<PAGE>

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

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                             ---------------------
                                   FORM 10-K

<Table>
<C>        <S>
   [X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
           SECURITIES EXCHANGE ACT OF 1934

           FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

                                  OR


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

</Table>

                   COMMISSION FILE NO. 0-19136 (COMMON STOCK)
                      AND 333-9045 (SERIES B SENIOR NOTES)
                     AND 333-38075 (SERIES D SENIOR NOTES)

                          NATIONAL ENERGY GROUP, INC.
             (Exact name of registrant as specified in its charter)

<Table>
<S>                                                  <C>
                      DELAWARE                                            58-1922764
          (State or other jurisdiction of                               (IRS Employer
           incorporation or organization)                            Identification No.)

               4925 GREENVILLE AVENUE
                   DALLAS, TEXAS                                            75206
      (Address of principal executive offices)                            (Zip code)
</Table>

                                 (214) 692-9211
              (Registrant's telephone number, including area code)

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

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

                         COMMON STOCK, $0.01 PAR VALUE
                                (Title of Class)

           SECURITIES REGISTERED PURSUANT TO SECURITIES ACT OF 1933:

                    SERIES B SENIOR NOTES, 10 3/4% DUE 2006
                    SERIES D SENIOR NOTES, 10 3/4% DUE 2006

     Indicate  by check  mark whether the  registrant (1) has  filed all reports
required to be filed by  Section 13 or 15(d) of  the Securities Exchange Act  of
1934  during  the preceding  12  months (or  for  such shorter  period  that the
registrant was required to file such reports), and (2) has been subject to  such
filing requirements for the past 90 days.  Yes [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  the  Registrant's  knowledge,  in  definitive  proxy  or  information
statements incorporated  by reference  in Part  III  of this  Form 10-K  or  any
amendments hereto to this Form 10-K.  Yes [X]     No [ ]

     Indicate  by check mark whether the  registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ]     No [X]

     The  aggregate  market  value  of  the  shares  of  Common  Stock  held  by
non-affiliates  of the  Registrant, as  of June 30,  2002, (based  upon the last
sales price of $.26 as reported by the OTC Bulletin Board) was $2,909,569.

     Indicate by check mark whether the  registrant has filed all documents  and
reports  required  to be  filed by  Section 12,  13 or  15(d) of  the Securities
Exchange Act of 1934 subsequent to  the distribution of securities under a  plan
confirmed by a court.  Yes [X]     No [ ]

     11,190,650  shares of the Registrant's common  stock, $0.01 par value, were
outstanding on March 25, 2003.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

                               TABLE OF CONTENTS

<Table>
<Caption>
                                                                        PAGE
                                                                        ----
<S>       <C>                                                           <C>
                                   PART I
ITEMS 1. AND 2.  BUSINESS AND PROPERTIES..............................    3
          Forward-Looking Statements..................................    3
          Background and Recent Developments..........................    3
          Principal Areas of Operations...............................    6
          Oil and Natural Gas Reserves................................    6
          Oil and Natural Gas Production and Unit Economics...........    7
          Leasehold Acreage...........................................    7
          Drilling Activity...........................................    8
          Control Over Production Activities..........................    8
          Markets and Customers.......................................    8
          Investment in NEG Holding LLC...............................    9
          Principal Areas of Operation -- NEG Holding LLC.............   10
          Oil and Natural Gas Reserves -- NEG Holding LLC.............   12
          Oil and Natural Gas Production and Unit Economics -- NEG
          Holding LLC.................................................   13
          Productive Well Summary -- NEG Holding LLC..................   14
          Leasehold Acreage -- NEG Holding LLC........................   14
          Drilling Activity -- NEG Holding LLC........................   15
          Title to Oil and Natural Gas Properties -- NEG Holding
          LLC.........................................................   15
          Production and Sales Prices -- NEG Holding LLC..............   15
          Control Over Production Activities -- NEG Holding LLC.......   15
          Markets and Customers -- NEG Holding LLC....................   15
          Regulation -- NEG Holding LLC...............................   16
          Operational Hazards and Insurance -- NEG Holding LLC........   19
          Competition -- NEG Holding LLC..............................   19
          Office Space................................................   19
          Employees...................................................   19
ITEM 3.   LEGAL PROCEEDINGS...........................................   19

                                  PART II
ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
          STOCKHOLDER MATTERS.........................................   20
          Market Information..........................................   20
          Holders.....................................................   20
          Dividends on Common Stock...................................   20
ITEM 6.   SELECTED FINANCIAL DATA.....................................   20
ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
          AND RESULTS OF OPERATIONS...................................   23
          Results of Operations.......................................   25
          Liquidity and Capital Resources.............................   29
          Future Capital and Financing Requirements...................   30
          Financial Reporting Impact of Full Cost Method of
          Accounting..................................................   31
          Critical Accounting Policies................................   31
</Table>

                                        1
<PAGE>

<Table>
<Caption>
                                                                        PAGE
                                                                        ----
<S>       <C>                                                           <C>
          Recent Accounting Pronouncements............................   32
          Changes in Prices...........................................   33
          Inflation...................................................   33
ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
          RISK........................................................   33
ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................   33
ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
          AND FINANCIAL DISCLOSURE....................................   33

                                  PART III
ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..........   33
ITEM 11.  EXECUTIVE COMPENSATION......................................   33
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
          MANAGEMENT..................................................   34
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............   34
ITEM 14.  CONTROLS AND PROCEDURES.....................................   34

                                  PART IV
ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
          8-K.........................................................   34
          Signatures..................................................   40
</Table>

                                        2
<PAGE>

                                     PART I

ITEMS 1. AND 2.  BUSINESS AND PROPERTIES

FORWARD-LOOKING STATEMENTS

     This document includes "forward-looking  statements" within the meaning  of
various provisions of the Securities Act of 1933 and the Securities Exchange Act
of  1934, as amended.  The words "expect,"  "estimate," "anticipate," "predict,"
"believe," and  similar  expressions  and variations  thereof  are  intended  to
identify  forward-looking statements.  All statements, other  than statements of
historical facts, included in this document that address activities, events,  or
developments  that  National  Energy  Group,  Inc.  (the  "Company")  expects or
anticipates will or may occur in the future, including such things as  estimated
future  net revenues  from oil  and natural gas  reserves and  the present value
thereof, drilling of  wells, future production  of oil and  natural gas,  future
capital  expenditures  (including  the  amount  and  nature  thereof),  business
strategy and  measures  to  implement strategy,  competitive  strengths,  goals,
expansion,   and  growth  of  the  Company's  business  and  operations,  plans,
references to future success, references to intentions as to future matters  and
other  such  matters  are  forward-looking  statements  and  include  statements
regarding the  interest, belief  or  current expectations  of the  Company,  its
directors, or its officers regarding such matters. These statements are based on
certain  assumptions and analyses made by the Company in light of its experience
and its perception of historical trends, current conditions and expected  future
developments  as well  as other  factors it  believes are  appropriate under the
circumstances. However,  whether actual  results and  developments will  conform
with  the Company's expectations and predictions is subject to a number of risks
and uncertainties, including the risk factors discussed in this document, future
oil and natural gas prices, future operating costs, severance and excise  taxes,
general  economic,  market or  business conditions,  the opportunities  (or lack
thereof) that  may be  presented  to and  pursued  by the  Company,  competitive
actions  by other oil and natural gas companies, changes in laws or regulations,
and other  factors,  many  of which  are  beyond  the control  of  the  Company.
Consequently,  all of the  forward-looking statements made  in this document are
qualified by these cautionary statements and there can be no assurance that  the
actual  results or developments anticipated by  the Company will be realized or,
even if substantially realized, that they will have the expected consequences to
or effects on the Company or its business or operations. Such statements are not
guarantees of future performance and  actual results or developments may  differ
materially from those projected in the forward-looking statements.

BACKGROUND AND RECENT DEVELOPMENTS

     National Energy Group, Inc. was incorporated under the laws of the State of
Delaware  on November 20, 1990.  Effective June 11, 1991,  Big Piney Oil and Gas
Company and VP Oil, Inc. merged with  and into the Company. On August 29,  1996,
Alexander  Energy Corporation was merged with and into a wholly-owned subsidiary
of the  Company,  which subsidiary  was  merged with  and  into the  Company  on
December 31, 1996.

     On  February 11, 1999, the United  States Bankruptcy Court for the Northern
District of Texas, Dallas Division  ("Bankruptcy Court") entered an  involuntary
petition  placing the Company under protection  of the Bankruptcy Court pursuant
to Title 11, Chapter  11 of the United  States Bankruptcy Code (the  "Bankruptcy
Proceeding").  On July 24, 2000 the  Bankruptcy Court entered a subsequent order
confirming a  Plan  of Reorganization  (the  "Plan of  Reorganization")  jointly
proposed by the Company and the official committee of unsecured creditors, which
Plan  of Reorganization became effective on August 4, 2000. The Bankruptcy Court
issued a final decree closing the case effective December 13, 2001. Accordingly,
the Company  has effectively  settled  all matters  relating to  the  Bankruptcy
Proceeding.

     As  mandated by  the Plan of  Reorganization and the  Bankruptcy Court, NEG
Holding LLC ("Holding LLC"), a Delaware limited liability company, was formed in
August 2000. In exchange for an initial 50% membership interest in Holding  LLC,
on  September 12, 2001, but effective as of May 1, 2001, the Company contributed
to Holding LLC all of  its operating assets and  oil and natural gas  properties
excluding  cash  of $4.3  million. In  exchange for  its initial  50% membership
interest in  Holding  LLC,  Gascon  Partners  ("Gascon"),  an  entity  owned  or
controlled  by Carl C. Icahn, the Company's largest stockholder, contributed (i)
its sole  membership interest  in Shana  National LLC,  an oil  and natural  gas
producing company, and

                                        3
<PAGE>

(ii)  cash, including a $10.9 million Revolving Note evidencing borrowings under
the Company's revolving credit facility issued to Arnos Corp ("Arnos"), also  an
entity  owned or controlled by Carl C. Icahn, the Company's largest shareholder.
In connection  with  the foregoing,  Holding  LLC  initially owns  100%  of  the
membership  interest in NEG Operating LLC  ("Operating LLC"), a Delaware limited
liability company. Holding LLC is  governed by an operating agreement  effective
as  of May 12, 2001, which provides for management of Holding LLC by Gascon (the
"Holding LLC Operating Agreement"). Gascon  is currently the managing member  of
Holding  LLC. All of the  oil and natural gas  assets contributed by the Company
and all of the oil and natural gas assets associated with Gascon's  contribution
to  Holding LLC were transferred from Holding  LLC to Operating LLC on September
12, 2001, but effective as of May 1, 2001.

     Pursuant to the Holding LLC Operating Agreement, the Company is to  receive
guaranteed  payments, in  addition to a  priority distribution  amount of $202.2
million before Gascon receives any monies.  It is anticipated that the  priority
distribution amount of $202.2 million will be used by the Company to pay off the
Company's  indebtedness (currently held by entities  owned or controlled by Carl
C. Icahn). The  priority distribution is  to be  made on or  before November  1,
2006.  Guaranteed payments are  to be paid on  a semi annual  basis, based on an
annual interest rate of 10.75% of the outstanding priority distribution  amount.
The  guaranteed  payments are  expected to  be sufficient  to make  the interest
payments on the Senior Notes until their due date of 2006. After the payments to
the Company,  Gascon is  to  receive distributions  equivalent to  the  priority
distribution amount and guaranteed payments plus other amounts as defined in the
NEG  Holding  LLC  Operating  Agreement  referred  herein.  Following  the above
distributions to the Company and  Gascon, additional distributions, if any,  are
to  be made in accordance with their respective capital accounts. Because of the
substantial uncertainty that  the Company will  receive any distributions  above
the  priority  and  guaranteed payment  amounts,  the Company  accounts  for its
investment in Holding LLC as  a preferred investment whereby guaranteed  payment
amounts  received and receipts of the  priority distribution amount are recorded
as reductions in the investment and  income is recognized from accretion of  the
investment  up  to the  priority distribution  amount, including  the guaranteed
payments (based on the interest method), and the residual interest  attributable
to  Holding LLC will be valued at zero. Cash receipts, if any, from the residual
interest will be reported in income as earned. In March 2003, Holding LLC made a
priority distribution  of $53.6  million  to the  Company, consisting  of  $42.7
million  in  cash  and  the  $10.9 million  note  outstanding  under  the credit
facility. The Company utilized  the $42.7 million cash  to repay the  Reinstated
Interest.

     The  Holding  LLC Operating  Agreement  further contains  a  provision that
allows Gascon  at any  time, in  its sole  discretion, to  redeem the  Company's
membership  interest in Holding LLC at a price equal to the fair market value of
such interest determined as if Holding LLC  had sold all of its assets for  fair
market value and liquidated. Since all of the Company's operating assets and oil
and natural gas properties have been contributed to Holding LLC, as noted above,
following such a redemption, the Company's principal assets would consist solely
of  its cash balances. In  the event that such  redemption right is exercised by
Gascon, the Company may be obligated to  use the proceeds that it would  receive
for  its  redeemed  membership  interest  to  pay  outstanding  indebtedness and
operating expenses before the  distribution of any portion  of such proceeds  to
the  Company's shareholders. Following the payment of the Company's indebtedness
(currently held  by entities  owned or  controlled  by Carl  C. Icahn)  and  its
operating  expenses, there is a substantial risk  that there will be no proceeds
remaining for  distribution to  the Company's  shareholders. It  is the  present
intention of Holding LLC to continue to conduct oil and natural gas drilling and
development activities in the ordinary course of business and to seek additional
reserves.

     The  management and operation  of Operating LLC is  being undertaken by the
Company pursuant to  a Management Agreement  (the "Management Agreement")  which
the  Company has entered into with Operating LLC. However, neither the Company's
officers nor directors will control  the strategic direction of Operating  LLC's
oil and natural gas business, including oil and natural gas drilling and capital
investments,  which shall  be controlled by  the managing member  of Holding LLC
(currently Gascon).  The Management  Agreement provides  that the  Company  will
manage Operating LLC's oil and natural gas assets and business until the earlier
of  November 1, 2006,  or such time as  Operating LLC no longer  owns any of the
managed oil and natural gas properties. The Company's employees will conduct the
day-to-day operations of Operating LLC's oil and natural gas properties, and all
costs  and  expenses  incurred  in  the   operation  of  the  oil  and   natural

                                        4
<PAGE>

gas  properties  shall  be  borne  by  Operating  LLC;  although  the Management
Agreement provides  that the  salary of  the Company's  Chief Executive  Officer
shall be 70% attributable to the managed oil and natural gas properties, and the
salaries of each of the General Counsel and Chief Financial Officer shall be 20%
attributable  to the managed oil and natural gas properties. In exchange for the
Company's management services, Operating LLC shall pay the Company a  management
fee  equal  to  115%  of  the  actual  direct  and  indirect  administrative and
reasonable overhead  costs incurred  by the  Company in  operating the  oil  and
natural  gas properties which either  the Company, or Operating  LLC may seek to
change within the range of 110%-115%  as such change is warranted; however,  the
parties   have  agreed  to   consult  with  each  other   to  ensure  that  such
administrative  and  reasonable  overhead  costs  attributable  to  the  managed
properties  are properly reflected in the management fee paid to the Company. In
addition, Operating LLC  has agreed to  indemnify the Company  to the extent  it
incurs  any  liabilities in  connection  with its  operation  of the  assets and
properties of Operating LLC,  except to the extent  of its gross negligence,  or
misconduct.  The Company recorded $7.6 million as  a management fee for the year
ended December 31, 2002.

     As a result of the  foregoing transactions and as  mandated by the Plan  of
Reorganization effective September 12, 2001, the Company's principal assets were
its  remaining cash balances, accounts  receivable from affiliates, deferred tax
asset and its initial 50% membership  interest in Holding LLC and its  principal
liabilities  were the $10.9 million outstanding  under its existing $100 million
revolving credit facility  with Arnos,  the 10  3/4% Senior  Notes (the  "Senior
Notes")  and  the Reinstated  Interest (defined  below).  None of  the Company's
employees were transferred to Holding LLC or Operating LLC.

     As a result of the terms  and conditions of the various agreements  related
to  the repayment of  the Company's indebtedness  to Arnos and  repayment of the
priority distribution amounts and the guaranteed payments (plus accrued interest
thereon) to Gascon, there is  a substantial risk that  there will be no  amounts
remaining for distribution to the Company's stockholders.

     Pursuant to the Plan of Reorganization, as of December 31, 2000 the Company
reinstated  $45.8 million of  interest expense on  the Senior Notes ("Reinstated
Interest"). This Reinstated Interest consisted  of $10.5 million of  prepetition
interest  and $35.3 million of  interest expense that did  not accrue during the
pendancy of the  Bankruptcy Proceeding  pursuant to Bankruptcy  Court rules  and
regulations.  The Reinstated Interest plus  interest accrued thereon becomes due
in April 2003.  The Senior Note  balance is  $148.6 million as  of December  31,
2002. (See Note 6 to the Consolidated Financial Statements).

     On  March  26, 2003,  NEG Holding  LLC distributed  the $10.9  million note
outstanding under the  existing credit  facility to  the Company  as a  priority
distribution.  Also,  on March  26, 2003  the Company,  Arnos and  Operating LLC
entered into an agreement  to assign the existing  credit facility to  Operating
LLC.  Effective  with  this assignment,  Arnos  amended the  credit  facility to
increase the revolving commitment to  $150 million, increase the borrowing  base
to  $75  million  and  extend  the  revolving  due  date  until  June  30, 2004.
Concurrently, Arnos extended  a $42.7 million  loan to Operating  LLC under  the
amended credit facility; Operating LLC then distributed $42.7 million to Holding
LLC  who, thereafter, made a $42.7 million priority distribution to the Company.
The Company utilized  these funds  to pay the  entire amount  of the  Reinstated
Interest and interest accrued thereon outstanding on March 27, 2003.

     In  August  2001,  the Company  redeemed  both $16.4  million  of principal
outstanding under the Senior Note obligations and $4.8 million of the Reinstated
Interest for a cash consideration of  $10.5 million. The Company paid two  Arnos
affiliates  approximately $.4 million in current interest on the redeemed Senior
Note obligations at  the date of  redemption related to  interest owed from  the
last semi-annual interest payment date of May 1, 2001 to the date of redemption.
As  this was a partial redemption of the Senior Notes, it has been accounted for
as a modification  of terms that  changes the amounts  of future cash  payments.
Accordingly,  the excess of redeemed principal  and interest over the redemption
payment of $10.5 million  will be amortized as  a reduction to interest  expense
over   the  remaining  life  of  the  Senior  Notes.  In  connection  with  this
transaction, the  Company  borrowed  $10.9 million  under  its  existing  credit
facility with Arnos.

     The  Company remains highly leveraged following confirmation of the Plan of
Reorganization and entry of the Final Decree closing the Bankruptcy Proceeding.

                                        5
<PAGE>

     At  December  31, 2002,  the Company  had  no Proved  Reserves, due  to the
contribution of all oil and natural gas assets to Holding LLC in September 2001.
After the contribution, the Company owns 50% of Holding LLC.

PRINCIPAL AREAS OF OPERATIONS

     The Company contributed all of its operating assets and oil and natural gas
properties, excluding cash of  $4.3 million, to Holding  LLC in exchange for  an
initial  50% membership  interest ("LLC Contribution").  For financial reporting
purposes  the  transaction  is  as  of  September  1,  2001.  Due  to  the   LLC
Contribution,  the  Company  had no  direct  ownership  of oil  and  natural gas
properties at December 31, 2001 and  at December 31, 2002. The Company  received
revenue  and  incurred  expenses  from  oil  and  natural  gas  properties until
September 1,  2001. The  following  discussion of  oil  and natural  gas  covers
periods  prior to that date. Effective  with the LLC Contribution, all ownership
interests are  held by  Holding LLC  which includes  its single  member  limited
liability  company, NEG Operating LLC. See  "Principal Areas of Operation -- NEG
Holding LLC".

OIL AND NATURAL GAS RESERVES

     All of  the  Company's reserves  were  located in  the  continental  United
States.  The Company's  reserve report  was prepared  using constant  prices and
costs in accordance with the published guidelines of the Securities and Exchange
Commission ("SEC"). The estimated reserves and related future net revenues as of
August 31,  2001, were  prepared  internally using  the estimated  reserves  and
related future net revenues prepared by Netherland, Sewell & Associates, Inc. as
of  December 31,  2001, for  the oil and  natural gas  properties contributed to
Holding LLC. This was accomplished by adding back the related production for the
four month period August 31, 2001 to December 31, 2001 and using constant prices
in effect  at August  31, 2001.  The net  weighted average  prices used  in  the
Company's  reserve report at August 31, 2001,  were $26.02 per barrel of oil and
$2.49 per Mcf of natural gas. The estimation of reserves and future net revenues
can be materially affected by the oil  and natural gas prices used in  preparing
the  reserve  report. Substantially  all of  the Company's  oil and  natural gas
properties were  subject  to  liens,  and the  remaining  oil  and  natural  gas
properties  were subject to  a negative pledge pursuant  to the Company's credit
facility.

     All reserves are evaluated at  constant temperature and pressure which  can
affect  the  measurement of  natural  gas reserves.  Estimated  operating costs,
development costs, abandonment costs, severance taxes and ad valorem taxes  were
deducted  in arriving at the  estimated future net cash  flows. No provision was
made for income taxes. The following estimates set forth reserves considered  to
be   economically  recoverable  under  normal  operating  methods  and  existing
conditions at the prices and operating  costs prevailing at the dates  indicated
above. The estimates of the PV10% from future net cash flows can differ from the
Standardized  Measure of discounted future net cash flows set forth in the notes
to the Consolidated  Financial Statements  of the Company,  which is  calculated
after  provision for future income  taxes. There can be  no assurance that these
estimates are accurate predictions of future net cash flows from oil and natural
gas reserves or their present value.

     Reservoir engineering is a subjective process of estimating the volumes  of
underground  accumulations  of  oil and  natural  gas which  cannot  be measured
precisely. The accuracy of any reserve estimates is a function of the quality of
available data and  of engineering and  geological interpretation and  judgment.
Reserve  estimates prepared by  other engineers might  differ from the estimates
contained herein. Results of drilling, testing, and production subsequent to the
date of  the estimate  may  justify revision  of  such estimate.  Future  prices
received for the sale of oil and natural gas may be different from those used in
preparing  these  reports.  The  amounts  and  timing  of  future  operating and
development  costs  may  also  differ  from  those  used.  Accordingly,  reserve
estimates  are often different from  the quantities of oil  and natural gas that
are ultimately recovered.

     No estimates of Proved Reserves of oil  and natural gas have been filed  by
the  Company with, or included in any  report to, any United States authority or
agency (other than the SEC) since December 31, 2001.

                                        6
<PAGE>

     The following table sets forth certain information for the Company's  total
Proved  Reserves of oil  and natural gas  and the PV10%  of estimated future net
revenues from  such  reserves,  at  August  31,  2001.  Also  presented  is  the
Standardized  Measure of the Company's total  Proved Reserves of oil and natural
gas.

<Table>
<Caption>
                                                           AS OF AUGUST 31, 2001
                                              -----------------------------------------------
                                                                   NATURAL
                                                        NATURAL      GAS
                                                OIL       GAS     EQUIVALENT       PV10%
                                              (MBBLS)   (MMCF)     (MMCFE)     (IN THOUSANDS)
                                              -------   -------   ----------   --------------
<S>                                           <C>       <C>       <C>          <C>
Proved Developed Reserves...................   3,605    48,237      69,867        $ 93,478
Proved Undeveloped Reserves.................     434    10,195      12,799           8,781
                                               -----    ------      ------        --------
Total Proved Reserves.......................   4,039    58,432      82,666        $102,259
                                               =====    ======      ======        ========
Standardized Measure........................                                      $102,259
                                                                                  ========
</Table>

OIL AND NATURAL GAS PRODUCTION AND UNIT ECONOMICS

     The following table  shows the approximate  net production attributable  to
the  Company's oil and natural gas interests, the average sales price per barrel
of oil and Mcf of natural gas produced, and the average unit economics per  Mcfe
related  to  the  Company's  oil  and natural  gas  production  for  the periods
indicated. Information  relating  to  properties  acquired  or  disposed  of  is
reflected in this table only since or up to the closing date of their respective
acquisition  or sale, and may  affect the comparability of  the data between the
periods presented.

<Table>
<Caption>
                                                                             EIGHT MONTHS
                                                               YEAR ENDED       ENDED
                                                              DECEMBER 31,    AUGUST 31,
                                                                  2000           2001
                                                              ------------   ------------
<S>                                                           <C>            <C>
Net production:
  Oil (Mbbls)...............................................        799            428
  Natural gas (Mmcf)........................................      7,081          4,333
  Natural gas equivalent (Mmcfe)............................     11,873          6,901
Average sales price:
  Oil (per Bbl).............................................    $ 29.24         $27.70
  Natural gas (per Mcf).....................................       3.91           4.92
Unit economics (per Mcfe):
  Average sales price.......................................    $  4.30         $ 4.81
  Lease operating expenses..................................        .48            .56
  Oil and natural gas production taxes......................        .24            .25
  Depletion rate (excluding writedowns).....................        .88            .85
  General and administrative expenses.......................        .38            .50
</Table>

LEASEHOLD ACREAGE

     The Company generally acquired a leasehold interest in the properties to be
explored. The leases granted the lessee the right to explore for and extract oil
and natural gas  from a  specified area. Lease  rentals usually  consisted of  a
fixed annual charge made prior to obtaining production. Once production had been
established, a royalty was paid to the lessor based upon the gross proceeds from
the  sale of  oil and natural  gas. Once  wells were drilled,  a lease generally
continued as long as production of oil and natural gas continued. In some cases,
leases were  acquired in  exchange for  a  commitment to  drill or  finance  the
drilling of a specified number of wells to predetermined depths.

     Substantially all of the Company's producing oil and natural gas properties
were  located on leases held by the Company for an indeterminate number of years
as long as production was maintained. All of the

                                        7
<PAGE>

Company's non-producing acreage was held under  leases from mineral owners or  a
government  entity which expired at varying  dates. The Company was obligated to
pay annual  delay rentals  to the  lessors  of certain  properties in  order  to
prevent  the  leases  from  terminating. Delay  rentals  were  approximately $.6
million for the year ended December 31, 2000 and were approximately $.2  million
for the eight months ended August 31, 2001.

DRILLING ACTIVITY

     The following table sets forth exploration and development drilling results
for the year ended December 31, 2000 and the eight months ended August 31, 2001.

<Table>
<Caption>
                                                                           EIGHT MONTHS
                                                             YEAR ENDED       ENDED
                                                            DECEMBER 31,    AUGUST 31,
                                                                2000           2001
                                                            ------------   ------------
                                                            GROSS   NET    GROSS   NET
                                                            -----   ----   -----   ----
<S>                                                         <C>     <C>    <C>     <C>
Exploratory
  Productive..............................................    1       .3     2       .4
  Non-productive..........................................   --       --     3      1.4
                                                             --     ----    --     ----
     Total................................................    1       .3     5      1.8
                                                             --     ----    --     ----
Development
  Productive..............................................   16     12.7    16     13.2
  Non-productive..........................................   --       --    --       --
                                                             --     ----    --     ----
     Total................................................   16     12.7    16     13.2
                                                             --     ----    --     ----
Combined Total............................................   17     13.0    21     15.0
                                                             ==     ====    ==     ====
</Table>

CONTROL OVER PRODUCTION ACTIVITIES

     The  Company operated 303 of  the 396 producing wells  in which it owned an
interest as of  August 31, 2001.  The non-operated properties  were operated  by
unrelated  third parties  pursuant to  operating agreements  which are generally
standard in  the  industry.  Significant decisions  about  operations  regarding
non-operated properties have been determined by the outside operator rather than
by  the Company. If the Company declined to participate in additional activities
proposed by the outside operator under certain operating agreements, the Company
would not receive revenues from, and/or would lose its interest in the  activity
in which it declined to participate.

MARKETS AND CUSTOMERS

     The  availability of a ready market for any oil and natural gas produced by
the Company and the prices obtained for  such oil and natural gas depended  upon
numerous  factors beyond its control, including the demand for and supply of oil
and  natural  gas;   fluctuations  in  production   and  seasonal  demand;   the
availability  of adequate pipeline and  other transportation facilities; weather
conditions; economic  conditions;  imports  of  crude  oil;  production  by  and
agreements among OPEC members; and the effects of state and federal governmental
regulations  on the import, production, transportation, sale and taxation of oil
and natural gas. The occurrence  of any factor that  affects a ready market  for
the Company's oil and natural gas or reduced the price obtained for such oil and
natural gas, would have adversely affected the Company.

     A  large percentage of the Company's oil and natural gas sales were made to
a small number of purchasers. For the eight months ended August 31, 2001, Plains
Marketing and Transportation accounted for 95%  of the Company's oil sales,  and
Aquila  Energy  Marketing,  Crosstex  Energy  and  Duke  Energy  Field  Services
accounted for  26%, 20%  and 15%,  respectively, of  the Company's  natural  gas
sales.  For the year ended December 31, 2000, Plains Marketing accounted for 96%
of the Company's oil sales, and Aquila  and Crosstex accounted for 28% and  20%,
respectively, of the Company's natural gas sales.

                                        8
<PAGE>

     The  agreement with  Plains Marketing, entered  into in  1993, provided for
Plains  Marketing  to  purchase  the  Company's  oil  pursuant  to  West   Texas
Intermediate  posted prices plus  a premium. A portion  of the Company's natural
gas production was sold pursuant  to long-term netback contracts. Under  netback
contracts,  gas purchasers buy gas  from a number of  producers, process the gas
for natural gas  liquids, and sell  the liquids and  residue gas. Each  producer
receives  a fixed  portion of  the proceeds  from the  sale of  the liquids, and
residue  gas.  The  gas  purchasers  pay  for  transportation,  processing,  and
marketing  of the gas and liquids, and  assume the risk of contracting pipelines
and processing plants in return for a portion of the proceeds of the sale of the
gas and liquids. Generally, because  the purchasers are marketing large  volumes
of  hydrocarbons gathered from multiple producers, higher prices may be obtained
for the gas and liquids. The remainder of the Company's natural gas was sold  on
the spot market under short-term contracts.

INVESTMENT IN NEG HOLDING LLC

     As explained below, the Company's investment in NEG Holding LLC is recorded
as  a preferred  investment. The initial  investment was  recorded at historical
book carrying  value  of  the  net  assets contributed  with  no  gain  or  loss
recognized  on the transfer.  The following discussion of  the operations of NEG
Holding LLC  includes the  operations  of its  single member  limited  liability
company, NEG Operating LLC.

     Pursuant  to the Holding LLC Operating Agreement, the Company is to receive
guaranteed payments, in  addition to  a priority distribution  amount of  $202.2
million  before Gascon receives  any monies. The priority  distribution is to be
made on or before November 1, 2006. Guaranteed payments are to be paid on a semi
annual basis, based  on an  annual interest rate  of 10.75%  of the  outstanding
priority  distribution  amount.  The  guaranteed  payments  are  expected  to be
sufficient to make  the interest payments  on the Senior  Notes until their  due
date  of  2006.  After  the  payments  to  the  Company,  Gascon  is  to receive
distributions equivalent  to the  priority  distribution amount  and  guaranteed
payments  plus  other  amounts  as  defined in  the  NEG  Holding  LLC Operating
Agreement referred herein. Following the above distributions to the Company  and
Gascon,  additional distributions,  if any,  are to  be made  in accordance with
their respective capital accounts.  The order of  distribution is listed  below.
Because  of  the  substantial  uncertainty that  the  Company  will  receive any
distributions above the  priority and  guaranteed payment  amounts, the  Company
accounts  for its  investment in Holding  LLC as a  preferred investment whereby
guaranteed payment amounts  received and receipts  of the priority  distribution
amount  are recorded  as reductions in  the investment and  income is recognized
from accretion  of  the  investment  up to  the  priority  distribution  amount,
including  the  guaranteed  payments (based  on  the interest  method),  and the
residual interest  attributable to  Holding  LLC will  be  valued at  zero.  The
Company  received guaranteed payments  of $21.7 million  from Holding LLC during
2002 in accordance with the Holding  LLC Operating Agreement. Cash receipts,  if
any,  from the residual interest will be  reported in income as earned. In March
2003, Holding LLC made a priority distribution of $53.6 million to the Company.

     The Holding LLC Operating Agreement requires that (provided full payment of
all outstanding guaranteed payments has  been made) distributions shall be  made
to both the Company and Gascon as follows:

     - First  and through November 1, 2006, to the Company in an amount equal to
       the Company's  initial  priority  amount  of  $202.2  million  minus  any
       distributions previously made to the Company.

     - Second,  to Gascon in an amount equal to the excess of (a) the sum of (i)
       the Company's  initial  priority  amount  of  $202.2  million,  (ii)  any
       additional  capital contributions made by Gascon, (iii) the aggregate sum
       of all  Guaranteed Payments,  and (iv)  an amount  equal to  the  Accrued
       Gascon Amount (which, under the Holding LLC Operating Agreement, means an
       amount equal to the aggregate of interest that would be computed annually
       if  interest were imposed at a rate equal  to the prime rate plus 1/2% as
       of the close of each fiscal year on the excess of (a) the sum of (i)  the
       cumulative  Guaranteed  Payments and  (ii) the  aggregate of  any Accrued
       Gascon  Amount  computed  in  prior   years,  over  (b)  the   cumulative
       distributions   by  Holding  LLC  to   Gascon),  over  (b)  distributions
       previously made to Gascon pursuant to  this provision in the Holding  LLC
       Operating Agreement.

     - Third, to the Company and Gascon in accordance with their then respective
       Capital Accounts.

                                        9
<PAGE>

PRINCIPAL AREAS OF OPERATIONS -- NEG HOLDING LLC

     In  November 2002, Holding  LLC completed the  acquisition of producing oil
and natural gas  properties in  Pecos County,  Texas known  as Longfellow  Ranch
Field.  The consideration  for this  acquisition consisted  of $45.4  million in
cash, which was funded from Holding LLC's available cash.

