**TABLE OF CONTENTS**       Article 1. PURCHASE AND SALE  1      Section 1.1 Purchase and Sale  1      Section 1.2 Certain Definitions  1      Section 1.3 Effective Time; Proration of Costs and Revenues  4        Article 2. PURCHASE PRICE  6      Section 2.1 Purchase Price  6      Section 2.2 Adjustments to First Purchase Price  6      Section 2.3 Adjustments to Second Purchase Price  7      Section 2.4 Allocation of Purchase Price  8        Article 3. TITLE MATTERS  9      Section 3.1 Title  9      Section 3.2 Definition of Marketable Title  9      Section 3.3 Definition of Permitted Encumbrances  10      Section 3.4 Notice of Title Defects; Defect Adjustments  10      Section 3.5 Notice of Environmental Defects; Defect Adjustments  12      Section 3.6 Consents to Assignment and Preferential Rights to Purchase  13      Section 3.7 Assertion of Defects  14        Article 4. REPRESENTATIONS AND WARRANTIES OF SELLER  14      Section 4.1 Existence and Qualification  14      Section 4.2 Power  14      Section 4.3 Authorization and Enforceability  14      Section 4.4 No Conflicts  14      Section 4.5 Liability for Brokers’ Fees  15      Section 4.6 Litigation  15      Section 4.7 Taxes and Assessments  15      Section 4.8 Environmental Laws  15      Section 4.9 Outstanding Capital Commitments  16      Section 4.10 Compliance with Laws  16      Section 4.11 Payments for Production  16      Section 4.12 Properties  17      Section 4.13 Consents and Preferential Purchase Rights  17      Section 4.14 Contracts  17      Section 4.15 Wells  18      Section 4.16 Receipt of Payments for Production  18      Section 4.17 Facilities  18      Section 4.18 Wells to Be Plugged and Abandoned  18      Section 4.19 Rights of First Refusal  18      Section 4.20 Intellectual Property  19      Section 4.21 Non-Consents and Elections Not to Participate  19      Section 4.22 No Knowledge of Material Inaccuracies or Misstatements  19      Section 4.23 No Adverse Changes  19      Section 4.24 Bankruptcy  19 
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       Article 5. REPRESENTATIONS AND WARRANTIES OF PURCHASER  20      Section 5.1 Existence and Qualification  20      Section 5.2 Power  20      Section 5.3 Authorization and Enforceability  20      Section 5.4 No Conflicts  20      Section 5.5 Liability for Brokers’ Fees;  20      Section 5.6 Litigation  21      Section 5.7 Purchase for Own Account  21        Article 6. COVENANTS OF THE PARTIES  21      Section 6.1 Access  21      Section 6.2 Public Announcements  21      Section 6.3 Operation of Business  22      Section 6.4 Material Developments  22      Section 6.5 Confidentiality Obligations  23      Section 6.6 Consents and Preferential Rights  23      Section 6.7 Tax Matters; First Transaction  23      Section 6.8 Tax Matters; Second Transaction  24      Section 6.9 Further Assurances  24        Article 7. CONDITIONS TO CLOSING  24      Section 7.1 Conditions of Seller to First Closing  24      Section 7.2 Conditions of Purchaser to First Closing  25      Section 7.3 Conditions of Seller to Second Closing  25      Section 7.4 Conditions of Purchaser to Second Closing  26        Article 8. CLOSING  27      Section 8.1 Time and Place of First Closing  27      Section 8.2 Obligations of Seller at First Closing  27      Section 8.3 Obligations of Purchaser at First Closing  27      Section 8.4 Closing Payment and Post-Closing First Purchase Price Adjustments  28      Section 8.5 Time and Place of Second Closing  29      Section 8.6 Obligations of Seller at Second Closing  29      Section 8.7 Obligations of Purchaser at Second Closing  29      Section 8.8 Second Closing Payment and Post-Closing Second Purchase Price Adjustments           Article 9. TERMINATION AND AMENDMENT  31      Section 9.1 Termination  31      Section 9.2 Effect of Termination  31        Article 10. INDEMNIFICATION; LIMITATIONS  31      Section 10.1 Assumption and Indemnification  31      Section 10.2 Indemnification Actions  33      Section 10.3 Limitation on Actions  34      Section 10.4 Recording  34 
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       Article 11. MISCELLANEOUS  35      Section 11.1 Receipts Not Reflected in Purchase Price  35      Section 11.2 Expenses Not Reflected in Purchase Price  35      Section 11.3 Counterparts  35      Section 11.4 Notices  35      Section 11.5 Sales or Use Tax, Recording Fees and Similar Taxes and Fees  36      Section 11.6 Expenses  36      Section 11.7 Replacement of Bonds, Letters of Credit and Guarantees  36      Section 11.8 Governing Law  37      Section 11.9 Captions  37      Section 11.10 Waivers  37      Section 11.11 Assignment  37      Section 11.12 Entire Agreement  37      Section 11.13 Amendment  37      Section 11.14 No Third-Party Beneficiaries  38      Section 11.15 References  38      Section 11.16 Construction  38      Section 11.17 Limitation on Damages  38      Section 11.18 Arbitration  39      Section 11.19 Records  39        EXHIBIT “A” LEASES   1 EXHIBIT “A-1” Wells   1 EXHIBIT “A-2” Units   1 EXHIBIT “A-3” Agreements  1 
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**PURCHASE AND SALE AGREEMENT**     This Purchase and Sale Agreement (this “Agreement”), is dated as of January 15, 2008, by andamong DAYBREAK OIL AND GAS, INC., a Washington corporation (“Seller”), and LASSO PARTNERS, LLC, aDelaware limited liability company (“Purchaser”). Seller and Purchaser are sometimes referred tocollectively as the “Parties” and individually as a “Party.”**RECITALS:**     Seller desires to sell and Purchaser desires to purchase certain interests in oil and gasproperties owned by Seller.     NOW, THEREFORE, in consideration of the premises and of the mutual promises, representations,warranties, covenants, conditions and agreements contained herein, and for other valuableconsideration, the receipt and sufficiency of which is hereby acknowledged, the Parties agree asfollows:**ARTICLE 1. PURCHASE AND SALE**     **Section 1.1****Purchase and Sale.**     Seller agrees to sell, convey and assign to Purchaser and Purchaser agrees to purchase, acceptand pay for twenty-five percent of Seller’s interest in the Assets, as defined in Section 1.2 (the“First Transaction”). Seller agrees to sell, convey and assign to Purchaser and Purchaser agreesto purchase, accept and pay for Seller’s remaining seventy-five percent interest in the Assets, asdefined in Section 1.2 (the “Second Transaction”).     **Section 1.2****Certain Definitions.**     As used herein:     (a) “Assets” means all of Seller’s right, title, and interest in and to the following,being not more than the working interests and not less than the net revenue interests in theWells, Units and Leases specified in Exhibit “A”, Exhibit “A-1” andExhibit “A-3”:     (i) The oil and gas leases, oil, gas and mineral leases, subleases and otherleaseholds, royalties, overriding royalties, net profits interests, mineral feeinterests, carried interests, and other properties and interests described onExhibit “A”, together with any other leases or interests within orpertaining to lands within the Area of Mutual Interest described in Section1.2(a)(vii) hereof (collectively, the “Leases”), and any and all oil, gas, water,CO2 or injection wells thereon, including the interests in the wells shown onExhibit “A-1” attached hereto (the “Wells”);     (ii) All pooled, communitized or unitized acreage which includes all or a partof any Lease or includes any Well including but not limited to those
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productionunits described on Exhibit “A-2” (the “Units”), and all tenements,hereditaments and appurtenances belonging to the Leases and Units;     (iii) All gas and water pipelines and gathering systems and water disposalsystems, compressors, wellhead equipment and facilities, central productionfacilities, saltwater disposal wells and facilities located on the Leases or used inconnection with the Wells (collectively, the “Facilities” and, together with theUnits, Leases and Wells, the “Properties”);     (iv) All presently existing written contracts, agreements and instruments bywhich the Assets are bound, to the extent applicable to the Assets, including butnot limited to, operating agreements, unitization, pooling and communitizationagreements, declarations and orders, area of mutual interest agreements, includingthe Area of Mutual Interest Agreement described on Exhibit “A-3”, jointventure agreements, farmin and farmout agreements, exchange agreements,transportation agreements, and agreements for the sale and purchase of Hydrocarbonsand processing agreements, to the extent applicable to the Properties or theproduction of Hydrocarbons from the Properties (the “Contracts”);     (v) All surface fee interests, easements, permits, licenses, servitudes,rights-of-way, surface leases and other surface rights appurtenant to, and used orheld for use in connection with, the Properties (“Appurtenant Rights”);     (vi) All equipment, machinery, fixtures and other tangible personal propertyand improvements located on the Properties or used or held for use in connectionwith the operation of the Properties (the “Equipment”);     (vii) All of the following, to the extent related to the Properties and inSeller’s possession, or used or held for use in connection with the maintenance oroperation thereof and to the extent such are assignable or transferable by Sellerwithout restriction under applicable law or any contracts, instruments or agreements(and without payment by Seller): all technical information, including, but notlimited to, all geological, geochemical and geophysical information, geographic andstructural geological maps, well logs and related analyses and correlations,paleontological data, stratigraphic studies and data pertaining to permeability orporosity, seismic and gravitational data and production records, engineering andgeological data, consultants’ studies or reports regarding any of the foregoing andany and all interpretative analyses of the foregoing; copies of all insurancepolicies and bonds, all original books, records, files, documents (includingaccounts payable and receivable, accounting records, Leases, deeds, and Contracts);all title information (including, but not limited to, lease files, land files, wellfiles, division order files, agreement files, gas sales, gathering and processingfiles, title opinions, abstracts, evidence that rentals, royalties and otherpayments due under the Leases and Contracts have been paid, evidence that Taxeshave been paid, maps and surveys, lease records and data sheets),computer-sensible copies of all of Seller’s computer records; and all plans for exploration
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and development, applications, inspection reports, environmental impactstatements, assessments and studies, permits, licenses, orders, consents, notices,correspondence and other statements and instruments pertaining to environmentalmatters and requirements that have been filed with or supplied to or by anyGovernmental Authority (the “Records”).     (b) “Affiliate” means, with respect to any Person, a Person that, directly orindirectly, controls, is controlled by, or is under common control with such Person, withcontrol in such context meaning the ability to direct the management or policies of a Personthrough ownership of voting shares or other securities, pursuant to a written agreement, orotherwise.     (c) “Business Day” means any day other than a Saturday, a Sunday, or a day on whichbanks are closed for business in Austin, Texas, United States of America.     (d) “Closings” shall mean the First Closing and the Second Closing, as defined inSection 1.3, or, in the singular, one of them.     (e) “Closing Dates” shall mean the First Closing Date and the Second Closing Date, asdefined in Section 1.3, or, in the singular, one of them.     (f) “Disclosure Schedule” means the schedule prepared by Seller related to itsrepresentations and warranties contained in Article 4 and attached hereto as theDisclosure Schedule.     (g) “Environmental Law” means any and all laws, statutes, ordinances, rules,regulations or orders of any Governmental Authority pertaining to health or the environment,including, without limitation, the Clean Air Act, as amended, the ComprehensiveEnvironmental, Response, Compensation, and Liability Act of 1980 (“CERCLA”), as amended, theFederal Water Pollution Control Act, as amended, the Occupational Safety and Health Act of1970, as amended, the Resource Conservation and Recovery Act of 1976 (“RCRA”), as amended,the Safe Drinking Water Act, as amended, the Toxic Substances Control Act, as amended, theHazardous & Solid Waste Amendments Act of 1984, as amended, the Superfund Amendments andReauthorization Act of 1986, as amended, the Hazardous Materials Transportation Act, asamended, the Oil Pollution Act of 1990 (“OPA”), any state laws implementing the foregoingfederal laws, and any state laws pertaining to the handling of oil and gas exploration andproduction wastes or the use, maintenance and closure of pits and impoundments, and allother environmental conservation or protection laws. For purposes of this Agreement, theterms “hazardous substance” and “release” have the meanings specified in CERCLA, and theterm “disposal” has the meaning specified in RCRA; provided, however, that to the extent thelaws of the state of Louisiana establish a meaning for “hazardous substance,” “release,” or“disposal” that is broader than that specified in either CERCLA or RCRA, such broadermeaning shall apply.     (h) “Governmental Authority” means any nation and any political subdivision thereof,and any government, department, court, commission, board, bureau, ministry,
