##### Table of Contents



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, D.C.
    20549
    Form 10-K
  þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal Year Ended
    December 31, 2005oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934   Commission file
    no. 0-19136
    (Common Stock)
 and
    333-9045
    (Series B Senior Notes)
 and
    333-38075
    (Series D Senior Notes)
  National Energy Group,
    Inc.
 (Exact name of registrant as
    specified in its charter)
  Delaware

58-1922764(State or other jurisdiction
    of
    incorporation or organization)

(IRS Employer
    Identification No.)4925 Greenville Avenue
    Dallas, Texas(Address of principal
    executive offices)

75206(Zip
    code)   (214) 692-9211
 (Registrants telephone number, including area code)
  Securities registered pursuant to Section 12(b) of the
    Act:
 None
  Securities registered pursuant to Section 12(g) of the
    Act:
 Common Stock, $0.01 par value
 (Title of Class)
 Securities registered pursuant to Securities Act of 1933:
 Series B Senior Notes,
    103/4%
    due 2006
 Series D Senior Notes,
    103/4%
    due 2006
  o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K.  Yes þ o
  rule 12b-2
 o o þ
  Rule 12b-2 o þ
    þ o




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##### Table of Contents



TABLE OF
    CONTENTS
  PagePART IITEMS 1. AND 2.

BUSINESS AND
    PROPERTIES


5Forward-Looking
    Statements


5Introduction


5Ownership and
    Control of Outstanding Stock


6Proposed Merger


6The Holding LLC
    Operating Agreement


7The Reorganized
    Company


8The Management
    Agreements


9Operating LLC
    Credit Agreements


10Senior Notes


11Our Properties and
    Principal Areas of Operations


11Investment in
    Holding LLC


12Holding
    LLC   Principal Areas of Operations


12Holding
    LLC  Mid-Continent Area


13Holding
    LLC  East Texas Area


14Holding
    LLC  West Texas Area


14Holding
    LLC  Gulf Coast Area


15Holding
    LLC  Oil and Natural Gas Reserves


15Holding
    LLC  Oil and Natural Gas Production and Unit
    Economics


16Holding
    LLC  Productive Well Summary


17Holding
    LLC  Leasehold Acreage


17Holding
    LLC  Drilling Activity


18Holding
    LLC  Title to Oil and Natural Gas Properties


18Holding
    LLC  Production and Sales Prices


18Holding
    LLC  Control Over Production Activities


18Holding
    LLC  Markets and Customers


18Holding
    LLC  Regulation


19Holding
    LLC  Operational Hazards and Insurance


21Holding
    LLC  Competition


22Our Office Space


22Our Employees


22Access to Public
    Filings


22ITEM 1A.

RISK FACTORS


22ITEM 1B.

UNRESOLVED STAFF
    COMMENTS


31ITEM 3.

LEGAL
    PROCEEDINGS


31PART IIITEM 4.

SUBMISSION OF
    MATTERS TO A VOTE OF SECURITY HOLDERS


31ITEM 5.

MARKET FOR
    REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER
    MATTERS


31Market
    Information


31Holders


32Dividends on Common
    Stock


32 2




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PageITEM 6.

SELECTED FINANCIAL
    DATA


33ITEM 7.

MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS


34Overview of Our
    Business


34Ownership and
    Control of Outstanding Stock


35Proposed Merger


35Senior Notes Due
    Date Extension


36The Holding LLC
    Operating Agreement


36The Reorganized
    Company


38Management
    Agreements


38Operating LLC
    Credit Agreement


39Senior Notes


40Results of
    Operations


41Accretion of Our
    Investment in Holding LLC


41Management Fees and
    Affiliates


41Costs and
    Expenses


42Deferred Income Tax
    Asset


42Liquidity and
    Capital Resources


42Table of
    Contractual Obligations


43Future Capital and
    Financing Requirements


43Off Balance Sheet
    Arrangements


43Critical Accounting
    Policies and Estimates


43Recent Accounting
    Pronouncements


44Changes in
    Prices


45Inflation


45ITEM 7A.

QUANTITATIVE AND
    QUALITATIVE DISCLOSURES ABOUT MARKET RISK


45ITEM 8.

FINANCIAL
    STATEMENTS AND SUPPLEMENTARY DATA


45ITEM 9.

CHANGES IN AND
    DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
    DISCLOSURE


46ITEM 9A.

CONTROLS AND
    PROCEDURES


46Conclusion
    Regarding the Effectiveness of Disclosure Controls and
    Procedures


46Changes in Internal
    Control over Financial Reporting


46Managements
    Report on Internal Control Over Financial Reporting


47Auditors
    Report on Internal Control Over Financial Reporting


48ITEM 9B.

OTHER
    INFORMATION


49Entry into a
    Material Definitive Agreement


49PART IIIITEM 10.

DIRECTORS AND
    EXECUTIVE OFFICERS OF THE REGISTRANT


49Board of
    Directors


51Audit Committee


51Compensation
    Committee


52 3




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PageSpecial
    Committee


52Code of Ethics


52Selected 16(a)
    Beneficial Ownership Reporting Compliance


53ITEM 11.

EXECUTIVE
    COMPENSATION


53ITEM 12.

SECURITY OWNERSHIP
    OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT


54ITEM 13.

CERTAIN
    RELATIONSHIPS AND RELATED TRANSACTIONS


56ITEM 14.

PRINCIPAL
    ACCOUNTING FEES AND SERVICES


57PART IVITEM 15.

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


58Signatures


61Affirmation of Obligations Among NEG Operating LLCSupplemental IndentureComputation of Ratio of Earnings to Fixed ChargesConsent of Netherland Sewell & Associates, Inc.Consent of Prator Bett, LLCConsent of DeGolyer and MacNaughtonCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906   4




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PART I  Items 1.
    and 2.
    Business
    and Properties Forward-Looking
    Statements  Form 10-K
   Introduction     5




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Ownership
    and Control of Outstanding Stock     Proposed
    Merger     6




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Form S-1
 The
    Holding LLC Operating Agreement    Order
    of Distributions
         7




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Redemption Provision
     The
    Reorganized Company   8




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Management
    Agreements  The
    Operating LLC Management Agreement
  day-to-day
  The
    National Onshore Management Agreement
    day-to-day
 9




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The
    National Offshore Management Agreement
   Operating
    LLC Credit Agreements       10




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Senior
    Notes  3 4
   Our
    Properties and Principal Areas of Operations   11




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and/or
 Investment
    in Holding LLC         Holding
    LLC  Principal Areas of Operations   12




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NaturalNatural


GasOil


Gas


Equivalent


% of(Mbbls)


(Mmcf)


(Mmcfe)


TotalArea:Mid-Continent


336



30,285



32,301



10.0
%East Texas


374



55,158



57,402



17.7West Texas


3,745



199,737



222,207



68.7Gulf Coast


709



7,364



11,619



3.6Total


5,164



292,544



323,529



100.0
%     NaturalNatural


GasOil


Gas


Equivalent


% of(Mbbls)


(Mmcf)


(Mmcfe)


TotalArea:Mid-Continent


35



2,805



3,018



15.6
%East Texas


38



5,330



5,559



28.6West Texas


299



7,132



8,928



46.0Gulf Coast


154



982



1,906



9.8Total


526



16,249



19,411



100.0
%  Holding
    LLC  Mid-Continent Area    Anadarko Basin.
 13




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Arkoma Basin.
   Holding
    LLC  East Texas Area    East Texas Basin.
   Holding
    LLC  West Texas Area    West Texas.
  
    Goldsmith Adobe Unit (GAU) is located in the Permian
    Basin of West Texas. Holding LLC now owns a 99.9% working
    interest in this property. Originally the GAU was drilled on
    40-acre
    spacing units. Previous operators had drilled several wells on
    20-acre
    spacing units and, based on the results of this drilling and
    20-acre
    spacing development on adjoining leases, National Energy Group,
    Inc. began a drilling program in July 1994 to develop the GAU on
    20-acre
    spacing units. Typically, wells drilled at the GAU produce from
    the Upper Clearfork formation at an average depth of
    6,100 feet.    
    Longfellow Ranch Field and associated producing fields are
    located in the Val Verde Basin, primarily a natural gas
    producing area. Longfellow Ranch Field (Pinion Field) was
    discovered in 1983 by Fina Oil and Gas, but was not extensively
    developed due to lack of necessary pipeline and associated
    facilities. Riata Energy Inc. acquired the field in 1996 and
    began an extensive development program. The field is located
    near the leading edge of the Marathon thrust belt, where massive
    sheets of basin-ward Pennsylvanian, Mississippian and Devonian
    age rocks were thrust over the shelf onto deposits of similar
    age. The thrust belt in this region is further overlain by early
    Pennsylvanian and Permian sediments. The primary producing
    horizons in the field are the Caballos Novaculites of Devonian
    age. These sediments were deposited as laminated cherts ranging
    in thicknesses from 75 to over 800 feet thick. Additional
    producing horizons 14




