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National Energy Group, Inc.
Management Incentive Plan

I.   PURPOSE       The National Energy Group, Inc. Management Incentive Plan has
been established to provide additional compensation to Participants for their
contribution to the achievement of the objectives of the Company, encouraging
and stimulating superior performance by such personnel, and assisting in
attracting and retaining highly qualified key employees.

II.   DEFINITIONS

  A.   “Base Salary” equals the base annual salary effective December 31st for
which the award is calculated.     B.   “Board of Directors” means the Board of
Directors for National Energy Group, Inc.     C.   “Company” means National
Energy Group, Inc. and its subsidiaries and its successors and assigns.     D.  
“Fiscal Year” means the Company’s Fiscal Year beginning January 1 and ending the
last day of December.     E.   “Plan” means the National Energy Group, Inc.
Management Incentive Plan, as from time to time amended.     F.   “Chief
Executive Officer” means the Chief Executive Officer of National Energy Group,
Inc.     G.   “Financial Targets” are the financial goal(s) of the Company
identified in exhibit B as applied to Participants in the position levels
outlined in Exhibit C.     H.   “Personal Goals” refer to the personal goals and
objectives set by each Participant and his/her supervisor prior to April 1st of
each Fiscal Year, against which performance is measured under Section V below.

     

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  I.   “Change in Control” means the consummation of any transaction (including,
without limitation, any merger or consolidation), the result of which is that
any Person, other than Carl Icahn or the Related Parties, becomes the Beneficial
Owner, directly or indirectly, of more than 50% of the Voting Stock of the
Company, measured by voting power rather than number of shares.

For purposes of the definition of Change in Control, the following capitalized
terms will have the following meaning:
   “Beneficial Owner” has the meaning assigned to such term in Rule 13d-3 and
Rule 13d-5 under the Exchange Act, except that in calculating the beneficial
ownership of any particular “person” (as that term is used in Section 13(d)(3)
of the Exchange Act), such “person” will be deemed to have beneficial ownership
of all securities that such “person” has the right to acquire by conversion or
exercise of other securities, whether such right is currently exercisable or is
exercisable only after the passage of time. The terms “Beneficially Owns” and
“Beneficially Owned” have a corresponding meaning.
   “Control” and “Controlled” means the right, power or ability of one Person,
whether or not exercised, to direct or influence the management, policies or
decisions of another person.
   “Exchange Act” means the Securities Exchange Act of 1934, as amended, and any
successor thereto.
   “Person” means any individual, entity or group within the meaning of
Section 13(d)(3) of the Exchange Act, other than employee benefit plans
sponsored or maintained by the Company or by entities controlled by the Company.
   “Related Parties” means: (1) Carl Icahn, any spouse and any child, stepchild,
sibling or descendant of Carl Icahn; (2) any estate of Carl Icahn or of any
person under clause (1); (3) any person who receives a

     

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   beneficial interest in any estate under clause (2) to the extent of such
interest; (4) any executor, personal administrator or trustee who holds such
beneficial interest in the Company for the benefit of, or as fiduciary for, any
person under clauses (1), (2), or (3) to the extent of such interest; (5) any
corporation, partnership, limited liability Partnership, trust, or similar
entity, directly or indirectly owned or controlled by Carl Icahn or any other
person or persons identified in clauses (1), (2), (3) or (4) and (6) any
not-for-profit entity not subject to taxation pursuant to Section 501(c)(3) of
the Internal Revenue Code or any successor provision to which Carl Icahn or any
person identified in clauses (1), (2), or (3) above contributes his beneficial
interest in the Company or to which such beneficial interest passes pursuant to
such person’s will.
   “Voting Stock” means, with respect to any Person that is (a) a corporation,
any class or series of capital stock of such Person that is ordinarily entitled
to vote in the election of directors thereof at a meeting of stockholders called
for such purpose, without the occurrence of any additional event or contingency,
(b) a limited liability company, membership interests entitled to manage, or to
elect or appoint the Persons that will manage the operations or business of the
limited liability company, or (c) a partnership, partnership interests entitled
to elect or replace the general partner thereof.

  J.   Reserve Replacement” shall be deemed to mean total capital expenditures
for drilling and exploration for the Plan year divided by a finding cost target,
compared to the reserve additions for the Plan year. Reserve additions shall be
calculated as the sum of extensions, discoveries and revisions, plus any PUDs
moved to the PDNP and/or PDP, in addition to any PDNP’s moved to PDP. The
finding cost target shall be determined annually, together with the other
Financial Targets for each Plan year.