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agency, or otherinstrumentality of such a nation or political subdivision exercising or entitled to exerciseadministrative, executive, judicial, legislative, police, regulatory or taxing authority.     (i) “Hydrocarbons” means oil, gas, other liquid or gaseous hydrocarbons, and/or otherminerals, or any of them or any combination thereof.     (j) “Laws” means all laws, statutes, rules, regulations, ordinances, orders, decrees,requirements, judgments, and codes of Governmental Authorities.     (k) “Material Adverse Effect” means a material adverse effect on the value or operationof the Assets taken as a whole.     (l) “Person” means any individual, corporation, company, partnership, limited liabilitycompany, trust, estate, Governmental Authority, or any other entity.     (m) “Purchase Price” means the First Purchase Price and the Second Purchase Price,defined in Section 2.1.     (n) “Subsidiary” with respect to any Person means any other Person of which at least amajority of the voting interests is owned, directly or indirectly, by such Person.     (o) “Tax” means all taxes, including income tax, surtax, remittance tax, presumptivetax, net worth tax, special contribution, production tax, pipeline transportation tax, valueadded tax, withholding tax, gross receipts tax, windfall profits tax, profits tax, severancetax, personal property tax, real property tax, sales tax, service tax, transfer tax, usetax, excise tax, premium tax, customs duties, stamp tax, motor vehicle tax, entertainmenttax, insurance tax, capital stock tax, franchise tax, occupation tax, payroll tax,employment tax, social security, unemployment tax, disability tax, alternative or add-onminimum tax, estimated tax, and any other assessments, duties, fees, levies or other chargesimposed by a Governmental Authority, together with any interest, fine or penalty thereon, oraddition thereto.     **Section 1.3****Effective Time; Proration of Costs and Revenues.**     (a) Twenty-five percent of Seller’s interest in the Assets shall be transferred fromSeller to Purchaser at the consummation of the First Transaction contemplated by thisAgreement (the “First Closing”), provided, however, that certain financial benefits andburdens in respect of said twenty-five percent of the Assets shall be transferred effectiveas of 7:00 a.m., local time, where the respective Assets are located, on January 1, 2008(the “Effective Time”), as described below.     (b) Upon consummation of the First Transaction, Purchaser shall be entitled totwenty-five percent of all production of Hydrocarbons from or attributable to the Assets atand after the Effective Time (and all products and proceeds attributable thereto), and totwenty-five percent of all other income, proceeds, receipts and credits earned withrespect to the Assets at or after the Effective Time, and shall be responsible fortwenty-five percent of all Property Costs (as defined below) incurred at and after theEffective
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Time. Seller shall be entitled to all production of Hydrocarbons from orattributable to the Assets prior to the Effective Time (and all products and proceedsattributable thereto), and to all other income, proceeds, receipts and credits earned withrespect to the Assets prior to the Effective Time, and shall be responsible for all PropertyCosts incurred prior to the Effective Time. “Earned” and “incurred,” as used in thisAgreement, shall be interpreted in accordance with United States generally acceptedaccounting principles (as published by the Financial Accounting Standards Board) (“GAAP”)and Council of Petroleum Accountants Societies (COPAS) standards.     (c) Seller’s remaining seventy-five percent interest in the Assets shall be transferredfrom Seller to Purchaser at the consummation of the Second Transaction contemplated by thisAgreement (the “Second Closing”), provided, however, that certain financial benefits andburdens in respect of Seller’s said remaining seventy-five percent interest in the Assetsshall be transferred effective as of the Effective Time as described below.     (d) Upon consummation of the Second Transaction, Purchaser shall be entitled to allremaining production of Hydrocarbons from or attributable to the Assets at and after theEffective Time (and all products and proceeds attributable thereto), and to all otherincome, proceeds, receipts and credits earned with respect to the Assets at or after theEffective Time, and shall be responsible for all remaining Property Costs (as defined below)incurred at and after the Effective Time.     (e) “Property Costs” means all operating and production expenses (including, withoutlimitation, costs of insurance and ad valorem, property, severance, production and similarTaxes based upon or measured by the ownership or operation of the Assets or the productionof Hydrocarbons therefrom, but excluding any other Taxes), capital expenditures incurred inthe ownership and operation of the Assets in the ordinary course of business, and overheadcosts charged to the Assets under the applicable operating agreement or if none, charged tothe Assets on the same basis as charged on the date of this Agreement, but excluding,without limitation, liabilities, losses, costs, and expenses attributable to (i) claims,investigations, administrative proceedings, arbitration or litigation directly or indirectlyarising out of or resulting from actual or claimed personal injury or death, propertydamage, breach of contract or violation of any Law, (ii) obligations to plug wells,dismantle facilities, close pits and restore the surface around such wells, facilities andpits, (iii) obligations to remediate any contamination of groundwater, surface water, soilor equipment under applicable Laws, (iv) obligations to furnish make-up gas according to theterms of applicable gas sales, gathering or transportation contracts, (v) productionbalancing obligations, and (vi) whether or not described in clauses (i) through (v), anyclaims for indemnification or reimbursement from any third Person with respect to costs ofthe type described in preceding clauses (i) through (v), whether such claims are madepursuant to contract or otherwise, all as may have been incurred during the AdjustmentPeriod (as hereinafter defined).     (f) For purposes of allocating production (and accounts receivable with respectthereto), under this Section 1.3, (i) liquid Hydrocarbons shall be deemed to be “from orattributable to” the Assets when they pass through the flow lines connecting the
