NATIONAL EQUITIES HOLDINGS INC /DE/, 10KSB, 1998-11-20

NATIONAL EQUITIES HOLDINGS INC /DE/
10KSB, 1998-11-20
CRUDE PETROLEUM & NATURAL GAS

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UNITED STATES
SECURITIES EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------

FORM 10-KSB

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1997

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

Commission file number 033-19992-LA

NATIONAL EQUITIES HOLDINGS, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)

Delaware 76-0539342
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)

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

Issuer's telephone number, including area code:
Telephone:(281) 583-1280 Fax:(281) 583-9363

With copies to:
Jeffrey A. Koeppel, Esq. or Sheryl Jones Alu, Esq.,
Elias, Matz, Tiernan & Herrick, L.L.P.,
734 Fifteenth Street, N.W., Washington, DC 20005
Telephone: (202) 347-0300 Fax: (202) 347-2712

Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:

Common Stock par value $0.001 OTC Bulletin Board
(Title of each crass) (Name of each exchange on
which registered)

Indicate by check mark whether the Issuer (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-B is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part m of this Form 10-KSB or any
amendment to this Form 10-KSB. ( )

The Issuer's revenues for the year ended December 31, 1997 were
$165,140.00

The aggregate market value of the voting stock held by non-affiliates
of the Registrant as of November 10, 1998 was $9,333,625. For purposes of the
determination of the above-stated amount only, all directors, executive officers
and 5% or more shareholders of the Registrant are presumed to be affiliates.

As of November 10, 1998 there were 38,890,105 shares of the Company's
common stock outstanding.

Transactional Small Business Disclosure Format (check one):
Yes ____ No X

Documents Incorporated By Reference -- None

<PAGE>

NATIONAL EQUITIES HOLDINGS, INC.

INDEX TO FORM 10-KSB

Page

Glossary of Selected Oil and Natural Gas Terms....................1

PART I

Item 1. Description of Business...........................................4

Item 2. Description of Properties .......................................16

Item 3. Legal Proceedings................................................22

Item 4. Submission of Matters to a Vote of Security Holders .............24

PART II

Item 5. Market for Common Equity and Related Stockholder Matters........ 24

Item 6. Managements Discussion and Analysis or Plan of Operations .......25

Item 7. Financial Statements ........................................... 28

Item 8. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure ......................................28

PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act .............28

Item 10. Executive Compensation ..........................................30

Item 11. Security Ownership of Certain Beneficial Owners and Management...31

Item 12. Certain Relationships and Related Transactions ..................32

PART IV

Item 13. Exhibit List and Reports on Form 8-K ............................34

<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.

<PAGE>

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.

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 December 31, 1997, 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 "SEC"), 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 SEC rules,

<PAGE>

estimates have been made using constant oil and natural gas prices and operating
costs, at December 31, 1997 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.

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.

<PAGE>

PART I

Item 1. Description of Business

General

National Equities Holdings, Inc. ("NEHI" or the "Company") is engaged
in the oilfield service industry and is also an independent energy company
primarily engaged in the exploration, development and exploitation of oil and
natural gas properties. The Company does business under the name "NEHI
Petroleum". For the year ended December 31, 1997 and through November 10, 1998,
NEHI continued to experience losses in its 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 and the fact that the Company is presently unable
to honor its obligations to pay for certain services provided to the Company
during the past two fiscal years and through November 10, 1998 as well as its
inability to pay its current debts as they come due has raised serious concerns
regarding the Company's ability to continue as a going concern. See Part II,
Item 6 - Management's Discussion and Analysis or Plan of Operations and Note 18
to the Notes to the Financial Statements. Management has taken steps to overcome
these negative trends by acquiring interests in two limited partnerships, one of
which is to be a licensee of a patent pending for a down-hole drilling tool
known as a "rotary steerable device" (the "Device"). See Strategic Acquisitions
and Changes in Control. Management has also entered into farm-in agreements on
properties in West Virginia, which based upon independent reserve evaluations
performed in April, 1998, are believed to contain substantial oil and natural
gas reserves. See Part I, Item 2 - Description of Properties.

The Company's headquarters were located at 616 FM 1960 West, Suite 222,
Houston, Texas until the relocation thereof in the Spring of 1998 to 13700
Veteran's Memorial Drive, Suite 410, Houston, Texas 77014. The telephone number
of the Company is (281) 583-1280 and its facsimile number is (281) 583-9363.

Business Strategy

The Company's business strategy is to identify and develop proven oil
and natural gas prospects to achieve reserve growth, increase cash flow, and
enhance earnings. As a means to accomplish this, the Company's focus is to
exploit proven prolific oil and natural gas reserves quickly and efficiently
through the use of advanced technology and innovation. The Company also is
targeting oil and natural gas leases where the application of re-entry,
horizontal and multilateral technology can be successfully applied; however, its
present cash deficiency may hamper this strategy.

The Company's focus will also continue to be on acquisition of upstream
oil and natural gas service business interests that specialize in areas of
"enabling technology" and have long term growth potential. Recent advances in
certain key technologies enable operators to produce reserves much

<PAGE>

more efficiently than the past. This enables oil companies to compete during
periods of depressed oil and natural gas pricing. These technologies also allow
operators to produce fields that would have otherwise been uneconomical,
increasing production as well as proven reserve estimates. The recent
affiliation with Rotary Steerable Tools (USA) LP ("RST-USA") is in line with
this philosophy. See Strategic Acquisitions and Changes of Control. Rotary
steerable tools, 3D/4D seismic, multi-lateral completion systems and coiled
tubing applications are a few examples of "enabling technology".

Strategic Acquisitions and Changes of Control

NEHI was initially organized in Delaware on November 24, 1987 under the
name "AsquithVenture Associates, Inc." On July 1, 1988, the Company entered into
an Agreement and Plan of Reorganization with the shareholders of Amadeus
Corporation, a Nevada corporation incorporated in April 1987, to acquire all of
the issued and outstanding shares of common stock of Amadeus. On October 27,
1988, the Company changed its name to "Amadeus Holdings, Inc." and adopted its
present name on January 20, 1993. The business purpose of the Company was to
market a subsurface irrigation system, a family educational game and real estate
development.

On August 9, 1996, the business focus of the Company changed to the oil
and natural gas industry with the acquisition by the Company of the oil and
natural gas reserves of Erin Oil Exploration, Inc., a Texas corporation, ("Erin
Oil") from Mr. Bill Knollenberg in exchange for 13,122,045 shares of common
stock, par value $0.001 per share, of NEHI ("Common Stock"). These 13,122,045
shares of NEHI Common Stock had a fair market value of $6,854,486 as of the date
of the acquisition and were issued to 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
Notes 3 and 21 to the Notes to the Financial Statements, Part I, Item 3 - Legal
Proceedings and Exhibit 10.2 hereto.

From August 1996 until November 1997, the Company was under the
management and control of Mr. Bill Knollenberg, primarily as Chairman, Director
and Chief Executive Officer. 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 I, Item 3 - Legal
Proceedings.

The general partner of HORSE is Horizontal Oil Recovery Specialists,
LLC ("HR LLC"). The other limited partners of HORSE are Messrs. George
Sutherland, Feroze Variava, Steve

<PAGE>

McLoughlin and Jack Chance, who serve as directors of and maintain senior
management positions with the Company. Messrs. Sutherland, Variava, McLoughlin
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 RST-USA, a Texas limited partnership. 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-USA. Former management of NEHI simultaneously sold five percent of NEHI's
interest in RST-USA to an unaffiliated third party for $250,000 in cash, whereby
the Company's interest in RST-USA 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-USA.

The general partner of RST-USA is Rotary Steerable Tools LLC, a Texas
limited liability company("RST LLC"). The other limited partners of RST-USA are
Messrs. Jack Chance, Chairman and Chief Executive Officer of the Company, Steve
McLoughlin, the Company's Treasurer and Executive Vice President of Oilfield
Services, George Sutherland, President and Chief Executive Officer of the
Company and Feroze Variava, the Company's Secretary and Executive Vice President
of Operations. Messrs. Chance and McLoughlin are the inventors and assignors of
the intellectual property related to the Device. See Part I, Item 3 - Legal
Proceedings, Notes 14 and 21 to the Notes to the Financial Statements 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.,
("RST-BVI"), a company intended to be the holder of the patent and worldwide
licensor of the patent technology for the Device. The "Device, used in
connection with directional 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 conventional, directional,
horizontal and multilateral drilling. The Device has not yet been offered
commercially. RST-USA is to be 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

<PAGE>

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 approximately
nine feet long, which allows survey instrumentation to be placed closer to the
drill bit, and the quality of formation evaluation information is expected to be
better because the drilling mud will have had less time to contaminate the rock
formation. The Device is scheduled to be among the first rotary steerable tools
to enter the market. According to industry authority, Baker Hughes Inteq, rotary
steerable technology represents an advancement in drilling technology through a
step function change and has demonstrated gains in drilling efficiency.

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-USA and field testing is anticipated to begin in the first
quarter of 1999.

In addition, the RST-USA/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-USA and
HORSE, as directors and officers of the Company. 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-USA/HORSE transactions, the Company and its current
management have refocused the Company as an exploitation and oilfield service
company.

The Company has not been able to meet its financial obligations to
either HORSE or RST-USA and has yet to realize cash flow from either HORSE or
RST-USA. 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-USA
that NEHI was in breach of the November 5, 1997 agreement by not meeting the
financial obligations of the contract. RST-USA has not revoked the Company's
interest in RST-USA, and has been negotiating with the Company on ways to
resolve the breach.

<PAGE>

companies located in all countries. In the United States, RST-USA will receive
an operating license from RST-BVI to lease the Device. Pursuant to the "roll
up," the present limited partners of RST-USA, which include NEHI, will be given
the opportunity to surrender and convert their limited partnership interests
into an equity position in RST-BVI. Proportional to the worldwide market value
of RST-BVI, the partnership interest in RST-USA will be rolled up in proportion
to each partner's holding therein. Every percentage (1%) interest held in
RST-USA will be converted to an interest of 0.25% in RST-BVI. The basis for this
ratio is determined by industry custom and practice with RST-BVI representing
100% of the available market globally and the value of the RST-USA market being,
at best, 25% and, perhaps, even as low as 15% of such market. No absolute market
value has yet been established as this determination will be proportionate to
the market share achieved, but the total available global market is estimated by
leading industry sources to be in excess of $1.1 Billion.

Current management of the Company has indicated that it will accept the
terms of the roll up, because the interest in RST-BVI represents an interest in
the world wide market for use of the Device rather than its present limited
partnership interest solely in RST-USA, which will only benefit from use of the
Device in the United States. Management believes the equity interest in RST-BVI
represents a more stable base of investment by reducing the exposure created by
the volatility of the domestic oilfield market. At present, the United States
oil market is in a depressed state, and there is every likelihood that this
state of affairs may continue for the foreseeable future.

With respect to NEHI's present 20% limited partnership interest in
RST-USA, upon completion of the conversion, it would hold 5% of the common stock
of RST-BVI. In addition, for those partners who have paid their initial capital
contribution for their limited partnership interest in full, an additional roll
up interest will be converted. Since November of 1997, NEHI has invested
$310,000 of the $1,000,000, agreed to by NEHI and RST-USA on November 5, 1997
and therefore will not be entitled to the additional roll up percentage. Due to
the related interest between the Management of the Company and management of
RST-USA and RST-BVI, the election to convert the limited partnership interests
of RST-USA held by NEHI cannot be viewed as an arms length decision, and current
Management, therefore, will be seeking approval of the "roll up" and conversion
of NEHI's interest in RST-USA by the shareholders of the Company at its next
shareholders meeting.

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, A. 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

<PAGE>

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 I, Item 3 - Legal Proceedings.

Competition in Oil and Natural Gas Exploration, Development and Production

The business of exploring, developing and producing oil and natural gas
is highly competitive. The Company competes with numerous firms and other
individuals in its activities, including major oil firms and other independent
exploration and producing firms, many of which have substantially greater
financial resources, management and technical skills, and facilities than those
of the Company. Major and independent oil and natural gas companies and
individuals actively bid for desirable producing properties as well as
unexplored oil and natural gas prospects and compete for equipment, services,
and labor required to explore, develop and operate such properties. The Company
faces intense competition from other energy firms attempting to form exploration
groups to provide funding to complete desired exploration, including drilling.
In the opinion of the Company, the decision of a firm to participate in a
proposed exploration group is based on the estimated likelihood of finding oil
and natural gas in commercial quantities, the cost of exploration and, if
warranted, development, the size of the potential reservoir, the interest to be
earned by completing specified exploration or drilling or providing necessary
funding, alternative opportunities for the employment of limited capital, the
exploration philosophy or area of interest of potential participants, the
reputation of the Company, and other factors, many of which are beyond the
control of the Company.

