================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                           ----------------------------
                                   FORM 10-QSB
(Mark One)

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934

               For the quarterly period ended September 30, 1998

                                       or

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

For the transition period from__________________________to_____________________

Commission File Number   033-19992-LA

                         National Equities Holding, Inc.
             -------------------------------------------------------
             (Exact name of registrant as specified in its charter)

          Delaware                                   76-0539342
------------------------------                 ----------------------
(State of other jurisdiction of                  (I.R.S. Employer
incorporation or organization)                 Identification Number)

13700 Veterans Memorial Drive
Suite 410
Houston, Texas                                         77014
------------------------------                      -----------
(Address of principal                               (Zip Code)
executive office)

Registrant's telephone number, including area code:  (281) 583-1280

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                                                    No X 
   -------                                               ----

As of November 10, 1998, the latest practicable date, 38,890,105 shares of the
registrant's common stock, $0.001 par value, were issued and outstanding based
upon the stock transfer agents records. See, however, Part II -- Other
Information, Item 1. Legal Proceedings in connection with claims concerning the
issuance of certain of those securities and the consideration therefor.

================================================================================
<PAGE>


                        NATIONAL EQUITIES HOLDINGS, INC.

                                      INDEX
PART I.     Financial  Information                                         Page
------      ----------------------                                        -----

            Glossary of Selected Oil and Natural Gas Terms...................3

Item 1.     Financial Statements.............................................6

            Balance Sheet as of September 30, 1998 (unaudted)................6

            Statements of Operations for the
            Nine Months Ended September 30, 1998
            and 1997 (Unaudited) and the Three
            Months Ended September 30, 1998 and 1997 (unaudited).............8

            Statements of Cash Flows for
            the Nine Months Ended September 30, 1998
            and 1997 (Unaudited) and the Three
            Months Ended September 30, 1998 and 1997 (unaudited) ............9

            Reconciliation of Net Loss to
            Net Cash Used in Operating Activities for
            the Nine Months Ended September 30, 1998
            and 1997 (Unaudited) and the Three
            Months Ended September 30, 1998 and 1997(unaudited).............10

            Notes to Financial Statements ..................................11

Item 2.     Management's Discussion and Analysis or
            Plan of Operations .............................................21

PART II.    Other Information

Item 1.     Legal Proceedings...............................................27
Item 2.     Changes in Securities.......................................... 28
Item 3.     Defaults upon Senior Securities ................................28
Item 4.     Submission of Matters to a Vote of Security Holders ............28
Item 5.     Other Information ..............................................29
Item 6.     Exhibits and Reports on Form 8-K ...............................30
Signatures  ................................................................32

                                       2

<PAGE>

                 GLOSSARY OF SELECTED OIL AND NATURAL GAS TERMS

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

Developed Acreage. The number of acres which are allocated or assignable to
producing wells or wells capable of production.

Developed Well. A well drilled within the proved area of an oil or natural gas
reservoir to the depth of a stratigraphic horizon known to be productive.

Dry Hole. A well found to be incapable of producing either oil or natural gas in
sufficient quantities to justify completion as a developed oil or natural gas
well.

Estimated Future Net Revenues. Revenues from production of oil and natural gas
in an unproved area, net of all production-related taxes, lease operating
expenses and capital costs.

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.

Farm-in. An agreement whereby the lease owner agrees to allow another to drill a
well or wells and thereby earn the right to an assignment of a portion or all of
the lease, with the original lease owner typically retaining an overriding
royalty interest and other rights to participate in the lease.

Field. One or more reserves related to the same individual geological structural
feature.

Gross acres or gross wells. The total acres or wells, as the case may be, in
which a working interest is owned.

Lease Expirations. Oil and natural gas leases are for a fixed period. Under
certain circumstances, if no well is drilled or production ceases a situation
may be created in which the number of acres holding oil for production would be
in excess of production holding regulations. In Texas, for example, the
production holding regulation for an oil well is 40 acres. If there is no
production for six months, the lease expires naturally and reverts back to the
mineral rights holder.

Mcf. One thousand cubic feet of natural gas.

Net Acres or Net Wells. The sum of the fractional working interests owned in
gross acres or gross wells.

Net Oil and Natural Gas Sales. Oil and natural gas sales less oil and natural
gas production expenses.

Net Production. Production that is owned by the Company after royalties and oil
and natural gas production due others.

Overriding 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 exploration and production.

Payout. That point in time when a party has recovered monies out of the
production from a well equal to the cost of drilling and completing the well and
the cost of operating the well through that date.

                                       3

<PAGE>

Productive Well. A well that is producing oil or natural gas or that is capable
of production in paying quantities.

Properties. Any ownership in, or an interest representing the right to, or the
participation in, the extraction of oil and/or natural gas. The term also
includes a nonoperating interest, such as royalty interests or production
interests payable in oil and/or natural gas.

Proved Developed Non-Producing Reserves. Reserves that consist of (i) Proved
Reserves from wells which have been completed and tested but are not producing
due to lack of market or minor completion problems which are expected to be
corrected and (ii) Proved Reserves currently behind the pipe in existing wells
and which are expected to be productive due to both the well log characteristics
and analogous production in the immediate vicinity of the wells.

Proved Developed Producing Reserves. 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 oil, and natural gas 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. Proved 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 recompletion.

Recompletion. The completion for production of an existing well bore in a
different formation or producing horizon from that in which the well was
previously completed.

Reservoir. A separate confined underground formation containing a natural
accumulation of producible oil and/or natural gas.

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.

SEC PV-10. The present value of proved reserves is an estimate of the discounted
future net cash flows from each of the properties at September 30, 1998, or as
otherwise indicated. Net cash flow is defined as net revenues less, after
deducting production and ad valorem taxes, future capital costs and operating
expenses, but before deducting federal income taxes. As required by rules of the
Securities and Exchange Commission (the "Commission"), the future net cash flows
have been discounted at an annual rate of 10% to determine their "present
value." The present value is shown to indicate the effect of time on the value
of the revenue stream and should not be construed as being the fair market value
of the properties. In accordance with Commission rules, estimates have been made
using constant oil and natural gas prices and operating costs, at September 30,
1998 or as otherwise indicated.

Shut-In. To close down a producing well or field temporarily for repair,
cleaning out, building up reservoir pressure, lack of a market or similar
conditions.

                                       4
<PAGE>


Sidetrack. A drilling operation involving the use of a portion of an existing
well to drill a second hole, in which a milling tool is used to grind out a
"window" through the side of a drill casing at some selected depth. The drilling
bit is then directed out of the window at a desired angle into previously
undrilled strata. From this directional start, a new hole is drilled to the
desired formation depth and casing is set in the new hole and tied back into the
older casing, generally at a lower cost than the cost to drill a new well
because of the utilization of a portion of the original casing.

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.

Unproved Properties. Lease acreage on which wells have not been drilled, but are
believed to be candidates for probable or possible oil and natural gas reserves.

Working Interest. The operating interest that gives the owner of the property or
mineral rights the right to (i) drill, produce and conduct operating activities
on the property; and (ii) a share of the production, subject to all royalties,
overriding royalties and other burdens as well as all costs of exploration,
development and operations and all risks in connection therewith.

Workover. Work performed on a well, subsequent to the initial drilling and
completion phase of a well. Typically, a workover involves procedures to repair
a well or to improve a well's production.


