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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                               ------------------

                                   FORM 10-K

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

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

                                       OR

      [ ]     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)

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

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

                                 (214) 692-9211
              (Registrant's telephone number, including area code)
          Securities registered pursuant to Section 12(b) of the Act:
                                      None
          Securities registered pursuant to Section 12(g) of the Act:
                         Common Stock, $0.01 par value
                                (Title of Class)
           Securities registered pursuant to Securities Act of 1933:
                    Series B Senior Notes, 10 3/4% due 2006
                    Series D Senior Notes, 10 3/4% due 2006

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes [X]  No [ ]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments hereto to this Form 10-K.  [X]

     The aggregate market value of the shares of Common Stock held by
non-affiliates of the Registrant, as of March 23, 2000, (based upon the last
sales price of $.22 as reported by the OTC Bulletin Board was $6,317,190.

     40,527,482 shares of the Registrant's common stock, $0.01 par value, were
outstanding on March 23, 2000.

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                               TABLE OF CONTENTS

                                     PART I

<TABLE>
<CAPTION>
                                                                            PAGE
                                                                            ----
<S>           <C>                                                           <C>
ITEMS 1. AND 2. BUSINESS AND PROPERTIES...................................    3
              Forward-Looking Statements..................................    3
              Background and Recent Developments..........................    3
              Principal Areas of Operations...............................    6
              Oil and Natural Gas Reserves................................    8
              Oil and Natural Gas Production and Unit Economics...........    9
              Productive Well Summary.....................................   10
              Leasehold Acreage...........................................   10
              Drilling Activity...........................................   11
              Title to Oil and Natural Gas Properties.....................   11
              Production and Sales Prices.................................   11
              Control Over Production Activities..........................   11
              Markets and Customers.......................................   11
              Regulation..................................................   12
              Operational Hazards and Insurance...........................   14
              Competition.................................................   15
              Office Space................................................   15
              Employees...................................................   15
ITEM 3.       LEGAL PROCEEDINGS...........................................   15
ITEM 4.       SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........   15
                                    PART II
ITEM 5.       MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
              STOCKHOLDER MATTERS.........................................   16
              Market Information..........................................   16
              Holders.....................................................   16
              Dividends on Common Stock...................................   16
              Annual Meeting..............................................   16
ITEM 6.       SELECTED FINANCIAL DATA.....................................   17
ITEM 7.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
              AND RESULTS OF OPERATIONS...................................   20
              Overview....................................................   21
              Results of Operations.......................................   21
              Liquidity and Capital Resources.............................   24
              Future Capital Requirements.................................   25
              Financial Reporting Impact of Full Cost Method of
              Accounting..................................................   25
              Recent Accounting Pronouncements............................   26
              Changes in Prices...........................................   26
              Inflation...................................................   26
              Year 2000...................................................   26
ITEM 7A.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..   26
ITEM 8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................   27
ITEM 9.       CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
              AND FINANCIAL DISCLOSURE....................................   27
</TABLE>

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<TABLE>
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                                                                            PAGE
                                                                            ----
<S>           <C>                                                           <C>
                                    PART III
ITEM 10.      DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..........   27
ITEM 11.      EXECUTIVE COMPENSATION......................................   30
ITEM 12.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
              MANAGEMENT..................................................   37
ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............   42
                                    PART IV
ITEM 14.      EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
              8-K.........................................................   43
              Signatures..................................................   50
</TABLE>

                                        2
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                                     PART I

ITEMS 1. AND 2. BUSINESS AND PROPERTIES

FORWARD-LOOKING STATEMENTS

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

BACKGROUND AND RECENT DEVELOPMENTS

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

     The Company is an independent energy company which has historically engaged
in the exploration, acquisition, exploitation, development and production of oil
and natural gas properties in major producing basins onshore in Texas,
Louisiana, Oklahoma, Arkansas and offshore in the Gulf of Mexico.

     On December 4, 1998, certain of the holders of the Senior Notes of National
Energy Group, Inc. filed an Involuntary Petition for an Order for Relief under
Chapter 11 of Title 11 of the United States Bankruptcy Code in the United States
Bankruptcy Court for the Northern District of Texas, Dallas Division, due to
non-payment of interest due December 2, 1998, after expiration of a 30-day grace
period. On December 23, 1998, the Company filed, in the Bankruptcy Court, an
Answer to and Motion to Dismiss the pending Involuntary Petition. The Company's
Motion affirmed that it (i) was meeting its obligations and generally paying its
debts as they become due, unless such debts were the basis of a bona fide
dispute and (ii) had arranged with the lender under its credit facility to
borrow additional funds sufficient to pay the interest due on the Senior Notes,
conditioned upon the Court's dismissal of the Involuntary Petition. However, on
February 8, 1999, the Bankruptcy Court denied the Company's Motion to Dismiss
the Involuntary Petition. An Order for Relief was entered by the Bankruptcy
Court on February 11, 1999. The Order for Relief placed the Company under the
protection of the

                                        3
<PAGE>   5

Court and precluded payment of the interest on the Senior Notes until the
conclusion of the Bankruptcy proceeding. Additionally, payment of liabilities
existing as of February 11, 1999 to certain unsecured creditors and dividends in
arrears to holders of the Company's preferred stock and any pending litigation
are stayed during the Bankruptcy proceeding. The Company shall act as
debtor-in-possession and will continue to operate its business and manage its
properties in the ordinary course of business during its Chapter 11 proceeding.
As a result of the Chapter 11 proceeding, the Company discontinued the accrual
of interest on the unsecured Senior Notes and discontinued the accrual of
dividends on the unsecured preferred stock. Approximately $17.7 million
additional interest expense would have been recognized by the Company for 1999
if not for the discontinuation of the interest accrual on the Senior Notes.

     On August 4, 1999, the Company and the unsecured creditors' committee (the
"Committee") appeared before the Bankruptcy Court and announced agreement on the
process for marketing the Company and/or its assets. The Court entered an order
which provided that the Company and the Committee would employ CIBC World
Markets Corp. ("CIBC") to solicit bids for sale of the Company and/or its
assets. The Company assisted CIBC in assembling a data room for potential
bidders to view information regarding the Company's assets. CIBC marketed the
Company's assets pursuant to procedures approved by the Company, the Committee
and the Court. In addition, the Court approved the retention of Netherland,
Sewell & Associates, Inc. to (i) complete its reserve evaluation of the
Company's oil and natural gas properties as of December 31, 1998, (ii) update
the reserve evaluation as of July 1, 1999 and (iii) provide assistance to the
Company, CIBC and prospective buyers during the marketing process. The marketing
process culminated in an auction conducted by the Bankruptcy Court on November
1, 1999. At the auction, bidding on the Company's oil and gas properties,
exclusive of the Company's Lake Mongoulois and Mustang Island properties,
ultimately ended at a high bid of $96.25 million given by Arnos, Corp. ("Arnos")
an affiliated subsidiary of the Company's Series D preferred stockholder. The
Committee, after review, concluded that it would recommend to the Court that it
accept the high bid of $96.25 million. An order accepting Arnos as the highest
bidder was signed by the Court on November 16, 1999. Arnos filed a motion to
close the Purchase and Sale Agreement ("Arnos PSA") into escrow pending (i) the
Court's confirmation of a plan of reorganization or (ii) in the event a plan of
reorganization is not confirmed, a court ordered closing of the sale of the
properties to Arnos. On or about January 28, 2000 the substantive purchase and
sale closing documents were delivered into the registry of the Court, however,
the closing of the Arnos PSA is still pending as noted. The Court approved this
motion and ordered Arnos to pay into the Court's registry the sum of $61.625
million which equals the purchase price of $96.25 million less a previously
escrowed deposit of $9.625 million and the principal balance of $25 million
outstanding under the Company's secured credit facility with Arnos.

     On February 28, 2000, the Committee filed with the Court a Joint Disclosure
Statement ("Committee Disclosure Statement") and proposed Plan of Reorganization
(the "Committee Plan"). The Committee Plan provides for (i) the possibility of a
limited continuation of the Company's oil and gas business operations; (ii) the
creation of a creditors trust to which will be transferred substantially all of
the cash and cash equivalents remaining in the Company, the funds held in the
Registry of the Court from the auction of the Company's properties, and all
causes of action for the payment and primary benefit of certain allowed
administrative, tax, priority and miscellaneous secured and unsecured creditors;
and (iii) payment in full of the secured claims. The Committee Plan designates
eight (8) classes of claims and equity interests. The Company's Senior
Noteholders are deemed to be Allowed Class 6 Claims in the Committee's Plan and
are entitled to their pro rata share of the remaining proceeds in the creditors
trust after payment of the secured claims. Following distribution of the
creditors trust fund to the various claimants, the Committee retains the right
to sell the Company's remaining assets or sell to third parties the rights of
the Senior Noteholders to retain between 49% and 95% of the outstanding stock of
the reorganized Company in the form of newly issued additional common stock. In
connection therewith, the Senior Noteholders shall have the right to elect all
members of the Company's Board of Directors for a two (2) year term following
the effective date of the Committee's Plan. The Committee's Plan further
provides that all of the Company's preferred stock shall be converted into
Common Stock at a conversion price of $.25 per share, and the existing common
and preferred equity interests of the Company shall remain in existence. Neither
the Company's preferred shareholders, nor the Company's common shareholders are
entitled to vote on the Committee's Plan and have been deemed for all purposes
to have rejected it in its entirety. Both

                                        4
<PAGE>   6

the Committee Plan and Committee Disclosure Statement are subject to amendment,
and a hearing in the Bankruptcy Court on the Committee Disclosure Statement is
scheduled on April 17, 2000.

     On March 14, 2000, the Company filed with the Court a Joint Disclosure
Statement ("Company Disclosure Statement") and Plan of Reorganization (the
"Company Plan"). The Company Plan provides for (i) continuation of the Company's
oil and gas business operations; (ii) payment in full of all secured claims,
including the Arnos secured claim in the amount of $25 million, plus interest as
may be due; (iii) payment of a cash sum not to exceed $10,000 to certain classes
of claimants involved in litigation with the Company if such class accepts the
Company's Plan or, alternatively, if rejected by such class, cash in the amount
of 56.5% of any Allowed Claim in such class; (iv) acquisition by Arnos of any
Senior Notes, not otherwise held by Arnos, in consideration of a payment equal
to 56.5% of the face value of each such bond acquired, or, alternatively, a pro
rata share of the cash which Senior Noteholders would receive in a liquidation,
plus a pro rata beneficial interest in a creditor's trust consisting of certain
causes of action, two properties of the Company and $250,000 in cash; (v)
payment of a cash sum equal to 75% of any Allowed Claim to trade creditors; (vi)
retention by each of the preferred and common shareholder equity interests;
provided that both the preferred and common equity interests may, at the option
of Arnos, be deemed cancelled and reissued to holders in a form to be determined
by Arnos; (vii) purchase by Arnos, or an affiliate of Arnos, of additionally
issued shares of the reorganized Company's common stock to the extent that Arnos
or its affiliate shall own up to 49% of all the issued and outstanding common
stock of the reorganized Company; and (viii) amendment to the Senior Notes
Indenture. The Company's Plan further proposes that the Company's existing
officers and directors shall continue as the officers and directors of the
reorganized Company until otherwise replaced as provided in the Company's
bylaws. Neither the Company's preferred shareholders, nor the Company's common
shareholders are entitled to vote on the Company's Plan and have been deemed for
all purposes to have rejected it in its entirety. Both the Company Plan and
Company Disclosure Statement are subject to amendment, and a hearing in the
Bankruptcy Court on the Company Disclosure Statement is scheduled on April 20,
2000.

     Pursuant to an Order of the Bankruptcy Court dated September 7, 1999, the
Company's severance policy was abated and a Court ordered severance program was
put into effect for all employees of the Company ("Severance Program"). The
Severance Program provides for contingent payments as follows: (a) a "stay-pay"
component payable on the earlier of an employees termination without cause; the
closing of a sale of substantially all the Company's assets or the confirmation
of a plan of reorganization; and (b) a "severance" component, whereby upon
termination any employee who does not obtain new employment, or is not offered a
permanent job in Dallas, Texas for a period of at least one year at the same pay
and benefits provided by the Company, shall be entitled to certain severance
benefits. The Order also provided that any employee who participates in the
Severance Program waives and releases any and all claims arising from any
current Employment Agreement with the Company. Certain employees are not
entitled to any payments under the Severance Program until the earlier of (i)
confirmation of a Plan of Reorganization, (ii) conversion to a Chapter 7
bankruptcy proceeding or (iii) termination of their employment by a trustee
appointed by the Court.

     The Company's last annual meeting of shareholders was held on June 4, 1998,
and due to the Company's bankruptcy proceeding, no meeting was held during 1999.
Accordingly, the Company is in violation of its Delaware charter which requires
that an annual meeting of shareholders be held each year or within thirteen
months of the last annual meeting of shareholders. Such failure to hold an
annual meeting of shareholders within the designated period could result in an
order by the Delaware Court of Chancery compelling such a meeting if deemed
appropriate. The Company anticipates that no annual meeting of shareholders will
be convened until such time that the Company's bankruptcy proceeding has
concluded.

     The accompanying consolidated financial statements have been prepared on a
going concern basis of accounting and do not reflect any adjustments that might
result should the Company be unable to continue as a going concern. The
Company's prior losses from operations and the related Chapter 11 proceeding
raise concern about its ability to continue as a going concern. The
appropriateness of using the going concern basis is dependent upon, among other
things, (i) confirmation of a plan of reorganization under the Bankruptcy Code
which provides for continuation of the Company's oil and gas operations, (ii)
the ability to achieve profitable operations after such confirmation and (iii)
the ability to generate sufficient cash from operations to meet its obligations.

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     Due to the Chapter 11 filing, the Company has suspended its exploratory and
development drilling program. The Company has been limited in its capital
expenditures to ordinary course enhancement of current production through
workovers, recompletions, and other production enhancing activities deemed to be
economic. During the bankruptcy proceeding, development drilling is anticipated
to be limited to (i) ordinary course non-operated wells in which the Company
owns limited working interests and in which the failure to participate may
result in drainage, depletion or loss of current reserves and (ii) operated
wells deemed to be economical given current oil and gas prices. Large
expenditures for developmental drilling may require court approval and none are
planned at this time.

     At December 31, 1999, the Company had estimated Proved Reserves, as
determined from reserve reports prepared by Netherland, Sewell & Associates,
Inc., of 96.6 Bcfe with a PV10% at that date of approximately $108.9 million.
The reserves were approximately 65.0% natural gas and 88.1% Proved Developed
Reserves.

PRINCIPAL AREAS OF OPERATIONS

     Due to the Chapter 11 filing the Company has suspended its exploratory and
development drilling program. However, the Company currently has an inventory of
exploratory prospects in Louisiana and offshore at Mustang Island.

     Historically, the Company has developed and exploited existing properties
by drilling Development Wells, and recompleting and reworking existing wells.
The Company will continue to participate in non-operated wells as described
above and continue its drilling operations where economical in accordance with
the rulings and procedures set forth by the Court.

     The following table sets forth the Company's principal areas of operations
and the Company's Proved Reserves of oil and natural gas at December 31, 1999.
See - "Oil and Natural Gas Properties".

<TABLE>
<CAPTION>
                                                                                  NATURAL
                                                           OIL AND     NATURAL      GAS
                                                          CONDENSATE     GAS     EQUIVALENT   % OF
                                                           (MBBLS)     (MMCF)     (MMCFE)     TOTAL
                                                          ----------   -------   ----------   -----
<S>                                                       <C>          <C>       <C>          <C>
Area:
  Mid-Continent.........................................      511      33,184      36,248      37.5%
  East and West Texas...................................    2,852      22,058      39,174      40.6
  Gulf Coast............................................    2,251       7,654      21,158      21.9
                                                            -----      ------      ------     -----
     Total..............................................    5,614      62,896      96,580     100.0%
                                                            =====      ======      ======     =====
</TABLE>

     The following table sets forth the Company's production by principal area
of operation for the year ended December 31, 1999:

<TABLE>
<CAPTION>
                                                                                 NATURAL
                                                                      NATURAL      GAS
                                                              OIL       GAS     EQUIVALENT   % OF
                                                            (MBBLS)   (MMCF)     (MMCFE)     TOTAL
                                                            -------   -------   ----------   -----
<S>                                                         <C>       <C>       <C>          <C>
Area:
  Mid-Continent...........................................      73     5,145       5,580      34.7%
  East and West Texas.....................................     337     2,972       4,997      31.1
  Gulf Coast..............................................     725     1,149       5,501      34.2
                                                             -----     -----      ------     -----
     Total................................................   1,135     9,266      16,078     100.0%
                                                             =====     =====      ======     =====
</TABLE>

  MID-CONTINENT AREA

     At December 31, 1999, approximately 37.5% (36.2 Bcfe) of the Company's
Proved Reserves were located in the Mid-Continent area in Oklahoma and Western
Arkansas which includes the Anadarko and Arkoma Basins.

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     ANADARKO BASIN. The Anadarko Basin is considered a mature oil and natural
gas province characterized by multiple producing horizons and relatively long
reserve lives. Drilling a Producing Well on these locations can convert Proved
Undeveloped Reserves to Proved Developed Producing Reserves, and can provide
additional PUD locations on the Company's leasehold acreage.

     The Company's Anadarko Basin properties were initially drilled on 640 acre
producing units. Industry has successfully demonstrated to Oklahoma regulators
that deeper wells in the Anadarko Basin will not efficiently drain 640 acres and
have obtained authorization for increased density drilling on smaller acreage
units. Further, under the forced pooling rules in Oklahoma, even if the Company
is not the operator of the property for which increased density drilling has
been approved, the Company may propose to drill and operate additional wells on
the original production unit. Frequently this results in the proposing party
owning a larger portion of newly drilled wells because other Working Interest
owners may decline to participate.

     During the year ended December 31, 1999, the Company drilled 3 Gross (.38
Net) Development Wells in the Anadarko Basin all of which were completed as
commercially productive. The Company's wells typically are completed in horizons
ranging in depth between 7,000 and 15,000 feet.

     ARKOMA BASIN. Most Arkoma Basin reserves are produced from formations at
depths ranging from approximately 3,000 to 8,000 feet.

     During 1999, the Company drilled 2 Gross (.64 Net) Development Wells in the
Arkoma Basin of which 1 Gross (.48 Net) Development Well was completed as
commercially productive. The typical Arkoma Basin well is drilled to a total
depth of approximately 7,500 feet.

  EAST AND WEST TEXAS AREA

     At December 31, 1999, approximately 40.6% (39.2 Bcfe) of the Company's
Proved Reserves were located in the East and West Texas area, including East
Texas and the Goldsmith Adobe Unit in West Texas.

     EAST TEXAS. These reserves are found in the Cotton Valley formation and the
Travis Peak formation. The Cotton Valley formation is generally found at depths
of 8,500 to 10,500 feet in the Company's area of interest. These properties
produce from low permeability reservoirs that generally contain relatively long
life natural gas reserves. A significant portion of the cost to complete Cotton
Valley wells is incurred due to the low permeability of interbedded sandstones
and shales, which requires large hydraulic fracture stimulation, typically of
multiple zones of the producing formation, to obtain the increased production
levels necessary to make such wells commercially viable. The Travis Peak
formation is generally found at a depth of 7,200 feet and principally contains
oil reserves.

     During the year ended December 31, 1999, the Company did not drill any
wells in East Texas.

     GOLDSMITH ADOBE UNIT ("GAU"). The Goldsmith Adobe Unit is in the Permian
Basin in West Texas. The Company owns approximately a 95% Working Interest in
the GAU, which it operates.

     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, the Company
began a drilling program in July 1994 to develop the GAU on 20 acre spacing
units. Typically, wells drilled by the Company at the GAU are drilled to depths
between 5,600 and 6,000 feet into the Clearfork formation. During 1999, the
Company did not drill any wells at the GAU.

  GULF COAST AREA

     At December 31, 1999, 21.9% (21.2 Bcfe) of the Company's Proved Reserves
were located in the Gulf Coast areas, principally in the Greater Bayou Sorrel
Area in Iberville Parish, Louisiana and at Mustang Island in offshore Gulf of
Mexico. The Company also has participated in exploratory activity in various
parishes throughout Southern Louisiana.

     GREATER BAYOU SORREL AREA. The Greater Bayou Sorrel Area is located
approximately eighty miles west of New Orleans, in Iberville Parish, Louisiana,
in the Atchafalaya River Basin. The target formations of the

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<PAGE>   9

Company's exploration prospects in this area range from approximately 11,000 to
14,000 feet and include the Marg Vag, Marg Howeii, Camerina, Cib Haz, and Marg
Tex zones. The topography of the surface is river swamp and all work must be
done with barge-mounted drilling rigs and boats. Production platforms are
mounted on pilings. The Company first participated in the successful exploratory
test of the Schwing #1 well in the Company's East Bayou Sorrel prospect in
January 1996. This discovery well was drilled to a total depth of approximately
14,000 feet on the eastern flank of the old Bayou Sorrel Field, which was
discovered by Shell Oil Company in 1954. The old Bayou Sorrel Field was drilled
in the 1950s and 1960s, with a total of 87 wells drilled and produced in
twenty-eight different horizons ranging in depths from 7,000 to 11,100 feet.
During 1997, the Company successfully drilled and completed a second test well,
the Schwing #2. In 1998, the Company successfully drilled and completed the
State Lease 2102 #1 well.

     During 1999, the Company did not drill any wells in the Greater Bayou
Sorrel Area.

     The Company has completed shooting, processing and interpreting, an
approximate 54 square mile 3-D seismic survey over the Greater Bayou Sorrel
Area. The Company has identified additional potential drilling locations for
prospects in this area through interpretation of the 3-D seismic data. However,
the Company's ability to pursue drilling of these sites is currently limited by
the ongoing Chapter 11 proceeding. The Greater Bayou Sorrel Area has produced
and continues to produce significant oil and gas. Because of the difficult
topography, very little seismic data had been acquired prior to the Company's
3-D survey.

     In March 1998, the Company acquired Fortune Natural Resources Corporation's
interests in the East Bayou Sorrel field for approximately $4.5 million in cash.

     MUSTANG ISLAND. The Mustang Island area is located offshore in shallow
state waters in Nueces County, Texas. The Company currently has approximately a
92% working interest in approximately 16,000 gross acres of leases, majority
interests in 2 producing wells, 11 miles of pipeline, and an onshore tank
facility. In addition, the Company participated in a 3-D seismic survey over the
area, which provided approximately 90 square miles of data. Several exploratory
opportunities have been identified from this 3-D seismic data. The Company did
not drill any wells at Mustang Island during 1999.

     In June 1998, the Company acquired Germany Oil Company's interest in six
state leases and one producing well in the Mustang Island area for $.4 million
in cash.

     OTHER SOUTH LOUISIANA. The Company has also participated in exploratory
prospects outside of the Greater Bayou Sorrel area in various parishes in South
Louisiana. During 1999, the Company did not drill any wells in these areas.

OIL AND NATURAL GAS RESERVES

     The estimated reserves and related future net revenues as of December 31,
1999, were prepared by Netherland, Sewell & Associates, Inc. All of the
Company's reserves are located in the continental United States. This reserve
report was prepared using constant prices and costs in accordance with the
published guidelines of the SEC. The net weighted average prices used in the
Company's reserve report at December 31, 1999, were $24.97 per barrel of oil and
$2.26 per Mcf of natural gas. The estimation of reserves and future net revenues
can be materially affected by the oil and gas prices used in preparing the
reserve report. Substantially all of the Company's oil and natural gas
properties are subject to liens, and the remaining oil and natural gas
properties are subject to a negative pledge pursuant to the Company's credit
facility.

     All reserves are evaluated at constant temperature and pressure which can
affect the measurement of natural gas reserves. Estimated operating costs,
development costs, abandonment costs and certain production-related and ad
valorem taxes were deducted in arriving at the estimated future net cash flows.
No provision was made for income taxes. The following estimates set forth
reserves considered to be economically recoverable under normal operating
methods and existing conditions at the prices and operating costs prevailing at
the dates indicated above. The estimates of the PV10% from future net cash flows
can differ from the Standardized Measure of discounted future net cash flows set
forth in the notes to the Financial Statements of the Company, which is
calculated after provision for future income taxes. There can be no assurance
that these estimates are accurate predictions of future net cash flows from oil
and natural gas reserves or their present value.
                                        8
<PAGE>   10

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

     No estimates of Proved Reserves of oil and natural gas have been filed by
the Company with, or included in any report to, any United States authority or
agency (other than the SEC) since December 31, 1998.

     The following table sets forth certain information for the Company's total
Proved Reserves of oil and natural gas and the PV10% of estimated future net
revenues from such reserves, at December 31, 1999. Also presented is the
Standardized Measure of the Company's total Proved Reserves of oil and natural
gas.

<TABLE>
<CAPTION>
                                                               AS OF DECEMBER 31, 1999
                                                  -------------------------------------------------
                                                             NATURAL   NATURAL GAS
                                                    OIL        GAS     EQUIVALENT        PV10%
                                                  (MBBLS)    (MMCF)      (MMCFE)     (IN THOUSANDS)
                                                  --------   -------   -----------   --------------
<S>                                               <C>        <C>       <C>           <C>
Proved Developed Reserves.......................   4,731     56,730      85,115         $ 99,692
Proved Undeveloped Reserves.....................     883      6,166      11,465            9,201
                                                   -----     ------      ------         --------
Total Proved Reserves...........................   5,614     62,896      96,580         $108,893
                                                   =====     ======      ======         ========
Standardized Measure............................                                        $108,893
                                                                                        ========
</TABLE>

OIL AND NATURAL GAS PRODUCTION AND UNIT ECONOMICS

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

<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                                                              ---------------------------
                                                               1997      1998      1999
                                                              -------   -------   -------
<S>                                                           <C>       <C>       <C>
Net production:
  Oil (Mbbls)...............................................    1,110     1,238     1,135
  Natural gas (Mmcf)........................................   13,146    11,255     9,266
  Natural gas equivalent (Mmcfe)............................   19,807    18,685    16,078
Average sales price:
  Oil (per Bbl).............................................  $ 19.17   $ 12.66   $ 17.62
  Natural gas (per Mcf).....................................     2.37      2.02      2.08
Unit economics (per Mcfe):
  Average sales price.......................................  $  2.65   $  2.06   $  2.44
  Lease operating expenses..................................      .34       .46       .38
  Oil and gas production taxes..............................      .16       .13       .13
  Depletion rate (excluding writedowns).....................     1.11      1.06       .91
  General and administrative expenses.......................      .22       .33       .25
</TABLE>

                                        9
<PAGE>   11

PRODUCTIVE WELL SUMMARY

     The Company's production of oil and natural gas is primarily derived from
wells located in Texas, Oklahoma, Louisiana, and Arkansas. The following table
sets forth the Company's interests in Productive Wells, by principal area of
operation, as of December 31, 1999:

<TABLE>
<CAPTION>
                                                 OIL         NATURAL GAS        TOTAL
                                            -------------   -------------   -------------
                                            GROSS    NET    GROSS    NET    GROSS    NET
                                            -----   -----   -----   -----   -----   -----
<S>                                         <C>     <C>     <C>     <C>     <C>     <C>
Area:
  Mid-Continent...........................   63.0    34.3   175.0    89.5   238.0   123.8
  East and West Texas.....................  118.0   111.9    36.0    35.0   154.0   146.9
  Gulf Coast..............................   18.0    16.9     4.0     1.5    22.0    18.4
                                            -----   -----   -----   -----   -----   -----
     Total................................  199.0   163.1   215.0   126.0   414.0   289.1
                                            =====   =====   =====   =====   =====   =====
</TABLE>

LEASEHOLD ACREAGE

     The following table shows the approximate Gross and Net Acres in which the
Company had a leasehold interest as of December 31, 1999:

<TABLE>
<CAPTION>
                                                                             UNDEVELOPED
                                                      DEVELOPED ACREAGE        ACREAGE
                                                      ------------------   ---------------
                                                       GROSS       NET     GROSS     NET
                                                      --------   -------   ------   ------
<S>                                                   <C>        <C>       <C>      <C>
Area:
  Mid-Continent.....................................   84,477    44,727     1,956    1,294
  East and West Texas...............................   14,519    12,976     4,208    2,921
  Gulf Coast........................................   14,047     9,733    24,287   18,374
                                                      -------    ------    ------   ------
     Totals.........................................  113,043    67,436    30,451   22,589
                                                      =======    ======    ======   ======
</TABLE>

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

     Substantially all of the Company's producing oil and natural gas properties
are located on leases held by the Company for an indeterminate number of years
as long as production is maintained. All of the Company's non-producing acreage
is held under leases from mineral owners or a government entity which expire at
varying dates. The Company is obligated to pay annual delay rentals to the
lessors of certain properties in order to prevent the leases from terminating.
Delay rentals were approximately $.9 million for the year ended December 31,
1998 and were approximately $.5 million for the year ended December 31, 1999,
and could increase in future periods depending on the Company's lease
acquisition activities.