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 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.

Geographic Focus

In 1997, the Company acquired a 10,122 acre oil and natural gas farm-in
in Wirt County, West Virginia. 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 as part of the
farm-in agreement and plans to target the fractured Devonian Shales. The Company
plans to exploit the Devonian Shale reservoir utilizing high angle, multilateral
drainholes.

<PAGE>

In addition to the Company's recent acquisition of acreage in West
Virginia, the Company's oil and natural gas development efforts are focused
primarily on the Gulf Coast and Upper Gulf Coast salt basins of the southeast
United States and the Permian Basin area of west Texas and southeast New Mexico.
Management's experience in many of the major oil and natural gas producing
basins around the world allows the Company the flexibility of pursuing other
producing opportunities elsewhere as they are presented.

The Company's primary efforts will be to assemble leases on well
documented oil and natural gas development or exploration prospects conducive to
its core business of re-entry horizontal and multilateral drilling assuming it
is able to obtain the capital resources to finance such operations. The Company
will obtain industry or non-industry participants to aid in exploitation of the
drilling prospects. The Company intends to retain lease payments, overriding
royalty interests and non-operating working interests.

Well Operations

The Company operates 12 onshore wells in which it owns a majority or
all of the working interest. Operations are conducted pursuant to joint
operating agreements. Presently, such operations are being conducted primarily
from the Fisher County, Texas properties. See Part I, Item 2 - Description of
Properties. The Company considers these joint operating agreements to be on
terms customary within the industry. The operator of an oil and natural gas
property supervises production, maintains production records, employs field
personnel, and performs other functions required in the production and
administration of such property. The compensation paid to the operator for such
services customarily varies from property to property, depending on the nature,
depth, and location of the property being operated.

Acquisition, Development and Other Activities

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.
See Notes 1 and 11 to the Notes to the Financial Statements. Abandonments of oil
and natural 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.

Marketing of Production

The Company's production is marketed to third parties consistent with
industry practices. Typically, oil is sold at the wellhead at field posted
prices and natural gas is sold under contract at a negotiated price based upon
factors normally considered in the industry, such as price regulations,

<PAGE>

distance from the well to the pipeline, well pressure, estimated reserves,
quality of natural gas and prevailing supply and demand conditions.

Funding of Business Activities

During the first seven months of 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 SEC by filing this Form 10-KSB for the year ended 1997. See Part I, Item 3
Legal Proceedings.

The Company's liquidity requirements for 1998 are anticipated to be
$300,000. The Company presently exhibits serious cash flow problems and
therefore its 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 natural 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.

History of Substantial Losses

The Company has experienced significant losses during 1997 and
continues to do so during 1998, primarily due to lack of oil and natural gas
production revenue and the write off of oil reserves. The Company also
experienced losses in connection with it interests in the fields of agricultural
water irrigation and computer software. See Notes 11 and 12 to the Notes to the
Financial Statements. The Company is no longer involved in those lines of
business. In addition, this continuing cycle of increased operating losses has
raised concerns regarding the Company's ability to continue as a going concern.
In order to attain profitability, the Company must drill successful oil and
natural gas wells and exploit its drilling technology. There can be no assurance
that the Company's business will generate sufficient cash flow in an amount
sufficient to enable the Company to make necessary expenditures.

Limited Operating History: No Assurance of Successful Implementation of Business
Strategy

The Company became active in the oil and natural gas industry in 1996;
thus, the Company has had limited experience exploring, developing and producing
oil and natural gas. The Company's future success depends upon its ability to
find or acquire additional oil and natural gas reserves that are economically
recoverable and exploit its present lease acreage. Except to the extent the
Company

<PAGE>

conducts successful exploration or development activities or acquires properties
containing Proved Reserves, the Proved Reserves of the Company will generally
decline as they are produced. The decline rate varies depending upon reservoir
characteristics and other factors. The Company's future oil and natural gas
reserves and production, and, therefore, cash flow and income are highly
dependent upon the company's level of success in exploiting its current reserves
and acquiring or finding additional reserves. The business of exploring for,
developing or acquiring reserves is capital intensive. To the extent cash flow
from operations continues to be reduced and external sources of capital remain
limited or unavailable, the Company's ability to make the necessary capital
investments to maintain or expand its asset base of oil and natural gas reserves
will be impaired. There can be no assurance that the Company's planned
development projects and acquisition activities will result in significant
additional reserves or that the Company will have success drilling productive
wells at economic returns to replace its current and future continued
production. The Company believes that it now has adequate management depth;
nonetheless, the continued success of the Company is dependent on its ability to
finance its activities. Presently, the Company has liquidity and severe cash
flow problems. There can be no assurance that the Company will be able to raise
funds to finance its activities, nor can there be assurance that any such
financing will be available on terms acceptable to the Company if at all. Should
sufficient capital not be available, the Company may not be able to continue to
implement its strategy. In addition to the inherent risks in the oil and natural
gas business, the Company faces all the risks inherent in the growth of a
developing business. Therefore, securities of the Company must be regarded as
being at high risk with all the unforeseen costs, expenses, problems and
difficulties to which the Company is subject.

Risk of Oil and Natural Gas Exploration, Development, Production and Marketing

Oil and natural gas exploration, development, production and marketing
have inherent risks. There can be no assurance that the Company can find
commercially exploitable reserves of oil and natural gas, nor can there be any
assurance that the Company will be able to successfully develop commercial
reserves, if discovered. There can be no assurance that the Company will be able
to maintain production, nor successfully market production. The Company believes
that its management possess the skills to address the inherent risks of the oil
and natural gas industry.

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 obtain additional
capital on attractive terms is also substantially dependent upon oil and natural
gas prices. Historically, the markets for oil and natural gas are subject to
wide fluctuations in response to: (i) relatively minor changes in the supply of,
and demand 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

<PAGE>

foreign government relations, the price and availability of alternative fuels
and overall economic conditions.

Uncertainty of Estimates of Reserves and Future Net Cash Flows

This report of the Company contains estimates of its oil and natural
gas reserves, which have been prepared by certain independent petroleum
consultants. There are numerous uncertainties inherent in estimating quantities
of Proved Reserves of oil and natural gas and in projecting future rates of
production and the timing of development expenditures, including many factors
beyond the Company's control. The estimates herein are based on various
assumptions, including, for example, constant oil and natural gas prices,
operating expenses, capital expenditures and the availability of funds, and,
therefore, are inherently imprecise indications of future net cash flows. Actual
future production, cash flows, taxes operating expenses, development
expenditures and quantities of recoverable oil and natural gas reserves may vary
substantially from those assumed in the estimates. Any significant variance in
these assumptions could materially affect the estimated quantity and value of
reserves set forth herein. Additionally, the Company's reserves may be subject
to downward or upward revision based upon actual production performance, results
of future development and exploration, prevailing oil and natural gas prices and
other factors, many of which are beyond the Company's control. See Part I, Item
2 - Description of Properties.

Product Development Risks of RST-USA and Protection of Proprietary Technology.

The Company owns a 20% interest in RST-USA, a Texas limited
partnership, which is to be the licensee in the United States for certain rotary
steerable drilling tool technology. The Company cannot state that others will
not independently develop alternative proprietary methods for similar types of
processes and apparatus or that the Company may not be required to obtain
licenses under the patent rights of others. The Company has not received notice
that any of its apparatus or processes infringe any patent. The patent pending
for the Device, held by RST-BVI, was filed originally pending under the Patent
Cooperation Treaty in the United Kingdom. Applications for individual patents
have been applied for in 23 countries, including the United States.

Costs of Compliance with Governmental Regulations

Governmental regulations govern matters related to drilling.
Governmental authorities have the power, under various circumstances, to enforce
compliance, and violators may be subject to civil or criminal penalties. Private
individuals may also have the right to sue to enforce compliance with certain of
the governmental requirements. Operating permits are generally required by
federal and state agencies for drilling. The Company may from time to time
become subject to governmental enforcement proceedings and resulting fines or
other sanctions and may incur penalties. Such expenditures can be substantial
and accordingly could have a material adverse effect on the Company's financial
condition.

<PAGE>

Competition

The Company competes with oil and natural gas producers that have
significantly larger financial resources than the Company. No assurance can be
given that the Company will be able to successfully compete with such companies.

Operating Risks and Possible Insufficiency of Insurance

The business of the Company exposes it to various risks, including
claims for damage to property, injuries to persons, negligence and professional
errors or omissions in the planning or performing of its services and providing
of its products, which claims could be substantial. There can be no assurances
that the Company will continue to be able to obtain adequate or required
insurance coverage as its business grows or, if obtainable, purchase it at
reasonable rates. If the Company has difficulty in obtaining or maintaining such
coverage, it could be at a competitive disadvantage with other companies, it may
become exposed to significant uninsured risks and losses, and/or may be unable
to continue certain of its operations. Accordingly, there can be no assurance
that liabilities that may be incurred by the Company will be covered by
insurance or that the dollar amount of such liabilities which may be covered by
insurance will not exceed the Company's policy limits. A partially or completely
uninsured claim, if successful, could have a material adverse effect on the
Company's financial condition and results of operations.

Lack of Diversification: Risks of Investing in the Oil and Natural Gas Industry

The Company operates primarily in the oil and natural gas industry. The
current plan of operation calls for expansion within, but does not anticipate
diversification beyond, this industry. The plan of operation, therefore,
subjects the Company to the economic fluctuations within this industry and
increases the risk associated with its operations. An investment in any aspect
of the oil and natural gas industry is speculative and historically has involved
a high degree of risk. The continued success of the Company will depend on
various factors over which the Company has little or no control.

Dependence on Management

The Company is dependent upon the time, talent and experience of
Messrs. Jack Chance, George Sutherland, Feroze Variava and Steve McLoughlin.
Although each has a significant equity ownership in the Company, the Company
through RST-USA and HORSE does not presently have employment agreements with
such individuals. The loss of the services of any of them, for any reason, could
have a material adverse effect on the Company. The Company does not currently
maintain key-man life insurance on any of its employees.

<PAGE>

Future Need for Additional Personnel

As a result of a recent restructuring of the management and operations
of the Company, the Company has obtained the services of new personnel to
perform certain functions important to the long-term development of the Company,
including accounting, finance and quality control functions. The Company may
hire additional staff with the special skills and education necessary for
important Company functions. Competition for such personnel is intense, and
there can be no assurance that the Company will be successful in attracting and
retaining such personnel.

Convertible Debentures

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. See Note 6 to the
Notes to the Financial Statements. 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.

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 Note 6 to the Notes
to the Financial Statements and 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 later 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 NEHI Common Stock will be released from the escrow. As of November 10,
1998, 2,820,675 shares of Common Stock had been exchanged for Erin Oil
Debentures and the balance of the 2,913,200 shares of Common Stock was held in
escrow. In addition, the transaction had the effect

<PAGE>

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, and 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 Company and such holders have agreed to convert such
debentures to Common Stock, which is anticipated to occur during the fourth
quarter of 1998. Upon conversion, the outstanding debentures will represent
282,258 additional shares of the Company's Common Stock. See Note 21 to the
Notes to the Financial Statements and Exhibit 4.2 hereto.

During the first seven months of 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 has been discontinued until the
Company has fulfilled its reporting requirements with the SEC.

Employees

As of December 31, 1997 and November 10, 1998, the Company employed ten
full-time persons and eight full-time persons, respectively. The Company's
employees are not represented by a union.

Item 2. Description of Properties

Properties

Fisher County, Texas

The Company has four primary properties in Fisher County, Texas. They
are located in different lease blocks along the western flank of the Bend Arch
and on the Eastern Shelf of the Permian Basin. These properties were acquired
from Erin Oil. The Fisher County properties account for all of NEHI's production
and proved producing reserves during the first nine months of 1998.

<PAGE>

Production has declined significantly on these properties from water
breakthrough and mechanical well problems. Well 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 I,
Item 3 - 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. The properties are listed below:

The Pardue-Holly Lease - The Pardue-Holly lease consists of 640 acres.
On this lease, the Flippen Lime and the Swastika Sand are capable of production.
The company also operates two saltwater disposal wells on this lease.

The Neversuch Lease - The Neversuch lease has 156 acres with two wells
now producing from the Flippen Lime.

The Young Lease - The Young lease has one producing well on 640 acres.
On this lease, the Flippen Lime, Swastika Sand, Canyon Sand and Noodle Creek
Sand formations all have potential for production. One well is currently
producing from the Flippen Lime and other zones are being investigated for
possible drilling projects.

