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Exhibit 10.1
 
 
SECURITIES PURCHASE AGREEMENT

BY AND AMONG

GULF WESTERN PETROLEUM CORPORATION

AND

METAGE FUNDS LIMITED

AND

NCIM LIMITED
 
 
Dated as of September 10, 2007

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TABLE OF CONTENTS
 

 
Page
   
SECTION 1. Purchase and Sale of Securities
5
1.1
Purchase and Sale of Note, Closing Shares and Warrant
5
1.2
The Closing Date
5
1.3
Form of Payment
5
   
SECTION 2. Buyer’s Representations And Warranties
6
2.1
Investment Purpose
6
2.2
Economic Loss, Suitability and Sophistication
6
2.3
Accredited Investor Status
6
2.4
Reliance on Exemptions
6
2.5
Information
6
2.6
No Governmental Review
7
2.7
Transfer or Resale
7
2.8
Legends
7
2.9
Authorization; Enforcement; Validity
8
2.10
Residency
8
2.11
Recent Activity
8
   
SECTION 3. Representations And Warranties Of The Company
8
3.1
Organization and Qualification
9
3.2
Authorization; Enforcement; Validity
9
3.3
Capitalization
10
3.4
Issuance of Securities
11
3.5
No Conflicts
11
3.6
SEC Documents; Financial Statements
13
3.7
Absence of Certain Changes
14
3.8
Absence of Litigation
14
3.9
No Undisclosed Events, Liabilities, Developments or Circumstances
14
3.10
Acknowledgment Regarding Buyer’s Purchase of Note and Warrant
14
3.11
Employee Relations
15
3.12
Intellectual Property Rights
15
3.13
Environmental Laws
15
3.14
Title
16
3.15
Insurance
17
3.16
Regulatory Permits
17
3.17
Internal Accounting Controls; Disclosure Controls and Procedures; Books and
Records
18
3.18
Tax Status
18
3.19
Transactions With Affiliates
19
3.20
Application of Takeover Protections; Rights Agreement
19
3.21
Foreign Corrupt Practices
19
3.22
Outstanding Indebtedness, Permitted Indebtedness and Liens
19
3.23
Ranking of Note
20
3.24
Oil and Gas Property
20

 

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3.25
Leases, Performance of Obligations
21
3.26
Operation of Oil and Gas Property, Marketing
21
3.27
Tangible Assets
22
3.28
Investment Company
22
   
SECTION 4. Affirmative Covenants
22
4.1
Best Efforts
22
4.2
Reporting Status
22
4.3
Use of Proceeds
22
4.4
Financial Information
22
4.5
Reservation of Shares
23
4.6
Listing
23
4.7
Disclosure of Transactions and Other Material Information
23
4.8
Notices
23
4.9
Compliance with Laws and Maintenance of Permits
24
4.10
Inspection and Audits
24
4.11
Insurance
25
4.12
Collateral
26
4.13
Taxes
26
4.14
Intellectual Property
26
4.15
Patriot Act, Investor Secrecy Act and Office of Foreign Assets Control
26
4.16
Drilling Title Opinions
27
4.17
Security Covenants
27
4.18
Subsidiary Interests
28
4.19
Submission of Matters to a Stockholder Vote
28
4.20
Subsidiary Certificates
28
   
SECTION 5. Negative Covenants
29
5.1
Stay, Extension and Usury Laws
29
5.2
Payment Restrictions Affecting Subsidiaries
29
5.3
Prepayments
29
5.4
Indebtedness
29
5.5
Liens
29
5.6
Sale of Collateral
30
5.7
Corporate Existence; Leases
30
5.8
Restrictions on Loans; Investments; Subsidiary Equity
30
5.9
Equipment
31
5.10
Affiliate Transactions
31
5.11
Settling of Accounts
31
5.12
Limitation on Sale and Leaseback Transactions
31
5.13
Investment Company
31
5.14
Leases
31
5.15
Restriction on Purchases or Payments
32
5.16
No Avoidance of Obligations
32
5.17
Regulation M
32
   
SECTION 6. Conditions To The Obligation Of The Company To Sell
32
   
SECTION 7. Conditions To The Obligation Of The Buyer To Purchase
33

 
ii

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SECTION 8. Indemnification
35
   
SECTION 9. Right to Participate in Future Financing
37
   
SECTION 10. Governing Law; Miscellaneous.
38
10.1
Governing Law; Jurisdiction; Jury Trial
38
10.2
Counterparts
38
10.3
Headings
39
10.4
Severability
39
10.5
Entire Agreement; Amendments
39
10.6
Notices
39
10.7
Successors and Assigns
40
10.8
No Third Party Beneficiaries
40
10.9
Survival
40
10.10
Further Assurances
40
10.11
Termination
41
10.12
No Strict Construction
41
10.13
Remedies
41
10.14
Payment Set Aside
41
10.15
Transfer Agent Instructions
41
10.16
Interpretative Matters
42

iii

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SECURITIES PURCHASE AGREEMENT
 
SECURITIES PURCHASE AGREEMENT (the “Agreement”), dated as of September 10, 2007,
by and among Gulf Western Petroleum Corporation, a Nevada corporation, with
principal offices located at 4801 Woodway Drive, Suite 306 W, Houston, Texas,
77056 (together with its predecessors, the “Company”), and Metage Funds Limited
and NCIM Limited (together with their respective successors and assigns,
individually and collectively, “Buyer”).
 
WHEREAS:
 
A.           The Company and Buyer are executing and delivering this Agreement
in reliance upon the exemption from securities registration afforded by Rule 506
of Regulation D (“Regulation D”) as promulgated by the United States Securities
and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended
(the “1933 Act”).
 
B.           Buyer wishes to purchase from the Company and the Company, wishes
to sell to Buyer, upon the terms and conditions stated in this Agreement, (1)
1,500,000 shares (the “Closing Shares”) of the Company’s common stock, par value
$0.001 per share (“Common Stock”), (2) senior secured notes, in the form
attached as Exhibit A, in an original aggregate principal amount of $3,700,000
(such notes collectively, as they may be amended, supplemented, restated or
modified and in effect from time to time, the “Note”), and (3) a warrant, in the
form attached as Exhibit B, to acquire an aggregate number of shares of the
Company’s Common Stock, equal to the quotient of $900,000 divided by the Warrant
Exercise Price (as defined in the Warrant), at a exercise price per share equal
to the Warrant Exercise Price (such warrant, as it may be amended, supplemented,
restated or modified and in effect from time to time, being referred to as the
“Warrant”; and the shares of Common Stock issuable from time to time upon
exercise of the Warrant being referred to as the “Warrant Shares”).
 
C.           The Note shall be convertible into shares of Common Stock in
accordance with the terms of the Note (the shares of Common Stock issuable upon
conversion of the Note being referred to herein as the “Conversion Shares”).
 
D.           Contemporaneously with the execution and delivery of this
Agreement, the parties hereto are executing and delivering a Registration Rights
Agreement (as the same may be amended, supplemented, restated or modified and in
effect from time to time, the “Registration Rights Agreement”), pursuant to
which the Company agrees to provide certain registration rights under the 1933
Act and all other securities laws, with respect to the Closing Shares, the
Conversion Shares and the Warrant Shares.
 
E.           Contemporaneously with the closing of the purchase and sale of the
Note and the Warrant (the “Closing”), the parties hereto and the Subsidiaries
(as defined in Section 3.1) will execute and deliver a Security Agreement (as
the same may be amended, supplemented, restated or modified and in effect from
time to time, the “Security Agreement”), pursuant to which the Company and its
Subsidiaries will agree to provide the Collateral Agent, as agent for Buyer,
with a security interest in substantially all assets of the Company.

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F.           Contemporaneously with the Closing, the Subsidiaries will execute
and deliver a Guaranty (as the same may be amended, supplemented, restated or
modified and in effect from time to time, together, the “Guaranty”), pursuant to
which the Subsidiaries will agree to guarantee certain obligations of the
Company (the guarantees under the Guaranty, including any such guarantee added
after the Closing, being referred to herein as the “Guarantees”).
 
G.           Contemporaneously with the Closing, the parties hereto will execute
and deliver a Pledge Agreement (as the same may be amended, supplemented,
restated or modified and in effect from time to time, together, the “Pledge
Agreement”), pursuant to which the Company will agree to pledge all of the
capital stock and other equity in the Subsidiaries to Metage Funds Limited, as
the Collateral Agent for the Buyer (the “Collateral Agent”), as collateral for
the Note.
 
H.           Contemporaneously with the Closing, Buyer and the Debtors (as
defined in the Security Agreement) will execute and deliver one or more
mortgages, deeds of trust, assignments of production, security agreements,
fixture filings and financing statements (the “Mortgages”), pursuant to which
the Debtors will agree to grant to Buyer a security interest in certain real and
personal property, rights, titles, interests and estates described therein.
 
NOW THEREFORE, the Company and Buyer hereby agree as follows:
 
SECTION 1.
PURCHASE AND SALE OF SECURITIES
 
1.1           Purchase and Sale of Note, Closing Shares and Warrant.  Subject to
the satisfaction (or waiver) of the conditions set forth in Sections 6 and 7
below, the Company shall issue and sell to Buyer, and Buyer agrees to purchase
from the Company, (i) the Closing Shares, (ii) the Note in the principal amount
of $3,700,000 and (iii) the Warrant to purchase a number of shares of Common
Stock equal to $900,000, divided by the Warrant Exercise Price.  The aggregate
purchase price (the “Purchase Price”) for the Note, the Closing Shares and
Warrant purchased by Buyer shall be $3,700,000.  All references herein and in
each of the other Transaction Documents (as defined in Section 7) to “dollars”
or “$” shall mean the lawful money of the United States of America.
 
1.2           The Closing Date.  The date and time of the Closing (the “Closing
Date”) shall be 10:00 a.m., Houston, Texas time, on the first Business Day
following the date of this Agreement, subject to the satisfaction (or waiver) of
all of the conditions to the Closing set forth in Sections 6 and 7 (or such
later or earlier date as is mutually agreed to by the Company and Buyer).  The
Closing shall occur on the Closing Date at the offices of Porter & Hedges,
L.L.P., 1000 Main Street, 36th Floor, Houston, Texas 77002, or at such other
place as the Company and Buyer may designate in writing.  As used in this
Agreement, “Business Day” means any day other than Saturday, Sunday or other day
on which commercial banks in Houston, Texas are authorized or required by law to
remain closed.
 
1.3           Form of Payment.  On the Closing Date, (i) Buyer shall pay the
Purchase Price to the Company for the Closing Shares, Note and Warrant to be
issued and sold to Buyer on the Closing Date, by wire transfer of immediately
available funds in accordance with the Company’s written wire instructions, and
(ii) the Company shall deliver to Buyer (A) certificates representing the
Closing Shares, (B) the Note, and (C) the Warrant, in each case duly executed on
behalf of the Company and registered in the name of Buyer.

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SECTION 2.
BUYER'S REPRESENTATIONS AND WARRANTIES
 
Buyer represents and warrants, as of the date of this Agreement and the Closing
Date, with respect to only itself, that:
 
2.1           Investment Purpose.  Buyer (i) is acquiring the Note (along with
the related Guaranty), the Closing Shares and the Warrant purchased by Buyer
hereunder, and (ii) upon conversion (if any) of the Note will acquire the
Conversion Shares issuable upon conversion thereof, and (iii) upon any exercise
of the Warrant will acquire the Warrant Shares issuable upon such exercise
thereof, (the Note, the Conversion Shares, the Closing Shares, the Guarantees,
the Warrant and the Warrant Shares being collectively referred to herein as the
“Securities”) for Buyer’s own account and not with a view towards, or for resale
in connection with, the public sale or distribution thereof, except pursuant to
sales registered under, or exempted from the registration requirements of, the
1933 Act.
 
2.2           Economic Loss, Suitability and Sophistication.  Buyer (i) is able
to bear the economic risk of losing its entire investment in the Securities and
(ii) is able to bear such risk for an indefinite period of time.  Buyer has
evaluated the risks involved in investing in the Securities and has determined
that the Securities are a suitable investment for Buyer.  Buyer’s overall
commitment to investments which are not readily marketable is not
disproportionate to its net worth.  Buyer’s investment in the Securities will
not cause such overall commitment to become excessive.  Buyer has such knowledge
and experience in financial and business matters that it is capable of
evaluating the risks and merits of this investment.
 
2.3           Accredited Investor Status.  Buyer is an “accredited investor” as
that term is defined in Rule 501(a) of Regulation D inasmuch as Buyer is a
company not formed for the specific purpose of making an investment in the
Securities and Buyer’s total assets are in excess of $5,000,000.
 
2.4           Reliance on Exemptions.  Buyer understands that the Securities are
being offered and sold to it in reliance on specific exemptions from the
registration requirements of securities laws and that the Company is relying in
part upon the truth and accuracy of, and Buyer’s compliance with, the
representations, warranties, agreements, acknowledgments and understandings of
Buyer set forth herein in order to determine the availability of such exemptions
and the eligibility of Buyer to acquire the Securities.  For purposes hereof,
“securities laws” means the securities laws, legislation and regulations of, and
the instruments, policies, rules, orders, codes, notices and interpretation
notes of, the securities regulatory authorities (including the SEC) of the
United States and any applicable states and other jurisdictions.
 
2.5           Information.  Buyer and its advisors, if any, have been furnished
with all materials relating to the business, finances and operations of the
Company and materials relating to the offer and sale of the Securities that have
been requested by Buyer.  Buyer and its advisors, if any, have been afforded the
opportunity to ask questions of the Company.  Buyer understands that its
investment in the Securities involves a high degree of risk.  Buyer has sought
such accounting, legal and tax advice as it has considered necessary to make an
informed investment decision with respect to its acquisition of the Securities.

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2.6           No Governmental Review.  Buyer understands that no Governmental
Entity has passed on or made any recommendation or endorsement of the Securities
or the fairness or suitability of an investment in the Securities nor have such
authorities passed upon or endorsed the merits of the offering of the
Securities.  As used in this Agreement, “Governmental Entity” means the
government of the United States or any other nation, or any political
subdivision thereof, whether state, provincial or local, or any agency
(including any self-regulatory agency or organization), authority,
instrumentality, regulatory body, court, central bank or other entity exercising
executive, legislative, judicial, taxing, regulatory or administration powers or
functions of or pertaining to government over the Company or any of its
Subsidiaries, or any of their respective properties, assets or undertakings.
 
