<PAGE>

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

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

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



             FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

                                   OR



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

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

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

<Table>
<S>                                            <C>
                   DELAWARE                                      58-1922764
       (State or other jurisdiction of                         (IRS Employer
        incorporation or organization)                      Identification No.)
            4925 GREENVILLE AVENUE
                DALLAS, TEXAS                                      75206
   (Address of principal executive offices)                      (Zip code)
</Table>

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

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

          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                         COMMON STOCK, $0.01 PAR VALUE
                                (Title of Class)

           SECURITIES REGISTERED PURSUANT TO SECURITIES ACT OF 1933:
                    SERIES B SENIOR NOTES, 10 3/4% DUE 2006
                    SERIES D SENIOR NOTES, 10 3/4% DUE 2006

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

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments hereto to this Form 10-K.  Yes [X]     No [ ]

     The aggregate market value of the shares of Common Stock held by
non-affiliates of the Registrant, as of March 25, 2002, (based upon the last
sales price of $.38 as reported by the OTC Bulletin Board) was $4,252,447.

     11,190,650 shares of the Registrant's common stock, $0.01 par value, were
outstanding on March 25, 2002.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

                               TABLE OF CONTENTS

<Table>
<Caption>
                                                                        PAGE
                                                                        ----
<S>       <C>                                                           <C>
                                   PART I
ITEMS 1. AND 2.  BUSINESS AND PROPERTIES..............................    3
          Forward-Looking Statements..................................    3
          Background and Recent Developments..........................    3
          Principal Areas of Operations...............................    5
          Oil and Natural Gas Reserves................................    7
          Oil and Natural Gas Production and Unit Economics...........    9
          Productive Well Summary.....................................    9
          Leasehold Acreage...........................................   10
          Drilling Activity...........................................   10
          Control Over Production Activities..........................   11
          Markets and Customers.......................................   11
          Investment in NEG Holding LLC...............................   11
          Principal Areas of Operation -- NEG Holding LLC.............   12
          Oil and Natural Gas Reserves -- NEG Holding LLC.............   14
          Oil and Natural Gas Production and Unit Economics -- NEG
          Holding LLC.................................................   15
          Productive Well Summary -- NEG Holding LLC..................   16
          Leasehold Acreage -- NEG Holding LLC........................   16
          Drilling Activity -- NEG Holding LLC........................   17
          Title to Oil and Natural Gas Properties -- NEG Holding
          LLC.........................................................   17
          Production and Sales Prices -- NEG Holding LLC..............   17
          Control Over Production Activities -- NEG Holding LLC.......   17
          Markets and Customers -- NEG Holding LLC....................   17
          Regulation -- NEG Holding LLC...............................   18
          Operational Hazards and Insurance -- NEG Holding LLC........   21
          Competition -- NEG Holding LLC..............................   21
          Office Space................................................   21
          Employees...................................................   21
ITEM 3.   LEGAL PROCEEDINGS...........................................   21
ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........   22

                                  PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
          STOCKHOLDER MATTERS.........................................   23
          Market Information..........................................   23
          Holders.....................................................   23
          Dividends on Common Stock...................................   23
ITEM 6.   SELECTED FINANCIAL DATA.....................................   24
</Table>

                                        1
<PAGE>

<Table>
<Caption>
                                                                        PAGE
                                                                        ----
<S>       <C>                                                           <C>
ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
          AND RESULTS OF OPERATIONS...................................   27
          Results of Operations.......................................   29
          Liquidity and Capital Resources.............................   32
          Future Capital and Financing Requirements...................   33
          Financial Reporting Impact of Full Cost Method of
          Accounting..................................................   34
          Critical Accounting Policies................................   34
          Recent Accounting Pronouncements............................   35
          Changes in Prices...........................................   35
          Inflation...................................................   35
ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
          RISK........................................................   36
ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................   36
ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
          AND FINANCIAL DISCLOSURE....................................   36

                                  PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..........   36
ITEM 11.  EXECUTIVE COMPENSATION......................................   36
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
          MANAGEMENT..................................................   36
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............   36

                                  PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
          8-K.........................................................   37
          Signatures..................................................   42
</Table>

                                        2
<PAGE>

                                     PART I

ITEMS 1. AND 2.  BUSINESS AND PROPERTIES

FORWARD-LOOKING STATEMENTS

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

BACKGROUND AND RECENT DEVELOPMENTS

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

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

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

                                        3
<PAGE>

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

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

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

     The management and operation of Operating LLC is being undertaken by the
Company pursuant to a Management Agreement (the "Management Agreement") which
the Company has entered into with Operating LLC. However, neither the Company's
officers nor directors will control the strategic direction of Operating LLC's
oil and natural gas business, including oil and natural gas drilling and capital
investments, which shall be controlled by the managing member of Holding LLC
(currently Gascon). The Management Agreement provides that the Company will
manage Operating LLC's oil and natural gas assets and business until the earlier
of November 1, 2006, or such time as Operating LLC no longer owns any of the
managed oil and natural gas properties. The Company's employees will conduct the
day-to-day operations of Operating LLC's oil and natural gas properties, and all
costs and expenses incurred in the operation of the oil and natural gas
properties shall be borne by Operating LLC; although the Management Agreement
provides that the salary of the Company's Chief Executive Officer shall be 70%
attributable to the managed oil and natural gas properties, and the salaries of
each of the General Counsel and Chief Financial Officer shall be 20%
attributable to the managed oil and natural gas properties. In exchange for the
Company's management

                                        4
<PAGE>

services, Operating LLC shall pay the Company a management fee equal to 115% of
the actual direct and indirect administrative and reasonable overhead costs
incurred by the Company in operating the oil and natural gas properties which
either the Company, or Operating LLC may seek to change within the range of
110%-115% as such change is warranted; however, the parties have agreed to
consult with each other to ensure that such administrative and reasonable
overhead costs attributable to the managed properties are properly reflected in
the management fee paid to the Company. In addition, Operating LLC has agreed to
indemnify the Company to the extent it incurs any liabilities in connection with
its operation of the assets and properties of Operating LLC, except to the
extent of its gross negligence, or misconduct. The Company recorded $2.7 million
as a management fee for the four-month period ended December 31, 2001.

     As a result of the foregoing transactions and as mandated by the Plan of
Reorganization, the Company is a holding company of which (i) the principal
assets are its remaining cash balances, accounts receivable from affiliates,
deferred tax asset and its initial 50% membership interest in Holding LLC, and
(ii) the principal liabilities are the $10.9 million outstanding under its
existing $25 million revolving credit facility with Arnos and its 10 3/4% senior
notes and Reinstated Interest (defined below). None of the Company's employees
have been transferred to Holding LLC or Operating LLC.

     Pursuant to the Plan of Reorganization, as of December 31, 2000 the Company
reinstated $45.8 million of interest expense on the senior notes ("Reinstated
Interest"). This Reinstated Interest consisted of $10.5 million of prepetition
interest and $35.3 million of interest expense that did not accrue during the
pendancy of the Bankruptcy Proceeding pursuant to Bankruptcy Court rules and
regulations. Accordingly, interest will accrue at 10.75% on the revised
obligation amount at December 31, 2000 of $210.8 million pursuant to terms of
the senior notes indenture. The Reinstated Interest plus interest accrued
thereon becomes due in installments beginning in April 2003. The Company will
continue to pay the semi-annual interest on the original senior note face amount
of $165 million. The senior note balance is $148.6 million as of December 31,
2001. (See Note 6 to the Consolidated Financial Statements).

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

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

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

PRINCIPAL AREAS OF OPERATIONS

     The Company contributed all of its operating assets and oil and natural gas
properties, excluding cash of $4.3 million, to Holding LLC in exchange for an
initial 50% membership interest ("LLC Contribution"). For financial reporting
purposes the transaction is as of September 1, 2001. The following discussion of
operations for 2001 covers the period January 1 through August 31, 2001, as of
September 1, 2001, all assets were contributed to Holding LLC. Due to the LLC
Contribution, the Company had no direct ownership of oil and natural gas
properties at December 31, 2001. All ownership interests are held by Holding
LLC. See "Principal Areas of Operation -- NEG Holding LLC".

                                        5
<PAGE>

     The following table sets forth the Company's principal areas of operations
and the Company's Proved Reserves of oil and natural gas at August 31, 2001.
See  --  "Oil and Natural Gas Properties".

<Table>
<Caption>
                                                                        NATURAL
                                                             NATURAL      GAS
                                                     OIL       GAS     EQUIVALENT   % OF
                                                   (MBBLS)   (MMCF)     (MMCFE)     TOTAL
                                                   -------   -------   ----------   -----
<S>                                                <C>       <C>       <C>          <C>
Area:
  Mid-Continent..................................     472    33,325      36,157      43.7%
  East and West Texas............................   2,391    20,446      34,792      42.1
  Gulf Coast.....................................   1,176     4,661      11,717      14.2
                                                    -----    ------      ------     -----
       Total.....................................   4,039    58,432      82,666     100.0%
                                                    =====    ======      ======     =====
</Table>

     The following table sets forth the Company's production by principal area
of operation for the eight months ended August 31, 2001:

<Table>
<Caption>
                                                                         NATURAL
                                                              NATURAL      GAS
                                                      OIL       GAS     EQUIVALENT   % OF
                                                    (MBBLS)   (MMCF)     (MMCFE)     TOTAL
                                                    -------   -------   ----------   -----
<S>                                                 <C>       <C>       <C>          <C>
Area:
  Mid-Continent...................................     28      2,296      2,463       35.7%
  East and West Texas.............................    249      1,543      3,039       44.0
  Gulf Coast......................................    151        494      1,399       20.3
                                                      ---      -----      -----      -----
       Total......................................    428      4,333      6,901      100.0%
                                                      ===      =====      =====      =====
</Table>

MID-CONTINENT AREA

     At August 31, 2001, approximately 43.7% (36.2 Bcfe) of the Company's Proved
Reserves were located in the Mid-Continent area in Oklahoma and West Arkansas
which includes the Anadarko and Arkoma Basins.

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

     During the eight months ended August 31, 2001, the Company drilled 2 Gross
(.2 Net) Development Wells in the Anadarko Basin both of which were completed as
commercially productive.

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

     During the eight months ended August 31, 2001, the Company did not drill
any wells in the Arkoma Basin.

                                        6
<PAGE>

EAST AND WEST TEXAS AREA

     At August 31, 2001, approximately 42.1% (34.8 Bcfe) of the Company's Proved
Reserves were located in the East and West Texas area, including East Texas,
South Arkansas and the Goldsmith Adobe Unit in West Texas.

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

     During the eight months ended August 31, 2001, the Company drilled 3 Gross
(2.9 Net) Development wells in East Texas all of which were completed as
commercially productive.

     West Texas.  The Goldsmith Adobe Unit ("GAU") is located in the Permian
Basin of West Texas. In the first quarter of 2001, the Company purchased
additional working interests in the GAU for approximately $2.3 million. As a
result, the Company owned 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, the Company began
a drilling program in July 1994 to develop the GAU on 20-acre spacing units.
Typically, wells drilled by the Company produced from the Upper Clearfork
formation at an average depth of 6,100 feet.

     During the eight months ended August 31, 2001, the Company drilled 10 Gross
(9.9 Net) Development wells at the GAU all of which were completed as
commercially productive.

GULF COAST AREA

     At August 31, 2001, approximately 14.2% (11.7 Bcfe) of the Company's Proved
Reserves were located in the Gulf Coast area which includes South Louisiana and
South Texas.

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

     During the eight months ended August 31, 2001, the Company drilled 2 Gross
(.4 Net) Exploratory wells and 1 Gross (.14 Net) Development well in the Gulf
Coast area that were all completed as commercially productive. During the same
period the Company drilled 3 Gross (1.4 Net) Exploratory wells that were not
completed as commercially productive.

OIL AND NATURAL GAS RESERVES

     All of the Company's reserves were located in the continental United
States. The Company's reserve report was prepared using constant prices and
costs in accordance with the published guidelines of the Securities and Exchange
Commission ("SEC"). The estimated reserves and related future net revenues as of
August 31, 2001, were prepared internally using the estimated reserves and
related future net revenues prepared by Netherland, Sewell & Associates, Inc. as
of December 31, 2001, for the oil and natural gas properties contributed to
Holding LLC. This was accomplished by adding back the related production for the
four month period August 31, 2001 to December 31, 2001 and using constant prices
in effect at August 31, 2001. The net weighted average prices used in the
Company's reserve report at August 31, 2001, were

                                        7
<PAGE>

$26.02 per barrel of oil and $2.49 per Mcf of natural gas. The estimation of
reserves and future net revenues can be materially affected by the oil and
natural gas prices used in preparing the reserve report. Substantially all of
the Company's oil and natural gas properties were subject to liens, and the
remaining oil and natural gas properties were subject to a negative pledge
pursuant to the Company's credit facility.

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

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

     No estimates of Proved Reserves of oil and natural gas have been filed by
the Company with, or included in any report to, any United States authority or
agency (other than the SEC) since December 31, 2000.

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

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

                                        8
<PAGE>

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       EIGHT MONTHS
                                                         DECEMBER 31,         ENDED
                                                       -----------------    AUGUST 31,
                                                        1999      2000         2001
                                                       -------   -------   ------------
<S>                                                    <C>       <C>       <C>
Net production:
  Oil (Mbbls)........................................    1,135       799         428
  Natural gas (Mmcf).................................    9,266     7,081       4,333
  Natural gas equivalent (Mmcfe).....................   16,078    11,873       6,901
Average sales price:
  Oil (per Bbl)......................................  $ 17.62   $ 29.24      $27.70
  Natural gas (per Mcf)..............................     2.08      3.91        4.92
Unit economics (per Mcfe):
  Average sales price................................  $  2.44   $  4.30      $ 4.81
  Lease operating expenses...........................      .38       .48         .56
  Oil and natural gas production taxes...............      .13       .24         .25
  Depletion rate (excluding writedowns)..............      .91       .88         .85
  General and administrative expenses................      .25       .38         .50
</Table>

PRODUCTIVE WELL SUMMARY

     The Company's production of oil and natural gas was 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 August 31, 2001:

<Table>
<Caption>
                                                 OIL         NATURAL GAS        TOTAL
                                            -------------   -------------   -------------
                                            GROSS    NET    GROSS    NET    GROSS    NET
                                            -----   -----   -----   -----   -----   -----
<S>                                         <C>     <C>     <C>     <C>     <C>     <C>
Area:
  Mid-Continent...........................    16      7.7    180     94.8    196    102.5
  East and West Texas.....................   152    151.4     39     37.9    191    189.3
  Gulf Coast..............................     6      3.4      3       .4      9      3.8
                                             ---    -----    ---    -----    ---    -----
       Total..............................   174    162.5    222    133.1    396    295.6
                                             ===    =====    ===    =====    ===    =====
</Table>

                                        9
<PAGE>

LEASEHOLD ACREAGE

     The following table shows the approximate Gross and Net Acres in which the
Company had a leasehold interest as of August 31, 2001:

<Table>
<Caption>
                                                         DEVELOPED       UNDEVELOPED
                                                          ACREAGE          ACREAGE
                                                      ---------------   --------------
                                                      GROSS     NET     GROSS     NET
                                                      ------   ------   ------   -----
<S>                                                   <C>      <C>      <C>      <C>
Area:
  Mid-Continent.....................................  72,035   38,760       --      --
  East and West Texas...............................  14,519   13,654    2,732   1,208
  Gulf Coast........................................   7,280    1,132   17,946   6,475
                                                      ------   ------   ------   -----
       Totals.......................................  93,834   53,546   20,678   7,683
                                                      ======   ======   ======   =====
</Table>

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

     Substantially all of the Company's producing oil and natural gas properties
were located on leases held by the Company for an indeterminate number of years
as long as production was maintained. All of the Company's non-producing acreage
was held under leases from mineral owners or a government entity which expired
at varying dates. The Company was obligated to pay annual delay rentals to the
lessors of certain properties in order to prevent the leases from terminating.
Delay rentals were approximately $.6 million for the year ended December 31,
2000 and were approximately $.2 million for the eight months ended August 31,
2001.