The Scifres Lease - The Scifres lease currently has one well on this 40
acre lease. Formations that are capable of producing in the area are the Flippen
Lime at approximately 3,100 feet, the Swastika Sand at 3,700 feet, and the
Canyon Sand at 4,300. One well is on the Scifres lease and is currently shut in
pending evaluation.

Gross proved producing reserves on these Fisher County properties total
85,700 barrels of oil ("bbls").

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 existed which 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.
Additional acreage is being pursued which is contiguous with this lease to
complete a larger, horizontal drillable gas unit. The Company is pursuing the
sale of this project or industry

<PAGE>

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 lease assignment on 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 the "Roberts" 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
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 customary
practice within the oil and natural gas industry and necessary to pursue the
Company's strategy in refocusing its efforts towards oil and natural gas
exploration and exploitation.

Ritchie County and Pleasants County, West Virginia

The Company did not include production numbers or reserve numbers for
its properties in Ritchie and Pleasants Counties, West Virginia. The Company
received its interest in these wells during 1996 from Erin Gas Producers, Inc.
The Company has not been able to accurately determine the chain of title and
ownership of these properties as had been represented by previous management.
The Company is investigating this matter. The Company believes that Erin Gas
Producers, Inc. and RFBK partners, from whom the Company would have obtained
assignment of these properties, are involved in litigation with the former
owners of these properties. If the Company establishes that it has ownership of
these properties, then the Company would make claims on production and reserves.

<PAGE>

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.

Reserves

In general, estimates of economically recoverable oil and natural gas
reserves and of the future net revenues therefrom are based upon a number of
variable factors and assumptions such as historical production from the subject
properties, the assumed efforts of regulation by governmental agencies and
assumptions concerning future oil and natural gas prices and future operating
costs, all of which may vary considerably from actual results. All such
estimates are to some degree speculative and classifications of reserves are
only attempts to define the degree of speculation involved. For these reasons,
estimates of the economically recoverable oil and natural gas reserves
attributable to any particular group of properties, classifications of such
reserves based on risk of recovery and estimates of the future net revenues
expected therefrom, prepared by different engineers or by the same engineers at
different times, may vary substantially. Therefore, the actual production,
revenues, severance and excise taxes, development and operating expenditures
with respect to the Company's reserves will likely vary from such estimates, and
such variances could be material.

In accordance with applicable requirements of the SEC, the estimated
discounted future net revenues from estimated proves reserves are based on
prices and costs as of the date of the estimate unless such prices or costs are
contractually determined at such date. Actual future prices and costs may be
materially higher or lower. Actual future net revenues also will be affected by
factors such as actual production, supply and demand for oil and natural gas,
curtailments or increases in consumption by natural gas purchasers, changes in
governmental regulations or taxation and the impact of inflation on costs.

Acreage

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 in most bearing interests
customary in the industry. The Company does not believe

<PAGE>

that any of these encumbrances or burdens will materially affect the Company's
ownership or use of its properties.

Reserves Reported to Other Agencies

During 1997, there were no estimates of total, proved net oil or gas
reserves filed with or included in reports to the SEC or any other Federal
authority or agency.

Production

The production of crude oil by NEHI represents one fiscal year (1/1/97
thru 12/31/97) and is shown below as required by SPAS No. 69. Total annual gross
production was 5,374 bbls. Total net production was 3,754 bbls.

Total Gross Total Net Average Effective
(8/8ths bbls) Production Sales Lifting Cost
Lease Name Production Fiscal 1997 Price ($/bbl) ($/bbl)
- ------------ ------------- ----------- ------------- ------------

Scifres 258 196 20.36 6.64

Neversuch B 2,475 1,708 19.97 11.67

Neversuch C 1,678 1,159 19.97 8.3

Pardue Holly C 497 343 19.81 53.84

Pardue-Holly 56 39 20.32 218.68

Young 298 226 18.85 6.89

Carrol Hinds (1) 112 83 19.75 490.61

- -------------------
(1) During 1997, the Company abandoned the Carrol Hinds lease.

<PAGE>

Productive Wells and Acreage

Production declined in 1997. As of December 31, 1997, the total gross
and net productive wells and developed acreage owned by NEHI is shown in the
table below by geographical region as required by SPAS No. 69. Several of the
wells listed below are shut-in pending evaluation for workover.

Gross
Developed Gross Net Gross Net
Acres On Well Working Revenue Acreage Drilled
Lease Name Lease Name Interest Interest To Well Acreage
- --------------------------------------------------------------------------------
TEXAS

Neversuch 156.00 #1B 0.69 0.314 20.00 7.70
#3B 0.69 0.314 20.00 7.70
#3C 0.69 0.314 20.00 4.40

Pardue & 640.00 #1C 0.69 0.690 20.00 13.80
Holly #2C 0.69 0.690 20.00 13.80
#3C 0.69 0.690 20.00 13.80
Pardue #6 0.69 0.690 290.00 200.10
Holly #1 0.69 0.690 290.00 200.10

Scifres 40.00 Scifres #1 0.76 0.760 40.00 30.40

Young 640.00 Young #7 0.76 0.740 640.00 486.40

Ball 5.00 #2A 1.000 0.800 5.00 4.00

Campbell 5.00 #1 1.000 0.800 5.00 4.00

Cokeley 5.00 #1 1.000 0.800 5.00 4.00

Freshwater 5.00 #1 1.000 0.800 5.00 4.00

Jemison 5.00 #1 1.000 0.800 5.00 4.00

Richards 40.00 #2 1.000 0.800 40.00 32.00

TOTALS 1,685.78 16,218 12,360 1,485.00 1,062.20

<PAGE>

Producers, Inc. and RFBK partners, from whom the Company would have obtained
assignment of these properties, are involved in litigation with the former
owners of these properties. If the Company establishes that it has ownership of
these properties, then the Company would make claims on production and reserves.

Undeveloped Acreage

As of December 31, 1997, the total gross and net undeveloped acreage
owned by NEHI is shown in the table below, by geographical region. The total
gross undeveloped acreage owned by NEH1 is 10,501.57, while the total net
undeveloped acreage is 8395.87.

Gross Net Gross Net
Working Revenue Undeveloped Undeveloped
Lease Name County Interest Interest Acres On Lease Acres On Lease
- ---------- ------ -------- -------- -------------- ---------------

TEXAS
McMullen/
Brunson Scurry 1.000 0.800 200.00 160.00

Smithers Walker 1.000 0.770 179.57 138.27

WEST VIRGINIA
Roberts Wirt 1.000 0.800 10,122.00 8.097.60

TOTALS 10,501.57 8.395.87

Drilling Activity

No new wells were drilled during 1997; however, test drilling of the
Wirt County, West Virginia property is anticipated for the last quarter of 1998,
pursuant to the farm-in agreement made on behalf of NEHI by HORSE.

Item 3. 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, A. 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 A. 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

<PAGE>

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, A. 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-USA 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-USA and HORSE by NEHI in issuing its
securities to RST-USA 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, the
filing of certain reports with the SEC and the holding of a shareholders meeting
among other matters, were resolved. See Exhibit 99.3 hereto.

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

On October 30, 1998, issues arose under the Interlocutory Agreement
concerning the delay in filing the 1997 Form 10-KSB with the SEC and the status
of the stock certificate representing the $1,000,000 shares of 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 SEC during the week of November 16,
1998. See Exhibit 99.5 hereto.

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. See Exhibit 99.6 hereto.

<PAGE>

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. These 400,000 shares were to be issued out of the
2,913,200 shares, which had 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 4. Submission of Matters to a Vote of Security Holders.

None.

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.

Limited Trading Market

The Company's common stock is traded in the over-the-counter market and
is quoted on the Over-the-Counter ("OTC") Bulletin Board of the National
Association of Securities Dealers, Inc. under the symbol "NEHI." Quotations
prior to July 1996 are not available as the Company's common stock was traded
only in the pink sheets and the primary market maker of the Company's common
stock did not publish its prices in the pink sheets; therefore, there is no
reliable information from which to present data as to market activity prior to
mid-1996. The following table sets forth for the calendar period indicated the
high the low bid prices for the Company's common stock as quoted on the OTC
Bulletin Board. The prices shown reject inter-dealer prices, without retail mark
up, mark-down or commission and may not represent actual transactions:

BID PRICE
---------------
High Low

Fiscal Year Ended December 31, 1996
- -----------------------------------
Third Quarter 2.00 1-1/2
Fourth 2.00 1-1/2
Fiscal Year Ended December 31, 1997
- -----------------------------------
First Quarter 1-3/8 1.00
Second Quarter 7/8 5/16
Third Quarter 3/8 7/32
Fourth Quarter 1-5/8 3/8

<PAGE>

The Company has 49,000,000 shares of common stock authorized, of which
there were 35,633,780 shares outstanding and 339 shareholders of record on
December 31, 1997.

On November 10, 1998 there were 38,890,105 shares of the Company's
common stock outstanding and approximately 455 holders of record thereof. The
Company's transfer agent is Harris Trust and Savings Bank located in Houston
Texas.

Dividend policy

The Company has not paid a cash dividend on its Common Stock and does
not expect to pay such a dividend in the foreseeable future.

Item 6. Managements Discussion and Analysis or Plan of Operations.

General

The company experienced dramatic changes during the fiscal year ended
1997. Declining production, severe cash flow shortages and a lack of experienced
staff resulted in poor financial performance in 1997. This prompted a company
restructuring plan for 1998. The plan involved a change in company control, a
change in management, divestiture of uneconomical oil and natural gas
properties, a significant write off of impaired assets and a change in company
focus, all of which have occurred.

Results of Operations
Year ended December 31, 1996 and 1997

The Company's operations resulted in a net loss of $2.3 million for the
year ended December 31, 1997 representing a $1.1 million increase from the net
loss of $1.2 million for the same period in 1996, primarily due to the Coleman
County, Texas property abandonment. The company continues to evaluate our
remaining properties for asset impairment and further abandonments may be
required. In that regard, the company subsequently abandoned the Scurry County,
Texas leases in April, 1998. See Notes 11 and 12 to the Notes to the Financial
Statements.

The Company's revenues totaled $165,000 for the year ended December 31,
1997 compared to $50,000 for the same period in 1996, an increase of $115,000.
Of such amount, $34,000 represented well administrative fees and $131,000
represented oil sales primarily from the Fisher County, Texas properties.

The cost of revenue increased to $141,000 for the year ended December
31, 1997 from $32,000 for the year ended December 31, 1996. This increase of
$109,000 was the result of an increase in lease operating expenses.

<PAGE>

General and Administrative expenses decreased $172,000 from $385,000
for the year ended December 31, 1996 to $223,000 for the same period in 1997.
This decrease was the result of steps taken by management to control overhead
costs. In 1997, $80,000 was accrued as accounting and legal fees for preparation
of the 1996 Transitional Form 10-KSB, the 1996 Form 10-KSB and 1997 quarterly
reports filed with the SEC and preparation of the Series A Convertible Debenture
as well as, the documents and defense associated with litigation (see Part I,
Item 3 - Legal Proceedings) and the 1997 audit report.

Erin Oil reassumed the liability on December 18, 1997 for $3,468,800 of
its 8% convertible debentures, which had been transferred to NEHI as part of the
1996 exchange Erin Oil reserve for NEHI Common Stock by Mr. Bill Knollenberg.
This removed the Company liability for these debentures and decreased interest
expense from $29,000 in 1996 to $0 in 1997. The Company determined in December,
1997 that there were lease abandonments and expirations which amounted to
$2,057,819; no similar expense was taken during 1996.

Liquidity and Capital Resources

Cash Flow from Operating Activities

Cash flow from operations for fiscal year end 1997 was $89,926 which
was a substantial improvement over 1996 where cash flow was $547,412.

Cash Flow from Investing Activities

The company invested $250,000 in RST-USA in November, 1997. The Company
is unable to meet all of its financial obligations to either HORSE or RST and
has yet to realize cash flow from either although it believes its investments in
both of these entities will produce earnings in the future. The Company was
notified in December 1997 by RST-USA that NEHI was in breach of the November 5,
1997 agreement by not meeting the financial obligations of the contract and has
been negotiating with the Company on ways to resolve the breach and retain an
interest in RST.