2.7           Transfer or Resale.  Buyer understands that, except as provided in
the Registration Rights Agreement, (i) the Securities have not been and are not
being registered under the 1933 Act or any other securities laws, and may not be
offered for sale, sold, assigned or transferred unless (A) subsequently
registered thereunder, (B) Buyer shall have delivered to the Company an opinion
of counsel, in generally acceptable form and substance to the Company, to the
effect that such Securities to be sold, assigned or transferred may be sold,
assigned or transferred pursuant to one or more specified exemptions from such
registration, or (C) Buyer provides the Company with reasonable assurance that
such Securities can be sold, assigned or transferred pursuant to Rule 144
promulgated under the 1933 Act, as amended (or a successor rule thereto) (“Rule
144”); (ii) any sale of the Securities made in reliance on Rule 144 may be made
only in accordance with the terms of Rule 144, and further, if Rule 144 is not
applicable, any resale of the Securities under circumstances in which the seller
(or the person through whom the sale is made) may be deemed to be an underwriter
(as that term is defined in the 1933 Act) may require compliance with some other
exemption under the 1933 Act or any other securities laws; (iii) except as set
forth in the Registration Rights Agreement, neither the Company nor any other
person is under any obligation to register the Securities under the 1933 Act or
any other securities laws; and (iv) the ability of the Company to register the
Closing Shares, the Conversion Shares and the Warrant Shares may be limited by
the rules and regulations of the SEC, state securities authorities, and the
published and unpublished interpretations of their respective staffs.
 
2.8           Legends.  Buyer understands that the certificates or other
instruments representing the Note and the Warrant and, until such time as the
sale of the Closing Shares, the Conversion Shares and the Warrant Shares have
been registered under the 1933 Act as contemplated by the Registration Rights
Agreement, the stock certificates representing the Closing Shares, the
Conversion Shares and Warrant Shares, except as set forth below, shall bear a
restrictive legend in the following form (the “1933 Act Legend”) (and a
stop-transfer order may be placed against transfer of such stock certificates):

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THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES
LAWS.  THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED
(I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES
LAWS OR (B) AN OPINION OF COUNSEL, IN GENERALLY ACCEPTABLE FORM AND SUBSTANCE,
THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES
LAWS PURSUANT TO SPECIFIED EXEMPTIONS THEREFROM OR (II) UNLESS SOLD PURSUANT TO
RULE 144 UNDER SAID ACT AND APPLICABLE EXEMPTIONS FROM STATE SECURITIES LAWS.
 
The legend set forth above shall be removed and the Company shall issue a
certificate without the 1933 Act Legend to the holder of the Securities upon
which it is stamped, if (i) such Securities are registered and sold under the
1933 Act, (ii) in connection with a sale transaction, such holder provides the
Company with an opinion of counsel, in generally acceptable form and substance,
to the effect that a public sale, assignment or transfer of the Securities may
be made without registration under the 1933 Act and other securities laws
pursuant to one or more specified exemptions, (iii) such holder provides the
Company with reasonable assurances that the Securities can be sold pursuant to
Rule 144(k) promulgated under the 1933 Act (or a successor rule thereto), or
(iv) such holder provides the Company reasonable assurances that the Securities
have been or are being sold pursuant to Rule 144.
 
2.9    Authorization; Enforcement; Validity.  Buyer is validly existing and has
the requisite power and authority to purchase the Securities pursuant to this
Agreement.  This Agreement and the Registration Rights Agreement have been duly
and validly authorized, executed and delivered on behalf of Buyer and are valid
and binding agreements of Buyer enforceable against Buyer in accordance with
their respective terms.  The Security Agreement, the Registration Rights
Agreement and each of the other agreements entered into and other documents
executed by Buyer in connection with the transactions contemplated hereby and
thereby as of the Closing will have been duly and validly authorized, executed
and delivered on behalf of Buyer as of the Closing and will be valid and binding
agreements of Buyer, enforceable against Buyer in accordance with their
respective terms.
 
2.10    Residency.  Metage Funds Limited is a Cayman domiciled entity and is
organized and operated from the Cayman Islands.  NCIM Capital Limited is
organized under the laws of England and its principal place of business is in
London, England
 
2.11    Recent Activity.  Neither Buyer nor any “affiliate” (as such term is
defined in Rule 405 under the 1933 Act) of Buyer or any broker or dealer acting
on their behalf has sold or purchased, or offered to sell or purchase, the
Common Stock within the preceding 60 days.
 
SECTION 3.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY

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The Company represents and warrants, as of the date of this Agreement and on the
Closing Date, to Buyer, that:
 
3.1           Organization and Qualification.  Set forth in Schedule 3.1 is a
true and correct list of the Company’s Subsidiaries and the jurisdiction in
which each is organized or incorporated, together with their respective
jurisdictions of organization and the percentage of the outstanding capital
stock or other equity interests of each such entity that is held by the Company
or any of its Subsidiaries.  Other than with respect to the entities listed on
Schedule 3.1, the Company does not directly or indirectly own any security or
beneficial ownership interest, in any other Person (including through joint
venture or partnership agreements) or have any interest in any other
Person.  Each of the Company and its Subsidiaries is a corporation, limited
liability company, partnership or other entity and is duly organized or formed
and validly existing in good standing under the laws of the jurisdiction in
which it is incorporated or organized and has the requisite corporate,
partnership, limited liability company or other organizational power and
authority to own its properties and to carry on its business as now being
conducted and as proposed to be conducted by the Company and its
Subsidiaries.  Each of the Company and its Subsidiaries is duly qualified to do
business and is in good standing in every jurisdiction in which such
qualification is required, except to the extent that the failure to be so
qualified or be in good standing could not have and could not be, individually
or in the aggregate, reasonably be expected to have a Material Adverse
Effect.  As used in this Agreement, “Material Adverse Effect” means any material
adverse effect on (i) the business, properties, assets, operations, results of
operations, or condition (financial or otherwise) of the Company and its
Subsidiaries, taken as a whole, or (ii) the authority or ability of the Company
or any other Person (other than Buyer) party to any of the Transaction Documents
to enter into the Transaction Documents and perform its obligations
thereunder.  The Company holds all right, title and interest in and to 100% of
the capital stock, equity or similar interests of each of its Subsidiaries, in
each case, free and clear of any Liens (as defined below) other than Permitted
Liens, including any restriction on the use, voting, transfer, receipt of income
or other exercise of any attributes of free and clear ownership by a current
holder (other than restrictions arising under federal or state securities laws),
and no such Subsidiary owns capital stock or holds an equity or similar interest
in any other Person. As used in this Agreement, “Lien” means with respect to any
asset, any mortgage, lien, pledge, hypothecation, charge, security interest, or
encumbrance of any kind (including any of the foregoing created by, arising
under or evidenced by any conditional sale or other title retention agreement,
the interest of a lessor with respect to a Capital Lease Obligation, or any
financing lease having substantially the same economic effect as any of the
foregoing); “Subsidiary” means any entity in which the Company, directly or
indirectly, owns capital stock or holds an equity or similar interest (at the
time of this Agreement or at any time thereafter); “Capital Lease Obligation”
means, as to any Person, any obligation that is required to be classified and
accounted for as a capital lease on a balance sheet of such Person prepared in
accordance with U.S. generally accepted accounting principles (“GAAP”), and the
amount of such obligation shall be the capitalized amount thereof, determined in
accordance with GAAP; and “Person” means an individual, a limited liability
company, a partnership, a joint venture, a corporation, a trust, an
unincorporated organization, a Governmental Entity or any other legal entity.
 
3.2           Authorization; Enforcement; Validity.  The Company and each of the
Subsidiaries have the requisite corporate, limited liability company or limited
partnership power and authority (as the case may be) to enter into and perform
their obligations under this Agreement, the Registration Rights Agreement, the
Irrevocable Transfer Agent Instructions (as set forth in Section 9(q)), the
Note, the Warrant, the Security Agreement, the Mortgages, the Guaranty, the
Pledge Agreement and each of the other agreements or instruments to which they
are a party or by which they are bound and which are entered into by the parties
hereto in connection with the transactions contemplated hereby and thereby
(collectively, the “Transaction Documents”), and to issue the Securities in
accordance with the terms hereof and thereof assuming in each case the truth and
accuracy of Buyer’s representations and warranties in the Transaction
Documents.  The execution and delivery of the Transaction Documents by the
Company and each of the Subsidiaries and the consummation by the Company and
each of the Subsidiaries of the transactions contemplated hereby and thereby,
including the issuance of the Note, the Closing Shares and the Warrant and the
reservation for issuance and the issuance of the Conversion Shares and the
Warrant Shares, have been duly authorized by the respective boards of directors,
members, managers, stockholders or other equityholders, as applicable, of the
Company and each of the Subsidiaries and no further consent or authorization is
required by the Company, any of the Subsidiaries or any of their respective
boards of directors, members, managers, stockholders or other equityholders, as
applicable.  This Agreement and the other Transaction Documents dated of even
date herewith have been duly executed and delivered by the Company and each
other Person (other than Buyer or the Collateral Agent) party thereto, and
constitute the valid and binding obligations of the Company and each of the
Subsidiaries, enforceable against the Company and each of the Subsidiaries in
accordance with their respective terms, except as may be limited by bankruptcy,
insolvency, fraudulent conveyance or similar laws affecting creditors’ rights
generally and general principles of equity.  As of the Closing, the Transaction
Documents dated after the date of this Agreement and on or prior to the Closing
Date shall have been duly executed and delivered by the Company and each of the
Subsidiaries and shall constitute the valid and binding obligations of the
Company and each of the Subsidiaries, enforceable against the Company and each
of the Subsidiaries in accordance with their respective terms, except as may be
limited by bankruptcy, insolvency, fraudulent conveyance or similar laws
affecting creditors’ rights generally and general principles of equity.

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3.3           Capitalization.  As of the date of this Agreement and as of the
Closing Date, (i) the authorized capital stock of the Company consists of (i)
1,200,000,000 shares of Common Stock, of which 52,289,662 shares are issued and
outstanding, 9,000,000 shares are reserved for issuance pursuant to the
Company’s 2007 Non Qualified Stock Option Plan (the “Option Plan”), including
3,625,000 shares issuable pursuant to outstanding awards under the Option Plan,
and 13,170,000 shares are issuable and reserved for issuance pursuant to
securities issued or to be issued (other than the Note, the Warrant and the
Closing Shares, and other than pursuant to the Option Plan), exercisable or
exchangeable for, or convertible into, shares of Common Stock, (ii) no shares of
Common Stock are reserved for issuance under any plan or agreement, other than
with respect to the Note and Warrant and the shares of Common Stock reserved for
issuance under the Option Plan, and (iii) there are no other securities of the
Company issued, outstanding or reserved for issuance.  All of such outstanding
or issuable shares have been, or upon issuance will be, validly issued and are,
or upon issuance will be, fully paid and nonassessable.  Except as set forth on
Schedule 3.3 or as provided for in the Option Plan, (A) no shares of the capital
stock of the Company are subject to preemptive rights or any other similar
rights; (B) there are no outstanding options, warrants, scrip, rights to
subscribe to, calls or commitments of any character whatsoever relating to, or
securities or rights convertible into or exercisable for, any shares of capital
stock of the Company or any of its Subsidiaries, or contracts, commitments,
understandings or arrangements by which the Company or any of its Subsidiaries
is or may become bound to issue additional shares of capital stock of the
Company or any of its Subsidiaries or options, warrants, scrip, rights to
subscribe to, calls or commitments of any character whatsoever relating to, or
securities or rights convertible into or exercisable for, any shares of capital
stock of the Company or any of its Subsidiaries; (C) there are no outstanding
securities or instruments of the Company or any of its Subsidiaries that contain
any redemption or similar provisions, and there are no contracts, commitments,
understandings or arrangements by which the Company or any of its Subsidiaries
is or may become bound to redeem a security of the Company or any of its
Subsidiaries, and there are no other stockholder agreements or similar
agreements to which the Company, any of its Subsidiaries, or, to the Company’s
Knowledge, any holder of the Company’s capital stock is a party; (D) there are
no securities or instruments containing anti-dilution or similar provisions that
will or may be triggered by the issuance of the Securities; and (E) the Company
does not have any stock appreciation rights or “phantom stock” plans or
agreements or any similar plan or agreement.  The Company has furnished to Buyer
true and correct copies of the Company’s Certificate of Incorporation, as
amended and in effect on the date of this Agreement (the “Certificate of
Incorporation”), and the Company’s Bylaws, as amended and in effect on the date
of this Agreement (the “Bylaws”), the organizational documents of each of the
Company’s Subsidiaries, as amended and in effect on the date of this Agreement,
and all documents and instruments containing the terms of all securities, if
any, that are convertible into, or exercisable or exchangeable for, Common
Stock, and the material rights of the holders thereof in respect thereto.  All
of the equity interests of each of the Subsidiaries are certificated or
otherwise represented in tangible form. “To the Company’s Knowledge” and similar
language means the actual knowledge of W. Milton Cox, Bassam “Sam” Nastat, and
Donald L. Systma (the “Management Members”).

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3.4           Issuance of Securities.  The Closing Shares are duly authorized
and, upon issuance in accordance with the terms hereof, will be validly issued,
fully paid and nonassessable and free from all taxes and Liens with respect to
the issuance thereof, with the holders being entitled to all rights accorded to
a holder of shares of Common Stock.  Upon issuance and payment therefor in
accordance with this Agreement, the Note will be duly authorized and shall be
(i) free from all taxes and Liens with respect to the issuance thereof and (ii)
entitled to the rights set forth therein.  At least 14,500,000 shares of Common
Stock (subject to adjustment pursuant to the Company’s covenant set forth in
Section 4.7 below) have been duly authorized and reserved for issuance upon
exercise of the Warrant and conversion of the Note.  Upon conversion of the Note
or upon exercise in accordance with such Warrant, the Conversion Shares or
Warrant Shares (as the case may be) will be validly issued, fully paid and
nonassessable and free from all taxes and Liens with respect to the issuance
thereof, with the holders being entitled to all rights accorded to a holder of
shares of Common Stock issued upon each such exercise, subject to restrictions
on transfer pursuant to the Transaction Documents and federal and state
securities laws.
 