                                       10
<PAGE>   12

DRILLING ACTIVITY

     The following table sets forth exploration and development drilling results
for the years ended December 31, 1997, 1998 , and 1999.

<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31,
                                                        -------------------------------------------
                                                            1997            1998           1999
                                                        ------------    ------------    -----------
                                                        GROSS   NET     GROSS   NET     GROSS   NET
                                                        -----   ----    -----   ----    -----   ---
<S>                                                     <C>     <C>     <C>     <C>     <C>     <C>
Exploratory
  Productive..........................................    2      1.0      1       .3     --      --
  Non-productive......................................    6      2.4      6      3.6     --      --
                                                         --     ----     --     ----     --     ---
     Total............................................    8      3.4      7      3.9     --      --
                                                         --     ----     --     ----     --     ---
Development
  Productive..........................................   67     58.5     13      8.4      4      .9
  Non-productive......................................    2      1.5      4      2.1      1      .1
                                                         --     ----     --     ----     --     ---
     Total............................................   69     60.0     17     10.5      5     1.0
                                                         --     ----     --     ----     --     ---
Combined Total........................................   77     63.4     24     14.4      5     1.0
                                                         ==     ====     ==     ====     ==     ===
</TABLE>

TITLE TO OIL AND NATURAL GAS PROPERTIES

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

PRODUCTION AND SALES PRICES

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

CONTROL OVER PRODUCTION ACTIVITIES

     The Company operated 332 of the 414 producing wells in which it owned an
interest as of December 31, 1999. The non-operated properties are operated by
unrelated third parties pursuant to operating agreements which are generally
standard in the industry. Significant decisions about operations regarding
non-operated properties may be determined by the outside operator rather than by
the Company. If the Company declines to participate in additional activities
proposed by the outside operator under certain operating agreements, the Company
will not receive revenues from, and/or will lose its interest in the activity in
which it declined to participate.

MARKETS AND CUSTOMERS

     The availability of a ready market for any oil and natural gas produced by
the Company and the prices obtained for such oil and natural gas depend upon
numerous factors beyond its control, including the demand for and supply of oil
and natural gas; fluctuations in production and seasonal demand; the
availability of adequate pipeline and other transportation facilities; weather
conditions; economic conditions; imports of crude oil;

                                       11
<PAGE>   13

production by and agreements among OPEC members; and the effects of state and
federal governmental regulations on the import, production, transportation, sale
and taxation of oil and natural gas. The occurrence of any factor that affects a
ready market for the Company's oil and natural gas or reduces the price obtained
for such oil and natural gas, may adversely affect the Company.

     A large percentage of the Company's oil and natural gas sales are made to a
small number of purchasers. The Company normally sells its oil under six month
contracts. For the year ended December 31, 1997, Plains Marketing and
Transportation accounted for 84% of the Company's oil sales, and Crosstex Energy
and GPM Natural Gas Corporation accounted for 20% and 14%, respectively, of the
Company's natural gas sales. For the year ended December 31, 1998, Plains
accounted for 85% of the Company's oil sales, and Crosstex and Aquila Energy
Marketing accounted for 23% and 26%, respectively, of the Company's natural gas
sales. For the year ended December 31, 1999, Plains accounted for 90% of the
Company's oil sales, and Aquila and Crosstex accounted for 21% and 17%,
respectively, of the Company's natural gas sales. The agreement with Plains,
entered into in 1993, provides for Plains to purchase the Company's oil pursuant
to West Texas Intermediate posted prices plus a premium. The Company does not
believe that the loss of any purchaser would have a material adverse effect on
its business because, under prevailing market conditions, such purchaser could
be replaced.

     A portion of the Company's natural gas production is sold pursuant to long
term netback contracts. Under netback contracts, gas purchasers buy gas from a
number of producers, process the gas for natural gas liquids, and sell the
liquids and residue gas. Each producer receives a fixed portion of the proceeds
from the sale of the liquids, and residue gas. The gas purchasers pay for
transportation, processing, and marketing of the gas and liquids, and assume the
risk of contracting pipelines and processing plants in return for a portion of
the proceeds of the sale of the gas and liquids. Generally, because the
purchasers are marketing large volumes of hydrocarbons gathered from multiple
producers, higher prices may be obtained for the gas and liquids. The remainder
of the Company's natural gas is sold on the spot market under short-term
contracts.

REGULATION

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

     EXPLORATION AND PRODUCTION. The Company's exploration and development
operations are subject to various types of regulation at the federal, state, and
local levels. Such regulation includes requiring permits for the drilling of
wells; maintaining bonding requirements in order to drill or operate wells; and
regulating the location of wells, the method of drilling and casing wells, the
surface use and restoration of properties upon which wells are drilled, and the
plugging and abandoning of wells. The Company's operations are also subject to
various conservation regulations and rules to protect the correlative rights of
mineral interest owners. These include the regulation of the size of drilling
and spacing units or proration units, the density of wells which may be drilled,
and the unitization or pooling of oil and natural gas properties. In this
regard, some states allow the forced pooling or integration of tracts to
facilitate exploration, while other states rely on voluntary pooling of land and
leases. In addition, some state conservation laws establish maximum rates of
production from oil and natural gas wells, generally prohibit the venting or
flaring of natural gas, and impose certain requirements regarding the ratability
of production. The effect of these regulations is to limit the amounts of oil
and natural gas the Company can produce from its wells and to limit the number
of wells or the locations at which the Company can drill. Legislation in
Oklahoma and regulatory action in Texas governs the methodology by which the
regulatory agencies establish permissible monthly production allowables. The
Company cannot predict what effect any change in prorationing regulations might
have on its production and sales of natural gas.

     Certain of the Company's Oil, Gas and Mineral Leases are granted by the
federal government and administered by various federal agencies. Such leases
require compliance with detailed federal regulations and orders which regulate,
among other matters, drilling and operations on these leases and calculation and

                                       12
<PAGE>   14

disbursement of royalty payments to the federal government. The Mineral Lands
Leasing Act of 1920 places limitations on the number of acres under federal
leases that may be owned in any one state.

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

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

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

     The Resource Conservation and Recovery Act ("RCRA") and regulations
promulgated thereunder govern the generation, storage, transfer and disposal of
hazardous wastes. RCRA, however, currently excludes from the definition of
hazardous wastes "drilling fluids, produced waters, and other wastes associated
with the exploration, development, or production of crude oil, natural gas, or
geothermal energy." Because of this exclusion, many of the Company's operations
are exempt from RCRA regulation. Nevertheless, the Company must comply with RCRA
regulations for any of its operations that do not fall within the RCRA exclusion
(such as painting activities or use of solvents). On August 8, 1998, EPA added
four petroleum refining wastes to the list of RCRA hazardous wastes. While the
full impact of the rule has yet to be determined, the rule may, as of February
1999, impose increased expenditures and operating expenses on the Company, which
may take on increased obligations relating to the treatment, storage,
transportation and disposal of certain petroleum refining wastes that previously
were not regulated as hazardous wastes. The impact would not likely be any more
burdensome to the Company than to any other similarly situated company involved
in oil and natural gas exploration and production.

     Because oil and natural gas exploration and production, and possibly other
activities, have been conducted at some of the Company's properties by previous
owners and operators, materials from these operations remain on some of the
properties and in some instances require remediation. In addition, the Company
has agreed to indemnify some sellers of producing properties from whom the
Company has acquired reserves against certain liabilities for environmental
claims associated with such properties. While the Company does not believe that
costs to be incurred by the Company for compliance and remediating previously or
currently owned or operated properties will be material, there can be no
guarantee that such costs will not result in material expenditures.

     Additionally, in the course of the Company's routine oil and natural gas
operations, surface spills and leaks, including casing leaks of oil or other
materials occur, and as a result, the Company incurs costs for waste handling
                                       13
<PAGE>   15

and environmental compliance. Moreover, the Company is able to control directly
the operations of only those wells for which it acts as the operator.
Notwithstanding the Company's lack of control over wells in which the Company
owns an interest but is operated by others, the failure of the operator to
comply with applicable environmental regulations may, in certain circumstances,
be attributable to the Company.

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

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

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

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

OPERATIONAL HAZARDS AND INSURANCE

     The Company's operations are subject to all of the risks inherent in oil
and natural gas exploration, drilling and production. These hazards can result
in substantial losses to the Company due to personal injury and loss of life,
severe damage to and destruction of property and equipment, pollution or
environmental damage, or suspension of operations. The Company maintains
insurance of various types customary in the industry to cover its operations.
The Company believes it is insured prudently against certain of these risks. In
addition, the Company maintains operator's extra expense coverage that provides
coverage for the care, custody and control of wells drilled by the Company. The
Company's insurance does not cover every potential risk associated with the

                                       14
<PAGE>   16

drilling and production of oil and natural gas. The Company does, however,
maintain levels of insurance customary in the industry to limit its financial
exposure in the event of a substantial environmental claim resulting from sudden
and accidental discharges. However, 100% coverage is not maintained. The
occurrence of a significant adverse event, the risks of which are not fully
covered by insurance, could have a material adverse effect on the Company's
financial condition and results of operations. Moreover, no assurance can be
given that the Company will be able to maintain adequate insurance in the future
at rates it considers reasonable. The Company believes that it operates in
compliance with government regulations and in accordance with safety standards
which meet or exceed industry standards.

COMPETITION

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

OFFICE SPACE

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

EMPLOYEES

     At March 23, 2000, the Company had 46 full-time employees. Of these
employees, six are field-related personnel. The Company does not have any
collective bargaining agreements with employees and believes that relations with
its employees are generally satisfactory.

ITEM 3. LEGAL PROCEEDINGS

     Other than the Bankruptcy Court proceedings, the Company is not a party to
any additional material pending legal proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1999.

                                       15
<PAGE>   17

                                    PART II

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

MARKET INFORMATION

     The Company's Common Stock was traded on the Nasdaq National Market since
September 1, 1995 under the symbol "NEGX". On November 9, 1998, Nasdaq notified
the Company that its common stock would be delisted effective at the close of
business that day for failing to meet the net tangible asset test and minimum
bid price requirements set forth in NASD Marketplace Rules 4450(a)(3) and
4450(a)(5). Nasdaq also advised the Company that its common stock was
immediately eligible for trading on the OTC Bulletin Board through authorized
broker-dealers who had been market makers in the Company's stock during the last
30-days. The Company contacted its OTC Market Makers to notify them of Nasdaq's
action and to facilitate future trading activity. The Company's common stock
currently trades on the OTC Bulletin Board under the symbol "NEGXQ". The
following table sets forth for the periods indicated, the high and low closing
sales prices for the Company's Common Stock, as reported on Nasdaq and/or the
OTC Bulletin Board. The quotations represent prices between dealers in
securities and may not include retail mark-up, mark-down, or commission and may
not represent actual transactions.

<TABLE>
<CAPTION>
                                                                COMMON STOCK
                                                                   PRICE
                                                              ----------------
                                                              HIGH        LOW
                                                              -----      -----
<S>                                                           <C>        <C>
CALENDAR YEARS BY QUARTER
1999:
  First.....................................................  $ .27      $ .08
  Second....................................................    .13        .06
  Third.....................................................    .14        .06
  Fourth....................................................    .09        .02
1998:
  First.....................................................  $4.13      $2.31
  Second....................................................   2.78       1.38
  Third.....................................................   1.50        .38
  Fourth....................................................    .38        .03
</TABLE>

     On March 23, 2000, the latest practicable date for providing price
information, the last sales price for the Company's Common Stock was $.22.

HOLDERS

     As of March 23, 2000, the Company had approximately 5,000 record holders of
its shares of Common Stock, including multiple nominee holders for an
undetermined number of beneficial owners.

DIVIDENDS ON COMMON STOCK

     The Company has not paid cash dividends on its Common Stock and does not
expect to declare cash dividends in the foreseeable future. Payment of dividends
is prohibited under bankruptcy rules and regulations. Furthermore, any future
dividends on the Common Stock will be limited by the terms of the Preferred
Stock, which prohibits cash dividends on Common Stock unless all accrued and
unpaid dividends on the preferred stock have been paid, and the terms of the
Company's credit facility with Arnos, Inc., which does not permit dividends on
the Common Stock.

ANNUAL MEETING

     The Company's last annual meeting of shareholders was held on June 4, 1998,
and due to the Company's bankruptcy proceeding, no meeting was held during 1999.
Accordingly, the Company is in violation of its Delaware charter which requires
that an annual meeting of shareholders be held each year or within thirteen

                                       16
<PAGE>   18

months of the last annual meeting of shareholders. Such failure to hold an
annual meeting of shareholders within the designated period could result in an
order by the Delaware Court of Chancery compelling such a meeting if deemed
appropriate. The Company anticipates that no annual meeting of shareholders will
be convened until such time that the Company's bankruptcy proceeding has
concluded.

ITEM 6. SELECTED FINANCIAL DATA

     The following table sets forth selected historical financial and operating
data with respect to the Company as of and for each of the five years in the
period ended December 31, 1999. The Company acquired significant producing oil
and natural gas properties during certain of the periods presented which affects
the comparability of the historical financial and operating data for the periods
presented. The financial data was derived from the historical financial
statements of the Company. This information is not necessarily indicative of the
Company's future performance. The financial data set forth below should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and the
related notes thereto of the Company included elsewhere herein.

<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                          -------------------------------------------------------
                                           1995       1996       1997        1998         1999
                                          -------   --------   --------    ---------    ---------
                                            (IN THOUSANDS, EXCEPT FOR RATIOS AND PER UNIT DATA)
<S>                                       <C>       <C>        <C>         <C>          <C>
STATEMENT OF OPERATIONS DATA:(1)
Oil and natural gas sales...............  $ 7,827   $ 24,174   $ 52,417    $  38,440    $  39,300
Costs and expenses:
  Lease operating.......................    1,701      3,596      6,729        8,590        6,101
  Oil and natural gas production
     taxes..............................      416      1,285      3,139        2,504        2,095
  Depreciation, depletion and
     amortization.......................    3,171      9,901     23,205       21,311       15,889
  Writedown of oil and natural gas
     properties(2)......................       --     43,497     46,396      148,400           --
  Restructuring charges.................       --         --         --        1,869           --
  General and administrative............    1,634      2,157      4,392        6,141        4,098
                                          -------   --------   --------    ---------    ---------
     Total costs and expenses...........    6,922     60,436     83,861      188,815       28,183
                                          -------   --------   --------    ---------    ---------
Operating income (loss).................      905    (36,262)   (31,444)    (150,375)      11,117
Interest expense........................   (1,011)    (4,108)   (11,212)     (14,432)      (1,909)
Other income............................      312        308      1,032          293           --
                                          -------   --------   --------    ---------    ---------
Income (loss) before reorganization
  items, income taxes and extraordinary
  item..................................      206    (40,062)   (41,624)    (164,514)       9,208
Reorganization items:
  Professional fees and other...........       --         --         --           --       (4,727)
  Writeoff of unamortized debt premium
     and issuance costs, net............       --         --         --           --       (3,219)
  Interest earned on accumulating cash
     resulting from Chapter 11
     proceedings........................       --         --         --           --          762
                                          -------   --------   --------    ---------    ---------
Income (loss) before income taxes and
  extraordinary items...................      206    (40,062)   (41,624)    (164,514)       2,024
Income tax benefit (provision)..........       --     14,504      7,286           --           --
                                          -------   --------   --------    ---------    ---------
Income (loss) before extraordinary
  item..................................      206    (25,558)   (34,338)    (164,514)       2,024
Extraordinary loss......................     (432)      (292)        --           --           --
                                          -------   --------   --------    ---------    ---------
Net income (loss).......................  $  (226)  $(25,850)  $(34,338)   $(164,514)   $   2,024
                                          =======   ========   ========    =========    =========
Net income (loss) per common share
  before extraordinary item.............  $ (0.05)  $  (1.33)  $   (.94)   $   (4.08)   $     .05
                                          =======   ========   ========    =========    =========
Net income (loss) per common share,
  basic and diluted.....................  $ (0.09)  $  (1.34)  $   (.94)   $   (4.08)   $     .05
                                          =======   ========   ========    =========    =========
</TABLE>

                                       17
<PAGE>   19

<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                          -------------------------------------------------------
                                           1995       1996       1997        1998         1999
                                          -------   --------   --------    ---------    ---------
                                            (IN THOUSANDS, EXCEPT FOR RATIOS AND PER UNIT DATA)
<S>                                       <C>       <C>        <C>         <C>          <C>
CASH FLOW DATA:
Net cash provided by operating
  activities............................  $ 2,857   $ 11,788   $ 22,864    $   5,082    $  27,713
Net cash used in investing activities...  (16,726)   (49,277)   (75,826)     (53,303)      (1,038)
Net cash provided by financing
  activities............................   17,352     45,595     64,734       24,809           --
OTHER FINANCIAL DATA:
EBITDA(3)...............................  $ 4,387   $ 17,443   $ 39,189    $  19,628    $     N/A(5)
Ratio of EBITDA to interest expense.....     4.3x       4.2x       3.5x         1.4x          N/A(5)
Ratio of earnings to fixed charges(4)...     1.2x         --         --           --          N/A(5)
BALANCE SHEET DATA (AT PERIOD END):(1)
Cash and cash equivalents...............  $ 6,076   $ 14,182   $ 25,954    $   2,542    $  29,217
Working capital (deficit)...............   (2,335)    (1,582)     8,387     (197,834)(7)       N/A(6)
Total assets............................   43,491    216,199    254,361       95,002      100,358
Long-term debt..........................   13,475    100,000    166,397          N/A(7)       N/A(7)
Stockholders' equity/(deficit)..........   17,775     80,426     47,893     (116,933)    (114,906)
</TABLE>

<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                                    ---------------------------------------------
                                                     1995     1996     1997      1998      1999
                                                    ------   ------   -------   -------   -------
<S>                                                 <C>      <C>      <C>       <C>       <C>
OPERATING DATA:(1)
Production:
  Oil (Mbls)......................................     283      522     1,110     1,238     1,135
  Natural gas (Mmcf)..............................   1,753    5,681    13,146    11,255     9,266
  Natural gas equivalent (Mmcfe)..................   3,454    8,811    19,807    18,685    16,078
Average sales price:
  Oil (per Bbl)...................................  $17.22   $21.70   $ 19.17   $ 12.66   $ 17.62
  Natural gas (per Mcf)...........................    1.68     2.26      2.37      2.02      2.08
Unit economics (per Mcfe):
  Average sales price.............................  $ 2.27   $ 2.74   $  2.65   $  2.06   $  2.44
  Lease operating expenses........................     .49      .41       .34       .46       .38
  Oil and natural gas production taxes............     .12      .15       .16       .13       .13
  Depreciation, depletion and amortization(8).....     .92     1.12      1.17      1.14       .99
  General and administrative......................     .47      .24       .22       .33       .25
</TABLE>

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

(1) Reflects the revenues, results of operations, and production subsequent to
    the dates of acquisitions of various oil and natural gas properties that
    affect the comparability of the data presented. In August 1996, the Company
    completed the Merger with Alexander.

(2) The results of operations for the year ended December 31, 1996 include a
    writedown of oil and natural gas properties of approximately $43.5 million
    ($28.3 million net of deferred income taxes), in accordance with the full
    cost method of accounting, which resulted from the Merger with Alexander.
    The results of operations for the year ended December 31, 1997 included a
    writedown of oil and natural gas properties of approximately $46.4 million
    ($37.5 million, net of deferred income taxes) in accordance with the full
    cost method of accounting. The results of operations for the year ended
    December 31, 1998, include writedowns of oil and natural gas properties of
    approximately $148.4 million in accordance with the full cost method of
    accounting.

(3) See the Glossary included elsewhere herein for the definition of EBITDA.
    EBITDA is not a measure of cash flow as determined by generally accepted
    accounting principles. The Company has included information concerning
    EBITDA because EBITDA is a measure used by certain investors in determining
    the

                                       18
<PAGE>   20

    Company's historical ability to service its indebtedness. However, this
    measure may not be comparable to similarly titled measures of other
    companies. EBITDA should not be considered as an alternative to, or more
    meaningful than, net income or cash flows as determined in accordance with
    generally accepted accounting principles as an indicator of the Company's
    operating performance or liquidity.

(4) For the purposes of calculating the ratio of earnings to, or deficiency of
    earnings over, fixed charges, earnings consist of income before
    extraordinary items and income taxes plus fixed charges, excluding
    capitalized interest. Fixed charges consist of interest expense, capitalized
    interest, the interest component of rent expense, and amortization of debt
    premium, discount and financing costs. The deficiency of earnings over fixed
    charges for the years ended December 31, 1996, 1997 and 1998, were
    approximately $40.0 million, $44.2 million, and $167.9 million,
    respectively.

(5) Due to the discontinuance of the accrual of interest on the Company's
    unsecured Senior Notes during the Bankruptcy proceeding, these measurements
    are not meaningful for the year ended December 31, 1999 and have not been
    presented.

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

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

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

                                       19
<PAGE>   21

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

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

     On December 4, 1998, certain of the holders of the Senior Notes of the
Company filed an Involuntary Petition for an Order for Relief under Chapter 11
of Title 11 of the United States Bankruptcy Code in the United States Bankruptcy
Court for the Northern District of Texas, Dallas Division, due to non-payment of
interest due December 2, 1998, after expiration of a 30-day grace period. On
December 23, 1998, the Company filed, in the Bankruptcy Court, an Answer to and
Motion to Dismiss the pending Involuntary Petition. However, on February 8,
1999, the Bankruptcy Court denied the Company's Motion to Dismiss the
Involuntary Petition. An Order for Relief was entered by the Bankruptcy Court on
February 11, 1999. As a result of the Chapter 11 proceeding, the Company
discontinued the accrual of interest on the unsecured Senior Notes and
discontinued the accrual of dividends on the unsecured preferred stock.
Approximately $17.7 million additional interest expense would have been
recognized by the Company for 1999 if not for the discontinuation of the
interest accrual on the Senior Notes.

     On August 4, 1999, the Company and the Committee appeared before the
Bankruptcy Court and announced agreement on the process for marketing the
Company and/or its assets. The marketing process culminated in an auction
conducted by the Bankruptcy Court on November 1, 1999. At the auction, bidding
on the Company's oil and gas properties, exclusive of the Company's Lake
Mongoulois and Mustang Island properties, ultimately ended at a high bid of
$96.25 million given by Arnos. The Committee, after review, concluded that it
would recommend to the Court that it accept the high bid of $96.25 million. An
order accepting Arnos as the highest bidder was signed by the Court on November
16, 1999. Arnos filed a motion to close the Purchase and Sale Agreement ("Arnos
PSA") into escrow pending (i) the Court's confirmation of a plan of
reorganization or (ii) in the event a plan of reorganization is not confirmed, a
court ordered closing of the sale of the properties to Arnos. On or about
January 28, 2000 the substantive purchase and sale closing documents were
delivered into the registry of the Court, however, the closing of the Arnos PSA
is still pending as noted. The Court approved this motion and ordered Arnos to
pay into the Court's registry the sum of $61.625 million which equals the
purchase price of $96.25 million less a previously escrowed deposit of $9.625
million and the principal balance of $25 million outstanding under the Company's
secured credit facility with Arnos.

     On February 28, 2000, the Committee Disclosure Statement and Committee Plan
were filed with the Court. The Committee Plan provides for (i) the possibility
of a limited continuation of the Company's oil and gas business operations; (ii)
the creation of a creditors trust to which will be transferred substantially all
of the cash and cash equivalents remaining in the Company, the funds held in the
Registry of the Court from the auction of the Company's properties, and all
causes of action for the payment and primary benefit of certain allowed
administrative, tax, priority and miscellaneous secured and unsecured creditors;
and (iii) payment in full of the secured claims. Both the Committee Plan and
Committee Disclosure Statement are subject to amendment, and a hearing in the
Bankruptcy Court on the Committee Disclosure Statement is scheduled on April 17,
2000.

     On March 14, 2000, the Company Disclosure Statement and Company Plan were
filed with the Court. The Company Plan provides for (i) continuation of the
Company's oil and gas business operations; (ii) payment in full of all secured
claims, including the Arnos secured claim in the amount of $25 million, plus
interest as may be due; (iii) payment of a cash sum not to exceed $10,000 to
certain classes of claimants involved in litigation with the Company if such
class accepts the Company's Plan or, alternatively, if rejected by such class,
cash in the amount of 56.5% of any Allowed Claim in such class; (iv) acquisition
by Arnos of any Senior Notes, not otherwise held by Arnos, in consideration of a
payment equal to 56.5% of the face value of each such bond acquired, or,
alternatively, a pro rata share of the cash which Senior Noteholders would
receive in a liquidation, plus a pro rata beneficial interest in a creditor's
trust consisting of certain causes of action, two properties of the Company and
$250,000 in cash; (v) payment of a cash sum equal to 75% of any Allowed Claim to
trade

                                       20
<PAGE>   22

creditors; (vi) retention by each of the preferred and common shareholder equity
interests; provided that both the preferred and common equity interests may, at
the option of Arnos, be deemed cancelled and reissued to holders in a form to be
determined by Arnos; (vii) purchase by Arnos, or an affiliate of Arnos, of
additionally issued shares of the reorganized Company's common stock to the
extent that Arnos or its affiliate shall own up to 49% of all the issued and
outstanding Common Stock of the reorganized Company; and (viii) amendment to the
Senior Notes Indenture. Both the Company Plan and Company Disclosure Statement
are subject to amendment, and a hearing in the Bankruptcy Court on the Company
Disclosure Statement is scheduled on April 20, 2000.

