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                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
  (Mark One)
  [XAnnual]report pursuant to Section 13 or 15(d) of the Securities
    Exchange Act of 1934 for the fiscal year ended December 31, 1997 or
  [_Transition]report pursuant to Section 13 or 15(d) of the Securities
    Exchange Act of 1934 for the transition period from to
 
                                   FORM 10-K
 
                        Commission file number 1-12905
 
                               ----------------
 
                                EEX CORPORATION
            (Exact name of Registrant as specified in its charter)
 
                               ----------------
 
                 TEXAS                               75-2421863
    (State or other jurisdiction of     (I.R.S. Employer Identification No.)
    incorporation or organization)
 
    2500 CITYWEST BLVD. SUITE 1400                       77042
            HOUSTON, TEXAS                           (Zip Code)
    (Address of principal executive
                office)
 
                                (713) 243-3100
             (Registrant's Telephone Number, Including Area Code)
 
  Securities registered pursuant to section 12(b) of the Act:
 
 
     COMMON STOCK ($.01 PAR VALUE)             NEW YORK STOCK EXCHANGE
         (Title of Each Class)                 (Name of Each Exchange
                                                on which Registered)
 
  Securities registered pursuant to section 12(g) of the Act:
 
                                     NONE
 
  Indicate by check mark whether 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 twelve months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]  No [_]
 
  Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
 
  Aggregate market value of the outstanding shares of Common Stock of the
Registrant, based upon the closing price of the shares on the New York Stock
Exchange on such date, held by nonaffiliates of the Registrant as of March 12,
1998: $1,132,783,053.
 
  Shares of the Registrant's Common Stock outstanding as of March 12, 1998:
127,067,427 shares.
 
  Documents incorporated by reference and the Part of the Form 10-K into which
the document is incorporated: The information required by Part III (Items 10,
11, 12 and 13) is incorporated by reference to Registrant's definitive proxy
statement filed in connection with the 1998 annual meeting of shareholders.
 
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<PAGE>
 
                                   FORM 10-K
 
                                 ANNUAL REPORT
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
 
                               TABLE OF CONTENTS
 
                                     PART I
 
<TABLE>
<CAPTION>
                                                                                                PAGE
                                                                                                ----
<S>      <C>                                                                                    <C>
ITEM 1.  Business..............................................................................   1
         General...............................................................................   1
         History of EEX........................................................................   1
         U.S. Exploration and Development......................................................   1
         Offshore..............................................................................   1
         GB 388 (Cooper).......................................................................   2
         Gulf of Mexico Shelf..................................................................   2
         Texas State Waters....................................................................   2
         Onshore...............................................................................   2
         International Exploration and Development.............................................   3
         Indonesia (Onshore Java) Tuban Block..................................................   3
         Indonesia (Offshore Sumatra) Asahan Block.............................................   3
         Turkey................................................................................   3
         Asset Divestitures....................................................................   3
         Sale of East Texas Properties.........................................................   3
         Plant Operations Business.............................................................   3
         Sales Information.....................................................................   4
         Major Customers.......................................................................   4
         Competition...........................................................................   4
         Government Regulation.................................................................   4
         Regulation of Oil and Natural Gas Exploration and Production..........................   4
         Environmental Matters.................................................................   5
         Regulation of Offshore Operations.....................................................   6
         Natural Gas Marketing and Transportation..............................................   6
         Employees.............................................................................   6
         Offices...............................................................................   6
         Forward Looking Statements-Uncertainties and Risks....................................   7
ITEM 2.  Properties............................................................................   8
ITEM 3.  Legal Proceedings.....................................................................  10
ITEM 4.  Submission of Matters to a Vote of Security Holders...................................  11
 
                                    PART II
 
ITEM 5.  Market for Registrant's Common Equity and Related Stockholder Matters.................  11
ITEM 6.  Selected Financial Data...............................................................  11
ITEM 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations.  11
ITEM 8.  Financial Statements and Supplementary Data...........................................  11
ITEM 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..  11
</TABLE>
<PAGE>
 
                                    PART III
 
<TABLE>
<S>         <C>                                                              <C>
ITEM 10.    Incorporated by reference.......................................  12
ITEM 11.    Incorporated by reference.......................................  12
ITEM 12.    Incorporated by reference.......................................  12
ITEM 13.    Incorporated by reference.......................................  12
 
                                    PART IV
 
ITEM 14.    Exhibits, Financial Statement Schedules and Reports on Form 8-K.  12
APPENDIX A    Financial Information......................................... A-1
</TABLE>
<PAGE>
 
                                    PART I
 
ITEM 1. BUSINESS
 
GENERAL
 
  EEX Corporation ("EEX" or the "Company") and its predecessors have been
engaged in the exploration for and the development, production and sale of
natural gas and crude oil since 1918. Its activities are currently
concentrated in Texas, the Offshore Gulf of Mexico and International. EEX also
provides operation and maintenance services, under contract, to cogeneration
plants located in Sweetwater, Texas, Buffalo, New York and Bellingham,
Washington ("Plant Operations Business").
 
HISTORY OF EEX
 
  The oil and gas exploration and production business of EEX Corporation was
conducted, historically, through subsidiary and affiliate entities of ENSERCH
Corporation ("ENSERCH"). From 1985 through December 30, 1994, this business
was conducted primarily through Enserch Exploration Partners, Ltd. ("EP"), a
limited partnership in which a minority interest (less than 1% after 1988) was
held by the public. At year-end 1994, EP and its affiliates were reorganized
into a Texas corporation, Enserch Exploration, Inc. ("Old EEI"), in which
ENSERCH maintained an approximately 99% stock ownership interest, with the
balance held by the public. The public's stock ownership interest increased to
approximately 17% following a public sale by Old EEI of its common stock in
August 1995.
 
  EEX was organized in the State of Texas in 1992 as a wholly owned subsidiary
of ENSERCH. It conducted the Plant Operations Business of ENSERCH under the
name of Lone Star Energy Plant Operations, Inc. ("LSEPO").
 
  In 1996, ENSERCH entered into a merger agreement with Texas Utilities
Company under which ENSERCH agreed to exit the oil and gas business and divest
all of its interests in Old EEI. This divestiture was accomplished in two
steps. First, Old EEI was merged into LSEPO, with LSEPO being the surviving
company ("Merger"). In the Merger, LSEPO changed its name to Enserch
Exploration, Inc. ("EEI"). Second, ENSERCH distributed its entire 83%
ownership interest in EEI pro rata to its shareholders in a tax-free
distribution ("Distribution"). The Merger and the Distribution were each
effective on August 5, 1997.
 
  At a special shareholders's meeting held on December 19, 1997, Enserch
Exploration, Inc. changed its name to EEX Corporation.
 
  (References throughout this Form 10-K to the business conducted by EEX are
meant to include the business of Old EEI and LSEPO conducted before the Merger
and the business of EEX conducted after the Merger, except as otherwise
noted.)
 
U.S. EXPLORATION AND DEVELOPMENT
 
OFFSHORE
 
  Deepwater Gulf of Mexico--During early 1997, the EEX focus shifted from the
shallower Pleistocene play to the deeper Pliocene and Miocene plays where
significant economic reserve potential has been confirmed by recent industry
activity. To reduce the financial risk associated with dry holes and to
accelerate the drilling program, a joint venture was formed with Enterprise
Oil PLC ("Enterprise") in which Enterprise funds substantially all early
exploratory well costs and certain appraisal and development costs in return
for one half of EEX's working interest in 78 deep water leases.
 
  The prospect inventory was expanded through participation in two lease sales
that added 18 leases comprising 10 prospects in 1997. At the end of the year,
the deep water prospect inventory totaled in excess of 40 prospects and leads.
The Enterprise agreement covers funding for EEX's share of the first $65
million of exploration drilling costs, $10 million of appraisal costs and $25
million of development costs. The first
 
                                       1
<PAGE>
 
exploratory well (Llano) drilled in this deepwater program at Garden Banks 386
was successful. The well encountered a number of hydrocarbon intervals between
23,000 feet and 25,000 feet until drilling was suspended due to pressure
limitations for the rig on location. The well was temporarily abandoned in
order to obtain a rig with higher pressure capabilities. Such a rig has been
contracted and is expected to begin deepening the well late in the first
quarter 1998 to evaluate the Miocene potential of the prospect.
 
  EEX has two other rigs under long term contract at attractive day rates to
evaluate and appraise the deepwater potential. From time to time EEX intends
to contract for rigs having additional capabilities in order to fully evaluate
the prospect inventory.
 
  GB 388 (Cooper)--The Cooper field was developed in the Pleistocene play.
Reservoir performance in 1997 was disappointing. In addition, the A-3 well was
abandoned after an unsuccessful attempt to drill through unconsolidated sand
in a near salt region. A re-evaluation of reserves in 1997 at Cooper resulted
in a downward revision of 82 billion cubic feet of gas equivalent.
 
  At year-end, EEX owned interests in 85 blocks in the Deepwater Gulf of
Mexico, 9 of which were held by production, and 55 of which were operated by
EEX.
 
  Gulf of Mexico Shelf--During 1997, new geophysical interpretation, new 3-D
seismic and an improved technical approach were employed. This restructured
program resulted in drilling 11 wells of which seven were successful. Five of
the successful wells were operated by EEX, including those drilled in East
Cameron blocks 303 and 349/350 and Matagorda Island 705. Production commenced
in the second half of 1997 with gross producing rates from these East Cameron
blocks of approximately 57 million cubic feet of natural gas and 2,985 barrels
of oil per day. Gross producing rates from the new Matagorda Island 705 well
were approximately 19 million cubic feet of natural gas and 50 barrels of oil
per day.
 
  At year-end, EEX owned interests in 113 blocks in the Gulf of Mexico Shelf,
52 of which were held by production, and 58 of which were operated by EEX.
 
  Texas State Waters--The Trinity Bay program resulted in 5 discoveries in 6
attempts and added approximately 50 million cubic feet of natural gas
equivalent per day ("mmcfe/d") (gross) of production by December, 1997 with
two wells remaining to be completed. Three additional wells remain to be
drilled in the area. At nearby Nassau Bay, one successful well was drilled
producing 10 mmcfe/d and one dry hole was drilled.
 
  At year-end, EEX owned interests in 35 blocks in Texas State waters, 15 of
which were held by production, and all of which were operated by EEX.
 
ONSHORE
 
  The Onshore program in 1997 focused on three areas, developing the Warwink
field in West Texas and evaluating adjacent exploration opportunities, and
realizing value from the Hardeman basin in North Texas and the Anadarko basin
in Oklahoma. At Warwink, 15 wells were drilled, 14 of which were successful.
Additional acreage was obtained in the area to support further exploratory
drilling.
 
  Two joint ventures were undertaken in 1997 to allow EEX to benefit from
exploration in non-core fields with minimal EEX technical effort and reduce
the financial risk associated with dry holes. These agreements provide for
carried well costs and result in a lower cost of ownership. Lariat Petroleum
purchased 25% of EEX's working interest in the Oklahoma properties and assumed
operations. In addition, Lariat will carry EEX for a 50% working interest in
$7 million of exploratory drilling. Key Production purchased a 20% working
interest in EEX properties in the Hardeman Basin and assumed operations. Key
will carry EEX for a 40% working interest in 20 exploratory wells. These joint
ventures allow local operators, for whom these assets represent a core
business, to exploit EEX's underdeveloped acreage prior to its ultimate
disposition.
 
                                       2
<PAGE>
 
INTERNATIONAL EXPLORATION AND DEVELOPMENT
 
  Indonesia (Onshore Java) Tuban block--During 1997, development drilling
continued and work was completed on the initial production facilities.
Production commenced from the Mudi field on December 30, 1997 and gross
production is projected to be 20,000 barrels per day by the second quarter of
1998. In addition, two exploration prospects were evaluated and are scheduled
to be tested in 1998. On February 10, 1998, EEX announced that it entered into
an agreement with Risjad Salim Petroleum (Tuban) Ltd. ("RSP") to acquire, as
of January 1, 1998, RSP's 25% participation interest in the Tuban Production
Sharing Contract located on the island of Java in Indonesia. This transaction
will increase EEX's interest in the Tuban block to 50%. In addition to several
exploration prospects, the Tuban block contains the Mudi field. EEX will pay
approximately $40 million plus a portion of future net profits for the RSP
interest. The transaction is expected to close before March 31, 1998.
 
  Indonesia (Offshore Sumatra) Asahan block--In April 1997, EEX acquired a 60%
interest in 103,783 acres in the Asahan block. EEX will pay all seismic
acquisition costs and own a 60% participation interest. Upon completion of
geophysical operations, EEX can elect to participate in an exploration
drilling program or withdraw with no further obligation. All block costs
beyond 1998 seismic acquisition will be shared 60% by EEX and 40% by its
partner, Risjad Salim.
 
  Turkey--On February 10, 1998, EEX announced that it had entered into an
agreement to acquire 60% of Aladdin Middle East, Ltd.'s and White Wolf
Exploration's interest in thirteen exploration licenses covering 1.6 million
gross acres located in the South Mardin basin in southeastern Turkey. EEX will
spend $3.0 million to reprocess existing seismic data and acquire new data
over the southeastern portion of the South Mardin Basin. Upon completion of
geophysical operations, EEX can elect to participate in an exploration
drilling program or withdraw with no further obligation. This region has oil
source characteristics similar to recent light oil discoveries in Saudi
Arabia.
 
  On February 25, 1998, EEX entered into a second agreement with Aladdin
Middle East, Ltd. and Transmediterranean Oil Company, Ltd. to acquire a 60%
interest in 8 exploration licenses covering approximately 807,000 gross acres
in central Turkey. EEX will pay 60% of the costs of drilling an exploratory
well in the area and approximately $1.0 million to acquire seismic data to
earn its interest.
 
ASSET DIVESTITURES
 
  During 1997, proceeds from asset sales totaled approximately $133 million
resulting in a gain of $53 million. These asset sales included oil and natural
gas reserves of approximately 198 billion cubic feet equivalent ("Bcfe"). In
addition, these sales allow EEX to reduce its cost of ownership for its U.S.
operations and focus exploration efforts in those areas where significant
value can be added. Total sales include proved undeveloped reserves of
approximately 91 Bcfe associated with the Green Canyon 254 (Allegheny)
project, which was sold for $20.5 million and additional interest in nearby
exploration acreage on the Sheba prospect.
 
  Sale of East Texas Properties. On February 25, 1998, EEX announced that it
had entered into an agreement to sell substantially all of its properties in
East Texas and North Louisiana, representing proved reserves of approximately
250 Bcfe of natural gas, for $265 million. The effective date of the sale is
January 1, 1998 with the closing expected in the second quarter of 1998. As a
part of the sale, EEX will retain an obligation to deliver approximately 30
billion cubic feet of natural gas under a long-standing agreement with Encogen
One Partners, Ltd. Proceeds from the sale will be used to fund the previously
announced purchase of additional interests in Indonesia and to provide
additional financial flexibility.
 
PLANT OPERATIONS BUSINESS
 
  EEX provides operation and maintenance services under contract, to three
cogeneration plants: (i) "Encogen One," a 255 megawatt cogeneration facility
located in Sweetwater, Texas, (ii) "Encogen Four," a 62 megawatt cogeneration
facility located in Buffalo, New York and (iii) "Encogen Northwest," a 160
megawatt
 
                                       3
<PAGE>
 
cogeneration facility located in Bellingham, Washington. EEX operates and
maintains the facilities under the terms of operation and maintenance
agreements that provide EEX periodic fees and reimbursement of certain costs.
EEX employs approximately 65 full-time employees in connection with the Plant
Operations Business.
 
SALES INFORMATION
 
  Sales data are set forth under "Selected Operating Data" included in
Appendix A to this report.
 
MAJOR CUSTOMERS
 
  EEX sells its gas under both long- and short-term contracts. EEX markets
most of its gas through third-party gas marketing organizations while
maintaining a small core staff to ensure market prices are received.
 
  EEX sells its oil under contracts that are for one year or less. Prices
generally are based upon field posted prices plus negotiated bonuses.
 
  EEX utilizes futures contracts, commodity price swaps and other financial
instruments to reduce exposure of its oil and gas production to price
volatility. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Oil and Gas Market Volatility" and Note 12 of the
Notes to Consolidated Financial Statements included in Appendix A for
additional information on hedging activities.
 
COMPETITION
 
  All phases of the oil and gas industry are highly competitive. EEX competes
in the acquisition of properties, the search for and development of reserves,
the production and sale of oil and gas and the securing of the labor and
equipment required to conduct operations. EEX's competitors include major oil
and gas companies, other independent oil and gas concerns and individual
producers and operators. Many of these competitors have financial and other
resources that substantially exceed those available to EEX. Oil and gas
producers also compete with other industries that supply energy and fuel.
EEX's success in discovering reserves will depend upon its ability to select
suitable prospects for future exploration in today's competitive environment.
 
GOVERNMENT REGULATION
 
  The oil and gas industry is extensively regulated by federal, state and
local authorities and by governmental agencies of foreign countries.
Legislation affecting the oil and gas industry is under constant review for
amendment or expansion. Numerous departments and agencies, federal, state and
foreign, have issued rules and regulations binding on the oil and gas industry
and its individual members, some of which carry substantial penalties for the
failure to comply. Inasmuch as such laws and regulations are frequently
amended, reinterpreted or expanded, EEX is unable to predict the future cost
or impact of complying with such laws and regulations.
 
REGULATION OF OIL AND NATURAL GAS EXPLORATION AND PRODUCTION
 
  The Texas Railroad Commission regulates the production of oil and gas by EEX
in Texas. Similar regulations are in effect in all states in which EEX
explores for and produces oil and gas, and in foreign countries where EEX has
operations. Such regulations include requiring permits for the drilling of
wells, maintaining bonding requirements in order to drill or operate wells,
and regulating the location of wells, the method of drilling and casing wells,
the surface use and restoration of properties upon which wells are drilling
and the plugging and abandonment of wells. EEX's operations are also subject
to various conservation laws and regulations. These include the regulation of
the size of drilling and spacing units or proration units and the density of
wells which may be drilled and unitization or pooling of oil and gas
properties. In this regard, some states allow the forced pooling or
integration of tracts to facilitate exploration while other states rely on
voluntary pooling of lands and leases. In addition, state conservation laws
establish maximum rates of production requirements regarding the ratability of
production.
 
                                       4
<PAGE>
 
ENVIRONMENTAL MATTERS
 
  Oil and gas operations are subject to extensive federal, state and local
laws and regulations dealing with environmental protection, including, but not
limited to, the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), also known as "Superfund," and similar state
statutes. Foreign countries also have environmental regulations affecting oil
and gas operations.
 