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include the lower Pennsylvanian Dimple and upper Mississippian
    Tesnus formations. The Dimple is a shelf limestone deposit of
    Atokan or Morrowan age and the Tesnus is a clastic sandstone
    sequence. Other objectives include a normal stratigraphic
    section of Devonian, Silurian and Ordovician. These horizons
    have produced north of the Marathon thrust belt, where the
    structures can produce over one TCF of natural gas. The
    Longfellow Ranch Field is not delineated and is considered to be
    immature in its oil and natural gas development.   Holding
    LLC  Gulf Coast Area    3-D 3-D
   Holding
    LLC  Oil and Natural Gas Reserves       15




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As of December 31,
    2005NaturalNatural


GasOil


Gas


Equivalent(Mbbls)


(Mmcf)


(Mmcfe)


PV10%(In thousands)Proved Developed Reserves


3,609



141,262



162,915


$
657,693Proved Undeveloped Reserves


1,555



151,282



160,614



420,800Total Proved Reserves


5,164



292,544



323,529


$
1,078,493Standardized Measure













$
1,075,881  Holding
    LLC  Oil and Natural Gas Production and Unit
    Economics    Year Ended
    December 31,2003


2004


2005Net production:Oil (Mbbls)


629



565



527Natural gas (Mmcf)


13,437



13,106



16,250Natural gas equivalent (Mmcfe)


17,211



16,496



19,411Average sales price:Oil (per Bbl)

$
26.54


$
28.37


$
49.11Natural gas (per Mcf)


4.39



5.21



6.02Unit economics (per Mcfe):Average sales price

$
4.40


$
5.11


$
6.37Lease operating expenses


.66



.82



.95Oil and natural gas production
    taxes


.34



.35



.44Depletion rate


1.25



1.28



1.65General and administrative expenses


.28



.25



.20  16




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##### Table of Contents



Holding
    LLC  Productive Well Summary    Oil


Natural Gas


TotalGross


Net


Gross


Net


Gross


NetArea:Mid-Continent


33



11



209



97



242



108East Texas


3



3



87



84



90



87West Texas


164



160



174



67



338



227Gulf Coast


18



9



50



21



68



30Total


218



183



520



269



738



452  Holding
    LLC  Leasehold Acreage    Developed


UndevelopedAcreage


AcreageGross


Net


Gross


NetArea:Mid-Continent


68,600



36,300







East Texas


11,300



10,700



6,600



5,300West Texas


31,200



15,900



108,900



98,500Gulf Coast


21,900



7,600



1,200



200Totals


133,000



70,500



116,700



104,000      17




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##### Table of Contents



Holding
    LLC  Drilling Activity    Year Ended
    December 31,2003


2004


2005Gross


Net


Gross


Net


Gross


NetExploratory wellsProductive


29



7.9



52



17.4



41



17.9Non-productive


2



.2



11



3.3



6



2.4Total


31



8.1



63



20.7



47



20.3Development wellsProductive


36



26.0



39



19.0



38



24.5Non-productive


1



.4











1



.2Total


37



26.4



39



19.0



39



24.7Combined Total


68



34.5



102



39.7



86



45.0  Holding
    LLC  Title to Oil and Natural Gas
    Properties   Holding
    LLC  Production and Sales Prices  and/or
 Holding
    LLC  Control Over Production
    Activities  and/or
 Holding
    LLC  Markets and Customers   18




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Holding
    LLC  Regulation  General.
  Exploration and Production.
 19




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Environmental Protection and Occupational
    Safety.
           20




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Marketing and Transportation.
    No. 636-A No. 636-B
 Holding
    LLC  Operational Hazards and Insurance   21




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Holding
    LLC  Competition   Our
    Office Space   Our
    Employees   Access to
    Public Filings  Form 10-K, Form 10-Q, Form 8-K, http://www.negx.com. http://www.sec.gov.
  Item 1A.
    Risk
    Factors  Risks
    Related to our Business and the Oil and Natural Gas
    Industry
  We may
    not be able to pay our Senior Notes by the extended due
    date
     22




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Our
    principal sources of revenues and cash flows are derived from
    affiliates which we do not control.
    day-to-day
    We are
    a management company and have no direct ownership of oil and
    natural gas properties or proved reserves.
    We are
    not certain that there would be any residual value in Holding
    LLC after Guaranteed Payments and Priority Amount
    distributions.
    The
    Holding LLC Operating Agreement includes a provision that allows
    NEG Oil & Gas to redeem our membership interest in
    Holding LLC at a price equal to the fair market value of such
    interest determined as if Holding LLC had sold all of its assets
    for fair market value and liquidated.
     23




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and/or
  Oil
    and natural gas prices are volatile. A decrease in oil and
    natural gas prices could have a material adverse effect on our
    investment in Holding LLC, payments of the Guaranteed Amounts or
    Priority Amount.
    
    changes in global supply and demand for oil and natural gas;
    commodity processing, gathering and transportation availability;
    actions of the Organization of Petroleum Exporting Countries;
    domestic and foreign governmental regulations and taxes;
    domestic and foreign political conditions, including embargoes,
    wars or terrorism activities affecting oil-producing activity;
    the level of global oil and natural gas exploration activity and
    inventories;
    the relative availability of domestic and imported oil and
    natural gas;
    the price, availability and consumer acceptance of alternative
    fuel sources;
    the availability of refining capacity;
    technological advances affecting energy consumption;
    weather conditions;
    financial and commercial market uncertainty;
    worldwide economic conditions; and
    disruptions as a result of natural calamities. 24




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Estimating
    Holding LLCs reserves, production and future net cash flow
    may not represent the current market value of our oil and
    natural gas reserves.
      PV-10 PV-10
  The
    businesses of Holding LLC and the companies that we manage
    involve significant operating risks.
    
    well blowouts;
    craterings and explosions;
    pipe failures and ruptures;
    pipeline accidents and failures;
    casing collapses;
    unexpected formations or pressures;
    fires;
    mechanical and operational problems that affect production; 25




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
    formations with abnormal pressures;
    uncontrollable flows of oil, natural gas, brine or well
    fluids; and
    releases of contaminants into the environment, including
    groundwater contamination.    Holding
    LLCs commodity price risk management activities may limit
    future revenues from price increases and result in financial
    losses or reduce income.
    
    production is less than expected;
    a counterparty to a derivative contract fails to perform under
    the contract;
    there is a change in the expected differential between the
    underlying price in the derivative contract and actual prices
    received; or
    there is a sudden, unexpected event that materially impacts oil
    or natural gas prices.      
    cash flow available for capital expenditures;
    ability to borrow and raise additional capital;
    quantity of oil and natural gas Holding LLC can produce;
    quantity of oil and gas reserves; and
    operating results for oil and natural gas activities.     26




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Holding
    LLC may experience difficulty finding and acquiring additional
    reserves and may be unable to compensate for the depletion of
    proved reserves.
    Oil
    and natural gas exploration, exploitation and development
    activities may not be successful.
    
    title problems;
    problems in delivery of Holding LLCs oil and natural gas
    to market;
    pressure or irregularities in geological formations;
    equipment failures or accidents;
    shortages of, or delays in obtaining, equipment or qualified
    personnel;
    adverse weather conditions;
    reductions in oil and natural gas prices;
    compliance with environmental and other governmental
    requirements; and
    costs of, or shortages or delays in the availability of,
    drilling rigs, equipment and services. 27




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Our
    insurance coverage may not be sufficient and insufficient
    insurance coverage and increased insurance costs could adversely
    impact our results of operations, financial condition or cash
    flows.
    Holding
    LLC is subject to complex laws and regulations, including
    environmental laws and regulations, that can adversely affect
    the cost, manner and feasibility of doing
    business.
    
    land use restrictions where many of our operations are located;
    drilling bonds and other financial responsibility requirements;
    spacing of wells;
    emissions into the air;
    unitization and pooling of properties;
    habitat and endangered species protection, reclamation and
    remediation;
    the containment and disposal of hazardous substances, oil field
    waste and other waste materials;
    the use of underground storage tanks;
    the use of underground injection wells, which affects the
    disposal of water and other produced liquids from our wells;
    safety precautions;
    the prevention of oil spills;
    releases of contaminants into the environment;
    wetlands protection;
    the closure of exploration and production facilities; and
    operational reporting requirements.    
    governmental sanctions, such as fines, penalties, and injunctive
    relief;
    property and natural resource damages;
    releases or discharges of hazardous materials;
    well reclamation costs;
    oil spill
    clean-up
    costs;
    other remediation and
    clean-up
    costs; 28




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
    plugging and abandonment costs, which may be particularly high
    in the case of offshore facilities;
    personal injuries; and
    other environmental damages.    Holding
    LLC may be required to write down the carrying value of its
    properties.
    The
    loss of our president and chief executive officer or other key
    personnel could adversely affect our business.
    Changes
    in the financial condition of any of Holding LLCs large
    oil and natural gas purchasers could make it difficult to
    collect amounts due from those purchasers.
    Threatened
    or actual terrorist activity could adversely affect our
    business.
   29




