##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form 10-K


|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|  
|   |  | For the fiscal Year Ended December 31, 2004                                                 
|  
|or
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934

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)


|                                         |  |                    
|---------------------------------------- |  | -------------------
|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)         

(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,
103/4%
due 2006


Series D Senior Notes,
103/4%
due 2006


þ o


þ o


o þ




þ o














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##### Table of Contents










TABLE OF CONTENTS


|                |  |                         |  |                                                                     |    |  |    | 
|--------------- |  | ----------------------- |  | ------------------------------------------------------------------- | -- |  | -- | 
|                |  |                         |  | Page                                                                |   
|                |  |                         |  |                                                                     |   
|PART I         
|               
|ITEMS 1. AND 2. |  | BUSINESS AND PROPERTIES |  |                                                                     | 4  | 
|                |  |                         |  | Forward-Looking Statements                                          |    |  | 4  | 
|                |  |                         |  | Introduction                                                        |    |  | 4  | 
|                |  |                         |  | Ownership and Control of Outstanding
    Stock                      |    |  | 5  | 
|                |  |                         |  | Our Bankruptcy and Formation of Holding
    LLC                     |    |  | 5  | 
|                |  |                         |  | The Holding LLC Operating Agreement                                 |    |  | 6  | 
|                |  |                         |  | Order of Distributions                                              |    |  | 6  | 
|                |  |                         |  | Redemption Provision in the Holding LLC
    Operating Agreement     |    |  | 7  | 
|                |  |                         |  | The Reorganized Company                                             |    |  | 7  | 
|                |  |                         |  | The Operating LLC Management Agreement                              |    |  | 7  | 
|                |  |                         |  | The TransTexas Management Agreement                                 |    |  | 8  | 
|                |  |                         |  | The Panaco Management Agreement                                     |    |  | 8  | 
|                |  |                         |  | Our Credit Facility                                                 |    |  | 8  | 
|                |  |                         |  | Operating LLC Credit Facility                                       |    |  | 9  | 
|                |  |                         |  | Our Properties and Principal Areas of
    Operations                |    |  | 9  | 
|                |  |                         |  | Investment in Holding LLC                                           |    |  | 10 | 
|                |  |                         |  | Holding LLC  Principal Areas of
    Operations                     |    |  | 10 | 
|                |  |                         |  | Holding LLC  Mid-Continent                                         |    |  | 11 | 
|                |  |                         |  | Holding LLC  East and West
    Texas                               |    |  | 12 | 
|                |  |                         |  | Holding LLC  Gulf Coast Area                                       |    |  | 13 | 
|                |  |                         |  | Holding LLC  Oil and Natural Gas
    Reserves                      |    |  | 13 | 
|                |  |                         |  | Holding LLC  Oil and Natural Gas
    Production and Unit Economics |    |  | 14 | 
|                |  |                         |  | Holding LLC  Productive Well
    Summary                           |    |  | 15 | 
|                |  |                         |  | Holding LLC  Leasehold
    Acreage                                 |    |  | 15 | 
|                |  |                         |  | Holding LLC  Drilling
    Activity                                 |    |  | 16 | 
|                |  |                         |  | Holding LLC  Title to Oil and
    Natural Gas Properties           |    |  | 16 | 
|                |  |                         |  | Holding LLC  Production and
    Sales Prices                       |    |  | 16 | 
|                |  |                         |  | Holding LLC  Control Over
    Production Activities                |    |  | 16 | 
|                |  |                         |  | Holding LLC  Markets and
    Customers                             |    |  | 16 | 
|                |  |                         |  | Holding LLC  Regulation                                            |    |  | 17 | 
|                |  |                         |  | Holding LLC  Operational Hazards
    and Insurance                 |    |  | 20 | 
|                |  |                         |  | Holding LLC  Competition                                           |    |  | 20 | 
|                |  |                         |  | Our Office Space                                                    |    |  | 20 | 
|                |  |                         |  | Our Employees                                                       |    |  | 20 | 
|                |  |                         |  | Access to Public Filings                                            |    |  | 20 | 
|ITEM 3.         |  | LEGAL PROCEEDINGS       |  |                                                                     | 20 | 

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|         |  |                                                                                           |  |                                                                 |    |  |    | 
|-------- |  | ----------------------------------------------------------------------------------------- |  | --------------------------------------------------------------- | -- |  | -- | 
|         |  |                                                                                           |  | Page                                                            |   
|         |  |                                                                                           |  |                                                                 |   
|PART II 
|        
|ITEM 4.  |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY
    HOLDERS                                   |  |                                                                 | 22 | 
|ITEM 5.  |  | MARKET FOR REGISTRANTS COMMON EQUITY
    AND RELATED STOCKHOLDER MATTERS                 |  |                                                                 | 22 | 
|         |  |                                                                                           |  | Market Information                                              |    |  | 22 | 
|         |  |                                                                                           |  | Holders                                                         |    |  | 22 | 
|         |  |                                                                                           |  | Dividends on Common Stock                                       |    |  | 22 | 
|ITEM 6.  |  | SELECTED FINANCIAL DATA                                                                   |  |                                                                 | 23 | 
|ITEM 7.  |  | MANAGEMENTS DISCUSSION AND ANALYSIS
    OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |  |                                                                 | 25 | 
|         |  |                                                                                           |  | Overview of Our Business                                        |    |  | 25 | 
|         |  |                                                                                           |  | Ownership and Control of Outstanding
    Stock                  |    |  | 25 | 
|         |  |                                                                                           |  | Our Bankruptcy and Formation of Holding
    LLC                 |    |  | 26 | 
|         |  |                                                                                           |  | The Holding LLC Operating Agreement                             |    |  | 26 | 
|         |  |                                                                                           |  | Order of Distributions                                          |    |  | 26 | 
|         |  |                                                                                           |  | Redemption Provision in the Holding LLC
    Operating Agreement |    |  | 27 | 
|         |  |                                                                                           |  | The Reorganized Company                                         |    |  | 28 | 
|         |  |                                                                                           |  | Management Agreements                                           |    |  | 28 | 
|         |  |                                                                                           |  | The Operating LLC Management Agreement                          |    |  | 28 | 
|         |  |                                                                                           |  | The TTG Management Agreement                                    |    |  | 28 | 
|         |  |                                                                                           |  | The Panaco Management Agreement                                 |    |  | 29 | 
|         |  |                                                                                           |  | Credit Facility                                                 |    |  | 29 | 
|         |  |                                                                                           |  | Operating LLC Credit Facility                                   |    |  | 29 | 
|         |  |                                                                                           |  | Results of Operations                                           |    |  | 30 | 
|         |  |                                                                                           |  | Accretion of Our Investment in Holding
    LLC                  |    |  | 30 | 
|         |  |                                                                                           |  | Management Fees and Affiliates                                  |    |  | 31 | 
|         |  |                                                                                           |  | Costs and Expenses                                              |    |  | 31 | 
|         |  |                                                                                           |  | Deferred Income Tax Asset                                       |    |  | 31 | 
|         |  |                                                                                           |  | Liquidity and Capital Resources                                 |    |  | 32 | 
|         |  |                                                                                           |  | Table of Contractual Obligations                                |    |  | 33 | 
|         |  |                                                                                           |  | Future Capital and Financing
    Requirements                   |    |  | 33 | 
|         |  |                                                                                           |  | Off Balance Sheet Arrangements                                  |    |  | 33 | 
|         |  |                                                                                           |  | Critical Accounting Policies and
    Estimates                  |    |  | 33 | 
|         |  |                                                                                           |  | Recent Accounting Pronouncements                                |    |  | 34 | 
|         |  |                                                                                           |  | Changes in Prices                                               |    |  | 35 | 
|         |  |                                                                                           |  | Inflation                                                       |    |  | 35 | 
|ITEM 7A. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES
    ABOUT MARKET RISK                            |  |                                                                 | 35 | 
|ITEM 8.  |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY
    DATA                                           |  |                                                                 | 35 | 

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|                                                                 |  |                                                                                          |  |            |    |  |    | 
|---------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------- |  | ---------- | -- |  | -- | 
|                                                                 |  |                                                                                          |  | Page       |   
|                                                                 |  |                                                                                          |  |            |   
|ITEM 9.                                                          |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
    FINANCIAL DISCLOSURE |  |            | 35 | 
|ITEM 9A.                                                         |  | CONTROLS AND PROCEDURES                                                                  |  |            | 35 | 
|PART III                                                        
|                                                                
|ITEM 10.                                                         |  | DIRECTORS AND EXECUTIVE OFFICERS OF THE
    REGISTRANT                                   |  |            | 39 | 
|ITEM 11.                                                         |  | EXECUTIVE COMPENSATION                                                                   |  |            | 39 | 
|ITEM 12.                                                         |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
    OWNERS AND MANAGEMENT                       |  |            | 39 | 
|ITEM 13.                                                         |  | CERTAIN RELATIONSHIPS AND RELATED
    TRANSACTIONS                                       |  |            | 39 | 
|ITEM 14.                                                         |  | PRINCIPLE ACCOUNTANT FEES AND SERVICES                                                   |  |            | 39 | 
|PART IV                                                         
|                                                                
|ITEM 15.                                                         |  | EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
    REPORTS ON FORM 8-K                      |  |            | 40 | 
|                                                                 |  |                                                                                          |  | Signatures |    |  | 43 | 
|Computation of Ratio of Earnings to Fixed Charges               
|Consent of Netherland Sewell & Associates, Inc.                 
|Consent of Prator Bett, LLC                                     
|Consent of DeGolyer and MacNaughton                             
|Certification of Chief Executive Officer Pursuant to Section 302
|Certification of Chief Financial Officer Pursuant to Section 302
|Certification of Chief Executive Officer Pursuant to Section 906
|Certification of Chief Financial Officer Pursuant to Section 906



3



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PART I







|                |                        
|--------------- | -----------------------
|Items 1. and 2. | Business and Properties




Forward-Looking Statements









Introduction








4



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Ownership and Control of Outstanding Stock









Our Bankruptcy and Formation of Holding LLC








5



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| |                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------
| | 1. Its sole membership interest in Shana National LLC, an
    oil and natural gas producing company,               
|
| | 2. Cash of $75.2 million, and                                                                                      
|
| | 3. A $10.9 million revolving note evidencing
    borrowings under our revolving credit facility issued
    to Arnos






The Holding LLC Operating Agreement







Order of Distributions






| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. Guaranteed payments (Guaranteed Payments)
    are to be paid to us, calculated on an annual interest rate of
    10.75% on the outstanding priority amount (the Priority
    Amount). The Priority Amount includes all outstanding debt
    owed to entities owned or controlled by Mr. Carl C. Icahn,
    including the amount of our 10.75% Senior Notes (the
    Senior Notes). As of December 31, 2004, the
    Priority Amount was $148.6 million. The Guaranteed Payments
    will be made on a semi-annual basis.
|
| | 2. The Priority Amount is to be paid to us. Such payment is
    to occur by November 6, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | 3. An amount equal to the Priority Amount and all
    Guaranteed Payments paid to us, plus any additional capital
    contributions made by Gascon, less any distributions previously
    made by Holding LLC to Gascon, is to be paid to Gascon.                                                                                                                                                                                                                                                                                
|
| | 4. An amount equal to the aggregate annual interest
    (calculated at prime plus
    1/2%
    on the sum of the Guaranteed Payments), plus any unpaid interest
    for prior years (calculated at prime plus
    1/2%
    on the sum of the Guaranteed Payments), less any distributions
    previously made by Holding LLC to Gascon, is to be paid to
    Gascon.                                                                                                                                                             
|
| | 5. After the above distributions have been made, any
    additional distributions will be made in accordance with the
    ratio of Gascons and our respective capital accounts.
    (Capital accounts as defined in the Holding LLC Operating
    Agreement)                                                                                                                                                                                                                                                                    



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Redemption Provision in the Holding LLC Operating
Agreement











The Reorganized Company







The Operating LLC Management Agreement




7



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The TransTexas Management Agreement









The Panaco Management Agreement







Our Credit Facility






8



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Operating LLC Credit Facility















Our Properties and Principal Areas of Operations




9



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Investment in Holding LLC













Holding LLC  Principal Areas of Operations






10



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|      |                     |         |  |         |        |         |     |            |         |  |       |         |         |  |  |      |       |  
|----- | ------------------- | ------- |  | ------- | ------ | ------- | --- | ---------- | ------- |  | ----- | ------- | ------- |  |  | ---- | ----- | -
|      |                     |         |  |         |        | Natural |     |            |        
|      |                     |         |  | Natural |        |         | Gas |            |         | 
|      |                     | Oil     |  |         | Gas    |         |     | Equivalent |         |  | % of  |        
|      |                     | (Mbbls) |  |         | (Mmcf) |         |     | (Mmcfe)    |         |  | Total |        
|      |                     |         |  |         |        |         |     |            |         |  |       |        
|Area: |                     |         |  |         |        |         |     |            |         |  |       |         |         |  |  |     
|      | Mid-Continent       |         |  | 531     |        |         |     | 28,926     |         |  |       | 32,112  |         |  |  | 13.8 | %    
|      | East and West Texas |         |  | 3,492   |        |         |     | 164,508    |         |  |       | 185,460 |         |  |  | 79.9 |      
|      | Gulf Coast          |         |  | 853     |        |         |     | 9,512      |         |  |       | 14,630  |         |  |  | 6.3  |      
|      |                     |         |  |         |        |         |     |            |         |  |       |        
|      |                     | Total   |  |         | 4,876  |         |     |            | 202,946 |  |       |         | 232,202 |  |  |      | 100.0 | %
|      |                     |         |  |         |        |         |     |            |         |  |       |        



|      |                     |         |  |         |        |         |     |            |        |  |       |        |        |  |  |      |       |  
|----- | ------------------- | ------- |  | ------- | ------ | ------- | --- | ---------- | ------ |  | ----- | ------ | ------ |  |  | ---- | ----- | -
|      |                     |         |  |         |        | Natural |     |            |       
|      |                     |         |  | Natural |        |         | Gas |            |        | 
|      |                     | Oil     |  |         | Gas    |         |     | Equivalent |        |  | % of  |       
|      |                     | (Mbbls) |  |         | (Mmcf) |         |     | (Mmcfe)    |        |  | Total |       
|      |                     |         |  |         |        |         |     |            |        |  |       |       
|Area: |                     |         |  |         |        |         |     |            |        |  |       |        |        |  |  |     
|      | Mid-Continent       |         |  | 33      |        |         |     | 2,962      |        |  |       | 3,160  |        |  |  | 19.2 | %    
|      | East and West Texas |         |  | 353     |        |         |     | 9,017      |        |  |       | 11,135 |        |  |  | 67.5 |      
|      | Gulf Coast          |         |  | 179     |        |         |     | 1,127      |        |  |       | 2,201  |        |  |  | 13.3 |      
|      |                     |         |  |         |        |         |     |            |        |  |       |       
|      |                     | Total   |  |         | 565    |         |     |            | 13,106 |  |       |        | 16,496 |  |  |      | 100.0 | %
|      |                     |         |  |         |        |         |     |            |        |  |       |       




Holding LLC  Mid-Continent Area




Anadarko Basin.




Arkoma Basin.


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Holding LLC  East and West Texas Area




East Texas Basin.




West Texas.




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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
    Tesnus formations. The Dimple is a shelf limestone deposit of
    Atokan or Morrowan 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

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| |  |                                                                                                                                                                          
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.