DRILLING ACTIVITY

     The following table sets forth exploration and development drilling results
for the years ended December 31, 1999, 2000 and the eight months ended August
31, 2001.

<Table>
<Caption>
                                                                             EIGHT MONTHS
                                                 YEAR ENDED DECEMBER 31,        ENDED
                                                --------------------------    AUGUST 31,
                                                   1999           2000           2001
                                                -----------   ------------   ------------
                                                GROSS   NET   GROSS   NET    GROSS   NET
                                                -----   ---   -----   ----   -----   ----
<S>                                             <C>     <C>   <C>     <C>    <C>     <C>
Exploratory
  Productive..................................    --    --       1      .3      2      .4
  Non-productive..............................    --    --      --      --      3     1.4
                                                ----    ---   ----    ----   ----    ----
          Total...............................    --    --       1      .3      5     1.8
                                                ----    ---   ----    ----   ----    ----
Development
  Productive..................................     4    .9      16    12.7     16    13.2
  Non-productive..............................     1    .1      --      --     --      --
                                                ----    ---   ----    ----   ----    ----
          Total...............................     5    1.0     16    12.7     16    13.2
                                                ----    ---   ----    ----   ----    ----
Combined Total................................     5    1.0     17    13.0     21    15.0
                                                ====    ===   ====    ====   ====    ====
</Table>

                                        10
<PAGE>

CONTROL OVER PRODUCTION ACTIVITIES

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

MARKETS AND CUSTOMERS

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

     A large percentage of the Company's oil and natural gas sales were made to
a small number of purchasers. For the eight months ended August 31, 2001, Plains
Marketing and Transportation accounted for 95% of the Company's oil sales, and
Aquila Energy Marketing, Crosstex Energy and Duke Energy Field Services
accounted for 26%, 20% and 15%, respectively, of the Company's natural gas
sales. For the year ended December 31, 2000, Plains Marketing accounted for 96%
of the Company's oil sales, and Aquila and Crosstex accounted for 28% and 20%,
respectively, of the Company's natural gas sales. For the year ended December
31, 1999, Plains Marketing 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 Marketing, entered into in 1993, provided for
Plains Marketing to purchase the Company's oil pursuant to West Texas
Intermediate posted prices plus a premium. A portion of the Company's natural
gas production was sold pursuant to long-term netback contracts. Under netback
contracts, gas purchasers buy gas from a number of producers, process the gas
for natural gas liquids, and sell the liquids and residue gas. Each producer
receives a fixed portion of the proceeds from the sale of the liquids, and
residue gas. The gas purchasers pay for transportation, processing, and
marketing of the gas and liquids, and assume the risk of contracting pipelines
and processing plants in return for a portion of the proceeds of the sale of the
gas and liquids. Generally, because the purchasers are marketing large volumes
of hydrocarbons gathered from multiple producers, higher prices may be obtained
for the gas and liquids. The remainder of the Company's natural gas was sold on
the spot market under short-term contracts.

INVESTMENT IN NEG HOLDING LLC

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

     Pursuant to the Holding LLC Operating Agreement, the Company is to receive
guaranteed payments, in addition to a priority distribution amount of $202.2
million before Gascon receives any monies. The priority distribution is to be
made on or before November 1, 2006. Guaranteed payments are to be paid on a semi
annual basis, based on 10.75% of the outstanding priority distribution amount.
After the payments to the Company, Gascon is to receive distributions equivalent
to the priority distribution amount and guaranteed payments plus other amounts
as defined in the NEG Holding LLC Operating Agreement referred herein. Following
the above distributions to the Company and Gascon, additional distributions, if
any, are to be made in accordance with their respective capital accounts. The
order of distributions is listed below. Because of the substantial uncertainty
that the Company will receive any distributions above the priority and
guaranteed
                                        11
<PAGE>

payment amounts, the Company accounts for its investment in Holding LLC as a
preferred investment whereby guaranteed payment amounts received and receipts of
the priority distribution amount are recorded as reductions in the investment
and income is recognized from accretion of the investment up to the priority
distribution amount, including the guaranteed payments (based on the interest
method), and the residual interest attributable to Holding LLC will be valued at
zero. The Company received a guaranteed payment of $10.9 million from Holding
LLC in November 2001 in accordance with the Holding LLC Operating Agreement.
Cash receipts, if any, from the residual interest will be reported in income as
earned.

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

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

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

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

PRINCIPAL AREAS OF OPERATIONS -- NEG HOLDING LLC

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

     The following table sets forth Holding LLC's principal areas of operations
and Holding LLC's Proved Reserves of oil and natural gas at December 31, 2001.

<Table>
<Caption>
                                                                        NATURAL
                                                             NATURAL      GAS
                                                     OIL       GAS     EQUIVALENT   % OF
                                                   (MBBLS)   (MMCF)     (MMCFE)     TOTAL
                                                   -------   -------   ----------   -----
<S>                                                <C>       <C>       <C>          <C>
Area:
  Mid-Continent..................................     459    32,192      34,946      30.8%
  East and West Texas............................   2,615    26,969      42,659      37.6
  Gulf Coast.....................................   2,085    23,271      35,781      31.6
                                                    -----    ------     -------     -----
          Total..................................   5,159    82,432     113,386     100.0%
                                                    =====    ======     =======     =====
</Table>

                                        12
<PAGE>

     The following table sets forth Holding LLC's production by principal area
of operation for the four months ended December 31, 2001:

<Table>
<Caption>
                                                                         NATURAL
                                                              NATURAL      GAS
                                                      OIL       GAS     EQUIVALENT   % OF
                                                    (MBBLS)   (MMCF)     (MMCFE)     TOTAL
                                                    -------   -------   ----------   -----
<S>                                                 <C>       <C>       <C>          <C>
Area:
  Mid-Continent...................................     13      1,133      1,211       28.9%
  East and West Texas.............................    131        850      1,636       39.1
  Gulf Coast......................................    102        730      1,342       32.0
                                                      ---      -----      -----      -----
          Total...................................    246      2,713      4,189      100.0%
                                                      ===      =====      =====      =====
</Table>

MID-CONTINENT AREA

     At December 31, 2001, approximately 30.8% (34.9 Bcfe) of Holding LLC's
Proved Reserves were located in the Mid-Continent area in Oklahoma and West
Arkansas which includes the Anadarko and Arkoma Basins.

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

     During the four months ended December 31, 2001, Holding LLC drilled 1 Gross
(.3 Net) Exploratory Well in the Anadarko Basin which was completed as
commercially productive.

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

     During the four months ended December 31, 2001, Holding LLC drilled 1 Gross
(.2 Net) Development Well and 1 Gross (.3 Net) Exploratory Well in the Arkoma
Basin both of which were completed as commercially productive.

EAST AND WEST TEXAS AREA

     At December 31, 2001, approximately 37.6% (42.7 Bcfe) of Holding LLC's
Proved Reserves were located in the East and West Texas area, including East
Texas, South Arkansas and the Goldsmith Adobe Unit in West Texas.

     East Texas Basin.  The reserves in this region are found in the Cotton
Valley formation and the Travis Peak formation. These properties produce from
low permeability reservoirs that generally contain relatively long-lived
reserves. A significant portion of the cost to complete Cotton Valley wells is
incurred due to the low permeability of interbedded sandstones and shales, which
requires large hydraulic fracture stimulation,

                                        13
<PAGE>

typically of multiple zones of the producing formation, to obtain the increased
production levels necessary to make such wells commercially viable. Cotton
Valley production occurs in a mature natural gas province characterized by
long-lived reserves producing from formations at depths ranging from 8,500 to
10,500 feet. Travis Peak is considered to be a mature oil province characterized
by long-lived reserves producing from formations at a depth of 7,200 feet.

     During the four months ended December 31, 2001, Holding LLC did not drill
any wells in the East Texas Basin.

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

     During the four months ended December 31, 2001, Holding LLC did not drill
any wells at the GAU.

GULF COAST AREA

     At December 31, 2001, approximately 31.6% (35.8 Bcfe) of Holding LLC's
Proved Reserves were located in the Gulf Coast area which includes South
Louisiana and South Texas.

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

     During the four months ended December 31, 2001, Holding LLC drilled 3 Gross
(.4 Net) Exploratory wells and 2 Gross (1.5 Net) Development wells in the Gulf
coast area, all of which were completed as commercially productive. During the
same period Holding LLC drilled 1 Gross (.25 Net) Exploratory well and 1 Gross
(.5 Net) Development wells that were not completed as commercially productive.

OIL AND NATURAL GAS RESERVES -- NEG HOLDING LLC

     The estimated reserves and related future net revenues as of December 31,
2001, were prepared by Netherland, Sewell & Associates, Inc and Prator Bett,
LLC. All of Holding LLC's reserves are located in the continental United States.
Holding LLC's reserve report was prepared using constant prices and costs in
accordance with the published guidelines of the Securities and Exchange
Commission ("SEC"). The net weighted average prices used in Holding LLC's
reserve report at December 31, 2001, were $18.48 per barrel of oil and $2.66 per
Mcf of natural gas. The estimation of reserves and future net revenues can be
materially affected by the oil and natural gas prices used in preparing the
reserve report.

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

                                        14
<PAGE>

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

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

<Table>
<Caption>
                                                         AS OF DECEMBER 31, 2001
                                               --------------------------------------------
                                                         NATURAL   NATURAL GAS     PV10%
                                                 OIL       GAS     EQUIVALENT       (IN
                                               (MBBLS)   (MMCF)      (MMCFE)     THOUSANDS)
                                               -------   -------   -----------   ----------
<S>                                            <C>       <C>       <C>           <C>
Proved Developed Reserves....................   4,608    67,189       94,837      $102,423
Proved Undeveloped Reserves..................     551    15,243       18,549        10,699
                                                -----    ------      -------      --------
Total Proved Reserves........................   5,159    82,432      113,386      $113,122
                                                =====    ======      =======      ========
Standardized Measure.........................                                     $113,122
                                                                                  ========
</Table>

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

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

<Table>
<Caption>
                                                              FOUR MONTHS
                                                                 ENDED
                                                              DECEMBER 31,
                                                                  2001
                                                              ------------
<S>                                                           <C>
Net production:
  Oil (Mbbls)...............................................        246
  Natural gas (Mmcf)........................................      2,713
  Natural gas equivalent (Mmcfe)............................      4,189
Average sales price:
  Oil (per Bbl).............................................     $20.81
  Natural gas (per Mcf).....................................       2.63
Unit economics (per Mcfe):
  Average sales price.......................................     $ 2.97
  Lease operating expenses..................................        .64
  Oil and natural gas production taxes......................        .17
  Depletion rate (excluding writedowns).....................       1.00
  General and administrative expenses.......................        .50
</Table>

                                        15
<PAGE>

PRODUCTIVE WELL SUMMARY -- NEG HOLDING LLC

     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 Holding LLC's interests in Productive Wells, by principal area of
operation, as of December 31, 2001:

<Table>
<Caption>
                                                 OIL         NATURAL GAS        TOTAL
                                            -------------   -------------   -------------
                                            GROSS    NET    GROSS    NET    GROSS    NET
                                            -----   -----   -----   -----   -----   -----
<S>                                         <C>     <C>     <C>     <C>     <C>     <C>
Area:
  Mid-Continent...........................    16      7.7    183     95.5    199    103.2
  East and West Texas.....................   268    152.9     44     37.9    312    190.8
  Gulf Coast..............................    24     11.8     70     28.4     94     40.2
                                             ---    -----    ---    -----    ---    -----
          Total...........................   308    172.4    297    161.8    605    334.2
                                             ===    =====    ===    =====    ===    =====
</Table>

LEASEHOLD ACREAGE -- NEG HOLDING LLC

     The following table shows the approximate Gross and Net Acres in which
Holding LLC had a leasehold interest as of December 31, 2001:

<Table>
<Caption>
                                                                           UNDEVELOPED
                                                     DEVELOPED ACREAGE       ACREAGE
                                                     ------------------   --------------
                                                      GROSS       NET     GROSS     NET
                                                     --------   -------   ------   -----
<S>                                                  <C>        <C>       <C>      <C>
Area:
  Mid-Continent....................................   76,583    38,985        --      --
  East and West Texas..............................   14,871    13,703     3,573   1,577
  Gulf Coast.......................................   37,895    17,105     9,788   2,900
                                                     -------    ------    ------   -----
          Totals...................................  129,349    69,793    13,361   4,477
                                                     =======    ======    ======   =====
</Table>

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

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

                                        16
<PAGE>

DRILLING ACTIVITY -- NEG HOLDING LLC

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

<Table>
<Caption>
                                                                    FOUR
                                                                MONTHS ENDED
                                                              DECEMBER 31, 2001
                                                              -----------------
                                                              GROSS        NET
                                                              ------       ----
<S>                                                           <C>          <C>
Exploratory
  Productive................................................     5         1.0
  Non-productive............................................     1          .3
                                                                --         ---
          Total.............................................     6         1.3
                                                                --         ---
Development
  Productive................................................     3         1.7
  Non-productive............................................     1          .5
                                                                --         ---
          Total.............................................     4         2.2
                                                                --         ---
Combined Total..............................................    10         3.5
                                                                ==         ===
</Table>

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

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

PRODUCTION AND SALES PRICES -- NEG HOLDING LLC

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

CONTROL OVER PRODUCTION ACTIVITIES -- NEG HOLDING LLC

     Holding LLC operated 410 of the 605 producing wells in which it owned an
interest as of December 31, 2001. The non-operated properties are operated by
unrelated third parties pursuant to operating agreements which are generally
standard in the industry. Significant decisions about operations regarding
non-operated properties may be determined by the outside operator rather than by
Holding LLC. If Holding LLC declines to participate in additional activities
proposed by the outside operator under certain operating agreements, Holding LLC
will not receive revenues from, and/or will lose its interest in the activity in
which it declined to participate.

MARKETS AND CUSTOMERS -- NEG HOLDING LLC

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

                                        17
<PAGE>

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

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

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

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

REGULATION -- NEG HOLDING LLC

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

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

                                        18
<PAGE>

which the regulatory agencies establish permissible monthly production
allowables. Holding LLC cannot predict what effect any change in prorationing
regulations might have on its production and sales of natural gas.

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

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

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

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

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

     Because oil and natural gas exploration, production and other activities
have been conducted at some of Holding LLC's properties by previous owners and
operators, materials from these operations may remain on some of the properties
and in some instances require remediation. In addition, Holding LLC has agreed
to indemnify some sellers of producing properties from whom Holding LLC has
acquired reserves against certain liabilities for environmental claims
associated with such properties. While Holding LLC does not believe that costs
to be incurred by Holding LLC for compliance and remediating previously or
currently owned or
                                        19
<PAGE>

operated properties will be material, there can be no guarantee that such costs
will not result in future material expenditures.

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

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

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

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

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

                                        20
<PAGE>

OPERATIONAL HAZARDS AND INSURANCE -- NEG HOLDING LLC

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

COMPETITION -- NEG HOLDING LLC

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

OFFICE SPACE

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

EMPLOYEES

     On March 25, 2002, the Company had 54 full-time employees. Of these
employees, 13 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 acting pursuant to the Management Agreement as it relates to the
management and operations of the oil and natural gas properties owned by
Operating LLC, the Company is not a party to any material pending legal
proceedings. With respect to certain claims of the Company against Enron Corp.
relating to the oil and natural gas properties contributed to Holding LLC, a
representative of the Company has been appointed to the official committee of
unsecured creditors in the Enron bankruptcy proceeding.

