.

         Upon a "change of control" in the Company, as defined in the 8 1/2%
Notes Indenture, the 8 1/2% Notes holders may require, at their election, that
the Company prepay all or a portion of the 8 1/2% Notes at a purchase price
equal to 101% of the aggregate principal amount thereof plus accrued and unpaid
interest, if any, thereon. Furthermore, under certain circumstances, the
Company may become obligated to offer to purchase all or a portion of the 8
1/2% Notes at 100% of the principal amount thereof, together with accrued and
unpaid interest, if any, with the net proceeds of certain asset sales.

         The 9 1/2% Notes Indenture and the 8 1/2% Notes Indenture both contain
certain covenants which include the following: (i) limitations on disposition
of proceeds from asset sales; (ii) limitations on payment of dividends, making
of distributions or certain investments; (iii) limitations on the incurrence of
additional indebtedness or liens (iv) limitations on sale and leaseback
transactions; (v) limitations on mergers, consolidations and transfers of
substantially all of the Company's assets; and (vi) limitation on certain
transactions with affiliates.


                                     F-14
<PAGE>   63

                                 FORCENERGY INC
                             (DEBTOR-IN-POSSESSION)
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

         The 9 1/2% Notes and the 8 1/2% Notes are both subordinate to the
Senior Credit Facility and rank pari passu with each other.

7% EXCHANGEABLE SUBORDINATED NOTES

         On November 6, 1996, in conjunction with a public offering of common
stock by the Company, the Company's Exchangeable Notes were exchanged into a
total of 2,343,047 shares of common stock. The exchange resulted in a non-cash
credit to stockholder's equity totaling $35.8 million, representing principal,
accrued deferred interest and capitalized debt issuance cost relating to the
Exchangeable Notes.

         At the current stage in the bankruptcy proceedings, it is not possible
to project the Company's aggregate long-term debt maturities for the next five
calendar years, however, the scheduled maturities would be as follows:


<TABLE>
                                                                                       (IN THOUSANDS)
                         <S>                                                             <C>
                         1999...................................................         $   27,227
                         2000...................................................                 --
                         2001...................................................                 --
                         2002...................................................            269,473
                         2003...................................................                 --
                         Thereafter.............................................            375,000
                                                                                         ----------
                         Total..................................................         $  671,700
                                                                                         ==========
</TABLE>

         The fair values of the Company's fixed rate 9 1/2% Notes and 8 1/2%
Notes at December 31, 1998 were $128.8 million and $146.4 million, respectively
based on current market prices at December 31, 1998.

NOTE 5 -- INCOME TAXES

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

<TABLE>
<CAPTION>
                                                                                  YEAR ENDED DECEMBER 31,
                                                                         ---------------------------------------
                                                                           1998           1997            1996
                                                                         ---------      ---------      ---------
                                                                                     (IN THOUSANDS)

   <S>                                                                   <C>            <C>            <C>
   Deferred:
   Federal........................................................       $       --     $  17,929      $  (5,991)
   State  ........................................................               --         2,692           (720)
                                                                         ----------     ---------      ---------
        Total.....................................................       $       --     $  20,621      $  (6,711)
                                                                         ==========     =========      =========
</TABLE>

         The Company's deferred income tax assets and liabilities were
comprised of the following differences between financial and tax reporting (in
thousands):

<TABLE>
<CAPTION>
                                                                                     DECEMBER 31,
                                                                        ---------------------------------------
                                                                            1998          1997           1996
                                                                        -----------    ----------     ---------
  <S>                                                                   <C>            <C>            <C>
  Capitalized costs and write-offs................................       $   99,898      $ (7,914)     $(28,556)
     Net operating loss carry forwards............................           59,970        47,210         7,512
     Deferred interest deductions.................................               --            --            --
     Valuation allowance..........................................         (159,868)      (39,296)           --
                                                                         ----------      --------      --------
     Deferred tax liability.......................................       $       --     $      --      $(21,044)
                                                                         ==========      ========      ========
</TABLE>


                                     F-15
<PAGE>   64

                                 FORCENERGY INC
                             (DEBTOR-IN-POSSESSION)
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

         At December 31, 1998 and 1997, the Company had approximately $160
million and $39 million, respectively, of unrecognized deferred tax assets
comprised mainly of capitalized costs and write-offs and net operating loss
("NOL") carryforwards available to offset future taxable income for federal
purposes. Valuation allowances have been provided against these deferred tax
assets as it is presently more likely than not that the benefit will not be
utilized. The Company continues to evaluate the realizability of its deferred
tax assets and its estimate is subject to change. The Company had no deferred
tax asset valuation allowance at December 31, 1996.