Holding LLC  Gulf Coast Area











Holding LLC  Oil and Natural Gas Reserves








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|                            |  |                         |       |         |        |            |         |            |  |  |         |  |  |   |         | 
|--------------------------- |  | ----------------------- | ----- | ------- | ------ | ---------- | ------- | ---------- |  |  | ------- |  |  | - | ------- | 
|                            |  | As of December 31, 2004 |      
|                            |  |                         |      
|                            |  |                         |       | Natural |        |            |        
|                            |  |                         |       | Natural |        |            | Gas     |            |  | 
|                            |  | Oil                     |       |         | Gas    |            |         | Equivalent |  |  |        
|                            |  | (Mbbls)                 |       |         | (Mmcf) |            |         | (Mmcfe)    |  |  | PV10%   | 
|                            |  |                         |       |         |        |            |         |            |  |  |         | 
|                            |  |                         |       |         |        | (In        |         |            | 
|                            |  |                         |       |         |        | thousands) |         |            | 
|Proved Developed Reserves   |  |                         | 3,798 |         |        |            | 111,127 |            |  |  | 133,915 |  |  | $ | 346,707 | 
|Proved Undeveloped Reserves |  |                         | 1,078 |         |        |            | 91,819  |            |  |  | 98,287  |  |  |   | 190,378 | 
|                            |  |                         |       |         |        |            |         |            |  |  |         | 
|Total Proved Reserves       |  |                         | 4,876 |         |        |            | 202,946 |            |  |  | 232,202 |  |  |   | 537,085 | 
|                            |  |                         |       |         |        |            |         |            |  |  |         | 
|Standardized Measure        |  |                         |       |         |        |            |         |            |  |  |         |  |  | $ | 534,824 | 
|                            |  |                         |       |         |        |            |         |            |  |  |         | 




Holding LLC  Oil and Natural Gas Production
and Unit Economics




|                           |                                                               |                         |   |        |      |  |   |        |  |  |   |        | 
|-------------------------- | ------------------------------------------------------------- | ----------------------- | - | ------ | ---- |  | - | ------ |  |  | - | ------ | 
|                           |                                                               | Year Ended December 31, |  
|                           |                                                               |                         |  
|                           |                                                               | 2002                    |   |        | 2003 |  |   | 2004   | 
|                           |                                                               |                         |   |        |      |  |   |        | 
|Net production:            |                                                               |                         |   |        |      |  |   |        |  |  |   |       
|                           | Oil (Mbbls)                                                   |                         |   | 629    |      |  |   | 629    |  |  |   | 565    | 
|                           | Natural gas (Mmcf)                                            |                         |   | 7,827  |      |  |   | 13,437 |  |  |   | 13,106 | 
|                           | Natural gas equivalent (Mmcfe)                                |                         |   | 11,602 |      |  |   | 17,211 |  |  |   | 16,496 | 
|Average sales price:       |                                                               |                         |   |        |      |  |   |        |  |  |   |       
|                           | Oil (per Bbl)                                                 |                         | $ | 23.93  |      |  | $ | 26.54  |  |  | $ | 28.37  | 
|                           | Natural gas (per Mcf)                                         |                         |   | 3.06   |      |  |   | 4.39   |  |  |   | 5.21   | 
|Unit economics (per Mcfe): |                                                               |                         |   |        |      |  |   |        |  |  |   |       
|                           | Average sales price                                           |                         | $ | 3.36   |      |  | $ | 4.40   |  |  | $ | 5.11   | 
|                           | Lease operating expenses                                      |                         |   | .73    |      |  |   | .66    |  |  |   | .82    | 
|                           | Oil and natural gas production taxes (net of refunds in 2002) |                         |   | .16    |      |  |   | .34    |  |  |   | .35    | 
|                           | Depletion rate                                                |                         |   | 1.29   |      |  |   | 1.25   |  |  |   | 1.28   | 
|                           | General and administrative expenses                           |                         |   | .50    |      |  |   | .28    |  |  |   | .25    | 

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Holding LLC  Productive Well Summary




|      |                     |       |  |     |             |  |  |       |     |  |     |     |     |       |  |     |     |  |  |     |     |  |  |     |     | 
|----- | ------------------- | ----- |  | --- | ----------- |  |  | ----- | --- |  | --- | --- | --- | ----- |  | --- | --- |  |  | --- | --- |  |  | --- | --- | 
|      |                     | Oil   |  |     | Natural Gas |  |  | Total |    
|      |                     |       |  |     |             |  |  |       |    
|      |                     | Gross |  |     | Net         |  |  | Gross |     |  | Net |     |     | Gross |  |     | Net | 
|      |                     |       |  |     |             |  |  |       |     |  |     |     |     |       |  |     |     | 
|Area: |                     |       |  |     |             |  |  |       |     |  |     |     |     |       |  |     |     |  |  |     |     |  |  |    
|      | Mid-Continent       |       |  | 35  |             |  |  | 11    |     |  |     | 210 |     |       |  | 99  |     |  |  | 245 |     |  |  | 110 |    
|      | East and West Texas |       |  | 155 |             |  |  | 150   |     |  |     | 207 |     |       |  | 113 |     |  |  | 362 |     |  |  | 263 |    
|      | Gulf Coast          |       |  | 15  |             |  |  | 7     |     |  |     | 56  |     |       |  | 22  |     |  |  | 71  |     |  |  | 29  |    
|      |                     |       |  |     |             |  |  |       |     |  |     |     |     |       |  |     |     | 
|      |                     | Total |  |     | 205         |  |  |       | 168 |  |     |     | 473 |       |  |     | 234 |  |  |     | 678 |  |  |     | 402 | 
|      |                     |       |  |     |             |  |  |       |     |  |     |     |     |       |  |     |     | 




Holding LLC  Leasehold Acreage




|      |                     |           |  |        |             |  |  |        |        |  |     |        |        |  |  |        |        | 
|----- | ------------------- | --------- |  | ------ | ----------- |  |  | ------ | ------ |  | --- | ------ | ------ |  |  | ------ | ------ | 
|      |                     | Developed |  |        | Undeveloped | 
|      |                     | Acreage   |  |        | Acreage     | 
|      |                     |           |  |        |             | 
|      |                     | Gross     |  |        | Net         |  |  | Gross  |        |  | Net |       
|      |                     |           |  |        |             |  |  |        |        |  |     |       
|Area: |                     |           |  |        |             |  |  |        |        |  |     |        |        |  |  |       
|      | Mid-Continent       |           |  | 67,101 |             |  |  | 36,037 |        |  |     | 640    |        |  |  | 248    |       
|      | East and West Texas |           |  | 38,103 |             |  |  | 23,029 |        |  |     | 84,709 |        |  |  | 25,393 |       
|      | Gulf Coast          |           |  | 23,536 |             |  |  | 7,881  |        |  |     | 4,278  |        |  |  | 1,367  |       
|      |                     |           |  |        |             |  |  |        |        |  |     |       
|      |                     | Totals    |  |        | 128,740     |  |  |        | 66,947 |  |     |        | 89,627 |  |  |        | 27,008 | 
|      |                     |           |  |        |             |  |  |        |        |  |     |       





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Holding LLC  Drilling Activity




|               |                |                         |    |    |      |  |     |       |     |  |     |    |    |       |      |      |      |  |     |    |    |  |      |      |      | 
|-------------- | -------------- | ----------------------- | -- | -- | ---- |  | --- | ----- | --- |  | --- | -- | -- | ----- | ---- | ---- | ---- |  | --- | -- | -- |  | ---- | ---- | ---- | 
|               |                | Year Ended December 31, |   
|               |                |                         |   
|               |                | 2002                    |    |    | 2003 |  |     | 2004  |    
|               |                |                         |    |    |      |  |     |       |    
|               |                | Gross                   |    |    | Net  |  |     | Gross |     |  | Net |    |    | Gross |      |      | Net  | 
|               |                |                         |    |    |      |  |     |       |     |  |     |    |    |       |      |      |      | 
|Exploratory    |                |                         |    |    |      |  |     |       |     |  |     |    |    |       |      |      |      |  |     |    |    |  |      |     
|               | Productive     |                         |    | 6  |      |  |     | 1.6   |     |  |     | 29 |    |       |      | 7.9  |      |  |     | 52 |    |  |      | 17.4 |     
|               | Non-productive |                         |    | 1  |      |  |     | .4    |     |  |     | 2  |    |       |      | .2   |      |  |     | 11 |    |  |      | 3.3  |     
|               |                |                         |    |    |      |  |     |       |     |  |     |    |    |       |      |      |      | 
|               |                | Total                   |    |    | 7    |  |     |       | 2.0 |  |     |    | 31 |       |      |      | 8.1  |  |     |    | 63 |  |      |      | 20.7 | 
|               |                |                         |    |    |      |  |     |       |     |  |     |    |    |       |      |      |      | 
|Development    |                |                         |    |    |      |  |     |       |     |  |     |    |    |       |      |      |      |  |     |    |    |  |      |     
|               | Productive     |                         |    | 15 |      |  |     | 5.3   |     |  |     | 36 |    |       |      | 26.0 |      |  |     | 39 |    |  |      | 19.0 |     
|               | Non-productive |                         |    | 1  |      |  |     | 1.0   |     |  |     | 1  |    |       |      | .4   |      |  |     |   |    |  |      |     |     
|               |                |                         |    |    |      |  |     |       |     |  |     |    |    |       |      |      |      | 
|               |                | Total                   |    |    | 16   |  |     |       | 6.3 |  |     |    | 37 |       |      |      | 26.4 |  |     |    | 39 |  |      |      | 19.0 | 
|               |                |                         |    |    |      |  |     |       |     |  |     |    |    |       |      |      |      | 
|Combined Total |                |                         | 23 |    |      |  | 8.3 |       |     |  | 68  |    |    |       | 34.5 |      |      |  | 102 |    |    |  | 39.7 |     
|               |                |                         |    |    |      |  |     |       |     |  |     |    |    |       |      |      |      | 




Holding LLC  Title to Oil and Natural Gas
Properties







Holding LLC  Production and Sales Prices







Holding LLC  Control Over Production
Activities







Holding LLC  Markets and Customers




16



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##### Table of Contents












Holding LLC  Regulation


General.


Exploration and Production.


17



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##### Table of Contents







Environmental Protection and Occupational Safety.










18



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##### Table of Contents









Marketing and Transportation.






19



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Holding LLC  Operational Hazards and
Insurance







Holding LLC  Competition







Our Office Space







Our Employees







Access to Public Filings


http://www.negx.com. http://www.sec.gov.







|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings



20



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| |                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) $20,500 in post bond premiums alleged to be owed for
    certain plugging and abandonment liabilities associated with the
    oil and gas properties sold to Osprey,
|
| | (b) $5,422 in expenses associated with our bond claim,                                                                                                                  
|
| | (c) $53,226 in attorneys fees,                                                                                                                                          
|
| | (d) $24,617 in administrative expenses paid to the American
    Arbitration Association,                                                                                
|
| | (e) an order requiring Osprey to post and maintain an
    acceptable replacement bond,                                                                                  
|
| | (f) a finding that Ospreys counterclaim in the amount
    of $15 million was without merit, and                                                                        
|
| | (g) a ruling that Osprey is entitled to no recovery of any
    damages or expenses associated with our bond claim or
    Ospreys counterclaim.                         









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PART II







|        |                                                    
|------- | ---------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security Holders








|        |                                                                           
|------- | --------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity and Related
    Stockholder Matters.




Market Information




|                          |        |              |   |      |     |  |   |      | 
|------------------------- | ------ | ------------ | - | ---- | --- |  | - | ---- | 
|                          |        | Common Stock |  
|                          |        | Price        |  
|                          |        |              |  
|                          |        | High         |   |      | Low | 
|                          |        |              |   |      |     | 
|Calendar Years by Quarter |        |              |   |      |     |  |   |     
|2004:                     |        |              |   |      |     |  |   |     
|                          | First  |              | $ | 4.55 |     |  | $ | 2.45 | 
|                          | Second |              |   | 4.10 |     |  |   | 2.05 | 
|                          | Third  |              |   | 2.85 |     |  |   | 1.20 | 
|                          | Fourth |              |   | 3.25 |     |  |   | 2.06 | 
|2003:                     |        |              |   |      |     |  |   |     
|                          | First  |              | $ | .30  |     |  | $ | .30  | 
|                          | Second |              |   | .71  |     |  |   | .64  | 
|                          | Third  |              |   | 1.25 |     |  |   | 1.15 | 
|                          | Fourth |              |   | 2.75 |     |  |   | 2.50 | 






Holders







Dividends on Common Stock




22



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|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data