  With respect to federal leases, EEX's operations are subject to interruption
or termination by governmental authorities on account of environmental and
other considerations. Regulations of the Department of the Interior currently
impose absolute liability upon the lessee under a federal lease for the costs
to clean-up pollution resulting from a lessee's operations, and such lessee
may also be subject to possible legal liability for pollution damages. EEX
maintains insurance against costs of clean-up operations, but is not fully
insured against all such risks. A serious incident of pollution may result in
the Department of the Interior requiring lessees under federal leases to
suspend or cease operation in the affected area. With respect to any EEX
operations conducted on offshore federal leases, liability may generally be
imposed under the Outer Continental Shelf Lands Act for costs of clean-up and
damages caused by pollution resulting from such operations, other than damages
caused by acts of war or the negligence of third parties.
 
  EEX's onshore operations are subject to numerous United States federal,
state and local laws and regulations controlling the discharge of materials
into the environment or otherwise relating to the protection of the
environment, including CERCLA. These regulations, among other things, impose
absolute liability on the lessee under a lease for the cost of clean-up of
pollution resulting from a lessee's operations, subject the lessee to
liability for pollution damages, may require suspension or cessation of
operations in affected areas and impose restrictions on the injection of
liquids into subsurface aquifers that may contaminate groundwater. Persons who
are or were responsible for releases of hazardous substances under CERCLA may
be subject to joint and several liability for the remediation and clean-up
costs and for damages to natural resources.
 
  The Texas Natural Resource Conservation Commission has named EEX a
potentially responsible party ("PRP"), under a state-equivalent of CERCLA, for
the cleanup of the McBay State Oil & Gas site, a former waste oil reclamation
plant that operated in Grapeland, Texas from 1959 until 1987. EEX and 21 other
PRPs have entered into an agreement to conduct a waste removal action at the
site. The waste removal is expected to cost less than $500,000. Based upon the
Company's estimated contribution of less than 1% of the waste contained at the
site, EEX's exposure is not expected to exceed $5,000. However, because
liability for cleanup under Superfund statutes is joint and several, it is
possible that EEX would be required to bear the entire costs of cleanup.
Because a number of parties have indicated they will share the costs, the
imposition of the full liability on EEX is deemed remote.
 
  The Oil Pollution Act of 1990 and regulations thereunder impose a variety of
regulations on "responsible parties" (which includes owners and operators of
offshore facilities) related to the prevention of oil spills and liability for
damages resulting from such spills in the United States waters. In addition,
it imposes ongoing requirements on responsible parties, including proof of
financial responsibility to cover at least some costs in a potential spill.
The Coastal Zone Management Act authorizes state implementation and
development of programs containing management measures for the control of
nonpoint source pollution to restore and protect coastal waters.
 
  The operations of EEX are also subject to the Clean Water Act and the Clean
Air Act, as amended, and comparable state statutes. EEX may be required to
incur certain capital expenditures over the next five to ten years for
pollution control equipment. The Company's operations may generate or
transport both hazardous and nonhazardous solid wastes that are subject to the
requirements of the Resource Conservation and Recovery Act and comparable
state statutes and regulations.
 
                                       5
<PAGE>
 
REGULATION OF OFFSHORE OPERATIONS
 
  Lessees must obtain the approval of the Minerals Management Service ("MMS"),
a federal agency, and various other federal and state agencies' approval for
exploration, development and production plans prior to the commencement of
offshore operations. Similarly, the MMS has promulgated other regulations
governing the plugging and abandoning of wells located offshore and the
removal of all production facilities. Under certain circumstances, including
but not limited to, conditions deemed to be a threat or harm to the
environment, the MMS may also require any EEX operation on federal leases to
be suspended or terminated in the affected area.
 
NATURAL GAS MARKETING AND TRANSPORTATION
 
  Although maximum selling prices of natural gas were formerly regulated, the
Natural Gas Wellhead Decontrol Act of 1989 ("Decontrol Act") terminated
wellhead price controls on all domestic natural gas on January 1, 1993, and
amended the Natural Gas Policy Act of 1978 to remove completely by January 1,
1993 price and nonprice controls for all "first sales" of natural gas, which
will include all sales by EEX of its own production. Consequently, sales of
EEX's natural gas currently may be made at market prices, subject to
applicable contract provisions. The FERC's jurisdiction over natural gas
transportation was unaffected by the Decontrol Act.
 
  The Federal Energy Regulatory Commission (the "FERC") regulates interstate
natural gas transportation rates and service conditions, which affect the
marketing of natural gas produced by EEX, as well as the revenues received by
EEX for sales of such natural gas. Since the latter part of 1985, the FERC has
endeavored to make interstate natural gas transportation more accessible to
gas buyers and sellers on an open and nondiscriminatory basis. The FERC's
efforts have significantly altered the marketing and pricing of natural gas.
Commencing in April 1992, the FERC issued Order Nos. 636, 636-A and 636-B
(collectively, "Order No. 636"), which, among other things, require interstate
pipelines to "restructure" to provide transportation separate or "unbundled"
from the pipelines' sales of gas. Also, Order No. 636 requires pipelines to
provide open-access transportation on a basis that is equal for all gas
supplies.
 
  Additional proposals and proceedings that might affect the natural gas
industry are considered from time to time by Congress, the FERC, state
regulatory bodies and the courts. EEX cannot predict when or if any such
proposals might become effective, or their effect, if any, on EEX'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. State regulation of gathering facilities generally includes
various transportation, safety, environmental, and nondiscriminatory purchase
and nondiscriminatory purchase and transport requirements, but does not
generally entail rate regulation.
 
  In the aggregate, compliance with federal and state rules and regulations is
not expected to have a material adverse effect on EEX's operations.
 
EMPLOYEES
 
  At January 1, 1998, EEX had 420 full-time employees, 355 of which were
involved principally with oil and gas operations. The remainder were involved
with cogeneration operations.
 
OFFICES
 
  The principal offices of EEX are located at 2500 CityWest Blvd., Suite 1400,
Houston, Texas 77042, and its telephone number is (713) 243-3100. Production
offices are maintained in Dallas, Houston, and Athens, Texas. Cogeneration
offices are maintained in Sweetwater, Texas, Buffalo, New York and Bellingham,
Washington.
 
 
                                       6
<PAGE>
 
FORWARD LOOKING STATEMENTS--UNCERTAINTIES AND RISKS
 
  Certain statements in this report, including statements of EEX's and
management's expectations, intentions, plans and beliefs, including those
contained in or implied by "Business," "Properties," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the Notes
to Consolidated Financial Statements, are "forward-looking statements," within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
that are subject to certain events, risks and uncertainties that may be
outside EEX's control. These forward-looking statements include statements of
management's plans and objectives for EEX's future operations and statements
of future economic performance; information regarding drilling schedules,
expected or planned production, future production levels of international and
domestic fields, EEX's capital budget and future capital requirements, EEX's
meeting its future capital needs, the level of future expenditures for
environmental costs and the outcome of regulatory and litigation matters; and
the assumptions described in this report underlying such forward-looking
statements. Actual results and developments could differ materially from those
expressed in or implied by such statements due to a number of factors,
including, without limitation, those described in the context of such forward-
looking statements and the risk factors set forth below and described from
time to time in EEX's other documents and reports filed with the Securities
and Exchange Commission.
 
  Exploration Risk. Exploration for oil and gas in the deepwater Gulf of
Mexico and unexplored frontier areas have inherent and historically high risk.
As described in this report, EEX is selling its onshore producing properties
and will focus on exploration opportunities in offshore and international
areas which will increase associated risk. Future reserve increases and
production will be dependent on EEX's success in these exploration efforts and
no assurances can be given of such success.
 
  Estimating Reserves and Future Net Cash Flows. Uncertainties are inherent in
estimating quantities and values of reserves and in projecting rates of
production, net revenues and the timing of development expenditures. The
reserve data represent estimates only of the recovery of hydrocarbons from
underground accumulations and are often different from the quantities
ultimately recovered. Any downward adjustment in reserve estimates could
adversely affect EEX.
 
  Operational Risks and Hazards. EEX's operations are subject to the risks and
uncertainties associated with finding, acquiring and developing oil and gas
properties, and producing, transporting and selling oil and gas. Operations
may be materially curtailed, delayed or canceled as a result of numerous
factors, such as accidents, weather conditions, compliance with governmental
requirements and shortages or delays in the delivery of equipment. Drilling
may involve unprofitable efforts, not only with respect to dry wells, but also
with respect to wells that are productive but do not produce sufficient net
revenues to return a profit after drilling, operating and other costs. Various
field operating hazards such as fires, explosions, blow-outs, equipment
failures, abnormally pressured formations and environmental accidents may
adversely affect production from successful wells. EEX's ability to sell its
oil and gas production is dependent on the availability and capacity of
gathering systems, pipelines and other forms of transportation.
 
  Offshore Risks. EEX's offshore Gulf of Mexico oil and gas reserves include
properties located in water depths of 20 to in excess of 7,000 feet where
operations are by their nature more difficult than drilling operations
conducted on land in established producing areas. Deepwater drilling and
operations require the application of more advanced technologies that involve
a higher risk of mechanical failure and can result in significantly higher
drilling and operating costs. Furthermore, offshore operations require a
significant amount of time between the time of discovery and the time the gas
or oil is actually marketed, increasing the market risk involved with such
operations.
 
  Volatility of Oil and Gas Markets. EEX's operations are highly dependent
upon the prices of, and demand for, oil and gas. These prices have been, and
are likely to continue to be, volatile. Prices are subject to fluctuations in
response to a variety of factors that are beyond the control of EEX, such as
worldwide economic and political conditions as they affect actions of OPEC and
Middle East and other producing countries, and the
 
                                       7
<PAGE>
 
price and availability of alternative fuels. EEX's hedging activities with
respect to some of its projected oil and gas production, which are designed to
protect against price declines, may prevent EEX from realizing the benefits of
price increases above the levels of the hedges and protect it from incurring
the detriments of price decreases below the level of hedges. Because the
majority of EEX's reserve base is natural gas on an energy equivalent basis,
it is more sensitive to fluctuations in the price of natural gas.
 
  Government Regulation. EEX's business is subject to certain federal, state
and local laws and regulations relating to the drilling for the production of
oil and gas, as well as environmental and safety matters. See "Business--
Government Regulation."
 
  International Operations. EEX's interests in countries outside the United
States are subject to the various risks inherent in foreign operations. These
risks may include, among other things, currency restrictions and exchange rate
fluctuations, loss of revenue, property and equipment as a result of
expropriation, nationalization, war, insurrection and other political risks,
risks of increases in taxes and governmental royalties, renegotiation of
contracts with governmental entities, changes in laws and policies governing
operations of foreign-based companies and other uncertainties arising out of
foreign government sovereignty over the Company's international operations.
The Company's international operations may also be adversely affected by laws
and policies of the United States affecting foreign trade, taxation and
investment. In addition, in the event of a dispute arising from foreign
operations, the Company may be subject to the exclusive jurisdiction of
foreign courts or may not be successful in subjecting foreign persons to the
jurisdiction of the courts of the United States.
 
ITEM 2. PROPERTIES
 
  EEX's domestic activities were focused in four regions in 1997: the Gulf of
Mexico; East Texas; the Gulf Coast Region of Texas, Louisiana, Mississippi and
Alabama; and other onshore areas. The following table sets forth estimated net
proved reserves of EEX by region, as estimated by Netherland, Sewell &
Associates, Inc., at January 1, 1998:
 
<TABLE>
<CAPTION>
                                                                 OIL
                                                      NATURAL  AND GAS
                                                        GAS    LIQUIDS  TOTAL
       REGION                                         (BCF)*  (MMBBLS)* BCFE*
       ------                                         ------- --------- -----
   <S>                                                <C>     <C>       <C>
   Gulf of Mexico....................................   58.4     4.5     85.2
   East Texas........................................  212.5     1.4    221.0(a)
   Gulf Coast........................................  143.2     3.3    163.1
   Other onshore.....................................   46.1     8.9     99.5
                                                       -----    ----    -----
       Total Domestic................................  460.2    18.1    568.8
   International.....................................    --      5.7     34.4
                                                       -----    ----    -----
       Total.........................................  460.2    23.8    603.2
                                                       =====    ====    =====
</TABLE>
--------
 * Bcf--Billion cubic feet.
   MMBbls--Million barrels.
   Bcfe--Billion cubic feet of gas equivalent.
(a) Net of approximately 30 Bcf related to obligation to Encogen One Partners,
    Ltd.
 
  See Note 17 of the Notes to Consolidated Financial Statements included in
Appendix A to this report for additional information on oil and gas reserves.
 
  During 1997, EEX filed Form EIA-23 with the Department of Energy reflecting
reserve estimates for the year 1996. Such reserve estimates were not
materially different from the 1996 reserve estimates reported in Note 17 of
the Notes to Consolidated Financial Statements included in Appendix A to this
report.
 
 
                                       8
<PAGE>
 
  Developed and undeveloped lease acreage as of December 31, 1997, are set
forth below:
 
<TABLE>
<CAPTION>
                                             DEVELOPED ACRES  UNDEVELOPED ACRES
                                             --------------- -------------------
                                              GROSS   NET(1)   GROSS     NET(1)
                                             ------- ------- --------- ---------
   <S>                                       <C>     <C>     <C>       <C>
   Domestic
     Offshore............................... 163,814  38,809   892,960   365,144
     Onshore................................ 318,950 177,180   519,908   340,276
                                             ------- ------- --------- ---------
       Total................................ 482,764 215,989 1,412,868   705,420
   International............................   5,000   5,000 3,436,895 1,182,727
                                             ------- ------- --------- ---------
       Total................................ 487,764 220,989 4,849,763 1,888,147
                                             ======= ======= ========= =========
</TABLE>
--------
(1) Represents the proportionate interest of EEX in the gross acres under
    lease.
 
  EEX purchased about 47,000 net acres in 18 blocks in the Gulf of Mexico in
1997. EEX's Gulf of Mexico holdings at year end totaled some 365,000 net
acres, with 201,000 net acres in U.S. Continental Shelf properties and 164,000
net acres in deep water blocks, with a total average gross working interest of
35.44% in leases covering 233 blocks. EEX operates 148 of the leases. EEX also
canceled or allowed to expire 13 Gulf of Mexico leases and sold its interest
in another eight during the year, which were condemned following either
drilling on or near them or after geophysical and geological findings.
 
  EEX plans further drilling on undeveloped acreage but at this time cannot
specify the extent of the drilling or predict how successful it will be in
establishing commercial reserves sufficient to justify retention of the
acreage. The primary terms under which the undeveloped acreage can be retained
by the payment of delay rentals without the establishment of oil and gas
reserves expire as follows:
 
<TABLE>
<CAPTION>
                                                 UNDEVELOPED ACRES EXPIRING
                                             -----------------------------------
                                                DOMESTIC        INTERNATIONAL
                                             --------------- -------------------
                                              GROSS    NET     GROSS      NET
                                             ------- ------- --------- ---------
   <S>                                       <C>     <C>     <C>       <C>
   1998..................................... 254,316 126,976   188,014    70,013
   1999..................................... 268,445 134,030
   2000 and later........................... 890,107 444,414 3,248,881 1,112,714
</TABLE>
 
  Drilling rights with regard to a portion of the undeveloped acreage may be
allowed to expire before the expiration of primary terms specified in this
schedule by non-payment of delay rentals.
 
  At December 31, 1997, EEX owned interests in 1,587 gas wells (923 net) and
1,643 oil wells (348 net) in the United States and 9 oil wells (1.125 net) in
Indonesia. Of these, 72 gas wells (51.7 net) and 2 oil wells (.7 net) were
dual completions in single boreholes.
 
                                       9
<PAGE>
 
  Drilling activity during the three years ended December 31, 1997, is set
forth below:
 
<TABLE>
<CAPTION>
                                                   1997       1996       1995
                                                ---------- ---------- ----------
                                                GROSS NET  GROSS NET  GROSS NET
                                                ----- ---- ----- ---- ----- ----
   <S>                                          <C>   <C>  <C>   <C>  <C>   <C>
   Exploratory Wells:
     Productive................................   32  11.3   42  30.0   38  24.6
     Dry.......................................   19   8.7   32  20.7   47  26.8
                                                 ---  ----  ---  ----  ---  ----
       Total...................................   51  20.0   74  50.7   85  51.4
                                                 ===  ====  ===  ====  ===  ====
   Development Wells:
     Productive................................   75  33.2   82  54.3   41  26.4
     Dry.......................................    9   3.8    5   4.0    6   3.5
                                                 ---  ----  ---  ----  ---  ----
       Total...................................   84  37.0   87  58.3   47  29.9
                                                 ===  ====  ===  ====  ===  ====
</TABLE>
 
Note: Productive wells are either producing wells or wells capable of
    commercial production, although currently shut-in. The term "gross" refers
    to the wells in which a working interest is owned, and the term "net"
    refers to gross wells multiplied by the percentage of EEX's working
    interest owned therein.
 
  At December 31, 1997, EEX was participating in 44 wells (26 net), which were
either being drilled or in some stage of completion.
 
  The number of wells drilled is not a significant measure or indicator of the
relative success or value of a drilling program because the significance of
the reserves and economic potential may vary widely for each project. It is
also important to recognize that reported completions may not necessarily
correspond to capital expenditures, since Securities and Exchange Commission
(SEC) guidelines do not allow a well to be reported as completed until it is
ready for production. In the case of offshore wells, this may be several years
following initial drilling because of the timing of construction of platforms,
pipelines and other necessary facilities.
 
  Additional information relating to the oil and gas activities of EEX is set
forth in Note 17 of the Notes to Consolidated Financial Statements included in
Appendix A to this report.
 
  EEX leases approximately 169,000 square feet of office space for its offices
in Dallas and Houston, Texas, under leases expiring in December 1998 and
September 2002.
 
ITEM 3. LEGAL PROCEEDINGS
 
  EEX is a party to lawsuits arising in the ordinary course of its business.
EEX believes, based on its current knowledge and the advice of counsel, that
all lawsuits and claims would not have a material adverse effect on its
financial condition.
 
  The Texas Natural Resource Conservation Commission has named EEX a
potentially responsible party ("PRP"), under a state-equivalent of CERCLA, for
the cleanup of the McBay State Oil & Gas site, a former waste oil reclamation
plant that operated in Grapeland, Texas from 1959 until 1987. EEX and 21 other
PRP's have entered into an agreement to conduct a waste removal action at the
site. The waste removal is expected to cost less than $500,000. Based upon the
Company's estimated contribution of less than 1% of the waste contained at the
site, EEX's exposure is not expected to exceed $5,000. However, because
liability for cleanup under Superfund statutes is joint and several, it is
possible that EEX would be required to bear the entire cost of cleanup.
Because a number of parties have indicated they will share the costs, the
imposition of the full liability on EEX is deemed remote.
 
  A lawsuit described in EEX's Form 10-Q for the quarter ended September 30,
1997, concerning a claim of anticipatory breach of a rig contract, was settled
during the fourth quarter of 1997 resulting in a rig sharing arrangement that
continues EEX's use of the rig.
 
