<PAGE>
 
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                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                                   FORM 10-K
(Mark One)
 
[X]   Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
      Act of 1934 (fee required) for the fiscal year ended December 31, 1998 or
 
[_]   Transition report pursuant to Section 13 or 15(d) of the Securities
      Exchange Act of 1934 (no fee required) for the transition period from     
      to
 
                        Commission file number 1-12905
 
                               ----------------
 
                                EEX CORPORATION
            (Exact name of Registrant as specified in its charter)
 
                               ----------------
 
<TABLE>
<CAPTION>
               Texas                                   75-2421863
<S>                                       <C>
  (State or other jurisdiction of                   (I.R.S. Employer
   incorporation or organization)                  Identification No.)
 
<CAPTION>
        2500 CityWest Blvd.                              77042
             Suite 1400                                (Zip Code)
           Houston, Texas
<S>                                       <C>
  (Address of principal executive
               office)
</TABLE>
 
                                (713) 243-3100
             (Registrant's Telephone Number, Including Area Code)
 
  Securities registered pursuant to Section 12(b) of the Act:
 
<TABLE>
<CAPTION>
   Common Stock ($.01 Par Value)              New York Stock Exchange
<S>                                  <C>
       (Title of Each Class)                  (Name of Each Exchange
                                               on Which Registered)
</TABLE>
 
  Securities registered pursuant to Section 12(g) of the Act:
 
                                     NONE
 
  Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 1,
1999: $242,579,367.
 
  Shares of the Registrant's Common Stock outstanding as of March 1, 1999:
42,382,058 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 the Registrant's definitive
proxy statement for the 1999 annual meeting of shareholders.
 
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<PAGE>
 
                                   FORM 10-K
 
                                 ANNUAL REPORT
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
 <C>      <S>                                                              <C>
                                    PART I
 ITEM 1.  Business......................................................     3
            General.....................................................     3
            History.....................................................     3
            Strategy....................................................     3
            U.S. Exploration and Development--Offshore..................     4
            U.S. Exploration and Development--Onshore...................     5
            International Exploration and Development...................     6
            Plant Operations Business...................................     6
            Sales of Natural Gas and Crude Oil..........................     7
            Competition.................................................     7
            Government Regulation.......................................     7
            Employees...................................................     9
            Offices.....................................................     9
            Forward-Looking Statements--Uncertainties and Risks.........    10
 ITEM 2.  Properties....................................................    11
 ITEM 3.  Legal Proceedings.............................................    13
 ITEM 4.  Submission of Matters to a Vote of Security Holders...........    14
 
                                    PART II
 
 ITEM 5.  Market for Registrant's Common Equity and Related Stockholder
           Matters......................................................    14
 ITEM 6.  Selected Financial and Operating Data.........................    15
 ITEM 7.  Management's Discussion and Analysis of Financial Condition
           and Results of Operations....................................    17
            Results of Operation........................................    17
            Liquidity and Capital Resources.............................    20
            Other Matters...............................................    21
 ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk.....    22
 ITEM 8.  Financial Statements and Supplementary Data...................    23
 ITEM 9.  Changes in and Disagreements with Accountants on Accounting
           and Financial Disclosure.....................................    48
 
                                   PART III
 
 ITEM 10. Directors and Executive Officers of Registrant................    48
 ITEM 11. Executive Compensation........................................    48
 ITEM 12. Security Ownership of Certain Beneficial Owners and
           Management...................................................    48
 ITEM 13. Certain Relationships and Related Transactions................    48
 
                                    PART IV
 
 ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-
           K............................................................    48
</TABLE>
 
                                       2
<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 Gulf of Mexico and Indonesia. EEX also provides
operation and maintenance services, under contract, to two cogeneration plants
("Plant Operations Business").
 
History
 
  The oil and gas exploration and production business of EEX was conducted,
historically, through subsidiary and affiliate entities of ENSERCH Corporation
("ENSERCH"). From 1985 through December 30, 1994, the 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 ownership interest of approximately 99%, with the balance held
by the public. The public's ownership interest increased to approximately 17%
following a public sale of common stock by Old EEI in September 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. Old EEI was first merged into LSEPO, with
LSEPO being the surviving company ("Merger"). In the Merger, LSEPO changed its
name to Enserch Exploration, Inc. ("EEI"). ENSERCH then 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. On December 19, 1997, EEI changed its name to EEX
Corporation.
 
Strategy
 
  The transition to independent status in 1997, coupled with the engagement of
a new senior management team, resulted in a significant restructuring of the
Company's assets, operations and strategy. The resultant strategy is intended
to provide reserve and production growth and improved investment and operating
efficiency. EEX separates its Gulf of Mexico activities into two major areas:
the Continental Shelf ("Shelf") for water depths up to 600 feet and the
deepwater Gulf of Mexico ("Deepwater") for water depths in excess of 600 feet
(a majority of the Deepwater blocks held by EEX fall in water depths between
1,500 and 3,500 feet). Areas where water depths are in excess of 5,000 feet
are often referred to as "Ultra-deep." The major elements of this strategy
are:
 
  Explore EEX's Deepwater Gulf of Mexico Lease Portfolio--During early 1997,
the EEX focus in the Deepwater Gulf of Mexico shifted from the shallower
Pleistocene play to the deeper Pliocene and Miocene plays where significant
reserve potential has been confirmed by recent industry activity. Through
application of geologic and geophysical models, the Company believes that
potential reserves under its current leasehold interests may provide the basis
for significant long-term production growth. The Company believes that the
rigs it has under contract (supplemented as necessary by rigs available in the
global market) are sufficient to execute its Deepwater exploration program. 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 1997. This joint venture provides that Enterprise will fund
a portion of EEX's share of exploratory well costs and certain appraisal and
development costs in return for one-half of EEX's working interest in 78
Deepwater leases. EEX plans to pursue additional joint venture arrangements in
the future to reduce its financial risk. The Company plans to continue to
acquire additional leases as part of its Deepwater strategy.
 
                                       3
<PAGE>
 
  Realize Value from the Cooper Floating Production System ("FPS") and
Pipelines--The Company owns a 60% interest in the FPS and associated pipelines
and other supporting facilities. The FPS is a combination Deepwater drilling
rig and processing facility capable of simultaneous operations. The facility
is capable of processing approximately 40,000 barrels of oil and 100 million
cubic feet of gas daily for transport into a pipeline system. The two
associated pipelines are each approximately 53 miles long and have estimated
daily throughput capacity of 100,000 barrels of oil and 200 million cubic feet
of gas. A processing facility located at the terminus of the pipelines in
shallow water is also 60% owned by EEX. The Company believes that these assets
are significantly underutilized in their present capacity as support for the
Cooper Field. The FPS and pipelines are located approximately six miles from
the Llano discovery well and may have utility as support infrastructure for
anticipated development at Llano and the greater Llano area. In addition, the
Company is evaluating other options to realize the value of the FPS, including
its potential use in support of other drilling and/or processing operations.
 
  Explore and Exploit EEX's Gulf of Mexico Shelf Lease Portfolio--Production
from EEX's Shelf properties represents approximately 50% of total Company
production. In late 1998, the Company began geologic and geophysical studies
to identify reserve potential in formations deeper than conventionally pursued
in the Gulf of Mexico Shelf. The Company believes it may be economically more
attractive to explore this potential than to continue a large-scale
exploitation program in and around existing mature fields. The Company intends
to limit its investment in conventional Shelf exploitation and focus technical
resources on the deeper exploration reserve potential. The Company may change
the composition and size of its leasehold position in the Shelf through
participation in lease sales, asset trades or sales to other operators,
acquisition of producing properties, and/or permitting some leases to expire.
 
  Exit Onshore U.S. Operations--During 1998, the Company sold substantially
all of its assets in East Texas, Oklahoma and North Texas. In addition, the
Company traded its West Texas assets and most of its producing properties in
Louisiana for Gulf of Mexico Shelf producing properties. The Company's
remaining onshore U.S. assets, located along the Texas and Louisiana Gulf
Coast, are generally of higher quality than the assets divested. The Company
has allocated a limited capital investment program to pursue the additional
exploration reserve potential in this area prior to eventual sale or trade.
 
  Expand International--EEX believes that exploration outside of the U.S can
be economically attractive and plans to continue exploration and development
activities in Indonesia. The Company ended all evaluation and exploration
activity under agreements previously signed in Turkey. Additional exploration
opportunities may be acquired, primarily those requiring limited near-term
investment and providing options to expand operations if prospectivity and
economic conditions warrant.
 
U.S. Exploration and Development--Offshore
 
  Deepwater Gulf of Mexico Exploration--In 1997, the first exploratory well
(Llano, EEX 30% interest) drilled in the Deepwater program, at Garden Banks
Block 386, encountered hydrocarbon intervals between 23,000 and 25,000 feet.
 
  During 1998, EEX deepened the Llano discovery well, drilled two exploration
wells in untested areas of the Deepwater and participated in a third
exploration well that tested a prospect in Ultra-deep waters. The Llano well
was deepened to 27,864 feet into Miocene age sands and encountered
hydrocarbons. Well logs indicated the presence of approximately 200 feet of
net pay. An initial exploration well in Green Canyon Block 341 (Sheba, EEX
36.25% interest) was drilled into the eastern edge of a large untested
structure. This well encountered sand development in the primary target sand
but did not appear to be connected to a migration pathway from the hydrocarbon
source and, consequently, was not successful. Additional seismic
interpretation work has identified other prospects in this structure. The
second Deepwater exploratory well in 1998 was drilled at Mississippi Canyon
Block 580 (Elvis, EEX 23% interest) and was unsuccessful due to the absence of
sufficient sand development. EEX participated in a third exploratory well
drilled by another operator (Gamera, EEX 12.5% interest) in a water depth in
excess of 7,700 feet on Atwater Valley Blocks 118/119. This well was also
unsuccessful.
 
                                       4
<PAGE>
 
  EEX also participated in an exploration well located on Viosca Knoll Block
737 (EEX 12.5% interest) operated by another company to test a shallower
Miocene-aged structure on the Flex Trend in the Gulf of Mexico. The well
encountered gas sands; however, the reserve size was insufficient to justify
commercial development at this time. The well was plugged and abandoned.
 
  As a result of the Enterprise joint venture agreement and agreements with
other working interest owners entered into to reduce the financial risk
associated with Deepwater exploration, EEX's total dry hole expense in 1998
associated with its Deepwater exploration wells was $5 million. In the absence
of these agreements, EEX's dry hole expense in 1998 would have increased by
$27 million.
 
  EEX participated in the Minerals Management Service sponsored Outer
Continental Shelf lease sales numbers 169 and 171, adding 12 Deepwater blocks
to the leasehold inventory at a net cost of $9 million. As a result of these
new leases, four new prospects were added to EEX's Deepwater prospect
inventory while solidifying leasehold positions around several existing
prospects. At year-end, EEX held interests in 98 blocks in the Deepwater Gulf
of Mexico, nine of which were held by unit production, and 57 of which were
operated by EEX.
 
  In October 1998, EEX entered into a three-year contract for the use of the
Global Marine semi-submersible rig, Arctic I, at an average rate over the life
of the contract of $130,000 per day commencing upon delivery of the rig in
mid-1999. At the end of 1998, EEX had two Deepwater rigs under contract. The
first is the Diamond Offshore Ocean Voyager, whose rig contract will expire in
early 1999 with the conclusion of drilling the first appraisal well at the
Llano prospect. The second rig contract, for the R&B Falcon C. Kirk Rhein, Jr.
rig, has approximately one year of drilling time remaining over the next two
calendar years at a cost of approximately $95,000 per day. In early 1999, this
rig completed drilling at the Elvis prospect and began drilling the George
Prospect on Mississippi Canyon Block 442.
 
  Deepwater Gulf of Mexico Appraisal and Development--In the third quarter of
1998, the first appraisal well began to drill on Garden Banks Block 386 to
follow-up on the Llano discovery. EEX expects to incur no net capital
expenditure for the cost of this well as it is covered under the Enterprise
joint venture agreement. During 1998, EEX also undertook feasibility studies
to explore early production options for the Llano field. The working interest
owners on the lease elected to defer additional studies or procurement of
facilities until the results of the appraisal well are obtained and evaluated.
EEX reported no proved reserves at year-end 1998 attributable to the Llano
discovery.
 
  Deepwater Gulf of Mexico, Cooper Field--The Cooper Field (Garden Banks Block
388), developed in the shallower depths of Pleistocene sands, began to produce
oil and gas in 1995 and has declined rapidly. During 1998, the field began to
approach the end of its economic life. EEX is assessing alternative uses for
the FPS and the oil and gas pipelines serving the Cooper Field. The Company is
studying the possible use of these facilities and pipelines as part of an
early production option for production anticipated from the discovery at
Llano. The Cooper Field had four wells on production at year-end 1998.
 
  Gulf of Mexico Shelf (Including Texas State Waters)--During 1998, EEX
participated in the drilling of 13 wells on the Continental Shelf: nine of
which were completed, three were unsuccessful and one well on Vermillion Block
37 (EEX 75% interest) was temporarily abandoned for possible sidetracking
following additional evaluation of seismic data. Approximately $5 million in
net well costs for Vermillion Block 37 has been suspended pending the outcome
of this technical review. Shelf operating costs on an equivalent operating
basis were reduced from $3.20 per barrel of oil in 1997 to $2.71 per barrel of
oil in 1998. This reduction was achieved through the restructuring of shore
base operations in Cameron and Fourchon in Louisiana, consolidations and
improvement in helicopter and supply boat logistics and maintenance operations
and decreased facility downtimes.
 
U.S. Exploration and Development--Onshore
 
  During 1998, the Company aggressively pursued its strategy to exit U.S.
onshore.
 
                                       5
<PAGE>
 
  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.
This sale was closed in April 1998 with an effective date of January 1, 1998.
EEX received $235 million and retained an approximate 30 billion cubic feet
production payment (net of royalty) from the purchaser. EEX retained this
production payment to support a long-standing volumetric gas supply obligation
to Encogen One Partners, Ltd.
 
  In October 1998, EEX closed a property trade that exchanged substantially
all of its properties located in West Texas for properties in the Gulf of
Mexico Shelf plus $9 million in cash consideration. The effective date for
this exchange was January 1, 1998.
 
  In December 1998, EEX agreed to sell substantially all of its oil and gas
properties in the Oklahoma and the Hardeman basin in North Central Texas, for
an aggregate consideration of approximately $32 million in cash. The two
transactions were closed in December 1998.
 
  In December 1998, EEX agreed to exchange its operated oil and gas producing
properties in Louisiana plus cash compensation for interests in the East
Cameron Block 349/350 field. This exchange was completed on January 21, 1999.
 
  EEX's remaining onshore producing properties are concentrated primarily
along the Texas Gulf Coast.
 
International Exploration and Development
 
  Indonesia (Onshore Java) Tuban Block--EEX acquired an additional 25%
interest in the Tuban block during the first quarter of 1998 for approximately
$40 million plus a portion of the future net profits. As a result of this
acquisition, EEX now owns a 50% interest in the production sharing contract
relating to the Tuban block, which includes the Mudi Field. During the second
quarter of 1998, initial production facilities at the Mudi Field were
completed by the operator and production was increased to approximately 20,000
barrels of oil per day (gross). Well productivity has exceeded expectations
and contributed to an increase in reported gross recoverable reserves. EEX
also participated in the drilling of an unsuccessful exploration well on the
Karang Anyar prospect located southeast of the Mudi Field. The well
encountered a non-commercial gas accumulation and was plugged.
 
  Indonesia (Offshore Sumatra) Asahan Block--In 1997, EEX acquired a 60%
interest in 4,200 square kilometers in the Asahan block. During 1998, seismic
data over the block was acquired and processed. During 1999, EEX plans to seek
a partner to contribute all or a portion of exploratory well costs to earn an
interest in the block.
 