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

                                        21
<PAGE>

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

     On October 5, 2001, an annual meeting of the shareholders of the Company
was held.

     At the meeting two proposals were voted upon and the following sets forth
the number of votes that were cast for and against the proposals and the number
of abstentions and broker no votes on the proposals:

          (i) Proposal to elect five nominees as directors of the Company to
     serve until the next annual meeting of shareholders:

                                NAME OF DIRECTOR

<Table>
<Caption>
                         BOB G.     ROBERT H.    RUSSELL D.   ROBERT J.     JACK G.
                       ALEXANDER       KITE        GLASS       MITCHELL    WASSERMAN
                       ----------   ----------   ----------   ----------   ----------
<S>                    <C>          <C>          <C>          <C>          <C>
For..................  10,389,706   10,423,684   10,420,572   10,420,500   10,420,174
Against..............      73,532       39,554       42,666       42,738       43,064
Abstain..............          --           --           --           --           --
                       ----------   ----------   ----------   ----------   ----------
                       10,463,238   10,463,238   10,463,238   10,463,238   10,463,238
                       ==========   ==========   ==========   ==========   ==========
</Table>

          (ii) Proposal to ratify the selection of KPMG LLP as the Company's
     independent auditors for the current fiscal year ended December 31, 2001.

<Table>
<S>                                                           <C>
For.........................................................  10,414,359
Against.....................................................      43,921
Abstain.....................................................       4,958
Broker no Votes.............................................          --
                                                              ----------
                                                              10,463,238
                                                              ==========
</Table>

                                        22
<PAGE>

                                    PART II

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

MARKET INFORMATION

     The Company's common stock currently trades on the OTC Bulletin Board.
Effective October 19, 2000, the Company's common stock began trading under the
symbol "NEGI". The following table sets forth, for the periods indicated, the
high and low closing sales prices as reported on the OTC Bulletin Board. The
prices for periods prior to confirmation of the Joint Plan have been adjusted to
reflect a 7-for-1 reverse stock split. 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
2001:
  First.....................................................  $2.00   $1.25
  Second....................................................   2.00    1.04
  Third.....................................................    .95     .39
  Fourth....................................................    .48     .22
2000:
  First.....................................................  $2.08   $ .22
  Second....................................................   1.64     .77
  Third.....................................................   3.39    1.53
  Fourth....................................................   3.00     .81
</Table>

     On March 25, 2002, the latest practicable date for providing price
information, the last quoted price for the Company's common stock was $.38.

HOLDERS

     As of March 25, 2002, the Company had approximately 7,500 record holders of
its shares of common stock, including multiple nominee holders for an
undetermined number of beneficial owners.

DIVIDENDS ON COMMON STOCK

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

                                        23
<PAGE>

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, 2001. 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,
                                          ----------------------------------------------------------------
                                            1997       1998           1999           2000           2001
                                          --------   ---------      ---------      ---------      --------
                                                (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...............  $ 52,417   $  38,440      $  39,300      $  51,014      $ 33,176
Accretion of Investment in NEG Holding
  LLC...................................        --          --             --             --         9,834
Management fee..........................        --          --             --             --         2,699
                                          --------   ---------      ---------      ---------      --------
    Total revenue.......................    52,417      38,440         39,300         51,014        45,709
                                          --------   ---------      ---------      ---------      --------
Costs and expenses:
  Lease operating.......................     6,729       8,590          6,101          5,672         3,874
  Oil and natural gas production
    taxes...............................     3,139       2,504          2,095          2,888         1,695
  Depreciation, depletion and
    amortization........................    23,205      21,311         15,889         11,044         6,163
  Writedown of oil and natural gas
    properties(2).......................    46,396     148,400             --             --            --
  Restructuring charges.................        --       1,869             --             --            --
  General and administrative............     4,392       6,141          4,098          4,527         5,931
                                          --------   ---------      ---------      ---------      --------
    Total costs and expenses............    83,861     188,815         28,183         24,131        17,663
                                          --------   ---------      ---------      ---------      --------
Operating income (loss).................   (31,444)   (150,375)        11,117         26,883        28,046
Interest expense(3).....................   (11,212)    (14,432)        (1,909)        (9,656)      (21,224)
Interest income and other, net..........     1,032         293             --          1,672          (336)
                                          --------   ---------      ---------      ---------      --------
Income (loss) before reorganization
  items, income taxes and extraordinary
  item..................................   (41,624)   (164,514)         9,208         18,899         6,486
Reorganization items:
  Professional fees and other...........        --          --         (4,727)        (1,354)          236
  Writeoff of unamortized debt premium
    and issuance costs, net.............        --          --         (3,219)            --            --
  Interest earned on accumulating cash
    resulting from Chapter 11
    proceedings.........................        --          --            762          1,064            --
                                          --------   ---------      ---------      ---------      --------
Income (loss) before income taxes and
  extraordinary items...................   (41,624)   (164,514)         2,024         18,609         6,722
Income tax benefit......................     7,286          --             --             --        30,589
                                          --------   ---------      ---------      ---------      --------
Income (loss) before extraordinary
  item..................................   (34,338)   (164,514)         2,024         18,609        37,311
Extraordinary loss......................        --          --             --        (33,047)          (11)
                                          --------   ---------      ---------      ---------      --------
Net income (loss).......................  $(34,338)  $(164,514)     $   2,024      $ (14,438)     $ 37,300
                                          ========   =========      =========      =========      ========
Net income (loss) per common share
  before extraordinary item.............  $  (6.58)  $  (28.56)     $     .35      $    2.71      $   3.33
                                          ========   =========      =========      =========      ========
Net income (loss) per common share,
  basic and diluted.....................  $  (6.58)  $  (28.56)     $     .35      $   (2.10)     $   3.33
                                          ========   =========      =========      =========      ========
</Table>

                                        24
<PAGE>

<Table>
<Caption>
                                                              YEAR ENDED DECEMBER 31,
                                          ----------------------------------------------------------------
                                            1997       1998           1999           2000           2001
                                          --------   ---------      ---------      ---------      --------
                                                (IN THOUSANDS, EXCEPT FOR RATIOS AND PER UNIT DATA)
<S>                                       <C>        <C>            <C>            <C>            <C>
CASH FLOW DATA:
Net cash provided by operating
  activities............................  $ 22,864   $   5,082      $  27,713      $  23,831      $ 11,537
Net cash used in investing activities...   (75,826)    (53,303)        (1,038)       (11,720)      (27,215)
Net cash provided by (used in) financing
  activities............................    64,734      24,809             --          2,000       (24,560)
OTHER FINANCIAL DATA:
EBITDA(4)...............................  $ 39,189   $  19,628      $  27,006      $  39,599      $ 24,039
Ratio of EBITDA to interest expense.....       3.5x        1.4x           N/A(6)         N/A(6)        1.1x
Ratio of earnings to fixed charges(5)...        --          --            N/A(6)         N/A(6)        1.3x
BALANCE SHEET DATA (AT PERIOD END):(1)
Cash and cash equivalents...............  $ 25,954   $   2,542      $  29,217      $  43,328      $  3,090
Working capital (deficit)...............     8,387    (197,834)(8)        N/A(7)      19,835         1,673
Total assets............................   254,361      95,002        100,358        118,654       132,709
Long-term debt..........................   166,397         N/A(8)         N/A(8)     210,827       202,471
Stockholders' equity(deficit)...........    47,893    (116,933)      (114,906)      (127,171)      (82,405)
</Table>

<Table>
<Caption>
                                                                    YEAR ENDED DECEMBER 31,
                                                        ------------------------------------------------
                                                         1997      1998      1999      2000     2001(10)
                                                        -------   -------   -------   -------   --------
<S>                                                     <C>       <C>       <C>       <C>       <C>
OPERATING DATA:(1)
Production:
  Oil (Mbls)..........................................    1,110     1,238     1,135       799       428
  Natural gas (Mmcf)..................................   13,146    11,255     9,266     7,081     4,333
  Natural gas equivalent (Mmcfe)......................   19,807    18,685    16,078    11,873     6,901
Average sales price:
  Oil (per Bbl).......................................  $ 19.17   $ 12.66   $ 17.62   $ 29.24    $27.70
  Natural gas (per Mcf)...............................     2.37      2.02      2.08      3.91      4.92
Unit economics (per Mcfe):
  Average sales price.................................  $  2.65   $  2.06   $  2.44   $  4.30    $ 4.81
  Lease operating expenses............................      .34       .46       .38       .48       .56
  Oil and natural gas production taxes................      .16       .13       .13       .24       .25
  Depreciation, depletion and amortization(9).........     1.17      1.14       .99       .93       .89
  General and administrative..........................      .22       .33       .25       .38       .50
</Table>

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

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

 (2) The results of operations for the year ended December 31, 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) Accrual of interest on the Company's senior notes was discontinued during
     the Bankruptcy Proceeding. Approximately $17.7 million and $10.5 million of
     additional interest expense would have been recognized by the Company
     during 1999 and 2000, respectively, if not for the discontinuation of the
     interest accrual.

 (4) EBITDA is earnings (including interest income and excluding accretion of
     Investment in NEG Holding LLC, discontinued operations, extraordinary
     items, charges resulting from changes in accounting and significant
     nonrecurring revenues and expenses and reorganization items) before
     interest expense,

                                        25
<PAGE>

     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. The
     Company has included information concerning EBITDA because EBITDA is a
     measure used by certain investors in determining the 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.

 (5) 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, 1997 and
     1998, were approximately $44.2 million, and $167.9 million, respectively.

 (6) 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 years ended December 31, 1999 and December 31,
     2000 and have not been presented.

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

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

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

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

                                        26
<PAGE>

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

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

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

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

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

     The Holding LLC Operating Agreement entered into on September 12, 2001,
contains a provision that allows Gascon at any time, in its sole discretion, to
redeem the Company's membership interest in Holding LLC at a price equal to the
fair market value of such interest determined as if Holding LLC had sold all of
its assets for fair market value and liquidated. Since all of the Company's
operating assets and oil and natural gas properties have been contributed to
Holding LLC, as noted above, following such a redemption, the Company's
principal assets would consist solely of its cash balances. In the event that
such redemption right is
                                        27
<PAGE>

exercised by Gascon and there follows a liquidation and distribution of the
proceeds, the Company may be obligated to use the proceeds that it would receive
for its redeemed membership interest to pay outstanding indebtedness and
operating expenses before the distribution of any portion of such proceeds to
the Company's shareholders. Following the payment of the Company's indebtedness
(currently held by entities owned or controlled by Carl C. Icahn) and its
operating expenses, there is a substantial risk that there will be no proceeds
remaining for distribution to the Company's shareholders. It is the present
intention of Holding LLC to continue to conduct oil and natural gas drilling and
development activities in the ordinary course of business and to seek additional
reserves.

     The management and operation of Operating LLC is being undertaken by the
Company pursuant to a Management Agreement (the "Management Agreement") which
the Company has entered into with Operating LLC. However, neither the Company's
officers nor directors will control the strategic direction of Operating LLC's
oil and natural gas business, including oil and natural gas drilling and capital
investments, which shall be controlled by the managing member of Holding LLC
(currently Gascon). The Management Agreement provides that the Company will
manage Operating LLC's oil and natural gas assets and business until the earlier
of November 1, 2006, or such time as Operating LLC no longer owns any of the
managed oil and natural gas properties. The Company's employees will conduct the
day-to-day operations of Operating LLC's oil and natural gas properties, and all
costs and expenses incurred in the operation of the oil and natural gas
properties shall be borne by Operating LLC; although the Management Agreement
provides that the salary of the Company's Chief Executive Officer shall be 70%
attributable to the managed oil and natural gas properties, and the salaries of
each of the General Counsel and Chief Financial Officer shall be 20%
attributable to the managed oil and natural gas properties. In exchange for the
Company's management services, Operating LLC shall pay the Company a management
fee equal to 115% of the actual direct and indirect administrative and
reasonable overhead costs incurred by the Company in operating the oil and
natural gas properties, which either the Company or Operating LLC may seek to
change within the range of 110%-115% as such change is warranted; however, the
parties have agreed to consult with each other to ensure that such
administrative and reasonable overhead costs attributable to the managed
properties are properly reflected in the management fee paid to the Company. In
addition, Operating LLC has agreed to indemnify the Company to the extent it
incurs any liabilities in connection with its operation of the assets and
properties of Operating LLC, except to the extent of its gross negligence, or
misconduct. The Company recorded $2.7 million as a management fee for the four
month period ended December 31, 2001.

     As a result of the foregoing transactions and as mandated by the Plan of
Reorganization, the Company is a holding company of which (i) the principal
assets are its remaining cash balances, accounts receivable from affiliates,
deferred tax asset and its initial 50% membership interest in Holding LLC, and
(ii) the principal liabilities are the $10.9 million outstanding under its
existing $25 million revolving credit facility with Arnos and its 10 3/4% senior
notes and Reinstated Interest (defined below). None of the Company's employees
have been transferred to Holding LLC or Operating LLC.

     Pursuant to the Plan of Reorganization, as of December 31, 2000 the Company
reinstated $45.8 million of interest expense on the senior notes ("Reinstated
Interest"). This Reinstated Interest consisted of $10.5 million of prepetition
interest and $35.3 million of interest expense that did not accrue during the
pendancy of the Bankruptcy Proceeding pursuant to Bankruptcy Court rules and
regulations. Accordingly, interest will accrue at 10.75% on the revised
obligation amount at December 31, 2000 of $210.8 million pursuant to terms of
the senior notes indenture. The Reinstated Interest plus interest accrued
thereon becomes due in installments beginning in April 2003. The Company will
continue to pay the semi-annual interest on the original senior note face amount
of $165 million. The senior note balance is $148.6 million as of December 31,
2001. (See Note 6 to the Consolidated Financial Statements).

     In August 2001, the Company redeemed both $16.4 million of principal
outstanding under the senior note obligations and $4.8 million of Reinstated
Interest for $10.5 million. The Company paid two Arnos affiliates approximately
$.4 million in current interest on the redeemed senior note obligations at the
date of redemption related to interest owed from the last semi-annual interest
payment date of May 1, 2001 to the date of redemption. As this was a partial
redemption of the senior notes, it has been accounted for as a modification of
terms that changes the amounts of future cash payments. Accordingly, the excess
of redeemed principal and
                                        28
<PAGE>

interest over the redemption payment of $10.5 million will be amortized as a
reduction to interest expense over the remaining life of the bonds. In
connection with this transaction, the Company borrowed $10.9 million under its
existing credit facility with Arnos.

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

RESULTS OF OPERATIONS

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

 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       EIGHT MONTHS
                                                         DECEMBER 31,         ENDED
                                                       -----------------    AUGUST 31,
                                                        1999      2000         2001
                                                       -------   -------   ------------
<S>                                                    <C>       <C>       <C>
Net production:
  Oil (Mbbls)........................................    1,135       799         428
  Natural Gas (Mmcf).................................    9,266     7,081       4,333
  Natural Gas Equivalent (Mmcfe).....................   16,078    11,873       6,901
Oil and natural gas sales (in thousands):
  Oil................................................  $20,006   $23,355     $11,859
  Natural gas........................................   19,294    27,659      21,317
                                                       -------   -------     -------
          Total......................................  $39,300   $51,014     $33,176
                                                       =======   =======     =======
Average sales price:
  Oil (per Bbl)......................................  $ 17.62   $ 29.24     $ 27.70
  Natural gas (per Mcf)..............................     2.08      3.91        4.92
Unit economics (per Mcfe):
  Average sales price................................  $  2.44   $  4.30     $  4.81
  Lease operating expenses...........................      .38       .48         .56
  Oil and natural gas production taxes...............      .13       .24         .25
  Depletion rate (excluding writedowns)..............      .91       .88         .85
  General and administrative.........................      .25       .38         .50
</Table>

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

     Revenues.  Total revenues decreased by $5.3 million (10.4%) to $45.7
million for 2001 from $51.0 million in 2000. The decrease in revenues is due to
the decrease in overall production and the LLC Contribution. Average natural gas
prices increased $1.01 per Mcf to $4.92 per Mcf for 2001 from $3.91 for 2000,
and

                                        29
<PAGE>

average oil prices decreased $1.54 per barrel to $27.70 per barrel for 2001 from
$29.24 for 2000. The Company recorded $9.8 million in accretion of investment in
Holding LLC and management fees of $2.7 million in 2001.