In that regard, RST-USA has proposed a "roll up" of its limited
partnership interests into RST-BVI, a British Virgin Island corporation formed
after RST-USA in order to utilize tax advantages enabled by the laws of that
jurisdiction. Following the formation of RST-BVI, Messrs. Chance and McLoughlin
assigned the patent to the Device to RST-BVI on September 23, 1998. RST-BVI will
hold the patent, production and operating rights for the Device for its use by
companies located in all countries. In the United States, RST-USA will receive
an operating license from RST-BVI to lease the Device. Pursuant to the "roll
up," the present limited partners of RST-USA, which include NEHI, will be given
the opportunity to surrender and convert their limited partnership interests
into an equity position in RST-BVI. Proportional to the worldwide market value
of RST-BVI, the partnership interest in RST-USA will be rolled up in proportion
to each partner's holding therein. Every percentage (1%) interest held in
RST-USA will be converted to an interest of 0.25% in RST-BVI. The basis for this
ratio is determined by industry custom and practice with RST-BVI representing
100% of the available market globally and the value of the RST-USA market being,
at best, 25% and, perhaps, even as low as 15% of such market. No absolute market
value has yet been established as this determination will be proportionate to
the market share achieved, but the total available global market is estimated by
leading industry sources to be in excess of $1.1 Billion.

<PAGE>

Cash Flow from Financing Activities

The Company secured capital to fund lease acquisitions, drilling
projects, purchase equity interests in affiliate companies and to take care of
general and administrative costs through the private placement offering of the
1998 NEHI Debentures. All of the 1998 NEHI Debenture holders have been converted
to 958,618 shares of NEHI Common Stock. This offering has been discontinued
until the Company has fulfilled its reporting requirements with the SEC. See
Part I (Item 1 - Description of Business, Convertible Debentures and, Item 3 -
Legal Proceedings).

<PAGE>

Plan of Operations

The Company is focusing on oil and natural gas investments for 1998 and
the foreseeable future. Strategic lease acquisitions and equity investments by
or into the Company and joint venture drilling opportunities are all being
pursued to improve NEHI's financial condition. 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. The Company's focus will also continue to be on acquisition
of upstream oil and natural gas service business interests that specialize in
areas of "enabling technology" and have long term growth potential. Recent
advances in certain key technologies enable operators to produce reserves much
more efficiently than the past. This enables oil companies to compete during
periods of depressed oil & natural gas pricing. These technologies also allow
operators to produce fields that would have otherwise been uneconomical,
increasing production as well as proven reserve estimates. The affiliation with
RST-USA 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 and
will typically retain lease payments, override royalty interests and
non-operating working interest positions. The continued success of the plan
assumes the Company can overcome its lack of liquidity and need for capital.

In addition, 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 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.

Forward-Looking Information

The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements made by the Company in its
disclosures to the public. There is certain information contained herein, in the
Company's press releases and in oral statements made by authorized officers of
the Company which are forward-looking statements, as defined by such Act. When
used herein, in the Company's press releases and in such oral statements, the
words "estimate," "project," "anticipate," "expect," "intend," "believe,"
"plans," and similar expressions are intended to identify forward-looking
statements. See Exhibit 99.4 for a discussion of the risks and uncertainties
which could cause actual results to differ materially from the forward-looking
information.

<PAGE>

Item 7. Financial Statements and Supplementary Data

The information required by this Item 7 is included in this report as
set forth in the "Index to Financial Statements on page F-1.

Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure

On June 17, 1998, Alvin L. Dahl & Associates, Inc. resigned as the
Company's independent auditors as reported in the Form 8-K Current Reported
filed with the SEC on July 22, 1998. Current Management of the Company has
engaged Weinstein, Spira & Company, P.C., Houston, Texas as its independent
auditors for the year ended December 31, 1998.

PART III

Item 9. Directors and Executive Officers of the Registrant

Name Age Position Since
- ---- --- -------- -----
<S> <C> <C> <C>
Jack Chance 46 Director, Chairman of the Board and Chief
Executive Officer 1997

George Sutherland 35 Director, President and Chief Operating Officer 1997

Feroze Variava 43 Director, Secretary and Executive Vice President --
Operations 1997

Steve McLoughlin 39 Executive Vice President -- Oilfield Services, Treasurer 1997
and Chief Financial Officer

Bill M. Knollenberg(1) 72 Director 1996

A. Bradley Knollenberg(1) 33 Director 1997

</TABLE>

The Articles of Incorporation provide that the Board of Directors is to
be divided into three classes having staggered terms of three years. At the
present time, the Board terms are not classified or staggered.

- --------------
(1) Bill M. Knollenberg is the father of A. Bradley Knollenberg.

Business Experience of Officers and Directors

Jack Chance. For the past 26 years, Mr. Chance has been involved in the
drilling industry with such companies as Howell, Wilson Downhole,
Eastman-Christensen, Smith International, Haliburton, and Schlumberger. Mr.
Chance has expertise in horizontal and multilateral drilling. He

<PAGE>

is one of the inventors of the Rotary Steerable Device. He has experience in
milling techniques, whipstocks, horizontal and multi-lateral drilling, open hole
sidetracking, air drilling and geothermal applications.

George Sutherland. Mr. Sutherland is a graduate of the University of
Texas, Austin, Texas (1984) with a degree in geology. From 1984 through 1997 he
worked for Schlumberger in a variety of technical positions as a manager. Mr.
Sutherland has expertise in horizontal and multilateral drilling. He has
experience in re-entry, horizontal, multi-lateral well technology, geosteering
and deep water pore pressure analysis. Most recently, he managed Middle East
business for Schlumberger-Anadrill including the well planning, execution and
evaluation of many horizontal, re-entry, multi-lateral and short radius wells.

Feroze Varzava. Mr. Variava is a graduate of the University of
Sheffield, Sheffield, England (1977) with a degree in geology. From 1978 through
1997 he worked for Schlumberger in a variety of technical positions as a
manager. Mr. Variava has expertise in horizontal-and multilateral drilling. He
was with Schlumberger-Anadrill in various field and management positions,
including well construction and special projects. He has experience in planning
and supervising standard deviated wells, horizontal wells, and short radius
multi-lateral wells.

Steve McLoughlin. Mr. McLoughlin is a graduate of the University of
Keele, Keele, England (1981) with a degree in law. From 1988 through 1997 he was
involved with several major oil and natural gas industry service companies
including Baker Hughes, Smith International, Haliburton and Schlumberger. Mr.
McLoughlin has expertise in horizontal and multilateral drilling. He is one of
the inventors of the Rotary Steerable Device. He has experience in completion
systems, air-flush, DITI, foam drilling, gyros, steering tools, MWD/LWD systems
and all facets of directional drilling.

Bill M. Knollenberg. In 1982, Mr. Knollenberg began selling oil and
natural gas ventures. In 1995, Gulf Minerals, a general partnership of which Mr.
Knollenberg, Doris C. Knollenberg and A. Bradley Knollenberg are partners,
acquired controlling interest in Erin Oil with Mr. Knollenberg assuming the
position of President. In August of 1996, Gulf Minerals became the largest
shareholder of NEHI and Mr. Knollenberg assumed the position of Director of
NEHI. In August 1997, Mr. Knollenberg resigned as director of Erin Oil. Bill M
Knollenberg is the father of A. Bradley Knollenberg.

A. Bradley Knollenberg Mr. A. Bradley Knollenberg is the son of Mr.
Bill M. Knollenberg. From 1984 through 1989, he worked as a design consultant
for Sound and Lighting Systems. Since 1989 he founded and operated several
companies including Waste Water Disposal and Environmental Water Treatment. He
is a director of PK Oil and Gas Corporation.

Compliance with Section 16(a) of the Exchange Act.

Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires the Company's officers, directors and persons who own
more than 10% of the Company's

<PAGE>

Common Stock to file reports of ownership and changes in ownership with the SEC
and the National Association of Securities Dealers, Inc. Officers, directors and
greater than 10% stockholders are required by regulation to furnish the Company
with copies of all forms they file pursuant to Section 16(a) of the Exchange
Act. The Company knows of no person who owns 10% or more of the Company's Common
Stock.

None of the present or former officers or directors have filed the
reports required by Section 16(a) of the Exchange Act for the most recent fiscal
year or prior fiscal years.

Item 10. Executive Compensation

During 1997, 1996, and 1995, no executive officer or director of the
Company received cash compensation, and no director, officer or employee of the
Company received cash compensation exceeding $100,000.

Year Salary All Other

Jack Chance 1997 10,000 - 0 -
1996 - 0 - - 0 -
1995 - 0 - - 0 -

Bill M. Knollenberg (1) 1997 15,850 - 0 -
1996 - 0 - - 0 -
1995 - 0 - - 0 -

- -------------------
(1) In 1997, Mr. Bill M. Knollenberg received 885,052 shares of the
Company's common stock as payment-in-kind for services, Doris
Knollenberg, a former director of NEHI, received 1,000,000 shares of
the Company's common stock as payment-in-kind for services and A.
Bradley Knollenberg received 1,000,000 shares of the Company's common
stock as payment-in-kind for services. These transactions have 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
Rule 144 promulgated under the Securities Act of 1933, as amended,
create additional valuation problems. See Part I, Item 3 - Legal
Proceedings, Notes 14 and 21 to the Notes to the Financial Statements.

<PAGE>

Item 11. Security Ownership of Certain Beneficial and Management.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of November 10, 1998, by: (i) each
person known by the Company to be the beneficial owner of more than 5.0% of the
Company's Common Stock, (ii) each of the Company's directors, (iii) each of the
Company's executive officers and (iv) all executive officers and directors as a
group. Except as otherwise noted, the named beneficial owner has sole voting and
investment power.

Name and Address of Shares Beneficially Owned
Beneficial Owner as of November 10, 1998
---------------- -----------------------
Number Percent
------ -------
Gulf Minerals Exploration
21818 North Freeway
Spring, Texas 77373 10,421,324(2) 26.85

Horse Energy LP
3 Felicity Trace
The Woodlands, Texas 77381 7,868,594(3) 20.28

Rotary Steerable Tools (U.S.A.) L.P.
4708 Pecan Grove
San Antonio, Texas 78222 6,473,522(4) 16.68

Jack Chance
5215 Wincroft Court
Houston, Texas 77069 20,000(3)(4) 0.05

George Sutherland
3 Felicity Trace
The Woodlands, Texas 77381 --(3) --

Feroze Variava
8327 Domer Drive
Houston, Texas 77379 --(3) --

Steve McLoughlin
403 NASA Road, #381
Webster, Texas 77598 20,000(4) 0.05

Bill M. Knollenberg
21818 North Freeway
Houston, Texas 77373 2,145,052(2,5) 5.53

A. Bradley Knollenberg
21818 North Freeway
Spring,Texas 77373 1,000,000(2) 2.58

Directors and Executive Officers
as a Group (six persons) 27,948,492(1) 72.02

- -------------------
(1) Based upon information furnished by respective individuals and
entities. The information is not necessarily indicative of beneficial
ownership for any other purpose. Under regulations promulgated pursuant
to the Exchange Act, shares are deemed to be beneficially owned by a
person if he or she directly or indirectly has or shares; (i) voting
power, which includes the power to vote or to direct voting of the
shares, or (ii) investment power, which includes the power to dispose
or to direct the disposition of the shares.

(Footnotes continued on following page)

<PAGE>

(2) Gulf Minerals Exploration is a general partnership, of which Bill M.
Knollenberg is a 20% partner, Doris C. Knollenberg, Bill Knollenberg's
wife, is a 20% partner, and A Bradley Knollenberg, Bill Knollenberg's
son, is a 60% partner.

(3) HORSE limited partnership whose general partner is HR LLC, which is
owned by George Sutherland, Jack Chance and Feroze Variava, and whose
limited partners are George Sutherland, Jack Chance, Feroze Variava,
Steve McLoughlin and NEHI. Based on agreements between the general and
limited partners, the shares of NEHI Common Stock are held by HORSE for
the benefit of George Sutherland (3,250,511 shares or 8.36%), Jack
Chance (1,342,572 shares or 3.45%), and Feroze Variava (3,275,511
shares or 8.42%).

(4) RST is a limited partnership whose general partner is RST LLC, which is
owned by Jack Chance and Steve McLoughlin, and whose principle limited
partners are Jack Chance, Steve McLoughlin, George Sutherland, Feroze
Variava and NEHI. Based on agreements between the general and limited
partners, these shares of NEHI Common Stock are held by RST-USA for the
benefit of Jack Chance (3,223,011 shares or 8.29%) and Steve McLoughlin
(3,250,511 shares or 8.36%).

(5) Includes 350,000 shares owned by Erin Oil, of which Bill M. Knollenberg
is a controlling person, and 1,000,000 shares owned by Mr. Bill
Knollenberg's wife.

Item 12. Certain Relationships and Related Transactions.