  Turkey--During 1998, EEX pursued two exploration opportunities in Turkey. An
exploratory well was drilled in the Salt Lake Prospect, the Sultanhani #2, for
a net cost to EEX of approximately $4 million. The well was unsuccessful.
Additionally, EEX had the opportunity to participate in exploratory licenses
covering 1.6 million gross acres located on the southeastern portion of the
South Mardin Basin. EEX elected not to fund these additional investments and
the agreement was cancelled. Both concessions in Turkey were returned to the
operator, concluding EEX's activities in Turkey.
 
Plant Operations Business
 
  EEX Power Systems Company ("EEXPS"), a division of EEX, provides operation
and maintenance services under contract to two cogeneration plants: (i)
"Encogen One," a 255 MW cogeneration facility located in Sweetwater, Texas and
(ii) "Encogen Northwest," a 160 MW cogeneration facility located in
Bellingham, Washington. EEXPS operates and maintains the facilities under
terms of operation and maintenance agreements that provide EEXPS periodic fees
and reimbursement of certain costs. Until November 1998, EEXPS also operated a
third cogeneration facility in Buffalo, New York. However, as a result of the
termination of the facility's power purchase agreement, the owners exercised
buy-out provisions and terminated the operation and maintenance agreement.
 
                                       6
<PAGE>
 
Sales of Natural Gas and Crude Oil
 
  EEX sells its natural gas under both long- and short-term contracts. EEX
markets most of its gas through third-party marketing organizations. EEX sells
its crude oil under contracts that are for periods of one year or less. Prices
generally are based upon field posted prices plus negotiated bonuses. EEX
makes no sales of natural gas and/or crude oil that are in the aggregate equal
to ten percent or more of its revenues to a customer where the loss of such
customer would have a material adverse effect on EEX.
 
  Sales data are set forth under "Selected Operating Data" included as part of
Item 6.
 
  EEX utilizes financial instruments to reduce exposure of its oil and gas
production to price volatility. See Item 7A, "Quantitative and Qualitative
Disclosures about Market Risk"; Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Oil and Gas Marketing"; and
Note 12 to Consolidated Financial Statements in Item 8 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,
equipment, and capital required to conduct operations. EEX's competitors
include major oil and gas companies, as well as numerous 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. The Company believes that it has a large
inventory of exploratory prospects, relative to its size; however, large
capital investments will be required to explore, appraise and develop these
prospects. The Company's success in discovering reserves will depend on its
ability to select and exploit suitable prospects in today's competitive market
and on its ability to find appropriate partners to reduce the financial risk
of exploration and development.
 
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. Because these 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 Onshore Operations--The Texas Railroad Commission regulates
the production of oil and gas by EEX in Texas. Similar types of regulations
are in effect in Indonesia and other foreign countries. 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
addition, conservation laws establish maximum rates of production requirements
regarding the ratability of production.
 
  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 for exploration, development and production plans
prior to the commencement of offshore operations. Similarly, the MMS has
promulgated regulations governing the plugging and abandoning of wells located
offshore and the removal of all production facilities. The MMS also issues
rules on calculation of royalty payments and valuation of production for
royalty purposes. 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.
 
                                       7
<PAGE>
 
  Environmental Matters--EEX's U.S. 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. Failure to comply with these laws
and regulations may result in the assessment of administrative, civil, or
criminal penalties.
 
  With respect to offshore leases in U.S. waters, EEX's operations are subject
to interruption or termination by governmental authorities on account of
environmental contamination and other considerations. The Outer Continental
Shelf Lands Act ("OCSLA") provides the federal government with broad
discretion in regulating the release or continued use of offshore resources
for oil and gas production. If the government were to exercise its authority
under OCSLA to restrict the availability of offshore oil and gas leases (for
example, due to a serious incident of pollution), such an action could have a
material adverse effect on EEX's operations.
 
  The Oil Pollution Act of 1990 ("OPA") and regulations thereunder impose a
variety of regulations on "responsible parties" (which includes owners and
operators of onshore facilities, pipelines, and vessels, or lessees or
permittees of areas where offshore facilities are located) related to the
prevention of oil spills and liability for damages resulting from such spills
in the United States waters. The OPA assigns liability to each responsible
party for oil removal and cleanup costs, and a variety of public and private
damages including natural resource damages. In addition, OPA imposes ongoing
requirements on responsible parties, including preparation of spill response
plans and proof of financial responsibility to cover at least some costs in a
potential spill. EEX maintains insurance against costs of cleanup operations,
but is not fully insured against all such risks. 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.
 
  EEX's U.S. onshore operations are subject to numerous laws and regulations
controlling the discharge of materials into the environment or otherwise
relating to the protection of the environment. These laws and regulations,
among other things, may 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, 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 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 ("RCRA") and
comparable state laws and regulations. In addition, EEX currently owns or
leases, and has in the past owned or leased, properties that have been used
for oil and gas operations for many years. Although EEX has utilized operating
and disposal practices that were standard in the industry at the time,
hydrocarbons or other wastes may have been disposed of or released on or under
the properties owned or leased by EEX or on or under other locations where
such wastes have been taken for disposal. Many of these properties have been
operated by third parties whose operations were not under EEX's control. These
properties and the wastes disposed thereon may be subject to CERCLA, RCRA, and
analogous state laws, and EEX could be required to remove or remediate
previously disposed wastes or property contamination or perform remedial
plugging operations to prevent future contamination.
 
  EEX's foreign operations are potentially subject to similar governmental
controls and restrictions relating to the environment. Requirements of these
foreign governmental bodies may include, among other things, controls over the
discharge of materials in the environment, standards for removal and cleanup
of spills, and restrictions on the handling and disposal of waste materials.
 
                                       8
<PAGE>
 
  Regulation of 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 includes 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 jurisdiction of the Federal Energy Regulatory Commission
("FERC") over natural gas transportation was unaffected by the Decontrol Act.
 
  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.
 
  The courts have largely affirmed the significant features of Order No. 636
and numerous related orders pertaining to the individual pipelines, although
certain appeals remain pending and the FERC continues to review and modify its
open access regulations. In particular, the FERC has recently begun a broad
review of its transportation regulations, including how they operate in
conjunction with state proposals for retail gas market restructuring, whether
to eliminate cost-of-service rates for short-term transportation, whether to
allocate all short-term capacity on the basis of competitive auctions, and
whether changes to its long-term transportation policies may also be
appropriate to avoid a market bias toward short-term contracts. While any
resulting FERC action would affect EEX only indirectly, these inquiries are
intended to further enhance competition in natural gas markets, while
maintaining adequate consumer protections.
 
  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, nondiscriminatory purchase and
transport requirements, but does not currently entail rate regulation. Growing
competitive pressures in marketing natural gas may cause states to regulate
gathering facilities more stringently in the future.
 
  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, 1999, EEX had 243 full-time employees, 192 of which were
involved principally with oil and gas operations. The remaining employees were
involved with Plant Operations Business.
 
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. Plant
operation offices are maintained in Sweetwater, Texas and Bellingham,
Washington.
 
                                       9
<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, are "forward-looking
statements," within the meaning of Section 21E of the Securities Exchange Act
of 1934, as amended, and 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 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 focusing on exploration opportunities in
offshore and international areas which will increase associated exploration
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. Exploration 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.
 
  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. Operating
hazards such as fires, explosions, blow-outs, equipment failures, abnormally
pressured formations and environmental accidents may have a material adverse
effect on EEX's operations or financial condition. 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 Gulf of Mexico oil and gas reserves include properties
located in water depths of 20 to greater than 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 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 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.
 
  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. Downward adjustment in reserve estimates could adversely
affect EEX. Also, any substantial decline in projected net revenues resulting
from production of reserves could have a material adverse effect on the
Company's financial position and results of operations.
 
                                      10
<PAGE>
 
  Capital Funding--EEX's access to public or private equity or debt markets
may be limited by general conditions in or volatility of the markets or
conditions affecting the oil and gas industry. No assurances can be given that
the Company will be able to secure funds in these markets, or that such funds
will be obtained on terms favorable to the Company.
 
  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" and "Environmental Matters," above. Enforcement of or
changes to these regulations could have a material impact on the Company's
operations, financial condition and results of operations.
 
  International Operations--EEX's interests in properties 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,
renegotiations 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
 
  In 1998, EEX's domestic properties were located in two regions: the Gulf of
Mexico (including state waters) and Onshore (Texas and Louisiana);
international properties were located primarily in Indonesia. The following
table sets forth estimated net proved reserves of EEX by region, as estimated
by Netherland, Sewell & Associates, Inc., at December 31, 1998:
 
<TABLE>
<CAPTION>
                                                        Proved Reserves at
                                                        December 31, 1998
                                                  ------------------------------
                                                             Oil and
                                                   Natural     Gas
                                                     Gas     Liquids     Total
                                                  (MMcf)(1) (MBbls)(2) (MBoe)(3)
                                                  --------- ---------- ---------
   <S>                                            <C>       <C>        <C>
   Gulf of Mexico................................   99,792     4,036    20,668
   Onshore.......................................  103,759     2,395    19,688
                                                   -------    ------    ------
    Total Domestic...............................  203,551     6,431    40,356
   International.................................       --    19,728    19,728
                                                   -------    ------    ------
    Total........................................  203,551    26,159    60,084
                                                   =======    ======    ======
</TABLE>
--------
(1)  Million cubic feet.
(2)  Thousand barrels.
(3)  Thousand barrels of oil equivalent with six Mcf of gas converted to one
     barrel of liquid.
 
  See Note 18 to Consolidated Financial Statements in Item 8 for additional
information on oil and gas reserves.
 
  During 1998, EEX filed Form EIA-23 with the Department of Energy reflecting
reserve estimates for the year 1997. Such reserve estimates were not
materially different from the 1997 reserve estimates reported in Note 18 to
Consolidated Financial Statements in Item 8.
 
                                      11
<PAGE>
 
  Developed and undeveloped lease acreage as of December 31, 1998 is set forth
below:
 
<TABLE>
<CAPTION>
                                             Developed Acres   Undeveloped Acres
                                             ---------------  -------------------
                                              Gross  Net (1)    Gross    Net (1)
                                             ------- -------  --------- ---------
   <S>                                       <C>     <C>      <C>       <C>
   Gulf of Mexico........................... 324,365  91,444  1,024,785   349,093
   Onshore..................................  72,132  35,156     76,648    38,542
                                             ------- -------  --------- ---------
     Total Domestic......................... 396,497 126,600  1,101,433   387,635
   International............................   5,000   5,000  2,950,589 1,194,202
                                             ------- -------  --------- ---------
     Total.................................. 401,497 131,600  4,052,022 1,581,837
                                             ======= =======  ========= =========
</TABLE>
--------
(1)Represents the proportionate interest of EEX in the gross acres under
lease.
 
  EEX purchased approximately 28,000 net acres in 13 offshore blocks (12
Deepwater and one shelf) at the two 1998 Federal OCS Lease Sales.
Additionally, EEX acquired 66,192 net acres in 1998 through a like-kind
exchange transaction completed in the third quarter.
 
  At year-end, EEX's Gulf of Mexico holdings totaled some 440,537 net acres,
with 248,121 net acres located on the Shelf and 192,416 net acres located in
the Deepwater. The total number of blocks in which EEX had an interest at
year-end was 328, with an average working interest of 35.04%. EEX operates 129
of these blocks.
 
  During 1998, EEX cancelled or allowed to expire nine Gulf of Mexico blocks
and sold its interest in another 37 blocks that had already been condemned
through either geological or geophysical findings or by drilling.
 
  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>
   1999...................................   200,568  79,561 2,594,323 1,105,135
   2000...................................   243,741  82,288        --        --
   2001 and later.........................   657,124 225,786   356,266    89,067
                                           --------- ------- --------- ---------
   Total.................................. 1,101,433 387,635 2,950,589 1,194,202
                                           ========= ======= ========= =========
</TABLE>
 
  The Company may determine to permit drilling rights with regard to a portion
of the undeveloped acreage to expire before the expiration of primary terms
specified in this schedule by non-payment of delay rentals.
 
  Drilling activity during the three years ended December 31, 1998 is set
forth below:
 
<TABLE>
<CAPTION>
                                                   1998       1997       1996
                                                ---------- ---------- ----------
                                                Gross Net  Gross Net  Gross Net
                                                ----- ---- ----- ---- ----- ----
   <S>                                          <C>   <C>  <C>   <C>  <C>   <C>
   Exploratory Wells:
    Productive.................................  5.0   2.3   32  11.3   42  30.0
    Dry........................................  9.0   3.4   19   8.7   32  20.7
                                                ----  ----  ---  ----  ---  ----
     Total..................................... 14.0   5.7   51  20.0   74  50.7
                                                ====  ====  ===  ====  ===  ====
   Development Wells:
    Productive................................. 35.0  17.1   75  33.2   82  54.3
    Dry........................................  3.0   1.2    9   3.8    5   4.0
                                                ----  ----  ---  ----  ---  ----
     Total..................................... 38.0  18.3   84  37.0   87  58.3
                                                ====  ====  ===  ====  ===  ====
</TABLE>
 
                                      12
<PAGE>
 
  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, 1998, EEX was participating in 6 wells (2.5 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
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.
 
  At December 31, 1998, EEX owned interests in 443 gas wells (196 net) and 71
oil wells (23 net) in the United States and 20 oil wells (10 net) in
Indonesia. Of these, 73 gas wells (41 net) and 4 oil wells (3 net) were dual
completions in single boreholes.
 
  Additional information relating to the oil and gas activities of EEX is set
forth in Note 18 to Consolidated Financial Statements in Item 8 and in
"Selected Operating Data" in Item 6.
 
  EEX leases approximately 78,000 square feet of office space for its office
in Houston, Texas, under leases expiring in September 2002.
 
Item 3. Legal Proceedings
 
  EEX is involved in a number of legal and administrative proceedings incident
to the ordinary course of its business. In the opinion of management, based on
the advice of counsel and current assessment, any liability to EEX relative to
these ordinary course proceedings will not have a material adverse effect on
EEX's operations or financial condition.
 
  In addition, on August 3, 1998, EEX, several of its current and/or former
officers and directors, Texas Utilities Company ("TUC") and TUC's Chief
Executive Officer were named in a class action lawsuit filed in the Northern
District of Texas that was designated as Gracy Fund L.P. v. EEX Corporation,
et al., ("Gracy Fund"). The Gracy Fund complaint alleged violations of the
Securities Act of 1933 ("33 Act") and the Securities Exchange Act of 1934 ("34
Act") against various defendants.
 
  Additionally, on August 3, 1998, EEX, several of its current and/or former
officers and directors, and two additional companies (ENSERCH Corporation and
DeGolyer & MacNaughton) were named in a class action lawsuit filed in the
Southern District of Texas that was designated as Stan C. Thorne v. EEX Corp.,
et al ("Thorne"). The Thorne complaint alleged violations of the 34 Act and
common law-based negligent misrepresentations and fraud claims.
 
  On October 5, 1998, the Thorne defendants filed a motion to transfer the
Thorne action to the Northern District of Texas. On November 20, 1998, the
Thorne action was transferred to the Northern District of Texas and
consolidated with the Gracy Fund action.
 
  On January 22, 1999, plaintiffs filed an amended class action complaint in
the consolidated Gracy Fund action against EEX, several of its current and/or
former officers and directors and another company, ENSERCH Corporation
("Consolidated Complaint"). The Consolidated Complaint alleges violations of
Sections 11, 12(a)(2) and 15 of the 33 Act and violations of Sections 10(b),
14(a) and 20(a) of the 34 Act against various defendants. The Consolidated
Complaint alleges the Sections 10(b), 15 and 20(a) claims on behalf of a class
of plaintiffs who acquired EEX's stock pursuant to an October 1996
Registration Statement and Proxy/Prospectus ("EEX Subclass").
 