|                                                                            |                                                                                |                                                     |         |         |         |   |        |        |        |   |        |        |        |      |        |        |        |   |        |        |        | 
|--------------------------------------------------------------------------- | ------------------------------------------------------------------------------ | --------------------------------------------------- | ------- | ------- | ------- | - | ------ | ------ | ------ | - | ------ | ------ | ------ | ---- | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                                                                            |                                                                                | Year Ended December 31,                             |        
|                                                                            |                                                                                |                                                     |        
|                                                                            |                                                                                | 2000                                                |         |         | 2001(1) |   |        | 2002   |        |   | 2003   |        |        | 2004 |       
|                                                                            |                                                                                |                                                     |         |         |         |   |        |        |        |   |        |        |        |      |       
|                                                                            |                                                                                | (In thousands, except for ratios and per unit data) |        
|Statement of Operations Data:                                               |                                                                                |                                                     |         |         |         |   |        |        |        |   |        |        |        |      |        |        |        |   |        |       
|Oil and natural gas sales                                                   |                                                                                | $                                                   | 51,014  |         |         | $ | 33,176 |        |        | $ |       |        |        | $    |       |        |        | $ |       |       
|Accretion of Investment in Holding LLC                                      |                                                                                |                                                     |        |         |         |   | 9,834  |        |        |   | 32,879 |        |        |      | 30,141 |        |        |   | 34,432 |       
|Management fees  affiliates                                                |                                                                                |                                                     |        |         |         |   | 2,699  |        |        |   | 7,637  |        |        |      | 7,967  |        |        |   | 11,563 |       
|Interest income and other, net                                              |                                                                                |                                                     | 1,672   |         |         |   | (336   | )      |        |   | 36     |        |        |      | 34     |        |        |   | 39     |       
|                                                                            |                                                                                |                                                     |         |         |         |   |        |        |        |   |        |        |        |      |       
|                                                                            |                                                                                | Total revenue                                       |         |         | 52,686  |   |        |        | 45,373 |   |        |        | 40,552 |      |        |        | 38,142 |   |        |        | 46,034 | 
|                                                                            |                                                                                |                                                     |         |         |         |   |        |        |        |   |        |        |        |      |       
|Costs and expenses:                                                         |                                                                                |                                                     |         |         |         |   |        |        |        |   |        |        |        |      |        |        |        |   |        |       
|                                                                            | Lease operating                                                                |                                                     |         | 5,672   |         |   |        | 3,874  |        |   |        |       |        |      |        |       |        |   |        |       |       
|                                                                            | Oil and natural gas production taxes                                           |                                                     |         | 2,888   |         |   |        | 1,695  |        |   |        |       |        |      |        |       |        |   |        |       |       
|                                                                            | Depreciation, depletion and amortization                                       |                                                     |         | 11,044  |         |   |        | 6,163  |        |   |        |       |        |      |        |       |        |   |        |       |       
|                                                                            | Salaries and wages                                                             |                                                     |         | 2,466   |         |   |        | 3,327  |        |   |        | 4,256  |        |      |        | 4,349  |        |   |        | 7,225  |       
|                                                                            | Insurance                                                                      |                                                     |         | 849     |         |   |        | 502    |        |   |        | 588    |        |      |        | 638    |        |   |        | 1,002  |       
|                                                                            | Rent and utilities                                                             |                                                     |         | 552     |         |   |        | 597    |        |   |        | 624    |        |      |        | 669    |        |   |        | 699    |       
|                                                                            | Other G&A expenses                                                             |                                                     |         | 660     |         |   |        | 1,505  |        |   |        | 1,637  |        |      |        | 1,575  |        |   |        | 2,219  |       
|                                                                            | Interest expense(2)                                                            |                                                     |         | 9,656   |         |   |        | 21,224 |        |   |        | 18,964 |        |      |        | 15,115 |        |   |        | 13,940 |       
|                                                                            |                                                                                |                                                     |         |         |         |   |        |        |        |   |        |        |        |      |       
|                                                                            |                                                                                | Total costs and expenses                            |         |         | 33,787  |   |        |        | 38,887 |   |        |        | 26,069 |      |        |        | 22,346 |   |        |        | 25,085 | 
|                                                                            |                                                                                |                                                     |         |         |         |   |        |        |        |   |        |        |        |      |       
|Income before reorganization items, income taxes and
    extraordinary item |                                                                                |                                                     | 18,899  |         |         |   | 6,486  |        |        |   | 14,483 |        |        |      | 15,796 |        |        |   | 20,949 |       
|Reorganization items:                                                       |                                                                                |                                                     |         |         |         |   |        |        |        |   |        |        |        |      |        |        |        |   |        |       
|                                                                            | Gain (loss) in restructuring of payables                                       |                                                     |         | 2,238   |         |   |        | (11    | )      |   |        |       |        |      |        |       |        |   |        |       |       
|                                                                            | Loss on restatement of interest on Senior Notes(2)                             |                                                     |         | (35,285 | )       |   |        |       |        |   |        |       |        |      |        |       |        |   |        |       |       
|                                                                            | Professional fees and other                                                    |                                                     |         | (1,354  | )       |   |        | 236    |        |   |        |       |        |      |        |       |        |   |        |       |       
|                                                                            | Interest earned on accumulating cash resulting from
    Chapter 11 proceedings |                                                     |         | 1,064   |         |   |        |       |        |   |        |       |        |      |        |       |        |   |        |       |       
|                                                                            |                                                                                |                                                     |         |         |         |   |        |        |        |   |        |        |        |      |       
|Income (loss) before income taxes                                           |                                                                                |                                                     | (14,438 | )       |         |   | 6,711  |        |        |   | 14,483 |        |        |      | 15,796 |        |        |   | 20,949 |       
|Income tax benefit (expense)(5)                                             |                                                                                |                                                     |        |         |         |   | 30,589 |        |        |   | (5,068 | )      |        |      | (225   | )      |        |   | (6,664 | )     
|                                                                            |                                                                                |                                                     |         |         |         |   |        |        |        |   |        |        |        |      |       
|Net income (loss)                                                           |                                                                                | $                                                   | (14,438 | )       |         | $ | 37,300 |        |        | $ | 9,415  |        |        | $    | 15,571 |        |        | $ | 14,285 |       
|                                                                            |                                                                                |                                                     |         |         |         |   |        |        |        |   |        |        |        |      |       
|Net income per common share before extraordinary item                       |                                                                                | $                                                   | 2.71    |         |         | $ | 3.33   |        |        | $ | .84    |        |        | $    | 1.39   |        |        | $ | 1.28   |       
|                                                                            |                                                                                |                                                     |         |         |         |   |        |        |        |   |        |        |        |      |       
|Net income (loss) per common share, basic and diluted                       |                                                                                | $                                                   | (2.10   | )       |         | $ | 3.33   |        |        | $ | .84    |        |        | $    | 1.39   |        |        | $ | 1.28   |       
|                                                                            |                                                                                |                                                     |         |         |         |   |        |        |        |   |        |        |        |      |       

23



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|                                                    |  |                                                     |          |   |         |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|--------------------------------------------------- |  | --------------------------------------------------- | -------- | - | ------- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                    |  | Year Ended December 31,                             |         
|                                                    |  |                                                     |         
|                                                    |  | 2000                                                |          |   | 2001(1) |   |         | 2002 |  |   | 2003    |   |  | 2004 |        
|                                                    |  |                                                     |          |   |         |   |         |      |  |   |         |   |  |      |        
|                                                    |  | (In thousands, except for ratios and per unit data) |         
|Cash Flow Data:                                     |  |                                                     |          |   |         |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net cash provided by (used in) operating activities |  | $                                                   | 23,831   |   |         | $ | 11,537  |      |  | $ | (21,266 | ) |  | $    | (59,053 | ) |  | $ | (16,650 | )
|Net cash used in investing activities               |  |                                                     | (11,720  | ) |         |   | (30,840 | )    |  |   | 21,653  |   |  |      | 58,735  |   |  |   | 15,978  |  
|Net cash provided by (used in) financing activities |  |                                                     | 2,000    |   |         |   | (20,935 | )    |  |   |        |   |  |      |        |   |  |   |        |  
|Balance Sheet Data (at period end):                 |  |                                                     |          |   |         |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Cash and cash equivalents                           |  | $                                                   | 43,328   |   |         | $ | 3,090   |      |  | $ | 3,477   |   |  | $    | 3,159   |   |  | $ | 2,488   |  
|Working capital (deficit)                           |  |                                                     | 19,835   |   |         |   | 1,673   |      |  |   | (40,001 | ) |  |      | 1,699   |   |  |   | 2,200   |  
|Total assets                                        |  |                                                     | 118,654  |   |         |   | 132,709 |      |  |   | 138,805 |   |  |      | 99,684  |   |  |   | 112,113 |  
|Long-term debt                                      |  |                                                     | 210,827  |   |         |   | 202,471 |      |  |   | 159,576 |   |  |      | 148,637 |   |  |   | 148,637 |  
|Stockholders deficit                               |  |                                                     | (127,171 | ) |         |   | (82,405 | )    |  |   | (72,989 | ) |  |      | (57,418 | ) |  |   | (43,133 | )

|                           |                                          |                         |   |        |         |  |   |         |  |         |   |         |  |  |   |   |  |  |   |   | 
|-------------------------- | ---------------------------------------- | ----------------------- | - | ------ | ------- |  | - | ------- |  | ------- | - | ------- |  |  | - | - |  |  | - | - | 
|                           |                                          | Year Ended December 31,
|                           |                                          |                        
|                           |                                          | 2000                    |   |        | 2001(3) |  |   | 2002(4) |  | 2003(4) |   | 2004(4)
|                           |                                          |                         |   |        |         |  |   |         |  |         |   |        
|Operating Data:            |                                          |                         |   |        |         |  |   |         |  |         |   |         |  |  |   |   |  |  |   |  
|Production:                |                                          |                         |   |        |         |  |   |         |  |         |   |         |  |  |   |   |  |  |   |  
|                           | Oil (Mbls)                               |                         |   | 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     |  |         |   |        |  |  |   |  |  |  |   |  | 
|                           | Depreciation, depletion and amortization |                         |   | .93    |         |  |   | .89     |  |         |   |        |  |  |   |  |  |  |   |  | 
|                           | General and administrative               |                         |   | .38    |         |  |   | .50     |  |         |   |        |  |  |   |  |  |  |   |  | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | As mandated by our Plan of Reorganization we contributed all of
    our assets and liabilities, except for $4.3 million in
    cash, to Holding LLC in exchange for a 50% membership interest
    and certain Guaranteed Amounts and Priority Distributions. The
    contribution was recorded as of September 1, 2001.                                                                                    
|   
|(2) | Accrual of interest on the Companys Senior Notes was
    discontinued during the Bankruptcy Proceeding. Approximately
    $10.5 million of additional interest expense would have
    been recognized by the Company during 2000, if not for the
    discontinuation of the interest accrual. As part of the Plan of
    Reorganization, $35.3 million of interest on the Senior
    Notes was reinstated.
|   
|(3) | Operating data is included only through August 31, 2001
    when the oil and natural gas assets were contributed to Holding
    LLC.                                                                                                                                                                                                                                                                       
|   
|(4) | We had no oil and natural gas operations during 2002, 2003 and
    2004 as all the oil and natural gas assets were contributed to
    Holding LLC effective August 31, 2001.                                                                                                                                                                                                                               
|   
|(5) | See Note 9 in Notes to Consolidated Financial Statements.                                                                                                                                                                                                                                                                                                                                                  

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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations








Overview of our Business

















Ownership and Control of Outstanding Stock




25



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##### Table of Contents










Our Bankruptcy and Formation of Holding LLC











The Holding LLC Operating Agreement







Order of Distributions




26



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##### Table of Contents







| |                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. Guaranteed Payments are to be paid to us, calculated on
    an annual interest rate of 10.75% on the outstanding Priority
    Amount. The Priority Amount includes all outstanding debt owed
    to entities owned or controlled by Mr. Carl C. Icahn,
    including the amount of our Senior Notes. As of
    December 31, 2004, the Priority Amount was
    $148.6 million. The Guaranteed Payments will be made on a
    semi-annual basis.
|
| | 2. The Priority Amount is to be paid to us. Such payment is
    to occur by November 6, 2006.                                                                                                                                                                                                                                                                                                                                                    
|
| | 3. An amount equal to the Priority Amount and all
    Guaranteed Payments paid to us, plus any additional capital
    contributions made by Gascon, less any distributions previously
    made by Holding LLC to Gascon, is to be paid to Gascon.                                                                                                                                                                                                
|
| | 4. An amount equal to the aggregate annual interest
    (calculated at prime plus
    1/2%
    on the sum of the Guaranteed Payments), plus any unpaid interest
    for prior years (calculated at prime plus
    1/2%
    on the sum of the Guaranteed Payments), less any distributions
    previously made by Holding LLC to Gascon, is to be paid to
    Gascon.                                                                             
|
| | 5. After the above distributions have been made, any
    additional distributions will be made in accordance with the
    ratio of Gascon and our respective capital accounts. (Capital
    accounts as defined in the Holding LLC Operating Agreement).                                                                                                                                                                                         






Redemption Provision in the Holding LLC Operating
Agreement








27



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The Reorganized Company







Management Agreements







| |                                       
| | --------------------------------------
| | The Operating LLC Management Agreement








| |                             
| | ----------------------------
| | The TTG Management Agreement





28



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| |                                
| | -------------------------------
| | The Panaco Management Agreement






Credit Facility







Operating LLC Credit Facility






29



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##### Table of Contents














Results of Operations







Accretion of Our Investment in Holding LLC




30



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##### Table of Contents












Management Fees from Affiliates




|              |       |      |           |           |      |   |           |           |  |   |           |            | 
|------------- | ----- | ---- | --------- | --------- | ---- | - | --------- | --------- |  | - | --------- | ---------- | 
|              |       | 2002 |           |           | 2003 |   |           | 2004      | 
|              |       |      |           |           |      |   |           |           | 
|Operating LLC |       | $    | 7,637,285 |           |      | $ | 6,629,001 |           |  | $ | 6,161,919 |           
|TTG           |       |      |          |           |      |   | 1,338,000 |           |  |   | 4,675,525 |           
|Panaco        |       |      |          |           |      |   |          |           |  |   | 725,282   |           
|              |       |      |           |           |      |   |           |           | 
|              | Total |      | $         | 7,637,285 |      |   | $         | 7,967,001 |  |   | $         | 11,562,726 | 
|              |       |      |           |           |      |   |           |           | 




Costs and Expenses




|                   |                       |                         |            |            |      |   |            |            |  |   |            |   |  |      |     |   |      |   |            |            |  |   |            |            |  |   |            |   |  |  |    |   | 
|------------------ | --------------------- | ----------------------- | ---------- | ---------- | ---- | - | ---------- | ---------- |  | - | ---------- | - |  | ---- | --- | - | ---- | - | ---------- | ---------- |  | - | ---------- | ---------- |  | - | ---------- | - |  |  | -- | - | 
|                   |                       | Year Ended December 31, |           
|                   |                       |                         |           
|                   |                       | 2002                    |            |            | 2003 |   |            | Variance   |  |   | %          |   |  | 2003 |     |   | 2004 |   |            | Variance   |  |   | %          |           
|                   |                       |                         |            |            |      |   |            |            |  |   |            |   |  |      |     |   |      |   |            |            |  |   |            |           
|Salaries and wages |                       | $                       | 4,256,386  |            |      | $ | 4,348,645  |            |  | $ | 92,259     |   |  |      | 2   |   |      | $ | 4,348,645  |            |  | $ | 7,224,605  |            |  | $ | 2,875,960  |   |  |  | 66 |  
|Insurance          |                       |                         | 587,600    |            |      |   | 637,585    |            |  |   | 49,985     |   |  |      | 9   |   |      |   | 637,585    |            |  |   | 1,001,644  |            |  |   | 364,059    |   |  |  | 57 |  
|Rent and utilities |                       |                         | 624,322    |            |      |   | 668,802    |            |  |   | 44,480     |   |  |      | 7   |   |      |   | 668,802    |            |  |   | 699,674    |            |  |   | 30,872     |   |  |  | 5  |  
|Other G&A Expenses |                       |                         | 1,636,541  |            |      |   | 1,575,514  |            |  |   | (61,027    | ) |  |      | (4  | ) |      |   | 1,575,514  |            |  |   | 2,218,752  |            |  |   | 643,238    |   |  |  | 41 |  
|Interest expense   |                       |                         | 18,964,052 |            |      |   | 15,114,928 |            |  |   | (3,849,124 | ) |  |      | (20 | ) |      |   | 15,114,928 |            |  |   | 13,940,391 |            |  |   | (1,174,537 | ) |  |  | (8 | )
|                   |                       |                         |            |            |      |   |            |            |  |   |            |   |  |      |     |   |      |   |            |            |  |   |            |           
|                   | Total cost & expenses |                         | $          | 26,068,901 |      |   | $          | 22,345,474 |  |   |            |   |  |      |     |   |      |   | $          | 22,345,474 |  |   | $          | 25,085,066 |  |   |            |   |  |  |    |   | 
|                   |                       |                         |            |            |      |   |            |            |  |   |            |   |  |      |     |   |      |   |            |            |  |   |            |           










Deferred Income Tax Asset




31



---



##### Table of Contents








Liquidity and Capital Resources
















32



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##### Table of Contents






Table of Contractual Obligations




|                  |       |                       |             |             |          |   |            |            |  |           |             |             |            |   |   |   |  |   |   |   | 
|----------------- | ----- | --------------------- | ----------- | ----------- | -------- | - | ---------- | ---------- |  | --------- | ----------- | ----------- | ---------- | - | - | - |  | - | - | - | 
|                  |       | Payment Due by Period
|                  |       |                      
|                  |       |                       |             | Less Than   |          |   | One-Three  |            |  | Four-Five |             | After      
|                  |       | Total                 |             |             | One Year |   |            | Years      |  |           | Years       |             | Five Years
|                  |       |                       |             |             |          |   |            |            |  |           |             |             |           
|Senior Notes      |       | $                     | 148,637,000 |             |          | $ |           |            |  | $         | 148,637,000 |             |            | $ |  |   |  | $ |  |  
|Interest payments |       |                       | 31,956,956  |             |          |   | 15,978,478 |            |  |           | 15,978,478  |             |            |   |  |   |  |   |  |  
|Rent              |       |                       | 1,830,015   |             |          |   | 610,005    |            |  |           | 1,220,010   |             |            |   |  |   |  |   |  |  
|                  |       |                       |             |             |          |   |            |            |  |           |             |             |            |   |  
|                  | Total |                       | $           | 182,423,971 |          |   | $          | 16,588,483 |  |           | $           | 165,835,488 |            |   | $ |  |  |   | $ |  | 
|                  |       |                       |             |             |          |   |            |            |  |           |             |             |            |   |  