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Factors
    That May Impact Future Results of Operations
  If we
    fail to realize the anticipated benefits of the merger with NEG,
    Inc., our stockholders may receive lower returns than they
    expect.
    The
    number of shares of NEG, Inc. common stock that our stockholders
    receive in the merger will be based upon a fixed exchange ratio.
    The value of the shares of NEG, Inc. common stock at the time
    our stockholders receive them could be less than the value of
    our common stock today.
    Obtaining
    required approvals and satisfying closing conditions may delay
    or prevent completion of the merger.
  Form S-1 S-1
 30




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Some
    of our directors and executive officers have interests that are
    different from, or in addition to, the interests of our
    stockholders.
    Item 1B.
    Unresolved
    Staff Comments  None.
  Item 3.
    Legal
    Proceedings       PART II  Item 4.
    Submission
    of Matters to a Vote of Security Holders    Item 5.
    Market
    for Registrants Common Equity and Related Stockholder
    Matters Market
    Information   31




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Common StockPriceHigh


LowCalendar Years by
    Quarter2005:First

$
3.40


$
2.25Second


3.09



2.12Third


5.50



2.40Fourth


7.75



3.702004:First

$
4.55


$
2.45Second


4.10



2.05Third


2.85



1.20Fourth


3.25



2.06    Holders   Dividends
    on Common Stock   32




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##### Table of Contents



Item 6.
    Selected
    Financial Data    Year Ended
    December 31,2001(1)


2002


2003


2004


2005(In thousands, except for ratios
    and per unit data)Statement of Operations
    Data:Oil and natural gas sales

$
33,176


$



$



$



$
Accretion of Investment in Holding
    LLC


9,834



32,879



30,141



34,432



44,306Management
    fees  affiliates


2,699



7,637



7,967



11,563



14,587Interest income and other, net


(336
)


36



34



39



78Total revenue


45,373



40,552



38,142



46,034



58,971Costs and expenses:Lease operating


3,874















Oil and natural gas production taxes


1,695















Depreciation, depletion and
    amortization


6,163















Salaries and wages


3,327



4,256



4,349



7,225



8,790Insurance


502



588



638



1,002



809Rent and utilities


597



624



669



699



804Other G&A expenses


1,505



1,637



1,575



2,219



4,502Interest expense(2)


21,224



18,964



15,115



13,940



13,940Total costs and expenses


38,887



26,069



22,346



25,085



28,845Income before reorganization items
    and income taxes


6,486



14,483



15,796



20,949



30,126Reorganization items:Loss in restructuring of payables


(11
)














Professional fees and other


236















Income loss before income taxes


6,711



14,483



15,796



20,949



30,126Income tax benefit (expense)(5)


30,589



(5,068
)


(225
)


(6,664
)


(4,852
)Net income

$
37,300


$
9,415


$
15,571


$
14,285


$
25,274Net income per common share, basic
    and diluted

$
3.33


$
.84


$
1.39


$
1.28


$
2.26Cash Flow Data:Net cash provided by (used in)
    operating activities

$
11,537


$
(21,266
)

$
(59,053
)

$
(16,650
)

$
(15,407
)Net cash provided by (used in)
    investing activities


(30,840
)


21,653



58,735



15,978



15,978Net cash used in financing
    activities


(20,935
)














Balance Sheet Data (at period
    end):Cash and cash equivalents

$
3,090


$
3,477


$
3,159


$
2,488


$
3,059Working capital (deficit)


1,673



(40,001
)


1,699



2,200



1,809Total assets


132,709



138,805



99,684



112,113



135,727Long-term debt


202,471



159,576



148,637



148,637



148,637Stockholders deficit


(82,405
)


(72,989
)


(57,418
)


(43,133
)


(17,859
)   33




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Year Ended
    December 31,2001(3)


2002(4)


2003(4)


2004(4)


2005(4)Operating Data:Production:Oil (Mbls)


428















Natural gas (Mmcf)


4,333















Natural gas equivalent (Mmcfe)


6,901















Average sales price:Oil (per Bbl)

$
27.70















Natural gas (per Mcf)


4.92















Unit economics (per Mcfe):Average sales price

$
4.81















Lease operating expenses


.56















Oil and natural gas production
    taxes


.25















Depreciation, depletion and
    amortization


.89















General and administrative


.50















     (1)
    
    As mandated by our Plan of Reorganization we contributed all of
    our assets and liabilities, except for $4.3 million in
    cash, to Holding LLC in exchange for an unconsolidated
    non-controlling 50% membership interest and certain Guaranteed
    Amounts and Priority Distributions. The contribution was
    recorded as of September 1, 2001.(2)
    
    As part of the Plan of Reorganization, $35.3 million of
    interest on the Senior Notes was reinstated.(3)
    
    Operating data is included only through August 31, 2001,
    when the oil and natural gas assets were contributed to Holding
    LLC.(4)
    
    We had no oil and natural gas operations during 2002, 2003, 2004
    and 2005 as all the oil and natural gas assets were contributed
    to Holding LLC effective August 31, 2001.(5)
    
    See Note 10 in Notes to Consolidated Financial Statements.  Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations     Overview
    of our Business   34




---



##### Table of Contents



Ownership
    and Control of Outstanding Stock     Proposed
    Merger   35




---



##### Table of Contents



Form S-1
 Senior
    Notes Due Date Extension   The
    Holding LLC Operating Agreement   36




---



##### Table of Contents



Order
    of Distributions
                Redemption Provision
    in the Holding LLC Operating Agreement
     37




---



##### Table of Contents



The
    Reorganized Company   Management
    Agreements  The
    Operating LLC Management Agreement
  day-to-day
  The
    National Onshore Management Agreement
   38




---



##### Table of Contents



day-to-day
  The
    National Offshore Management Agreement
   Operating
    LLC Credit Agreement     39




---



##### Table of Contents



Senior
    Notes  3 4
 40




---



##### Table of Contents



Results
    of Operations   Accretion
    of Our Investment in Holding LLC       Management
    Fees from Affiliates    2003


2004


2005Operating LLC

$
6,629,001


$
6,161,919


$
5,597,737National Onshore


1,338,000



4,675,525



4,768,036National Offshore






725,282



4,221,433Total

$
7,967,001


$
11,562,726


$
14,587,206  41




---



##### Table of Contents



Costs and
    Expenses    Year Ended
    December 31,2003


2004


Variance


%


2004


2005


Variance


%Salaries and wages

$
4,348,645


$
7,224,605


$
2,875,960



66


$
7,224,605


$
8,789,555


$
1,564,950



22Insurance


637,585



1,001,644



364,059



57



1,001,644



809,099



(192,545
)


(19
)Rent and utilities


668,802



699,674



30,872



5



699,674



804,353



104,679



15Other G&A Expenses


1,575,514



2,218,752



643,238



41



2,218,752



4,501,433



2,282,681



103Interest expense


15,114,928



13,940,391



(1,174,537
)


(8
)


13,940,391



13,940,383



(8
)


Total cost & expenses

$
22,345,474


$
25,085,066


$
2,739,592






$
25,085,066


$
28,844,823


$
3,759,757            Deferred
    Income Tax Asset   Liquidity
    and Capital Resources       42




---



##### Table of Contents



3 4
     Table of
    Contractual Obligations    Payment Due by PeriodAfterLess Than


One-Three


Four-Five


FiveTotal


One Year


Years


Years


YearsSenior Notes

$
148,637,000


$



$
148,637,000


$



$
Interest payments


15,978,478



15,978,478











Rent


1,220,110



610,055



610,055







Total

$
165,835,588


$
16,558,533


$
149,247,055


$



$
  Future
    Capital and Financing Requirements   Off
    Balance Sheet Arrangements   Critical
    Accounting Policies and Estimates   43




---



##### Table of Contents



Recent
    Accounting Pronouncements   44




---



##### Table of Contents



fair-value-based
     Changes
    in Prices   Inflation    Item 7A.
    Quantitative
    and Qualitative Disclosures About Market Risk    Item 8.
    Financial
    Statements and Supplementary Data  Rule 15d-21 Form 11-K
 45




---



##### Table of Contents



Item 9.
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure    Item 9A.
    Controls
    and Procedures Conclusion
    Regarding the Effectiveness of Disclosure Controls and
    Procedures  Rules 13a-15(f) 15d-15(f),
 Changes
    In Internal Control Over Financial Reporting         46




---



##### Table of Contents



Managements
    Report on Internal Control Over Financial Reporting  Rules 13a-15(f)and 15d-15(f) Internal
    Control  Integrated Framework Internal Control  Integrated Framework
   47




---



##### Table of Contents



Auditors
    Report on Internal Control Over Financial Reporting  REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
      Internal Control  Integrated Framework
        Internal
    Control  Integrated Framework Internal Control  Integrated
    Framework
        48




---



##### Table of Contents



Item 9B.
    Other
    Information Entry
    into a Material Definitive Agreement     PART III  Item 10.
    Directors
    and Executive Officers of the Registrant    Name