     The accompanying consolidated financial statements have been prepared on a
going concern basis of accounting and do not reflect any adjustments that might
result should the Company be unable to continue as a going concern. The
Company's prior losses from operations and the related Chapter 11 proceeding
raise concern about its ability to continue as a going concern. The
appropriateness of using the going concern basis is dependent upon, among other
things, (i) confirmation of a plan of reorganization under the Bankruptcy Code
which provides for continuation of the Company's oil and gas operations, (ii)
the ability to achieve profitable operations after such confirmation and (iii)
the ability to generate sufficient cash from operations to meet its obligations.

OVERVIEW

     The revenues generated by the Company's operations are highly dependent
upon the prices of, and demand for, oil and natural gas. The price received by
the Company for its oil and natural gas production depends on numerous factors
beyond the Company's control, including seasonal price fluctuation, the
condition of the U.S. economy, foreign imports, political conditions in other
oil and natural gas producing countries, the actions of the Organization of
Petroleum Exporting Countries and domestic governmental regulations, legislation
and policies. Commodity prices have increased during 1999 as compared to 1998
which has had a positive effect on the Company's revenues, profitability and
cash flows.

RESULTS OF OPERATIONS

OVERVIEW OF PRODUCTION, SALES AND UNIT ECONOMICS

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

<TABLE>
<CAPTION>
                                                       YEAR ENDED DECEMBER 31,
                                                     ---------------------------
                                                      1997      1998      1999
                                                     -------   -------   -------
<S>                                                  <C>       <C>       <C>
Net production:
  Oil (Mbbls)......................................    1,110     1,238     1,135
  Natural Gas (Mmcf)...............................   13,146    11,255     9,266
  Natural Gas Equivalent (Mmcfe)...................   19,807    18,685    16,078
Oil and natural gas sales (in thousands):
  Oil..............................................  $21,276   $15,673   $20,006
  Natural gas......................................   31,141    22,767    19,294
                                                     -------   -------   -------
          Total....................................  $52,417   $38,440   $39,300
                                                     =======   =======   =======
Average sales price:
  Oil (per Bbl)....................................  $ 19.17   $ 12.66   $ 17.62
  Natural gas (per Mcf)............................     2.37      2.02      2.08
Unit economics (per Mcfe):
  Average sales price..............................  $  2.65   $  2.06   $  2.44
  Lease operating expenses.........................      .34       .46       .38
  Oil and gas production taxes.....................      .16       .13       .13
  Depletion rate (excluding writedowns)............     1.11      1.06       .91
  General and administrative.......................      .22       .33       .25
</TABLE>

                                       21
<PAGE>   23

YEAR ENDED DECEMBER 31, 1999, COMPARED WITH YEAR ENDED DECEMBER 31, 1998

     Revenues. Total revenues increased by $.9 million (2.3%) to $39.3 million
for 1999 from $38.4 million in 1998. The increase in revenues is due to the
increase in oil and gas prices from the same period in 1998. Average natural gas
prices increased $.06 per Mcf to $2.08 per Mcf for 1999 from $2.02 for 1998, and
average oil prices increased $4.96 per barrel to $17.62 per barrel for 1999 from
$12.66 for 1998. The increase in average prices increased 1999 revenues by
approximately $6.2 million compared to 1998.

     In 1999, the Company produced 1,135 Mbbls of oil, a decrease of 8.3%
compared to 1,238 Mbbls in 1998, and the Company produced 9,266 Mmcf of natural
gas in 1999, a decrease of 17.7% from 11,255 Mmcf in the same period of 1998.
The decrease in oil and gas production was caused by natural production
declines. The Company's ability to offset these natural production declines
through its drilling and exploration program was limited during 1999 due to
Bankruptcy Court restrictions. The reduction in oil production was partially
offset by the successful drilling and completion of the State Lease #2102 well
at the Company's East Bayou Sorrel area which came on line in October of 1998.
The Company expects production to continue to decline unless replaced through
drilling, workovers, recompletions and/or acquisitions.

     Costs and Expenses. Lease operating expenses decreased $2.5 million (29.1%)
to $6.1 million for 1999 from $8.6 million in 1998 primarily due to the
Company's efforts to reduce and control these costs. Lease operating expenses
per Mcfe decreased to $.38 for 1999 from $.46 for 1998 due to the 29.1% decrease
in lease operating expenses which more than offset the 14.0% decline in
equivalent production.

     Production taxes decreased $.4 million (16.0%) to $2.1 million for 1999
compared to $2.5 million for 1998. This decrease principally resulted from tax
exemptions and refunds obtained by the Company.

     Depreciation, depletion and amortization ("DD&A") decreased $5.4 million
(25.4%) to $15.9 million for 1999 compared to $21.3 million for 1998. This
decrease in DD&A is due to the decrease in the depletion rate per Mcfe from
$1.06 in 1998 to $.91 for 1999, caused by the effects on depletion expense of
the full cost ceiling writedowns recorded by the Company during 1998. Also
contributing to the decline in DD&A was the decrease in overall production
discussed above.

     At March 31, June 30, September 30, and December 31, 1998, the net book
value of the Company's oil and natural gas properties exceeded the full cost
ceiling, resulting in non-cash writedowns of the oil and natural gas properties
totaling $148.4 million for the year. These writedowns resulted primarily from
the decline in oil and natural gas prices during 1998, costs incurred on
unsuccessful exploratory wells drilled during such periods and unfavorable
revisions to estimates of oil and gas reserves. The Company did not incur
ceiling writedowns during 1999.

     During 1998, the Company recorded non-recurring restructuring charges of
approximately $1.9 million for severance and related costs resulting from the
restructuring of its executive management team and other personnel changes.

     General and administrative costs decreased $2.0 million (32.8%) to $4.1
million for 1999 compared to $6.1 million for 1998. The decrease in general and
administrative expenses compared to 1998 was primarily due to the Company's
restructuring of its management team and other personnel during 1998 as well as
continuing efforts to control other costs. General and administrative costs per
Mcfe decreased 24.2% to $.25 for 1999 from $.33 for 1998. This decrease per Mcfe
is attributable to the decrease in general and administrative costs noted above
which more than offset the decline in overall production. As discussed in Note 2
to the consolidated financial statements, the Company capitalizes internal
general and administrative costs that can be directly identified with
acquisition, development and exploration activities. The Company's capitalized
general and administrative expenses totaled $1.9 million and $.8 million for the
years ended December 31, 1998 and 1999, respectively.

     Other Income and Expenses. The decrease of $12.5 million in interest
expense to $1.9 million for 1999 from $14.4 million for 1998, was due to the
discontinuation of the accrual of interest on the Senior Notes due to the
Chapter 11 proceeding. Approximately $17.7 million additional interest expense
would have been recognized by the Company if not for the discontinuation of the
interest accrual on the Senior Notes. The average balance of

                                       22
<PAGE>   24

debt outstanding during 1999 was $190.0 million as compared to average debt
outstanding of $180.6 million for 1998. The weighted average interest rate for
1999 was 8.2% for interest accrued compared to 9.9% for 1998. The decline in the
weighted average interest rate is due to the discontinuation of the accrual of
interest on the Senior Notes.

     Reorganization Items. During 1999, the Company incurred $4.7 million of
professional fees and other expenses associated with the Chapter 11 filing. In
addition, the Company wrote off a total of $3.2 million of unamortized debt
issuance costs and premiums related to the Senior Notes due to the Chapter 11
proceeding, and earned approximately $761,000 in interest income on cash
accumulating during the Chapter 11 proceeding.

     Net Income. Net income of $2.0 million was recognized for 1999, compared
with a net loss of $164.5 million for 1998. Net income for 1999 excludes
approximately $17.7 million in interest expense and includes expenses of
approximately $7.2 million, net, relating to the bankruptcy proceeding, as
discussed above. The net loss for 1998 included writedowns of oil and natural
gas properties of $148.4 million. Excluding the effects of these amounts a net
loss of $9.3 million would have been generated for 1999 compared to a net loss
of $16.1 million for 1998.

YEAR ENDED DECEMBER 31, 1998, COMPARED WITH YEAR ENDED DECEMBER 31, 1997

     Revenues. Total revenues decreased by $14.0 million (26.7%) to $38.4
million for 1998 from $52.4 million in 1997. The reduction in revenues is
primarily due to the decrease in commodity prices from the same period in 1997.
Average natural gas prices decreased $.35 per Mcf to $2.02 per Mcf for 1998 from
$2.37 for 1997, and average oil prices decreased $6.51 per barrel to $12.66 for
1998 from $19.17 for 1997. The decrease in average prices reduced 1998 revenues
by approximately $12.0 million compared to 1997.

     Also contributing to the decrease in revenues was the Mmcfe equivalent
decrease in production. In 1998, the Company produced 1,238 Mbbls of oil, an
increase of 11.5% over 1,110 Mbbls in 1997, and 11,255 Mmcf of natural gas, a
decrease of 14.4% over 13,146 Mmcf in the same period of 1997. The increase in
oil production is due primarily to the completion of four GAU wells in the first
quarter of 1998, the completion of the State Lease #2102 well (in the Greater
Bayou Sorrel area) in October of 1998 and the drilling activity on the Company's
Anadarko Basin properties. The decline in gas production is primarily due to the
flush production in 1997 from the drilling program on the East Texas and Arkoma
properties. The Company had limited drilling activity in these areas during
1998.

     Also affecting 1998 production was the temporary shut-in of the East Bayou
Sorrel field to allow for a pipeline repair, which reduced 1998 production by
291 Mmcfe, the 1997 sale of certain non-strategic properties and natural decline
of production not replaced by additional drilling activity. The East Bayou
Sorrel field was also shut-in for seven days to allow for the completion of the
State Lease #2102 and Hurricane George. The Company expects production to
continue to decline unless replaced through drilling, workovers, recompletions
and/or acquisitions.

     Costs and Expenses. Lease operating expenses increased $1.9 million (28.4%)
to $8.6 million for 1998 from $6.7 million for 1997 primarily due to additional
wells brought into production during 1998 and 1997. The Company also entered
into a saltwater disposal lease and $.4 million was paid for this lease during
the fourth quarter of 1998. The increase in lease operating expenses was in part
offset by the 1997 sale of non-strategic properties and the Company's efforts to
reduce operating costs. Lease operating expenses per Mcfe increased to $.46 for
1998 from $.34 for 1997 due to increased costs combined with the Mmcfe
equivalent decline in production during the period.

     Production taxes decreased $.6 million (19.4%) to $2.5 million for 1998
compared to $3.1 million for 1997. This decrease principally resulted from the
decrease in total oil and natural gas revenues discussed above.

     Depreciation, depletion and amortization decreased $1.9 million (8.2%) to
$21.3 million for 1998 compared to $23.2 million for 1997. This decrease is due
to the decrease in the depletion rate per Mcfe from $1.11 in 1997 to $1.06 for
1998. This decrease in the depletion rate was primarily due to the effects on
depletion expense of the full cost ceiling writedowns discussed below in 1998.

                                       23
<PAGE>   25

     At March 31, June 30, September 30, and December 31, 1998, the net book
value of the Company's oil and natural gas properties exceeded the full cost
ceiling, resulting in non-cash writedowns of the oil and natural gas properties
totaling $148.4 million for the year. These writedowns resulted primarily from
the decline in oil and natural gas prices, costs incurred on unsuccessful
exploratory wells drilled during such period and unfavorable revisions to
estimates of oil and gas reserves.

     During 1998, the Company recorded non-recurring charges of approximately
$1.9 million for severance and related costs resulting from the restructuring of
its executive management team, other personnel changes and costs associated with
the Chapter 11 filing.

     General and administrative costs increased $1.7 million (38.6%) to $6.1
million compared to $4.4 million for 1997. The increase in general and
administrative expenses compared to 1997 was primarily due to increased
personnel and office space due to the increase in the scope of the Company's
operations. In 1998, in an effort to reduce general and administrative costs the
Company restructured its executive management team and other personnel. The
Company also renegotiated its office lease and implemented other cost cutting
strategies. The Company's capitalized general and administrative expenses
totaled $1.6 million and $1.9 million for the years ended December 31, 1997 and
1998, respectively. General and administrative costs per Mcfe increased 50.0% to
$.33 for 1998 from $.22 for 1997. This increase per Mcfe is attributable to the
decrease in production, combined with additional general and administrative
costs noted above.

     Other Income and Expenses. The increase of $3.2 million in interest expense
to $14.4 million for 1998 from $11.2 million for 1997, was due to the issuance
of the Series C Notes in August 1997, and interest on borrowings under the
credit facility, partially offset by an increase of $.8 million of interest
costs which were capitalized during 1998 related to the Company's unproved oil
and natural gas properties. The average balance of debt outstanding during 1998
was $180.6 million as compared to average debt outstanding of $133.4 million for
1997. The weighted average interest rate for 1998 was 9.9% compared to 10.3% for
1997. As of December 4, 1998, the Company discontinued the accrual of interest
on unsecured liabilities subject to compromise, which primarily consisted of the
Senior Notes, as a result of filing the Involuntary Petition. Approximately $1.3
million additional interest expense would have been recognized by the Company if
not for the discontinuation of the interest accrual on the Senior Notes.

     Net Loss. A net loss of $164.5 million was generated for 1998, compared
with net loss of $34.3 million for 1997. The net losses for 1998 and 1997
included writedowns of oil and natural gas properties of $148.4 million and
$37.5 million, respectively, net of deferred taxes. Excluding these charges,
income decreased $19.3 million in 1998 compared with 1997 due to the decrease in
operating income and increased interest expense.

LIQUIDITY AND CAPITAL RESOURCES

YEAR ENDED DECEMBER 31, 1999, COMPARED WITH YEAR ENDED DECEMBER 31, 1998

     Net cash provided by operating activities was $27.7 million for the year
ended December 31, 1999, compared to $5.1 million for the same period in 1998.
The increase in cash flow from operating activities is due, in part, to the
increase in income from operations before non-cash charges, resulting from
increased oil and gas revenues from higher commodity prices as well as
significantly lower lease operating expenses and general and administrative
expenses. Also largely contributing to the increase in net cash provided by
operations is the fact that the Company discontinued accruing interest on the
Senior Notes as a result of the Chapter 11 proceeding.

     Net cash used by investing activities was $1.0 million for 1999 compared
with $53.3 million for 1998. The cash used by investing activities for 1999
sharply declined due to the Company's discontinuation of its drilling program
pursuant to Court restrictions.

     No cash was provided by financing activities during 1999 compared with
$24.8 million for the same period in 1998. The net cash provided by financing
activities during 1998 consisted primarily of proceeds from the credit facility.

                                       24
<PAGE>   26

YEAR ENDED DECEMBER 31, 1998, COMPARED WITH YEAR ENDED DECEMBER 31, 1997

     Net cash provided by operating activities was $5.1 million for the year
ended December 31, 1998, compared to $22.9 million for the same period in 1997.
The decrease in cash flow from operating activities is primarily due to the
decrease in income from operations before non-cash charges, resulting from
depressed sales prices for oil and gas and reduced production at such prices.

     Net cash used by investing activities was $53.3 million for 1998 compared
with $75.8 million for 1997. The cash used by investing activities for 1998
included $52.0 million for exploration and development expenditures pursuant to
the Company's drilling program, including acquisitions of leasehold interests
and seismic costs.

     Net cash provided by financing activities was $24.8 million for 1998
compared with $64.7 million for the same period in 1997. The net cash provided
by financing activities during 1998 consisted primarily of proceeds from the
credit facility. In 1997, cash provided by financing activities consisted
primarily of proceeds from the issuance of the Series C Notes.

     The Company's working capital deficit at December 31, 1998, was $197.8
million compared to a working capital surplus at December 31, 1997 of $8.4
million. The decrease in working capital was due primarily to the classification
as a current liability of the $25.0 million due under the Arnos credit facility,
the $166.2 million due on the Senior Notes and the accrued interest on the
Senior Notes.

FUTURE CAPITAL REQUIREMENTS

     During the period of the bankruptcy proceeding, the Company has suspended
its development and exploratory drilling program. The Company has been limited
in its capital expenditures to ordinary course enhancement of current production
through workovers, recompletions, and other production enhancing activities
deemed to be economic given current oil and gas prices. Also during the
bankruptcy period, development drilling is anticipated to be limited to (i)
ordinary course nonoperated wells in which we have limited working interests and
in which the failure to participate may result in drainage, depletion or loss of
current reserves and (ii) operated wells deemed to be economical given current
oil and gas prices. Large expenditures for developmental drilling may require
court approval and none are planned at this time.

     The Company currently expects that existing cash and cash flows from
operations will be sufficient to fund planned capital expenditures for its
existing properties through 2000. However, the Company could require additional
capital to fund any large acquisitions and access to these markets could be
limited due to the Chapter 11 proceeding.

     Subject to Court approval, the Company may seek additional capital, if
required, from traditional reserve base borrowings, equity, and debt offerings
or joint ventures to further develop and explore its properties and to acquire
additional properties. There is no assurance, even if approved by the Court,
that the Company would be able to access additional capital or that, if
available, it will be at prices or on terms acceptable to the Company. In
addition, the Chapter 11 proceeding and restrictions from the Bankruptcy Court
could limit the Company's ability to access additional capital markets.

     Should the Company be unable to access the capital markets or should
sufficient capital not be available, the development and exploration of the
Company's properties could be delayed or reduced and, accordingly, oil and
natural gas revenues and operating results may be adversely affected.

FINANCIAL REPORTING IMPACT OF FULL COST METHOD OF ACCOUNTING

     The Company follows the full cost method of accounting for oil and natural
gas properties. Under such method, the net book value of such properties, less
related deferred income taxes, may not exceed a calculated "ceiling." The
ceiling is the estimated after-tax future net revenues from proved oil and
natural gas properties, discounted at 10% per year. In calculating future net
revenues, prices and costs in effect at the time of the calculation are held
constant indefinitely, except for changes which are fixed and determinable by
existing contracts. The net book value is compared to the ceiling on a quarterly
and yearly basis. The excess, if any, of the net book value above the ceiling is
required to be written off as a non-cash expense. During the years ended

                                       25
<PAGE>   27

December 31, 1997 and 1998, the net book value of the Company's oil and natural
gas properties exceeded the ceiling based on the weighted average prices of
crude oil and natural gas received by the Company resulting in non-cash
writedowns totaling $37.5 million, net of deferred taxes and $148.4 million,
respectively. The Company had no ceiling limitation writedowns during 1999.
There can be no assurance that there will not be additional writedowns in future
periods under the full cost method of accounting as a result of sustained
decreases in oil and natural gas prices or other factors.

RECENT ACCOUNTING PRONOUNCEMENTS

     In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS No. 133"), which will be adopted by the Company
January 1, 2001. The statement will require the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
will either be offset against the change in fair value of the hedged assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a hedge's change in fair value will be immediately
recognized in earnings. The Company is currently evaluating the effect of SFAS
No. 133 on its financial statements.

CHANGES IN PRICES

     The prices received by the Company for its oil and natural gas production
declined dramatically during 1998. In 1998 the prices received for crude oil
reached their lowest level in 50 years and were the lowest inflation-adjusted
oil prices since the Depression. The Company's revenue and value of its oil and
natural gas properties were adversely affected by such prices. However, oil and
gas prices recovered during 1999 and had a positive effect on the results of
operations for 1999. Oil and gas prices are subject to seasonal and other
fluctuations that are beyond the Company's ability to control or predict.

INFLATION

     Although certain of the Company's costs and expenses are affected by the
level of inflation, inflation has not had a significant effect on the Company's
results of operations during the three years ended December 31, 1999.

YEAR 2000

     The year 2000 ("Y2K") problem arose because of computer programs which use
two digits rather than four digits to define a year and which had the potential
to result in errors or system failures. In prior years, the Company discussed
the nature and progress of its plans to become Y2K ready. In 1999, the Company
completed its remediation and testing of systems. As a result of those planning
and implementation efforts, the Company experienced no significant disruptions
in information technology and non-information technology systems and believes
those systems successfully responded to the year 2000 date change. The Company's
expenses during 1999 in connection with remediating its systems were nominal.
The Company is not aware of any material problems resulting from Y2K issues,
either with its products, its internal systems, or the products and services of
third parties. The Company will continue to monitor its computer applications to
ensure that any latent Y2K matters that may arise are addressed promptly.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     In the past, the Company has utilized various derivative instruments and
may do so in the future, principally to hedge the prices received for its gas
production. While the use of hedging arrangements limits the downside risk of
adverse price movements, it may also limit future gains from favorable
movements. The Company addresses market risk by selecting instruments whose
value fluctuations correlate strongly with the underlying commodity being
hedged. Credit risk related to hedging activities is managed by requiring
minimum credit standards for counter parties, periodic settlements, and market
to market valuations. The Company has not been

                                       26
<PAGE>   28

required to provide collateral relating to hedging activities. At December 31,
1998 and 1999, the Company had no hedging or basis swap agreements outstanding.

     At December 31, 1998, the Company had entered into forward sales contracts
with two purchasers covering the future production of natural gas. Deliveries
under these contracts were priced based on NYMEX prices less a differential
whereby the Company may fix the price for deliveries under these contracts at
any time three days prior to the close of the then current contract based on the
NYMEX prices at that time. The Company pays the cost of transportation of the
natural gas to the delivery point specified in the contracts. At December 31,
1999, the Company was not a party to any forward sale contracts.

     The Company's exposure to interest rates relates primarily to its
borrowings under its credit facility. The Company does not currently use
derivatives to manage interest rate risk. Interest is payable on borrowings
under the credit facility based on a floating rate. If short-term interest rates
average 10% higher in 2000 than they were in 1999, the Company's interest
expense would increase by approximately $225,000. This amount was determined by
applying the hypothetical interest rate change to the Company's outstanding
borrowings under the credit facility at December 31, 1999.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

     None.

ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT

     The following table lists the name, age as of March 3, 2000 and present
position with the Company for each of the Company's directors and executive
officers:

<TABLE>
<CAPTION>
NAME                                          AGE       PRESENT POSITION WITH THE COMPANY(1)
----                                          ---       ------------------------------------
<S>                                           <C>   <C>
Bob G. Alexander............................  66    Chairman of the Board of Directors,
                                                    President and Chief Executive Officer
Jim L. David................................  60    Director, Assistant to the President
Russell D. Glass............................  37    Director
Martin Hirsch...............................  45    Director
Robert H. Kite..............................  45    Director
Robert J. Mitchell..........................  52    Director
Jack G. Wasserman...........................  63    Director
Philip D. Devlin............................  55    Vice President, General Counsel and
                                                    Secretary
R. Kent Lueders.............................  43    Vice President, Corporate Development
Melissa H. Rutledge.........................  34    Vice President, Controller and Chief
                                                    Accounting Officer
</TABLE>

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

(1) Messrs. Alexander, David and Mitchell were appointed to the Board on August
    29, 1996, and Mr. Alexander was appointed President and Chief Executive
    Officer of the Company effective November 23, 1998. Messrs. Glass, Hirsch
    and Wasserman were appointed to the Board on December 1, 1998. Pursuant to
    the terms of the Series B Preferred Stock, Series C Preferred Stock and
    Series D Preferred Stock, the holders of a majority of the outstanding
    shares of each series have the right to appoint one member to the Company's
    Board of Directors at all times while such series are outstanding. Mr.
    Elwood Schafer, the Series C Preferred Stock appointee, resigned from the
    Board of Directors effective, December 31, 1998, and no new

                                       27
<PAGE>   29

    appointment has been made. Mr. Mitchell is the Series D Preferred Stock
    appointee. Directors generally serve for a term of one year (until the next
    annual meeting of shareholders) and until their successors are duly elected
    and qualified, or until their death, resignation or removal, at which time
    the Board of Directors has the authority to appoint replacements to fill any
    such vacancies until the next annual meeting of shareholders.

     Bob G. Alexander. Mr. Alexander, a founder of Alexander Energy Corporation,
was appointed a Director of the Company when Alexander merged into NEG-OK on
August 29, 1996 and was appointed President and Chief Executive Officer of the
Company on November 23, 1998. From 1980 until the Merger, Mr. Alexander served
as Chairman of the Board, President and Chief Executive Officer of Alexander.
From 1976 to 1980, Mr. Alexander was Vice President and General Manager of the
Northern Division of Reserve Oil, Inc. and President of Basin Drilling Corp.
(subsidiaries of Reserve Oil and Gas Company). Mr. Alexander attended the
University of Oklahoma and graduated with a Bachelor of Science degree in
geological engineering.

     Jim L. David. Mr. David, a founder of Alexander Energy Corporation, was
appointed a Director of the Company when Alexander merged into NEG-OK on August
29, 1996. From August 1996 until July 1998, Mr. David served as Vice President,
Exploration of the Company. In December 1998, he became Assistant to the
President of the Company. From 1980 until the Merger, Mr. David served as
Executive Vice President of Alexander. From 1977 to 1980, Mr. David was employed
as exploration manager for Reserve Oil, Inc., Northern Division. Mr. David
served as Alaska chief geologist and senior staff geologist for Texas
International from 1973 to 1976. Mr. David graduated with a B.A. degree in
geology from Louisiana Tech University and obtained a Master of Arts in geology
from the University of Missouri.

     Russell D. Glass. Effective December 1, 1998 Mr. Glass was appointed to the
Board of Directors of the Company. Mr. Glass has been President and Chief
Investment Officer of Icahn Associates Corp., a diversified investment firm,
since April 1998. Since August 1998 he has also served as Vice-Chairman of
Lowestfare.com, Inc., an internet travel reservations company. Previously, Mr.
Glass had been a Partner in Relational Investors LLC, from 1996 to 1998, and in
Premier Partners Inc., from 1988 to 1996, firms engaged in investment research
and management. From 1984 to 1986 he served as an investment banker with Kidder,
Peabody & Co. Mr. Glass currently serves as a Director of Automated Travel
Systems, Inc., a travel industry software development firm; Cadus Pharmaceutical
Corporation, a genetic pharmaceutical research company; Delicious Brands, Inc.,
a branded food products company; Lowestfare.com, Inc., an internet travel
reservations company; and the A.G. Spanos Corporation, a national real estate
development firm and owner of the NFL San Diego Chargers Football Club. Mr.
Glass earned a B.A. degree in Economics from Princeton University and an M.B.A.
from the Stanford University Graduate School of Business.

     Martin Hirsch. Effective December 1, 1998, Mr. Hirsch was appointed to the
Board of Directors of the Company. Mr. Hirsch has served as a Vice President of
American Property Investors since March 18, 1991 where he is involved in
investing, managing and disposing of real estate properties and securities. From
January 1986 to January 1991, he was at Integrated Resources, Inc. as a Vice
President and where he was involved in the acquisition of commercial real estate
properties and asset management. From 1985 to 1986, he was a Vice President of
Hall Financial Group where he was involved in acquiring and financing commercial
and residential properties. Mr. Hirsch received his M.B.A. from The Emory
University Graduate School of Business.

     Robert H. Kite. Effective December 17, 1990, Mr. Kite was appointed a
Director of the Company. From November 1987 until June 11, 1991, Mr. Kite served
as a Director of VP. Since 1980, Mr. Kite has been President and Chief Operating
Officer of KFC, Ltd., a family-owned company with operations which include real
estate development, investments and medical MRI clinics. He has also been Chief
Executive Officer of Roamin' Korp., Inc. since 1982, which is engaged in the
businesses of construction, recording, mining and equity investments. Mr. Kite
graduated from Southern Methodist University with a B.S. degree in Psychology
and Political Science.