                                      13
<PAGE>
 
  Plaintiffs allege that during the class period, defendants made materially
false and misleading statements, and failed to disclose material facts,
regarding the value and volume of EEX's proved reserves from its East Texas
operations. According to plaintiffs, these purported misrepresentations
artificially inflated the price of EEX's common stock throughout the class
period, induced the EEX Subclass to approve the merger that spun EEX off from
ENSERCH and induced the EEX Subclass to acquire stock pursuant to the
Registration Statement and Proxy/Prospectus issued regarding this merger.
 
  While the Company intends to contest this action vigorously, and filed a
motion to dismiss the Consolidated Complaint on March 8, 1999, the Company
cannot predict the outcome of this matter at this time. All discovery is
stayed pending the determination of the motion to dismiss.
 
Item 4. Submission of Matters to a Vote of Security Holders
 
  At a special meeting of shareholders held on December 8, 1998, the
shareholders approved a one-for-three reverse split of the Company's issued
and outstanding common stock and a decrease in the number of authorized shares
of the Company's outstanding common stock from 400,000,000 shares to
150,000,000 shares. Listed below is the result of the vote.
 
<TABLE>
<CAPTION>
        Shares                      Shares Voted                                    Shares
      Voted "For"                    "Against"                                   "Abstaining"
      -----------                   ------------                                 ------------
      <S>                           <C>                                          <C>
      97,771,506                     19,490,902                                    281,146
</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 under the ticker symbol "EEX." The following table shows the high and
low sales prices per share of the common stock as reported in the New York
Stock Exchange--Composite Transactions report for the periods shown. Prices
prior to the one-for-three reverse stock split described in Item 4 above have
been adjusted for the stock split.
 
<TABLE>
<CAPTION>
                                            1998                1997
                                          --------------      -------------
                                          High      Low       High     Low
                                          ----      ----      ----     ----
      <S>                                 <C>       <C>       <C>      <C>
      First Quarter...................... $30 3/8   $22 11/16 $36 3/4  $25 7/8
      Second Quarter.....................  31 7/8    24 9/16   33 3/4   23 1/4
      Third Quarter......................  28 11/16  11 5/8    35 7/16  21 15/16
      Fourth Quarter.....................  15         5 1/16   29 1/4   24
</TABLE>
 
  At March 1, 1999, EEX had 42,382,058 outstanding shares of common stock held
by 12,426 shareholders of record.
 
  There were no dividends declared on the Company's common stock in 1998 or
1997. The declaration of future dividends will be dependent upon business
conditions, earnings, cash requirements and other relevant factors as
determined by the Company's Board of Directors. Under the terms of the
Company's Series B 8% Cumulative Perpetual Preferred Stock (the "Series B
Preferred Stock") issued on January 8, 1999, the Company may not declare or
pay any dividend or make any other distribution on its common stock, unless
all dividends due upon the Series B Preferred Stock have been paid or provided
for.
 
                                      14
<PAGE>
 
Item 6. Selected Financial and Operating Data
 
                                EEX CORPORATION
                            SELECTED FINANCIAL DATA
 
<TABLE>
<CAPTION>
                                As of or for Year Ended December 31
                         -----------------------------------------------------
                           1998      1997        1996        1995       1994
                         --------  ---------  ----------  ----------  --------
                             (In thousands, except per share amounts)
<S>                      <C>       <C>        <C>         <C>         <C>
INCOME STATEMENT DATA
 Revenues............... $219,052  $ 314,213  $  338,146  $  237,358  $191,866
                         ========  =========  ==========  ==========  ========
 Net (Loss)............. $(40,926) $(216,103) $  (36,801) $  (42,585) $(50,733)
                         ========  =========  ==========  ==========  ========
 Pro forma information--
  Change in tax status
  (a)
   (Loss) before income
    taxes...............                                              $(50,477)
   Income taxes
    (benefit)...........                                               (17,591)
                                                                      --------
    Net (Loss)..........                                              $(32,886)
                                                                      ========
 Basic and Diluted Net
  (Loss) per Share (pro
  forma for years prior
  to 1995)(b)........... $  (0.97) $   (5.12) $    (0.87) $    (1.14) $  (0.93)
                         ========  =========  ==========  ==========  ========
BALANCE SHEET DATA
 Total Assets........... $565,070  $ 807,789  $1,195,454  $1,180,238  $812,871
                         ========  =========  ==========  ==========  ========
<CAPTION>
CAPITAL STRUCTURE
<S>                      <C>       <C>        <C>         <C>         <C>
 Short-term borrowings..       --  $   5,000          --          --        --
 Capital lease
  obligations........... $233,318    241,735  $  244,985  $   98,043  $155,855
 Long-term debt.........       --     25,000     115,000     160,000        --
 Company-obligated
  mandatorily redeemable
  preferred securities
  of subsidiary.........       --         --     150,000     150,000        --
 Minority interests in
  preferred stock of
  subsidiary............       --    100,000          --          --        --
 Shareholders' equity...  234,300    274,663     490,406     525,992   364,828
                         --------  ---------  ----------  ----------  --------
 Total.................. $467,618  $ 646,398  $1,000,391  $  934,035  $520,683
                         ========  =========  ==========  ==========  ========
</TABLE>
--------
(a) 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.
(b) The per share amounts for periods prior to 1998 have been restated to
    reflect the reduction in weighted average shares outstanding due to the
    one-for-three reverse stock split effective on December 8, 1998.
 
                                      15
<PAGE>
 
                                EEX CORPORATION
                            SELECTED OPERATING DATA
 
<TABLE>
<CAPTION>
                                         As of or for Year Ended December 31
                                       ---------------------------------------
                                        1998   1997    1996     1995    1994
                                       ------ ------ -------- -------- -------
<S>                                    <C>    <C>    <C>      <C>      <C>
Sales volume
 Natural gas (Bcf)....................   57.9   84.5    100.5     90.2    67.1
 Oil and condensate (MMBbls)..........    5.6    4.7      5.1      3.4     2.0
 Natural gas liquids (MMBbls).........    0.2    0.7      0.6      0.5     0.2
  Total volumes (MMBoe) (a)...........   15.5   19.5     22.5     18.9    13.4
Average sales price(b)
 Natural gas (per Mcf)................ $ 2.21 $ 2.36 $   2.17 $   1.74 $  2.15
 Oil and condensate (per Bbl).........  13.24  19.19    19.40    16.86   15.38
 Natural gas liquids (per Bbl)........  10.47  13.80    12.27     9.38   10.85
  Total (per Boe)(a)..................  13.22  15.39    14.43    11.57   13.26
Average costs and expenses (per
 Boe)(a)(c)
 Production and operating(b).......... $ 3.03 $ 2.51 $   3.13 $   2.63 $  2.36
 Exploration..........................   2.92   3.62     4.16     4.06    4.61
 Depreciation and amortization........   6.54   7.42     7.55     5.93    5.27
 General, administrative and other....   1.56   1.46     1.56     1.58    1.48
 Taxes, other than income.............   0.71   0.89     0.97     1.00    0.99
Net Wells Drilled
 Total................................     24     57      109       81      74
 Productive...........................     19     44       84       51      44
Proved Reserve Data (at year end)
 Natural Gas (Bcf)....................  203.6  460.2  1,216.2  1,362.8 1,041.7
 Oil and condensate (MMBbls) (d)......   26.2   23.8     59.2     71.5    50.6
  Total (MMBoe) (a)...................   60.1  100.5    261.9    298.6   224.2
Standardized Measure of Discounted
 Future Net Cash Flows (in millions).. $275.9 $619.1 $1,715.1 $1,227.4 $ 879.3
</TABLE>
--------
(a) Natural gas is converted to barrels of oil equivalents (Boe) on the basis
    of six Mcf equals one Boe.
(b) Before related production, severance and ad valorem taxes.
(c) Excludes unusual and non-recurring expenses.
(d) Reserves include natural gas liquids attributable to leasehold interests.
 
  The above table includes the operating data from the Company's International
activities. In 1998, oil sales volumes were 2.4 MMBbls at an average price of
$12.38 per barrel with production and operating expense of $4.72 per Boe. In
prior years, the Company had no International production.
 
                                       16
<PAGE>
 
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
 
  The following discussion should be read in conjunction with EEX's
Consolidated Financial Statements and notes thereto included under Item 8.
 
  In 1997, EEX became a separate company, wholly independent of its former
majority owner, ENSERCH Corporation, a public utility. This transition to
independent status, coupled with the engagement of a new management team,
resulted in a restructuring of the Company's assets, operations and strategy.
Refer to Item 1 for a discussion of the development of EEX's business and
strategy.
 
  Certain statements in this report, including statements of EEX Corporation's
("EEX" or the "Company") 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
"Forward-Looking Statements--Uncertainties and Risks" in Item 1.
 
Results of Operations
 
  On December 8, 1998, the shareholders approved a one-for-three reverse split
of EEX common stock. All references to the number of common shares and per
share amounts for prior period financial statements have been restated to
reflect this event. See "Capital Structure" below.
 
  EEX reported a 1998 net loss of $41 million ($0.97 per share), versus a net
loss of $216 million ($5.12 per share) in 1997 and a net loss of $37 million
($0.87 per share) in 1996.
 
  In 1998, results of operations were impacted by two major unusual items. The
first item was a $10 million pre-tax charge for impairment of producing oil
and gas properties required by Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." The second major unusual item was a gain on sales
of property, plant and equipment of $9 million pre-tax.
 
  In the following comparisons of results of operations, 1998 results have
been adjusted to exclude the unusual items described above. Results for 1997
were adjusted to exclude gains on sale of assets of $53 million pre-tax, FAS
121 impairment of $260 million pre-tax and reorganization expense of $27
million pre-tax. Results for 1996 have been adjusted to exclude gains on sales
of assets of $30 million pre-tax.
 
  The reorganization expense in 1997 was classified as general, administrative
and other expense in the Consolidated Statement of Operations. Cash
requirements for these charges total $25 million, of which $11 million was
paid in 1998 and $14 million in 1997.
 
1998 Results of Operations Compared With 1997
 
  Revenues for 1998 were $219 million, $95 million (30%) lower than 1997.
Natural gas revenues, 36% lower than 1997, were impacted by a 6% decrease in
average prices, and a 31% decrease in production, primarily due to property
sales. The average natural gas sales price per thousand cubic feet (Mcf) was
$2.21 in 1998 compared with $2.36 in 1997. Natural gas production for 1998 was
58 billion cubic feet (Bcf), compared with 84 Bcf in 1997. Oil revenues
decreased $17 million (18%), reflecting a 31% decrease in the average sales
price per barrel to $13.24, which was partially offset by an 18% increase in
production primarily attributable to start up of the Mudi Field in Indonesia.
Crude oil production was 5,612 thousand barrels (MBbls), compared with 4,743
MBbls in 1997. Production from the Mudi Field was 2,364 MBbls.
 
  Costs and expenses, excluding the unusual items described above, were $239
million in 1998, compared to $320 million in 1997, a 25% decrease. Operating
expenses (production and operating, general and administrative and taxes other
than income) were $82 million in 1998, 14% lower than 1997, resulting from
property sales and the favorable impact from restructuring measures
implemented over the last year. Production and operating costs for 1998
includes $11 million for oil production from the Mudi Field. Exploration
expenses for 1998 decreased 36% from 1997 due to curtailment of the onshore
exploration program and the impact of the offshore exploration joint ventures
with Enterprise and others. Exploration expense for 1998 includes $18 million
for dry holes in
 
                                      17
<PAGE>
 
both domestic and international drilling activities. Depreciation and
amortization was $101 million in 1998, $43 million lower than 1997 due to
lower production volumes resulting from asset sales and the impairment to
producing oil and gas properties recognized in 1997, which was partially
offset by amortization recorded from oil production from the Mudi Field.
Taxes, other than income, decreased 37% from 1997, primarily due to property
sales and lower commodity prices.
 
  Total interest and other financing costs, including minority interest, were
$26 million, a $10 million reduction from 1997, resulting from a lower overall
debt level in 1998 and redemption of the minority interest in the second
quarter of 1998.
 
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 Mcf was $2.36 in
1997, compared with $2.17 in 1996. Natural gas production for 1997 was 84 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 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 of the Cooper Project
operating lease in December 1996, and an ongoing cost reduction program
initiated in 1997. Exploration expenses decreased 25%, primarily due to a
change in focus to offshore and international and the curtailment of the
onshore exploration program during 1997. Exploration expenses were 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 exposure, in the
near term, to Deepwater Gulf of Mexico dry hole costs resulting from an
offshore exploration joint venture. 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.
 
Oil and Gas Marketing
 
  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 a barrel of oil equivalent basis, gas reserves at
January 1, 1999 constituted approximately 56% of total reserves, and gas
production accounted for approximately 62% of total production for 1998.
Accordingly, variations in gas prices have a more significant impact on
operations than variations in oil prices.
 
  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 and collars. EEX fixed the price on 1998 production volumes of 26.5
Bcf of natural gas (46% of production) at an average price of $2.32 per Mcf
and 3,249 MBbls of oil (58% of production) at an average price of $15.78 per
Bbl. In total, oil and gas price hedging activities increased 1998 revenues by
$7.5 million and decreased 1997 and 1996 revenues by $11 million and $20
million, respectively.
 
  At December 31, 1998, EEX had outstanding swaps and collars that were
entered into as hedges extending through December 31, 1999, to exchange
payments on 17.2 Bcf of natural gas and 31 MBbls of oil. At December 31, 1998,
there were $0.7 million of net unrealized and unrecognized hedging losses
based on the difference
 
                                      18
<PAGE>
 
between the strike price and the New York Mercantile Exchange futures price
for the applicable trading months of 1999. In addition, there were $0.5
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 1999.
 
Impairment of Assets
 
  EEX accounts for oil and gas properties using the successful efforts method
which requires EEX to comply with the requirements of 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"). See Note 5
to Consolidated Financial Statements in Item 8. In the fourth quarter of 1998,
the Company's independent petroleum consultant completed its annual review and
evaluation of Company's proved oil and gas reserves and their commercial
feasibility. EEX recorded a $10 million pre-tax charge for impairment in 1998.
 
  The Company reviewed the estimated value of the production payment due EEX
as a result of the sale of its East Texas properties together with the
estimated future gas delivery obligation to Encogen One Partners, Ltd.
("Encogen") and determined that a provision for possible future losses was not
appropriate. The production payment is recorded as oil and gas properties, net
of a provision for future gas deliveries arising from past gas "overtakes."
This review included estimates of the cost of EEX's future gas delivery
obligations to Encogen and estimated receipts from the production payment on
an undiscounted cash flow basis. The analysis also included assumptions about
future gas delivery schedules, gas prices and the likelihood that the obligor
will exercise annual options to repurchase portions of the production payment.
The obligor did not exercise its option in 1998. As of December 31, 1998, the
Company had a future volumetric delivery obligation of approximately 30 Bcf of
natural gas to Encogen; the production payment covers a similar volume.
 
  The Company again reviewed the estimated future value of the Cooper Floating
Production System, pipelines and other related facilities. In 1997, the
Company impaired the assets by approximately $83 million, reducing the net
carrying value to approximately $145 million. The Company determined that, if
placed in service as an early production and pipeline system for future oil
and gas developments in the area adjacent to the Cooper Field, the estimated
future cash flows from the assets would exceed the current carrying value.
Further, the Company continues to evaluate other potential uses for these
facilities. Based on these analyses and the Company's assessment of the
probable uses of the facilities, no additional impairment was considered
appropriate in 1998.
 
  As of December 31, 1998, the Company had a deferred tax asset of
approximately $98 million. A valuation allowance of $67 million has been
applied to result in a net realizable value of $31 million. The plan to
realize the value of the net deferred tax asset is based on expected future
earnings and tax planning strategies which include, primarily, planned sales
of assets with fair market values in excess of book basis. The Company does
not expect to tax-effect any future operating losses until the value of the
net deferred tax asset has been realized.
 