                                       5
<PAGE>


                        NATIONAL EQUITIES HOLDINGS, INC.
                             CONDENSED BALANCE SHEET
                                  (UNAUDITED)
<TABLE>
<CAPTION>

ASSETS                                                                                                     September 30, 1998
-------                                                                                                    ------------------
<S>                                            <C>                                                          <C> 

CURRENT ASSETS:

                                                CASH                                                              $ 3,611
                                                ACCOUNTS RECEIVABLE                                                15,632
                                                PREPAID EXPENSES                                                      720
                                                                                                               ----------
                                                TOTAL CURRENT ASSETS                                               19,964
                                                                                                               ----------
OIL AND NATURAL GAS PROPERTIES, AS DETERMINED 
BY THE SUCCESSFUL EFFORTS METHOD OF ACCOUNTING
                                                OIL AND NATURAL GAS PROPERTIES, PROVED                            263,586
                                                OIL AND NATURAL GAS PROPERTIES, UNPROVED AND UNDEVELOPED          905,843
                                                WELL AND RELATED EQUIPMENT                                        211,855
                                                LESS:    ACCUMULATED DEPLETION,                           
                                                         DEPRECIATION AND AMORTIZATION                           (57,576)
                                                                                                               ----------
                                                TOTAL OIL AND NATURAL GAS PROPERTIES                            1,323,708
                                                                                                               ----------
OTHER ASSETS
                                                INVESTMENT IN LIMITED PARTNERSHIP INTERESTS OF            
                                                RST/HORSE  (See Note 4)                                         2,562,000
                                                PROPERTY, PLANT AND EQUIPMENT- OFFICE EQUIPMENT                     5,534
                                                DEPOSITS                                                            6,039
                                                                                                               ----------
                                                TOTAL OTHER ASSETS                                              2,573,573
                                                                                                               ----------
TOTAL ASSETS                                                                                                   $3,917,244
                                                                                                               ----------
                                                                                                               ----------
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                       6
<PAGE>


                        NATIONAL EQUITIES HOLDINGS, INC.
                             CONDENSED BALANCE SHEET
                                   (UNAUDITED)
<TABLE>
<CAPTION>

LIABILITIES AND CAPITAL:
------------------------
                                                                                                      September 30, 1998
                                                                                                      ------------------
<S>                                           <C>                                                        <C> 

CURRENT LIABILITIES:

                                               ACCOUNTS PAYABLE                                            $ 174,677
                                               ACCRUED EXPENSES                                              203,767
                                               ACCRUED INTEREST                                                9,476
                                               ADVANCE FROM SHAREHOLDER                                       15,000
                                               NOTE PAYABLE (See Note 9)                                     275,459
                                               NEHI DEBENTURES (See Note 6)                                  120,000
                                                                                                             -------

TOTAL LIABILITIES                                                                                            798,379
                                                                                                             -------
COMMITMENTS AND CONTINGENCIES (See Note 11)                                                                  -------
STOCKHOLDERS' EQUITY:
PREFERRED STOCK                                                                                          
                                               1,000,000 SHARES AUTHORIZED
                                               AT $0.001 PAR VALUE; NONE
                                               ISSUED AND OUTSTANDING
COMMON STOCK
                                               49,000,000 SHARES AUTHORIZED AT $0.001 PAR VALUE:
                                               38,228,261 SHARES  ISSUED AND OUTSTANDING 
                                               (See Notes 4, 5 and 9)                                         38,228
PAID IN CAPITAL                                                                                            9,331,784
ACCUMULATED (DEFICIT)                                                                                     (6,251,147)
                                                                                                         -----------
TOTAL STOCKHOLDERS' EQUITY                                                                                 3,118,865
                                                                                                         -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                                                $3,917,244
                                                                                                         -----------
                                                                                                         -----------
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                       7
<PAGE>

                        NATIONAL EQUITIES HOLDINGS, INC.
                            STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                         THREE MONTHS ENDED                            NINE MONTHS ENDED 
                                                             SEPTEMBER 30,                                SEPTEMBER 30,   
                                                    ---------------------------------             -------------------------
                                                         1998                   1997               1998               1997
<S>                                                   <C>                    <C>                <C>                  <C>    
REVENUE:
    SALES                                             $  12,768              $  9,480           $ 36,608             $54,811
    OTHER INCOME                                          9,000                 3,000             27,000              22,008
    COST OF REVENUE:
         LEASE OPERATING EXPENSES                       (13,922)               (8,990)           (48,219)            (81,815)
    ABANDONMENT-
    SCURRY/MCMULLEN  (See Note 8)                            --                    --           (910,827)                --
                                                         ------               -------             -------          ---------
GROSS PROFIT (LOSS)                                       7,846                 3,490           (895,438)             (4,996)
GENERAL AND ADMINISTRATIVE EXPENSES                    (256,278)               (7,842)          (655,499)           (195,381)
INTEREST EXPENSE                                         (3,210)              (74,875)            (9,660)           (219,366)
                                                         ------               -------             -------          ---------
NET (LOSS)                                            $(251,642)             $(79,227)       $(1,560,597)         $ (419,743)
                                                       ========               =======         ==========          ==========
WEIGHTED AVERAGE
    NUMBER OF SHARES OUTSTANDING                     38,231,848            14,873,630         37,378,288          14,873,630
BASIC (LOSS) PER SHARE                                 $(0.0066)             $(0.0053)          $(0.0041)           $(0.0053)
</TABLE>


   The accompanying notes are an integral part of these financial statements.


                                       8
<PAGE>


                        NATIONAL EQUITIES HOLDINGS, INC.
                            STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>

                                                                                                     
                                                                     THREE MONTHS ENDED                NINE MONTHS ENDED
                                                                         SEPTEMBER 30,                     SEPTEMBER 30, 
                                                                     ---------------------            --------------------
                                                                      1998            1997             1998           1997
                                                                     -----           -----             ----           -----
<S>                                                                 <C>            <C>              <C>            <C>

CASH FLOWS FROM
OPERATING ACTIVITIES:
         Cash Received from Operations                              $21,768         $ 12,480        $ 56,754        $ 76,819
         Lease operating expenses paid                              (13,922)          (8,990)        (48,219)        (81,815)
            Interest Paid on Erin Oil Debentures                         --               --              --              --
         General and Administrative expenses paid                   (82,243)          (7,842)       (299,747)        (92,562)
                                                                   --------          -------       ---------        --------
Net Cash used in Operating Activities                               (74,397)          (4,352)       (291,212)        (97,558)
                                                                   --------          -------       ---------        --------
CASH FLOW FROM INVESTING ACTIVITIES
         (Increase) in Capital Expenditures                              --        (250,000)          (5,535)       (275,809)
                                                                     ------        ---------         -------       ---------
Net Cash Used in Investing Activities                                    --        (250,000)          (5,535)       (275,809)
                                                                     ------        ---------         -------       ---------
CASH FLOWS FROM FINANCING ACTIVITIES                       
         Stock issued for services                                      400               --            (250)             --
         Advance from shareholder                                        --               --          15,000              --
         Advance (to) from Affiliate                                     --          244,812          (3,001)        368,179
         Sale of stock                                               50,000               --         261,000              --
                                                                     ------        ---------        --------        --------
Net Cash Provided by Financing Activities                            50,000          244,812         272,749         368,179
                                                                     ------         --------        --------        --------
Net Increase (Decrease) in Cash                                     (23,998)          (9,540)        (23,998)         (5,188)
Cash Balance, Beginning of Period                                    27,609              346          27,609          (4,006)
                                                                     ------         --------        --------         --------
Cash Balance, End of Period                                          $3,611         $ (9,194)        $ 3,611         $(9,194)
                                                                     ======          ========        =======         ========
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                       9
<PAGE>




                        NATIONAL EQUITIES HOLDINGS, INC.
      RECONCILIATION OF NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES:


<TABLE>
<CAPTION>

                                                         THREE MONTHS ENDED                       NINE MONTHS ENDED
                                                             SEPTEMBER 30,                          SEPTEMBER 30,
                                                       -------------------------              ------------------------
                                                       1998                  1997              1998               1997
                                                      -----                 -----             -----               ----
<S>                                                <C>                     <C>             <C>                  <C>

Net (Loss)                                          $(251,462)             $(79,227)       $(1,560,597)          $(419,743)
Abandonment-Scurry/McMullen                                --                    --            910,827                  --
(Decrease) in Assets                                  (30,451)                   --            (44,064)                 --
Increase in Accrued                            
Expenses                                              207,516                74,875            402,622             322,185
                                                      -------                ------            -------             -------
Net Cash Used in Operating Activities               $ (74,397)              $(4,352)         $(291,212)          $ (97,588)
                                                     ========               =======          =========             =======

</TABLE>


    The accompanying notes are an integral part of the financial statements.