         A reconciliation of the federal statutory income tax rates to the
Company's effective rate is as follows:

<TABLE>
<CAPTION>
                                                                           YEAR ENDED DECEMBER 31,
                                                                        ----------------------------
                                                                        1998        1997        1996
                                                                        ----        ----        ----
     <S>                                                                <C>         <C>         <C>
     Income taxes at federal statutory rates ...................        35.0%       35.0%       35.0%
     State income tax, less federal benefit ....................         3.3         3.3         2.6
     Valuation allowance .......................................       (38.3)      (25.3)         --
     Other, net ................................................          --          .3         (.3)
                                                                        ----        ----        ----
     Total .....................................................         0.0%       13.3%       37.3%
                                                                        ====        ====        ====
</TABLE>

         At December 31, 1998, the Company had a NOL carryforward for tax
purposes of $156.8 million. The NOLs will expire unless otherwise utilized,
beginning in 1999. The utilization of NOL carryforwards is subject to
limitations under U.S. Federal Income Tax Laws. The NOL carryforwards may be
reduced or eliminated as a result of the bankruptcy (See Note 1).

NOTE 6 -- STOCK BASED COMPENSATION PLANS

         The Company has adopted the disclosure provisions of SFAS No. 123.
Accordingly, no compensation costs have been recorded for the stock options or
warrants as the exercise price of all options granted was the fair market value
on the date of grant.

         The Company has reserved 6,100,000 shares of common stock for issuance
to officers, employees, and directors under stock option and employee stock
purchase plans.

STOCK OPTION PLANS

         The exercise price for options granted to directors, officers and
employees is the fair market value of the stock at the date of grant. The
outstanding options have varying vesting periods, expire at various dates
through the year 2008, and are exercisable at prices ranging from $5.56 to
$34.75 per share, with an aggregate exercise price of $68.5 million.

         The Company's President and Chief Executive Officer has the right to
require the Company to purchase any shares of Common Stock owned as a result of
the exercise of stock options at the then current market price of the Common
Stock and any unexercised stock options at the excess of the fair market value
of the Common Stock over the option price, upon (i) a termination of
employment, (ii) the maturity of, or inability to obtain financing to exercise
the stock options and (iii) any expiration of the right to exercise stock
options.


                                     F-16
<PAGE>   65

                                 FORCENERGY INC
                             (DEBTOR-IN-POSSESSION)
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

         The following table summarizes the stock option activity for 1996,
1997 and 1998:

<TABLE>
<CAPTION>
                                                   NUMBER            OPTION PRICE      WEIGHTED AVERAGE
                                                 OF SHARES             PER SHARE        EXERCISE PRICE
                                                 ---------          ----------------   ----------------

         <S>                                     <C>                <C>                <C>
         Outstanding at December 31, 1995 ...    1,705,918          $10.00 - $ 14.51        $11.59
         Granted ............................    1,070,929           10.50 -   32.00         20.58
         Exercised ..........................     (108,637)          10.00 -   14.51         14.09
         Canceled ...........................     (157,292)          10.00 -   14.51         12.18
                                                 ---------          ----------------        ------
         Outstanding at December 31, 1996 ...    2,510,918           10.00 -   32.00         15.25
         Granted ............................    1,512,225           25.81 -   38.88         28.93
         Exercised ..........................     (120,562)          10.00 -   26.88         14.73
         Canceled ...........................     (277,579)          10.00 -   36.25         23.70
                                                 ---------          ----------------        ------
         Outstanding at December 31, 1997 ...    3,625,002           10.00 -   38.88         20.25
         Granted ............................      708,086            5.56 -   26.75         21.11
         Exercised ..........................       (3,675)          10.00 -   14.13         10.28
         Cancelled ..........................     (685,971)          10.00 -   38.88         29.60
                                                 ---------          ----------------        ------
         Outstanding at December 31, 1998 ...    3,643,442          $ 5.56 - $ 34.75        $18.79
                                                 =========          ================        ======
</TABLE>

         The following table summarizes information about stock options
outstanding at December 31, 1998:

<TABLE>
<CAPTION>
                          OPTIONS OUTSTANDING                                      OPTIONS EXERCISABLE
------------------------------------------------------------------------    ---------------------------------
    RANGE OF         OUTSTANDING       WEIGHTED AVERAGE      WEIGHTED                            WEIGHTED
    EXERCISE             AT             REMAINING LIFE        AVERAGE         EXERCISABLE AT      AVERAGE
     PRICES       DECEMBER 31, 1998         YEARS         EXERCISE PRICE    DECEMBER 31, 1998  EXERCISE PRICE
----------------  -----------------    ----------------   --------------    -----------------  --------------
<S>               <C>                  <C>                <C>               <C>                <C>
$  5.56 - $ 5.75        32,000               9.7             $ 5.74                     --           $   --
  10.00 -  14.51     1,582,952               6.4              11.47              1,240,852            11.43
  15.13 -  22.00       753,490               7.4              20.35                161,722            17.38
  22.75 -  29.38     1,255,000               8.3              26.83                550,000            26.69
  34.75 -  34.75        20,000               6.8              34.75                  5,000            34.75
----------------     ---------               ---             ------              ---------           ------
$  5.56 - $34.75     3,643,442               7.3             $18.79              1,957,574           $16.27
================     =========               ===             ======              =========           ======
</TABLE>

         The weighted average fair value for options granted during 1998, 1997
and 1996 was $4.98, $13.30 and $12.95, respectively.