Age

Present Position with the
    CompanyBob G. Alexander*


72


Chairman of the Board of
    Directors, President and Chief Executive OfficerMartin L. Hirsch*


51


DirectorRobert H. Kite*


51


DirectorRobert J. Mitchell*


59


DirectorJack G. Wasserman*


69


DirectorF. Wayne Campbell


54


Vice President, ExplorationRandall D. Cooley


52


Vice President and Chief Financial
    OfficerPhilip D. Devlin


61


Vice President, General Counsel
    and SecretaryRick L. Kirby


52


Vice President, Drilling and
    ProductionR. Kent Lueders


48


Vice President, Corporate
    DevelopmentLori K. Mauk


45


Vice President, Product MarketingDavid V. Rigsby


54


Vice President, LandJenny V. Robins


52


Vice President, Non-Operated
    Properties     *
    
    Current Director.  Bob G. Alexander.
  Martin L. Hirsch.
 49




---



##### Table of Contents



Robert H. Kite.
  Robert J. Mitchell.
  Jack G. Wasserman.
  F. Wayne Campbell.
  Randall D. Cooley.
  Philip D. Devlin.
 50




---



##### Table of Contents



Rick L. Kirby.
  R. Kent Lueders.
  Lori K. Mauk.
  David V. Rigsby.
  Jenny V. Robins.
 Board of
    Directors   Audit
    Committee   51




---



##### Table of Contents



Rule 10A-3
      Regulation S-K.
  Form 10-K
 Compensation
    Committee   Special
    Committee   Code of
    Ethics   52




---



##### Table of Contents



Form 8-K
 Section 16(a)
    Beneficial Ownership Reporting Compliance    Item 11.
    Executive
    Compensation  Executive Compensation.
  Summary
    Compensation Table
    2005
  Long TermCompensation AwardsAnnual


Restricted


SecuritiesCompensation(1)


Stock


Underlying


All OtherName and Principal
    Position

Year


Salary ($)


Bonus ($)(2)


Awards ($)


Options


Compensation ($)Bob G. Alexander


2005


$
350,000


$
250,000










$
9,000
(2)President and Chief


2004



300,000



175,000











8,000
(2)Executive Officer


2003



300,000



150,000











6,000
(2)F. Wayne Campbell


2005


$
152,083


$
45,000










$
7,840
(3)Vice President, Exploration


2004



110,000



45,000











5,500
(3)2003



101,250



15,000











5,062
(3)Randall D. Cooley


2005


$
184,000


$
70,000










$
8,512
(4)Vice President, Chief


2004



154,000



55,000











7,700
(4)Financial Officer


2003



135,083



24,000











6,000
(4)Philip D. Devlin


2005


$
200,000


$
80,000










$
9,000
(5)Vice President, General


2004



200,000



70,000











8,000
(5)Counsel and Secretary


2003



186,000



25,000











6,708
(5)Rick L. Kirby


2005


$
156,800


$
56,000










$
7,840
(6)Vice President, Drilling


2004



135,300



56,000











6,765
(6)and Production


2003



124,538



15,000











6,000
(6)     (1)
    
    Excludes the aggregate, incremental cost to us 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.(2)
    
    Mr. Alexander received $6,000, $8,000 and $9,000 in
    matching funds contributed by us to the 401(k) plan during 2003,
    2004, and 2005, respectively.(3)
    
    Mr. Campbell received $5,062, $5,500 and $7,840 in matching
    funds contributed by us to the 401(k) plan during 2003, 2004,
    and 2005, respectively.(4)
    
    Mr. Cooley received $6,000, $7,700 and $8,512 in matching
    funds contributed by us to the 401(k) Plan during 2003, 2004 and
    2005, respectively.(5)
    
    Mr. Devlin received $6,708, $8,000 and $9,000 in matching
    funds contributed by us to the 401(k) Plan during 2003, 2004 and
    2005, respectively. 53




---



##### Table of Contents



(6)
    
    Mr. Kirby received $6,000, $6,765 and $7,840 in matching
    funds contributed by us to the 401(k) Plan during 2003, 2004 and
    2005, respectively.        Item 12.
    Security
    Ownership of Certain Beneficial Owners and
    Management    Security Ownership of Certain Beneficial
    Owners.
  Name and Address




Number


Percentof Beneficial Owner

Title of Class


of Shares


of Class(1)NEG Oil & Gas LLC


Common Stock



5,597,824(2
)


50.01
%767 Fifth Avenue,
    47th FloorNew York, NY 10153     (1)
    
    Based upon the 11,190,650 shares of Common Stock that were
    outstanding on December 31, 2005.(2)
    
    NEG Oil & Gas directly owns these shares and may be
    deemed to be the beneficial owner thereof. Mr. Carl C.
    Icahn, by virtue of his relationship to NEG Oil & Gas,
    may be deemed to beneficially own (as that term is
    defined in
    Rule 13d-3
    under the Exchange Act) these shares. Mr. Icahn disclaims
    beneficial ownership of such shares for all other purposes. Mr.
    Mitchell, a present director of our company and a former
    employee of affiliates of NEG Oil & Gas, and
    Mr. Martin L. Hirsch, a present director of our company and
    employee of affiliates of NEG Oil & Gas, also disclaim
    any beneficial ownership of these shares.  Security Ownership of Directors and
    Management.
  Name and Address of




NumberBeneficial Owner

Title of Class


of Shares


% of Class(1)Bob G. Alexander


Common Stock



57,000
(2)


(15
)4925 Greenville AvenueSuite 1400Dallas, TX 75206Robert H. Kite


Common Stock



84,262
(3)


(15
)6910 East Fifth StreetScottsdale, AZ 85251R. Kent Lueders


Common Stock



33,572
(4)


(15
)4925 Greenville AvenueSuite 1400Dallas, Texas 75206 54




---



##### Table of Contents



Name and Address of




NumberBeneficial Owner

Title of Class


of Shares


% of Class(1)Philip D. Devlin


Common Stock



15,209
(5)


(15
)4925 Greenville AvenueSuite 1400Dallas, TX 75206Rick L. Kirby


Common Stock



14,864
(6)


(15
)4925 Greenville AvenueSuite 1400Dallas, TX 75206F. Wayne Campbell


Common Stock



496
(7)


(15
)4925 Greenville AvenueSuite 1400Dallas, TX 75206Lori K. Mauk


Common Stock



276
(8)


(15
)4925 Greenville AvenueSuite 1400Dallas, TX 75206Robert J. Mitchell


Common Stock



(9
)767 Fifth AvenueNew York, NY 10153Jack G. Wasserman


Common Stock



(10
)111 BroadwayNew York, NY 10006Martin L. Hirsch


Common Stock



(11
)767 Fifth AvenueNew York, NY 10153David V. Rigsby


Common Stock



(12
)4925 Greenville AvenueSuite 1400Dallas, TX 75206Randall D. Cooley


Common Stock



(13
)4925 Greenville AvenueSuite 1400Dallas, TX 75206Jenny V. Robins


Common Stock



(14
)4925 Greenville AvenueSuite 1400Dallas, TX 75206All officers and directors as a
    group (13 people)






205,6791.83
%     (1)
    
    As of December 31, 2005, there were 11,190,650 shares
    of our Common Stock outstanding. All stock options and warrants
    were cancelled pursuant to the Plan of Reorganization, and no
    new options or warrants have been authorized or issued.(2)
    
    Shares held directly by Mr. Alexander.(3)
    
    Robert H. Kite is Chief Operating Officer and a 33.0% beneficial
    owner of KFT, LLLP and may be deemed to be the beneficial owner
    of shares held by KFT, LLLP. 59,285 shares are held by KFT,
    LLLP and Mr. Kite holds 24,977 shares directly.(4)
    
    Shares held directly by Mr. Lueders.(5)
    
    Shares held directly by Mr. Devlin.(6)
    
    Shares held directly by Mr. Kirby. 55




---



##### Table of Contents



(7)
    
    Shares held directly by Mr. Campbell.(8)
    
    Shares held directly by Ms. Mauk.(9)
    
    Mr. Mitchell holds no shares of our common stock and
    disclaims beneficial ownership of any shares attributable to NEG
    Oil & Gas LLC.  (10)
    
    Mr. Wasserman holds no shares of our common stock.(11)
    
    Mr. Hirsch holds no shares of our common stock and
    disclaims beneficial ownership of any shares attributable to NEG
    Oil & Gas LLC.(12)
    
    Mr. Rigsby holds no shares of our common stock.(13)
    
    Mr. Cooley holds no shares of our common stock.(14)
    
    Ms. Robins holds no shares of our common stock.(15)
    
    Less than one percent.  Item 13.
    Certain
    Relationships and Related Transactions           56




---



##### Table of Contents



Item 14.
    Principal
    Accounting Fees and Services    2005


2004Audit Fees(1)

$
175,300


$
184,000Audit Related Fees






Audit and Audit Related Fees

$
175,300


$
184,000Tax Fees(2)