<PAGE>



                          NOTES TO FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1998

NOTE 1:  Summary of Significant Accounting Policies:

Basis of Presentation:

The accompanying unaudited Financial Statements were prepared in accordance with
the instructions for Form 10-QSB and, therefore, do not include all disclosures
necessary for a complete presentation of financial condition, results of
operations, and cash flows in conformity with generally accepted accounting
principles. All adjustments which are, in the opinion of management, of a normal
recurring nature and are necessary for a fair presentation of the interim
financial statements, have been included. The results of operations for the
period ended September 30, 1998 are not necessarily indicative of the results
that may be expected for the entire fiscal year or any other interim period.

This summary of significant accounting policies of NATIONAL EQUITIES HOLDINGS,
INC. ("NEHI" or the "Company") is presented to assist in understanding the
Company's financial statements. The financial statements and notes are
representations of the Company's management, which is responsible for their
integrity and objectivity.

a. Organization and Business Activities:

The Company was formed on November 24, 1987 and is an independent oil and
natural gas exploration and production company with operations focused on
properties in western Texas and West Virginia. The Company operates in an
environment with many financial and operating risks, including, but not limited
to, the ability to acquire additional economially recoverable oil and natural
gas reserves, the inherent risks of the search for, development of and
production of oil and natural gas, the ability to sell oil and natural gas at
prices which will provide attractive rates of return, the highly competitive
nature of the industry and local and worldwide economic conditions. The
Company's ability to expand its reserve base and diversify its operations is
also dependent upon obtaining the necessary capital through operating cash flow,
borrowings or the issuance of additional equity.

b. Cash and Cash Equivalents:

The Company considers all cash accounts, which are not subject to withdrawal
restrictions or penalties, and highly liquid debt instruments purchased with a
maturity of three months or less, to be cash equivalents.


                                       11
<PAGE>

c. Revenue Recognition:

The Company recognizes revenue from oil produced at the point of sale, which is
deemed when the oil is run from the field production storage tanks to
purchasers. Natural gas is not stored on the leased property; thus, revenue is
recognized at the point of production and sale because they are the same.

d. Basis of Accounting:

The Company prepares its financial statements and federal income taxes on the
accrual basis of accounting. The Company's oil and natural gas properties are
accounted for using the "Successful Efforts" basis of accounting.

Costs to acquire mineral interests in oil and natural gas properties, to drill
and equip exploratory wells that find proved reserves, and to drill and equip
development wells are capitalized. Costs to drill exploratory wells that do not
find proved reserves, geological and geophysical costs, and costs of carrying
and retaining unproved properties are expensed.

Unproved oil and natural gas properties that are individually significant are
periodically assessed for impairment of value, and a loss is recognized at the
time of impairment by providing an impairment allowance. Other unproved
properties are amortized based on the Company's experience of successful
drilling and average holding period. Capitalized costs of producing oil and
natural gas properties, after considering estimated dismantlement and
abandonment costs and estimated salvage values, are depreciated and depleted by
the unit-of-production method. Support equipment and other property and
equipment are depreciated over their estimated useful lives.

On the sale or retirement of a complete unit of a proved property, the cost and
related accumulated depreciation, depletion, and amortization are eliminated
from the property accounts, and the resultant gain or loss is recognized. On the
retirement or sale of a partial unit of proved property, the cost is charged to
accumulated depreciation, depletion and amortization with a resulting gain or
loss recognized in income.

On the sale of an entire interest in an unproved property for cash or cash
equivalent, gain or loss on the sale is recognized, taking into consideration
the amount of any recorded impairment if the property had been assessed
individually. If a partial interest in an unproved property is sold, the amount
received is treated as a reduction of the cost of the interest retained.

e. Oil and natural gas leases held for resale:


The Company has acquired and may continue to acquire certain oil and natural gas
leases from time to time in the future for the purpose of contributing the
leases to affiliated oil and natural gas partnerships or selling the leases to
industry partners for cash consideration. Such leases held for resale are
periodically reviewed to determine if they have been impaired. If impairment
exists, a loss is recognized by providing an impairment allowance. Abandonments
of oil and natural
                                       12
<PAGE>

gas leases held for resale are charged to expense. With respect to leases
transferred to affiliated oil and natural

gas partnerships, the determination of recovery of total costs is made on a
partnership-by-partnership basis.

f. Capitalized interest:

The Company capitalizes interest on expenditures for significant exploration and
development projects during the period in which such activities are in progress.

g. Management Fees:

In connection with the planned sponsorship of oil and natural gas partnerships,
the Company will seek to receive a management fee from such partnerships, which
will be credited to income as earned.

h. Income Taxes:

The Company records income taxes in accordance with the requirements of
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes," which requires recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred tax assets
and liabilities are determined based on the differences between the financial
statement and tax bases of assets and liabilities using enacted tax rates. The
Company does not have any deferred tax liabilities as of the date of these
financial statements.

i. Asset Impairment

Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
applies to (1) long-lived assets, certain identifiable intangibles and goodwill
related to those assets to be held and used and (2) long-lived assets and
certain identifiable intangibles to be disposed of. Management is responsible
for considering whether an asset is impaired. SFAS 121 requires impairment
testing of assets to be held and used only when events or circumstances indicate
carrying amounts may not be recoverable. Management performs a review of its
long-lived assets annually.

Proved Reserves are reviewed annually by independent petroleum engineers who
issue a report which estimates discounted future cash flows. Management will
review these reports for indicated impairment and take appropriate steps. If
such impairment is determined to exist, a loss is recognized by providing for an
impairment allowance.

j. Property, Plant and Equipment:

Property and equipment are carried at cost. Oil and natural gas pipelines and
equipment are depreciated on the straight-line method over their estimated
lives, typically fifteen years. Other property is also depreciated on the
straight-line method over their estimated lives, ranging from three to ten
years.


                                       13
<PAGE>

k. Per Share Amounts:


The Company has adopted Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings per Share." In accordance with SFAS No. 128, the Company's basic
earnings per share amounts have been computed based on the average number of
common shares outstanding.

l. Reclassification:

Certain financial statement items have been reclassified to conform to the
current year's presentation.

m. Use of Estimates:

The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses, and
disclosure of contingent assets and liabilities in the financial statements,
including the use of estimates for oil and natural gas reserve information and
the valuation allowance for deferred income taxes. Actual results could differ
from those estimates. Estimates related to oil and natural gas reserve
information and the standardized measure are based on estimates provided by
independent engineering firms. Changes in prices could significantly affect
these estimates from year to year.

NOTE 2:  Going Concern:

The nine months ended September 30, 1998 continued a period of losses in NEHI's
oil and natural gas operations. In addition, a substantial write-down of oil and
natural gas reserves was taken for impairment, abandonment and lease
expirations. Oil and natural gas production steadily decreased during the year
in the Company's producing wells. This cycle of increasing operating losses has
raised concerns regarding the Company's ability to continue as a going concern.
Management has taken steps to overcome these negative trends by acquiring
interests in two limited partnerships, one of which is a licensee of a patent,
which is pending, for a down-hole drilling tool known as a "rotary steerable
device" (the "Device"). Management has also entered into farm-in agreements in
West Virginia, which based upon independent reserve evaluations performed in
April, 1998, are believed to contain substantial oil and natural gas reserves.
Despite these efforts, the Company is presently unable to honor its obligations
to pay for certain services, which have been provided to the Company during the
previous two fiscal years and through the nine months ended September 30, 1998,
and is currently unable to pay its debts as they come due.

NOTE 3: Volatility of Oil and Natural Gas Prices:

The Company's revenues, profitability and the carrying value of its oil and
natural gas properties are substantially dependent upon prevailing prices of,
and demand for, oil and natural gas and the costs of acquiring, finding,
developing and producing reserves. The Company's ability to borrow, to repay
outstanding indebtedness, and to obtain additional capital on attractive terms
is also substantially dependent upon oil and natural gas prices. Historically,
the markets for oil and natural gas have been volatile and are likely to
continue to be volatile in the future. Prices for oil and natural gas are
subject to wide fluctuations in response to: (i) relatively minor changes in the
supply of, and demand 

                                       14
<PAGE>

for, oil and natural gas; (ii) market uncertainty; and (iii) a variety of
additional factors, all of which are beyond the Company's control. These factors
include domestic and foreign political conditions, the price and availability of
domestic and imported oil and natural gas, the level of consumer and industrial
demand, weather, domestic and foreign government relations, the price and
availability of alternative fuels and overall economic conditions.