         If compensation expense for the stock options and warrants had been
determined and recorded based on the fair value on the grant date and using the
Black-Scholes option pricing model to estimate the theoretical future value of
those options, the Company's net income (loss) and net income (loss) per share
amounts would have been reduced to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                                               1998         1997             1996
                                                                           -----------    ----------      ---------

         <S>                                                               <C>            <C>             <C>
         Pro forma net income (loss)                                       $ (320,127)    $ (142,585)     $   9,196
                                                                           ==========     ==========      =========
         Pro forma net income (loss) per share                             $   (12.88)    $    (6.16)     $     .46
                                                                           ==========     ==========      =========
</TABLE>

         Due to the uncertainties in these estimates, such as market prices,
exercise possibilities, and the possibility of future awards and cancellations,
these pro forma disclosures are not likely to be representative of the effects
on reported income for future years.


                                     F-17
<PAGE>   66

                                 FORCENERGY INC
                             (DEBTOR-IN-POSSESSION)
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

         For proforma purposes, the fair value of each option grant is
estimated on the date of grant with the following weighted-average assumptions:

<TABLE>
<CAPTION>
                                                                                 1998         1997          1996
                                                                                 -----        -----         ----
         <S>                                                                     <C>          <C>           <C>
         Expected life (years).........................................           4.5          4.5           10
         Interest rate.................................................           5.5%        6.17%         6.5%
         Volatility....................................................          52.9%        45.6%          40%
         Dividend yield................................................            --           --           --
</TABLE>

         On February 1, 1999, all options then outstanding were cancelled and
reissued with an exercise price of $1.275 per share, the current fair market
of the underlying stock plus 20%. As a result of this repricing of options,
the plan changed from a fixed option plan to a compensatory plan for accounting
purposes. All other terms of options previously granted to non-executives
remained unchanged. The number of options held by executives and directors was
reduced by approximately 114,000 shares.

STOCK PRICE PERFORMANCE INCENTIVE PLAN

         On November 21, 1996, the Board of Directors of the Company adopted
the 1997 Stock Price Performance Incentive Plan (the "Performance Plan")
covering all employees of the Company which was approved by shareholder vote in
May 1997. The Performance Plan has a commencement date of January 1, 1997 and
expires on December 31, 1999. The purpose of the Performance Plan is to provide
a meaningful financial incentive to employees that will assist the Company in
recruiting and retaining high quality industry professionals, while
simultaneously benefiting the shareholders by aligning the financial interests
of employees with those of the shareholders by focusing their efforts on the
price performance of the stock. The plan provides that should the price of the
Company's stock reach $60 per share at any time during the term of the plan,
every employee will receive a non-cash award of the right to receive common
stock in the Company in an amount equivalent in value to five (5) times his/her
annual salary on January 1, 1997 (or date of hire, if later). For employees
hired after January 1, 1997, the award will be prorated giving consideration to
the date of hire and the stock price on the date of hire. The right to receive
the common stock, and the granting of the common stock, will vest to each
employee still employed by the Company, in equal amounts, on the first through
third anniversaries of the date that the common stock reaches $60 per share.

         Should the price of the common stock not reach $60 per share during
the term of the plan, but reaches $50 per share, each employee will receive, on
December 31, 1999, a similar right to receive common stock with similar vesting
provisions but with an equivalent value of two and one-half times his/her
salary. That right would vest, in equal amounts on December 31, in the years
2000 through 2002. Compensation expense will be recognized by the Company from
the award date through the vesting period with a cumulative recognition of
compensation expense recognized on the date of award, giving consideration to
employee services rendered prior to the award date. For the year ended December
31, 1998, annual salaries for all employees were approximately $21 million.

STOCKHOLDER RIGHTS PLAN

         On December 10, 1997 the Company adopted a stockholder rights plan
(the "Rights Plan"). Under the Rights Plan, as amended during 1998, each
shareholder became entitled to receive one right for each outstanding share of
common stock, should a triggering event occur. The rights which expire on
December 10, 2007 become exercisable if a person or group acquires 15% or more
of the Company's outstanding voting stock or announces a tender or exchanger
offer that would result in ownership of 15% or more of the outstanding voting
common stock.

         Each right will entitle the holder to buy one one-thousandth of a
share of a new series of junior participating preferred stock at an exercise
price of $200 per right, subject to antidilution adjustments. Each one
one-thousandth of a share of this new preferred stock has the dividend and
voting rights of, and is designed to be substantially equivalent to, one share
of common stock. Forcenergy's Board of Directors may, at its option, redeem all
rights for $.01 per right at any time prior to the acquisition of 15% or more
of Forcenergy's voting stock by a person or group.


                                     F-18
<PAGE>   67

                                 FORCENERGY INC
                             (DEBTOR-IN-POSSESSION)
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

         If a person or group acquires 15% or more of Forcenergy's outstanding
voting stock, each right will entitle holders, other than the acquiring party,
to purchase for $200 shares of Forcenergy common stock having a market value of
twice that amount.