3.5           No Conflicts.  The execution and delivery of this Agreement and
the other Transaction Documents by the Company and each of the Subsidiaries, the
performance by the Company and each of the Subsidiaries of its obligations
thereunder and the consummation by the Company and each of the Subsidiaries of
the transactions contemplated thereby (including the reservation for issuance
and issuance of the Warrant Shares) will not (i) result in a violation of the
certificate or articles of incorporation, certificate or articles of
organization, bylaws, operating agreement, partnership agreement or any other
governing documents, as applicable, of any such Person; (ii) conflict with, or
constitute a breach or default (or an event which, with the giving of notice or
passage of time or both, constitutes or would constitute a breach or default)
under, or give to others any right of termination, amendment, acceleration or
cancellation of, or other remedy with respect to, any agreement, indenture or
instrument to which any such Person is a party; (iii) result in a violation of
any law, rule, regulation, order, judgment or decree (including securities laws
and the rules and regulations, if any, of the Principal Market (as defined in
Section 3.16)) applicable to any such Person or by which any property or asset
of any such Person is bound or affected.  Neither the Company nor any of the
Subsidiaries is or has been in violation of any term of or in default under (or
with the giving of notice or passage of time or both would be in violation of or
default under) any contract, agreement, mortgage, indebtedness, indenture,
instrument, judgment, decree or order or any Law applicable to the Company or
its Subsidiaries, except where such violation or default could not reasonably be
expected to have a Material Adverse Effect or to result in the acceleration of
any Indebtedness (as defined below) or other obligation.  The business of the
Company and its Subsidiaries has not been and is not being conducted, in
violation of any Law of any Governmental Entity except as could not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect.  Except for the filings and listings expressly contemplated by
the Registration Rights Agreement and the filing of instruments to perfect
security interests, and filings to be made pursuant to Section 4.2 hereof,
neither the Company nor any of the Subsidiaries is or has been required to
obtain any consent, authorization or order of, or make any filing or
registration with, any court or Governmental Entity in order for it to execute,
deliver or perform any of its obligations under or contemplated by the
Transaction Documents in accordance with the terms hereof or thereof.  As used
in this Agreement, “Laws” means all present federal, state, local or foreign
laws, statutes, rules, regulations, ordinances and codes, together with all
administrative or judicial orders or decrees, consent agreements, licenses,
authorizations and permits of, and agreements with, any Governmental Entity;
“Indebtedness” of any Person means, without duplication (A) all indebtedness for
borrowed money, (B) all obligations issued, undertaken or assumed as the
deferred purchase price of property or services (other than unsecured account
trade payables that are (i) entered into or incurred in the ordinary course of
the Company’s and its Subsidiaries’ business, (ii) on terms that require full
payment within 90 days from the date entered into or incurred, and (iii) not
unpaid in excess of 120 days from the date entered into or incurred, or are
being contested in good faith and as to which such reserve as is required by
GAAP has been made, (C) all reimbursement or payment obligations with respect to
letters of credit, surety bonds and other similar instruments, (D) all
obligations evidenced by notes, bonds, debentures, redeemable capital stock or
similar instruments, including obligations so evidenced incurred in connection
with the acquisition of property, assets or businesses, (E) all indebtedness
created or arising under any conditional sale or other title retention
agreement, or incurred as financing, in either case with respect to any property
or assets acquired with the proceeds of such indebtedness (even though the
rights and remedies of the seller, bank or other financing source under such
agreement in the event of default are limited to repossession or sale of such
property), (F) all Capital Lease Obligations, (G) all indebtedness referred to
in clauses (A) through (F) above secured by (or for which the holder of such
indebtedness has an existing right, contingent or otherwise, to be secured by)
any mortgage, lien, pledge, charge, security interest or other encumbrance upon
or in any property or assets (including accounts and contract rights) owned by
any Person, even though the Person that owns such assets or property has not
assumed or become liable for the payment of such indebtedness, and (H) all
Contingent Obligations in respect of indebtedness or obligations of others of
the kinds referred to in clauses (A) through (G) above; and “Contingent
Obligation” means, as to any Person, any direct or indirect liability,
contingent or otherwise, of that Person with respect to any indebtedness, lease,
dividend or other obligation of another Person if the primary purpose or intent
of the Person incurring such liability, or the primary effect thereof, is to
provide assurance to the obligee of such liability that such liability will be
paid or discharged, or that any agreements relating thereto will be complied
with, or that the holders of such liability will be protected (in whole or in
part) against loss with respect thereto.

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3.6           SEC Documents; Financial Statements.  Since June 30, 2006, the
Company has filed all reports, schedules, forms, statements and other documents
required to be filed by it with the SEC pursuant to the reporting requirements
of the Securities and Exchange Act of 1934, as amended (the “1934 Act”) (all of
the foregoing filed prior to the date this representation is made (including all
exhibits included therein and financial statements and schedules thereto and
documents incorporated by reference therein) being referred to herein as the
“SEC Documents” and the Company’s consolidated balance sheet as of May 31, 2007,
as included in the Company’s quarterly report on Form 10-QSB for the period then
ended, as filed with the SEC on July 17, 2007, being referred to herein as the
“Most Recent Balance Sheet”).  A complete and accurate list of the SEC Documents
is available on the SEC’s web site at www.sec.gov.  As of their respective
dates, the SEC Documents complied in all material respects with the securities
laws.  None of the SEC Documents, at the time they were filed with the SEC,
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.  As of their respective dates, the consolidated financial statements
of the Company and its Subsidiaries included in the SEC Documents complied as to
form in all material respects with applicable accounting requirements and the
securities laws with respect thereto.  Such consolidated financial statements
have been prepared in accordance with generally accepted accounting principles,
consistently applied, during the periods involved (except (i) as may be
otherwise indicated in such financial statements or the notes thereto, or (ii)
in the case of unaudited interim statements, to the extent they may exclude
footnotes) and fairly present in all material respects the financial position of
the Company and its Subsidiaries as of the dates thereof and the results of
their operations and cash flows for the periods then ended (subject, in the case
of unaudited statements, to normal year-end audit adjustments).  The accounting
firm that has expressed its opinion with respect to the consolidated financial
statements included in the Company’s registration statement on Form SB-2, File
No. 333-B3759 (the “Audit Opinion”) is independent of the Company pursuant to
the standards set forth in Rule 2-01 of Regulation S-X promulgated by the SEC
and such firm was otherwise qualified to render the Audit Opinion under
applicable securities laws.  Each other accounting firm that since such filing
has conducted or will conduct a review or audit of any of the Company’s
consolidated financial statements is independent of the Company pursuant to the
standards set forth in Rule 2-01 of Regulation S-X promulgated by the SEC and is
otherwise qualified to conduct such review or audit and render an audit opinion
under applicable securities laws.

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3.7           Absence of Certain Changes.  Neither the Company nor any of the
Subsidiaries has taken any steps, and neither the Company nor any such
Subsidiary expects to take any steps to seek protection pursuant to any
bankruptcy law nor, to the Company’s Knowledge, is there any (i) reason to
believe that the creditors of such Person intend to initiate involuntary
bankruptcy proceedings or (ii) any fact that would reasonably lead a creditor to
do so.  Neither the Company nor any Subsidiary is as of the date this
representation is made, nor after giving effect to the transactions contemplated
hereby or by any of the other Transaction Documents will be, Insolvent (as
defined below).  As used in this Agreement, “Insolvent” means, with respect to
any Person, (i) the present fair saleable value of such Person’s assets is less
than (A) the total amount of liabilities (including contingent liabilities) of
such Person or (B) the amount required to pay such Person’s probable liabilities
on its existing total indebtedness, contingent or otherwise, as such
indebtedness becomes absolute and due (ii) such Person is unable to pay its
debts and liabilities, subordinated, contingent or otherwise, as such debts and
liabilities become absolute and matured, (iii) such Person intends to incur, or
believes that it will incur, debts that would be beyond its ability to pay as
such debts mature or (iv) such Person has unreasonably small capital with which
to conduct the business in which it is engaged as such business is now conducted
and is proposed to be conducted.
 
3.8           Absence of Litigation.  There is not any action, suit, proceeding,
inquiry or investigation (“Litigation”) before or by any court, public board,
Governmental Entity, self-regulatory organization or body pending or, to the
Company’s Knowledge, threatened against or affecting the Company or any of its
Subsidiaries.  To the Company’s Knowledge, no director or officer of the Company
or any of its Subsidiaries has been involved in securities-related Litigation
during the past five years.
 
3.9           No Undisclosed Events, Liabilities, Developments or
Circumstances.  Except as set forth on Schedule 3.9, since December 31, 2006,
there has been no Material Adverse Effect and no circumstances exist that,
individually or in the aggregate, could reasonably be expected to be, cause or
have a Material Adverse Effect except as disclosed in the Schedules to this
Agreement.  Except (A) as and to the extent disclosed or reserved against on the
Most Recent Balance Sheet, (B) as incurred since the date thereof in the
ordinary course of business consistent with past practice, (C) as incurred at
the Closing Date under the Note and the other Transaction Documents or in
connection with the transactions contemplated thereby, or (D) as set forth on
Schedule 3.9, neither the Company, nor any of its Subsidiaries has any
liabilities or obligations of any nature, whether known or unknown, absolute,
accrued, contingent or otherwise and whether due or to become due.
 
3.10    Acknowledgment Regarding Buyer’s Purchase of Note and Warrant.  The
Company acknowledges and agrees that Buyer is acting solely in the capacity of
an arm’s length purchaser with respect to the Company in connection with this
Agreement and the other Transaction Documents and the transactions contemplated
hereby and thereby.  The Company further acknowledges that Buyer is not acting
as a financial advisor or fiduciary of any party to this Agreement or any of the
other Transaction Documents (or in any similar capacity) with respect to this
Agreement and the other Transaction Documents and the transactions contemplated
hereby and thereby, and any advice given by Buyer or any of its representatives
or agents in connection with the Transaction Documents and the transactions
contemplated hereby and thereby is merely incidental to Buyer’s purchase of the
Securities.  The Company further represents to Buyer that the decision of each
of the Company and the Subsidiaries to enter into the Transaction Documents has
been based solely on the independent evaluation by the Company, the Subsidiaries
and their representatives.

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3.11    Employee Relations.  Neither the Company nor any of its Subsidiaries is
involved in any labor union dispute nor, to the Knowledge of the Company, is any
such dispute threatened.  None of the employees of either the Company or any of
its Subsidiaries is or has been a member of a union that relates to such
employee’s relationship with the Company and neither the Company nor any of its
Subsidiaries is a party to a collective bargaining agreement.  Schedule 3.11
lists each individual who will be employed by the Company or retained by the
Company as of the Closing Date.  Such individuals constitute all of the
employees and consultants necessary to conduct the Company’s business as
presently conducted.  Except as set forth on Schedule 3.11, to the Company’s
Knowledge, no such individual is, has been, or is expected to be, in violation
of any material term of any employment contract, confidentiality, disclosure or
proprietary information agreement or non-competition agreement, or any other
contract or agreement or any restrictive covenant, and, to the Company’s
Knowledge, the employment of each such individual does not, has not and will not
subject the Company or any of its Subsidiaries to any liability with respect to
any of the foregoing matters.  The Company and each of its Subsidiaries is and
has been in compliance with all Laws relating to employment and employment
practices, terms and conditions of employment and wages and hours except as
could not reasonably be expected to have a Material Adverse Effect.
 
3.12    Intellectual Property Rights.  The Company and its Subsidiaries own or
possess adequate rights or licenses to use all trademarks, trademark
applications and registrations, trade names, service marks, service mark
registrations, service names, patents, patent rights, patent applications,
copyrights (whether or not registered), inventions, licenses, approvals,
governmental authorizations, trade secrets and other intellectual property
rights (collectively, “Intellectual Property”) necessary to conduct their
respective businesses as now conducted.  The Company and its Subsidiaries have
taken reasonable security measures to protect the secrecy, confidentiality and
value of all of their material Intellectual Property.
 
3.13    Environmental Laws.  Each of the Company and its Subsidiaries (i) is,
and has at all times been, in compliance in all material respects with any and
all Environmental Laws (as defined below) and has not violated any Environmental
Laws, (ii) has no, and has never had any, liability for failure to comply with
any Environmental Law, (iii) has received all permits, licenses or other
approvals required of it under applicable Environmental Laws to conduct its
business as presently conducted, and (iv) is in com­pliance with all terms and
conditions of any such permit, license or approval except with respect to
clauses (i) through (iv) as could not reasonably be expected to have a Material
Adverse Effect.  As used in this Agreement, “Environmental Laws” means all Laws
relating to any matter arising out of or relating to public health and safety,
or pollution or protection of the environment (including ambient air, surface
water, groundwater, land surface or subsurface strata) or workplace, including
any of the foregoing relating to the presence, use, production, generation,
handling, transport, treatment, storage, disposal, distribution, discharge,
emission, release, threatened release, control or cleanup of any Hazardous
Materials, including the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, 42 U.S.C. §9601 et seq., as amended (“CERCLA”), the
Resource Conservation and Recovery Act of 1976, as amended, 42 U.S.C. §6901, et
seq., the Clean Air Act, 42 U.S.C. §7401, et seq., as amended, the Federal Water
Pollution Control Act, 33 U.S.C. §1251, et seq., as amended, the Oil Pollution
Act of 1990, 33 U.S.C. §2701, et seq., and the Toxic Substances Control Act, 15
U.S.C. §2601, et seq.