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Wells withthe storage facilities into which they are run and (ii) gaseous Hydrocarbons shall be deemedto be “from or attributable to” the Assets when they pass through the delivery point salesmeters on the pipelines through which they are transported. Seller and Purchaser shallutilize reasonable interpolative procedures to arrive at a mutually acceptable allocation ofproduction when exact meter readings or gauging and strapping data is not available.Seller, upon request, shall provide to Purchaser, no later than five (5) Business Days priorto the First Closing, evidence of all meter readings and all gauging and strappingprocedures conducted on or about the Effective Time in connection with the Assets, togetherwith all data necessary to support any allocation, for purposes of establishing theadjustment to the First Purchase Price pursuant to Section 2.2 and Second Purchase Pricepursuant to Section 2.3. For the purpose of allocating Property Costs (and accounts payablewith respect thereto), an item of expense shall be deemed to have been incurred on theservice date therefor as shown on the vendor’s invoice.     (g) Taxes (other than Taxes measured by gross proceeds, income, profits or capitalgains), right-of-way fees, insurance premiums and other Property Costs that are paidperiodically shall be prorated based on the number of days in the applicable period fallingbefore, and at or after, the Effective Time, except that production, severance and similarTaxes shall be prorated based on the amount of Hydrocarbons actually produced, purchased orsold, as applicable, before, and at or after, the Effective Time. After the First Closing,Purchaser shall be responsible for twenty-five percent (25%) of the portion allocated to theperiod at and after the Effective Time and Seller shall be responsible for the portionallocated to the period before the Effective Time. After the Second Closing, Purchasershall be responsible for the remaining portion allocated to the period at and after theEffective Time.**ARTICLE 2. PURCHASE PRICE**     **Section 2.1****Purchase Price.**     The purchase price for the Assets conveyed pursuant to the First Transaction contemplatedunder this Agreement shall be $2,000,000.00, adjusted as provided in Section 2.2 (the “FirstPurchase Price”). The purchase price for the Assets conveyed pursuant to the Second Transactioncontemplated under this Agreement shall be $6,000,000.00, adjusted as provided in Section 2.3 (the“Second Purchase Price).     **Section 2.2****Adjustments to First Purchase Price.**     The First Purchase Price shall be adjusted as follows:     (a) Reduced by twenty-five percent of the aggregate amount of the following proceedsactually received by Seller and attributable to production during the period between theEffective Time and the date (the “First Closing Date”) on which the FirstClosing occurs (with the period between the Effective Time and the First Closing Datereferred to as the “First Adjustment Period”): (i) proceeds from the sale of Hydrocarbons(net of any royalties, overriding royalties or other burdens on or payable out of
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production, gathering, processing and transportation costs and any production, severance,sales or excise and similar Taxes not reimbursed to Seller by the purchaser of productionwhich are not included in Property Costs) produced from or attributable to the Assets duringthe First Adjustment Period, and (ii) other proceeds earned with respect to the Assetsduring the First Adjustment Period;     (b) Reduced in accordance with Section 3.4, relating to Title Defects;     (c) Reduced in accordance with Section 3.5, relating to Environmental Defects;     (d) Reduced in accordance with Section 3.6, relating to preferential rights andconsents;     (e) Increased by twenty-five percent of the amount of all Property Costs and othercosts attributable to the ownership and operation of the Assets which are paid by Seller andincurred at or after the Effective Time, except any Property Costs and other such costsalready deducted in the determination of proceeds in Section 2.2(a); and     (f) Increased by twenty-five percent of the value of Seller’s share of make up gas instorage under the applicable Balancing Agreement pertaining to the Assets, with the valuethereof to be determined based upon the average price per MMBTU received by Seller for gassold during December, 2007. Seller and Purchaser have agreed that the adjustment for makeup gas in storage shall be effected as part of the First Post Closing Adjustmentcontemplated in Section 8.4 hereof, subject to Seller providing adequate documentation ofthe imbalance.     The First Purchase Price, adjusted as set forth in Section 2.2(a) through (f), shall bereferred to herein as the “Adjusted First Purchase Price.”     **Section 2.3****Adjustments to Second Purchase Price.**     The Second Purchase Price shall be adjusted as follows:     (a) Reduced by the aggregate amount of the following proceeds actually received bySeller and attributable to production during the period between the Effective Time and thedate (the “Second Closing Date”) on which the Second Closing occurs (with the period betweenthe Effective Time and the Second Closing Date referred to as the “Second AdjustmentPeriod”): (i) proceeds from the sale of Hydrocarbons (net of any royalties, overridingroyalties or other burdens on or payable out of production, gathering, processing andtransportation costs and any production, severance, sales or excise and similar Taxes notreimbursed to Seller by the purchaser of production which are not included in PropertyCosts) produced from or attributable to the Assets during the Second Adjustment Period, and(ii) other proceeds earned with respect to the Assets during the Second Adjustment Period;