     In December  2002,  Holding LLC  completed  the acquisition  of  additional
interest in Longfellow Ranch Field in Pecos County, Texas. The consideration for
this  acquisition  consisted of  $2.9  million in  cash,  which was  funded from
Holding LLC's available cash.

     Holding LLC is  developing and exploiting  existing properties by  drilling
Development  and  Exploratory  Wells, and  recompleting  and  reworking existing
wells. It is anticipated that Holding LLC will continue its drilling  operations
on   existing   properties  and   will   selectively  participate   in  drilling
opportunities generated by third parties.

     The following table sets forth Holding LLC's principal areas of  operations
and Holding LLC's Proved Reserves of oil and natural gas at December 31, 2002.

<Table>
<Caption>
                                                                       NATURAL
                                                            NATURAL      GAS
                                                    OIL       GAS     EQUIVALENT   % OF
                                                  (MBBLS)   (MMCF)     (MMCFE)     TOTAL
                                                  -------   -------   ----------   -----
<S>                                               <C>       <C>       <C>          <C>
Area:
  Mid-Continent.................................     438     31,789     34,417      22.4%
  East and West Texas...........................   3,387     74,587     94,909      61.7
  Gulf Coast....................................   1,383     16,191     24,489      15.9
                                                   -----    -------    -------     -----
     Total......................................   5,208    122,567    153,815     100.0%
                                                   =====    =======    =======     =====
</Table>

     The  following table sets forth Holding  LLC's production by principal area
of operation for the  year ended December 31,  2002. Production from  Longfellow
Ranch Field, which is included in East and West Texas, is only included from the
acquisition date of November 20, 2002.

<Table>
<Caption>
                                                                         NATURAL
                                                              NATURAL      GAS
                                                      OIL       GAS     EQUIVALENT   % OF
                                                    (MBBLS)   (MMCF)     (MMCFE)     TOTAL
                                                    -------   -------   ----------   -----
<S>                                                 <C>       <C>       <C>          <C>
Area:
  Mid-Continent...................................     38      3,225       3,453      29.8%
  East and West Texas.............................    289      2,866       4,600      39.6
  Gulf Coast......................................    302      1,736       3,549      30.6
                                                      ---      -----      ------     -----
     Total........................................    629      7,827      11,602     100.0%
                                                      ===      =====      ======     =====
</Table>

MID-CONTINENT AREA

     At  December 31,  2002, approximately  22.4% (34.4  Bcfe) of  Holding LLC's
Proved Reserves were  located in  the Mid-Continent  area in  Oklahoma and  West
Arkansas which includes the Anadarko and Arkoma Basins.

     Anadarko  Basin.   The  Anadarko  Basin properties  are  located throughout
central  and  west  Oklahoma.  Anadarko   Basin  is  among  the  most   prolific
petroliferous  basins of the continental United States. Major tectonic features,
regional facies  changes, and  significant unconformities  provide the  trapping
mechanisms for the accumulation of oil and natural gas. The sedimentary sequence
is  represented  by a  wide  variety of  lithologic  units ranging  in  age from
Cambrian through Permian.  The Anadarko  Basin is  considered a  mature oil  and
natural gas province characterized by multiple producing horizons and long-lived
and  predictable reserves with low cost operations. Most Anadarko Basin reserves
are produced  from formations  at  depths ranging  from approximately  5,000  to
15,000   feet.  Drilling  a  producing  well  on  these  locations  can  convert

                                        10
<PAGE>

proved  undeveloped  reserves to  proved developed  producing reserves,  and can
provide additional  proved  undeveloped  locations on  the  Company's  leasehold
acreage.

     During  the year ended December  31, 2002, Holding LLC  drilled 4 Gross (.4
Net)  Development  Wells  in  the   Anadarko  Basin  which  were  completed   as
commercially productive.

     Arkoma  Basin.    The  Arkoma Basin  properties  are  located  in southeast
Oklahoma and northwest Arkansas. The basin  is approximately 250 miles long  and
30  to  50  miles wide.  The  region  is essentially  a  non-associated  dry gas
province. Most of the basin is of Atokan (Pennsylvanian) Age and is noted by  an
abundance  of east-west trending anticlines and synclines, usually faulted along
their axes and expressed at the surface. The Arkoma Basin is considered a mature
natural gas province characterized by multiple producing horizons and long-lived
and predictable reserves with  low cost operations.  Most Arkoma Basin  reserves
are produced from formations at depths ranging from approximately 3,000 to 8,000
feet.  The principle productive  formations are Atokan and,  to a lesser extent,
Morrowan sandstones deposited as deltaic channel sands.

     During the year ended December 31,  2002, Holding LLC drilled 4 Gross  (2.6
Net) Development Wells which were completed as commercially productive.

EAST AND WEST TEXAS AREA

     At  December 31,  2002, approximately  61.7% (94.9  Bcfe) of  Holding LLC's
Proved Reserves were  located in the  East and West  Texas area, including  East
Texas, South Arkansas and in West Texas, the Goldsmith Adobe Unit and Longfellow
Ranch Field.

     East  Texas Basin.   The reserves  in this  region are found  in the Cotton
Valley formation and the  Travis Peak formation.  These properties produce  from
low   permeability  reservoirs  that  generally  contain  relatively  long-lived
reserves. A significant portion of the  cost to complete Cotton Valley wells  is
incurred due to the low permeability of interbedded sandstones and shales, which
requires  large hydraulic fracture  stimulation, typically of  multiple zones of
the producing formation, to obtain the increased production levels necessary  to
make such wells commercially viable. Cotton Valley production occurs in a mature
natural  gas  province  characterized  by  long-lived  reserves  producing  from
formations at  depths  ranging  from  8,500  to  10,500  feet.  Travis  Peak  is
considered  to be  a mature  oil province  characterized by  long-lived reserves
producing from formations at a depth of 7,200 feet.

     During the year  ended December  31, 2002, Holding  LLC did  not drill  any
wells in the East Texas Basin.

     West Texas.  The following fields comprise the West Texas area:

     - Goldsmith  Adobe Unit  ("GAU") is  located in  the Permian  Basin of West
       Texas. Holding LLC now  owns a 99.9% working  interest in this  property.
       Originally  the  GAU  was  drilled  on  40-acre  spacing  units. Previous
       operators had drilled several wells  on 20-acre spacing units and,  based
       on  the  results  of this  drilling  and 20-acre  spacing  development on
       adjoining leases, National  Energy Group, Inc.  ("NEG") began a  drilling
       program  in  July  1994 to  develop  the  GAU on  20-acre  spacing units.
       Typically, wells  drilled at  the GAU  produce from  the Upper  Clearfork
       formation at an average depth of 6,100 feet.

      During  the year ended  December 31, 2002,  Holding LLC did  not drill any
wells at the GAU.

     - Longfellow Ranch Field and associated producing fields are located in the
       Val Verde Basin, a  prolific gas producing  area. Longfellow Ranch  Field
       (Pinion  Field) was discovered in  1983 by Fina Oil  and Gas, but was not
       extensively developed due  to lack of  necessary pipeline and  associated
       facilities.  Riata Energy  Inc. acquired the  field in 1996  and began an
       extensive development program. The field is located near the leading edge
       of  the  Marathon  thrust  belt,  where  massive  sheets  of   basin-ward
       Pennsylvanian,  Mississippian and Devonian age rocks were thrust over the
       shelf onto deposits  of similar age.  The thrust belt  in this region  is
       further  overlain  by  early  Pennsylvanian  and  Permian  sediments. The
       primary producing horizons in the  field are the Caballos Novaculites  of
       Devonian  age. These sediments were deposited as laminated cherts ranging
       in thicknesses  from 75  to  over 800  feet thick.  Additional  producing
       horizons  include the lower Pennsylvanian  Dimple and upper Mississippian
                                        11
<PAGE>

       Tesnus formations. The Dimple is a  shelf limestone deposit of Atokan  or
       Morrowian  age  and the  Tesnus is  a  clastic sandstone  sequence. Other
       objectives include a normal  stratigraphic section of Devonian,  Silurian
       and Ordovician. These horizons have produced north of the Marathon thrust
       belt,  where the structures can produce over a TCF of gas. The Longfellow
       Ranch Field is not delineated  by any dry holes  and is considered to  be
       immature  in  its  oil and  gas  development. This  field  presents great
       opportunities, both recognized and yet to be recognized.

     During the year ended December 31,  2002, Holding LLC drilled 3 Gross  (1.2
Net)  Development Wells  and 5 Gross  (1.5 Net) Exploratory  Wells in Longfellow
Ranch Field all of which were completed as commercially productive.

GULF COAST AREA

     At December  31, 2002,  approximately 15.9%  (24.5 Bcfe)  of Holding  LLC's
Proved  Reserves  were  located in  the  Gulf  Coast area  which  includes South
Louisiana and South Texas.

     The  Gulf  Coast  area  encompasses  the  large  coastal  plain  from   the
southernmost tip of Texas through the southern portion of Louisiana. These rocks
are  comprised of sediments ranging from  the Cretaceous through the Tertiary in
age. Our production ranges in depth from as shallow as several thousand feet  to
in  excess of 14,000 feet. New technology, including the use of 3-D seismic with
subsurface mapping, has  yielded many  new opportunities in  the entire  coastal
area. The Company is involved in many projects using 3-D seismic technology.

     During  the year ended December  31, 2002, Holding LLC  drilled 1 Gross (.1
Net) Exploratory well and 4 Gross (1.1 Net) Development wells in the Gulf  coast
area,  all of which  were completed as commercially  productive. During the same
period Holding LLC drilled 1 Gross (.4 Net) Exploratory well and 1 Gross (1 Net)
Development well that was not completed as commercially productive.

OIL AND NATURAL GAS RESERVES -- NEG HOLDING LLC

     The estimated  proved  reserves  and  related future  net  revenues  as  of
December  31, 2002,  were prepared by  Netherland, Sewell &  Associates, Inc and
Prator Bett, LLC. All of Holding  LLC's reserves are located in the  continental
United  States. Holding LLC's reserve report  was prepared using constant prices
and costs in  accordance with  the published  guidelines of  the Securities  and
Exchange  Commission ("SEC").  The net weighted  average prices  used in Holding
LLC's reserve report at  December 31, 2002,  were $29.86 per  barrel of oil  and
$4.92 per Mcf of natural gas. The estimation of reserves and future net revenues
can  be materially affected by the oil  and natural gas prices used in preparing
the reserve report.

     All reserves are evaluated at  constant temperature and pressure which  can
affect  the  measurement of  natural  gas reserves.  Estimated  operating costs,
development costs, abandonment costs, severance taxes and ad valorem taxes  were
deducted  in arriving at the  estimated future net cash  flows. No provision was
made for income taxes. The following estimates set forth reserves considered  to
be   economically  recoverable  under  normal  operating  methods  and  existing
conditions at the prices and operating  costs prevailing at the dates  indicated
above. The estimates of the PV10% from future net cash flows can differ from the
Standardized  Measure of discounted future net cash flows set forth in the notes
to the Consolidated  Financial Statements  of Holding LLC,  which is  calculated
after  provision for future income  taxes. There can be  no assurance that these
estimates are accurate predictions of future net cash flows from oil and natural
gas reserves or their present value.

     Reservoir engineering is a subjective process of estimating the volumes  of
underground  accumulations  of  oil and  natural  gas which  cannot  be measured
precisely. The accuracy of any reserve estimates is a function of the quality of
available data and  of engineering and  geological interpretation and  judgment.
Reserve  estimates prepared by  other engineers might  differ from the estimates
contained herein. Results of drilling, testing, and production subsequent to the
date of  the estimate  may  justify revision  of  such estimate.  Future  prices
received for the sale of oil and natural gas may be different from those used in
preparing these reports. The amounts

                                        12
<PAGE>

and timing of future operating and development costs may also differ from  those
used.  Accordingly, reserve estimates are often different from the quantities of
oil and natural gas that are ultimately recovered.

     The following table sets forth certain information for Holding LLC's  total
Proved  Reserves of oil  and natural gas  and the PV10%  of estimated future net
revenues from  such  reserves, at  December  31,  2002. Also  presented  is  the
Standardized  Measure of Holding LLC's total  Proved Reserves of oil and natural
gas.

<Table>
<Caption>
                                                         AS OF DECEMBER 31, 2002
                                             -----------------------------------------------
                                                                  NATURAL
                                                       NATURAL      GAS
                                               OIL       GAS     EQUIVALENT       PV10%
                                             (MBBLS)   (MMCF)     (MMCFE)     (IN THOUSANDS)
                                             -------   -------   ----------   --------------
<S>                                          <C>       <C>       <C>          <C>
Proved Developed Reserves..................   4,239     92,382    117,816        $242,782
Proved Undeveloped Reserves................     969     30,185     35,999          67,850
                                              -----    -------    -------        --------
Total Proved Reserves......................   5,208    122,567    153,815        $310,632
                                              =====    =======    =======        ========
Standardized Measure.......................                                      $310,632
                                                                                 ========
</Table>

OIL AND NATURAL GAS PRODUCTION AND UNIT ECONOMICS -- NEG HOLDING LLC

     The following table  shows the approximate  net production attributable  to
the  Holding LLC's oil  and natural gas  interests, the average  sales price per
barrel of oil and Mcf  of natural gas produced,  and the average unit  economics
per  Mcfe related to Holding LLC's oil and natural gas production for the period
indicated. Information  relating  to  properties  acquired  or  disposed  of  is
reflected in this table only since or up to the closing date of their respective
acquisition or sale.

<Table>
<Caption>
                                                              FOUR MONTHS
                                                                 ENDED        YEAR ENDED
                                                              DECEMBER 31,   DECEMBER 31,
                                                                  2001           2002
                                                              ------------   ------------
<S>                                                           <C>            <C>
Net production:
  Oil (Mbbls)...............................................        246            629
  Natural gas (Mmcf)........................................      2,713          7,827
  Natural gas equivalent (Mmcfe)............................      4,189         11,602
Average sales price:
  Oil (per Bbl).............................................     $20.81        $ 23.93
  Natural gas (per Mcf).....................................       2.63           3.06
Unit economics (per Mcfe):
  Average sales price.......................................     $ 2.97        $  3.36
  Lease operating expenses..................................        .64            .73
  Oil and natural gas production taxes (net of refunds in
     2002)..................................................        .17            .16
  Depletion rate............................................       1.00           1.29
  General and administrative expenses.......................        .50            .50
</Table>

                                        13
<PAGE>

PRODUCTIVE WELL SUMMARY -- NEG HOLDING LLC

     Holding  LLC's production of oil and  natural gas is primarily derived from
wells located in Texas, Oklahoma,  Louisiana, and Arkansas. The following  table
sets  forth Holding  LLC's interests in  Productive Wells, by  principal area of
operation, as of December 31, 2002:

<Table>
<Caption>
                                                 OIL         NATURAL GAS        TOTAL
                                            -------------   -------------   -------------
                                            GROSS    NET    GROSS    NET    GROSS    NET
                                            -----   -----   -----   -----   -----   -----
<S>                                         <C>     <C>     <C>     <C>     <C>     <C>
Area:
  Mid-Continent...........................    87     11.4    212    104.4    299    115.8
  East and West Texas.....................   129    128.5    121     71.3    250    199.8
  Gulf Coast..............................    31     18.4     74     38.5    105     56.9
                                             ---    -----    ---    -----    ---    -----
     Total................................   247    158.3    407    214.2    654    372.5
                                             ===    =====    ===    =====    ===    =====
</Table>

LEASEHOLD ACREAGE -- NEG HOLDING LLC

     The following table  shows the  approximate Gross  and Net  Acres in  which
Holding LLC had a leasehold interest as of December 31, 2002:

<Table>
<Caption>
                                                       DEVELOPED         UNDEVELOPED
                                                        ACREAGE            ACREAGE
                                                    ----------------   ---------------
                                                     GROSS     NET     GROSS     NET
                                                    -------   ------   ------   ------
<S>                                                 <C>       <C>      <C>      <C>
Area:
  Mid-Continent...................................   71,773   37,871      640      248
  East and West Texas.............................   29,096   19,086   35,824    7,730
  Gulf Coast......................................   31,013   12,474   10,482    6,129
                                                    -------   ------   ------   ------
     Totals.......................................  131,882   69,431   46,946   14,107
                                                    =======   ======   ======   ======
</Table>

     Holding LLC generally acquires a leasehold interest in the properties to be
explored.  The leases grant the lessee the  right to explore for and extract oil
and natural gas from a specified area. Lease rentals usually consist of a  fixed
annual  charge  made prior  to obtaining  production.  Once production  has been
established, a royalty is paid to the lessor based upon the gross proceeds  from
the  sale of  oil and  natural gas.  Once wells  are drilled,  a lease generally
continues as long as production of oil and natural gas continues. In some cases,
leases may be  acquired in exchange  for a  commitment to drill  or finance  the
drilling of a specified number of wells to predetermined depths.

     Substantially all of Holding LLC's producing oil and natural gas properties
are  located on leases held by Holding  LLC for an indeterminate number of years
as long as production is maintained. All of Holding LLC's non-producing  acreage
is  held under leases from mineral owners or a government entity which expire at
varying dates.  Holding LLC  is obligated  to pay  annual delay  rentals to  the
lessors  of certain properties in order  to prevent the leases from terminating.
Delay rentals were approximately $.01 million for the four months ended December
31, 2001  and $.07  million  for the  year ended  December  31, 2002  and  could
increase  or  decrease  in  future  periods  depending  on  Holding  LLC's lease
acquisition activities.

                                        14
<PAGE>

DRILLING ACTIVITY -- NEG HOLDING LLC

     The following table  sets forth Holding  LLC's exploration and  development
drilling  results for  the four  months ended December  31, 2001  and year ended
December 31, 2002.

<Table>
<Caption>
                                                               FOUR MONTHS
                                                                  ENDED        YEAR ENDED
                                                              DECEMBER 31,    DECEMBER 31,
                                                                  2001            2002
                                                              -------------   -------------
                                                              GROSS    NET    GROSS    NET
                                                              ------   ----   ------   ----
<S>                                                           <C>      <C>    <C>      <C>
Exploratory
  Productive................................................     5     1.0       6     1.6
  Non-productive............................................     1      .3       1      .4
                                                                --     ---      --     ---
     Total..................................................     6     1.3       7     2.0
                                                                --     ---      --     ---
Development
  Productive................................................     3     1.7      15     5.3
  Non-productive............................................     1      .5       1     1.0
                                                                --     ---      --     ---
     Total..................................................     4     2.2      16     6.3
                                                                --     ---      --     ---
Combined Total..............................................    10     3.5      23     8.3
                                                                ==     ===      ==     ===
</Table>

TITLE TO OIL AND NATURAL GAS PROPERTIES -- NEG HOLDING LLC

     Holding LLC  has  acquired interests  in  producing wells  and  undeveloped
acreage  in the  form of  Working Interests,  Royalty Interests,  and Overriding
Royalty Interests.  To  reduce  Holding  LLC's financial  exposure  in  any  one
prospect, Holding LLC often acquires less than 100% of the Working Interest in a
prospect.  Working Interests held by Holding LLC  may, from time to time, become
subject to minor liens.  Prior to an  acquisition, due diligence  investigations
are  made  in accordance  with  standard practices  in  the industry,  which may
include securing an acquisition title opinion.

PRODUCTION AND SALES PRICES -- NEG HOLDING LLC

     Holding LLC produces oil and natural  gas solely in the continental  United
States.  Holding  LLC has  no obligations  to provide  a fixed  and determinable
quantity of oil  and/or natural gas  in the future  under existing contracts  or
agreements.  Nor does Holding LLC  refine or process the  oil and natural gas it
produces,  but  sells  the  production  to  unaffiliated  oil  and  natural  gas
purchasing companies in the area in which it is produced. Holding LLC expects to
sell  crude oil on a market price basis  and to sell natural gas under contracts
to both interstate and  intrastate natural gas  pipeline companies. Holding  LLC
currently  sells a significant portion of oil pursuant to a contract with Plains
Marketing and Transportation. See "-- Markets and Customers."

CONTROL OVER PRODUCTION ACTIVITIES -- NEG HOLDING LLC

     Holding LLC operated 386 of  the 654 producing wells  in which it owned  an
interest  as of December  31, 2002. The non-operated  properties are operated by
unrelated third parties  pursuant to  operating agreements  which are  generally
standard  in  the  industry. Significant  decisions  about  operations regarding
non-operated properties may be determined by the outside operator rather than by
Holding LLC. If  Holding LLC  declines to participate  in additional  activities
proposed by the outside operator under certain operating agreements, Holding LLC
will not receive revenues from, and/or will lose its interest in the activity in
which it declined to participate.

MARKETS AND CUSTOMERS -- NEG HOLDING LLC

     The  availability of a ready market for any oil and natural gas produced by
Holding LLC and the  prices obtained for  such oil and  natural gas depend  upon
numerous  factors beyond its control, including the demand for and supply of oil
and  natural  gas;   fluctuations  in  production   and  seasonal  demand;   the
availability of

                                        15
<PAGE>

adequate  pipeline  and  other  transportation  facilities;  weather conditions;
economic conditions; imports of  crude oil; production  by and agreements  among
OPEC  members; and the effects of  state and federal governmental regulations on
the import, production,  transportation, sale  and taxation of  oil and  natural
gas.  The occurrence of any factor that affects a ready market for Holding LLC's
oil and natural gas or reduces the price obtained for such oil and natural  gas,
may adversely affect Holding LLC.

     A large percentage of Holding LLC's oil and natural gas sales are made to a
small  number  of  purchasers  for  the year  ended  December  31,  2002, Plains
Marketing and Transportation ("Plains") accounted for 83.1% of Holding LLC's oil
sales  and  Crosstex  Energy  Services,  Inc.  "Crosstex  Energy",  Duke  Energy
Services,  Inc. and Oneok Gas Marketing Company  accounted for 20%, 11% and 10%,
respectively, of Holding LLC's material natural  gas sales. For the four  months
ended  December 31, 2001, Plains  accounted for 83% of  Holding LLC's oil sales,
and Aquila Energy Marketing, Crosstex Energy and Copano Field Services accounted
for 17%  and 15%  and 13%,  respectively, of  Holding LLC's  natural gas  sales.
Holding  LLC  does not  believe  that the  loss of  any  purchaser would  have a
material adverse  effect  on  its  business  because,  under  prevailing  market
conditions, other purchasers are readily available.

     The  agreement with  Plains, entered into  in 1993, provides  for Plains to
purchase Holding LLC's  oil pursuant  to West Texas  Intermediate posted  prices
plus  a  premium. A  portion of  Holding  LLC's natural  gas production  is sold
pursuant to long-term netback contracts. Under netback contracts, gas purchasers
buy gas from a number of producers, process the gas for natural gas liquids, and
sell the liquids and residue gas. Each producer receives a fixed portion of  the
proceeds  from the sale of the liquids,  and residue gas. The gas purchasers pay
for transportation, processing, and marketing of the gas and liquids, and assume
the risk of contracting pipelines and processing plants in return for a  portion
of  the proceeds  of the  sale of  the gas  and liquids.  Generally, because the
purchasers are marketing  large volumes of  hydrocarbons gathered from  multiple
producers,  higher prices may be obtained for the gas and liquids. The remainder
of Holding  LLC's  natural gas  is  sold on  the  spot market  under  short-term
contracts.

     Although  Holding  LLC acquired  certain hedge  contracts with  Enron North
America Corp. associated with the oil and gas assets contributed by the  Company
pursuant  to the Plan of Reorganization, the bankruptcy of Enron Corp. and Enron
North America  Corp. et  al did  not have  a material  effect on  Holding  LLC's
continuing  operations. Holding LLC  recorded a $4.6  million non cash valuation
writedown related to  the cancellation  of existing hedge  contracts with  Enron
during the four months ended December 31, 2001.

REGULATION -- NEG HOLDING LLC

     General.   Holding LLC's  oil and natural  gas exploration, production, and
related operations are subject to extensive rules and regulations promulgated by
federal and state agencies.  Failure to comply with  such rules and  regulations
can  result  in substantial  penalties.  The regulatory  burden  on the  oil and
natural gas industry increases Holding LLC's cost of doing business and  affects
its  profitability. Because such rules and regulations are frequently amended or
interpreted by  federal and  state  agencies or  jurisdictions, the  Company  is
unable to predict the future cost or impact of complying with such laws. Holding
LLC  believes that it operates  in compliance with all  federal, state and local
regulations.

     Exploration and  Production.   Holding  LLC's exploration  and  development
operations are subject to various types of regulation at the federal, state, and
local  levels. Such  regulation includes requiring  permits for  the drilling of
wells; maintaining bonding requirements in order to drill or operate wells;  and
regulating  the location of wells, the method  of drilling and casing wells, the
surface use and restoration of properties upon which wells are drilled, and  the
plugging  and abandoning of wells. Holding  LLC's operations are also subject to
various conservation regulations and rules to protect the correlative rights  of
mineral  interest owners. These  include the regulation of  the size of drilling
and spacing units or proration units, the density of wells which may be drilled,
and the  unitization or  pooling of  oil  and natural  gas properties.  In  this
regard,  some  states  allow the  forced  pooling  or integration  of  tracts to
facilitate exploration, while other states rely on voluntary pooling of land and
leases. In addition,  some state  conservation laws establish  maximum rates  of
production  from oil  and natural gas  wells, generally prohibit  the venting or
flaring of natural gas, and impose certain requirements regarding the ratability
of production. The effect of  these regulations is to  limit the amounts of  oil
and natural

                                        16
<PAGE>

gas  Holding LLC can produce from its wells  and to limit the number of wells or
the locations  at which  Holding  LLC can  drill.  Legislation in  Oklahoma  and
regulatory  action  in Texas  governs the  methodology  by which  the regulatory
agencies establish permissible monthly production allowables. Holding LLC cannot
predict what effect  any change in  prorationing regulations might  have on  its
production and sales of natural gas.

     Certain  of Holding LLC's  Oil, Gas and  Mineral Leases are  granted by the
federal government and  administered by  various federal  agencies. Such  leases
require  compliance with detailed federal regulations and orders which regulate,
among other matters, drilling and operations on these leases and calculation and
disbursement of royalty payments  to the federal  government. The Mineral  Lands
Leasing  Act of  1920 places  limitations on the  number of  acres under federal
leases that may be owned in any one state.

     Environmental Protection and Occupational Safety.   Holding LLC is  subject
to  numerous federal, state and local laws and regulations governing the release
of materials  into  the  environment  or  otherwise  relating  to  environmental
protection.  These laws and regulations may  require the acquisition of a permit
before drilling commences, restrict the  types, quantities and concentration  of
various  substances that can be released into the environment in connection with
drilling and production  activities, limit  or prohibit  drilling activities  on
certain  lands lying within wilderness, wetlands  and other protected areas, and
impose  substantial  liabilities  for   pollution  resulting  from   operations.
Moreover,   the  recent   trend  toward  stricter   standards  in  environmental
legislation and regulation  is likely to  continue. It is  not anticipated  that
Holding  LLC will  be required  in the  near future  to expend  amounts that are
material in  relation to  its total  capital expenditure  program by  reason  of
environmental  laws  and  regulations.  Because such  laws  and  regulations are
frequently changed,  Holding LLC  is unable  to predict  the ultimate  cost  and
effects of such compliance.

     The  Comprehensive Environmental  Response, Compensation  and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without regard
to fault or the legality of the original conduct, on certain classes of  persons
who are considered to have contributed to the release or threatened release of a
"hazardous  substance" into the environment. These  persons include the owner or
operator of the disposal site or sites where the release occurred and  companies
that  disposed or arranged  for the disposal of  the hazardous substances. Under
CERCLA,  such  persons  or  companies  may  be  subject  to  joint  and  several
liabilities for the costs of cleaning up the hazardous substances that have been
released  into the environment and for damages to natural resources. Also, it is
not uncommon for neighboring landowners and  other third parties to file  claims
for  personal injury, property damage, and  recovery of response costs allegedly
caused by hazardous substance released into the environment.

     In addition, the U.S. Oil Pollution Act of 1990 (the "OPA") and regulations
promulgated pursuant  thereto impose  a variety  of regulations  on  responsible
parties  related  to the  prevention  of oil  spills  and liability  for damages
resulting from such spills. The OPA  establishes strict liability for owners  of
facilities  that are  the site of  a release of  oil into "waters  of the United
States."  While  OPA  liability  more  typically  applies  to  facilities   near
substantial  bodies of  water, at  least one  district court  has held  that OPA
liability can attach if the contamination could enter waters that may flow  into
navigable waters.

     The  Resource  Conservation  and  Recovery  Act  ("RCRA")  and  regulations
promulgated thereunder govern the generation, storage, transfer and disposal  of
hazardous  wastes.  RCRA, however,  currently  excludes from  the  definition of
hazardous wastes "drilling fluids, produced waters, and other wastes  associated
with  the exploration, development, or production  of crude oil, natural gas, or
geothermal energy." Because of this exclusion, many of Holding LLC's  operations
are exempt from RCRA regulation. Nevertheless, Holding LLC must comply with RCRA
regulations for any of its operations that do not fall within the RCRA exclusion
(such  as painting activities or use of  solvents). On August 8, 1998, EPA added
four petroleum refining wastes to the list of RCRA hazardous wastes. The  impact
is  not  likely to  be any  more burdensome  to  Holding LLC  than to  any other
similarly situated  company involved  in  oil and  natural gas  exploration  and
production.

     Because  oil and natural  gas exploration, production  and other activities
have been conducted at some of  Holding LLC's properties by previous owners  and
operators,  materials from these operations may remain on some of the properties
and in some instances require remediation.  In addition, Holding LLC has  agreed
to  indemnify some  sellers of  producing properties  from whom  Holding LLC has
acquired reserves against certain
                                        17
<PAGE>

liabilities for  environmental claims  associated  with such  properties.  While
Holding  LLC  does not  believe that  costs to  be incurred  by Holding  LLC for
compliance and remediating previously or currently owned or operated  properties
will  be material, there can be no guarantee  that such costs will not result in
future material expenditures.

     Additionally, in the course  of Holding LLC's routine  oil and natural  gas
operations,  surface spills  and leaks, including  casing leaks of  oil or other
materials occasionally occur,  and as  a result,  Holding LLC  incurs costs  for
waste  handling and environmental  compliance. Moreover, Holding  LLC is able to
control directly the operations  of only those  wells for which  it acts as  the
operator.  Notwithstanding Holding  LLC's lack  of control  over wells  in which
Holding LLC owns  an interest  but is  operated by  others, the  failure of  the
operator  to comply  with applicable  environmental regulations  may, in certain
circumstances, be attributable to Holding LLC.

     Holding LLC is also subject to laws and regulations concerning occupational
safety and health. While it is not anticipated that Holding LLC will be required
in the near  future to  expend amounts  that are  material in  the aggregate  to
Holding  LLC's overall  operations by reason  of occupational  safety and health
laws and regulations,  Holding LLC  is unable to  predict the  ultimate cost  of
future compliance.

     Marketing  and Transportation.  Federal legislation and regulatory controls
in the United  States have historically  affected the price  of the natural  gas
produced by Holding LLC and the manner in which such production is marketed. The
transportation  and sales for  resale of natural gas  in interstate commerce are
regulated pursuant to the Natural  Gas Act of 1938  (the "NGA") and the  Federal
Energy   Regulatory  Commission  ("FERC")  regulations  promulgated  thereunder.
Maximum selling prices  of certain categories  of natural gas,  whether sold  in
interstate  or intrastate  commerce, previously  were regulated  pursuant to The
Natural Gas Policy Act of 1978 ("NGPA"). The NGPA established various categories
of natural gas  and provided  for graduated  deregulation of  price controls  of
several  categories  of natural  gas and  the deregulation  of sales  of certain
categories of natural gas.  All price deregulation  contemplated under the  NGPA
has already taken place. Subsequently, the Natural Gas Wellhead Decontrol Act of
1989  (the  "Decontrol Act")  terminated all  remaining NGA  and NGPA  price and
non-price controls on wellhead sales of domestic natural gas on January 1, 1993.
While natural  gas producers  may currently  make sales  at uncontrolled  market
prices, Congress could re-enact price controls in the future.

     In  April 1992, the FERC issued its  restructuring rule, known as Order No.
636 ("Order  No. 636"),  that has  had a  major impact  on pipeline  operations,
services,  and  rates. The  most significant  provisions of  Order No.  636: (i)
required interstate pipelines to  provide firm and interruptible  transportation
solely  on  an "unbundled"  basis,  separate from  their  sales service,  and to
convert  each  pipeline's  bundled  firm  sales  service  into  unbundled   firm
transportation  service; (ii) provided for  the issuance of blanket certificates
to pipelines to provide unbundled sales  service giving all utility customers  a
chance  to  purchase  their  firm supplies  from  non-pipeline  merchants; (iii)
required that pipelines provide firm and interruptible transportation service on
a basis that is equal in quality for all natural gas supplies, whether purchased
from the pipeline  or elsewhere;  (iv) required  that pipelines  provide a  new,
non-discriminatory  "no-notice" transportation  service that  largely replicates
the "bundled" sales  service previously provided  by pipelines; (v)  established
two  new, generic programs for the  reallocation of firm pipeline capacity; (vi)
required that all pipelines offer access  to their storage facilities on a  firm
and  interruptible basis; (vii) provided  for pregranted abandonment of pipeline
sales agreements,  interruptible and  firm short-term  (defined as  one year  or
less)  transportation agreements and conditional  pregranted abandonment of firm
long-term transportation service; (viii) modified transportation rate design  by
requiring  that all fixed  costs related to  transportation be recovered through
the reservation  charge;  and  (ix)  provided mechanisms  for  the  recovery  by
pipelines of certain transition costs occurring from implementation of Order No.
636.

     The rules contained in Order No. 636, as amended by Order No. 636-A (issued
in  August 1992)  and Order No.  636-B (issued in  November 1992) (collectively,
"Order No. 636"),  are far-reaching and  complex. While Order  No. 636 does  not
directly regulate natural gas producers such as Holding LLC, the FERC has stated
that  Order No. 636 is  intended to foster increased  competition within the gas
industry.