         The plan also includes an exchange option. If a person or group
acquires 15% or more, but less than 50%, of the outstanding voting stock, the
Board of Directors may, at its option, exchange the rights in whole or in part
for shares of Forcenergy stock. Under this option, Forcenergy would issue one
share of common stock, or one one-thousandth of a share of the new preferred
stock, for each outstanding right. This exchange would not apply to shares held
by the person or group holding 15% or more of Forcenergy's voting stock.

         If, after the rights have become exercisable, Forcenergy merges or
otherwise combines with another entity, or sells 50% or more of its assets or
earning power, each right then outstanding will entitle its holder to purchase
for $200, subject to antidilution adjustments, a number of the acquiring
party's common shares having a market value of twice that amount.

EMPLOYEE STOCK PURCHASE PLAN

         The Company has adopted the Forcenergy Employee Stock Purchase Plan
(the "Stock Purchase Plan"), which permits full-time Company employees (or part
time for at least 20 hours per week and at least five months per year) to
acquire common stock at a small discount from its fair market value through
payroll deductions. Up to a maximum 100,000 shares of common stock may be sold
to participants under the Stock Purchase Plan. As of December 31, 1998, a total
of 95,281 shares had been purchased by participants in the plan. As a result of
the bankruptcy, all monies deducted from payroll and not yet used to purchase
common stock were returned to participants.

NOTE 7 -- EARNINGS PER SHARE

         The following reconciles the numerators and denominators of the basic
and diluted EPS computations (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                                  FOR THE YEARS ENDED DECEMBER 31,
                                   -----------------------------------------------------------------------------------------------
                                               1998                              1997                              1996
                                   ------------------------------    -----------------------------     ---------------------------
                                                            PER                             PER                               PER
                                      LOSS      SHARES     SHARE        LOSS     SHARES    SHARE       INCOME       SHARES   SHARE
                                   ---------    ------   --------    ---------   ------   --------     --------     ------   -----
<S>                                <C>          <C>      <C>         <C>         <C>      <C>          <C>          <C>      <C>
BASIC EPS
     Income (loss) available
     to common stockholders        $(314,494)   24,856   $ (12.65)   $(134,818)  23,142   $  (5.83)    $ 11,278     18,934   $ .60

EFFECT OF DILUTIVE SECURITIES
     Options & Warrants                   --        --         (1)          --       --         (1)          --        738    (.03)
                                   ---------    ------   --------    ---------   ------   --------     --------     ------   -----

DILUTED EPS
     Income (loss) available
     to common stockholders
     and assumed exercises         $(314,494)   24,856   $ (12.65)   $(134,818)  23,142   $  (5.83)    $ 11,278     19,672   $ .57
                                   =========    ======   ========    =========   ======   ========     ========     ======   =====

</TABLE>

(1)      The effect of 415,348 and 1,293,866 shares of potential common stock
         were anti-dilutive in 1998 and 1997, respectively, due to the losses
         in both years.


                                     F-19
<PAGE>   68

                                 FORCENERGY INC
                             (DEBTOR-IN-POSSESSION)
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NOTE 8 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

         During 1998, 1997 and 1996, the Company was a party to various
financial instruments with off-balance-sheet risk in the normal course of
business to reduce its exposure to changing commodity prices. The Company
utilizes these arrangements for portions of its current oil and gas production
to achieve more predictable cash flows and to reduce its exposure to
fluctuations in oil and gas prices. The remaining portion of current production
is not hedged so as to provide the Company the opportunity to benefit from
increases in prices on that portion of the production, should price increases
materialize. The Company had various instruments in place, all of which were
cancelled at the option of the counterparties subsequent to the filing of
Chapter 11 under the U.S. Bankruptcy Code (see Note 1). The Company received
$5.5 million (fair market value) in settlement of the contracts pursuant to the
cancellations. The Company may enter into new arrangements in the future as part
of its strategy to reduce exposure to commodity price fluctuations. The
instruments are utilized to hedge oil and gas prices for varying time periods.
The instruments contain an element of credit risk and price risk. The Company
attempts to minimize the extent of credit risk by limiting the counterparties to
major banks or significant industry participants. All of these arrangements are
entered into on a no-cash basis and are settled monthly. The Company accounts
for these arrangements as hedging activities and, accordingly, gains or losses
are included in oil and gas revenues for the period the production was hedged.
Since 1994, the Company has entered into a number of arrangements with oil and
gas purchasers and industry trading companies. Under these agreements, monthly
settlements are based on the differences between the prices specified in the
instrument and/or the settlement price of certain oil and gas futures contracts
quoted on the New York Mercantile Exchange ("NYMEX"). In instances where the
applicable settlement price is less than the price specified in the contract,
the Company receives a settlement based on the difference and in instances where
the applicable settlement price is higher than the specified prices, the Company
pays an amount based on the difference. As a result of these hedging activities,
the Company recognized additional oil and gas sales revenue of $15.8 million
in 1998 and a reduction to field revenue of $10.8 million and $20.5 million in
1997 and 1996, respectively.