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     (b) Reduced in accordance with Section 3.4, relating to Title Defects (save and exceptfor amounts for which an adjustment was made in computing the Adjusted First PurchasePrice);     (c) Reduced in accordance with Section 3.5, relating to Environmental Defects (save andexcept for amounts for which an adjustment was made in computing the Adjusted First PurchasePrice);     (d) Reduced in accordance with Section 3.6, relating to preferential rights andconsents (save and except for amounts for which an adjustment was made in computing theAdjusted First Purchase Price);     (e) Increased by the amount of all Property Costs and other costs attributable to theownership and operation of the Assets which are paid by Seller and incurred at or after theEffective Time, except any Property Costs and other such costs already deducted in thedetermination of proceeds in Section 2.3(a) or in determining the Adjusted First PurchasePrice; and     (f) Increased by the value of Seller’s share of make up gas in storage under theapplicable Balancing Agreement pertaining to the Assets, with the value thereof to bedetermined based upon the average price per MMBTU received by Seller for gas sold duringDecember, 2007. Seller and Purchaser have agreed that the adjustment for make up gas instorage shall be effected as part of the Second Post Closing Adjustment contemplated inSection 8.8 hereof, subject to Seller providing adequate documentation of the imbalance.     The Second Purchase Price, adjusted as set forth in Section 2.3(a) through (f), shall bereferred to herein as the “Adjusted Second Purchase Price.”     **Section 2.4****Allocation of Purchase Price.**     Schedule 2.4 sets forth the agreed allocation of the unadjusted Purchase Price among each ofthe Assets, which has been made in compliance with the principles of Section 1060 of the InternalRevenue Code of 1986, as amended (the “Code”), and the Treasury regulations thereunder. The“Allocated Value” for any Asset equals the portion of the unadjusted Purchase Price allocated tosuch Asset on Schedule 2.4, increased or decreased as described in this Section. Any adjustmentsto the Purchase Price other than the adjustments provided for in Sections 2.2(b), 2.2(c) and 2.2(d) and Sections 2.3(b), 2.3(c) and 2.3(d) shall be applied on a pro rata basis to the amounts setforth on Schedule 2.4 for all Assets. After all such adjustments are made, any adjustments to thePurchase Price pursuant to Sections 2.2 (b), 2.2 (c) and 2.2(d) and Sections 2.3(b), 2.3(c) and2.3(d) shall be applied to the amounts set forth in Schedule 2.4 for the particular affectedAssets. Seller has accepted such Allocated Values for purposes of this Agreement and thetransactions contemplated hereby, but otherwise makes no representation or warranty as to theaccuracy of such values. Seller agrees to use the allocation of the Purchase Price agreed to inSchedule 2.4 for tax reporting purposes and for the completion of Form 8594. The parties willagree to the reporting on IRS Form 8594 within one-hundred twenty (120) days after the ClosingDate.
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**ARTICLE 3. TITLE MATTERS**     **Section 3.1****Title.**     (a) Seller represents and warrants to Purchaser that as of the Effective Time and as ofeach Closing, Seller has or will have good, indefeasible and Marketable Title in and to allthe Wells, Units and Leases as to Seller’s proportionate share of the working interests andnet revenue interests described in Exhibits “A”, “A-1” and “A-2”, attached heretoand good, indefeasible and Marketable Title in and to all other Assets, free and clear ofany Encumbrances except Permitted Encumbrances.     (b) The conveyance covering the Assets to be conveyed under the First Transactioncontemplated under this Agreement (the “First Conveyance”) shall be in substantially theform of Exhibit “B” attached hereto. The conveyance covering the Assets to beconveyed under the Second Transaction contemplated under this Agreement (the “SecondConveyance”) shall be in substantially the form of Exhibit “C” attached hereto.Both the First Conveyance and Second Conveyance shall be delivered by Seller to Purchaser,shall contain a special warranty of title, subject only to Permitted Encumbrances (asdefined in Section 3.3) and shall transfer to Purchaser all of Seller’s rights or actions ontitle warranties given or made by Seller’s predecessors respecting the Assets to be conveyedunder this Agreement.     **Section 3.2****Definition of Marketable Title.**     As used in this Agreement and respecting the transactions contemplated hereunder, the term“Marketable Title” includes title of Seller which:     (a) Entitles such Seller to receive not less than such Seller’s proportionate share ofthe net revenue interest set forth in Exhibits “A”, “A-1” and “A-2” hereto withrespect to any Well, Unit or Lease under the caption “Revenue Interest” or “NRI” withoutreduction during the life of such Well, Unit or Lease except as set forth in Exhibits“A”, “A-1” and “A-2” hereto.     (b) Obligates such Seller to pay costs and expenses relating to each Well, Unit orLease in an amount not greater than such Seller’s proportionate share of the workinginterest set forth under the caption “Working Interest” or “WI” as set forth in Exhibits“A”, “A-1”, and “A-2” hereto with respect to such Well, Unit or Lease, without increaseover the life of such Well, Unit or Lease except as set forth in Exhibits “A”, “A-1” and“A-2” hereto.     (c) Is free and clear of all Encumbrances except Permitted Encumbrances.     As used in this Agreement, the term “Encumbrance” means any pledges, restrictions, charges,liens, mortgages, security interests, contract obligations, claims and encumbrances of any kind orcharacter, obligation, irregularity or other defect (including a discrepancy or error in netrevenue interest or working interest as set forth in Exhibits “A”, “A-1” and “A-2”, and theterm “Title Defect” means any Encumbrance that causes a breach of a Seller’s representation andwarranty in Section 3.1(a).