All Other Fees(3)


90,000



55,200Total Fees

$
265,300


$
239,200     (1)
    
    Represents fees for professional services rendered for the audit
    of our annual financial statements for 2004 and 2005 and the
    reviews of the financial statements included in our quarterly
    reports on
    Form 10-Q
    for each of those years. 57




---



##### Table of Contents



(2)
    
    Represents fees for professional services rendered for tax
    preparation and tax audit services in 2004 and 2005.(3)
    
    Represents fees for professional services rendered for
    consulting and Sarbanes Oxley compliance in 2004 and 2005.   PART IV  Item 15.
    Exhibits,
    Financial Statement Schedules and Reports on
    Form 8-K    Financial Statements: page F-1
  Financial Statement Schedules: page F-1
  Exhibits:
   58




---



##### Table of Contents



Glossary
    Bbl
  Bcf
  Bcfe
  Behind the Pipe
  Developed Acreage
  Development Well
  Dry Well
  Exploratory Well
  Gross Acres or Gross Wells
  Infill Well
  Mbbl
  Mcf
  Mcfe
  Mmcf
  Mmcfe
  Natural Gas Equivalent
  Net Acres or Net Wells
  NYMEX
  Oil, Gas and Mineral Lease
  OPEC
  Overriding Royalty Interest
  PDNP
  Productive Well
  Proved Developed Producing
    Reserves
  Proved Developed Reserves
 59




---



##### Table of Contents



Proved Reserves
  Proved Undeveloped Reserves
  PUD
  PV 10%
  Revenue Interest
  Royalty Interest
  Secondary Recovery
  Standardized Measure
  Undeveloped Acreage
  Working Interest
 60




---



##### Table of Contents



SIGNATURES      By:
    /s/  BOB
    G. ALEXANDER    President and Chief Executive Officer
    BY:
    /s/  RANDALL
    D. COOLEY    Vice President and Chief Financial Officer
    POWER OF
    ATTORNEY AND SIGNATURES
  attorney-in-fact Form 10-K attorney-in-fact,
    /s/  BOB
    G. ALEXANDERBob
    G. Alexander

President, Chief Executive Officer
    and Director/s/  MARTIN
    L. HIRSCHMartin
    L. Hirsch

Director/s/  ROBERT
    H. KITERobert
    H. Kite

Director/s/  ROBERT
    J. MITCHELLRobert
    J. Mitchell

Director/s/  JACK
    G. WASSERMANJack
    G. Wasserman

Director  61




---



##### Table of Contents



INDEX TO
    FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
  FINANCIAL STATEMENTS
  PageNational Energy Group,
    Inc.Report of
    Independent Registered Public Accounting
    Firm  Grant Thornton LLP


F-2Balance Sheets as
    of December 31, 2004 and 2005


F-3Statements of
    Operations for the years ended December 31, 2003, 2004 and
    2005


F-4Statements of Cash
    Flows for the years ended December 31, 2003, 2004 and
    2005


F-5Statements of
    Stockholders Deficit for the years ended December 31,
    2003, 2004 and 2005


F-6Notes to Financial
    Statements


F-7NEG Holding LLCReport of
    Independent Registered Public Accounting
    Firm  Grant Thornton LLP


F-19Consolidated
    Balance Sheets as of December 31, 2004 and 2005


F-20Consolidated
    Statements of Operations for the years ended December 31,
    2003, 2004 and 2005


F-21Consolidated
    Statements of Cash Flows for years ended December 31, 2003,
    2004 and 2005


F-22Consolidated
    Statements of Members Equity for the years ended
    December 31, 2003, 2004 and 2005


F-23Notes to
    Consolidated Financial Statements


F-24   Financial
    Statement Schedules
   F-1




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                 F-2




---



##### Table of Contents



NATIONAL
    ENERGY GROUP, INC.
  BALANCE
    SHEETS
  December 31,2004


2005ASSETSCurrent assets:Cash and cash equivalents

$
2,487,672


$
3,059,007Accounts
    receivable  other


191,802



Accounts
    receivable  affiliates


2,207,767



1,659,816Other


184,188



339,843Total current assets


5,071,429



5,058,666Investment in Holding LLC


87,799,748



116,127,681Deferred tax assets


19,241,529



14,540,446Total assets

$
112,112,706


$
135,726,793LIABILITIES AND
    STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable

$
208,802


$
435,594Income tax payable






151,270Accrued interest on senior
    notes  affiliates


2,663,080



2,663,080Total current liabilities


2,871,882



3,249,944Long-term Liabilities:Senior
    Notes  affiliates


148,637,000



148,637,000Deferred gain on Senior Note
    redemption


3,736,508



1,698,413Commitments and contingenciesStockholders deficit:Common stock, $.01 par value:Authorized
    shares  15,000,000 at December 31, 2004 and
    2005; Issued and outstanding shares  11,190,650
    at December 31, 2004 and 2005


111,907



111,907Additional paid-in capital


123,020,121



123,020,121Accumulated deficit


(166,264,712
)


(140,990,592
)Total stockholders deficit


(43,132,684
)


(17,858,564
)Total liabilities and
    stockholders deficit

$
112,112,706


$
135,726,793    F-3




---



##### Table of Contents



NATIONAL
    ENERGY GROUP, INC.
  STATEMENTS OF OPERATIONS
  Year Ended
    December 31,2003


2004


2005Revenues:Accretion of Investment in Holding
    LLC

$
30,141,171


$
34,431,731


$
44,306,411Management fees from affiliates


7,967,001



11,562,726



14,587,206Interest income and other, net


33,508



39,310



77,679Total revenue


38,141,680



46,033,767



58,971,296Costs and expenses:Salaries and wages


4,348,645



7,224,605



8,789,555Insurance


637,585



1,001,644



809,099Rent and utilities


668,802



699,674



804,353Other general and administrative
    expenses


1,575,514



2,218,752



4,501,433Interest expense


15,114,928



13,940,391



13,940,383Total costs and expenses


22,345,474



25,085,066



28,844,823Income before income taxes


15,796,206



20,948,701



30,126,473Income tax expense


(224,573
)


(6,663,834
)


(4,852,353
)Net income

$
15,571,633


$
14,284,867


$
25,274,120Earnings per share:Net income per common share, basic
    and diluted

$
1.39


$
1.28


$
2.26Weighted average number of common
    shares outstanding


11,190,650



11,190,650



11,190,650    F-4




---



##### Table of Contents



NATIONAL
    ENERGY GROUP, INC.
 STATEMENTS
    OF CASH FLOWS  Year Ended
    December 31,2003


2004


2005Operating ActivitiesNet income

$
15,571,633


$
14,284,867


$
25,274,120Deferred gain
    amortization  interest reduction


(2,038,092
)


(2,038,095
)


(2,038,095
)Accretion of Investment in Holding
    LLC


(30,141,171
)


(34,431,731
)


(44,306,411
)Deferred income taxes


(427,269
)


6,663,834



4,701,083Changes in operating assets and
    liabilities:Accounts receivable


(354,731
)


(1,394,197
)


739,753Other current assets


51,379



83,841



(155,654
)Accounts payable and accrued
    liabilities


(41,715,038
)


181,859



378,061Net cash used in operating
    activities


(59,053,289
)


(16,649,622
)


(15,407,143
)Investing ActivitiesGuaranteed Payment from Holding LLC


18,228,784



15,978,478



15,978,478Priority Amount distribution from
    Holding LLC


40,506,071







Net cash provided by investing
    activities


58,734,855



15,978,478



15,978,478Increase (decrease) in cash and
    cash equivalents


(318,434
)


(671,144
)


571,335Cash and cash equivalents at
    beginning of period


3,477,250



3,158,816



2,487,672Cash and cash equivalents at end
    of period

$
3,158,816


$
2,487,672


$
3,059,007Supplemental Cash Flow
    InformationInterest paid in cash

$
50,860,483


$
15,978,478


$
15,978,478Non Cash Financing and
    Investing ActivitiesContribution of note from Holding
    LLC

$
10,939,750


$



$
    F-5




---



##### Table of Contents



NATIONAL
    ENERGY GROUP, INC.
 STATEMENTS
    OF STOCKHOLDERS DEFICIT  Additional





TotalCommon Stock


Paid-In


Accumulated


StockholdersShares


Amount


Capital


Deficit


DeficitBalance at December 31, 2002


11,190,650


$
111,907


$
123,020,121


$
(196,121,212
)

$
(72,989,184
)Net income 2003














15,571,633



15,571,633Balance at December 31, 2003


11,190,650


$
111,907


$
123,020,121


$
(180,549,579
)

$
(57,417,551
)Net income 2004














14,284,867



14,284,867Balance at December 31, 2004


11,190,650


$
111,907


$
123,020,121


$
(166,264,712
)

$
(43,132,684
)Net income 2005














25,274,120



25,274,120Balance at December 31, 2005


11,190,650


$
111,907


$
123,020,121


$
(140,990,592
)