                                        18
<PAGE>

OPERATIONAL HAZARDS AND INSURANCE -- NEG HOLDING LLC

     Holding LLC's operations are  subject to all of  the risks inherent in  oil
and  natural gas exploration, drilling and  production. These hazards can result
in substantial losses to Holding  LLC due to personal  injury and loss of  life,
severe  damage  to  and  destruction of  property  and  equipment,  pollution or
environmental  damage,  or  suspension  of  operations.  Holding  LLC  maintains
insurance of various types customary in the industry to cover its operations and
believes  it is insured  prudently against certain of  these risks. In addition,
Holding LLC maintains operator's extra  expense coverage that provides  coverage
for the care, custody and control of wells drilled by Holding LLC. Holding LLC's
insurance  does not cover every potential  risk associated with the drilling and
production of  oil and  natural gas.  As a  prudent operator,  Holding LLC  does
maintain  levels of insurance  customary in the industry  to limit its financial
exposure in the event of a substantial environmental claim resulting from sudden
and accidental  discharges.  However,  100%  coverage  is  not  maintained.  The
occurrence  of a  significant adverse  event, the risks  of which  are not fully
covered by insurance,  could have  a material  adverse effect  on Holding  LLC's
financial  condition and  results of operations.  Moreover, no  assurance can be
given that Holding LLC will be able to maintain adequate insurance in the future
at rates  it considers  reasonable. Holding  LLC believes  that it  operates  in
compliance  with government regulations and  in accordance with safety standards
which meet or exceed industry standards.

COMPETITION -- NEG HOLDING LLC

     The oil and  natural gas industry  is intensely competitive  in all of  its
phases.  Holding  LLC, which  is  a small  competitive  factor in  the industry,
encounters strong  competition from  major oil  companies, independent  oil  and
natural gas concerns, and individual producers and operators, many of which have
financial  resources,  staffs, facilities  and experience  substantially greater
than those of  Holding LLC.  Furthermore, in  times of  high drilling  activity,
exploration  for and production  of oil and  natural gas may  be affected by the
availability of equipment, labor, supplies and by competition for drilling rigs.
Holding LLC cannot predict the effect these factors will have on its operations.
Holding LLC owns  no drilling  rigs, and therefore  will be  dependent on  third
parties  for any future drilling. Furthermore,  the oil and natural gas industry
also  competes  with  other  industries   in  supplying  the  energy  and   fuel
requirements of industrial, commercial, and individual consumers.

OFFICE SPACE

     The  Company leases  approximately 25,000  square feet  of office  space in
Dallas, Texas. The Company also leases a small amount of office space in  Odessa
and Halletsville, Texas, Yukon, Oklahoma and Iberville Parish, Louisiana for its
business activities.

EMPLOYEES

     On  March  25,  2003, the  Company  had  54 full-time  employees.  Of these
employees, 17  are  field-related  personnel.  The Company  does  not  have  any
collective bargaining agreements with employees and believes that relations with
its employees are generally satisfactory.

ITEM 3. LEGAL PROCEEDINGS

     The  Company is  not a  party to any  material pending  or threatened legal
proceedings.  Pursuant  to  the  Management  Agreement  as  it  relates  to  the
management  and  operations  of the  oil  and  natural gas  properties  owned by
Operating LLC, the Company  is not aware of  any material pending or  threatened
legal  proceedings against Operating LLC. With  respect to certain claims of the
Company filed against Enron Corp. relating to the oil and natural gas properties
contributed to Holding LLC, a representative  of the Company has been  appointed
to  the  official  committee  of unsecured  creditors  in  the  Enron bankruptcy
proceeding.

     The Company's Joint Plan became effective August 4, 2000 and the Bankruptcy
Court issued a final decree effective December 13, 2001 closing the case.

                                        19
<PAGE>

                                    PART II

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

MARKET INFORMATION

     The Company's common stock currently trades on the OTC Bulletin Board.  The
Company's  common stock trades under the symbol "NEGI". The following table sets
forth, for  the periods  indicated, the  high and  low closing  sales prices  as
reported  on the  OTC Bulletin  Board. The  quotations represent  prices between
dealers in  securities  and  may  not  include  retail  mark-up,  mark-down,  or
commission and may not represent actual transactions.

<Table>
<Caption>
                                                              COMMON STOCK
                                                                  PRICE
                                                              -------------
                                                              HIGH     LOW
                                                              -----   -----
<S>                                                           <C>     <C>
CALENDAR YEARS BY QUARTER
2002:
  First.....................................................  $ .49   $ .23
  Second....................................................    .49     .22
  Third.....................................................    .28     .15
  Fourth....................................................    .37     .14
2001:
  First.....................................................  $2.00   $1.25
  Second....................................................   2.00    1.04
  Third.....................................................    .95     .39
  Fourth....................................................    .48     .22
</Table>

     On  March  25,  2003,  the  latest  practicable  date  for  providing price
information, the last quoted price for the Company's common stock was $.24.

HOLDERS

     As of March 25, 2003, the Company had approximately 7,500 record holders of
its  shares  of  common  stock,  including  multiple  nominee  holders  for   an
undetermined number of beneficial owners.

DIVIDENDS ON COMMON STOCK

     The  Company has never paid cash dividends on its common stock and does not
expect to declare  cash dividends in  the foreseeable future.  The terms of  the
Company's  credit  facility with  Arnos do  not permit  dividends on  the common
stock.

ITEM 6. SELECTED FINANCIAL DATA

     The following table sets forth selected historical financial and  operating
data  with respect to the  Company as of and  for each of the  five years in the
period ended  December  31,  2002.  The financial  data  was  derived  from  the
historical  financial  statements  of  the  Company.  This  information  is  not
necessarily indicative of the Company's  future performance. The financial  data
set forth below should be read in conjunction with

                                        20
<PAGE>

"Management's  Discussion  and Analysis  of Financial  Condition and  Results of
Operations" and  the consolidated  financial statements  and the  related  notes
thereto of the Company included elsewhere herein.

<Table>
<Caption>
                                                               YEAR ENDED DECEMBER 31,
                                             -----------------------------------------------------------
                                               1998          1999          2000        2001       2002
                                             ---------     ---------     ---------   --------   --------
                                                 (IN THOUSANDS, EXCEPT FOR RATIOS AND PER UNIT DATA)
<S>                                          <C>           <C>           <C>         <C>        <C>
STATEMENT OF OPERATIONS DATA:(1)
Oil and natural gas sales..................  $  38,440     $  39,300     $  51,014   $ 33,176   $     --
Accretion of Investment in NEG Holding
  LLC......................................         --            --            --      9,834     32,879
Management fee.............................         --            --            --      2,699      7,637
                                             ---------     ---------     ---------   --------   --------
    Total revenue..........................     38,440        39,300        51,014     45,709     40,516
                                             ---------     ---------     ---------   --------   --------
Costs and expenses:
  Lease operating..........................      8,590         6,101         5,672      3,874         --
  Oil and natural gas production taxes.....      2,504         2,095         2,888      1,695         --
  Depreciation, depletion and
    amortization...........................     21,311        15,889        11,044      6,163         --
  Writedown of oil and natural gas
    properties(2)..........................    148,400            --            --         --         --
  Restructuring charges....................      1,869            --            --         --         --
  General and administrative...............      6,141         4,098         4,527      5,931      7,105
                                             ---------     ---------     ---------   --------   --------
    Total costs and expenses...............    188,815        28,183        24,131     17,663      7,105
                                             ---------     ---------     ---------   --------   --------
Operating income (loss)....................   (150,375)       11,117        26,883     28,046     33,411
Interest expense(3)........................    (14,432)       (1,909)       (9,656)   (21,224)   (18,964)
Interest income and other, net.............        293            --         1,672       (336)        36
                                             ---------     ---------     ---------   --------   --------
Income (loss) before reorganization items,
  income taxes and extraordinary item......   (164,514)        9,208        18,899      6,486     14,483
Reorganization items:......................                                                --
  Professional fees and other..............         --        (4,727)       (1,354)       236         --
  Writeoff of unamortized debt premium and
    issuance costs, net....................         --        (3,219)           --         --         --
  Interest earned on accumulating cash
    resulting from Chapter 11
    proceedings............................         --           762         1,064         --         --
                                             ---------     ---------     ---------   --------   --------
Income (loss) before income taxes and
  extraordinary items......................   (164,514)        2,024        18,609      6,722     14,483
Income tax benefit (expense)...............         --            --            --     30,589     (5,068)
                                             ---------     ---------     ---------   --------   --------
Income (loss) before extraordinary item....   (164,514)        2,024        18,609     37,311      9,415
Extraordinary loss.........................         --            --       (33,047)       (11)        --
                                             ---------     ---------     ---------   --------   --------
Net income (loss)..........................  $(164,514)    $   2,024     $ (14,438)  $ 37,300   $  9,415
                                             =========     =========     =========   ========   ========
Net income (loss) per common share before
  extraordinary item.......................  $  (28.56)    $     .35     $    2.71   $   3.33   $    .84
                                             =========     =========     =========   ========   ========
Net income (loss) per common share, basic
  and diluted..............................  $  (28.56)    $     .35     $   (2.10)  $   3.33   $    .84
                                             =========     =========     =========   ========   ========
CASH FLOW DATA:
Net cash provided by (used in) operating
  activities...............................  $   5,082     $  27,713     $  23,831   $ 11,537   $(21,266)
Net cash provided by (used in) investing
  activities...............................    (53,303)       (1,038)      (11,720)   (27,215)    21,653
Net cash provided by (used in) financing
  activities...............................     24,809            --         2,000    (24,560)        --
</Table>

                                        21
<PAGE>

<Table>
<Caption>
                                                               YEAR ENDED DECEMBER 31,
                                             -----------------------------------------------------------
                                               1998          1999          2000        2001       2002
                                             ---------     ---------     ---------   --------   --------
                                                 (IN THOUSANDS, EXCEPT FOR RATIOS AND PER UNIT DATA)
<S>                                          <C>           <C>           <C>         <C>        <C>
BALANCE SHEET DATA (AT PERIOD END):(1)
Cash and cash equivalents..................  $   2,542     $  29,217     $  43,328   $  3,090      3,477
Working capital (deficit)..................   (197,834)(5)       N/A(4)     19,835      1,673    (40,001)
Total assets...............................     95,002       100,358       118,654    132,709    138,805
Long-term debt.............................        N/A(5)        N/A(5)    210,827    202,471    159,576
Stockholders' equity(deficit)..............   (116,933)     (114,906)     (127,171)   (82,405)   (72,989)
</Table>

<Table>
<Caption>
                                                                      YEAR ENDED DECEMBER 31,
                                                          -----------------------------------------------
                                                           1998      1999      2000     2001(7)   2002(8)
                                                          -------   -------   -------   -------   -------
<S>                                                       <C>       <C>       <C>       <C>       <C>
OPERATING DATA:(1)
Production:.............................................                           --
  Oil (Mbls)............................................    1,238     1,135       799      428       --
  Natural gas (Mmcf)....................................   11,255     9,266     7,081    4,333       --
  Natural gas equivalent (Mmcfe)........................   18,685    16,078    11,873    6,901       --
Average sales price:
  Oil (per Bbl).........................................  $ 12.66   $ 17.62   $ 29.24   $27.70       --
  Natural gas (per Mcf).................................     2.02      2.08      3.91     4.92       --
Unit economics (per Mcfe):
  Average sales price...................................  $  2.06   $  2.44   $  4.30   $ 4.81       --
  Lease operating expenses..............................      .46       .38       .48      .56       --
  Oil and natural gas production taxes..................      .13       .13       .24      .25       --
  Depreciation, depletion and amortization(6)...........     1.14       .99       .93      .89       --
  General and administrative............................      .33       .25       .38      .50       --
</Table>

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

(1) Reflects  the revenues, results of  operations, and production subsequent to
    the dates of  acquisitions of various  oil and natural  gas properties  that
    affect the comparability of the data presented.

(2) The  results of  operations for  the year  ended December  31, 1998, include
    writedowns of oil and natural gas properties of approximately $148.4 million
    in accordance with the full cost method of accounting.

(3) Accrual of interest on  the Company's Senior  Notes was discontinued  during
    the  Bankruptcy Proceeding. Approximately $17.7 million and $10.5 million of
    additional interest expense would have been recognized by the Company during
    1999 and 2000, respectively, if not for the discontinuation of the  interest
    accrual.

(4) Due to the Chapter 11 proceedings, these measurements are not meaningful for
    the year ended December 31, 1999 and have not been presented. See Notes 1, 5
    and 6 of Notes to Consolidated Financial Statements.

(5) The  principal and  interest outstanding under  the Senior  Notes and credit
    facility was classified as current at December 31, 1998. Due to the  Chapter
    11  proceedings, this measurement is not  meaningful as of December 31, 1999
    and has not been  presented. See Note 6  of Notes to Consolidated  Financial
    Statements.

(6) Excludes the effects of the full cost ceiling writedowns discussed in Note 2
    above.

(7) Operating  data is included  only through August  31, 2001 when  the oil and
    natural gas assets were contributed to NEG Holding LLC.

(8) No oil and natural gas operations during 2002 as all the oil and natural gas
    assets were contributed to NEG Holding LLC effective August 31, 2001.

                                        22
<PAGE>

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

     The following discussion should be  read in conjunction with the  Company's
Financial Statements and "Selected Financial Data" and respective notes thereto,
included  elsewhere herein.  The information  below should  not be  construed to
imply that  the results  discussed  herein will  necessarily continue  into  the
future  or that any conclusion reached  herein will necessarily be indicative of
actual operating results in the future. Such discussion only represents the best
present assessment by management of the Company.

     On February 11, 1999, the United  States Bankruptcy Court for the  Northern
District  of Texas, Dallas Division  ("Bankruptcy Court") entered an involuntary
petition placing the Company under  protection of the Bankruptcy Court  pursuant
to  Title 11, Chapter 11  of the United States  Bankruptcy Code (the "Bankruptcy
Proceeding"). On July 24, 2000 the  Bankruptcy Court entered a subsequent  order
confirming  a  Plan of  Reorganization  (the "Plan  of  Reorganization") jointly
proposed by the Company and the official committee of unsecured creditors, which
Plan of Reorganization became effective on August 4, 2000. The Bankruptcy  Court
issued a Final Decree closing the case effective December 13, 2001. Accordingly,
the  Company  has effectively  settled all  matters  relating to  the Bankruptcy
Proceeding.

     As mandated by  the Plan of  Reorganization and the  Bankruptcy Court,  NEG
Holding LLC ("Holding LLC"), a Delaware limited liability company, was formed in
August  2000. In exchange for an initial 50% membership interest in Holding LLC,
on September 12, 2001, but effective as of May 1, 2001, the Company  contributed
to  Holding LLC all of  its operating assets and  oil and natural gas properties
excluding cash  of $4.3  million. In  exchange for  its initial  50%  membership
interest  in Holding LLC, Gascon Partners, an entity owned or controlled by Carl
C. Icahn, the  Company's largest  stockholder ("Gascon"),  contributed its  sole
membership  interest in  Shana National  LLC, an  oil and  natural gas producing
company, and cash,  including a  $10.9 million  Revolving Note  issued to  Arnos
Corp.,  an entity owned  or controlled by  Carl C. Icahn,  the Company's largest
stockholder ("Arnos"), evidencing the  borrowings under the Company's  revolving
credit  facility. In connection  with the foregoing,  Holding LLC initially owns
100% of  the membership  interest  in NEG  Operating  LLC ("Operating  LLC"),  a
Delaware  limited  liability company.  All  of the  oil  and natural  gas assets
contributed by the Company and all of the oil and natural gas assets  associated
with  Gascon's contribution to Holding LLC  were transferred from Holding LLC to
Operating LLC on September 12, 2001, but effective as of May 1, 2001.

     Pursuant to the Holding LLC Operating Agreement, the Company is to  receive
guaranteed  payments, in  addition to a  priority distribution  amount of $202.2
million before Gascon receives any monies.  It is anticipated that the  priority
distribution amount of $202.2 million will be used by the Company to pay off the
Company's  indebtedness (currently held by entities  owned or controlled by Carl
C. Icahn). The  priority distribution is  to be  made on or  before November  1,
2006.  Guaranteed payments are  to be paid on  a semi annual  basis, based on an
annual interest rate of 10.75% of the outstanding priority distribution  amount.
The  guaranteed  payments are  expected to  be sufficient  to make  the interest
payments on the Senior Notes until their due date of 2006. After the payments to
the Company,  Gascon is  to  receive distributions  equivalent to  the  priority
distribution amount and guaranteed payments plus other amounts as defined in the
NEG  Holding  LLC  Operating  Agreement  referred  herein.  Following  the above
distributions to the Company and  Gascon, additional distributions, if any,  are
to  be made in accordance with their respective capital accounts. Because of the
substantial uncertainty that  the Company will  receive any distributions  above
the  priority  and  guaranteed payment  amounts,  the Company  accounts  for its
investment in Holding LLC as  a preferred investment whereby guaranteed  payment
amounts  received and receipts of the  priority distribution amount are recorded
as reductions in the investment and  income is recognized from accretion of  the
investment  up  to the  priority distribution  amount, including  the guaranteed
payments (based on the interest method), and the residual interest  attributable
to  Holding LLC will be valued at zero. Cash receipts, if any, from the residual
interest will be reported in income as earned. In March 2003, Holding LLC made a
priority distribution  of $53.6  million  to the  Company, consisting  of  $42.7
million  in  cash  and  the  $10.9 million  note  outstanding  under  the credit
facility. The Company utilized  the $42.7 million cash  to repay the  Reinstated
Interest.

     The  Holding LLC  Operating Agreement entered  into on  September 12, 2001,
contains a provision that allows Gascon at any time, in its sole discretion,  to
redeem the Company's membership interest in Holding

                                        23
<PAGE>

LLC  at a price equal to the fair market value of such interest determined as if
Holding LLC had sold  all of its  assets for fair  market value and  liquidated.
Since  all of the Company's operating assets  and oil and natural gas properties
have been  contributed  to  Holding  LLC,  as  noted  above,  following  such  a
redemption,  the Company's  principal assets  would consist  solely of  its cash
balances. In the event  that such redemption right  is exercised by Gascon,  the
Company  may be  obligated to  use the  proceeds that  it would  receive for its
redeemed membership  interest  to  pay outstanding  indebtedness  and  operating
expenses  before  the  distribution  of  any portion  of  such  proceeds  to the
Company's shareholders.  Following the  payment  of the  Company's  indebtedness
(currently  held  by entities  owned or  controlled  by Carl  C. Icahn)  and its
operating expenses, there is a substantial  risk that there will be no  proceeds
remaining  for distribution  to the  Company's shareholders.  It is  the present
intention of Holding LLC to continue to conduct oil and natural gas drilling and
development activities in the ordinary course of business and to seek additional
reserves.

     The management and operation  of Operating LLC is  being undertaken by  the
Company  pursuant to a  Management Agreement (the  "Management Agreement") which
the Company has entered into with Operating LLC. However, neither the  Company's
officers  nor directors will control the  strategic direction of Operating LLC's
oil and natural gas business, including oil and natural gas drilling and capital
investments, which shall  be controlled by  the managing member  of Holding  LLC
(currently  Gascon).  The Management  Agreement provides  that the  Company will
manage Operating LLC's oil and natural gas assets and business until the earlier
of November 1, 2006,  or such time as  Operating LLC no longer  owns any of  the
managed oil and natural gas properties. The Company's employees will conduct the
day-to-day operations of Operating LLC's oil and natural gas properties, and all
costs  and  expenses  incurred in  the  operation  of the  oil  and  natural gas
properties shall be borne  by Operating LLC;  although the Management  Agreement
provides  that the salary of the Company's  Chief Executive Officer shall be 70%
attributable to the managed oil and natural gas properties, and the salaries  of
each   of  the  General  Counsel  and  Chief  Financial  Officer  shall  be  20%
attributable to the managed oil and natural gas properties. In exchange for  the
Company's  management services, Operating LLC shall pay the Company a management
fee equal  to  115%  of  the  actual  direct  and  indirect  administrative  and
reasonable  overhead  costs incurred  by the  Company in  operating the  oil and
natural gas properties, which  either the Company or  Operating LLC may seek  to
change  within the range of 110%-115% as  such change is warranted; however, the
parties  have  agreed  to   consult  with  each  other   to  ensure  that   such
administrative  and  reasonable  overhead  costs  attributable  to  the  managed
properties are properly reflected in the management fee paid to the Company.  In
addition,  Operating LLC has  agreed to indemnify  the Company to  the extent it
incurs any  liabilities in  connection  with its  operation  of the  assets  and
properties  of Operating LLC, except  to the extent of  its gross negligence, or
misconduct. The Company recorded $7.6 million  as a management fee for the  year
ended December 31, 2002.

     As  a result of the  foregoing transactions and as  mandated by the Plan of
Reorganization effective September 12, 2001, the Company's principal assets were
its remaining cash balances, accounts  receivable from affiliates, deferred  tax
asset  and its initial 50% membership interest  in Holding LLC and its principal
liabilities were the $10.9 million  outstanding under its existing $100  million
revolving  credit facility  with Arnos,  the 10  3/4% Senior  Notes (the "Senior
Notes") and  the Reinstated  Interest  (defined below).  None of  the  Company's
employees have been transferred to Holding LLC or Operating LLC.

     As  a result of the terms and  conditions of the various agreements related
to the repayment  of the Company's  indebtedness to Arnos  and repayment of  the
priority distribution amounts and the guaranteed payments (plus accrued interest
thereon)  to Gascon, there is  a substantial risk that  there will be no amounts
remaining for distribution to the Company's stockholders.

     Pursuant to the Plan of Reorganization, as of December 31, 2000 the Company
reinstated $45.8 million of  interest expense on  the Senior Notes  ("Reinstated
Interest").  This Reinstated Interest consisted  of $10.5 million of prepetition
interest and $35.3 million  of interest expense that  did not accrue during  the
pendancy  of the  Bankruptcy Proceeding pursuant  to Bankruptcy  Court rules and
regulations. The Reinstated Interest plus  interest accrued thereon becomes  due
in  April 2003.  The Senior Note  balance is  $148.6 million as  of December 31,
2002. (See Note 6 to the Consolidated Financial Statements).

                                        24
<PAGE>

     On  March  26, 2003,  NEG Holding  LLC distributed  the $10.9  million note
outstanding under the  existing credit  facility to  the Company  as a  priority
distribution.  Also,  on March  26, 2003  the Company,  Arnos and  Operating LLC
entered into an agreement  to assign the existing  credit facility to  Operating
LLC.  Effective  with  this assignment,  Arnos  amended the  credit  facility to
increase the revolving commitment to  $150 million, increase the borrowing  base
to  $75  million  and  extend  the  revolving  due  date  until  June  30, 2004.
Concurrently, Arnos extended  a $42.7 million  loan to Operating  LLC under  the
amended credit facility; Operating LLC then distributed $42.7 million to Holding
LLC  who, thereafter, made a $42.7 million priority distribution to the Company.
The Company utilized  these funds  to pay the  entire amount  of the  Reinstated
Interest and interest accrued thereon outstanding on March 27, 2003.

     In  August  2001,  the Company  redeemed  both $16.4  million  of principal
outstanding under the Senior Note obligations and $4.8 million of the Reinstated
Interest for a cash consideration of  $10.5 million. The Company paid two  Arnos
affiliates  approximately $.4 million in current interest on the redeemed Senior
Note obligations at  the date of  redemption related to  interest owed from  the
last semi-annual interest payment date of May 1, 2001 to the date of redemption.
As  this was a partial redemption of the Senior Notes, it has been accounted for
as a modification  of terms that  changes the amounts  of future cash  payments.
Accordingly,  the excess of redeemed principal  and interest over the redemption
payment of $10.5 million  will be amortized as  a reduction to interest  expense
over   the  remaining  life  of  the  Senior  Notes.  In  connection  with  this
transaction, the  Company  borrowed  $10.9 million  under  its  existing  credit
facility with Arnos.

     Although the Company is highly leveraged following confirmation of the Plan
of  Reorganization,  the Company  expects that  availability under  its existing
credit  facility,  expected  cash  flows  from  guaranteed  payments,   priority
distributions  and management fees will be sufficient to fund its operations and
debt service. However, no assurances can be given that Holding LLC will generate
sufficient cash flows  to make  these payments and  in that  event, the  Company
would not be able to meet its obligations.

RESULTS OF OPERATIONS

     On  September 12, 2001 the Company contributed all its operating assets and
oil and natural gas properties, excluding  cash of $4.3 million to Holding  LLC,
in exchange for an initial 50% membership interest ("LLC Contribution"). For tax
and valuation purposes the effective date is May 1, 2001, however, for financial
reporting  purposes the transaction is as  of September 1, 2001. Operations from
September 1 to September 12 were not significant. In 2001, the Company  recorded
eight  months of oil and natural gas  operations and four months of accretion of
the preferred investment and management fees. During 2002 and in the future,  it
is  anticipated the  Company will  only recognize  income from  accretion of the
preferred investment and management fees.

                                        25
<PAGE>

  OVERVIEW OF PRODUCTION, SALES AND UNIT ECONOMICS

     The following table sets forth certain information regarding the production
volumes, oil and natural gas sales, average sales prices, and unit economics per
Mcfe for  revenues and  costs and  expenses  related to  the Company's  oil  and
natural gas production for the periods indicated.

<Table>
<Caption>
                                                                             EIGHT MONTHS
                                                               YEAR ENDED       ENDED
                                                              DECEMBER 31,    AUGUST 31,
                                                                  2000           2001
                                                              ------------   ------------
<S>                                                           <C>            <C>
Net production:
  Oil (Mbbls)...............................................        799            428
  Natural Gas (Mmcf)........................................      7,081          4,333
  Natural Gas Equivalent (Mmcfe)............................     11,873          6,901
Oil and natural gas sales (in thousands):
  Oil.......................................................    $23,355        $11,859
  Natural gas...............................................     27,659         21,317
                                                                -------        -------
     Total..................................................    $51,014        $33,176
                                                                =======        =======
Average sales price:
  Oil (per Bbl).............................................    $ 29.24        $ 27.70
  Natural gas (per Mcf).....................................       3.91           4.92
Unit economics (per Mcfe):
  Average sales price.......................................    $  4.30        $  4.81
  Lease operating expenses..................................        .48            .56
  Oil and natural gas production taxes......................        .24            .25
  Depletion rate (excluding writedowns).....................        .88            .85
  General and administrative................................        .38            .50
</Table>

  YEAR ENDED DECEMBER 31, 2002, COMPARED WITH YEAR ENDED DECEMBER 31, 2001

     Revenues.    Total  revenues decreased  by  $5.2 million  (11.4%)  to $40.5
million for 2002 from $45.7 million in 2001. The decrease in revenues is due  to
the LLC Contribution. Average natural gas prices were $4.92 per Mcf for 2001 and
average  oil prices were $27.70  per barrel for 2001.  The Company recorded $9.8
million and  $32.9  million  in  accretion of  investment  in  Holding  LLC  and
management fees of $2.7 and $7.6 million in 2001 and 2002.

     In  2001, the Company produced  428 Mbbls of oil  and 4,333 Mmcf of natural
gas. The Company had no  oil and natural gas production  during 2002 due to  the
LLC Contribution.

     Costs  and Expenses.   Due  to the  LLC Contribution,  the Company  did not
record any lease operating expenses for 2002 compared to $3.9 million for  2001.
Lease operating expenses per Mcfe were $.56 for 2001.

     Due to the LLC Contribution, the Company did not record any oil and natural
gas production taxes for 2002 compared to $1.7 million for 2001.

     Due  to the LLC Contribution, the  Company did not record any depreciation,
depletion and amortization for 2002 compared to $6.2 million for 2001.

     General and administrative  costs increased  $1.2 million  (20.3%) to  $7.1
million  for 2002 compared to $5.9 million for 2001. This increase is the result
of the LLC Contribution and the  resulting change in the Company's recording  of
general  and administrative costs.  Effective September 1,  2001, the Company no
longer offsets general and administrative costs by field employee costs or lease
management income, but is reimbursed a management fee for these and other  costs
of  115%  of  general and  administrative  costs  as defined  in  the Management
Agreement. As  discussed in  Note 2  to the  consolidated financial  statements,
prior to

                                        26
<PAGE>

September  2001,  the Company  capitalized  internal general  and administrative
costs  that  can  be  directly  identified  with  acquisition,  development  and
exploration  activities.  The Company's  capitalized general  and administrative
expenses totaled $.5 million for the year ended December 31, 2001.

     Other Income and Expenses.  The  $2.2 million decrease in interest  expense
to  $19.0 million  for 2002  from $21.2  million for  2001 was  due primarily to
reduced amounts  outstanding  of  senior note  obligations  and  the  Reinstated
Interest.  The Company  accrued interest on  the revised  senior note obligation
amount at December 31, 2000 of $210.8  million through July 31, 2001. In  August
2001, the Company redeemed both $16.4 million of principal outstanding under the
senior  note obligations and  $4.8 million of the  Reinstated Interest for $10.5
million. The weighted average interest rate for 2002 was 10.4% compared to 10.6%
for the same period in 2001.

     Of the $.3 million other expense recognized for the year ended December 31,
2001, $.7 million  represents the  non-cash decrease in  the fair  value of  the
Company's  derivative contracts.  No other expense  was recognized  for the year
ended December 31, 2002.

     Income Taxes.  As  of December 31, 2002,  the Company had consolidated  net
operating  loss  carryforwards of  approximately $101.3  million for  income tax
reporting purposes  that begin  expiring  in 2003.  Prior  to the  formation  of
Holding  LLC, the income tax benefit  associated with the loss carryforwards had
not been  recognized  since,  in  the  opinion  of  management,  there  was  not
sufficient  positive evidence of future taxable income to justify recognition of
a benefit. Upon  the formation of  Holding LLC, management  again evaluated  all
evidence,  both  positive  and  negative,  in  determining  whether  a valuation
allowance to reduce the carrying value  of deferred tax assets was still  needed
and  concluded, based on the projected  allocations of taxable income by Holding
LLC, the Company more likely  than not will realize  a partial benefit from  the
loss  carryforwards. Accordingly, the  Company recorded a  deferred tax asset of
$31.9 million in September 2001, $25.5 million as of December 31, 2002. Ultimate
realization of the deferred  tax asset is dependent  upon, among other  factors,
the   Company's  ability  to  generate  sufficient  taxable  income  within  the
carryforward periods  and is  subject to  change depending  on the  tax laws  in
effect  in the  years in which  the carryforwards are  used. As a  result of the
recognition of  expected  future  income tax  benefits,  subject  to  additional
changes  in  the valuation  allowance, subsequent  periods  will reflect  a full
effective tax rate provision.

     Net Income.  Net income of $37.3 million was recognized for 2001,  compared
with  a net income of  $9.4 million for the  comparable 2002 period. Results for
2001 include income of  $.2 million related to  the Bankruptcy Proceeding and  a
$31.9  million benefit from income taxes as a result of the LLC Contribution and
$1.3 million in deferred income tax expense.

  YEAR ENDED DECEMBER 31, 2001, COMPARED WITH YEAR ENDED DECEMBER 31, 2000

     Revenues.   Total  revenues decreased  by  $5.3 million  (10.4%)  to  $45.7
million  for 2001 from $51.0 million in 2000. The decrease in revenues is due to
the decrease in overall production and the LLC Contribution. Average natural gas
prices increased $1.01 per Mcf  to $4.92 per Mcf for  2001 from $3.91 for  2000,
and  average oil prices decreased $1.54 per barrel to $27.70 per barrel for 2001
from $29.24  for  2000.  The  Company recorded  $9.8  million  in  accretion  of
investment in Holding LLC and management fees of $2.7 million in 2001.

     In  2001,  the Company  produced  428 Mbbls  of  oil, a  decrease  of 46.4%
compared to 799 Mbbls in  2000, and the Company  produced 4,333 Mmcf of  natural
gas in 2001, a decrease of 38.8% from 7,081 Mmcf in the same period of 2000. The
decrease  in production is  due to the  LLC Contribution and  natural decline in
production.

     Costs and  Expenses.    Lease operating  expenses  decreased  $1.8  million
(31.6%)  to $3.9 million for 2001 from $5.7 million in 2000 primarily due to the
LLC Contribution. Lease operating expenses per  Mcfe increased to $.56 for  2001
from $.48 for 2000 due to the decline in overall production.

     Production  taxes decreased $1.2  million (41.4%) to  $1.7 million for 2001
compared to $2.9 million  for 2000. This  decrease is the  direct result of  the
decline in overall production and revenue in 2001 and the LLC Contribution.
                                        27
<PAGE>

     Depreciation,  depletion and  amortization ("DD&A")  decreased $4.8 million
(43.6%) to  $6.2 million  for 2001  compared  to $11.0  million for  2000.  This
decrease  in  DD&A is  due  to the  decline in  overall  production and  the LLC
Contribution.

     General and administrative  costs increased  $1.4 million  (31.1%) to  $5.9
million  for 2001 compared to $4.5 million for 2000. This increase is the result
of the LLC Contribution and the  resulting change in the Company's recording  of
general  and administrative costs.  Effective September 1,  2001, the Company no
longer offsets general and administrative costs by field employee costs or lease
management income, but is reimbursed a management fee for these and other  costs
of  115%  of  general and  administrative  costs  as defined  in  the Management
Agreement. As  discussed in  Note 2  to the  consolidated financial  statements,
prior   to  September  2001,  the   Company  capitalized  internal  general  and
administrative  costs  that  can   be  directly  identified  with   acquisition,
development  and exploration  activities. The Company's  capitalized general and
administrative expenses totaled $.6 million and $.5 million for the years  ended
December 31, 2000 and 2001, respectively.

     Other  Income and Expenses.  The $11.5 million increase in interest expense
to $21.2  million for  2001 from  $9.7 million  for 2000  was due  primarily  to
interest  expense on the  Senior Notes that began  accruing upon confirmation of
the Plan of Reorganization. The Company  accrued interest on the revised  senior
note  obligation amount at December 31, 2000  of $210.8 million through July 31,
2001. In  August 2001,  the Company  redeemed both  $16.4 million  of  principal
outstanding under the senior note obligations and $4.8 million of the Reinstated
Interest  for  $10.5 million.  Approximately  $10.5 million  additional interest
expense would  have been  recognized by  the Company  for 2000  if not  for  the
discontinuation of the interest accrual on the Company's Senior Notes during the
Bankruptcy  Proceeding pursuant to  Bankruptcy Court rules  and regulations. The
weighted average interest rate for 2001 was 10.6% compared to 10.4% for the same
period in 2000.