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     **Section 3.3****Definition of Permitted Encumbrances.**     As used herein, the term “Permitted Encumbrances” means any or all of the following:     (a) Lessors’ royalties and any overriding royalties, reversionary interests and otherburdens (and any liens or security interests created by law or reserved in instrumentscreating such interests to secure payment of same) to the extent that they do not,individually or in the aggregate, reduce Seller’s net revenue interests below that shown inExhibit “A,” “A-1” and “A-2” or increase Seller’s working interest above that shownin Exhibit “A,” “A-1” and “A-2” without a corresponding increase in the net revenueinterest;     (b) All leases, unit agreements, pooling agreements, operating agreements, productionsales contracts, division orders and other contracts, agreements and instruments applicableto the Leases and appearing of record or disclosed by Seller to Purchaser in writing, to theextent that they do not, individually or in the aggregate, reduce Seller’s net revenueinterests below that shown in Exhibit “A,” “A-1” and “A-2” or increase Seller’sworking interest above that shown in Exhibit “A,” “A-1” and “A-2” without acorresponding increase in the net revenue;     (c) Third-party consent requirements, preferential rights and similar restrictions withrespect to which waivers or consents are obtained by Seller from the appropriate partiesprior to each Closing Date or the appropriate time period for asserting the right hasexpired or which need not be satisfied prior to a transfer;     (d) Liens for current Taxes or assessments not yet due on each Closing Date;     (e) Materialmen’s, mechanic’s, repairman’s, employee’s, contractor’s, operator’s andother similar liens or charges arising in the ordinary course of business for amounts notyet delinquent;     (f) All rights to consent by, required notices to, filings with, or other actions bygovernmental agencies in connection with the sale or conveyance of oil and gas leases orinterests therein or sale of production therefrom if the same are prudently obtainedsubsequent to such sale or conveyance; or     (g) Easements, rights of way, servitudes, permits, surface leases, and other rights inrespect of surface operations on or over any of the Properties which do not materiallyinterfere with the current or proposed operations on the Properties.     **Section 3.4****Notice of Title Defects; Defect Adjustments.**     (a) To assert a claim arising out of a breach of Section 3.1, Purchaser must deliver aclaim notice to Seller on or before a date (the “Title Claim Date”) which is at least one(1) Business Day prior to the Second Closing Date, except as otherwise provided underSection 3.6. Such notice shall be in writing and shall include (i) a description of thealleged Title Defect(s), (ii) the Properties affected, (iii) the Allocated Values of theProperties subject to the alleged Title Defect(s), (iv) reasonable supporting
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documents to permit Seller (as well as any title attorney or examiner hired by Seller)to verify the existence of the alleged Title Defect(s) and (v) the amount by which Purchaserreasonably believes the Allocated Values of those Properties are reduced by the allegedTitle Defect(s) and the computations and information upon which Purchaser’s belief is based.     (b) Seller shall have the right, but not the obligation, to attempt, at its sole cost,to cure or remove on or before a Closing, any Title Defects of which it has been notified byPurchaser.     (c) With respect to each Property affected by Title Defects reported under Section3.4(a) and not cured prior to a Closing, such Property at Purchaser’s sole election, shallbe either (i) assigned at Closing subject to all such uncured Title Defects and the PurchasePrice shall be reduced by an amount (the “Title Defect Amount”) equal to the reduction inthe Allocated Value for such Property caused by such Title Defects, as determined pursuantto Section 3.4(d), or (ii) be excluded from the Assets to be purchased hereunder and theapplicable Purchase Price shall be reduced by an amount equal to the Allocated Value of suchProperty.     (d) The Title Defect Amount resulting from a Title Defect shall be determined asfollows:     (i) if Purchaser and Seller agree on the Title Defect Amount prior to Closing,that amount shall be the Title Defect Amount;     (ii) if the Title Defect is an Encumbrance which is undisputed and liquidatedin amount, then the Title Defect Amount shall be the amount necessary to be paid toremove the Title Defect from the affected Property;     (iii) if the Title Defect represents a discrepancy between (A) the actual netrevenue interest for any Property and (B) the net revenue interest or percentageownership stated on Exhibits “A”, “A-1” and “A-2” for such Property, thenthe Title Defect Amount shall be the product of the Allocated Value multiplied by afraction, the numerator of which is the net revenue interest or percentage ownershipdecrease and the denominator of which is the net revenue interest or percentageownership stated on Exhibits “A”, “A-1” and “A-2”;     (iv) if the Title Defect represents a discrepancy between (A) the workinginterest for a Property and (B) the working interest or percentage ownership statedon Exhibits “A”, “A-1” and “A-2” for such Property, then to the extent thereis not a corresponding increase in the net revenue interest, the Title Defect Amountshall be the product of the Allocated Value multiplied by a fraction, the numeratorof which is the working interest or percentage ownership increase and thedenominator of which is the working interest or percentage ownership stated onExhibits “A”, “A-1” and “A-2”;     (v) if the Title Defect represents an Encumbrance of a type not described insubsections (i), (ii), (iii) or (iv) above, the Title Defect Amount shall