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3.14    Title.  Except as set forth in Schedule 3.14, neither the Company nor
any of its Subsidiaries has any interest in Oil and Gas Property or any oil, gas
or other mineral drilling, exploration or development rights.  The Company and
each of its Subsidiaries has valid title to all personal property currently
possessed by them that is material to the business of such Person, in each case
free and clear of all Liens except such as are described in Schedule 3.14 and
Permitted Liens.  The Company and each of its Subsidiaries has indefeasible
title to all Oil and Gas Property owned (rather than leased) by such Person (the
“Owned Oil and Gas Property”) as set forth on Schedule 3.14, in each case free
and clear of all Liens, other than Permitted Liens, except such as are described
in Schedule 3.14.  As used in this Agreement, “Permitted Lien” means (I) Liens
created by the Security Documents; (II) Liens for taxes or other governmental
charges not at the time due and payable, or which are being contested in good
faith by appropriate proceedings diligently prosecuted, so long as foreclosure,
distraint, sale or other similar proceedings have not been initiated, and in
each case for which the Company and its Subsidiaries maintain adequate reserves
in accordance with GAAP in respect of such taxes and charges; (III) Liens
arising in the ordinary course of business in favor of carriers, warehousemen,
mechanics and materialmen, or other similar Liens imposed by law, which remain
payable without penalty or which are being contested in good faith by
appropriate proceedings diligently prosecuted, which proceedings have the effect
of preventing the forfeiture or sale of the property subject thereto, and in
each case for which adequate reserves in accordance with GAAP are being
maintained; (IV) Liens arising in the ordinary course of business in connection
with worker’s compensation, unemployment compensation and other types of social
security (excluding Liens arising under ERISA); (V) attachments, appeal bonds
(and cash collateral securing such bonds), judgments and other similar Liens,
for sums not exceeding $100,000 in the aggregate for the Company and its
Subsidiaries, arising in connection with court proceedings, provided that the
execution or other enforcement of such Liens is effectively stayed; (VI)
easements, rights of way, restrictions, minor defects or irregularities in title
and other similar Liens arising in the ordinary course of business and not
materially detracting from the value of the property subject thereto and not
interfering in any material respect with the ordinary conduct of the business of
the Company or any of its Subsidiaries; (VII) surety bonds, bids, performance
bonds, and similar obligations (exclusive of obligations for the payment of
borrowed money) obtained by the Company and its Subsidiaries in the ordinary
course of business for the purpose of satisfying federal, state, provincial and
territorial and/or local legal requirements for owning and operating their oil
and gas properties; (VIII) Oil and Gas Liens; and (IX) Liens arising solely by
virtue of any statutory or common law provision relating to banker’s liens,
rights of set-off or similar rights and remedies and burdening only deposit
accounts or other funds maintained with a creditor depository institution,
provided that no such deposit account is a dedicated cash collateral account or
is subject to restrictions against access by the depositor in excess of those
set forth by regulations promulgated by the Board of Governors of the U.S.
Federal Reserve System and that no such deposit account is intended by the
Company or any of its Subsidiaries to provide collateral to the depository
institution.  As used in this Agreement, “Security Documents” means the Security
Agreement, the Guaranty, the Pledge Agreement, the Mortgages and any other
agreements, documents and instruments executed concurrently herewith or at any
time hereafter pursuant to which the Company, its Subsidiaries, or any other
Person either (i) guarantees payment or performance of all or any portion of the
obligations hereunder or under any other instruments delivered in connection
with the transactions contemplated hereby and by the other Transaction
Documents, and/or (ii) provides, as security for all or any portion of such
obligations, a Lien on any of its assets in favor of Buyer, as any or all of the
same may be amended, supplemented, restated or otherwise modified from time to
time.  “Oil and Gas Liens” means (i) Liens of operators and non operators under
joint operating agreements arising in the ordinary course of the business of the
Company or its Subsidiaries to secure amounts owing, which amounts are not yet
due and will be paid in accordance with customary business practices, as same
exist on the date hereof, or are being contested in good faith by appropriate
proceedings diligently prosecuted, so long as foreclosure, distraint, sale or
other similar proceedings have not been initiated, and in each case for which
the Company and its Subsidiaries maintain adequate reserves in accordance with
GAAP in respect of such taxes and charges; (ii) Liens on an oil or gas producing
property to secure obligations incurred or guarantees of obligations incurred
(in each case, other than Indebtedness) in connection with or necessarily
incidental to commitments for the purchase or sale of, or the transportation or
distribution of, the production from such property which obligations are not yet
due and will be paid in accordance with customary business practices, as same
exist on the date hereof, or are being contested in good faith by appropriate
proceedings diligently prosecuted, so long as foreclosure, sale or other similar
proceedings have not been initiated; and (iii) Liens on pipelines or pipelines
facilities that arise by operation of law securing obligations which are not yet
due and will be paid in accordance with customary business practices, as same
exist on the date hereof, or are being contested in good faith by appropriate
proceedings diligently prosecuted, so long as foreclosure, sale or other similar
proceedings have not been initiated, and in each case for which the Company and
its Subsidiaries maintain adequate reserves in accordance with GAAP in respect
of such taxes and charges.

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3.15    Insurance.  The Company and each of its Subsidiaries have insurance
policies (or the operators of its non-operated properties are required to carry
insurance policies) against such losses and risks and in such amounts as
management of the Company believes to be prudent and customary in the businesses
in which the Company and its Subsidiaries are engaged.
 
3.16    Regulatory Permits.  Except as could not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect (as defined
in Section 3.1) or a material adverse effect on the production, extraction,
transportation or sale of oil, gas, minerals or other hydrocarbons from any
portion of the Owned Oil and Gas Property (as defined in Section 3.14) that is
producing oil, gas, minerals and/or other hydrocarbons at the time this
representation is made, the Company and its Subsidiaries possess all
certificates, authorizations, approvals, licenses and permits issued by the
appropriate federal, state or foreign regulatory authorities necessary to
conduct their respective businesses as conducted at the time this representation
is made (“Permits”), and neither the Company nor any such Subsidiary has
received any notice of proceedings relating to the revocation or modification of
any such Permit.  Without limiting the foregoing, the Company and its
Subsidiaries possess all Permits necessary to produce, extract, transport and
sell the oil, gas and other minerals in that portion of Oil and Gas Property
that is producing oil, gas, minerals and/or other hydrocarbons at the time this
representation is made.  Except as could not reasonably be expected to have a
Material Adverse Effect, the Company and its Subsidiaries have no reason to
believe that they will not be able to obtain necessary Permits as and when
necessary to enable the Company to produce, extract, transport and sell the oil,
gas, minerals and other hydrocarbons in the Oil and Gas Property.  The Company
is not in violation of any of the rules, regulations or requirements of the OTC
Bulletin Board (the “Principal Market”).

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3.17    Internal Accounting Controls; Disclosure Controls and Procedures; Books
and Records.  The Company has, and has caused each of its Subsidiaries to, at
all times keep books, records and accounts with respect to all of such Person’s
business activities, in accordance with sound accounting practices and GAAP
consistently applied.  The Company and each of its Subsidiaries maintains a
system of internal accounting controls sufficient to provide reasonable
assurance that (i) transactions are executed in accordance with management’s
general or specific authorizations, (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset and liability
accountability, (iii) access to assets or incurrence of liability is permitted
only in accordance with management’s general or specific authorization and (iv)
the recorded accountability for assets and liabilities is compared with the
existing assets and liabilities at reasonable intervals and appropriate action
is taken with respect to any differences.  The Company has filed all
certifications and statements required by (A) Rule 13a-14 or Rule 15d-14 under
the 1934 Act and (B) Section 906 of Sarbanes Oxley with respect to any Company
SEC Documents.  The Company maintains disclosure controls and procedures
required by Rule 13a-15 or Rule 15d-15 under the 1934 Act; except as set forth
in Schedule 3.17, such disclosure controls and procedures are, and at all times
have been, effective to ensure that the information required to be disclosed by
the Company in the reports that it files with or submits to the SEC (X) is
recorded, processed, summarized and reported accurately within the time periods
specified in the SEC’s rules and forms and (Y) is accumulated and communicated
to the Company’s management, including its principal executive officer and
principal financial officer, as appropriate to allow timely decisions regarding
required disclosure.  The Company maintains internal control over financial
reporting required by Rule 13a-14 or Rule 15d-14 under the 1934 Act; except as
set forth in Schedule 3.17, such internal control over financial reporting is,
and has at all times been, effective and does not contain, and has not
contained, any material weaknesses.
 
3.18    Tax Status.  Except as set forth in Schedule 3.18, the Company and each
of its Subsidiaries (i) has made or filed all foreign, federal and state income
and all other tax returns, reports and declarations required by any jurisdiction
to which it is subject, (ii) has paid all taxes and other governmental
assessments and charges that are material in amount, shown or determined to be
due on such returns, reports and declarations, except those being contested in
good faith and for which the Company has made appropriate reserves on its books,
and (iii) has set aside on its books provisions reasonably adequate for the
payment of all taxes for periods subsequent to the periods to which such
returns, reports or declarations (referred to in clause (i) above)
apply.  Except as set forth in Schedule 3.18, there are no unpaid taxes in any
material amount claimed in writing to be due from the Company or any of its
Subsidiaries by the taxing authority of any jurisdiction, and there is no basis
for any such claim.  Neither the Company nor any of its Subsidiaries is a
“United States real property holding corporation” (“USRPHC”) as that term is
defined in Section 897(c)(2) of the Internal Revenue Code of 1986, as amended,
and the Treasury Regulations promulgated thereunder.

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3.19    Transactions With Affiliates.  Except as set forth on Schedule 3.19, no
Related Party (as defined below) of the Company or any of its Subsidiaries, nor
any Affiliate thereof, is presently, or will be as a result of the transactions
contemplated by this Agreement and the other Transaction Documents, a party to
any transaction, contract, agreement, instrument, commitment, understanding or
other arrangement or relationship with the Company or any of its Subsidiaries,
whether for the furnishing of services to or by, providing for rental of real or
personal property to or from, or otherwise requiring payments or consideration
to or from any such Related Party.  Except as set forth on Schedule 3.19, no
Related Party of the Company or any of its Subsidiaries, or any of their
respective Affiliates, has any direct or indirect ownership interest in any
Person (other than ownership of less than 2% of the outstanding common stock of
a publicly traded corporation) in which the Company or any of its Subsidiaries
has any direct or indirect ownership interest or with which the Company or any
of its Subsidiaries competes or has a business relationship.  “Related Party”
means a Person’s or any of its subsidiary’s officers, directors, persons who
were officers or directors at any time, from and as of December 31, 2007,
stockholders (other than any holder of less than 5% of the outstanding shares of
such Person), or Affiliates of such Person.  As used in this Agreement,
“Affiliate” means, with respect to any Person, another Person that, directly or
indirectly, (i) has a 5% equity interest in that Person, (ii) has a common
ownership with that Person, (iii) controls that Person, (iv) is controlled by
that Person or (v) shares common control with that Person; and “control” or
“controls” means that a Person has the power, direct or indirect, to conduct or
govern the policies of another Person.
 
3.20    Application of Takeover Protections; Rights Agreement.  The Company and
its board of directors have taken all necessary action, if any, in order to
render inapplicable any control share acquisition, business combination, or
other similar anti-takeover provision under the Certificate of Incorporation or
any certificates of designations or the laws of the jurisdiction of its
formation or incorporation to the transactions contemplated by this Agreement,
the Company’s issuance of the Securities in accordance with the terms hereof and
any Buyer’s ownership of the Securities.  The Company has not adopted a
stockholder rights plan or similar arrangement relating to accumulations of
beneficial ownership of Common Stock or a change in control of the Company.
 
3.21    Foreign Corrupt Practices.  Neither the Company, nor any of its
Subsidiaries, nor any director, officer, agent, employee or other person acting
on behalf of the Company or any of its Subsidiaries has, in the course of its
actions for, or on behalf of, the Company, used any corporate funds for any
unlawful contribution, gift, entertainment or other unlawful expenses relating
to political activity; made any direct or indirect unlawful payment to any
foreign or domestic government official or employee from corporate funds;
violated or is in violation of any provision of the U.S. Foreign Corrupt
Practices Act of 1977, as amended; or made any unlawful bribe, rebate, payoff,
influence payment, kickback or other unlawful payment to any foreign or domestic
government official or employee.
 
3.22    Outstanding Indebtedness, Permitted Indebtedness and Liens.  Except as
set forth on Schedule 3.22, (i) neither the Company nor any of its Subsidiaries
has any, and upon consummation of the transactions contemplated hereby and by
the other Transaction Documents will not have any, outstanding Indebtedness or
trade account payables other than pursuant to the Transaction Documents, (ii)
there are no, and upon consummation of the transactions contemplated hereby and
by the other Transaction Documents there will not be any, Liens other than
Permitted Liens on any of the assets of the Company and its Subsidiaries, and
(iii) there are no, and upon consummation of the transactions contemplated
hereby and by the other Transaction Documents there will not be any, Uniform
Commercial Code financing statements or similar filings, registrations or
recordings evidencing Liens in respect of any obligations of Indebtedness of any
amounts filed against the Company or any of its Subsidiaries or any of their
respective assets, other than under the Security Agreement.

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3.23    Ranking of Note.  No Indebtedness of the Company is, or will be upon
consummation of the transactions contemplated hereby and by the other
Transaction Documents, senior to or pari passu with the Note in right of
payment, whether with respect of payment of redemptions, interest or principal.
 
3.24    Oil and Gas Property.  Schedule 3.24 contains a complete and correct
list of all the (i) real property; leasehold interests; fee interests; oil, gas
and other mineral interests drilling, exploration and development rights;
pooling, spacing, communitization and unitization rights and interests; royalty
interests, overriding royalty interests, and other interests in payments out of
or pursuant to production; other rights and interests in and to oil, gas and
other minerals, including contractual rights to production, concessions, back in
after payout interests, net profits interests, working interests, carried
working interests and participation interests (including all Hydrocarbon
Property (as defined in the Mortgages)); and (ii) any options, acquisition
agreements, joint development agreements, area of mutual interest agreements,
farmins, farmouts, exploration agreements or other contractual rights for the
acquisition or earning of any interests of the types set forth in subpart (i)
hereof (including any of the foregoing acquired after the date of this Agreement
and all facilities, fixtures and equipment relating or incidental to such
interests, singularly, an “Oil and Gas Property” and collectively, the “Oil and
Gas Properties”), which list identifies all of the Oil and Gas Properties and
specifies which of the Company and its Subsidiaries leases, owns or possesses
each of the Oil and Gas Properties.  The oil, gas and/or mineral leases, deeds,
pooling, spacing, communitization and unitization orders, rights and agreement
and contracts and other agreements, as set forth in Schedule 3.24 included in
the Oil and Gas Properties (not including easements, rights of way, access
agreements, surface damage agreements, surface use agreements or similar
agreements that pertain to the Oil and Gas Property) are collectively referred
to herein as the “Leases”.  Except as set forth in Schedule 3.24, the Company or
one of its Subsidiaries possesses indefeasable title to the Oil and Gas
Property, free and clear of all Liens (other than Permitted Liens) and
encumbrances that could impair the ability of the Company and its Subsidiaries
to realize the benefits of the rights provided to any of them under the
Leases.  Except as set forth on Schedule 3.24, there are no pending or, to the
Company’s Knowledge, threatened in writing condemnation, eminent domain or
similar proceedings, or litigation or other proceedings affecting any Oil and
Gas Property, or any portion or portions thereof.  Except as set forth on
Schedule 3.24, no well included in the Oil and Gas Properties is subject to a
Payout Balance and Schedule 3.24 correctly reflects the Payout Balance for each
well listed thereon as being subject to a Payout Balance.  “Payout Balance”
means the status, as of the date set forth in Schedule 3.24 of the recovery by
the Company, its Subsidiaries or a third person of a cost amount specified in
the contract relating to a well out of the revenue from such well where the net
revenue interest of the Company or any of its Subsidiaries therein will be
reduced or the working interest therein will be increased when such amount has
been recovered.

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3.25    Leases, Performance of Obligations.  All of the Leases are valid and in
full force and effect and are enforceable against all parties thereto.  Neither
the Company nor any of its Subsidiaries nor, to the Company’s Knowledge, any
other party thereto is in default in any material respect under any of such
Leases and no event has occurred which with the giving of notice and/or the
passage of time could constitute a default under, or otherwise give any party
the right to terminate, any of such Leases, or affect the Company’s or any of
its Subsidiaries’ interest in and title to the Oil and Gas Property arising
under any of such Leases.  No Lease is subject to termination, modification or
acceleration as a result of the transactions contemplated hereby and the
transactions contemplated hereby (including the granting of the Mortgages) will
not make any right of first refusal exercisable by any third party with respect
to any of the Oil and Gas Properties.  Except as set forth in Schedule 3.25, all
of the Leases will remain in full force and effect upon, and permit, the
consummation of the transactions contemplated hereby and by the other
Transaction Documents (including the granting of leasehold mortgages).  There
are no restrictions applicable to any Oil and Gas Property that would interfere
with the Company’s or any of its Subsidiary’s making an assignment or granting
of a Mortgage to any Buyer as contemplated by the Security Documents, including
any requirement under any Lease.  The Leases will by their terms remain in
effect for at least as long as oil, gas or other minerals are produced in paying
quantities, all required royalty payments are made or they are otherwise
maintained by operations.
 