NOTE 4:  Asset Acquisition:

On August 9, 1996, the Company acquired from Mr. Bill Knollenberg, a director
and former senior executive officer of the Company, the oil and natural gas
reserves of Erin Oil Exploration, Inc., a Texas corporation, ("Erin Oil") for
13,122,045 shares of NEHI Common Stock having a fair market value of $6,854,486
as of the date of the acquisition. Of these 13,122,045 shares of Common Stock,
all of such shares are held by Gulf Minerals Exploration, a general partnership
("Gulf Minerals") of which Mr. Bill Knollenberg and his wife, Mrs. Doris C.
Knollenberg are each 20% partners and Mr. A. Bradley Knollenberg, their son,
holds a 60% partnership interest. As a part of this transaction, the Company
assumed the liability for convertible debentures issued by Erin Oil in the
amount of $2,770,000. This transaction is the subject of litigation between the
Company and the Knollenbergs as well as Erin Oil and Gulf Minerals. See Note 6
to the Notes to the Financial Statements, Part II -- Other Information, Item 1
-- Legal Proceedings and Exhibit 10.2 hereto.

On November 1, 1997 the Company acquired a 25% limited partnership interest in
HORSE ENERGY LP, a Texas limited partnership ("HORSE"). NEHI issued a total of
7,871,023 shares of common stock having, as of such date, a fair market value of
$1,338,074 (or $0.17 per share) to HORSE. HORSE is an exploration and
development entity formed for the purpose of engaging in advanced technology and
innovation for the production of oil and natural gas reserves. NEHI agreed to
invest, as a non-operating partner, $5,000,000 in drilling ventures to be
assembled and operated by HORSE. This transaction is the subject of litigation
between the Company and the Knollenbergs as well as Erin Oil and Gulf Minerals.
See Part II -- Other Information, Item 1 -- Legal Proceedings.

The general partner of HORSE is Horse Energy, LLC ("HE LLC"). The other limited
partners of HORSE are Messrs. George Sutherland, Feroze Variava and Jack Chance,
who serve as directors of and maintain senior management positions with the
Company. Messrs. Sutherland, Variava and Chance have significant experience in
the oil and natural gas exploration industry having been involved, in the
aggregate, in the drilling of in excess of 500 horizontal, 50 re-entry and 20
multilateral horizontal wells. See Exhibit 10.4 hereto.

On November 5, 1997, the Company acquired a 25% limited partnership interest in
Rotary Steerable Tools (USA) LP, a Texas limited partnership ("RST"). NEHI
issued 6,551,022 shares of Common Stock having, as of such date, a fair market
value of $1,113,674 (or $0.17 per share), as well as $250,000 in cash in return
for such interest in RST. Former management of NEHI simultaneously sold five
percent of NEHI's interest in RST to an unaffiliated third party for $250,000 in
cash, whereby the Company's interest in RST was reduced to 20%. NEHI has an
obligation to fund certain expenses up to $1,000,000 incurred in relation to the
development of the Device in return for its interest in RST.


                                       15
<PAGE>



The Company has not been able to meet its financial obligations to either HORSE
or RST and has yet to realize cash flow from either HORSE or RST. The Company
feels that interest in both of these affiliates will pay dividends in the
future. The Company was notified in December 1997 by RST that NEHI was in breach
of the November 5, 1997 agreement by not meeting the financial obligations of
the contract. RST has not revoked the Company's interest in RST, and has been
negotiating with the Company on ways to resolve the breach and retain NEHI an
interest in RST.

The general partner of RST is Rotary Steerable Tools LLC, a Texas limited
liability company ("RST LLC"), of which other limited partners of RST are
Messrs. Jack Chance, Chairman and Chief Executive Officer of the Company, and
Steve McLoughlin, the Company's Treasurer and Executive Vice President of
Oilfield Services. Messrs. Chance and McLoughlin are the inventors and assignors
of the intellectual property related to the Device. See Part II -- Other
Information, Item 1 -- Legal Proceedings and Exhibit 10.5 hereto.

The Device is patent pending and is presently in the patent application process
in the U.S. and the U.K. A patent application was filed in the United Kingdom in
1995. Subsequently, an international patent application, under the Patent
Cooperation Treaty, was filed in 1996. The international patent application was
published on October 10, 1996 under serial number WO-96-31679. The priority date
on the international patent application is April 5, 1995. A patent was applied
for in the United States on October 5, 1997. Patents in other countries have
also been applied for. On September 23, 1998, Messrs. Chance and McLoughlin
assigned the patent to Rotary Steerable Tools (BVI), Inc., a company intended to
be the worldwide licensor of the patent technology for the Device. The Device,
used in connection with steerable oil and natural gas drilling, is generally
described as a down-hole adjustable device for trajectory control in the
drilling of deviated wells. The Device can be used for horizontal and
multilateral drilling. The Device has not yet been offered commercially. RST
(USA) L.P. is the licensee in the United States for the Device.

The Device is designed to enable drillers to control the inclination and
direction of the well bore while maintaining complete rotation of the
drillstring at all times during the drilling process. The Device uses the static
method of rotary steering and the Device is self-aligning within the borehole.
Forces are applied continuously to the borehole by means of an eccentric cam
which can be rotated and then locked into place during drilling. During
drilling, there are no moving parts. The Device has three major components. The
mandrel carries all axial and torque loadings from the drillstring to the drill
bit. The inner sleeve is the eccentric cam component which transmits forces to
the borehole wall by means of blades which are set on the outer housing. The
outer housing contains the pregnant, self-aligning portion of the Device. It has
two parallel short stabilizer blades set at a distance of approximately two to
three feet from the face of the drill bit. The blades apply radial forces to the
borehole. The blades can be removed in the field and shimmed to different
heights which results in a change in the dog-leg characteristics which the
Device can provide. The outer housing contains the mechanical means of
controlling the position of the inner sleeve, as well as the power source and
instrumentation for the Device. The Device is only eight feet long, which allows
survey instrumentation to be placed closer to the drill bit, and the quality of
formation evaluation information can be better because the drilling mud will
have had less time to contaminate the rock formation.


                                       16
<PAGE>



The competitive market for steerable drilling tools includes such companies as:
Baker Hughes Inteq, Camco, Cambridge, Halliburton, Schlumberger and Sperry-Sun,
which manufacture and market similar drilling equipment which would compete with
the Device. Two prototype Devices are in advanced stages of development by RST
(U.S.A.) L.P. and field testing is anticipated to begin in the first quarter of
1999.

Messrs. Chance, McLoughlin, Sutherland and Variava each have extensive oil and
natural gas industry experience, particularly in horizontal and multi-lateral
oil and natural gas drilling. With the RST/Horse transactions, the Company and
its current management is in the process of developing plans to refocus the
Company as an exploitation and oilfield service company.

The transaction between NEHI and RST has been accounted for at cost. Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" states "...the fair value of the equity instruments issued shall
be used to measure the transaction if that value is more reliably measurable
than the fair value of the consideration received."

NOTE 5: Change in Control:

The RST/HORSE transactions resulted in a change of control of the Company. Bill
Knollenberg was the only serving officer and director of the Company in November
1997, and, as a part of such transactions, appointed the four individuals, who
have controlling interests in RST and/or HORSE, as directors and officers of the
Company.