  Although management believes that the estimates and assumptions underlying
the analyses described above are appropriate, no assurances can be given that
events in the future will be consistent with those estimates and assumptions.
 
Reserves
 
  EEX's natural gas reserves, as estimated by Netherland, Sewell & Associates,
Inc., independent petroleum consultants, at January 1, 1999 were 204 Bcf,
compared with 460 Bcf the year earlier. Oil and condensate reserves, including
natural gas liquids, were 26 MMBbls, compared with the year-earlier level of
24 MMBbls. EEX's proved reserve estimates do not include any volumes
attributable to the Llano discovery well in the Deepwater Gulf of Mexico.
 
                                      19
<PAGE>
 
Liquidity and Capital Resources
 
Cash Flows
 
  During 1998, EEX generated sufficient cash flows from operations and
property sales to fund its capital requirements and reduce financings,
including minority interests in preferred securities of subsidiaries, by $138
million. Net cash flows from operating activities were $24 million, a decrease
of $164 million over 1997 largely due to lower commodity prices and production
levels and changes in current operating assets and liabilities. Net cash flows
from investing activities in 1998 were $127 million, a $181 million increase
from cash flows of $55 million used for investing activities in 1997.
 
  The Company intends to continue to make substantial capital expenditures in
1999 for the exploration and development of its properties primarily in the
Gulf of Mexico and/or the acquisition of producing properties. These capital
expenditures may be funded by operating cash flows, proceeds from property
sales, proceeds from recent equity sales (see Capital Structure below), and
investment costs carried by joint venture arrangements. EEX does not
anticipate paying cash dividends on its common stock in the foreseeable
future.
 
Capital Structure
 
  In January 1999, EEX recorded $150 million of equity from the issuance of
1.5 million of shares of Series B 8% Cumulative Perpetual Preferred Stock
("Preferred Stock") and Warrants to acquire 21 million shares of common stock
to Warburg Pincus Equity Partners, L.P. and its affiliates. At December 31,
1998, the closing and funding of the transaction was awaiting clearance under
the Hart Scott Rodino Act. On January 8, 1999, the transaction was closed and
EEX issued the Preferred Stock and Warrants in exchange for $150 million. Each
share of Preferred Stock has a stated value of $100 and a current dividend
rate of 8% per year, payable quarterly. The 8% dividend rate will be adjusted
to a market rate, not to exceed 18%, after seven years or the earlier
occurrence of certain events including a change of control as defined in the
agreements. Prior to any adjustment of the dividend rate, the Company may, at
its option, accrue dividends or pay them in cash, shares of Preferred Stock or
shares of common stock. After any adjustment of the dividend rate, dividends
must be paid in cash. Prior to any adjustment in the dividend rate, holders of
the Preferred Stock will be entitled to cast an aggregate of eight million
votes on matters voted on by the holders of common stock and to a separate
class vote on certain matters affecting the Preferred Stock. The purchasers
have agreed to standstill provisions for ten years that restrict their
purchases of additional shares of common stock, prohibit sales by the
purchasers of common stock or Warrants to any person or group that would
beneficially own more than 10% (5% in the case of a competitor of the Company)
of the outstanding common stock after the sale, prohibits the purchasers from
proposing business combinations involving the Company or soliciting proxies,
and limits the purchasers' aggregate voting rights to one vote less than 20%
of the aggregate number of votes entitled to be cast on any matter by holders
of common stock or any other class of capital stock. In the event of a change
of control occurring prior to the sixth anniversary of the closing of issuance
of the Preferred Stock, the purchasers of the Preferred Stock will have the
right to exchange all or part of their Preferred Stock and Warrants
proportionately for shares of common stock at the rate of 18.6047 shares of
common stock for each share of Preferred Stock (and proportionate number of
Warrants), subject to adjustment under certain circumstances and to the
Company's right under certain circumstances to pay a portion of the exchange
in cash. For additional information, see Note 4 to Consolidated Financial
Statements in Item 8.
 
  In the second quarter of 1998, EEX redeemed, at par value, all the
outstanding preferred securities of a subsidiary. The dividend rate on these
preferred securities was based on LIBOR plus a spread of 4% for the quarter
ended March 31, 1998, 5% for the quarter ended June 30, 1998 and was to
increase by 1% quarterly through December 31, 1998.
 
  At December 31, 1998, debt, including both capital and operating leases as
defined in loan agreements, represented 51% of total capitalization, compared
to 50% at December 31, 1997.
 
  At a special meeting held on December 8, 1998, the Company's shareholders
approved a one-for-three reverse split of the Company's issued and outstanding
common stock and a reduction of the Company's authorized common stock from 400
million shares to 150 million shares.
 
                                      20
<PAGE>
 
Capital Budget
 
  Planned 1999 capital expenditures range from $100 million to $140 million,
compared with actual expenditures of $166 million in 1998 and $180 million in
1997. Planned 1999 capital expenditures exclude approximately $30 million of
carried working interest expenses resulting from joint venture arrangements
and any significant costs which may be incurred for the acquisition of
producing properties.
 
Other Matters
 
Year 2000 Issue
 
  EEX initiated its Year 2000 Readiness Program in 1998 by engaging a
consultant to perform a preliminary analysis of the Company's asset inventory
and provide strategic guidelines to ensure EEX's operations are not
interrupted by the potential failure of computer programs to recognize and
interpret date codes correctly in the Year 2000 ("Year 2000 Issue"). A project
team reviewed the consultant's conclusions and developed a business plan to
address the Year 2000 Issue.
 
  This plan entails inventory, assessment, implementation, testing and
contingency phases applied to three major program areas: Information
Technology ("IT") systems, Non-IT systems, and External Agents.
 
  For purposes of the EEX Year 2000 Readiness Program, IT systems include the
Company's business and financial software applications, geological and
geophysical software applications, operating systems, hardware, and the
interfaces and interdependencies between these components. A consultant is
providing technical assistance in addressing the Year 2000 Readiness of
Company IT systems.
 
  Non-IT systems include those systems that employ embedded chip technology
and are associated with onshore and offshore production operations. Other
embedded system applications not associated with production operations are
addressed through either the IT System or External Agents programs. The
Company has employed an engineering consulting firm to assist in Non-IT
systems Year 2000 readiness efforts.
 
  External Agents are those non-EEX parties upon whom the Company relies for
goods and services in order to conduct its day to day activities. Included in
this group are vendors and suppliers, service providers, customers, partners,
financial institutions, utilities and other third parties. The Company has
requested assurances in writing of the External Agent's Year 2000 readiness.
External Agents not able to provide a satisfactory level of assurance
regarding Year 2000 readiness will be evaluated to determine the feasibility
of an alternate relationship.
 
  The Company intends to complete all Year 2000 Readiness Program phases prior
to the fourth quarter of 1999. However, some contingency plans are not
complete and readiness activities may continue into the fourth quarter of
1999. Contingency plans will address what the Company identifies as its most
reasonably likely worst case scenario or scenarios. To date, EEX has spent
$0.2 million of a budgeted $1.5 million in addressing the Year 2000 Issue.
 
  The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
no assurances can be given that business interruptions arising from the Year
2000 Issue will not occur. However, the Company believes that implementation
of its Year 2000 Readiness Program can reduce the potential for material
adverse consequences to occur.
 
New Accounting Standard
 
  In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
effective for fiscal years beginning after June 15, 1999, with earlier
adoption encouraged. This Statement requires companies to record derivatives
on the balance sheet as assets and liabilities, measured at fair value. Gains
or losses resulting from changes in the values of those derivatives would be
accounted for depending on the use of the derivative and whether it qualifies
for hedge
 
                                      21
<PAGE>
 
accounting. EEX has not yet determined what the effect, if any, of SFAS No.
133 will be on results of operations and financial position. EEX will adopt
this accounting standard as required by January 1, 2000.
 
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
 
  EEX is exposed to market risk, including adverse change in commodity prices
and interest rates as discussed below.
 
  Commodity Price Risk--The Company produces, purchases and sells natural gas,
crude oil, and NGLs. As a result, the Company's financial results can be
significantly affected as these commodity prices fluctuate widely in response
to changing market forces. The Company made use of a variety of derivative
financial instruments only for non-trading purposes as a hedging strategy to
manage commodity prices associated with oil (58% of 1998 production) and
natural gas (46% of 1998 production) sales and to reduce the impact of
commodity price fluctuations. The Company used the hedge or deferral method of
accounting for these instruments and, as a result, gains and losses on
commodity derivative financial instruments were generally offset by similar
changes in the realized prices of the commodities.
 
  The table below provides information about EEX's hedging techniques for oil
and natural gas as of December 31, 1998. The Notional Amount is equal to the
net volumetric hedge position of EEX during the periods. The fair values of
the hedging techniques are based on the difference between the strike price
and the New York Mercantile Exchange future prices for the applicable trading
months of 1999. No hedging contracts for periods beyond December 31, 1999
existed as of December 31, 1998.
 
<TABLE>
<CAPTION>
                                                                  Fair Value at
                                                         Average   December 31,
                                                Notional  Strike       1998
                       Period                    Amount  Price(a) (in thousands)
                       ------                   -------- -------- --------------
      <S>                                       <C>      <C>      <C>
      Gas (million cubic feet)
        January 1999-March 1999................   9,200    2.05       $ 539
        April 1999-June 1999...................   6,200    1.98        (109)
        July 1999-September 1999...............     900    1.86        (163)
        October 1999-December 1999.............     900    1.71        (499)
                                                 ------               -----
          Total................................  17,200    2.00        (232)(b)
                                                 ======               =====
 
      Crude Oil (thousand barrels).............      31   11.96       $   8
</TABLE>
--------
(a) For gas, $ per Mcf; for oil, $ per barrel.
(b) This figure includes $0.5 million of realized gains on hedging activities
    that were deferred until 1999.
 
  Interest Rate Risk--The Company has no open interest rate swap or interest
rate lock agreements. At December 31, 1998, the Company's only outstanding
debt consisted of capital leases with fixed interest rates. The following
table presents principal amounts and related average interest rates by year of
maturity for the Company's capital leases at December 31, 1998:
<TABLE>
<CAPTION>
                                                                        Average
                                                                        Interest
      Year                                                 Principal      Rate
      ----                                               -------------- --------
                                                         (In thousands)
      <S>                                                <C>            <C>
      1999..............................................    $ 10,874      6.46%
      2000..............................................      16,810      6.46%
      2001..............................................      13,351      6.46%
      2002..............................................      15,419      6.46%
      2003..............................................      15,573      6.46%
      Thereafter........................................     161,291      6.46%
                                                            --------
      Total.............................................    $233,318
                                                            ========
      Fair Value........................................    $233,318
                                                            ========
</TABLE>
 
  The Company's exposure to interest rate risk is primarily related to future
use of its revolving credit facility and to market conditions, as they may
exist, should new financings be undertaken. These exposures will be managed
through the use of swap or other derivatives as appropriate.
 
                                      22
<PAGE>
 
Item. 8. Financial Statements and Supplementary Data
 
                        REPORT OF INDEPENDENT AUDITORS
 
The Board of Directors and Shareholders of
EEX Corporation
 
  We have audited the accompanying consolidated balance sheet of EEX
Corporation and subsidiaries (the "Company"), as of December 31, 1998 and
1997, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
  In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of EEX
Corporation and subsidiaries at December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
 
                                          ERNST & YOUNG LLP
 
Houston, Texas
February 19, 1999
 
                                      23
<PAGE>
 
                                EEX CORPORATION
 
                      CONSOLIDATED STATEMENT OF OPERATIONS
 
<TABLE>
<CAPTION>
                                              Year Ended December 31
                                      ------------------------------------------
                                          1998          1997           1996
                                      ------------- -------------  -------------
                                      (In thousands except per share amounts)
<S>                                   <C>           <C>            <C>
Revenues:
  Natural gas.......................  $    128,061  $     199,754  $    217,968
  Oil and condensate................        74,329         91,029        98,529
  Natural gas liquids...............         1,999          9,161         8,099
  Cogeneration operations...........        13,794         13,297        11,400
  Other.............................           869            972         2,150
                                      ------------  -------------  ------------
    Total...........................       219,052        314,213       338,146
                                      ------------  -------------  ------------
Costs and Expenses:
  Production and operating..........        46,861         48,960        70,325
  Exploration.......................        45,144         70,599        93,544
  Depreciation and amortization.....       101,051        144,485       169,864
  Impairment of producing oil and
   gas properties...................        10,439        260,112            --
  (Gain) on sales of property, plant
   and equipment....................        (9,085)       (52,917)      (30,175)
  Cogeneration operations...........        10,564         10,381         9,924
  General, administrative and
   other............................        24,058         55,590        34,995
  Taxes, other than income..........        11,017         17,356        21,715
                                      ------------  -------------  ------------
    Total...........................       240,049        554,566       370,192
                                      ------------  -------------  ------------
Operating (Loss)....................       (20,997)      (240,353)      (32,046)
Other Income--Net...................            81            301         2,092
Interest Income.....................           512            574           266
Interest and Other Financing Costs..       (18,987)       (30,645)      (27,149)
                                      ------------  -------------  ------------
(Loss) Before Income Taxes..........       (39,391)      (270,123)      (56,837)
Income Tax (Benefit)................        (4,997)       (58,945)      (20,036)
Minority Interest...................        (6,532)        (4,925)           --
                                      ------------  -------------  ------------
Net (Loss)..........................  $    (40,926) $    (216,103) $    (36,801)
                                      ============  =============  ============
Basic and Diluted Net (Loss) Per
 Share..............................  $      (0.97) $       (5.12) $      (0.87)
                                      ============  =============  ============
Weighted Average Shares
 Outstanding........................        42,208         42,214        42,186
                                      ============  =============  ============
</TABLE>
 
                See Notes to Consolidated Financial Statements.
 
                                       24
<PAGE>
 
                                EEX CORPORATION
 
                      CONSOLIDATED STATEMENT OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                  Year Ended December 31,
                                                ------------------------------
                                                  1998       1997       1996
                                                ---------  ---------  --------
                                                       (In thousands)
<S>                                             <C>        <C>        <C>
OPERATING ACTIVITIES
  Net (Loss)................................... $ (40,926) $(216,103) $(36,801)
  Impairment of producing oil and gas
   properties..................................    10,439    260,112        --
  Impairment of undeveloped leasehold..........     1,936     40,866    34,000
  Dry hole cost................................    18,326      8,224    21,345
  Depreciation and amortization................   101,051    144,485   169,864
  Deferred income tax (benefit)................    (9,397)   (55,461)  (24,324)
  (Gain) on sales of property, plant and
   equipment...................................    (9,085)   (52,917)  (30,175)
  Other........................................       547     10,332   (10,735)
  Changes in current operating assets and
   liabilities
    Accounts receivable........................    15,395     24,550    (6,999)
    Other current assets.......................    (2,695)     6,721    (3,380)
    Accounts payable...........................   (57,187)    18,392    (4,127)
    Other current liabilities..................    (4,841)    (1,812)    1,168
                                                ---------  ---------  --------
      Net cash flows from operating
       activities..............................    23,563    187,389   109,836
                                                ---------  ---------  --------
INVESTING ACTIVITIES
  Additions of property, plant and equipment...  (165,820)  (180,147) (174,349)
  Proceeds from dispositions of property, plant
   and equipment...............................   298,373    133,426   140,863
  Other (changes in accruals)..................    (5,901)    (7,859)      507
                                                ---------  ---------  --------
      Net cash flows from (used in) investing
       activities..............................   126,652    (54,580)  (32,979)
                                                ---------  ---------  --------
FINANCING ACTIVITIES
  Borrowings under bank revolving credit
   agreement...................................   175,000    170,000   136,000
  Repayment of borrowings under bank revolving
   credit agreement............................  (200,000)  (260,000) (181,000)
  Borrowings under short-term financing
   agreement...................................   171,264    172,900        --
  Repayment of borrowings under short-term
   financing agreement.........................  (176,264)  (167,900)       --
  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....................  (100,000)   (50,000)       --
  Changes in temporary advances with affiliated
   companies...................................        --     13,328   (32,051)
  Payments of capital lease obligations........    (8,417)    (3,250)   (3,832)
  Change in advances under leasing
   arrangements--net...........................        --     (5,457)    5,457
  Issuance of common stock.....................        --          2       249
  Other........................................        --         --    (1,887)
                                                ---------  ---------  --------
      Net cash flows used in financing
       activities..............................  (138,417)  (130,377)  (77,064)
                                                ---------  ---------  --------
Net Increase (Decrease) in Cash and Cash
 Equivalents...................................    11,798      2,432      (207)
Cash and Cash Equivalents at Beginning of
 Year..........................................     3,790      1,358     1,565
                                                ---------  ---------  --------
Cash and Cash Equivalents at End of Year....... $  15,588  $   3,790  $  1,358
                                                =========  =========  ========
</TABLE>
 
                See Notes to Consolidated Financial Statements.
 