$
(17,858,564
)    F-6




---



##### Table of Contents



NATIONAL
    ENERGY GROUP, INC.
  NOTES TO
    FINANCIAL STATEMENTS
 December 31,
    2005
  1.
    Background
    and Basis of Presentation                 F-7




---



##### Table of Contents



NATIONAL
    ENERGY GROUP, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
         2.
    Pending
    Merger and Extension of Due Date for Senior Notes            Form S-1
 F-8




---



##### Table of Contents



NATIONAL
    ENERGY GROUP, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
     3.
    Significant
    Accounting Policies  Accounting
    Estimates
    Cash
    and Cash Equivalents
  and/or
  Accounts
    Receivable  Affiliates
    Investment
    in Holding LLC
      and/or
  Income
    Taxes
   F-9




---



##### Table of Contents



NATIONAL
    ENERGY GROUP, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    Financial
    Instruments
  3 4
    Earnings
    (Loss) Per Share
    Comprehensive
    Income
    Recent
    Accounting Pronouncements
    fair-value-based
   F-10




---



##### Table of Contents



NATIONAL
    ENERGY GROUP, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
      4.
    Management
    Agreements  day-to-day
    day-to-day
 F-11




---



##### Table of Contents



NATIONAL
    ENERGY GROUP, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
      5.
    Credit
    Facility/Pledge of Our Membership Interest in Holding,
    LLC      The
    Operating LLC Credit Facility
     F-12




---



##### Table of Contents



NATIONAL
    ENERGY GROUP, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
                Pledge
    of Our Membership Interest in Holding LLC
  attorney-in-fact
 F-13




---



##### Table of Contents



NATIONAL
    ENERGY GROUP, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  and/or
    6.
    Senior
    Notes Due 2006  3 4
        7.
    Commitments
    and Contingencies    2006

$
610,0052007

$
610,005     8.
    Investment
    in Holding LLC   F-14




---



##### Table of Contents



NATIONAL
    ENERGY GROUP, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
     2003


2004


2005Total revenues

$
78,491,066


$
79,621,556


$
88,426,341Total cost and expenses


(47,651,057
)


(48,207,118
)


(66,023,312
)Operating income


30,840,009



31,414,438



22,403,029Other income (expense)


30,071



(2,291,924
)


(1,311,872
)Net income

$
30,870,080


$
29,122,514


$
21,091,157        F-15




---



##### Table of Contents



NATIONAL
    ENERGY GROUP, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
     2004


2005Investment in Holding LLC at
    beginning of year

$
69,346,495


$
87,799,748Guaranteed Payment from Holding LLC


(15,978,478
)


(15,978,478
)Accretion of investment in Holding
    LLC


34,431,731



44,306,411Investment in Holding LLC at end
    of year

$
87,799,748


$
116,127,681               9.
    Stockholders
    Equity  Common
    Stock
  winding-up
   F-16




---



##### Table of Contents



NATIONAL
    ENERGY GROUP, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
   10.
    Income
    Taxes    Year Ended
    December 31,2003


2004


2005Current

$
(651,842
)

$



$
(151,270
)Deferred


427,269



(6,663,834
)


(4,701,083
)$
(224,573
)

$
(6,663,834
)

$
(4,852,353
)     Year Ended
    December 31,2003


2004


2005Income tax expense at statutory
    rate

$
(5,528,672
)

$
(7,332,045
)

$
(10,544,266
)Valuation allowance on deferred
    tax assets


5,313,446



1,286,986



5,709,342Other


(9,347
)


(618,775
)


(17,429
)$
(224,573
)

$
(6,663,834
)

$
(4,852,353
)     December 31,2004


2005Deferred tax assets related to:Investment in Holding LLC

$
5,332,868


$
Net operating loss carryforwards


26,580,610



29,375,108AMT credit carryforwards


608,197



759,467Other, net


1,307,778



594,44533,829,453



30,729,020Less valuation allowance


(14,587,924
)


(8,878,582
)$
19,241,529


$
21,850,438Deferred tax liabilities related
    to:Investment in Holding LLC






(7,303,588
)Property, plant and equipment






(6,404
)Total deferred tax liabilities






(7,309,992
)Net deffered tax assets

$
19,241,529


$
14,540,446    F-17




---



##### Table of Contents



NATIONAL
    ENERGY GROUP, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    11.
    Quarterly
    Financial Results (Unaudited)    Three Months EndedMarch 31


June 30


September 30


December 31Year ended December 31,
    2004:Total revenues

$
10,528


$
11,088


$
11,588


$
12,830Total costs and expenses

$
5,916


$
6,235


$
5,944


$
6,990Net income

$
2,998


$
3,155


$
3,669


$
4,463Per common share:Net income

$
.27


$
.28


$
.33


$
.40Year ended December 31,
    2005:Total revenues

$
13,178


$
13,814


$
15,248


$
16,731Total costs and expenses

$
6,540


$
6,391


$
7,187


$
8,727Net income

$
4,315


$
4,825


$
5,240


$
10,894Per common share:Net income

$
.39


$
.43


$
.47


$
.97  F-18




---



##### Table of Contents



Report of
    Independent Registered Public Accounting Firm               F-19




---



##### Table of Contents



NEG
    HOLDING LLC
  CONSOLIDATED BALANCE SHEETS
  December 31,2004


2005ASSETSCurrent assets:Cash and cash equivalents

$
882,841


$
25,680,447Accounts
    receivable  oil and natural gas sales


18,220,105



32,971,655Accounts
    receivable  joint interest and other (net of
    allowance of $104,000 in 2004 and 2005)


495,272



933,366Notes
    receivable  other (net of allowance of $790,000
    in 2004 and $1,259,000 in 2005)


489,389



10,176Drilling prepayments


858,114



2,411,011Other


2,200,156



4,127,339Total current assets


23,145,877



66,133,994Oil and natural gas properties, at
    cost (full cost method):Subject to ceiling limitation


573,069,515



693,826,614Accumulated depreciation,
    depletion, and amortization


(343,485,274
)


(375,460,827
)Net oil and natural gas properties


229,584,241



318,365,787Other property and equipment


5,055,490



5,476,230Accumulated depreciation


(4,063,781
)


(4,395,827
)Net other property and equipment


991,709



1,080,403Note receivable


3,090,000



Equity investment


2,379,108



Other long term assets


1,082,504



12,803Total assets

$
260,273,439


$
385,592,987LIABILITIES AND MEMBERS
    EQUITYCurrent liabilities:Accounts
    payable  trade

$
10,239,384


$
7,002,735Accounts
    payable  affiliate


1,595,235



723,039Accounts
    payable  revenue


4,104,029



6,990,277Advance
    payable  affiliate






1,500,000Prepayments from partners


90,186



73,583Other


77,593



265,722Accrued
    interest  related party






266,093Derivative financial instruments


6,349,714



38,404,009Total current liabilities


22,456,141



55,225,458Long term liabilities:Note payable


83,031



Gas balancing


897,852



904,964Credit facility


51,833,624



Credit
    facility  related party






132,357,634Asset retirement obligation


3,055,240



3,729,200Derivative financial instruments


7,766,144



14,081,645Commitments and contingenciesMembers equity


174,181,407



179,294,086Total liabilities and
    members equity

$
260,273,439


$
385,592,987    F-20




---



##### Table of Contents



NEG
    HOLDING LLC
  CONSOLIDATED STATEMENTS OF OPERATIONS
  Year Ended
    December 31,2003


2004


2005Revenues:Oil and natural gas
    sales  gross

$
79,612,508


$
85,091,674


$
123,659,406Unrealized derivative loss


(2,987,013
)


(7,520,383
)


(38,369,796
)Field operations


297,069



326,960



401,035Plant operations


1,568,502



1,723,305



2,735,696Total revenue


78,491,066



79,621,556



88,426,341Costs and expenses:Lease operating


12,386,425



14,399,433



18,502,854Field operations


397,669



334,443



390,395Plant operations


577,003



680,066



916,996Oil and natural gas production
    taxes


5,770,865



5,732,265



8,482,417Depreciation, depletion and
    amortization


23,442,797



21,385,529



32,377,328Accretion of asset retirement
    obligation


242,752



261,471



265,319Amortization of loan cost






494,386



1,147,783General and administrative


4,833,546



4,919,525



3,940,220Total costs and expenses


47,651,057



48,207,118



66,023,312Operating income


30,840,009



31,414,438



22,403,029Other income (expense):Interest expense


(1,538,048
)


(2,222,009
)


(6,085,899
)Interest income and other, net


472,337



299,327



645,996Interest
    expense  related party










(266,093
)Interest income from affiliate


114,867



149,650



Commitment fee income


125,000







Gain (loss) on equity method
    investment


(102,000
)


(518,892
)


4,394,124Loss on sale of securities


(953,790
)