In February 1998, an agreement (the "February 1998 Agreement") was entered into
pursuant to which certain principal shareholders of NEHI agreed that the
Company's Board of Directors would consist of three Directors selected
collectively by Bill M. Knollenberg, Bradley Knollenberg and Doris Knollenberg;
three Directors selected collectively by Jack Chance, George Sutherland, Feroze
Variava and Steve McLoughlin; and one ex-officio advisor, to be selected by the
parties to the agreement, who would have authority to vote if the Board of
Directors was deadlocked. See Exhibit 10.7. As part of the February 1998
Agreement, Daniel R. Kirshbaum, Esq., former counsel to the Company, was
designated to serve as the initial ex-officio advisor until such time as he
resigned or was replaced by the Board of Directors and Mr. McLoughlin agreed to
resign. Mr. McLoughlin's resignation was effective in April 1998. NEHI was not a
party to the February 1998 Agreement and, current Management does not believe
the Company is bound by such agreement. Based upon this conclusion, it is the
Company's position that the present directors of the Company are: Messrs. Jack
Chance, George Sutherland, Feroze Variava, Bill M. Knollenberg and A. Bradley
Knollenberg. Mr. Bill Knollenberg tendered his resignation as Chairman of the
Board of Directors (but, not as a director) and Chief Executive Officer of the
Company on December 8, 1997. Current corporate officers and management are
Messrs. Jack Chance, Chairman and Chief Executive Officer, George Sutherland,
President and Chief Operating Officer, Feroze Variava, Executive Vice President
of Operations and Secretary and Steve McLoughlin, Executive Vice President of
Oilfield Services and Treasurer. See Part II -- Other Information, Item 1 --
Legal Proceedings.

                                       17

<PAGE>


NOTE 6 - Convertible Debentures:

1996 Transactions: As a part of the acquisition of the oil and natural gas
reserves from Erin Oil in 1996, the Company assumed liability for convertible
debentures previously issued by Erin Oil and outstanding as of September 30,
1996 ("Erin Oil Debentures"). The Erin Oil Debentures were issued at various
times during 1996 at interest rates of 8 to12% due January 5, 1998. As of
January 5, 1997, the first anniversary date of the Erin Oil Debentures, such
debentures were available for conversion into common stock of the Company. The
conversion ratio varied from $0.75 to $2.00 per share of Common Stock, depending
upon the amount of such debenture. A principal amount of $5,000,000 was
authorized by the Erin Oil Board of Directors, of which $2,770,000 were sold and
outstanding at September 30, 1996. An additional $698,000 of Erin Oil Debentures
were sold by Erin Gas Producers, Inc. ("Erin Gas"), another company affiliated
with Mr. Bill Knollenberg, from October 1 through December 31, 1996, and
subsequently assigned to the Company, bringing the total amount of outstanding
Erin Oil Debentures to $3,468,800. If fully converted on January 5, 1997, the
outstanding Erin Oil Debentures would have represented 3,048,638 additional
shares of the Company's Common Stock.

1997 Transactions: On May 27, 1997, the NEHI Board, through its sole director,
Mr. Bill Knollenberg, approved the conversion of $745,000 of Erin Oil Debentures
into 597,903 shares of NEHI common stock. On December 18, 1997, the Company
entered into an agreement with Erin Oil and Mr. Bill Knollenberg (the "December
18, 1997 Agreement"). The December 18, 1997 Agreement, which was not an
arms-length transaction, transferred the liability for the balance, which
amounted to $2,746,080, as of December 16, 1997, of the outstanding Erin Oil
Debentures and accrued interest to Mr. Bill Knollenberg and Erin Oil. See
Exhibit 10.6 hereto. At the time the Erin Oil Debentures were sold to the
public, it was represented that such debentures would be convertible into common
stock of a public company represented as NEHI. Because of these representations,
the Company agreed to hold in escrow for Erin Oil, 2,913,200 shares of the
Company's Common Stock to be used by Erin Oil for the express purpose of
converting the outstanding Erin Oil Debenture debt. Based on the December 18,
1997 Agreement, Erin Oil, Gulf Minerals and Mr. Bill Knollenberg have assumed
any additional liability for payment or conversion of the Erin Oil Debentures.
As Erin Oil retires these debentures, a corresponding amount of Common Stock
will be released from the escrow. As of September 30, 1998, 2,495,746 shares of
Common Stock had been exchanged for Erin Oil Debentures and the balance of the
stock was held in escrow. In addition, the transaction had the effect of
removing approximately $2,621,800 of debt from the Company's balance sheet.
Current Management believes the 2,913,200 shares of Common Stock transferred to
escrow satisfy NEHI's liability for these debentures.

In August, 1998, it was discovered that from August through September, 1997,
$120,000 of NEHI Series A Convertible Debentures were sold by former management
of NEHI at an interest rate of 8% due August 25, 1999 ("1997 NEHI Debentures").
According to the 1997 NEHI Debenture documents, these debentures are part of a
series of NEHI convertible debentures of up to an aggregate principal of
$1,000,000. Other than the $120,000 of debentures, current Management has been
unable to determine whether any additional debentures of these series have been
sold and are outstanding, but intensive efforts to ascertain the likelihood of
additional outstanding debentures are on-going. The Company does not intend to
meet the interest obligation, which was due on these debentures on August 25,
1998 and based on discussions with the present debenture holders, the 


                                       18
<PAGE>


Company and such holders have agreed to convert such debentures to Common Stock.
Upon conversion, the outstanding debentures will represent 282,258 additional
shares of the Company's Common Stock. See Exhibit 4.2 hereto.

NOTE 7 -  Stock Options:

On August 9, 1996, an option was granted to Diversified Service Brokers, Inc.,
an unrelated party, to purchase 200,000 shares of the common stock of the
Company, at $0.44 per share. This option expires on August 8, 1999 and was based
on a previous purchase of stock for cash at $0.44 per share. The Company has
elected to account for its stock options under the fair value method of
accounting for stock-based compensation plans. This stock option, which was
granted as a result of the Erin Oil transaction, is the only currently
outstanding stock option. The Company has not issued any compensation based
stock options to employees.

NOTE 8: Write off of Assets:

In June 1998, the Company determined that there were lease abandonments and
expirations which amounted to $910,827 for the Scurry/McMullen lease located in
Scurry County, Texas.

NOTE 9:  Related Party Transactions:

During 1997, Mr. Bill Knollenberg as Chief Executive Officer of NEHI and
representing the then majority common stock interests, represented to the Board
of Directors that personal advances by him had been made to the Company totaling
$278,460, which covered operating cash shortfalls and investments made by the
Company. These advances were made as needed to the Company and were unsecured.
Subsequent to December 31, 1997, the Company executed a note in the amount of
$200,000 to Mr. Knollenberg with payment due December 31, 1998. To cover the
difference and interest, the Company issued 400,000 shares of restricted common
stock to Mr. Knollenberg, which have since been cancelled and returned to
unissued status. These accounts are being reviewed by NEHI and are a part of
ongoing litigation. Accordingly, the note payable reflected on the balance sheet
is an obligation outstanding to Mr. Bill Knollenberg. See also Notes 4 and 6 to
the Notes to the Financial Statements and Part II -- Other Information, Item 1
-- Legal Proceedings.

         The following shares were issued to the Knollenbergs in 1997, all in
connection with services rendered:

Related Party
                            No. of Shares       Date Issued         Fair Value

A. Bradley Knollenberg       1,000,000         July 3, 1997           Unknown
Doris C. Knollenberg         1,000,000         December 9, 1997       Unknown
Bill Knollenberg               885,052         December 8, 1997       Unknown

This transaction has not been accounted for at a known value, due to lack of
marketability of the common stock at the time of approval and the unknown fair
value of the services rendered. Restrictions on the sale of this Common Stock
under SEC Rule 144 create additional valuation 


                                       19
<PAGE>

problems. Accordingly, a zero value has been assigned to this transaction in
these financial statements.

The issuance of the aforementioned shares is also the subject of ongoing
litigation. See also Part II -- Other Information, Item 1 -- Legal Proceedings.

NOTE 10:  Year 2000 Issues:

The Year 2000 issue ("Y2K") is the result of computer programs being written
using two digits rather than four to define the applicable year. Any programs
that have time sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a major system failure or
miscalculation. NEHI currently uses an oil and natural gas accounting program
running on a Windows 95 operating system. Management is currently checking with
the software vendor to see if this accounting program is Y2K compliant.
Management is also reviewing the Company's individual desktop units to insure
that these units are Y2K compliant. Assuming all systems are non-compliant, the
cost of Y2K compliance would be less than $30,000.