                                       25
<PAGE>
 
                                EEX CORPORATION
 
                           CONSOLIDATED BALANCE SHEET
 
<TABLE>
<CAPTION>
                                                              December 31
                                                         ---------------------
                                                            1998       1997
                                                         ---------- ----------
                         ASSETS                             (In thousands)
<S>                                                      <C>        <C>
Current Assets:
  Cash and cash equivalents............................. $   15,588 $    3,790
  Accounts receivable--trade (net of allowance of $2,504
   and $1,161)..........................................     42,530     57,925
  Other.................................................     14,240     11,545
                                                         ---------- ----------
    Total current assets................................     72,358     73,260
                                                         ---------- ----------
Property, Plant and Equipment (at cost):
  Oil and gas properties (successful efforts method)....  1,106,274  1,882,097
  Other.................................................     19,998     19,581
                                                         ---------- ----------
    Total...............................................  1,126,272  1,901,678
  Less accumulated depletion, depreciation and
   amortization.........................................    674,887  1,192,691
                                                         ---------- ----------
    Net property, plant and equipment...................    451,385    708,987
                                                         ---------- ----------
Deferred Income Tax Assets..............................     28,826     20,238
                                                         ---------- ----------
Other Assets............................................     12,501      5,304
                                                         ---------- ----------
    Total............................................... $  565,070 $  807,789
                                                         ========== ==========
 
<CAPTION>
          LIABILITIES AND SHAREHOLDERS' EQUITY
          ------------------------------------
<S>                                                      <C>        <C>
Current Liabilities:
  Accounts payable--trade............................... $   45,528 $  108,616
  Short-term borrowings.................................         --      5,000
  Current portion of capital lease obligations..........     10,874      8,418
  Other.................................................      5,190     10,031
                                                         ---------- ----------
    Total current liabilities...........................     61,592    132,065
                                                         ---------- ----------
Bank Revolving Credit Agreement.........................         --     25,000
                                                         ---------- ----------
Capital Lease Obligations...............................    222,444    233,317
                                                         ---------- ----------
Other Liabilities.......................................     46,734     42,744
                                                         ---------- ----------
Minority Interests in Preferred Securities of
 Subsidiary.............................................         --    100,000
Commitments and Contingencies...........................         --         --
Shareholders' Equity (Consolidated Statement of
 Shareholders' Equity)..................................    234,300    274,663
                                                         ---------- ----------
    Total............................................... $  565,070 $  807,789
                                                         ========== ==========
</TABLE>
 
 
                See Notes to Consolidated Financial Statements.
 
                                       26
<PAGE>
 
                                EEX CORPORATION
 
                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
 
<TABLE>
<CAPTION>
                                                    Year Ended December 31
                                                  ----------------------------
                                                    1998      1997      1996
                                                  --------  --------  --------
                                                        (In thousands)
<S>                                               <C>       <C>       <C>
Common Stock, authorized 150 million shares:
  Balance at beginning of year................... $  1,271  $126,736  $126,575
    Issued for stock plans (103, 323 and 161
     shares).....................................        1       185       161
  Change in par value to $0.01 from $1.00........       --  (125,650)       --
  One-for-three reverse split at par value
   (84,775 shares reduction).....................     (848)       --        --
                                                  --------  --------  --------
  Balance at end of year (Outstanding shares:
   42,387, 127,059 and 126,736)..................      424     1,271   126,736
                                                  --------  --------  --------
Preferred Stock, authorized 10 million shares,
 none issued:
  Pro forma effect of January 8, 1999 stock
   issue, 1.5 million shares, $0.01 par value....       15        --        --
  Less amount outstanding on January 8, 1999
   issue.........................................      (15)       --        --
                                                  --------  --------  --------
  Balance at end of year.........................       --        --        --
Paid in Capital:
  Balance at beginning of year...................  570,493   442,246   440,836
  Excess of proceeds over par value of common
   stock issued for stock plans..................      871     3,075     1,370
  Market valuation adjustments of restricted
   stock.........................................   (2,944)     (478)       40
  Change in par value of common stock............       --   125,650        --
  One-for-three reverse common stock split.......      848        --        --
  Pro forma effect of January 8, 1999 issue of
   Preferred
    Stock and Warrants:
      Warrants...................................   24,000        --        --
      Excess of proceeds over par value of
       preferred stock issue.....................  125,985        --        --
      Less amount outstanding on January 8, 1999
       preferred stock issue..................... (149,985)       --        --
                                                  --------  --------  --------
  Balance at end of year.........................  569,268   570,493   442,246
                                                  --------  --------  --------
Retained Earnings (Deficit):
  Balance at beginning of year................... (293,772)  (77,669)  (40,868)
    Net (loss)...................................  (40,926) (216,103)  (36,801)
                                                  --------  --------  --------
  Balance at end of year......................... (334,698) (293,772)  (77,669)
                                                  --------  --------  --------
Unamortized Restricted Stock Compensation:
  Balance at beginning of year...................   (2,877)     (677)     (551)
    Grants (151, 387 and 137 shares).............   (1,195)   (3,874)   (1,190)
    Restrictions lifted (98 shares)..............       --        --       756
    Cancellations (10, 90 and 25 shares).........        4       715       230
    Amortization.................................    1,032       515       132
    Market value adjustments.....................    2,830       444       (54)
                                                  --------  --------  --------
  Balance at end of year.........................     (206)   (2,877)     (677)
                                                  --------  --------  --------
Treasury Stock:
  Balance at beginning of year...................     (452)     (230)       --
    Issuance of shares for restricted stock
     awards (47 and 67 shares)...................      452       625        --
    Cancellations of restricted stock grants (10,
     90 and 25 shares)...........................      (90)     (847)     (230)
    Repurchase of outstanding shares (55
     shares).....................................     (398)       --        --
                                                  --------  --------  --------
  Balance at end of year (22, 47 and 25 shares)..     (488)     (452)     (230)
                                                  --------  --------  --------
Shareholders' Equity............................. $234,300  $274,663  $490,406
                                                  ========  ========  ========
</TABLE>
 
                See Notes to Consolidated Financial Statements.
 
                                       27
<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 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 two
cogeneration plants. Prior to August 5, 1997, Enserch Exploration, Inc. ("Old
EEI"), EEX's predecessor, 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.
 
  On December 19, 1997, a special meeting of shareholders was held at which
time the name of the Company was changed to EEX Corporation.
 
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
estimates and assumptions by management, many of which may significantly
affect financial results. Future outcomes could differ from those estimates
and assumptions and materially affect reported financial results. Certain
items in prior periods have been reclassified to be consistent with the
current presentation.
 
  Net Income (Loss) Per Share--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.
 
  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 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 later deemed 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.
 
                                      28
<PAGE>
 
                                EEX CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
  Derivative Instruments--The Company enters into swaps, 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. In applying hedge
accounting, the Company periodically monitors the correlation of changes in
the value of its derivative contracts with that of the prices the Company
realizes for its production. In the event of a lack of significant
correlation, as might occur in the event of a major market disturbance,
certain of the Company's derivative contracts no longer may qualify for hedge
accounting, and would be marked to market accordingly. The Company may also
enter 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. In accordance with the
SFAS 123, EEX has elected 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 sales
volumes are not significantly different from the Company's share of
production.
 
3. COMMON STOCK TRANSACTIONS
 
  At a special meeting held on December 8, 1998, the Company's shareholders
approved a one-for-three reverse split of the issued and outstanding common
stock and a decrease in the number of authorized shares of common stock from
400,000,000 shares to 150,000,000 shares. The effect of the reverse stock
split is reflected as of December 31, 1998 in the Consolidated Statement of
Shareholders' Equity, but all activity prior to December 8, 1998 has not been
restated. All references to the number of common shares and per share amounts
elsewhere in the consolidated financial statements and related footnotes have
been restated as appropriate to reflect the effect of the split for all
periods presented.
 
  Early in 1998, EEX entered into two forward purchase facilities to
repurchase shares of its common stock. During the third and fourth quarters of
1998, EEX initiated several transactions under these facilities. These
facilities allow for settlement, at EEX's option, by physical delivery of the
shares to EEX in exchange for cash or on a net basis in either shares of EEX
common stock or in cash. For a net basis settlement, to the extent that the
market price of EEX's common stock on a settlement date is higher (lower) than
the forward purchase price, the net differential is received (paid) by EEX. As
of December 31, 1998, transactions under these facilities covered
approximately $5.6 million or 335,633 shares of EEX's stock, with an average
forward purchase price of $16.63 per share. If the agreements were settled on
a net basis on the December 31, 1998 market price of EEX's common stock ($7.00
per share), EEX would be obligated to pay approximately $3.2 million in cash
or deliver approximately 461,806 shares.
 
                                      29
<PAGE>
 
                                EEX CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
4. PREFERRED STOCK TRANSACTION
 
  On December 22, 1998, EEX entered into a Purchase Agreement ("Agreement")
which provides that the Company would receive $150 million and issue to the
Purchaser 1,500,000 shares of Series B 8% Cumulative Perpetual Preferred Stock
and Warrants to acquire 21 million shares of the Company's Common Stock. At
December 31, 1998, the closing and funding of the transaction was awaiting
clearance under the Hart Scott Rodino Act. On January 8, 1999, clearance was
obtained, the transaction was closed and EEX issued the Preferred Stock and
Warrants in exchange for $150 million. The Consolidated Statement of
Shareholders' Equity as of December 31, 1998 shows pro forma amounts in
Preferred Stock and Paid In Capital accounts reflecting the additional equity
created at closing of the transaction, offset by the amount outstanding from
the transaction at December 31, 1998. Below is the pro forma effect on
Consolidated Shareholders' Equity when EEX issued the Preferred Stock and
Warrants in exchange for $150 million on January 8, 1999:
 
<TABLE>
<CAPTION>
                                                       Pro Forma
                                                       Effect of
                                                       Preferred     Pro Forma
                                           Balance     Stock and      Balance
                                           12/31/98  Warrants Issue After Issue
                                           --------  -------------- -----------
                                                     (In thousands)
<S>                                        <C>       <C>            <C>
Consolidated Shareholders' Equity
  Common Stock............................ $    424     $     --     $    424
  Preferred Stock, 1,500 shares, par value
   of $0.01...............................       --           15           15
  Paid in Capital.........................  569,268      149,985(a)   719,253
  Unamortized Restricted Stock
   Compensation...........................     (206)          --         (206)
  Treasury Stock..........................     (488)          --         (488)
  Retained Earnings (Deficit)............. (334,698)          --     (334,698)
                                           --------     --------     --------
    Total Shareholders' Equity............ $234,300     $150,000     $384,300
                                           ========     ========     ========
 
      (a) Warrants issued.................              $ 24,000
          Excess of proceeds over par 
            value of preferred stock 
            issued........................               125,985
                                                        --------
         TOTAL............................              $149,985
                                                        ========
</TABLE>
 
  Each share of Preferred Stock has a stated value of $100 and a current
dividend rate of 8% per year, payable quarterly. The 8% dividend rate will be
adjusted to a market rate, not to exceed 18%, after seven years or earlier
occurrence of certain events including a change of control (as defined). Prior
to any adjustment of the dividend rate, the Company may, at the Company's
option, accrue dividends or pay them in cash, shares of Preferred Stock or
shares of Common Stock. After any adjustment of the dividend rate, dividends
must be paid in cash. The Preferred Stock is entitled to a liquidation
preference of $100 per share plus accrued and unpaid dividends. The Preferred
Stock may be redeemed, in whole but not in part, by the Company at any time
for cash at the stated value plus accrued and unpaid dividends. Until any
adjustment of the dividend rate, holders of the Preferred Stock will be
entitled to cast an aggregate of eight million votes on matters voted upon by
the Common Stock holders, and to a separate class vote on certain matters
affecting the Preferred Stock. EEX has entered into a Registration Rights
Agreement to register under the Securities Act of 1933, and maintain the
effectiveness of such registration of, the resale of the Preferred Shares, the
Warrants and any Common Stock acquired by Purchaser pursuant to the Warrants.
Under the terms of the Agreement, the Purchaser has the right to add a member
to the Company's Board of Directors and did so in January 1999. The Purchaser
may continue the membership on the Company's Board of Directors if certain
conditions are maintained. In the event of a Change of Control, as defined in
the Agreement, occurring prior to the sixth anniversary of the closing of the
transaction, the Purchaser has the right to exchange all or part of the
Preferred Stock and Warrants proportionally for EEX Common Stock at the rate
of 18.6047 shares of Common Stock for each share of Preferred Stock (and
 
                                      30
<PAGE>
 
                                EEX CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

proportionate number of Warrants), provided that the Company may, under
certain circumstances, pay a portion of the exchange in cash. The exercise
price of the Warrants and the exchange formula related to a Change in Control
may be adjusted upon the occurrence of certain events described in the anti-
dilution provisions of the Warrants.
 
  The Warrants were issued in three series, each exercisable at any time
beginning 9 months after issuance for $12 per share of Common Stock: (a)
Series A Warrants to acquire 10.5 million shares, exercisable for 10 years;
(b) Series B Warrants to acquire 2.5 million shares, exercisable for 7 years,
and (c) Series C Warrants to acquire 8 million shares, exercisable for 7
years. Until approved by the shareholders of the Company at the 1999 annual
meeting, the Warrants will be exercisable only in the form of a stock
appreciation right (entitled to receive the cash difference between the
exercise price and the market price of the Common Stock on the trading day
prior to the date of exercise). If the shareholders approve, the Series A and
Series B Warrants will be exercisable for cash or by utilizing shares of
Preferred Stock at the stated value on a gross or net basis. The Series C
Warrants will be exercisable only as a stock appreciation right unless the
Company, prior to July 30, 2002, elects to allow the Series C Warrants to be
exercised for cash or by utilizing shares of Preferred Stock at the stated
value on a gross or net basis.
 
  The purchasers have agreed to standstill provisions for 10 years that
restrict their purchases of additional shares of Common Stock, prohibit sales
by the purchasers of Common Stock or Warrants to any person or group that
would beneficially own more than 10% (5% in the case of a competitor of the
Company) of the outstanding Common Stock after the sale, prohibits the
purchasers from proposing business combinations involving the Company or
soliciting proxies, and limits the purchasers' aggregate voting rights to one
vote less than 20% of the aggregate number of votes entitled to be cast on any
matter by holders of Common Stock or any other class of capital stock.
 
5. 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 such events, changed circumstances or periodic evaluation,
SFAS 121 requires the carrying value of the subject long-lived asset to be
reduced to its fair value.
 