     
 
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III.   EMPLOYEES COVERED BY THIS PLAN       Those employees whose position
levels are listed on Exhibit C (each a “Participant”) shall be eligible to
participate in this Plan.   IV.   FINANCIAL AWARD       A Participant in the
Plan shall be entitled to a Financial Award computed as the product of:

             
Participants
Base Salary
´
  Bonus as a % of salary (Determined by Performance as a % of target) ´  
Individual Performance Rating on a percentage scale of 0 -100%   = Participants
Financial Award
 
           

  A.   “Participant’s Base Salary” shall be the salary as defined in
Section II-A in effect during applicable period.     B.   “Bonus as % of Salary”
shall be as set forth in Exhibit A, Table I based upon position level of each
Participant.     C.   “Performance as a % of Target” shall be determined in
accordance with the schedule set forth in Exhibit A, Table II based on the
attainment of the Company’s financial target as identified in Exhibit B for the
applicable period and as measured in performance percentages by target for
Participants in the position levels outlined per Exhibit C.     D.   “Individual
Performance Rating” shall be based on an individual performance evaluation in
accordance with Section V below.     E.   “Participant’s Financial Award” shall
be the total bonus amount that includes both a cash award and a banked bonus
award.     F.   “Cash Award” refers to the Participant Financial Award amount
disbursed in the form of a cash payment. Each Position Level has a minimum and a
maximum cash disbursement award limit as indicated in Exhibit A, Table II. Cash
Awards will be distributed as applicable by April 15th of the year following the
year for which the award is payable.     G.   “Banked Bonus Award” refers to the
portion of the Participant Financial Award that is paid out over a period of

     
 
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four (4) years, as it vests. Vesting rights will begin at the end of the first
(1st) year with 25% vesting at the end of that year and each subsequent year up
to a 100% vesting after four (4) years. Each Position Level has a minimum and a
maximum banked bonus award limit as indicated in Exhibit A, Table II. Vested
Banked Awards will be paid at the same time as the current year Cash Award
payment.
If a Participant was in more than one management level during a Fiscal Year, a
separate computation shall be made for each level applicable to the Participant
during such Fiscal Year; the sum of the separate computations shall be the
Participant’s Financial Award.

V.   PERSONAL PERFORMANCE RATING       Personal goals for each Participant are
to be developed jointly by the Participant and his/her supervisor for the Fiscal
Year. Attainment of such goals and other performance criteria, both quantifiable
and non-quantifiable, may be used to arrive at an overall individual performance
rating from 0% to 100%. Such criteria shall be applied consistently to
Participants with similar duties pursuant to an evaluation process to be
reviewed and approved by the Chief Executive Officer and the Vice President,
General Counsel. Criteria that may be weighed in arriving at an individual
performance rating include,
without limitation:

  •   Achievement of income goals by business unit     •   Development of
subordinates     •   Successful development of new products/processes     •  
Improvement in products or production     •   Attainment of self-development
objectives     •   Control or reduction of operating expenses by business unit  
  •   Safety record of Facility or Facilities

The supervisor will assign a Personal Performance %, from 0% to 100%, reflecting
the Participant’s performance during such Fiscal

     
 
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Year. The Personal Performance % recommendation of the supervisor shall be
reviewed by the department executive, who shall recommend an appropriate
Personal Performance % to the Chief Executive Officer who shall approve the
final Personal Performance % for each Participant. Personal Performance
recommendations are due to the Chief Executive Officer prior to March 15th of
the year following the fiscal year for which the performance is being measured.
The Chief Executive Officer reserves the right, in his sole discretion, to
accept the Personal Performance % recommendation for each Participant or to
modify any Personal Performance % for any Participant to achieve such dispersion
of performance ratings as the Chief Executive Office deems appropriate.
Notwithstanding the previous sentence, in no event may a Participant’s
Individual Performance Factor be modified upward or downward by more than 50%.

VI.   DEFERRED COMPENSATION OR BANKED BONUS AWARD       The deferred, or banked
part of a Participant’s Financial Award is calculated as a function of Company
Financial Performance as outlined in Exhibit A, Tables I and II. The
participants’ Banked Bonus Award begins to vest at the end of the first (1st)
year after the original Banked Bonus Award is made. By way of example, banked
amounts will be 25% vested after one (1) year, 50% vested after two (2) years,
75% vested after three (3) years, and 100% fully vested at the end of the fourth
(4th) year, at the same time and under the same guidelines as the then current
cash portion of the Plan.       The Banked Bonus Award portion of a
Participant’s Award accumulates investment growth, compounded annually at the
same rate as the guaranteed investment vehicle used within the Company’s 401k
Plan for that Fiscal Year.   VII.   The financial performance measures, targets
and payout ranges used for incentive purposes shall be approved by the Chief
Executive Officer and the Board of Directors. The performance measures, targets
and payout ranges are defined in Exhibit A and B.   VIII.   PARTICIPANT BONUS
COMPOSITION       The composition of the bonuses are established at the
executive level and communicated individually to each Participant.