     Robert J. Mitchell. Effective August 29, 1996, Mr. Mitchell was appointed a
Director of the Company. Mr. Mitchell is Chief Executive Officer of ACF
Industries Inc., has served as Senior Vice President -- Finance of such company
from March 1995 to the present and was Treasurer from December 1984 to March
1995.

                                       28
<PAGE>   30

Mr. Mitchell has also served as President and Treasurer of ACF Industries
Holdings Inc. since August 1993 and as Vice President, Liaison Officer of Icahn
& Co., Inc. since November 1984. From 1987 to January 1993, Mr. Mitchell served
as Treasurer of TransWorld Airlines, Inc. and was the Treasurer of TransWorld
Airlines, Inc. when it filed for reorganization under Chapter 11 of the United
States Bankruptcy Code, as amended, in January 1992. Mr. Mitchell is also a
director of Cadus Pharmaceutical Corporation, a NASDAQ National Market listed
pharmaceutical company.

     Jack G. Wasserman. Effective December 1, 1998, Mr. Wasserman was appointed
to the Board of Directors of the Company. Mr. Wasserman is a senior partner of
Wasserman, Schneider, Babb and Reed, a New York law firm, and has been a partner
of that firm and its predecessors since 1966. Mr. Wasserman is admitted to
practice before the Supreme Court of the United States and in the states of New
York, Florida and the District of Columbia. He serves as a Director of American
Property Investors, Inc., the general partner of American Real Estate Partners,
L.P. whose units are traded on the New York Stock Exchange, and Cadus
Pharmaceutical Corporation whose shares are traded on the NASDAQ National
Market. Mr. Wasserman holds a B.A. degree from Adelphi University, a J.D. degree
from Georgetown University, and a Graduate Diploma from the Johns Hopkins
University School of Advanced International Studies in Bologna, Italy.

     Philip D. Devlin. Effective March 1, 1997, Mr. Devlin was appointed Vice
President and General Counsel of the Company and, effective March 20, 1997, the
Board of Directors appointed him Secretary of the Company. From September 1984
to October 1994, Mr. Devlin served as Executive Vice President, General Counsel
and Secretary for Sunrise Energy Services, Inc., a publicly-held natural gas
marketing company. From October 1994 through February 1997, Mr. Devlin acted as
President and Chief Executive Officer of Sunrise Energy Services, Inc. In July
1995, Sunrise Energy Services, Inc. filed to reorganize under Chapter 11 of the
Bankruptcy Code and in February 1997 a Plan of Reorganization was confirmed by
the Bankruptcy Court. Mr. Devlin is licensed by the State Bar of Texas, admitted
to practice before the Supreme Court of the United States and is a past
President and Director of the Natural Gas and Electric Power Association of
North Texas. Mr. Devlin holds a B.A. degree and an M.A. degree from the
University of California and J.D. degree with honors from California Western
School of Law, San Diego, California.

     R. Kent Lueders. Effective April 13, 1998, Mr. Lueders was appointed
Director of Corporate Development and in September 1998 was made a Vice
President of the Company. From 1996 to 1998, Mr. Lueders was Manager of
Acquisitions for Merit Energy. From 1994 to 1996, Mr. Lueders worked as a
consulting evaluation engineer for RK Engineering. Prior to this Mr. Lueders was
the Product Line Manager with Munro Garrett International from 1993 to 1994.
From 1982 to 1993, Mr. Lueders was Manager of Engineering Services for Pacific
Enterprises Oil Company (USA) where he managed the reserves, budget and
engineering systems. Mr. Lueders began his career with Amoco Production Company
in 1979 as an engineer working East and West Texas. He received a B.S. degree in
Petroleum Engineering from the University of Missouri at Rolla in 1979.

     Melissa H. Rutledge. Effective August 15, 1994, Ms. Rutledge was appointed
Controller and Chief Accounting Officer of the Company and in December 1997 was
made a Vice President of the Company. From September 1990 to August 1994, Ms.
Rutledge was a Senior Auditor for Ernst & Young LLP in Dallas. Ms. Rutledge
received her B.B.A. degree in Accounting from Texas Tech University and is
currently licensed as a CPA in the State of Texas.

     All of the Company's Executive Officers and Directors were acting in such
capacity upon the granting of the United States Bankruptcy Court for the
Northern District of Texas of an involuntary petition for an Order for Relief
under Chapter 11 of Title 11 of the United States Bankruptcy Code on February
11, 1999.

     The Company had a number of Committees which were dissolved October 26,
1998 in favor of the entire Board of Directors acting en banc in all matters.
Accordingly, the various Committees held no formal meetings during 1999, and all
matters were handled by the Board acting en banc.

     The Board of Directors held eight (8) regular and special meetings during
the year ended December 31, 1999.

     Due to the ongoing Bankruptcy Proceeding and because the Board of Directors
are currently acting en banc, the Company has not yet evaluated what the effect,
if any, of the recommendations contained in the report of the
                                       29
<PAGE>   31

Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit
Committees will be with respect to the Company's audit committee composition and
practices.

     The executive officers of the Company are elected annually at the first
meeting of the Company's Board of Directors held after each annual meeting of
shareholders. Each executive officer holds office until the first meeting of the
Board after the annual meeting of shareholders next succeeding his or her
election and until his or her successor is duly elected and qualified, or until
his or her death or resignation or until he or she shall have been removed in
the manner provided in the Company's bylaws. Due to the Bankruptcy Proceeding,
no annual meeting of shareholders was held during 1999 and none is expected
until such time that the Company's Bankruptcy Proceeding is concluded.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     The Company has no delinquent filers and no former officers of the Company
who resigned during the year ended December 31, 1999 were required to file a
Form 5 for that period.

ITEM 11. EXECUTIVE COMPENSATION

EXECUTIVE COMPENSATION

     The following tables set forth the cash compensation received by the
Company's Chief Executive Officer and each of the next four most highly
compensated executive officers of the Company whose cash compensation exceeded
$100,000 for the fiscal year ended December 31, 1999, and whose base salary plus
bonus equaled or exceeded $100,000. Such tables also include option grants in
the last fiscal year for such officers and aggregate option/SAR exercises during
the last fiscal year and year end option/SAR values.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                        LONG TERM
                                                                   COMPENSATION AWARDS
                                                                --------------------------
                                                ANNUAL          RESTRICTED
                                           COMPENSATION(1)        STOCK       SECURITIES           ALL
                                         --------------------     AWARDS      UNDERLYING          OTHER
NAME AND PRINCIPAL POSITION       YEAR   SALARY($)   BONUS($)      ($)       OPTIONS(#)(2)   COMPENSATION($)
---------------------------       ----   ---------   --------   ----------   -------------   ---------------
<S>                               <C>    <C>         <C>        <C>          <C>             <C>
Bob G. Alexander................  1999   $278,843         --          --            --          $112,500(4)
  President and Chief             1998    148,910         --          --        37,500                --
  Executive Officer(3)            1997    148,645         --          --            --                --
Jim L. David....................  1999    132,290         --          --            --                --
  Assistant to the President      1998    105,000         --          --            --           197,000(5)
                                  1997    132,500    $35,000          --        75,000                --
Philip D. Devlin................  1999    178,825         --          --            --                --
  Vice President,                 1998    193,882         --          --            --                --
  General Counsel(6)              1997    137,500     25,000     203,500(7)     60,000            50,885(8)
Melissa H. Rutledge.............  1999    111,515         --          --            --                --
  Vice President, Controller and  1998    107,000         --          --            --                --
  and Chief Accounting
     Officer(9)                   1997     80,000     15,000          --        30,000                --
R. Kent Lueders.................  1999    118,825         --          --            --                --
  Vice President, Corporate       1998     80,556         --          --        25,000                --
  Development(10)                 1997         --         --          --            --                --
</TABLE>

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

 (1) Excludes the aggregate, incremental cost to the Company of perquisites and
     other personal benefits, securities or property, the aggregate amount of
     which, with respect to the named individual, does not equal or exceed the
     lesser of $50,000 or 10% of reported annual salary and bonus for such
     person.

                                       30
<PAGE>   32

 (2) All options granted since June 1996 were granted pursuant to the 1996
     Incentive Compensation Plan which was approved by the shareholders June 4,
     1996 and registered by the Company on December 5, 1997. All previous
     options had been registered by the Company prior to January 1, 1997.

 (3) Effective November 23, 1998, Mr. Alexander was appointed President and
     Chief Executive Officer of the Company.

 (4) Mr. Alexander was paid $112,500, the amount remaining on his Consulting
     Agreement with the Company pursuant to the acquisition of Alexander Energy,
     as partial compensation for his appointment as the Company's President and
     Chief Executive Officer in November 1998.

 (5) Mr. David's employment with the Company was terminated July 31, 1998, and
     these amounts were paid pursuant to a Separation Agreement with the
     Company. Mr. David was subsequently rehired by the Company on December 1,
     1998 as an assistant to the President.

 (6) Effective March 1, 1997, Mr. Devlin was appointed Vice President and
     General Counsel of the Company.

 (7) Mr. Devlin was granted 50,000 shares of the Company's common stock during
     1997 which was subsequently registered and had a market value of $203,500
     as of December 31, 1997.

 (8) Mr. Devlin earned $50,885 as consulting fees from the Company during 1997
     prior to joining the Company as an employee and officer.

 (9) Effective December 4, 1997, Ms. Rutledge was appointed Vice President of
     the Company and has served as its Controller and Chief Accounting Officer
     since August 1994.

(10) Mr. Lueders was employed by the Company April 13, 1998 and effective
     September 2, 1998, Mr. Lueders was appointed Vice President, Corporate
     Development of the Company.

OPTION/GRANTS IN LAST FISCAL YEAR

     There were no options granted by the Company to its Chief Executive Officer
and the next four most highly compensated executive officers during 1999.

                AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                           AND YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
                                                                 NUMBER OF
                                                                 SECURITIES
                                                                 UNDERLYING       VALUE OF UNEXERCISED
                                                                UNEXERCISED       IN-THE-MONEY OPTIONS
                                                                 OPTIONS AT            AT FISCAL
                                      SHARES                 FISCAL YEAR-END(#)       YEAR-END($)
                                     ACQUIRED      VALUE        EXERCISABLE/          EXERCISABLE/
NAME                                ON EXERCISE   REALIZED     UNEXERCISABLE        UNEXERCISABLE(1)
----                                -----------   --------   ------------------   --------------------
                                        (#)         ($)
<S>                                 <C>           <C>        <C>                  <C>
Bob G. Alexander(2)...............      --           --            75,000/--               --
Jim L. David(2)...................      --           --           105,000/--               --
Philip D. Devlin(2)...............      --           --            60,000/--               --
Melissa H. Rutledge(2)............      --           --            70,000/--               --
R. Kent Lueders(2)................      --           --        12,500/12,500               --
</TABLE>

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

(1) Based on the closing price of the Company's common stock at December 31,
    1999 of $0.03 per share.

(2) These individuals did not exercise any options during 1999.

     The Company does not have any long-term incentive plans or defined benefit
or actuarial plans. Therefore, the tables on long-term incentive plan awards and
pension plans are omitted.

EMPLOYEE STOCK PURCHASE PLAN

     The Company has an Employee Stock Purchase Plan (the "Plan") pursuant to
Section 423(b) of the United States Internal Revenue Code of 1986, as amended.
Pursuant to the Plan, all Eligible Participants may

                                       31
<PAGE>   33

participate in each semi-annual offering in an amount of not less than 1% or
more than 10% of his or her base pay in effect as of the Offering Commencement
Date of each offering. At the end of each offering, the employee shall be
entitled to purchase stock of the Company from the payroll deductions through
the Offering Period at a price equal to the lower of:

     (a) 85% of the closing price of the stock on the Offering Commencement Date
         or the nearest prior business day on which trading occurred on the
         NASDAQ National Market System; or

     (b) 85% of the closing price of the stock on the Offering Termination Date
         or the nearest prior business day on which trading occurred on the
         NASDAQ National Market System; or

     (c) if the Common Stock of the Company is not admitted to trading on any of
         the aforesaid dates for which closing prices of the stock are to be
         determined, then reference shall be made to the fair market value of
         the stock on that date, as determined on such basis as shall be
         established or specified for purposes of the offering by the Board of
         Directors.

During 1999, no employees participated in the Company's Stock Purchase Plan.

COMPENSATION OF DIRECTORS

     The Company compensates non-employee Board of Directors members in the
amount of $1,000 for each official Board of Directors' meeting and $500 for each
Board of Directors' committee meeting unless such committee meeting is held at
the time of, or in conjunction with, an official Board of Directors' meeting. In
addition, members of the Board of Directors have been granted stock options in
past years. During 1999, no stock options were granted to directors.

     Incorp Inc. (which acts as a petroleum consultant and independent oil and
gas producer) and an affiliated company of former Director, Mr. Norman Miller,
was paid $35,000 for consulting services rendered to the Company by Mr. Miller
during 1998, but no payments were made in 1999. Pursuant to an agreement
effective as of November 11, 1994, Mr. Miller was entitled to receive $500 for
each day he worked on Company matters. Incorp Inc. terminated its relationship
with the Company on December 7, 1998, and Mr. Miller resigned from the Board of
Directors effective February 10, 1999.

     Upon consummation of the Alexander merger, Mr. Bob G. Alexander entered
into a consulting agreement with the Company for a term running from September
1996 to September 1999 at a compensation level of $150,000 per year. Effective
November 23, 1998, Mr. Alexander was appointed President and Chief Executive
Officer of the Company at an annual salary of $250,000 per year. In January
1999, Mr. Alexander was paid the outstanding amount of $112,500 due under his
consulting agreement as partial compensation for his appointment as the
Company's President and Chief Executive Officer.

     In addition, the Company pays other incidental compensation to executive
officers and directors from time to time, consisting primarily of health
insurance and reimbursement for travel and entertainment expenses on behalf of
the Company.

EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS

     In January 1996, the Company executed an employment agreement with Melissa
H. Rutledge, Vice President, Controller and Chief Accounting Officer, which has
a term of three years from the effective date of a "change in control" of the
Company. In March 1997 and April 1998, respectively, the Company executed a
similar employment agreement with each of Philip D. Devlin, Vice President,
General Counsel and Secretary and R. Kent Lueders, Vice President, Corporate
Development, (together with Ms. Rutledge's employment agreement, the "Employment
Agreements"). The Employment Agreements each provide that the three-year term
will continuously roll over (so that at any time during the term of such
agreements there is a remaining term of three years, but in no event beyond the
time the executive and/or officer reaches age 65).

     The Employment Agreements define the "change in control" to have occurred
when (i) a person, entity or group becomes the beneficial owner of a majority of
the securities of the Company ordinarily having the right to

                                       32
<PAGE>   34

vote for election of directors, (ii) during any consecutive two year period, the
directors at the beginning of the period (together with directors approved by a
vote of 66 2/3% of such initial directors plus directors previously approved by
such 66 2/3% margin) cease to constitute a majority of the Company's Board of
Directors, (iii) any sale, lease, exchange or transfer of all, or substantially
all, of the Company's assets occurs, or (iv) a merger or consolidation occurs
with the effect that any person, entity or group, or the shareholders thereof,
become the owner of securities of the surviving corporation representing a
majority of the voting power of such surviving corporation for the election of
directors.

     The Employment Agreements provide for a three year employment term during
which the executive and/or officer receives for each year (i) 100% of the
average of the executive's annual base salary at the time in question and the
executive's annual base salary for each of the preceding two years, and (ii)
100% of the average of the bonuses paid to the executive and/or officer for each
of the preceding three fiscal years. If the executive and/or officer is
discharged without cause or resigns for "good reason" (as defined therein) after
a change in control, then in lieu of the compensation described in the preceding
sentence, the executive and/or officer is entitled to a lump sum cash severance
payment equal to three times the sum of (a) the executive's annual base salary
then in effect, (b) the average of cash bonuses for each of the three previous
years, and (c) the average of fully-vested contributions to retirement plans for
such executive and/or officer for each of the three preceding years. In
addition, at such time, all options and all other retirement or pension
contributions or benefits become fully vested and remain fully exercisable for
360 days.

     Pursuant to an agreement with the Company dated December 3, 1998, each of
Ms. Rutledge, Mr. Devlin and Mr. Lueders agreed to terminate their existing
Employment Agreements; provided that no court (including the bankruptcy court)
reduces or dismisses any of the Severance Pay Benefits (described below)
available to such executives pursuant to the Company's Severance Policy.

     In addition to the Employment Agreements discussed above, the Company
entered into an employment agreement with Jim L. David in March 1997, then Vice
President, Exploration for a two year term, commencing with the date of
consummation of the merger of the Company with Alexander Energy Corporation.
Under such agreement, in the event Mr. David resigned for a good reason after a
"change of control" as defined above, or upon the discharge of Mr. David without
cause during the employment term, Mr. David would receive severance benefits
equal to the sum of (i) his annual base salary then in effect, (ii) his last
annual cash bonus and (iii) the average retirement plan contributions by the
Company on his behalf on a fully vested bases for the last two fiscal years,
multiplied by three (3). Mr. David would also have all stock options previously
granted to him become fully vested and exercisable for a three-year period (360
days) following termination. Mr. David's Employment Agreement was terminated in
July, 1998 and the benefits payable under this Employment Agreement were paid
and made a part of his separation agreement. Effective December 1, 1998, Mr.
David was re-employed with the Company as an Assistant to the President;
however, he does not have a new employment agreement in conjunction therewith.

SEVERANCE POLICY

     Effective November 23, 1998, the directors initiated a Severance Policy for
all employees which provides that for a period ending October 31, 2000, all
Eligible Participants shall be entitled to a Severance Pay Benefit up to 18
months (as defined in the Policy) in the event such Eligible Participant is
terminated by the Company for any reason other than "cause" (as defined in the
Policy). The Policy provides that payments to such terminated employee shall be
subject to the employee's execution of a Separation Agreement which shall
include the following provisions:

     (i)   a release of all claims against the Company;

     (ii)  a confidentiality provision; and

     (iii) an agreement to give notice to the Company and not accept or retain
        any further Severance Pay Benefit in the event the Eligible Participant
        shall accept the same or substantially similar employment with any other
        employer.

                                       33
<PAGE>   35

Payments under the Policy shall be made to each such terminated employee on a
monthly basis; provided that in the event the Company is sold pursuant to a
merger or liquidation proceeding and the Eligible Participant is not offered the
same or substantially similar employment, such Severance Pay Benefit shall be
paid to each Eligible Participant in a lump sum. During 1999, no employees were
terminated by the Company who would be eligible for Severance Pay Benefits under
the Policy.

     Pursuant to an Order of the Bankruptcy Court dated September 7, 1999, the
Company's Severance Policy was abated and a Court ordered Severance Program was
put into effect for all employees of the Company. The Severance Program provides
for contingent payments as follows: (a) a "stay-pay" component payable on the
earlier of an employees termination without cause; the closing of a sale of
substantially all the Company's assets or the confirmation of a Plan of
Reorganization; and (b) a "severance" component, whereby upon termination any
employee who does not obtain new employment, or is not offered a permanent job
in Dallas, Texas for a period of at least one year at the same pay and benefits
provided by the Company, shall be entitled to certain severance benefits. The
Order also provided that any employee who participates in the Severance Program
waives and releases any and all claims arising from any current Employment
Agreement with the Company. Effective October 1, 1999, each of Ms. Rutledge, Mr.
Devlin and Mr. Lueders agreed to participate in the Severance Program and void
their Employment Agreements; provided that all benefits described in the
Severance Program are paid to each, respectively, as prescribed. The Order
further provided that Mr. Alexander and Mr. Devlin would not be entitled to any
payments under the Severance Program until the earlier of (i) confirmation of a
Plan of Reorganization, (ii) conversion to a Chapter 7 bankruptcy proceeding or
(iii) termination of their employment by a trustee appointed by the Court.

     In connection with the Severance Program the following payments will be
made to the below listed officers of the Company upon the occurrence of the
contingent event:

<TABLE>
<CAPTION>
NAME                                                STAY-PAY   SEVERANCE
----                                                --------   ---------
<S>                                                 <C>        <C>
Bob G. Alexander..................................  $125,000   $125,000
Philip D. Devlin..................................    90,000     90,000
R. Kent Lueders...................................    60,000     40,000
Melissa H. Rutledge...............................    57,500     38,333
</TABLE>

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     As the Board of Directors functioned en banc on all matters during 1999,
there are no reportable Compensation Committee interlocks or insider
participation matters affecting the actions of the directors with respect to the
business of the Company.

COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

     Prior to its dissolution in October 1998, the Compensation Committee was
composed of four Directors, including the former President and Chief Executive
Officer of the Company who acted as an ad hoc member. The Compensation Committee
advises the Company's Board of Directors and management concerning compensation
for its executive officers. Upon dissolution of the Compensation Committee, the
Board of Directors acting en banc assumed responsibility for all matters
relating to compensation; provided that directors who are executive officers or
employees of the Company shall abstain from all matters in which they have a
vested interest. Compensation for executive officers is based on the principles
that compensation must be competitive to enable the Company to motivate, attract
and retain highly qualified and talented employees to lead and grow the
Company's business and, at the same time, provide rewards which are closely
linked to the Company's and the individual's performance.

     The Compensation Committee considers management skills, long term
performance, operating results, unusual accomplishments as well as economic
conditions and other external events that affect the Company's operations.

     In addition to salaries, bonuses and stock options are generally granted
once annually based on performance, length of service or other noted
accomplishments in helping to increase the performance, reserves and/or cash

                                       34
<PAGE>   36

flows of the Company. Options are granted under the National Energy Group, Inc.,
1996 Incentive Compensation Plan which was approved by the Board of Directors
and was approved by the shareholders at the 1997 Annual Meeting. Shares have
been issued annually to executives at market price on the grant date. The Board
of Directors believes that the award of long-term stock options aligns the
interests of the executive officers with the interests of the Company by
creating value for the executives through positive results of the Company.
During 1999, no bonuses were granted and no options were given to any executive
officers of the Company. No severance payments were made to any executive
officer whose employment with the Company terminated during 1999 and none are
due and owing as a result of such termination.

     With respect to Mr. Alexander's base compensation, the Board of Directors
recognized that the growth and performance of the Company is dependent on the
efforts and results of its executive officers and in particular its Chief
Executive Officer. Mr. Alexander's base salary was determined to reflect his
increased responsibilities to the Company during the Company's period of
financial instability which eventually culminated in an involuntary bankruptcy
proceeding.

                                       35
<PAGE>   37

                             COMPENSATION COMMITTEE

             (CONSISTING OF THE BOARD OF DIRECTORS ACTING EN BANC)

CORPORATE PERFORMANCE

     The following graph shows a five year comparison of cumulative total
stockholder returns for the Company, the NASDAQ Market Index (the "Broad
Market") and an index of peer companies in the oil and gas industry selected by
the Company (the "Peer Group").

                                    [GRAPH]

                    Assumes $100 Invested On January 1, 1995
                          Assumes Dividend Reinvested
                      Fiscal Year Ending December 31, 1999

     The total cumulative return in investment (change in the year end stock
price plus reinvested dividends) for each of the years for the Company, the
NASDAQ Market Index and the Peer Group is based on the stock price or composite
index beginning at the end of the calendar year 1995. The Company has never paid
dividends on the Company's Common Stock.

     The Peer Group Index, is a diversified group of independent oil and gas
companies comprised of Abraxas Petroleum, C.P. N.V.; Basin Exploration, Inc.;
Coho Energy, Inc.; Comstock Resources, Inc.; Gothic Energy Corp.; Panaco, Inc.;
and Petrocorp, Inc. Two companies formerly used as part of the peer group, Arch
Petroleum, Inc. and Lomak Petroleum, Inc., have been acquired by other entities
and no longer exist.

                                       36
<PAGE>   38

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following tables set forth, to the best knowledge of the Company,
information as to the ownership of the Company's Common Stock and all series of
Preferred Stock held by (i) each person or entity who owns of record or who is
known by the Company to own beneficially 5% or more of the outstanding shares of
such stock, (ii) directors, and (iii) all directors and officers as a group, as
of March 23, 2000. Except as otherwise indicated, ownership of shares by the
persons named below includes sole voting and investment power held by such
persons.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

     The following table sets forth as of March 23, 2000, the individuals or
entities known to the Company to own more than 5% of the Company's outstanding
shares of capital stock.

<TABLE>
<CAPTION>
NAME AND ADDRESS                                                              NUMBER        PERCENT
OF BENEFICIAL OWNER                                    TITLE OF CLASS        OF SHARES    OF CLASS(1)
-------------------                                    --------------        ---------    -----------
<S>                                               <C>                        <C>          <C>
                                            COMMON STOCK
Carl C. Icahn...................................  Common Stock               8,847,044(2)    19.2%
  114 West 47th Street
  19th Floor
  New York, NY 10036
Kayne, Anderson Investment Management, Inc......  Common Stock               4,414,068(3)     9.9%
  1800 Avenue of Stars
  Suite 1424
  Los Angeles, CA 90067
Croft-Leominster, Inc...........................  Common Stock               2,161,710(4)     5.3%
  207 E. Redwood St.
  Suite 802
  Baltimore, MD 21202

                                      SERIES B PREFERRED STOCK
Kayne, Anderson Investment Management, Inc......  Series B Preferred Stock      38,687(5)     100%
  1800 Avenue of Stars
  Suite 1424
  Los Angeles, CA 90067
Arbco Associates, L.P...........................  Series B Preferred Stock      13,928(5)      36%
  1800 Avenue of Stars
  Suite 1424
  Los Angeles, CA 90067
Offense Group Associates, L.P...................  Series B Preferred Stock      11,607(5)      30%
  1800 Avenue of Stars
  Suite 1424
  Los Angeles, CA 90067
Kayne, Anderson Non-Traditional Investments,
L.P.............................................  Series B Preferred Stock      10,832(5)      28%
  1800 Avenue of Stars
  Suite 1424
  Los Angeles, CA 90067
Opportunity Associates L.P......................  Series B Preferred Stock       2,320(5)       6%
  1800 Avenue of Stars
  Suite 1424
  Los Angeles, CA 90067
</TABLE>

                                       37
<PAGE>   39

<TABLE>
<CAPTION>
NAME AND ADDRESS                                                              NUMBER        PERCENT
OF BENEFICIAL OWNER                                    TITLE OF CLASS        OF SHARES    OF CLASS(1)
-------------------                                    --------------        ---------    -----------
<S>                                               <C>                        <C>          <C>
                                      SERIES C PREFERRED STOCK
Kayne, Anderson Investment Management, Inc......  Series C Preferred Stock      23,000(6)     100%
  1800 Avenue of Stars
  Suite 1424
  Los Angeles, CA 90067
Arbco Associates, L.P...........................  Series C Preferred Stock       8,280(6)      36%
  1800 Avenue of Stars
  Suite 1424
  Los Angeles, CA 90067
Offense Group Associates, L.P...................  Series C Preferred Stock       7,240(6)      31%
  1800 Avenue of Stars
  Suite 1424
  Los Angeles, CA 90067
Kayne, Anderson Non-Traditional Investments,
L.P.............................................  Series C Preferred Stock       6,100(6)      27%
  1800 Avenue of Stars
  Suite 1424
  Los Angeles, CA 90067
Opportunity Associates L.P......................  Series C Preferred Stock       1,380(6)       6%
  1800 Avenue of Stars
  Suite 1424
  Los Angeles, CA 90067

                                      SERIES D PREFERRED STOCK
Carl C. Icahn...................................  Series D Preferred Stock     100,000(2)     100%
  114 West 47th Street
  19th Floor
  New York, NY 10036

                                      SERIES E PREFERRED STOCK
Kayne, Anderson Investment Management, Inc......  Series E Preferred Stock       9,500(7)     100%
  1800 Avenue of Stars
  Suite 1424
  Los Angeles, CA 90067
Foremost Insurance Company......................  Series E Preferred Stock       7,500(7)      79%
  5230 33rd Street, S.E.
  Grand Rapids, MI 49512
Topa Insurance Company..........................  Series E Preferred Stock       2,000(7)      21%
  c/o Kayne, Anderson Investment Management,
  Inc.
  1800 Avenue of Stars
  Suite 1424
  Los Angeles, CA 90067
</TABLE>

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

(1) Based upon the 40,527,482 shares of Common Stock, 38,687 shares of issued
    and outstanding Series B Preferred Stock, 23,000 shares of issued and
    outstanding Series C Preferred Stock, 100,000 shares of issued and
    outstanding Series D Preferred Stock and 9,500 shares of issued and
    outstanding Series E Preferred Stock that are outstanding as of April 20,
    1999. For each person or group, the percentages are calculated on the basis
    of the amount of outstanding securities of the particular class plus any
    securities that such person or group has the right to acquire within 60 days
    of March 23, 2000 pursuant to options, warrants, conversion privileges or
    other rights.