     Of the $.3 million other expense recognized for the year ended December 31,
2001, $.7 million  represents the  non-cash decrease in  the fair  value of  the
Company's  derivative contracts. Of the $1.7 million other income recognized for
the year ended December 31, 2000, $.6 million represents the non-cash change  in
the  fair  value  of  the  Company's  derivative  contracts  and  the  remainder
represents interest earned on cash accumulated subsequent to confirmation of the
Joint Plan.

     Reorganization Items.  The Company incurred $1.4 million for the year ended
December 31, 2000, for professional fees and other expenses associated with  the
bankruptcy  proceeding. The  Company earned $1.1  million in  interest income on
cash accumulating during the bankruptcy  proceeding for the year ended  December
31, 2000.

     Income  Taxes.  As of  December 31, 2001, the  Company had consolidated net
operating loss  carryforwards  of  approximately $129  million  for  income  tax
reporting  purposes  that begin  expiring  in 2002.  Prior  to the  formation of
Holding LLC, the income tax benefit  associated with the loss carryforwards  had
not  been  recognized  since,  in  the  opinion  of  management,  there  was not
sufficient positive evidence of future taxable income to justify recognition  of
a  benefit. Upon  the formation of  Holding LLC, management  again evaluated all
evidence, both  positive  and  negative,  in  determining  whether  a  valuation
allowance  to reduce the carrying value of  deferred tax assets was still needed
and concluded, based on the projected  allocations of taxable income by  Holding
LLC,  the Company more likely  than not will realize  a partial benefit from the
loss carryforwards. Accordingly, the  Company recorded a  deferred tax asset  of
$31.9  million in September 2001. Ultimate realization of the deferred tax asset
is dependent  upon,  among other  factors,  the Company's  ability  to  generate
sufficient  taxable income  within the  carryforward periods  and is  subject to
change depending  on  the  tax  laws  in  effect  in  the  years  in  which  the
carryforwards are used. As a result of the recognition of expected future income
tax  benefits,  subject  to  additional  changes  in  the  valuation  allowance,
subsequent periods will reflect a full effective tax rate provision.

     Extraordinary Loss.  The Company  recognized a $33.0 million  extraordinary
loss  during  2000  in  connection  with confirmation  of  the  Joint  Plan. The
extraordinary loss consists of $35.3 million  of the Reinstated Interest on  the
Senior  Notes which  was offset  by a  $2.2 million  gain on  discharge of other
indebtedness pursuant to the Joint Plan.
                                        28
<PAGE>

     Net Loss.  Net loss of $14.4 million was recognized for 2000, compared with
a net income of $37.3 million for  the comparable 2001 period. Results for  2000
(i) include $1.4 million, relating to the Bankruptcy Proceeding and (ii) include
$1.1  million  in interest  income on  cash  accumulating during  the Bankruptcy
Proceeding and (iii) includes a  $33.0 million extraordinary loss in  connection
with  the confirmation of the Joint Plan. Results for 2001 include income of $.2
million related to the  Bankruptcy Proceeding and a  $31.9 million benefit  from
income  taxes as a result  of the LLC Contribution  and $1.3 million in deferred
income tax expense.

LIQUIDITY AND CAPITAL RESOURCES

  YEAR ENDED DECEMBER 31, 2002, COMPARED WITH YEAR ENDED DECEMBER 31, 2001

     Net cash used in operating activities was $21.3 million for the year  ended
December  31, 2002,  compared to  net cash  provided by  operating activities of
$11.5 million  for the  same period  in 2001.  The decrease  in cash  flow  from
operating activities is primarily due to LLC Contribution.

     Net  cash  provided  by investing  activities  was $21.7  million  for 2002
compared with net cash used in  investing activities of $27.2 million for  2001.
The  cash used by investing activities  for 2001 consisted primarily of drilling
activities on the oil and natural gas assets prior to the LLC Contribution.  Net
cash  provided by investing activities in  2002 consisted of Guaranteed Payments
from NEG Holding LLC.

     Net cash used in  financing activities in 2001  was $24.6 million. The  net
cash  used  in  financing  activities  in 2001  consisted  of  repayment  of the
outstanding borrowing of $25 million under the credit facility. In August  2001,
the  Company borrowed  $10.9 under  its existing  credit facility  with Arnos in
order to redeem  $16.4 million of  principal outstanding under  the senior  note
obligations and $4.8 million of the Reinstated Interest for $10.5 million. There
was no cash used in or provided by financing activities in 2002.

     The  guaranteed payments are expected to be sufficient to make the interest
payments on the Senior  Notes until their  due date of  2006. The fees  received
under  the Operating LLC  Management Agreement are expected  to be sufficient to
fund the  Company's  operations.  While  there  is  no  assurance,  the  Company
currently anticipates the priority distributions will be sufficient to repay the
Senior Notes due 2006.

     The  Company's working capital deficit at December 31, 2002 was $40 million
compared to a  working capital  surplus at December  31, 2001  of $1.7  million.
Effective  with the March 2003  priority distribution, working capital increased
by $43 million.

     The following table is a summary of contractual obligations as of  December
31, 2002.

<Table>
<Caption>
                                     2003          2004          2005           2006
                                  -----------   -----------   -----------   ------------
<S>                               <C>           <C>           <C>           <C>
Senior Notes....................  $        --   $        --   $        --   $148,637,000
Reinstated interest.............   41,696,720            --            --             --
Credit facility.................   10,939,750            --            --             --
Interest payments...............   17,154,124    15,978,478    15,978,478     14,646,938
Rent............................      596,128       596,128       596,128        596,128
                                  -----------   -----------   -----------   ------------
  Total.........................  $70,386,722   $16,574,606   $16,574,606   $163,880,066
                                  ===========   ===========   ===========   ============
</Table>

  YEAR ENDED DECEMBER 31, 2001, COMPARED WITH YEAR ENDED DECEMBER 31, 2000

     Net  cash provided by  operating activities was $11.5  million for the year
ended December 31, 2001, compared to $23.8 million for the same period in  2000.
The  decrease  in  cash  flow  from operating  activities  is  primarily  due to
decreased  income  from  operations  before  non-cash  charges,  resulting  from
additional  interest expense due to the  revised obligation amount of the Senior
Notes. (See Note 6 of the Consolidated Financial Statements).

                                        29
<PAGE>

     Net cash used by investing activities  was $27.2 million for 2001  compared
with  $11.7 million  for 2000.  The cash used  by investing  activities for 2001
increased due to the Company's resumption of its drilling activities at the  end
of 2000 and during 2001.

     Net cash used in financing activities in 2001 was $24.6 million compared to
net  cash provided by financing activities of $2.0 million in 2000. The net cash
used in financing activities in 2001  consisted of repayment of the  outstanding
borrowing  of $25 million under the credit facility. In August 2001, the Company
borrowed $10.9 under its existing credit facility with Arnos in order to  redeem
$16.4  million of  principal outstanding under  the senior  note obligations and
$4.8 million of the Reinstated Interest for $10.5 million. The net cash provided
by financing activities during 2000 consisted of the $2.0 million paid by Arnos,
in accordance with  the Joint  Plan, to  purchase additional  common stock  such
that, together with its affiliates, it would own 49.9% of the outstanding common
stock of the Company.

     The Company's working capital surplus at December 31, 2001 was $1.7 million
compared to a working capital surplus at December 31, 2000 of $19.8 million. The
decrease  in working capital was due  primarily to increased drilling activities
and the LLC Contribution.

FUTURE CAPITAL AND FINANCING REQUIREMENTS

     The Company currently has $10.9 million outstanding under its existing $100
million credit facility  with Arnos.  Arnos continues to  be the  holder of  the
credit facility; however, the $10.9 million note currently outstanding under the
credit  facility was contributed to Holding LLC as part of Gascon's contribution
to Holding LLC on September 12, 2001. In December 2001, the maturity date of the
credit facility was extended to  December 31, 2003 and  the Company was given  a
waiver  of  compliance with  respect  to any  and  all covenant  violations. The
Company anticipates repayment of this  amount through the priority  distribution
from  Holding LLC. The Company  was not in compliance  with the minimum interest
coverage ratio at September 30, 2002 and December 31, 2002 and the current ratio
at December 31, 2002, however, in December  2001 the Company was given a  waiver
of  compliance with respect to any  and all covenant violations through December
31, 2003.

     On March  26, 2003,  NEG Holding  LLC distributed  the $10.9  million  note
outstanding  under the  existing credit  facility to  the Company  as a priority
distribution. Also,  on March  26, 2003  the Company,  Arnos and  Operating  LLC
entered  into an agreement  to assign the existing  credit facility to Operating
LLC. Effective  with  this assignment,  Arnos  amended the  credit  facility  to
increase  the revolving commitment to $150  million, increase the borrowing base
to $75  million  and  extend  the  revolving  due  date  until  June  30,  2004.
Concurrently,  Arnos extended  a $42.7 million  loan to Operating  LLC under the
amended credit facility; Operating LLC then distributed $42.7 million to Holding
LLC who, thereafter, made a $42.7 million priority distribution to the  Company.
The  Company utilized  these funds  to pay the  entire amount  of the Reinstated
Interest and interest accrued thereon outstanding on March 27, 2003.

     In August  2001,  the Company  redeemed  both $16.4  million  of  principal
outstanding  under  the  senior  note  obligations,  and  $4.8  million  of  the
Reinstated Interest for  $10.5 million.  The Company paid  two Arnos  affiliates
approximately  $.4  million  in current  interest  on the  redeemed  senior note
obligations at  the  date  of  redemption related  to  interest  owed  from  the
semi-annual  interest payment date of May 1,  2001 to the date of redemption. As
this was a partial  redemption of the  Senior Notes, it was  accounted for as  a
modification  of  terms  that  changes  the  amounts  of  future  cash payments.
Accordingly, the excess of redeemed  principal and interest over the  redemption
payment  of $10.5 million will  be amortized as a  reduction to interest expense
over the remaining life of the senior note obligations. In connection with  this
transaction,  the  Company  borrowed  $10.9 million  under  its  existing credit
facility with Arnos.

     Although the Company is highly leveraged following confirmation of the Plan
of Reorganization,  the Company  expects that  availability under  its  existing
credit   facility,  expected  cash  flows  from  guaranteed  payments,  priority
distributions and management fees will be sufficient to fund its operations  and
debt service. However, no assurances can be given that Holding LLC will generate
sufficient  cash flows  to make  these payments and  in that  event, the Company
would not be able to meet its obligations.

                                        30
<PAGE>

FINANCIAL REPORTING IMPACT OF FULL COST METHOD OF ACCOUNTING

     Prior to the LLC Contribution, the Company followed the full cost method of
accounting for oil and natural gas  properties. Under such method, the net  book
value  of such properties, less related deferred  income taxes, may not exceed a
calculated "ceiling." The ceiling is the estimated after-tax future net revenues
from proved  oil and  natural gas  properties, discounted  at 10%  per year.  In
calculating  future net revenues, prices and costs  in effect at the time of the
calculation are held constant indefinitely,  except for changes which are  fixed
and  determinable by existing contracts.  The net book value  is compared to the
ceiling on a quarterly  and yearly basis.  The excess, if any,  of the net  book
value above the ceiling is required to be written off as a non-cash expense. The
Company  had no ceiling limitation writedowns during 1999 or 2000. There will be
no writedowns in future periods under the full cost method of accounting due  to
the LLC Contribution in 2001.

CRITICAL ACCOUNTING POLICIES

     The  Company follows certain significant accounting policies when preparing
its consolidated financial statements. A  complete summary of these policies  is
included in Note 1 of Notes to Consolidated Financial Statements.

     Certain  of  the  policies  require  management  to  make  significant  and
subjective estimates, which are sensitive  to deviations of actual results  from
management's  assumptions. In  particular, management  makes estimates regarding
the total amount and  timing of guaranteed  payments and priority  distributions
that will actually be received from NEG Holding LLC in determining the amount of
accretion  income to  be recorded;  and, estimates  of future  taxable income in
determining the amount of deferred tax assets which are more likely than not  be
realized.

     Under  the  Holding  LLC Operating  Agreement,  the Company  is  to receive
guaranteed payments  in addition  to a  priority distribution  amount of  $202.2
million  before Gascon receives  any monies. The priority  distribution is to be
made on or before  November 1, 2006.  Guaranteed payments are to  be paid, on  a
semi-annual basis, based on an annual interest rate of 10.75% of the outstanding
priority  distribution  amount.  The  guaranteed  payments  are  expected  to be
sufficient to make  the interest payments  on the Senior  Notes until their  due
date  of  2006.  After  the  payments  to  the  Company,  Gascon  is  to receive
distributions equivalent  to the  priority  distribution amount  and  guaranteed
payments  plus  other  amounts  as  defined in  the  NEG  Holding  LLC Operating
Agreement referred herein. Following the above distributions to the Company  and
Gascon,  additional distributions,  if any,  are to  be made  in accordance with
their respective capital accounts. Because  of the substantial uncertainty  that
the  Company will  receive any distributions  above the  priority and guaranteed
payment amounts, the  Company accounts for  its investment in  Holding LLC as  a
preferred investment whereby guaranteed payment amounts received and receipts of
the  priority distribution amount are recorded  as reductions in the investment,
and income is  recognized from accretion  of the investment  up to the  priority
distribution  amount including  the guaranteed  payments (based  on the interest
method) and the residual interest attributable to Holding LLC will be valued  at
zero.  The ability of Holding  LLC to make the  guaranteed payments and priority
distributions may be significantly impacted by the market prices of natural  gas
and  crude oil and  the ability of  Holding LLC to  effectively replace existing
natural gas and  crude oil reserves.  Current estimates could  change if  future
events are different than assumed by management.

     Upon the formation of Holding LLC, management again evaluated all evidence,
both  positive and  negative, in  determining whether  a valuation  allowance to
reduce the carrying value of deferred tax assets was still needed and concluded,
based on the projected allocations of taxable income by Holding LLC, the company
more likely than not will realize a partial benefit from the loss carryforwards.
Ultimate realization of the  deferred tax asset is  dependent upon, among  other
factors,  the Company's ability to generate sufficient taxable income within the
carryforward periods  and is  subject to  change depending  on the  tax laws  in
effect in the years in which the carryforwards are used.

                                        31
<PAGE>

RECENT ACCOUNTING PRONOUNCEMENTS

     In  June  2001,  the  Financial Accounting  Standards  Board  (FASB) issued
Statement of  Financial Accounting  Standards (SFAS)  No. 143,  "Accounting  for
Asset Retirement Obligations" ("SFAS 143"). SFAS No. 143 requires the Company to
record  the fair value of  an asset retirement obligation  as a liability in the
period in which it incurs a  legal obligation associated with the retirement  of
tangible  long-lived  assets  that result  from  the  acquisition, construction,
development, and/or normal use  of the assets. It  also requires the Company  to
record  a corresponding asset  that is depreciated  over the life  of the asset.
Subsequent to the initial  measurement of the  asset retirement obligation,  the
obligation  will be adjusted at the end of each period to reflect the passage of
time and changes in the estimated  future cash flows underlying the  obligation.
The  Company is required to adopt SFAS No.  143 on January 1, 2003. The adoption
of SFAS  No.  143  will have  no  material  impact on  the  Company's  financial
statements.

     On  October 3,  2001, the  FASB issued  SFAS No.  144, "Accounting  for the
Impairment or  Disposal  of  Long-Lived Assets"  ("SFAS  144")  which  addresses
financial  accounting and reporting for the impairment or disposal of long-lived
assets. SFAS No. 144 is effective for fiscal years beginning after December  15,
2001,  and interim  periods within those  fiscal years  with earlier application
encouraged. This  statement  will  have  no material  impact  on  the  Company's
financial statements.

     In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation  -- Transition and  Disclosure, an amendment  of FASB Statement No.
123" ("SFAS 123"). SFAS No. 148  amends FASB Statement No. 123, "Accounting  for
Stock-Based  Compensation", to provide  alternative methods of  transition for a
voluntary change to the fair value method of accounting for stock-based employee
compensation. In addition, SFAS  No. 148 amends  the disclosure requirements  of
Statement  No. 123 to  require prominent disclosures in  both annual and interim
financial statements. Certain of the  disclosure modifications are required  for
fiscal  years ending after December 15, 2002.  The adoption of SFAS No. 148 will
have no material impact on the Company's financial statements.

     In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. ("SFAS 146") SFAS No. 146 addresses  financial
accounting  and reporting for costs associated  with exit or disposal activities
and  nullifies  Emerging  Issues  Task   Force  (EITF)  Issue  94-3,   Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity.  The provisions of  this Statement are effective  for exit or disposal
activities that are initiated  after December 31,  2002, with early  application
encouraged.  The adoption  of SFAS No.  146 is  not expected to  have a material
effect on the Company's financial statements.

     In November  2002,  the  FASB issued  Interpretation  No.  45,  Guarantor's
Accounting  and  Disclosure  Requirements  for  Guarantees,  Including  Indirect
Guarantees of Indebtedness to Others,  an interpretation of FASB Statements  No.
5,   57  and  107  and  a  rescission   of  FASB  Interpretation  No.  34.  This
Interpretation elaborates on the  disclosures to be made  by a guarantor in  its
interim  and annual financial statements  about its obligations under guarantees
issued. The  Interpretation  also clarifies  that  a guarantor  is  required  to
recognize,  at inception of a  guarantee, a liability for  the fair value of the
obligation undertaken. The initial recognition and measurement provisions of the
Interpretation are applicable  to guarantees issued  or modified after  December
31,  2002  and are  not  expected to  have a  material  effect on  the Company's
financial statements. The  disclosure requirements are  effective for  financial
statements of interim and annual periods ending after December 31, 2002.

     In  January 2003, the FASB issued  Interpretation No. 46, "Consolidation of
Variable  Interest   Entities,  an   interpretation  of   ARB  No.   51".   This
Interpretation  addresses the consolidation by  business enterprises of variable
interest entities as defined in  the Interpretation. The Interpretation  applies
immediately  to variable interests  in variable interest  entities created after
January 31,  2003,  and to  variable  interests in  variable  interest  entities
obtained after January 31, 2003. The Interpretation requires certain disclosures
in  financial  statements issued  after  January 31,  2003  if it  is reasonably
possible that  the  Company  will  consolidate  or  disclose  information  about
variable  interest  entities  when  the  Interpretation  becomes  effective. The
Company is currently evaluating the impact of the adoption of Interpretation No.
46 and it is reasonably possible that Holding LLC is a variable interest entity.
                                        32
<PAGE>

CHANGES IN PRICES

     Oil and natural gas prices are  subject to seasonal and other  fluctuations
that are beyond the Company's ability to control or predict.

INFLATION

     Although  certain of the  Company's costs and expenses  are affected by the
level of inflation, inflation has not had a significant effect on the  Company's
results of operations during the three years ended December 31, 2002.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     In  the past, the Company utilized various hedging instruments, principally
to control risk related to future oil  and natural gas prices. While the use  of
hedge  contracts can limit the downside risk  of adverse price movements, it may
also limit future gains from  favorable movements. The Company addressed  market
risk  by selecting instruments whose value fluctuations correlated strongly with
the underlying  commodity.  Credit risk  related  to derivative  activities  was
managed  by  requiring  minimum credit  standards  for  counterparties, periodic
settlements, and market to market valuations.

     No hedge assets, or liabilities have been recorded by the Company as all of
the hedges  entered into  by the  Company  were contributed  to Holding  LLC  in
September 2001. (Note 1)

     The   Company's  exposure  to  interest  rates  relates  primarily  to  its
borrowings under  its  credit  facility.  The Company  does  not  currently  use
derivatives  to manage  interest rate  risk. Interest  is payable  on borrowings
under the credit facility based on a floating rate. If short-term interest rates
average 10%  higher in  2003 than  they  were in  2002, the  Company's  interest
expense  would increase by approximately $.1 million. This amount was determined
by applying the hypothetical interest  rate change to the Company's  outstanding
borrowings under the credit facility at December 31, 2002.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The  Financial  Statements  of the  Company  required  by this  Item  8 are
included as part of Item 14(a)(1) hereof. These Financial Statements also  serve
as  financial statements required pursuant  to Rule 15d-21 and  Form 11-K of the
Exchange Act for the National Energy  Group, Inc. Employee Stock Purchase  Plan,
as such Plan invests solely in the Company's common stock.

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

     As  discussed in our  Form 8-K dated  April 26, 2001,  the Company replaced
Ernst & Young LLP  with KPMG LLP  as the principal  independent auditor for  the
fiscal year ending December 31, 2001.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The  information required by this Item 10  will be provided in the sections
entitled  "Director  Election",  "Management"  and  "Certain  Relationships  and
Related  Transactions" in the Company's definitive  Proxy Statement for its 2003
Annual Meeting  of Shareholders  (the "Proxy  Statement"), and  is  incorporated
herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

     The  information required by this  Item 11 will be  provided in the section
entitled, "Executive  Compensation" in  the Company's  Proxy Statement,  and  is
incorporated herein by reference.

                                        33
<PAGE>

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The  information required by this  item 12 will be  provided in the section
entitled "Security Ownership of Certain Beneficial Owners and Management" in the
Company's Proxy Statement, and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by  this Item 13 will  be provided in the  section
entitled "Certain Relationships and Related Transactions" in the Company's Proxy
Statement, and is incorporated herein by reference.

ITEM 14. CONTROLS AND PROCEDURES

     Our  Board of Directors  adopted a policy  designed to establish disclosure
controls and procedures that are  adequate to provide reasonable assurance  that
we   will  be  able  to  collect,   process  and  disclose  both  financial  and
non-financial information, on a timely basis,  in our reports to the  Securities
and  Exchange Commission ("SEC") and other communications with our stockholders.
Disclosure controls and  procedures include  all processes  necessary to  ensure
that material information is recorded, processed, summarized and reported within
the  time periods specified in the SEC's rules and forms, and is accumulated and
communicated  to  our  management,  including  our  chief  executive  and  chief
accounting officer, to allow timely decisions regarding required disclosures.

     With respect to our disclosure controls and procedures:

     - We  have evaluated the  effectiveness of the design  and operation of our
       disclosure controls and procedures within 90 days prior to the filing  of
       this report;

     - This  evaluation  was  conducted  under  the  supervision  and  with  the
       participation of our management, including our chief executive and  chief
       accounting officer; and

     - It  is the conclusion of our  chief executive and chief financial officer
       that these disclosure controls and procedures operate such that  material
       information  flows to the appropriate collection and disclosure points in
       a timely manner and are  effective in ensuring that material  information
       is  accumulated and communicated  to our management and  is made known to
       the chief executive and chief accounting officer, particularly during the
       period in which this report was prepared, as appropriate to allow  timely
       decisions regarding required disclosures.

                                    PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

     (a) The following documents are filed as part of this report.

          1.  Financial  Statements:    See Index  to  Financial  Statements and
     Financial Statement Schedules on page F-1 of this report.

          2. Financial Statement Schedules:   See Index to Financial  Statements
     and Financial Statement Schedules on page F-1 of this report.

          3.  Exhibits:  The  following documents are filed  as exhibits to this
     report:

<Table>
<C>     <S>
 2.1    Debtors Joint Plan of Reorganization under Chapter 11 of the
        Bankruptcy Code dated May 12, 2000(12)
 2.2    Debtor's and  Official  Committee  of  Unsecured  Creditors'
        Joint   Disclosure  Statement  under  Section  1125  of  the
        Bankruptcy  Code   Regarding  the   Debtor's  and   Official
        Committee    of   Unsecured   Creditors'   Joint   Plan   of
        Reorganization under  Chapter  11 of  the  Bankruptcy  Code,
        dated May 12 2000(12)
</Table>

                                        34
<PAGE>
<Table>
<C>     <S>
 3.1    Restated   Certificate  of  Incorporation   filed  with  the
        Secretary of State of Delaware on October 16, 2000(13)
 3.2    By-laws of the Company(2)
 4.1    Indenture dated as of November  1, 1996, among the  Company,
        National  Energy Group of  Oklahoma, Inc. (the "Guarantor"),
        formerly NEG-OK, and Bank One, Columbus, N.A.(3)
 4.2    Indenture dated August 21, 1997, among the Company and  Bank
        One, N.A.(9)
 4.3    Instrument of Resignation, Appointment and Acceptance, dated
        October  23, 1998, between  the Company, Bank  One, N.A. and
        Norwest Bank Minnesota, N.A.(11)
10.1    Crude Oil Purchase Contract, dated February 8, 1993, between
        the Company and Plains Marketing and Transportation Inc. and
        the predecessor contract, the  Crude Oil Purchase  Contract,
        dated  November 12,  1991, between  Sunnybrook Transmission,
        Inc. and TriSearch Inc.(4)
10.2    National Energy  Group,  Inc.  1996  Incentive  Compensation
        Plan(7)
10.3    National Energy Group, Inc. Employee Stock Purchase Plan(8)
10.4    National Energy Group, Inc. Employee Severance Policy(11)
10.5    Restated Loan Agreement dated August 29, 1996 among Bank One
        and  Credit Lyonnais New York Branch ("Credit Lyonnais") and
        the  Company,  NEG-OK   and  Boomer  Marketing   Corporation
        ("Boomer")(1)
10.6    $50,000,000  Revolving Note dated August 29, 1996 payable to
        Bank One(1)
10.7    $50,000,000 Revolving Note dated August 29, 1996 payable  to
        Credit Lyonnais(1)
10.8    Assignment of $50,000,000 Revolving Note to Arnos Corp. from
        Bank One, Texas, N.A.(11)
10.9    Assignment of $50,000,000 Revolving Note to Arnos Corp. from
        Credit Lyonnais New York Branch(11)
10.10   Unlimited  Guaranty of NEG-OK dated  August 29, 1996 for the
        benefit of Bank One(1)
10.11   Unlimited Guaranty of NEG-OK, dated August 29, 1996 for  the
        benefit of Credit Lyonnais(1)
10.12   Unlimited  Guaranty of Boomer dated  August 29, 1996 for the
        benefit of Bank One(1)
10.13   Unlimited Guaranty of Boomer dated  August 29, 1996 for  the
        benefit of Credit Lyonnais(1)
10.14   First Amendment to Restated Loan Agreement dated October 31,
        1996  among Bank  One and  Credit Lyonnais  and the Company,
        Guarantor and Boomer(5)
10.15   Second Amendment to  Restated Loan  Agreement dated  October
        31,  1996,  among  Bank  One  and  Credit  Lyonnais  and the
        Company, Guarantor and Boomer(6)
10.16   Third Amendment to Restated Loan Agreement dated October 31,
        1996, among Bank  One and Credit  Lyonnais and the  Company,
        Guarantor and Boomer(6)
10.17   Fourth  Amendment to  Restated Loan  Agreement dated October
        31, 1996,  among  Bank  One  and  Credit  Lyonnais  and  the
        Company, Guarantor and Boomer(10)
10.18   Multi-State  Assignment  Agreement dated  December  22, 1998
        between Bank  One, Texas,  N.A.,  Credit Lyonnais  New  York
        Branch and Arnos Corp.(11)
10.19   Multi-State    Assignment   Agreement,   LaFourche   Parish,
        Louisiana, dated December 22, 1998, between Bank One, Texas,
        N.A., Credit Lyonnais New York Branch and Arnos Corp.(11)
10.20   Multi-State   Assignment   Agreement,   Iberville    Parish,
        Louisiana, dated December 22, 1998, between Bank One, Texas,
        N.A., Credit Lyonnais New York Branch and Arnos Corp.(11)
10.21   Oklahoma  Assignment  Agreement,  dated  December  22, 1998,
        between Bank  One, Texas,  N.A.,  Credit Lyonnais  New  York
        Branch and Arnos Corp.(11)
10.22   Crude Oil Swap agreement among Enron North America Corp. and
        the   Company  covering  April   1,  2001  through  December
        31,2001(14)
10.23   Crude Oil Swap agreement among Enron North America Corp. and
        the Company covering  January 1, 2002  through December  31,
        2002(14)
10.24   Crude Oil Swap agreement among Enron North America Corp. and
        the  Company covering  January 1, 2003  through December 31,
        2003(14)
</Table>

                                        35
<PAGE>

<Table>
<S>           <C>
       10.25  Crude  Oil Swap agreement among Enron North America Corp. and the Company covering January 1, 2004 through
              December 31, 2004(14)
       10.26  Natural Gas Swap agreement among  Enron North America Corp. and  the Company covering April, 2001  through
              December 31, 2004(14)
       10.27  Fifth Amendment to Restated Loan Agreement dated August 1, 2001, among the Company and Arnos Corp.(15)
       10.28  Debt Purchase Agreement dated August 1, 2001 between the Company and High River Limited Partnership.(15)
       10.29  Debt Purchase Agreement dated August 1, 2001 between the Company and High Coast Limited Partnership.(15)
       10.30  Debt Purchase Agreement dated August 1, 2001 between the Company and High River Limited Partnership.(13)
       10.31  Debt Purchase Agreement dated August 1, 2001 between the Company and High Coast Limited Partnership.(13)
       10.32  NEG Holding LLC Operating Agreement dated May 1, 2001 between the Company and Gascon Partners.(14)
       10.33  NEG Operating LLC Operating Agreement dated May 1, 2001 executed by NEG Holding LLC.(14)
       10.34  Shana  National LLC  Amended and  Restated Operating Agreement  dated September  12, 2001  executed by NEG
              Operating LLC.(14)
       10.35  Management Agreement dated September 12, 2001 between the Company and NEG Operating LLC.(14)
       10.36  Master Conveyance dated September 12, 2001 executed by the Company in favor of NEG Holding LLC.(14)
       10.37  Master Conveyance dated September 12, 2001 executed by Gascon Partners in favor of NEG Holding LLC.(14)
       10.38  Master Conveyance dated September 12, 2001 executed by NEG Holding LLC in favor of NEG Operating LLC.(14)
       10.39  Master Conveyance  dated September  12,  2001 executed  by  Shana Petroleum  Company  in favor  of  Gascon
              Partners.(14)
       10.40  Master  Conveyance dated September 12, 2001 executed by Shana Petroleum Company in favor of Shana National
              LLC.(14)
       10.41  Final Decree of Bankruptcy Court(17)
       10.42  Sixth Amendment to Restated Loan Agreement dated December 15, 2001, among the Company and Arnos Corp.(18)
       10.43  Assignment of  Restated Loan  Agreement dated  March 26,  2003, among  Arnos Corp.,  the Company  and  NEG
              Operating LLC.(18)
       10.44  Seventh  Amendment to Restated  Loan Agreement dated March  26, 2003, among Arnos  Corp. and NEG Operating
              LLC.(18)
       12.1   Computation of Ratio of Earnings to Fixed Charges(18)
       23.2   Consent of Netherland Sewell & Associates, Inc., Independent Engineers(18)
       23.3   Consent of Prator Bett, LLC, Independent Engineers(18)
       24.1   Power of Attorney (included in signature pages to this Form 10-K)(18)
       99.1   Certification of Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002, 18  U.S.C.
              Section 1350(18)
       99.2   Certification  of Chief Financial and  Strategic Officer pursuant to Section  906 of Sarbanes-Oxley Act of
              2002, 18 U.S.C. Section 1350(18)
</Table>

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

 (1) Incorporated by  reference to  the Company's  Current Report  on Form  8-K,
     dated August 29, 1996.

 (2) Incorporated  by reference to the  Company's Registration Statement on Form
     S-4 (No. 33-38331), dated April 23, 1991.

                                        36
<PAGE>

 (3) Incorporated  by reference to  the Company's Quarterly  Report on Form 10-Q
     for the quarter ended September 30, 1996.

 (4) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
     the year ended December 31, 1992.

 (5) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
     the year ended December 31, 1995.

 (6) Incorporated by reference to  the Company's Quarterly  Report on Form  10-Q
     for the quarter ended March 31, 1997.

 (7) Incorporated  by reference  to the Company's  Schedule 14A  filed April 25,
     1997.

 (8) Incorporated by  reference to  the Company's  Form S-8  filed December  23,
     1997.

 (9) Incorporated  by reference to the Company's Form S-4 (No. 333-38075), filed
     October 16, 1997.

(10) Incorporated by reference to the Company's  Annual Report on Form 10-K  for
     the year ended December 31, 1997.

(11) Incorporated  by reference to the Company's  Annual Report on Form 10-K for
     the year ended December 31, 1998.

(12) Incorporated by reference to  the Company's Quarterly  Report on Form  10-Q
     for the quarter ended March 31, 2000.

(13) Incorporated  by reference to  the Company's Quarterly  Report on Form 10-Q
     for the quarter ended September 30, 2000.

(14) Incorporated by reference to the Company's  Annual Report on Form 10-K  for
     the year Ended December 31, 2000.

(15) Incorporated  by reference to  the Company's Quarterly  Report on Form 10-Q
     for the quarter ended June 30, 2001.

(16) Incorporated by reference to  the Company's Quarterly  Report on Form  10-Q
     for the quarter ended September 30, 2001.

(17) Incorporated  by reference to the Company's  Annual Report on Form 10-K for
     the year ended December 31, 2001.

(18) Filed herewith.

     (b) No reports on Form 8-K were filed during the quarter ended December 31,
2002

                                        37
<PAGE>

GLOSSARY

     Wherever used herein, the following terms shall have the meaning specified.

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

     Bcf -- One billion cubic feet.

     Bcfe -- One billion cubic feet of Natural Gas Equivalent.

     Behind  the  Pipe  --  Hydrocarbons  in  a  potentially  producing  horizon
penetrated by a well bore the production of which has been postponed pending the
production  of hydrocarbons from another formation  penetrated by the well bore.
The hydrocarbons are classified as proved but non-producing reserves.

     Developed Acreage -- Acres which  are allocated or assignable to  producing
wells or wells capable of production.