                                      10
<PAGE>
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
  At a special meeting of shareholders held on December 19, 1997, the
shareholders approved changing the name of the Company to "EEX Corporation."
Listed below is the result of the vote.
 
<TABLE>
<CAPTION>
           SHARES                     SHARES VOTED                                  SHARES
         VOTED "FOR"                   "AGAINST"                                 "ABSTAINING"
         -----------                  ------------                               ------------
         <S>                          <C>                                        <C>
         110,208,997                   2,778,998                                   357,744
</TABLE>
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
  The Company's common stock is traded principally on the New York Stock
Exchange. The following table shows the high and low sales prices per share of
the common stock of the Company reported in the New York Stock Exchange--
Composite Transactions report for the periods shown as quoted in the Wall
Street Journal.
 
<TABLE>
<CAPTION>
                                                   1997              1996
                                                 -------------     -----------
                                                 HIGH      LOW     HIGH    LOW
                                                 ----      ---     ----    ---
   <S>                                           <C>       <C>     <C>     <C>
   First Quarter................................ $12 1/4   $8 5/8  $12     $ 9
   Second Quarter...............................  11 1/4    7 3/4  11 3/8   9 5/8
   Third Quarter................................  11 13/16  7 5/16 11 1/2   8 1/4
   Fourth Quarter...............................   9 3/4     8     11 7/8   8 7/8
</TABLE>
 
  At March 12, 1997, EEX had 127,067,427 outstanding shares of Common Stock
held by 15,968 shareholders of record.
 
  There were no dividends declared on the Company's common stock in 1997 or
1996. The declaration of future dividends will be dependent upon business
conditions, earnings, cash requirements and other relevant factors.
 
ITEM 6. SELECTED FINANCIAL DATA
 
  The information required hereunder is set forth under "Selected Financial
Data" included in Appendix A to this report.
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
 
  The information required hereunder is set forth under "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in Appendix A to this report.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
  The information required hereunder is set forth under "Report of Independent
Auditors," "Management Report on Responsibility for Financial Reporting,"
"Statements of Consolidated Operations," "Statements of Consolidated Cash
Flows," "Consolidated Balance Sheets," "Statements of Consolidated
Shareholders' Equity," "Notes to Consolidated Financial Statements" and
"Quarterly Results" included in Appendix A to this report.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
  Information concerning Registrant's change of accountants was previously
reported in Current Report on Form 8-K dated September 25, 1997.
 
                                      11
<PAGE>
 
                                   PART III
 
ITEMS 10-13.
 
  Pursuant to Instruction G(3) to Form 10K, the information required in Items
10-13 is incorporated by reference from EEX's definitive proxy statement filed
pursuant to Regulation 14A.
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
 
(A)-1 FINANCIAL STATEMENTS
 
  The following items appear in the Financial Information section included in
Appendix A to this report:
 
<TABLE>
<CAPTION>
             ITEM                                                           PAGE
             ----                                                           ----
   <S>                                                                      <C>
   Selected Financial Data.................................................  A-2
   Selected Operating Data.................................................  A-3
   Management's Discussion and Analysis of Finanacial
    Condition and Results of Operations....................................  A-4
   Report of Independent Auditors.......................................... A-12
   Management Report on Responsibility for Financial Reporting............. A-13
   Financial Statements:
     Statements of Consolidated Operations................................. A-14
     Statements of Consolidated Cash Flows................................. A-15
     Consolidated Balance Sheets........................................... A-16
     Statements of Consolidated Shareholders' Equity....................... A-17
     Notes to Consolidated Financial Statements............................ A-18
   Quarterly Results....................................................... A-37
</TABLE>
 
(A)-2 FINANCIAL STATEMENT SCHEDULES
 
  The consolidated financial statement schedules are omitted because of the
absence of the conditions under which they are required or because the
required information is included in the consolidated financial statements or
notes thereto.
 
(A)-3 EXHIBITS
3.1 Restated Articles of Incorporation of the Registrant as currently in
    effect. (1)
3.2 Bylaws of the Registrant as currently in effect. (1)
4.1 Form of Common Stock Certificate incorporated by reference to Exhibit
    4.1 to the Registration Statement of Old EEI on Form S-4 (No. 33-
    56792). (2)
4.2 Rights Agreement dated as of September 10, 1996, between the
    Registrant's (formerly Lone Star Energy Plant Operations) and Harris
    Trust Company of New York as Rights Agent, incorporated by reference to
    Exhibit 10.21 to the Registrant's Registration Statement on Form S-4
    (No. 333-13241). (2)
4.3 Amended and Restricted Preferred Stock Subscription Agreement dated
    October 27, 1997 and effective as of September 29, 1997, among EEX
    Capital Inc., and UBS Securities LLC, as Placement Agent for the
    Holders from time to time of the Preferred Stock and EEI (not an
    issuer), incorporated by reference to Exhibit 4.3 to Registrant's Form
    10-Q for the Quarter Ended September 30, 1997. (2)
4.4 Amended and Restated Certificate of Designations, Preferences and
    Relative, Participating, Optional and Other Special Rights of Preferred
    Stock and Qualifications, Limitations and Restrictions thereof of Class
    A Cumulative Perpetual Increasing Dividend Preferred Stock of EEX
    Capital Inc., incorporated by reference to Exhibit 4.4 to Registrant's
    Quarterly Report on Form 10-Q for the Quarter ended September 30,1997.
    (2)
 
                                      12
<PAGE>
 
 
4.5   $150,000,000 Subordinated Note made by EEX in favor of EEX Capital,
      Inc., incorporated by reference to Exhibit 4.5 to Registrant's Form 10-
      Q for the Quarter Ended September 30, 1997. (2)
10.1  PRODUCTION SYSTEM LEASE AGREEMENT (1996-A) dated as of November 15,
      1996 among WILMINGTON TRUST COMPANY, not in its individual capacity but
      solely as Corporate Grantor Trustee under the Trust Agreement, and
      THOMAS P. LASKARIS, not in his individual capacity but solely as
      Individual Grantor Trustee under the Trust Agreement, Lessor and
      ENSERCH EXPLORATION, INC., Lessee. (1)
10.2  PRODUCTION SYSTEM LEASE AGREEMENT (1996-B) dated as of November 15,
      1996 among WILMINGTON TRUST COMPANY, not in its individual capacity but
      solely as Corporate Grantor Trustee under the Trust Agreement, and
      THOMAS P. LASKARIS, not in his individual capacity but solely as
      Individual Grantor Trustee under the Trust Agreement, Lessor and
      ENSERCH EXPLORATION, INC., Lessee. (1)
10.3  Participation Agreement between EP Operating Limited Partnership and
      Mobil Producing Texas and New Mexico Inc. incorporated by reference to
      Exhibit 10.6 to the Registration Statement of Old EEI on Form S-4 (No.
      33-56792). (2)
10.4  Stock Purchase Agreement, dated as of April 12, 1995, by and between
      PG&E Enterprises, as Seller and Old EEI, as Buyer, incorporated
      by reference to Exhibit 10 to ENSERCH's Current Report on Form 8-K dated
      May 26, 1995. (2)
10.5  Credit Agreement, dated as of May 1, 1995, among Registrant as
      Borrower, Texas Commerce Bank National Association, as Administrative
      Agent, The Chase Manhattan Bank, N.A., as Syndication Agent, Chemical
      Bank, as Auction Agent, and The Lenders now or hereafter Parties hereto,
      amended by First Amendment dated September 16, 1996, Second Amendment
      dated June 27, 1997, Third Amendment, dated September 25, 1997, and
      Fourth Amendment dated December 15, 1997. (1)
10.6  Tax Sharing Agreement, dated as of January 1, 1995, between ENSERCH and
      Old EEI, incorporated by reference to Exhibit 10.21 to the Registration
      Statement of Old EEI on Form S-2 (No. 33-60461).(2)
10.7  Tax Allocation Agreement among ENSERCH, the Registrant and Texas
      Utilities Company incorporated by reference to Annex A-3 to the
      Agreement and Plan of Merger filed as Exhibit 2 to the Registrant's
      Registration Statement on Form S-4 (No. 333-13241). (2)
10.8  Tax Assurance Agreement between ENSERCH and the Registrant incorporated
      by reference to Annex A-4 to the Agreement and Plan of Merger filed as
      Exhibit 2 to the Registrant's Registration Statement on Form S-4 (No.
      333-13241). (2)
10.9  Purchase and Sale Agreement, dated February 12, 1998, between EEX
      Operating L.P. and Registrant as Seller and Cross Timbers Oil Company,
      as Buyer. (1)
10.10 Exploration and Participation Agreement, dated June 20, 1997, by and
      between Old EEI and Enterprise Oil Gulf of Mexico, Inc. (1)

EXECUTIVE COMPENSATION
(EXHIBITS 10.11 THROUGH 10.15)

10.11 Enserch Exploration, Inc. Revised and Amended 1996 Stock Incentive Plan
      incorporated by reference to Annex A-2 to the Agreement and plan of
      Merger filed as Exhibit 2 to the Company's Registration Statement on
      Form S-4 (No. 333-13241). (2)
10.12 The Registrant's Deferred Compensation Plan effective as of July 1,
      1997, incorporated by reference to Exhibit 10.12 to Registrant's
      Quarterly Report on Form 10-Q for the quarter ended September 30, 1997.
      (2)
10.13 Deferred Compensation Trust, effective as of July 1, 1997, incorporated
      by reference to Exhibit 10.13 to Registrant's Quarterly Report on Form
      10-Q for the quarter ended September 30, 1997. (2)
10.14 Form of Change of Control Agreement executed by certain executive
      officers of the Company, filed as Exhibit 10.20 to the Annual Report on
      Form 10-K for the year ended December 31, 1996 of Old EEX. (2)
 
                                      13
<PAGE>
 
10.15 Form of Employment Agreement executed by certain executive officers of
      the Registrant, incorporated by reference to Exhibit 10.20 to the
      Annual Report on Form 10-K for the year ended December 31, 1996 of Old
      EEI. (2)
21    Subsidiaries of the Registrant. (1)
23.1  Consent of Ernst & Young LLP, including consent to incorporation by
      reference in Registration Statements on Form S-8 (No. 333-24595 and No.
      333-41979). (1)
23.2  Consent of Netherland, Sewell & Associates, Inc. (1)
23.3  Consent of DeGoyler & MacNaughton. (1)
27.1  Financial Data Schedule--December 31, 1997. (1)
27.2  Financial Data Schedules--September 30, 1997; June 30, 1997; March 31,
      1997; and December 31, 1996. (1)
27.3  Financial Data Schedules--September 30, 1996; June 30, 1996; March 31,
      1996; December 31, 1995; and December 31, 1994. (1)
--------
  Long-term debt is described in the Notes to Consolidated Financial
Statements included in Appendix A to this report. EEX agrees to provide the
Commission, upon request, copies of instruments defining the rights of holders
of such long-term debt, which instruments are not filed herewith pursuant to
Paragraph (b)(4)(iii)(A) of Item 601 of Regulation S-K.
 
(1) Filed herewith.
 
(2) Incorporated by reference.
 
(B) REPORTS ON FORM 8-K
 
  Current Report on Form 8-K dated October 15, 1997, was filed on October 16,
1997 (third quarter 1997 results of operations), Current Report on Form 8-K
dated December 16, 1997, was filed on December 17, 1997 (announcement of
successful deepwater discovery) and Current Report on Form 8-K dated December
19, 1997 was filed on December 22, 1997 (result of vote on proposal at Special
Meeting of Shareholders held on December 19, 1997).
 
                                      14
<PAGE>
 
                                  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:
 
                                          EEX Corporation
 
                                          By:      /s/ T. M Hamilton
                                             ----------------------------------
                                                     T. M Hamilton,
                                                 Chairman and President
March 17, 1998
 
  Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
 
              SIGNATURE                                   DATE
 
By:      /s/ T. M Hamilton
                                                  March 17, 1998
  ----------------------------------
     T. M Hamilton Chairman and
 President, Chief Executive Officer
 
        /s/ R. S. Langdon
  ----------------------------------              March 17, 1998
    R. S. Langdon Executive Vice
       President, Finance and
   Administration, Chief Financial
               Officer
 
        /s/ R. E. Schmitz
                                                  March 17, 1998
  ----------------------------------
  R. E. Schmitz Vice President and
             Controller
 
         /s/ F. S. Addy
  ----------------------------------              March 17, 1998
             F. S. Addy
              Director
 
   /s/ B. A. Bridgewater, Jr.
  ----------------------------------              March 17, 1998
   B. A. Bridgewater, Jr. Director
 
        /s/ F. M. Lowther
  ----------------------------------              March 17, 1998
       F. M. Lowther Director
 
        /s/ M. P. Mallardi
  ----------------------------------              March 17, 1998
       M. P. Mallardi Director
 
                                      15
<PAGE>
 
                                                                      APPENDIX A
 
                                EEX CORPORATION
 
                         INDEX TO FINANCIAL INFORMATION
                               DECEMBER 31, 1997
 
<TABLE>
<CAPTION>
                                                                            PAGE
                                                                            ----
<S>                                                                         <C>
Selected Financial Data...................................................   A-2
Selected Operating Data...................................................   A-3
Management's Discussion and Analysis of Financial Condition and Results of
 Operations...............................................................   A-4
Report of Independent Auditors............................................  A-12
Management Report on Responsibility for Financial Reporting...............  A-13
Financial Statements:
  Statements of Consolidated Operations...................................  A-14
  Statements of Consolidated Cash Flows...................................  A-15
  Consolidated Balance Sheets.............................................  A-16
  Statements of Consolidated Shareholders' Equity.........................  A-17
  Notes to Consolidated Financial Statements..............................  A-18
Quarterly Results.........................................................  A-37
</TABLE>
 
                                      A-1
<PAGE>
 
                                EEX CORPORATION
 
                            SELECTED FINANCIAL DATA
                        (RESTATED, SEE NOTE (A) BELOW)
 
  The financial data as of and for the years ended December 31, 1993 through
1997 were derived from the audited consolidated financial statements of the
Company and should be read in connection with the consolidated financial
statements and related notes included elsewhere herein.
 
<TABLE>
<CAPTION>
                                AS OF OR FOR YEAR ENDED DECEMBER 31,
                         -------------------------------------------------------
                           1997        1996      1995(b)      1994       1993
                         ---------  ----------  ----------  ---------  ---------
                              (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                      <C>        <C>         <C>         <C>        <C>
INCOME STATEMENT DATA
 Revenues............... $ 314,213  $  338,146  $  237,358  $ 191,866  $ 200,458
                         =========  ==========  ==========  =========  =========
 Net (Loss)............. $(216,103) $  (36,801) $  (42,585) $ (50,733) $ (24,193)
                         =========  ==========  ==========  =========  =========
 Pro forma
  information--Change
  in tax status(c)
  (Loss) before income
   taxes................                                    $ (50,477) $ (26,857)
  Income taxes
   (benefit)............                                      (17,591)    (9,295)
                                                            ---------  ---------
 Net (Loss).............                                    $ (32,886) $ (17,562)
                                                            =========  =========
 Basic and Diluted Net
  (Loss) per Share (pro
  forma for
  years prior to
  1995)(d).............. $   (1.71) $    (0.29) $    (0.38) $   (0.31) $   (0.16)
                         =========  ==========  ==========  =========  =========
BALANCE SHEET DATA
 Total Assets........... $ 807,789  $1,195,454  $1,180,238  $ 812,871  $ 624,383
                         =========  ==========  ==========  =========  =========
CAPITAL STRUCTURE
 Short term borrowings.. $   5,000
 Capital lease
  obligations...........   241,735  $  244,985  $   98,043  $ 155,855
 Long--term debt........    25,000     115,000     160,000             $ 298,000
 Company--obligated
  mandatorily
  redeemable preferred
  securities of
  subsidiary............               150,000     150,000
 Minority interests in
  preferred stock of
  subsidiary............   100,000
 Owners' equity.........   274,663     490,406     525,992    364,828    311,423
                         ---------  ----------  ----------  ---------  ---------
   Total................ $ 646,398  $1,000,391  $  934,035  $ 520,683  $ 609,423
                         =========  ==========  ==========  =========  =========
</TABLE>
--------
(a) The consolidated financial statements for periods prior to 1997 have been
    restated for a merger with a company under common control and for a change
    to the successful efforts method of accounting. See Notes 1 and 3 of Notes
    to Consolidated Financial Statements for further information.
 
(b) 1995 includes results of Dalen Corporation since acquisition on June 8,
    1995.
 
(c) Prior to December 30, 1994, the operations of EEX were conducted through
    Enserch Exploration Partners, Ltd., a partnership. Pro forma net (loss)
    and per share data for periods prior to 1995 include a pro forma provision
    for income taxes on partnership operations based on the applicable federal
    statutory rate.
(d) The per share amounts for periods prior to 1997 have been restated as
    required to comply with Statement of Financial Standards No. 128 "Earnings
    Per Share". See Note 2 of Notes to Consolidated Financial Statements for
    further information.
 
                                      A-2
<PAGE>
 
                                EEX CORPORATION
 
                            SELECTED OPERATING DATA
 
<TABLE>
<CAPTION>
                                         AS OF OR FOR YEAR ENDED DECEMBER 31,
                                       -----------------------------------------
                                        1997    1996     1995    1994     1993
                                       ------ -------- -------- ------- --------
                                        (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S>                                    <C>    <C>      <C>      <C>     <C>
Sales volume
  Natural gas (Bcf)..................    84.5    100.5     90.2    67.1     70.0
  Oil and condensate (MMBbls)........     4.7      5.1      3.4     2.0      2.1
  Natural gas liquids (MMBbls).......      .7       .6       .5      .2       .3
    Total volumes (Bcfe)(a)..........   116.9    135.0    113.4    80.5     84.9
Average sales price
  Natural gas (per Mcf)..............  $ 2.36 $   2.17 $   1.74 $  2.15 $   2.09
  Oil and condensate (per Bbl).......   19.19    19.40    16.86   15.38    17.24
  Natural gas liquids (per Bbl)......   13.80    12.27     9.38   10.85    12.09
    Total (per Mcfe)(a)..............    2.57     2.40     1.93    2.21     2.21
Costs and expenses (per Mcfe)(a)(b)
  Production and operating(c)........  $  .42 $    .52 $    .44 $   .39 $    .37
  Exploration........................     .60      .69      .68     .77      .43
  Depreciation and amortization......    1.24     1.26      .99     .88      .58
  General, administrative and other..     .24      .26      .26     .25      .35
  Taxes, other than income...........     .15      .16      .17     .16      .19
Net Wells
  Drilled............................      57      109       81      74       79
  Productive.........................      44       84       51      44       64
Proved Reserve Data (at year end)
  Natural Gas (Bcf)..................   460.2  1,216.2  1,362.8 1,041.7  1,086.5
  Oil and condensate (MMBbls)(d).....    23.8     59.2     71.5    50.6     39.3
    Total (Bcfe)(a)..................   603.2  1,571.5  1,791.8 1,345.3  1,322.3
Standardized Measure of Discounted
 Future Net Cash Flows (in millions).  $619.1 $1,715.1 $1,227.4 $ 879.3 $1,102.6
</TABLE>
--------
(a) Oil and natural gas liquids are converted to Mcf equivalents (Mcfe) on the
    basis of one barrel equals 6.0 Mcfe.
(b) Excludes unusual and non-recurring expenses.
(c) Excludes related production, severance and ad valorem taxes.
(d) Reserves include natural gas liquids attributable to leasehold interests.
 