NOTE 11: Commitments and Contingencies:

Based on agreements between NEHI and RST and HORSE, the Company has commitments
to pay $1,000,000 and $5,000,000 to RST and HORSE, respectively. The principals
of RST and HORSE have indicated that neither RST or HORSE intend to enforce
these commitments at this time and therefore such commitments are not reflected
on the balance sheet. See Exhibits 10.4 and 10.5 hereto.

In addition, see Note 6 to the Notes to the Financial Statements with respect to
shares of Common Stock (i) held in escrow by the Company to retire the Erin Oil
Debentures and (ii) to be issued in connection with the conversion of the
$120,000 of outstanding 1997 NEHI Debentures. In the event any additional
debentures of the series of up to $1,000,000 1997 NEHI Debentures are discovered
outstanding, the Company will need to meet its obligations to the holders of
such debentures.


                                       20

<PAGE>



ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
         OF OPERATIONS

Forward Looking Information

This Form 10-QSB contains certain forward looking statements. For this purpose,
any statements contained in this Form 10-QSB that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, words such as "may," "will," "expect," "believe," "anticipates,"
"estimates," or "continue" or comparable terminology or the negative thereof are
intended to identify certain forward-looking statements. These statements by
their nature involve substantial risks and uncertainties, both known and
unknown, and actual results may differ materially from any future results
expressed or implied by such forward-looking statements. Such statements speak
only as of the quarter ended September 30, 1998 and the Company undertakes no
obligation to publicly update or revise any forward-looking statements whether
as a result of new information, future events or otherwise. See Exhibit 99.4
hereto.

Company Control

Until November, 1997, the Company was under the management and control of Mr.
Bill Knollenberg, who acquired the controlling interest in NEHI in September of
1996 through a transaction involving a transfer of certain leasehold interests
located in Fisher and Scurry County, Texas from Erin Oil Exploration, Inc.("Erin
Oil"), a company owned by Mr. Knollenberg, in exchange for 14,022,045 shares of
NEHI common stock. In addition, NEHI assumed $2,770,000 of Erin Oil Debentures
as part of the transaction in which Mr. Knollenberg gained controlling interest
in the Company as well as $698,000 in convertible debentures of Erin Gas
Producers, Inc. ("Erin Gas"),another affiliated company of Mr. Knollenberg. In
1997, Mr. Knollenberg issued to himself and/or his family or affiliated
businesses, 7,000,000 additional shares of NEHI common stock of which 4,114,947
shares have been returned to the Company and 2,885,082 remain in control of Mr.
Knollenberg or his affiliates. The issuance of these shares is the subject of
ongoing litigation. See also Part II -- Other Information, Item 1 -- Legal
Proceedings.

Also in December 1997, Mr. Bill Knollenberg resigned as Chairman and Chief
Executive Officer of the Company and appointed Messrs. George Sutherland, Jack
Chance, Feroze Variava and Steve McLoughlin, as directors and officers of the
Company ("Current Management"). These individuals have extensive management and
technical skills in oilfield services and hold various positions with RST and
HORSE. See Note 4 to the Notes to the Financial Statements.

On December 18, 1997, the Company agreed to place in escrow 2,913,200 shares of
NEHI Common Stock to be used to convert the Erin Oil Debentures in exchange for
an agreement from Mr. Knollenberg that he and his companies would assume and
retire certain existing long-term debt of Erin Oil previously assigned by Mr.
Knollenberg to NEHI, when Mr. Knollenberg acquired controlling interest of NEHI
in 1996. See Note 6 to the Notes to the Financial Statements.


                                       21
<PAGE>

Results of Operations

Three Months Ended September 30, 1998 and 1997

The Company's operations resulted in a net loss of $252,000 for the three months
ended September 30, 1998 representing a $171,000 increase from the net loss of
$79,227 for the same period in 1997, primarily due to an increase in general and
administrative expenses, including accounting and legal fees and accrued
management compensation.

The Company's revenues totaled $22,000 for the three months ended September 30,
1998 compared to $12,000 for the same period in 1997, an increase of $10,000. Of
such amount, $9,000 represented well administrative fees and $13,000 represented
oil sales primarily from the Fisher County, Texas properties.

The cost of revenue increased from $9,000 for the three months ended September
30, 1997 to $14,000 for the three months ended September 30, 1998, an increase
of $5,000, which related to an increase in lease operating expenses.

General and Administrative expenses increased $248,000 from $8,000 for the three
month period ended September 30, 1997 to $256,000 for the same period in 1998.
This increase was primarily related to accounting and legal fees of $108,000 and
accrued management compensation of $96,000 over the three-month period ended
September 30, 1998.

Nine Months Ended September 30, 1998 and 1997

The Company's operations resulted in a net loss of $1.6 million for the nine
months ended September 30, 1998 representing a $1.2 million increase from the
net loss of $420,000 for the same period in 1997, primarily as a result of the
Scurry/McMullen lease abandonment. See Note 8 to the Notes to the Financial
Statements.

The Company's revenues totaled $64,000 for the nine months ended September 30,
1998 compared to $77,000 for the same period in 1997, represented by a decrease
of $17,000 in oil and natural gas sales and an increase in well administrative
fees of $5,000.

The cost of revenue increased from $82,000 for the nine months ended September
30, 1997 to $960,000 for the nine months ended September 30, 1998, an increase
of $878,000, which was as a result of the abandonment of the reserves under the
Scurry/McMullen property lease and a decrease of lease operating expenses.

General and Administrative expenses increased $460,000 from $195,000 for the
nine month period ended September 30, 1997 to $655,000 for the same period in
1998. This increase was primarily related to $246,000 in accounting and legal
fees for preparation of the 1996 Transitional and Year End Form 10-KSB, 1997
quarterly reports and 1998 quarterly reports filed with the Commission,
preparation of the Series A Convertible Debenture, the documents associated with
litigation (see Part II, Item 1 - Legal Proceedings) and the 1997 Year End Form
10-KSB and accrued management compensation of $203,000.


                                       22
<PAGE>

Liquidity and Capital Resources

During seven of the nine months ended September 30, 1998 the Company secured
capital resources for lease acquisition and drilling projects primarily through
the private placement offering of a new issuance of up to $20,000,000 of NEHI
Series A 9% Convertible Debentures, which was initiated in January 1998 ("1998
NEHI Debentures"). The $261,000 obtained as proceeds from this offering have
been used to fund lease acquisitions, well workover projects and to pay general
and administrative costs. The debenture holders have converted such debt to
958,618 shares of NEHI Common Stock. This offering was discontinued in July and
will remain suspended until the Company has fulfilled its reporting requirements
with the Commission. See Note 6 to the Notes to the Financial Statements and
Part II -- Other Information, Item 1 -- Legal Proceedings.

Capital expenditures of $5,535 during the first two quarters of 1998, which were
funded by cash flows, consisted primarily of purchases of office equipment.

The Company is currently pursuing inexpensive workovers on West Texas
properties, low cost drilling opportunities and joint ventures with industry
partners to improve cash flow for 1998.

The Company's liquidity requirements for the remainder of 1998 are anticipated
to be $60,000. The Company presently exhibits serious cash flow problems and is
unable to pay certain of its expenses as they become due. In light of such cash
flow problems, the Company's ability to meet such liquidity requirements is in
question. Continuing efforts to raise working capital through the private
placement of the 1998 NEHI Debentures is one source to meet such requirements.
It is anticipated that such efforts will be renewed in the fourth quarter of the
1998 fiscal year; however, there is no assurance that such placements will be
successful or sufficient to meet the Company's needs. Failure to obtain
sufficient financing could have a material adverse affect on the Company and
could result in one or more creditors or the Company filing a petition under the
U.S. Bankruptcy Code to resolve its outstanding debts.

Plan of Oil and Natural Gas Operations

The identification and development of proven oil and natural gas prospects to
achieve reserve growth, increase cash flow, and enhance share value are the
central focus of the Company's business. Prospects are generated primarily
internally, by joint venture participation with industry partners, and by
consulting explorationists with whom the Company has a working relationship.