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

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

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

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

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

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

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

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

     Income Taxes.  As of December 31, 2001, the Company had consolidated net
operating loss carryforwards of approximately $129 million for income tax
reporting purposes that expire from 2002 through 2020. Prior to the formation of
Holding LLC, the income tax benefit associated with the loss carryforwards had
not

                                        30
<PAGE>

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

     Extraordinary Loss.  The Company recognized a $33.0 million extraordinary
loss during 2000 in connection with confirmation of the Joint Plan. The
extraordinary loss consists of $35.3 million reinstated interest on the senior
notes which was offset by a $2.2 million gain on discharge of other indebtedness
pursuant to the Joint Plan.

     Net Loss.  Net loss of $14.4 million was recognized for 2000, compared with
a net income of $37.3 million for the comparable 2001 period. Results for 2000
(i) include $1.4 million, relating to the Bankruptcy Proceeding and (ii) include
$1.1 million in interest income on cash accumulating during the Bankruptcy
Proceeding and (iii) includes a $33.0 million extraordinary loss in connection
with the confirmation of the Joint Plan. Results for 2001 include income of $.2
million related to the Bankruptcy Proceeding and a $31.9 million benefit from
income taxes as a result of the LLC Contribution and $1.3 million in deferred
income tax expense. Excluding the effects of the above items, a net income of
$18.9 million would have been recognized for 2000 compared to net income of $6.5
million for the same period in 2001.

  YEAR ENDED DECEMBER 31, 2000, COMPARED WITH YEAR ENDED DECEMBER 31, 1999

     Revenues.  Total revenues increased by $11.7 million (29.8%) to $51.0
million for 2000 from $39.3 million in 1999. The increase in revenues is due to
the increase in oil and natural gas prices from the same period in 1999, offset
in part by a decline in overall production. Average natural gas prices increased
$1.83 per Mcf to $3.91 per Mcf for 2000 from $2.08 for 1999, and average oil
prices increased $11.62 per barrel to $29.24 per barrel for 2000 from $17.62 for
1999. The increase in average prices increased 2000 revenues by approximately
$22.2 million compared to 1999.

     In 2000, the Company produced 799 Mbbls of oil, a decrease of 29.6%
compared to 1,135 Mbbls in 1999, and the Company produced 7,081 Mmcf of natural
gas in 2000, a decrease of 23.6% from 9,266 Mmcf in the same period of 1999. The
decline in production is primarily due to natural production declines combined
with the loss of production from non-strategic properties sold at an oil and
natural gas auction in December 1999. During the Bankruptcy Proceeding, the
Company's ability to offset natural production declines through drilling and
exploration was limited due to the Bankruptcy Court restrictions. However, the
Company has emerged from Chapter 11 and is operating its business in the
ordinary course and initiated drilling activity in 2000.

     Costs and Expenses.  Lease operating expenses decreased $.4 million (6.6%)
to $5.7 million for 2000 from $6.1 million in 1999 primarily due to the
Company's efforts to reduce and control these costs. The decline is also, in
part, due to the sale of oil and natural gas properties in the December 1999
auction. Lease operating expenses per Mcfe increased to $.48 for 2000 from $.38
for 1999 due to the decline in overall production.

     Production taxes increased $.8 million (38.1%) to $2.9 million for 2000
compared to $2.1 million for 1999. This increase is the direct result of the
increased oil and natural gas revenue in 2000 combined with certain
non-recurring severance tax refunds received during 1999.

                                        31
<PAGE>

     Depreciation, depletion and amortization ("DD&A") decreased $4.9 million
(30.8%) to $11.0 million for 2000 compared to $15.9 million for 1999. This
decrease in DD&A is due to the decrease in production combined with the slight
decrease in the depletion rate per Mcfe from $.91 in 1999 to $.88 for 2000.

     General and administrative costs increased $.4 million (9.8%) to $4.5
million for 2000 compared to $4.1 million for 1999. This increase is primarily
due to the fact that capitalized internal costs decreased during the Bankruptcy
proceeding. 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 $.8
million and $.6 million for the years ended December 31, 1999 and 2000,
respectively.

     Other Income and Expenses.  The increase of $7.8 million in interest
expense to $9.7 million for 2000 from $1.9 million for 1999 was primarily due to
the accrual of interest expense on the senior notes subsequent to the effective
date of the Joint Plan. Approximately $10.5 million and $17.7 million additional
interest expense would have been recognized by the Company if not for
discontinuance of the interest accrual on the senior notes during the Bankruptcy
Proceeding in 2000 and 1999, respectively. The average balance of debt
outstanding during 2000 and 1999 was $190.0 million. The weighted average
interest rate for 2000 was 10.4% for interest accrued compared to 8.2% for 1999.
The increase in the weighted average interest rate is due to the accrual of
interest on the senior notes subsequent to the effective date of the Joint Plan.

     Of the $1.7 million other income recognized for the year ended December 31,
2000, $580,500 represents the noncash change in the fair value of the Company's
derivative contract and the remainder represents interest earned on cash
accumulated subsequent to confirmation of the Joint Plan.

     Reorganization Items.  The Company incurred $4.7 million and $1.4 million
for the years ended December 31, 1999 and 2000, respectively, for professional
fees and other expenses associated with the bankruptcy proceeding. The Company
earned $.8 million and $1.1 million in interest income on cash accumulating
during the bankruptcy proceeding for the years ended December 31, 1999 and 2000,
respectively. 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 Bankruptcy Proceeding in 1999.

     Extraordinary Loss.  The Company recognized a $33.0 million extraordinary
loss during 2000 in connection with confirmation of the Joint Plan. The
extraordinary loss consists of $35.3 million reinstated interest on the senior
notes which was offset by a $2.2 million gain on discharge of indebtedness
pursuant to the Joint Plan.

     Net Loss.  Net income of $2.0 million was recognized for 1999, compared
with a net loss of $14.4 million for the comparable 2000 period. Results for
1999 and 2000 (i) include expenses of $7.9 million and $1.4 million,
respectively, relating to the Bankruptcy Proceeding and (ii) include $.8 million
and $1.1 million in interest income on cash accumulating during the Bankruptcy
Proceeding. The year ended December 31, 1999 excludes $17.7 million in
additional interest expense on the senior notes not accrued during the
Bankruptcy Proceeding pursuant to Bankruptcy Court rules and regulations. The
year ended December 31, 2000 includes a $33.0 million extraordinary loss in
connection with the confirmation of the Joint Plan. Excluding the effects of the
above items, a net loss of $8.6 million would have been recognized for 1999
compared to net income of $18.9 million for the same period in 2000.

LIQUIDITY AND CAPITAL RESOURCES

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

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

                                        32
<PAGE>

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

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

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

     The following table is a summary of contractual obligations as of December
31, 2001.

<Table>
<Caption>
                          2002        2003          2004          2005          2006
                        --------   -----------   -----------   ----------   ------------
<S>                     <C>        <C>           <C>           <C>          <C>
Senior notes..........  $     --   $        --   $        --   $       --   $148,637,000
Reinstated interest...        --    16,287,000    17,738,000    8,868,815             --
Credit facility.......        --    10,939,750            --           --             --
Rent..................   487,442       549,934       549,934      549,934        549,934
                        --------   -----------   -----------   ----------   ------------
     Total............  $487,442   $27,776,684   $18,287,934   $9,418,749   $149,186,934
                        ========   ===========   ===========   ==========   ============
</Table>

  YEAR ENDED DECEMBER 31, 2000, COMPARED WITH YEAR ENDED DECEMBER 31, 1999

     Net cash provided by operating activities was $23.8 million for the year
ended December 31, 2000, compared to $27.7 million for the same period in 1999.
Although income from operations significantly increased from 1999, cash flow
from operating activities decreased as approximately $4.8 million of the
increase in net income is attributable to a decline in non-cash depletion
expense and the Company began making interest payments on its senior notes upon
confirmation of the Joint Plan.

     Net cash used by investing activities was $11.7 million for 2000 compared
with $1.0 million for 1999. The cash used by investing activities for 2000
increased due to the Company's resumption of its drilling activities during
2000.

     Net cash provided by financing activities in 2000 was $2.0 million. The net
cash provided by financing activities during 2000 consisted of the $2.0 million
paid by Arnos, in accordance with the Joint Plan, to purchase additional common
stock such that, together with its affiliates, it would own 49.9% of the
outstanding common stock of the Company. There was no cash provided by financing
activities in 1999.

     The Company's working capital surplus at December 31, 2000 was $19.8
million compared to a working capital deficit at December 31, 1999 of $11.1
million. The increase in working capital was due primarily to the increase in
cash and cash equivalents and the reclassification of the prepetition accrued
interest to long-term.

FUTURE CAPITAL AND FINANCING REQUIREMENTS

     The Company currently has $10.9 million outstanding under its existing $25
million credit facility with Arnos. The credit facility will remain in place
under existing terms until new terms are agreed upon between the Company and
Arnos. The Company was in violation of the credit facility's minimum interest
coverage ratio at June 30, 2001 and September 30, 2001, however, the Company
obtained a default waiver from Arnos through December 31, 2001 with respect to
this violation and an extension of the maturity date of the credit facility
through December 31, 2001. Arnos continues to be the holder of the credit
facility; however, the $10.9 million note currently outstanding under the credit
facility was contributed to Holding LLC as part of

                                        33
<PAGE>

Gascon's contribution to Holding LLC on September 12, 2001. The Company
anticipates repayment of this amount through the priority distribution from
Holding LLC. In December 2001, the maturity date of the credit facility was
extended to December 31, 2003 and a waiver of compliance was given with respect
to any and all covenant violations.

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

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

FINANCIAL REPORTING IMPACT OF FULL COST METHOD OF ACCOUNTING

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

CRITICAL ACCOUNTING POLICIES

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

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

     Under the Holding LLC Operating Agreement, the Company is to receive
guaranteed payments in addition to a priority distribution amount of $202.2
million before Gascon receives any monies. The priority distribution is to be
made on or before November 1, 2006. Guaranteed payments are to be paid, on a
semi-annual basis, based on 10.75% of the outstanding priority distribution
amount. After the payments to the Company, Gascon is to receive distributions
equivalent to the priority distribution amount and guaranteed payments plus
other amounts as defined in the NEG Holding LLC Operating Agreement referred
herein. Following the above distributions to the Company and Gascon, additional
distributions, if any, are to be made in accordance with their respective
capital accounts. Because of the substantial uncertainty that the Company will
receive any distributions above the priority and guaranteed payment amounts, the
Company accounts for its investment in Holding LLC as a preferred investment
whereby guaranteed payment amounts received and
                                        34
<PAGE>

receipts of the priority distribution amount are recorded as reductions in the
investment, and income is recognized from accretion of the investment up to the
priority distribution amount including the guaranteed payments (based on the
interest method) and the residual interest attributable to Holding LLC will be
valued at zero. The ability of Holding LLC to make the guaranteed payments and
priority distributions may be significantly impacted by the market prices of
natural gas and crude oil and the ability of Holding LLC to effectively replace
existing natural gas and crude oil reserves. Current estimates could change if
future events are different than assumed by management.

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

RECENT ACCOUNTING PRONOUNCEMENTS

     In July 2001, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards No. 141 "Business Combinations"
("SFAS No. 141") and No. 142 "Goodwill and Other Intangible Assets" ("SFAS No.
142"). SFAS No. 141 requires that all business combinations initiated after June
30, 2001, be accounted for under the purchase method and SFAS No. 142 requires
that goodwill no longer be amortized to earnings, but instead be reviewed for
impairment. As of September 30, 2001, there is no impact to the Company's
financial statements as we have not entered into any business combinations and
have not acquired goodwill.

     Also, the FASB issued Statement of Financial Accounting Standards No. 143
"Accounting for Asset Retirement Obligations" ("SFAS No. 143") which establishes
requirements for the accounting of removal-type costs associated with asset
retirements. SFAS No. 143 is effective for fiscal years beginning after June 15,
2002, with earlier application encouraged. The Company is currently assessing
the impact on its financial statements.

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

CHANGES IN PRICES

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

INFLATION

     Although certain of the Company's costs and expenses are affected by the
level of inflation, inflation has not had a significant effect on the Company's
results of operations during the three years ended December 31, 2001.

                                        35
<PAGE>

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

     The Company's exposure to interest rates relates primarily to its
borrowings under its credit facility. The Company does not currently use
derivatives to manage interest rate risk. Interest is payable on borrowings
under the credit facility based on a floating rate. If short-term interest rates
average 10% higher in 2002 than they were in 2001, the Company's interest
expense would increase by approximately $.1 million. This amount was determined
by applying the hypothetical interest rate change to the Company's outstanding
borrowings under the credit facility at December 31, 2001.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

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

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information required by this Item 10 will be provided in the sections
entitled "Director Election", "Management" and "Certain Relationships and
Related Transactions" in the Company's definitive Proxy Statement for its 2002
Annual Meeting of Shareholders (the "Proxy Statement"), and is incorporated
herein by reference.

ITEM 11.  EXECUTIVE COMPENSATION

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

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

                                        36
<PAGE>

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

                                        37
<PAGE>
<Table>
<C>    <S>
10.17  Fourth Amendment to Restated Loan Agreement dated October
       31, 1996, among Bank One and Credit Lyonnais and the
       Company, Guarantor and Boomer(10)
10.18  Multi-State Assignment Agreement dated December 22, 1998
       between Bank One, Texas, N.A., Credit Lyonnais New York
       Branch and Arnos Corp.(11)
10.19  Multi-State Assignment Agreement, LaFourche Parish,
       Louisiana, dated December 22, 1998, between Bank One, Texas,
       N.A., Credit Lyonnais New York Branch and Arnos Corp.(11)
10.20  Multi-State Assignment Agreement, Iberville Parish,
       Louisiana, dated December 22, 1998, between Bank One, Texas,
       N.A., Credit Lyonnais New York Branch and Arnos Corp.(11)
10.21  Oklahoma Assignment Agreement, dated December 22, 1998,
       between Bank One, Texas, N.A., Credit Lyonnais New York
       Branch and Arnos Corp.(11)
10.22  Crude Oil Swap agreement among Enron North America Corp. and
       the Company covering April 1, 2001 through December 31,
       2001(14)
10.23  Crude Oil Swap agreement among Enron North America Corp. and
       the Company covering January 1, 2002 through December 31,
       2002(14)
10.24  Crude Oil Swap agreement among Enron North America Corp. and
       the Company covering January 1, 2003 through December 31,
       2003(14)
10.25  Crude Oil Swap agreement among Enron North America Corp. and
       the Company covering January 1, 2004 through December 31,
       2004(14)
10.26  Natural Gas Swap agreement among Enron North America Corp.
       and the Company covering April, 2001 through December 31,
       2004(14)
10.27  Fifth Amendment to Restated Loan Agreement dated August 1,
       2001, among the Company and Arnos Corp.(15)
10.28  Debt Purchase Agreement dated August 1, 2001 between the
       Company and High River Limited Partnership.(15)
10.29  Debt Purchase Agreement dated August 1, 2001 between the
       Company and High Coast Limited Partnership.(15)
10.30  Debt Purchase Agreement dated August 1, 2001 between the
       Company and High River Limited Partnership.(13)
10.31  Debt Purchase Agreement dated August 1, 2001 between the
       Company and High Coast Limited Partnership.(13)
10.32  NEG Holding LLC Operating Agreement dated May 1, 2001
       between the Company and Gascon Partners.(14)
10.33  NEG Operating LLC Operating Agreement dated May 1, 2001
       executed by NEG Holding LLC.(14)
10.34  Shana National LLC Amended and Restated Operating Agreement
       dated September 12, 2001 executed by NEG Operating LLC.(14)
10.35  Management Agreement dated September 12, 2001 between the
       Company and NEG Operating LLC.(14)
10.36  Master Conveyance dated September 12, 2001 executed by the
       Company in favor of NEG Holding LLC.(14)
10.37  Master Conveyance dated September 12, 2001 executed by
       Gascon Partners in favor of NEG Holding LLC.(14)
10.38  Master Conveyance dated September 12, 2001 executed by NEG
       Holding LLC in favor of NEG Operating LLC.(14)
10.39  Master Conveyance dated September 12, 2001 executed by Shana
       Petroleum Company in favor of Gascon Partners.(14)
10.40  Master Conveyance dated September 12, 2001 executed by Shana
       Petroleum Company in favor of Shana National LLC.(14)
10.41  Final Decree of Bankruptcy Court(17)
12.1   Computation of Ratio of Earnings to Fixed Charges(17)
</Table>

                                        38
<PAGE>
<Table>
<C>    <S>
23.2   Consent of Netherland Sewell & Associates, Inc., Independent
       Engineers(17)
23.3   Consent of Prator Bett, LLC, Independent Engineers(17)
24.1   Power of Attorney (included in signature pages to this Form
       10-K)(17)
</Table>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(17) Filed herewith.