                                      A-3
<PAGE>
 
                                EEX CORPORATION
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS
 
  Certain statements in this report, including statements of EEX's and
management's expectations, intentions, plans and beliefs, are "forward-looking
statements", within the meaning of Section 21E of the Securities Exchange Act
of 1934, as amended, that are subject to certain events, risks and
uncertainties that may be outside EEX's control. See Part I, Forward Looking
Statements--Uncertainties and Risks for further information.
 
OVERVIEW
 
  In 1997, EEX Corporation ("EEX") became a separate company wholly
independent of its former majority owner, ENSERCH Corporation ("ENSERCH"), a
public utility. This transition to independent status coupled with the
engagement of a new senior management team resulted in a significant
restructuring of the Company's assets and operations. Early in the year, EEX's
management team completed a preliminary evaluation of the Company's prior
operations and announced a new business strategy designed to maximize
shareholder value as an independent company. A critical part of the strategy
development process included comparisons of past key operating statistics with
a group of peer independent producers, evaluations of non-core properties for
possible disposal, and reviews of proved non-producing reserves in core areas.
Key elements of the newly adopted strategy include near and long term goals
designed to reduce operating costs, accelerate the development of reserves and
improve the capital investment program through the reduction of finding costs
and enhanced reserve replacements. The more significant impacts of
implementing this strategy in 1997 are included in the discussion below.
 
REDUCE OPERATING COSTS
 
  Operating costs consisting of production, general and administrative and
taxes other than income, totaled $0.94 per Mcfe in 1996, substantially higher
than EEX's peer companies. Management's long term goal is to reduce operating
costs to $0.55 per Mcfe primarily through staff reductions, production
efficiencies and the sale or trade of high cost, high overhead non-core
assets, primarily onshore U.S. Various initiatives are currently in progress
to achieve these goals. Several packages of properties were sold during 1997
and EEX recorded gains totaling $53 million pre-tax ($34 million after tax).
The Corporate headquarters were relocated to Houston, Texas, in early August,
and a formal plan to reduce the oil and gas employee count from over 500 to
less than 200 was announced. EEX recorded an unusual charge of $27 million in
1997 primarily for severance costs. Operating costs totaled $0.81 per Mcfe in
1997, reflecting property sales and the cost reduction initiatives described
above.
 
DEVELOP NON-PRODUCING RESERVES
 
  EEX had a large inventory of proved, non-producing reserves at year end
1996. During the second quarter of 1997, several industry specialist companies
were commissioned to assist management in undertaking field studies with the
objective of converting these reserves to a producing status. The results of
the evaluations were disappointing. EEX immediately began an in-depth review
and evaluation of its reserves. As part of this review, EEX also reassessed
the reservoir performance and economic potential of the Cooper project which
indicated a major reduction in proven reserves for the project was required.
On August 5, 1997, based on preliminary results, EEX announced that it
expected a downward revision of 500 to 700 Bcfe in its non-producing reserves,
primarily in East Texas and the Cooper project. At the end of the third
quarter 1997, again based on preliminary results, EEX announced that downward
revisions were expected to be 670 Bcfe.
 
  Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of"
(SFAS 121) provides for the recognition of losses when
 
                                      A-4
<PAGE>
 
events or changes in circumstances indicate that the carrying value of long-
lived assets may not be realized. The Company estimates fair values using the
present value of expected future cash flows for each significant oil and gas
field together with additional information (e.g., ongoing negotiations or
offers for properties offered for sale) where available. Amongst other
factors, the Company looks for an indication of impairment by comparing the
carrying value of its properties to the estimated future net revenues to be
generated by producing or selling these reserves. The book value of properties
held for production (use) for which undiscounted expected future net revenues
are less than book value and properties scheduled for disposal is adjusted to
the lower of cost or fair value. Accordingly, as a result of the third quarter
reserve revisions and the application of SFAS 121, EEX reduced the value of
its oil and gas properties by $210 million in the third quarter 1997 to
reflect the lower of cost or fair value for impaired properties.
 
  EEX subsequently determined that its East Texas properties were no longer
core assets and packaged them for sale. Based on the estimated net realizable
value of these properties, EEX recognized an additional $40 million impairment
in the fourth quarter. Downward revisions in the final year-end reserve report
prepared by Netherland, Sewell and Associates, Inc. (N&S) totaled 712 Bcfe for
the year, requiring an additional $10 million impairment of the carrying value
of certain properties in the fourth quarter 1997, increasing the total
impairment for the year to $260 million. EEX presently expects to continue to
trade or sell existing onshore assets with the intent of exiting the onshore
U.S. Further, EEX expects that the fair value of its remaining onshore
properties is in excess of their book value.
 
REDUCE FINDING COSTS AND INCREASE RESERVE REPLACEMENT PERCENTAGE
 
  The Company's long-term goal is to significantly reduce finding costs to
less than $4 per barrel and to replace at least 250% of annual production. The
strategies to realize these goals include the following: concentrate
exploration activities in areas with significant reserve potential, primarily
in the offshore deepwater U.S. Gulf of Mexico and selected international
countries; execute an orderly exit strategy from current onshore U.S.
activities and limit onshore exploration activities to selected plays; upgrade
exploration staff; and minimize financial exposure to dry holes. EEX has an
active exploration program in the deepwater Gulf of Mexico and recently
announced a discovery at Llano. Three additional wildcat wells will be spudded
late in the first quarter or early second quarter 1998 and the Llano well will
be reentered for deepening and further evaluation. The Company is actively
pursuing several international opportunities and recently announced
exploration ventures in Turkey. Onshore exploration activities have been
limited primarily to three areas: the Delaware Basin of West Texas, Hardeman
Basin of North Central Texas and Anadarko basin of Oklahoma, with positive
results. In conjunction with limited onshore exploration activity, the
exploration staff has been reduced by over 40% since year end 1996. Seismic
expenditures and costs of acquiring and holding the onshore leasehold
inventory will be further reduced in 1998. The Company executed three
agreements in 1997 which reduce financial exposure to dry holes in the near
term. A joint venture agreement with Enterprise Oil Plc was executed to
evaluate EEX's portfolio of blocks in the deepwater Gulf of Mexico. Under this
agreement Enterprise will pay the first $65 million to fund EEX's exploratory
drilling costs and an additional $35 million is available for evaluation and
development, depending on drilling success. EEX estimates that as many as 10
to 12 exploration wells will be covered by this agreement. In the Hardeman
basin, EEX's share of drilling and completion costs will be paid by Key
Production, who purchased a 20% interest and is the operator on the first 20
exploratory wells drilled in the project. Lariat, who purchased a 25% interest
and is the operator of the Oklahoma properties, will carry EEX for a 50%
working interest in $7 million of exploratory drilling.
 
REORGANIZATION
 
  EEX is an independently owned energy exploration company involved in both
domestic and international oil and gas exploration and production. EEX also
provides operation and maintenance services, under contract, to three
cogeneration plants. Prior to August 5, 1997, Enserch Exploration, Inc. ("Old
EEI") was approximately 83% owned by ENSERCH.
 
                                      A-5
<PAGE>
 
  On August 5, 1997, the merger of ENSERCH and Texas Utilities Company and the
related merger of Old EEI and Lone Star Energy Plant Operations, Inc.
("LSEPO") were completed. Under the terms of the Old EEI/LSEPO merger, LSEPO
changed its name to "Enserch Exploration, Inc." ("EEI"), shares of Old EEI
were automatically converted into shares of EEI on a one-for-one basis in a
tax-free transaction, EEI issued 691,631 shares of common stock to ENSERCH in
exchange for outstanding LSEPO common stock and ENSERCH distributed to its
shareholders, on a pro rata basis, all of the shares of EEI common stock it
owned. In addition, the merger fixed LSEPO's working capital at $3.5 million.
For financial reporting purposes, the Old EEI/LSEPO merger was treated as a
combination of entities under common control. Accordingly, the operations and
assets and liabilities of Old EEI and LSEPO have been recorded at their
historical amounts in the accompanying consolidated financial statements. The
number of common shares outstanding for all periods has been increased to
reflect the 691,631 additional shares issued in the merger. The Restated
Articles of Incorporation of EEI authorized 400 million shares of common stock
with a par value of $.01. This change has been reflected in the accompanying
consolidated financial statements. On December 19, 1997 a special meeting of
shareholders was held at which the name of EEI was changed to EEX Corporation.
 
RESULTS OF OPERATIONS
 
  EEX adopted the successful efforts method to account for its oil and gas
operations in the third quarter of 1997 and all prior period financial
statements have been restated. See Note 3 of Notes to Consolidated Financial
Statements for additional information. The following discussions of operating
results are based on those restated amounts.
 
  EEX reported a 1997 net loss of $216 million ($1.71 per share), versus a net
loss of $37 million ($.29 per share) in 1996 and a net loss of $43 million
($.38 per share) in 1995.
 
  As discussed above, 1997 was a year of change for EEX and the results of
operations for 1997 were impacted by the following unusual items:
 
    . A $204 million after-tax ($260 million pre-tax) charge for impairment
        of producing oil and gas properties required by SFAS 121. This
        impairment will reduce future depreciation and amortization expense.
 
    . A gain on sales of property, plant and equipment of $34 million after-
  tax ($53 million pre-tax).
 
    . An unusual charge, primarily severance, of $18 million after-tax ($27
        million pre-tax) related to the reorganization and restructuring of
        operations and the relocation of corporate headquarters to Houston,
        Texas.
 
  In the following comparisons of results of operations, 1997 results have
been adjusted to exclude the unusual items described above. Results of
operations for 1996 and 1995 have also been adjusted to exclude gains on sales
of property, plant and equipment of $20 million and $10 million after-tax ($30
million and $15 million pre-tax), respectively.
 
1997 RESULTS OF OPERATIONS COMPARED WITH 1996
 
  Revenues for 1997 were $314 million, $24 million (7%) lower than 1996.
Natural gas revenues, 8% lower than 1996, were impacted by a 9% increase in
average prices, offset by a 16% decrease in production due to sales of non-
core properties. The average natural gas sales price per thousand cubic feet
(Mcf) was $2.36 in 1997 compared with $2.17 in 1996. Natural gas production
for 1997 was 84 billion cubic feet (Bcf), compared with 101 Bcf in 1996. Oil
revenues decreased $7 million (8%) due to sales of non-core properties and a
decrease in the average crude oil sales price per barrel to $19.19 in 1997
from $19.40 in 1996. Crude oil production was 4,743 thousand barrels
(MBbls),compared with 5,080 MBbls in 1996.
 
  Costs and expenses, excluding the unusual items described above, were down
20% in 1997 compared to 1996. Production and operating expenses decreased 30%
from 1996 as a result of properties sold, capitalization
 
                                      A-6
<PAGE>
 
of the Cooper Project operating lease in December 1996, and an ongoing cost
reduction program initiated in 1997. Exploration expenses decreased 25% due
primarily to a change in focus to offshore and international and the
curtailment of the onshore exploration program during 1997. Exploration
expenses are expected to be at lower levels in the future due to reduction of
exploration staff levels, major curtailment of onshore exploration and
reduction of the financial exposure, in the near term, to deep water Gulf of
Mexico dry hole costs resulting from the offshore exploration joint venture.
See Offshore Exploration Joint Venture below. Taxes, other than income
decreased 20% from 1996 primarily due to property sales.
 
  Interest and other financing costs for 1997 were $31 million, a $3.5 million
(13%) increase from 1996 as a result of the impact of capitalization of the
Cooper Project operating lease in December 1996 and refinancing of preferred
securities of subsidiaries. Excluding interest associated with capitalized
Cooper project leases and financing costs for preferred securities of
subsidiaries, interest and other financing costs were unchanged from 1996.
 
1996 RESULTS OF OPERATIONS COMPARED WITH 1995
 
  EEX reported a 1996 net loss of $37 million ($.29 per share), versus a net
loss of $43 million ($.38 per share) in 1995. Results for 1996 were adversely
impacted by nonrecurring charges of $2.8 million after tax ($4.3 million pre-
tax) related to preparation for the Company's separation from ENSERCH and
associated management changes. The year to year improvement is primarily
attributable to higher commodity prices in 1996 and a full year's contribution
to production volumes from properties acquired in 1995 and the Cooper Project.
Operating loss was $32 million in 1996, compared with an operating loss of $49
million in 1995.
 
  Revenues for 1996 were $338 million, a $101 million (42%) increase from
1995, reflecting a $61 million (39%) increase in natural gas revenues, and a
$42 million (74%) improvement in oil and other revenues. The average natural
gas sales price per Mcf was $2.17 in 1996 compared with $1.74 in 1995. Natural
gas production increased to 101 Bcf in 1996, 11% higher than in 1995. The
higher natural gas volumes primarily resulted from 1996 operations containing
a full year of production from the properties acquired in the acquisition of
DALEN Corporation in June 1995. Higher oil revenues in 1996 reflect a 15%
improvement in the average sales price and a 52% increase in sales volumes due
primarily to the continued development of the Cooper Project and the DALEN
acquisition.
 
  Production and operating expenses for 1996 were $21 million (41%) higher
than in 1995, primarily due to a full year's activity from the Cooper Project
(up $15 million), and the properties acquired in the DALEN acquisition.
Exploration expenses were 22% higher in 1996, reflecting increased abandoned
leasehold and dry hole cost, partially offset by lower seismic expenditures.
General and administrative expenses increased $5.1 million from 1995,
reflecting a full year's impact of the DALEN acquisition and $3.4 million for
costs associated with preparation for the Company's separation from ENSERCH
and related management changes.
 
  Interest and other financing costs for 1996 were $27 million, compared with
$18 million in 1995. Interest in 1996 includes a full year's impact from the
debt incurred to finance the DALEN acquisition in June 1995 and the Cooper
Project capital lease, partially offset by the reduction in debt from proceeds
of property sales. Interest on the Cooper Project capital lease was deferred
through September 1995, the date of first production.
 
OIL AND GAS MARKET VOLATILITY
 
  Results of operations are largely dependent upon the difference between the
prices received for oil and gas produced and the costs of finding and
producing such resources. On an energy equivalent basis, gas reserves at
January 1, 1998 constituted approximately 76% of total reserves, and gas
production accounted for approximately 72% of total production for 1997.
Accordingly, variations in gas prices have a more significant impact on
operations than variations in oil prices. Gas production as a percentage of
total production is expected to decrease as a result of exiting current
onshore U.S. assets and development of the offshore Gulf of Mexico properties.
 
                                      A-7
<PAGE>
 
  A portion of the risk associated with fluctuations in the price of oil and
natural gas is managed through the use of hedging techniques such as oil and
gas swaps, collars and futures agreements. EEX fixed the price on 1997
production volumes of 70 Bcf of natural gas (83% of production) at an average
price of $2.61 per Mcf and 2,587 MBbls of oil (48% of production) at an
average price of $20.96 per Bbl. In total oil and gas price hedging activities
decreased 1997 and 1996 revenues by $11 million and $20 million, respectively
and increased revenues $.1 million in 1995.
 
  At December 31, 1997 EEX had outstanding swaps, collars and futures
agreements that were entered into as hedges extending through December 31,
1998, to exchange payments on 38 Bcf of natural gas and 720 MBbls of oil. At
December 31, 1997, the weighted average strike price and market price per Mcf
of natural gas was $2.37 and $2.34, respectively, and the weighted average
strike price and market price per barrel of oil was $19.25 and $17.74,
respectively. At December 31, 1997, there were $2.3 million of net unrealized
and unrecognized hedging gains based on the difference between the strike
price and the New York Mercantile Exchange futures price for the applicable
trading months of 1998. In addition, there were $1.9 million of realized gains
on hedging activities that were deferred and will be applied as an increase in
revenues in the applicable month of physical sale of production in 1998.
 
IMPAIRMENT OF PRODUCING OIL AND GAS PROPERTIES
 
  In the third quarter of 1997, EEX adopted the successful efforts method of
accounting in order to be on a comparable basis with its peer group. Adoption
of the successful efforts method required EEX to comply with the requirements
of SFAS 121. SFAS 121 provides for the recognition of losses when events or
changes in circumstances indicate that the carrying value of long-lived assets
may not be realized. When there is evidence that the cost of such assets may
not be realized based upon periodic evaluation, SFAS 121 requires the carrying
values of long-lived assets be written down to fair values. The Company
estimates fair values using the present value of expected future cash flows
for each significant oil and gas field.
 
  In the fourth quarter of 1997, EEX completed a review and evaluation of the
commercial feasibility of its oil and gas reserves. Based upon this review, a
downward revision of 712 billion cubic feet of gas equivalent was recorded to
EEX's oil and natural gas reserves, primarily in behind pipe and proved
undeveloped reserves in East Texas and the Cooper Project offshore in the
deep-water Gulf of Mexico.
 
  As a result of the downward revision of reserves, the Company reexamined the
carrying value of its properties as a part of the overall process. In order to
determine whether its assets had been impaired, EEX grouped its producing
properties by fields, which it believes is the lowest level for which cash
flows are reasonably and separately identifiable, and determined that
anticipated future cash flows based on the revised reserve estimates and
development plans were insufficient to recover the carrying value of certain
fields. Accordingly, the carrying value of such fields was reduced to fair
value, and EEX recorded a $204 million after-tax, ($260 million pre-tax)
charge for impairment in 1997.
 
OIL AND GAS RESERVES
 
  EEX's natural gas reserves at January 1, 1998, as estimated by Netherland,
Sewell & Associates, Inc., independent petroleum consultants, were 460 Bcf,
compared with 1.22 trillion cubic feet the year earlier. Oil and condensate
reserves, including natural gas liquids, were 24 MMBbls compared with the year
earlier level of 59 MMBbls. In the fourth quarter of 1997, EEX completed a
review and evaluation of the commercial feasibility of its non-producing oil
and gas reserves. Based upon this review, EEX's reserves were reduced by 623
Bcf of natural gas and 15 MMBbls of oil and condensate, 712 billion cubic feet
of gas equivalent, primarily in behind pipe in East Texas and proved
undeveloped reserves in the Cooper Project. See OVERVIEW Develop Non-producing
Reserves above for further information.
 