Future Capital and Financing Requirements







Off Balance Sheet Arrangements







Critical Accounting Policies and Estimates










33



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Recent Accounting Pronouncements


Share-Based Payment




34



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##### Table of Contents






Changes in Prices







Inflation









|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures About Market
    Risk








|        |                                            
|------- | -------------------------------------------
|Item 8. | Financial Statements and Supplementary Data








|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure








|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

Conclusion Regarding The Effectiveness Of Disclosure Controls
And Procedures




Changes In Internal Control Over Financial Reporting








| |   |                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------
| |  | instances where consultants were allowed unsupervised access to
    our production systems;             
|
| |  | limited circumstances where our virus protection systems were
    disabled due to programming conflicts;
|
| |  | lack of a documented and regular reviews of system error files;                                         
|
| |  | certain instances of noncompliance with our program change
    policies and procedures; and             
|
| |  | lack of thorough testing of our data recovery processes.                                                

35



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Managements Report on Internal Control Over Financial
Reporting


Internal Control  Integrated Framework Internal Control  Integrated
Framework


36



---



##### Table of Contents





Auditors Report on Internal Control Over Financial
Reporting


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
















37



---



##### Table of Contents







| |                   
| | ------------------
| | GRANT THORNTON LLP





38



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##### Table of Contents






PART III







|         |                                                   
|-------- | --------------------------------------------------
|Item 10. | Directors and Executive Officers of the Registrant



http://www.negx.com







|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation








|         |                                                                   
|-------- | ------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial Owners and
    Management








|         |                                               
|-------- | ----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions








|         |                                       
|-------- | --------------------------------------
|Item 14. | Principle Accounting Fees and Services



39



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##### Table of Contents






PART IV







|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules and Reports on
    Form 8-K





| |                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------
| | 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.

Exhibits:




| |                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Reference is made to the Index to Exhibits immediately following
    the Notes to Consolidated Financial Statements for a list of all
    exhibits filed as part of this report.

40



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##### Table of Contents



Glossary




Bbl


Bcf


Bcfe


Behind the Pipe


Developed Acreage


Development Well


Dry Well


Exploratory Well


Gross Acres or Gross Wells


Infill Well


Mbbl


Mcf


Mcfe


Mmcf


Mmcfe


Natural Gas Equivalent


Net Acres or Net Wells


NYMEX


Oil, Gas and Mineral Lease


OPEC


Overriding Royalty Interest


PDNP


Productive Well


41



---



##### Table of Contents



Proved Developed Producing Reserves


Proved Developed Reserves


Proved Reserves


Proved Undeveloped Reserves


PUD


PV 10%


Revenue Interest


Royalty Interest


Secondary Recovery


Standardized Measure


Undeveloped Acreage


Working Interest


42



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##### Table of Contents






SIGNATURES






| |                            
| | ---------------------------
| | NATIONAL ENERGY GROUP, INC.



| |     |                     
| | --- | --------------------
| | By: | /s/ BOB G. ALEXANDER

| |                                      
| | -------------------------------------
| |                                      
| | Bob G. Alexander                     
| | President and Chief Executive Officer





| |     |                      
| | --- | ---------------------
| | By: | /s/ RANDALL D. COOLEY

| |                                           
| | ------------------------------------------
| |                                           
| | Randall D. Cooley                         
| | Vice President and Chief Financial Officer



POWER OF ATTORNEY AND SIGNATURES






|                                             |  |                                                 |  | 
|-------------------------------------------- |  | ----------------------------------------------- |  | 
|                                            
|/s/ BOB G. ALEXANDERBob
    G. Alexander     |  | President, Chief Executive Officer and Director
|                                            
|/s/ MARTIN L. HIRSCHMartin
    L. Hirsch     |  | Director                                       
|                                            
|/s/ ROBERT H. KITERobert
    H. Kite         |  | Director                                       
|                                            
|/s/ ROBERT J. MITCHELLRobert
    J. Mitchell |  | Director                                       
|                                            
|/s/ JACK G. WASSERMANJack
    G. Wasserman   |  | Director                                       

43



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INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULES


FINANCIAL STATEMENTS


|                                                                                                          |  |      |      | 
|--------------------------------------------------------------------------------------------------------- |  | ---- | ---- | 
|                                                                                                          |  | Page |     
|                                                                                                          |  |      |     
|National Energy Group, Inc.                                                                               |  |      |      | 
|Report of Independent Registered Public
    Accounting Firm  KPMG LLP                                    |  |      | F-2  | 
|Report of Independent Registered Public
    Accounting Firm  Grant Thornton LLP                          |  |      | F-3  | 
|Balance Sheets as of December 31, 2003
    and 2004                                                       |  |      | F-4  | 
|Statements of Operations for the years
    ended December 31, 2002, 2003 and 2004                         |  |      | F-5  | 
|Statements of Cash Flows for the years
    ended December 31, 2002, 2003 and 2004                         |  |      | F-6  | 
|Statements of Stockholders Equity
    (Deficit) for the years ended December 31, 2002, 2003
    and 2004 |  |      | F-7  | 
|Notes to Financial Statements                                                                             |  |      | F-8  | 
|                                                                                                         
|NEG Holding LLC                                                                                           |  |      |      | 
|Report of Independent Registered Public
    Accounting Firm  KPMG LLP                                    |  |      | F-20 | 
|Report of Independent Registered Public
    Accounting Firm  Grant Thornton LLP                          |  |      | F-21 | 
|Consolidated Balance Sheets as of
    December 31, 2003 and 2004                                          |  |      | F-22 | 
|Consolidated Statements of Operations for
    the years ended December 31, 2002, 2003 and 2004            |  |      | F-23 | 
|Consolidated Statements of Cash Flows for
    years ended December 31, 2002, 2003 and 2004                |  |      | F-24 | 
|Consolidated Statements of Members
    Equity for the years ended December 31, 2002, 2003
    and 2004   |  |      | F-25 | 
|Notes to Consolidated Financial
    Statements                                                            |  |      | F-26 | 

Financial Statement Schedules




F-1



---



##### Table of Contents






REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM














| |         
| | --------
| | KPMG LLP





F-2



---



##### Table of Contents






REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
















| |                   
| | ------------------
| | GRANT THORNTON LLP





F-3



---



##### Table of Contents



NATIONAL ENERGY GROUP, INC.





BALANCE SHEETS


|                                               |                                               |                                                                                                                                                |                                             |              |         |             |            |              |         |             |  
|---------------------------------------------- | --------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------- | ------------ | ------- | ----------- | ---------- | ------------ | ------- | ----------- | -
|                                               |                                               | December 31,                                                                                                                                   |                                            
|                                               |                                               |                                                                                                                                                |                                            
|                                               |                                               | 2003                                                                                                                                           |                                             |              | 2004    |            
|                                               |                                               |                                                                                                                                                |                                             |              |         |            
|ASSETS                                        
|Current assets:                                |                                               |                                                                                                                                                |                                             |              |         |             |            |             
|                                               | Cash and cash equivalents                     |                                                                                                                                                | $                                           | 3,158,816    |         |             | $          | 2,487,672    |        
|                                               | Accounts receivable  other                   |                                                                                                                                                |                                             | 149,498      |         |             |            | 191,802      |        
|                                               | Accounts receivable  affiliates              |                                                                                                                                                |                                             | 812,231      |         |             |            | 2,207,767    |        
|                                               | Other                                         |                                                                                                                                                |                                             | 268,029      |         |             |            | 184,188      |        
|                                               |                                               |                                                                                                                                                |                                             |              |         |            
|                                               |                                               |                                                                                                                                                | Total current assets                        |              |         | 4,388,574   |            |              |         | 5,071,429   |  
|Investment in Holding LLC                      |                                               |                                                                                                                                                | 69,346,495                                  |              |         |             | 87,799,748 |             
|Deferred tax assets                            |                                               |                                                                                                                                                | 25,949,007                                  |              |         |             | 19,241,529 |             
|                                               |                                               |                                                                                                                                                |                                             |              |         |            
|                                               |                                               |                                                                                                                                                | Total assets                                |              | $       | 99,684,076  |            |              | $       | 112,112,706 |  
|                                               |                                               |                                                                                                                                                |                                             |              |         |            
|                                              
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
|Current liabilities:                           |                                               |                                                                                                                                                |                                             |              |         |             |            |             
|                                               | Accounts payable                              |                                                                                                                                                | $                                           | 26,943       |         |             | $          | 208,802      |        
|                                               | Accrued interest on senior notes  affiliates |                                                                                                                                                |                                             | 2,663,080    |         |             |            | 2,663,080    |        
|                                               |                                               |                                                                                                                                                |                                             |              |         |            
|                                               |                                               |                                                                                                                                                | Total current liabilities                   |              |         | 2,690,023   |            |              |         | 2,871,882   |  
|Long term liabilities:                         |                                               |                                                                                                                                                |                                             |              |         |             |            |             
|                                               | Senior notes  affiliates                     |                                                                                                                                                |                                             | 148,637,000  |         |             |            | 148,637,000  |        
|                                               | Deferred gain on senior note redemption       |                                                                                                                                                |                                             | 5,774,604    |         |             |            | 3,736,508    |        
|Commitments and contingencies                  |                                               |                                                                                                                                                |                                             |              |         |             |            |             
|                                               | Stockholders deficit:                        |                                                                                                                                                |                                             |              |         |             |            |              |        
|                                               | Common stock, $.01 par value:                 |                                                                                                                                                |                                             |              |         |             |            |              |        
|                                               |                                               | Authorized shares  15,000,000 at December 31,
    2003 and 2004; Issued and outstanding shares 
    11,190,650 at December 31, 2003 and 2004 |                                             |              | 111,907 |             |            |              | 111,907 |            
|                                               | Additional paid-in capital                    |                                                                                                                                                |                                             | 123,020,121  |         |             |            | 123,020,121  |        
|                                               | Accumulated deficit                           |                                                                                                                                                |                                             | (180,549,579 | )       |             |            | (166,264,712 | )      
|                                               |                                               |                                                                                                                                                |                                             |              |         |            
|                                               |                                               |                                                                                                                                                | Total stockholders deficit                 |              |         | (57,417,551 | )          |              |         | (43,132,684 | )
|                                               |                                               |                                                                                                                                                |                                             |              |         |            
|                                               |                                               |                                                                                                                                                | Total liabilities and stockholders deficit |              | $       | 99,684,076  |            |              | $       | 112,112,706 |  
|                                               |                                               |                                                                                                                                                |                                             |              |         |            



F-4



---



##### Table of Contents



NATIONAL ENERGY GROUP, INC.





STATEMENTS OF OPERATIONS


|                                                     |                                           |                          |            |            |            |   |            |            |            |   |            |            |            | 
|---------------------------------------------------- | ----------------------------------------- | ------------------------ | ---------- | ---------- | ---------- | - | ---------- | ---------- | ---------- | - | ---------- | ---------- | ---------- | 
|                                                     |                                           | Year Ended December 31,  |           
|                                                     |                                           |                          |           
|                                                     |                                           | 2002                     |            |            | 2003       |   |            | 2004       |           
|                                                     |                                           |                          |            |            |            |   |            |            |           
|Revenues:                                            |                                           |                          |            |            |            |   |            |            |            |   |            |           
|                                                     | Accretion of Investment in Holding LLC    |                          | $          | 32,878,642 |            |   | $          | 30,141,171 |            |   | $          | 34,431,731 |           
|                                                     | Management fees from affiliates           |                          |            | 7,637,285  |            |   |            | 7,967,001  |            |   |            | 11,562,726 |           
|                                                     | Interest income and other, net            |                          |            | 36,074     |            |   |            | 33,508     |            |   |            | 39,310     |           
|                                                     |                                           |                          |            |            |            |   |            |            |           
|                                                     |                                           | Total revenue            |            |            | 40,552,001 |   |            |            | 38,141,680 |   |            |            | 46,033,767 | 
|Costs and expenses:                                  |                                           |                          |            |            |            |   |            |            |            |   |            |           
|                                                     | Salaries and wages                        |                          |            | 4,256,386  |            |   |            | 4,348,645  |            |   |            | 7,224,605  |           
|                                                     | Insurance                                 |                          |            | 587,600    |            |   |            | 637,585    |            |   |            | 1,001,644  |           
|                                                     | Rent and utilities                        |                          |            | 624,322    |            |   |            | 668,802    |            |   |            | 699,674    |           
|                                                     | Other general and administrative expenses |                          |            | 1,636,541  |            |   |            | 1,575,514  |            |   |            | 2,218,752  |           
|                                                     | Interest expense                          |                          |            | 18,964,052 |            |   |            | 15,114,928 |            |   |            | 13,940,391 |           
|                                                     |                                           |                          |            |            |            |   |            |            |           
|                                                     |                                           | Total costs and expenses |            |            | 26,068,901 |   |            |            | 22,345,474 |   |            |            | 25,085,066 | 
|                                                     |                                           |                          |            |            |            |   |            |            |           
|Income before income taxes                           |                                           |                          | 14,483,100 |            |            |   | 15,796,206 |            |            |   | 20,948,701 |           
|Income tax expense                                   |                                           |                          | (5,067,705 | )          |            |   | (224,573   | )          |            |   | (6,663,834 | )         
|                                                     |                                           |                          |            |            |            |   |            |            |           
|Net income                                           |                                           | $                        | 9,415,395  |            |            | $ | 15,571,633 |            |            | $ | 14,284,867 |           
|                                                     |                                           |                          |            |            |            |   |            |            |           
|Earnings per share:                                  |                                           |                          |            |            |            |   |            |            |            |   |            |           
|Net income per common share, basic and diluted       |                                           | $                        | .84        |            |            | $ | 1.39       |            |            | $ | 1.28       |           
|                                                     |                                           |                          |            |            |            |   |            |            |           
|Weighted average number of common shares outstanding |                                           |                          | 11,190,650 |            |            |   | 11,190,650 |            |            |   | 11,190,650 |           
|                                                     |                                           |                          |            |            |            |   |            |            |           



F-5



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##### Table of Contents



NATIONAL ENERGY GROUP, INC.