3.26    Operation of Oil and Gas Property, Marketing.  Except as set forth in
Schedule 3.26, all of the wells on the Oil and Gas Properties have been drilled
and completed, or plugged and abandoned, at legal locations within the
boundaries set forth in the appropriate Lease; and no such well is subject to
penalties on allowables after the date hereof because of any overproduction or
violation of applicable laws, rules, regulations, permits or judgments, orders
or decrees of any court or governmental body or agency which would prevent such
well from being entitled to its full legal and regular allowance from and after
the date hereof as prescribed by any court or Governmental Entity.  Except as
set forth in Schedule 3.26, there are no joint operating agreements applicable
to any Oil and Gas Property.  The Company and the Subsidiaries will not be
obligated, as of the Closing Date or thereafter, including by virtue of a
prepayment arrangement, make-up right under a production sales contract
containing a “take or pay” or similar provision, production payment, buydowns,
buyouts, or any other arrangement, (i) to deliver hydrocarbons, or proceeds from
the sale thereof, attributable to any of the Oil and Gas Properties at some
future time without then or thereafter receiving the full contract price
therefor, or (ii) to deliver oil or gas (or cash in lieu thereof) from any Oil
and Gas Property to other owners of interests as a result of past production by
the Company or the Subsidiaries or any of their predecessors in excess of the
share to which it was entitled with respect to such Oil and Gas
Property.  Except as set forth in Schedule 3.26, no Person has any call upon,
option to purchase or similar right to obtain production from any portion of the
Oil and Gas Property and no Oil and Gas Property or production therefrom is
subject to any forward sales contract or other hedging arrangement.  Except as
set forth in Schedule 3.26, all oil and gas production proceeds payable by the
Company or its Subsidiaries to others from the Oil and Gas Properties under the
applicable terms of the Leases or under applicable Laws, including all
royalties, overriding royalties and net profits interests, have been disbursed
and all deductions from those oil and gas production proceeds have been made in
accordance with the applicable terms and conditions of those Leases and Laws,
except for revenues which are properly being suspended or held in accordance
with applicable Laws, and (iii) the Company and its Subsidiaries are in
compliance in all material respects with all applicable Laws pertaining to
escheatment.

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3.27    Tangible Assets.  The Company and its Subsidiaries have defensible title
to all of their tangible assets (the “Assets”), all of which are free and clear
of any Lien, other than Permitted Liens, and include all assets necessary for
the conduct of the Company’s business as presently proposed to be
conducted.  The Assets that are pipelines, facilities, fixtures, equipment, and
other personal property have been maintained in all material respects in
accordance with normal industry practice, and are in good operating condition
and repair (subject to normal wear and tear), and are suitable for the purposes
for which they are now used and proposed to be used.  There are no existing
agreements, options, commitments or rights with, of or to any Person to acquire
any assets, or any interests therein.
 
3.28    Investment Company.  The Company is not, and upon each Closing will not
be, an “investment company,” a company controlled by an “investment company,” or
an “affiliated person” of, or “promoter” or “principal underwriter” for, an
“investment company,” as such terms are defined in the Investment Company Act of
1940, as amended (the “Investment Company Act”).
 
SECTION 4.
AFFIRMATIVE COVENANTS
 
4.1           Best Efforts.  Each party shall use its reasonable best efforts to
timely satisfy each of the conditions to be satisfied by it as provided in
Sections 6 and 7 of this Agreement.
 
4.2           Reporting Status.  Until the latest of (i) the date that is one
year after the date as of which the Investors (as that term is defined in the
Registration Rights Agreement) may sell all of the Closing Shares and all of the
Warrant Shares without restriction pursuant to Rule 144(k) promulgated under the
1933 Act (or successor thereto) and (ii) the date on which neither the Note nor
the Warrant remains outstanding (the period ending on such latest date, the
“Reporting Period”), the Company shall file all reports required to be filed
with the SEC pursuant to the 1934 Act in a timely manner (including any
extensions of the applicable time frames permitted by Rule 12b-25 under the 1934
Act pursuant to timely filed Forms 12b-25), and the Company shall not terminate
its status as an issuer required to file reports under the 1934 Act even if the
securities laws would otherwise permit such termination.
 
4.3           Use of Proceeds.  The Company will use the proceeds from the sale
of the Closing Shares, Note and Warrant as set forth on Schedule 4.3.
 
4.4           Financial Information.  The Company agrees to send the following
to each Investor (as defined in the Registration Rights Agreement) during the
Reporting Period (i) unless the following are filed with the SEC through EDGAR
and are immediately available to the public through the EDGAR system, within one
Business Day after the filing thereof with the SEC, a copy of each of its
quarterly reports on Form 10-QSB or 10-Q and annual reports on Form 10-KSB or
10-K, as the case may be (each, a “Periodic Report”), Current Reports on Form
8-K, registration statements (other than on Form S-8) and amendments and
supplements to each of the foregoing, (ii) unless immediately available through
Bloomberg Financial Markets (or any successor thereto), facsimile copies of all
press releases issued by the Company or any of its Subsidiaries,
contemporaneously with the issuance thereof, and (iii) copies of any notices and
other information made available or given to the stockholders of the Company
generally, contemporaneously with the making available or giving thereof to the
stockholders.

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4.5           Reservation of Shares.  The Company shall take all action
necessary to at all times have authorized, and reserved for the purpose of
issuance, no less than the aggregate number of shares of Common Stock issuable
upon Conversion of the Note and exercise of the Warrant.
 
4.6           Listing.  The Company shall take all actions necessary to remain
eligible for quotation of its Common Stock on the OTC Bulletin Board and to
cause all of the Registrable Securities (as defined in the Registration Rights
Agreement) covered by a registration statement to be quoted thereon, unless
listed on a national securities exchange.
 
4.7           Disclosure of Transactions and Other Material
Information.  Contemporaneous with or prior to the earlier of (i) the Company’s
first public announcement of the transactions contemplated hereby and (ii) 4:00
p.m. (New York City time) on the fourth Business Day following the Closing Date,
the Company shall file the Announcing 8-K with the SEC.  The “Announcing Form
8-K,” (x) shall describe the terms of the transactions contemplated by the
Transaction Documents, including the purchase of the Closing Shares, Note and
Warrant, (y) shall include as exhibits to such Form 8-K this Agreement
(including the schedules hereto), the form of Note, the Registration Rights
Agreement, the form of Warrant, the form of Security Agreement, the form of
Guaranty, the form of Pledge Agreement, and the form of Mortgage, and (z) shall
include any other information required to be disclosed therein pursuant to any
securities laws or other Laws.  Unless required by Law, the Company shall not
make any public announcement regarding the transactions contemplated hereby
prior to the Closing.  From and after the filing of the Announcing Form 8-K with
the SEC, Buyer shall not be in possession of any material non-public information
received from the Company, any of its Subsidiaries or any of their respective
officers, directors, employees or agents.  In the event that the Company
believes that a notice or communication to any Buyer or Investor after the
filing date of the Announcing 8-K, contains material, non-public information
relating to the Company or any of its Subsidiaries, the Company so shall
indicate to Buyer or Investor contemporaneously with delivery of such notice or
communication, and such indication shall provide Buyer or Investor the means to
refuse to receive such notice or communication; and in the absence of any such
indication, the holders of the Securities shall be allowed to presume that all
matters relating to such notice or communication do not constitute material,
non-public information relating to the Company or any of its Subsidiaries.  If
the Buyer or Investor elects to receive material, non-public information from
the Company, each Buyer or Investor shall as a condition to receiving such
information execute and deliver to the Company a confidentiality agreement with
respect thereto in such form as the Company may request to comply with federal
and state securities laws.
 
4.8           Notices.  From the date of this Agreement until the first date
following the Closing Date on which no Note is outstanding and the Security
Agreement has terminated, the Company shall and shall cause each of its
Subsidiaries to:
 

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(i)           Locations.  Promptly (but in no event less than 20 days prior to
the occurrence thereof) notify Buyer of the proposed opening of any new place of
business or new location of Collateral (as defined in the Security Agreement),
the closing of any existing place of business or location of Collateral, any
change in the location of such Person’s books, records and accounts (or copies
thereof), the opening or closing of any post office box, the opening or closing
of any bank account or, if any of the Collateral consists of Goods (as defined
in the Security Agreement) of a type normally used in more than one state, the
use of any such Goods in any state other than a state in which such Person has
previously advised Buyer that such Goods will be used.
 
(ii)           Names and Trade Names.  Notify Buyer in writing (A) at least 30
days in advance of any change in such Person’s legal name and (B) within 10 days
of the change of the use of any trade name, assumed name, fictitious name or
division name not previously disclosed to Buyer in writing.
 
All of the foregoing notices shall be provided by the Company or applicable
Subsidiary to Buyer in writing.
 
4.9           Compliance with Laws and Maintenance of Permits.  From the date of
this Agreement until the first date following the Closing Date on which neither
the Note nor the Warrant is outstanding and the Security Agreement has
terminated, the Company shall, and shall cause each of its Subsidiaries to,
maintain all governmental consents, franchises, certificates, licenses,
authorizations, approvals and permits, the lack of which would reasonably be
expected to have individually or in the aggregate a Material Adverse Effect, and
the Company and each of its Subsidiaries shall remain in compliance with all
Laws (including Environmental Laws and Laws relating to taxes, employer and
employee contributions and similar items, securities, ERISA or employee health
and safety) the failure with which to comply would reasonably be expected to
have individually or in the aggregate a Material Adverse Effect on such Person.
 
4.10    Inspection and Audits.  From the date of this Agreement until the first
date following the Closing Date on which the Note is no longer outstanding and
the Security Agreement has terminated, (i) the Company shall, and shall cause
each of its Subsidiaries to, permit Buyer, or any Persons designated by Buyer,
to call at such Person’s places of business at any reasonable times, and,
without hindrance or delay, to inspect, examine and audit the Collateral and to
inspect, audit, check and make extracts from such Person’s books, records,
journals, orders, receipts and any correspondence and other data relating to
such Person’s business, the Collateral or any transactions between the parties
hereto, and shall have the right to make such verification concerning such
Person’s business as Buyer may consider reasonable under the circumstances; and
(ii) Buyer, through its officers, employees or agents shall have the right, at
any time and from time to time, in Buyer’s name, to verify the validity, amount
or any other matter relating to any of the Company’s and its Subsidiaries’
Accounts (as defined in the Security Agreement), by mail, telephone, telecopy,
electronic mail or otherwise.  Notwithstanding anything to the contrary herein,
upon written request to the Company by any Buyer, the Company shall promptly
provide Buyer with any financial, operating or other type of information
requested by Buyer, subject to Buyer’s execution of a confidentiality agreement
reasonably acceptable to the Company with respect to such information, which
execution shall constitute a waiver, with respect to any material non-public
information regarding the Company and the Subsidiaries provided to Buyer
directly in response to such written request, of the restriction herein on the
Company’s disclosure to Buyer of material non-public information.

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4.11    Insurance.  From the date of this Agreement until the first date
following the Closing Date on which the Note is no longer outstanding and the
Security Agreement has terminated, the Company shall, and shall cause each of
its Subsidiaries to:
 
(i)           Keep the Collateral properly housed (to the extent customary in
the oil and gas business) and insured for the full insurable value thereof
against loss or damage by fire, theft, explosion, sprinklers, collision (in the
case of motor vehicles) and such other risks with companies that regularly
insure Persons engaged in businesses similar to that of the Company or
applicable Subsidiary, such coverage and the premiums payable in respect thereof
to be acceptable in scope and amount to the Collateral Agent.  Within 60 days
after the filing of the Announcing 8-K, original (or certified) copies of such
policies of insurance shall be delivered to Buyer, together with evidence of
payment of all premiums therefor, and shall contain an endorsement, in form and
substance reasonably acceptable to Collateral Agent, showing loss under such
insurance policies payable to Collateral Agent.  Such endorsement, or an
independent instrument furnished to the Collateral Agent, shall provide that the
insurance company shall give the Collateral Agent at least 30 days’ written
notice before any such policy of insurance is altered or canceled and that no
act, whether willful or negligent, or default of such Company or applicable
Subsidiary or any other Person shall affect the right of the Collateral Agent to
recover under such policy of insurance in case of loss or damage.
 
(ii)           Maintain, at its expense, such public liability and third party
property damage insurance with companies that regularly insure Persons engaged
in businesses similar to that of the Company or applicable Subsidiary, such
coverage and the premiums payable in respect thereof to be acceptable in scope
and amount to the Collateral Agent.  Within 60 days after the filing of the
Announcing 8-K, original (or certified) copies of such policies have been
delivered to Buyer, together with evidence of payment of all premiums therefor;
each such policy shall contain an endorsement showing the Collateral Agent as an
additional insured thereunder and providing that the insurance company shall
give Collateral Agent at least 30 days’ written notice before any such policy
shall be altered or canceled.
 
If the Company or any of its Subsidiaries at any time or times hereafter shall
fail to obtain or maintain any of the policies of insurance required above or to
pay any premium relating thereto, Buyer, without waiving or releasing any
obligation or default by the Company hereunder, may (but shall be under no
obligation to) obtain and maintain such policies of insurance and pay such
premiums and take such other actions with respect thereto as Buyer deems
advisable.  Such insurance, if obtained by Buyer, may, but need not, protect the
Company’s and its Subsidiaries’ interests or pay any claim made by or against
the Company and its Subsidiaries with respect to the Collateral.  Such insurance
may be more expensive than the cost of insurance the Company and its
Subsidiaries may be able to obtain on their own and may be cancelled only upon
the Company and its Subsidiaries’ providing evidence that they have obtained the
insurance as required above.  All sums disbursed by Buyer in connection with any
such actions, including court costs, expenses, other charges relating thereto
and reasonable attorneys’ fees, shall constitute Indebtedness under the Note,
shall be payable on demand by the Company to Buyer and, until paid, shall bear
interest at the highest rate then applicable to principal under the Note.

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4.12    Collateral.  From the date of this Agreement until the first date
following the Closing Date on which the Note is no longer outstanding, the
Company shall, and shall cause its Subsidiaries to maintain the Collateral in
good condition, repair and order (ordinary wear and tear excepted) and shall
make all necessary repairs to the Equipment (as defined in the Security
Agreement) and replacements thereof so that the operating efficiency and the
value thereof shall at all times be preserved and maintained.
 