On August 9, 1996, the Company acquired the proved oil and natural gas
reserves of Erin Oil, having a discounted cash value of $12,464,584.00, and
issued 21,510,418 shares of its Common Stock to Gulf Minerals. As a part of this
transaction, the Company assumed the liability for the Erin Oil Debentures in
the amount of $2,770,000. Subsequently, the value of the transaction was lowered
to the carrying value of the existing wells plus the purchase cost of the
reserves for the twenty well program less the Erin Oil Debentures outstanding.
The Common Stock issued to Gulf Minerals was reduced to 13,122,045 shares. See
Part I, Item 1 - Description of Business, Strategic Acquisitions and Changes of
Control, and Convertible Debentures and Item 3 - Legal Proceedings and Notes 3,
6 and 21 to the Notes to the Financial Statements.

The acquisition of control of NEHI in 1996 utilized a trust so that
there would not be issues related to (1) control of the assets before and after
the transaction, and (2) related party issues. Subsequently, a legal opinion had
been received which indicated that the trust for the Knollenberg family was, in
fact, a Texas general partnership of which Bill M. Knollenberg and his family
members are partners. The transaction was an exchange of nonmonetary assets by
each party, i.e., common stock was exchanged for oil and natural gas reserves
and the assumption of debt.

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 later 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

<PAGE>

Stock will be released from the escrow. As of November 10, 1998, 2,820,675
shares of Common Stock had been exchanged for Erin Oil Debentures and the
balance of the shares 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. See Exhibit
10.6.

Ms. P.A. Hartley, former Chairman of the Board of Directors, received
180,000 shares of common stock for services rendered on behalf of the Company
for the eight month period from January 1, 1996 through August 9, 1996, under an
agreement authorized by the Board of Directors at a meeting of the Board of
Directors, January 6, 1997.

HORSE is a limited partnership whose general partner is HR LLC, which
is owned by George Sutherland, Jack Chance and Feroze Variava, and whose limited
partners are NEHI, and George Sutherland, Jack Chance, Feroze Variava and Steve
McLoughlin, all of whom are Directors of the Company. Messrs. Sutherland,
Chance, McLoughlin and Variava collectively own 69% of Horse Energy LP, and they
control the general partner of HORSE.

RST-USA is a limited partnership whose general partner is RST LLC,
which is owned by Jack Chance and Steve McLoughlin, and whose principle limited
partners are NEHI, Jack Chance, Steve McLoughlin, George Sutherland and Feroze
Variava, all of whom are Directors of the Company. Messrs. Chance and McLoughlin
collectively own 75% of RST-USA, and they control the general partner of RST
LLC.

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
totalling $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 Notes 18
and 21 to the Notes to the Financial Statements and Part I, Item 3 - Legal
Proceedings.

In July, 1997, the Company issued 1,000,000 shares of common stock to
A. Bradley Knollenberg. In December, 1997, the Company issued 885,052 shares of
common stock to Bill Knollenberg, and 1,000,000 shares of common stock to Doris
Knollenberg, a former director of NEHI, all in connection with services rendered
to the Company. New management of the Company took operational control as of
February 26, 1998.

<PAGE>

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 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 M. Knollenberg 885,052 December 9, 1997 Unknown

These transactions are the subject of litigation between the Company
and the Knollenbergs as well as Erin Oil and Gulf Minerals. See Notes 18 and 21
to the Notes to the Financial Statements, Part I, Item 3 - Legal Proceedings and
Exhibit 10.2 hereto.

Item 13. Exhibits and Reports on Form 8-K,

(a) Exhibits Required by Item 601 of Regulation SB

<TABLE>
<S> <C>
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-USA, 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, A. 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.

<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**
Exhibit 99.5 Agreement-Order in Case No. 98-28403***
Exhibit 99.6 First Amended Original Petition of Michael R. Silberstein Against Erin Oil et
al. 133rd Judicial District for the District Civil Court of Harris County, Texas,
Case No. 98-33207***
</TABLE>

- -------------------
*** Filed herewith.

(b) Reports on Form 8-K: None

<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 EQUITIES HOLDINGS, INC.

By: /s/ Jack Chance
-----------------------------
Jack Chance
Chairman of the Board and
Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

/s/ Jack Chance November 20, 1998
- ------------------------------------------------
Jack Chance
Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer)

/s/ Steve McLoughlin November 20, 1998
- ------------------------------------------------
Steve McLoughlin
Executive Vice President and Treasurer
(Principal Financial and Accounting Officer)

/s/ George Sutherland November 20, 1998
- ------------------------------------------------
George Sutherland
Director, President and Chief Operating Officer

/s/ Feroze Variava November 20, 1998
- ------------------------------------------------
Feroze Variava
Director, Executive Vice President and Secretary

November ___, 1998
- ------------------------------------------------
Bill M. Knollenberg
Director

November ___, 1998
- ------------------------------------------------
A. Bradley Knollenberg
Director

<PAGE>

NATIONAL EQUITIES HOLDINGS, INC.

FINANCIAL STATEMENTS

December 31, 1997 and 1996

<PAGE>

NATIONAL EQUITIES HOLDINGS, INC.

FINANCIAL STATEMENTS

For the Year Ended December 31, 1997 and 1996

Auditors'Report.....................................................F-1

Financial Statements:

Balance Sheets - Assets.............................................F-2

Balance Sheets - Liabilities and Stockholders' Equity...............F-3

Statements of Income................................................F-4

Statements of Stockholders' Equity..................................F-5

Statements of Cash Flows............................................F-6

Supplemental Schedule of Non-cash Investing and Financing
Activities..........................................................F-7

Notes to the Financial Statements................................F-8-18

Supplemental Information...........................................F-19

<PAGE>

Independent Auditor's Report

The Board of Directors and Stockholders
National Equities Holdings, Inc.

We have audited the accompanying balance sheets of National Equities Holdings,
Inc. as of December 31, 1997 and 1996, and the related statements of operations,
stockholders' equity, and cash flows for the years 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 audits.

We conducted our audits in accordance with generally accepted auditing
standards. 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, based on our audit, the financial statements referred to above
present fairly, in all material respects, the financial position of National
Equities Holdings as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.

Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental information as required
by Statement of Financial Accounting Standards No. 69, is presented for purposes
of additional analysis and has not been subjected to the auditing procedures
applied in the audit of the basic financial statements, and, accordingly, we
express no opinion on it.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 20 to the
financial statements, the Company has sustained substantial operating losses and
abandonment in its oil & gas operations which raises substantial doubt about its
ability to continue as a going concern. Management's plans concerning this
matter are also discussed in note 20. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.

As discussed in Note 21 to the financial statements, on June 16, 1998, the
Company filed a lawsuit against a Director, stockholder, and related parties
alleging mismanagement and other allegations. Additionally, it was determined
that Convertible Debentures had been issued but not recorded in the Company's
records.

/s/ ALVIN L. DAHL & Associates, PC

Dallas, Texas

April 8, 1998, except for Note 21
as to which the date is September 3, 1998

<PAGE>

NATIONAL EQUITIES HOLDINGS, INC.

BALANCE SHEETS

ASSETS

December 31, December 31,
1997 1996
----------- -----------

Current Assets:
Cash $ 62,014 $ 3,480
Accounts Receivable 24,833 37,554
Due from Erin (Note 16) 0 342,506
----------- -----------

Total Current Assets 86,847 383,560
----------- -----------

Proved Oil and Gas Properties
Net of Depreciation
(Note 3) 206,010 1,050,964
Unproved Oil and Gas
Properties (Note 16) 1,816,670 2,876,300
Wells and Related Equipment 211,855 390,385
----------- -----------

Oil and Gas Properties 2,234,535 4,317,649
----------- -----------

Other Assets:

Investment in RST/HORSE 2,562,000 0
----------- -----------

Total Other Assets 2,562,000 0

Total Assets $ 4,883,382 $ 4,701,209
=========== ===========

The accompanying notes are an integral part
of these financial statements

F-2
<PAGE>

NATIONAL EQUITIES HOLDINGS, INC.

BALANCE SHEETS

LIABILITIES and STOCKHOLDERS' EQUITY

December 31, December 31,
1997 1996
----------- -----------
Current Liabilities:

Accounts Payable (Note 17) $ 65,787 $ 151,727
Accrued Interest 0 135,213
Note Payable-Stockholder (Note 18) 278,460 0
----------- -----------
Total Current Liabilities 344,247 286,940

ERIN Convertible Debentures (Note 6) 0 3,468,800
NEHI Convertible Debentures (Note 21) 120,000 0
-----------
Total Liabilities 464,247 3,755,740
----------- -----------
Stockholders' Equity:

Preferred Stock
1,000,000 shares authorized at
$.001 par value; none issued
and outstanding 0 0

Common Stock
49,000,000 shares authorized at
$.001 par value; 35,633,780 issued
and outstanding at December 31,
1997; 14,833,630 issued
and outstanding at December 31,
1996 (Note 9) 32,788 14,873

Paid In Capital 9,076,896 3,365,617

Accumulated (Deficit) (4,690,549) (2,434,821)
Total Stockholders' Equity (Note 10) 4,419,135 945,469
----------- -----------
Total Liabilities and
Stockholders' Equity $ 4,883,382 $ 4,701,209
=========== ===========

The accompanying notes are an integral part
of these financial statements

F-3

<PAGE>

NATIONAL EQUITIES HOLDINGS, INC.

STATEMENTS OF OPERATIONS

For the Year Ended December 31, 1997 and 1996

December 31, December 31,
1997 1996
------------ ------------
INCOME:
Sales $ 165,140 $ 50,040
Less: Lease Operating
Expenses (140,543) (31,573)
------------ ------------
Gross Profit 24,597 18,467

General & Administrative
Expenses (222,506) (384,897)
------------ ------------
Net Income (Loss)
from operations (197,909) (366,430)

OTHER REVENUES:

Refund of Prepaid Legal 10,756

OTHER EXPENSES:

Interest Expense (28,913)
Write Off of Assets (12) (744,524)
Abandonments & Expirations (2,057,819) 0

EXTRAORDINARY ITEM:

Forgiveness of Debt (15) 5,365
------------

NET INCOME (LOSS) $ (2,255,728) $ (1,123,746)
============ ============

Weighted Average
Number of Shares 19,541,295 3,326,144

Income (Loss) Per Share $ (0.115) $ (0.338)

The Accompanying notes are an integral part
of these financial statements

F-4
<PAGE>

NATIONAL EQUITIES HOLDINGS, INC.

STATEMENT OF STOCKHOLDERS' EQUITY

For the Two Years Ended December 31, 1997

<TABLE>
<CAPTION>
Accum- Stock-
Common Stock Paid In ulated holders'
Shares $ Capital (Deficit) Equity
------------ ------ ------- --------- --------
<S> <C> <C> <C> <C> <C>
Balance, Jan. 1, 1996 1,231,585 1,271 1,980,956 (1,311,075) 671,152
---------- ------ --------- ---------- ----------
January 6, 1996
Stock issued for services 180,000 180 26,820 -0- 27,000
August 9, 1996
Stock issued for cash 300,000 300 131,700 -0- 132,000
August 9, 1996
Stock issued for assets 13,122,045 13,122 1,226,141 -0- 1,239,263
Income (Loss) 1996 -0- -0- -0- (1,123,746) (1,123,746)
---------- ------ --------- ---------- ----------

Balance, Jan. 1, 1997 14,833,630 14,873 3,365,617 (2,434,821) 945,669

May 9, 1997

Conversion 579,903 580 744,420 -0- 745,000

Stock for services 2,885,052 -0- -0- -0- -0-

Nov--Dec, 1997

Stock for Assets 14,422,045 14,422 2,297,578 -0- 2,312,000

Conversion 713,312 713 803,583 -0- 804,296

Conversion Escrow 2,199,838 2,200 1,865,698 -0- 1,867,898

Income (Loss) 1997 -0- -0- -0- (2,255,728) (2,255,728)
---------- ------ --------- ---------- ----------
Balance, Dec 31, 1997 35,633,780 32,788 9,076,896 (4,690,549) 4,419,135
</TABLE>

The accompanying notes are an integral part
of these financial statements

F-5
<PAGE>

NATIONAL EQUITIES HOLDINGS, INC.