STATEMENTS OF CASH FLOWS


|                                                 |                                           |                         |             |             |      |   |             |             |   |   |             |             |  
|------------------------------------------------ | ----------------------------------------- | ----------------------- | ----------- | ----------- | ---- | - | ----------- | ----------- | - | - | ----------- | ----------- | -
|                                                 |                                           | Year Ended December 31, |            
|                                                 |                                           |                         |            
|                                                 |                                           | 2002                    |             |             | 2003 |   |             | 2004        |  
|                                                 |                                           |                         |             |             |      |   |             |             |  
|Operating Activities                             |                                           |                         |             |             |      |   |             |             |   |   |             |            
|Net income                                       |                                           | $                       | 9,415,395   |             |      | $ | 15,571,633  |             |   | $ | 14,284,867  |            
|Deferred gain amortization  interest reduction  |                                           |                         | (2,038,095  | )           |      |   | (2,038,092  | )           |   |   | (2,038,095  | )          
|Accretion of Investment in Holding LLC           |                                           |                         | (32,878,642 | )           |      |   | (30,141,171 | )           |   |   | (34,431,731 | )          
|Deferred income taxes                            |                                           |                         | 5,067,705   |             |      |   | (427,269    | )           |   |   | 6,663,834   |            
|Changes in operating assets and liabilities:     |                                           |                         |             |             |      |   |             |             |   |   |             |            
|                                                 | Accounts receivable                       |                         |             | 580,460     |      |   |             | (354,731    | ) |   |             | (1,394,197  | )
|                                                 | Other current assets                      |                         |             | (132,207    | )    |   |             | 51,379      |   |   |             | 83,841      |  
|                                                 | Accounts payable and accrued liabilities  |                         |             | (1,280,546  | )    |   |             | (41,715,038 | ) |   |             | 181,859     |  
|                                                 |                                           |                         |             |             |      |   |             |             |  
|                                                 | Net cash used in operating activities     |                         |             | (21,265,930 | )    |   |             | (59,053,289 | ) |   |             | (16,649,622 | )
|                                                 |                                           |                         |             |             |      |   |             |             |  
|Investing Activities                             |                                           |                         |             |             |      |   |             |             |   |   |             |            
|Guaranteed Payment from Holding LLC              |                                           |                         | 21,652,819  |             |      |   | 18,228,784  |             |   |   | 15,978,478  |            
|Priority Amount distribution from Holding LLC    |                                           |                         |            |             |      |   | 40,506,071  |             |   |   |            |            
|                                                 |                                           |                         |             |             |      |   |             |             |  
|                                                 | Net cash provided by investing activities |                         |             | 21,652,819  |      |   |             | 58,734,855  |   |   |             | 15,978,478  |  
|                                                 |                                           |                         |             |             |      |   |             |             |  
|Increase (decrease) in cash and cash equivalents |                                           |                         | 386,889     |             |      |   | (318,434    | )           |   |   | (671,144    | )          
|Cash and cash equivalents at beginning of period |                                           |                         | 3,090,361   |             |      |   | 3,477,250   |             |   |   | 3,158,816   |            
|                                                 |                                           |                         |             |             |      |   |             |             |  
|Cash and cash equivalents at end of period       |                                           | $                       | 3,477,250   |             |      | $ | 3,158,816   |             |   | $ | 2,487,672   |            
|                                                 |                                           |                         |             |             |      |   |             |             |  
|Supplemental Cash Flow Information               |                                           |                         |             |             |      |   |             |             |   |   |             |            
|Interest paid in cash                            |                                           | $                       | 22,246,984  |             |      | $ | 50,860,483  |             |   | $ | 15,978,478  |            
|                                                 |                                           |                         |             |             |      |   |             |             |  
|Non Cash Financing and Investing Activities      |                                           |                         |             |             |      |   |             |             |   |   |             |            
|Contribution of note from Holding LLC            |                                           | $                       |            |             |      | $ | 10,939,750  |             |   | $ |            |            
|                                                 |                                           |                         |             |             |      |   |             |             |  



F-6



---



##### Table of Contents



NATIONAL ENERGY GROUP, INC.





STATEMENTS OF STOCKHOLDERS DEFICIT


|                             |            |              |            |   |            |   |         |                 |       |   |               |   |  |         |              |            |  |   |             |            | 
|---------------------------- | ---------- | ------------ | ---------- | - | ---------- | - | ------- | --------------- | ----- | - | ------------- | - |  | ------- | ------------ | ---------- |  | - | ----------- | ---------- | 
|                             |            | Common Stock |            |   |            |   |         |                 | Total |  
|                             |            |              |            |   | Additional |   |         | Accumulated     |       |   | Stockholders |  
|                             |            | Shares       |            |   | Amount     |   |         | Paid-In Capital |       |   | Deficit       |   |  | Deficit |             
|                             |            |              |            |   |            |   |         |                 |       |   |               |   |  |         |             
|Balance at December 31, 2001 |            |              | 11,190,650 |   |            | $ | 111,907 |                 |       | $ | 123,020,121   |   |  | $       | (205,536,607 | )          |  | $ | (82,404,579 | )         
|                             | Net income |              |            |  |            |   |         |                |       |   |               |  |  |         |              | 9,415,395  |  |   |             | 9,415,395  | 
|                             |            |              |            |   |            |   |         |                 |       |   |               |   |  |         |             
|Balance at December 31, 2002 |            |              | 11,190,650 |   |            | $ | 111,907 |                 |       | $ | 123,020,121   |   |  | $       | (196,121,212 | )          |  | $ | (72,989,184 | )         
|                             | Net income |              |            |  |            |   |         |                |       |   |               |  |  |         |              | 15,571,633 |  |   |             | 15,571,633 | 
|                             |            |              |            |   |            |   |         |                 |       |   |               |   |  |         |             
|Balance at December 31, 2003 |            |              | 11,190,650 |   |            | $ | 111,907 |                 |       | $ | 123,020,121   |   |  | $       | (180,549,579 | )          |  | $ | (57,417,551 | )         
|                             | Net income |              |            |  |            |   |         |                |       |   |               |  |  |         |              | 14,284,867 |  |   |             | 14,284,867 | 
|                             |            |              |            |   |            |   |         |                 |       |   |               |   |  |         |             
|Balance at December 31, 2004 |            |              | 11,190,650 |   |            | $ | 111,907 |                 |       | $ | 123,020,121   |   |  | $       | (166,264,712 | )          |  | $ | (43,132,684 | )         
|                             |            |              |            |   |            |   |         |                 |       |   |               |   |  |         |             



F-7



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##### Table of Contents



NATIONAL ENERGY GROUP, INC.





NOTES TO FINANCIAL STATEMENTS


December 31, 2004




|   |                                 
|-- | --------------------------------
|1. | Background and Bankruptcy Filing















F-8



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##### Table of Contents



NATIONAL ENERGY GROUP, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)










|   |                                
|-- | -------------------------------
|2. | Significant Accounting Policies



| |                      
| | ---------------------
| | Basis of Presentation





| |                     
| | --------------------
| | Accounting Estimates





| |                          
| | -------------------------
| | Cash and Cash Equivalents





| |                          
| | -------------------------
| | Investment in Holding LLC





F-9



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##### Table of Contents



NATIONAL ENERGY GROUP, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)








| |                             
| | ----------------------------
| | Other Property and Equipment





| |             
| | ------------
| | Income Taxes





| |                      
| | ---------------------
| | Financial Instruments

3 4






| |                          
| | -------------------------
| | Earnings (Loss) Per Share





| |                     
| | --------------------
| | Comprehensive Income





| |                                 
| | --------------------------------
| | Recent Accounting Pronouncements

Share-Based Payment


F-10



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##### Table of Contents



NATIONAL ENERGY GROUP, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)








| |                  
| | -----------------
| | Reclassifications





|   |                      
|-- | ---------------------
|3. | Management Agreements



F-11



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##### Table of Contents



NATIONAL ENERGY GROUP, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)








4.     Credit Facility/ Pledge of
Our Membership Interest in Holding, LLC






F-12



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##### Table of Contents



NATIONAL ENERGY GROUP, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




| |                                  
| | ---------------------------------
| | The Operating LLC Credit Facility















| |                                                 
| | ------------------------------------------------
| | Pledge of Our Membership Interest in Holding LLC



F-13



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##### Table of Contents



NATIONAL ENERGY GROUP, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)








|   |                      
|-- | ---------------------
|5. | Senior Notes Due 2006

3 4










F-14



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##### Table of Contents



NATIONAL ENERGY GROUP, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




|   |                              
|-- | -----------------------------
|6. | Commitments and Contingencies



|     |  |   |         | 
|---- |  | - | ------- | 
|2005 |  | $ | 610,005 | 
|2006 |  | $ | 610,005 | 
|2007 |  | $ | 610,005 | 





|   |                          
|-- | -------------------------
|7. | Investment in Holding LLC





|                        |  |      |             |   |      |   |             |      |  |   |             |  
|----------------------- |  | ---- | ----------- | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|                        |  | 2002 |             |   | 2003 |   |             | 2004 | 
|                        |  |      |             |   |      |   |             |      | 
|Total revenues          |  | $    | 35,900,900  |   |      | $ | 77,605,944  |      |  | $ | 78,727,489  |  
|Total cost and expenses |  |      | (32,064,463 | ) |      |   | (46,765,935 | )    |  |   | (47,313,051 | )
|                        |  |      |             |   |      |   |             |      | 
|Operating income        |  |      | 3,836,437   |   |      |   | 30,840,009  |      |  |   | 31,414,438  |  
|Other income (expense)  |  |      | 10,089,664  |   |      |   | 30,071      |      |  |   | (2,291,924  | )
|                        |  |      |             |   |      |   |             |      | 
|Net income              |  | $    | 13,926,101  |   |      | $ | 30,870,080  |      |  | $ | 29,122,514  |  
|                        |  |      |             |   |      |   |             |      | 





F-15



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##### Table of Contents



NATIONAL ENERGY GROUP, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)








|                                               |  |      |             |   |      |   |             |  
|---------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | -
|                                               |  | 2003 |             |   | 2004 |  
|                                               |  |      |             |   |      |  
|Investment in Holding LLC at beginning of year |  | $    | 108,879,929 |   |      | $ | 69,346,495  |  
|Priority Amount distribution from Holding LLC  |  |      | (51,445,821 | ) |      |   |            |  
|Guaranteed Payment from Holding LLC            |  |      | (18,228,784 | ) |      |   | (15,978,478 | )
|Accretion of investment in Holding LLC         |  |      | 30,141,171  |   |      |   | 34,431,731  |  
|                                               |  |      |             |   |      |  
|Investment in Holding LLC at end of year       |  | $    | 69,346,495  |   |      | $ | 87,799,748  |  
|                                               |  |      |             |   |      |  







| |                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. Guaranteed Payments are to be paid to us, calculated on
    an annual interest rate of 10.75% on the outstanding Priority
    Amount. The Priority Amount includes all outstanding debt owed
    to entities owned or controlled by Carl C. Icahn, including the
    amount of our 10.75% Senior Notes. As of December 31,
    2004, the Priority Amount was $148.6 million. The
    Guaranteed Payments will be made on a semi-annual basis.
|
| | 2. The Priority Amount is to be paid to us. Such payment is
    to occur by November 6, 2006.                                                                                                                                                                                                                                                                                                                                                   
|
| | 3. An amount equal to the Priority Amount and all
    Guaranteed Payments paid to us, plus any additional capital
    contributions made by Gascon, less any distribution previously
    made by Holding LLC to Gascon, is to be paid to Gascon.                                                                                                                                                                                                
|
| | 4. An amount equal to the aggregate annual interest
    (calculated at prime plus
    1/2%
    on the sum of the Guaranteed Payments), plus any unpaid interest
    for prior years (calculated at prime plus
    1/2%
    on the sum of the Guaranteed Payments), less any distributions
    previously made by Holding LLC to Gascon, is to be paid to
    Gascon.                                                                            
|
| | 5. After the above distributions have been made, any
    additional distributions will be made in accordance with the
    ratio of our companys and Gascons respective capital
    accounts. (Capital accounts as defined in the Holding LLC
    Operating Agreement).                                                                                                                                                                        

F-16



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##### Table of Contents



NATIONAL ENERGY GROUP, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




|   |                     
|-- | --------------------
|8. | Stockholders Equity



| |             
| | ------------
| | Common Stock







|   |             
|-- | ------------
|9. | Income Taxes



|         |  |                         |            |   |      |   |          |      |  |   |            |  
|-------- |  | ----------------------- | ---------- | - | ---- | - | -------- | ---- |  | - | ---------- | -
|         |  | Year Ended December 31, |           
|         |  |                         |           
|         |  | 2002                    |            |   | 2003 |   |          | 2004 | 
|         |  |                         |            |   |      |   |          |      | 
|Current  |  | $                       |           |   |      | $ | (651,842 | )    |  | $ |           |  
|Deferred |  |                         | (5,067,705 | ) |      |   | 427,269  |      |  |   | (6,663,834 | )
|         |  |                         |            |   |      |   |          |      | 
|         |  | $                       | (5,067,705 | ) |      | $ | (224,573 | )    |  | $ | (6,663,834 | )
|         |  |                         |            |   |      |   |          |      | 



|                                           |  |                         |            |   |      |   |            |      |  |   |            |  
|------------------------------------------ |  | ----------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                           |  | Year Ended December 31, |           
|                                           |  |                         |           
|                                           |  | 2002                    |            |   | 2003 |   |            | 2004 | 
|                                           |  |                         |            |   |      |   |            |      | 
|Income tax expense at statutory rate       |  | $                       | (5,069,085 | ) |      | $ | (5,528,672 | )    |  | $ | (7,332,045 | )
|Valuation allowance on deferred tax assets |  |                         |           |   |      |   | 5,313,446  |      |  |   | 1,286,986  |  
|Other                                      |  |                         | 1,380      |   |      |   | (9,347     | )    |  |   | (618,775   | )
|                                           |  |                         |            |   |      |   |            |      | 
|                                           |  | $                       | (5,067,705 | ) |      | $ | (224,573   | )    |  | $ | (6,663,834 | )
|                                           |  |                         |            |   |      |   |            |      | 

F-17



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##### Table of Contents



NATIONAL ENERGY GROUP, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




|                                 |  |              |             |   |      |   |             |  
|-------------------------------- |  | ------------ | ----------- | - | ---- | - | ----------- | -
|                                 |  | December 31, |            
|                                 |  |              |            
|                                 |  | 2003         |             |   | 2004 |  
|                                 |  |              |             |   |      |  
|Deferred tax assets related to:  |  |              |             |   |      |   |             |  
|Investment in Holding LLC        |  | $            | 18,844,927  |   |      | $ | 5,332,868   |  
|Net operating loss carryforwards |  |              | 20,306,036  |   |      |   | 26,580,610  |  
|AMT credit carryforwards         |  |              | 651,842     |   |      |   | 608,197     |  
|Other, net                       |  |              | 2,021,112   |   |      |   | 1,307,778   |  
|                                 |  |              |             |   |      |  
|                                 |  |              | 41,823,917  |   |      |   | 33,829,453  |  
|Less valuation allowance         |  |              | (15,874,910 | ) |      |   | (14,587,924 | )
|                                 |  |              |             |   |      |  
|                                 |  | $            | 25,949,007  |   |      | $ | 19,241,529  |  
|                                 |  |              |             |   |      |  