     Development  Well -- A  well drilled within  the proved area  of an oil and
natural gas  reservoir  to  the  depth of  stratigraphic  horizon  known  to  be
productive.

     Dry Well -- A well found to be incapable of producing either oil or natural
gas  in sufficient  quantities to  justify completion as  an oil  or natural gas
well.

     Exploratory Well -- A well drilled to  find and produce oil or natural  gas
in  an unproved area, to find a new  reservoir in a field previously found to be
productive of oil  or natural gas  in another  reservoir, or to  extend a  known
reservoir.

     Gross Acres or Gross Wells -- The total acres or wells, as the case may be,
in which a Working Interest is owned.

     Infill Well -- A well drilled between known producing wells.

     Mbbl -- One thousand Bbl.

     Mcf -- One thousand cubic feet.

     Mcfe -- One thousand cubic feet of Natural Gas Equivalent.

     Mmcf -- One million cubic feet.

     Mmcfe -- One million cubic feet of Natural Gas Equivalent.

     Natural  Gas Equivalent -- The ratio of one  Bbl of crude oil to six Mcf of
natural gas.

     Net Acres or Net Wells -- The sum of the fractional Working Interests owned
in Gross Acres or Gross Wells.

     NYMEX -- New York Mercantile Exchange.

     Oil, Gas and Mineral Lease  -- An instrument by  which a mineral fee  owner
grants  to a lessee the right  for a specific period of  time to explore for oil
and natural gas  underlying the  lands covered  by the  lease and  the right  to
produce  any oil and natural gas so discovered generally for so long as there is
production in economic quantities from such lands.

     OPEC -- Organization of Petroleum Exporting Countries.

     Overriding Royalty Interest --  A fractional undivided  interest in an  oil
and  natural gas property entitling the owner of  a share of oil and natural gas
production, in addition to the usual royalty paid to the owner, free of costs of
production.

     PDNP -- Proved developed, nonproducing, or Behind the Pipe reserves.

     Productive Well -- A well that is  producing oil or natural gas or that  is
capable of production.

                                        38
<PAGE>

     Proved Developed Producing Reserves -- Proved reserves that can be expected
to be recovered from currently producing zones under the continuation of present
operating methods.

     Proved  Developed Reserves -- Reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods.

     Proved Reserves -- The estimated quantities of crude oil, natural gas,  and
natural  gas  liquids which  geological  and engineering  data  demonstrate with
reasonable certainty to  be recoverable  in future years  from known  reservoirs
under existing economic and operating conditions.

     Proved  Undeveloped Reserves -- Reserves that  are expected to be recovered
from new wells on undrilled acreage,  or from existing wells where a  relatively
major expenditure is required for completion.

     PUD -- See Proved Undeveloped Reserves.

     PV  10% -- The discounted future net  cash flows for Proved Reserves of oil
and natural gas  computed on  the same basis  as the  Standardized Measure,  but
without  deducting  income  taxes, which  is  not in  accordance  with generally
accepted accounting principles.  PV 10%  is an important  financial measure  for
evaluating  the  relative significance  of oil  and  natural gas  properties and
acquisitions, but should not be construed as an alternative to the  Standardized
Measure   (as  determined  in  accordance  with  generally  accepted  accounting
principles).

     Revenue Interest  --  The interest  in  a lease  or  well that  receives  a
proportionate share of all revenues from that lease or well as identified in the
division order.

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

     Secondary  Recovery -- A method of oil  and natural gas extraction in which
energy sources extrinsic to the reservoir are utilized.

     Standardized Measure --  The estimated  future net cash  flows from  Proved
Reserves  of oil and  natural gas computed  using prices and  costs, at the date
indicated, after income taxes and discounted at 10%.

     Undeveloped Acreage -- Lease acreage on  which wells have not been  drilled
or  completed  to  a  point  that  would  permit  the  production  of commercial
quantities of oil and  natural gas regardless of  whether such acreage  contains
Proved Reserves.

     Working  Interest -- The operating interest which gives the owner the right
to participate in the drilling,  producing, and conducting operating  activities
on  the  property and  a share  of  all costs  of exploration,  development, and
operations and all risks in connection therewith.

                                        39
<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.

                                          NATIONAL ENERGY GROUP, INC.

                                          By:     /s/ BOB G. ALEXANDER
                                            ------------------------------------
                                                      Bob G. Alexander
                                               President and Chief Executive
                                                           Officer

March 31, 2003

                                          By:     /s/ RANDALL D. COOLEY
                                            ------------------------------------
                                                     Randall D. Cooley
                                             Vice President and Chief Financial
                                                           Officer

March 31, 2003

                        POWER OF ATTORNEY AND SIGNATURES

     The  undersigned  directors and  officers  of National  Energy  Group, Inc.
hereby constitute and appoint Bob G. Alexander  with full power to act and  with
full   power   of  substitution   and  resubstitution,   our  true   and  lawful
attorney-in-fact with full power to execute in our name and on our behalf in the
capacities indicated below any and all amendments to this Form 10-K and to  file
the  same, with all exhibits thereto and other documents in connection therewith
with  the   Commission,  and   hereby   ratify  and   confirm  all   that   such
attorney-in-fact,  which he or his  substitute shall lawfully do  or cause to be
done by virtue hereof.

     Pursuant to the requirements of the  Securities Exchange Act of 1934,  this
report  has been signed by the following persons on behalf of the registrant and
in the capacities on March 31, 2003.

<Table>
<S>     <C>                                          <C>

               /s/ BOB G. ALEXANDER                   President, Chief Executive Officer and Director
 ------------------------------------------------
                 Bob G. Alexander


               /s/ MARTIN L. HIRSCH                                       Director
 ------------------------------------------------
                 Martin L. Hirsch


                /s/ ROBERT H. KITE                                        Director
 ------------------------------------------------
                  Robert H. Kite


              /s/ ROBERT J. MITCHELL                                      Director
 ------------------------------------------------
                Robert J. Mitchell


              /s/ JACK G. WASSERMAN                                       Director
 ------------------------------------------------
                Jack G. Wasserman
</Table>

                                        40
<PAGE>

                                 CERTIFICATIONS

I Bob G. Alexander, certify that:

     1. I have reviewed this annual report  on the Form 10-K of National  Energy
Group, Inc.

     2.  Based on my knowledge,  this annual report does  not contain any untrue
statement of a material fact or omit to state a material fact necessary to  make
the  statements made, in light of  the circumstances under which such statements
were made, not  misleading with  respect to the  period covered  by this  annual
report;

     3.  Based on  my knowledge, the  financial statements,  and other financial
information included  in this  annual  report, fairly  present in  all  material
respects  the financial condition,  results of operations and  cash flows of the
registrant as of, and for, the periods presented in this annual report;

     4. The  registrant's other  certifying officer  and I  are responsible  for
establishing  and maintaining disclosure controls  and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

          (a) designed such  disclosure controls and  procedures to ensure  that
     material  information relating  to the registrant,  is made known  to us by
     others within those entities, particularly during the period in which  this
     annual report is being prepared;

          (b)  evaluating  the  effectiveness  of  the  registrant's  disclosure
     controls and procedures as  of a date  within 90 days  prior to the  filing
     date of this annual report (the "Evaluation Date") and

          (c)  presented  in  this  annual  report  our  conclusions  about  the
     effectiveness of  the  disclosure  controls and  procedures  based  on  our
     evaluation as of the Evaluation Date;

     5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of  registrant's  board  of  directors  (or  persons  performing  the equivalent
function):

          (a) all  significant  deficiencies  in  the  design  or  operation  of
     internal  controls which could adversely affect the registrant's ability to
     record, process, summarize  and report financial  data and have  identified
     for the registrant's auditors any material weaknesses in internal controls;
     and

          (b)  any fraud, whether  or not material,  that involves management or
     other employees who have  a significant role  in the registrant's  internal
     controls; and

     6.  The registrant's other certifying officer  and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

                                          By:     /s/ BOB G. ALEXANDER
                                            ------------------------------------
                                                      Bob G. Alexander
                                                  Chief Executive Officer

March 31, 2003

                                        41
<PAGE>

                                 CERTIFICATIONS

I Randall D. Cooley, certify that:

     1. I have reviewed this annual report  on the Form 10-K of National  Energy
Group, Inc.

     2.  Based on my knowledge,  this annual report does  not contain any untrue
statement of a material fact or omit to state a material fact necessary to  make
the  statements made, in light of  the circumstances under which such statements
were made, not  misleading with  respect to the  period covered  by this  annual
report;

     3.  Based on  my knowledge, the  financial statements,  and other financial
information included  in this  annual  report, fairly  present in  all  material
respects  the financial condition,  results of operations and  cash flows of the
registrant as of, and for, the periods presented in this annual report;

     4. The  registrant's other  certifying officer  and I  are responsible  for
establishing  and maintaining disclosure controls  and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

          (a) designed such  disclosure controls and  procedures to ensure  that
     material  information relating  to the registrant,  is made known  to us by
     others within those entities, particularly during the period in which  this
     annual report is being prepared;

          (b)  evaluating  the  effectiveness  of  the  registrant's  disclosure
     controls and procedures as  of a date  within 90 days  prior to the  filing
     date of this annual report (the "Evaluation Date") and

          (c)  presented  in  this  annual  report  our  conclusions  about  the
     effectiveness of  the  disclosure  controls and  procedures  based  on  our
     evaluation as of the Evaluation Date;

     5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of  registrant's  board  of  directors  (or  persons  performing  the equivalent
function):

          (a) all  significant  deficiencies  in  the  design  or  operation  of
     internal  controls which could adversely affect the registrant's ability to
     record, process, summarize  and report financial  data and have  identified
     for the registrant's auditors any material weaknesses in internal controls;
     and

          (b)  any fraud, whether  or not material,  that involves management or
     other employees who have  a significant role  in the registrant's  internal
     controls; and

     6.  The registrant's other certifying officer  and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

                                          By:     /s/ RANDALL D. COOLEY
                                            ------------------------------------
                                                     Randall D. Cooley
                                                  Chief Financial Officer

March 31, 2003

                                        42
<PAGE>

        INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

                              FINANCIAL STATEMENTS

<Table>
<Caption>
                                                              PAGE
                                                              ----
<S>                                                           <C>
NATIONAL ENERGY GROUP, INC.
Report of Independent Auditors..............................   F-2
Balance Sheets as of December 31, 2001 and 2002.............   F-4
Statements of Operations for the years ended December 31,
  2000, 2001 and 2002.......................................   F-5
Statements of Cash Flows for the years ended December 31,
  2000, 2001 and 2002.......................................   F-6
Statements of Stockholders' Equity (Deficit) for the years
  ended December 31, 2000, 2001 and 2002....................   F-7
Notes to Financial Statements...............................   F-8
NEG HOLDING LLC
Report of Independent Auditors..............................  F-25
Consolidated Balance Sheets as of December 31, 2001 and
  2002......................................................  F-26
Consolidated Statements of Operations for the years ended
  December 31, 2001 and 2002................................  F-27
Consolidated Statements of Cash Flows for years ended
  December 31, 2001 and 2002................................  F-28
Consolidated Statements of Members' Equity for the years
  ended December 31, 2001 and 2002..........................  F-29
Notes to Consolidated Financial Statements..................  F-30
</Table>

FINANCIAL STATEMENT SCHEDULES

     All schedules  for which  provision is  made in  the applicable  accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.

                                       F-1
<PAGE>

                         REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders
National Energy Group, Inc.

     We  have audited the accompanying balance  sheets of National Energy Group,
Inc. ("the  Company"),  as  of December  31,  2002  and 2001,  and  the  related
statements of operations, stockholders' equity (deficit), and cash flows for the
years  then  ended. These  financial statements  are  the responsibility  of the
Company's management.  Our responsibility  is  to express  an opinion  on  these
financial statements based on our audits.

     We  conducted our  audits in  accordance with  auditing standards generally
accepted in the United States of  America. Those standards require that we  plan
and  perform  the  audits  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 financial position of National Energy Group, Inc.,
as of December 31, 2002 and 2001, and the results of its operations and its cash
flows for  the  years  then  ended, in  conformity  with  accounting  principles
generally accepted in the United States of America.

                                          /s/ KPMG LLP

Dallas, Texas
March 27, 2003

                                       F-2
<PAGE>

                         REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders
National Energy Group, Inc.

     We  have audited  the accompanying  consolidated statements  of operations,
stockholders' equity (deficit), and  cash flows of  National Energy Group,  Inc.
for  the  year  ended December  31,  2000.  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 audit.

     We  conducted  our audit  in accordance  with auditing  standards generally
accepted in the United States. 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 audit  provides a reasonable basis
for our opinion.

     In our opinion, the financial statements referred to above present  fairly,
in  all material respects, the consolidated results of operations, stockholders'
equity (deficit) and  cash flows  of National Energy  Group, Inc.  for the  year
ended  December  31, 2000,  in conformity  with accounting  principles generally
accepted in the United States.

                                          /s/ ERNST & YOUNG LLP

Dallas, Texas
April 16, 2001

                                       F-3
<PAGE>

                          NATIONAL ENERGY GROUP, INC.

                                 BALANCE SHEETS

<Table>
<Caption>
                                                                      DECEMBER 31,
                                                              -----------------------------
                                                                  2001            2002
                                                              -------------   -------------
<S>                                                           <C>             <C>
                                          ASSETS
Current assets:
  Cash and cash equivalents.................................  $   3,090,361   $   3,477,250
  Accounts receivable -- other..............................             --          18,876
  Accounts receivable -- affiliates.........................      1,187,458         588,122
  Other.....................................................        187,202         319,409
                                                              -------------   -------------
          Total current assets..............................      4,465,021       4,403,657
Investment in NEG Holding LLC...............................     97,654,106     108,879,929
Deferred tax assets.........................................     30,589,443      25,521,738
                                                              -------------   -------------
          Total assets......................................  $ 132,708,570   $ 138,805,324
                                                              =============   =============

                      LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
  Accounts payable -- trade.................................  $      80,767   $      45,254
  Accrued interest on senior notes..........................      2,711,023      44,359,805
                                                              -------------   -------------
          Total current liabilities.........................      2,791,790      44,405,059
Long term liabilities:
  Credit facility...........................................     10,939,750      10,939,750
  Senior notes..............................................    148,637,000     148,637,000
  Long-term interest payable on senior notes................     42,893,815              --
  Deferred gain on senior note redemption...................      9,850,794       7,812,699
Commitments and contingencies
  Stockholders' equity (deficit):
  Common stock, $.01 par value:
     Authorized shares -- 100,000,000 at December 31, 2001
       and 15,000,000 at December 31, 2002; Issued and
       outstanding shares -- 11,190,650 at December 31, 2001
       and 2002.............................................        111,907         111,907
  Additional paid-in capital................................    123,020,121     123,020,121
  Accumulated deficit.......................................   (205,536,607)   (196,121,212)
                                                              -------------   -------------
          Total stockholders' equity (deficit)..............    (82,404,579)    (72,989,184)
                                                              -------------   -------------
          Total liabilities and stockholders' equity
            (deficit).......................................  $ 132,708,570   $ 138,805,324
                                                              =============   =============
</Table>

                            See accompanying notes.
                                       F-4
<PAGE>

                          NATIONAL ENERGY GROUP, INC.

                            STATEMENTS OF OPERATIONS

<Table>
<Caption>
                                                              YEAR ENDED DECEMBER 31,
                                                     ------------------------------------------
                                                         2000           2001           2002
                                                     ------------   ------------   ------------
<S>                                                  <C>            <C>            <C>
Revenues:
  Oil and natural gas sales........................  $ 51,014,416   $ 33,175,564   $         --
  Accretion of Investment in NEG Holding LLC.......            --      9,834,206     32,878,642
  Management fee...................................            --      2,699,372      7,637,285
                                                     ------------   ------------   ------------
     Total revenue.................................    51,014,416     45,709,142     40,515,927
Costs and expenses:
  Lease operating..................................     5,671,697      3,873,671             --
  Oil and natural gas production taxes.............     2,888,468      1,694,860             --
  Depreciation, depletion and amortization.........    11,043,872      6,162,698             --
  General and administrative.......................     4,526,883      5,931,228      7,104,849
                                                     ------------   ------------   ------------
     Total costs and expenses......................    24,130,920     17,662,457      7,104,849
                                                     ------------   ------------   ------------
Operating income...................................    26,883,496     28,046,685     33,411,078
Other income (expense):
  Interest expense.................................    (9,655,622)   (21,223,820)   (18,964,052)
  Interest income and other, net...................     1,671,092       (336,568)        36,074
                                                     ------------   ------------   ------------
Income before reorganization items and income
  taxes............................................    18,898,966      6,486,297     14,483,100
Reorganization items:
  Professional fees and other......................    (1,354,015)       236,130             --
  Interest earned on accumulating cash resulting
     from Chapter 11 proceedings...................     1,064,688             --             --
                                                     ------------   ------------   ------------
Income before income taxes.........................    18,609,639      6,722,427     14,483,100
Income tax benefit (expense).......................            --     30,589,443     (5,067,705)
                                                     ------------   ------------   ------------
Income before extraordinary item...................    18,609,639     37,311,870      9,415,395
Extraordinary loss on confirmation of Joint Plan...   (33,047,231)       (11,458)            --
                                                     ------------   ------------   ------------
Net income (loss) applicable to common
  stockholders.....................................  $(14,437,592)  $ 37,300,412   $  9,415,395
                                                     ============   ============   ============
Earnings per common share, basic and diluted Income
  before extraordinary item........................  $       2.71   $       3.33   $        .84
  Extraordinary loss on confirmation of Joint
     Plan..........................................         (4.81)          (.00)            --
                                                     ------------   ------------   ------------
  Net income (loss) per common share...............  $      (2.10)  $       3.33   $        .84
                                                     ============   ============   ============
Weighted average number of common shares
  outstanding......................................     6,875,640     11,190,650     11,190,650
                                                     ============   ============   ============
</Table>

                            See accompanying notes.
                                       F-5
<PAGE>

                          NATIONAL ENERGY GROUP, INC.

                            STATEMENTS OF CASH FLOWS

<Table>
<Caption>
                                                                       YEAR ENDED DECEMBER 31,
                                                              ------------------------------------------
                                                                  2000           2001           2002
                                                              ------------   ------------   ------------
<S>                                                           <C>            <C>            <C>
OPERATING ACTIVITIES
Income from operations (net of income tax)..................  $ 18,898,966   $ 37,075,740   $  9,415,395
Chapter 11 proceeding reorganization costs, net.............      (289,327)       224,672             --
Adjustments to reconcile income from operations to net cash
  provided by operating activities:
Depreciation and depletion..................................    10,922,806      6,162,698             --
Amortization of loan costs and issuance premium.............       121,066             --             --
Amortization of deferred compensation.......................        41,682             --             --
Deferred gain amortization -- interest reduction............            --       (849,205)    (2,038,095)
Accretion of Investment in NEG Holding LLC..................            --     (9,834,206)   (32,878,642)
Deferred income taxes.......................................            --    (30,589,443)     5,067,705
Change in fair market value of derivative contracts.........      (580,500)       716,454             --
Other.......................................................        30,952             --             --
Changes in operating assets and liabilities:
  Accounts receivable.......................................    (2,558,123)     9,602,161        580,460
  Drilling prepayments......................................            --       (406,322)            --
  Derivative deposit........................................            --       (500,000)            --
  Other current assets......................................      (541,294)       139,719       (132,207)
  Accounts payable and accrued liabilities..................    (2,214,951)      (204,782)    (1,280,546)
                                                              ------------   ------------   ------------
  Net cash provided by (used in) operating activities.......    23,831,277     11,537,486    (21,265,930)
                                                              ------------   ------------   ------------
INVESTING ACTIVITIES
Oil and natural gas acquisition, exploration, and
  development expenditures..................................   (14,089,999)   (27,363,808)            --
Purchases of other property and equipment...................      (247,084)       (29,056)            --
Proceeds from sale of marketable securities.................       413,147             --             --
Proceeds from sales of oil and natural gas properties.......     2,465,213        931,744             --
Guaranteed payment from NEG Holding LLC.....................            --      3,625,473     21,652,819
Investment in NEG Holding LLC...............................            --     (4,378,983)            --
Other.......................................................      (261,550)            --             --
                                                              ------------   ------------   ------------
  Net cash provided by (used in) investing activities.......   (11,720,273)   (27,214,630)    21,652,819
                                                              ------------   ------------   ------------
FINANCING ACTIVITIES
Proceeds from common stock issuance.........................     2,000,000             --             --
Repayment of credit facility................................            --    (25,000,000)            --
Proceeds from credit facility...............................            --     10,939,750             --
Repayment of senior notes...................................            --    (10,500,000)            --
                                                              ------------   ------------   ------------
  Net cash provided by (used in) financing activities.......     2,000,000    (24,560,250)            --
                                                              ------------   ------------   ------------
Increase (decrease) in cash and cash equivalents............    14,111,004    (40,237,394)       386,889
Cash and cash equivalents at beginning of period............    29,216,751     43,327,755      3,090,361
                                                              ------------   ------------   ------------
Cash and cash equivalents at end of period..................  $ 43,327,755   $  3,090,361   $  3,477,250
                                                              ============   ============   ============
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid in cash.......................................  $  6,670,638   $ 31,123,931   $ 22,246,984
                                                              ============   ============   ============
NON CASH FINANCING AND INVESTING ACTIVITIES
Transfer of assets and liabilities to NEG Holding LLC.......  $         --   $ 87,066,390   $         --
                                                              ============   ============   ============
</Table>

                            See accompanying notes.
                                       F-6
<PAGE>

                          NATIONAL ENERGY GROUP, INC.

                  STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<Table>
<Caption>
                                                                                              GAIN
                                 CONVERTIBLE                                               (LOSS) ON
                               PREFERRED STOCK          COMMON STOCK         ADDITIONAL    AVAILABLE
                             --------------------   ---------------------     PAID-IN       FOR SALE     ACCUMULATED
                              SHARES     AMOUNT       SHARES      AMOUNT      CAPITAL      SECURITIES      DEFICIT
                             --------   ---------   ----------   --------   ------------   ----------   -------------
<S>                          <C>        <C>         <C>          <C>        <C>            <C>          <C>
Balance at December 31,
  1999.....................   171,187   $ 171,187    5,819,475   $ 58,195   $113,436,952   $(172,407)   $(228,399,427)
  Preferred stock
    conversion pursuant to
    confirmation of Joint
    Plan...................  (171,187)   (171,187)     714,286      7,143        164,044          --               --
  Common stock issued
    pursuant to
    confirmation of Joint
    Plan...................        --          --    4,656,889     46,569      1,953,431          --               --
  Sale of marketable
    securities.............        --          --           --         --             --     172,407               --
  Net loss.................                    --           --         --             --          --      (14,437,592)
                             --------   ---------   ----------   --------   ------------   ---------    -------------
Balance at December 31,
  2000.....................        --          --   11,190,650    111,907    115,554,427          --     (242,837,019)
  Capital contribution
    related to the transfer
    of operating assets to
    NEG Holding LLC........        --          --           --         --      7,465,694          --               --
  Net income...............        --          --           --         --             --          --       37,300,412
                             --------   ---------   ----------   --------   ------------   ---------    -------------
Balance at December 31,
  2001.....................        --   $      --   11,190,650   $111,907   $123,020,121   $      --    $(205,536,607)
  Net income...............        --          --           --         --             --          --        9,415,395
                             --------   ---------   ----------   --------   ------------   ---------    -------------
Balance at December 31,
  2002.....................        --   $      --   11,190,650   $111,907   $123,020,121   $      --    $(196,121,212)
                             ========   =========   ==========   ========   ============   =========    =============

<Caption>

                                 TOTAL
                             STOCKHOLDERS'
                                EQUITY
                               (DEFICIT)
                             -------------
<S>                          <C>
Balance at December 31,
  1999.....................  $(114,905,500)
  Preferred stock
    conversion pursuant to
    confirmation of Joint
    Plan...................             --
  Common stock issued
    pursuant to
    confirmation of Joint
    Plan...................      2,000,000
  Sale of marketable
    securities.............        172,407
  Net loss.................    (14,437,592)
                             -------------
Balance at December 31,
  2000.....................   (127,170,685)
  Capital contribution
    related to the transfer
    of operating assets to
    NEG Holding LLC........      7,465,694
  Net income...............     37,300,412
                             -------------
Balance at December 31,
  2001.....................  $ (82,404,579)
  Net income...............      9,415,395
                             -------------
Balance at December 31,
  2002.....................  $ (72,989,184)
                             =============
</Table>

                            See accompanying notes.
                                       F-7
<PAGE>

                          NATIONAL ENERGY GROUP, INC.

                         NOTES TO FINANCIAL STATEMENTS
                               DECEMBER 31, 2002

1.  BACKGROUND AND BANKRUPTCY FILING

     National Energy Group, Inc. (the "Company") was incorporated under the laws
of the State  of Delaware on  November 20,  1990. Effective June  11, 1991,  Big
Piney  Oil and Gas Company and VP Oil, Inc. merged with and into the Company. On
August 29,  1996,  Alexander Energy  Corporation  was  merged with  and  into  a
wholly-owned  subsidiary of  the Company, which  subsidiary was  merged with and
into the Company on December 31, 1996.

     On February 11, 1999, the United  States Bankruptcy Court for the  Northern
District  of Texas, Dallas Division  ("Bankruptcy Court") entered an involuntary
petition placing the Company under  protection of the Bankruptcy Court  pursuant
to  Title 11, Chapter 11  of the United States  Bankruptcy Code (the "Bankruptcy
Proceeding"). On July 24, 2000, the Bankruptcy Court entered a subsequent  order
confirming  a  Plan of  Reorganization  (the "Plan  of  Reorganization") jointly
proposed by the Company and the official committee of unsecured creditors, which
Plan of Reorganization became effective on August 4, 2000. The Bankruptcy  Court
issued a final decree closing the case effective December 13, 2001. Accordingly,
the  Company  has effectively  settled all  matters  relating to  the Bankruptcy
Proceeding.

     As mandated by  the Plan of  Reorganization and the  Bankruptcy Court,  NEG
Holding LLC ("Holding LLC"), a Delaware limited liability company, was formed in
August  2000. In exchange for an initial 50% membership interest in Holding LLC,
on September 12, 2001, but effective as of May 1, 2001, the Company  contributed
to  Holding LLC all of  its operating assets and  oil and natural gas properties
excluding cash of $4.3 million ("LLC Contribution"). In exchange for its initial
50% membership interest  in Holding LLC,  Gascon Partners, an  affiliate of  the
Company's  largest  stockholder  ("Gascon"),  contributed  its  sole  membership
interest in Shana National  LLC, an oil and  natural gas producing company,  and
cash,  including  a  $10.9 million  Revolving  Note  issued to  Arnos  Corp., an
affiliate  of  the  Company's  largest  stockholder  ("Arnos"),  evidencing  the
borrowings under the Company's revolving credit facility. In connection with the
foregoing,  Holding LLC  initially owns 100%  of the membership  interest in NEG
Operating LLC ("Operating LLC"),  a Delaware limited  liability company. All  of
the oil and natural gas assets contributed by the Company and all of the oil and
natural  gas assets  associated with Gascon's  contribution to  Holding LLC were
transferred from  Holding  LLC to  Operating  LLC  on September  12,  2001,  but
effective as of May 1, 2001.

     The assets contributed by the Company to Holding LLC were current assets of
$11.5  million, net oil and natural gas assets of $85.0 million and other assets
of $4.8 million. The liabilities assumed by Holding LLC were current liabilities
of $4.2 million, intercompany  payable to Gascon of  $4.8 million and  long-term
liabilities of $1.0 million.

     The  Holding LLC  Operating Agreement entered  into on  September 12, 2001,
contains a provision that allows Gascon at any time, in its sole discretion,  to
redeem  the Company's membership interest in Holding LLC at a price equal to the
fair market value of such interest determined as if Holding LLC had sold all  of
its  assets for  fair market  value and liquidated.  Since all  of the Company's
operating assets and  oil and natural  gas properties have  been contributed  to
Holding  LLC,  as  noted  above,  following  such  a  redemption,  the Company's
principal assets would consist  solely of its cash  balances. In the event  that
such  redemption right is exercised  by Gascon, the Company  may be obligated to
use the proceeds that it would  receive for its redeemed membership interest  to
pay  outstanding indebtedness and operating  expenses before the distribution of
any portion  of  such proceeds  to  the Company's  shareholders.  Following  the
payment  of  the Company's  indebtedness (currently  held  by entities  owned or
controlled by Carl C. Icahn) and its operating expenses, there is a  substantial
risk  that there will be no proceeds remaining for distribution to the Company's
shareholders.

     As a result of the  foregoing transactions and as  mandated by the Plan  of
Reorganization effective September 12, 2001, the Company's principal assets were
its remaining cash balances, accounts receivable

                                       F-8
<PAGE>
                          NATIONAL ENERGY GROUP, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

from  affiliates, deferred tax asset and  its initial 50% membership interest in
Holding LLC and  its principal  liabilities were the  $10.9 million  outstanding
under  its  existing  $100 million  revolving  credit facility  with  Arnos, the
10 3/4% Senior Notes (the "Senior  Notes") and the Reinstated Interest  (defined
below).  None  of the  Company's employees  were transferred  to Holding  LLC or
Operating LLC.

     As a result of the terms  and conditions of the various agreements  related
to  the repayment of  the Company's indebtedness  to Arnos and  repayment of the
priority distribution amounts and the guaranteed payments (plus accrued interest
thereon) to Gascon, there is  a substantial risk that  there will be no  amounts
remaining for distribution to the Company's stockholders.

     Pursuant to the Plan of Reorganization, as of December 31, 2000 the Company
reinstated  $45.8 million of  interest expense on  the Senior Notes ("Reinstated
Interest"). This Reinstated Interest consisted  of $10.5 million of  prepetition
interest  and $35.3 million of  interest expense that did  not accrue during the
pendancy of the  Bankruptcy Proceeding  pursuant to Bankruptcy  Court rules  and
regulations.  The Reinstated Interest plus  interest accrued thereon becomes due
in April 2003.  The Senior Note  balance is  $148.6 million as  of December  31,
2002.

     The  Company remains  highly leveraged  after confirmation  of the  Plan of
Reorganization.

2.  SIGNIFICANT ACCOUNTING POLICIES

  BASIS OF PRESENTATION

     The accompanying  financial statements  for periods  during the  Bankruptcy
Proceeding  have been presented  in accordance with  Statement of Position 90-7,
Financial Reporting  by Entities  in Reorganization  under the  Bankruptcy  Code
("SOP  90-7"). In accordance with SOP 90-7, no interest was accrued on unsecured
debt, no dividends  on preferred  stock were accrued,  unamortized premiums  and
debt  issuance costs relating to unsecured debt were expensed during 1999, costs
relating to the bankruptcy proceeding  and interest earned on accumulating  cash
resulting  from the bankruptcy proceeding  were reported as reorganization items
in the  accompanying  statements  of  operations,  and  liabilities  subject  to
compromise have been separately reported in the accompanying balance sheets.

     The  Company's contribution of all its operating assets and oil and natural
gas properties occurred on September 12,  2001. For tax and valuation  purposes,
the effective date is as of May 1, 2001, however, solely for financial reporting
purposes the transaction is as of September 1, 2001. Operations from September 1
to  September 12 were  not significant. Management  fees and guaranteed payments
accruing from  May  1 through  September  1, 2001  aggregating  $7,465,694  were
recorded as an increase to additional paid-in capital.

  CONSOLIDATION

     The  2000  consolidated financial  statements include  the accounts  of the
Company and  its  subsidiary.  All  significant  intercompany  transactions  and
balances have been eliminated.

  ACCOUNTING ESTIMATES

     The  preparation  of  financial statements  in  conformity  with accounting
principles  generally  accepted  in  the  United  States  of  America   requires
management to make estimates and assumptions that affect the reported amounts of
assets  and liabilities and  disclosure of contingent  assets and liabilities at
the date of the  financial statements and the  reported amounts of revenues  and
expenses  during the  reporting period. Actual  results could  differ from these
estimates.

                                       F-9
<PAGE>
                          NATIONAL ENERGY GROUP, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

  CASH AND CASH EQUIVALENTS

     Cash  and  cash  equivalents   may  include  demand  deposits,   short-term
commercial  paper,  and/or  money-market investments  with  maturities  of three
months or less when purchased.

  INVESTMENT IN NEG HOLDING LLC

     Due to  the  substantial uncertainty  that  the Company  will  receive  any
distribution  above  the priority  and guaranteed  payment amounts,  the Company
accounts for its  investment in Holding  LLC as a  preferred investment  whereby
guaranteed  payment amounts received  and receipts of  the priority distribution
amount are recorded  as reductions in  the investment and  income is  recognized
from  accretion  of  the  investment up  to  the  priority  distribution amount,
including the guaranteed payments (based on  the interest method) (see Note  9).
Following  receipt of  the guaranteed  payments and  priority distributions, the
residual interest in the investment will be valued at zero.

     The Company periodically evaluates the propriety of the carrying amount  of
its   investment  in  Holding  LLC  to   determine  whether  current  events  or
circumstances warrant  adjustments to  the carrying  value and/or  revisions  to
accretion  of income. The Company currently believes that no such impairment has
occurred and that no revision to the accretion of income is warranted.

  OIL AND NATURAL GAS PROPERTIES

     Prior to the LLC Contribution, the Company utilized the full cost method of
accounting for its  crude oil and  natural gas properties.  Under the full  cost
method,  all productive and nonproductive costs  incurred in connection with the
acquisition, exploration, and development of crude oil and natural gas  reserves
were  capitalized  and amortized  on the  units-of-production method  based upon
total proved reserves. The costs of  unproven properties were excluded from  the
amortization  calculation until the  individual properties were  evaluated and a
determination was made as to whether reserves exist. Conveyances of  properties,
including  gains  or  losses  on abandonments  of  properties,  were  treated as
adjustments to the cost of crude oil and natural gas properties, with no gain or
loss recognized.