                                       38
<PAGE>   40

(2) High River Limited Partnership, the record owner of these shares, is a
    Delaware limited partnership, and has pledged these shares to ING Capital.
    Riverdale Investors Corp., Inc. is a Delaware corporation and is the general
    partner of High River. Mr. Carl C. Icahn is the sole stockholder and a
    director of Riverdale. Riverdale's principal business address is 90 South
    Bedford Road, Mount Kisco, New York 10549, and Mr. Icahn's principal
    business address is c/o Icahn Associates Corp., 114 West 47th Street, 19th
    Floor, New York, New York 10036. Gascon Partners, a New York general
    partnership, an affiliate of Mr. Icahn, High River and Riverdale holds
    warrants to purchase 300,000 shares of Common Stock. High River also holds
    700,000 warrants issued in August 1996 in connection with the Company's
    acquisition of and merger with Alexander Energy Company. The ownership
    figures in the table assume that all the shares of Series D Preferred Stock
    are converted and warrants for 1,000,000 shares of Common Stock are
    exercised. Riverdale and Mr. Icahn, by virtue of their relationships to High
    River and Gascon, may be deemed to beneficially own (as that term is defined
    in Rule 13d-3 under the Exchange Act) the shares which High River directly
    beneficially owns and the shares which Gascon has warrants to purchase. Each
    of Riverdale and Mr. Icahn disclaims beneficial ownership of such shares for
    all other purposes. Mr. Robert J. Mitchell has been appointed a director of
    the Company as the representative of the holders of the Series D Preferred
    Stock. Mr. Mitchell does not have dispositive or voting power over any of
    the shares owned by High River. Mr. Russell Glass and Mr. Martin Hirsch,
    directors of the Company and affiliates of High River, disclaim any
    beneficial ownership of these shares.

(3) Richard A. Kayne ("Kayne") is President, Chief Executive Officer and
    Director of Kayne Anderson Investment Management Inc. ("KAIM") and of KA
    Associates, Inc., a registered broker/dealer. KAIM is the general partner of
    KAIM Non-Traditional, L.P. ("L.P."), registered investment advisor, which is
    the general partner of and investment advisor to the investment partnerships
    referred to in this footnote. Mr. Kayne is also a limited partner in each
    investment partnership and a general partner on one of them. Mr. Kayne and
    L.P. have shared dispositive and voting power through investment
    partnerships for 38,687 shares of Series B Preferred Stock, 23,000 shares of
    Series C Preferred Stock, and 9,500 shares of Series E Preferred Stock,
    which may be converted at anytime into 2,380,738, 1,150,000 and 422,222
    shares of Common Stock, respectively, and for warrants to purchase 217,000
    shares of Common Stock. The percentage ownership figures in the table assume
    that all shares of Series B Preferred Stock, Series C Preferred Stock and
    Series E Preferred Stock are converted, the warrants to purchase 217,000
    shares of Common Stock are exercised and 4,169,960 shares of Common Stock
    are issued, and such shares are added to the shares of Common Stock
    outstanding. Mr. Kayne disclaims beneficial ownership of the shares held by
    the investment partnerships in excess of the amount attributable to him by
    virtue of his direct interest as a limited or general partner and by virtue
    of his indirect interest in L.P.'s interest in the investment partnerships.
    L.P. disclaims beneficial ownership of the shares held by the investment
    partnerships in excess of the amount attributable to them by virtue of their
    percentage interest in the investment partnerships.

(4) Croft-Leominster, Inc. the record owner of the shares, is a Maryland
    corporation.

(5) Beneficial ownership of all the Series B Preferred Stock is attributed to
    KAIM. For information on Richard A. Kayne, KAIM and L.P., see footnote (3)
    above. Arbco Associates L.P. has shared dispositive and voting power with
    Mr. Kayne, and L.P. of 13,928 shares of Series B Preferred Stock, which is
    convertible at any time into 857,107 shares of Common Stock. Offense Group
    Associates has shared dispositive and voting power with Mr. Kayne, and L.P.
    for 11,607 shares of Series B Preferred Stock, which is convertible at any
    time into 714,276 shares of Common Stock. Kayne, Anderson Non-Traditional
    Investments has shared dispositive and voting power with Mr. Kayne and L.P.
    for 10,832 shares of Series B Preferred Stock, which is convertible at any
    time into 666,584 shares of Common Stock. Opportunity Associates L.P. has
    shared dispositive and voting power with Mr. Kayne, and L.P. of 2,320 shares
    of Series B Preferred Stock, which is convertible at any time into 142,769
    shares of Common Stock.

(6) Beneficial ownership of all the Series C Preferred Stock is attributed to
    KAIM. For information on Richard A. Kayne, KAIM and L.P., see footnote (3)
    above. Arbco Associates L.P. has shared dispositive and voting power with
    Mr. Kayne, and L.P. of 8,280 shares of Series C Preferred Stock, which is
    convertible at any time into 414,000 shares of Common Stock. Offense Group
    Associates has shared dispositive and voting power with Mr. Kayne, and L.P.
    for 7,240 shares of Series C Preferred Stock, which is convertible at any
    time into 362,000 shares of Common Stock. Kayne, Anderson Non-Traditional
    Investments has shared
                                       39
<PAGE>   41

    dispositive and voting power with Mr. Kayne, and L.P. for 6,100 shares of
    Series C Preferred Stock, which is convertible at any time into 305,000
    shares of Common Stock. Opportunity Associates L.P. has shared dispositive
    and voting power with Mr. Kayne, and L.P. for 1,380 shares of Series C
    Preferred Stock, which is convertible at any time into 69,000 shares of
    Common Stock.

(7) Beneficial ownership of all the Series E Preferred Stock is attributed to
    KAIM, except with respect to Foremost Insurance Company which owns 7,500
    shares of Series E Preferred Stock (convertible at any time into 333,333
    shares of Common Stock) and warrants for 105,000 shares of Common Stock.
    Topa Insurance Company has dispositive and voting power for 2,000 shares of
    Series E Preferred Stock, which is convertible at any time into 88,888
    shares of Common Stock and warrants for 28,000 shares of Common Stock.

SECURITY OWNERSHIP OF MANAGEMENT

     The following table sets forth information concerning the beneficial
ownership of the Company's capital stock as of March 23, 2000 by each of the
Company's present directors and executive officers and certain other parties,
and the directors and executive officers of the Company as a group, all as
reported by each such person as of March 24, 2000.

<TABLE>
<CAPTION>
NAME AND ADDRESS OF                                                        NUMBER
BENEFICIAL OWNER                                    TITLE OF CLASS        OF SHARES    % OF CLASS(1)
-------------------                                 --------------        ---------    -------------
<S>                                            <C>                        <C>          <C>
Bob G. Alexander.............................  Common Stock                 475,002(2)      1.2%
  4925 Greenville Avenue
  Suite 1400
  Dallas, TX 75206
Robert H. Kite...............................  Common Stock                 518,955(3)      1.3%
  6910 East Fifth Street
  Scottsdale, AZ 85251
Jim L. David.................................  Common Stock                 512,889(4)      1.3%
  4925 Greenville Avenue
  Suite 1400
  Dallas, TX 75206
R. Kent Lueders..............................  Common Stock                 212,500(5)       --(6)
  4925 Greenville Avenue
  Suite 1400
  Dallas, Texas 75206
Philip D. Devlin.............................  Common Stock                 166,473(7)       --(6)
  4925 Greenville Avenue
  Suite 1400
  Dallas, TX 75206
Melissa H. Rutledge..........................  Common Stock                  81,800(8)       --(6)
  4925 Greenville Avenue
  Suite 1400
  Dallas, TX 75206
Robert J. Mitchell...........................  Common Stock                  50,000(9)       --(6)
  767 Fifth Avenue
  New York, NY 10153
Jack G. Wasserman............................  Common Stock                      --(10)       --(6)
  111 Broadway
  New York, NY 10006
Russell D. Glass.............................  Common Stock                      --(11)       --(6)
  767 Fifth Avenue
  New York, NY 10153
</TABLE>

                                       40
<PAGE>   42

<TABLE>
<CAPTION>
NAME AND ADDRESS OF                                                        NUMBER
BENEFICIAL OWNER                                    TITLE OF CLASS        OF SHARES    % OF CLASS(1)
-------------------                                 --------------        ---------    -------------
<S>                                            <C>                        <C>          <C>
Martin Hirsch................................  Common Stock                      --(12)       --(6)
  767 Fifth Avenue
  New York, NY 10153
All officers and directors as a group (10      Common Stock               2,017,619(13)      5.0%
  people)....................................
All officers and directors as a group (10      Series B Preferred Stock
  people)....................................
All officers and directors as a group (10      Series C Preferred Stock
  people)....................................
All officers and directors as a group (10      Series D Preferred Stock
  people)....................................
All officers and directors as a group (10      Series E Preferred Stock
  people)....................................
</TABLE>

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

 (1) As of March 23, 2000 there were 40,527,482 shares of the Company's common
     stock outstanding.

 (2) Includes 340,000 shares held directly by Mr. Alexander and 60,002 shares
     owned by Mr. Alexander's wife, Donna Ports Alexander, and immediately
     exercisable options to purchase 75,000 shares. Mr. Alexander disclaims any
     beneficial interest in the shares owned by his wife.

 (3) Robert H. Kite is Chief Operating Officer and a 33.0% beneficial owner of
     KFT, Ltd. and may be deemed to be the beneficial owner of shares held by
     KFT, Ltd. KFT, Ltd. holds 176,297 shares and Mr. Kite holds 257,658 shares
     directly and immediately exercisable options to purchase 85,000 shares.

 (4) Includes 407,889 shares held directly by Mr. David and immediately
     exercisable options to purchase 105,000 shares.

 (5) Includes 200,000 shares held directly by Mr. Lueders and immediately
     exercisable options to purchase 12,500 shares, but does not include options
     to purchase 12,500 shares which are not yet exercisable.

 (6) Less than one percent.

 (7) Includes 106,473 shares of Common Stock held directly by Mr. Devlin and
     immediately exercisable options to purchase 60,000 shares.

 (8) Includes 11,800 shares held directly by Ms. Rutledge and immediately
     exercisable options to purchase 70,000 shares.

 (9) Includes immediately exercisable options to purchase 50,000 shares, and Mr.
     Mitchell disclaims any beneficial ownership of stock attributable to High
     River.

(10) Mr. Wasserman holds no stock or options of the Company.

(11) Mr. Glass holds no stock or options of the Company and disclaims beneficial
     ownership of any stock attributable to High River.

(12) Mr. Hirsch holds no stock or options of the Company and disclaims
     beneficial ownership of any stock attributable to High River.

(13) Includes a total of 1,560,119 shares held directly or indirectly by the
     executive officers and directors and options and warrants to purchase
     457,500 shares which are immediately exercisable or exercisable within 60
     days.

     Under the terms of the Series D Preferred Stock, a change in control of the
Company may occur if any of the events occur that trigger the Series D Preferred
Stock Contingent Voting Rights (as defined) to elect one-half of the Board of
Directors plus one member and if such rights are exercised by such holder.
Pursuant to an order dated February 11, 1999 of the United States Bankruptcy
Court for the Northern District of Texas, the Company was placed into a Title
11, Chapter 11 of the United States Code bankruptcy reorganization proceeding.
Such proceeding gives rise to the Series D Preferred stockholder to exercise its
right to control the Company's Board of Directors. To date, the Series D
Preferred Stockholder has not exercised such right. However, Messrs. Mitchell,
Glass and Hirsch are affiliated with the Series D Preferred Stockholder. See
"Description of Capital Stock -- Series D Preferred Stock."

                                       41
<PAGE>   43

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The Company entered into an agreement in 1997 (the "IAC Agreement") with
Icahn Associates Corp. ("IAC"), an affiliate of Mr. Carl C. Icahn, who is a
beneficial owner of more than 5% of the Company's Common Stock. Pursuant to the
IAC Agreement, IAC committed and subsequently spent $10 million to participate
for specified interests in each of the prospects generated or acquired by the
Company through September 30, 1998. Each party is entitled to certain rights of
first refusal in the event that the other party decides to sell all or part of
its participation interest in a prospect in which both parties are
participating. As partial consideration for IAC's obligations under the
participation agreement, the Company has also granted Gascon Partners, an
affiliate of IAC, certain warrants, which became exercisable prior to December
31, 1997 and will expire July 11, 2002, to purchase 300,000 shares of Common
Stock at an exercise price of three dollars ($3.00) per share.

     Effective December 22, 1998, the Company's credit facility and related $25
million outstanding balance was assigned jointly by Bank One Texas, N.A. and
Credit Lyonnais New York Branch Bank to Arnos Corp., another affiliate of Mr.
Carl C. Icahn. During 1999 the Company has paid fees and interest associated
with the credit facility in the amount of $2.1 million to Arnos Corp. Pursuant
to a Bankruptcy Court ordered auction sale on November 1, 1999 of the Company's
oil and gas properties, Arnos Corp. acquired substantially all of such
properties for a purchase price of $96.25 million, which has been deposited into
the registry of the Bankruptcy Court with a final closing pending (i) the
Court's confirmation of a plan of reorganization or (ii) in the event a plan of
reorganization is not confirmed, a court ordered closing of the sale of the
properties to Arnos. The Court approved this motion and ordered Arnos to pay
into the Court's registry the sum of $61.25 million which equals the purchase
price of $96.25 million less the previously escrowed deposit of $9.625 million
and the principal balance of $25 million outstanding under the Arnos credit
facility.

     During the year ended December 31, 1999, the Company sold $18.2 million, or
90.1% of the Company's total oil sales to Plains. KAIM and investment
partnerships associated with KAIM, and other accounts managed by affiliates of
KAIM, own on a fully diluted basis approximately 27.82% of the issued and
outstanding shares of Common Stock of Plains Resources, Inc. The Company has
agreements with Plains that were entered into in 1993 pursuant to which Plains
purchases oil produced from the major oil-producing properties which the Company
operates, at West Texas Intermediate posted prices plus a premium. The premium
is based on Plains purchasing substantially all the production of the Company.
Sales to Plains will account for a significant percentage of the Company's total
oil and natural gas sales in 2000.

                                       42
<PAGE>   44

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

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

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

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

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

<TABLE>
              <S>    <C>
              2.1    Agreement and Plan of Merger, dated June 6, 1996, among the
                     Company, NEG-OK, Inc. ("NEG OK"), and Alexander Energy
                     Corporation ("Alexander")(1)
              2.2    First Amendment to Agreement and Plan of Merger, dated as of
                     June 20, 1996, among the Company, NEG-OK and Alexander(2)
              2.3    Mutual Waiver Agreement dated as of August 29, 1996 by and
                     among the Company, NEG-OK and Alexander(3)
              2.4    Debtor's Joint Disclosure Statement under Section 1125 of
                     the Bankruptcy Code Regarding Debtor's Joint Plan of
                     Reorganization under Chapter 11 of the Bankruptcy Code dated
                     March 14, 2000(20)
              2.5    Debtors Joint Plan of Reorganization under Chapter 11 of the
                     Bankruptcy Code dated March 14, 2000(20)
              2.6    Joint Disclosure Statement under Section 1125 of the
                     Bankruptcy Code with Respect to the Plan of Reorganization
                     proposed by the Official Committee of Unsecured Creditors
                     dated February 28, 2000(20)
              2.7    Plan of Reorganization Submitted by the Official Committee
                     of Unsecured Creditors dated February 28, 2000(20)
              3.1    Certificate of Incorporation of the Company, which includes
                     the Certificate of Incorporation of the Company filed with
                     the Secretary of State of Delaware on November 20, 1990(4),
                     the Certificate of Elimination of the Redeemable Convertible
                     Preferred Stock, Series A of the Company, filed with the
                     office of the Secretary of State of the State of Delaware on
                     June 2, 1994(3), the Certificate of Amendment of Certificate
                     of Incorporation of the Company, filed with the office of
                     the Secretary of State of the State of Delaware on August
                     29, 1996(3), the Certificate of Designations of the Company
                     of 10% Cumulative Convertible Preferred Stock, Series B(5),
                     the Certificate of Designations of the Company of 10 1/2%
                     Cumulative Convertible Preferred Stock, Series C(6), the
                     Certificate of Designations of the Company of Convertible
                     Preferred Stock, Series D(3), and the Certificate of
                     Designations of the Company of Convertible Preferred Stock,
                     Series E(3)
              3.2    By-laws of the Company(4)
              4.1    Certificate of Designations of the Company of 10% Cumulative
                     Convertible Preferred Stock, Series B(5)
              4.2    Certificate of Designations of the Company of 10 1/2%
                     Cumulative Convertible Preferred Stock, Series C(6)
              4.3    Certificate of Designations of the Company of Convertible
                     Preferred Stock, Series D(3)
              4.4    Certificate of Designations of the Company of Convertible
                     Preferred Stock, Series E(3)
              4.5    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.(7)
</TABLE>

                                       43
<PAGE>   45
<TABLE>
              <S>    <C>
              4.6    Indenture dated August 21, 1997, among the Company and Bank
                     One, N.A.(14)
              4.7    Instrument of Resignation, Appointment and Acceptance, dated
                     October 23, 1998, between the Company, Bank One, N.A. and
                     Norwest Bank Minnesota, N.A.(19)
              10.1   Crude Oil Purchase Contract, dated November 30, 1992,
                     between the Company and Plains Liquids Transport Inc.(8)
              10.2   Amendment to Crude Oil Purchase Contract, dated November 17,
                     1993, between the Company and Plains Liquids Transport,
                     Inc.(5)
              10.3   Crude Oil Purchase Contract, dated February 8, 1993, between
                     the Company and Plains Marketing and Transportation Inc. and
                     the predecessor contract, the Crude Oil Purchase Contract,
                     dated November 12, 1991, between Sunnybrook Transmission,
                     Inc. and TriSearch Inc.(8)
              10.4   Agreement for Purchase and Sale (Mustang Island) dated April
                     20, 1995, between the Company and Sierra Mineral
                     Development, L.C.(6)
              10.5   Agreement for Purchase and Sale (Oak Hill) dated April 12,
                     1995, between the Company and Sierra 1994 I Limited
                     Partnership(6)
              10.6   Stock Purchase Agreement, dated as of June 14, 1995, among
                     the Company, Arbco Associates L.P., Offense Group Associates
                     L.P., Kayne, Anderson Nontraditional Investments L.P., and
                     Opportunity Associates L.P.(6)
              10.7   High River Limited Partnership Warrant to purchase 700,000
                     shares of Common Stock, dated August 29, 1996(3)
              10.8   Form of Series E Investors' Warrants to purchase an
                     aggregate 350,000 shares of Common Stock, dated August 29,
                     1996(3)
              10.9   Gascon Partners Warrant to Purchase 300,000 shares of the
                     Company's Common Stock(13)
              10.10  Prudential Securities Incorporated Warrant to Purchase
                     100,000 shares of the Company's Common Stock(3)
              10.11  Gaines Berland, Inc. Warrant to Purchase 300,000 shares of
                     the Company's Common Stock dated August 29, 1996(3)
              10.12  Gaines Berland, Inc. Warrant to Purchase 700,000 shares of
                     the Company's Common Stock dated August 29, 1996(3)
              10.13  Executive Employment Agreement, dated January 1, 1996,
                     between the Company and Miles D. Bender(9)
              10.14  Separation Agreement, dated November 24, 1998, between the
                     Company and Miles D. Bender(19)
              10.15  Executive Employment Agreement, dated January 1, 1996,
                     between the Company and Melissa Rutledge(9)
              10.16  Separation Agreement between the Company and Robert A. Imel
                     dated October 31, 1997(15)
              10.17  Separation Agreement, dated May 18, 1998, between the
                     Company and William T. Jones(17)
              10.18  Executive Employment Agreement, dated June 6, 1996, between
                     the Company and Jim L. David(1)
              10.19  Executive Employment Agreement dated March 20, 1997, between
                     the Company and Philip D. Devlin(10)
              10.20  Separation Agreement, dated May 19, 1998, between the
                     Company and Gene W. Anderson(19)
</TABLE>

                                       44
<PAGE>   46
<TABLE>
              <S>    <C>
              10.21  Executive Employment Agreement dated August 25, 1997,
                     between the Company and C. Dewayne Cravens(19)
              10.22  Separation Agreement, dated May 18, 1998, between the
                     Company and C. Dewayne Cravens(19)
              10.23  Executive Employment Agreement, dated January 29, 1998,
                     between the Company and Fred R. Miller(15)
              10.24  Executive Employment Agreement, dated March 5, 1998, between
                     the Company and Chuck Elsey(16)
              10.25  Termination Notice and Agreement, dated October 28, 1998,
                     between the Company and Chuck Elsey(19)
              10.26  Executive Employment Agreement, dated April 13, 1998,
                     between the Company and Kent Lueders(16)
              10.27  Executive Employment Agreement, dated June 1, 1998, between
                     the Company and Leslie Wylie(17)
              10.28  National Energy Group, Inc. 1996 Incentive Compensation
                     Plan(11)
              10.29  National Energy Group, Inc. Employee Stock Purchase Plan(12)
              10.30  National Energy Group, Inc. Employee Severance Policy(19)
              10.31  Agreement dated January 1, 1996 between the Company and
                     Sandefer Oil & Gas, Inc.(1)
              10.32  Consulting Agreement dated January 1, 1996 between Sandefer
                     Oil & Gas, Inc. and Potosky Oil & Gas, Inc. and Atocha
                     Exploration, Inc.(1)
              10.33  Memorandum of Amendment dated March 27, 1997 amending (i)
                     Agreement dated January 1, 1996 between the Company and
                     Sandefer Oil & Gas, Inc. and (ii) Consulting Agreement dated
                     January 1, 1996 between Sandefer Oil & Gas, Inc. and Potosky
                     Oil & Gas, Inc. and Atocha Exploration, Inc.(15)
              10.34  First Amendment dated April 15, 1997 to (i) Agreement dated
                     January 1, 1996 between the Company and Sandefer Oil & Gas,
                     Inc. and (ii) Consulting Agreement dated January 1, 1996
                     between Sandefer Oil & Gas, Inc. and Potosky Oil & Gas, Inc.
                     and Atocha Exploration, Inc.(15)
              10.35  Restated Loan Agreement dated August 29, 1996 among Bank One
                     and Credit Lyonnais New York Branch ("Credit Lyonnais") and
                     the Company, NEG-OK and Boomer Marketing Corporation
                     ("Boomer")(3)
              10.36  $50,000,000 Revolving Note dated August 29, 1996 payable to
                     Bank One(3)
              10.37  $50,000,000 Revolving Note dated August 29, 1996 payable to
                     Credit Lyonnais(3)
              10.38  Assignment of $50,000,000 Revolving Note to Arnos Corp. from
                     Bank One, Texas, N.A.(19)
              10.39  Assignment of $50,000,000 Revolving Note to Arnos Corp. from
                     Credit Lyonnais New York Branch(19)
              10.40  Unlimited Guaranty of NEG-OK dated August 29, 1996 for the
                     benefit of Bank One(3)
              10.41  Unlimited Guaranty of NEG-OK, dated August 29, 1996 for the
                     benefit of Credit Lyonnais(3)
              10.42  Unlimited Guaranty of Boomer dated August 29, 1996 for the
                     benefit of Bank One(3)
              10.43  Unlimited Guaranty of Boomer dated August 29, 1996 for the
                     benefit of Credit Lyonnais(3)
              10.44  First Amendment to Restated Loan Agreement dated October 31,
                     1996 among Bank One and Credit Lyonnais and the Company,
                     Guarantor and Boomer(9)
              10.45  Second Amendment to Restated Loan Agreement dated October
                     31, 1996, among Bank One and Credit Lyonnais and the
                     Company, Guarantor and Boomer(10)
</TABLE>

                                       45
<PAGE>   47
<TABLE>
              <S>    <C>
              10.46  Third Amendment to Restated Loan Agreement dated October 31,
                     1996, among Bank One and Credit Lyonnais and the Company,
                     Guarantor and Boomer(10)
              10.47  Fourth Amendment to Restated Loan Agreement dated October
                     31, 1996, among Bank One and Credit Lyonnais and the
                     Company, Guarantor and Boomer(15)
              10.48  Multi-State Assignment Agreement dated December 22, 1998
                     between Bank One, Texas, N.A., Credit Lyonnais New York
                     Branch and Arnos Corp.(19)
              10.49  Multi-State Assignment Agreement, LaFourche Parish,
                     Louisiana, dated December 22, 1998, between Bank One, Texas,
                     N.A., Credit Lyonnais New York Branch and Arnos Corp.(19)
              10.50  Multi-State Assignment Agreement, Iberville Parish,
                     Louisiana, dated December 22, 1998, between Bank One, Texas,
                     N.A., Credit Lyonnais New York Branch and Arnos Corp.(19)
              10.51  Oklahoma Assignment Agreement, dated December 22, 1998,
                     between Bank One, Texas, N.A., Credit Lyonnais New York
                     Branch and Arnos Corp.(19)
              10.52  Arnos Corporation Letter dated December 23, 1998(19)
              10.53  Purchase and Sale Agreement between National Energy Group,
                     Inc. as Seller and Arnos Corporation as buyer dated November
                     1, 1999(20)
              12.1   Computation of Ratio of Earnings to Fixed Charges(20)
              23.1   Consent of Ernst & Young LLP, Independent Auditors(20)
              23.2   Consent of Netherland Sewell & Associates, Inc., Independent
                     Engineers(20)
              24.1   Power of Attorney (included in signature pages to this Form
                     10-K)(20)
              27.1   Financial Data Schedule(20)
              99.1   Order of Bankruptcy Court Granting Relief on Involuntary
                     Petition(19)
              99.2   Order of Bankruptcy Court Implementing Auction Sale
                     Closing(20)
</TABLE>

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

 (1) Incorporated by reference to the Company's Registration Statement on Form
     S-4 (No. 333-9045), dated July 29, 1996.