F-18



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##### Table of Contents



NATIONAL ENERGY GROUP, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




|    |                                        
|--- | ---------------------------------------
|10. | Quarterly Financial Results (Unaudited)



|                              |                          |                    |   |        |         |  |   |              |     |  |             |        |     |  |   |        |     | 
|----------------------------- | ------------------------ | ------------------ | - | ------ | ------- |  | - | ------------ | --- |  | ----------- | ------ | --- |  | - | ------ | --- | 
|                              |                          | Three Months Ended |  
|                              |                          |                    |  
|                              |                          | March 31           |   |        | June 30 |  |   | September 30 |     |  | December 31 |       
|                              |                          |                    |   |        |         |  |   |              |     |  |             |       
|Year ended December 31, 2003  |                          |                    |   |        |         |  |   |              |     |  |             |        |     |  |   |       
|                              | Total revenues           |                    | $ | 10,632 |         |  | $ | 8,716        |     |  | $           | 9,048  |     |  | $ | 9,746  |    
|                              |                          |                    |   |        |         |  |   |              |     |  |             |       
|                              | Total costs and expenses |                    | $ | 6,372  |         |  | $ | 5,361        |     |  | $           | 5,076  |     |  | $ | 5,536  |    
|                              |                          |                    |   |        |         |  |   |              |     |  |             |       
|                              | Net income               |                    | $ | 2,769  |         |  | $ | 2,181        |     |  | $           | 2,582  |     |  | $ | 8,040  |    
|                              |                          |                    |   |        |         |  |   |              |     |  |             |       
|                              | Per common share:        |                    |   |        |         |  |   |              |     |  |             |        |     |  |   |        |    
|                              |                          | Net income         |   | $      | .25     |  |   | $            | .19 |  |             | $      | .23 |  |   | $      | .72 | 
|                              |                          |                    |   |        |         |  |   |              |     |  |             |       
|Year ended December 31, 2004: |                          |                    |   |        |         |  |   |              |     |  |             |        |     |  |   |       
|                              | Total revenues           |                    | $ | 10,528 |         |  | $ | 11,088       |     |  | $           | 11,588 |     |  | $ | 12,830 |    
|                              |                          |                    |   |        |         |  |   |              |     |  |             |       
|                              | Total costs and expenses |                    | $ | 5,916  |         |  | $ | 6,235        |     |  | $           | 5,944  |     |  | $ | 6,990  |    
|                              |                          |                    |   |        |         |  |   |              |     |  |             |       
|                              | Net income               |                    | $ | 2,998  |         |  | $ | 3,155        |     |  | $           | 3,669  |     |  | $ | 4,463  |    
|                              | Per common share:        |                    |   |        |         |  |   |              |     |  |             |        |     |  |   |        |    
|                              |                          | Net income         |   | $      | .27     |  |   | $            | .28 |  |             | $      | .33 |  |   | $      | .40 | 

F-19



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##### Table of Contents






REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
















| |         
| | --------
| | KPMG LLP





F-20



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##### Table of Contents






Report of Independent Registered Public Accounting Firm














| |                   
| | ------------------
| | GRANT THORNTON LLP





F-21



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##### Table of Contents



NEG HOLDING LLC





CONSOLIDATED BALANCE SHEETS


|                                                            |                                                                                                  |                                    |                                       |              |             |             |             |              |             |             | 
|----------------------------------------------------------- | ------------------------------------------------------------------------------------------------ | ---------------------------------- | ------------------------------------- | ------------ | ----------- | ----------- | ----------- | ------------ | ----------- | ----------- | 
|                                                            |                                                                                                  | December 31,                       |                                      
|                                                            |                                                                                                  |                                    |                                      
|                                                            |                                                                                                  | 2003                               |                                       |              | 2004        |            
|                                                            |                                                                                                  |                                    |                                       |              |             |            
|ASSETS                                                     
|Current assets:                                             |                                                                                                  |                                    |                                       |              |             |             |             |             
|                                                            | Cash and cash equivalents                                                                        |                                    | $                                     | 15,401,433   |             |             | $           | 882,841      |            
|                                                            | Accounts receivable  oil and natural gas sales                                                  |                                    |                                       | 13,214,537   |             |             |             | 18,220,105   |            
|                                                            | Accounts receivable  joint interest and other (net of
    allowance of $104,000 in 2003 & 2004) |                                    |                                       | 485,083      |             |             |             | 495,272      |            
|                                                            | Notes receivable  other (net of allowance of $790,000
    in 2004)                              |                                    |                                       | 1,220,960    |             |             |             | 489,389      |            
|                                                            | Derivative broker deposit                                                                        |                                    |                                       | 1,700,000    |             |             |             |             |            
|                                                            | Drilling prepayments                                                                             |                                    |                                       | 1,106,871    |             |             |             | 858,114      |            
|                                                            | Other                                                                                            |                                    |                                       | 286,399      |             |             |             | 2,200,156    |            
|                                                            |                                                                                                  |                                    |                                       |              |             |            
|                                                            |                                                                                                  |                                    | Total current assets                  |              |             | 33,415,283  |             |              |             | 23,145,877  | 
|Oil and natural gas properties, at cost (full cost method): |                                                                                                  |                                    |                                       |              |             |             |             |             
|                                                            | Subject to ceiling limitation                                                                    |                                    |                                       | 507,250,803  |             |             |             | 573,069,515  |            
|                                                            | Accumulated depreciation, depletion, and amortization                                            |                                    |                                       | (322,443,045 | )           |             |             | (343,485,274 | )          
|                                                            |                                                                                                  |                                    |                                       |              |             |            
|                                                            |                                                                                                  | Net oil and natural gas properties |                                       |              | 184,807,758 |             |             |              | 229,584,241 |            
|Other property and equipment                                |                                                                                                  |                                    | 4,838,114                             |              |             |             | 5,055,490   |             
|Accumulated depreciation                                    |                                                                                                  |                                    | (3,746,317                            | )            |             |             | (4,063,781  | )           
|                                                            |                                                                                                  |                                    |                                       |              |             |            
|                                                            |                                                                                                  | Net other property and equipment   |                                       |              | 1,091,797   |             |             |              | 991,709     |            
|Note receivable                                             |                                                                                                  |                                    | 1,827,000                             |              |             |             | 3,090,000   |             
|Equity investment                                           |                                                                                                  |                                    | 1,698,000                             |              |             |             | 2,379,108   |             
|Other long term assets                                      |                                                                                                  |                                    | 964,500                               |              |             |             | 1,082,504   |             
|                                                            |                                                                                                  |                                    |                                       |              |             |            
|                                                            |                                                                                                  |                                    | Total assets                          |              | $           | 223,804,338 |             |              | $           | 260,273,439 | 
|                                                            |                                                                                                  |                                    |                                       |              |             |            
|                                                           
|LIABILITIES AND MEMBERS EQUITY                            
|Current liabilities:                                        |                                                                                                  |                                    |                                       |              |             |             |             |             
|                                                            | Accounts payable  trade                                                                         |                                    | $                                     | 2,879,138    |             |             | $           | 10,239,384   |            
|                                                            | Accounts payable  affiliate                                                                     |                                    |                                       | 411,731      |             |             |             | 1,595,235    |            
|                                                            | Accounts payable  revenue                                                                       |                                    |                                       | 3,964,530    |             |             |             | 4,104,029    |            
|                                                            | Prepayments from partners                                                                        |                                    |                                       | 265,871      |             |             |             | 90,186       |            
|                                                            | Other                                                                                            |                                    |                                       | 136,707      |             |             |             | 77,593       |            
|                                                            | Derivative financial instruments                                                                 |                                    |                                       | 6,595,475    |             |             |             | 6,349,714    |            
|                                                            |                                                                                                  |                                    |                                       |              |             |            
|                                                            |                                                                                                  |                                    | Total current liabilities             |              |             | 14,253,452  |             |              |             | 22,456,141  | 
|Long term liabilities:                                      |                                                                                                  |                                    |                                       |              |             |             |             |             
|                                                            | Note payable                                                                                     |                                    |                                       | 592,889      |             |             |             | 83,031       |            
|                                                            | Gas balancing                                                                                    |                                    |                                       | 818,621      |             |             |             | 897,852      |            
|                                                            | Credit facility                                                                                  |                                    |                                       | 43,833,624   |             |             |             | 51,833,624   |            
|                                                            | Asset retirement obligation                                                                      |                                    |                                       | 3,268,381    |             |             |             | 3,055,240    |            
|                                                            | Derivative financial instruments                                                                 |                                    |                                       |             |             |             |             | 7,766,144    |            
|Members equity                                             |                                                                                                  |                                    | 161,037,371                           |              |             |             | 174,181,407 |             
|                                                            |                                                                                                  |                                    |                                       |              |             |            
|                                                            |                                                                                                  |                                    | Total liabilities and members equity |              | $           | 223,804,338 |             |              | $           | 260,273,439 | 
|                                                            |                                                                                                  |                                    |                                       |              |             |            



F-22



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##### Table of Contents



NEG HOLDING LLC





CONSOLIDATED STATEMENTS OF OPERATIONS


|                                                                  |                                                     |                          |            |            |            |   |            |            |            |   |            |            |            | 
|----------------------------------------------------------------- | --------------------------------------------------- | ------------------------ | ---------- | ---------- | ---------- | - | ---------- | ---------- | ---------- | - | ---------- | ---------- | ---------- | 
|                                                                  |                                                     | Year Ended December 31,  |           
|                                                                  |                                                     |                          |           
|                                                                  |                                                     | 2002                     |            |            | 2003       |   |            | 2004       |           
|                                                                  |                                                     |                          |            |            |            |   |            |            |           
|Revenues:                                                         |                                                     |                          |            |            |            |   |            |            |            |   |            |           
|                                                                  | Oil and natural gas sales                           |                          | $          | 35,319,918 |            |   | $          | 75,740,373 |            |   | $          | 76,677,224 |           
|                                                                  | Field operations                                    |                          |            | 403,933    |            |   |            | 297,069    |            |   |            | 326,960    |           
|                                                                  | Plant operations                                    |                          |            | 177,049    |            |   |            | 1,568,502  |            |   |            | 1,723,305  |           
|                                                                  |                                                     |                          |            |            |            |   |            |            |           
|                                                                  |                                                     | Total revenue            |            |            | 35,900,900 |   |            |            | 77,605,944 |   |            |            | 78,727,489 | 
|Costs and expenses:                                               |                                                     |                          |            |            |            |   |            |            |            |   |            |           
|                                                                  | Lease operating                                     |                          |            | 8,508,744  |            |   |            | 11,501,303 |            |   |            | 13,505,366 |           
|                                                                  | Field operations                                    |                          |            | 420,188    |            |   |            | 397,669    |            |   |            | 334,443    |           
|                                                                  | Plant operations                                    |                          |            | 68,767     |            |   |            | 577,003    |            |   |            | 680,066    |           
|                                                                  | Oil and natural gas production taxes                |                          |            | 1,874,854  |            |   |            | 5,770,865  |            |   |            | 5,732,265  |           
|                                                                  | Depreciation, depletion and amortization            |                          |            | 15,509,106 |            |   |            | 23,442,797 |            |   |            | 21,385,529 |           
|                                                                  | Accretion of asset retirement obligation            |                          |            |           |            |   |            | 242,752    |            |   |            | 261,471    |           
|                                                                  | Amortization of loan cost                           |                          |            |           |            |   |            |           |            |   |            | 494,386    |           
|                                                                  | General and administrative                          |                          |            | 5,682,804  |            |   |            | 4,833,546  |            |   |            | 4,919,525  |           
|                                                                  |                                                     |                          |            |            |            |   |            |            |           
|                                                                  |                                                     | Total costs and expenses |            |            | 32,064,463 |   |            |            | 46,765,935 |   |            |            | 47,313,051 | 
|                                                                  |                                                     |                          |            |            |            |   |            |            |           
|Operating income                                                  |                                                     |                          | 3,836,437  |            |            |   | 30,840,009 |            |            |   | 31,414,438 |           
|Other income (expense):                                           |                                                     |                          |            |            |            |   |            |            |            |   |            |           
|                                                                  | Interest expense                                    |                          |            | (96,491    | )          |   |            | (1,538,048 | )          |   |            | (2,222,009 | )         
|                                                                  | Interest income and other, net                      |                          |            | 1,245,204  |            |   |            | 472,337    |            |   |            | 299,327    |           
|                                                                  | Interest income from affiliate                      |                          |            | 546,228    |            |   |            | 114,867    |            |   |            | 149,650    |           
|                                                                  | Commitment fee income                               |                          |            | 175,000    |            |   |            | 125,000    |            |   |            |           |           
|                                                                  | Equity in loss on investment                        |                          |            |           |            |   |            | (102,000   | )          |   |            | (518,892   | )         
|                                                                  | Dividend expense                                    |                          |            | (145,200   | )          |   |            |           |            |   |            |           |           
|                                                                  | Gain (loss) on sale of securities                   |                          |            | 8,711,915  |            |   |            | (953,790   | )          |   |            |           |           
|                                                                  | Unrealized loss on financial instruments/short sale |                          |            | (346,992   | )          |   |            |           |            |   |            |           |           
|                                                                  |                                                     |                          |            |            |            |   |            |            |           
|Income before cumulative effect of change in accounting principle |                                                     |                          | 13,926,101 |            |            |   | 28,958,375 |            |            |   | 29,122,514 |           
|                                                                  | Cumulative effect of change in accounting principle |                          |            |           |            |   |            | 1,911,705  |            |   |            |           |           
|                                                                  |                                                     |                          |            |            |            |   |            |            |           
|Net income                                                        |                                                     | $                        | 13,926,101 |            |            | $ | 30,870,080 |            |            | $ | 29,122,514 |           
|                                                                  |                                                     |                          |            |            |            |   |            |            |           