                                      A-8
<PAGE>
 
LIQUIDITY AND CAPITAL RESOURCES
 
CASH FLOWS
 
  EEX generated sufficient cash flows from operations and property sales to
fund its capital requirements and reduce financings, including preferred stock
of subsidiaries, by $138 million. Net cash flows from operating activities
were $187 million, an increase of $78 million over 1996 largely due to reduced
costs and expenses in 1997 and changes in current operating assets and
liabilities. Net cash flows used for investing activities in 1997 were $55
million, a $22 million increase from 1996.
 
  EEX intends to utilize substantially all of its internally generated cash
flows for growth of the business and expects to have sufficient cash flow from
operations and the ongoing monetization of non-core assets to fund its
business plans. Borrowings under EEX's credit facilities may be used to
supplement temporary cash flow needs. EEX does not anticipate paying cash
dividends in the foreseeable future.
 
CAPITAL STRUCTURE
 
  In 1997, EEX redeemed, at the stated value of $150 million, all the
outstanding mandatorily redeemable preferred securities of a subsidiary. The
redemption was funded by private sales of new issues of preferred securities
by EEX subsidiaries. The new preferred securities are redeemable at the option
of the subsidiaries and $50 million was redeemed in late 1997. Debt at
December 31, 1997 represented 50% of total capitalization, as defined,
compared to 51% of total capitalization at December 31, 1996. The reduction in
total capitalization at December 31, 1997 was due to the reduction in
shareholders' equity from non-cash impairment of producing oil and gas
properties, redemption of preferred securities of subsidiaries and reduction
of the funding required from the bank revolving credit agreement.
 
  On February 27, 1998, EEX announced a one-year program to repurchase up to
12.7 million, or 10% of the Company's outstanding common shares, at an
aggregate cost not to exceed $125 million. Stock may be purchased in open
market or negotiated transactions, or any other manner deemed appropriate by
management. The timing and terms of any purchases will be at the discretion of
EEX management.
 
CAPITAL BUDGET
 
  Planned 1998 capital expenditures will range from $150 million to $170
million, compared with actual expenditures of $180 million in 1997 and $174
million in 1996. Not included in planned 1998 capital expenditures are the
purchase of an additional participation interest in the Tuban block in
Indonesia of $40 million and approximately $40 to $50 million of carried
interest costs resulting from both offshore and onshore exploration
agreements. Capital expenditure amounts also exclude costs of offshore
equipment and facilities financed under operating lease arrangements of $25
million in 1996 and $24 million in 1995.
 
OFFSHORE EXPLORATION JOINT VENTURE
 
  On July 1, 1997 EEX announced an agreement with Enterprise Oil Plc
("Enterprise") to participate in an exploration venture to evaluate EEX's
portfolio of offshore blocks in the deep water of the Gulf of Mexico.
 
  The agreement, covering approximately 78 blocks primarily in the areas of
Garden Banks, Green Canyon and Mississippi Canyon, was closed on September 15,
1997 and all required governmental approvals have been obtained. Excluded from
the agreement are reserves at Green Canyon 254 (Allegheny Project) and
reserves and production facilities at Mississippi Canyon 441 and Garden Banks
388 (Cooper Project).
 
  Under the agreement, Enterprise will pay $65 million, which will be used to
fund EEX's exploration drilling costs and in return received an immediate
assignment of 50% of EEX's deep water portfolio. A further $35 million to be
funded by Enterprise is contingent on drilling successes and the announcement
of at least two commercial developments. Enterprise became a full partner in
the relevant Joint Operating Agreements.
 
                                      A-9
<PAGE>
 
  The companies intend to conduct a 10 to 12 well drilling program over the
next two and one-half years utilizing two rigs capable of drilling in water
depths of approximately 3,500 feet. The rigs are under long-term contract to
EEX at attractive day rates. The first well was spudded on the Llano prospect
in Garden Banks 386 and EEX announced a discovery in December 1997. The well
encountered a number of hydrocarbon bearing intervals located between depths
of 23,000 and 25,000 feet. Drilling was suspended at a total measured depth of
25,342 feet prior to reaching the primary objective when the well reached
pressure limitations for the semi-submersible rig on location. On January 16,
1998 EEX announced completion of a letter of intent to acquire use of a semi-
submersible rig for purposes of deepening and appraising this discovery. This
rig is expected to begin drilling late in the first quarter of 1998. The next
three wells in this program are expected to be spudded late in the first
quarter or early in the second quarter of 1998.
 
YEAR 2000 ISSUE
 
  EEX is continuing its efforts towards addressing the Year 2000 issue as it
relates to any potential impact on the Company's operations. Evaluations of
the Company's internal systems, primarily focused on the financial systems,
have been initiated and will be complete by the end of 1998. To date,
preliminary studies have yielded potential problem areas with some
applications. Most of these applications which have potential Year 2000
deficiencies are third party applications provided by outside vendors, and in
each case the deficiencies are being addressed by the software vendor. Any in-
house applications developed by EEX will be modified before the end of 1998
and reviewed by an independent entity with expertise in this area. In all
cases the cost of Year 2000 compliance is considered immaterial.
 
  During 1998 the Company will be conducting an independent review of
operational (field) systems which are the responsibility of third party
companies doing business with EEX. This Year 2000 review will include any
operational system on which any EEX-sanctioned work is performed, and will
include both hardware and software subsystems. Any third party companies doing
business with EEX found not to be adequately addressing the Year 2000 issue
will be identified in the review, along with the potential impact of non-
compliance by the vendor. As such, the Company at this time cannot adequately
assess the extent to which further actions will be required, and cannot at
this time make any statements as to whether or not this issue will have a
material affect upon future operations.
 
FOURTH QUARTER RESULTS
 
  The fourth quarter 1997 net loss was $19 million ($.15 per share), compared
with a net loss of $11 million ($.08 per share) for the same period of 1996.
Operating income for 1997 was $6.3 million versus an operating loss of $12
million for the same period of 1996. The increased fourth quarter 1997 loss
results from the after-tax impact of a non-cash charge for impairment of
producing oil and gas properties and dividend requirements for the preferred
securities of subsidiary, partially offset by gain on sales of property, plant
and equipment. The impairment results principally from the East Texas
properties which were packaged for sale and were written down to their
estimated net realizable value. See Overview Develop Non-producing Reserves
above and Recent Developments below.
 
RECENT DEVELOPMENTS
 
  On February 25, 1998, EEX announced that it had entered into an agreement to
sell substantially all of its properties in East Texas and North Louisiana,
representing proved reserves of approximately 250 billion cubic feet
equivalent of natural gas, for $265 million. The effective date of the sale is
January 1, 1998 with the closing expected in the second quarter of 1998. As a
part of the sale, EEX will retain an obligation to deliver approximately 30
Bcf of natural gas under a long-standing agreement with Encogen One Partners,
Ltd. This sale was made pursuant to EEX's previously announced strategy to re-
deploy the value of its onshore U.S. properties into Gulf of Mexico and
International opportunities. Proceeds from the sale will be used to fund the
purchase of additional interests in Indonesia and to provide additional
financial flexibility.
 
                                     A-10
<PAGE>
 
  On February 10, 1998, EEX announced that it entered into an agreement with
Risjad Salim Petroleum (Tuban) Ltd. ("RSP") to acquire, as of January 1, 1998,
RSP's 25% participation interest in the Tuban Production Sharing Contract
located on the island of Java in Indonesia. This transaction will increase
EEX's interest in the Tuban block to 50%. In addition to several exploration
prospects, the Tuban block contains the Mudi field. EEX will pay approximately
$40 million plus a portion of future net profits for the RSP interest. The
transaction is expected to close before April 30, 1998.
 
                                     A-11
<PAGE>
 
                        REPORT OF INDEPENDENT AUDITORS
 
The Board of Directors and Shareholders of EEX Corporation
 
  We have audited the accompanying consolidated balance sheets of EEX
Corporation and subsidiaries (the Company), as of December 31, 1997 and 1996,
and the related statements of consolidated operations, owners' equity, and
consolidated cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
  In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of EEX Corporation and subsidiaries at December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
 
  As discussed in Note 3 to the consolidated financial statements, in 1997 the
Company adopted the successful efforts method of accounting for its oil and
gas producing activities.
 
                                              ERNST & YOUNG LLP
 
Houston, Texas
February 13, 1997
 
 
                                     A-12
<PAGE>
 
          MANAGEMENT REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING
 
  The management of EEX Corporation is responsible for the preparation and
integrity of the financial statements and other information contained in this
report. The financial statements have been prepared in conformity with
accounting principles generally accepted in the United States and include
amounts that represent management's best estimates and judgments. Management
has established practices and procedures designed to support the reliability
of the estimates and minimize the possibility of a material misstatement.
 
  Management has established and maintains internal accounting controls that
provide reasonable assurance as to the integrity and reliability of the
financial statements, the protection of assets from unauthorized use or
disposition and the prevention and detection of fraudulent financial
reporting. The system of internal control is supported by written policies and
procedures and the control environment is regularly evaluated by both
EEX Corporation's internal auditors and Ernst & Young, LLP, the Company's
independent auditors. The Board of Directors maintains an Audit Committee
composed of Directors who are not employees. The Audit Committee meets
periodically with management, the independent auditors and the internal
auditors to discuss significant accounting, auditing, internal accounting
control and financial reporting matters related to EEX Corporation. The
independent auditors and the internal auditors have free access to the Audit
Committee.
 
  Management believes that, as of December 31, 1997, the overall system of
internal accounting controls is sufficient to accomplish the objectives
described herein.
 
  Thomas M. Hamilton        Richard S. Langdon            Ray E. Schmitz
  Chairman, President and   Executive Vice President,     Vice President and
  Chief Executive Officer   Finance and Administration,   Controller
                            Chief Financial Officer   
   
February 13, 1998
 
                                     A-13
<PAGE>
 
                                EEX CORPORATION
 
                     STATEMENTS OF CONSOLIDATED OPERATIONS
 
<TABLE>
<CAPTION>
                                              YEAR ENDED DECEMBER 31
                                      ------------------------------------------
                                          1997           1996          1995
                                      -------------  ------------- -------------
                                                            (RESTATED)
                                                     ---------------------------
                                      (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S>                                   <C>            <C>           <C>
Revenues
  Natural gas.......................  $     199,754  $    217,968  $    157,308
  Oil and condensate................         91,029        98,529        56,525
  Natural gas liquids...............          9,161         8,099         4,859
  Cogeneration operations...........         13,297        11,400        16,507
  Other.............................            972         2,150         2,159
                                      -------------  ------------  ------------
     Total..........................        314,213       338,146       237,358
                                      -------------  ------------  ------------
Costs and Expenses
  Production and operating..........         48,960        70,325        49,792
  Exploration.......................         70,599        93,544        76,706
  Depreciation and amortization.....        144,485       169,864       112,033
  Impairment of producing oil and
   gas properties...................        260,112
  (Gain) on sales of property, plant
   and equipment....................        (52,917)      (30,175)      (15,315)
  Unusual charges...................         27,105
  Cogeneration operations...........         10,381         9,924        14,258
  General, administrative and other.         28,485        34,995        29,937
  Taxes, other than income..........         17,356        21,715        18,813
                                      -------------  ------------  ------------
    Total...........................        554,566       370,192       286,224
                                      -------------  ------------  ------------
Operating (Loss)....................       (240,353)      (32,046)      (48,866)
Other Income--Net...................            301         2,092           161
Interest Income.....................            574           266         1,027
Interest and Other Financing Costs..        (30,645)      (27,149)      (18,149)
                                      -------------  ------------  ------------
(Loss) Before Income Taxes..........       (270,123)      (56,837)      (65,827)
Income Tax (Benefit)................        (58,945)      (20,036)      (23,242)
Minority Interest...................         (4,925)
                                      -------------  ------------  ------------
Net (Loss)..........................  $    (216,103) $    (36,801) $    (42,585)
                                      =============  ============  ============
Basic and Diluted Net (Loss) Per
 Share..............................  $       (1.71) $      (0.29) $      (0.38)
                                      =============  ============  ============
Weighted Average Shares Outstanding.        126,641       126,557       111,829
                                      =============  ============  ============
</TABLE>
 
                See Notes to Consolidated Financial Statements.
 
                                      A-14
<PAGE>
 
                                EEX CORPORATION
 
                     STATEMENTS OF CONSOLIDATED CASH FLOWS
 
<TABLE>
<CAPTION>
                                                  YEAR ENDED DECEMBER 31
                                               -------------------------------
                                                 1997       1996       1995
                                               ---------  ---------  ---------
                                                              (RESTATED)
                                                          --------------------
                                                      (IN THOUSANDS)
<S>                                            <C>        <C>        <C>
OPERATING ACTIVITIES
  Net (loss).................................. $(216,103) $ (36,801) $ (42,585)
  Impairment of producing oil and gas
   properties.................................   260,112
  Impairment of undeveloped leasehold.........    40,866     34,000     15,426
  Dry hole cost...............................     8,224     21,345     16,651
  Depreciation and amortization...............   144,485    169,864    112,033
  Deferred income tax (benefit)...............   (55,461)   (24,324)   (26,456)
  Gain on sales of property, plant &
   equipment..................................   (52,917)   (30,175)   (15,315)
  Other.......................................    10,332    (10,735)   (13,857)
  Changes in current operating assets and
   liabilities
    Accounts receivable.......................    24,550     (6,999)   (26,859)
    Other current assets......................     6,721     (3,380)    (6,223)
    Accounts payable..........................    18,392     (4,127)    34,767
    Other current liabilities.................    (1,812)     1,168     (2,223)
                                               ---------  ---------  ---------
    Net cash flows from operating activities..   187,389    109,836     45,359
                                               ---------  ---------  ---------
INVESTING ACTIVITIES
  Additions of property, plant and equipment..  (180,147)  (174,349)  (153,195)
  Proceeds from dispositions of property,
   plant and equipment........................   133,426    140,863     54,977
  Purchase of DALEN, net of cash acquired.....                        (332,888)
  Collection of note receivable from
   affiliated company.........................                          86,077
  Other.......................................    (7,859)       507     (6,939)
                                               ---------  ---------  ---------
    Net cash flows used in investing
     activities...............................   (54,580)   (32,979)  (351,968)
                                               ---------  ---------  ---------
FINANCING ACTIVITIES
  Borrowings under bank revolving credit
   agreement..................................   170,000    136,000    380,000
  Repayment of borrowings under bank revolving
   credit agreement...........................  (260,000)  (181,000)  (220,000)
  Borrowings under short term financing
   agreement..................................   172,900
  Repayment of borrowings under short term
   financing agreement........................  (167,900)
  Issuance of company-obligated mandatorily
   redeemable preferred securities of
   subsidiary.................................                         150,000
  Repayment of borrowings under bridge loan...                        (150,000)
  Redemption of company-obligated mandatorily
   redeemable preferred securities of
   subsidiary.................................  (150,000)
  Issuance of minority interests in preferred
   securities of subsidiary...................   150,000
  Redemption of minority interests in
   preferred securities of subsidiary.........   (50,000)
  Changes in temporary advances with
   affiliated companies.......................    13,328    (32,051)   (89,085)
  Payments of capital lease obligations.......    (3,250)    (3,832)    (4,424)
  Increase (Decrease) in advances under
   leasing arrangements--net..................    (5,457)     5,457
  Borrowings under bridge loan................                         150,000
  Repayment of DALEN bank debt assumed at
   acquisition................................                        (115,000)
  Issuance of common stock....................         2        249    207,940
  Other.......................................               (1,887)    (1,526)
                                               ---------  ---------  ---------
    Net cash flows (used in) from financing
     activities...............................  (130,377)   (77,064)   307,905
                                               ---------  ---------  ---------
Net Increase (Decrease) in Cash and Cash
 Equivalents..................................     2,432       (207)     1,296
Cash and Cash Equivalents at Beginning of
 Year.........................................     1,358      1,565        269
                                               ---------  ---------  ---------
Cash and Cash Equivalents at End of Year...... $   3,790  $   1,358  $   1,565
                                               =========  =========  =========
</TABLE>
                See Notes to Consolidated Financial Statements.
 
                                      A-15
<PAGE>
 
                                EEX CORPORATION
 
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                           ---------------------
                                                              1997       1996
                                                           ---------- ----------
                                                                      (RESTATED)
                                                                      ----------
                                                              (IN THOUSANDS)
<S>                                                        <C>        <C>
                         ASSETS
Current Assets
  Cash and cash equivalents..............................  $    3,790 $    1,358
  Accounts receivable--trade (net of allowance for
   possible losses of $1,161 and $1,351).................      57,925     65,926
  Accounts receivable--affiliated companies..............                 16,549
  Temporary advances--affiliated companies...............                 13,328
  Other..................................................      11,545     18,266
                                                           ---------- ----------
    Total current assets.................................      73,260    115,427
                                                           ---------- ----------
Property, Plant and Equipment (at cost)
  Oil and gas properties (successful efforts method).....   1,882,097  1,984,341
  Other..................................................      19,581     22,084
                                                           ---------- ----------
    Total................................................   1,901,678  2,006,425
  Less accumulated depreciation and amortization.........   1,192,691    941,052
                                                           ---------- ----------
    Net property, plant and equipment....................     708,987  1,065,373
                                                           ---------- ----------
Deferred Income Tax Benefit..............................      20,238
                                                           ---------- ----------
Other Assets.............................................       5,304     14,654
                                                           ---------- ----------
    Total................................................  $  807,789 $1,195,454
                                                           ========== ==========
          LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
  Accounts payable--trade................................  $  108,616 $   91,026
  Accounts payable--affiliated companies.................                  8,924
  Short term borrowings..................................       5,000
  Advances under leasing arrangements....................                  5,457
  Current portion of capital lease obligations...........       8,418      3,250
  Other..................................................      10,031     11,843
                                                           ---------- ----------
    Total current liabilities............................     132,065    120,500
                                                           ---------- ----------
Bank Revolving Credit Agreement..........................      25,000    115,000
                                                           ---------- ----------
Capital Lease Obligations................................     233,317    241,735
                                                           ---------- ----------
Other Liabilities
  Deferred income taxes..................................                 35,330
  Other..................................................      42,744     42,483
                                                           ---------- ----------
    Total other liabilities..............................      42,744     77,813
                                                           ---------- ----------
Company--Obligated Mandatorily Redeemable Preferred
 Securities of Subsidiary................................                150,000
Minority Interests in Preferred Securities of Subsidiary.     100,000
Commitments and Contingent Liabilities (Notes 9 and 16)
Preferred Stock--authorized 10 million shares, none
 issued
Shareholders' Equity.....................................     274,663    490,406
                                                           ---------- ----------
    Total................................................  $  807,789 $1,195,454
                                                           ========== ==========
</TABLE>
 
                See Notes to Consolidated Financial Statements.
 