STATEMENTS OF CASH FLOWS

For the Years Ended
----------------------------
December 31, December 31,
1997 1996
----------- -----------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) (2,255,728) (1,123,746)
Adjustments to reconcile Net Income to
Net cash provided by Operating Activities:
Depreciation, Depletion
& Amortization 26,346 31,230
(Increase)/Decrease in Receivables 310,762 (380,060)
Increase in Payables (93,912) 151,727
Increase(Decrease) in
Accrued Interest (135,213) 28,913
Asset Writeoff 2,057,819 744,524
---------- ----------
Net Cash Provided (used) by
Operating Activities (89,926) (547,412)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) in Capital
Expenditures 0 (206,516)
Investment in HORSE/RST (250,000) 0
---------- ----------
Net Cash Provided by (used) by
Investing Activities (250,000) (206,516)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (Decrease) in
Note Payable 278,460 (38,526)
Increase (Decrease)
in Loan Payable 0 (34,912)
Increase in Conv. Debentures 120,000 698,800
Issuance of Common Stock
Paid In Capital 0 132,000
---------- ----------
Net Cash Provided by
Financing Activities 398,460 757,362
---------- ----------
Net Increase (Decrease) in Cash 58,534 3,434
Cash Balance, Beginning 3,480 46
---------- ----------
Cash Balance, Ending 62,014 3,480
========== ==========

The accompanying notes are an integral part
of these financial statements

F-6
<PAGE>

NATIONAL EQUITIES HOLDINGS, INC.

SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES

For the Year Ended December 31, 1997

Issuance of Common Stock for assets $ 2,312,000
(Limited Partnership Interest)

Issuance of Common Stock for Debentures $ 3,468,800

Lease Abandonment and Expirations $ 2,057,819

Stock for Services $ -0-

The accompany notes are an integral part
of these financial statements

F-7
<PAGE>

NOTES TO FINANCIAL STATEMENTS

December 31, 1997
And December 31, 1996

NOTE 1: Summary of Significant Accounting Policies

This summary of significant accounting policies of NATIONAL EQUITIES HOLDINGS,
INC. 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. These
accounting policies conform to generally accepted accounting principles and have
been consistently applied in the preparation of the financial statements.

a. Organization and Business Activities:

Asquith Venture Associates, Inc. was formed on November 24, 1987 with a name
change to Amadeus Holdings, Inc. on October 27, 1988. Corporate stock was issued
for the organization of several business ventures, all of which were
unsuccessful. On January 20, 1993, there was a name change to National Equities
Holdings, Inc. The business prupose was to market a subsurface irrigation system
(Patent number 5,205,487), a family educational game (Copyright Txu 516862) (See
Notes 2,13, and 14), future real estate construction and development, and oil
and gas production and development.

b. Depreciation, amortization and depletion:

Depreciation will be provided by the straight-line method at rates calculated to
amortize cost over the estimated useful lives of respective assets. Upon sale or
retirement of the respective assets, the related cost and accumulated
depreciation will be eliminated from the accounts, and gains or losses will be
reflected on the income statement. Repair and maintenance expenditures, not
anticipated to extend original asset lives will be charged to expenses as
incurred. Amortization will be provided by the straight line method when
products are brought to market. Depreciation and depletion (including provisions
for future abandonment and restoration costs) of all capitalized costs of proved
oil and gas producing properties, except mineral interests, will be expensed
using the unit-of-production method by individual fields as the proved developed
reserves are produced. Depletion expenses for capitalized costs of proved
mineral interest are recognized using the unit-of-production method by
individual fields as the related proved reserves are produced. Periodic
valuation provisions for impairment of capitalized costs of unproved mineral
interests will be expensed.

F-8

<PAGE>

c. 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.

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 gas ventures will be
accounted for using the "Successful Efforts" basis of accounting.

Revenue Recognition:

The Company will recognize revenue from oil produced at the point of sale--that
is, when the oil is run from the tanks. Gas is not stored on the lease; thus,
revenue will be recognized at the point of production and sale because they are
the same.

Oil & Gas Properties (Successful Efforts):

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

Unproved oil and gas properties that are individually significant will be
periodically assessed for impairment of value, and a loss will be recognized at
the time of impairment by providing an impairment allowance. Other unproved
properties will be amortized based on the Company's experience of successful
drilling and average holding period. Capitalized costs of producing oil and gas
properties, after considering estimated dismantlement and abandonment costs and
estimated salvage values, will be depreciated and depleted by the
unit-of-production method. Support equipment and other property and equipment
will be 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 will be eliminated
from the property accounts, and the resultant gain or loss will be recognized.
On the retirement or sale of a partial unit of proved property, the cost will be
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 will be 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 will be treated as a reduction of the cost of the interest
retained.

F-9

<PAGE>

Oil and gas leases held for resale:

The Company will acquire certain oil and gas leases for the purpose of
contributing the leases to affiliated oil and gas partnerships of for the
purpose of selling the leases to industry partners for cash consideration. Such
leases held for resale, or subsequently acquired, will be periodically reviewed
to determine if they have been impaired. If impairment exists, a loss will be
recognized by providing an impairment allowance. Abandonment's of oil and gas
leases held for resale will be charged to expense. With respect to leases
transferred to affiliated oil and gas partnerships, the determination of
recovery of total costs will be made on a partnership-by-partnership basis.

Capitalized interest:

The Company will capitalize interest on expenditures for significant exploration
and development projects while activities are in progress to bring the assets to
their intended use.

Management Fees:

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

NOTE 2: Copyright & Patent Costs:

Copyright Txu 516862, issued for the family educational game and Patent Number
5,205,487 issued for the subsurface irrigation system was test marketed by the
Company. It was determined that a market for each product existed; however lack
of funding kept the Company from aggressively marketing these products. Stock
and notes were issued to purchase these products. At December 31, 1996, it was
determined that the family educational game was out of date and would not be
cost effective to update. The patent was discovered to be a license, which the
inventor refused to renew. The cost of these assets was charged to expense in
1996.

NOTE 3: Asset Acquisition

On August 9, 1996, the Company acquired the Oil and Gas Reserves of Erin Oil
Exploration, Inc. 21,510,418 shares were issued to Erin Oil Exploration, Inc.
for oil and gas reserves having a discounted cash value of $12,464,584.00. As a
part of this transaction, the Company assumed the liability for Convertible
debentures issued by Erin in the amount of $2,770,000. Subsequently on September
9, 1996, the transaction value was reduced to $6,854,486.00 and the 21,510,418
share certificate was cancelled. At the request of Erin, the company issued Gulf
Minerals Exploration with 13,122,045 shares for the transaction value of
$6,854,486.00. As a part of this transaction, the Company assumed the liability
for Convertible debentures issued by Erin in the amount of $2,770,000.

F-10

<PAGE>

On November 1 and November 5, 1997 respectively, the Company acquired a 25%
Limited Partnership interest in each of HORSE ENERGY LP and ROTARY STEERABLE
TOOLS (USA) LP. NEHI issued a total of 14,422,025 shares of common stock to
HORSE ENERGY LP and ROTARY STEERABLE TOOLS (USA) LP in return for its limited
partnership interest. Horse is an exploration and development entity and NEHI
agreed to invest, as a non-operating partner, $5,000,000 in drilling ventures to
be assembled and operated by HORSE. HORSE will retain overrides, carried working
interests, and fees normally provided to operators under usual industry
practices. NEHI and/or its affiliates will retain 20% of all funds raised to
cover overhead and sales costs. RST is developing a device generally described
as "A down hole adjustable device for trajectory control in the drilling of
deviated wells" which is patent pending. 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. NEHI subsequently sold a portion of its
interest in RST (USA) L.P., leaving NEHI a 20% interest in RST (USA) L.P.

The transaction 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 4: Risks and Uncertainties:

Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.

Concentrations: The Company has acquired Proved Reserves in the oil and gas
industry. This will place the majority of the Company's assets in this industry.

NOTE 5: Change in Control:

The RST/HORSE ENERGY transaction resulted in a change of control of the Company.
Bill Knollenberg was the only serving officer and Director, and appointed four
individuals as Directors to serve until the annual stockholder's meeting. The
Directors of the Company are as follows:

Directors:

Bill M. Knollenberg
A. Bradley Knollenberg
Jack Chance
George Sutherland
Feroze Variava
Steve McLoughlin

F-11

<PAGE>

NOTE 6: Convertible Debentures:

HISTORICAL BACKGROUND: As a part of the acquisition of the oil and gas reserves
from Erin Oil Exploration, Inc., the Company assumed liability for Convertible
Debentures previously issued by Erin and outstanding as of September 30, 1996.
NEHI also assumed liability for the Erin Gas Producers, Inc debentures which
post dated the acquisition transaction date. The debentures were issued at
various times during 1996 at an interest rate of 8% with interest accruing and
due and payable on January 5,1997 and with interest and principal due on January
5, 1998. ($595,000 of debentures was sold carrying a contract interest rate of
10%) At the first anniversary date of the debenture, the debenture may be
convertible into common stock of the Company. The conversion ratio varies from
2.0 to 0.75 per share of common stock, depending upon the amount of the
debenture. A principal amount of $5,000,000 was authorized by the ERIN Board of
Directors, of which, $2,770,000 was sold and outstanding at September 30, 1996.
An additional $698,000 of debentures were sold by Erin Gas Producers Inc. from
October 1 through December 31, 1996, and subsequently assigned to the company,
bringing the total amount of outstanding debentures to $3,468,800. If converted
on the call date, the outstanding debentures will represent 3,048,638 additional
shares of the Company's Common Stock.

1997 TRANSACTIONS: In early 1997, the Erin Board of Directors discontinued the
sale of convertible debentures. On May 27, 1997, the NEHI Board approved the
conversion of $745,000 of debentures into 597,903 shares of NEHI common stock.
On December 18, 1997, the Company entered into agreements with Erin Oil
Exploration, Inc., and Bill Knollenberg which transferred the liability for the
balance, as of December 16, 1997, of the outstanding convertible debentures and
accrued interest to Bill Knollenberg and Erin Oil Exploration, Inc. The Company
agreed to hold in escrow for Erin, 2,913,200 shares of the Company's issued and
outstanding common stock. This stock will be used by ERIN for the express
purpose of retiring the outstanding debenture debt. ERIN, Gulf Minerals and Bill
Knollenberg assumed any additional liability for the debentures. As ERIN retires
the debentures, a corresponding amount of common stock will be released. As of
December 31,1997, 713,362 shares of common stock had been exchanged for
debentures and the balance of the stock was held in escrow. The 2,913,200 shares
of common stock transferred to escrow satisfied NEHI's liability for the
debentures.

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,

F-12

<PAGE>

which was granted as a result of the Erin Reserve transaction, is the only
currently outstanding stock option. The Company has not any compensation based
stock options to employees.

NOTE 8: Income Taxes:

Income tax expense (benefit) is comprised of current tax expense, deferred tax
expense and Benefits from net operating loss carryforward. The Company has
available at December 31, 1997; unused net operating loss carrforwards that may
provide future tax benefits. However, since doubt exists as to the actual future
benefit to be realized, an allowance has been made and no deferred tax asset,
relating to the net operating loss carryforward, has been reported in these
financial statements. The Company does not have any deferred tax liabilities as
of the date of these financial statements.

12/31/97 12/31/96 12/31/95
-------- -------- --------
Non Current Asset (Liability)

Benefit of NOL Carry forward $ 4,810,232 $ 2,403,391 $ 1,311,075

Valuation Allowance (4,810,232) (2,403,391) (1,311,075)

NOTE 9: Stockholder's Equity:

The total number shares of all classes of authorized capital stock is 50,000,000
shares of which 1,000,000 shall be Preferred Stock, $.001 par value per share
and 49,000,000 shares of Common Stock, $.001 par value per share. As of December
31, 1997, there is no Preferred Stock issued and outstanding and 33,473,992
shares of Common Stock are issued and are outstanding. An addition 2,199,838
shares of common stock were issued as part of the debenture assumption
transaction with ERIN. The contract required that these shares be escrowed and
released as needed. This raises the total number of shares of common stock
issued and outstanding to 35,673,830 at December 31, 1997.

NOTE 10: Industry Segment Information:

The oil and gas drilling and production segment was acquired in August of 1996
with production assumed October 1, 1996, although new management has determined
that the production assumed was never properly and fully transferred to NEHI.
(See NOTE 21) The major business is production and sales of oil and gas from
existing wells and drilling of exploratory oil and gas wells. This will be done
for the Company's own account, for outside companies, or for oil and gas
partnerships.

Although the Company acquired limited partnership interests in two companies
during 1997 (see notes 3 & 14), no income was recorded which would be attributed
to these companies. The drilling tool segment, when operational, will have
reportable segment information in future years.

F-13

<PAGE>

NOTE 11: 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.

Previous Company management had taken the position that no impairment exists to
the patent/license and copyright as of prior balance sheet dates. At December
31, 1996, management determined that the copyright was out of date and the
patent was not valid. Both assets were written off in the 1996 year end
financial statements.

Proved Reserves are reviewed annually by independent petroleum engineers who
issue a report which estimates discounted future cash flows. As disclosed in
footnote 1. management will review these reports for indicated impairment and
take appropriate steps if impairment exists.