Income before cumulative effect of
    change in accounting principle


28,958,375



29,122,514



21,091,157Cumulative effect of change in
    accounting principle


1,911,705







Net income

$
30,870,080


$
29,122,514


$
21,091,157    F-21




---



##### Table of Contents



NEG
    HOLDING LLC
  CONSOLIDATED STATEMENTS OF CASH FLOWS
  Year Ended
    December 31,2003


2004


2005Operating ActivitiesNet income

$
30,870,080


$
29,122,514


$
21,091,157Adjustments to reconcile net
    income to net cash provided by operating activities:Depreciation, depletion and
    amortization


23,442,797



21,385,529



32,377,328Unrealized derivative loss


2,987,013



7,520,383



38,369,796Gain on sale of assets






(6,136
)


(8,553
)Equity in (gain) loss on investment


102,000



518,892



(4,394,124
)Accretion of asset retirement
    obligation


242,752



261,471



265,319Provision for doubtful account






790,000



469,037Amortization of note costs






494,386



1,147,783Cumulative effect of change in
    accounting principle


(1,911,705
)






Changes in operating assets and
    liabilities:Accounts receivable


(1,296,013
)


(5,078,989
)


(15,067,889
)Notes receivable


(1,831,802
)


(1,258,198
)


3,098,420Drilling prepayments


(380,288
)


248,758



(1,552,897
)Derivative broker deposit


100,000



1,700,000



Other current assets


(26,215
)


(2,086,257
)


(1,965,266
)Accounts payable and accrued
    liabilities


493,730



8,017,822



2,063,119Net cash provided by operating
    activities


52,792,349



61,630,175



75,893,230Investing ActivitiesOil and natural gas exploration
    and development expenditures


(36,034,277
)


(67,487,412
)


(120,738,756
)Purchases of other property and
    equipment


(149,897
)


(245,250
)


(497,923
)Proceeds from sales of oil and
    natural gas properties


1,436,016



1,202,263



274,365Proceeds from equity investment
    sale










7,227,070Sale of other property and
    equipment










11,935Equity investment


(1,800,000
)


(1,200,000
)


(453,837
)Net cash used in investing
    activities


(36,548,158
)


(67,730,399
)


(114,177,146
)Financing ActivitiesProceeds from Arnos credit facility


46,756,377







Repayment of Arnos credit facility


(46,756,377
)






Proceeds from Mizuho credit
    facility


43,833,624



8,000,000



79,100,000Loan issuance costs


(951,697
)


(439,890
)


(40,000
)Guaranteed Payment to member


(18,228,781
)


(15,978,478
)


(15,978,478
)Priority Amount distribution to
    member


(40,506,072
)






Net cash provided by (used in)
    financing activities


(15,852,926
)


(8,418,368
)


63,081,522Increase (decrease) in cash and
    cash equivalents


391,265



(14,518,592
)


24,797,606Cash and cash equivalents at
    beginning of period


15,010,168



15,401,433



882,841Cash and cash equivalents at end
    of period

$
15,401,433


$
882,841


$
25,680,447Supplemental Cash Flow
    InformationInterest paid in cash

$
1,537,127


$
1,713,136


$
4,715,895Distribution of member note payable

$
10,939,750


$



$
    F-22




---



##### Table of Contents



NEG
    HOLDING LLC
  CONSOLIDATED STATEMENTS OF MEMBERS
    EQUITY
  MembersEquityBalance at December 31, 2002

$
199,841,894Guaranteed Payment to member


(18,228,781
)Priority Amount distribution to
    member


(51,445,822
)Net income


30,870,080Balance at December 31, 2003

$
161,037,371Guaranteed Payment to member


(15,978,478
)Net income


29,122,514Balance at December 31, 2004

$
174,181,407Guaranteed Payment to member


(15,978,478
)Net income


21,091,157Balance at December 31, 2005

$
179,294,086    F-23




---



##### Table of Contents



NEG
    HOLDING LLC
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 December 31,
    2005
  1.
    Background    National EnergyGroup, Inc.


Gascon


TotalCurrent assets

$
11,535,745


$
97,183,477


$
108,719,222Net oil and natural gas properties


84,983,139



30,573,625



115,556,764Hedge assets


4,807,689







4,807,689Intercompany receivable






4,783,737



4,783,737Total assets

$
101,326,573


$
132,540,839


$
233,867,412Current liabilities

$
4,157,430


$
2,657,190


$
6,814,620Long-term liabilities


940,033



1,377,782



2,317,815Intercompany payable


4,783,737







4,783,737Members equity


91,445,373



128,505,867



219,951,240Total liabilities and
    members equity

$
101,326,573


$
132,540,839


$
233,867,412        F-24




---



##### Table of Contents



NEG
    HOLDING LLC
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   2.
    Significant
    Accounting Policies  Consolidation
    Accounting
    Estimates
    Cash
    and Cash Equivalents
  and/or
  Oil
    and Natural Gas Properties
  units-of-production
       F-25




---



##### Table of Contents



NEG
    HOLDING LLC
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  and/or
    Other
    Property and Equipment
        Income
    Taxes
    Financial
    Instruments
      Accounts
    Receivable
     F-26




---



##### Table of Contents



NEG
    HOLDING LLC
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Revenue
    Recognition
    Natural
    Gas Production Imbalances
    Comprehensive
    Income
    Derivatives
  Accounting
    for Certain Derivative Instruments and Certain Hedging
    Activities Accounting for Certain Derivative Instruments and
    Certain Hedging Activity an Amendment of
    SFAS 133
    2003


2004


2005Gross cash receipts

$
14,924


$
1,327,200


$
Gross cash payments

$
8,681,198


$
13,694,010


$
31,895,230Unrealized derivative loss

$
2,987,013


$
7,520,383


$
38,369,796      F-27




---



##### Table of Contents



NEG
    HOLDING LLC
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Type Contract

Production Year


Volume per Month


Floor


CeilingNo Cost Collars


2006



500,000 MMBTU


$
4.50


$
5.00No Cost Collars


2006



120,000 MMBTU


$
6.00


$
7.28No Cost Collars


2007



730,000 MMBTU


$
8.00


$
10.23No Cost Collars


2008



610,000 MMBTU


$
7.00


$
10.35No Cost Collars


2006



16,000 Bbls


$
41.75


$
45.40No Cost Collars(1)


2006



16,000 Bbls


$
60.00


$
68.50No Cost Collars


2007



12,000 Bbls


$
57.00


$
70.50No Cost Collars


2007



12,000 Bbls


$
57.50


$
72.00No Cost Collars


2008



21,000 Bbls


$
55.00


$
69.00     (1)
    
    This contract has a second ceiling at $84.50.    Recent
    Accounting Pronouncements
    fair-value-based
   F-28




---



##### Table of Contents



NEG
    HOLDING LLC
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Reclassifications
    3.
    Management
    Agreement  day-to-day
    4.
    Acquisitions       F-29




---



##### Table of Contents



NEG
    HOLDING LLC
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   5.
    Investments/Note Receivable  mark-to-market
        6.
    Credit
    Facilities     F-30




---



##### Table of Contents



NEG
    HOLDING LLC
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
                7.
    Commitments
    and Contingencies     F-31




---



##### Table of Contents



NEG
    HOLDING LLC
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
            8.
    Asset
    Retirement Obligation  Accounting for Asset
    Retirement Obligations and/or
 F-32




---



##### Table of Contents



NEG
    HOLDING LLC
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Balance as of January 1, 2004

$
3,268,381Add: Accretion


261,471Additions


93,838Less: Revisions


(250,650
)Settlements


(24,354
)Dispositions


(293,446
)Balance as of December 31,
    2004

$
3,055,240Add: Accretion


265,319Additions


690,961Less: Revisions


(261,540
)Settlements


(17,601
)Dispositions


(3,179
)Balance as of December 31,
    2005

$
3,729,200   9.
    Distributions
    under the Holding LLC Operating Agreement                 F-33




---



##### Table of Contents



NEG
    HOLDING LLC
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   10.
    Crude Oil
    and Natural Gas Producing Activities    Year Ended
    December 31,2003


2004


2005Acquisition of properties

$



$



$
31,913,309Exploration costs


6,950,706



29,006,772



41,797,225Development costs


29,083,571



38,480,640



47,028,222Depletion rate per Mcfe

$
1.25


$
1.28


$
1.65     Year Ended
    December 31,2003


2004


2005Plains Marketing and Transportation

$
15,666,690


$
19,786,979


$
25,591,281Crosstex Energy Services,
    Inc.


9,225,086



5,080,974



10,158,839Riata Energy, Inc.