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be determined by taking into account the Allocated Value of the Property soaffected, the portion of the Property affected by the Title Defect, the legal effectof the Title Defect, the potential economic effect of the Title Defect over the lifeof the affected Property, the values placed upon the Title Defect by Purchaser andSeller and such other factors as are necessary to make a proper evaluation; and     (vi) except as provided in Section 3.4(d)(ii), notwithstanding anything to thecontrary in this Article 3, the aggregate Title Defect Amounts attributable to theeffect of all Title Defects in respect of any particular Property shall not exceedthe Allocated Value of such Property.     (e) Seller and Purchaser shall attempt to agree on all Title Defect Amounts no laterthan one (1) Business Day prior to each Closing Date. If Seller and Purchaser are unable toagree by that date, the arithmetic average of Purchaser’s and Seller’s estimates shall beused to determine the Closing Payment pursuant to Section 8.4(a) and Section 8.8(a)), andthe Title Defect Amounts in dispute shall be exclusively and finally resolved by arbitrationpursuant to this Section 3.4(e). During the 10-day period following the Closing Date, TitleDefect Amounts in dispute shall be submitted to an attorney licensed in the State ofLouisiana and with at least 10 years’ recent experience in oil and gas titles as selected by(A) mutual agreement of Purchaser and Seller or (B) absent such agreement during the 10-dayperiod, by the Dallas, Texas, office of the American Arbitration Association (the “TitleArbitrator”). The Title Arbitrator shall not have had an affiliation with any Party ortheir Affiliates within the seven (7) year period preceding the arbitration, or have anyfinancial interest in the dispute, controversy, or claim. The arbitration proceeding shallbe held in New Orleans, Louisiana, and shall be conducted in accordance with the CommercialArbitration Rules of the American Arbitration Association, to the extent such rules do notconflict with the terms of this Section. The Title Arbitrator’s determination shall be madewithin 30 days after submission of the matters in dispute and shall be final and bindingupon both Parties, without right of appeal. In making his determination, the TitleArbitrator shall be bound by the rules set forth in Section 3.4(d) and may consider suchother matters as in the opinion of the Title Arbitrator are necessary or helpful to make aproper determination. Additionally, the Title Arbitrator may consult with and engagedisinterested third parties to advise the arbitrator including, without limitation, titleattorneys from other states and petroleum engineers. The Title Arbitrator shall act as anexpert for the limited purpose of determining the specific disputed Title Defect Amountssubmitted by either Party and may not award damages, interest or penalties to either partywith respect to any matter. Seller and Purchaser shall each bear its own legal fees andother costs of presenting its case. Each Party shall bear one-half of the costs andexpenses of the Title Arbitrator.     **Section 3.5****Notice of Environmental Defects; Defect Adjustments.**     (a) From and after the date of execution hereof, Seller shall afford Purchaser, itsrepresentatives, agents and employees access to the Properties to conduct reasonableinspections and to conduct an environmental assessment as herein provided.
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     (b) If the results of the environmental assessment indicate in Purchaser’s judgment (i)a material environmental hazard or condition which constitutes a violation or reasonablycould result in the violation of any Environmental Law or (ii) the existence of a conditionwhich would require future action by Purchaser or reasonably could result in Purchaser beingrequired to take future action as an environmental obligation or liability (an“Environmental Defect”), then Purchaser shall notify Seller of same at least one (1)Business Day prior to the Second Closing. With respect to each Property affected by anEnvironmental Defect, such Property, at Purchaser’s sole discretion shall be either (i)assigned at Closing subject to the Environmental Defect and the Purchase Price shall bereduced by an amount as described below (“Environmental Defect Amount”) or (ii) be excludedfrom the Assets to be purchased hereunder and the Purchase Price shall be reduced by anamount equal to the allocated value of such Property. Seller and Purchaser shall use theirbest efforts to agree on the amount of the Environmental Defect Amount. If Seller andPurchaser cannot agree on a resolution of such Environmental Defect Amount prior to aClosing, the Property(ies) which are affected by such condition shall be excluded from thesale and the Purchase Price shall be reduced by the value allocated to such Property(ies) inSchedule 2.3 or Schedule 2.4, as applicable.     **Section 3.6****Consents to Assignment and Preferential Rights to Purchase.**     (a) Seller shall notify Purchaser at least five (5) Business Days prior to a Closingof all required third-party consents to the assignment of the Assets to Purchaser which havenot been obtained and the Assets to which they pertain, as well as advise Purchaser if theassignment of any Contract or other Asset without obtaining a consent would result intermination or material impairment of Seller’s or Purchaser’s rights in such Contract orother Asset. In no event shall there be included in any Conveyance any Asset subject to aconsent requirement that provides that transfer of the Asset without consent will result ina termination or other material impairment of any rights in relation to such Asset. Incases where the Asset subject to such a requirement is a Lease and the third-party consentto the sale and transfer of the Lease is not obtained prior to a Closing Date, Purchaser mayelect to treat the unsatisfied consent requirement as a Title Defect and receive theappropriate Purchase Price adjustment under Section 2.2(b) and Section 2.3(b) by givingSeller notice thereof in accordance with Section 3.4(a), except that such notice may begiven at any time prior to a Closing. If an unsatisfied consent requirement with respect towhich a Purchase Price adjustment is made under Section 3.4 is subsequently satisfied priorto the date of the final adjustment to a Purchase Price under Section 8.4(b) or Section8.8(b), Seller shall be paid the amount of the previous reduction in the applicable PurchasePrice and the provisions of this Section 3.6 shall no longer apply.     (b) If any preferential rights to purchase any Leases are exercised prior to a Closing,those Leases transferred or to be transferred to a third party as a result of the exerciseof such preferential rights shall be treated as if subject to a Title Defect resulting incomplete loss of title and the applicable Purchase Price shall be adjusted accordingly underSections 2.2(b), 2.3(b) and 3.4(e). Seller shall retain the consideration paid or to bepaid by the third party.