4.13    Taxes.  From the date of this Agreement until the first date following
the Closing Date on which the Note is no longer outstanding, the Company shall,
and shall cause each of its Subsidiaries to file all required tax returns and
pay all of its taxes when due, subject to any extensions granted by the
applicable taxing authority, including taxes imposed by federal, state or
municipal agencies, and shall cause any Liens for taxes to be promptly released;
provided, that Person shall have the right to contest the payment of such taxes
in good faith by appropriate proceedings so long as (i) the amount so contested
is shown on such Person’s financial statements; (ii) the contesting of any such
payment does not give rise to a Lien for taxes; (iii) such Person keeps on
deposit with the Collateral Agent (such deposit to be held without interest) an
amount of money which, in the sole judgment of the Collateral Agent, is
sufficient to pay such taxes and any interest or penalties that may accrue
thereon; and (iv) if such Person fails to prosecute such contest with reasonable
diligence, the Collateral Agent may apply the money so deposited in payment of
such taxes.  If the Company or applicable Subsidiary fails to pay any such taxes
(other than taxes not yet due, subject to an extension or subject to a contest)
and in the absence of any such contest by such Person, Buyer may (but shall be
under no obligation to) advance and pay any sums required to pay any such taxes
and/or to secure the release of any Lien therefor, and any sums so advanced by
Buyer shall constitute Indebtedness under the Note, shall be payable by the
Company to Buyer on demand, and, until paid, shall bear interest at the highest
rate then applicable to principal under the Note.
 
4.14    Intellectual Property.  From the date of this Agreement until the first
date following the Closing Date on which the Note is no longer outstanding, the
Company shall and shall cause each of its Subsidiaries to maintain adequate
licenses, patents, patent applications, copyrights, service marks and trademarks
to continue its business as presently proposed to be conducted by it or as
hereafter conducted by it, unless the failure to maintain any of the foregoing
would not reasonably be expected to have a Material Adverse Effect.
 
4.15    Patriot Act, Investor Secrecy Act and Office of Foreign Assets
Control.  As required by federal law and Buyer’s policies and practices, Buyer
may need to obtain, verify and record certain customer identification
information and documentation in connection with opening or maintaining
accounts, or establishing or continuing to provide services, and, from the date
of this Agreement until the first date following the Closing Date on which the
Note is no longer outstanding, the Company agrees to, and shall cause each of
its Subsidiaries to, provide such information as reasonably requested by Buyer.

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4.16    Drilling Title Opinions.  From the date of this Agreement until the
first date following the Closing Date on which the Note is no longer
outstanding, prior to the Company’s or any of its Subsidiaries’ drilling on any
of the Oil and Gas Property, the Company or such Subsidiary will obtain a
customary drilling title opinion with respect to such drillsite.  Upon written
request to the Company by Buyer, the Company shall promptly provide Buyer with a
copy of such drilling title opinion.
 
4.17    Security Covenants.  From the date of this Agreement until the first
date following the Closing Date on which the Note is no longer outstanding,
Company shall, and shall cause each of its Subsidiaries to, at its own cost and
expense, cause to be promptly and duly taken, executed, acknowledged and
delivered all such further acts, documents and assurances as may from time to
time be necessary or as Buyer or the Collateral Agent may from time to time
request in order to carry out the intent and purposes of this Agreement, the
Security Documents and the other Transaction Documents and the transactions
contemplated hereby and thereby, including all such actions to establish,
create, preserve, protect and perfect a first priority Lien (subject only to
Permitted Liens) in favor of the Collateral Agent for the benefit of Buyer on
the Collateral (as each term is defined in the Security Agreement, and including
Collateral acquired after the date hereof), including on any and all assets of
the Company and each of its Subsidiaries, whether now owned or hereafter
acquired.
 
(i)           Without limiting the generality of the foregoing, in the event
that the Company or any of its Subsidiaries shall, at any time from the date of
this Agreement until the first date following the Closing Date on which the Note
is no longer outstanding, acquire or form any new Subsidiary after the date
hereof, the Company shall, or shall cause the respective Subsidiary to cause
such new Subsidiary, upon such acquisition or concurrently with such formation,
as applicable, (A) to execute, and thereafter perform its obligations under, the
Security Agreement and the Guaranty and to take such other action (including
authorizing the filing of such UCC financing statements and delivering
certificates in respect of the equity securities of such Subsidiary) as shall be
necessary or appropriate to establish, create, preserve, protect and perfect a
first priority Lien (subject only to Permitted Liens) in favor of Collateral
Agent for the benefit of Collateral Agent and Buyer on all assets, both real and
personal, in which such new Subsidiary has or may thereafter acquire any
interest, (B) to execute such other Security Documents, in form and content
acceptable to Collateral Agent, as may be required or requested by Collateral
Agent in connection with the actions contemplated by the preceding clause (A),
and (C) to deliver such proof of corporate (or comparable) action, incumbency of
officers, opinions of counsel and other documents as Collateral Agent shall have
required or requested.
 
(ii)           From the date of this Agreement until the first date following
the Closing Date on which the Note is no longer outstanding, (A) the Company
shall, and shall cause each of its Subsidiaries to, take such action from time
to time as shall be necessary to ensure that each of its Subsidiaries is a
wholly-owned Subsidiary, and that Collateral Agent shall have, for the benefit
of Collateral Agent and Buyer, a first priority Lien on all capital stock or
other equity securities of each of its Subsidiaries concurrently with
acquisition or formation of such Subsidiary; and (B) in the event that any
additional capital stock or other equity securities shall be issued by any of
its Subsidiaries, the Company shall or shall cause each of its Subsidiaries to,
concurrently with such issuance, deliver to Collateral Agent, to the extent
required by the applicable Security Documents, the certificates evidencing such
securities, accompanied by undated powers executed in blank and to take such
other action as Collateral Agent shall request to perfect the security interest
created therein pursuant to such Security Documents.  As used in this Agreement,
“Capital Stock” means any and all shares, interests, participations or other
equivalents (however designated) of capital stock of a corporation, any and all
equivalent ownership interests in a Person (other than a corporation) and any
and all warrants, rights or options to purchase any of the foregoing.

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(iii)           At any time from the date of this Agreement until the first date
following the Closing Date on which the Note is no longer outstanding,
concurrently with the acquisition by the Company or any of its Subsidiaries, of
any real estate or Oil and Gas Property leasehold interests, the Company shall
deliver or cause to be delivered to the Collateral Agent, with respect to such
real estate, (A) a mortgage or deed of trust, as applicable, in form and
substance satisfactory to the Collateral Agent, executed by the title holder
thereof, (B) with respect to any real estate owned by the Company not
constituting Oil and Gas Property, an ALTA lender’s title insurance policy
issued by a title insurer reasonably satisfactory to the Collateral Agent in
form and substance and in amounts reasonably satisfactory to the Collateral
Agent ensuring the Collateral Agent’s first priority Lien on such real estate,
free and clear of all defects, encumbrances and Liens except Permitted Liens.
 
(iv)           From the date of this Agreement until the first date following
the Closing Date on which the Note is no longer outstanding, the Company shall,
and shall cause each of its Subsidiaries to, (A) refrain from engaging to any
substantial extent in any business other than the exploration and development of
natural gas and oil reserves within the United States and business reasonably
related thereto or in furtherance thereof, and (B) preserve, renew and keep in
full force and effect their respective material rights, privileges and
franchises necessary or desirable in the normal conduct of their business.
 
4.18    Subsidiary Interests.  From the date of this Agreement until the first
date following the Closing Date on which the Note is no longer outstanding, all
of the equity interests of each of the Subsidiaries shall be certificated or
otherwise represented in tangible form.
 
4.19    Submission of Matters to a Stockholder Vote.  From the date of this
Agreement until the earlier of the (i) second anniversary of the Closing Date,
the Company shall comply with the requirements of Section 312.03 of the New York
Stock Exchange Listed Company Manual as to matters requiring the prior approval
of the Company’s stockholders or (ii) the date on which the Common Stock is
listed on the Toronto Stock Exchange.
 
4.20    Subsidiary Certificates.  By no later than the third date following the
Closing Date, the Company shall deliver to the Buyer certificates representing
100% of the ownership interests in each of the Subsidiaries (and corresponding
stock powers executed in blank).

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SECTION 5.
NEGATIVE COVENANTS

 
From the date hereof until the date the Note is no longer outstanding, the
Company covenants and agrees as follows:
 
5.1           Stay, Extension and Usury Laws.  The Company covenants (to the
extent that it may lawfully do so) that it shall not at any time insist upon,
plead, or in any manner whatsoever claim or take the benefit or advantage of,
any stay, extension or usury law or other law that would prohibit or forgive it
from paying all or any portion of any principal of, or interest or premium on
the Note as contemplated herein or therein, wherever enacted, now or at any time
hereafter in force, or which may affect the covenants or the performance of any
of the Transaction Documents; and the Company (to the extent it may lawfully do
so) hereby expressly waives all benefit or advantage of any such Law, and
covenants that it will not, by resort to any such law, hinder, delay or impede
the execution of any power herein granted to any Buyer, but will suffer and
permit the execution of every such power as though no such law has been enacted.
 
5.2           Payment Restrictions Affecting Subsidiaries.  The Company shall
not, nor will it permit any of its Subsidiaries to, enter into or assume any
agreement prohibiting or otherwise restricting the creation or assumption of any
Lien upon its properties or assets, whether now owned or hereafter acquired, or
requiring the grant of any security for an obligation, except to the extent any
such agreement provides for Permitted Liens.  Except as provided herein, the
Company shall not and shall not cause or permit its Subsidiaries to directly or
indirectly create or otherwise cause or suffer to exist or become effective any
consensual encumbrance or consensual restriction of any kind on the ability of
any such Subsidiary to:  (1) pay dividends or make any other distribution on any
of such Subsidiary’s capital stock owned by the Company or any other Subsidiary;
(2) pay any Indebtedness owed to the Company or any other Subsidiary; (3) make
loans or advances to the Company or any other Subsidiary; or (4) transfer any of
its property or assets to the Company or any other Subsidiary.
 
5.3           Prepayments.  The Company shall not, nor will it permit any of its
Subsidiaries to, prepay any Indebtedness that is in parity with or subordinate
to the Note by structure or contract.
 
5.4           Indebtedness.  The Company shall not, and shall cause each of its
Subsidiaries not to, create, incur, assume, extend the term of, or guaranty or
otherwise become obligated with respect to, any Indebtedness other than
Indebtedness under the Note issued pursuant to this Agreement, except that the
Company and its Subsidiaries may incur Indebtedness for borrowed money and trade
payables in an aggregate amount outstanding not in excess of $1,750,000 in
addition to permitted Indebtedness identified in Schedule 3.22 outstanding on
the Closing Date.
 
5.5           Liens.  The Company shall not, and shall cause each of its
Subsidiaries not to, grant any Lien, claim, security interest or other
encumbrance whatsoever on any of its assets, other than Permitted Liens.

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5.6           Sale of Collateral.  Neither the Company nor any of the
Subsidiaries shall sell, transfer, farm-out, assign or dispose of any Oil and
Gas Property (and any of the Collateral used in connection with the operation of
such Oil and Gas Property) (a “Collateral Disposition”), without the prior
written consent of the holders of at least 51% of the aggregate principal amount
of the Notes then outstanding, which consent shall not be unreasonably withheld.
 
5.7           Corporate Existence; Leases.  The Company shall maintain its
corporate existence and shall not sell all or any material portion of the
Company’s assets (including, for the avoidance of any doubt, all or any material
portion of the assets of the Subsidiaries in the aggregate).  From the date of
this Agreement until the first date following the Closing Date on which the Note
is not outstanding, the Company shall, and shall cause each of its Subsidiaries
to, refrain from violating, breaching or defaulting under in any respect, or
taking or failing to take any action that (with or without notice or lapse of
time or both) would constitute a violation or breach of, or default under, any
term or provision of any Lease to which the Company or any of its Subsidiaries
is a party, except to the extent such violation, breach or default, action or
inaction would not and would not be reasonably expected to have, either
individually or in the aggregate, a Material Adverse Effect
 
5.8           Restrictions on Loans; Investments; Subsidiary Equity.  The
Company shall not, and shall not permit any of its Subsidiaries to, (i) except
for Permitted Investments (as defined herein) in which the Collateral Agent or
any other holder of the Note has a valid, perfected first priority security
interest, make any loans to, or investments in, any other person or entity,
including through lending money, deferring the purchase price of property or
services (other than trade accounts receivable on terms of 90 days or less),
purchasing any note, bond, debenture or similar instrument, entering into any
letter of credit, guaranteeing (or taking any action that has the effect of
guaranteeing) any obligations of any other person or entity, or acquiring any
equity securities of, or other ownership interest in, or making any capital
contribution to any other entity, (ii) invest in, participate in, lease,
purchase, obtain or otherwise acquire any real property, facilities, or oil, gas
or other mineral drilling, exploration or development rights, concessions,
working interests or participation interests (collectively, “Interests”) in
which the Collateral Agent, on behalf of Buyer and any other holder of the Note,
is not provided with a valid, perfected first priority security interest,
subject to Permitted Liens, in such Interests on or prior to the date that is
the earliest of (A) the tenth Business Day of the subsequent calendar quarter,
(B) 20 Business Days after the date on which the aggregate acquisition price of
such investments, participations, leases, purchases or acquisitions exceeds
$500,000 during a calendar quarter, and (C) concurrently with any investment,
participation, lease, purchase or acquisition that has an acquisition price that
individually exceeds $1,000,000, or (iii) issue, transfer or pledge any capital
stock or equity interest in any Subsidiary to any Person other than the
Company.  “Permitted Investments” means any investment in (A) direct obligations
of the United States or obligations guaranteed by the United States, in each
case which mature and become payable within 90 days of the investment by the
Company or any Subsidiary, (B) commercial paper rated at least A-1 by Standard &
Poor’s Ratings Service and P-1 by Moody’s Investors Services, Inc., (C) time
deposits with, including certificates of deposit issued by, any office located
in the United States of any bank or trust company which is organized under the
laws of the United States or any State thereof and has capital, surplus and
undivided profits aggregating at least $250,000,000 and which issues (or the
parent of which issues) certificates of deposit or commercial paper with a
rating described in clause (B) above, in each case which mature and become
payable within 90 days of the investment by the Company or any Subsidiary, (D)
repurchase agreements with respect to securities described in clause (A) above
entered into with an office of a bank or trust company meeting the criteria
specified in clause (C) above, provided in each case that such investment
matures and becomes payable within 90 days of the investment by the Company or
any Subsidiary, (E) any money market or mutual fund which invests only in the
foregoing types of investments and the liquidity of which is satisfactory to the
Collateral Agent, or (F) non-monetary proceeds of Permitted Collateral
Dispositions.