 (2) Incorporated by reference to Amendment No. 1 to the Company's Registration
     Statement on Form S-4 (No. 333-9045), dated August 7, 1996.

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

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

 (5) Incorporated by reference to the Company's Current Report on Form 8-K,
     dated June 17, 1994.

 (6) Incorporated by reference to the Company's Current Report on Form 8-K,
     dated July 17, 1995.

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

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

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

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

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

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

(13) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
     for the quarter ended September 30, 1997.

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

                                       46
<PAGE>   48

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

(16) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
     for the quarter ended March 31, 1998.

(17) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
     for the quarter ended June 30, 1998.

(18) Incorporated by reference to the Company's Current Report on Form 8-K,
     dated February 8, 1999.

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

(20) Filed herewith.

     (b) The Company filed a report on Form 8-K, dated February 8, 1999,
reporting the entry of an Order for Relief Under Chapter 11 of the Bankruptcy
Code by the United States Bankruptcy Court for the Northern District of Texas,
Dallas Division. Under the Order, the Court assumed jurisdiction and supervision
of the Company and its assets and business.

                                       47
<PAGE>   49

                                    GLOSSARY

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

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

     Bcf -- One billion cubic feet.

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

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

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

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

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

     EBITDA -- Earnings (including interest income and excluding discontinued
operations, extraordinary items, charges resulting from changes in accounting
and significant nonrecurring revenues and expenses) before interest expense,
income taxes, depletion, depreciation and amortization, and the provision for
impairment of oil and natural gas properties. EBITDA is not a measure of cash
flow as determined by generally accepted accounting principles. EBITDA
information has been included in this document because EBITDA is a measure used
by certain investors in determining historical ability to service indebtedness.
EBITDA should not be considered as an alternative to, or more meaningful than,
net income or cash flows as determined in accordance with generally accepted
accounting principles as an indicator of operating performance or liquidity.

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

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

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

     Mbbl -- One thousand Bbl.

     Mcf -- One thousand cubic feet.

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

     Mmcf -- One million cubic feet.

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

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

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

     NYMEX -- New York Mercantile Exchange.

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

                                       48
<PAGE>   50

     OPEC -- Organization of Petroleum Exporting Countries.

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

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

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

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

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

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

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

     PUD -- See Proved Undeveloped Reserves.

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

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

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

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

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

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

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

                                       49
<PAGE>   51

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

<TABLE>
<S>                      <C>                                                     <C>
                         NATIONAL ENERGY GROUP, INC.
                                       By: /s/ Bob G. Alexander                           March 30, 2000
                           -------------------------------------------------
                                           Bob G. Alexander
                                 President and Chief Executive Officer

                                      By: /s/ Melissa H. Rutledge                         March 30, 2000
                           -------------------------------------------------
                                          Melissa H. Rutledge
                            Vice President, Principal Financial Officer and
                                              Controller
</TABLE>

                        POWER OF ATTORNEY AND SIGNATURES

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

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities on March 30, 2000.

<TABLE>
<S>                                              <C>

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

               /s/ Jim L. David                  Assistant to President and Director
----------------------------------------------
                 Jim L. David

             /s/ Russell D. Glass                Director
----------------------------------------------
               Russell D. Glass

              /s/ Martin Hirsch                  Director
----------------------------------------------
                Martin Hirsch

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

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

            /s/ Jack G. Wasserman                Director
----------------------------------------------
              Jack G. Wasserman
</TABLE>

                                       50
<PAGE>   52

        INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Report of Independent Auditors..............................  F-2
Consolidated Balance Sheets as of December 31, 1998, and
  1999......................................................  F-3
Consolidated Statements of Operations for the years ended
  December 31, 1997, 1998, and 1999.........................  F-4
Consolidated Statements of Cash Flows for the years ended
  December 31, 1997, 1998, and 1999.........................  F-5
Consolidated Statements of Stockholders' Equity (Deficit)
  for the years ended December 31, 1997, 1998, and 1999.....  F-6
Notes to Consolidated Financial Statements..................  F-7
</TABLE>

FINANCIAL STATEMENT SCHEDULES

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

                                       F-1
<PAGE>   53

                         REPORT OF INDEPENDENT AUDITORS

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

     We have audited the accompanying consolidated balance sheets of National
Energy Group, Inc., as of December 31, 1998 and 1999, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of National Energy
Group, Inc., at December 31, 1998 and 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.

     The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 of the Notes to the Consolidated Financial Statements, on February 11, 1999,
the United States Bankruptcy Court granted an Involuntary Petition for an Order
for Relief under Chapter 11 of Title 11 of the United States Bankruptcy Code.
This matter raises substantial doubt about the ability of the Company to
continue as a going concern. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.

                                          ERNST & YOUNG LLP

Dallas, Texas
March 23, 2000

                                       F-2
<PAGE>   54

                          NATIONAL ENERGY GROUP, INC.
                              DEBTOR-IN-POSSESSION

                          CONSOLIDATED BALANCE SHEETS
                                    (NOTE 1)

<TABLE>
<CAPTION>
                                                                      DECEMBER 31,
                                                              -----------------------------
                                                                  1998            1999
                                                              -------------   -------------
<S>                                                           <C>             <C>
                                          ASSETS
Current assets:
  Cash and cash equivalents.................................  $   2,542,235   $  29,216,751
  Marketable securities.....................................        339,250         342,937
  Accounts receivable -- oil and natural gas sales..........      5,030,155       5,057,904
  Accounts receivable -- joint interest and other...........      1,918,411         490,339
  Other.....................................................      1,905,050       1,411,783
                                                              -------------   -------------
     Total current assets...................................     11,735,101      36,519,714
Oil and natural gas properties, at cost (full cost method):
  Subject to ceiling limitation.............................    327,459,034     327,330,494
  Accumulated depreciation, depletion, and amortization.....   (251,712,879)   (266,282,860)
                                                              -------------   -------------
  Net oil and natural gas properties........................     75,746,155      61,047,634
Other property and equipment................................      2,601,163       2,495,606
Accumulated depreciation....................................       (989,905)     (1,361,349)
                                                              -------------   -------------
  Net other property and equipment..........................      1,611,258       1,134,257
Other assets and deferred charges, net......................      5,909,344       1,656,521
                                                              -------------   -------------
     Total assets...........................................  $  95,001,858   $ 100,358,126
                                                              =============   =============

                      LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Liabilities not subject to compromise:
  Current liabilities:
     Accounts payable -- trade..............................  $   2,019,114   $   4,437,802
     Accounts payable -- revenue............................      4,446,696       2,545,610
     Credit facility........................................     25,000,000      25,000,000
     Accrued interest on credit facility....................        280,160              --
     Senior Notes including unamortized issuance premium....    166,238,513              --
     Accrued interest on Senior Notes.......................     10,537,601              --
     Current portion of gas prepayments.....................        485,845              --
     Other..................................................        561,049              --
                                                              -------------   -------------
          Total current liabilities.........................    209,568,978      31,983,412
Long-term liabilities:
  Gas balancing and prepayments.............................      2,052,691              --
  Other.....................................................        312,957              --
Liabilities subject to compromise:
  Accounts payable -- trade.................................             --       2,154,158
  Accounts payable -- revenue...............................             --       2,879,469
  Senior Notes..............................................             --     165,000,000
  Accrued interest on Senior Notes..........................             --      10,537,601
  Gas balancing and prepayments.............................             --       2,685,645
  Other.....................................................             --          23,341
                                                              -------------   -------------
     Total liabilities subject to compromise................             --     183,280,214
Commitments and contingencies (Note 6)
Stockholders' equity (deficit):
  Convertible preferred stock, $1.00 par:
     Authorized shares -- 1,000,000; Issued and outstanding
      shares -- 171,187
     Aggregate liquidation preference -- $17,118,700........        171,187         171,187
  Common stock, $.01 par value:
     Authorized shares -- 100,000,000; Issued and
      outstanding shares -- 40,527,482 at December 31, 1998
      and 1999, respectively................................        405,275         405,275
  Additional paid-in capital................................    113,089,872     113,089,872
  Unrealized loss on marketable securities, net.............       (176,094)       (172,407)
  Accumulated deficit.......................................   (230,423,008)   (228,399,427)
                                                              -------------   -------------
     Total stockholders' equity (deficit)...................   (116,932,768)   (114,905,500)
                                                              -------------   -------------
          Total liabilities and stockholders' equity
            (deficit).......................................  $  95,001,858   $ 100,358,126
                                                              =============   =============
</TABLE>

                            See accompanying notes.

                                       F-3
<PAGE>   55

                          NATIONAL ENERGY GROUP, INC.
                              DEBTOR-IN-POSSESSION

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                    (NOTE 1)

<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                                                       ------------------------------------------
                                                           1997           1998           1999
                                                       ------------   -------------   -----------
<S>                                                    <C>            <C>             <C>
Revenues:
  Oil and natural gas sales..........................  $ 52,417,108   $  38,440,260   $39,300,183
Costs and expenses:
  Lease operating....................................     6,728,684       8,589,663     6,101,334
  Oil and natural gas production taxes...............     3,138,644       2,503,616     2,095,221
  Depreciation, depletion and amortization...........    23,205,462      21,310,754    15,889,266
  Writedowns of oil and natural gas properties.......    46,396,334     148,400,000            --
  Restructuring charges..............................            --       1,869,169            --
  General and administrative.........................     4,392,469       6,141,837     4,097,529
                                                       ------------   -------------   -----------
                                                         83,861,593     188,815,039    28,183,350
                                                       ------------   -------------   -----------
Operating income (loss)..............................   (31,444,485)   (150,374,779)   11,116,833
Other income (expense):
  Interest expense...................................   (11,211,607)    (14,431,794)   (1,908,749)
  Interest income and other, net.....................     1,031,980         292,242            --
                                                       ------------   -------------   -----------
Income (loss) before reorganization items and income
  taxes..............................................   (41,624,112)   (164,514,331)    9,208,084
Reorganization items:
  Professional fees and other........................            --              --    (4,726,587)
  Writeoff of unamortized debt premium and issuance
     costs, net......................................            --              --    (3,219,428)
  Interest earned on accumulating cash resulting from
     Chapter 11 proceedings..........................            --              --       761,512
                                                       ------------   -------------   -----------
Income (loss) before income taxes....................   (41,624,112)   (164,514,331)    2,023,581
Benefit (provision) for income taxes.................     7,285,765              --            --
                                                       ------------   -------------   -----------
Net income (loss)....................................   (34,338,347)   (164,514,331)    2,023,581
Preferred stock dividend requirements................       883,435         628,380            --
                                                       ------------   -------------   -----------
Net income (loss) applicable to common
  shareholders.......................................  $(35,221,782)  $(165,142,711)  $ 2,023,581
                                                       ============   =============   ===========
Net income (loss) per common share, basic and
  diluted............................................  $       (.94)  $       (4.08)  $       .05
                                                       ============   =============   ===========
Weighted average number of common shares outstanding,
  basic and diluted..................................    37,380,343      40,499,911    40,527,482
                                                       ============   =============   ===========
</TABLE>

                            See accompanying notes.

                                       F-4
<PAGE>   56

                          NATIONAL ENERGY GROUP, INC.
                              DEBTOR-IN-POSSESSION

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                    (NOTE 1)

<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                                                       ------------------------------------------
                                                           1997           1998           1999
                                                       ------------   -------------   -----------
<S>                                                    <C>            <C>             <C>
OPERATING ACTIVITIES
Income (loss) from operations........................  $(41,624,112)  $(164,514,331)  $ 9,208,084
Chapter 11 proceeding reorganization costs, net......            --              --    (3,965,075)
Adjustments to reconcile net income (loss) to net
  cash provided by operating activities:
Depreciation and depletion...........................    22,521,612      20,374,833    15,026,217
Writedowns of oil and natural gas properties.........    46,396,334     148,400,000            --
Amortization of loan costs and issuance premium......       573,705         777,804       704,937
Amortization of deferred compensation................        39,094          42,366        59,260
Common stock, options, and warrants issued for
  services...........................................       151,365              --            --
Other................................................        11,936         290,701      (121,647)
Changes in operating assets and liabilities excluding
  effects of business acquisitions:
  Accounts receivable................................    (7,771,430)      8,581,932     1,392,085
  Other current assets...............................    (1,350,230)        194,926       640,568
  Accounts payable and accrued liabilities...........     3,915,896      (9,066,079)    4,768,533
                                                       ------------   -------------   -----------
  Net cash provided by operating activities..........    22,864,170       5,082,152    27,712,962
                                                       ------------   -------------   -----------
INVESTING ACTIVITIES
Purchases of marketable securities...................      (515,344)             --            --
Purchases of other property and equipment............    (1,910,904)       (687,613)           --
Oil and natural gas acquisition, exploration, and
  development expenditures...........................   (77,902,861)    (51,999,775)   (3,785,889)
Proceeds from sales of oil and gas properties........     5,419,581          50,881     3,357,928
Other................................................      (916,639)       (666,956)     (610,485)
                                                       ------------   -------------   -----------
  Net cash used in investing activities..............   (75,826,167)    (53,303,463)   (1,038,446)
                                                       ------------   -------------   -----------
FINANCING ACTIVITIES
Proceeds from issuance of 10 3/4% Notes due 2006,
  net................................................    64,483,206              --            --
Proceeds from issuance of other long-term debt,
  net................................................    32,978,502      30,000,000            --
Repayments of other long-term debt...................   (33,000,000)     (5,000,000)           --
Repayments of other long-term liabilities............      (776,034)        (26,918)           --
Proceeds from exercise of stock options and
  warrants...........................................     1,917,561          93,750            --
Proceeds from employee stock purchase plan...........            --          56,420            --
Preferred stock dividends............................      (786,685)       (314,185)           --
Other................................................       (82,320)             --            --
                                                       ------------   -------------   -----------
  Net cash provided by financing activities..........    64,734,230      24,809,067            --
                                                       ------------   -------------   -----------
Increase (decrease) in cash and cash equivalents.....    11,772,233     (23,411,244)   26,674,516
Cash and cash equivalents at beginning of period.....    14,182,246      25,954,479     2,542,235
                                                       ------------   -------------   -----------
Cash and cash equivalents at end of period...........  $ 25,954,479   $   2,542,235   $29,216,751
                                                       ============   =============   ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid in cash................................  $ 12,403,910   $   9,940,420   $ 2,146,295
                                                       ============   =============   ===========
</TABLE>

                            See accompanying notes.

                                       F-5
<PAGE>   57

                          NATIONAL ENERGY GROUP, INC.
                              DEBTOR-IN-POSSESSION

           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                                    (NOTE 1)
<TABLE>
<CAPTION>

                                   CONVERTIBLE
                                 PREFERRED STOCK         COMMON STOCK
                                ------------------   ---------------------
                                SHARES     AMOUNT      SHARES      AMOUNT
                                -------   --------   ----------   --------
<S>                             <C>       <C>        <C>          <C>
Balance at December 31,
  1996........................  242,500   $242,500   35,977,140   $359,771
  Common stock issued upon
    exercise of options and
    warrants..................       --         --      920,300      9,203
  Common stock and warrants
    issued for services and
    other.....................       --         --       82,854        829
  Common stock issued upon
    conversion of Series B, C,
    and E convertible
    preferred.................  (71,313)   (71,313)   3,500,026     35,000
  Repurchase of common
    stock.....................       --         --      (24,000)      (240)
  Preferred stock dividends...       --         --           --         --
  Unrealized loss on
    marketable securities.....       --         --           --         --
  Net loss....................       --         --           --         --
                                -------   --------   ----------   --------
Balance at December 31,
  1997........................  171,187   $171,187   40,456,320   $404,563
  Common stock issued upon
    exercise of options and
    warrants..................       --         --       25,000        250
  Common stock issued under
    employee stock purchase
    plan......................       --         --       46,162        462
  Preferred stock dividends...       --         --           --         --
  Unrealized loss on
    marketable securities.....       --         --           --         --
  Net loss....................       --         --           --         --
                                -------   --------   ----------   --------
Balance at December 31,
  1998........................  171,187   $171,187   40,527,482   $405,275
  Unrealized gain on
    marketable securities.....       --         --           --         --
  Net income..................       --         --           --         --
                                -------   --------   ----------   --------
Balance at December 31,
  1999........................  171,187   $171,187   40,527,482   $405,275
                                =======   ========   ==========   ========

<CAPTION>
                                                  GAIN
                                               (LOSS) ON                        TOTAL
                                 ADDITIONAL    AVAILABLE                    STOCKHOLDERS'
                                  PAID-IN       FOR SALE     ACCUMULATED       EQUITY
                                  CAPITAL      SECURITIES      DEFICIT        (DEFICIT)
                                ------------   ----------   -------------   -------------
<S>                             <C>            <C>          <C>             <C>
Balance at December 31,
  1996........................  $110,293,386   $      --    $ (30,469,460)  $  80,426,197
  Common stock issued upon
    exercise of options and
    warrants..................     1,908,358          --               --       1,917,561
  Common stock and warrants
    issued for services and
    other.....................       782,489          --               --         783,318
  Common stock issued upon
    conversion of Series B, C,
    and E convertible
    preferred.................        36,313          --               --              --
  Repurchase of common
    stock.....................       (80,132)         --               --         (80,372)
  Preferred stock dividends...            --          --         (786,685)       (786,685)
  Unrealized loss on
    marketable securities.....            --     (28,594)              --         (28,594)
  Net loss....................            --          --      (34,338,347)    (34,338,347)
                                ------------   ---------    -------------   -------------
Balance at December 31,
  1997........................  $112,940,414   $ (28,594)   $ (65,594,492)  $  47,893,078
  Common stock issued upon
    exercise of options and
    warrants..................        93,500          --               --          93,750
  Common stock issued under
    employee stock purchase
    plan......................        55,958          --               --          56,420
  Preferred stock dividends...            --          --         (314,185)       (314,185)
  Unrealized loss on
    marketable securities.....            --    (147,500)              --        (147,500)
  Net loss....................            --          --     (164,514,331)   (164,514,331)
                                ------------   ---------    -------------   -------------
Balance at December 31,
  1998........................  $113,089,872   $(176,094)   $(230,423,008)  $(116,932,768)
  Unrealized gain on
    marketable securities.....            --       3,687               --           3,687
  Net income..................            --          --        2,023,581       2,023,581
                                ------------   ---------    -------------   -------------
Balance at December 31,
  1999........................  $113,089,872   $(172,407)   $(228,399,427)  $(114,905,500)
                                ============   =========    =============   =============
</TABLE>

                            See accompanying notes.

                                       F-6
<PAGE>   58

                          NATIONAL ENERGY GROUP, INC.
                              DEBTOR-IN-POSSESSION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 31, 1999

1. BACKGROUND AND BANKRUPTCY FILING

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

     The Company is an independent energy company which has historically engaged
in the exploration, acquisition, exploitation, development and production of oil
and natural gas properties in major producing basins onshore in Texas,
Louisiana, Oklahoma, Arkansas and offshore in the Gulf of Mexico.

     On December 4, 1998, certain of the holders of the Senior Notes of National
Energy Group, Inc. (the "Company") filed an Involuntary Petition for an Order
for Relief under Chapter 11 of Title 11 of the United States Bankruptcy Code in
the United States Bankruptcy Court for the Northern District of Texas, Dallas
Division, due to non-payment of interest due December 2, 1998, after expiration
of a 30-day grace period. On December 23, 1998, the Company filed, in the
Bankruptcy Court, an Answer to and Motion to Dismiss the pending Involuntary
Petition. The Company's Motion affirmed that it (i) was meeting its obligations
and generally paying its debts as they become due, unless such debts were the
basis of a bona fide dispute and (ii) had arranged with the lender under its
credit facility to borrow additional funds sufficient to pay the interest due on
the Senior Notes, conditioned upon the Court's dismissal of the Involuntary
Petition. However, on February 8, 1999, the Bankruptcy Court denied the
Company's Motion to Dismiss the Involuntary Petition. An Order for Relief was
entered by the Bankruptcy Court on February 11, 1999. The Order for Relief
placed the Company under the protection of the Court and precluded payment of
the interest on the Senior Notes until the conclusion of the Bankruptcy
proceeding. Additionally, payment of liabilities existing as of February 11,
1999 to certain unsecured creditors and dividends in arrears to holders of the
Company's preferred stock and any pending litigation are stayed during the
Bankruptcy proceeding. The Company shall act as debtor-in-possession and will
continue to operate its business and manage its properties in the ordinary
course of business during its Chapter 11 proceeding. As a result of the Chapter
11 proceeding, the Company discontinued the accrual of interest on the unsecured
Senior Notes and discontinued the accrual of dividends on the unsecured
preferred stock. Approximately $17.7 million additional interest expense would
have been recognized by the Company for 1999 if not for the discontinuation of
the interest accrual on the Senior Notes.

     On August 4, 1999, the Company and the unsecured creditors' committee (the
"Committee") appeared before the Bankruptcy Court and announced agreement on the
process for marketing the Company and/or its assets. The Court entered an order
which provided that the Company and the Committee would employ CIBC World
Markets Corp. ("CIBC") to solicit bids for sale of the Company and/or its
assets. The Company assisted CIBC in assembling a data room for potential
bidders to view information regarding the Company's assets. CIBC marketed the
Company's assets pursuant to procedures approved by the Company, the Committee
and the Court. In addition, the Court approved the retention of Netherland,
Sewell & Associates, Inc. to (i) complete its reserve evaluation of the
Company's oil and natural gas properties as of December 31, 1998, (ii) update
the reserve evaluation as of July 1, 1999 and (iii) provide assistance to the
Company, CIBC and prospective buyers during the marketing process. The marketing
process culminated in an auction conducted by the Bankruptcy Court on November
1, 1999. At the auction, bidding on the Company's oil and gas properties,
exclusive of the Company's Lake Mongoulois and Mustang Island properties,
ultimately ended at a high bid of $96.25 million given by Arnos, Corp. ("Arnos")
an affiliated subsidiary of the Company's Series D preferred stockholder. The
Committee, after review, concluded that it would recommend to the Court that it
accept the high bid of $96.25 million. An order accepting Arnos as the highest
bidder was signed by the Court on November 16, 1999. Arnos filed a motion to
close the Purchase and Sale Agreement ("Arnos PSA") into escrow pending (i) the
Court's confirmation of a plan of reorganization or (ii) in the event a plan of
reorganization is not confirmed, a

                                       F-7
<PAGE>   59
                          NATIONAL ENERGY GROUP, INC.
                              DEBTOR-IN-POSSESSION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 31, 1999

1. BACKGROUND AND BANKRUPTCY FILING (CONTINUED)
court ordered closing of the sale of the properties to Arnos. On or about
January 28, 2000 the substantive purchase and sale closing documents were
delivered into the registry of the Court, however, the closing of the Arnos PSA
is still pending as noted. The Court approved this motion and ordered Arnos to
pay into the Court's registry the sum of $61.625 million which equals the
purchase price of $96.25 million less a previously escrowed deposit of $9.625
million and the principal balance of $25 million outstanding under the Company's
secured credit facility with Arnos.

     On February 28, 2000, the Committee filed with the Court a Joint Disclosure
Statement ("Committee Disclosure Statement") and proposed Plan of Reorganization
(the "Committee Plan"). The Committee Plan provides for (i) the possibility of a
limited continuation of the Company's oil and gas business operations; (ii) the
creation of a creditors trust to which will be transferred substantially all of
the cash and cash equivalents remaining in the Company, the funds held in the
Registry of the Court from the auction of the Company's properties, and all
causes of action for the payment and primary benefit of certain allowed
administrative, tax, priority and miscellaneous secured and unsecured creditors;
and (iii) payment in full of the secured claims. The Committee Plan designates
eight (8) classes of claims and equity interests. The Company's Senior
Noteholders are deemed to be Allowed Class 6 Claims in the Committee's Plan and
are entitled to their pro rata share of the remaining proceeds in the creditors
trust after payment of the secured claims. Following distribution of the
creditors trust fund to the various claimants, the Committee retains the right
to sell the Company's remaining assets or sell to third parties the rights of
the Senior Noteholders to retain between 49% and 95% of the outstanding stock of
the reorganized Company in the form of newly issued additional common stock. In
connection therewith, the Senior Noteholders shall have the right to elect all
members of the Company's Board of Directors for a two (2) year term following
the effective date of the Committee's Plan. The Committee's Plan further
provides that all of the Company's preferred stock shall be converted into
Common Stock at a conversion price of $.25 per share, and the existing common
and preferred equity interests of the Company shall remain in existence. Neither
the Company's preferred shareholders, nor the Company's common shareholders are
entitled to vote on the Committee's Plan and have been deemed for all purposes
to have rejected it in its entirety. Both the Committee Plan and Committee
Disclosure Statement are subject to amendment, and a hearing in the Bankruptcy
Court on the Committee Disclosure Statement is scheduled on April 17, 2000.

     On March 14, 2000, the Company filed with the Court a Joint Disclosure
Statement ("Company Disclosure Statement") and Plan of Reorganization (the
"Company Plan"). The Company Plan provides for (i) continuation of the Company's
oil and gas business operations; (ii) payment in full of all secured claims,
including the Arnos secured claim in the amount of $25 million, plus interest as
may be due; (iii) payment of a cash sum not to exceed $10,000 to certain classes
of claimants involved in litigation with the Company if such class accepts the
Company's Plan or, alternatively, if rejected by such class, cash in the amount
of 56.5% of any Allowed Claim in such class; (iv) acquisition by Arnos of any
Senior Notes, not otherwise held by Arnos, in consideration of a payment equal
to 56.5% of the face value of each such bond acquired, or, alternatively, a pro
rata share of the cash which Senior Noteholders would receive in a liquidation,
plus a pro rata beneficial interest in a creditor's trust consisting of certain
causes of action, two properties of the Company and $250,000 in cash; (v)
payment of a cash sum equal to 75% of any Allowed Claim to trade creditors; (vi)
retention by each of the preferred and common shareholder equity interests;
provided that both the preferred and common equity interests may, at the option
of Arnos, be deemed cancelled and reissued to holders in a form to be determined
by Arnos; (vii) purchase by Arnos, or an affiliate of Arnos, of additionally
issued shares of the reorganized Company's common stock to the extent that Arnos
or its affiliate shall own up to 49% of all the issued and outstanding common
stock of the reorganized Company; and (viii) amendment to the Senior Notes
Indenture. The Company's Plan further proposes that the Company's existing
officers and directors shall continue as the officers and directors of the
reorganized Company until otherwise replaced as provided in the Company's
bylaws.
                                       F-8
<PAGE>   60
                          NATIONAL ENERGY GROUP, INC.
                              DEBTOR-IN-POSSESSION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 31, 1999

1. BACKGROUND AND BANKRUPTCY FILING (CONTINUED)
Neither the Company's preferred shareholders, nor the Company's common
shareholders are entitled to vote on the Company's Plan and have been deemed for
all purposes to have rejected it in its entirety. Both the Company's Plan and
Disclosure Statement are subject to amendment, and a hearing in the Bankruptcy
Court on the Disclosure Statement is scheduled on April 20, 2000.