     (b) No reports on Form 8-K were filed during the quarter ended December 31,
2001

                                        39
<PAGE>

GLOSSARY

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

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

     Bcf -- One billion cubic feet.

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

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

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

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

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

     EBITDA -- Earnings (including interest income and excluding accretion of
Investment in NEG Holding LLC, discontinued operations, extraordinary items,
charges resulting from changes in accounting and significant nonrecurring
revenues and expenses and reorganization items) 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

                                        40
<PAGE>

right to produce any oil and natural gas so discovered generally for so long as
there is production in economic quantities from such lands.

     OPEC -- Organization of Petroleum Exporting Countries.

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

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

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

     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.

                                        41
<PAGE>

                                   SIGNATURES

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

                                          NATIONAL ENERGY GROUP, INC.

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


 By:                  /s/ BOB G. ALEXANDER                                 April 1, 2002
        ------------------------------------------------
                        Bob G. Alexander
             President and Chief Executive Officer


 By:                 /s/ RANDALL D. COOLEY                                 April 1, 2002
        ------------------------------------------------
                       Randall D. Cooley
          Vice President and Chief Accounting Officer
</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 April 1, 2002.

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

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


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


                   /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>

                                        42
<PAGE>

        INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

                              FINANCIAL STATEMENTS

<Table>
<Caption>
                                                              PAGE
                                                              ----
<S>                                                           <C>
NATIONAL ENERGY GROUP, INC.
Report of Independent Auditors..............................   F-2
Consolidated Balance Sheets as of December 31, 2000, and
  2001......................................................   F-4
Consolidated Statements of Operations for the years ended
  December 31, 1999, 2000, and 2001.........................   F-5
Consolidated Statements of Cash Flows for the years ended
  December 31, 1999, 2000, and 2001.........................   F-6
Consolidated Statements of Stockholders' Equity (Deficit)
  for the years ended December 31, 1999, 2000, and 2001.....   F-7
Notes to Consolidated Financial Statements..................   F-8
NEG HOLDING LLC
Report of Independent Auditors..............................  F-26
Consolidated Balance Sheet as of December 31, 2001..........  F-27
Consolidated Statement of Operations for the year ended
  December 31, 2001.........................................  F-28
Consolidated Statement of Cash Flows for year ended December
  31, 2001..................................................  F-29
Consolidated Statement of Members' Equity for the ended
  December 31, 2001.........................................  F-30
Notes to Consolidated Financial Statements..................  F-31
</Table>

FINANCIAL STATEMENT SCHEDULES

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

                                       F-1
<PAGE>

                         REPORT OF INDEPENDENT AUDITORS

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

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

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

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of National
Energy Group, Inc., at December 31, 2001, and the results of their operations
and their cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.

                                                     /s/ KPMG LLP

Dallas, Texas
March 22, 2002

                                       F-2
<PAGE>

                         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, 2000, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for
each of the two years in the period ended December 31, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our 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, 2000, and the consolidated results of its
operations and its cash flows for each of the two years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.

                                                 /s/ ERNST & YOUNG LLP

Dallas, Texas
April 16, 2001

                                       F-3
<PAGE>

                          NATIONAL ENERGY GROUP, INC.

                          CONSOLIDATED BALANCE SHEETS

<Table>
<Caption>
                                                                      DECEMBER 31,
                                                              ----------------------------
                                                                  2000            2001
                                                              -------------   ------------
<S>                                                           <C>             <C>
                                          ASSETS

Current assets:
  Cash and cash equivalents.................................  $  43,327,755   $  3,090,361
  Accounts receivable -- oil and natural gas sales..........      7,516,321             --
  Accounts receivable -- joint interest and other...........        530,962             --
  Accounts receivable -- affiliates.........................             --      1,187,458
  Other.....................................................      2,495,411        187,202
                                                              -------------   ------------
         Total current assets...............................     53,870,449      4,465,021
Oil and natural gas properties, at cost (full cost method):
  Subject to ceiling limitation.............................    340,509,044             --
  Accumulated depreciation, depletion, and amortization.....   (276,731,307)            --
                                                              -------------   ------------
  Net oil and natural gas properties........................     63,777,737             --
Other property and equipment................................      2,742,689             --
Accumulated depreciation....................................     (1,835,708)            --
                                                              -------------   ------------
  Net other property and equipment..........................        906,981             --
Other assets and deferred charges, net......................         98,996             --
Investment in NEG Holding LLC...............................             --     97,654,106
Deferred tax asset..........................................             --     30,589,443
                                                              -------------   ------------
         Total assets.......................................  $ 118,654,163   $132,708,570
                                                              =============   ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
  Accounts payable -- trade.................................  $   2,572,872   $     80,767
  Accounts payable -- revenue...............................      3,482,005             --
  Accrued interest on senior notes..........................      2,961,018      2,711,023
  Credit facility...........................................     25,000,000             --
  Other.....................................................         19,605             --
                                                              -------------   ------------
         Total current liabilities..........................     34,035,500      2,791,790
Long term liabilities:
  Credit facility...........................................             --     10,939,750
  Senior notes..............................................    165,000,000    148,637,000
  Long-term interest payable on senior notes................     45,822,147     42,893,815
  Deferred gain on senior note redemption...................             --      9,850,794
  Gas balancing.............................................        967,201             --
Commitments and contingencies
Stockholders' equity (deficit):
  Common stock, $.01 par value:
    Authorized shares -- 100,000,000; Issued and outstanding
       shares -- 11,190,650 at December 31, 2000 and 2001...        111,907        111,907
  Additional paid-in capital................................    115,554,427    123,020,121
  Accumulated deficit.......................................   (242,837,019)  (205,536,607)
                                                              -------------   ------------
         Total stockholders' equity (deficit)...............   (127,170,685)   (82,404,579)
                                                              -------------   ------------
         Total liabilities and stockholders' equity
           (deficit)........................................  $ 118,654,163   $132,708,570
                                                              =============   ============
</Table>

                            See accompanying notes.

                                       F-4
<PAGE>

                          NATIONAL ENERGY GROUP, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<Table>
<Caption>
                                                               YEAR ENDED DECEMBER 31,
                                                      -----------------------------------------
                                                         1999           2000           2001
                                                      -----------   ------------   ------------
<S>                                                   <C>           <C>            <C>
Revenues:
  Oil and natural gas sales.........................  $39,300,183   $ 51,014,416   $ 33,175,564
  Accretion of Investment in NEG Holding LLC........           --             --      9,834,206
  Management fee....................................           --             --      2,699,372
                                                      -----------   ------------   ------------
     Total revenue..................................   39,300,183     51,014,416     45,709,142
Costs and expenses:
  Lease operating...................................    6,101,334      5,671,697      3,873,671
  Oil and natural gas production taxes..............    2,095,221      2,888,468      1,694,860
  Depreciation, depletion and amortization..........   15,889,266     11,043,872      6,162,698
  General and administrative........................    4,097,529      4,526,883      5,931,228
                                                      -----------   ------------   ------------
     Total costs and expenses.......................   28,183,350     24,130,920     17,662,457
                                                      -----------   ------------   ------------
Operating income....................................   11,116,833     26,883,496     28,046,685
Other income (expense):
  Interest expense..................................   (1,908,749)    (9,655,622)   (21,223,820)
  Interest income and other, net....................           --      1,671,092       (336,568)
                                                      -----------   ------------   ------------
Income before reorganization items and income
  taxes.............................................    9,208,084     18,898,966      6,486,297
Reorganization items:
  Professional fees and other.......................   (4,726,587)    (1,354,015)       236,130
  Writeoff of unamortized debt premium and issuance
     costs, net.....................................   (3,219,428)            --             --
  Interest earned on accumulating cash resulting
     from Chapter 11 proceedings....................      761,512      1,064,688             --
                                                      -----------   ------------   ------------
Income before income taxes..........................    2,023,581     18,609,639      6,722,427
Income tax benefit..................................           --             --     30,589,443
                                                      -----------   ------------   ------------
Income before extraordinary item....................    2,023,581     18,609,639     37,311,870
Extraordinary loss on confirmation of Joint Plan....           --    (33,047,231)       (11,458)
                                                      -----------   ------------   ------------
Net income (loss) applicable to common
  shareholders......................................  $ 2,023,581   $(14,437,592)  $ 37,300,412
                                                      ===========   ============   ============
Earnings per common share, basic and diluted Income
  before extraordinary item.........................  $       .35   $       2.71   $       3.33
  Extraordinary loss on confirmation of Joint
     Plan...........................................           --          (4.81)          (.00)
                                                      -----------   ------------   ------------
  Net income (loss) per common share................  $       .35   $      (2.10)  $       3.33
                                                      ===========   ============   ============
Weighted average number of common shares
  outstanding.......................................    5,819,475      6,875,640     11,190,650
                                                      ===========   ============   ============
</Table>

                            See accompanying notes.

                                       F-5
<PAGE>

                          NATIONAL ENERGY GROUP, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<Table>
<Caption>
                                                                    YEAR ENDED DECEMBER 31,
                                                            ----------------------------------------
                                                               1999          2000           2001
                                                            -----------   -----------   ------------
<S>                                                         <C>           <C>           <C>
OPERATING ACTIVITIES
Income from operations (net of income tax)................  $ 9,208,084   $18,898,966   $ 37,075,740
Chapter 11 proceeding reorganization costs, net...........   (3,965,075)     (289,327)       224,672
Adjustments to reconcile income from operations to net
  cash provided by operating activities:
Depreciation and depletion................................   15,026,217    10,922,806      6,162,698
Amortization of loan costs and issuance premium...........      704,937       121,066             --
Amortization of deferred compensation.....................       59,260        41,682             --
Deferred gain amortization................................           --            --       (849,205)
Accretion of Investment in NEG Holding LLC................           --            --     (9,834,206)
Deferred income taxes.....................................           --            --    (30,589,443)
Change in fair market value of derivative contracts.......           --      (580,500)       716,454
Other.....................................................     (121,647)       30,952             --
Changes in operating assets and liabilities:
  Accounts receivable.....................................    1,392,085    (2,558,123)     9,602,161
  Drilling prepayments....................................           --            --       (406,322)
  Derivative deposit......................................           --            --       (500,000)
  Other current assets....................................      640,568      (541,294)       139,719
  Accounts payable and accrued liabilities................    4,768,533    (2,214,951)      (204,782)
                                                            -----------   -----------   ------------
  Net cash provided by operating activities...............   27,712,962    23,831,277     11,537,486
                                                            -----------   -----------   ------------
INVESTING ACTIVITIES
Oil and natural gas acquisition, exploration, and
  development expenditures................................   (3,785,889)  (14,089,999)   (27,363,808)
Purchases of other property and equipment.................           --      (247,084)       (29,056)
Proceeds from sale of marketable securities...............           --       413,147             --
Proceeds from sales of oil and natural gas properties.....    3,357,928     2,465,213        931,744
Guaranteed payment from NEG Holding LLC...................           --            --      3,625,473
Investment in NEG Holding LLC.............................           --            --     (4,378,983)
Other.....................................................     (610,485)     (261,550)            --
                                                            -----------   -----------   ------------
  Net cash used in investing activities...................   (1,038,446)  (11,720,273)   (27,214,630)
                                                            -----------   -----------   ------------
FINANCING ACTIVITIES
Proceeds from common stock issuance.......................           --     2,000,000             --
Repayment of credit facility..............................           --            --    (25,000,000)
Proceeds from credit facility.............................           --            --     10,939,750
Repayment of senior notes.................................           --            --    (10,500,000)
                                                            -----------   -----------   ------------
  Net cash provided by (used in) financing activities.....           --     2,000,000    (24,560,250)
                                                            -----------   -----------   ------------
Increase (decrease) in cash and cash equivalents..........   26,674,516    14,111,004    (40,237,394)
Cash and cash equivalents at beginning of period..........    2,542,235    29,216,751   $ 43,327,755
                                                            -----------   -----------   ------------
Cash and cash equivalents at end of period................  $29,216,751   $43,327,755   $  3,090,361
                                                            ===========   ===========   ============
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid in cash.....................................  $ 2,146,295   $ 6,670,638   $ 31,123,931
                                                            ===========   ===========   ============
NON CASH FINANCING AND INVESTING ACTIVITIES
Transfer of assets and liabilities to NEG Holding LLC.....           --            --   $ 87,066,390
                                                            ===========   ===========   ============
</Table>

                            See accompanying notes.
                                       F-6
<PAGE>

                          NATIONAL ENERGY GROUP, INC.