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5.9           Equipment.  The Company shall not, and shall cause each of its
Subsidiaries not to, (i) permit any Equipment to become a fixture to Oil and Gas
Property unless such Oil and Gas Property is owned or leased by such Person and
is subject to a mortgage in favor of the Collateral Agent, for the benefit of
Buyer, and if such Oil and Gas Property is leased, is subject to a landlord’s
agreement in favor of Buyer on terms acceptable to the Collateral Agent, or (ii)
permit any Equipment to become an accession to any other personal property
unless such personal property is subject to a first priority perfected Lien,
subject to Permitted Liens, in favor of the Collateral Agent, for the benefit of
Buyer and any other holders of the Note.
 
5.10    Affiliate Transactions.  The Company shall not, and shall cause each of
its Subsidiaries not to, enter into, amend, modify or supplement any
transaction, contract, agreement, instrument, commitment, understanding or other
arrangement with any Related Party, except for customary employment arrangements
and benefit programs, on reasonable terms, that are not otherwise prohibited by
this Agreement.
 
5.11    Settling of Accounts.  The Company shall not, and shall cause each of
its Subsidiaries not to, sell, discount, settle or adjust any Account (as
defined in the Security Agreement); provided, that the Company and its
Subsidiaries may (i) discount or settle past due Accounts on an arm’s length
basis in the ordinary course of business, and (ii) provide early payment
discounts in respect of Accounts in the ordinary course of business, consistent
with past practice.
 
5.12    Limitation on Sale and Leaseback Transactions.  The Company shall not,
and shall cause each of its Subsidiaries not to, directly or indirectly, enter
into any arrangement with any Person whereby in a substantially contemporaneous
transaction the Company or any of its Subsidiaries sells or transfers all or
substantially all of its right, title and interest in an asset and, in
connection therewith, acquires or leases back the right to use such asset.
 
5.13    Investment Company.  The Company shall not become an “investment
company,” a company controlled by an “investment company,” or an “affiliated
person” of, or “promoter” or “principal underwriter” for, an “investment
company,” as such terms are defined in the Investment Company Act of 1940.
 
5.14    Leases.  The Company shall not, and shall cause each of its Subsidiaries
not to, violate, breach or default under in any respect, or take or fail to take
any action that (with or without notice or lapse of time or both) would
constitute a violation or breach of, or default under, any term or provision of,
or would result in a reversion of rights to a Person under, any Lease to which
the Company or any of its Subsidiaries is a party, except to the extent such
violation, breach or default, action or in-action could not reasonably be
expected, individually or in the aggregate, to have a Material Adverse Effect.

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5.15    Restriction on Purchases or Payments.  The Company shall not, and shall
cause each of its Subsidiaries not to, (i) declare, set aside or pay any
dividends on or make any other distributions (other than dividends or
distributions to the Company’s stockholders consisting solely of the Company’s
capital stock) in respect of any capital stock; provided however, that any
Subsidiary may declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock, equity securities or property) in respect
of any of its capital stock that is held solely by the Company or by a domestic
Subsidiary, provided that 100% of the equity of such domestic Subsidiary is
directly or indirectly owned by the Company, such domestic Subsidiary is
controlled by the Company and such domestic Subsidiary is a party to the
Guaranty Agreement and the Security Agreement, or (ii) purchase, redeem or
otherwise acquire, directly or indirectly, any shares of the Company’s capital
stock, except repurchases of unvested shares in connection with the termination
of the employment relationship with any employee pursuant to stock option or
purchase agreements in effect on the date of this Agreement or provisions of
stock options or restricted stock issued under the Option Plan permitting “net
exercise” or retention of shares to pay taxes.
 
5.16    No Avoidance of Obligations.  The Company shall not, and shall cause
each of its Subsidiaries not to, enter into any agreement which would limit or
restrict the Company’s or any of its Subsidiaries’ ability to perform under, or
take any other voluntary action to avoid or seek to avoid the observance or
performance of any of the terms to be observed or performed by it under, this
Agreement, the Note and the other Transaction Documents.
 
5.17    Regulation M.  Neither the Company, nor its Subsidiaries nor any
Affiliates of the foregoing will take any action prohibited by Regulation M
under the 1934 Act, in connection with the offer, sale and delivery of the
Securities contemplated hereby.
 
5.18    Company Contracts.  The Company shall not, and shall not permit its
Subsidiaries to, enter into any gas purchase agreement, or any similar
agreement, until each prospective customer or joint-operator, as the case may
be, delivers to the Company and the Collateral Agent a duly executed
acknowledgment and agreement to the Notice of Assignment of Proceeds
substantially in the form of Exhibit B to the Security Agreement.
 
SECTION 6.
CONDITIONS TO THE OBLIGATION OF THE COMPANY TO SELL

 
The obligation of the Company to issue and sell the Closing Shares, Note and
Warrant to Buyer at the Closing is subject to the satisfaction, at or before the
Closing Date, of each of the following conditions, provided that these
conditions are for the Company’s sole benefit and may be waived by the Company
at any time in its sole discretion by providing Buyer with prior written notice
thereof:

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(a)
Buyer shall have executed each of the Transaction Documents to which it is a
party and delivered the same to the Company.

 
 
(b)
Buyer shall have delivered to the Company the Purchase Price for the Closing
Shares, Note and Warrant being purchased by Buyer at the Closing by wire
transfer of immediately available funds pursuant to the wire instructions
provided by the Company.

 
 
(c)
The representations and warranties of Buyer herein shall be true and correct as
of the date when made and as of the Closing Date as though made at that time
(except for representations and warranties that speak as of a specific date,
which shall be true and correct as of such date), and Buyer shall have
performed, satisfied and complied with the covenants, agreements and conditions
required by the Transaction Documents to be performed, satisfied or complied
with by Buyer at or prior to the Closing Date.

 
SECTION 7.
CONDITIONS TO THE OBLIGATION OF THE BUYER TO PURCHASE
 
The obligation of Buyer to purchase the Closing Shares, Note and Warrant from
the Company at the Closing is subject to the satisfaction, at or before the
Closing Date, of each of the following conditions, provided that these
conditions are for Buyer’s sole benefit and may be waived only by Buyer at any
time in its sole discretion by providing the Company with prior written notice
thereof:
 
 
(a)
Each of the Company and each other Person (other than Buyer and the Collateral
Agent) party to the Transaction Documents shall have executed and delivered the
same to Buyer.

 
 
(b)
The representations and warranties of the Company herein and in all Transaction
Documents shall be true and correct as of the date when made and as of the
Closing Date as though made at that time (except for representations and
warranties that speak as of a specific date, which shall be true and correct as
of such date) and the Company shall have performed, satisfied and complied with
the covenants, agreements and conditions required by the Transaction Documents
to be performed, satisfied or complied with by the Company at or prior to the
Closing Date.  Buyer shall have received a certificate, executed by the chief
executive officer of the Company, dated as of the Closing Date, to the foregoing
effect and as to such other matters as may be reasonably requested by Buyer.

 
 
(c)
Buyer shall have received the opinions of Porter & Hedges, LLP, Rice Silbey
Reuther & Sullivan, LLP and Morris, Laing, Evans, Brock & Kennedy, Chartered,
each dated as of the Closing Date, which opinions will collectively address,
among other things, certain laws of the States of Nevada, Texas, and Kansas
applicable to the transactions contemplated hereby and the security interests
provided pursuant to the Security Agreement, in form, scope and substance
reasonably satisfactory to Buyer.

 

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(d)
The Company shall have executed and delivered to Buyer the Note and Warrant.

 
 
(e)
The Board of the Company shall have adopted, and not rescinded or otherwise
amended or modified, resolutions consistent with Section 3(b) above and in a
form reasonably acceptable to Buyer (the “Resolutions”).

 
 
(f)
As of the Closing Date, the Company shall have reserved out of its authorized
and unissued Common Stock a sufficient number of shares to cover the exercise of
the Warrant and the Conversion of the Note.

 
 
(g)
The Company shall have delivered to Buyer a certificate evidencing the
incorporation (or other organization) and good standing of the Company and each
Subsidiary in such entity’s state or other jurisdiction of incorporation or
organization issued by the Secretary of State (or other applicable authority) of
such state or jurisdiction of incorporation or organization as of a date within
20 days of the Closing Date.

 
 
(h)
The Company shall have delivered to Buyer a secretary’s certificate, dated as of
the Closing Date, certifying as to (A) the Resolutions, (B) the Certificate of
Incorporation, certified as of a date within 20 days of the Closing Date, by the
Secretary of State of Nevada, (C) the Bylaws of the Company, (D) the certificate
or articles of incorporation or other organizational documents of each of the
Company’s Subsidiaries, each certified as of a date within 20 days of the
Closing Date, by the Secretary of State of the state of such entity’s
jurisdiction of incorporation or organization, and (E) the bylaws or other
similar documents of each of the Company’s Subsidiaries, each as in effect at
the Closing.

 
 
(i)
The Company shall have delivered to Buyer a letter from the Company’s transfer
agent certifying the number of shares of Common Stock outstanding as of a date
within five Business Days of the Closing Date.

 
 
(j)
The Company and its Subsidiaries shall have delivered and pledged to Buyer all
the Collateral, in each case in accordance with the Security Agreement, the
Pledge Agreement and the other Security Documents.

 
 
(k)
The Company and its Subsidiaries shall have given, executed, delivered, filed
and/or recorded all Security Documents, Mortgages with respect to all of the Oil
and Gas Property, and any other financing statements, notices, instruments,
documents, agreements and other papers that may be necessary or desirable (in
the reasonable judgment of Buyer) to create, preserve, perfect or validate the
security interest in all of the assets of the Company and its Subsidiaries
granted to Buyer pursuant to the Security Agreement and to enable Buyer to
exercise and enforce its rights with respect to such security interest.

 

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

 
(l)
The Company shall have delivered to Buyer drill site title opinions, in form and
substance acceptable to Buyer, with respect to all of the Oil and Gas Property
that is producing, or on which drilling has commenced or is imminent for, oil,
gas, minerals and/or other hydrocarbons (the “Producing Property”).

 
 
(m)
The Company shall have delivered to Buyer “landman reports,” in form and
substance acceptable to Buyer, with respect to all of the Oil and Gas Property
(other than the Producing Property).

 
 
(n)
The Company shall have reimbursed Buyer’s expenses in connection with the
transactions contemplated by this Agreement and the other Transaction Documents
pursuant to Section 8(b) hereof.

 
 
(o)
The Company shall have delivered to Buyer such other documents relating to the
transactions contemplated by this Agreement as Buyer or its counsel may
reasonably request.

 
SECTION 8.
INDEMNIFICATION; EXPENSES; TAXES
 
(i)           In consideration of Buyer’s execution and delivery of the
Transaction Documents and acquiring the Securities thereunder and in addition to
all of the Company’s and its Subsidiaries’ other obligations under the
Transaction Documents, the Company shall defend, protect, indemnify and hold
harmless Buyer and each other holder of the Securities and all of their
stockholders, partners, officers, directors, members, managers, employees and
direct or indirect investors and any of the foregoing Persons’ agents or other
representatives (including those retained in connection with the transactions
contemplated by this Agreement) (collectively, the “Indemnitees”) from and
against any and all actions, causes of action, suits, claims, losses, costs,
penalties, fees, liabilities and damages, and expenses in connection therewith
(irrespective of whether any such Indemnitees is a party to the action for which
indemnification hereunder is sought), and including reasonable attorneys’ fees
and disbursements (the “Indemnified Liabilities”), incurred by any Indemnitees
as a result of, or arising out of, or relating to (a) any misrepresentation or
breach of any representation or warranty made by the Company or any of its
Subsidiaries in any of the Transaction Documents or any other certificate,
instrument or document contemplated hereby or thereby, (b) any breach of any
covenant, agreement or obligation of the Company or any of its Subsidiaries
contained in the Transaction Documents or any other certificate, instrument or
document contemplated hereby or thereby, (c) any cause of action, suit or claim
brought or made against such Indemnitees and arising out of or resulting from
the execution, delivery, performance or enforcement of the Transaction Documents
in accordance with the terms thereof or any other certificate, instrument or
document contemplated hereby or thereby in accordance with the terms thereof
(other than a cause of action, suit or claim brought or made against an
Indemnitee by such Indemnitee’s owners, investors or Affiliates), (d) any other
transaction financed or to be financed in whole or in part, directly or
indirectly, with the proceeds of the issuance of the Securities, or (e) the
status of Buyer or holder of the Securities as an investor in the Company.  To
the extent that the foregoing undertaking by the Company may be unenforceable
for any reason, the Company shall make the maximum contribution to the payment
and satisfaction of each of the Indemnified Liabilities that is permissible
under applicable law.  Except as otherwise set forth herein, the mechanics and
procedures with respect to the rights and obligations under this Section 8 shall
be the same as those set forth in Section 6 of the Registration Rights
Agreement, including those procedures with respect to the settlement of claims
and the Company’s rights to assume the defense of claims.

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(ii)           The Company shall reimburse Buyer’s expenses in connection with
the transactions contemplated by this Agreement and the other Transaction
Documents to the extent that the amount of such expenses exceeds $10,000.
 
(iii)           Any and all payments by or on account of any obligation of the
Company or any of its Subsidiaries under this Agreement, the Note, the Warrant
or any other Transaction Document shall be made without any set-off,
counterclaim or deduction and free and clear of and without deduction for any
Indemnified Taxes; provided that if the Company or any of its Subsidiaries shall
be required to deduct any Indemnified Taxes from such payments, then (i) the sum
payable shall be increased as necessary so that after making all required
deductions (including Indemnified Taxes imposed or asserted on or attributable
to amounts payable under this Section 8), Buyer receives an amount equal to the
sum it would have received had no such deductions been made, (ii) the Company,
or such Subsidiary as applicable, shall make such deductions and (iii) the
Company or such Subsidiary shall pay the full amount deducted to the relevant
Governmental Authority in accordance with applicable law.  “Indemnified Taxes”
means, with respect to Buyer, or any other recipient of payment to be made by or
on account of any obligations of the Company or any of its Subsidiaries under
this Agreement, the Note, the Warrant or under any other Transaction Document,
all Taxes other than income or franchise taxes imposed on (or measured by) such
recipient’s net income by the United States of America or such other
jurisdiction under the laws of which such recipient is organized or its
principal offices are located.  “Taxes” means any present or future tax, levy,
impost, duty, fee, assessment, deduction, withholding or other charge of any
nature and whatever called, by whomsoever, on whomsoever and wherever imposed,
levied, collected, withheld or assessed, including interest, penalties,
additions to tax and any similar liabilities with respect thereto.
 