  The process by which the Company assesses its assets under SFAS 121 starts
with a comparison of the carrying value of an asset to its estimated future
undiscounted net cash flow ("Future Value"). These net cash flows are prepared
by the Company's independent petroleum consultant, Netherland, Sewell &
Associates, Inc., as part of the year-end report of proved reserves. This
analysis uses a multi-year market based commodity price forecast in effect at
year-end 1998. The base prices used in this analysis for 1999 annual cash
flows were $13.13 per barrel of oil and $2.05 per million British Thermal
Units of gas. This analysis is generally prepared at a field level or field-
group level. The fields or groups reflect the lowest level for which cash
flows are reasonably and separately identifiable and for which the assets
possess common operational infrastructure and geographic proximity. In some
cases, additions to the Future Value were made by the Company to reflect the
estimated fair value of an identified exploratory prospect on the asset.
 
  Where insufficient Future Value is projected to recover the carrying value
of an asset, a determination of fair value is made. Fair value is estimated by
discounting the annual net cash flows at a rate of 10% per annum. The carrying
value of the asset is reduced to its estimated fair value.
 
  Assets held for sale are carried at the lower of cost or estimated net
realizable value.
 
                                      31
<PAGE>
 
                                EEX CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
  Based upon the resulting fair values at December 31, 1998, the carrying
value of long-lived assets was reduced and a charge of $10 million for
impairment was recorded for oil and gas properties located in the Gulf of
Mexico and Texas, primarily due to lower commodity prices and downward reserve
revisions.
 
6. 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 of 1997, as an
integral part of this restructuring 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.
 
  The Company incurred approximately $27 million of restructure costs in 1997
which are classified as general, administrative and other expense in the
Consolidated Statement of Operations. Cash requirements for these charges
total $25 million, of which $11 million was paid in 1998 and $14 million in
1997. Severance benefits were paid to 210 and 172 employees in 1998 and 1997,
respectively.
 
7. SUPPLEMENTAL CASH FLOW INFORMATION
 
  Cash paid for interest, net of amounts capitalized, was $18,976 in 1998,
$25,430 in 1997, and $27,704 in 1996. Net cash income taxes were $2,432 in
1998, refunds of $5,621 in 1997, and payments of $1,530 in 1996. Non-cash
investing and financing activities include the assumption of $151 million in
capital asset and lease obligations in 1996.
 
  In October 1998, EEX closed a property trade that exchanged substantially
all of its properties located in West Texas for properties in the Gulf of
Mexico Shelf plus $9 million in cash consideration. The effective date for
this exchange was January 1, 1998. The Company accounted for the exchange of
interests as a nonmonetary transaction whereby the basis in the exchanged
properties became the new basis in the properties received as reduced by the
cash consideration. No gain or loss was recognized as a result of the exchange
of interests in accordance with Statement of Financial Accounting Standards
No. 19, "Financial Accounting and Reporting by Oil and Gas Producing
Companies."
 
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 none was used at December 31, 1998. 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) plus 0.21% to 0.45% per annum,
plus a facility fee of 0.09% to 0.20% per annum, depending upon the
capitalization ratio. A portion of the funds available under the revolving
credit line may be borrowed on a short-term basis at current money market
rates.
 
  The following is a summary of interest and other financing costs:
 
<TABLE>
<CAPTION>
                                                         1998    1997    1996
                                                        ------- ------- -------
      <S>                                               <C>     <C>     <C>
      Interest costs incurred.......................... $18,987 $30,645 $29,323
      Interest capitalized.............................      --      --  (2,174)
                                                        ------- ------- -------
      Interest charged to expense...................... $18,987 $30,645 $27,149
                                                        ======= ======= =======
</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,
 
                                      32
<PAGE>
 
                                EEX CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 6.43%. 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 may not be removed from U.S. waters under the lease provisions.
 
  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 7.06%.
 
  EEX also leases buildings and office space under noncancellable operating
leases that expire at various dates through 2002.
 
  Estimated future minimum payments under noncancellable operating and capital
leases with initial or remaining terms of one year or more at December 31,
1998 are as follows:
 
<TABLE>
<CAPTION>
                                                             Operating Capital
                                                              Leases    Leases
                                                             --------- --------
      <S>                                                    <C>       <C>
      1999..................................................  $2,147   $ 25,147
      2000..................................................   2,173     30,948
      2001..................................................   2,201     25,998
      2002..................................................   1,993     26,000
      2003..................................................     423     25,999
      Thereafter............................................      --    184,706
                                                              ------   --------
        Total...............................................  $8,937    318,798
                                                              ======
        Less interest factor................................             85,480
                                                                       --------
        Capital lease obligations...........................           $233,318
                                                                       ========
</TABLE>
 
  Assets recorded under capital leases are as follows:
 
<TABLE>
<CAPTION>
                                                              1998      1997
                                                            --------  --------
      <S>                                                   <C>       <C>
      Property and equipment............................... $249,699  $249,699
      Accumulated depreciation............................. (106,399)  (98,535)
                                                            --------  --------
        Net................................................ $143,300  $151,164
                                                            ========  ========
</TABLE>
 
  Rental expenses incurred under all operating leases totaled $2.4 million,
$3.6 million, and $21 million in 1998, 1997 and 1996, respectively.
 
10. MINORITY INTERESTS IN PREFERRED SECURITIES OF SUBSIDIARY
 
  In late 1997, EEX concluded several transactions which resulted in
redemption of all of the outstanding mandatorily redeemable preferred
securities of a subsidiary at the stated value of $150 million, funded by
private sales of new issues of preferred stock by EEX Capital, Inc. ("EEXC"),
wholly-owned by EEX. EEXC has no operations independent of EEX. The dividend
rate for EEXC's new securities was 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. The new securities were redeemable, in whole or
in part, at the option of EEXC on the quarterly dividend payment dates and $50
million was redeemed in the fourth quarter of 1997 and the remaining $100
million in the second quarter of 1998.
 
                                      33
<PAGE>
 
                                EEX CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
11. STOCK PLANS
 
  The Company's Revised and Amended 1996 Stock Incentive Plan (the "1996
SIP"), 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 1.3 million shares of its
common stock for issuance under the 1996 SIP. Options granted under the 1996
SIP have an exercise price of not less than the fair market value of the
common stock on the grant date. Options granted under the 1996 SIP 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.
 
  The following is a summary of stock option activity under the 1996 SIP:
 
<TABLE>
<CAPTION>
                                                               Weighted Weighted
                                                               Average  Average
                                                    Number of  Exercise   Fair
                                                     Shares     Price    Value
                                                    ---------  -------- --------
     <S>                                            <C>        <C>      <C>
     Options outstanding
       December 31, 1995...........................    56,667   $32.82
       Granted.....................................   355,500   $27.99   $12.84
       Exercised...................................    (3,333)  $29.25
       Canceled....................................   (88,333)  $28.50
                                                    ---------   ------
     Options outstanding
       December 31, 1996...........................   320,500   $28.68
       Granted.....................................   942,750   $31.71   $12.84
       Exercised...................................        --       --
       Canceled....................................  (312,917)  $28.68
                                                    ---------   ------
     Options outstanding
       December 31, 1997...........................   950,333   $31.59
       Granted.....................................   130,000   $25.14   $10.02
       Exercised...................................        --       --
       Canceled....................................   (59,667)  $28.50
                                                    ---------   ------
     Options outstanding
       December 31, 1998........................... 1,020,667   $31.02
                                                    =========   ======
</TABLE>
 
  The following is a summary of 1996 SIP stock options outstanding at December
31, 1998:
 
<TABLE>
<CAPTION>
                                               Range of Exercise Prices
                                         -------------------------------------
                                         $23.16-$29.64 $35.64-$43.50   Total
                                         ------------- ------------- ---------
   <S>                                   <C>           <C>           <C>
   Options outstanding..................    556,000       464,667    1,020,667
   Weighted average remaining
    contractual life, in years..........          8             8            8
   Weighted average exercise price......    $ 27.00       $ 35.86    $   31.03
   Number exercisable...................     84,750        14,667       99,417
   Weighted average exercise price......    $ 28.27       $ 42.97    $   30.44
</TABLE>
 
                                      34
<PAGE>
 
                                EEX CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
  A summary of restricted stock award activity follows:
 
<TABLE>
<CAPTION>
                                                         Number of Shares
                                                      -------------------------
                                                       1998     1997     1996
                                                      -------  -------  -------
      <S>                                             <C>      <C>      <C>
      Outstanding--Beginning of year................. 123,477   23,333   18,667
        Awarded......................................  53,000  130,144   45,667
        Restrictions Lifted..........................  (4,477)      --  (32,667)
        Canceled.....................................  (3,333) (30,000)  (8,333)
                                                      -------  -------  -------
      Outstanding--End of year....................... 168,667  123,477   23,333
                                                      =======  =======  =======
</TABLE>
 
  The weighted average grant date fair value per share of restricted stock
awarded during 1998, 1997 and 1996 was $23.76, $30.06 and $28.08,
respectively. Fair value is equal to the common stock fair market value on the
grant date.
 
  In 1998, the Company adopted the 1998 Stock Incentive Plan ("1998 SIP") for
directors, officers and eligible full-time employees. The 1998 SIP provides
for awards to directors, officers and employees of restricted stock, stock
options and stock appreciation rights. The 1998 SIP is subject to the approval
of shareholders at the 1999 annual meeting. Subject to that approval, 2.5
million shares of common stock are reserved for issuance under the 1998 SIP.
Option terms and restrictions on restricted stock may be set by the
Compensation Committee of the Board of Directors (the "Committee"), but the
exercise price may be no less than the fair market value on the date of grant.
In September and October 1998, the Committee made grants of options under the
"Performance Option Program." These are subject to approval of the 1998 SIP by
the shareholders, and consist of a basic grant option award that becomes
exercisable over three years and a performance grant option award determined
by EEX common stock price performance as measured over a three-year period. If
EEX stock achieves a designated performance goal, the performance grant
becomes exercisable over three years. All options granted under the 1998 SIP
have an exercise price of not less than the fair market value of the common
stock on the grant date.
 
  The following is a summary of basic stock option activity under the 1998
SIP:
 
<TABLE>
<CAPTION>
                                                               Weighted Weighted
                                                      Number   Average  Average
                                                        of     Exercise   Fair
                                                      Shares    Price    Value
                                                      -------  -------- --------
      <S>                                             <C>      <C>      <C>
      Options outstanding
        December 31, 1997............................      --       --
        Granted...................................... 329,850   $12.24   $4.83
        Canceled.....................................  (4,117)  $11.16
                                                      -------   ------
      Options outstanding
        December 31, 1998............................ 325,733   $12.27
                                                      =======   ======
</TABLE>
 
  At December 31, 1998, exercise prices range from $11.16 to $15.48 and these
options have a weighted average remaining contractual life of ten years. No
options were exercisable as of December 31, 1998.
 
  In 1997, the Company adopted the 1997 Non-Officer Stock Option Plan ("1997
SOP") 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 0.5 million shares for issuance under the 1997 SOP. Options become
exercisable over three years and expire after ten years.
 
                                      35
<PAGE>
 
                                EEX CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
  A summary of stock option activity under the 1997 SOP follows:
 
<TABLE>
<CAPTION>
                                                               Weighted Weighted
                                                      Number   Average  Average
                                                        of     Exercise   Fair
                                                      Shares    Price    Value
                                                      -------  -------- --------
<S>                                                   <C>      <C>      <C>
Options outstanding
  December 31, 1996..................................      --       --
  Granted............................................ 126,667   $30.51   $11.61
  Exercised..........................................      --       --
  Canceled...........................................  (5,000)  $32.25
                                                      -------   ------
Options outstanding
  December 31, 1997.................................. 121,667   $30.48
  Granted............................................  25,333   $11.37   $ 4.44
  Canceled...........................................  (1,667)  $32.25
                                                      -------   ------
Options outstanding
  December 31, 1998.................................. 145,333   $27.15
                                                      =======   ======
</TABLE>
 
  The following is a summary of 1997 SOP stock options outstanding at December
31, 1998:
 
<TABLE>
<CAPTION>
                                                 Range of Exercise Prices
                                            ----------------------------------
                                            $7.71-$20.91 $25.56-$32.25  Total
                                            ------------ ------------- -------
<S>                                         <C>          <C>           <C>
Options outstanding........................    25,333       120,000    145,333
Weighted average remaining contractual
 life, in years............................        10             8          8
Weighted average exercise price............    $11.17       $ 30.47    $ 27.11
Number exercisable.........................        --        39,998     39,998
Weighted average exercise price............        --       $ 30.47    $ 30.47
</TABLE>
 
  In 1996, the Company adopted the 1996 Employee Stock Option Plan ("1996
SOP"). 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 reserved a total of 0.5 million shares for issuance under
this plan. Options become exercisable over three to seven years and expire
after ten years. The ability to grant new options under the 1996 SOP expired
December 31, 1998.
 
                                      36
<PAGE>
 
                                EEX CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
  A summary of stock option activity under the 1996 SOP follows:
 
<TABLE>
<CAPTION>
                                                               Weighted Weighted
                                                      Number   Average  Average
                                                        of     Exercise   Fair
                                                      Shares    Price    Value
                                                     --------  -------- --------
<S>                                                  <C>       <C>      <C>
Options outstanding
  December 31, 1995.................................       --       --
  Granted...........................................  367,487   $33.00   $15.42
  Exercised.........................................       --       --
  Canceled..........................................   (4,170)  $33.00
                                                     --------   ------
Options outstanding
  December 31, 1996.................................  363,317   $33.00
  Granted...........................................  137,733   $26.91   $12.84
  Exercised.........................................       --       --
  Canceled.......................................... (176,457)  $32.88
                                                     --------   ------
Options outstanding
  December 31, 1997.................................  324,593   $30.48
  Granted...........................................  207,033   $25.62   $10.20
  Exercised.........................................       --       --
  Canceled.......................................... (110,650)  $32.19
                                                     --------   ------
Options outstanding
  December 31, 1998.................................  420,977   $27.63
                                                     ========   ======
</TABLE>
 
  The following is a summary of stock options outstanding under the 1996 SOP
at December 31, 1998:
 
<TABLE>
<CAPTION>
                                           Range of Exercise Prices
                               ------------------------------------------------
                               $5.88-$20.91 $23.16-$29.64 $30.09-$35.07  Total
                               ------------ ------------- ------------- -------
<S>                            <C>          <C>           <C>           <C>
Options outstanding..........     25,250       293,643       102,083    420,977
Weighted average remaining
 contractual life, in years..         10             9             8          9
Weighted average exercise
 price.......................     $18.69       $ 26.54       $ 32.94      27.62
Number exercisable...........         --         2,215        13,211     15,426
Weighted average exercise
 price.......................         --       $ 23.53       $ 33.00      31.64
</TABLE>
 
  Total compensation cost recognized in income for 1998, 1997 and 1996 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>
                                                   1998      1997       1996
                                                 --------  ---------  --------
<S>                                              <C>       <C>        <C>
Net (loss)
  As reported................................... $(40,926) $(216,103) $(36,801)
  Pro forma..................................... $(44,252) $(218,663) $(37,991)
Basic and diluted net (loss) per share
  As reported................................... $  (0.97) $   (5.12) $  (0.87)
  Pro forma..................................... $  (1.05) $   (5.18) $  (0.90)
</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.
 
                                      37
<PAGE>
 
                                EEX CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
  Fair value of options was calculated by using the Black Scholes options
pricing model using the following weighted average assumptions:
 
<TABLE>
<CAPTION>
                                                               1998  1997  1996
                                                               ----  ----  ----
      <S>                                                      <C>   <C>   <C>
      Risk free interest rate................................. 5.36% 6.26% 6.17%
      Expected life, in years.................................    5     5     6
      Expected volatility.....................................   42%   37%   37%
      Expected dividend yield................................. None  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 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 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 increased revenues by $7.5 million in 1998
and reduced revenues by $11 million and $20 million in 1997 and 1996,
respectively.
 