     Pursuant to an Order of the Bankruptcy Court dated September 7, 1999, the
Company's severance policy was abated and a Court ordered severance program was
put into effect for all employees of the Company ("Severance Program"). The
Severance Program provides for contingent payments as follows: (a) a "stay-pay"
component payable on the earlier of an employees termination without cause; the
closing of a sale of substantially all the Company's assets or the confirmation
of a plan of reorganization; and (b) a "severance" component, whereby upon
termination any employee who does not obtain new employment, or is not offered a
permanent job in Dallas, Texas for a period of at least one year at the same pay
and benefits provided by the Company, shall be entitled to certain severance
benefits. The Order also provided that any employee who participates in the
Severance Program waives and releases any and all claims arising from any
current Employment Agreement with the Company. Certain employees are not
entitled to any payments under the Severance Program until the earlier of (i)
confirmation of a Plan of Reorganization, (ii) conversion to a Chapter 7
bankruptcy proceeding or (iii) termination of their employment by a trustee
appointed by the Court. Maximum potential payments due to employees under the
Severance Program total approximately $2.2 million.

     The accompanying consolidated financial statements have been prepared on a
going concern basis of accounting and do not reflect any adjustments that might
result should the Company be unable to continue as a going concern. The
Company's prior losses from operations and the related Chapter 11 proceeding
raise concern about its ability to continue as a going concern. The
appropriateness of using the going concern basis is dependent upon, among other
things, (i) confirmation of a plan of reorganization under the Bankruptcy Code
which provides for continuation of the Company's oil and gas operations, (ii)
the ability to achieve profitable operations after such confirmation and (iii)
the ability to generate sufficient cash from operations to meet its obligations.

     During 1999, the Company incurred professional fees and other expenses of
$4.7 million and wrote off $3.2 million of unamortized debt issuance costs and
premium associated with the Senior Notes due to the bankruptcy proceedings. At
December 31, 1999, substantially all of the Company's unsecured liabilities are
subject to compromise under the terms of the bankruptcy proceeding. During 1999,
the Company recognized interest income of approximately $761,000 on cash
balances accumulating during the Chapter 11 proceeding.

2. SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

     The accompanying financial statements as of and for the year ended December
31, 1999 have been presented in accordance with Statement of Position 90-7,
Financial Reporting by Entities in Reorganization under the Bankruptcy Code
("SOP 90-7"). In accordance with SOP 90-7, no interest has been accrued on
unsecured debt, no dividends on preferred stock have been accrued, unamortized
premiums and debt issuance costs relating to unsecured debt have been expensed,
costs relating to the bankruptcy proceeding and interest earned on accumulating
cash resulting from the bankruptcy proceeding have been reported as
reorganization items in the accompanying statement of operations, and
liabilities subject to compromise have been separately reported in the
accompanying balance sheet.

                                       F-9
<PAGE>   61
                          NATIONAL ENERGY GROUP, INC.
                              DEBTOR-IN-POSSESSION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 31, 1999

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Consolidation

     The consolidated financial statements include the accounts of National
Energy Group, Inc., and its subsidiaries. All significant intercompany
transactions and balances have been eliminated.

Accounting Estimates

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

Cash and Cash Equivalents

     Cash and cash equivalents may include demand deposits, short-term
commercial paper, and/or money-market investments with maturities of three
months or less when purchased. At December 31, 1999, all cash and cash
equivalents were invested with Bank One, Texas, N.A.

Oil and Natural Gas Properties

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

     Under the full cost method, the net book value of oil and natural gas
properties, less related deferred income taxes, may not exceed the estimated
after-tax future net revenues from proved oil and natural gas properties,
discounted at 10% per year (the ceiling limitation). In arriving at estimated
future net revenues, estimated lease operating expenses, development costs,
abandonment costs, and certain production related and ad-valorem taxes are
deducted. In calculating future net revenues, prices and costs in effect at the
time of the calculation are held constant indefinitely, except for changes which
are fixed and determinable by existing contracts. The net book value is compared
to the ceiling limitation on a quarterly and yearly basis. The excess, if any,
of the net book value above the ceiling limitation is required to be written off
as a non-cash expense. During 1997 and 1998, the net book value of the Company's
oil and natural gas properties exceeded the ceiling limitation resulting in non-
cash writedowns totaling $46.4 million and $148.4 million, respectively. The
Company did not incur ceiling limitation writedowns during 1999. There can be no
assurance that there will not be additional writedowns in future periods under
the full cost method of accounting as a result of sustained decreases in oil and
natural gas prices or other factors.

     Oil and natural gas properties excluded from the ceiling limitation consist
primarily of unevaluated acreage, acquisition costs, and related seismic and
other geological and geophysical costs (unproven properties). During 1998,
unproven properties with a carrying value of approximately $32.0 million were
transferred to proved properties, largely as a result of drilling activities,
and became subject to the full cost ceiling limitation. At December 31, 1998,
due to uncertainty relating to the Company's ability to obtain Court approval
for exploration of its remaining portfolio of unproven properties and due to low
oil prices which make the projects uneconomical,

                                      F-10
<PAGE>   62
                          NATIONAL ENERGY GROUP, INC.
                              DEBTOR-IN-POSSESSION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 31, 1999

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the remaining carrying value of the unproven properties, approximately $9.1
million, was transferred to proved properties and became subject to the ceiling
limitation.

     The Company has capitalized internal costs of $1,582,021, $1,950,914 and
$814,476 for the years ended December 31, 1997, 1998, and 1999, respectively.
Such capitalized costs include salaries and related benefits of individuals
directly involved in the Company's acquisition, exploration, and development
activities based on the percentage of their time devoted to such activities.
During the years ended December 31, 1997 and 1998, the Company capitalized
interest costs of $2,545,617 and $3,371,279, respectively, related to its
unproved oil and gas properties. The Company did not capitalize interest during
1999.

Other Property and Equipment

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

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

Income Taxes

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

Financial Instruments

     The Company does not hold or issue financial instruments for trading
purposes.

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

     The Company from time to time utilizes certain derivative financial
instruments to hedge future gas prices. (Note 9). Gains and losses arising from
the use of these instruments are deferred until realized and are reported as oil
and natural gas sales.

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

     The following is a summary of available-for-sale securities at December 31,
1998 and 1999:

<TABLE>
<CAPTION>
                                                          GROSS        GROSS      ESTIMATED
                                                        UNREALIZED   UNREALIZED     FAIR
                                               COST       GAINS        LOSSES       VALUE
                                             --------   ----------   ----------   ---------
<S>                                          <C>        <C>          <C>          <C>
Common stocks at December 31, 1998.........  $515,344    $     --     $176,094    $339,250
                                             ========    ========     ========    ========
Common stocks at December 31, 1999.........  $515,344    $     --     $172,407    $342,937
                                             ========    ========     ========    ========
</TABLE>

                                      F-11
<PAGE>   63
                          NATIONAL ENERGY GROUP, INC.
                              DEBTOR-IN-POSSESSION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 31, 1999

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
     The Company had no sales of marketable securities during 1997, 1998 or
1999.

     The Company's investment in marketable securities is comprised of
securities of another independent oil and gas company.

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

     Allowances for bad debt totaled approximately $150,000 and $149,000 at
December 31, 1998 and 1999, respectively. At December 31, 1998 and 1999, the
carrying value of the Company's accounts receivable approximates fair value.

Natural Gas Production Imbalances

     The Company accounts for natural gas production imbalances using the sales
method, whereby the Company recognizes revenue on all natural gas sold to its
customers notwithstanding the fact that its ownership may be less than 100% of
the natural gas sold.

Stock Options

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

Earnings (Loss) Per Share

     Earnings (loss) per share is computed in accordance with Financial
Accounting Standards Board Statement No. 128, Earnings per Share. Basic earnings
per share data is computed by dividing net income (loss) applicable to common
shareholders by the weighted average number of common shares outstanding and
excludes any dilutive effects of options, warrants, and convertible securities.
Shares issuable upon exercise of options and warrants are included in the
computation of diluted earnings per common and common equivalent share to the
extent that they are dilutive. Diluted earnings per share computations also
assume the conversion of the Company's preferred stock (Note 7) if such
conversion has a dilutive effect. For the years ended December 31, 1997, 1998,
and 1999, neither the common equivalent shares nor the assumed conversion of the
preferred stock had a dilutive effect on the loss per share calculations.
Accordingly, both basic and diluted loss per share calculations for such periods
are based on the weighted average number of common shares outstanding during
each year.

Comprehensive Income

     Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. For 1997, 1998 and 1999, the differences between the
Company's net earnings and total comprehensive income were not material.

                                      F-12
<PAGE>   64
                          NATIONAL ENERGY GROUP, INC.
                              DEBTOR-IN-POSSESSION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 31, 1999

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Pronouncements

     In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities, ("SFAS No. 133") which will be adopted by the Company
January 1, 2001. The Statement will require the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
will either be offset against the change in fair value of the hedged assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a hedge's change in fair value will be immediately
recognized in earnings. The Company is currently evaluating the effect of SFAS
No. 133 on its financial statements.

Reclassifications

     Certain previously reported amounts have been reclassified to conform with
the current presentation.

3. ACQUISITIONS AND DISPOSALS

     In March 1998, the Company acquired Fortune Natural Resources Corporation's
interests in the East Bayou Sorrel field for approximately $4.5 million in cash.
In June 1998, the Company acquired Germany Oil Company's interest in six state
leases and one producing well in the Mustang Island area for $.4 million in
cash. These acquisitions did not have a significant impact on the Company's
results of operations for 1998.

     In December 1999, the Company sold its interest at an oil and gas auction
in 142 marginal and non-producing oil and gas properties to various purchasers.
Net proceeds from this sale approximated $3.0 million. The sale of these
properties did not have a significant impact on the Company's results of
operations for 1999.

4. CREDIT FACILITIES

     In 1996, the Company and its subsidiaries, NEG-OK and Boomer Marketing,
entered into an amended credit facility with Bank One, as Bank and
Administrative Agent, and the Credit Lyonnais New York Branch, as Bank and
Syndication Agent (collectively, the "Banks"). The credit facility had a
borrowing base of $25.0 million, maturing August 29, 2000.

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

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

     On December 7, 1998, Bank One and Credit Lyonnais gave notice to the
Company that all outstanding obligations under the credit facility were
accelerated and were immediately due and payable due to certain unspecified
Events of Default as defined in the loan agreement.

     Effective December 22, 1998, the credit facility and all associated liens
were assigned by the Banks to Arnos, Inc., ("Arnos") an affiliated subsidiary of
the Company's Series D Preferred Stockholder. In a letter

                                      F-13
<PAGE>   65
                          NATIONAL ENERGY GROUP, INC.
                              DEBTOR-IN-POSSESSION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 31, 1999

4. CREDIT FACILITIES (CONTINUED)
dated December 23, 1998, Arnos (1) rescinded the acceleration of the loan, (2)
waived all defaults existing at that time and (3) made sufficient borrowings
available to pay the interest on the Senior Notes that was due on November 2,
1998 conditioned upon the Bankruptcy Court's dismissal of the Involuntary
Petition. The Company is currently paying interest under the Arnos credit
facility. The Company had $25,000,000 outstanding under the Arnos credit
facility as of December 31, 1999 and 1998. At December 31, 1999 and 1998, the
Company was in violation of the minimum interest coverage ratio and current
ratio covenants under the Arnos credit facility and as a result has classified
the borrowings under the credit facility as a current liability.

     On August 4, 1999, the Company and the Committee appeared before the
Bankruptcy Court and announced agreement on the process for marketing the
Company and/or its assets. The marketing process culminated in an auction
conducted by the Bankruptcy Court on November 1, 1999. At the auction, bidding
on the Company's oil and gas properties, exclusive of the Company's Lake
Mongoulois and Mustang Island properties, ultimately ended at a high bid of
$96.25 million given by Arnos. The Committee, after review, concluded that it
would recommend to the Court that it accept the high bid of $96.25 million. An
order accepting Arnos as the highest bidder was signed by the Court on November
16, 1999. Arnos filed a motion to close the Purchase and Sale Agreement ("Arnos
PSA") into escrow pending (i) the Court's confirmation of a plan of
reorganization or (ii) in the event a plan of reorganization is not confirmed, a
court ordered closing of the sale of the properties to Arnos. The Court approved
this motion and ordered Arnos to pay into the Court's registry the sum of
$61.625 million which equals the purchase price of $96.25 million less the
previously escrowed deposit of $9.625 million and the principal balance of $25
million outstanding under the Arnos credit facility.

     At December 31, 1999, the fair value of borrowings under the Arnos credit
facility approximates the carrying value of the liability.

5. 10 3/4 SENIOR NOTES DUE 2006

     In 1996, the Company issued $100 million aggregate principal amount of
unregistered Series A 10 3/4% Senior Notes due 2006 which were exchanged in 1997
for registered Series B 10 3/4% Senior Notes due 2006 with substantially
identical terms. Collectively, the Series A Notes and Series B Notes are
referred to as the Series A/B Notes." In August 1997, the Company issued $65.0
million aggregate principal amount of its unregistered Series C 10 3/4% Senior
Notes. In December 1997, the Company exchanged substantially all of the Series
A/B Notes and all of the Series C Notes for registered Series D 10 3/4% Senior
Notes due 2006. The Series D Notes are substantially identical to the Series A/B
Notes and the Series C Notes. The Series A/B Notes, the Series C Notes and the
Series D Notes are collectively referred to as the "Senior Notes." The Senior
Notes bear interest at an annual rate of 10 3/4%, payable semiannually in
arrears on May 1 and November 1 of each year. The Senior Notes are senior,
unsecured obligations of the Company, ranking pari passu with all existing and
future senior indebtedness of the Company, and senior in right of payment to all
future subordinated indebtedness of the Company. Subject to certain limitations
set forth in the indenture covering the Senior Notes (the "Indenture"), the
Company and its subsidiaries may incur additional senior indebtedness and other
indebtedness.

     Due to the non-payment of interest due December 2, 1998, the Notes were in
default at December 31, 1998 and 1999, and have been classified as a current
liability in the accompanying December 31, 1998 balance sheet.

     On December 4, 1998, certain holders of the Senior Notes filed an
Involuntary Petition for an Order for Relief under Chapter 11 of Title 11 of the
United States Bankruptcy Code. See Note 1. Accrual of interest on the Senior
Notes has been discontinued during the Chapter 11 proceeding. Approximately
$17.7 million additional

                                      F-14
<PAGE>   66
                          NATIONAL ENERGY GROUP, INC.
                              DEBTOR-IN-POSSESSION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 31, 1999

5. 10 3/4 SENIOR NOTES DUE 2006 (CONTINUED)
interest expense would have been recognized by the Company during 1999 if not
for the discontinuation of the interest accrual.

     During 1999, the Company wrote off the remaining $3.2 million of
unamortized issuance premiums and deferred debt issuance costs associated with
the Senior Notes in accordance with the provisions of SOP 90-7.

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

     At December 31, 1999, the fair value of the Senior Notes, as determined by
quoted market prices, was approximately $82.5 million.

6. COMMITMENTS AND CONTINGENCIES

     The Company leases office space under an operating lease. Rental expense
charged to operations was approximately $275,000, $364,000 and $449,000 during
the years ended December 31, 1997, 1998 and 1999, respectively. Minimum lease
payments under future operating lease commitments at December 31, 1999, are as
follows:

<TABLE>
<S>                                                           <C>
2000........................................................     487,442
2001........................................................     487,442
2002........................................................     487,442
2003........................................................     549,934
2004........................................................     549,934
Thereafter..................................................   1,649,802
                                                              ----------
                                                              $4,211,996
                                                              ==========
</TABLE>

     Other than the Bankruptcy Court proceeding, the Company is not a party to
any additional material pending legal proceedings.

                                      F-15
<PAGE>   67
                          NATIONAL ENERGY GROUP, INC.
                              DEBTOR-IN-POSSESSION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 31, 1999

7. STOCKHOLDERS' EQUITY

Preferred Stock

     At December 31, 1999, the Company has authorized 330,000 shares of $1.00
par value convertible preferred stock designated in four series B through E:

<TABLE>
<CAPTION>
                                      SERIES B         SERIES C         SERIES D         SERIES E
                                    -------------   --------------   --------------   --------------
<S>                                 <C>             <C>              <C>              <C>
Number of authorized shares.......        100,000           80,000          100,000           50,000
Number of shares issued and
  outstanding:
  December 31, 1997...............         38,687           23,000          100,000            9,500
  December 31, 1998...............         38,687           23,000          100,000            9,500
  December 31, 1999...............         38,687           23,000          100,000            9,500
Conversion price per common
  share...........................         $1.625            $2.00            $2.25            $2.25
Liquidation preference value per
  share...........................        $100.00          $100.00          $100.00          $100.00
</TABLE>

<TABLE>
<S>                                 <C>            <C>             <C>             <C>
Dividend rights (stayed during the
  Chapter 11 proceeding)..........   10% payable      10 1/2%      Participation   Participation
                                    semi-annually     payable      with common     with common
                                    (cumulative)   semi-annually   stock           stock
                                                    (cumulative)
</TABLE>

     The Series B has a liquidation and dividend preference over the Company's
Common Stock. The Series B has a 10% dividend, payable semi-annually. In
December 1998, the Board of Directors declared a dividend on Series B to be made
in shares of Series B. To date, the dividends have not been paid and therefore
there are $193,435 dividends in arrears at December 31, 1999, which are
unsecured claims subject to compromise for purposes of the Chapter 11
proceeding. The Series B is redeemable by the Company at $100.00 per share, plus
accrued and unpaid dividends; provided, however, that the Company cannot redeem
any shares of Series B unless and until all outstanding shares of the Series C
have been redeemed by the Company. The holders of Series B currently have the
right to appoint one member to the Company's Board of Directors.

     In December 1998, the Board of Directors declared a dividend on Series C to
be made in shares of Series C. To date, the dividend is unpaid and therefore
there are $120,750 dividends in arrears at December 31, 1999, which are
unsecured claims subject to compromise for purposes of the Chapter 11
proceeding. The Series C is redeemable by the Company at $100.00 per share, plus
accrued and unpaid dividends. The holders of the Series C currently have the
right to appoint one member to the Company's Board of Directors.

     The holders of Series B and C, respectively, are entitled to one vote for
each share as to matters upon which by law they are entitled to vote as a class.
The approval of a majority of the Series B and C, respectively, each voting
separately as a class, is required to (i) make changes to the Company's
Certificate of Incorporation or By-Laws which adversely affect the Series B or
C, (ii) authorize or issue additional shares of Series B or C, (iii) issue
preferred stock equal to or senior to the Series B or C as to dividends or
liquidation, (iv) subject to certain exceptions, to effect an extraordinary
transaction that requires a vote of the Company stockholders. As a result, a
class vote of the holders of Series C, as well as the Series B, would be
required for the Company to merge or be acquired and may therefore delay, deter,
or prevent a change in control of the Company.

     On August 29, 1996, the Company closed the sale for $10.0 million to High
River Limited Partnership of 100,000 shares of its Convertible Preferred Stock,
Series D, $1.00 par value per share and warrants to purchase 700,000 shares of
Common Stock exercisable immediately at $2.50 per share, which warrants expire
five years

                                      F-16
<PAGE>   68
                          NATIONAL ENERGY GROUP, INC.
                              DEBTOR-IN-POSSESSION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 31, 1999

7. STOCKHOLDERS' EQUITY (CONTINUED)
from their date of issuance. The Series D Preferred Stock is convertible into
4,444,444 shares of Common Stock, based upon a conversion price of $2.25 per
share.

     The holder of the Series D is entitled to one vote for each share when
entitled to vote as described below and as to matters upon which by law it is
entitled to vote as a class. The holder of Series D has the right to appoint one
member to the Board of Directors. The Company may not, without the consent of
the director appointed by the holder of Series D, voluntarily file for
protection under federal or other bankruptcy laws. In addition, the holder of
Series D currently has the right to choose to appoint one-half of the members of
the Board of Directors plus one member (including the member appointed by the
Series D) if it elects to exercise such right. Currently, the holder of the
Series D has appointed a total of three directors to the Board.

     On August 29, 1996, simultaneously with the closing of the sale for $10.0
million of the Series D to High River, the Company also closed the sale for $5.0
million to two insurance companies and four affiliates of Kayne, Anderson
Investment Management, Inc., a registered investment adviser, of 50,000 shares
of Convertible Preferred Stock, Series E, $1.00 par value per share and warrants
to purchase 350,000 shares of the Common Stock exercisable immediately at $2.50
per share, which warrants expire five years from their date of issuance. The
Series E Preferred Stock is convertible into 2,222,222 shares of Common Stock,
based upon a conversion price of $2.25 per share. The Series E will vote
together with the Common Stock on all matters submitted to the holders of Common
Stock and shall have that number of votes per share equal to the number of
shares of Common Stock into which such share is convertible as of the record
date for the vote.

     In October 1997, 13,813 shares of Series B Preferred Stock, 17,000 shares
of Series C Preferred Stock and 40,500 shares of Series E Preferred Stock were
converted into approximately 3.5 million shares of Common Stock.

  Common Stock

     Holders of Common Stock are entitled to one vote for each share held of
record on all matters voted on by stockholders. The shares of the Common Stock
do not have cumulative voting rights, which means that the holders of more than
50% of the shares of the Common Stock voting for the election of the directors
can elect all of the directors to be elected by holders of the Common Stock, in
which event the holders of the remaining shares of Common Stock will not be able
to elect any director. Upon any liquidation, dissolution, or winding-up of the
affairs of the Company, holders of the Common Stock would be entitled to
receive, pro rata, all of the assets of the Company available for distribution
to stockholders, after payment of any liquidation preference of any Preferred
Stock that may be issued and outstanding at the time. Holders of the Common
Stock have no subscription, redemption, sinking fund, or preemptive rights.

Warrants

     During 1996, the Company issued warrants to purchase 1,050,000 shares of
Common Stock with exercise prices of $2.50 per share to the purchasers of the
Series D preferred stock and Series E preferred stock and issued warrants to
purchase 300,000 shares of Common Stock with exercise prices of $2.875 per share
to financial advisors in connection with this transaction. In connection with
the Company's merger with Alexander Energy in 1996, the Company issued warrants
to purchase 800,000 shares of Common Stock to two financial advisors. Warrants
to purchase 700,000 shares have an exercise price of $2.875 per share while
warrants to purchase 100,000 shares have an exercise price of $4.09 per share.
The Company also assumed 396,015 warrants to purchase common stock at prices
ranging from $2.07 to $3.00 in the Alexander merger. During 1997, 353,515 of
these warrants were exercised and the remainder expired during 1998. During
1997, the Company issued

                                      F-17
<PAGE>   69
                          NATIONAL ENERGY GROUP, INC.
                              DEBTOR-IN-POSSESSION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 31, 1999

7. STOCKHOLDERS' EQUITY (CONTINUED)
warrants to purchase 300,000 shares of common stock with exercise prices of
$3.00 per share in connection with the formation of a drilling joint venture.

     The following table summarizes warrants outstanding at December 31, 1999:

<TABLE>
<CAPTION>
NUMBER OF SHARES     EXPIRATION       WARRANTS     EXERCISE
 UNDER WARRANT          DATE         EXERCISABLE    PRICES
----------------   ---------------   -----------   --------
<S>                <C>               <C>           <C>
   1,050,000       August 29, 2001    1,050,000     $ 2.50
     300,000       August 29, 2001      300,000      2.875
     700,000       August 29, 2001      700,000      2.875
     100,000       August 29, 2001      100,000       4.09
     300,000         July 11, 2002      300,000       3.00
   ---------                          ---------
2,450,000...                          2,450,000
   =========                          =========
</TABLE>

Stock Options

     A summary of the Company's stock option activity, and related information
for the years ended December 31, 1997, 1998, and 1999, follows:

<TABLE>
<CAPTION>
                                      1997                     1998                    1999
                              ---------------------   ----------------------   --------------------
                                           WEIGHTED                 WEIGHTED               WEIGHTED
                                           AVERAGE                  AVERAGE                AVERAGE
                                           EXERCISE                 EXERCISE               EXERCISE
                               OPTIONS      PRICE       OPTIONS      PRICE      OPTIONS     PRICE
                              ----------   --------   -----------   --------   ---------   --------
<S>                           <C>          <C>        <C>           <C>        <C>         <C>
Outstanding at beginning
  of year...................     873,486    $2.28       3,072,201    $3.62     1,637,850    $3.40
Granted.....................   2,707,500     3.92         415,000     2.65            --       --
Exercised...................    (266,785)    2.44         (25,000)    3.75            --       --
Canceled....................    (242,000)    3.52      (1,824,351)    3.58      (988,350)    3.27
                              ----------              -----------              ---------
Outstanding at end of
  year......................   3,072,201     3.62       1,637,850     3.40       649,500     3.61
                              ==========              ===========              =========
Exercisable at end of
  year......................     936,450    $2.84       1,148,600    $3.45       613,250    $3.73
                              ==========              ===========              =========
Weighted-average fair value
  of options granted or
  assumed during the year...  $     1.46              $      1.11
                              ==========              ===========
</TABLE>

                                      F-18
<PAGE>   70
                          NATIONAL ENERGY GROUP, INC.
                              DEBTOR-IN-POSSESSION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 31, 1999

7. STOCKHOLDERS' EQUITY (CONTINUED)
     Information related to options outstanding and exercisable at December 31,
1999, is summarized below:

<TABLE>
<CAPTION>
                         OPTIONS OUTSTANDING             OPTIONS EXERCISABLE
                 ------------------------------------   ----------------------
                                WEIGHTED
                                 AVERAGE     WEIGHTED                 WEIGHTED
                                REMAINING    AVERAGE                  AVERAGE
   RANGE OF        OPTIONS     CONTRACTUAL   EXERCISE     OPTIONS     EXERCISE
EXERCISE PRICES  OUTSTANDING      LIFE        PRICE     EXERCISABLE    PRICE
---------------  -----------   -----------   --------   -----------   --------
<S>              <C>           <C>           <C>        <C>           <C>
$1.31 -- $2.99      97,500        2.84        $1.88        61,250      $2.07
$3.32 -- $4.00     543,500        2.57         3.89       543,500       3.89
     $5.75           8,500        2.79         5.75         8,500       5.75
                   -------                                -------
                   649,500                    $3.61       613,250      $3.73
                   =======                                =======
</TABLE>

     Statement of Financial Accounting Standards No. 123, Accounting for Stock
Based Compensation, requires the disclosure of pro forma net income and earnings
per share information computed as if the Company had accounted for its employee
stock options granted subsequent to December 31, 1994, under the fair value
method set forth in SFAS 123. The fair value for these options was estimated at
the date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1997 and 1998, respectively: risk-free interest
rates of 5.5% and 5.5%, a dividend yield of 0%, and volatility factors of .53
and .53. In addition, the fair value of these options was estimated based on an
expected life of three to five years for options granted by the Company.