     
 
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IX.   COMPUTATION AND DISBURSEMENT OF FUNDS       As soon as practicable after
the close of the Fiscal Year, but no later than March 15th, the Executive of
each department will recommend a Personal Performance % for each Participant in
his/her department to the Chief Executive Officer. In addition, the Chief
Financial Officer of the Company shall calculate the financial performance
measure and the proposed payout under the Plan based upon the Chief Executive
Officer’s determination of each Participant’s Personal Performance % and the
achievement of the financial performance measure. The proposed payout shall be
presented to the Chief Executive Officer and the Board of Directors for final
approval. Once approved, payment of the Financial Awards shall be made as soon
as practicable after the completion of the annual audit but no later than
April 15th.       Notwithstanding anything to the contrary, the Company may, at
its election, accelerate the vesting of and cause the payment of all Banked
Bonus Award amounts with respect to any particular Participant: (1) in the event
such participant retires on or after obtainment of the then current federal
retirement age; or (2) immediately prior to a Company Change of Control.      
If the Participant dies before receiving his/her award, the amount due will be
paid to the designated beneficiaries on file with the Company and, in the
absence of such designation, to the Participant’s estate.       All payment
awards shall be reduced by amounts required to be withheld for taxes at the time
payments are made.   X.   CHANGES TO TARGET       The Board of Directors, at any
time prior to the final determination of awards, may consider changes to the
performance measures, targets, and payout ranges used for incentive purposes,
such that if, in the judgment of the Board of Directors, such change(s) is/are
desirable in the interests of equitable treatment of the Participants and the
Company as a result of extraordinary or non-recurring events, changes in
applicable accounting rules or principles, changes in the Company’s methods of
accounting, changes in applicable law, changes due to consolidation,
acquisitions, or

     
 
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reorganization. The Chief Executive Officer shall implement such changes(s) for
immediate incorporation into the Plan.

XI.   A Participant shall be entitled to payment of a partial Financial Award
if, prior to the end of such Fiscal Year, a Participant:

  •   Dies     •   Becomes permanently disabled     •   Transfers to a position
with a salary grade not eligible for participation in the Plan     •   Enters
military service     •   Takes an approved leave of absence     •   Is appointed
or elected to public office     •   Is terminated due to position elimination

provided that the Participant was an active employee for a minimum of 90
consecutive calendar days during such Fiscal Year. Such partial awards shall be
paid at the time when payments of awards for such Fiscal Year are made to active
Participants.
Participants hired, or who otherwise become eligible to participate hereunder,
during the course of a Fiscal Year and who are employed through the end of such
Fiscal Year shall be eligible for a pro-rated award based on their Base Salary
during such Fiscal Year and length of eligible service prior to the end of the
Fiscal Year so long as the Participant was in a bonus eligible position for at
least 90 days.

XII.   FORFEITURE OF BONUS       Except as provided in Section X, no Participant
who ceases to be an employee of the Company prior to the payment date of the
award shall be entitled to any Financial Award under this Plan for such Fiscal
Year unless the Chief Executive Officer in consultation with the Board of
Directors determines otherwise.   XII.   ADMINISTRATION

     
 
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This Plan shall be administered by the Vice President, General Counsel of
National Energy Group, Inc., subject to the control and supervision of the Chief
Executive Officer and the Board of Directors of National Energy Group, Inc.
In the event of a claim or dispute brought forth by a Participant, the decision
of the Chief Executive Officer as to the facts in the case and the meaning and
intent of any provision of the Plan, or its application, shall be final and
conclusive.

XIII.   NO EMPLOYMENT CONTRACT; FUTURE PLANS       Participation in this Plan
shall not confer upon any Participant any right to continue in the employ of the
Company nor interfere in any way with the right of the Company to terminate any
Participant’s employment at any time. The Company is under no obligation to
continue the Plan in future Fiscal Years.   XIV.   AMENDMENT OR TERMINATION    
  The Board of Directors of the Company may at any time, or from time to time,
(a) amend, alter or modify the provisions of this Plan, (b) terminate this Plan,
or (c) terminate the participation of an employee or group of employees in this
Plan; provided, however, that in the event of the termination of this Plan or a
termination of participation, the Company shall provide notification to the
affected participants, as soon as practicable, outlining the extent of the Plan
termination or Participant termination in the Plan and the calculation of the
partial awards to be granted to the affected Participant(s) for the portion of
the Fiscal Year during which such employee(s) were Participants in this Plan, in
a manner in which the Company, in its sole judgment, determines to be equitable
to such Participants and the Board of Directors of the Company.   XV.   GENERAL
PROVISIONS

  A.   No right under the Plan shall be assignable, either voluntarily or
involuntarily by way of encumbrance, pledge, attachment, level or charge of any
nature (except as may be required by state or federal law).     B.   Nothing in
the Plan shall require the Company to segregate or set aside any funds or other
property for the purpose of paying any portion of an award. No Participant,
beneficiary or other

     
 
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person shall have any right, title or interest in any amount awarded under the
Plan prior to the close of the Fiscal Year, or in any property of the company or
its subsidiaries.