     Under the full  cost method,  the net  book value  of oil  and natural  gas
properties,  less related  deferred income taxes,  may not  exceed the estimated
after-tax future  net  revenues from  proved  oil and  natural  gas  properties,
discounted  at 10% per  year (the ceiling limitation).  In arriving at estimated
future net  revenues, estimated  lease  operating expenses,  development  costs,
abandonment  costs,  and certain  production  related and  ad-valorem  taxes are
deducted. In calculating future net revenues, prices and costs in effect at  the
time of the calculation are held constant indefinitely, except for changes which
are fixed and determinable by existing contracts. The net book value is compared
to  the ceiling limitation on a quarterly  and yearly basis. The excess, if any,
of the net book value above the ceiling limitation is required to be written off
as a non-cash expense. The Company  did not incur ceiling limitation  writedowns
during 2000 or 2001.

     The  Company contributed all of  its oil and natural  gas assets to Holding
LLC in September 2001.

     The Company capitalized  internal costs  of $559,000 and  $454,000 for  the
years  ended  December 31,  2000 and  2001,  respectively, as  costs of  oil and
natural gas  properties. Such  capitalized costs  include salaries  and  related
benefits   of  individuals  directly  involved  in  the  Company's  acquisition,
exploration, and development activities based on a percentage of their salaries.
The Company did not capitalize interest during 2000 or 2001. Effective with  the
transfer of the Company's oil and natural gas assets to Holding LLC, the Company
no longer capitalizes internal costs.

     As  an operator of oil and natural  gas properties, the Company was subject
to extensive federal, state, and local environmental laws and regulations. These
laws, which are constantly  changing, regulate the  discharge of materials  into
the  environment  and  may  require  the  Company  to  remove  or  mitigate  the
environment effects

                                       F-10
<PAGE>
                          NATIONAL ENERGY GROUP, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

of the disposal or release of petroleum or chemical substances at various sites.
Environmental expenditures  were  expensed  or capitalized  depending  on  their
future  economic  benefit. Expenditures  that  relate to  an  existing condition
caused by  past  operations and  that  have  no future  economic  benefits  were
expensed. Liabilities for expenditures of a noncapital nature were recorded when
environmental  assessment and/or remediation  is probable, and  the costs can be
reasonably estimated. Effective with the LLC Contribution, the Company no longer
owns any  oil  and natural  gas  properties and  is  not subject  to  the  above
expenditures.

  OTHER PROPERTY AND EQUIPMENT

     Other  property  and  equipment  includes  furniture,  fixtures,  and other
equipment. Such  assets are  recorded at  cost and  are depreciated  over  their
estimated  useful lives using  the straight-line method.  Effective with the LLC
Contribution, the Company no longer owns any property and equipment.

  INCOME TAXES

     Deferred tax assets  and liabilities  are determined  based on  differences
between  financial reporting  and tax  basis of  assets and  liabilities and are
measured using  enacted  tax  rates.  The effect  on  deferred  tax  assets  and
liabilities  of a change in  tax rate is recognized  in the period that includes
the enactment date.  The measurement  of deferred tax  assets is  adjusted by  a
valuation  allowance, if necessary,  to recognize the extent  to which, based on
available evidence,  the  future tax  benefits  more  likely than  not  will  be
realized.

  FINANCIAL INSTRUMENTS

     See  Notes 5 and 6 for disclosure of the fair value of borrowings under the
Company's credit facility and the 10 3/4% Senior Notes, respectively.

     The Company's marketable securities were classified as  available-for-sale.
Available-for-sale  securities were carried  at fair value,  with the unrealized
gains and losses, net of tax, reported as a separate component of  stockholders'
equity.   Realized  gains  and  losses  and  declines  in  value  judged  to  be
other-than-temporary were included  in income.  The cost of  securities sold  is
based on the specific identification method.

     The   Company  sold  its  marketable   securities  in  2000  for  $413,147,
recognizing  a  loss  of  $102,197.  The  Company's  investment  in   marketable
securities  was comprised of  securities of another  independent oil and natural
gas company. The  Company had  no purchases  or sales  of marketable  securities
during 2001 or 2002.

     The  Company  sold  crude oil  and  natural  gas to  various  customers. In
addition, the Company participated with other parties in the operation of  crude
oil  and  natural  gas  wells.  Substantially  all  of  the  Company's  accounts
receivable were  due from  either purchasers  of crude  oil and  natural gas  or
participants  in crude oil and natural gas wells for which the Company served as
the operator. Generally, operators of crude oil and natural gas properties  have
the  right to offset future revenues  against unpaid charges related to operated
wells. Crude oil and natural gas sales were generally unsecured.

     Allowances for  bad debt  totaled approximately  $229,000 at  December  31,
2000.  At  December 31,  2001  and 2002,  the  carrying value  of  the Company's
accounts receivable approximates fair value.

  NATURAL GAS PRODUCTION IMBALANCES

     Prior to  the  LLC Contribution,  the  Company accounted  for  natural  gas
production  imbalances using  the sales  method, whereby  the Company recognized
revenue on all natural gas sold  to its customers notwithstanding the fact  that
its  ownership may be less  than 100% of the  natural gas sold. Liabilities were
recorded by the Company for imbalances greater than the Company's  proportionate
share  of remaining estimated natural gas  reserves. After the LLC Contribution,
the Company had no oil and natural gas production imbalances.

                                       F-11
<PAGE>
                          NATIONAL ENERGY GROUP, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

  STOCK COMPENSATION

     The Company has elected to  follow Accounting Principles Board Opinion  No.
25,  Accounting for  Stock Issued to  Employees, in accounting  for its employee
stock options.  Under APB  25, if  the  exercise price  of an  employee's  stock
options  equals or exceeds the market price  of the underlying stock on the date
of grant, no compensation expense is recognized.

     In  March   2000,  the   Financial   Accounting  Standards   Board   issued
Interpretation  No.  44, "Accounting  for  Certain Transactions  Involving Stock
Compensation" ("FIN 44"), an interpretation of APB 25. FIN 44, which was adopted
prospectively by the Company as of July 1, 2000, requires certain changes to the
previous practice  regarding  the  accounting  for  certain  stock  compensation
arrangements.  FIN 44  does not  change APB  25's intrinsic  value method, under
which compensation  expense is  generally  not recognized  for grants  of  stock
options  to employees with  an exercise price  equal to the  market price of the
stock at the date of grant, but it has narrowed its application. The adoption of
FIN 44 did not  have a significant effect  on the Company's existing  accounting
for its employee stock options.

  EARNINGS (LOSS) PER SHARE

     Earnings  (loss)  per  share  is  computed  in  accordance  with  Financial
Accounting Standards Board Statement No. 128, Earnings per Share. Basic earnings
per share data is  computed by dividing net  income (loss) applicable to  common
shareholders  by the  weighted average number  of common  shares outstanding and
excludes any dilutive effects of options, warrants, and convertible  securities.
Shares  issuable  upon exercise  of  options and  warrants  are included  in the
computation of diluted earnings  per common and common  equivalent share to  the
extent  that they  are dilutive.  Diluted earnings  per share  computations also
assume the  conversion  of the  Company's  preferred  stock (Note  10)  if  such
conversion has a dilutive effect. For the year ended December 31, 2000, prior to
the  confirmation of the  Joint Plan, neither  the options and  warrants nor the
assumed conversion of the preferred stock had a dilutive effect on the loss  per
share calculations. Subsequent to the confirmation of the Plan of Reorganization
and  in 2001, all common stock  equivalents had been canceled. Accordingly, both
basic and diluted loss per share calculations for such periods are based on  the
weighted average number of common shares outstanding during 2001 and 2002.

  COMPREHENSIVE INCOME

     Comprehensive  income  is defined  as the  change in  equity of  a business
enterprise during a period from transactions and other events and  circumstances
from  non-owner sources.  For 2000,  the differences  between the  Company's net
earnings and total comprehensive income were not material, consisting solely  of
unrealized  gains  and losses  on the  Company's  available for  sale marketable
securities.  There  were   no  differences  between   net  earnings  and   total
comprehensive income in 2001 and 2002.

  DERIVATIVES

     In  June  1998,  the  Financial Accounting  Standards  Board  (FASB) issued
Statement of  Financial Accounting  Standards (SFAS)  No. 133,  "Accounting  for
Derivative  Instruments and Certain Hedging Activities."  In June 2000, the FASB
issued SFAS No. 138, "Accounting for Certain Derivative Instruments and  Certain
Hedging  Activity, an  Amendment of  SFAS 133."  SFAS No.  133 and  SFAS No. 138
require that all  derivative instruments  be recorded  on the  balance sheet  at
their  respective fair values. SFAS  No. 133 and SFAS  No. 138 are effective for
all fiscal  quarters of  all fiscal  years beginning  after June  30, 2000.  The
adoption  of SFAS 133 and 138 did not  have an impact on the Company's financial
statements.

     All derivatives are recognized  on the balance sheet  at their fair  value.
Prior  to the LLC Contribution, the Company periodically managed its exposure to
fluctuations in oil and natural gas  prices by entering into various  derivative
instruments  consisting  principally of  collar options  and swaps.  The Company
elected not to

                                       F-12
<PAGE>
                          NATIONAL ENERGY GROUP, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

designate these instruments as hedges  for accounting purposes, accordingly  the
change  in unrealized gains and losses is  included in other income and expense.
Cash settlements of these instruments are included in oil and natural gas sales.
The following summarizes the  cash settlements and  unrealized gains and  losses
for the years ended December 31, 2000, 2001 and 2002:

<Table>
<Caption>
                                                            2000       2001      2002
                                                          --------   ---------   ----
<S>                                                       <C>        <C>         <C>
Gross cash receipts.....................................  $     --   $ 250,710     --
Gross cash payments.....................................        --          --     --
Valuation gains (losses)................................  $580,500   $(716,454)    --
</Table>

     In  connection with  the LLC  Contribution in  September 2001,  the Company
contributed all of  its derivative financial  instruments with a  fair value  of
$(135,954)  to  NEG Holding  LLC.  The fair  value  of the  Company's derivative
financial instruments was $580,500 at December  31, 2000. Subsequent to the  LLC
Contribution,  the  Company  has  not  entered  into  any  derivative  financial
instruments.

  RECENT ACCOUNTING PRONOUNCEMENTS

     In June  2001,  the  Financial Accounting  Standards  Board  (FASB)  issued
Statement  of  Financial Accounting  Standards (SFAS)  No. 143,  "Accounting for
Asset Retirement Obligations" ("SFAS 143"). SFAS No. 143 requires the Company to
record the fair value of  an asset retirement obligation  as a liability in  the
period  in which it incurs a legal  obligation associated with the retirement of
tangible long-lived  assets  that  result from  the  acquisition,  construction,
development,  and/or normal use of  the assets. It also  requires the Company to
record a corresponding  asset that is  depreciated over the  life of the  asset.
Subsequent  to the initial  measurement of the  asset retirement obligation, the
obligation will be adjusted at the end of each period to reflect the passage  of
time  and changes in the estimated  future cash flows underlying the obligation.
The Company is required to adopt SFAS  No. 143 on January 1, 2003. The  adoption
of  SFAS  No.  143 will  have  no  material impact  on  the  Company's financial
statements.

     On October  3, 2001,  the FASB  issued SFAS  No. 144,  "Accounting for  the
Impairment  or  Disposal  of  Long-Lived Assets"  ("SFAS  144")  which addresses
financial accounting and reporting for the impairment or disposal of  long-lived
assets.  SFAS No. 144 is effective for fiscal years beginning after December 15,
2001, and interim  periods within  those fiscal years  with earlier  application
encouraged.  This  statement  will  have no  material  impact  on  the Company's
financial statements.

     In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. ("SFAS 146") SFAS No. 146 addresses  financial
accounting  and reporting for costs associated  with exit or disposal activities
and  nullifies  Emerging  Issues  Task   Force  (EITF)  Issue  94-3,   Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity.  The provisions of  this Statement are effective  for exit or disposal
activities that are initiated  after December 31,  2002, with early  application
encouraged.  The adoption  of SFAS No.  146 is  not expected to  have a material
effect on the Company's financial statements.

     In November  2002,  the  FASB issued  Interpretation  No.  45,  Guarantor's
Accounting  and  Disclosure  Requirements  for  Guarantees,  Including  Indirect
Guarantees of Indebtedness to Others,  an interpretation of FASB Statements  No.
5,   57  and  107  and  a  rescission   of  FASB  Interpretation  No.  34.  This
Interpretation elaborates on the  disclosures to be made  by a guarantor in  its
interim  and annual financial statements  about its obligations under guarantees
issued. The  Interpretation  also clarifies  that  a guarantor  is  required  to
recognize,  at inception of a  guarantee, a liability for  the fair value of the
obligation undertaken. The initial recognition and measurement provisions of the
Interpretation are applicable  to guarantees issued  or modified after  December
31,  2002  and are  not  expected to  have a  material  effect on  the Company's
financial statements. The  disclosure requirements are  effective for  financial
statements of interim and annual periods ending after December 31, 2002.

                                       F-13
<PAGE>
                          NATIONAL ENERGY GROUP, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

     In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation  -- Transition and  Disclosure, an amendment  of FASB Statement No.
123" ("SFAS 123"). SFAS No. 148  amends FASB Statement No. 123, "Accounting  for
Stock-Based  Compensation", to provide  alternative methods of  transition for a
voluntary change to the fair value method of accounting for stock-based employee
compensation. In addition, SFAS  No. 148 amends  the disclosure requirements  of
Statement  No. 123 to  require prominent disclosures in  both annual and interim
financial statements. Certain of the  disclosure modifications are required  for
fiscal  years ending after December 15, 2002.  The adoption of SFAS No. 148 will
have no material impact on the Company's financial statements.

     In January 2003, the FASB  issued Interpretation No. 46, "Consolidation  of
Variable   Interest   Entities,  an   interpretation  of   ARB  No.   51".  This
Interpretation addresses the consolidation  by business enterprises of  variable
interest  entities as defined in  the Interpretation. The Interpretation applies
immediately to variable  interests in variable  interest entities created  after
January  31,  2003,  and to  variable  interests in  variable  interest entities
obtained after January 31, 2003. The  application of this Interpretation is  not
expected  to have a  material effect on the  Company's financial statements. The
Interpretation requires certain disclosures in financial statements issued after
January 31, 2003 if it is reasonably possible that the Company will  consolidate
or disclose information about variable interest entities when the Interpretation
becomes  effective.  The  Company  is currently  evaluating  the  impact  of the
adoption of Interpretation No. 46.

3.  MANAGEMENT AGREEMENT

     The management and operation  of Operating LLC is  being undertaken by  the
Company  pursuant to a  Management Agreement (the  "Management Agreement") which
the Company has entered into with Operating LLC. However, neither the  Company's
officers  nor directors will control the  strategic direction of Operating LLC's
oil and natural gas business including oil and natural gas drilling and  capital
investments,  which shall  be controlled by  the managing member  of Holding LLC
(currently Gascon).  The Management  Agreement provides  that the  Company  will
manage Operating LLC's oil and natural gas assets and business until the earlier
of  November 1, 2006,  or such time as  Operating LLC no longer  owns any of the
managed oil and natural gas properties. The Company's employees will conduct the
day-to-day operations of Operating LLC's oil and natural gas properties, and all
costs and  expenses  incurred  in the  operation  of  the oil  and  natural  gas
properties  shall be borne  by Operating LLC;  although the Management Agreement
provides that the salary of the  Company's Chief Executive Officer shall be  70%
attributable  to the managed oil and natural gas properties, and the salaries of
each  of  the  General  Counsel  and  Chief  Financial  Officer  shall  be   20%
attributable  to the managed oil and natural gas properties. In exchange for the
Company's management services, Operating LLC shall pay the Company a  management
fee  equal  to  115%  of  the  actual  direct  and  indirect  administrative and
reasonable overhead  costs incurred  by the  Company in  operating the  oil  and
natural  gas properties, which either  the Company or Operating  LLC may seek to
change within the range of 110%-115%  as such change is warranted; however,  the
parties   have  agreed  to   consult  with  each  other   to  ensure  that  such
administrative  and  reasonable  overhead  costs  attributable  to  the  managed
properties  are properly reflected in the management fee paid to the Company. In
addition, Operating LLC  has agreed to  indemnify the Company  to the extent  it
incurs  any  liabilities in  connection  with its  operation  of the  assets and
properties of Operating LLC,  except to the extent  of its gross negligence,  or
misconduct.  The Company recorded $7.6 million as  a management fee for the year
ended December 31, 2002.

4.  ACQUISITIONS AND DISPOSALS

     In January 2001, the  Company sold its interest  in the Shell Bayou  Sorrel
field located in Iberville Parish Louisiana for $.75 million.

                                       F-14
<PAGE>
                          NATIONAL ENERGY GROUP, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

     In  the first  quarter of  2001, the  Company purchased  additional working
interests in  the Goldsmith  Adobe  Unit, for  approximately $2.3  million.  The
Company  owned an approximate  99.9% working interest in  this property prior to
the LLC Contribution.

5.  CREDIT FACILITIES

     The credit facility was originally secured by liens granted by the  Company
on  substantially all of  the Company's oil and  natural gas properties, whether
currently owned or hereafter  acquired, and a negative  pledge on all other  oil
and  natural gas properties. The Company contributed  all of its oil and natural
gas properties to Holding  LLC and therefore, the  credit facility is  currently
secured  by  oil and  natural gas  properties  held by  Holding LLC.  The credit
facility requires, among other  things, semiannual engineering reports  covering
oil  and natural  gas properties, and  maintenance of  certain financial ratios,
including the maintenance of a minimum interest coverage, a current ratio, and a
minimum tangible net worth.

     The credit facility  contains other covenants  prohibiting cash  dividends,
distributions,  loans, or advances to third  parties, except that cash dividends
on preferred stock  will be allowed  so long as  no event of  default exists  or
would exist as a result of the payment thereof.

     The Company currently has $10.9 million outstanding under its existing $100
million  credit facility  with Arnos.  Arnos continues to  be the  holder of the
credit facility; however, the $10.9 million note currently outstanding under the
credit facility was contributed to Holding LLC as part of Gascon's  contribution
to Holding LLC on September 12, 2001. In December 2001, the maturity date of the
credit  facility was extended to  December 31, 2003 and  the Company was given a
waiver of  compliance with  respect  to any  and  all covenant  violations.  The
Company  anticipates repayment of this  amount through the priority distribution
from Holding LLC. The  Company was not in  compliance with the minimum  interest
coverage ratio at September 30, 2002 and December 31, 2002 and the current ratio
at  December 31, 2002, however, in December  2001 the Company was given a waiver
of compliance with respect to any  and all covenant violations through  December
31,  2003. If no priority distribution is  made by December 31, 2003, the credit
facility must be extended.

     At December  31,  2002, the  fair  value  of borrowings  under  the  credit
facility  approximates  the  carrying value  of  the liability,  as  interest on
borrowings under the facility accrues at variable rates based on prime rates.

6.  SENIOR NOTES DUE 2006

     Upon confirmation of  the Joint Plan,  the senior notes  are held in  their
entirety  by Arnos  and its  affiliates. The  Senior Notes  bear interest  at an
annual rate of 10 3/4%, payable semiannually in arrears on May 1 and November  1
of each year. The Senior Notes are senior, unsecured obligations of the Company,
ranking  pari  passu with  all existing  and future  senior indebtedness  of the
Company, and senior in right of payment to all future subordinated  indebtedness
of  the  Company. Subject  to  certain limitations  set  forth in  the indenture
covering the Senior Notes  (the "Indenture"), the  Company and its  subsidiaries
may incur additional senior indebtedness and other indebtedness.

     The  Indenture contains certain covenants limiting the Company with respect
to  the  following:  (i)  asset  sales;  (ii)  restricted  payments;  (iii)  the
incurrence  of additional  indebtedness and  the issuance  of certain redeemable
preferred stock; (iv) liens; (v) sale and leaseback transactions; (vi) lines  of
business;  (vii) dividend and other payment restrictions affecting subsidiaries;
(viii) mergers and consolidations; and (ix) transactions with affiliates.

     On December  4,  1998,  certain  holders  of  the  Senior  Notes  filed  an
Involuntary Petition for an Order for Relief under Chapter 11 of Title 11 of the
United  States Bankruptcy Code (Note 1). Accrual of interest on the Senior Notes
was discontinued during the  Bankruptcy Proceeding. Approximately $10.5  million
additional  interest expense  would have been  recognized by  the Company during
2000 if not for the discontinuation of the
                                       F-15
<PAGE>
                          NATIONAL ENERGY GROUP, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

interest accrual.  In  connection with  the  Plan of  Reorganization,  Unaccrued
Interest  (including compounding interest) totalling approximately $35.3 million
was reinstated (Note 1).

     The Company is unable to reasonably determine the fair value of the  senior
notes at December 31, 2002, due to a lack of available market quotations, credit
ratings and inability to determine an appropriate discount rate.

     In  August  2001,  the Company  redeemed  both $16.4  million  of principal
outstanding under the  senior note  obligations and $4.8  million of  Reinstated
Interest  for a cash consideration of $10.5  million. The Company paid two Arnos
affiliates approximately $.4 million in current interest on the redeemed  senior
note  obligations at the  date of redemption  related to interest  owed from the
last semi-annual  interest  payment  date  of  May  1,  2001,  to  the  date  of
redemption.  As this was a  partial redemption of the  senior notes, it has been
accounted for as a modification of terms that changes the amounts of future cash
payments. Accordingly, the excess  of redeemed principal  and interest over  the
redemption payment of $10.5 million will be amortized as a reduction to interest
expense  over  the  remaining  life  of  the  bonds.  In  connection  with  this
transaction, the  Company  borrowed  $10.9 million  under  its  existing  credit
facility with Arnos.

7.  SUBSEQUENT EVENTS

     On  March  26, 2003,  NEG Holding  LLC distributed  the $10.9  million note
outstanding under the  existing credit  facility to  the Company  as a  priority
distribution.  Also,  on March  26, 2003  the Company,  Arnos and  Operating LLC
entered into an agreement  to assign the existing  credit facility to  Operating
LLC.  Effective  with  this assignment,  Arnos  amended the  credit  facility to
increase the revolving commitment to  $150 million, increase the borrowing  base
to  $75  million  and  extend  the  revolving  due  date  until  June  30, 2004.
Concurrently, Arnos extended  a $42.7 million  loan to Operating  LLC under  the
amended credit facility; Operating LLC then distributed $42.7 million to Holding
LLC  who, thereafter, made a $42.7 million priority distribution to the Company.
The Company utilized  these funds  to pay the  entire amount  of the  Reinstated
Interest and interest accrued thereon outstanding on March 27, 2003.

8.  COMMITMENTS AND CONTINGENCIES

     The  Company leases office  space under an  operating lease. Rental expense
charged to operations  was approximately $500,000,  553,000 and $564,000  during
the  years ended December  31, 2000, 2001 and  2002, respectively. Minimum lease
payments under future operating lease commitments  at December 31, 2002, are  as
follows:

<Table>
<S>                                                           <C>
2003........................................................  596,128
2004........................................................  596,128
2005........................................................  596,128
2006........................................................  596,128
2007........................................................  596,128
</Table>

     The  Company is not a party to  any material pending legal proceedings. The
Company's Joint Plan became effective August 4, 2000, at which time the  Company
emerged  from bankruptcy with  the authority to  conduct its business operations
without Bankruptcy Court approval.

9.  INVESTMENT IN NEG HOLDING LLC

     As explained below, the Company's investment in NEG Holding LLC is recorded
as a preferred  investment. The  initial investment was  recorded at  historical
carrying  value of the net assets contributed with no gain or loss recognized on
the transfer.

                                       F-16
<PAGE>
                          NATIONAL ENERGY GROUP, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

     The  following is a  summary income statement  for NEG Holding  LLC for the
years ended December 31, 2001 and 2002.

<Table>
<Caption>
                                                               2001           2002
                                                            -----------   ------------
<S>                                                         <C>           <C>
Total revenues............................................  $12,636,933   $ 39,509,362
Total cost and expenses...................................   19,988,426    (32,064,463)
                                                            -----------   ------------
Operating income..........................................    2,648,512      7,444,899
Other income (expense)....................................   (3,939,972)     6,481,202
                                                            -----------   ------------
Net income (loss).........................................  $(1,291,460)  $ 13,926,101
                                                            ===========   ============
</Table>

     Under the  Holding  LLC Operating  Agreement,  the Company  is  to  receive
guaranteed  payments in  addition to  a priority  distribution amount  of $202.2
million before Gascon receives  any monies. The priority  distribution is to  be
made  on or before  November 1, 2006. Guaranteed  payments are to  be paid, on a
semi annual basis, based on an annual interest rate of 10.75% of the outstanding
priority distribution amount. After  the payments to the  Company, Gascon is  to
receive  distributions  equivalent  to  the  priority  distribution  amount  and
guaranteed  payments  plus  other  amounts  as  defined.  Following  the   above
distributions  to the Company and Gascon,  additional distributions, if any, are
to be made in  accordance with their respective  capital accounts. The order  of
distributions  is listed below. Because of  the substantial uncertainty that the
Company will receive any distributions above the priority and guaranteed payment
amounts, the  Company  will account  for  its investment  in  Holding LLC  as  a
preferred investment whereby guaranteed payment amounts received and receipts of
the  priority distribution amount are recorded  as reductions in the investment,
and income is  recognized from accretion  of the investment  up to the  priority
distribution  amount including  the guaranteed  payments (based  on the interest
method) and the residual interest attributable to Holding LLC will be valued  at
zero.

<Table>
<S>                                                           <C>
Investment balance at December 31, 2001.....................  $ 97,654,106
Accretion of investment.....................................    32,878,642
Distribution from Holding LLC...............................   (21,652,819)
                                                              ------------
Investment balance at December 31, 2002.....................  $108,879,929
                                                              ============
</Table>

     The Company received a guaranteed payment of $10.9 million from NEG Holding
in  November 2001. The portion  of the guaranteed payment  related to the period
prior to the  transfer has  been reflected as  a contribution  to the  Company's
equity.

     The Holding LLC Operating Agreement requires that (provided full payment of
all  outstanding guaranteed payments has been  made) distributions shall be made
to both the Company and Gascon as follows:

     - First and through November 1, 2006, to the Company in an amount equal  to
       the  Company's  initial  priority  amount  of  $202.2  million  minus any
       distributions previously made to the Company.

     - Second, to Gascon in an amount equal to the excess of (a) the sum of  (i)
       the  Company's  initial  priority  amount  of  $202.2  million,  (ii) any
       additional capital contributions made by Gascon, (iii) the aggregate  sum
       of  all  Guaranteed Payments,  and (iv)  an amount  equal to  the Accrued
       Gascon Amount (which, under the Holding LLC Operating Agreement, means an
       amount equal to the aggregate of interest that would be computed annually
       if interest were imposed at a rate  equal to the prime rate plus 1/2%  as
       of  the close of each fiscal year on the excess of (a) the sum of (i) the
       cumulative Guaranteed  Payments and  (ii) the  aggregate of  any  Accrued
       Gascon Amount computed in prior years,

                                       F-17
<PAGE>
                          NATIONAL ENERGY GROUP, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

       over (b) the cumulative distributions by Holding LLC to Gascon), over (b)
       distributions previously made to Gascon pursuant to this provision in the
       Holding LLC Operating Agreement.

     - Third, to the Company and Gascon in accordance with their then respective
       Capital Accounts.

10.  STOCKHOLDERS' EQUITY

     In  connection with the  Plan of Reorganization, all  330,000 shares of the
Company's preferred stock issuances were converted into 714,286 shares of  newly
issued  common  stock  of the  reorganized  Company. Accordingly,  no  shares of
preferred stock are outstanding as of December 31, 2001 and 2002.

  COMMON STOCK

     Holders of common stock  are entitled to  one vote for  each share held  of
record  on all matters voted on by  stockholders. The shares of the common stock
do not have cumulative voting rights, which means that the holders of more  than
50%  of the shares of the common stock  voting for the election of the directors
can elect all of the directors to be elected by holders of the common stock,  in
which event the holders of the remaining shares of common stock will not be able
to  elect any director. Upon any  liquidation, dissolution, or winding-up of the
affairs of  the  Company, holders  of  the common  stock  would be  entitled  to
receive,  pro rata, all of the assets  of the Company available for distribution
to stockholders, after payment  of any liquidation  preference of any  Preferred
Stock  that may  be issued and  outstanding at  the time. Holders  of the common
stock have no subscription, redemption, sinking fund, or preemptive rights.  The
Company has never paid cash dividends on its common stock and does not expect to
declare cash dividends in the foreseeable future.

     Under  terms of  the Plan  of Reorganization,  each holder  of common stock
received one share of  stock in the reorganized  Company for every seven  shares
cancelled  as a result  of the reorganization. The  new certificates were issued
pursuant to a  registration exemption under  Section 1145 of  the United  States
Bankruptcy  Code  and  include a  restrictive  legend  mandated by  the  Plan of
Reorganization which prohibits  transactions in  the Company's  common stock  by
anyone  who is or will become, as a result of any such transaction, a "5 percent
shareholder" within the meaning of Section 382 of the Internal Revenue Code. All
information relating to shares of common stock for periods prior to confirmation
of the Plan of Reorganization have been restated to reflect the effects of  this
reverse stock split.

  STOCK OPTIONS

     A  summary of the Company's stock  option activity, and related information
for the years ended December 31, 2000, 2001, and 2002, follows:

<Table>
<Caption>
                                      2000                  2001                 2002
                               -------------------   ------------------   ------------------
                                          WEIGHTED             WEIGHTED             WEIGHTED
                                          AVERAGE              AVERAGE              AVERAGE
                                          EXERCISE             EXERCISE             EXERCISE
                               OPTIONS     PRICE     OPTIONS    PRICE     OPTIONS    PRICE
                               --------   --------   -------   --------   -------   --------
<S>                            <C>        <C>        <C>       <C>        <C>       <C>
Outstanding at beginning of
  year.......................   649,500    $3.61        --      $  --        --      $  --
Granted......................        --       --        --         --        --         --
Exercised....................        --       --        --         --        --         --
Canceled.....................  (649,500)    3.61        --         --        --         --
                               --------               ----                 ----
Outstanding at end of year...        --    $  --        --      $  --        --      $  --
                               ========               ====                 ====
Exercisable at end of year...        --    $  --        --      $  --        --      $  --
                               ========               ====                 ====
</Table>

     All outstanding stock  options were cancelled  pursuant to confirmation  of
the Plan of Reorganization.

                                       F-18
<PAGE>
                          NATIONAL ENERGY GROUP, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

     The  Company has not  issued any options subsequent  to the confirmation of
the Plan of Reorganization.

  STOCK PURCHASE PLAN

     During 1998,  the Company's  shareholders approved  the Company's  Employee
Stock  Purchase Plan ("ESPP"). Pursuant to  the ESPP, employees can purchase the
common stock of  the Company  at a  specified price  through payroll  deductions
during  an offering period, currently established on a semi-annual basis. During
2000, no  shares  were  issued  to  employees under  the  ESPP.  This  plan  was
terminated during 2001.

11.  INCOME TAXES

     The  (provision)  benefit for  U.S.  federal income  taxes  attributable to
continuing operations is as follows:

<Table>
<Caption>
                                                        YEAR ENDED DECEMBER 31,
                                                ---------------------------------------
                                                   2000          2001          2002
                                                -----------   -----------   -----------
<S>                                             <C>           <C>           <C>
Current.......................................  $ 2,577,452   $        --   $        --
Deferred......................................   (2,577,452)   30,589,443    (5,067,705)
                                                -----------   -----------   -----------
                                                $        --   $30,589,443   $(5,067,705)
                                                ===========   ===========   ===========
</Table>

     The reconciliation of income taxes  computed at the U.S. federal  statutory
tax  rates to the benefit for income  taxes on income from continuing operations
is as follows:

<Table>
<Caption>
                                                        YEAR ENDED DECEMBER 31,
                                                ---------------------------------------
                                                   2000          2001          2002
                                                -----------   -----------   -----------
<S>                                             <C>           <C>           <C>
Income tax benefit (expense) at statutory
  rate........................................  $(6,513,374)  $(2,352,849)  $(5,069,085)
Valuation allowance on deferred tax assets....    6,513,374    33,546,155            --
Other.........................................           --      (603,863)        1,380
                                                -----------   -----------   -----------
                                                $        --   $30,589,443   $(5,067,705)
                                                ===========   ===========   ===========
</Table>

     The computation of the net deferred tax asset (liability) follows:

<Table>
<Caption>
                                                                  DECEMBER 31,
                                                           ---------------------------
                                                               2001           2002
                                                           ------------   ------------
<S>                                                        <C>            <C>
Deferred tax assets (liabilities):
Investment in NEG Holding LLC............................  $ 21,747,074   $  8,439,825
Property and equipment...................................            --             --
Net operating loss carryforwards.........................    41,821,430     35,458,771
Statutory depletion carryforwards........................            --             --
Other, net...............................................     3,524,831      2,811,498
                                                           ------------   ------------
                                                             67,093,335     46,710,094
Less valuation allowance.................................   (36,503,892)   (21,188,356)
                                                           ------------   ------------
                                                           $ 30,589,443   $ 25,521,738
                                                           ============   ============
</Table>

     At December  31, 2002,  the Company  had net  operating loss  carryforwards
available  for federal income tax purposes of approximately $101.3 million which
begin expiring in 2003.  Utilization of approximately $27.6  million of the  net
operating  loss  carryforwards  is  subject to  various  limitations  because of
previous changes in  control of ownership  (as defined in  the Internal  Revenue
Code)  of  the  Company  and Alexander  Energy.  Additional  net  operating loss
limitations may be imposed as a result of subsequent changes in stock  ownership
of  the Company. Prior to  the formation of Holding  LLC, the income tax benefit
associated with the

                                       F-19
<PAGE>
                          NATIONAL ENERGY GROUP, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

loss carryforwards had not been recognized since, in the opinion of  management,
there  was not sufficient positive evidence  of future taxable income to justify
recognition of a benefit.  Upon the formation of  Holding LLC, management  again
evaluated  all evidence,  both positive and  negative, in  determining whether a
valuation allowance to  reduce the  carrying value  of deferred  tax assets  was
still needed and concluded, based on the projected allocations of taxable income
by  Holding LLC, the company more likely than not will realize a partial benefit
from the loss carryforwards.  Accordingly, the Company  recorded a deferred  tax
asset of $31.9 million in September 2001, $25.5 million as of December 31, 2002.
Ultimate  realization of the  deferred tax asset is  dependent upon, among other
factors, the Company's ability to generate sufficient taxable income within  the
carryforward  periods and  is subject  to change  depending on  the tax  laws in
effect in the  years in which  the carryforwards are  used. As a  result of  the
recognition  of  expected future  income tax  benefits, subsequent  periods will
reflect a full effective tax rate provision.