           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<Table>
<Caption>
                                                                                                  GAIN
                                     CONVERTIBLE                                               (LOSS) ON
                                   PREFERRED STOCK          COMMON STOCK         ADDITIONAL    AVAILABLE
                                 --------------------   ---------------------     PAID-IN       FOR SALE     ACCUMULATED
                                  SHARES     AMOUNT       SHARES      AMOUNT      CAPITAL      SECURITIES      DEFICIT
                                 --------   ---------   ----------   --------   ------------   ----------   -------------
<S>                              <C>        <C>         <C>          <C>        <C>            <C>          <C>
Balance at December 31, 1998...   171,187   $ 171,187    5,819,475   $ 58,195   $113,436,952   $(176,094)   $(230,423,008)
 Unrealized gain on marketable
   securities..................        --          --           --         --             --       3,687               --
 Net income....................        --          --           --         --             --          --        2,023,581
                                 --------   ---------   ----------   --------   ------------   ---------    -------------
Balance at December 31, 1999...   171,187     171,187    5,819,475     58,195    113,436,952    (172,407)    (228,399,427)
 Preferred stock conversion
   pursuant to confirmation of
   Joint Plan..................  (171,187)   (171,187)     714,286      7,143        164,044          --               --
 Common stock issued pursuant
   to confirmation of Joint
   Plan........................        --          --    4,656,889     46,569      1,953,431          --               --
 Sale of marketable
   securities..................        --          --           --         --             --     172,407               --
 Net loss......................                    --           --         --             --          --      (14,437,592)
                                 --------   ---------   ----------   --------   ------------   ---------    -------------
Balance at December 31, 2000...        --          --   11,190,650    111,907    115,554,427          --     (242,837,019)
 Capital contribution related
   to the transfer of operating
   assets to NEG Holding LLC...        --          --           --         --      7,465,694          --               --
 Net income....................        --          --           --         --             --          --       37,300,412
                                 --------   ---------   ----------   --------   ------------   ---------    -------------
Balance at December 31, 2001...        --   $      --   11,190,650   $111,907   $123,020,121   $      --    $(205,536,607)
                                 ========   =========   ==========   ========   ============   =========    =============

<Caption>

                                     TOTAL
                                 STOCKHOLDERS'
                                    EQUITY
                                   (DEFICIT)
                                 -------------
<S>                              <C>
Balance at December 31, 1998...  $(116,932,768)
 Unrealized gain on marketable
   securities..................          3,687
 Net income....................      2,023,581
                                 -------------
Balance at December 31, 1999...   (114,905,500)
 Preferred stock conversion
   pursuant to confirmation of
   Joint Plan..................             --
 Common stock issued pursuant
   to confirmation of Joint
   Plan........................      2,000,000
 Sale of marketable
   securities..................        172,407
 Net loss......................    (14,437,592)
                                 -------------
Balance at December 31, 2000...   (127,170,685)
 Capital contribution related
   to the transfer of operating
   assets to NEG Holding LLC...      7,465,694
 Net income....................     37,300,412
                                 -------------
Balance at December 31, 2001...  $ (82,404,579)
                                 =============
</Table>

                            See accompanying notes.
                                       F-7
<PAGE>

                          NATIONAL ENERGY GROUP, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 31, 2001

1.  BACKGROUND AND BANKRUPTCY FILING

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

     The Company was an independent energy company engaged in the acquisition,
exploration, exploitation, development and production of oil and natural gas
properties in major producing basins onshore in Texas, Louisiana, Oklahoma, and
Arkansas.

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

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

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

     The Holding LLC Operating Agreement entered into on September 12, 2001,
contains a provision that allows Gascon at any time, in its sole discretion, to
redeem the Company's membership interest in Holding LLC at a price equal to the
fair market value of such interest determined as if Holding LLC had sold all of
its assets for fair market value and liquidated. Since all of the Company's
operating assets and oil and natural gas properties have been contributed to
Holding LLC, as noted above, following such a redemption, the Company's
principal assets would consist solely of its cash balances. In the event that
such redemption right is exercised by Gascon and there follows a liquidation and
distribution of the proceeds, the Company may be obligated to use the proceeds
that it would receive for its redeemed membership interest to pay outstanding
indebtedness and operating expenses before the distribution of any portion of
such proceeds to the Company's shareholders. Following the payment of the
Company's indebtedness (currently held by entities

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

owned or controlled by Carl C. Icahn) and its operating expenses, there is a
substantial risk that there will be no proceeds remaining for distribution to
the Company's shareholders.

     As a result of the foregoing transactions and as mandated by the Plan of
Reorganization, the Company is a holding company of which (i) the principal
assets are its remaining cash balances, accounts receivable from affiliates,
deferred tax asset, and its initial 50% membership interest in Holding LLC, and
(ii) the principal liabilities are the $10.9 million outstanding under its
existing $25 million revolving credit facility with Arnos and its 10 3/4% senior
notes and Reinstated Interest (defined below). None of the Company's employees
have been transferred to Holding LLC or Operating LLC.

     Pursuant to the Plan of Reorganization, as of December 31, 2000, the
Company reinstated $45.8 million of interest expense on the senior notes
("Reinstated Interest"). This Reinstated Interest consisted of $10.5 million of
prepetition interest and $35.3 million of interest expense that did not accrue
during the pendancy of the Bankruptcy Proceeding pursuant to Bankruptcy Court
rules and regulations. Accordingly, interest will accrue at 10.75% on the
revised obligation amount at December 31, 2000, of $210.8 million pursuant to
terms of the senior notes indenture. The Reinstated Interest plus interest
accrued thereon becomes due in installments beginning in April 2003. The Company
will continue to pay the semi-annual interest on the original senior note face
amount of $165 million. The senior note balance is $148.6 million as of December
31, 2001.

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

2.  SIGNIFICANT ACCOUNTING POLICIES

  BASIS OF PRESENTATION

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

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

  CONSOLIDATION

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

  ACCOUNTING ESTIMATES

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

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  CASH AND CASH EQUIVALENTS

     Cash and cash equivalents may include demand deposits, short-term
commercial paper, and/or money-market investments with maturities of three
months or less when purchased. At December 31, 2001, all cash and cash
equivalents were invested with Bank One, Texas, N.A.

  INVESTMENT IN NEG HOLDING LLC

     The Company accounts for its investment in Holding LLC as a preferred
investment. Income is recognized based on the interest method through the
accretion of guaranteed payments and priority distributions to be received from
Holding LLC through November 1, 2006 (see Note 8). Cash distributions are
recorded as reductions in the carrying value of the investment when received.
Following receipt of the guaranteed payments and priority distributions, there
is substantial doubt that the Company will receive additional distributions from
Holding LLC. Accordingly, the residual interest will then be valued at zero.

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

  OIL AND NATURAL GAS PROPERTIES

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

     Under the full cost method, the net book value of oil and natural gas
properties, less related deferred income taxes, may not exceed the estimated
after-tax future net revenues from proved oil and natural gas properties,
discounted at 10% per year (the ceiling limitation). In arriving at estimated
future net revenues, estimated lease operating expenses, development costs,
abandonment costs, and certain production related and ad-valorem taxes are
deducted. In calculating future net revenues, prices and costs in effect at the
time of the calculation are held constant indefinitely, except for changes which
are fixed and determinable by existing contracts. The net book value is compared
to the ceiling limitation on a quarterly and yearly basis. The excess, if any,
of the net book value above the ceiling limitation is required to be written off
as a non-cash expense. The Company did not incur ceiling limitation writedowns
during 1999, 2000, or 2001.

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

     The Company has capitalized internal costs of $814,000, $559,000, and
$454,000 for the years ended December 31, 1999, 2000, and 2001, respectively, as
costs of oil and natural gas properties. Such capitalized costs include salaries
and related benefits of individuals directly involved in the Company's
acquisition, exploration, and development activities based on the percentage of
their time devoted to such activities. The Company did not capitalize interest
during 1999, 2000 or 2001. Effective with the transfer of the Company's oil and
natural gas assets to Holding LLC, the Company no longer capitalizes internal
costs.

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

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

     Prior to the LLC Contribution, the Company's operations were 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 maintained insurance of various types customary in the industry to
cover its operations and believed it was insured prudently against certain of
these risks. In addition, the Company maintained operator's extra expense
coverage that provided coverage for the care, custody and control of wells
drilled by the Company. The Company's insurance did not cover every potential
risk associated with the drilling and production of oil and natural gas. As a
prudent operator, the Company maintained 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 was not maintained. The occurrence of a significant adverse event,
the risks of which are not fully covered by insurance, could have had material
adverse effect on the Company's financial condition and results of operations.
The Company believed that it operates in compliance with government regulations
and in accordance with safety standards which meet or exceed industry standards.

  OTHER PROPERTY AND EQUIPMENT

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

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

  FINANCIAL INSTRUMENTS

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

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

     The Company sold its marketable securities in 2000 for $413,147,
recognizing a loss of $102,197. The Company's investment in marketable
securities was comprised of securities of another independent oil and natural
gas company. The Company had no sales of marketable securities during 1999 or
2001.

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

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

  NATURAL GAS PRODUCTION IMBALANCES

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

  STOCK COMPENSATION

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

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

  EARNINGS (LOSS) PER SHARE

     Earnings (loss) per share is computed in accordance with Financial
Accounting Standards Board Statement No. 128, Earnings per Share. Basic earnings
per share data is computed by dividing net income (loss) applicable to common
shareholders by the weighted average number of common shares outstanding and
excludes any dilutive effects of options, warrants, and convertible securities.
Shares issuable upon exercise of options and warrants are included in the
computation of diluted earnings per common and common equivalent share to the
extent that they are dilutive. Diluted earnings per share computations also
assume the conversion of the Company's preferred stock (Note 9) if such
conversion has a dilutive effect. For the year ended December 31, 1999 and in
2000, prior to the confirmation of the Joint Plan, neither the options and
warrants nor the assumed conversion of the preferred stock had a dilutive effect
on the loss per share calculations. Subsequent to the confirmation of the Plan
of Reorganization and in 2001, all common stock equivalents had been canceled.
Accordingly, both basic and diluted loss per share calculations for such periods
are based on the weighted average number of common shares outstanding during
each year.

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  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 1999 and 2000, the differences between the Company's
net earnings and total comprehensive income were not material, consisting solely
of unrealized gains and losses on the Company's available for sale marketable
securities. There were no differences between net earnings and total
comprehensive income in 2001.

  DERIVATIVES

     In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Certain Hedging Activities." In June 2000, the FASB
issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activity, an Amendment of SFAS 133." SFAS No. 133 and SFAS No. 138
require that all derivative instruments be recorded on the balance sheet at
their respective fair values. SFAS No. 133 and SFAS No. 138 are effective for
all fiscal quarters of all fiscal years beginning after June 30, 2000; the
Company adopted SFAS No. 133 and SFAS No. 138 on July 1, 2000, at which time it
was not a party to any derivative financial instruments.

     All derivatives are recognized on the balance sheet at their fair value.
Prior to the LLC Contribution, the Company periodically managed its exposure to
fluctuations in oil and natural gas prices by entering into various derivative
instruments consisting principally of collar options and swaps. The Company
elected not to designate these instruments as hedges for accounting purposes,
accordingly the change in unrealized gains and losses is included in other
income and expense. Cash settlements of these instruments are included in oil
and natural gas sales. The following summarizes the cash settlements and
unrealized gains and losses for the years ended December 31, 1999, 2000 and
2001:

<Table>
<Caption>
                                                          1999      2000       2001
                                                          -----   --------   ---------
<S>                                                       <C>     <C>        <C>
Gross cash receipts.....................................  $ --    $     --   $ 250,710
Gross cash payments.....................................    --          --          --
Net unrealized gains (losses)...........................  $ --    $580,500   $(716,454)
</Table>

     In connection with the LLC Contribution in September 2001, the Company
contributed all of its derivative financial instruments with a fair value of
$(135,954) to NEG Holding LLC. The fair value of the Company's derivative
financial instruments was $580,500 at December 31, 2000.

3.  MANAGEMENT AGREEMENT

     The management and operation of Operating LLC is being undertaken by the
Company pursuant to a Management Agreement (the "Management Agreement") which
the Company has entered into with Operating LLC. However, neither the Company's
officers nor directors will control the strategic direction of Operating LLC's
oil and natural gas business including oil and natural gas drilling and capital
investments, which shall be controlled by the managing member of Holding LLC
(currently Gascon). The Management Agreement provides that the Company will
manage Operating LLC's oil and natural gas assets and business until the earlier
of November 1, 2006, or such time as Operating LLC no longer owns any of the
managed oil and natural gas properties. The Company's employees will conduct the
day-to-day operations of Operating LLC's oil and natural gas properties, and all
costs and expenses incurred in the operation of the oil and natural gas
properties shall be borne by Operating LLC; although the Management Agreement
provides that the salary of the Company's Chief Executive Officer shall be 70%
attributable to the managed oil and natural gas properties, and the salaries of
each of the General Counsel and Chief Financial Officer shall be 20%
attributable to the managed oil and natural gas properties. In exchange for the
Company's management services, Operating LLC shall pay the Company a management
fee equal to 115% of the actual direct and

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

indirect administrative and reasonable overhead costs incurred by the Company in
operating the oil and natural gas properties, which either the Company or
Operating LLC may seek to change within the range of 110%-115% as such change is
warranted; however, the parties have agreed to consult with each other to ensure
that such administrative and reasonable overhead costs attributable to the
managed properties are properly reflected in the management fee paid to the
Company. In addition, Operating LLC has agreed to indemnify the Company to the
extent it incurs any liabilities in connection with its operation of the assets
and properties of Operating LLC, except to the extent of its gross negligence,
or misconduct. The Company recorded $2.7 million as a management fee for the
four month period ended December 31, 2001.

4.  ACQUISITIONS AND DISPOSALS

     In December 1999, the Company sold its interest at an oil and natural gas
auction in 142 non-strategic and non-producing oil and natural 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.

     In September 2000, the Company sold its interest in the Mustang Island
areas producing and non-producing leases, along with the associated facilities
and platforms for $.4 million and retained a right to take a 10% proportionately
reduced working interest in the first exploration well drilled. The sale of this
property did not have a significant impact on the Company's results of
operations for 2000.

     In October 2000, the Company sold its interest at an oil and natural gas
auction in 39 non-strategic oil and natural gas properties to various
purchasers. Net proceeds from this sale approximated $1.4 million.

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

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

5.  CREDIT FACILITIES

     The Company has an outstanding credit facility with Arnos Corp. with a
borrowing base of $25 million. The Company had $25 million outstanding under the
credit facility at December 31, 2000, and $10.9 million outstanding at December
31, 2001. Arnos continues to be the holder of the credit facility, however, the
$10.9 million note currently outstanding under the credit facility was
contributed to Holding LLC as part of Gascon's contribution on September 12,
2001. The credit facility was originally secured by liens granted by the Company
on substantially all of the Company's oil and natural gas properties, whether
currently owned or hereafter acquired, and a negative pledge on all other oil
and natural gas properties. The Company contributed all of its oil and natural
gas properties to Holding LLC and therefore, the credit facility is currently
secured by oil and natural gas properties held by Holding LLC. The credit
facility requires, among other things, semiannual engineering reports covering
oil and natural gas properties, and maintenance of certain financial ratios,
including the maintenance of a minimum interest coverage, a current ratio, and a
minimum tangible net worth.

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

     The Company was in compliance with the covenants at December 31, 2000, but
classified the amount outstanding as current since the credit facility matured
on August 29, 2000. On December 15, 2001, the maturity date was extended to
December 31, 2003, and there was a waiver of compliance with any and all

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

covenant violations through that date. At December 31, 2001, the balance
outstanding was classified as long-term. The Company was not in compliance with
the interest coverage ratio at December 31, 2001, however, there was no
violation due to the covenant waiver.

     At December 31, 2001, the fair value of borrowings under the credit
facility approximates the carrying value of the liability, as interest on
borrowings under the facility accrues at variable rates based on prime rates.

6.  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
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. Upon confirmation of the Joint Plan, the senior
notes are held in their entirety by Arnos and its affiliates. The Senior Notes
bear interest at an annual rate of 10 3/4%, payable semiannually in arrears on
May 1 and November 1 of each year. The Senior Notes are senior, unsecured
obligations of the Company, ranking pari passu with all existing and future
senior indebtedness of the Company, and senior in right of payment to all future
subordinated indebtedness of the Company. Subject to certain limitations set
forth in the indenture covering the Senior Notes (the "Indenture"), the Company
and its subsidiaries may incur additional senior indebtedness and other
indebtedness.

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

     On December 4, 1998, certain holders of the Senior Notes filed an
Involuntary Petition for an Order for Relief under Chapter 11 of Title 11 of the
United States Bankruptcy Code (Note 1). Accrual of interest on the Senior Notes
was discontinued during the Bankruptcy Proceeding. Approximately $10.5 million
additional interest expense would have been recognized by the Company during
2000 if not for the discontinuation of the interest accrual. In connection with
the Plan of Reorganization, Unaccrued Interest (including compounding interest)
totalling approximately $35.3 million was reinstated (Note 1).

     The Company is unable to determine the fair value of the senior notes at
December 31, 2001, due to a lack of available market quotations and inability to
determine an appropriate discount rate.