F-23



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##### Table of Contents



NEG HOLDING LLC





CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                                                      |                                                     |                         |             |            |      |   |             |            |   |   |             |            |  
|------------------------------------------------------------------------------------- | --------------------------------------------------- | ----------------------- | ----------- | ---------- | ---- | - | ----------- | ---------- | - | - | ----------- | ---------- | -
|                                                                                      |                                                     | Year Ended December 31, |            
|                                                                                      |                                                     |                         |            
|                                                                                      |                                                     | 2002                    |             |            | 2003 |   |             | 2004       |  
|                                                                                      |                                                     |                         |             |            |      |   |             |            |  
|Operating Activities                                                                  |                                                     |                         |             |            |      |   |             |            |   |   |             |           
|Net income                                                                            |                                                     | $                       | 13,926,101  |            |      | $ | 30,870,080  |            |   | $ | 29,122,514  |           
|Adjustments to reconcile net income to net cash provided by
    operating activities: |                                                     |                         |             |            |      |   |             |            |   |   |             |           
|                                                                                      | Depreciation, depletion and amortization            |                         |             | 15,509,106 |      |   |             | 23,442,797 |   |   |             | 21,385,529 |  
|                                                                                      | Change in fair market value of derivative contracts |                         |             | 3,608,462  |      |   |             | 2,987,013  |   |   |             | 7,520,383  |  
|                                                                                      | Unrealized loss on financial instruments/short sale |                         |             | 346,992    |      |   |             |           |   |   |             |           |  
|                                                                                      | Gain (loss) on sale of assets                       |                         |             | 7,058      |      |   |             |           |   |   |             | (6,136     | )
|                                                                                      | Equity in loss on investment                        |                         |             |           |      |   |             | 102,000    |   |   |             | 518,892    |  
|                                                                                      | Accretion of asset retirement obligation            |                         |             |           |      |   |             | 242,752    |   |   |             | 261,471    |  
|                                                                                      | Provision for doubtful account                      |                         |             |           |      |   |             |           |   |   |             | 790,000    |  
|                                                                                      | Amortization of note costs                          |                         |             |           |      |   |             |           |   |   |             | 494,386    |  
|                                                                                      | Cumulative effect of change in accounting principle |                         |             |           |      |   |             | (1,911,705 | ) |   |             |           |  
|Changes in operating assets and liabilities:                                          |                                                     |                         |             |            |      |   |             |            |   |   |             |           
|                                                                                      | Accounts receivable                                 |                         |             | (2,069,815 | )    |   |             | (1,296,013 | ) |   |             | (5,078,989 | )
|                                                                                      | Notes receivable                                    |                         |             | (2,774,968 | )    |   |             | (1,831,802 | ) |   |             | (1,258,198 | )
|                                                                                      | Drilling prepayments                                |                         |             | (457,565   | )    |   |             | (380,288   | ) |   |             | 248,758    |  
|                                                                                      | Derivative broker deposit                           |                         |             | (1,800,000 | )    |   |             | 100,000    |   |   |             | 1,700,000  |  
|                                                                                      | Other current assets                                |                         |             | 912,577    |      |   |             | (26,215    | ) |   |             | (2,086,257 | )
|                                                                                      | Accounts payable and accrued liabilities            |                         |             | (566,450   | )    |   |             | 493,730    |   |   |             | 8,017,822  |  
|                                                                                      |                                                     |                         |             |            |      |   |             |            |  
|                                                                                      | Net cash provided by operating activities           |                         |             | 26,641,498 |      |   |             | 52,792,349 |   |   |             | 61,630,175 |  
|                                                                                      |                                                     |                         |             |            |      |   |             |            |  
|Investing Activities                                                                  |                                                     |                         |             |            |      |   |             |            |   |   |             |           
|Oil and natural gas exploration and development expenditures                          |                                                     |                         | (18,106,385 | )          |      |   | (36,034,277 | )          |   |   | (67,487,412 | )         
|Longfellow Ranch acquisition                                                          |                                                     |                         | (51,037,347 | )          |      |   |            |            |   |   |            |           
|Purchases of other property and equipment                                             |                                                     |                         | (222,039    | )          |      |   | (149,897    | )          |   |   | (245,250    | )         
|Increase in restricted cash                                                           |                                                     |                         | (346,992    | )          |      |   |            |            |   |   |            |           
|Proceeds from sales of oil and natural gas properties                                 |                                                     |                         | 1,434,212   |            |      |   | 1,436,016   |            |   |   | 1,202,263   |           
|Equity investment                                                                     |                                                     |                         |            |            |      |   | (1,800,000  | )          |   |   | (1,200,000  | )         
|                                                                                      |                                                     |                         |             |            |      |   |             |            |  
|Net cash used in investing activities                                                 |                                                     |                         | (68,278,551 | )          |      |   | (36,548,158 | )          |   |   | (67,730,399 | )         
|Financing Activities                                                                  |                                                     |                         |             |            |      |   |             |            |   |   |             |           
|Proceeds from Arnos credit facility                                                   |                                                     |                         |            |            |      |   | 46,756,377  |            |   |   |            |           
|Repayment of Arnos credit facility                                                    |                                                     |                         |            |            |      |   | (46,756,377 | )          |   |   |            |           
|Proceeds from Mizuho credit facility                                                  |                                                     |                         |            |            |      |   | 43,833,624  |            |   |   | 8,000,000   |           
|Loan issuance costs                                                                   |                                                     |                         |            |            |      |   | (951,697    | )          |   |   | (439,890    | )         
|Guaranteed Payment to member                                                          |                                                     |                         | (21,652,819 | )          |      |   | (18,228,781 | )          |   |   | (15,978,478 | )         
|Priority Amount distribution to member                                                |                                                     |                         |            |            |      |   | (40,506,072 | )          |   |   |            |           
|                                                                                      |                                                     |                         |             |            |      |   |             |            |  
|Net cash used in financing activities                                                 |                                                     |                         | (21,652,819 | )          |      |   | (15,852,926 | )          |   |   | (8,418,368  | )         
|                                                                                      |                                                     |                         |             |            |      |   |             |            |  
|Increase (decrease) in cash and cash equivalents                                      |                                                     |                         | (63,289,872 | )          |      |   | 391,265     |            |   |   | (14,518,592 | )         
|Cash and cash equivalents at beginning of period                                      |                                                     |                         | 78,300,040  |            |      |   | 15,010,168  |            |   |   | 15,401,433  |           
|                                                                                      |                                                     |                         |             |            |      |   |             |            |  
|Cash and cash equivalents at end of period                                            |                                                     | $                       | 15,010,168  |            |      | $ | 15,401,433  |            |   | $ | 882,841     |           
|                                                                                      |                                                     |                         |             |            |      |   |             |            |  
|Supplemental Cash Flow Information                                                    |                                                     |                         |             |            |      |   |             |            |   |   |             |           
|Interest paid in cash                                                                 |                                                     | $                       | 96,491      |            |      | $ | 1,537,127   |            |   | $ | 1,713,136   |           
|                                                                                      |                                                     |                         |             |            |      |   |             |            |  
|Distribution of member note payable                                                   |                                                     | $                       |            |            |      | $ | 10,939,750  |            |   | $ |            |           
|                                                                                      |                                                     |                         |             |            |      |   |             |            |  



F-24



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##### Table of Contents



NEG HOLDING LLC





CONSOLIDATED STATEMENTS OF MEMBERS EQUITY


|                             |                                        |          |             |             |  
|---------------------------- | -------------------------------------- | -------- | ----------- | ----------- | -
|                             |                                        | Members |            
|                             |                                        | Equity   |            
|                             |                                        |          |            
|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 |            
|                             | Guaranteed Payment to member           |          |             | (18,228,781 | )
|                             | Priority Amount distribution to member |          |             | (51,445,822 | )
|                             | Net income                             |          |             | 30,870,080  |  
|                             |                                        |          |            
|Balance at December 31, 2003 |                                        | $        | 161,037,371 |            
|                             | Guaranteed Payment to member           |          |             | (15,978,478 | )
|                             | Net income                             |          |             | 29,122,514  |  
|                             |                                        |          |            
|Balance at December 31, 2004 |                                        | $        | 174,181,407 |            
|                             |                                        |          |            



F-25



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##### Table of Contents



NEG HOLDING LLC





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2004




|   |           
|-- | ----------
|1. | Background



|                                      |  |                 |             |  |        |   |             |       |  |   |             | 
|------------------------------------- |  | --------------- | ----------- |  | ------ | - | ----------- | ----- |  | - | ----------- | 
|                                      |  | National Energy |             |  |        |   |            
|                                      |  | Group, Inc.     |             |  | Gascon |   |             | Total | 
|                                      |  |                 |             |  |        |   |             |       | 
|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 | 
|                                      |  |                 |             |  |        |   |             |       | 





F-26



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##### Table of Contents



NEG HOLDING LLC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                                
|-- | -------------------------------
|2. | Significant Accounting Policies



| |              
| | -------------
| | Consolidation





| |                     
| | --------------------
| | Accounting Estimates





| |                          
| | -------------------------
| | Cash and Cash Equivalents





| |                               
| | ------------------------------
| | Oil and Natural Gas Properties









F-27



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##### Table of Contents



NEG HOLDING LLC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








| |                             
| | ----------------------------
| | Other Property and Equipment









| |             
| | ------------
| | Income Taxes





| |                      
| | ---------------------
| | Financial Instruments





| |                    
| | -------------------
| | Accounts Receivable



F-28



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##### Table of Contents



NEG HOLDING LLC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








| |                    
| | -------------------
| | Revenue Recognition





| |                                  
| | ---------------------------------
| | Natural Gas Production Imbalances





| |                     
| | --------------------
| | Comprehensive Income





| |            
| | -----------
| | Derivatives

Accounting
for Certain Derivative Instruments and Certain Hedging
Activities Accounting for Certain Derivative Instruments and
Certain Hedging Activity, an Amendment of SFAS 133




|                    |  |      |           |  |      |   |           |      |  |   |            | 
|------------------- |  | ---- | --------- |  | ---- | - | --------- | ---- |  | - | ---------- | 
|                    |  | 2002 |           |  | 2003 |   |           | 2004 | 
|                    |  |      |           |  |      |   |           |      | 
|Gross cash receipts |  | $    | 1,246,080 |  |      | $ | 14,924    |      |  | $ | 1,327,200  | 
|Gross cash payments |  | $    | 2,430     |  |      | $ | 8,681,198 |      |  | $ | 13,694,010 | 
|Valuation loss      |  | $    | 3,608,462 |  |      | $ | 2,987,013 |      |  | $ | 7,520,383  | 





F-29



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##### Table of Contents



NEG HOLDING LLC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                 |  |              |                |            |       |  |      |       |  |   |         |  |  |   |       | 
|---------------- |  | ------------ | -------------- | ---------- | ----- |  | ---- | ----- |  | - | ------- |  |  | - | ----- | 
|                 |  |              |                | Production |       |  |      |       | 
|Date of Contract |  | Volume/Month |                |            | Month |  |      | Floor |  |   | Ceiling | 
|                 |  |              |                |            |       |  |      |       |  |   |         | 
|August 2002      |  |              | 30,000 Bbls    |            |       |  | 2003 |       |  | $ | 23.55   |  |  | $ | 26.60 | 
|August 2002      |  |              | 300,000  MMBTU |            |       |  | 2003 |       |  | $ | 3.25    |  |  | $ | 4.62  | 
|November 2002    |  |              | 300,000  MMBTU |            |       |  | 2003 |       |  | $ | 3.50    |  |  | $ | 4.74  | 
|November 2002    |  |              | 300,000  MMBTU |            |       |  | 2004 |       |  | $ | 3.35    |  |  | $ | 4.65  | 
|November 2002    |  |              | 300,000  MMBTU |            |       |  | 2005 |       |  | $ | 3.25    |  |  | $ | 4.60  | 
|November 2003    |  |              | 45,000 Bbls    |            |       |  | 2004 |       |  | $ | 26.63   |  |  | $ | 29.85 | 
|February 2005    |  |              | 16,000 Bbls    |            |       |  | 2006 |       |  | $ | 41.75   |  |  | $ | 45.40 | 
|February 2005    |  |              | 120,000  MMBTU |            |       |  | 2006 |       |  | $ | 6.00    |  |  | $ | 7.28  | 





|                |  |                  |                         |  |                  |       |               |       |  |   |       |  |  |         |       |  |  |   |       | 
|--------------- |  | ---------------- | ----------------------- |  | ---------------- | ----- | ------------- | ----- |  | - | ----- |  |  | ------- | ----- |  |  | - | ----- | 
|                |  |                  |                         |  |                  | Fixed |               |       |  |   |      
|Type Contract   |  | Production Month |                         |  | Volume per Month |       |               | Price |  |   | Floor |  |  | Ceiling |      
|                |  |                  |                         |  |                  |       |               |       |  |   |       |  |  |         |      
|Fixed price     |  |                  | February - March 2004   |  |                  |       | 400,000 MMBTU |       |  | $ | 6.915 |  |  | $       |      |  |  | $ |      | 
|Fixed price     |  |                  | April - June 2004       |  |                  |       | 400,000 MMBTU |       |  | $ | 5.48  |  |  | $       |      |  |  | $ |      | 
|Fixed price     |  |                  | July - September 2004   |  |                  |       | 400,000 MMBTU |       |  | $ | 5.38  |  |  | $       |      |  |  | $ |      | 
|No Cost Collars |  |                  | October - December 2004 |  |                  |       | 400,000 MMBTU |       |  | $ |      |  |  | $       | 5.25  |  |  | $ | 5.85  | 
|No Cost Collars |  |                  | 2005                    |  |                  |       | 300,000 MMBTU |       |  | $ |      |  |  | $       | 4.75  |  |  | $ | 5.45  | 
|No Cost Collars |  |                  | 2006                    |  |                  |       | 500,000 MMBTU |       |  | $ |      |  |  | $       | 4.50  |  |  | $ | 5.00  | 
|No Cost Collars |  |                  | 2005                    |  |                  |       | 250,000 MMBTU |       |  | $ |      |  |  | $       | 6.00  |  |  | $ | 8.70  | 
|No Cost Collars |  |                  | 2005                    |  |                  |       | 25,000 Bbls   |       |  | $ |      |  |  | $       | 43.60 |  |  | $ | 45.80 | 



F-30



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##### Table of Contents



NEG HOLDING LLC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                                 
| | --------------------------------
| | Recent Accounting Pronouncements









|   |                     
|-- | --------------------
|3. | Management Agreement



F-31



---



##### Table of Contents



NEG HOLDING LLC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|   |             
|-- | ------------
|4. | Acquisitions







F-32



---



##### Table of Contents



NEG HOLDING LLC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                    |                                      |               |        |         |         |  
|------------------- | ------------------------------------ | ------------- | ------ | ------- | ------- | -
|                    |                                      | Pro Forma     |       
|                    |                                      | Year Ended    |       
|                    |                                      | December 31,  |       
|                    |                                      | 2002          |       
|                    |                                      |               |       
|                    |                                      | (Unaudited)   |       
|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 |        
|                    |                                      |               |       



|   |                             
|-- | ----------------------------
|5. | Investments/ Note Receivable







F-33



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##### Table of Contents



NEG HOLDING LLC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                  
|-- | -----------------
|6. | Credit Facilities













F-34



---



##### Table of Contents



NEG HOLDING LLC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










|   |                              
|-- | -----------------------------
|7. | Commitments and Contingencies











| |                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) $20,500 in post bond premiums alleged to be owed for
    certain plugging and abandonment liabilities associated with the
    oil and gas properties sold to Osprey,
|
| | (b) $5,422 in expenses associated with NEGs bond
    claim,                                                                                                            
|
| | (c) $53,226 in attorneys fees,                                                                                                                                          

F-35



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##### Table of Contents



NEG HOLDING LLC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------
| | (d) $24,617 in administrative expenses paid to the American
    Arbitration Association,                                                         
|
| | (e) an order requiring Osprey to post and maintain an
    acceptable replacement bond,                                                           
|
| | (f) a finding that Ospreys counterclaim in the amount
    of $15 million was without merit, and                                                 
|
| | (g) a ruling that Osprey is entitled to no recovery of any
    damages or expenses associated with NEGs bond claim or
    Ospreys counterclaim.









|   |                            
|-- | ---------------------------
|8. | Asset Retirement Obligation

Accounting for Asset
Retirement Obligations


F-36



---



##### Table of Contents



NEG HOLDING LLC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                |  |              |           |  |          |  
|------------------------------- |  | ------------ | --------- |  | -------- | -
|Balance as of January 1, 2003   |  | $            | 3,034,395 | 
|Add:                            |  | Accretion    |           |  | 242,752  |  
|                                |  | Additions    |           |  | 89,548   |  
|                                |  | Revisions    |           |  | 9,396    |  
|Less:                           |  | Settlements  |           |  | (57,008  | )
|                                |  | Dispositions |           |  | (50,702  | )
|                                |  |              |           |  |         
|Balance as of December 31, 2003 |  | $            | 3,268,381 | 
|Add:                            |  | Accretion    |           |  | 261,471  |  
|                                |  | Additions    |           |  | 93,838   |  
|Less:                           |  | Revisions    |           |  | (250,650 | )
|                                |  | Settlements  |           |  | (24,354  | )
|                                |  | Dispositions |           |  | (293,446 | )
|                                |  |              |           |  |         
|Balance as of December 31, 2004 |  | $            | 3,055,240 | 
|                                |  |              |          



|   |                                                        
|-- | -------------------------------------------------------
|9. | Distributions under the Holding LLC Operating Agreement







| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. Guaranteed Payments are to be paid to NEG, calculated on
    an annual interest rate of 10.75% on the outstanding Priority
    Amount. The Priority Amount includes all outstanding debt owed
    to entities owned or controlled by Carl C. Icahn, including the
    amount of the Companys 10.75% Senior Notes. As of
    December 31, 2004, the Priority Amount was
    $148.6 million. The Guaranteed Payments will be made on a
    semi-annual basis.
|
| | 2. The Priority Amount is to be paid to NEG. Such payment
    is to occur by November 6, 2006.                                                                                                                                                                                                                                                                                                                                                                 
|
| | 3. An amount equal to the Priority Amount and all
    Guaranteed Payments paid to NEG, plus any additional capital
    contributions made by Gascon, less any distribution previously
    made by the Company to Gascon, is to be paid to Gascon.                                                                                                                                                                                                              
|
| | 4. An amount equal to the aggregate annual interest
    (calculated at prime plus
    1/2%
    on the sum of the Guaranteed Payments), plus any unpaid interest
    for prior years (calculated at prime plus
    1/2%
    on the sum of the Guaranteed Payments), less any distributions
    previously made by the Company to Gascon, is to be paid to
    Gascon.                                                                                           
|
| | 5. After the above distributions have been made, any
    additional distributions will be made in accordance with the
    ratio of the NEGs and Gascons respective capital
    accounts. (Capital accounts as defined in the Holding LLC
    Operating Agreement).                                                                                                                                                                                           