NOTE 12: Write off of Assets:

Statement of Financial Standards No.2, Accounting for Research and Development
Costs indicates costs which are included in research and development and costs
of activities which are typically excluded from research and development. The
Development Costs which were previously capitalized are more properly treated as
expense items as incurred. Therefore, they are written off against income in a
previous period. The inventory items were judged obsolete with no discernable
future value and were written off against income in a previous period. Prior to
the date of the audit report, information was discovered which required that the
patent and copyright be written off against income. This action was disclosed in
the financial statements issued September 30, 1996. The patent was discovered to
be a license issued by the actual patent holder. Previous management had issued
the stock to reimburse the patent holder for the cost of obtaining the patent
and received a license to distribute the product. This cost was capitalized and
classified as a patent. The Company received correspondence revoking the license
and elected to charge the capitalized cost of the patent to income in the third
quarter of 1996.

The copyright for a family educational game has been evaluated and determined to
be out of date. SFAS 86 requires computer software be evaluated for evidence of
having achieved technical feasibility. While technological feasibility may have
been reached in an earlier period, current research indicates that additional
costs of updating the software and bringing the product to market are greater
than the potential cash flows, which may be generated. Therefore, management
elected to right this asset off in the third quarter of 1996.

F-14

<PAGE>

Previous Company management listed $18,898.00 in equipment in their published
financial statements. This equipment was not transferred in the exchange and a
charge to income in the corresponding amount was taken in the fourth quarter of
1996.

In December 1997, the Company determined that there were lease abandonments and
expirations which amounted to $2,057,819.00.

Note 13: Debt Forgiveness Income:

During 1996, the former President of the Company made several cash advances to
and on behalf of the Company. These advances were acknowledged as a debt of the
Company and were forgiven by the former President as a part of the transaction,
which occurred on August 9, 1996.

Note 14: Valuation of Exchange of Assets Transaction:

Subsequent to the issuance of a previous Audit Report on the September 30, 1996
financial statements, information was discovered which required that the assets
described as "Proved Reserves" be revalued. The original transaction was
accounted for as a purchase transaction. The transaction used a trust to
eliminate issues related to (1) control of the assets before and after the
transaction, and (2) related party issues. Subsequently, a legal opinion
indicated that the trust for the Knollenberg family was, in fact, a Texas
general partnership. As such, control resided in the hands of the same party,
before and after, and the transaction should have been recorded at the
transferor's historic cost. This required that the audit report be re-issued.
The reserves were recorded at $6,854,486, which was due to ERIN's future
discounted net cash flows less future costs to develop these cash flows. Due to
the control issue, the reserves should have been recorded at historical cost of
$1,239,263. The transaction is an exchange of nonmonetary assets by each party,
i.e. common stock was exchanged for oil & gas reserves and the assumption of
debt. APB 29 governs the accounting for nonmonetary transactions. The general
rule established by APB 29 is that the accounting for nonmonetary transactions
should be based on the fair values of the assets involved. The fair value to be
used is that of the asset surrendered unless the fair value of the asset
received is "more clearly evident". Fair value is defined in APB 29 as: "...the
estimated realizable values in cash transactions of the same or similar assets,
quoted market prices, independent appraisals, estimated fair values of assets or
services received in exchange, and other available evidence.

The original transaction used a negotiated per share value of $0.44 as a stock
value. Trading information prior to the date of the transaction is not reliable,
because few trades were made. Therefore , a ready market price for the stock was
not determinable. The transaction involved trading common stock for reserves
plus the assumption of debt. Therefore the transaction was valued at historical
cost of $1,239,263 plus the debt assumed of $2,876,300, or $4,115,563 which
equals $0.31 per share.

In November of 1997, NEHI acquired a 25% interest in Horse Energy, LP and RST
(USA) LP with an exchange of common stock and an agreement to provide additional
capital for these interests. NEHI subsequently transferred one fifth of its
interest in RST to a third party

F-15

<PAGE>

for $250,000 in funding. This transaction was accounted for using the principles
prescribed in Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation which states that "...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."
NEHI exchanged 14,422,045 shares of common stock for the aforementioned
interests. As of the date of the transaction, the quoted market price of NEHI
common stock was $0.32 per share, which would equate to a market value of
$4,615,054.00. This transaction required the issuance of common stock equal to
44.02% of the then outstanding common stock. This stock was also restricted
under Rule 144 of the U.S. Securities and Exchange Commission. Due to the size
of the stock transaction in relation to the total outstanding shares of common
stock and the rule 144 restrictions placed on resale, the Board of Directors
elected to value the transaction at $2,562,000.00 of which $250,000.00 was paid
in cash to RST (USA) LP. This equals a common stock price of $0.1776 per common
share.

NOTE 15: Development Stage Corporation

The Company was formerly a development stage corporation. The acquisition of the
oil and gas reserves from Erin Oil Exploration, Inc., effective October 1, 1996
marks the beginning of an operating cycle for the Company, although the delay in
finalizing asset transfers between Erin and NEHI until December, 1997 has
resulted in no appreciable gains from this transaction, to date. In this and
future periods, the Company will be reporting as an operating company.

NOTE 16: Intercompany Accounts

Since NEHI did not have operating personnel or procedures in place at the time
of acquisition, an agreement was made with ERIN to continue to operate the oil
and gas properties until December 31, 1996. All transactions which were
processed by ERIN through a DUE TO/FROM account. All transactions which were
accounted for using this account have been completed and the DUE TO/FROM account
is no longer in use as of the date of these financial statements.

NOTE 17: Receivables, Payables, Depreciation and Depletion:

Accounts Receivable as of December 31, 1997 consist of the following:

Production Revenues $ 19,267
Other Receivables $ 5,566

Accounts Payable as of December 31, 1997 consist of the following:

Trade Payables $ 65,787
Depreciation, Depletion, and Amortization $ 26,346

F-16

<PAGE>

NOTE 18: Related Party Transactions:

During 1997, Bill Knollenberg as CEO and representing the then majority common
stock interests, represented to the Board of Directors that advances had been
made to the Company totaling $278,460.00, which covered operating cash
shortfalls and investments made by the Company. The following shares were issued
to the Knollenbergs in 1997:

Related Party No. of Shares Date Approved Fair Value
- ------------- ------------- ------------- ----------

Brad Knollenberg 1,000,000 May 9, 1997 -Unknown-
Doris Knollenberg 1,000,000 May 9, 1997 -Unknown-
Bill Knollenberg 885,052 December, 1997 -Unknown-

New Management acknowledges the issuance of the aforementioned shares, however,
no adequate justification for the issuance of these shares has yet been
provided. They are partially the subject of ongoing litigation.

NOTE 19: 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 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 Y2K
compliance would be less than $30,000.00.

NOTE 20: Going Concern:

1997 continued a period operating losses in NEHI's oil and gas operations. In
addition, a substantial write-down of oil and gas reserves was taken for
impairment, abandonment and lease expirations. Oil and 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
has a patent pending for a down hole drilling tool. Management has also acquired
new leases in West Virginia which contain substantial oil and gas reserves (see
supplemental reserve data).

F-17

<PAGE>

NOTE 21: Subsequent Events:

On June 16, 1998 the Company filed a lawsuit against Bradley Knollenberg, Erin
Oil Exploration Inc., Gulf Minerals Exploration, Billy Knollenberg and Doris
Knollenberg alleging mismanagement of the business and financial affairs of the
Company, breach of fiduciary duty to the Company, 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 and insufficient
consideration. On July 10, 1998 the defendants responded with a counterclaim.

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 Company
and such holders have agreed to convert such debentures to Common Stock during
the fourth quarter of 1998. Upon conversion, the outstanding debentures will
represent 282,258 additional shares of the Company's Common Stock. See Exhibit
4.2 hereto.

F-18

<PAGE>

NEHI PETROLEUM CORPORATION
Supplemental Information (Unaudited)
Twelve Months Ended December 31, 1997

Capitalized Costs Relating to Oil and Gas Producing
Activities at December 31, 1997
- ---------------------------------------------------
Unproved oil and gain properties $1,816,670
Proved oil and Gas properties 263,586
Support equipment and facilities 211,855
----------
$2,292,111

Less accumulated depreciation, depletion, amortization
And impairment 57,576
----------
Net Capitalized Costs $2,234,535
==========

Costs Incurred in Oil and Gas Producing Activities
For the Year Ended December 31, 1997
- --------------------------------------------------
Property acquisition costs:
Proved $ 0
Unproved 0
Development Costs 25,000
Exploration Costs 0

Results of Operations for Oil & Gas Producing Activities
For the Year Ended December 31, 1997
- ---------------------------------------------------------
Oil and gas sales $ 131,183
Gain on sale of oil and gas properties 0
Gain on sale of oil and gas leases 0
Production costs (140,543)
Exploration Expenses (0)
Depreciation, depletion, and amortization (26,346)
----------
Results of operations for oil and gas producing activities
(excluding corporate overhead and financing costs) $ (35,706)
----------

Reserve Information

The following estimates of proved and proved developed reserves quantities and
related standardized measure of discounted net cash flow are estimates only, and
do not purport to reflect realizable values on fair market values of the
Company's reserves. The Company emphasizes that reserve estimates are inherently
imprecise and that estimates of new discoveries are more imprecise than those of
producing oil and gas properties. Accordingly, these estimates are expected to
change as future information becomes available. All of the Company's reserves
are located in the United States.

F-19

<PAGE>

Proved reserves are estimated reserves of crude oil (including condensate and
natural gas liquids) and natural gas that geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions. Proved
developed reserves are those expected to be recovered through existing wells,
equipment, and operating methods.

The standardized measure of discounted future net cash flows is computed by
applying year-end prices of oil and gas (with consideration of price changes
only to the extent provided by contractual arrangements) to the estimated future
production of proved oil and gas reserves, less estimated future expenditures
(based on year-end costs) to be incurred in developing and producing the proved
reserves, less estimated future income tax expense (based on year-end statutory
tax rates, with consideration of future tax rates already legislated) to be
incurred on pretax net cash flows less tax basis of the properties and available
credits, and assuming continuation of existing economic conditions. The
estimated future net cash flows are then discounted using a rate of 10 percent
a year to reflect the estimated timing of the future cash flows.

The following information has been extracted from a reserve report dated April
10, 1998 for proved reserves and future net cash flows associated with those
reserves as of January 1, 1998.

Oil (Blbs) Gas (MCF)
---------- ---------
Proved developed and undeveloped reserves
Beginning of year 1,032,395 3,616,345
Revision of previous estimates 76,083 0
Purchases of minerals in place 1,623,356 12,463,780
Abandonments and lease expirations (480,048) (944,354)
Production (2,947) 0
--------- ----------
End of Year 2,248,839 15,135,771

Proved developed reserves
Beginning of year 187,782 591,449
End of year 185,700 0

Standardized Measure of Undiscounted Future
Net Cash Flows at January 1, 1998
Future Cash Inflows $43,926,198

Standardized Measures of Discounted Future
Net Cash Flows relating to Proved Oil
And Gas Reserves at January 1, 1998
(Discounted at 10%) $25,568,244

F-20

<ARTICLE> 5
<LEGEND>
</LEGEND>
<CIK> 0000829324
<NAME> NATIONAL EQUITIES HOLDINGS, INC.
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1.000
<CASH> 62,014
<SECURITIES> 0
<RECEIVABLES> 24,833
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 86,847
<PP&E> 4,854,111
<DEPRECIATION> (57,576)
<TOTAL-ASSETS> 4,883,382
<CURRENT-LIABILITIES> 464,247
<BONDS> 0
0
0
<COMMON> 32,788
<OTHER-SE> 4,386,347
<TOTAL-LIABILITY-AND-EQUITY> 4,883,382
<SALES> 165,140
<TOTAL-REVENUES> 165,140
<CGS> (140,543)
<TOTAL-COSTS> 0
<OTHER-EXPENSES> (140,543)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,255,728)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,255,728)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,255,728)
<EPS-PRIMARY> (0.115)
<EPS-DILUTED> (0.115)

</TABLE>

Exhibit 99.5

NO. 98-28403

NATIONAL EQUITIES HOLDINGS, INC. In the District Court
of
v. HARRIS CO., TEXAS
BRADLEY KNOLLENBERG,
ET AL. 295TH JUDICIAL DISTRICT

AGREEMENT - ORDER

NATIONAL EQUITIES HOLDINGS, INC. and BRADLEY KNOLLENBERG, et. al. (Erin
Oil Exploration Inc., Gulf Minerals Exploration, Billy Knollenberg, and Doris
Knollenberg) hereby agree as follows:

1. Bradley Knollenberg shall complete, execute, and deliver (by
facsimile) his "Officers and Directors Questionnaire" for the year ended 31
December 1997, to Sheryl Jones Alu, counsel for NEHI, on or before 2 November
1998.