(iv)           The Company shall indemnify Buyer, within ten (10) Business Days
after written demand therefor, for the full amount of any Indemnified Taxes paid
by Buyer, on or with respect to any payment by or on account of any obligation
of the Company or any of its Subsidiaries under this Agreement, the Note, the
Warrant and the other Transaction Documents (including Indemnified Taxes imposed
or asserted on or attributable to amounts payable under this Section 8) and any
penalties, interest and reasonable expenses arising therefrom or with respect
thereto, whether or not such Indemnified Taxes were correctly or legally imposed
or asserted by the relevant Governmental Authority.  A certificate of Buyer as
to the amount of such payment or liability under this Section 8 shall be
delivered to the Company and shall be conclusive absent manifest error.
 

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SECTION 9.
RIGHT TO PARTICIPATE IN FUTURE FINANCING
 
Subject to the exceptions described below, each of the Company and its
Subsidiaries agrees that during the period beginning on the date hereof and
ending on the later of (i) the six-month anniversary of the Closing and (ii) 60
days after the first date following the Closing on which no Note remains
outstanding, neither the Company nor its Subsidiaries will (x) contract with any
party for any debt or equity financing (including any debt financing with an
equity component), (y) issue any debt or equity securities of the Company or any
Subsidiary or securities convertible, exchangeable or exercisable into or for
debt or equity securities of the Company or any Subsidiary (including debt
securities with an equity component) or (z) engage in “farm-out” financing
transactions or similar transactions which do not have operating obligations by
the financing party as a material component, in any form (a “Future Offering”),
unless, after it has received an offer regarding a Future Offering that it has a
bona fide intention to accept, it shall have first delivered to Buyer (or its
designee appointed by Buyer) written notice (the “Future Offering Notice”)
reporting that it has received and is prepared to accept such offer and
providing Buyer an option (the “Buyer Purchase Option”) to purchase up to 25% of
the total amount of securities to be issued in such Future Offering (the
limitations referred to in this and the preceding sentence are collectively
referred to as the “Capital Raising Limitations”).  No Future Offering Notice
shall contain any material non-public information regarding the Company or any
of its Subsidiaries.  Upon the written request of any Buyer made within five
Business Days after its receipt of a Future Offering Notice (an “Additional
Information Request”), the Company shall provide Buyer with such additional
information regarding the proposed Future Offering, including terms and
conditions and use of proceeds thereof, as Buyer shall reasonably
request.  Buyer may exercise its Buyer Purchase Option by delivering written
notice to the Company within five Business Days after the later of (i) Buyer’s
receipt of a Future Offering Notice or (ii) Buyer’s receipt of all of the
information reasonably requested by Buyer in an Additional Information Request
(the “Buyer Purchase Notice Date”), which notice shall state the quantity or
percentage of securities being offered in the Future Offering that Buyer will
purchase.  The Company shall have 60 days following the Buyer Purchase Notice
Date to sell the securities of the Future Offering (other than the securities to
be purchased by Buyer pursuant to this Section 9.16), upon terms and conditions
no more favorable to the purchasers thereof than specified in the Future
Offering Notice.  The exercise of the Buyer Purchase Option shall be contingent
upon, and contemporaneous with, the consummation of such Future Offering.  In
connection with such consummation, Buyer (if it exercises the Buyer Purchase
Option) shall deliver to the Company duly and properly executed originals of any
documents reasonably required by the Company, and in form and substance
reasonably satisfactory to Buyer, to effectuate such Future Offering together
with payment of the purchase price for the securities being purchased by Buyer
in such Future Offering, and the Company shall promptly issue to Buyer the
securities purchased thereby.  In the event the Company has not sold such
securities of the Future Offering within such 60-day period, the Company shall
not thereafter issue or sell such securities or any other securities subject to
this Section 9.16 without first offering such securities to Buyer in the manner
provided in this Section 9.16.  Buyer shall not be required to participate or
exercise its right of participation with respect to a particular Future Offering
in order to exercise its right of participation with respect to later Future
Offerings.  The Capital Raising Limitations shall not apply to (i) any
transaction involving the Company’s issuances of securities (A) as consideration
in a merger or consolidation (the primary purpose or material result of which is
not to raise or obtain equity capital or cash), (B) in connection with any
strategic partnership or joint venture (the primary purpose or material result
of which is not to raise or obtain equity capital or cash), or (C) as
consideration for the acquisition of a business, product, license or other
assets by the Company (the primary purpose or material result of which is not to
raise or obtain equity capital or cash) or (ii) Exempted Issuances (as defined
in the Warrant).
 
SECTION 10.
GOVERNING LAW; MISCELLANEOUS.
 
10.1    Governing Law; Jurisdiction; Jury Trial.  All questions concerning the
construction, validity, enforcement and interpretation of this Agreement shall
be governed by the internal laws of the State of New York, without giving effect
to any choice of law or conflict of law provision or rule (whether of the State
of New York or any other jurisdiction) that would cause the application of the
laws of any jurisdiction other than the State of New York.  Each party hereby
irrevocably submits to the exclusive jurisdiction of the state and federal
courts sitting in New York City (Borough of Manhattan), New York, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is brought in an inconvenient forum or that the
venue of such suit, action or proceeding is improper.  Each party hereby
irrevocably waives personal service of process and consents to process being
served in any such suit, action or proceeding by mailing a copy thereof to such
party at the address for such notices to it under this Agreement and agrees that
such service shall constitute good and sufficient service of process and notice
thereof.  Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law.  EACH PARTY HEREBY IRREVOCABLY
WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE
ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR ARISING OUT
OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.
 
10.2    Counterparts.  This Agreement and any amendments hereto may be executed
and delivered in one or more counterparts, and by the different parties hereto
in separate counterparts, each of which when executed shall be deemed to be an
original, but all of which taken together shall constitute one and the same
agreement, and shall become effective when counterparts have been signed by each
party hereto and delivered to the other parties hereto, it being understood that
all parties need not sign the same counterpart.  In the event that any signature
to this Agreement or any amendment hereto is delivered by facsimile transmission
or by e-mail delivery of a “.pdf” format data file, such signature shall create
a valid and binding obligation of the party executing (or on whose behalf such
signature is executed) with the same force and effect as if such facsimile or
“.pdf” signature page were an original thereof.  At the request of any party
each other party shall promptly re-execute an original form of this Agreement or
any amendment hereto and deliver the same to the other party.  No party hereto
shall raise the use of a facsimile machine or e-mail delivery of a “.pdf” format
data file to deliver a signature to this Agreement or any amendment hereto or
the fact that such signature was transmitted or communicated through the use of
a facsimile machine or e-mail delivery of a “.pdf” format data file as a defense
to the formation or enforceability of a contract, and each party hereto forever
waives any such defense.

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10.3    Headings.  The headings of this Agreement are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Agreement.
 
10.4    Severability.  If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remainder of this Agreement in that
jurisdiction or the validity or enforceability of any provision of this
Agreement in any other jurisdiction.
 
10.5    Entire Agreement; Amendments.  This Agreement supersedes all other prior
oral or written agreements between Buyer, the Company, its Subsidiaries, their
Affiliates and Persons acting on their behalf with respect to the matters
discussed herein, and this Agreement and the instruments referenced herein
contain the entire understanding of the parties with respect to the matters
covered herein and therein and, except as specifically set forth herein or
therein, neither the Company nor Buyer makes any representation, warranty,
covenant or undertaking with respect to such matters.  No provision of this
Agreement may be amended, modified or supplemented other than by an instrument
in writing signed by the Company and the holders of at least 51% of the
aggregate principal amount of the Notes than outstanding.  Any such amendment
shall bind all holders of the Note and the Warrant.  No such amendment shall be
effective to the extent that it applies to less than all of the holders of the
Note or Warrant then outstanding.
 
10.6    Notices.  Any notices, consents, waivers or other communications
required or permitted to be given under the terms of this Agreement must be in
writing and will be deemed to have been delivered:  (i) upon receipt, when
delivered personally; (ii) upon receipt, when sent by facsimile (provided
confirmation of transmission is mechanically or electronically generated and
kept on file by the sending party); or (iii) one Business Day after deposit with
a nationally recognized overnight delivery service, in each case properly
addressed to the party to receive the same.  The addresses and facsimile numbers
for such communications shall be:
 
If to the Company:

Gulf Western Petroleum Corporation
4801 Woodway Drive, Suite 306W
Houston, Texas  77056
Facsimile:  (713) 979-3728
Attention:  Donald L. Sytsma

If to the Holder:

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Metage Funds Limited
8 Pollen Street
London, England W1S 1NG
Attention:  Tom Sharp
Facsimile:  +44 207 318 5271

NCIM Limited
5th Floor, Manfield House
1 Southampton Street
London, England WC2R OLR
Attention:  Mervyn Roberts
Facsimile:  +44 207 557 4379

or at such other address and/or facsimile number and/or to the attention of such
other person as the recipient party has specified by written notice to the other
party at least five Business Days prior to the effectiveness of such
change.  Written confirmation of receipt (A) given by the recipient of such
notice, consent, waiver or other communication, (B) mechanically or
electronically generated by the sender’s facsimile machine containing the time,
date, recipient facsimile number and an image of the first page of such
transmission or (C) provided by a nationally recognized overnight delivery
service shall be rebuttable evidence of personal service, receipt by facsimile
or deposit with a nationally recognized overnight delivery service in accordance
with clause (i), (ii) or (iii) above, respectively.
 
10.7    Successors and Assigns.  This Agreement shall be binding upon and inure
to the benefit of the parties and their respective successors and assigns,
including any purchasers of the Securities.  The Company shall not assign this
Agreement or any rights or obligations hereunder without the prior written
consent of Buyer.  Buyer may assign some or all of its rights hereunder without
the consent of the Company; provided, however, that any such assignment shall
not release Buyer from its obligations hereunder unless such obligations are
assumed by such assignee (as evidenced in writing).  Notwithstanding anything to
the contrary contained in the Transaction Documents, Buyer shall be entitled to
pledge the Securities in connection with a bona fide margin account or other
loan or financing arrangement secured by the Securities.
 
10.8    No Third Party Beneficiaries.  This Agreement is intended for the
benefit of the parties hereto and their respective permitted successors and
assigns and, to the extent provided in Section 8 hereof, each Indemnitee, and is
not for the benefit of, nor may any provision hereof be enforced by, any other
Person.
 
10.9    Survival.  Unless this Agreement is terminated under Section 10.11, the
representations and warranties of the Company and Buyer contained in Sections 2
and 3, the agreements and covenants set forth in Sections 4, 5 and 9, and the
indemnification and contribution provisions set forth in Section 8, shall
survive the Closing.  Buyer shall be responsible only for its own
representations, warranties, agreements and covenants hereunder.
 
10.10    Further Assurances.  Each party shall do and perform, or cause to be
done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
 

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10.11    Termination.  In the event that the Closing shall not have occurred on
or before the third Business Day following the date of this Agreement due to the
Company’s or Buyer’s failure to satisfy the conditions set forth in Sections 6
and 7 above (and the nonbreaching party’s failure to waive such unsatisfied
condition(s)), the nonbreaching party shall have the option to terminate this
Agreement with respect to such breaching party at the close of business on such
date without liability of any party to any other party.
 
10.12    No Strict Construction.  The language used in this Agreement will be
deemed to be the language chosen by the parties to express their mutual intent,
and no rules of strict construction will be applied against any party.
 
10.13    Remedies.  Buyer and each holder of the Securities shall have all
rights and remedies set forth in the Transaction Documents and all rights and
remedies that Buyer and holders have been granted at any time under any other
agreement or contract and all of the rights that Buyer and holders have under
any law.  Any Person having any rights under any provision of this Agreement
shall be entitled to enforce such rights specifically, to recover damages by
reason of any breach of any provision of this Agreement and to exercise all
other rights granted by law.
 
10.14    Payment Set Aside.  To the extent that the Company or any of its
Subsidiaries makes a payment or payments to Buyer pursuant to this Agreement,
the Registration Rights Agreement, the Note, the Warrant, the Guaranty or any
other Transaction Document or Buyer enforces or exercises its rights hereunder
or thereunder, and such payment or payments or the proceeds of such enforcement
or exercise or any part thereof are subsequently invalidated, declared to be
fraudulent or preferential, set aside, recovered from, disgorged by or are
required to be refunded, repaid or otherwise restored to the Company or any of
its Subsidiaries, by a trustee, receiver or any other Person under any law
(including any bankruptcy law, state or federal law, common law or equitable
cause of action), then to the extent of any such restoration the obligation or
part thereof originally intended to be satisfied shall be revived and continued
in full force and effect as if such payment had not been made or such
enforcement or setoff had not occurred.
 
10.15    Transfer Agent Instructions.  The Company shall issue irrevocable
instructions to its transfer agent in the form attached hereto as Exhibit C (the
“Irrevocable Transfer Agent Instructions”), and any subsequent transfer agent,
to issue certificates or credit shares to the applicable balance accounts at the
Depository Trust Company (“DTC”), registered in the name of Buyer or its
nominee(s), for the Closing Shares, the Conversion Shares and the Warrant
Shares.  Prior to registration and sale of the Closing Shares, Conversion Shares
and the Warrant Shares under the 1933 Act, all such certificates shall bear the
restrictive legend specified in Section 2.8.  The Company warrants that no
instruction other than the Irrevocable Transfer Agent Instructions referred to
in this Section 10.15 and stop transfer instructions to give effect to Section
2.7 with respect to the Closing Shares, the Conversion Shares or Warrant Shares
prior to their registration and sale, respectively, under the 1933 Act will be
given by the Company to its transfer agent.
 

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10.16    Interpretative Matters.  Unless the context otherwise requires, (a) all
references to Sections, Schedules or Exhibits are to Sections, Schedules or
Exhibits contained in or attached to this Agreement, (b) each accounting term
not otherwise defined in this Agreement has the meaning assigned to it in
accordance with GAAP as applied by the Company, (c) words in the singular or
plural include the singular and plural and pronouns stated in either the
masculine, the feminine or neuter gender shall include the masculine, feminine
and neuter, and (d) the use of the word “including” in this Agreement shall be
by way of example rather than limitation.
 

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IN WITNESS WHEREOF, Buyer and the Company have caused this Securities Purchase
Agreement to be duly executed as of the date first written above.
 
COMPANY:

GULF WESTERN PETROLEUM CORPORATION

By:
/s/  Wm. M. Cox
 
Name:  
William M. Cox
 
Title:
Chairman and CEO
 

 
[Additional signature page follows]

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BUYER:

METAGE FUNDS LIMITED

 
By:
/s/  Tom Sharp
 
Name:  
Tom Sharp
 
Title:
Investment Manager
 

 
 
NCIM LIMITED

 
By:
/s/  J.M. Roberts
 
Name:  
J.M. Roberts
 
Title:
Manager
 

 
 

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