12.  NATURAL GAS HEDGING ACTIVITIES AND FORWARD SALES CONTRACTS

     While the  use of  derivative  contracts can  limit  the downside  risk  of
adverse  price  movements,  it  may  also  limit  future  gains  from  favorable
movements. The  Company addressed  market risk  by selecting  instruments  whose
value  fluctuations correlated  strongly with  the underlying  commodity. Credit
risk related to derivative  activities was managed  by requiring minimum  credit
standards   for  counterparties,  periodic  settlements,   and  mark  to  market
valuations.

     During 2001, the Company entered  into several derivative contracts.  These
contracts were contributed to Holding LLC in September 2001.

13.  CRUDE OIL AND NATURAL GAS PRODUCING ACTIVITIES

     The  Company contributed all of  its oil and natural  gas assets to Holding
LLC in September 2001.

     Costs incurred in connection with the exploration acquisition, development,
and exploitation of the Company's crude  oil and natural gas properties for  the
years ended December 31, 2000, 2001, and 2002, are as follows:

<Table>
<Caption>
                                                           YEAR ENDED DECEMBER 31,
                                                       --------------------------------
                                                          2000         2001       2002
                                                       ----------   -----------   -----
<S>                                                    <C>          <C>           <C>
Acquisitions of properties:
  Proved.............................................  $       --   $ 2,332,000   $  --
Exploration costs....................................   4,025,887     9,584,677      --
Development costs....................................   7,264,112    15,447,131      --
Depletion rate per Mcfe..............................         .88           .85      --
</Table>

     The  Company did not incur ceiling  limitation writedowns during 2000, 2001
or 2002.

     Revenues from individual purchasers that exceed 10% of total crude oil  and
natural gas sales are as follows:

<Table>
<Caption>
                                                           YEAR ENDED DECEMBER 31,
                                                      ---------------------------------
                                                         2000          2001       2002
                                                      -----------   -----------   -----
<S>                                                   <C>           <C>           <C>
Plains Marketing and Transportation.................  $22,436,810   $10,984,365   $  --
Crosstex Energy.....................................    5,597,853     4,286,226      --
Aquila Energy Corp..................................    7,727,339     5,701,992      --
Duke Energy Field Services..........................           --     3,352,172      --
</Table>

                                       F-20
<PAGE>
                          NATIONAL ENERGY GROUP, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

     The   Company  no  longer  owns  any   oil  and  natural  gas  assets  and,
consequently, no  longer  transacted business  with  the above  purchasers  from
September 2001 due to the transfer of it's oil and natural gas assets to Holding
LLC.

14.  SUPPLEMENTARY CRUDE OIL AND NATURAL GAS RESERVE INFORMATION (UNAUDITED)

     The  revenues generated by  the Company's operations  were highly dependent
upon the prices of, and demand for,  oil and natural gas. The price received  by
the  Company for its oil and natural gas production depended on numerous factors
beyond the Company's control, including  seasonality, the condition of the  U.S.
economy,  foreign imports,  political conditions  in other  oil and  natural gas
producing countries,  the actions  of the  Organization of  Petroleum  Exporting
Countries and domestic governmental regulations, legislation and policies.

     The   Company  has  made  ordinary  course  capital  expenditures  for  the
development, and  exploitation  of oil  and  natural gas  reserves,  subject  to
economic  conditions. The  Company had  interests in  crude oil  and natural gas
properties that are principally located  onshore in Texas, Louisiana,  Oklahoma,
and  Arkansas. The Company does  not own or lease any  crude oil and natural gas
properties outside the United States.

     In 2000, estimates of the Company's net recoverable crude oil, natural gas,
and  natural  gas  liquid  reserves  were  prepared  by  Netherland,  Sewell   &
Associates,  Inc. The estimated  reserves and related future  net revenues as of
August 31,  2001, were  prepared  internally using  the estimated  reserves  and
related future net revenues prepared by Netherland, Sewell & Associates, Inc. as
of  December 31,  2001 for  the oil  and natural  gas properties  contributed to
Holding LLC. This was accomplished by adding back production for the four  month
period  August 31, 2001 to December 31, 2001 and using constant prices in effect
at August 31, 2001.  Estimated proved net recoverable  reserves as shown  below,
include  only those quantities that can be  expected to be recoverable at prices
and costs  in  effect at  the  balance  sheet dates  under  existing  regulatory
practices and with conventional equipment and operating methods.

     Proved  developed  reserves represent  only those  reserves expected  to be
recovered through  existing wells.  Proved  undeveloped reserves  include  those
reserves  expected to be recovered  from new wells on  undrilled acreage or from
existing  wells  on  which  a  relatively  major  expenditure  is  required  for
recompletion.

                                       F-21
<PAGE>
                          NATIONAL ENERGY GROUP, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

     Net  quantities of proved developed and undeveloped reserves of natural gas
and crude oil, including condensate and  natural gas liquids, are summarized  as
follows:

<Table>
<Caption>
                                                                           NATURAL GAS
                                                              CRUDE OIL     (THOUSAND
                                                              (BARRELS)    CUBIC FEET)
                                                              ----------   -----------
<S>                                                           <C>          <C>
December 31, 1999...........................................   5,614,028    62,896,183
  Sales of reserves in place................................    (429,041)   (4,614,202)
  Purchase of reserves in place.............................     255,998       275,147
  Extensions and discoveries................................      24,000     1,928,963
  Revisions of previous estimates...........................   1,108,496    10,613,028
  Production................................................    (798,711)   (7,080,968)
                                                              ----------   -----------
December 31, 2000...........................................   5,774,770    64,018,151
                                                              ----------   -----------
  Sales of reserves in place................................     (26,159)     (284,477)
  Extensions and discoveries................................      43,125     2,198,994
  Revisions of previous estimates...........................  (1,324,266)   (3,167,139)
  Production................................................    (428,406)   (4,333,425)
  Transfer to NEG Holding LLC...............................  (4,039,064)  (58,432,104)
                                                              ----------   -----------
December 31, 2001...........................................          --            --
                                                              ==========   ===========
Proved developed reserves:
  December 31, 2000.........................................   4,866,957    57,320,408
  December 31, 2001.........................................          --            --
  December 31, 2002.........................................          --            --
</Table>

     The  Company contributed all of  its oil and natural  gas assets to Holding
LLC in September 2001, in exchange for a 50% interest in Holding LLC.

     Reservoir engineering is a subjective process of estimating the volumes  of
underground accumulations of oil and natural which cannot be measured precisely.
The  accuracy of any reserve estimates is a function of the quality of available
data and  of engineering  and geological  interpretation and  judgment.  Reserve
estimates  prepared by other engineers might differ from the estimates contained
herein. Results of drilling, testing, and  production subsequent to the date  of
the  estimate may justify revision of  such estimate. Future prices received for
the sale of oil and  natural gas may be different  from those used in  preparing
these  reports. The amounts and timing of future operating and development costs
may also  differ  from those  used.  Accordingly, reserve  estimates  are  often
different  from  the  quantities of  oil  and  natural gas  that  are ultimately
recovered.

     The following is a summary of a standardized measure of discounted net cash
flows related to the  Company's proved crude oil  and natural gas reserves.  For
these calculations, estimated future cash flows from estimated future production
of  proved reserves were computed  using crude oil and  natural gas prices as of
the end of each period presented. Future development, production and abandonment
costs attributable to the proved reserves were estimated assuming that  existing
conditions  would continue over the economic  lives of the individual leases and
costs were not escalated  for the future. Estimated  future income tax  expenses
were calculated by applying future statutory tax rates (based on the current tax
law  adjusted for permanent differences and tax credits) to the estimated future
pretax net cash flows related to proved crude oil and natural gas reserves, less
the tax basis of the properties involved and net operating loss carryforwards.

     The Company cautions against using this data to determine the fair value of
its crude oil and natural  gas properties. To obtain  the best estimate of  fair
value   of   the   crude  oil   and   natural  gas   properties,   forecasts  of

                                       F-22
<PAGE>
                          NATIONAL ENERGY GROUP, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

future economic conditions, varying discount  rates, and consideration of  other
than  proved reserves  would have  to be  incorporated into  the calculation. In
addition, there are significant uncertainties inherent in estimating  quantities
of  proved  reserves  and in  projecting  rates  of production  that  impair the
usefulness of the data.

     The standardized measure of  discounted future net  cash flows relating  to
proved crude oil and natural gas reserves are summarized as follows:

<Table>
<Caption>
                                                                  DECEMBER 31,
                                                              ---------------------
                                                                  2001        2002
                                                              -------------   -----
<S>                                                           <C>             <C>
Future cash inflows.........................................  $ 284,016,000   $  --
Future production and development costs.....................   (116,958,000)     --
Future income tax expenses..................................             --      --
                                                              -------------   -----
Future net cash flows.......................................    167,058,000      --
10% annual discount for estimated timing of cash flows......    (64,799,200)     --
Transfer of assets to NEG Holding LLC.......................   (102,258,800)     --
                                                              -------------   -----
Standardized measure of discounted future net cash flows....  $          --   $  --
                                                              =============   =====
</Table>

     The  following  are the  principal sources  of  change in  the standardized
measure of discounted future net cash flows:

<Table>
<Caption>
                                                         YEAR ENDED DECEMBER 31,
                                                   ------------------------------------
                                                       2000           2001        2002
                                                   ------------   -------------   -----
<S>                                                <C>            <C>             <C>
Sales and transfers of crude oil and natural gas
  produced, net of production costs..............  $(42,454,251)  $ (27,891,598)  $  --
Net changes in prices and production costs.......   222,214,763    (227,266,392)     --
Development costs incurred during the period and
  changes in estimated future development
  costs..........................................   (13,322,548)    (12,963,031)     --
Purchases of reserves in place...................     5,005,436              --      --
Sales of reserves in place.......................   (11,091,847)     (2,249,136)     --
Extensions and discoveries, less related costs...    10,983,523       4,038,494      --
Revisions of previous quantity estimates.........    73,724,762     (25,919,134)     --
Accretion of discount............................    10,889,270      28,573,300      --
Net change in income taxes.......................   (78,138,335)     78,138,335      --
Changes in production rates (timing) and other...      (970,473)      2,064,962      --
Transfer of assets to NEG Holding LLC............            --    (102,258,800)     --
                                                   ------------   -------------   -----
Net change.......................................  $176,840,300   $(285,733,000)  $  --
                                                   ============   =============   =====
</Table>

     During recent years, there have been significant fluctuations in the prices
paid for crude oil in the world markets. This situation has had a  destabilizing
effect  on crude oil  posted prices in  the United States,  including the posted
prices paid by purchasers of the  Company's crude oil. The net weighted  average
prices  of crude oil and  natural gas at December 31,  2000 and August 31, 2001,
used in  the  above table  were  $25.95 and  $26.02  per barrel  of  crude  oil,
respectively,  and  $10.53 and  $2.49 per  thousand cubic  feet of  natural gas,
respectively.

                                       F-23
<PAGE>
                          NATIONAL ENERGY GROUP, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

15.  QUARTERLY FINANCIAL RESULTS (UNAUDITED)

     The Company's  operating results  for each  quarter of  2001 and  2002  are
summarized below (in thousands, except per share data).

<Table>
<Caption>
                                                         THREE MONTHS ENDED
                                           -----------------------------------------------
                                           MARCH 31   JUNE 30   SEPTEMBER 30   DECEMBER 31
                                           --------   -------   ------------   -----------
<S>                                        <C>        <C>       <C>            <C>
YEAR ENDED DECEMBER 31, 2001
  Total revenues.........................  $14,650    $12,077     $ 9,411        $ 9,571
                                           =======    =======     =======        =======
  Operating income loss..................  $ 9,262    $ 6,111     $ 4,967        $ 7,707
                                           =======    =======     =======        =======
  Income before extraordinary item.......  $ 3,551    $   729     $31,188        $ 1,844
                                           =======    =======     =======        =======
  Net income.............................  $ 3,539    $   729     $31,188        $ 1,844
                                           =======    =======     =======        =======
  Per common share:
     Net Income..........................  $   .32    $   .07     $  2.79        $   .15
                                           =======    =======     =======        =======
  Production:
     Oil (Bbl)...........................      143        170         115             --
     Natural gas (Mcf)...................    1,552      1,654       1,127             --
     Natural gas equivalent (Mcfe).......    2,411      2,671       1,807             --
YEAR ENDED DECEMBER 31, 2002:
  Total revenues.........................  $ 9,844    $10,057     $10,228        $10,387
                                           =======    =======     =======        =======
  Operating income.......................  $ 8,021    $ 8,196     $ 8,596        $ 8,598
                                           =======    =======     =======        =======
  Net income.............................  $ 2,127    $ 2,248     $ 2,508        $ 2,532
                                           =======    =======     =======        =======
  Per common share:
     Net Income..........................  $   .19    $   .20     $   .22        $   .23
                                           =======    =======     =======        =======
</Table>

                                       F-24
<PAGE>

                         REPORT OF INDEPENDENT AUDITORS

The Members
NEG Holding LLC

     We have audited the accompanying consolidated balance sheets of NEG Holding
LLC  ("the  Company")  , as  of  December 31,  2002  and 2001,  and  the related
consolidated statements of operations, members'  equity, and cash flows for  the
years then ended. These consolidated financial statements are the responsibility
of  the Company's  management. Our  responsibility is  to express  an opinion on
these consolidated financial statements based on our audits.

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

     In our opinion,  the consolidated  financial statements  referred to  above
present  fairly, in all material respects, the financial position of NEG Holding
LLC as of December 31,  2002 and 2001, and the  results of their operations  and
their  cash  flows  for the  years  then  ended, in  conformity  with accounting
principles generally accepted in the United States of America.

                                          KPMG LLP

Dallas, Texas
March 27, 2003

                                       F-25
<PAGE>

                                NEG HOLDING LLC

                          CONSOLIDATED BALANCE SHEETS

<Table>
<Caption>
                                                                      DECEMBER 31,
                                                              -----------------------------
                                                                  2001            2002
                                                              -------------   -------------
<S>                                                           <C>             <C>
                                          ASSETS
Current assets:
  Cash and cash equivalents.................................  $  78,300,040   $  15,010,168
  Restricted cash...........................................             --      10,704,144
  Accounts receivable -- oil and natural gas sales..........      5,200,759      10,352,826
  Accounts receivable -- joint interest and other...........        684,383         499,080
  Notes receivable -- other.................................             --       2,774,968
  Hedge deposit.............................................             --       1,800,000
  Drilling prepayments......................................        269,017         726,582
  Other.....................................................      1,163,705         258,639
                                                              -------------   -------------
       Total current assets.................................     85,617,904      42,126,407
Oil and natural gas properties, at cost (full cost method):
  Subject to ceiling limitation.............................    408,153,509     471,051,556
  Accumulated depreciation, depletion, and amortization.....   (288,623,734)   (302,717,442)
                                                              -------------   -------------
     Net oil and natural gas properties.....................    119,529,775     168,334,114
Other property and equipment................................      2,896,529       4,728,496
Accumulated depreciation....................................     (2,284,453)     (3,405,751)
                                                              -------------   -------------
  Net other property and equipment..........................        612,076       1,322,745
Notes receivable -- affiliates..............................     10,939,750      10,939,750
Other long term assets......................................         21,853          14,353
                                                              -------------   -------------
       Total assets.........................................  $ 216,721,358   $ 222,737,369
                                                              =============   =============

                              LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
  Accounts payable -- trade.................................  $   2,500,657   $   2,715,039
  Accounts payable -- affiliate.............................      1,187,458         588,122
  Accounts payable -- revenue...............................      2,923,423       2,898,892
  Prepayments from partners.................................        190,371         248,187
  Other.....................................................        105,838         164,381
  Financial instruments/short sale..........................             --      10,704,144
  Hedge valuation...........................................             --       3,608,462
                                                              -------------   -------------
       Total current liabilities............................      6,907,747      20,927,227
Long term liabilities:
  Note payable..............................................      1,305,035       1,026,442
  Gas balancing.............................................        939,964         941,806
Members' equity.............................................    207,568,612     199,841,894
                                                              -------------   -------------
       Total liabilities and members' equity................  $ 216,721,358   $ 222,737,369
                                                              =============   =============
</Table>

                            See accompanying notes.
                                       F-26
<PAGE>

                                NEG HOLDING LLC

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<Table>
<Caption>
                                                               YEAR ENDED DECEMBER 31,
                                                              -------------------------
                                                                 2001          2002
                                                              -----------   -----------
<S>                                                           <C>           <C>
Revenues:
  Oil and natural gas sales.................................  $12,433,923   $38,928,380
  Field operations..........................................      203,015       403,933
  Plant operations..........................................           --       177,049
                                                              -----------   -----------
     Total revenue..........................................   12,636,938    39,509,362
Costs and expenses:
  Lease operating...........................................    2,687,243     8,508,744
  Field operations..........................................      124,478       420,188
  Plant operations..........................................           --        68,767
  Oil and natural gas production taxes......................      721,364     1,874,854
  Depreciation, depletion and amortization..................    4,348,515    15,509,106
  General and administrative................................    2,106,826     5,682,804
                                                              -----------   -----------
     Total costs and expenses...............................    9,988,426    32,064,463
                                                              -----------   -----------
Operating income............................................    2,648,512     7,444,899
Other income (expense):
  Interest expense..........................................      (63,982)      (96,491)
  Interest income and other, net............................      561,247     1,245,204
  Derivative loss...........................................   (4,647,782)   (3,608,462)
  Interest income from affiliate............................      210,545       546,228
  Commitment fee income.....................................           --       175,000
  Dividend expense..........................................           --      (145,200)
  Gain on sale of securities................................           --     8,711,915
  Unrealized loss on financial instruments..................           --      (346,992)
                                                              -----------   -----------
Net income (loss)...........................................  $(1,291,460)  $13,926,101
                                                              ===========   ===========
</Table>

                            See accompanying notes.
                                       F-27
<PAGE>

                                NEG HOLDING LLC

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<Table>
<Caption>
                                                                YEAR ENDED DECEMBER 31,
                                                              ---------------------------
                                                                  2001           2002
                                                              ------------   ------------
<S>                                                           <C>            <C>
OPERATING ACTIVITIES
Net income (loss)...........................................  $ (1,291,460)  $ 13,926,101
Adjustments to reconcile net income (loss) to net cash
  provided by operating activities:
  Depreciation and depletion................................     4,348,515     15,509,106
  Change in fair market value of derivative contracts.......     4,647,782      3,608,462
  Unrealized loss on financial instruments..................            --        346,992
  Loss on sale of assets....................................            --          7,058
Changes in operating assets and liabilities:
  Accounts receivable.......................................     1,464,018     (2,069,815)
  Notes receivable..........................................            --     (2,774,968)
  Drilling prepayments......................................     1,256,775       (457,565)
  Derivative deposit........................................     6,500,000     (1,800,000)
  Other current assets......................................      (366,434)       912,577
  Accounts payable and accrued liabilities..................      (390,195)      (566,450)
                                                              ------------   ------------
  Net cash provided by operating activities.................    16,169,001     26,641,498
                                                              ------------   ------------
INVESTING ACTIVITIES
Oil and natural gas exploration and development
  expenditures..............................................    (8,794,086)   (18,106,385)
Longfellow Ranch acquisition................................            --    (51,037,347)
Purchases of other property and equipment...................      (124,783)      (222,039)
Increase in restricted cash.................................            --       (346,992)
Proceeds from sales of oil and natural gas properties.......        86,311      1,434,212
Member contributions........................................    81,834,570             --
Guaranteed payment to member................................   (10,870,973)   (21,652,819)
                                                              ------------   ------------
Net cash provided by (used in) investing activities.........    62,131,039    (89,931,370)
                                                              ------------   ------------
Increase (decrease) in cash and cash equivalents............    78,300,040    (63,289,872)
Cash and cash equivalents at beginning of period............            --     78,300,040
                                                              ------------   ------------
Cash and cash equivalents at end of period..................  $ 78,300,040   $ 15,010,168
                                                              ============   ============
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid in cash.......................................  $         --   $     96,491
                                                              ============   ============
NON CASH FINANCING AND INVESTING ACTIVITIES
Contribution of assets by members...........................  $138,116,670   $         --
                                                              ============   ============
</Table>

                            See accompanying notes.
                                       F-28
<PAGE>

                                NEG HOLDING LLC

                   CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY

<Table>
<Caption>
                                                                MEMBERS'
                                                                 EQUITY
                                                              ------------
<S>                                                           <C>
Balance at January 1, 2001..................................  $         --
  Members' contribution.....................................   219,731,045
  Guaranteed payment to member..............................   (10,870,973)
  Net loss..................................................    (1,291,460)
                                                              ------------
Balance at December 31, 2001................................  $207,568,612
  Guaranteed payment to member..............................   (21,652,819)
  Net income................................................    13,926,101
                                                              ------------
  Balance at December 31, 2002..............................  $199,841,894
                                                              ============
</Table>

                            See accompanying notes.
                                       F-29
<PAGE>

                                NEG HOLDING LLC

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 31, 2001

1.  BACKGROUND AND BANKRUPTCY FILING

     NEG Holding LLC (the "Company"), a Delaware limited liability company,  was
formed in August 2000. Start up costs of the Company were incurred by Gascon and
were  not significant.  No other  activity occurred  from August  2000 until the
Members' contributions  in  September  2001.  In exchange  for  an  initial  50%
membership  interest in the Company, on September  12, 2001, but effective as of
May 1, 2001, National Energy Group, Inc. ("NEG") contributed to the Company  all
of  its operating assets and oil and natural gas properties. In exchange for its
initial 50%  membership interest  in the  Company, Gascon  Partners  ("Gascon"),
contributed  its  sole membership  interest in  Shana National  LLC, an  oil and
natural gas producing  company, and  cash, including a  $10.9 million  Revolving
Note  issued to Arnos  Corp. ("Arnos"), evidencing the  borrowings under the NEG
revolving credit  facility.  In  connection  with  the  foregoing,  the  Company
initially  owns 100% of the membership interest in NEG Operating LLC ("Operating
LLC"), a Delaware limited  liability company. Gascon  is currently the  managing
member  of the Company. All of the oil and natural gas assets contributed by NEG
and all of the oil and natural gas assets associated with Gascon's  contribution
to  the Company were transferred from the  Company to Operating LLC on September
12, 2001, but effective as of May 1, 2001. Allocation of membership interest  in
the  Company was  based principally  on the estimated  fair value  of the assets
contributed as of  May 1, 2001,  with each member  contributing assets of  equal
fair  value. The following summarizes the  historical book carrying value of the
net assets contributed as of September 1, 2001.

<Table>
<Caption>
                                            NATIONAL ENERGY
                                              GROUP, INC.        GASCON         TOTAL
                                            ---------------   ------------   ------------
<S>                                         <C>               <C>            <C>
Current assets............................   $ 11,535,745     $ 97,183,477   $108,719,222
Net oil and natural gas properties........     84,983,139       30,573,625    115,556,764
Hedge assets..............................      4,807,689               --      4,807,689
Intercompany receivable...................             --        4,783,737      4,783,737
                                             ------------     ------------   ------------
Total assets..............................   $101,326,573     $132,540,839   $233,867,412
                                             ============     ============   ============
Current liabilities.......................   $  4,157,430     $  2,657,190   $  6,814,620
Long-term liabilities.....................        940,033        1,377,782      2,317,815
Intercompany payable......................      4,783,737               --      4,783,737
Members' equity...........................     91,445,373      128,505,867    219,951,240
                                             ------------     ------------   ------------
Total liabilities and members' equity.....   $101,326,573     $132,540,839   $233,867,412
                                             ============     ============   ============
</Table>

     The Holding LLC  Operating Agreement  entered into on  September 12,  2001,
contains  a provision that allows Gascon at any time, in its sole discretion, to
redeem NEG's membership interest  in the Company  at a price  equal to the  fair
market  value of such interest determined as if  Holding LLC had sold all of its
assets for fair market value and liquidated.

     The Company shall be dissolved and its affairs wound up in accordance  with
the  Delaware  Limited  Liability  Company Act  and  the  Holding  LLC Operating
Agreement on December 31, 2024, unless the Company shall be dissolved sooner and
its affairs wound up in accordance  with the Delaware Limited Liability  Company
Act or the Holding LLC Operating Agreement.

                                       F-30
<PAGE>
                                NEG HOLDING LLC

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2.  SIGNIFICANT ACCOUNTING POLICIES

  CONSOLIDATION

     The  consolidated financial statements include the accounts of the Company,
and its sole subsidiary Operating LLC. All significant intercompany transactions
and balances have been eliminated.

  ACCOUNTING ESTIMATES

     The preparation  of  financial  statements in  conformity  with  accounting
principles   generally  accepted  in  the  United  States  of  America  requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and  disclosure of contingent  assets and liabilities  at
the  date of the financial  statements and the reported  amounts of revenues and
expenses during the  reporting period.  Actual results could  differ from  these
estimates.

  CASH AND CASH EQUIVALENTS

     Cash   and  cash  equivalents  may   include  demand  deposits,  short-term
commercial paper,  and/or  money-market  investments with  maturities  of  three
months or less when purchased.

  OIL AND NATURAL GAS PROPERTIES

     The  Company utilizes the full cost method  of accounting for its crude oil
and natural  gas properties.  Under the  full cost  method, all  productive  and
nonproductive  costs incurred  in connection with  the acquisition, exploration,
and development  of crude  oil  and natural  gas  reserves are  capitalized  and
amortized  on the units-of-production  method based upon  total proved reserves.
The costs of unproven properties are excluded from the amortization  calculation
until  the individual properties are evaluated and a determination is made as to
whether reserves exist. Conveyances of properties, including gains or losses  on
abandonments  of properties, are treated as adjustments to the cost of crude oil
and natural gas properties, with no gain or loss recognized.

     Under the full  cost method,  the net  book value  of oil  and natural  gas
properties,  less related  deferred income taxes,  may not  exceed the estimated
after-tax future  net  revenues from  proved  oil and  natural  gas  properties,
discounted  at 10% per  year (the ceiling limitation).  In arriving at estimated
future net  revenues, estimated  lease  operating expenses,  development  costs,
abandonment  costs,  and certain  production  related and  ad-valorem  taxes are
deducted. In calculating future net revenues, prices and costs in effect at  the
time of the calculation are held constant indefinitely, except for changes which
are fixed and determinable by existing contracts. The net book value is compared
to  the ceiling limitation on a quarterly basis.  The excess, if any, of the net
book value above  the ceiling  limitation is  required to  be written  off as  a
non-cash  expense. The  Company did  not incur a  ceiling writedown  in 2001 and
2002. Using December 31, 2001, constant prices and costs in accordance with  the
published guidelines of the SEC, there was a potential ceiling writedown of $6.3
million in the fourth quarter of 2001. On March 18, 2002, the ceiling limitation
test  was  performed using  pricing in  effect  at that  date. The  net weighted
average prices used were $23.79 per barrel  of oil and $3.49 per Mcf of  natural
gas.  Using this pricing, there  is no ceiling limitation  as of March 18, 2002.
There can be no assurance that there will not be additional writedowns in future
periods under  the full  cost method  of  accounting as  a result  of  sustained
decreases in oil and natural gas prices or other factors.

     The Company has capitalized internal costs of $202,000 and $601,000 for the
years  ended  December 31,  2001 and  2002,  respectively, as  costs of  oil and
natural gas  properties. Such  capitalized costs  include salaries  and  related
benefits   of  individuals  directly  involved  in  the  Company's  acquisition,
exploration, and development activities based on a percentage of their salaries.

     The Company is subject to extensive federal, state, and local environmental
laws and regulations. These  laws, which are  constantly changing, regulate  the
discharge    of    materials   into    the    environment   and    may   require

                                       F-31
<PAGE>
                                NEG HOLDING LLC

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the Company to  remove or mitigate  the environment effects  of the disposal  or
release  of  petroleum or  chemical substances  at various  sites. Environmental
expenditures are  expensed or  capitalized depending  on their  future  economic
benefit.  Expenditures  that  relate to  an  existing condition  caused  by past
operations and that have no  future economic benefits are expensed.  Liabilities
for  expenditures  of  a  noncapital  nature  are  recorded  when  environmental
assessment and/or  remediation is  probable,  and the  costs can  be  reasonably
estimated.

     The  Company's operations are subject  to all of the  risks inherent in oil
and natural gas exploration, drilling  and production. These hazards can  result
in  substantial losses to the  Company due to personal  injury and loss of life,
severe damage  to  and  destruction  of property  and  equipment,  pollution  or
environmental  damage,  or  suspension  of  operations.  The  Company  maintains
insurance of various types customary in the industry to cover its operations and
believes it is insured  prudently against certain of  these risks. In  addition,
the  Company maintains operator's extra  expense coverage that provides coverage
for the care, custody and control of wells drilled by the Company. The Company's
insurance does not cover every potential  risk associated with the drilling  and
production  of oil  and natural  gas. As  a prudent  operator, the  Company does
maintain levels of insurance  customary in the industry  to limit its  financial
exposure in the event of a substantial environmental claim resulting from sudden
and  accidental  discharges.  However,  100%  coverage  is  not  maintained. The
occurrence of a  significant adverse  event, the risks  of which  are not  fully
covered  by insurance,  could have  a material  adverse effect  on the Company's
financial condition and  results of  operations. Moreover, no  assurance can  be
given that the Company will be able to maintain adequate insurance in the future
at  rates  it considers  reasonable. The  Company believes  that it  operates in
compliance with government regulations and  in accordance with safety  standards
which meet or exceed industry standards.

     In  November 2002, the  Company completed the  acquisition of producing oil
and natural gas  properties in  Pecos County,  Texas known  as Longfellow  Ranch
Field.  The consideration  for this  acquisition consisted  of $45.4  million in
cash, which was funded from available cash.

     In December  2002,  the Company  completed  the acquisition  of  additional
interest in Longfellow Ranch Field in Pecos County, Texas. The consideration for
this  acquisition  consisted of  $2.9  million in  cash,  which was  funded from
available cash.

  OTHER PROPERTY AND EQUIPMENT

     Other property  and  equipment  includes  furniture,  fixtures,  and  other
equipment.  Such  assets are  recorded at  cost and  are depreciated  over their
estimated useful lives using the straight-line method.

     Maintenance and repairs are charged against income when incurred;  renewals
and  betterments, which extend  the useful lives of  property and equipment, are
capitalized.

  INCOME TAXES

     The Company will  be taxed as  a partnership under  federal and  applicable
state  laws; therefore, the Company has not provided for federal or state income
taxes since these taxes are the responsibility of the Members.

  FINANCIAL INSTRUMENTS

     The Company  sells crude  oil  and natural  gas  to various  customers.  In
addition,  the Company participates with other parties in the operation of crude
oil  and  natural  gas  wells.  Substantially  all  of  the  Company's  accounts
receivable  are  due from  either purchasers  of  crude oil  and natural  gas or
participants in crude oil and natural gas wells for which the Company serves  as
the  operator. Generally, operators of crude oil and natural gas properties have
the right to offset future revenues  against unpaid charges related to  operated
wells. Crude oil and natural gas sales are generally unsecured.
                                       F-32
<PAGE>
                                NEG HOLDING LLC

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Allowances for bad debt totaled approximately $229,000 at December 31, 2001
and  $104,000 at December 31, 2002. At  December 31, 2002, the carrying value of
the Company's accounts receivable approximates fair value.

  NATURAL GAS PRODUCTION IMBALANCES

     The Company accounts for natural gas production imbalances using the  sales
method,  whereby the Company recognizes  revenue on all natural  gas sold to its
customers notwithstanding the fact that its  ownership may be less than 100%  of
the  natural gas  sold. Liabilities are  recorded by the  Company for imbalances
greater than the  Company's proportionate share  of remaining estimated  natural
gas reserves.

  COMPREHENSIVE INCOME

     Comprehensive  income  is defined  as the  change in  equity of  a business
enterprise during a period from transactions and other events and  circumstances
from non-owner sources. There were no differences between net earnings and total
comprehensive income in 2001 and 2002.

  DERIVATIVES

     The  Company  follows  SFAS  No. 133,  "Accounting  for  Certain Derivative
Instruments and Certain Hedging  Activities" and SFAS  No. 138, "Accounting  for
Certain  Derivative Instruments  and Certain  Hedging Activity,  an Amendment of
SFAS 133" that  requires, that  all derivative  instruments be  recorded on  the
balance sheet at their respective fair value.

     Prior  to contributing all oil  and natural gas assets  to the Company, NEG
periodically managed its exposure to fluctuations in oil and natural gas  prices
by entering into various derivative instruments consisting principally of collar
options  and swaps. NEG elected not to designate these instruments as hedges for
accounting purposes, accordingly the  change in unrealized  gains and losses  is
included  in other income and expense. Cash settlements of these instruments are
included in  oil and  natural gas  sales. The  Company has  accounted for  these
instruments  in the same  manner. The following  summarizes the cash settlements
and unrealized gains and losses for the years ended December 31, 2001 and 2002:

<Table>
<Caption>
                                                                 2001         2002
                                                              ----------   ----------
<S>                                                           <C>          <C>
Gross cash receipts.........................................  $1,400,836   $1,246,080
Gross cash payments.........................................  $  178,805   $    2,430
Valuation loss..............................................  $4,647,782   $3,608,462
</Table>

     While the  use of  derivative  contracts can  limit  the downside  risk  of
adverse  price  movements,  it  may  also  limit  future  gains  from  favorable
movements. The  Company addresses  market risk  by selecting  instruments  whose
value fluctuations correlate strongly with the underlying commodity. Credit risk
related  to  derivative  activities  is  managed  by  requiring  minimum  credit
standards  for  counterparties,  periodic   settlements,  and  mark  to   market
valuations.