  At December 31, 1998, EEX had outstanding swaps, collars and futures
agreements that were entered into as hedges extending through December 31,
1999 to exchange payments on 17.2 Bcf of natural gas and 31 MBbls of oil. At
December 31, 1998, the weighted average strike price and market price per Mcf
of natural gas was $2.00 and $2.07, respectively. At December 31, 1998 there
were $0.7 million of net unrealized and unrecognized hedging losses 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 $0.5
million of realized gains on hedging activities which were deferred and will
be applied as an increase in revenues in 1999 in the month of physical sale of
production.
 
  Fair Value of Financial Instruments--At December 31, 1998, the estimated
proceeds the Company would have paid to terminate or otherwise settle all open
oil and gas swaps and collars was $0.7 million, which represented their fair
value. The fair value of all other financial instruments at December 31, 1998
and 1997 approximated their carrying value.
 
                                      38
<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>
                                                    1998      1997      1996
                                                   -------  --------  --------
<S>                                                <C>      <C>       <C>
Current:
  Federal......................................... $   741  $ (3,945) $  4,267
  Foreign.........................................   2,432        --        --
  State...........................................   1,227       461        21
                                                   -------  --------  --------
    Total.........................................   4,400    (3,484)    4,288
Deferred--Federal.................................  (9,397)  (55,461)  (24,324)
                                                   -------  --------  --------
    Total provision (benefit)..................... $(4,997) $(58,945) $(20,036)
                                                   =======  ========  ========
</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..................................... $(35,135) $(269,081) $(54,343)
  Foreign......................................   (4,256)    (1,042)  ( 2,494)
                                                --------  ---------  --------
    Total...................................... $(39,391) $(270,123) $(56,837)
                                                ========  =========  ========
 
Income taxes (benefit) computed at the federal
 statutory rate of 35%......................... $(13,787) $ (94,543) $(19,892)
  Percentage depletion.........................       --       (193)     (334)
  Foreign Taxes................................    2,432         --        --
  State Taxes..................................    1,227         --        --
  Valuation allowance on deferred tax asset....    5,410     35,254        --
  Other--net...................................     (279)       537       190
                                                --------  ---------  --------
    Provision for income taxes (benefit)....... $ (4,997) $ (58,945) $(20,036)
                                                ========  =========  ========
</TABLE>
 
  The deferred tax effect of the difference in financial accounting basis and
income tax basis of EEX's assets and liabilities at December 31, 1998 and 1997
was as follows:
 
<TABLE>
<CAPTION>
                                    1998                         1997
                         ---------------------------- ----------------------------
                          Total    Current Noncurrent  Total    Current Noncurrent
                         --------  ------- ---------- --------  ------- ----------
<S>                      <C>       <C>     <C>        <C>       <C>     <C>
Deferred Tax Assets:
  Property, plant and
   equipment............ $ 64,498      --   $ 64,498  $ 57,085     --    $ 57,085
  Employee benefit
   obligations..........    2,824      --      2,824     1,651     --       1,651
  Accruals and
   allowances...........    3,246  $1,800      1,446     6,923   $991       5,932
  Losses of controlled
   foreign
   corporations.........    9,230      --      9,230     9,882     --       9,882
  Net operating loss....   17,708      --     17,708     7,158     --       7,158
  Valuation allowance...  (66,880)     --    (66,880)  (61,470)    --     (61,470)
                         --------  ------   --------  --------   ----    --------
  Net deferred tax
   asset................ $ 30,626  $1,800   $ 28,826  $ 21,229   $991    $ 20,238
                         ========  ======   ========  ========   ====    ========
</TABLE>
 
Note: The current portion is included in other current assets in the
consolidated balance sheets.
 
                                      39
<PAGE>
 
                                EEX CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
  The Company maintains a 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). In 1998, EEX increased the
deferred tax asset by $9.4 million based upon several factors, one of which is
the taxable income from producing properties in Indonesia which will be
sheltered by past foreign net operating losses. The realization of the
remaining deferred tax asset is based on expected future earnings and tax
planning strategies which include planned sales of assets with fair market
values in excess of book and tax cost bases, utilization of excess capacity or
sale of the Cooper floating production facility and pipeline, acceleration of
income from shallow water Gulf of Mexico producing properties received as part
of a property swap completed during the third quarter of 1998, the favorable
impact from restructuring measures over the last year, the curtailment of the
onshore exploration program and reduction of dry hole exposure in the
Company's Gulf of Mexico exploration program. 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, assets impaired
under the provisions of SFAS 121 for which no tax deduction is immediately
available and past operating losses of controlled foreign corporations. Due to
the uncertainty of future income estimates, the additional anticipated
earnings benefit from further realization of the additional tax basis has not
been fully recognized at this time and is included in the valuation allowance
of $67 million at December 31, 1998 for the Company's deferred tax asset.
 
  As of December 31, 1998, the Company had approximately $50 million of U.S.
net operating loss carryforwards ("NOLs"). The NOLs have expiration dates
ranging from 2003 through 2018. Due to the uncertainty of the realization of
this tax carryforward, EEX has included in its valuation allowance the full
carryforward benefit of $18 million.
 
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.
 
  In 1998, the Company recognized a curtailment gain of approximately $2.5
million in connection with the termination of a significant number of
employees announced in 1997 pursuant to the provisions of Statement of
Financial Accounting Standards No. 88, "Employers' Accounting for Settlements
and Curtailments of Defined Benefit Pension Plans and for Termination
Benefits" (SFAS 88).
 
  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, 1997 through
December 31, 1998, EEX's costs for these benefits were based on EEX's
allocated pension plan assets, employees and retirees based upon information
provided by ENSERCH. EEX's share of the ENSERCH pension plan assets and
liabilities for accrued benefits have been estimated by EEX based upon
information supplied by ENSERCH. After resolving the definition of those
employees and retirees who are included in the EEX plan, it is expected that,
during 1999, these assets will be transferred to EEX's plan providing
substantially the same benefits as provided by the ENSERCH plan. For pension
benefits, the "benefit obligation" is the projected benefit obligation. For
post-retirement benefits, the "benefit obligation" is the accumulated post-
retirement benefit obligation.
 
                                      40
<PAGE>
 
                                EEX CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
Employee Benefit Plan Disclosures:
 
<TABLE>
<CAPTION>
                                                              Post-retirement
                                          Pension Benefits       Benefits
                                          ------------------  ----------------
                                            1998      1997     1998     1997
                                          --------  --------  -------  -------
<S>                                       <C>       <C>       <C>      <C>
Assumptions as of December 31:
  Discount rate used in determining
   benefit obligation....................     7.00%     7.25%    7.00%    7.25%
  Expected return on Plan assets.........     9.00%     9.00%
  Rate of compensation increases.........     4.00%     4.00%
 
Changes in Benefit Obligation:
  Benefit obligation as of beginning of
   period................................ $(23,396) $(21,331) $(8,366) $(7,993)
  Service cost...........................     (720)     (327)     (22)      (9)
  Interest cost..........................   (1,411)     (670)    (584)    (248)
  Actuarial liability gain (loss)........    3,179    (1,264)    (117)    (303)
  Effect of curtailment..................    2,378        --       98       --
  Participants contribution..............       --        --     (151)      --
  Benefits paid..........................      797       196      193      187
                                          --------  --------  -------  -------
    Benefit obligation as of December
     31.................................. $(19,173) $(23,396) $(8,949) $(8,366)
                                          ========  ========  =======  =======
 
Change in Plan Assets:
  Fair value of Plan assets as of
   beginning of period................... $ 11,420  $ 11,587
  Actual return on assets................    1,065      (104)
  Employer contributions.................       --        93
  Benefits paid..........................     (665)     (156)
                                          ========  ========
    Fair value of Plan assets as of
     December 31......................... $ 11,820  $ 11,420
                                          ========  ========
 
Reconciliation of Funded Status:
  Funded status.......................... $ (7,353) $(11,976) $(8,949) $(8,366)
  Unrecognized net obligation (asset)....       --        --    3,755    4,028
  Unrecognized actuarial (gain) loss.....   (1,516)    1,735    2,117    2,179
                                          --------  --------  -------  -------
    Accrued benefit cost as of December
     31.................................. $ (8,869) $(10,241) $(3,077) $(2,159)
                                          ========  ========  =======  =======
 
Components of Net Periodic Benefit Cost:
  Allocations from ENSERCH............... $     --  $    596  $    --  $   469
  Service cost--benefits earned during
   the period............................      720       327       22        9
  Interest cost on projected benefit
   obligation............................    1,411       670      584      248
  Expected return on assets..............     (993)     (367)      --       --
  Effect of curtailment..................   (2,378)       --      (98)      --
  Amortization--net obligation...........       --        --      273      114
  Amortization--unrecognized (gain)
   loss..................................       (1)       --       80       25
                                          --------  --------  -------  -------
    Net periodic benefit cost............ $ (1,241) $  1,226  $   861  $   865
                                          ========  ========  =======  =======
</TABLE>
 
  For measurement purposes, a 5.3% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1998. The rate was assumed
to decrease gradually to 4.3% for 2000 and remain at that level thereafter.
 
                                       41
<PAGE>
 
                                EEX CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
  Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage point change in
assumed health care cost trend rates would have the following effects:
 
<TABLE>
<CAPTION>
                                                   1-Percentage   1-Percentage
                                                  Point Increase Point Decrease
                                                  -------------- --------------
<S>                                               <C>            <C>
Effect on total of service and interest cost for
 1998...........................................       $ 38          $ (34)
Effect on year end 1998 post-retirement benefit
 obligation.....................................       $550          $(486)
</TABLE>
 
  Investment Plan--At December 31, 1998, EEX provided a defined contribution
pension plan which permits pre-tax employee contributions and was available to
substantially all employees of the Company. The Company's share of costs under
the plan was $276, $343, and $425 in 1998, 1997, and 1996, 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 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 for 1996.
 
  The Company had sales to certain ENSERCH companies (Enserch Energy Services,
Inc., Lone Star Gas Company and Enserch Processing Company) that aggregated
$25,675 and $86,235 in 1997, and 1996, respectively.
 
16. COMMITMENTS AND CONTINGENCIES
 
  EEX is involved in a number of legal and administrative proceedings incident
to the ordinary course of its business. In the opinion of management, based on
the advice of counsel and current assessment, any liability to EEX relative to
these ordinary course proceedings will not have a material adverse effect on
EEX's operations or financial condition.
 
  In addition, on August 3, 1998, EEX, several of its current and/or former
officers and directors, Texas Utilities Company ("TUC") and TUC's Chief
Executive Officer were named in a class action lawsuit filed in the Northern
District of Texas that was designated as Gracy Fund L.P. v. EEX Corporation,
et al., ("Gracy Fund"). The Gracy Fund complaint alleged violations of the
Securities Act of 1933 ("33 Act") and the Securities Exchange Act of 1934 ("34
Act") against various defendants.
 
  Additionally, on August 3, 1998, EEX, several of its current and/or former
officers and directors, and two additional companies (ENSERCH Corporation and
DeGolyer & MacNaughton) were named in a class action lawsuit filed in the
Southern District of Texas that was designated as Stan C. Thorne v. EEX Corp.,
et al ("Thorne"). The Thorne complaint alleged violations of the 34 Act and
common law-based negligent misrepresentations and fraud claims.
 
  On October 5, 1998, the Thorne defendants filed a motion to transfer the
Thorne action to the Northern District of Texas. On November 20, 1998, the
Thorne action was transferred to the Northern District of Texas and
consolidated with the Gracy Fund action.
 
  On January 22, 1999, plaintiffs filed an amended class action complaint in
the consolidated Gracy Fund action against EEX, several of its current and/or
former officers and directors and another company, ENSERCH
 
                                      42
<PAGE>
 
                                EEX CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Corporation ("Consolidated Complaint"). The Consolidated Complaint alleges
violations of Sections 11, 12(a)(2) and 15 of the 33 Act and violations of
Sections 10(b), 14(a) and 20(a) of the 34 Act against various defendants. The
Consolidated Complaint alleges the Sections 10(b), 15 and 20(a) claims on
behalf of a class of plaintiffs who acquired EEX's stock pursuant to an
October 1996 Registration Statement and Proxy/Prospectus ("EEX Subclass").
 
  Plaintiffs allege that during the class period, defendants made materially
false and misleading statements, and failed to disclose material facts,
regarding the value and volume of EEX's proved reserves from its East Texas
operations. According to plaintiffs, these purported misrepresentations
artificially inflated the price of EEX's common stock throughout the class
period, induced the EEX Subclass to approve the merger that spun EEX off from
ENSERCH and induced the EEX Subclass to acquire stock pursuant to the
Registration Statement and Proxy/Prospectus issued regarding this merger.
 
  While the Company intends to contest this action vigorously, the Company
cannot predict the outcome of this matter at this time. All discovery is
stayed pending the determination of the motion to dismiss.
 
  The operations and financial position of EEX continue to be affected from
time to time in varying degrees by domestic and foreign political developments
as well as legislation and regulations pertaining to restrictions on oil and
gas production, imports and exports, natural gas regulation, tax increases,
environmental regulations and cancellation of contract rights. Both the
likelihood of such occurrences and their overall effect on the Company vary
greatly and are not predictable. These uncertainties are part of a number of
items that EEX has taken and will continue to take into account in
periodically establishing accounting reserves.
 
  In the fourth quarter of 1998, EEX signed a contract with a major drilling
company to provide and operate an offshore drilling rig for use in Deepwater
drilling activities. The contract covers a basic period of three years at an
average day rate of $130 which is expected to commence in the summer of 1999
upon delivery of the rig.
 
  As of December 31, 1998, the Company has a future volumetric delivery
obligation of approximately 30 billion cubic feet of natural gas to Encogen
One Partners, Ltd. The Company has a production payment of a similar volume
due from the purchaser of its East Texas properties.
 
17. OTHER INFORMATION
 
  Major accounts in certain line items of the Consolidated Balance Sheets are:
 
<TABLE>
<CAPTION>
                                                                 1998    1997
                                                                ------- -------
<S>                                                             <C>     <C>
Other current assets Prepaid costs related to Mudi Field....... $ 5,784 $ 1,612
                                                                ======= =======
Other non-current liabilities
  Accrued liabilities for restoration, dismantlement and
   abandonment costs........................................... $25,157 $14,234
                                                                ======= =======
</TABLE>
 
                                      43
<PAGE>
 
                                EEX CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
18. SUPPLEMENTARY OIL AND GAS INFORMATION (UNAUDITED)
 
  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>
                                                             1998       1997
                                                           --------  ----------
<S>                                                        <C>       <C>
Capitalized Costs:
  Proved oil and gas properties........................... $799,948  $1,568,551
  Floating Production System and other service assets.....  228,844     228,844
  Unproved oil and gas properties.........................   77,482      84,702
  Accumulated depletion, depreciation and amortization.... (668,512) (1,178,939)
                                                           --------  ----------
    Total net capitalized cost............................ $437,762  $  703,158
                                                           ========  ==========
</TABLE>
 
<TABLE>
<CAPTION>
                                 1998             1997              1996
                           ---------------- ----------------- -----------------
                                     Non-
                             U.S.    U.S.     U.S.   Non-U.S.   U.S.   Non-U.S.
                           -------- ------- -------- -------- -------- --------
<S>                        <C>      <C>     <C>      <C>      <C>      <C>
Costs Incurred:
Property acquisition
 costs:
  Proved.................. $  7,990 $35,555       --      --  $  3,165      --
  Unproved................   14,168     473 $ 24,970 $   200    23,425      --
Exploration costs.........   59,729   6,501   50,220   1,428    80,321  $2,781
Development costs.........   44,845   8,142  112,457  12,396   100,395     628
                           -------- ------- -------- -------  --------  ------
    Total................. $126,732 $50,671 $187,647 $14,024  $207,306  $3,409
                           ======== ======= ======== =======  ========  ======
</TABLE>
 
  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. The disclosure excludes
interest expense, corporate overhead and gains and losses from hedging.
 