                                      A-16
<PAGE>
 
                                EEX CORPORATION
 
                STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
 
<TABLE>
<CAPTION>
                                                    YEAR ENDED DECEMBER 31
                                                 ------------------------------
                                                   1997       1996      1995
                                                 ---------  --------  ---------
                                                        (IN THOUSANDS)
<S>                                              <C>        <C>       <C>
Common Stock, authorized 400 million shares
 Balance at beginning of year................... $ 126,736  $126,575  $ 106,513
  Issued for stock plans (323, 161 and 62
   shares)......................................       185       161         62
  Cash sale to public (20,000 shares)...........                         20,000
  Change in par value to $.01 from $1.00........  (125,650)
                                                 ---------  --------  ---------
 Balance at end of year (Outstanding shares:
  127,059, 126,736 and 126,575).................     1,271   126,736    126,575
                                                 ---------  --------  ---------
Paid in Capital
 Balance at beginning of year...................   442,246   440,836    628,772
  Adjustment for cumulative effect through
   December 31, 1994 for restatement to the
   successful efforts method of accounting......                       (377,147)
  Adjustments for acquisition of international
   and SACROC operations........................                         (2,798)
  Additional deferred income tax benefit from
   reorganization...............................                          3,480
 Excess of proceeds over par value of common
  stock issued for:
  Stock plans...................................     3,075     1,370        679
  Cash sale to public...........................                        187,872
 Market valuation adjustments of restricted
  stock.........................................      (478)       40        (22)
 Change in par value of common stock............   125,650
                                                 ---------  --------  ---------
 Balance at end of year.........................   570,493   442,246    440,836
                                                 ---------  --------  ---------
Retained Earnings (Deficit)
 Balance at beginning of year as previously
  reported......................................     2,292    (9,415)     1,717
  Adjustment for cumulative effect on prior
   years for restatement to the successful
   efforts method of accounting.................   (79,961)  (31,453)
                                                 ---------  --------  ---------
 Balance at beginning of year, as restated......   (77,669)  (40,868)     1,717
  Net (loss)....................................  (216,103)  (36,801)   (42,585)
                                                 ---------  --------  ---------
 Balance at end of year.........................  (293,772)  (77,669)   (40,868)
                                                 ---------  --------  ---------
Unamortiized Restricted Stock Compensation
 Balance at beginning of year...................      (677)     (551)
  Grants (387, 137 and 56 shares)...............    (3,874)   (1,190)      (673)
  Restrictions lifted (98 shares)...............                 756
  Cancellations (90 and 25 shares)..............       715       230
  Amortization..................................       515       132        100
  Market value adjustments......................       444       (54)        22
                                                 ---------  --------  ---------
 Balance at end of year.........................    (2,877)     (677)      (551)
                                                 ---------  --------  ---------
Treasury Stock
 Balance at beginning of year...................      (230)
  Issuance of shares for restricted stock awards
   (67 shares)..................................       625
  Cancellations of restricted stock grants (90
   and 25 shares)...............................      (847)     (230)
                                                 ---------  --------  ---------
 Balance at end of year (47 and 25 shares)......      (452)     (230)
                                                 ---------  --------  ---------
Shareholders' Equity............................ $ 274,663  $490,406  $ 525,992
                                                 =========  ========  =========
</TABLE>
 
                 See Notes to Consolidated Financial Statements
 
 
                                      A-17
<PAGE>
 
                                EEX CORPORATION
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
  All dollar amounts, except per share amounts, in the notes to consolidated
financial statements are stated in thousands unless otherwise indicated.
 
1. ORGANIZATION AND BASIS OF PRESENTATION
 
  EEX Corporation ("EEX") is an independently owned energy exploration company
involved in both domestic and international oil and gas exploration and
production. EEX also provides operation and maintenance services, under
contract, to three cogeneration plants. Prior to August 5, 1997, Enserch
Exploration, Inc. ("Old EEI") was approximately 83% owned by ENSERCH
Corporation ("ENSERCH").
 
  On August 5, 1997, the merger of ENSERCH Corporation ("ENSERCH") and Texas
Utilities Company and the related merger of Old EEI and Lone Star Energy Plant
Operations, Inc. ("LSEPO") were completed. Under the terms of the Old
EEI/LSEPO merger, LSEPO changed its name to "Enserch Exploration, Inc."
("EEI"), shares of Old EEI were automatically converted into shares of EEI on
a one-for-one basis in a tax-free transaction, EEI issued 691,631 shares of
common stock to ENSERCH in exchange for outstanding LSEPO common stock and
ENSERCH distributed to its shareholders, on a pro rata basis, all of the
shares of EEI common stock it owned. In addition, the merger fixed LSEPO's
working capital at $3.5 million. For financial reporting purposes, the Old
EEI/LSEPO merger was treated as a combination of entities under common
control. Accordingly, the operations and assets and liabilities of Old EEI and
LSEPO have been recorded at their historical amounts in the accompanying
consolidated financial statements. The number of common shares outstanding for
all periods has been increased to reflect the 691,631 additional shares issued
in the merger. The Restated Articles of Incorporation of EEI authorized 400
million shares of common stock with a par value of $.01. This change has been
reflected in the accompanying consolidated financial statements. On December
19, 1997 a special meeting of shareholders was held at which the name of the
Company was changed to EEX Corporation.
 
  In 1995, Old EEI acquired the international oil and gas and SACROC
operations from ENSERCH in exchange for cash and Old EEI Common Stock.
ENSERCH's historical carrying value of the assets acquired and liabilities
assumed was recorded by Old EEI.
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  The consolidated financial statements include the accounts of EEX and its
subsidiaries. All intercompany accounts and transactions have been eliminated
in consolidation. The preparation of financial statements requires the use of
significant estimates and assumptions by management; actual results could
differ from those estimates. Certain items in prior periods have been
reclassified to be consistent with the current presentation.
 
  Net Income (Loss) Per Share--In 1997, the Financial Accounting Standards
Board issued Statement No. 128, "Earnings Per Share" (SFAS 128). SFAS 128
requires the calculation and presentation of basic and diluted net income
(loss) per share amounts. Basic net income (loss) per share is based on the
weighted average number of common shares outstanding during the period.
Diluted net income (loss) per common share is based on the weighted average
number of common shares and all dilutive potential common shares outstanding
during the period. All per share amounts presented in the accompanying
financial statements have been calculated in accordance with SFAS 128.
 
 
  Oil and Gas Properties--The successful efforts method of accounting is used
for oil and gas operations. Under the successful efforts method of accounting,
lease acquisition costs are capitalized when incurred. Significant unproved
properties are reviewed periodically on a property-by-property basis to
determine if there has been an impairment in value, with such impairment
charged to expense. All other unproved properties are
 
                                     A-18
<PAGE>
 
aggregated and a portion of the costs estimated to be non-productive, based on
historical experience, is amortized over the average life of the leases.
Geological and geophysical costs and the costs of carrying and retaining
undeveloped properties are expensed as incurred. Exploratory drilling costs
are initially capitalized but charged to current expense if the well is
commercially unsuccessful.
 
  Leasehold costs of producing properties are depleted using the unit of
production method based on estimated proved oil and gas reserves quantified on
the basis of their equivalent energy content. Amortization of drilling and
equipment costs is based on the unit of production method using estimated
proved developed oil and gas reserves quantified on the basis of their
equivalent energy content. Depreciation of other property, plant and equipment
is provided principally by the straight line method over the estimated service
lives of the related assets. The current undiscounted cost of estimated future
site restoration, dismantlement and abandonment, net of salvage, is included
in the cost of productive oil and gas properties and a corresponding liability
recorded. The recorded cost is amortized on the unit of production method.
Actual costs incurred for these activities are charged to the recorded
liability.
 
  Derivative Instruments--The Company enters into swaps, futures, options,
collars and other derivative contracts to hedge the price risks associated
with a portion of anticipated future oil and gas production. Realized gains
and losses on settled derivative contracts are deferred and recognized as
adjustments to oil and gas revenues in the applicable period(s) hedged. If a
derivative contract no longer qualifies for hedge accounting, it is marked to
market. The Company also enters into interest rate swaps to manage risk
associated with interest rates and reduce the Company's exposure to interest
rate fluctuations. Interest rate swaps are valued on a periodic basis, with
resulting differences recognized as an adjustment to interest and other
financing costs over the term of the agreement. The Company does not enter
into derivative contracts for trading purposes.
 
  Stock Based Employee Compensation--Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation," (SFAS 123)
encourages, but does not require companies to record compensation cost for
stock based employee compensation plans at fair value. EEX has chosen to
continue to account for stock based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related Interpretations. Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
quoted market price of EEX's stock at the date of the grant over the amount an
employee must pay to acquire the stock. Compensation cost for restricted stock
awards is based on the quoted market price of EEX's stock on the date the
award becomes vested (See Note 11).
 
  Cash and Cash Equivalents Cash and cash equivalents include highly liquid
investments with maturities of three months or less when purchased.
 
  Gas Imbalances--The Company follows the sales method of accounting for gas
imbalances, which recognizes over and under lifts of gas when sold, to the
extent sufficient gas reserves or balancing agreements are in place. Gas
revenues are not significantly different from the Company's share of
production.
 
3. ACCOUNTING CHANGE
 
  EEX adopted the successful efforts method of accounting in the third quarter
of 1997 resulting in a decrease in 1997 net (loss) for the nine months ended
September 30, 1997 of $39,488 ($0.31 per share for both basic and diluted net
(loss) per share amounts).
 
                                     A-19
<PAGE>
 
  The effect on previously reported net income (loss) for the years ended
December 31, 1996 and 1995 is as follows:
 
<TABLE>
<CAPTION>
                                                      YEAR ENDED DECEMBER 31
                                                      ------------------------
                                                         1996         1995
                                                      -----------  -----------
   <S>                                                <C>          <C>
   Net income (loss) as previously reported.......... $    10,774  $   (12,502)
   Effect of LSEPO merger............................         933        1,370
                                                      -----------  -----------
   Net income (loss) after merger....................      11,707      (11,132)
   Adjustment for effect of change to successful
    efforts..........................................     (48,508)     (31,453)
                                                      -----------  -----------
   Net (loss) as adjusted............................ $   (36,801) $   (42,585)
                                                      ===========  ===========
   Per share amounts:
   Basic and diluted net income (loss) after effect
    of LSEPO merger.................................. $       .09  $      (.10)
   Adjustment for effect of change to successful
    efforts..........................................        (.38)        (.28)
                                                      -----------  -----------
   Basic and diluted net (loss) as adjusted.......... $      (.29) $      (.38)
                                                      ===========  ===========
</TABLE>
 
  The cumulative effect of the accounting change for all periods through
December 31, 1994 totaled $377,147, after a tax benefit of $203,079, and paid
in capital was reduced accordingly.
 
4. IMPAIRMENT OF PRODUCING OIL AND GAS PROPERTIES
 
  Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
(SFAS 121) provides for the recognition of losses when events or changes in
circumstances indicate that the carrying value of long-lived assets may not be
realized. When there is evidence that the cost of such assets may not be
realized based upon periodic evaluation, SFAS 121 requires the carrying values
of long-lived assets be written down to fair values. The Company estimates
fair values using the present value of expected future cash flows for each
significant oil and gas field held for use. Assets held for sale are carried
at the lower of cost or estimated net realizable value.
 
  In the fourth quarter of 1997, EEX completed a review and evaluation of the
commercial feasibility of its non-producing oil and gas reserves. Based upon
this review, a material downward revision of 712 billion cubic feet of gas
equivalent was recorded to EEX's oil and natural gas reserves, primarily in
behind pipe and proved undeveloped reserves in East Texas and proved
undeveloped reserves in the Cooper Project.
 
  As a result of the downward revision of reserves, the Company compared the
carrying value of its properties against estimated future net revenues in
accordance with SFAS 121. EEX grouped its producing properties by fields,
which it believes is the lowest level for which cash flows are reasonably and
separately identifiable, and determined that anticipated future cash flows
based on the revised reserve estimations and development plans were
insufficient to recover the carrying value of certain fields. Accordingly, the
carrying value of such fields were reduced to fair value, and EEX recorded a
$204 million after-tax, ($260 million pre-tax) charge for impairment in 1997.
 
5. UNUSUAL CHARGES
 
  In early 1997, EEX management initiated a plan to sell or trade non core
assets, reduce operating costs and focus exploration activities in the
offshore U.S. Gulf of Mexico and International areas. Unusual charges include
costs incurred in connection with restructuring operations, relocating the
Corporate headquarters and severance. In the third quarter 1997, as an
integral part of this restructure plan, EEX relocated its Corporate
headquarters to Houston, Texas, committed to the severance of approximately
375 Dallas-based employees and authorized the closure of its Dallas, Texas
administrative office by year-end 1998.
 
                                     A-20
<PAGE>
 
  The Company incurred the following restructure costs in 1997 which are
classified as unusual charges in the Statements of Consolidated Operations:
 
<TABLE>
     <S>                                                                <C>
     Severance for 420 employees under existing plans.................. $20,341
     Office and employee relocation and other..........................   3,580
     Office lease cancellation.........................................     864
     Write down of assets to net realizable value......................   2,320
                                                                        -------
     Total unusual charges............................................. $27,105
                                                                        =======
</TABLE>
 
  Cash requirements for these charges total $25 million of which $14 million
was paid in 1997 with the remainder to be paid in 1998. Severance benefits
were paid to 172 employees in 1997.
 
6. SUPPLEMENTAL CASH FLOW INFORMATION
 
  Cash paid for interest, net of amounts capitalized, was $25,430 in 1997,
$27,704 in 1996, and $15,422 in 1995. Net cash income taxes were refunds of
$5,621 in 1997, and payments of $1,530 in 1996 and $6,011 in 1995.
 
  The table below summarizes non-cash investing and financing activities:
 
<TABLE>
<CAPTION>
                                                                1996     1995
                                                              -------- --------
     <S>                                                      <C>      <C>
     Capital asset and lease obligations assumed............. $150,775
                                                              ========
     Capital asset and lease obligations assumed by others...          $(53,388)
                                                                       ========
     Purchase of DALEN
     Fair value of assets acquired...........................          $474,755
     Cash paid for acquisition...............................           332,888
                                                                       --------
     Liabilities assumed.....................................          $141,867
                                                                       ========
</TABLE>
 
7. DALEN ACQUISITION
 
  On June 8, 1995, EEX acquired all the capital stock of DALEN Corporation
(DALEN) for cash of $340 million and assumed DALEN's bank debt of $115
million. The acquisition was accounted for as a purchase. Assuming the DALEN
acquisition had occurred at the beginning of 1995, EEX pro forma 1995 results
of operations would include revenues of $285,682; an operating loss of
$48,459; a net loss of $52,284 and a basic net loss per share of $0.47.
 
8. BORROWINGS AND CREDIT AGREEMENTS
 
  EEX has a $350 million revolving credit line with a group of banks that
matures on June 27, 2002, of which $320 million was unused at December 31,
1997. The revolving credit agreement limits, at all times, total debt, as
defined, to the lesser of 60% of capitalization, as defined, or $1 billion,
and prohibits liens on property except under certain circumstances. The
interest rate ranges from the London Inter-Bank Offered Rate (LIBOR) (6.0% in
effect at December 31, 1997) plus .21% to .45% per annum, plus a facility fee
of from .09% to .20% per annum, depending upon the consolidated capitalization
ratio. A portion of funds available under the revolving credit line may be
borrowed on a short term basis at current money market rates.
 
 
                                     A-21
<PAGE>
 
                                EEX CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The following is a summary of interest and other financing costs:
 
<TABLE>
<CAPTION>
                                                        1997    1996     1995
                                                       ------- -------  -------
   <S>                                                 <C>     <C>      <C>
   Interest costs incurred............................ $30,645 $29,323  $20,405
   Interest capitalized...............................          (2,174)  (2,256)
                                                       ------- -------  -------
   Interest charged to expense........................ $30,645 $27,149  $18,149
                                                       ======= =======  =======
</TABLE>
 
9. LEASE COMMITMENTS
 
  In December 1996, the Cooper Project equipment and facilities were
refinanced through certain financial institutions. EEX simultaneously entered
into two leases of the facilities extending through December 30, 2010, with
the option to renew the leases, with the consent of the lessors, for up to
five years. For accounting purposes, these leases are classified as capital
leases. The Company has the option to purchase the facilities for fair market
value on any renewal date, or for fixed amounts or fair market value at the
end of the initial lease term. The leases also contain two early buy-out
option dates on which the Company may purchase the facilities for fixed
amounts, and other special purchase options. Interest on the leases was fixed
at 6.51%. EEX is required to maintain a $65 million four-year letter of credit
in support of the equity owners of the leased facilities.
 
  The equipment and facilities used in developing and producing reserves in
the Mississippi Canyon Block 441 are leased through certain financial
institutions for a term extending through October 2001. For accounting
purposes, this lease is classified as a capital lease. EEX has an option to
purchase the facilities for a fixed amount at the early buy-out date of July
22, 2000, or for fair market value at the end of the lease term. There are no
renewal options. Interest on the lease was fixed at 6.97%.
 
  EEX also leases buildings and office space under noncancelable operating
leases that expire at various dates through 2002.
 
  Estimated future minimum payments under noncancelable operating and capital
leases with initial or remaining terms of one year or more at December 31,
1997 are as follows:
 
<TABLE>
<CAPTION>
                                                             OPERATING CAPITAL
                                                              LEASES    LEASES
                                                             --------- --------
   <S>                                                       <C>       <C>
   1998..................................................... $  1,404  $ 23,346
   1999.....................................................    1,404    25,147
   2000.....................................................    1,395    30,948
   2001.....................................................    1,388    25,998
   2002.....................................................    1,023    26,000
   Thereafter...............................................            210,705
                                                             --------  --------
     Total.................................................. $  6,614   342,144
                                                             ========
     Less interest factor...................................            100,409
                                                                       --------
     Capital lease obligations..............................           $241,735
                                                                       ========
 
  Assets recorded under capital leases are as follows:
 
<CAPTION>
                                                               1997      1996
                                                             --------- --------
   <S>                                                       <C>       <C>
   Property and equipment................................... $249,699  $249,699
   Accumulated depreciation and amortization and valuation
    allowances..............................................  123,535    40,054
                                                             --------  --------
     Net.................................................... $126,164  $209,645
                                                             ========  ========
</TABLE>
 
                                     A-22
<PAGE>
 
                                EEX CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  Rental expenses incurred under all operating leases totaled $3,553, $21,110,
and $6,468 in 1997, 1996 and 1995, respectively.
 