     The  Company received various commodity  swap agreements ("contracts") from
Gascon and NEG as part of  their initial contribution of assets and  liabilities
in September 2001. The counterparty to these instruments was through Enron North
America  Corp. As of December 2001, Enron Corp. and Enron North America Corp. et
al ("Enron")  filed for  protection under  Chapter 11,  Title 18  of the  United
States  Code.  Enron  ceased  making payments  under  the  various  contracts in
November 2001,  prior  to  the  bankruptcy filings.  Accordingly,  each  of  the
contracts  shall be administered  as a claim  filed by the  Company in the Enron
bankruptcy proceedings. The Company estimates its claim against Enron related to
these  contracts  is  approximately  $7.25  million.  The  $7.25  million  claim
represents  a  hedge against  future oil  and  natural gas  prices and  does not
reflect a cash  gain or  loss on  the contracts. For  this reason,  no asset  or
liability was

                                       F-33
<PAGE>
                                NEG HOLDING LLC

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

recorded  at December 31, 2001 and the Company recorded a net non cash valuation
loss of  $4.6  million  through  December 31,  2001  in  connection  with  these
contracts.  The Company  cannot predict  what amount,  if any  may be ultimately
received in the Enron bankruptcy proceeding.

     The following is  a summary of  the oil and  natural gas no-cost  commodity
price collars with Shell Trading [US] Company outstanding at December 31, 2002:

<Table>
<Caption>
                                                VOLUME/     PRODUCTION
DATE OF CONTRACT                                 MONTH        MONTH      FLOOR    CEILING
----------------                              -----------   ----------   ------   -------
<S>                                           <C>           <C>          <C>      <C>
August 2002.................................  30,000 Bbls      2003      $23.55   $26.60
August 2002.................................  300,000 Mcf      2003      $ 3.25   $ 4.62
November 2002...............................  300,000 Mcf      2003      $ 3.50   $ 4.74
November 2002...............................  300,000 Mcf      2004      $ 3.35   $ 4.65
November 2002...............................  300,000 Mcf      2005      $ 3.25   $ 4.60
</Table>

     A liability of $3.6 million has been recorded by the Company as of December
31, 2002 in connection with these contracts.

     On  January 28, 2003, the Company entered  into an eleven month fixed price
swap agreement with Plains Marketing, L.P,  consisting of a contract for  28,000
barrels  of oil  per month at  a fixed  price of $28.35  effective February 2003
through December 2003.

  RECENT ACCOUNTING PRONOUNCEMENTS

     In June  2001,  the  Financial Accounting  Standards  Board  (FASB)  issued
Statements  of Financial  Accounting Standards  (SFAS) No.  143, "Accounting for
Asset Retirement Obligations" ("SFAS 143"). SFAS No. 143 requires the Company to
record the fair value of  an asset retirement obligation  as a liability in  the
period  in which it incurs a legal  obligation associated with the retirement of
tangible long-lived  assets  that  result from  the  acquisition,  construction,
development,  and/or normal use of  the assets. It also  requires the Company to
record a corresponding  asset that is  depreciated over the  life of the  asset.
Subsequent  to the initial  measurement of the  asset retirement obligation, the
obligation will be adjusted at the end of each period to reflect the passage  of
time  and changes in the estimated  future cash flows underlying the obligation.
The Company is required to adopt SFAS No. 143 on January 1, 2003. Upon  adoption
of  SFAS No. 143, the  Company estimates the impact will  be to increase oil and
natural gas properties $4.9 million, and to record an abandonment obligation  of
$3.0  million and a  cumulative transition adjustment gain  of $1.9 million. The
Company will finalize  these calculations and  record the effects  in the  first
quarter of 2003.

     On  October 3,  2001, the  FASB issued  SFAS No.  144, "Accounting  for the
Impairment or  Disposal  of  Long-Lived Assets"  ("SFAS  144")  which  addresses
financial  accounting and reporting for the impairment or disposal of long-lived
assets. SFAS No. 144 is effective for fiscal years beginning after December  15,
2001,  and interim  periods within those  fiscal years  with earlier application
encouraged. This  statement  will  have  no material  impact  on  the  Company's
financial statements.

     In  June  2002,  the  FASB  issued  SFAS  No.  146,  "Accounting  for Costs
Associated with  Exit  or  Disposal  Activities."  ("SFAS  146")  SFAS  No.  146
addresses  financial accounting and reporting for  costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force (EITF) Issue  94-3,
Liability  Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity. The provisions of this Statement are effective for exit  or
disposal  activities  that are  initiated after  December  31, 2002,  with early
application encouraged. The adoption of SFAS No.  146 is not expected to have  a
material effect on the Company's financial statements.

                                       F-34
<PAGE>
                                NEG HOLDING LLC

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In  November  2002,  the  FASB issued  Interpretation  No.  45, Guarantor's
Accounting  and  Disclosure  Requirements  for  Guarantees,  Including  Indirect
Guarantees  of Indebtedness to Others, an  interpretation of FASB Statements No.
5,  57  and  107  and  a   rescission  of  FASB  Interpretation  No.  34.   This
Interpretation  elaborates on the disclosures  to be made by  a guarantor in its
interim and annual financial statements  about its obligations under  guarantees
issued.  The  Interpretation  also clarifies  that  a guarantor  is  required to
recognize, at inception of a  guarantee, a liability for  the fair value of  the
obligation undertaken. The initial recognition and measurement provisions of the
Interpretation  are applicable to  guarantees issued or  modified after December
31, 2002  and are  not  expected to  have a  material  effect on  the  Company's
financial  statements. The  disclosure requirements are  effective for financial
statements of interim and annual periods ending after December 31, 2002.

     In January 2003, the FASB  issued Interpretation No. 46, "Consolidation  of
Variable   Interest   Entities,  an   interpretation  of   ARB  No.   51".  This
Interpretation addresses the consolidation  by business enterprises of  variable
interest  entities as defined in  the Interpretation. The Interpretation applies
immediately to variable  interests in variable  interest entities created  after
January  31,  2003,  and to  variable  interests in  variable  interest entities
obtained after January 31, 2003. The  application of this Interpretation is  not
expected  to have a  material effect on the  Company's financial statements. The
Interpretation requires certain disclosures in financial statements issued after
January 31, 2003 if it is reasonably possible that the Company will  consolidate
or disclose information about variable interest entities when the Interpretation
becomes  effective.  The  Company  is currently  evaluating  the  impact  of the
adoption of Interpretation No. 46.

3.  MANAGEMENT AGREEMENT

     The management and operation  of Operating LLC is  being undertaken by  NEG
pursuant  to a Management  Agreement (the "Management  Agreement") which NEG has
entered into with Operating LLC. The strategic direction of Operating LLC's  oil
and  natural gas  business, including oil  and natural gas  drilling and capital
investments, which shall  be controlled by  the managing member  of the  Company
(currently  Gascon).  The Management  Agreement  provides that  NEG  will manage
Operating LLC's oil  and natural gas  assets and business  until the earlier  of
November  1, 2006,  or such  time as  Operating LLC  no longer  owns any  of the
managed oil  and  natural  gas  properties. NEG's  employees  will  conduct  the
day-to-day operations of Operating LLC's oil and natural gas properties, and all
costs  and  expenses  incurred in  the  operation  of the  oil  and  natural gas
properties shall be borne  by Operating LLC,  although the Management  Agreement
provides  that  the  salary  of  NEG's  Chief  Executive  Officer  shall  be 70%
attributable to the managed oil and natural gas properties, and the salaries  of
each   of  the  General  Counsel  and  Chief  Financial  Officer  shall  be  20%
attributable to the  managed oil  and natural  gas properties.  In exchange  for
NEG's  management services, Operating LLC shall pay NEG a management fee of 115%
of the actual direct and  indirect administrative and reasonable overhead  costs
incurred  by NEG in  operating the oil  and natural gas  properties which either
NEG, or Operating LLC may seek to  change within the range of 110%-115% as  such
change is warranted; however, the parties have agreed to consult with each other
to ensure that such administrative and reasonable overhead costs attributable to
the managed properties are properly reflected in the management fee paid to NEG.
In  addition, Operating LLC has agreed to  indemnify NEG to the extent it incurs
any liabilities in connection with its operation of the assets and properties of
Operating LLC, except to the extent of its gross negligence, or misconduct.  The
Company  recorded $2.7 million and  $7.6 million as a  management fee to NEG for
the years ended December 31,  2001 and 2002. These  amounts are included in  the
general and administrative expenses.

4.  ACQUISITIONS

     In  November 2002, the  Company completed the  acquisition of producing oil
and natural gas  properties in  Pecos County,  Texas known  as Longfellow  Ranch
Field.  The consideration  for this  acquisition consisted  of $45.4  million in
cash, which was funded from available cash.
                                       F-35
<PAGE>
                                NEG HOLDING LLC

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In  December  2002, the  Company  completed the  acquisition  of additional
interest in Longfellow Ranch Field in Pecos County, Texas. The consideration for
this acquisition  consisted of  $2.9  million in  cash,  which was  funded  from
available cash.

     The  following pro forma data  presents the results of  the Company for the
year ended 2002, as if the acquisition of properties had occurred on January  1,
2002. The pro forma results of operations are presented for comparative purposes
only  and are not  necessarily indicative of  the results which  would have been
obtained had the acquisition been  consummated as presented. The following  data
reflect  pro forma adjustments for the  oil and natural gas revenues, production
costs, and depreciation and depletion related to the properties (in thousands).

<Table>
<Caption>
                                                               PRO FORMA
                                                               YEAR ENDED
                                                              DECEMBER 31,
                                                                  2002
                                                              ------------
                                                              (UNAUDITED)
<S>                                                           <C>
Revenues:
  Oil and natural gas sales.................................    $ 47,659
  Plant operations..........................................       1,515
  Field operations..........................................         404
                                                                --------
     Total revenue..........................................      49,578
Costs and expenses:
  Oil and natural gas production taxes......................      (2,414)
  Lease operating...........................................     (12,250)
  Depreciation and depletion................................     (20,206)
  Plant operations expense..................................        (529)
  Field operations..........................................        (420)
  General and administrative................................      (5,683)
                                                                --------
     Total expense..........................................     (41,502)
                                                                --------
Operating income............................................    $  8,076
                                                                ========
Net income..................................................    $ 14,557
                                                                ========
</Table>

     The impact of  this acquisition  was insignificant  to the  2001 pro  forma
results of operations.

5.  NOTE RECEIVABLE FROM AFFILIATE

     A  $10.9 million note receivable from NEG was contributed to the Company as
part of Gascon's contribution  on September 12, 2001.  The maturity date on  the
note was extended to December 31, 2003. The interest rate on the note accrues at
variable rates based on prime rates. The carrying value of the note approximates
the  fair value  at December  31, 2002. This  note was  distributed to  NEG as a
priority distribution on March 26, 2003.

6.  INVESTMENTS

     In January 2002, the Company acquired stock valued at $49.95 million, which
was sold  at  a  gain  of  $8.7  million  in  February  2002.  In  an  unrelated
transaction,  the Company completed a  short sale of stock  in November 2002 for
$10.4 million. At December 31, 2002, this short sale position remained open  and
the  mark-to-market value of such  stock resulted in an  unrealized loss of $0.3
million. The proceeds  received and  additional amounts required  to settle  the
short sale obligation of $10.7 million are classified as restricted cash.

                                       F-36
<PAGE>
                                NEG HOLDING LLC

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7.  SUBSEQUENT EVENTS

     On  March  26,  2003,  the  Company  distributed  the  $10.9  million  note
outstanding  under  the  existing   credit  facility  to   NEG  as  a   priority
distribution.  Also, on March 26, 2003 NEG, Arnos and Operating LLC entered into
an agreement to assign the existing credit facility to Operating LLC.  Effective
with  this  assignment,  Arnos  amended  the  credit  facility  to  increase the
revolving commitment to $150 million, increase the borrowing base to $75 million
and extend  the revolving  due date  until June  30, 2004.  Concurrently,  Arnos
extended  a  $42.7  million  loan  to Operating  LLC  under  the  amended credit
facility; Operating  LLC then  distributed  $42.7 million  to the  Company  who,
thereafter,  made a  $42.7 million  priority distribution  to NEG.  NEG utilized
these funds to  pay the entire  amount of the  Reinstated Interest and  interest
accrued thereon outstanding on March 27, 2003.

8.  COMMITMENTS AND CONTINGENCIES

     The  Company has  entered into  a management  agreement with  NEG to manage
Operating LLC's oil  and natural  gas assets until  the earlier  of November  1,
2006,  or such  time as  Operating LLC no  longer owns  any oil  and natural gas
assets.

     The Company is obligated  to make semi-annual  payments to NEG  "Guaranteed
Payments"  as defined in the Holding  LLC Operating Agreement referred herein. A
payment for $10.9 million was made  in November 2001 under this obligation.  Two
payments  totaling $21.7  million were  made in  2002 under  this obligation. In
March 2003, the Company made a priority distribution of $53.6 million to NEG.

9.  INVESTMENT IN NEG HOLDING LLC OPERATING AGREEMENT

     Under the Holding  LLC Operating  Agreement, NEG is  to receive  guaranteed
payments  in addition to a priority distribution amount of $202.2 million before
Gascon receives any monies. The priority distribution is to be made on or before
November 1, 2006. Guaranteed payments  are to be paid,  on a semi annual  basis,
based  on  an  annual  interest  rate  of  10.75%  of  the  outstanding priority
distribution  amount.  After  the  payments   to  NEG,  Gascon  is  to   receive
distributions  equivalent  to the  priority  distribution amount  and guaranteed
payments plus other amounts as defined. After the above distributions to NEG and
Gascon, additional distributions,  if any,  are to  be made  in accordance  with
their respective capital accounts. The order of distributions is listed below.

     The Holding LLC Operating Agreement requires that (provided full payment of
all  outstanding guaranteed payments has been  made) distributions shall be made
to both NEG and Gascon as follows:

     - First and through November 1,  2006, to NEG in  an amount equal to  NEG's
       initial  priority  amount  of  $202.2  million  minus  any  distributions
       previously made to NEG.

     - Second, to Gascon in an amount equal to the excess of (a) the sum of  (i)
       NEG's  initial  priority amount  of $202.2  million, (ii)  any additional
       capital contributions  made by  Gascon, (iii)  the aggregate  sum of  all
       Guaranteed  Payments,  and (iv)  an amount  equal  to the  Accrued Gascon
       Amount (which, under the Holding LLC Operating Agreement, means an amount
       equal to the  aggregate of interest  that would be  computed annually  if
       interest  were imposed at a rate equal to  the prime rate plus 1/2% as of
       the close of each  fiscal year on the  excess of (a) the  sum of (i)  the
       cumulative  Guaranteed  Payments and  (ii) the  aggregate of  any Accrued
       Gascon  Amount  computed  in  prior   years,  over  (b)  the   cumulative
       distributions  by  the Company  LLC  to Gascon),  over  (b) distributions
       previously made to Gascon pursuant to  this provision in the Holding  LLC
       Operating Agreement.

     - Third, to NEG and Gascon in accordance with their then respective Capital
       Accounts.

                                       F-37
<PAGE>
                                NEG HOLDING LLC

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10.  CRUDE OIL AND NATURAL GAS PRODUCING ACTIVITIES

     Costs incurred in connection with the exploration acquisition, development,
and  exploitation of the Company's crude oil  and natural gas properties for the
year ended  December  31,  2001 and  2002,  (all  of which  occurred  after  the
contribution of assets by NEG and Gascon) are as follows:

<Table>
<Caption>
                                                              YEAR ENDED DECEMBER 31,
                                                              ------------------------
                                                                 2001         2002
                                                              ----------   -----------
<S>                                                           <C>          <C>
Acquisition of properties...................................  $       --   $49,049,174
Exploration costs...........................................   2,817,625     1,072,997
Development costs...........................................   5,976,461    16,124,610
Depletion rate per Mcfe.....................................  $     1.04   $      1.29
</Table>

     Revenues  from individual purchasers that exceed 10% of total crude oil and
natural gas sales are as follows:

<Table>
<Caption>
                                                              YEAR ENDED DECEMBER 31,
                                                              ------------------------
                                                                 2001         2002
                                                              ----------   -----------
<S>                                                           <C>          <C>
Plains Marketing and Transportation.........................  $4,262,310   $12,512,767
Crosstex Energy Services, Inc. .............................          --     4,843,756
</Table>

11.  SUPPLEMENTARY CRUDE OIL AND NATURAL GAS RESERVE INFORMATION (UNAUDITED)

     The revenues generated  by the  Company's operations  are highly  dependent
upon  the prices of, and demand for, oil  and natural gas. The price received by
the Company for its oil and  natural gas production depends on numerous  factors
beyond  the Company's control, including seasonality,  the condition of the U.S.
economy, foreign  imports, political  conditions in  other oil  and natural  gas
producing  countries,  the actions  of the  Organization of  Petroleum Exporting
Countries and domestic governmental regulations, legislation and policies.

     The  Company  has  made  ordinary  course  capital  expenditures  for   the
development  and  exploitation  of  oil and  natural  gas  reserves,  subject to
economic conditions. The  Company has  interests in  crude oil  and natural  gas
properties  that are principally located  onshore in Texas, Louisiana, Oklahoma,
and Arkansas. The Company does  not own or lease any  crude oil and natural  gas
properties outside the United States.

     In  2001 and  2002, estimates of  the Company's net  recoverable crude oil,
natural gas, and natural gas liquid reserves were prepared by Netherland, Sewell
& Associates,  Inc.  and Prator  Bett,  LLC. Estimated  proved  net  recoverable
reserves as shown below include only those quantities that can be expected to be
recoverable  at prices  and costs  in effect  at the  balance sheet  dates under
existing regulatory  practices and  with  conventional equipment  and  operating
methods.

     Proved  developed  reserves represent  only those  reserves expected  to be
recovered through  existing wells.  Proved  undeveloped reserves  include  those
reserves  expected to be recovered  from new wells on  undrilled acreage or from
existing  wells  on  which  a  relatively  major  expenditure  is  required  for
recompletion.

                                       F-38
<PAGE>
                                NEG HOLDING LLC

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Net  quantities of proved developed and undeveloped reserves of natural gas
and crude oil, including condensate and  natural gas liquids, are summarized  as
follows:

<Table>
<Caption>
                                                                          NATURAL GAS
                                                              CRUDE OIL    (THOUSAND
                                                              (BARRELS)   CUBIC FEET)
                                                              ---------   -----------
<S>                                                           <C>         <C>
January 1, 2001.............................................         --            --
  Contribution from NEG.....................................  4,039,064    58,432,104
  Contribution from Gascon..................................  1,009,388    13,848,084
  Purchase of reserves in place.............................      4,575       338,406
  Extensions and discoveries................................    351,245    12,518,633
  Revisions of previous estimates...........................         --        17,048
  Production................................................   (245,389)   (2,723,000)
                                                              ---------   -----------
December 31, 2001...........................................  5,158,883    82,431,275
  Purchases of reserves in place............................     30,436    34,196,450
  Sales of reserves in place................................   (223,214)           --
  Extensions and discoveries................................     28,892    14,403,643
  Revisions of previous estimates...........................    842,776      (636,931)
  Production................................................   (629,100)   (7,827,100)
                                                              ---------   -----------
December 31, 2002...........................................  5,208,673   122,567,337
                                                              =========   ===========
Proved developed reserves:
  December 31, 2001.........................................  4,607,434    67,188,454
  December 31, 2002.........................................  3,539,450    92,382,411
</Table>

     Reservoir  engineering is a subjective process of estimating the volumes of
underground accumulations  of  oil and  natural  gas which  cannot  be  measured
precisely. The accuracy of any reserve estimates is a function of the quality of
available  data and of  engineering and geological  interpretation and judgment.
Reserve estimates prepared by  other engineers might  differ from the  estimates
contained herein. Results of drilling, testing, and production subsequent to the
date  of  the estimate  may  justify revision  of  such estimate.  Future prices
received for the sale of oil and natural gas may be different from those used in
preparing these  reports.  The  amounts  and  timing  of  future  operating  and
development  costs  may  also  differ  from  those  used.  Accordingly,  reserve
estimates are often different  from the quantities of  oil and natural gas  that
are ultimately recovered.

     The following is a summary of a standardized measure of discounted net cash
flows  related to the Company's  proved crude oil and  natural gas reserves. For
these calculations, estimated future cash flows from estimated future production
of proved reserves were computed  using crude oil and  natural gas prices as  of
the end of each period presented. Future development, production and abandonment
costs  attributable to the proved reserves were estimated assuming that existing
conditions would continue over the economic  lives of the individual leases  and
costs were not escalated for the future.

     The Company cautions against using this data to determine the fair value of
its  crude oil and natural  gas properties. To obtain  the best estimate of fair
value of the crude oil and natural gas properties, forecasts of future  economic
conditions,  varying  discount rates,  and  consideration of  other  than proved
reserves would have to be incorporated into the calculation. In addition,  there
are  significant  uncertainties  inherent  in  estimating  quantities  of proved
reserves and in projecting rates of production that impair the usefulness of the
data.

                                       F-39
<PAGE>
                                NEG HOLDING LLC

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The  standardized measure of  discounted future net  cash flows relating to
proved crude oil and natural gas reserves are summarized as follows:

<Table>
<Caption>
                                                                 DECEMBER 31,
                                                         -----------------------------
                                                             2001            2002
                                                         -------------   -------------
<S>                                                      <C>             <C>
Future cash inflows....................................  $ 316,298,819   $ 758,633,342
Future production and development costs................   (127,339,430)   (248,072,491)
                                                         -------------   -------------
Future net cash flows..................................    188,959,389     510,560,851
10% annual discount for estimated timing of cash
  flows................................................    (75,837,589)   (199,928,529)
                                                         -------------   -------------
Standardized measure of discounted future net cash
  flows................................................  $ 113,121,800   $ 310,632,322
                                                         =============   =============
</Table>

     The following  are the  principal  sources of  change in  the  standardized
measure of discounted future net cash flows:

<Table>
<Caption>
                                                             YEAR ENDED DECEMBER 31,
                                                           ---------------------------
                                                               2001           2002
                                                           ------------   ------------
<S>                                                        <C>            <C>
Contribution from NEG....................................  $102,258,800   $         --
Contribution from Gascon.................................    34,528,067             --
Purchases of reserves....................................            --    102,916,472
Sales of reserves in place...............................            --     (2,509,704)
Sales and transfers of crude oil and natural gas
  produced, net of production costs......................    (9,025,316)   (31,115,247)
Net changes in prices and production costs...............   (10,960,878)   112,380,701
Development costs incurred during the period and changes
  in estimated future development costs..................   (33,987,448)   (45,230,813)
Extensions and discoveries, less related costs...........    24,358,514     43,640,702
Revisions of previous quantity estimates.................        11,491      8,510,824
Accretion of discount....................................     3,408,627     11,312,180
Changes in production rates (timing) and other...........     2,529,943     (2,394,593)
                                                           ------------   ------------
Net change...............................................  $113,121,800   $197,510,522
                                                           ============   ============
</Table>

     During recent years, there have been significant fluctuations in the prices
paid  for crude oil in the world markets. This situation has had a destabilizing
effect on crude  oil posted prices  in the United  States, including the  posted
prices  paid by purchasers of the Company's  crude oil. The net weighted average
prices of crude oil and natural gas at  December 31, 2001 and 2002, used in  the
above  table were $18.48 and  $29.86 per barrel of  crude oil, respectively, and
$2.68 and $4.92 per thousand cubic feet of natural gas, respectively.

                                       F-40
<PAGE>

                               INDEX TO EXHIBITS

<Table>
<Caption>
EXHIBIT
NUMBER                           DESCRIPTION
-------                          -----------
<C>      <S>
 2.1     Debtors Joint Plan of Reorganization under Chapter 11 of the
         Bankruptcy Code dated May 12, 2000(12)
 2.2     Debtor's  and  Official  Committee  of  Unsecured Creditors'
         Joint  Disclosure  Statement  under  Section  1125  of   the
         Bankruptcy   Code  Regarding   the  Debtor's   and  Official
         Committee   of   Unsecured   Creditors'   Joint   Plan    of
         Reorganization  under  Chapter  11 of  the  Bankruptcy Code,
         dated May 12 2000(12)
 3.1     Restated  Certificate  of   Incorporation  filed  with   the
         Secretary of State of Delaware on October 16, 2000(13)
 3.2     By-laws of the Company(2)
 4.1     Indenture  dated as of November  1, 1996, among the Company,
         National Energy Group of  Oklahoma, Inc. (the  "Guarantor"),
         formerly NEG-OK, and Bank One, Columbus, N.A.(3)
 4.2     Indenture  dated August 21, 1997, among the Company and Bank
         One, N.A.(9)
 4.3     Instrument of Resignation, Appointment and Acceptance, dated
         October 23, 1998,  between the Company,  Bank One, N.A.  and
         Norwest Bank Minnesota, N.A.(11)
10.1     Crude Oil Purchase Contract, dated February 8, 1993, between
         the Company and Plains Marketing and Transportation Inc. and
         the  predecessor contract, the  Crude Oil Purchase Contract,
         dated November  12, 1991,  between Sunnybrook  Transmission,
         Inc. and TriSearch Inc.(4)
10.2     National  Energy  Group,  Inc.  1996  Incentive Compensation
         Plan(7)
10.3     National Energy Group, Inc. Employee Stock Purchase Plan(8)
10.4     National Energy Group, Inc. Employee Severance Policy(11)
10.5     Restated Loan Agreement dated August 29, 1996 among Bank One
         and Credit Lyonnais New York Branch ("Credit Lyonnais")  and
         the   Company,  NEG-OK  and   Boomer  Marketing  Corporation
         ("Boomer")(1)
10.6     $50,000,000 Revolving Note dated August 29, 1996 payable  to
         Bank One(1)
10.7     $50,000,000  Revolving Note dated August 29, 1996 payable to
         Credit Lyonnais(1)
10.8     Assignment of $50,000,000 Revolving Note to Arnos Corp. from
         Bank One, Texas, N.A.(11)
10.9     Assignment of $50,000,000 Revolving Note to Arnos Corp. from
         Credit Lyonnais New York Branch(11)
10.10    Unlimited Guaranty of NEG-OK dated  August 29, 1996 for  the
         benefit of Bank One(1)
10.11    Unlimited  Guaranty of NEG-OK, dated August 29, 1996 for the
         benefit of Credit Lyonnais(1)
10.12    Unlimited Guaranty of Boomer dated  August 29, 1996 for  the
         benefit of Bank One(1)
10.13    Unlimited  Guaranty of Boomer dated  August 29, 1996 for the
         benefit of Credit Lyonnais(1)
10.14    First Amendment to Restated Loan Agreement dated October 31,
         1996 among Bank  One and  Credit Lyonnais  and the  Company,
         Guarantor and Boomer(5)
10.15    Second  Amendment to  Restated Loan  Agreement dated October
         31, 1996,  among  Bank  One  and  Credit  Lyonnais  and  the
         Company, Guarantor and Boomer(6)
10.16    Third Amendment to Restated Loan Agreement dated October 31,
         1996,  among Bank One  and Credit Lyonnais  and the Company,
         Guarantor and Boomer(6)
10.17    Fourth Amendment to  Restated Loan  Agreement dated  October
         31,  1996,  among  Bank  One  and  Credit  Lyonnais  and the
         Company, Guarantor and Boomer(10)
10.18    Multi-State Assignment  Agreement  dated December  22,  1998
         between  Bank  One, Texas,  N.A.,  Credit Lyonnais  New York
         Branch and Arnos Corp.(11)
10.19    Multi-State   Assignment   Agreement,   LaFourche    Parish,
         Louisiana, dated December 22, 1998, between Bank One, Texas,
         N.A., Credit Lyonnais New York Branch and Arnos Corp.(11)
10.20    Multi-State    Assignment   Agreement,   Iberville   Parish,
         Louisiana, dated December 22, 1998, between Bank One, Texas,
         N.A., Credit Lyonnais New York Branch and Arnos Corp.(11)
10.21    Oklahoma Assignment  Agreement,  dated  December  22,  1998,
         between  Bank  One, Texas,  N.A.,  Credit Lyonnais  New York
         Branch and Arnos Corp.(11)
</Table>
<PAGE>

<Table>
<Caption>
EXHIBIT
NUMBER                           DESCRIPTION
-------                          -----------
<C>      <S>
10.22    Crude Oil Swap agreement among Enron North America Corp. and
         the   Company  covering  April   1,  2001  through  December
         31,2001(14)
10.23    Crude Oil Swap agreement among Enron North America Corp. and
         the Company covering  January 1, 2002  through December  31,
         2002(14)
10.24    Crude Oil Swap agreement among Enron North America Corp. and
         the  Company covering  January 1, 2003  through December 31,
         2003(14)
10.25    Crude Oil Swap agreement among Enron North America Corp. and
         the Company covering  January 1, 2004  through December  31,
         2004(14)
10.26    Natural  Gas Swap agreement among  Enron North America Corp.
         and the Company  covering April, 2001  through December  31,
         2004(14)
10.27    Fifth  Amendment to Restated Loan  Agreement dated August 1,
         2001, among the Company and Arnos Corp.(15)
10.28    Debt Purchase  Agreement dated  August 1,  2001 between  the
         Company and High River Limited Partnership.(15)
10.29    Debt  Purchase Agreement  dated August  1, 2001  between the
         Company and High Coast Limited Partnership.(15)
10.30    Debt Purchase  Agreement dated  August 1,  2001 between  the
         Company and High River Limited Partnership.(13)
10.31    Debt  Purchase Agreement  dated August  1, 2001  between the
         Company and High Coast Limited Partnership.(13)
10.32    NEG Holding  LLC  Operating  Agreement  dated  May  1,  2001
         between the Company and Gascon Partners.(14)
10.33    NEG  Operating  LLC Operating  Agreement  dated May  1, 2001
         executed by NEG Holding LLC.(14)
10.34    Shana National LLC Amended and Restated Operating  Agreement
         dated September 12, 2001 executed by NEG Operating LLC.(14)
10.35    Management  Agreement dated  September 12,  2001 between the
         Company and NEG Operating LLC.(14)
10.36    Master Conveyance dated September  12, 2001 executed by  the
         Company in favor of NEG Holding LLC.(14)
10.37    Master  Conveyance  dated  September  12,  2001  executed by
         Gascon Partners in favor of NEG Holding LLC.(14)
10.38    Master Conveyance dated September  12, 2001 executed by  NEG
         Holding LLC in favor of NEG Operating LLC.(14)
10.39    Master Conveyance dated September 12, 2001 executed by Shana
         Petroleum Company in favor of Gascon Partners.(14)
10.40    Master Conveyance dated September 12, 2001 executed by Shana
         Petroleum Company in favor of Shana National LLC.(14)
10.41    Final Decree of Bankruptcy Court(17)
10.42    Sixth  Amendment to  Restated Loan  Agreement dated December
         15, 2001, among the Company and Arnos Corp.(18)
10.43    Assignment of Restated Loan Agreement dated March 26,  2003,
         among Arnos Corp., the Company and NEG Operating LLC.(18)
10.44    Seventh Amendment to Restated Loan Agreement dated March 26,
         2003, among Arnos Corp. and NEG Operating LLC.(18)
12.1     Computation of Ratio of Earnings to Fixed Charges(18)
23.2     Consent of Netherland Sewell & Associates, Inc., Independent
         Engineers(18)
23.3     Consent of Prator Bett, LLC, Independent Engineers(18)
</Table>
<PAGE>

<Table>
<Caption>
EXHIBIT
NUMBER                           DESCRIPTION
-------                          -----------
<C>      <S>
24.1     Power of Attorney (included in signature pages to this  Form
         10-K)(18)
99.1     Certification of Chief Executive Officer pursuant to Section
         906  of  Sarbanes-Oxley  Act  of  2002,  18  U.S.C.  Section
         1350(18)
99.2     Certification  of  Chief  Financial  and  Strategic  Officer
         pursuant  to Section 906  of Sarbanes-Oxley Act  of 2002, 18
         U.S.C. Section 1350(18)
</Table>

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

 (1) Incorporated by  reference to  the Company's  Current Report  on Form  8-K,
     dated August 29, 1996.

 (2) Incorporated  by reference to the  Company's Registration Statement on Form
     S-4 (No. 33-38331), dated April 23, 1991.

 (3) Incorporated by reference to  the Company's Quarterly  Report on Form  10-Q
     for the quarter ended September 30, 1996.

 (4) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
     the year ended December 31, 1992.

 (5) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
     the year ended December 31, 1995.

 (6) Incorporated  by reference to  the Company's Quarterly  Report on Form 10-Q
     for the quarter ended March 31, 1997.

 (7) Incorporated by reference  to the  Company's Schedule 14A  filed April  25,
     1997.

 (8) Incorporated  by reference  to the  Company's Form  S-8 filed  December 23,
     1997.

 (9) Incorporated by reference to the Company's Form S-4 (No. 333-38075),  filed
     October 16, 1997.

(10) Incorporated  by reference to the Company's  Annual Report on Form 10-K for
     the year ended December 31, 1997.

(11) Incorporated by reference to the Company's  Annual Report on Form 10-K  for
     the year ended December 31, 1998.

(12) Incorporated  by reference to  the Company's Quarterly  Report on Form 10-Q
     for the quarter ended March 31, 2000.

(13) Incorporated by reference to  the Company's Quarterly  Report on Form  10-Q
     for the quarter ended September 30, 2000.

(14) Incorporated  by reference to the Company's  Annual Report on Form 10-K for
     the year Ended December 31, 2000.

(15) Incorporated by reference to  the Company's Quarterly  Report on Form  10-Q
     for the quarter ended June 30, 2001.

(16) Incorporated  by reference to  the Company's Quarterly  Report on Form 10-Q
     for the quarter ended September 30, 2001.

(17) Incorporated by reference to the Company's  Annual Report on Form 10-K  for
     the year ended December 31, 2001.

(18) Filed herewith.

     (b) No reports on Form 8-K were filed during the quarter ended December 31,
2002