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

                                       F-15
<PAGE>
                          NATIONAL ENERGY GROUP, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7.  COMMITMENTS AND CONTINGENCIES

     The Company leases office space under an operating lease. Rental expense
charged to operations was approximately $449,000, $500,000, and $553,000 during
the years ended December 31, 1999, 2000, and 2001, respectively. Minimum lease
payments under future operating lease commitments at December 31, 2001, are as
follows:

<Table>
<S>                                                            <C>
2002........................................................   $487,442
2003........................................................    549,934
2004........................................................    549,934
2005........................................................    549,934
2006........................................................    549,934
Thereafter..................................................    549,934
</Table>

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

8.  INVESTMENT IN NEG HOLDING LLC

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

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

<Table>
<S>                                                            <C>
Total revenues..............................................   $12,636,938
Total cost and expenses.....................................    (9,988,426)
                                                               -----------
Operating income............................................     2,648,512
Other Expense...............................................    (3,939,972)
                                                               -----------
Net loss....................................................   $(1,291,460)
                                                               ===========
</Table>

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

<Table>
<S>                                                           <C>
Investment balance at September 1, 2001.....................  $91,445,373
Accretion of investment.....................................    9,834,206
Distribution from Holding LLC...............................   (3,625,473)
                                                              -----------
Investment balance at December 31, 2001.....................  $97,654,106
                                                              ===========
</Table>

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

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

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

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

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

9.  STOCKHOLDERS' EQUITY

  PREFERRED STOCK

     At December 31, 1999, the Company had 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, 1999..................         38,687         23,000       100,000         9,500
  December 31, 2000..................             --             --            --            --
  December 31, 2001..................             --             --            --            --
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
Dividend rights (stayed during the                          10 1/2%
  Chapter 11 proceeding).............    10% payable        payable   Participation Participation
                                       semi-annually   semi-annually  with common   with common
                                        (cumulative)   (cumulative)         stock         stock
</Table>

     The preferred stock series had certain liquidation and dividend preferences
over the Company's common stock, and certain rights relating to the approval of
corporate actions and appointment of members to the Company's Board of
Directors.

     In connection with the Plan of Reorganization, all of the Company's
preferred stock issuances were converted into 714,286 shares of newly issued
common stock of the reorganized Company. Accordingly, no shares of preferred
stock are outstanding as of December 31, 2000 and 2001.

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  COMMON STOCK

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

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

  WARRANTS

     During 1996 and 1997, the Company issued an aggregate of approximately
2,846,000 warrants to purchase shares of the Company's common stock with
exercise prices ranging form $2.07 to $4.09 per share. Approximately 2,450,000
warrants remaining outstanding were cancelled upon confirmation of the Plan of
Reorganization.

  STOCK OPTIONS

     A summary of the Company's stock option activity, and related information
for the years ended December 31, 1999, 2000, and 2001, follows:

<Table>
<Caption>
                                    1999                  2000                  2001
                            --------------------   -------------------   ------------------
                                        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.................  1,637,850    $3.40      649,500    $3.61        --      $  --
Granted...................         --       --           --       --        --         --
Exercised.................         --       --           --       --        --         --
Canceled..................   (988,350)    3.27     (649,500)    3.61        --         --
                            ---------              --------               ----
Outstanding at end of
  year....................    649,500    $3.61           --    $  --        --      $  --
                            =========              ========               ====
Exercisable at end of
  year....................    613,250    $3.73           --    $  --        --      $  --
                            =========              ========               ====
</Table>

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

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

     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

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Company had accounted for its employee stock options 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 1998: risk-free interest rates of 5.5%, a
dividend yield of 0%, and volatility factors of .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. All options
were canceled in 2000 upon confirmation of the Joint Plan. The Company's pro
forma information follows:

<Table>
<Caption>
                                                        YEAR ENDED DECEMBER 31,
                                                ---------------------------------------
                                                   1999          2000          2001
                                                ----------   ------------   -----------
<S>                                             <C>          <C>            <C>
Pro forma net income (loss)...................  $2,038,132   $(14,447,914)  $37,300,412
                                                ==========   ============   ===========
Pro forma net income (loss) per common
  share.......................................  $      .05   $      (2.10)  $      3.33
                                                ==========   ============   ===========
</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 and 2000, no shares were issued to employees under the ESPP. This
plan was terminated during 2001.

10.  INCOME TAXES

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

<Table>
<Caption>
                                                        YEAR ENDED DECEMBER 31,
                                                ---------------------------------------
                                                   1999          2000          2001
                                                -----------   -----------   -----------
<S>                                             <C>           <C>           <C>
Current.......................................  $ 3,152,209   $ 2,577,452   $        --
Deferred......................................   (3,152,209)   (2,577,452)   30,589,443
                                                -----------   -----------   -----------
                                                $        --   $        --   $30,589,443
                                                ===========   ===========   ===========
</Table>

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

<Table>
<Caption>
                                                        YEAR ENDED DECEMBER 31,
                                                 -------------------------------------
                                                   1999         2000          2001
                                                 ---------   -----------   -----------
<S>                                              <C>         <C>           <C>
Income tax benefit (expense) at statutory
  rate.........................................  $(708,167)  $(6,513,374)  $(2,352,849)
Valuation allowance on deferred tax assets.....    708,167     6,513,374    33,546,155
Other..........................................         --            --      (603,863)
                                                 ---------   -----------   -----------
                                                 $      --   $        --   $30,589,443
                                                 =========   ===========   ===========
</Table>

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<Table>
<Caption>
                                                                   DECEMBER 31,
                                                            --------------------------
                                                               2000           2001
                                                            -----------   ------------
<S>                                                         <C>           <C>
Deferred tax assets (liabilities):
Investment in NEG Holding LLC.............................  $        --   $ 21,747,074
Property and equipment....................................   23,840,457             --
Net operating loss carryforwards..........................   44,248,294     45,269,208
Statutory depletion carryforwards.........................    1,340,763             --
Other, net................................................      620,533         77,053
                                                            -----------   ------------
                                                             70,050,047     67,093,335
Less valuation allowance..................................  (70,050,047)   (36,503,892)
                                                            -----------   ------------
                                                            $        --   $ 30,589,443
                                                            ===========   ============
</Table>

     At December 31, 2001, the Company had net operating loss carryforwards
available for federal income tax purposes of approximately $129.3 million which
begin expiring in 2002. Utilization of approximately $27.6 million of the net
operating loss carryforwards is subject to various limitations because of
previous changes in control of ownership (as defined in the Internal Revenue
Code) of the Company and Alexander Energy. Additional net operating loss
limitations may be imposed as a result of subsequent changes in stock ownership
of the Company. Prior to the formation of Holding LLC, the income tax benefit
associated with the loss carryforwards had not been recognized since, in the
opinion of management, there was not sufficient positive evidence of future
taxable income to justify recognition of a benefit. Upon the formation of
Holding LLC, management again evaluated all evidence, both positive and
negative, in determining whether a valuation allowance to reduce the carrying
value of deferred tax assets was still needed and concluded, based on the
projected allocations of taxable income by Holding LLC, the company more likely
than not will realize a partial benefit from the loss carryforwards.
Accordingly, the Company recorded a deferred tax asset of $31.9 million in
September 2001. Ultimate realization of the deferred tax asset is dependent
upon, among other factors, the Company's ability to generate sufficient taxable
income within the carryforward periods and is subject to change depending on the
tax laws in effect in the years in which the carryforwards are used. As a result
of the recognition of expected future income tax benefits, subsequent periods
will reflect a full effective tax rate provision.

11.  NATURAL GAS HEDGING ACTIVITIES AND FORWARD SALES CONTRACTS

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

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

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12.  CRUDE OIL AND NATURAL GAS PRODUCING ACTIVITIES

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

     Costs incurred in connection with the exploration acquisition, development,
and exploitation of the Company's crude oil and natural gas properties for the
years ended December 31, 1999, 2000, and 2001, are as follows:

<Table>
<Caption>
                                                         YEAR ENDED DECEMBER 31,
                                                  -------------------------------------
                                                     1999         2000         2001
                                                  ----------   ----------   -----------
<S>                                               <C>          <C>          <C>
Acquisitions of properties:
  Proved........................................  $       --   $       --   $ 2,332,000
  Unproved......................................          --           --            --
Exploration costs...............................          --    4,025,887     9,584,677
Development costs...............................   3,785,889    7,264,112    15,447,131
Depletion rate per Mcfe.........................         .91          .88           .85
</Table>

     The Company did not incur ceiling limitation writedowns during 1999, 2000
or 2001.

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

<Table>
<Caption>
                                                        YEAR ENDED DECEMBER 31,
                                                ---------------------------------------
                                                   1999          2000          2001
                                                -----------   -----------   -----------
<S>                                             <C>           <C>           <C>
Plains Marketing and Transportation...........  $18,203,851   $22,436,810   $10,984,365
Crosstex Energy...............................           --     5,597,853     4,286,226
Aquila Energy Corp............................    4,298,281     7,727,339     5,701,992
Duke Energy Field Services....................           --            --     3,352,172
</Table>

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

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

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

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

     In 1999 and 2000, estimates of the Company's net recoverable crude oil,
natural gas, and natural gas liquid reserves were prepared by Netherland, Sewell
& Associates, Inc. The estimated reserves and related future net revenues as of
August 31, 2001, were prepared internally using the estimated reserves and
related future net revenues prepared by Netherland, Sewell & Associates, Inc. as
of December 31, 2001 for the oil and natural gas properties contributed to
Holding LLC. This was accomplished by adding back production for the four month
period August 31, 2001 to December 31, 2001 and using constant prices in effect
at August 31,

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2001. Estimated proved net recoverable reserves as shown below, include only
those quantities that can be expected to be recoverable at prices and costs in
effect at the balance sheet dates under existing regulatory practices and with
conventional equipment and operating methods.

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

     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, 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
                                                              ----------   -----------
  Sales of reserves in place................................    (429,041)   (4,614,202)
  Purchase of reserves in place.............................     255,998       275,147
  Extensions and discoveries................................      24,000     1,928,963
  Revisions of previous estimates...........................   1,108,496    10,613,028
  Production................................................    (798,711)   (7,080,968)
                                                              ----------   -----------
December 31, 2000...........................................   5,774,770    64,018,151
                                                              ----------   -----------
  Sales of reserves in place................................     (26,159)     (284,477)
  Extensions and discoveries................................      43,125     2,198,994
  Revisions of previous estimates...........................  (1,324,266)   (3,167,139)
  Production................................................    (428,406)   (4,333,425)
  Transfer to NEG Holding LLC...............................  (4,039,064)  (58,432,104)
                                                              ----------   -----------
December 31, 2001...........................................          --            --
                                                              ==========   ===========
Proved developed reserves:
  December 31, 1999.........................................   4,730,828    56,730,406
  December 31, 2000.........................................   4,866,957    57,320,408
  December 31, 2001.........................................          --            --
</Table>

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

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

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     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.

     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,
                                                         -----------------------------
                                                             2000            2001
                                                         -------------   -------------
<S>                                                      <C>             <C>
Future cash inflows....................................  $ 824,040,000   $ 284,016,000
Future production and development costs................   (181,626,000)   (116,958,000)
Future income tax expenses.............................   (148,933,000)             --
                                                         -------------   -------------
Future net cash flows..................................    493,481,000     167,058,000
10% annual discount for estimated timing of cash
  flows................................................   (207,748,000)    (64,799,200)
Transfer of assets to NEG Holding LLC..................             --    (102,258,800)
                                                         -------------   -------------
Standardized measure of discounted future net cash
  flows................................................  $ 285,733,000   $          --
                                                         =============   =============
</Table>

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<Table>
<Caption>
                                                      YEAR ENDED DECEMBER 31,
                                            -------------------------------------------
                                                1999           2000           2001
                                            ------------   ------------   -------------
<S>                                         <C>            <C>            <C>
Sales and transfers of crude oil and
  natural gas produced, net of production
  costs...................................  $(31,103,628)  $(42,454,251)  $ (27,891,598)
Net changes in prices and production
  costs...................................    40,307,593    222,214,763    (227,266,392)
Development costs incurred during the
  period and changes in estimated future
  development costs.......................     9,938,121    (13,322,548)    (12,963,031)
Purchases of reserves in place............            --      5,005,436              --
Sales of reserves in place................    (5,122,521)   (11,091,847)     (2,249,136)
Extensions and discoveries, less related
  costs...................................       702,422     10,983,523       4,038,494
Revisions of previous quantity
  estimates...............................    12,049,069     73,724,762     (25,919,134)
Accretion of discount.....................     7,587,748     10,889,270      28,573,300
Net change in income taxes................            --    (78,138,335)     78,138,335
Changes in production rates (timing) and
  other...................................    (1,343,584)      (970,473)      2,064,962
Transfer of assets to NEG Holding LLC.....            --             --    (102,258,800)
                                            ------------   ------------   -------------
Net change................................  $ 33,015,220   $176,840,300   $(285,733,000)
                                            ============   ============   =============
</Table>

     During recent years, there have been significant fluctuations in the prices
paid for crude oil in the world markets. This situation has had a destabilizing
effect on crude oil posted prices in the United States, including the posted
prices paid by purchasers of the Company's crude oil. The net weighted average
prices of crude oil and natural gas at December 31, 1999, 2000, and August 31,
2001, used in the above table were $24.97, $25.95 and $26.02 per barrel of crude
oil, respectively, and $2.26, $10.53 and $2.49 per thousand cubic feet of
natural gas, respectively.

14.  QUARTERLY FINANCIAL RESULTS (UNAUDITED)

     In connection with confirmation of the Joint Plan, the Company recorded an
extraordinary gain on the discharge of indebtedness during the three months
ended September 30, 2000, of approximately $11.3 million. This extraordinary
gain was primarily composed of the reversal of interest accrued on the senior
notes prior to the Bankruptcy Proceeding of approximately $10.5 million
("Prepetition Interest"). In accordance with Bankruptcy Court rules and
regulations, the Company did not accrue interest on the senior notes during the
Bankruptcy Proceeding ("Unaccrued Interest"). It was determined that
reinstatement of the Prepetition Interest and the Unaccrued Interest is
necessary and consistent with the Joint Plan. As a result, the Company has
recognized Unaccrued Interest (including interest on the Prepetition Interest
and Unaccrued Interest) of $35.3 million and Prepetition Interest of $10.5
million as long-term interest payable in the accompanying balance sheet. The
reinstatement of Unaccrued Interest has been recognized as an extraordinary loss
in the accompanying statement of operations. The Company and Arnos have agreed
this interest will not be due earlier than April 2003. Accordingly, interest
will accrue on the revised obligation amount of $210.8 million pursuant to terms
of the senior notes indenture.

                                       F-24
<PAGE>
                          NATIONAL ENERGY GROUP, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The Company's operating results for each quarter of 2000 and 2001 are
summarized below (in thousands, except per share data).