NOTE 9 -- LEASES

         The following is a schedule, by calendar year, of future minimum
rental payments, covering primarily office space, required under operating
leases with a term in excess of one year:

<TABLE>
                                                                               (IN THOUSANDS)
               <S>                                                               <C>
               1999...................................................           $   1,629
               2000...................................................               1,619
               2001...................................................               1,572
               2002...................................................               1,117
               2003...................................................                 164
                                                                                 ---------
               Total..................................................           $   6,101
                                                                                 =========
</TABLE>

         Total rental expense for operating leases was approximately
$1,976,000, $1,765,000 and $584,000 for the years ended December 31, 1998, 1997
and 1996, respectively.


NOTE 10 -- COMMITMENTS AND CONTINGENCIES

         The Company is involved in various litigation matters arising in the
normal course of business. Management's assessment is that none of these
matters are anticipated to have a material adverse affect on the financial
position or results of operations of the Company.


                                     F-20
<PAGE>   69

                                 FORCENERGY INC
                             (DEBTOR-IN-POSSESSION)
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NOTE 11 -- SIGNIFICANT CUSTOMERS

         The following table reflects sales to oil and gas purchasers who
individually accounted for more than 10% of the Company's total oil and gas
revenues in a given year (in thousands):

<TABLE>
<CAPTION>
                                                            1998              1997             1996
                                                          --------          --------         --------
     <S>                                                  <C>               <C>              <C>
     Cornerstone Propane, Inc                             $ 30,076          $ 93,342         $ 69,491
     Torch Energy Corporation                               42,171                --               --
     Texon Corporation                                          --            20,360           24,793
     Mobil Oil Corp                                             --                --            2,741
</TABLE>

           During 1998, two purchasers of the Company's production accounted
for more than 10% of the value of oil and gas sold by the Company. Based on
current demand for oil and natural gas sold, the Company does not believe the
loss of these purchasers would have a material adverse effect on the Company's
results of operations or cash flow. The Company currently relies on one
purchaser for its Alaska production. The contract with this purchaser runs
through December 1999 at which time a new contract must be negotiated or
another purchaser found. The inability to negotiate a new contract or to find a
new purchaser could materially impact the company's results of operations and
cash flows.

NOTE 12 -- CURRENT ASSETS AND LIABILITIES

         Current assets and liabilities include the following:

<TABLE>
<CAPTION>
                                                                                               DECEMBER 31,
                                                                                         -----------------------
                                                                                           1998           1997
                                                                                         --------       --------
                  <S>                                                                    <C>            <C>
                  CURRENT ASSETS:
                    Accounts receivable-joint interest billings ...................      $  7,331       $  7,975
                    Accrued oil and gas sales .....................................        22,691         35,472
                    Other .........................................................           410            455
                    Allowance for doubtful accounts ...............................        (1,999)          (400)
                                                                                         --------       --------
                       Accounts receivable, net ...................................      $ 28,433       $ 43,502
                                                                                         ========       ========

                    Prepaid drilling cost .........................................      $  4,789       $ 13,145
                    Royalties and production taxes receivable .....................         5,463          5,964
                    Other .........................................................         9,416         11,122
                                                                                         --------       --------
                       Other current assets .......................................      $ 19,668       $ 30,231
                                                                                         ========       ========

                  CURRENT LIABILITIES(1):
                    Accrued drilling cost .........................................      $ 25,725       $ 30,239
                    Accrued lease operating expenses ..............................        12,828         10,417
                    Accrued interest expense ......................................        10,799          9,434
                    Revenue and royalties payable .................................         4,588          7,255
                    Other .........................................................        10,897         12,664
                                                                                         --------       --------
                       Accrued liabilities ........................................      $ 64,837       $ 70,009
                                                                                         ========       ========
</TABLE>

(1)      As of December 31, 1998, these items are subject to compromise.


                                     F-21
<PAGE>   70

                                 FORCENERGY INC
                             (DEBTOR-IN-POSSESSION)
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NOTE 13 -- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

         During October 1997 Forcenergy acquired Edisto Resources Corporation
and Convest Energy Corporation for Forcenergy common stock and cash balances
Forcenergy received in the mergers. The accompanying financial statements
include the following attributable to the Edisto and Convest mergers:

<TABLE>
         <S>                                                                            <C>
         Issuance of common stock.........................................              $98,934
         Working capital acquired.........................................               (4,196)
                                                                                        -------
         Total included in oil and gas properties.........................              $94,738
                                                                                        =======
</TABLE>

         On March 31, 1998 the Company issued approximately 7.9 million shares
of common stock valued at $27 per share pursuant to the tender offer for all of
the outstanding common stock of FAB (see Note 2).

         The Company paid cash interest costs, including capitalized interest,
of $49.0 million, $34.8 million, and $11.5 million for the years ended December
31, 1998, 1997 and 1996, respectively.