F-37



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##### Table of Contents



NEG HOLDING LLC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                                               
|--- | ----------------------------------------------
|10. | Crude Oil and Natural Gas Producing Activities



|                          |  |                         |            |  |      |   |            |      |  |   |            | 
|------------------------- |  | ----------------------- | ---------- |  | ---- | - | ---------- | ---- |  | - | ---------- | 
|                          |  | Year Ended December 31, |           
|                          |  |                         |           
|                          |  | 2002                    |            |  | 2003 |   |            | 2004 | 
|                          |  |                         |            |  |      |   |            |      | 
|Acquisition of properties |  | $                       | 49,049,174 |  |      | $ |           |      |  | $ |           | 
|Exploration costs         |  |                         | 1,072,997  |  |      |   | 6,950,706  |      |  |   | 29,006,772 | 
|Development costs         |  |                         | 16,124,610 |  |      |   | 29,083,572 |      |  |   | 38,480,640 | 
|Depletion rate per Mcfe   |  | $                       | 1.29       |  |      | $ | 1.25       |      |  | $ | 1.28       | 



|                                    |  |                         |            |  |      |   |            |      |  |   |            | 
|----------------------------------- |  | ----------------------- | ---------- |  | ---- | - | ---------- | ---- |  | - | ---------- | 
|                                    |  | Year Ended December 31, |           
|                                    |  |                         |           
|                                    |  | 2002                    |            |  | 2003 |   |            | 2004 | 
|                                    |  |                         |            |  |      |   |            |      | 
|Plains Marketing and Transportation |  | $                       | 12,512,767 |  |      | $ | 15,666,690 |      |  | $ | 19,786,979 | 
|Crosstex Energy Services, Inc.      |  |                         | 4,843,756  |  |      |   | 9,225,086  |      |  |   | 5,080,974  | 
|Riata Energy, Inc.                  |  |                         |           |  |      |   | 30,420,624 |      |  |   | 29,884,850 | 
|Seminole Energy Services            |  |                         |           |  |      |   | 7,215,735  |      |  |   | 19,572,461 | 



|    |                                                                            
|--- | ---------------------------------------------------------------------------
|11. | Supplementary Crude Oil and Natural Gas Reserve Information
    (Unaudited)









F-38



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##### Table of Contents



NEG HOLDING LLC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                           |                                 |           |           |           |             |  |             |             |  
|-------------------------- | ------------------------------- | --------- | --------- | --------- | ----------- |  | ----------- | ----------- | -
|                           |                                 | Crude Oil |           |           | Natural Gas | 
|                           |                                 |           |           |           |             | 
|                           |                                 |           |           | (Thousand |            
|                           |                                 | (Barrels) |           |           | Cubic Feet) | 
|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 |            
|                           | Purchase of reserves in place   |           |           |          |             |  |             |            |  
|                           | Sales of reserves in place      |           |           | (25,399   | )           |  |             | (744,036    | )
|                           | Extensions and discoveries      |           |           | 494,191   |             |  |             | 61,637,828  |  
|                           | Revisions of previous estimates |           |           | (7,092    | )           |  |             | (2,419,969  | )
|                           | Production                      |           |           | (628,923  | )           |  |             | (13,436,865 | )
|                           |                                 |           |           |           |             | 
|December 31, 2003          |                                 |           | 5,041,450 |           |             |  | 167,604,295 |            
|                           | Purchase of reserves in place   |           |           |          |             |  |             |            |  
|                           | Sales of reserves in place      |           |           | (15,643   | )           |  |             | (344,271    | )
|                           | Extensions and discoveries      |           |           | 445,636   |             |  |             | 33,350,666  |  
|                           | Revisions of previous estimates |           |           | (30,249   | )           |  |             | 15,441,298  |  
|                           | Production                      |           |           | (565,100  | )           |  |             | (13,106,103 | )
|                           |                                 |           |           |           |             | 
|December 31, 2004          |                                 |           | 4,876,094 |           |             |  | 202,945,885 |            
|                           |                                 |           |           |           |             | 
|Proved developed reserves: |                                 |           |           |           |             |  |             |            
|                           | December 31, 2002               |           |           | 3,539,450 |             |  |             | 92,382,411  |  
|                           | December 31, 2003               |           |           | 4,096,596 |             |  |             | 104,207,660 |  
|                           | December 31, 2004               |           |           | 3,798,341 |             |  |             | 111,126,829 |  





F-39



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##### Table of Contents



NEG HOLDING LLC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                                                         |  |              |               |   |      |   |               |  
|-------------------------------------------------------- |  | ------------ | ------------- | - | ---- | - | ------------- | -
|                                                         |  | December 31, |              
|                                                         |  |              |              
|                                                         |  | 2003         |               |   | 2004 |  
|                                                         |  |              |               |   |      |  
|Future cash inflows                                      |  | $            | 1,184,869,747 |   |      | $ | 1,466,369,163 |  
|Future production and development costs                  |  |              | (374,829,047  | ) |      |   | (489,331,736  | )
|                                                         |  |              |               |   |      |  
|Future net cash flows                                    |  |              | 810,040,700   |   |      |   | 977,037,427   |  
|10% annual discount for estimated timing of cash flows   |  |              | (353,980,596  | ) |      |   | (442,213,801  | )
|                                                         |  |              |               |   |      |  
|Standardized measure of discounted future net cash flows |  | $            | 456,060,104   |   |      | $ | 534,823,626   |  
|                                                         |  |              |               |   |      |  



|                                                                                                   |  |                         |             |   |      |   |             |      |  |   |             |  
|-------------------------------------------------------------------------------------------------- |  | ----------------------- | ----------- | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|                                                                                                   |  | Year Ended December 31, |            
|                                                                                                   |  |                         |            
|                                                                                                   |  | 2002                    |             |   | 2003 |   |             | 2004 | 
|                                                                                                   |  |                         |             |   |      |   |             |      | 
|Purchases of reserves                                                                              |  | $                       | 102,916,472 |   |      | $ |            |      |  | $ |            |  
|Sales of reserves in place                                                                         |  |                         | (2,509,704  | ) |      |   | (2,475,742  | )    |  |   | (1,375,463  | )
|Sales and transfers of crude oil and natural gas produced, net
    of production costs             |  |                         | (31,115,247 | ) |      |   | (57,424,780 | )    |  |   | (83,004,073 | )
|Net changes in prices and production costs                                                         |  |                         | 112,380,701 |   |      |   | 44,711,900  |      |  |   | 31,039,998  |  
|Development costs incurred during the period and changes in
    estimated future development costs |  |                         | (45,230,813 | ) |      |   | (75,286,532 | )    |  |   | (81,370,910 | )
|Extensions and discoveries, less related costs                                                     |  |                         | 43,640,702  |   |      |   | 211,324,414 |      |  |   | 118,570,850 |  
|Revisions of previous quantity estimates                                                           |  |                         | 8,510,824   |   |      |   | (6,789,000  | )    |  |   | 49,194,080  |  
|Accretion of discount                                                                              |  |                         | 11,312,180  |   |      |   | 31,063,232  |      |  |   | 45,606,010  |  
|Changes in production rates (timing) and other                                                     |  |                         | (2,394,593  | ) |      |   | 304,290     |      |  |   | 103,030     |  
|                                                                                                   |  |                         |             |   |      |   |             |      | 
|Net change                                                                                         |  | $                       | 197,510,522 |   |      | $ | 145,427,782 |      |  | $ | 78,763,522  |  
|                                                                                                   |  |                         |             |   |      |   |             |      | 



F-40



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##### Table of Contents



INDEX TO EXHIBITS


| |    |     |  |                                                                                                                                                                                                                                                                                                                  
| | -- | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2  | .1  |  | Debtors Joint Plan of Reorganization under Chapter 11 of
    the Bankruptcy Code dated May 12, 2000(4)                                                                                                                                                                                                           
| | 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(4)
| | 3  | .1  |  | Restated Certificate of Incorporation filed with the Secretary
    of State of Delaware on October 16, 2000(5)                                                                                                                                                                                                   
| | 3  | .2  |  | By-laws of the Company(1)                                                                                                                                                                                                                                                                                        
| | 3  | .3  |  | Amendment to Restated Certificate of Incorporation filed with
    the Secretary of State of Delaware on November 10, 2003(8)                                                                                                                                                                                     
| | 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.(2)                                                                                                                               
| | 4  | .2  |  | Indenture dated August 21, 1997, among the Company and Bank
    One, N.A.(3)                                                                                                                                                                                                                                     
| | 10 | .1  |  | NEG Holding LLC Operating Agreement dated May 1, 2001
    between the Company and Gascon Partners.(6)                                                                                                                                                                                                            
| | 10 | .2  |  | NEG Operating LLC Operating Agreement dated May 1, 2001
    executed by NEG Holding LLC.(6)                                                                                                                                                                                                                      
| | 10 | .3  |  | Shana National LLC Amended and Restated Operating Agreement
    dated September 12, 2001 executed by NEG Operating LLC.(6)                                                                                                                                                                                       
| | 10 | .4  |  | Management Agreement dated September 12, 2001 between the
    Company and NEG Operating LLC.(6)                                                                                                                                                                                                                  
| | 10 | .5  |  | Final Decree of Bankruptcy Court(7)                                                                                                                                                                                                                                                                              
| | 10 | .6  |  | Management Agreement with TransTexas Gas Corporation dated
    August 28, 2003(8)                                                                                                                                                                                                                                
| | 10 | .7  |  | Credit Agreement dated as of December 29, 2003 among NEG
    Operating LLC, Certain Commercial Lending Institutions, Mizuho
    Corporate Bank, Ltd., Bank of Texas N.A., and the Bank of Nova
    Scotia(9)                                                                                                     
| | 10 | .8  |  | Security Agreement dated as of December 29, 2003 made by
    NEG Operating LLC in favor of Bank of Texas, N.A.(9)                                                                                                                                                                                                
| | 10 | .9  |  | Pledge Agreement and Irrevocable Proxy dated as of
    December 29, 2003 made by NEG Operating LLC in favor of
    Bank of Texas, N.A.(9)                                                                                                                                                                        
| | 10 | .10 |  | Pledge Agreement and Irrevocable Proxy dated as of
    December 29, 2003 made by National Energy Group, Inc. in
    favor of Bank of Texas, N.A.(9)                                                                                                                                                              
| | 10 | .11 |  | First Amendment to the Credit Agreement dated April 5, 2004
    among NEG Operating LLC, certain commercial lending
    institutions, Mizuho Corporate Bank LTD, Bank of Texas N.A. and
    the Bank of Nova Scotia(11)                                                                                          
| | 10 | .12 |  | Management Agreement effective November 16, 2004 between
    the Company and Panaco, Inc.(12)                                                                                                                                                                                                                    
| | 10 | .13 |  | National Energy Group, Inc. Incentive Plan(13)                                                                                                                                                                                                                                                                   
| | 12 | .1  |  | Computation of Ratio of Earnings to Fixed Charges(14)                                                                                                                                                                                                                                                            
| | 14 | .1  |  | Code of Business Conduct and Ethics Adopted March 24,
    2004(10)                                                                                                                                                                                                                                               
| | 23 | .2  |  | Consent of Netherland Sewell & Associates, Inc.,
    Independent Engineers(14)                                                                                                                                                                                                                                   
| | 23 | .3  |  | Consent of Prator Bett, LLC, Independent Engineers(14)                                                                                                                                                                                                                                                           
| | 23 | .4  |  | Consent of DeGolyer and MacNaughton, Independent Engineers(14)                                                                                                                                                                                                                                                   
| | 24 | .1  |  | Power of Attorney (included in signature pages to this
    Form 10-K)(14)                                                                                                                                                                                                                                        
| | 31 | .1  |  | Certification of Chief Executive Officer pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002(14)                                                                                                                                                                                                       
| | 31 | .2  |  | Certification of Chief Financial Officer pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002(14)                                                                                                                                                                                                       



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##### Table of Contents



| |    |    |  |                                                                                                                                                                                                                                                            
| | -- | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 32 | .1 |  | Certification of Chief Executive Officer pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002,
    18 U.S.C. Section 1350(14). Pursuant to SEC Release
    34-47551 this Exhibit is furnished to the SEC and shall not be
    deemed to be filed
| | 32 | .2 |  | Certification of Chief Financial Officer pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002,
    18 U.S.C. Section 1350(14). Pursuant to SEC Release
    34-47551 this Exhibit is furnished to the SEC and shall not be
    deemed to be filed






| |     |                                                                                                                           
| | --- | --------------------------------------------------------------------------------------------------------------------------
| | (1) | Incorporated by reference to the Companys Registration
    Statement on Form S-4 (No. 33-38331), dated
    April 3, 1991.
|
| | (2) | Incorporated by reference to the Companys Quarterly Report
    on Form 10-Q for the quarter ended September 30, 1996.    
|
| | (3) | Incorporated by reference to the Companys Form S-4
    (No. 333-38075), filed October 16, 1997.                          
|
| | (4) | Incorporated by reference to the Companys Quarterly Report
    on Form 10-Q for the quarter ended March 31, 2000.        
|
| | (5) | Incorporated by reference to the Companys Quarterly Report
    on Form 10-Q for the quarter ended September 30, 2000.    
|
| | (6) | Incorporated by reference to the Companys Quarterly Report
    on Form 10-Q for the quarter ended September 30, 2001.    
|
| | (7) | Incorporated by reference to the Companys Annual Report on
    Form 10-K for the year ended December 31, 2001.           
|
| | (8) | Incorporated by reference to the Companys Quarterly Report
    Form 10-Q for the quarter ended September 30, 2003.       
|
| | (9) | Incorporated by reference to the Companys Form 8-K
    filed January 14, 2004.                                           



|     |                                                                                                                    
|---- | -------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference to the Companys Annual Report on
    Form 10-K for the year ended December 31, 2003.    
|    
|(11) | Incorporated by reference to the Companys Quarterly Report
    Form 10-Q for the quarter ended March 31, 2004.    
|    
|(12) | Incorporated by reference to the Companys Quarterly Report
    Form 10-Q for the quarter ended September 30, 2004.
|    
|(13) | Incorporated by reference to the Companys Form 8-K,
    filed November 12, 2004.                                  
|    
|(14) | Filed herewith.