<Table>
<Caption>
                                                                 THREE MONTHS ENDED
                                                   -----------------------------------------------
                                                   MARCH 31   JUNE 30   SEPTEMBER 30   DECEMBER 31
                                                   --------   -------   ------------   -----------
<S>                                                <C>        <C>       <C>            <C>
YEAR ENDED DECEMBER 31, 2000:
  Total revenues.................................  $10,721    $12,326     $ 13,895       $14,072
                                                   =======    =======     ========       =======
  Operating income...............................  $ 4,650    $ 6,106     $  7,869       $ 8,258
                                                   =======    =======     ========       =======
  Income before extraordinary item...............  $ 4,372    $ 5,512     $  4,601       $ 4,125
                                                   =======    =======     ========       =======
  Net income (loss)..............................  $ 4,372    $ 5,512     $(28,843)      $ 4,521
                                                   =======    =======     ========       =======
  Per common share:
     Income before extraordinary item............  $   .75    $   .94     $    .73       $   .43
     Extraordinary gain (loss) on confirmation of
       Joint Plan................................       --         --        (5.33)          .04
                                                   -------    -------     --------       -------
     Net Income..................................  $   .75    $   .94     $  (4.60)      $   .47
                                                   =======    =======     ========       =======
  Production:
     Oil (Bbl)...................................      219        218          203           159
     Natural gas (Mcf)...........................    1,882      1,829        1,758         1,612
     Natural gas equivalent (Mcfe)...............    3,198      3,135        2,976         2,564
YEAR ENDED DECEMBER 31, 2001
  Total revenues.................................  $14,650    $12,077     $  9,411       $ 9,571
                                                   =======    =======     ========       =======
  Operating income (loss)........................  $ 9,262    $ 6,111     $  4,967       $ 7,707
                                                   =======    =======     ========       =======
  Income before extraordinary item...............  $ 3,551    $   729     $ 31,188       $ 1,844
                                                   =======    =======     ========       =======
  Net income (loss)..............................  $ 3,539    $   729     $ 31,188       $ 1,844
                                                   =======    =======     ========       =======
  Per common share:
     Income before extraordinary item............  $   .32    $   .07     $   2.79       $   .15
     Extraordinary gain (loss) on confirmation of
       Joint Plan................................       --         --           --            --
                                                   -------    -------     --------       -------
     Net Income..................................  $   .32    $   .07     $   2.79       $   .15
                                                   =======    =======     ========       =======
  Production:
     Oil (Bbl)...................................      143        170          115            --
     Natural gas (Mcf)...........................    1,552      1,654        1,127            --
     Natural gas equivalent (Mcfe)...............    2,411      2,671        1,807            --
</Table>

                                       F-25
<PAGE>

                         REPORT OF INDEPENDENT AUDITORS

The Members
NEG Holding LLC

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

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

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

                                                     /s/ KPMG LLP

Dallas, Texas
March 22, 2002

                                       F-26
<PAGE>

                                NEG HOLDING LLC

                           CONSOLIDATED BALANCE SHEET
                               DECEMBER 31, 2001

<Table>
<S>                                                            <C>
                                   ASSETS

Current assets:
  Cash and cash equivalents.................................   $  78,300,040
  Accounts receivable -- oil and natural gas sales..........       5,200,759
  Accounts receivable -- joint interest and other...........         684,383
  Notes receivable -- affiliates............................      10,939,750
  Drilling prepayments......................................         269,017
  Other.....................................................       1,163,705
                                                               -------------
          Total current assets..............................      96,557,654
Oil and natural gas properties, at cost (full cost method):
  Subject to ceiling limitation.............................     408,153,509
  Accumulated depreciation, depletion, and amortization.....    (288,623,734)
                                                               -------------
  Net oil and natural gas properties........................     119,529,775
Other property and equipment................................       2,896,529
Accumulated depreciation....................................      (2,284,453)
                                                               -------------
  Net other property and equipment..........................         612,076
Other long term assets......................................          21,853
                                                               -------------
          Total assets......................................   $ 216,721,358
                                                               =============

                      LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
  Accounts payable -- trade.................................   $   2,500,657
  Accounts payable -- affiliate.............................       1,187,458
  Accounts payable -- revenue...............................       2,923,423
  Prepayments from partners.................................         190,371
  Other.....................................................          44,230
                                                               -------------
          Total current liabilities.........................       6,846,139
Long term liabilities:
  Note payable..............................................       1,305,035
  Gas balancing.............................................         939,964
  Unearned revenue..........................................          61,608
Members' equity.............................................     207,568,612
                                                               -------------
          Total liabilities and members' equity.............   $ 216,721,358
                                                               =============
</Table>

                            See accompanying notes.

                                       F-27
<PAGE>

                                NEG HOLDING LLC

                      CONSOLIDATED STATEMENT OF OPERATIONS
                      FOR THE YEAR ENDED DECEMBER 31, 2001

<Table>
<S>                                                            <C>
Revenues:
  Oil and natural gas sales.................................   $12,433,923
  Field operations..........................................       203,015
                                                               -----------
     Total revenue..........................................    12,636,938
Costs and expenses:
  Lease operating...........................................     2,687,243
  Field operations..........................................       124,478
  Oil and natural gas production taxes......................       721,364
  Depreciation, depletion and amortization..................     4,348,515
  General and administrative................................     2,106,826
                                                               -----------
     Total costs and expenses...............................     9,988,426
                                                               -----------
Operating income............................................     2,648,512
Other income (expense):
  Interest expense..........................................       (63,982)
  Interest income and other, net............................       561,247
  Derivative loss...........................................    (4,647,782)
  Interest income from affiliate............................       210,545
                                                               -----------
Net loss....................................................   $(1,291,460)
                                                               ===========
</Table>

                            See accompanying notes.

                                       F-28
<PAGE>

                                NEG HOLDING LLC

                      CONSOLIDATED STATEMENT OF CASH FLOWS
                      FOR THE YEAR ENDED DECEMBER 31, 2001

<Table>
<S>                                                            <C>
OPERATING ACTIVITIES
Net loss....................................................   $ (1,291,460)
Adjustments to reconcile net income (loss) to net cash
  provided by operating activities:
Depreciation and depletion..................................      4,348,515
Change in fair market value of derivative contracts.........      4,647,782
Changes in operating assets and liabilities:
  Accounts receivable.......................................      1,464,018
  Drilling prepayments......................................      1,256,775
  Derivative deposit........................................      6,500,000
  Other current assets......................................       (366,434)
  Accounts payable and accrued liabilities..................       (390,195)
                                                               ------------
  Net cash provided by operating activities.................     16,169,001
                                                               ------------
INVESTING ACTIVITIES
Oil and natural gas acquisition, exploration, and
  development expenditures..................................     (8,794,086)
Purchases of other property and equipment...................       (124,783)
Proceeds from sales of oil and natural gas properties.......         86,311
Member contributions........................................     81,834,570
Guaranteed payment to member................................    (10,870,973)
                                                               ------------
Net cash provided by investing activities...................     62,131,039
                                                               ------------
Increase in cash and cash equivalents.......................     78,300,040
Cash and cash equivalents at beginning of period............             --
                                                               ------------
Cash and cash equivalents at end of period..................   $ 78,300,040
                                                               ============
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid in cash.......................................   $         --
                                                               ============
NON CASH FINANCING AND INVESTING ACTIVITIES
Contribution of assets by members...........................   $138,116,670
                                                               ============
</Table>

                            See accompanying notes.
                                       F-29
<PAGE>

                                NEG HOLDING LLC

                   CONSOLIDATED STATEMENT OF MEMBERS' EQUITY

<Table>
<Caption>
                                                                 MEMBERS'
                                                                  EQUITY
                                                               ------------
<S>                                                            <C>
Balance at January 1, 2001..................................   $         --
  Members' contribution.....................................    219,731,045
  Guaranteed payment to member..............................    (10,870,973)
  Net loss..................................................     (1,291,460)
                                                               ------------
Balance at December 31, 2001................................   $207,568,612
                                                               ============
</Table>

                            See accompanying notes.

                                       F-30
<PAGE>

                                NEG HOLDING LLC

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 31, 2001

1.  BACKGROUND AND BANKRUPTCY FILING

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

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

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

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

2.  SIGNIFICANT ACCOUNTING POLICIES

  CONSOLIDATION

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

                                       F-31
<PAGE>
                                NEG HOLDING LLC

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  ACCOUNTING ESTIMATES

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

  CASH AND CASH EQUIVALENTS

     Cash and cash equivalents may include demand deposits, short-term
commercial paper, and/or money-market investments with maturities of three
months or less when purchased. At December 31, 2001, all cash and cash
equivalents were invested with Bank One, Texas, N.A., Concordia Bank and Trust
Company, AmSouth Bank and Fleet Bank, 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 basis. The excess, if any, of the net
book value above the ceiling limitation is required to be written off as a
non-cash expense. The Company did not incur a ceiling writedown in 2001. Using
December 31, 2001, constant prices and costs in accordance with the published
guidelines of the SEC, there was a potential ceiling writedown of $6.3 million
in the fourth quarter of 2001. On March 18, 2002, the ceiling limitation test
was performed using pricing in effect at that date. The net weighted average
prices used were $23.79 per barrel of oil and $3.49 per Mcf of natural gas.
Using this pricing, there is no ceiling limitation as of March 18, 2002. There
can be no assurance that there will not be additional writedowns in future
periods under the full cost method of accounting as a result of sustained
decreases in oil and natural gas prices or other factors.

     The Company has capitalized internal costs of $779,000 for the year ended
December 31, 2001, as costs of oil and natural gas properties. Such capitalized
costs include salaries and related benefits of individuals directly involved in
the Company's acquisition, exploration, and development activities based on the
percentage of their time devoted to such activities.

     The Company is subject to extensive federal, state, and local environmental
laws and regulations. These laws, which are constantly changing, regulate the
discharge of materials into the environment and may require the Company to
remove or mitigate the environment effects of the disposal or release of
petroleum or chemical substances at various sites. Environmental expenditures
are expensed or capitalized depending on their future economic benefit.
Expenditures that relate to an existing condition caused by past operations and
that have no future economic benefits are expensed. Liabilities for expenditures
of a noncapital nature are

                                       F-32
<PAGE>
                                NEG HOLDING LLC

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

recorded when environmental assessment and/or remediation is probable, and the
costs can be reasonably estimated.

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

  OTHER PROPERTY AND EQUIPMENT

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

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

  INCOME TAXES

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

  FINANCIAL INSTRUMENTS

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

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

  NATURAL GAS PRODUCTION IMBALANCES

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

                                       F-33
<PAGE>
                                NEG HOLDING LLC

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  COMPREHENSIVE INCOME

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

  DERIVATIVES

     In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Certain Hedging Activities." In June 2000, the FASB
issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activity, an Amendment of SFAS 133." SFAS No. 133 and SFAS No. 138
require that all derivative instruments be recorded on the balance sheet at
their respective fair values. SFAS No. 133 and SFAS No. 138 are effective for
all fiscal quarters of all fiscal years beginning after June 30, 2000; NEG
adopted SFAS No. 133 and SFAS No. 138 on July 1, 2000. All derivatives
contributed to the Company were recorded in this manner.

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

<Table>
<Caption>
                                                                 2001
                                                              ----------
<S>                                                           <C>
Gross cash receipts.........................................  $1,400,836
Gross cash payments.........................................  $  178,805
Valuation loss..............................................  $4,647,782
</Table>

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

     The Company received various commodity swap agreements ("contracts") from
Gascon and NEG as part of their initial contribution of assets and liabilities
in September 2001. The counterparty to these instruments was through Enron North
America Corp. As of December 2001, Enron Corp. and Enron North America Corp. et
al ("Enron") filed for protection under Chapter 11, Title 18 of the United
States Code. Enron ceased making payments under the various contracts in
November 2001, prior to the bankruptcy filings. Accordingly, each of the
contracts shall be administered as a claim in the Enron bankruptcy proceedings.
Although no claim has been filed, (nor has any claim required to be filed as of
the date of this report) the Company estimates its claim against Enron related
to these contracts is approximately $7.25 million. The $7.25 million claim
represents a hedge against future oil and natural gas prices and does not
reflect a cash gain or loss on the contracts. For this reason, no asset or
liability was recorded at December 31, 2001 and the Company recorded a net non
cash valuation loss of $4.6 million through December 31, 2001 in connection with
these contracts. The Company cannot predict what amount, if any may be
ultimately received in the Enron bankruptcy proceeding.

                                       F-34
<PAGE>
                                NEG HOLDING LLC

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     No derivative assets or liabilities have been recorded by the Company as
all of the derivatives entered into by the Company have been canceled.

3.  MANAGEMENT AGREEMENT

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

4.  NOTE RECEIVABLE FROM AFFILIATE

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

5.  COMMITMENTS AND CONTINGENCIES

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

     The Company is obligated to make semi-annual payments to NEG "Guaranteed
Payments" as defined in the Holding LLC Operating Agreement referred herein. A
payment for $10.9 million was made in November 2001 under this obligation.

6.  INVESTMENT IN NEG HOLDING LLC OPERATING AGREEMENT

     Under the Holding LLC Operating Agreement, NEG is to receive guaranteed
payments in addition to a priority distribution amount of $202.2 million before
Gascon receives any monies. The priority distribution is to be made on or before
November 1, 2006. Guaranteed payments are to be paid, on a semi annual basis,
based on 10.75% of the outstanding priority distribution amount. After the
payments to NEG, Gascon is to receive distributions equivalent to the priority
distribution amount and guaranteed payments plus other

                                       F-35
<PAGE>
                                NEG HOLDING LLC

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

amounts as defined. After the above distributions to NEG and Gascon, additional
distributions, if any, are to be made in accordance with their respective
capital accounts. The order of distributions is listed below.

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

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

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

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

7.  CRUDE OIL AND NATURAL GAS PRODUCING ACTIVITIES

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

<Table>
<Caption>
                                                                 YEAR ENDED
                                                              DECEMBER 31, 2001
                                                              -----------------
<S>                                                           <C>
Exploration costs...........................................     $2,817,625
Development costs...........................................      5,976,461
Depletion rate per Mcfe.....................................     $     1.04
</Table>

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

<Table>
<Caption>
                                                                 YEAR ENDED
                                                              DECEMBER 31, 2001
                                                              -----------------
<S>                                                           <C>
Plains Marketing and Transportation.........................     $4,262,310
</Table>

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

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

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

                                       F-36
<PAGE>
                                NEG HOLDING LLC

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

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

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

<Table>
<Caption>
                                                                          NATURAL GAS
                                                              CRUDE OIL    (THOUSAND
                                                              (BARRELS)   CUBIC FEET)
                                                              ---------   -----------
<S>                                                           <C>         <C>
January 1, 2001.............................................         --           --
  Contribution from NEG.....................................  4,039,064   58,432,104
  Contribution from Gascon..................................  1,009,388   13,848,084
  Purchase of reserves in place.............................      4,575      338,406
  Extensions and discoveries................................    351,245   12,518,633
  Revisions of previous estimates...........................         --       17,048
  Production................................................   (245,389)  (2,723,000)
                                                              ---------   ----------
December 31, 2001...........................................  5,158,883   82,431,275
                                                              =========   ==========
Proved developed reserves:
  December 31, 2001.........................................  4,607,434   67,188,454
</Table>

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

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

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

                                       F-37
<PAGE>
                                NEG HOLDING LLC

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<Table>
<Caption>
                                                              DECEMBER 31,
                                                                  2001
                                                              -------------
<S>                                                           <C>
Future cash inflows.........................................  $ 316,298,819
Future production and development costs.....................   (127,339,430)
                                                              -------------
Future net cash flows.......................................    188,959,389
10% annual discount for estimated timing of cash flows......    (75,837,589)
                                                              -------------
Standardized measure of discounted future net cash flows....  $ 113,121,800
                                                              =============
</Table>

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

<Table>
<Caption>
                                                               YEAR ENDED
                                                              DECEMBER 31,
                                                                  2001
                                                              ------------
<S>                                                           <C>
Contribution from NEG.......................................  $102,258,800
Contribution from Gascon....................................    34,528,067
Sales and transfers of crude oil and natural gas produced,
  net of production costs...................................    (9,025,316)
Net changes in prices and production costs..................   (10,960,878)
Development costs incurred during the period and changes in
  estimated future development costs........................   (33,987,448)
Extensions and discoveries, less related costs..............    24,358,514
Revisions of previous quantity estimates....................        11,491
Accretion of discount.......................................     3,408,627
Changes in production rates (timing) and other..............     2,529,943
                                                              ------------
Net change..................................................  $113,121,800
                                                              ============
</Table>

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

                                       F-38
<PAGE>

                               INDEX TO EXHIBITS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(17) Filed herewith.