NOTE 14 -- SUPPLEMENTAL QUARTERLY INFORMATION (UNAUDITED)
                (IN THOUSANDS EXCEPT PER SHARE DATA)


<TABLE>
<CAPTION>
1998                                          FIRST          SECOND         THIRD          FOURTH             ANNUAL
                                             --------       --------       --------       ---------          ---------

<S>                                          <C>            <C>            <C>            <C>                <C>
Revenues ..............................      $ 71,955       $ 70,778       $ 67,898       $  62,918          $ 273,549
Income (loss) from operations .........      $  6,984       $  2,783       $    186       $(277,942)(1)      $(267,989)
Net loss ..............................      $ (1,599)      $ (5,611)      $(12,577)      $(294,707)         $(314,494)
Net loss per share:
         Basic ........................      $   (.06)      $   (.23)      $   (.51)      $  (11.92)         $  (12.65)
         Diluted ......................      $   (.06)      $   (.23)      $   (.51)      $  (11.92)         $  (12.65)


1997

Revenues ..............................      $ 71,005       $ 64,141       $ 63,515       $  85,524          $ 284,185
Income (loss) from operations .........      $ 24,622       $ 12,430       $ 13,100       $(176,523)(1)      $(126,371)
Net income (loss) .....................      $ 11,174       $  3,946       $  3,765       $(153,703)         $(134,818)
Net income (loss) per share:
         Basic ........................      $    .49       $    .17       $    .17       $   (6.25)         $   (5.83)
         Diluted ......................      $    .47       $    .16       $    .16       $   (6.25)         $   (5.83)
</TABLE>

(1)  Includes $275 million and $200 million ($162.8 million after tax) non-cash
     impairments of oil and gas assets recorded in the fourth quarters of 1998
     and 1997, respectively, pursuant to the full cost accounting rules
     mandated by the Securities and Exchange Commission ("SEC").


                                     F-22
<PAGE>   71

                                 FORCENERGY INC
                             (DEBTOR-IN-POSSESSION)
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NOTE 15 -- SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES
           (UNAUDITED)

COST INCURRED IN OIL AND GAS PRODUCING ACTIVITIES

         Presented below are costs incurred in petroleum property acquisition,
exploration and development activities (in thousands):

<TABLE>
<CAPTION>
                                                                       1998         1997          1996
                                                                   ---------     -----------   -----------
         <S>                                                       <C>           <C>           <C>
         Acquisition of properties:
              Proved properties....................                $   37,880    $   168,450   $   123,015
              Unevaluated properties...............                    17,430         41,907        25,179
         Exploration costs.........................                   158,331        176,543        42,262
         Development costs.........................                   111,546        106,260        92,555
                                                                   ----------    -----------   -----------
                  Total............................                $  325,187    $   493,160   $   283,011
                                                                   ==========    ===========   ===========
</TABLE>

CAPITALIZED COSTS RELATED TO OIL AND GAS PRODUCING ACTIVITIES

         The following table presents total capitalized costs of proved and
unevaluated properties and accumulated depletion, depreciation and amortization
related to oil and gas producing operations (thousands):

<TABLE>
<CAPTION>
                                                                                 1998             1997            1996
                                                                              -----------       ---------       ---------
         <S>                                                                  <C>               <C>             <C>
         Proved properties .............................................      $ 1,313,824     $   999,126       $ 601,725
         Unevaluated properties ........................................          165,885         165,480          63,077
                                                                              -----------     -----------       ---------
                                                                              $ 1,479,709     $ 1,164,606       $ 664,802
         Accumulated depletion, depreciation and amortization ..........         (874,064)       (455,340)       (143,061)
                                                                              -----------     -----------       ---------
                  Total ................................................      $   605,645     $   709,266       $ 521,741
                                                                              ===========     ===========       =========
</TABLE>

         Of the capitalized costs of unevaluated properties at December 31,
1998, approximately $76,313,000, $32,182,000, $28,518,000 and $28,872,000 were
incurred in 1998, 1997, 1996 and years prior to 1996, respectively. The Company
anticipates evaluating these properties over the next three to five years as it
continues its property exploitation and development program.

RESULTS OF OPERATIONS FROM OIL AND GAS PRODUCING ACTIVITIES

         The results of operations from oil and gas producing activities, which
do not include revenues associated with the production and sale of sulfur and
processing fees for third party gas, and excluding corporate overhead and
interest costs are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                                        FOR THE YEAR ENDED DECEMBER 31,
                                                                                  -----------------------------------------
                                                                                    1998            1997             1996
                                                                                  ---------       ---------       ---------
         <S>                                                                      <C>             <C>             <C>
         Revenues(1) .......................................................      $ 256,655       $ 292,456       $ 159,232
         Production costs ..................................................       (103,460)        (81,965)        (42,240)
         Depreciation, depletion and amortization ..........................       (145,856)       (113,347)        (58,464)
         Impairment of oil and gas properties ..............................       (275,000)       (200,000)             --
         Income tax benefit (provision) ....................................             --          20,621          (6,711)
                                                                                  ---------       ---------       ---------
         Results of operations for petroleum producing activities ..........      $(267,661)      $ (82,235)      $  51,817
                                                                                  =========       =========       =========

         Average realized sales prices(2):
         Liquids (per Bbl)(3) ..............................................      $   12.54       $   17.34       $   16.93
         Natural gas (per Mcf) .............................................      $    2.16       $    2.41       $    2.16
</TABLE>

----------------
         (1)  Does not include 1998 hedging gain of $15.8 million and 1997 and
              1996 hedging losses amounting to $10.8 million and $20.5 million,
              respectively.
         (2)  Net of effects of hedging.
         (3)  Includes condensate, crude oil and natural gas liquids.