     The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

     For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands except for earnings per share
information):

<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                                -----------------------------------------
                                                    1997           1998           1999
                                                ------------   -------------   ----------
<S>                                             <C>            <C>             <C>
Pro forma net income (loss)...................  $(35,226,665)  $(164,914,586)  $2,038,132
                                                ============   =============   ==========
Pro forma net income (loss) per common
  share.......................................  $       (.97)  $       (4.09)  $      .05
                                                ============   =============   ==========
</TABLE>

Stock Purchase Plan

     During 1998, the Company's shareholders approved the Company's Employee
Stock Purchase Plan ("ESPP"). Pursuant to the ESPP, employees can purchase the
common stock of the Company at a specified price through payroll deductions
during an offering period, currently established on a semi-annual basis. In June
1998, approximately 46,000 shares were issued to employees under the ESPP.
During 1999, no shares were issued to employees under the ESPP.

                                      F-19
<PAGE>   71
                          NATIONAL ENERGY GROUP, INC.
                              DEBTOR-IN-POSSESSION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 31, 1999

8. INCOME TAXES

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

<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                                   --------------------------------------
                                                      1997           1998         1999
                                                   -----------   ------------   ---------
<S>                                                <C>           <C>            <C>
Income tax benefit (expense) at statutory rate...  $14,568,439   $ 57,580,016   $(708,167)
Valuation allowance on deferred tax assets.......   (7,294,578)   (57,560,222)    708,167
Other............................................       11,904        (19,794)         --
                                                   -----------   ------------   ---------
                                                   $ 7,285,765   $         --   $      --
                                                   ===========   ============   =========
</TABLE>

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

<TABLE>
<CAPTION>
                                                                    DECEMBER 31,
                                                             ---------------------------
                                                                 1998           1999
                                                             ------------   ------------
<S>                                                          <C>            <C>
Deferred tax assets (liabilities):
Property and equipment.....................................  $ 36,718,003   $ 32,427,965
Net operating loss carryforwards...........................    29,766,440     31,262,503
Statutory depletion carryforwards..........................     1,340,763      1,340,763
Other, net.................................................     1,000,148      1,085,538
                                                             ------------   ------------
                                                               68,825,354     66,116,769
Less valuation allowance...................................   (68,825,354)   (66,116,769)
                                                             ------------   ------------
                                                             $         --   $         --
                                                             ============   ============
</TABLE>

     At December 31, 1999, the Company had net operating loss carryforwards
available for federal income tax purposes of approximately $89.3 million which
begin expiring in 2000. Utilization of approximately $31.0 million of the net
operating loss carryforwards is subject to various limitations because of
previous changes in control of ownership (as defined in the Internal Revenue
Code) of the Company and Alexander Energy. Additional net operating loss
limitations may be imposed as a result of subsequent changes in stock ownership
of the Company. Bankruptcy proceedings may eliminate all or a portion of the
Company's net operating loss carryforwards. For federal income tax purposes, the
Company also has statutory depletion carryforwards of $3.8 million, which do not
expire.

9. NATURAL GAS HEDGING ACTIVITIES AND FORWARD SALES CONTRACTS

     While the use of financial hedging arrangements limits the downside risk of
adverse price movements, it may also limit future gains from favorable
movements. The Company addresses market risk by selecting instruments whose
value fluctuations correlate strongly with the underlying commodity being
hedged. Credit risk related to hedging activities is managed by requiring
minimum credit standards for counterparties, periodic settlements, and mark to
market valuations. The Company has not been required to provide collateral
relating to its hedging activities.

     At December 31, 1999, the Company had not entered into any forward sales
contracts.

     At December 31, 1998, the Company had entered into forward sales contracts
with two purchasers covering future production of natural gas which expired
during 1999.

                                      F-20
<PAGE>   72
                          NATIONAL ENERGY GROUP, INC.
                              DEBTOR-IN-POSSESSION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 31, 1999

10. RESTRUCTURING CHARGES

     During 1998, the Company recorded non-recurring restructuring charges of
$1,869,169 related to severance and related costs resulting from restructuring
of the Company's executive management team, and other personnel changes and
costs associated with the Chapter 11 filing. The components of the restructuring
charges are as follows:

<TABLE>
<S>                                                          <C>
Severance..................................................  $1,401,537
Lease termination costs....................................     154,946
Cost associated with Chapter 11 filing.....................     312,686
                                                             ----------
                                                             $1,869,169
                                                             ==========
</TABLE>

     Substantially all of the restructuring charges required cash outlays which
had been made as of December 31, 1998.

11. CRUDE OIL AND NATURAL GAS PRODUCING ACTIVITIES

     Costs incurred in connection with the exploration acquisition, development,
and exploitation of the Company's crude oil and natural gas properties for the
years ended December 31, 1997, 1998, and 1999, are as follows:

<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                                    -------------------------------------
                                                       1997          1998         1999
                                                    -----------   -----------   ---------
<S>                                                 <C>           <C>           <C>
Acquisitions of properties:
  Proved..........................................  $        --   $ 5,093,000          --
  Unproved........................................    2,074,339            --          --
Exploration costs.................................   31,126,227     9,012,942          --
Development costs.................................   54,475,373    25,022,494   3,785,889
Depletion rate per Mcfe...........................         1.11          1.06         .91
</TABLE>

     During 1997 and 1998, the net book value of the Company's oil and natural
gas properties exceeded the full cost ceiling resulting in writedowns of the oil
and natural gas properties of $46.4 million and $148.4 million, respectively.
The Company did not incur ceiling limitation writedowns during 1999. There can
be no assurance that there will not be additional writedowns in future periods
under the full cost method of accounting as a result of sustained decreases in
oil and natural gas prices or other factors.

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

<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                                  ---------------------------------------
                                                     1997          1998          1999
                                                  -----------   -----------   -----------
<S>                                               <C>           <C>           <C>
Plains Marketing and Transportation.............  $17,918,762   $13,291,379   $18,203,851
Crosstex Energy.................................    6,471,157     5,140,693            --
GPM Natural Gas Corporation.....................    4,547,352            --            --
Aquila Energy Corp..............................           --     5,897,799     4,298,281
</TABLE>

     The Company believes that the loss of these purchasers would not have a
significant impact on the Company's results of operations or financial
condition.

                                      F-21
<PAGE>   73
                          NATIONAL ENERGY GROUP, INC.
                              DEBTOR-IN-POSSESSION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 31, 1999

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

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

     The Company has made, and will continue to make, ordinary course capital
expenditures for the development, and exploitation of oil and natural gas
reserves, subject to economic conditions and in accordance with the rulings and
procedures set forth by the Court. Due to the Chapter 11 filing, the Company has
suspended its development and exploratory drilling program. The Company will
limit its capital expenditures to ordinary course enhancement of current
production through workovers, recompletions, and other production enhancing
activities deemed to be economic. Development drilling is anticipated to be
limited to (i) ordinary course nonoperated wells in which the Company has
limited working interests and in which the failure to participate may result in
drainage, depletion or loss of current reserves and (ii) operated wells deemed
to be economical. Large expenditures for developmental drilling may require
Court approval and none are planned at this time. The Company has interests in
crude oil and natural gas properties that are principally located onshore in
Texas, Louisiana, Oklahoma, Arkansas, and offshore in the Gulf of Mexico. The
Company does not own or lease any crude oil and natural gas properties outside
the United States.

     In 1997 and 1998, estimates of the Company's future net recoverable crude
oil, natural gas, and natural gas liquid reserves were prepared by the Company's
in-house reserve engineers. In 1999, such estimates were prepared by Netherland,
Sewell & Associates, Inc. Estimated proved net recoverable reserves as shown
below include only those quantities that can be expected to be recoverable at
prices and costs in effect at the balance sheet dates under existing regulatory
practices and with conventional equipment and operating methods.

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

                                      F-22
<PAGE>   74
                          NATIONAL ENERGY GROUP, INC.
                              DEBTOR-IN-POSSESSION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 31, 1999

12. SUPPLEMENTARY CRUDE OIL AND NATURAL GAS RESERVE INFORMATION (UNAUDITED)
    (CONTINUED)
     Net quantities of proved developed and undeveloped reserves of natural gas
and crude oil, including condensate and natural gas liquids, are summarized as
follows:

<TABLE>
<CAPTION>
                                                                           NATURAL GAS
                                                              CRUDE OIL     (THOUSAND
                                                              (BARRELS)    CUBIC FEET)
                                                              ----------   -----------
<S>                                                           <C>          <C>
December 31, 1997...........................................   9,778,204   110,481,231
  Extensions and discoveries................................      74,000     1,857,000
  Revisions of previous estimates...........................  (4,346,951)  (24,279,454)
  Production................................................  (1,238,379)  (11,254,797)
  Purchase of reserves in place.............................     347,000       438,000
                                                              ----------   -----------
December 31, 1998...........................................   4,613,874    77,241,980
  Sales of reserves in place................................    (125,228)   (3,165,588)
  Extensions and discoveries................................          --       623,000
  Revisions of previous estimates...........................   2,260,635    (2,537,069)
  Production................................................  (1,135,253)   (9,266,140)
                                                              ----------   -----------
December 31, 1999...........................................   5,614,028    62,896,183
                                                              ==========   ===========
Proved developed reserves:
  December 31, 1997.........................................   5,780,958    89,939,678
  December 31, 1998.........................................   4,187,831    67,039,255
  December 31, 1999.........................................   4,730,828    56,730,406
</TABLE>

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

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

                                      F-23
<PAGE>   75
                          NATIONAL ENERGY GROUP, INC.
                              DEBTOR-IN-POSSESSION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 31, 1999

12. SUPPLEMENTARY CRUDE OIL AND NATURAL GAS RESERVE INFORMATION (UNAUDITED)
    (CONTINUED)
     The standardized measure of discounted future net cash flows relating to
proved crude oil and natural gas reserves are summarized as follows:

<TABLE>
<CAPTION>
                                                                    DECEMBER 31,
                                                            ----------------------------
                                                                1998           1999
                                                            ------------   -------------
<S>                                                         <C>            <C>
Future cash inflows.......................................  $207,087,600   $ 282,297,800
Future production and development costs...................   (85,893,140)   (115,829,000)
Future income tax expenses................................            --              --
                                                            ------------   -------------
Future net cash flows.....................................   121,194,460     166,468,800
10% annual discount for estimated timing of cash flows....   (45,316,980)    (57,576,100)
                                                            ------------   -------------
Standardized measure of discounted future net cash
  flows...................................................  $ 75,877,480   $ 108,892,700
                                                            ============   =============
</TABLE>

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

<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31,
                                              -------------------------------------------
                                                  1997            1998           1999
                                              -------------   ------------   ------------
<S>                                           <C>             <C>            <C>
Sales and transfers of crude oil and natural
  gas produced, net of production costs.....  $ (42,549,780)  $(27,705,832)  $(31,103,628)
Net changes in prices and production
  costs.....................................   (136,971,646)   (70,032,540)    40,307,593
Development costs incurred during the period
  and changes in estimated future
  development costs.........................     24,893,672     16,451,276      9,938,121
Purchases of reserves in place..............             --      4,783,270             --
Sales of reserves in place..................     (8,489,852)            --     (5,122,521)
Extensions and discoveries, less related
  costs.....................................     24,388,228      1,663,986        702,422
Revisions of previous quantity estimates....     (5,219,509)   (36,419,059)    12,049,069
Accretion of discount.......................     19,576,509     16,175,055      7,587,748
Net change in income taxes..................     54,258,990      7,633,978             --
Changes in production rates (timing) and
  other.....................................      2,084,308      1,576,794     (1,343,584)
                                              -------------   ------------   ------------
Net change..................................  $ (68,029,080)  $(85,873,072)  $ 33,015,220
                                              =============   ============   ============
</TABLE>

     During recent years, there have been significant fluctuations in the prices
paid for crude oil in the world markets. This situation has had a destabilizing
effect on crude oil posted prices in the United States, including the posted
prices paid by purchasers of the Company's crude oil. The net weighted average
prices of crude oil and natural gas at December 31, 1997, 1998, and 1999, used
in the above table were $17.03, $10.46 and $24.97 per barrel of crude oil,
respectively, and $2.38, $2.06 and $2.26 per thousand cubic feet of natural gas,
respectively.

                                      F-24
<PAGE>   76
                          NATIONAL ENERGY GROUP, INC.
                              DEBTOR-IN-POSSESSION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 31, 1999

13. QUARTERLY FINANCIAL RESULTS (UNAUDITED)

     The Company's operating results for each quarter of 1998 and 1999 are
summarized as follows (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                                THREE MONTHS ENDED
                                                 ------------------------------------------------
                                                 MARCH 31   JUNE 30    SEPTEMBER 30   DECEMBER 31
                                                 --------   --------   ------------   -----------
<S>                                              <C>        <C>        <C>            <C>
YEAR ENDED DECEMBER 31, 1998:
  Total revenues...............................  $10,529    $10,544      $  8,573      $  8,794
                                                 ========   ========     ========      ========
  Writedowns of oil and gas properties.........  $(26,500)  $(24,800)    $(38,650)     $(58,450)
                                                 ========   ========     ========      ========
  Operating loss...............................  $(25,757)  $(25,280)    $(39,690)     $(59,289)
                                                 ========   ========     ========      ========
  Net loss.....................................  $(29,044)  $(28,968)    $(43,592)     $(62,910)
                                                 ========   ========     ========      ========
  Income (loss) per common share...............  $  (.72)   $  (.72)     $  (1.08)     $  (1.56)
                                                 ========   ========     ========      ========
  Production:
     Oil (Bbl).................................      293        335           278           332
     Natural gas (Mcf).........................    3,080      2,913         2,682         2,580
     Natural gas equivalent (Mcfe).............    4,835      4,925         4,350         4,575
YEAR ENDED DECEMBER 31, 1999:
  Total revenues...............................  $ 7,244    $ 9,346      $ 11,209      $ 11,501
                                                 ========   ========     ========      ========
  Operating income (loss)......................  $  (183)   $ 2,102      $  4,171      $  5,027
                                                 ========   ========     ========      ========
  Net income (loss)............................  $(1,156)   $ 1,266      $  3,167      $ (1,253)
                                                 ========   ========     ========      ========
  Income (loss) per common share...............  $  (.03)   $   .03      $    .08      $   (.03)
                                                 ========   ========     ========      ========
  Production:
     Oil (Bbl).................................      294        291           280           270
     Natural gas (Mcf).........................    2,494      2,403         2,291         2,078
     Natural gas equivalent (Mcfe).............    4,260      4,149         3,971         3,698
</TABLE>

                                      F-25
<PAGE>   77

                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
      EXHIBIT
      NUMBER                                  DESCRIPTION
      -------                                 -----------
<C>                   <S>
        2.1           Agreement and Plan of Merger, dated June 6, 1996, among the
                      Company, NEG-OK, Inc. ("NEG OK"), and Alexander Energy
                      Corporation ("Alexander")(1)
        2.2           First Amendment to Agreement and Plan of Merger, dated as of
                      June 20, 1996, among the Company, NEG-OK and Alexander(2)
        2.3           Mutual Waiver Agreement dated as of August 29, 1996 by and
                      among the Company, NEG-OK and Alexander(3)
        2.4           Debtor's Joint Disclosure Statement under Section 1125 of
                      the Bankruptcy Code Regarding Debtor's Joint Plan of
                      Reorganization under Chapter 11 of the Bankruptcy Code dated
                      March 14, 2000(20)
        2.5           Debtors Joint Plan of Reorganization under Chapter 11 of the
                      Bankruptcy Code dated March 14, 2000(20)
        2.6           Joint Disclosure Statement under Section 1125 of the
                      Bankruptcy Code with Respect to the Plan of Reorganization
                      proposed by the Official Committee of Unsecured Creditors
                      dated February 28, 2000(20)
        2.7           Plan of Reorganization Submitted by the Official Committee
                      of Unsecured Creditors dated February 28, 2000(20)
        3.1           Certificate of Incorporation of the Company, which includes
                      the Certificate of Incorporation of the Company filed with
                      the Secretary of State of Delaware on November 20, 1990(4),
                      the Certificate of Elimination of the Redeemable Convertible
                      Preferred Stock, Series A of the Company, filed with the
                      office of the Secretary of State of the State of Delaware on
                      June 2, 1994(3), the Certificate of Amendment of Certificate
                      of Incorporation of the Company, filed with the office of
                      the Secretary of State of the State of Delaware on August
                      29, 1996(3), the Certificate of Designations of the Company
                      of 10% Cumulative Convertible Preferred Stock, Series B(5),
                      the Certificate of Designations of the Company of 10 1/2%
                      Cumulative Convertible Preferred Stock, Series C(6), the
                      Certificate of Designations of the Company of Convertible
                      Preferred Stock, Series D(3), and the Certificate of
                      Designations of the Company of Convertible Preferred Stock,
                      Series E(3)
        3.2           By-laws of the Company(4)
        4.1           Certificate of Designations of the Company of 10% Cumulative
                      Convertible Preferred Stock, Series B(5)
        4.2           Certificate of Designations of the Company of 10 1/2%
                      Cumulative Convertible Preferred Stock, Series C(6)
        4.3           Certificate of Designations of the Company of Convertible
                      Preferred Stock, Series D(3)
        4.4           Certificate of Designations of the Company of Convertible
                      Preferred Stock, Series E(3)
        4.5           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.(7)
        4.6           Indenture dated August 21, 1997, among the Company and Bank
                      One, N.A.(14)
        4.7           Instrument of Resignation, Appointment and Acceptance, dated
                      October 23, 1998, between the Company, Bank One, N.A. and
                      Norwest Bank Minnesota, N.A.(19)
       10.1           Crude Oil Purchase Contract, dated November 30, 1992,
                      between the Company and Plains Liquids Transport Inc.(8)
       10.2           Amendment to Crude Oil Purchase Contract, dated November 17,
                      1993, between the Company and Plains Liquids Transport,
                      Inc.(5)
       10.3           Crude Oil Purchase Contract, dated February 8, 1993, between
                      the Company and Plains Marketing and Transportation Inc. and
                      the predecessor contract, the Crude Oil Purchase Contract,
                      dated November 12, 1991, between Sunnybrook Transmission,
                      Inc. and TriSearch Inc.(8)
       10.4           Agreement for Purchase and Sale (Mustang Island) dated April
                      20, 1995, between the Company and Sierra Mineral
                      Development, L.C.(6)
</TABLE>
<PAGE>   78

<TABLE>
<CAPTION>
      EXHIBIT
      NUMBER                                  DESCRIPTION
      -------                                 -----------
<C>                   <S>
       10.5           Agreement for Purchase and Sale (Oak Hill) dated April 12,
                      1995, between the Company and Sierra 1994 I Limited
                      Partnership(6)
       10.6           Stock Purchase Agreement, dated as of June 14, 1995, among
                      the Company, Arbco Associates L.P., Offense Group Associates
                      L.P., Kayne, Anderson Nontraditional Investments L.P., and
                      Opportunity Associates L.P.(6)
       10.7           High River Limited Partnership Warrant to purchase 700,000
                      shares of Common Stock, dated August 29, 1996(3)
       10.8           Form of Series E Investors' Warrants to purchase an
                      aggregate 350,000 shares of Common Stock, dated August 29,
                      1996(3)
       10.9           Gascon Partners Warrant to Purchase 300,000 shares of the
                      Company's Common Stock(13)
       10.10          Prudential Securities Incorporated Warrant to Purchase
                      100,000 shares of the Company's Common Stock(3)
       10.11          Gaines Berland, Inc. Warrant to Purchase 300,000 shares of
                      the Company's Common Stock dated August 29, 1996(3)
       10.12          Gaines Berland, Inc. Warrant to Purchase 700,000 shares of
                      the Company's Common Stock dated August 29, 1996(3)
       10.13          Executive Employment Agreement, dated January 1, 1996,
                      between the Company and Miles D. Bender(9)
       10.14          Separation Agreement, dated November 24, 1998, between the
                      Company and Miles D. Bender(19)
       10.15          Executive Employment Agreement, dated January 1, 1996,
                      between the Company and Melissa Rutledge(9)
       10.16          Separation Agreement between the Company and Robert A. Imel
                      dated October 31, 1997(15)
       10.17          Separation Agreement, dated May 18, 1998, between the
                      Company and William T. Jones(17)
       10.18          Executive Employment Agreement, dated June 6, 1996, between
                      the Company and Jim L. David(1)
       10.19          Executive Employment Agreement dated March 20, 1997, between
                      the Company and Philip D. Devlin(10)
       10.20          Separation Agreement, dated May 19, 1998, between the
                      Company and Gene W. Anderson(19)
       10.21          Executive Employment Agreement dated August 25, 1997,
                      between the Company and C. Dewayne Cravens(19)
       10.22          Separation Agreement, dated May 18, 1998, between the
                      Company and C. Dewayne Cravens(19)
       10.23          Executive Employment Agreement, dated January 29, 1998,
                      between the Company and Fred R. Miller(15)
       10.24          Executive Employment Agreement, dated March 5, 1998, between
                      the Company and Chuck Elsey(16)
       10.25          Termination Notice and Agreement, dated October 28, 1998,
                      between the Company and Chuck Elsey(19)
       10.26          Executive Employment Agreement, dated April 13, 1998,
                      between the Company and Kent Lueders(16)
       10.27          Executive Employment Agreement, dated June 1, 1998, between
                      the Company and Leslie Wylie(17)
       10.28          National Energy Group, Inc. 1996 Incentive Compensation
                      Plan(11)
       10.29          National Energy Group, Inc. Employee Stock Purchase Plan(12)
       10.30          National Energy Group, Inc. Employee Severance Policy(19)
</TABLE>
<PAGE>   79

<TABLE>
<CAPTION>
      EXHIBIT
      NUMBER                                  DESCRIPTION
      -------                                 -----------
<C>                   <S>
       10.31          Agreement dated January 1, 1996 between the Company and
                      Sandefer Oil & Gas, Inc.(1)
       10.32          Consulting Agreement dated January 1, 1996 between Sandefer
                      Oil & Gas, Inc. and Potosky Oil & Gas, Inc. and Atocha
                      Exploration, Inc.(1)
       10.33          Memorandum of Amendment dated March 27, 1997 amending (i)
                      Agreement dated January 1, 1996 between the Company and
                      Sandefer Oil & Gas, Inc. and (ii) Consulting Agreement dated
                      January 1, 1996 between Sandefer Oil & Gas, Inc. and Potosky
                      Oil & Gas, Inc. and Atocha Exploration, Inc.(15)
       10.34          First Amendment dated April 15, 1997 to (i) Agreement dated
                      January 1, 1996 between the Company and Sandefer Oil & Gas,
                      Inc. and (ii) Consulting Agreement dated January 1, 1996
                      between Sandefer Oil & Gas, Inc. and Potosky Oil & Gas, Inc.
                      and Atocha Exploration, Inc.(15)
       10.35          Restated Loan Agreement dated August 29, 1996 among Bank One
                      and Credit Lyonnais New York Branch ("Credit Lyonnais") and
                      the Company, NEG-OK and Boomer Marketing Corporation
                      ("Boomer")(3)
       10.36          $50,000,000 Revolving Note dated August 29, 1996 payable to
                      Bank One(3)
       10.37          $50,000,000 Revolving Note dated August 29, 1996 payable to
                      Credit Lyonnais(3)
       10.38          Assignment of $50,000,000 Revolving Note to Arnos Corp. from
                      Bank One, Texas, N.A.(19)
       10.39          Assignment of $50,000,000 Revolving Note to Arnos Corp. from
                      Credit Lyonnais New York Branch(19)
       10.40          Unlimited Guaranty of NEG-OK dated August 29, 1996 for the
                      benefit of Bank One(3)
       10.41          Unlimited Guaranty of NEG-OK, dated August 29, 1996 for the
                      benefit of Credit Lyonnais(3)
       10.42          Unlimited Guaranty of Boomer dated August 29, 1996 for the
                      benefit of Bank One(3)
       10.43          Unlimited Guaranty of Boomer dated August 29, 1996 for the
                      benefit of Credit Lyonnais(3)
       10.44          First Amendment to Restated Loan Agreement dated October 31,
                      1996 among Bank One and Credit Lyonnais and the Company,
                      Guarantor and Boomer(9)
       10.45          Second Amendment to Restated Loan Agreement dated October
                      31, 1996, among Bank One and Credit Lyonnais and the
                      Company, Guarantor and Boomer(10)
       10.46          Third Amendment to Restated Loan Agreement dated October 31,
                      1996, among Bank One and Credit Lyonnais and the Company,
                      Guarantor and Boomer(10)
       10.47          Fourth Amendment to Restated Loan Agreement dated October
                      31, 1996, among Bank One and Credit Lyonnais and the
                      Company, Guarantor and Boomer(15)
       10.48          Multi-State Assignment Agreement dated December 22, 1998
                      between Bank One, Texas, N.A., Credit Lyonnais New York
                      Branch and Arnos Corp.(19)
       10.49          Multi-State Assignment Agreement, LaFourche Parish,
                      Louisiana, dated December 22, 1998, between Bank One, Texas,
                      N.A., Credit Lyonnais New York Branch and Arnos Corp.(19)
       10.50          Multi-State Assignment Agreement, Iberville Parish,
                      Louisiana, dated December 22, 1998, between Bank One, Texas,
                      N.A., Credit Lyonnais New York Branch and Arnos Corp.(19)
       10.51          Oklahoma Assignment Agreement, dated December 22, 1998,
                      between Bank One, Texas, N.A., Credit Lyonnais New York
                      Branch and Arnos Corp.(19)
       10.52          Arnos Corporation Letter dated December 23, 1998(19)
       10.53          Purchase and Sale Agreement between National Energy Group,
                      Inc. as Seller and Arnos Corporation as buyer dated November
                      1, 1999(20)
       12.1           Computation of Ratio of Earnings to Fixed Charges(20)
       23.1           Consent of Ernst & Young LLP, Independent Auditors(20)
       23.2           Consent of Netherland Sewell & Associates, Inc., Independent
                      Engineers(20)
       24.1           Power of Attorney (included in signature pages to this Form
                      10-K)(20)
</TABLE>
<PAGE>   80

<TABLE>
<CAPTION>
      EXHIBIT
      NUMBER                                  DESCRIPTION
      -------                                 -----------
<C>                   <S>
       27.1           Financial Data Schedule(20)
       99.1           Order of Bankruptcy Court Granting Relief on Involuntary
                      Petition(19)
       99.2           Order of Bankruptcy Court Implementing Auction Sale
                      Closing(20)
</TABLE>

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

 (1) Incorporated by reference to the Company's Registration Statement on Form
     S-4 (No. 333-9045), dated July 29, 1996.

 (2) Incorporated by reference to Amendment No. 1 to the Company's Registration
     Statement on Form S-4 (No. 333-9045), dated August 7, 1996.

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

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

 (5) Incorporated by reference to the Company's Current Report on Form 8-K,
     dated June 17, 1994.

 (6) Incorporated by reference to the Company's Current Report on Form 8-K,
     dated July 17, 1995.

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

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

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

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

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

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

(13) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
     for the quarter ended September 30, 1997.

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

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

(16) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
     for the quarter ended March 31, 1998.

(17) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
     for the quarter ended June 30, 1998.

(18) Incorporated by reference to the Company's Current Report on Form 8-K,
     dated February 8, 1999.

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

(20) Filed herewith.