30,420,624



29,884,850



46,126,024Seminole Energy Services


7,215,735



19,572,461



27,314,857   11.
    Supplementary
    Crude Oil and Natural Gas Reserve Information
    (Unaudited)         F-34




---



##### Table of Contents



NEG
    HOLDING LLC
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Crude Oil


Natural Gas(Barrels)


(Thousandcubic feet)December 31, 2002


5,208,673



122,567,337Sales of reserves in place


(25,399
)


(744,036
)Extensions and discoveries


494,191



61,637,828Revisions of previous estimates


(7,092
)


(2,419,969
)Production


(628,923
)


(13,436,865
)December 31, 2003


5,041,450



167,604,295Sales of reserves in place


(15,643
)


(344,271
)Extensions and discoveries


445,636



33,350,666Revisions of previous estimates


(30,249
)


15,441,298Production


(565,100
)


(13,106,103
)December 31, 2004


4,876,094



202,945,885Purchase of reserves in place


277,580



28,463,590Sales of reserves in place






(75,112
)Extensions and discoveries


736,501



64,000,863Revisions of previous estimates


(199,165
)


13,458,970Production


(526,915
)


(16,249,769
)December 31, 2005


5,164,095



292,544,427Proved developed reserves:December 31, 2003


4,096,596



104,207,660December 31, 2004


3,798,341



111,126,829December 31, 2005


3,608,666



141,262,660        F-35




---



##### Table of Contents



NEG
    HOLDING LLC
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      December 31,2004


2005Future cash inflows

$
1,466,369,163


$
3,179,810,738Future production and development
    costs


(489,331,736
)


(1,000,499,398
)Future net cash flows


977,037,427



2,179,311,34010% annual discount for estimated
    timing of cash flows


(442,213,801
)


(1,103,430,089
)Standardized measure of discounted
    future net cash flows

$
534,823,626


$
1,075,881,251     Year Ended
    December 31,2003


2004


2005Purchases of reserves

$



$



$
110,452,993Sales of reserves in place


(2,475,742
)


(1,375,463
)


(220,054
)Sales and transfers of crude oil
    and natural gas produced, net of production costs


(57,424,780
)


(83,004,073
)


(96,674,135
)Net changes in prices and
    production costs


44,711,900



31,039,998



240,976,967Development costs incurred during
    the period and changes in estimated future development costs


(75,286,532
)


(81,370,910
)


(127,488,468
)Extensions and discoveries, less
    related costs


211,324,414



118,570,850



322,710,871Revisions of previous quantity
    estimates


(6,789,000
)


49,194,080



35,280,975Accretion of discount


31,063,232



45,606,010



53,482,361Changes in production rates
    (timing) and other


304,290



103,030



2,536,115Net change

$
145,427,782


$
78,763,522


$
541,057,625    F-36




---



##### Table of Contents



INDEX TO
    EXHIBITS
  2.1

Debtors Joint Plan of
    Reorganization under Chapter 11 of the Bankruptcy Code
    dated May 12, 2000(4)2.2

Debtors and Official
    Committee of Unsecured Creditors Joint Disclosure Statement
    under Section 1125 of the Bankruptcy Code Regarding the
    Debtors and Official Committee of Unsecured
    Creditors Joint Plan of Reorganization under
    Chapter 11 of the Bankruptcy Code, dated May 12,
    2000(4)3.1

Restated Certificate of
    Incorporation filed with the Secretary of State of Delaware on
    October 16, 2000(5)3.2

By-laws of the Company(1)3.3

Amendment to Restated Certificate
    of Incorporation filed with the Secretary of State of Delaware
    on November 10, 2003(8)4.1

Indenture dated as of
    November 1, 1996, among the Company, National Energy Group
    of Oklahoma, Inc. (the Guarantor), formerly NEG-OK,
    and Bank One, Columbus, N.A.(2)4.2

Indenture dated August 21,
    1997, among the Company and Bank One, N.A.(3)10.1

NEG Holding LLC Operating
    Agreement dated May 1, 2001 between the Company and Gascon
    Partners.(6)10.2

NEG Operating LLC Operating
    Agreement dated May 1, 2001 executed by NEG Holding LLC.(6)10.3

Shana National LLC Amended and
    Restated Operating Agreement dated September 12, 2001
    executed by NEG Operating LLC.(6)10.4

Management Agreement dated
    September 12, 2001 between the Company and NEG Operating
    LLC.(6)10.5

Final Decree of Bankruptcy Court(7)10.6

Management Agreement with National
    Onshore LP dated August 28, 2003(8)10.7

Credit Agreement dated as of
    December 29, 2003 among NEG Operating LLC, Certain
    Commercial Lending Institutions, Mizuho Corporate Bank, Ltd.,
    Bank of Texas N.A., and the Bank of Nova Scotia(9)10.8

Security Agreement dated as of
    December 29, 2003 made by NEG Operating LLC in favor of
    Bank of Texas, N.A.(9)10.9

Pledge Agreement and Irrevocable
    Proxy dated as of December 29, 2003 made by NEG Operating
    LLC in favor of Bank of Texas, N.A.(9)10.10

Pledge Agreement and Irrevocable
    Proxy dated as of December 29, 2003 made by National Energy
    Group, Inc. in favor of Bank of Texas, N.A.(9)10.11

First Amendment to the Credit
    Agreement dated April 5, 2004 among NEG Operating LLC,
    certain commercial lending institutions, Mizuho Corporate Bank
    LTD, Bank of Texas N.A. and the Bank of Nova Scotia(11)10.12

Management Agreement effective
    November 16, 2004 between NEG and National Offshore LP.(12)10.13

National Energy Group, Inc.
    Incentive Plan(13)10.14

Agreement and Plan of Merger dated
    as of December 7, 2005, by and among National Energy Group,
    Inc., NEG Oil & Gas LLC, NEG IPOCO, Inc. and American
    Real Estate Holdings Limited Partnership.(14)10.15

Amended and Restated Credit
    Agreement, dated as of December 22, 2005, among NEG
    Operating LLC, NEG Oil & Gas LLC and Citicorp USA,
    Inc.(15)10.16

Affirmation of Obligations Among
    NEG Operating LLC, NEG Holding LLC, Shana National LLC, NGX GP
    of Delaware LLC, NGX of Delaware LLC NGX Energy Limited
    Partnership, AREP Oil & Gas LLC and Citicorp USA, Inc.
    dated December 20, 2005(16)10.17

Supplemental Indenture dated
    March 16, 2006(16)12.1

Computation of Ratio of Earnings
    to Fixed Charges(16)14.1

Code of Business Conduct and
    Ethics Adopted March 24, 2004(10)23.2

Consent of Netherland
    Sewell & Associates, Inc., Independent Engineers(16)23.3

Consent of Prator Bett, LLC,
    Independent Engineers(16)




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##### Table of Contents



23.4

Consent of DeGolyer and
    MacNaughton, Independent Engineers(16)24.1

Power of Attorney (included in
    signature pages to this
    Form 10-K)(16)31.1

Certification of Chief Executive
    Officer pursuant to Section 302 of the Sarbanes-Oxley Act
    of 2002(16)31.2

Certification of Chief Financial
    Officer pursuant to Section 302 of the Sarbanes-Oxley Act
    of 2002(16)32.1

Certification of Chief Executive
    Officer pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002, 18 U.S.C. Section 1350(16). Pursuant to SEC
    Release 34-47551 this Exhibit is furnished to the SEC and shall
    not be deemed to be filed32.2

Certification of Chief Financial
    Officer pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002, 18 U.S.C. Section 1350(16). Pursuant to SEC
    Release 34-47551 this Exhibit is furnished to the SEC and shall
    not be deemed to be filed     (1)
    
    Incorporated by reference to the Companys Registration
    Statement on Form
    S-4
    (No. 33-38331),
    dated April 3, 1991.(2)
    
    Incorporated by reference to the Companys Quarterly Report
    on
    Form 10-Q
    for the quarter ended September 30, 1996.(3)
    
    Incorporated by reference to the Companys
    Form S-4
    (No. 333-38075),
    filed October 16, 1997.(4)
    
    Incorporated by reference to the Companys Quarterly Report
    on
    Form 10-Q
    for the quarter ended March 31, 2000.(5)
    
    Incorporated by reference to the Companys Quarterly Report
    on
    Form 10-Q
    for the quarter ended September 30, 2000.(6)
    
    Incorporated by reference to the Companys Quarterly Report
    on
    Form 10-Q
    for the quarter ended September 30, 2001.(7)
    
    Incorporated by reference to the Companys Annual Report on
    Form 10-K
    for the year ended December 31, 2001.(8)
    
    Incorporated by reference to the Companys Quarterly Report
    Form 10-Q
    for the quarter ended September 30, 2003.(9)
    
    Incorporated by reference to the Companys
    Form 8-K
    filed January 14, 2004.(10)
    
    Incorporated by reference to the Companys Annual Report on
    Form 10-K
    for the year ended December 31, 2003.(11)
    
    Incorporated by reference to the Companys Quarterly Report
    Form 10-Q
    for the quarter ended March 31, 2004.(12)
    
    Incorporated by reference to the Companys Quarterly Report
    Form 10-Q
    for the quarter ended September 30, 2004.(13)
    
    Incorporated by reference to the Companys
    Form 8-K,
    filed November 12, 2004.(14)
    
    Incorporated by reference to the Companys
    Form 8-K,
    filed December 8, 2005.(15)
    
    Incorporated by reference to the Companys
    Form 8-K,
    filed December 29, 2005.(16)
    
    Filed herewith.