                                     F-23
<PAGE>   72

                  FORCENERGY INC FORCENERGY INCFORCENERGY INC
                             (DEBTOR-IN-POSSESSION)
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

RESERVE QUANTITIES (UNAUDITED)

         Estimates of proved reserves of the Company and the related
standardized measure of discounted future net cash flow information are based
on the reports of independent petroleum engineers. All of the Company's proved
reserves are located offshore or onshore - United States. There are numerous
uncertainties inherent in estimating oil and natural gas reserves and their
estimated values, including many factors beyond the control of the producer.
The reserve data set forth herein represents only estimates. Reservoir
engineering is a subjective process of estimating underground accumulations of
oil and natural gas that cannot be measured in an exact manner. Estimates of
economically recoverable oil and gas reserves and of future net cash flows
necessarily depend upon a number of variable factors and assumptions, such as
historical production from the area compared with production from other
producing areas, the assumed effects of regulations by governmental agencies
and assumptions concerning future oil and gas prices, future operating costs,
severance and excise taxes, development costs and workover and remedial costs,
all of which may in fact vary considerably from actual results. For these
reasons, estimates of the economically recoverable quantities of oil and
natural gas attributable to any particular group of properties, classifications
of such reserves based on risk of recovery, and estimates of the future net
cash flows expected therefrom prepared by different engineers or by the same
engineers at different times may vary substantially and such reserve estimates
may be subject to downward or upward adjustment based upon such factors. Actual
production, revenues and expenditures with respect to the Company's reserves
will likely vary from estimates, and such variances may be material.

         The present value of estimated future net cash flows included herein
should not be construed as the current market value of estimated oil and
natural gas reserves attributable to the Company's operations. In accordance
with the applicable requirements of the Commission, the estimated discounted
net cash flows from proved reserves are generally based on current prices and
costs as of the date of the estimate, whereas actual future prices and costs
may be materially higher or lower. Current prices in effect as of the valuation
date incorporated the estimated effects of hedging agreements in place (see
Note 8) as of the valuation date, and for the period the agreements will be in
effect. Actual future cash flows will also be affected by factors such as the
amount and timing of actual production, supply and demand for oil and natural
gas, curtailments or increases in consumption by purchasers and changes in
governmental regulation or taxation. The timing of actual future net cash flows
from proved reserves, and their actual present value, will be affected by the
timing of both production and the incurrence of expenses in connection with
development and production of oil and gas properties. In addition, the
calculation of the present value of the future net revenues using a 10%
discount as required by the Commission, is not necessarily the most appropriate
discount factor based on interest rates in effect from time to time and the
risk associated with the Company's reserves or the oil and gas industry in
general. The Company's estimates of its proved reserves and proved developed
reserves of oil and gas as of December 31, 1996, 1997 and 1998 and the changes
in its proved reserves are as follows:

<TABLE>
<CAPTION>
                                                         LIQUIDS(1)        GAS
                                                           (MBBL)         (MMCF)
                                                         ----------      --------
<S>                                                      <C>             <C>
1996
Proved developed and undeveloped:
Beginning of year ..................................       24,458        218,502
Production .........................................       (4,006)       (32,738)
Purchases of minerals-in-place .....................       27,206         38,107
Extensions and discoveries .........................        4,718         19,419
Sales of minerals-in-place .........................          (38)        (3,552)
Revisions to previous estimates ....................        2,321         17,175
                                                           ------        -------
End of year ........................................       54,659        256,913
                                                           ======        =======
Proved developed:
               Beginning of year ...................       16,050        154,705
                                                           ======        =======
               End of year .........................       45,040        187,949
                                                           ======        =======
</TABLE>


                                     F-24
<PAGE>   73

                                 FORCENERGY INC
                             (DEBTOR-IN-POSSESSION)
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

<TABLE>
<S>                                                         <C>          <C>
1997
Proved developed and undeveloped:
Beginning of year ..................................        54,659       256,913
Production .........................................        (8,210)      (57,737)
Purchases of minerals-in-place .....................        12,229        63,004
Extensions and discoveries .........................            48       110,270
Revisions to previous estimates ....................          (683)        8,311
                                                            ------       -------
End of year ........................................        58,043       380,761
                                                            ======       =======
Proved developed:
            Beginning of year ......................        45,040       187,949
                                                            ======       =======
            End of year ............................        39,766       309,542
                                                            ======       =======

1998
Proved developed and undeveloped:
Beginning of year ..................................        58,043       380,761
Production .........................................        (8,513)      (76,799)
Purchases of minerals-in-place .....................         3,324        44,161
Extensions and discoveries .........................         3,204        47,088
Sales of minerals-in-place .........................          (118)       (6,080)
Revisions to previous estimates ....................        (6,551)      (19,188)
                                                            ------       -------
End of year ........................................        49,389       369,943
                                                            ======       =======
Proved developed:
            Beginning of year ......................        39,766       309,542
                                                            ======       =======
            End of year ............................        31,746       297,117
                                                            ======       =======
</TABLE>

(1) Includes crude oil, condensate and natural gas liquids.