The Company's strategy is to exploit proven prolific oil and natural gas
reserves quickly and efficiently through the use of advanced technology and
innovation. The Company will target oil and natural gas leases where the
application of re-entry, horizontal and multilateral technology can be
successfully applied.

In its efforts to acquire leases or other exploration rights in new prospect
areas, the Company faces competition from major oil companies, independent oil
firms, and oil and natural gas speculators. The ability to acquire leases or
exploration rights is generally determined by the amount of cash

                                       23
<PAGE>

required to obtain the property interest, the royalty or other interest reserved
by the transferor, and the nature of any commitment to drill or complete other
exploration.

Acquisitions of oil and natural gas properties are being pursued as part of the
Company's strategy of securing properties that can best be exploited by the
recently acquired interest in its affiliate company, HORSE. Re-entry, horizontal
and multilateral development opportunities are being evaluated by HORSE and the
Company plans to secure mineral lease positions when investment funds are
available. Additionally, the Company's focus will also continue to be on
acquisition of oil and natural gas service business interests that have long
term growth potential. The Company's present cash deficiency, however, hampers
these efforts.

Properties

As is customary in the oil and natural gas industry, the Company makes only a
cursory review of title to undeveloped oil and natural gas leases at the time
they are acquired by the Company. However, before drilling commences, the
Company causes a thorough title search to be conducted, and any material defects
in title are remedied prior to the time actual drilling of a well on the lease
begins. To the extent title opinions or other investigations reflect title
defects, the Company, rather than the seller or lessor of the undeveloped
property, is typically obligated to cure any such title defects at its expense.
If the Company were unable to remedy or cure any title defect of a nature such
that it would not be prudent to commence drilling operations on the property,
the Company could suffer a loss of its entire investment in drilling operations
on the property. The Company believes that it has good title to its oil and
natural gas properties, some of which are subject to immaterial encumbrances,
easements and restrictions.

The oil and natural gas properties owned by the Company are also typically
subject to royalty and other similar non-current cost bearing interests
customary in the industry. The Company does not believe that any of these
encumbrances or burdens will materially affect the Company's ownership or use of
its properties.

         Coleman County, Texas

This property was acquired from Erin Oil. The Company has disposed of and
written down its proved producing reserves for the Coleman County properties.
Specifically, the Carroll Hinds Leases and the Rufus Allen Leases were
terminated due to poor production and low potential for applying alternative
drilling technologies to boost production.


                                       24
<PAGE>

         Fisher County, Texas

This property was acquired from Erin Oil. The Fisher County properties account
for all of NEHI's production and proved producing reserves during the nine
months of 1998. However, production declined significantly on these properties
over the last twelve months from water breakthrough and mechanical well
problems. Several workovers were performed in April and May and the properties
are being evaluated for possible infill drilling potential. Long term plans are
to divest of operating rights to these properties and retain a non-operated
interest. It was determined in April 1998 that the leasehold interests to the
Fisher County properties had never been transferred from Erin Oil to NEHI. As a
result of the Company initiating the cause of action against Mr. Knollenberg, et
al, in July 1998 (See Part II - Other Information, Item 1 - Legal Proceedings),
Erin Oil executed and delivered the documents necessary to transfer the
interests to NEHI late in July, 1998. The documents as delivered were dated
April 1998.

         Scurry County, Texas

This property was acquired from Erin Oil. Management has finalized its
evaluation of the Scurry/McMullen County property and determined that
substantial lease impairment exists which has resulted in these reserves being
written off as of June 30, 1998.

         Walker County, Texas

This property was acquired from Erin Oil. This block consists of 179.57 acres
and is located in close proximity to successful horizontal Austin Chalk wells
drilled by offsetting operators. The Austin Chalk is at 13,000 feet deep in this
area, and can be a very prolific, high volume natural gas producer. The Company
is pursuing the sale of this project or industry partners for joint venture.
Drilling costs for this development have been estimated at $1,500,000 by the
Company.

         Wirt County, West Virginia

In 1997, the Company extended its rights to a 10,122 acre "Roberts" oil and
natural gas estate in Wirt County, West Virginia through a drilling farm-in
commitment which was made on behalf of NEHI by company affiliate HORSE. The
property is in close proximity to the Burning Springs Anticline where
hydrocarbons have been produced since the early twentieth century. The Company
has a two well drilling commitment on the property for the fourth quarter of
1998 and plans to target the Greenbriar and Pocano Injun Formations as well as
the Fractured Devonian Shales using high angle multilateral well technology. The
Company's affiliate company, HORSE, will be engaged in the drilling aspects of
the project.

The Company has received an oil and natural gas farm-in assignment of the first
200 acre "Roberts" tracts, and acquired a lease on a 102 acre contiguous tract,
all of which the Company subsequently assigned to HORSE. The Company retained a
lease payment and overriding royalty on this property.

The Company feels that this property has the potential, with independent oil
reserve calculations placing the proven reserves worth more than $17,000,000 as
of April, 1998, discounted at 10% over two thirds of well life. Additionally,
the nature of the Devonian Shale Reservoir, makes this an ideal 

                                       25

<PAGE>


location to utilize high angle and horizontal well technology. The Company has
agreed to joint venture with HORSE to drill and test high angle multilateral
potential in these formations.

The transactions between NEHI and HORSE were not at arms-length; however,
current Management believes that such transactions were necessary to pursue the
Company's strategy to refocus its efforts towards oil and natural gas
exploration and exploitation.

         Ritchie and Pleasants County, West Virginia

The Company did not include production or reserve numbers for its properties in
Richie and Pleasants County, West Virginia. The Company was transferred its
mineral rights leasehold interest in these wells during 1996 from Erin Gas, but
has been unable to accurately determine chain of title to these properties. Erin
Gas and RFBK Partners, which includes Mr. Bill Knollenberg as one of its
partners, from whom NEHI would have obtained its assignment of these leases, are
involved in a lawsuit with the previous owners of the properties. NEHI is
investigating the situation and will claim production and reserve rights at such
time that rightful title can be established, if at all.

Other

The Company intends to continue to focus on oil and natural gas investments for
1998 and the foreseeable future. New management, strategic lease acquisition,
strategic equity investments by the Company or into the Company and joint
venture drilling opportunities are all being pursued to improve NEHI's financial
condition. NEHI is focusing on affiliation with companies in the oil field
service sector of the industry. The affiliation with RST is in line with this
philosophy. NEHI is also focusing on acquisition of oil and natural gas reserves
that can be exploited through affiliation with HORSE, the horizontal technology
company affiliate. NEHI plans to increase reserve holdings over the coming
years, acquiring undeveloped reserves to increase company value. The Company
will pursue development of these reserves through affiliation and joint venture
relationships with other companies. This assumes that the Company can overcome
its lack of liquidity and need for capital while proceeding with the current
litigation.



                                       26
<PAGE>



                  NATIONAL EQUITIES HOLDING, INC,

PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS


On June 16, 1998 the Company filed a lawsuit in the 295th Judicial District for
the District Civil Court of Harris County, Texas, Case No. 98-28403, against
Bill Knollenberg, Doris Knollenberg, Bradley Knollenberg, Erin Oil Oil
Exploration Inc., and Gulf Minerals Exploration (collectively referred to as
"Defendants"). Bill Knollenberg was the former Chairman of the Board, and
remains a director of the Company. Doris Knollenberg is a former director of the
Company and Bradley Knollenberg is a former officer of the Company and is also a
director. The Company's complaint alleges, among other things, mismanagement of
the business and financial affairs, of and breach of fiduciary duty to, the
Company by Bill and Doris Knollenberg, self-dealing and wrongful conversion by
the Knollenbergs in the issuance of securities of the Company to themselves,
Erin Oil and Gulf Minerals for inadequate consideration. As a remedy for such
alleged acts, the Company has demanded in its petition that Bill Knollenberg be
removed from his position as a director of the Company, that an injunction be
issued against the Defendants preventing them from directly or indirectly
selling any securities of the Company held by them and that the Court, upon a
proper finding, cancel and rescind the securities of the Company determined to
be improperly issued to said Defendants. See Exhibit 99.1 hereto.