     
February 1, 2006
  /s/ Bob G. Alexander      
Final Approval Date
  Chief Executive Officer

     
 
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Exhibit A
Management Incentive Plan
Computation of MIP Amounts

    The Position Level shall determine the potential bonus (both cash and
banked.) Table I below provides the bonus award limits for each position level.

                                                                               
      Bonus                   Bonus         Bonus Award at   Award at   Target
Bonus (Plan +   Award at   Bonus at Plan + 50% or TABLE I   Plan   Plan +   15%)
  Plan +   more     Cash   Bank   (5-14%)   Cash   Bank   (16-49%)   Cash   Bank
                                                             
Position Level I.
    27.5 %     13.75 %             40 %     20 %             66 %     33 %
Position Level II.
                                                               
II-A
    18 %     9 %   (See Table II)     30 %     15 %   (See Table II)     49 %  
  24.5 %
II-B
    15 %     7.5 %             25 %     12.5 %             41 %     20.5 %
Position Level III.
                                                               
III-A
    15 %     7.5 %             25 %     12.5 %             41 %     20.5 %
III-B
    10 %     5 %             16 %     8 %             25 %     12.5 %

    Table II

                                                                               
                                  Company                 Goals   Position Level
I   Position Level II-A   Position Level II-B & Level III - A   Position Level
III-B Achieved                                                     TOTAL   CASH
  BANK   TOTAL   CASH   BANK   TOTAL   CASH   BANK   TOTAL   CASH   BANK
95%—104.99%
    41.25 %     27.50 %     13.75 %     27.00 %     18.00 %     9.00 %     22.50
%     15.00 %     7.50 %     15 %     10 %     5 %
105— 109.99
    48.00 %     32.00 %     16.00 %     32.00 %     21.00 %     11.00 %    
27.00 %     18.00 %     9.00 %     18 %     12 %     6 %
110— 114.99
    55.50 %     37.00 %     18.50 %     38.00 %     25.00 %     13.00 %    
33.00 %     22.00 %     11.00 %     21 %     14 %     7 %
115—119.99
    60.00 %     40.00 %     20.00 %     45.00 %     30.00 %     15.00 %    
37.50 %     25.00 %     12.50 %     24 %     16 %     8 %
120—124.99
    64.50 %     43.00 %     21.50 %     48.00 %     32.00 %     16.00 %    
40.00 %     27.00 %     13.00 %     25.5 %     17 %     8.5 %
125—129.99
    69.00 %     46.00 %     23.00 %     52.00 %     34.50 %     17.50 %    
43.00 %     29.00 %     14.00 %     28.5 %     19 %     9.5 %
130—134.99
    73.50 %     49.00 %     24.50 %     56.00 %     37.00 %     19.00 %    
46.00 %     31.00 %     15.00 %     30 %     20 %     10 %
135—139.99
    79.50 %     53.00 %     26.50 %     60.00 %     40.00 %     20.00 %    
50.00 %     33.00 %     17.00 %     31.5 %     21 %     10.5 %
140—144.99
    85.50 %     57.00 %     28.50 %     64.00 %     43.00 %     21.00 %    
54.00 %     35.00 %     19.00 %     33 %     22 %     11 %
145—149.99
    91.50 %     61.00 %     30.50 %     68.50 %     46.00 %     22.50 %    
58.00 %     38.00 %     20.00 %     36 %     24 %     12 %
150%
    99.00 %     66.00 %     33.00 %     73.50 %     49.00 %     24.50 %    
62.50 %     41 %     20.5 %     37.5 %     25 %     12.5 %             99.0%
          73.5%
          61.5%
          37.5%

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Exhibit B
Company’s Financial Targets
Each year the Company in conjunction with the Board of Directors will determine
the goals for each of the following Financial Target areas:

  •   EBITDA     •   Lease Operating Expense     •   Production     •   Reserve
Replacement

     
 
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Exhibit C
Position Levels:
Level I: Executives
Level II: Technical/Field
Level II — A — Sr. Level Managers/Technicians
Level II — B — Technicians
Level III: Professional/Administrative
Level III — A — Director/Manager
Level III — B — Professional/Exempt

     
 
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