         Proved reserves are estimated quantities of liquids and natural gas
which geological and engineering data indicate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and
operating conditions. Proved developed reserves are proved reserves which can
be expected to be recovered through existing wells with existing equipment and
operating methods.

         Revisions to previous estimates for the year ended December 31, 1998
were primarily the result of lower prices the effect of those prices on the
economic life of the properties. In 1997, an 11 million barrel price-related
negative volume reduction in the Alaskan reserves, due to a technical reduction
in the economic life of the reserves, was substantially offset by other upward
revisions. Upward revisions to previous estimates in 1996 primarily resulted
from property performance.


                                     F-25
<PAGE>   74

                                 FORCENERGY INC
                             (DEBTOR-IN-POSSESSION)
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS (UNAUDITED)

         The standardized measure of discounted future net cash flows relating
to proved oil and gas reserves is as follows (in thousands):

<TABLE>
<CAPTION>
                                                                                 FOR THE YEAR ENDED DECEMBER 31,
                                                                         -----------------------------------------------
                                                                             1998             1997              1996
                                                                         -----------       -----------       -----------
         <S>                                                             <C>               <C>               <C>
         Future cash inflows ......................................      $ 1,217,620       $ 1,683,235       $ 2,220,916
         Future production costs ..................................         (391,478)         (530,327)         (588,973)
         Future development and dismantlement costs ...............         (280,155)         (311,065)         (191,022)
         Future income tax expense ................................               --           (52,291)         (377,857)
                                                                         -----------       -----------       -----------
         Future net cash flows ....................................          545,987           789,552         1,063,064
         10% annual discount for estimated timing of cash flows ...         (109,298)         (194,354)         (260,919)
                                                                         -----------       -----------       -----------
         Standardized measure of discounted future net cash flows .      $   436,689       $   595,198       $   802,145
                                                                         ===========       ===========       ===========
</TABLE>

         The following table summarizes the principal sources of change in the
standardized measure of discounted future net cash flows (in thousands):

<TABLE>
<CAPTION>
                                                                                    FOR THE YEAR ENDED DECEMBER 31,
                                                                               -----------------------------------------
                                                                                 1998            1997             1996
                                                                               ---------       ---------       ---------
         <S>                                                                   <C>             <C>             <C>
         Standardized measure -- beginning of period ....................      $ 595,198       $ 802,145       $ 406,956
         Sales of oil and gas produced, net of production costs .........       (168,950)       (210,491)       (116,993)
         Purchases of minerals-in-place .................................         19,066         160,608         277,205
         Extensions and discoveries .....................................         72,228         144,126         122,500
         Sales of minerals-in-place .....................................         (7,921)         (1,322)         (4,268)
         Net changes in prices and production costs .....................       (156,301)       (575,863)        131,553
         Changes in estimated future development and
           dismantlement costs ..........................................        (13,327)        (21,217)         (7,436)
         Revisions to previous quantity estimates .......................        (14,623)         11,087          70,230
         Accretion of discount ..........................................         59,520          80,215          40,696
         Changes in timing of production and other ......................         10,578          (6,635)          1,523
         Net changes in income taxes ....................................         41,221         212,545        (119,821)
                                                                               ---------       ---------       ---------
         Standardized measure -- end of period ..........................      $ 436,689       $ 595,198       $ 802,145
                                                                               =========       =========       =========
</TABLE>

         The standardized measure is based on current prices as of the
valuation date and reflects overall weighted average prices of:

<TABLE>
<CAPTION>
                                                                        FOR THE YEAR ENDED DECEMBER 31,
                                                                       --------------------------------
                                                                         1998        1997         1996
                                                                       -------     -------      -------
   <S>                                                                 <C>         <C>          <C>
   Oil (per Bbl)..................................................     $ 10.67     $ 14.72      $ 23.19
   Gas (per Mcf)..................................................     $  1.98     $  2.18      $  3.71
</TABLE>

         The standardized measure of discounted future net cash flows was
calculated by applying current prices to estimated future production, less
future expenditures (based on current costs) to be incurred in developing and
producing such proved reserves and the estimated effect of future income taxes
based on the current tax law. The resulting future net cash flows were
discounted using a rate of 10% per annum.

         During the first half of 1999, oil and gas prices have increased from
those being received as of the year-end reserve valuation date. If prices
decline from year-end levels, if not offset by other factors, the value of the
Company's reserves could be negatively impacted.


                                     F-26