2. Bradley Knollenberg shall produce the original of NEHI stock
certificate No. 2243 representing 1,000,000 shares of common stock of National
Equities Holdings, Inc., at the offices of Walter Cicack, 2300 America Tower,
2929 Allen Parkway, Houston, Texas 77019, between the hours of 1:00 p.m. and
4:00 p.m., Monday, 2 November 1998, and Michael B. Lee shall be permitted to
inspect and copy the same (on Walter Cicack's copier without charge).

3. National Equities Holdings, Inc. shall complete and file with the
Securities and Exchange Commission, via "EDGAR," the Form 10-K SB for the year
ended 31 December 1997, during the week of November 16, 1998.

AGREED this 30th day of October 1998.

/s/ Walter Cicack
--------------------------------------------
Walter Cicack,
Counsel for Bradley Knollenberg, et al.

/s/ Michael B. Lee
--------------------------------------------
Michael B. Lee
Counsel for National Equities Holdings, Inc.

Signed October 30, 1998

/s/ Sharolyn Wood
- -----------------------
Sharolyn Wood
Judge Presiding

Exhibit 99.6

FIRST AMENDED ORIGINAL PETITION

<PAGE>

NO. 98-33207

MICHAEL R. SILBERSTEIN ss. IN THE DISTRICT COURT
ss.
VS. ss. OF HARRIS COUNTY, TEXAS
ss.
ERIN OIL EXPLORATION, INC. AND ss.
NATIONAL EQUITIES HOLDINGS, INC. ss.
D/B/A NEHI PETROLEUM ss. 133RD JUDICIAL DISTRICT

PLAINTIFF'S FIRST AMENDED ORIGINAL PETITION

TO THE HONORABLE JUDGE OF SAID COURT:

COMES NOW Michael R. Silberstein (hereinafter referred to as
"Silberstein"), Plaintiff in the above styled and numbered cause and files this
First Amended Original Petition complaining of and against Erin Oil Exploration,
Inc. (hereinafter referred to as "Erin") and National Equities Holdings, Inc.
d/b/a Nehi Petroleum (hereinafter referred to as "Nehi"), jointly and severally,
collectively referred to as Defendants and for cause of action respectfully
shows the Court as follows:

I. Parties

1. Plaintiff, Michael R. Silberstein is an individual resident of
Missouri City, Fort Bend County, Texas.

2. Defendant Erin Oil Exploration, Inc. is a Texas corporation doing
business in Houston, Harris County, Texas and may be served with citation and
Plaintiff's Original Petition by serving its registered agent H. Dawson French,
Two Energy Square, Suite 800, Dallas, Texas 75206.

3. Defendant National Equities Holdings, Inc. d/b/a Nehi Petroleum is a
Delaware corporation doing business in Houston, Harris County, Texas and may be
served with citation and Plaintiff's First Amended Original Petition by serving
its President, George Sutherland, its CEO Jack Chance, Bill Knollenberg,
Chairman/CEO or any officer or representative designated to accept service on
behalf of Nehi Petroleum located at 13700 Veterans Memorial, Suite 410, Houston,
Texas 77014 or its corporate office 616 FM 1960 West, Suite 200, Houston, Texas
77090.

<PAGE>

II. Jurisdiction and Venue

1. This Court has jurisdiction over the subject matter of this cause
pursuant to common law.

2. The amount in controversy is within the limits of this Court.

3. Pursuant to general venue statutes, venue is proper in Harris
County, Texas since the Defendant did business in Harris County, Texas. Further,
the Defendants' conduct and breach of contract as set forth below occurred in
Harris County, Texas. Pursuant to ss. 15.002 of the Tex.Civ.Prac.&Rem.Code,
venue is proper in Harris County, since a substantial part of the events or
omissions giving rise to the Plaintiff's claim occurred in Harris County, Texas.

III. Agency

1. Wherever in this petition is it is alleged that Erin and Nehi did
any act or thing, it is meant that its predecessors, subsidiaries, officers,
agents, servants, employees, partners and/or representative did such act or
thing and at the time such act or thing was done, it was done with full
authorization or ratification of Nehi and was done in the normal and routine
course and scope of employment of Erin's and/or Nehi's predecessors,
subsidiaries, officers, agents, servants, employees, partners and/or
representatives.

IV. Alter Ego

1. At all times material hereto, the identity of Erin and Nehi are in
substance one and the same. The corporations are the alter egos of the other.
The corporations are run as a single enterprise. The corporations have been
operating in an unfair manner and committed actual frauds upon Silberstein for
the benefit of their shareholders, officers and directors. The corporations were
used as an unfair device to achieve an inequitable result and prejudice those
dealign with such corporations.

2. These defendants have integrated their resources to achieve a common
business purpose. This is demonstrated, inter alia, by one or more of the
following: (i) employees; (ii) common or related officers and/or directors
and/or shareholders; (iii) centralized accounting; (iv) payment of wages by one
corporation to another corporation's employees; (v) services rendered by the
employees of one corporation on behalf of another corporation; (vi) undocumented
transfers of funds between corporations; and (vii) unclear allocation of profits
and losses between corporations.

V. Facts

1. On or about December 19, 1995, Silberstein entered into a
Subscription Agreement ("Agreement") with Erin, for one unit valued in the
amount of Nine Thousand Six Hundred Forty Six and No/100 ($9,646.00) Dollars.
Included in the units subscription was a percentage of working

<PAGE>

interest valued at 1.25 percent interest.

2. Further, the addendum to the Subscription Agreement provided that
Silberstein would receive two thousand four hundred eleven (2,411) shares of
company stock ("stock") to be issued after Erin became public and further, that
Silberstein would receive prior to Erin going public, a certificate
acknowledging the two thousand four hundred eleven (2,411) shares of stock.

3. Pursuant to Defendants' actions and representations prior to the
entering of the Agreement and the terms of the Agreement, Plaintiff purchased
the stock for payment in the amount of Nine Thousand Six Hundred Forty Six and
No/100 ($9,646.00) Dollars.

4. After Silberstein made all payments required under the Agreement,
Erin failed to deliver the certificate for the stock or the stock.

5. Thereafter, sometime between September 26, 1997 and September 29,
1997, either Erin sold to Nehi or Erin was succeeded by Nehi or Nehi succeeded
Erin as a successor corporation, the details to which Plaintiff has no
knowledge.

6. On or about September 29, 1997, Nehi acknowledged in a letter to
Silberstein that he would receive Nehi stock with a conversion rate of Two and
No/100 ($2.00) Dollars per share.

7. Pursuant to Nehi's acknowledgment to deliver and issue the two
thousand four hundred eleven (2,411) shares of stock, Nehi failed to do so.
Silberstein has never received the certificate for the stock or the stock.
Thereafter, in or about June, 1998, Silberstein gave notice to Defendants of
their misrepresentations, fraudulent inducements and breach of contract and
demanded return of his money and payments.

8. Although demand was made, Erin and Nehi have failed and refused and
continue to fail and refuse to return Silberstein's money for payments under the
Agreement and the issuance of the Defendant's stock for which he now sues.

VI. Causes of Action

A. First Cause of Action - Breach of Contract - Recission
------------------------------------------------------

1. Plaintiff incorporates by reference the fact allegations of
paragraphs I, II, III, IV and V one (1) through eight (8) as hereinabove plead.

2. Defendants have breached their agreements by failing to deliver the
stock valued at Nine Thousand Six Hundred Forty Six and No/100 ($9,646.00)
Dollars to the Plaintiff. Though Defendants became and are bound and obligated
to deliver the stock or return such sums of money in the amount of Nine Thousand
Six Hundred Forty Six and No/100 ($9,646.00) Dollars, and though requested to do
so have failed and refused. Plaintiff is entitled to recission of the Agreement
and for

<PAGE>

return of payment in the amount of Nine Thousand Six Hundred Forty Six and
No/100 ($9,646.00) Dollars. Plaintiff has made demand upon Defendants for
payment of the amount of Nine Thousand Six Hundred Forty Six and No/100
($9,646.00) Dollars owed more than thirty (30) days prior to the filing hereof.
Defendants have failed and refused to pay said sums of money in the amount of
Nine Thousand Six Hundred Forty Six and No/100 ($9,646.00) Dollars for which
Plaintiff now sues.

B. Second Cause of Action - Fraud
------------------------------

1. Plaintiff incorporates by reference the fact allegations of
paragraphs I, II, III, IV and V one (1) through eight (8) as hereinabove plead.

2. Defendants induced Silberstein to enter into the Agreement. However,
Defendants concealed facts and made representations which were false, misleading
and deceptive. But for Defendants' misrepresentations, Silberstein would not
have entered the Agreement and purchased the stock, and would not have continued
payments under the Agreement, and/or would not have been involved with
Defendants whatsoever. As a direct result of such unlawful conduct and said
Defendants' conduct, Silberstein has been adversely affected and damaged.

3. Defendants committed fraud against Silberstein by making false
representations of fact to Silberstein. At the time the material representations
were made, Defendants knew they were false or were made recklessly without any
knowledge of its truth and as a positive assertion. The representations were
made with the intent that they would deceive Silberstein and be acted upon by
Silberstein and/or cause Silberstein not to take action. Defendants' actions and
conduct was designed to deceive Silberstein to purchase the stock and to induce
Silberstein to enter into the Agreement and understandings and as a proximate
result Silberstein has been damaged.

4. Defendants made and/or authorized untrue statements of material fact
and omitted to stated material facts necessary to make statements made not
misleading and engaged in such acts, practices and courses of business which
would and did operate as a fraud and deceit upon Silberstein.

5. Defendants' actions constitute fraud which has proximately caused
damages to Silberstein.

VI. Damages

1. Plaintiff is entitled to damages from Defendants in a sum not less
than Nine Thousand Six Hundred Forty Six and No/100 ($9,646.00) Dollars for
which Plaintiff now sues.

2. Silberstein brings this suit against Defendants for compensatory
damages and mental anguish in the amount of Fifty Thousand and No/100
($50,000.00) Dollars resulting from Defendants' fraud.

3. Defendant Erin's individual conduct as described above was willful,
intentional and/or

<PAGE>

constitutes gross negligence. As a result, Silberstein is entitled to recover
exemplary damages from Erin to prevent such conduct by others in Erin's
situation. Silberstein has suffered loss of time and other expenses incurred in
the investigation and prosecution of this cause of action. Silberstein is
entitled to recover from Erin punitive damages in an amount which exceeds the
minimum jurisdictional limits of this court as to make Erin an example that it
may be deterred in the future from such conduct and actions.

4. Defendant Nehi's individual conduct as described above was willful,
intentional and/or constitutes gross negligence. As a result, Silberstein is
entitled to recover exemplary damages from Nehi to prevent such conduct by
others in Nehi's situation. Silberstein has suffered loss of time and other
expenses incurred in the investigation and prosecution of this cause of action.
Silberstein is entitled to recover from Nehi punitive damages in an amount which
exceeds the minimum jurisdictional limits of this court as to make Nehi an
example that it may be deterred in the future from such conduct and actions.

5. It was necessary for Plaintiff to secure the services of Steven
Engelhardt, a duly licensed attorney. Such services were necessary and proper
for the preservation and protection of Plaintiff's rights. Reasonable attorney's
fees should be awarded and judgment rendered in favor of said attorney and
against Defendants.

VI. Prayer

WHEREFORE, PREMISES CONSIDERED, Plaintiff prays that Defendants be
cited to appear and answer herein and upon a final trial of this cause,
Plaintiff have judgment of and against Defendants jointly and severally for the
following relief:

1. Recission of the Agreement;

2. A money judgment in the amount of Fifty Thousand and No/100
($50,000.00) Dollars for compensatory damages and mental anguish damages;

3. A money judgment against Erin and Nehi for punitive and exemplary
damages in an amount which exceeds the minimum jurisdictional limits of this
court;

4. Prejudgment interest as provided by law;

5. Post judgment interest in the entire amount of Judgment until paid;

6. Reasonable attorney's fees and costs of Court; and

<PAGE>

7. For such other and further relief, both general and special, at law
or in equity, to which Plaintiff may show himself justly entitled.

Respectfully submitted,

By: /s/ Steven Engelhardt
------------------------------
STEVEN ENGELHARDT
State Bar No. 06624500
3555 Timmons Lane, Suite 1450
Houston, Texas 77027
(713) 626-1616
FAX (713) 626-1636

ATTORNEY FOR PLAINTIFF
Michael R. Silberstein