10. MINORITY INTERESTS IN PREFERRED SECURITIES OF SUBSIDIARY
 
  On September 29, 1997, EEX concluded a transaction in which all of the
outstanding mandatorily redeemable preferred securities of a subsidiary were
redeemed at the stated value of $150 million. The redemption was funded by a
private sale of new issues of preferred stock of EEX Capital, Inc. (EEXC),
wholly owned by EEX, and Preferred Interests of MIStS Issuer L.L.C. (Issuer),
whose common equity interests are wholly owned by EEXC. Issuer is a special
purpose finance subsidiary, and neither Issuer nor EEXC has operations
independent of EEX. EEXC used the proceeds from the new issue to retire $75
million of a demand note to Issuer under which proceeds from the issuance of
the mandatorily redeemable preferred securities had been loaned to EEXC. On
October 27, 1997, EEXC sold an additional $75 million of preferred stock and
used the proceeds to satisfy the remaining $75 million on the demand note with
Issuer. Issuer used the proceeds from EEXC to redeem all the preferred
interests sold by Issuer on September 29, 1997. The dividend rate for EEXC's
new securities is based on LIBOR (reset quarterly) plus a spread beginning at
3.0% for the period ending December 31, 1997, and increasing by 1.0% quarterly
through December 31, 1998. The new securities are redeemable, in whole or in
part, at the option of EEXC on the quarterly dividend payment dates and $50
million was redeemed in December 1997. Interest payable on a $100 million
demand note from EEX to EEXC will fund the dividends.
 
11. STOCK PLANS
 
  The Company's Revised and Amended 1996 Stock Incentive Plan (the "Plan"),
provides for awards to officers, directors and key employees of restricted
stock, stock options to purchase shares of common stock of EEX, or a
combination of both. EEX has reserved a total of 4 million shares of its
common stock for issuance under the Plan. Options granted under the Plan have
an exercise price of not less than the fair market value of the common stock
on the grant date. Options become exercisable over three to seven years and
expire after ten years. The terms for the release of restrictions on awards of
restricted stock may be performance based, time based, or a combination of
both, and each award may have different restrictions and conditions.
 
 
                                     A-23
<PAGE>
 
                                EEX CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  The following is a summary of stock option activity under the Plan:
 
<TABLE>
<CAPTION>
                                                               WEIGHTED WEIGHTED
                                                               AVERAGE  AVERAGE
                                                    NUMBER OF  EXERCISE   FAIR
                                                     SHARES     PRICE    VALUE
                                                    ---------  -------- --------
<S>                                                 <C>        <C>      <C>
Options outstanding
  December 31, 1994................................
  Granted..........................................   173,000   $10.92
  Exercised........................................
  Canceled.........................................    (3,000)  $ 9.75
                                                    ---------   ------
Options outstanding
  December 31, 1995................................   170,000   $10.94
  Granted.......................................... 1,066,500   $ 9.33   $4.28
  Exercised........................................   (10,000)  $ 9.75
  Canceled.........................................  (255,000)  $ 9.50
                                                    ---------   ------
Options outstanding
  December 31, 1996................................   971,500   $ 9.56
  Granted.......................................... 2,828,250    10.57   $4.28
  Exercised........................................
  Canceled.........................................  (850,500)    9.56
                                                    ---------   ------
Options outstanding
  December 31, 1997................................ 2,949,250   $10.53
                                                    =========   ======
</TABLE>
 
  The following is a summary of Plan stock options outstanding at December 31,
1997:
 
<TABLE>
<CAPTION>
                                                  RANGE OF EXERCISE PRICES
                                              ---------------------------------
                                               $8.81-
                                                $9.88   $11.88-$14.50   TOTAL
                                              --------- ------------- ---------
   <S>                                        <C>       <C>           <C>
   Options outstanding....................... 1,555,250   1,394,000   2,949,250
   Weighted average remaining contractual
    life,
    in years.................................         9           9
   Weighted average exercise price........... $    9.25   $   11.95
   Number exercisable........................   262,500      44,000     306,500
   Weighted average exercise price........... $    9.50   $   14.34
</TABLE>
 
  A summary of restricted stock award activity follows:
 
<TABLE>
<CAPTION>
                                                           NUMBER OF SHARES
                                                        ------------------------
                                                         1997     1996     1995
                                                        -------  -------  ------
   <S>                                                  <C>      <C>      <C>
   Outstanding--Beginning of year......................  70,000   56,000
     Awarded........................................... 390,432  137,000  56,000
     Restrictions Lifted...............................          (98,000)
     Canceled.......................................... (90,000) (25,000)
                                                        -------  -------  ------
   Outstanding--End of year............................ 370,432   70,000  56,000
                                                        =======  =======  ======
</TABLE>
 
  The weighted average grant date fair value of restricted stock awarded during
1997 and 1996 was $10.02 and $9.36, respectively. Fair value is equal to the
common stock fair market value on the grant date.
 
 
                                      A-24
<PAGE>
 
                                EEX CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  In 1997 the Company adopted the Non-Officer stock option plan for eligible
employees and non-employees. Stock options granted to purchase shares of EEX
common stock have an exercise price of not less than the fair market value of
the common stock on the grant date. EEX has reserved a total of 1.5 million
shares for issuance under this plan. Options become exercisable over three
years and expire after 10 years.
 
  A summary of stock option activity under this plan follows:
 
<TABLE>
<CAPTION>
                                                               WEIGHTED WEIGHTED
                                                      NUMBER   AVERAGE  AVERAGE
                                                        OF     EXERCISE   FAIR
                                                      SHARES    PRICE    VALUE
                                                      -------  -------- --------
   <S>                                                <C>      <C>      <C>
   Options outstanding
     December 31, 1996
     Granted......................................... 370,000   $10.17   $3.87
     Exercised.......................................
     Canceled........................................ (10,000)   10.75
                                                      -------   ------
   Options outstanding
     December 31, 1997............................... 360,000   $10.16
                                                      =======   ======
</TABLE>
 
  At December 31, 1997 exercise prices range from $8.52 to $10.75 and these
options have a weighted average remaining contractual life of 10 years. Five
thousand options with a weighted average exercise price of $10.75 were
exercisable at December 31, 1997.
 
  In 1996 the Company adopted the Employee Stock Option Plan for eligible
employees not covered by the plans described above. Stock options granted to
purchase shares of EEX common stock have an exercise price of not less than
the fair market value of the common stock on the grant date. EEX has reserved
a total of 1.5 million shares for issuance under this plan. Options become
exercisable over three to seven years and expire after ten years.
 
  A summary of stock option activity under this plan follows:
 
<TABLE>
<CAPTION>
                                                               WEIGHTED WEIGHTED
                                                               AVERAGE  AVERAGE
                                                    NUMBER OF  EXERCISE   FAIR
                                                     SHARES     PRICE    VALUE
                                                    ---------  -------- --------
   <S>                                              <C>        <C>      <C>
   Options outstanding
     December 31, 1995
     Granted....................................... 1,102,450   $11.00   $5.14
     Exercised.....................................
     Canceled......................................
   Options outstanding
     December 31, 1996............................. 1,102,450   $11.00
     Granted.......................................   404,500   $ 8.97   $4.28
     Exercised.....................................
     Canceled......................................  (497,475)  $10.96
                                                    ---------   ------
   Options outstanding December 31, 1997........... 1,009,475   $10.21
                                                    =========   ======
</TABLE>
 
                                     A-25
<PAGE>
 
                                EEX CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The following is a summary of stock options outstanding under this plan at
December 31, 1997:
 
<TABLE>
<CAPTION>
                                                 RANGE OF EXERCISE PRICES
                                            -----------------------------------
                                            $7.72-$9.88 $10.03-$11.69   TOTAL
                                            ----------- ------------- ---------
   <S>                                      <C>         <C>           <C>
   Options outstanding.....................   372,800      636,675    1,009,475
   Weighted average remaining contractual
    life,
    in years...............................        10            9
   Weighted average exercise price.........   $  8.87      $ 10.99
   Number exercisable......................       500       71,375
   Weighted average exercise price.........   $  8.91      $ 11.01
</TABLE>
 
  Total compensation cost recognized in income for 1997, 1996 and 1995 for
stock based employee compensation awards was immaterial. Had compensation cost
for the Company's plans been determined based on the fair value at the grant
dates consistent with the method of SFAS 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
 
<TABLE>
<CAPTION>
                                                                      1997       1996      1995
                                                                    ---------  --------  --------
   <C>                                    <S>                       <C>        <C>       <C>
   Net (loss)                             As reported.............  $(216,103) $(36,801) $(42,585)
                                          Pro forma...............  $(218,663) $(37,991) $(42,692)
   Basic and diluted net (loss) per share As reported.............  $   (1.71) $   (.29) $   (.38)
                                          Pro forma...............  $   (1.73) $   (.30) $   (.38)
</TABLE>
 
  The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts as additional awards in future years are
anticipated.
 
  Fair value of options was calculated by using the Black Scholes options
pricing model using the following weighted average assumption:
 
<TABLE>
<CAPTION>
                                                                     1997  1996
                                                                     ----  ----
     <S>                                                             <C>   <C>
     Risk free interest rate........................................ 6.26% 6.17%
     Expected life, in years........................................    5     6
     Expected volatility............................................   37%   37%
     Expected dividend yield........................................ None  None
</TABLE>
 
12. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
 
  The Company's operations involve managing market risks related to changes in
interest rates and commodity prices. Derivative financial instruments,
specifically swaps, futures, options and other contracts, are used to reduce
and manage those risks.
 
  In December 1996, in connection with the refinancing of the Cooper Project
leasing arrangements (See Note 9), the Company recognized a $1.4 million after
tax ($2.2 million pre-tax) gain on the settlement of the related interest rate
swap which had been in effect since December 1995 on a notional amount of $150
million.
 
  Commodity Hedging Activities--The Company addresses market risk by selecting
instruments whose value fluctuations correlate strongly with the underlying
commodity being hedged. The Company enters into swaps, futures and other
derivative contracts to hedge the price risks associated with a portion of
anticipated future oil and gas production. While the use of hedging
arrangements limits the downside risk of adverse price movements, it may also
limit future gains from favorable movements. Under these agreements, payments
are received or made based on the differential between a fixed and a variable
product price. These agreements are settled in cash
 
                                     A-26
<PAGE>
 
                                EEX CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
at or prior to expiration or exchanged for physical delivery contracts. The
Company does not obtain collateral to support the agreements but monitors the
financial viability of counter-parties and believes its credit risk is minimal
on these transactions. In the event of nonperformance, the Company would be
exposed to price risk. The Company has some risk of accounting loss since the
price received for the product at the actual physical delivery point may
differ from the prevailing price at the delivery point required for settlement
of the hedging transaction.
 
  Oil and gas hedging activities reduced revenues $11 million and $20 million
in 1997 and 1996, respectively and increased revenues $.1 million in 1995.
 
  At December 31, 1997, EEX had outstanding swaps, collars and futures
agreements that were entered into as hedges extending through December 31,
1998 to exchange payments on 38 Bcf of natural gas and 720 MBbls of oil. At
December 31, 1997, the weighted average strike price and market price per Mcf
of natural gas was $2.37 and $2.34, respectively, and the weighted average
strike price and market price per barrel of oil was $19.25 and $17.74,
respectively. At December 31, 1997 there were $2.3 million of net unrealized
and unrecognized hedging gains based on the difference between the strike
price and the New York Mercantile Exchange futures price for the applicable
trading month. In addition, there were $1.9 million of realized gains on
hedging activities which were deferred and will be applied as an increase in
revenues in 1998 in the month of physical sale of production.
 
  Fair Value of Financial Instruments--At December 31, 1997, the estimated
proceeds the Company would have received to terminate or otherwise settle oil
and gas swaps, collars and futures agreements was $2.3 million, which
represented their fair value. The fair value of all other financial
instruments at December 31, 1997 and 1996 approximated carrying value.
 
                                     A-27
<PAGE>
 
                                EEX CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
13. INCOME TAXES
 
  Prior to August 5, 1997 EEX's operations were included in ENSERCH's
consolidated federal income tax return. Pursuant to a tax sharing agreement,
EEX and ENSERCH made or received payments determined as though EEX and its
subsidiaries filed a separate consolidated federal income tax return. On
August 5, 1997 EEX became a separate taxable entity (See Note 1).
 
PROVISION (BENEFIT) FOR INCOME TAXES:
 
<TABLE>
<CAPTION>
                                                    1997      1996      1995
                                                  --------  --------  --------
<S>                                               <C>       <C>       <C>
Current:
  Federal........................................ $ (3,945) $  4,267  $  3,084
  State..........................................      461        21       130
                                                  --------  --------  --------
    Total........................................ $ (3,484) $  4,288  $  3,214
  Deferred--Federal..............................  (55,461)  (24,324)  (26,456)
                                                  --------  --------  --------
    Total provision (benefit).................... $(58,945) $(20,036) $(23,242)
                                                  ========  ========  ========
</TABLE>
 
RECONCILIATION OF INCOME TAXES (BENEFIT) COMPUTED AT THE FEDERAL STATUTORY
RATE TO PROVISION FOR INCOME TAXES (BENEFIT):
 
<TABLE>
   <S>                                           <C>        <C>       <C>
   (Loss) before income taxes:
     Domestic................................... $(269,081) $(54,343) $(61,726)
     Foreign....................................    (1,042)  ( 2,494)  ( 4,101)
                                                 ---------  --------  --------
       Total.................................... $(270,123) $(56,837) $(65,827)
                                                 =========  ========  ========
   Income taxes (benefit) computed at the
    federal
    statutory rate of 35%....................... $ (94,543) $(19,892) $(23,040)
     Percentage depletion.......................      (193)     (334)     (322)
     Valuation allowance on deferred tax asset..    35,254
     Other--net.................................       537       190       120
                                                 ---------  --------  --------
       Provision for income taxes (benefit)..... $ (58,945) $(20,036) $(23,242)
                                                 =========  ========  ========
</TABLE>
 
                                     A-28
<PAGE>
 
                                EEX CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The deferred tax effect of the difference in financial accounting basis and
income tax basis of EEX's assets and liabilities at December 31, 1997 and 1996
was as follows:
 
<TABLE>
<CAPTION>
                                    1997                           1996
                         ------------------------------ -------------------------------
                          TOTAL    CURRENT   NONCURRENT  TOTAL    CURRENT    NONCURRENT
                         --------  -------   ---------- --------  -------    ----------
<S>                      <C>       <C>       <C>        <C>       <C>        <C>
Deferred Tax Assets:
  Property, plant and
   equipment............ $ 41,910             $ 41,910
  Retirement and other
   employee
   benefit obligations..    1,840   $499         1,341  $    968  $  625      $    343
  Accruals and
   allowances...........    4,378    406         3,972       473     473
  Losses of controlled
   foreign corporations.    8,262                8,262     8,079                 8,079
  All other.............       93     86             7       647                   647
  Valuation allowance...  (35,254)             (35,254)
                         --------   ----      --------  --------  ------      --------
    Total............... $ 21,229   $991      $ 20,238  $ 10,167  $1,098      $  9,069
                         --------   ----      --------  --------  ------      --------
Deferred Tax
 Liabilities:
  Property, plant and
   equipment............                                $ 44,399              $ 44,399
                         --------   ----      --------  --------  ------      --------
Net deferred tax asset
 (liability)             $ 21,229   $991(a)   $ 20,238  $(34,232) $1,098(a)   $(35,330)
                         ========   ====      ========  ========  ======      ========
</TABLE>
--------
(a) Included in other current assets in the balance sheet.
  The Company established a $35 million valuation allowance to reduce the
calculated deferred tax asset to net realizable value in accordance with
Statement of Financial Accounting Standards No. 109 (SFAS 109). Although the
Company has incurred net taxable losses for book purposes in recent years,
management believes it is more likely than not that the Company will generate
taxable income sufficient to realize a portion of the tax benefits associated
with assets which have a tax basis in excess of net cost recorded under the
successful efforts method of accounting used for financial reporting purposes.
Such assets are primarily represented by seismic costs capitalized for tax
purposes but expensed under successful efforts accounting and assets impaired
under the provisions of SFAS 121 for which no tax deduction was immediately
available. This belief is based primarily on available tax planning strategies
which include anticipated sales of assets with fair market values in excess of
book and tax cost bases within the next year. While management is optimistic
that future earnings will be significantly enhanced as a result of its ongoing
restructuring program, the anticipated earnings benefit which could be
realized from further realization of the additional tax basis in selected
assets has not been recognized in the valuation of the Company's deferred tax
asset.
 
                                     A-29
<PAGE>
 
                                EEX CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
14. EMPLOYEE BENEFIT PLANS
 
  Most of the Company's employees participate in a noncontributory defined
benefit pension plan. Accrued retirement costs are funded based upon
applicable requirements of federal law and deductibility for federal income
tax purposes. Employees hired prior to July 1, 1989 are eligible for medical
benefits when they retire. Medical benefits are not prefunded.
 
  Prior to ENSERCH's August 5, 1997 distribution of EEI stock to ENSERCH
shareholders (see Note 1), EEX's cost for pension and retiree medical benefits
was based on allocations from ENSERCH plans. From August 5 through December
31, 1997, EEX's costs for these benefits were based on EEX's allocated pension
plan assets, employees and retirees. EEX's share of the ENSERCH pension plan
assets and liabilities for accrued benefits have been estimated by ENSERCH and
are disclosed in the 1997 column below. During 1998, EEX's allocated assets
will be transferred to an EEX plan with substantially the same benefits as
provided by the ENSERCH plan.
 