<TABLE>
<CAPTION>
                               1998                1997               1996
                         -----------------  ------------------- ------------------
                                    Non-
                           U.S.     U.S.      U.S.     Non-U.S.   U.S.    Non-U.S.
                         --------  -------  ---------  -------- --------  --------
<S>                      <C>       <C>      <C>        <C>      <C>       <C>
Results of Operations:
 Revenues............... $167,668  $29,270  $ 310,643      --   $344,911       --
 Less:
  Production costs (a)..   46,117   10,859     65,366      --     90,477       --
  Exploration costs.....   33,129   12,021     69,732   $ 882     91,003  $ 2,559
  Depletion,
   depreciation and
   amortization (b).....  101,925    8,421    401,538      --    167,169       --
  Income tax effects
   (c)..................      477       --    (44,037)   (309)    (1,643)    (895)
                         --------  -------  ---------   -----   --------  -------
    Net producing
     activities......... $(13,980) $(2,031) $(181,956)  $(573)  $ (2,095) $(1,664)
                         ========  =======  =========   =====   ========  =======
</TABLE>
--------
(a) Includes severance, ad valorem and production taxes.
(b) Includes pre-tax property impairment of $10 million and $260 million in
    1998 and 1997, respectively.
(c) Amount includes $5.4 million and $61.5 million for valuation allowance on
    deferred tax asset for 1998 and 1997, respectively.
 
  Oil and Gas Reserves--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, 1998 and 1997 reserves and
DeGolyer
 
                                      44
<PAGE>
 
                                EEX CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and MacNaughton, independent petroleum consultants, for December 31, 1996.
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.
 
<TABLE>
<CAPTION>
                                  Gas (MMcf)                Oil (MBbls) (a)
                         ------------------------------  ------------------------
                           1998      1997       1996      1998     1997     1996
                         --------  ---------  ---------  -------  -------  ------
<S>                      <C>       <C>        <C>        <C>      <C>      <C>
U.S. Reserves:
  At January 1..........  460,158  1,215,624  1,362,763   18,100   53,209  66,537
  Revisions of previous
   estimates............  (13,129)  (622,640)    (7,935)     847  (15,710) (8,173)
  Extensions,
   discoveries and
   additions............   38,458     40,254     72,854    1,145    3,062   4,315
  Purchase of minerals
   in place(b)..........   33,143         --     12,347    1,118       --      --
  Sales of minerals in
   place(c)............. (257,169)   (88,611)  (123,861) (11,340) (17,054) (3,730)
  Production............  (57,910)   (84,469)  (100,544)  (3,439)  (5,407) (5,740)
                         --------  ---------  ---------  -------  -------  ------
At December 31..........  203,551    460,158  1,215,624    6,431   18,100  53,209
                         ========  =========  =========  =======  =======  ======
Proved Developed
 Reserves:
  At January 1..........  425,773    859,094    937,372   16,882   27,938  30,110
  At December 31........  191,985    425,773    859,094    6,299   16,882  27,938
</TABLE>
--------
(a) Includes condensate and natural gas liquids of 561 MBbls for 1998, 825
    MBbls for 1997 and 1,103 MBbls for 1996.
(b) Includes reserves acquired through property exchanges of 1,118 MBbls and
    33,143 MMcf for 1998.
(c) Includes reserves disposed of through property exchanges of 6,497 MBbls
    and 24,102 MMcf for 1998.
 
<TABLE>
<CAPTION>
                                                   Gas
                                                 (MMcf)        Oil (MBbls)
                                                ---------- ---------------------
                                                1997  1996  1998    1997   1996
                                                ----  ---- ------  ------  -----
<S>                                             <C>   <C>  <C>     <C>     <C>
Non-U.S. Reserves:
  At January 1.................................  618   --   5,741   6,008  4,963
  Revisions of previous estimates..............   --   --   5,878     778     --
  Extensions, discoveries and additions........   --  618   4,733      --  1,045
  Purchases of minerals in place...............   --   --   5,741      --     --
  Sales of minerals in place................... (618)  --      --  (1,045)    --
  Production...................................   --   --  (2,364)     --     --
                                                ----  ---  ------  ------  -----
At December 31.................................   --  618  19,728   5,741  6,008
                                                ====  ===  ======  ======  =====
Proved Developed Reserves:
  At January 1.................................   --   --   4,767      --     --
  At December 31...............................   --   --  15,831   4,767     --
</TABLE>
 
  Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Oil and Gas Reserve Quantities--The following table 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) $2.19 in 1998, $2.51 in 1997 and $3.37 in 1996. Oil (per
barrel) $9.50 in 1998, $15.71 in 1997 and $23.33 in 1996.
 
                                      45
<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>
                                                        United
                                              Total     States    International
                                            ---------  ---------  -------------
<S>                                         <C>        <C>        <C>
Standardized Measure (in millions):
  1998
    Future cash inflows.................... $   706.1  $   498.0    $  208.1
    Future production and development
     costs.................................    (325.1)    (191.3)     (133.8)
    Future income tax expense..............        --         --          --
                                            ---------  ---------    --------
    Future net cash flows..................     381.0      306.7        74.3
    10% annual discount....................    (105.1)     (88.4)      (16.7)
                                            ---------  ---------    --------
    Standardized measure of discounted
     future net cash flows................. $   275.9  $   218.3    $   57.6
                                            =========  =========    ========
  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
    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
    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
                                            =========  =========    ========
 
Changes in Standardized Measure (in
 millions):
<CAPTION>
                                              1998       1997         1996
                                            ---------  ---------  -------------
<S>                                         <C>        <C>        <C>
  Sales and transfers of oil and gas
   produced, net of production costs....... $  (139.9) $  (245.6)   $ (254.4)
  Changes in prices, net of production and
   future development costs................    (149.3)    (761.8)    1,065.0
  Extensions, discoveries and improved
   recovery, less related costs............      58.3       92.5       185.0
  Purchases of minerals in place...........      70.2         --         3.2
  Revisions of previous quantity
   estimates...............................      (4.9)    (806.8)     (238.7)
  Sales of minerals in place...............    (258.7)    (231.6)     (125.2)
  Accretion of discount....................      61.9      234.3       144.4
  Net change in income taxes...............      26.9      622.3      (329.6)
  Other....................................      (7.6)       0.7        38.0
                                            ---------  ---------    --------
    Total.................................. $  (343.2) $(1,096.0)   $  487.7
                                            =========  =========    ========
</TABLE>
 
                                      46
<PAGE>
 
                         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 1997 and first three quarters of 1998 per share amounts have been
restated to reflect the reduction in weighted average shares outstanding due
to the one-for-three reverse stock split approved by shareholders on December
8, 1998.
 
<TABLE>
<CAPTION>
                                                 Quarter Ended
                                   --------------------------------------------
                                   March 31  June 30   September 30 December 31
                                   --------  --------  ------------ -----------
<S>                                <C>       <C>       <C>          <C>
1998:
  Revenues........................ $ 64,513  $ 58,561   $  46,323    $ 49,655
  Gains (Losses) on Property
   Sales..........................   (6,027)    1,761       3,000      10,351
  Impairment of Assets............       --        --          --     (10,439)
  Operating Income (Loss)(a)......   (9,169)   (2,484)     (7,098)     (2,246)
  Net Income (Loss)...............  (19,027)  (10,406)     (5,452)     (6,041)
  Basic and Diluted Net (Loss) Per
   Share.......................... $  (0.45) $  (0.25)  $   (0.13)   $  (0.14)
 
1997:
  Revenues........................ $ 86,807  $ 75,257   $  78,230    $ 73,919
  Gains (Losses) on Property
   Sales..........................       --        --       8,003      44,914
  Impairment of Assets............       --        --    (210,202)    (49,910)
  Operating Income (Loss)(a)......    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.......................... $  (0.05) $  (0.32)  $   (4.30)   $  (0.44)
</TABLE>
--------
(a) Net Income excluding interest and taxes.
 
                                      47
<PAGE>
 
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
 
  None in 1998 and information concerning Registrant's change of accountants
in 1997 was previously reported in Current Report on Form 8-K dated September
25, 1997.
 
                                   PART III
 
Item 10. Directors and Executive Officers of the Registrant
 
Item 11. Executive Compensation
 
Item 12. Security Ownership of Certain Beneficial Owners and Management
 
Item 13. Certain Relationships and Related Transactions
 
  Pursuant to Instruction G(3) to Form 10-K, the information required in Items
10-13 is incorporated by reference from EEX's definitive proxy statement to be
filed pursuant to Regulation 14A within 120 days after year-end.
 
                                    PART IV
 
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
 
(a)-1 Financial Statements
 
  The information required hereunder is set forth under "Report of Independent
Auditors," "Consolidated Statement of Operations," "Consolidated Statement of
Cash Flows," "Consolidated Balance Sheet," "Consolidated Statement of
Shareholders' Equity," "Notes to Consolidated Financial Statements" and
"Quarterly Results" included in Item 8.
 
(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
 
<TABLE>
 <C> <S>
 3.1 Restated Articles of Incorporation of the Registrant, as amended. (1)
 
 3.2 Bylaws of the Registrant, as amended. (1)
 
 4.1 Form of Common Stock Certificate. (1)
 
 4.2 Form of Preferred Stock Certificate. (1)
 
 4.3 Rights Agreement dated as of September 10, 1996, between the Registrant
     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)
 
 4.4 First Amendment to Rights Agreement dated December 21, 1998, the
     Registrant and Harris Trust Company of New York, as Rights Agent. (1)
 
 4.5 Statement of Resolution of Series B 8% Cumulative Perpetual Preferred
     Stock of the Registrant filed with the Secretary of State of Texas on
     January 7, 1999. (1)
 
 4.6 Form of Series A Warrant issued to Warburg, Pincus Equity Partners, L.P.,
     and affiliates on January 7, 1999. (1)
 
</TABLE>
 
 
                                      48
<PAGE>
 
<TABLE>
 <C>   <S>
   4.7 Form of Series B Warrant issued to Warburg, Pincus Equity Partners,
       L.P., and affiliates on January 7, 1999. (1)
 
   4.8 Form of Series C Warrant issued to Warburg, Pincus Equity Partners,
       L.P., and affiliates on January 7, 1999. (1)
 
  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. Incorporated by reference to Exhibit 10.1 to
       Registrant's Form 10-K for the year ended December 31, 1997. (2)
 
  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. Incorporated by reference to Exhibit 10.2 to
       Registrant's Form 10-K for the year ended December 31, 1997. (2)
 
  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 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. Incorporated by reference to Exhibit
       10.5 to Registrant's Form 10-K for the year ended December 31, 1997. (2)
 
  10.5 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)
 
  10.6 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)
 
  10.7 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)
 
  10.8 Exploration and Participation Agreement, dated June 20, 1997, by and
       between Old EEI and Enterprise Oil Gulf of Mexico, Inc. Incorporated by
       reference to Exhibit 10.10 to Registrant's Form 10-K for the year ended
       December 31, 1997. (2)
 
  10.9 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)
 
 10.10 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)
 
 10.11 First Amendment to Registrant's Deferred Compensation Plan dated as of
       November 1, 1998. (1)
 
 10.12 Second Amendment Registrant's Deferred Compensation Plan dated December
       8, 1998. (1)
 
 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)
 
</TABLE>
 
 
                                       49
<PAGE>
 
<TABLE>
 <C>   <S>
 10.14 Deferred Compensation Plan for Directors, effective January 1, 1996, as
       amended February 11, 1997. (1)
 
 10.15 Form of Change of Control Agreement executed by certain executive
       officers of the Registrant, filed as Exhibit 10.20 to the Annual Report
       on Form 10-K for the year ended December 31, 1996 of Old EEX. (2)
 
 10.16 Form of Amendment to Change of Control Agreement executed by certain
       executive officers of the Company. (1)
 
 10.17 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)
 
 10.18 Form of Amendment to Employment Agreement effective July 27, 1998
       between Registrant and certain executive officers. (1)
 
 10.19 Second Amendment to Employment Agreement effective July 27, 1998,
       between Registrant and Thomas M Hamilton. (1)
 
 10.20 Form of Amendment to Restricted Stock Agreement effective July 27, 1998,
       between Registrant and certain executive officers. (1)
 
 10.21 Floating Drilling Rig Requirement Offshore Drilling Contract dated
       October 15, 1998, between the Registrant and Global Marine Drilling
       Company for the "Glomar Arctic I" floating drilling unit, without
       appendices. (1)
 
 10.22 Purchase Agreement, dated as of December 22, 1998, by and among
       Registrant and Warburg, Pincus Equity Partners, L.P., a Delaware limited
       partnership, Warburg, Pincus Netherlands Equity Partners I, C.V., a
       Dutch limited partnership, Warburg, Pincus Netherlands Equity Partners
       II, C.V. a Dutch limited partnership and Warburg, Pincus Netherlands
       Equity Partners III, C.V., a Dutch limited partnership, incorporated by
       reference to Exhibit 99.1 to Registrant's Form 8-K dated December 22,
       1998. (2)
 
 10.23 Registration Rights Agreement dated January 8, 1999, by and among
       Registrant and Warburg, Pincus Equity Partners, L.P., and affiliates.
       (1)
 
 21    Subsidiaries of the Registrant. (1)
 
 23.1  Consent of Ernst & Young LLP. (1)
 
 23.2  Consent of Netherland, Sewell & Associates, Inc. (1)
 
 23.3  Consent of DeGolyer & MacNaughton. (1)
 
 27    Financial Data Schedule--December 31, 1998. (1)
</TABLE>
--------
Long-term debt is described in the Notes to Consolidated Financial Statements
in Item 8. 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.
 
                                      50
<PAGE>
 
  (b) Reports on Form 8-K
 
  Current Report on Form 8-K dated October 19, 1998. (News release dated
October 19, 1998: Update on planned spud of appraisal well at Llano.)
 
  Current Report on Form 8-K dated December 8, 1998. (EEX shareholders
approved one-for-three reverse split of EEX common stock.)
 
  Current Report on Form 8-K dated December 14, 1998. (News release dated
December 14, 1998: Update on EEX sale of properties in Oklahoma and Texas.)
 
  Current Report on Form 8-K dated December 22, 1998. (EEX announced signed
purchase agreement to issue preferred stock and warrants for $150 million when
final approval under the Hart Scott Rodino Act is obtained.)
 
                                      51
<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,
                                                 Chief Executive Officer
 
March 12, 1999
 
  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.
 
 
<TABLE>
<S>  <C> <C>
              Signature                      Title                   Date
 
         /s/ T. M Hamilton           Chairman and              March 12, 1999
-----------------------------------   President, Chief
           T. M Hamilton              Executive Officer
                                    
 
         /s/ R. S. Langdon           Executive Vice            March 12, 1999 
-----------------------------------   President,
           R. S. Langdon              Finance and Administration,
                                      Chief Financial
                                      Officer
                                    
 
          /s/ T. E. Coats            Vice President,           March 12, 1999
-----------------------------------   Planning and
            T. E. Coats               Controller
                                    
 
          /s/ F. S. Addy             Director                  March 12, 1999
-----------------------------------
            F. S. Addy
 
                               
    /s/ B. A. Bridgewater, Jr.       Director                  March 12, 1999
-----------------------------------
      B. A. Bridgewater, Jr.
 
         /s/ F. M. Lowther           Director                  March 12, 1999
-----------------------------------
           F. M. Lowther
 
        /s/ M. P. Mallardi           Director                  March 12, 1999
-----------------------------------
          M. P. Mallardi
 
         /s/ H. H. Newman            Director                  March 12, 1999
-----------------------------------
           H. H. Newman
</TABLE>
 
                                      52