On July 10, 1998, the Defendants responded with a counterclaim in which, among
other things, (a) it is being demanded that the Company be compelled to permit
inspection of its books and records by the Knollenbergs, and (b) injunctive
relief is being sought to (i) prevent the Company from hiring legal and
accounting professionals; (ii) prevent the Company from having a board of
directors meeting without all members of the board being given proper notice and
an opportunity to participate; and (iii) declare a February 26, 1998 agreement
among Bill, Bradley and Doris Knollenberg, Jack Chance, Steve McLoughlin, George
Sutherland and Feroze Variava, individually, as valid and binding on the
Company. See Exhibits 10.7 and 99.2 hereto.

The Defendants have also filed a third-party petition in the right of NEHI as
shareholders and on behalf of all other shareholders alleging, among other
things, Jack Chance, Steve McLoughlin, George Sutherland, Feroze Variava, RST
and HORSE negligently failed to disclose materials facts and/or knowingly
provided NEHI with material misinformation which led to the acquisition of the
interests in both RST and HORSE by NEHI in issuing its securities to RST and
HORSE for inadequate or no consideration thereby. See Exhibit 99.2 hereto.

On July 23, 1998, the parties to this litigation entered into an Interlocutory
Agreement in which the issues relative to the inspection of books and records,
the holding of a board of directors meeting and its procedure, and the holding
of a shareholders meeting among other matters, were resolved (the "Interlocutory
Agreement"). See Exhibit 99.3 hereto.

October 30, 1998, issues arose under the Interlocutory Agreement concerning the
delay in filing the 1997 Form 10-KSB and the status of the stock certificate
representing the $1,000,000 shares of


                                       27
<PAGE>

NEHI Common Stock held by A. Bradley Knollenberg. The Court ordered (a) A.
Bradley Knollenberg to produce (i) an executed copy of a directors and officer's
questionnaire containing information necessary to complete the 1997 Form 10-KSB,
and (ii) the stock certificate evidencing the $1,000,000 shares of NEHI Common
Stock; and (b) the Company to file the Form 10-KSB with the Securities and
Exchange Commission during the week of November 16, 1998.

The Company cannot, as of this date, predict the outcome of this litigation.

On or about September 4, 1998, the Company was served with a petition wherein
Michael R. Silberstein had brought an action for damages in excess of $50,000 in
the 133rd Judicial District for the District Civil Court of Harris County,
Texas, Case No. 98-33207 against Erin Oil and NEHI (the "Defendants") alleging
that the Defendants (i) are in breach of contract for failure to deliver to
Plaintiff stock valued at $9,646; and (ii) fraudulently induced Plaintiff to
purchase said stock. The Company intends to vigorously defend against this
action.

On May 12, 1997, the Company, along with Bill M. Knollenberg, Erin Oil and Erin
Oil Gas, was named as one of the defendants in an action by Suzanne R. Wilkes in
the 165th Judicial District for the District Civil Court of Harris County,
Texas, Case No. 97-25432, in which she claimed damages in connection with her
purchase of debentures of Erin Oil. On May 5, 1998, a Mediation Settlement
Agreement was executed between the parties in which a judgment against Mr.
Knollenberg and Erin Oil was agreed. In addition, Ms. Wilkes was given the right
to convert the Erin Oil debentures she owned into 400,000 shares of NEHI common
stock. The Erin Oil debentures held by Ms. Wilkes have been converted to 400,000
shares which were issued out of the 2,913,200 shares previously been set aside
pursuant to an agreement between the Company and Erin Oil for the purpose of the
conversion of the outstanding Erin Oil debentures. See Note 6 to the Notes to
the Financial Statements and Management's Discussion and Analysis of Financial
Condition and Results of Operations.

ITEM 2.  CHANGES IN SECURITIES

               Not Applicable

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

The interest payment due August 25, 1998 on the 1997 NEHI Debentures has not
been paid. The Company and the known holders thereof have agreed to convert the
debentures to shares of Common Stock. It is anticipated that a majority of such
1997 NEHI Debentures will be converted during the fourth quarter of 1998. See
Note 6 to the Notes to the Financial Statements.

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

               Not Applicable


                                       28
<PAGE>


ITEM 5.  OTHER INFORMATION

The Company has not filed its Form 10-KSB, the Annual Report for the year ended
December 31, 1997 (the "Form 10-KSB"). It has been unable to file the Form
10-KSB due to the necessity to resolve certain financial and legal disclosure
items, some of which are the subject of litigation. See Part II, -- Other
Information, Item 1 -- Legal Proceedings. The Company is currently working with
its independent accountants and with special counsel to file such report on or
before November 20, 1998.

On August 4, 1998, the Board of Directors of the Company held a meeting in which
it was resolved that a Special Meeting of the Stockholders of the Company would
be held after the filing of NEHI's Form 10-KSB in compliance with the
Interlocutory Agreement and the Company's Amended and Restated Certificate of
Incorporation and Bylaws. It is anticipated that the Form 10-KSB will be filed
upon resolving these financial and legal disclosure items. The primary purposes
of the Special Meeting will be the election of directors and the ratification of
the Independent Certified Accountants retained to audit NEHI's financial
statements for the year ended December 31, 1998.


                                       29
<PAGE>

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

<TABLE>
         <S>     <C>              <C>

         (a)      Exhibits Required by Item 601 of Regulation SB

                  Exhibit 3

                           (i)     Articles of Incorporation*, **

                           (ii)    By-Laws*, **

                  Exhibit 4.1      Specimen Stock Certificate*, **

                  Exhibit 4.2      Convertible Bond/Debenture**

                  Exhibit 10.1     NEHI Incentive Stock Option Plan*

                  Exhibit 10.2     Agreement between NEHI and Erin Oil, dated July 30, 1996**

                  Exhibit 10.3     Option  Agreement with  Diversified  Service Brokers Inc.,  dated August
                                   9, 1996 *

                  Exhibit 10.4     Agreement between NEHI and HORSE, dated November 1, 1998**

                  Exhibit 10.5     Agreement between NEHI and RST, dated November 5, 1998**

                  Exhibit 10.6     Agreement between Erin Oil and NEHI, dated December 18, 1997**

                  Exhibit 10.7     Agreement  by and among Bill  Knollenberg,  Doris  Knollenberg,  Bradley
                                   Knollenberg,  Jack Chance, George Sutherland,  Feroze Variava, and Steve
                                   McLoughlin dated February 26, 1998**


</TABLE>


-----------
 * Previously filed as an Exhibit to the Company's Form 10-KSB, as amended, for
the Year Ended December 31, 1996 and incorporated herein by reference.

** Previously filed as an Exhibit to the Company's Form 10-QSB for the Quarterly
Period Ended March 31, 1998 and incorporated herein by reference.


                                       30
<PAGE>
<TABLE>
         <S>              <C>   


         Exhibit 27       Financial Data Schedule***

         Exhibit 99.1     Petition  of the  Company  Against  Billy  Knollenberg,  et  al.,  295th
                          Judicial District for the District Civil Court of Harris County,  Texas,
                          Case No. 98-28403 ("Case No. 98-28403")**

         Exhibit 99.2     Answer and Original Counterclaim in Case No. 98-28403**

         Exhibit 99.3     Interlocutory Agreement in Case No. 98-28403**

         Exhibit 99.4     Forward Looking Statements**

(b)      Reports on Form 8-K.

         The Form 8-K filed on July 22, 1998.



</TABLE>

--------------
***      Previously filed as an Exhibit to the Company's Form 10-QSB
         for the Quarterly Period Ended June 30, 1998 and incorporated
         herein by reference.


                                       31
<PAGE>

                                   SIGNATURES

         Pursuant to the requirements 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 EQUITIES HOLDINGS, INC.


DATE: November 16, 1998                 By:  /s/ George Sutherland         
      ------------------                     -----------------------------
                                             George Sutherland, President
                                              and Chief Operating Officer