EMPLOYEE BENEFIT PLAN COSTS:
 
<TABLE>
<CAPTION>
                                                               1997   1996 1995
                                                              ------  ---- ----
   <S>                                                        <C>     <C>  <C>
   Allocations from ENSERCH.................................. $  596  $800 $600
     EEX Plan Costs:
       Service cost--benefits earned during the period.......    327
       Interest cost on projected benefit obligation.........    670
       Actual (return) loss on assets........................    104
       Net amortization and deferral.........................   (471)
                                                              ------  ---- ----
       Net periodic pension expense.......................... $1,226  $800 $600
                                                              ======  ==== ====
   Post-retirement health care and life insurance:
   Allocations from ENSERCH.................................. $  469  $800 $800
     EEX Plan Costs:
       Service cost--benefits earned during the period.......      9
       Interest cost on projected benefit obligation.........    248
       Net amortization and deferral.........................    139
                                                              ------  ---- ----
       Net periodic post-retirement benefit cost............. $  865  $800 $800
                                                              ======  ==== ====
</TABLE>
 
                                     A-30
<PAGE>
 
                                EEX CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
PENSION PLAN INFORMATION:
 
<TABLE>
<CAPTION>
                                                    EEX PLAN   ENSERCH PLAN
   Valuation Assumptions:                           --------  ---------------
   <S>                                              <C>       <C>        <C>
     Discount rate.................................     7.25%      7.75% 7.65%
     Rate of increase in compensation levels.......     4.00%      4.00% 4.00%
     Expected long-term rate of return on assets...     9.00%      9.50% 9.50%
   Amounts Recognized:
     Actuarial present value of pension benefit
      obligation:
       Vested benefit obligation................... $(18,010) $(302,400)
                                                    ========  =========
       Accumulated benefit obligation.............. $(18,080) $(305,000)
                                                    ========  =========
       Projected pension benefit obligation........ $(23,396) $(333,900)
   Plan assets at fair value.......................   11,420    285,800
                                                    --------  ---------
   Projected benefit obligation in excess of plan
    assets.........................................  (11,976)   (48,100)
   Unrecognized net asset at transition............             ( 3,400)
   Unrecognized prior service cost (credit)........             ( 3,600)
   Unrecognized net actuarial loss.................    1,735      3,400
                                                    --------  ---------
   ENSERCH accrued pension cost....................           $ (51,700)
                                                              =========
   EEX accrued pension cost........................ $(10,241) $ ( 4,900)
                                                    ========  =========
 
POST-RETIREMENT BENEFIT INFORMATION:
 
<CAPTION>
                                                    EEX PLAN   ENSERCH PLAN
   Valuation Assumptions:                           --------  ---------------
   <S>                                              <C>       <C>        <C>
     Discount rate.................................     7.25%      7.75% 7.65%
     Medical cost trend rate.......................     5.70%      6.50% 7.00%
   Amounts Recognized:
   Accumulated post-retirement benefit obligation.. $ (8,366) $ (73,200)
   Unrecognized obligation at transition...........    4,028     53,000
   Unrecognized net actuarial loss.................    2,179     10,700
                                                    --------  ---------
   ENSERCH accrued post-retirement benefit cost....           $ ( 9,500)
                                                              =========
   EEX accrued post-retirement benefit cost........ $ (2,159) $ ( 1,000)
                                                    ========  =========
</TABLE>
 
  The assumed health care cost trend rate is 5.7% for 1997, declining
gradually to 4.3% after 2000, and remaining at that level thereafter. If the
health care cost trend rate were increased by 1%, the accumulated post-
retirement benefit obligation as of December 31, 1997 and the net periodic
post-retirement benefit costs of EEX for 1997 would be increased by $547
thousand and $15 thousand, respectively.
 
  Investment Plan--At December 31, 1997 EEX provided a voluntary contributory
investment plan that was available to substantially all employees of the
Company. The Company's share of costs under the plan was $343, $425, and $304
in 1997, 1996, and 1995, respectively. The Company matches up to 60% of the
first 6% of employees contributions.
 
15. RELATED PARTY TRANSACTIONS
 
  As described in Note 1, on August 5, 1997 ENSERCH distributed to its
shareholders all the shares of EEI common stock it owned and EEI ceased being
a subsidiary of ENSERCH. In preparation for this distribution, on January 1,
1997 responsibility for all management and administrative functions for oil
and gas activities
 
                                     A-31
<PAGE>
 
                                EEX CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
previously performed by ENSERCH, along with selected ENSERCH employees, were
transferred to Old EEI and cost allocations from ENSERCH for these functions
were discontinued. ENSERCH charges to Old EEI for all indirect costs amounted
to $5,610 and $3,542 for 1996 and 1995, respectively.
 
  The Company had sales to certain ENSERCH companies (Enserch Energy Services,
Inc., Lone Star Gas Company and Enserch Processing Company) that aggregated
$25,675, $86,235, and $87,002 in 1997 (through August 5), 1996, and 1995,
respectively.
 
  The Company incurred interest costs, including amounts capitalized, of none
in 1997, and $72 and $3,389 in 1996, and 1995, respectively, on borrowings
from ENSERCH Companies.
 
  Interest income on notes receivable from ENSERCH Companies was $88, $66, and
$1,027 in 1997, 1996, and 1995, respectively.
 
16. CONTINGENT LIABILITIES
 
  Legal Proceedings--On March 23, 1994, a lawsuit was brought in the 299th
District Court of Harris County, Texas against EPO (the Company's predecessor)
and five other defendants by 19 royalty owners under leases contained within
the Corby Gas Unit in Leon County, Texas. Defendants are working interest
owners and lessees under the leases. The plaintiffs allege causes of action
involving breach of express and implied obligations under the leases,
drainage, failure to explore and develop for oil and gas under the leases,
civil conspiracy, tortuous interference with contractual relationships,
specific performance, negligence and conversion. The plaintiffs seek to
recover alleged actual damages in excess of $5.4 million, punitive damages of
at least ten times the actual damages, if any, found by a jury, interest and
attorneys' fees. The Company owned a 7.1% interest in these leases.
 
  A lawsuit was filed against ENSERCH, its utility division, EPO and EPO's
managing general partner in the 348th Judicial District Court of Tarrant
County in May 1989. Plaintiffs seek unspecified actual damages and punitive
damages in the amount of $5 million. Plaintiffs allege royalties were not
fully paid, certain expenses were improperly charged against the amount of
royalties due, negligence in the venting of gas and liquid hydrocarbons into
the air, and breach of duty of good faith and fair dealing by wrongfully
concealing certain material facts concerning sales of gas from the subject
leases to the utility division. On February 12, 1998 the court granted a
summary judgment in the Company's favor thereby dismissing the lawsuit.
 
  A lawsuit was filed on February 24, 1987, in the 112th Judicial District of
Sutton County, Texas, against certain subsidiaries and affiliates of ENSERCH,
including predecessors of EEX. The plaintiffs initially claimed that
defendants failed to make certain production and minimum purchase payments
under a gas purchase contract. In this connection, the plaintiffs have alleged
a conspiracy to violate purchase obligations, improper accounting of amounts
due, fraud, misrepresentation, duress, failure to properly market gas and
failure to act in good faith. Under amended pleadings filed in January, 1997,
plaintiffs have added allegations of negligence and gross negligence in
connection with the measurement of gas, and conversion. Plaintiffs seek actual
damages in excess of $5 million and punitive damages in an amount equal to
0.5% of the consolidated gross revenues of ENSERCH for the years 1982 through
1986 (approximately $85 million), interest, costs and attorneys' fees.
 
  On April 17, 1996, a subsidiary of EEX was made a third party defendant in a
lawsuit filed in the United States District Court for the Central Division of
Utah. The original suit was instituted to quiet title to an oil and gas lease
in Carbon County, Utah, which had been assigned to the plaintiffs by the
subsidiary. The defendants, previous assignees of the lease, are seeking
damages of $10 million from the subsidiary in the event the defendants lose
their rights to the lease.
 
                                     A-32
<PAGE>
 
                                EEX CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  Management believes that the named defendants have meritorious defenses to
the claims made in these and other actions brought in the ordinary course of
business. In the opinion of management, the Company will incur no liability in
excess of amounts provided from these and all other pending claims and suits
that is material for financial reporting purposes.
 
  Environmental Matters--The Company is subject to federal, state and local
environmental laws and regulations that regulate the discharge of materials
into the environment. Environmental expenditures are expensed or capitalized
depending on their future economic benefit. The level of future expenditures
for environmental matters, including costs of obtaining operating permits,
equipment monitoring and modifications under the Clean Air Act and cleanup
obligations, cannot be fully ascertained until the regulations that implement
the applicable laws have been approved and adopted. It is management's opinion
that all such costs, when finally determined, will not have a material adverse
effect on the consolidated financial position or results of operations of the
Company.
 
17. SUPPLEMENTARY OIL AND GAS INFORMATION
 
  Oil and Gas Producing Activities--The following tables set forth information
relating to oil and gas producing activities of EEX. Reserve data for natural
gas liquids attributable to leasehold interests owned by the Company are
included in oil and condensate.
 
<TABLE>
<CAPTION>
                     CAPITALIZED COSTS                       1997       1996
                     -----------------                    ---------- ----------
   <S>                                                    <C>        <C>
   Proved oil and gas properties......................... $1,797,395 $1,868,179
   Unproved oil and gas properties.......................     84,702    116,162
                                                          ---------- ----------
     Total............................................... $1,882,097 $1,984,341
                                                          ========== ==========
   Accumulated depreciation and amortization and
    valuation allowances................................. $1,178,939 $  925,921
                                                          ========== ==========
</TABLE>
 
<TABLE>
<CAPTION>
                                   1997            1996             1995
                             ---------------- --------------- -----------------
                                       NON-             NON-
                               U.S.    U.S.     U.S.    U.S.    U.S.   NON-U.S.
Costs Incurred:              -------- ------- -------- ------ -------- --------
<S>                          <C>      <C>     <C>      <C>    <C>      <C>
  Property acquisition
   costs:
    Proved.................. $                $  3,165        $356,326
    Unproved................   24,970 $   200   23,425         132,744
  Exploration costs.........   50,220   1,428   80,321 $2,781   64,894  $9,000
  Development costs.........  112,457  12,396  100,395    628   77,601
                             -------- ------- -------- ------ --------  ------
      Total................. $187,647 $14,024 $207,306 $3,409 $631,565  $9,000
                             ======== ======= ======== ====== ========  ======
Amortization (per Mcfe)..... $   1.21         $   1.24        $    .96
                             ========         ========        ========
</TABLE>
 
                                     A-33
<PAGE>
 
                                EEX CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The following information is required and defined by the Financial
Accounting Standards Board. The disclosure does not represent the results of
operations based on historical financial statements. In addition to requiring
different determinations of revenues and costs, the disclosure excludes
interest expense and corporate overhead.
 
<TABLE>
<CAPTION>
                                1997               1996                1995
                         ------------------- ------------------  ------------------
                           U.S.     NON-U.S.   U.S.    NON-U.S.    U.S.    NON-U.S.
                         ---------  -------- --------  --------  --------  --------
<S>                      <C>        <C>      <C>       <C>       <C>       <C>
Results of Operations:
  Revenues.............. $ 310,643           $344,911            $218,565
  Less:
   Production costs(a)..    65,366             90,477              65,520
   Exploration costs....    69,732   $ 882     91,003  $ 2,559     72,929  $ 3,777
   Depreciation and
    amortization(b).....   401,538            167,169             109,043      929
   Income tax
    effects(c)..........   (44,037)   (309)    (1,643)    (895)   (10,447)  (1,647)
                         ---------   -----   --------  -------   --------  -------
    Net producing
     activities......... $(181,956)  $(573)  $ (2,095) $(1,664)  $(18,480) $(3,059)
                         =========   =====   ========  =======   ========  =======
</TABLE>
--------
(a)Includes severance, ad valorem and production taxes.
(b) 1997 amount includes pre-tax property impairment of $260 million.
(c) 1997 U.S. amount includes $35,254 for valuation allowance on deferred tax
    asset.
 
  Oil and Gas Reserves (Unaudited)--The following table of estimated proved
and proved developed reserves of oil and gas has been prepared utilizing
estimates of year end reserve quantities provided by Netherland, Sewell &
Associates, Inc., independent petroleum consultants, for December 31, 1997
reserves and DeGolyer and MacNaughton, independent petroleum consultants, for
December 31, 1996 and 1995 reserves. Reserve estimates are inherently
imprecise and estimates of new discoveries are more imprecise than those of
producing oil and gas properties. Accordingly, the reserve estimates are
expected to change as additional performance data becomes available.
 
                                     A-34
<PAGE>
 
                                EEX CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  During the second quarter of 1997, several industry specialist companies
were commissioned to assist management in undertaking field studies with the
objective of converting proven, non-producing reserves to a producing status.
The results were disappointing and EEX immediately began an in-depth review
and evaluation of its reserves. As a result of this review and evaluation, EEX
recognized net downward revisions to its proven reserves of 712 Bcfe in 1997.
 
<TABLE>
<CAPTION>
                                  GAS (MMCF)                    OIL (MBBLS)(A)
                         -------------------------------  ------------------------
                           1997       1996       1995      1997     1996    1995
                         ---------  ---------  ---------  -------  ------  -------
<S>                      <C>        <C>        <C>        <C>      <C>     <C>
U.S. Reserves:
At January 1............ 1,215,624  1,362,763  1,041,736   53,209  66,537   46,486
Changes in reserves
  Revisions of previous
   estimates............  (622,640)    (7,935)    26,802  (15,710) (8,173)   2,312
  Extensions,
   discoveries and
   additions............    40,254     72,854     62,249    3,062   4,315   21,466
  Purchase of minerals
   in place.............               12,347    336,668                    11,417
  Sales of minerals in
   place................   (88,611)  (123,861)   (14,497) (17,054) (3,730) (11,274)
  Production............   (84,469)  (100,544)   (90,195)  (5,407) (5,740)  (3,870)
                         ---------  ---------  ---------  -------  ------  -------
At December 31..........   460,158  1,215,624  1,362,763   18,100  53,209   66,537
                         =========  =========  =========  =======  ======  =======
Proved Developed
 Reserves
  At January 1..........   859,094    937,372    698,643   27,938  30,110   14,437
  At December 31........   425,773    859,094    937,372   16,882  27,938   30,110
</TABLE>
--------
(a) Includes condensate and natural gas liquids of 825 MBbls for 1997, 1,103
    MBbls for 1996 and 3,593 MBbls for 1995.
 
<TABLE>
<CAPTION>
                                                     GAS
                                                   (MMCF)        OIL (MBBLS)
                                                  ---------- -------------------
                                                  1997  1996  1997   1996  1995
                                                  ----  ---- ------  ----- -----
<S>                                               <C>   <C>  <C>     <C>   <C>
Non-U.S. Reserves:
At January 1.....................................  618        6,008  4,963 4,105
  Revisions of previous estimates................               778
  Extensions, discoveries and additions..........       618          1,045   858
  Sales of minerals in place..................... (618)      (1,045)
                                                  ----  ---  ------  ----- -----
At December 31...................................  --   618   5,741  6,008 4,963
                                                  ====  ===  ======  ===== =====
Proved Developed Reserves
  At January 1...................................  --   --      --     --    --
  At December 31.................................  --   --    4,767    --    --
</TABLE>
 
  Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Oil and Gas Reserve Quantities (Unaudited)--has been prepared using estimated
future production rates and associated production and development costs.
Continuation of economic conditions existing at the balance sheet date was
assumed. Accordingly, estimated future net cash flows were computed by
applying prices and contracts in effect in December to estimated future
production of proved oil and gas reserves, estimating future expenditures to
develop proved reserves and estimating costs to produce the proved reserves
based on average costs for the year. Average prices used in the computations
were: Gas (per Mcf) $2.51 in 1997, $3.37 in 1996 and $2.19 in 1995. Oil (per
barrel) $15.71 in 1997, $23.33 in 1996 and $16.91 in 1995.
 
 
                                     A-35
<PAGE>
 
                                EEX CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  Because reserve estimates are imprecise and changes in the other variables
are unpredictable, the standardized measure should be interpreted as
indicative of the order of magnitude only and not as precise amounts.
 
<TABLE>
<CAPTION>
                                           TOTAL    UNITED STATES INTERNATIONAL
                                         ---------  ------------- -------------
<S>                                      <C>        <C>           <C>
Standardized Measure (in millions):
  1997
    Future cash inflows................. $ 1,529.0    $ 1,440.3      $  88.7
    Future production and development
     costs..............................    (540.1)      (509.7)       (30.4)
    Future income tax expense...........     (26.8)       (18.5)        (8.3)
                                         ---------    ---------      -------
    Future net cash flows...............     962.1        912.1         50.0
    Less 10% annual discount............     343.0        334.7          8.3
                                         ---------    ---------      -------
    Standardized measure of discounted
     future net cash flows.............. $   619.1    $   577.4      $  41.7
                                         =========    =========      =======
  1996
    Future cash inflows................. $ 5,474.3    $ 5,326.2      $ 148.1
    Future production and development
     costs..............................  (1,552.9)    (1,460.3)       (92.6)
    Future income tax expense...........  (1,030.2)    (1,014.0)       (16.2)
                                         ---------    ---------      -------
    Future net cash flows...............   2,891.2      2,851.9         39.3
    Less 10% annual discount............   1,176.1      1,157.6         18.5
                                         ---------    ---------      -------
    Standardized measure of discounted
     future net cash flows.............. $ 1,715.1    $ 1,694.3      $  20.8
                                         =========    =========      =======
  1995
    Future cash inflows................. $ 4,180.7    $ 4,091.4      $  89.3
    Future production and development
     costs..............................  (1,512.7)    (1,446.2)       (66.5)
    Future income tax expense...........    (597.1)      (592.0)        (5.1)
                                         ---------    ---------      -------
    Future net cash flows...............   2,070.9      2,053.2         17.7
    Less 10% annual discount............     843.5        833.7          9.8
                                         ---------    ---------      -------
    Standardized measure of discounted
     future net cash flows.............. $ 1,227.4    $ 1,219.5      $   7.9
                                         =========    =========      =======
Change in Standardized Measure (in
 millions):
<CAPTION>
                                           1997         1996          1995
                                         ---------  ------------- -------------
<S>                                      <C>        <C>           <C>
  Sales and transfers of oil and gas
   produced, net of production costs.... $  (245.6)   $  (254.4)     $(153.1)
  Changes in prices, net of production
   and future development costs.........    (761.8)     1,065.0         50.6
  Extensions, discoveries and improved
   recovery, less related costs.........      92.5        185.0        175.8
  Purchases of minerals in place........                    3.2        367.6
  Revisions of previous quantity
   estimates............................    (806.8)      (238.7)      (113.9)
  Sales of minerals in place............    (231.6)      (125.2)       (59.2)
  Accretion of discount.................     234.3        144.4        102.3
  Net change in income taxes............     622.3       (329.6)        (3.1)
  Other.................................        .7         38.0        (18.9)
                                         ---------    ---------      -------
    Total............................... $(1,096.0)   $   487.7      $ 348.1
                                         =========    =========      =======
</TABLE>
 
                                     A-36
<PAGE>
 
                                EEX CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
                               QUARTERLY RESULTS
                                  (UNAUDITED)
 
  The results of operations of the Company by quarters are summarized below.
In the opinion of the Company's management, all adjustments (consisting only
of normal recurring accruals) necessary for a fair presentation have been
made. The 1996 and first three quarters of 1997 per share amounts have been
restated to comply with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share".
 
<TABLE>
<CAPTION>
                                                   QUARTER ENDED
                                     --------------------------------------------
                                     MARCH 31  JUNE 30   SEPTEMBER 30 DECEMBER 31
                                     --------  --------  ------------ -----------
   <S>                               <C>       <C>       <C>          <C>
   1997:
     Revenues....................... $86,807   $ 75,257   $  78,230    $ 73,919
     Operating Income (Loss)........   4,208    (11,730)   (239,225)      6,394
     Net Income (Loss)..............  (2,201)   (13,529)   (181,608)    (18,765)
     Basic and Diluted Net
      (Loss) Per Share.............. $  (.02)  $   (.11)  $   (1.43)   $   (.15)
   1996:
     Revenues....................... $76,972   $ 86,969   $  84,539    $ 89,666
     Operating Income (Loss)........  (7,443)   (12,969)        803     (12,437)
     Net Income (Loss)..............  (9,192)   (13,139)     (3,943)    (10,527)
     Basic and Diluted Net
      (Loss) Per Share.............. $  (.07)  $   (.11)  $    (.03)   $   (.08)
</TABLE>
 
                                     A-37