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     **Section 3.7****Assertion of Defects.**     Seller agrees that notwithstanding the consummation of the First Transaction, Purchaser may,at its election, assert all Title and Environmental Defects, Consent requirements and PreferentialRight requirements relating to the Assets in connection with the Second Closing and may, at suchtime, receive the full adjustment(s) therefor.**ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF SELLER**     Seller represents and warrants to Purchaser the following:     **Section 4.1****Existence and Qualification.**     Seller is an entity of the type disclosed in the preamble hereto, and is duly organized,validly existing and in good standing under the laws of the State of Washington and Seller is dulyqualified to do business as a foreign corporation in Louisiana and each other jurisdiction where itdoes business.     **Section 4.2****Power.**     Seller has all requisite power and authority to carry on its business as presently conducted,to own, lease and operate the Assets owned, leased and operated by it, and to enter into andperform this Agreement and consummate the transactions contemplated by this Agreement.     **Section 4.3****Authorization and Enforceability.**     The execution, delivery and performance of this Agreement, and the performance of thetransactions contemplated hereby, have been duly and validly authorized by all necessary corporate,partnership or other action on the part of Seller. This Agreement has been duly executed anddelivered by Seller (and all documents required hereunder to be executed and delivered by Seller ateach Closing will be duly executed and delivered by such Seller) and this Agreement constitutes,and at each Closing such documents will constitute, the valid and binding obligation of Seller,enforceable in accordance with their terms except as such enforceability may be limited byapplicable bankruptcy, moratorium, insolvency, reorganization or other similar laws affecting therights and remedies of creditors generally, general principles of equity (regardless of whethersuch enforceability is considered in a proceeding in equity or at law) or the discretion of thecourt before which any proceeding therefor may be brought.     **Section 4.4****No Conflicts.**     The execution, delivery and performance of this Agreement by Seller, and the transactionscontemplated by this Agreement will not (i) violate any provision of the articles of incorporation,partnership or bylaws of Seller, (ii) result in a material default (with due notice or lapse oftime or both) or the creation of any lien or encumbrance or give rise to any right of termination,cancellation or acceleration under any of the terms, conditions or provisions of any note, bond,mortgage, indenture, license or agreement to which Seller is a party or which affect the Assets,(iii) violate any judgment, order, ruling, or decree applicable to Seller as a party in
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interest, or (iv) violate any Laws applicable to Seller or any of the Assets or (v) requireany filing with, notification of or consent, approval, authorization or waiver of any GovernmentalAuthority or other Person.     **Section 4.5****Liability for Brokers’ Fees.**     Purchaser shall not directly or indirectly have any responsibility, liability or expense, as aresult of undertakings or agreements of Seller, for brokerage fees, finder’s fees, agent’scommissions or other similar forms of compensation in connection with this Agreement or anyagreement or transaction contemplated hereby.     **Section 4.6****Litigation.**     There is no claim, action, suit, litigation, proceeding (including bankruptcy or receivershipproceedings), arbitration, governmental inquiry, or other investigation or inquiry of any kind, atlaw or in equity (including actions or proceedings seeking injunctive relief), pending with respectto or threatened against the Assets, or against Seller and Seller is not subject to any continuingorder of, consent decree, settlement agreement or other similar written agreement with, or,continuing investigation by, any Governmental Authority, or any judgment, order, writ, injunction,decree or award of any Government Authority or arbitrator, including, without limitation,cease-and-desist or other orders with respect to the Assets.     **Section 4.7****Taxes and Assessments.**     Seller has caused to be timely filed all Tax returns relating to the Assets. Seller has paidor caused to be paid all ad valorem, property, production, severance and similar Taxes based uponor measured by the ownership of or the production of Hydrocarbons from the Assets. Seller has notreceived written notice of any pending claim against Seller from any applicable taxing authorityfor assessment of Taxes with respect to the Assets. There are no audits of Seller by anyapplicable taxing authority with respect to Taxes attributable to the Assets. Except for statutoryliens for property taxes and ad valorem taxes not yet delinquent, there are no tax liens on or withrespect to the Assets.     **Section 4.8****Environmental Laws.**     The Assets and operations and activities of Seller with respect to the Assets are incompliance with all applicable Environmental Laws; (ii) the Assets are not subject to any existing,pending or threatened action, suit, investigation, inquiry or proceeding by or before any person orGovernmental Authority with respect to any claims for injury or damage to person or property orunder any applicable Environmental Law; (iii) all written notices, permits, licenses or similarauthorizations, if any, required to be obtained or filed by Seller under any applicableEnvironmental Law in connection with the Assets including, without limitation, those relating tothe treatment, storage, disposal or release of a hazardous substance, have been duly obtained orfiled except where the failure to obtain or file such notices, permits, licenses or similarauthorizations would not have a Material Adverse Effect, and Seller is in compliance with the termsand conditions of all such notices, permits, licenses and similar authorizations with respect tothe Assets and Seller is not aware of any reason that it would not be able to renew any of suchpermits, licenses or authority; (iv) Seller has satisfied and is currently in compliance with all
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financial responsibility requirements applicable to its operations with respect to the Assetsand imposed by any Governmental Authority under any Environmental Law, and Seller has not receivedany written notice of noncompliance with any such financial responsibility requirements; (v) thereare no physical or environmental conditions existing on any Asset that would give rise to anyon-site or off-site remedial obligations imposed on Seller under any Environmental Laws; (vi) sincethe effective date of the relevant requirements of applicable Environmental Laws and to the extentrequired by such applicable Environmental Laws, all hazardous substances generated by Seller withrespect to the Assets have been transported only by carriers authorized under applicableEnvironmental Laws to transport such substances and wastes, and disposed of only at treatment,storage and disposal facilities authorized under applicable Environmental Laws to treat, store ordispose of such substances and wastes; and (vii) there has been no exposure of any Person orproperty to hazardous substances or any pollutant or contaminant, nor has there been anyunauthorized release of hazardous substances, or any pollutant or contaminant, into the environmentby Seller, in connection with the Assets or operations with respect to the Assets. The operationsof each third-party operator of any of the Assets are in compliance with the terms of this Section4.8.     **Section 4.9****Outstanding Capital Commitments.**     Except as shown in the Disclosure Schedule, there are no outstanding Authority forExpenditures or other commitments to make capital expenditures with respect to the Assets.     **Section 4.10****Compliance with Laws.**     Except with respect to Environmental Laws, which are addressed in Section 4.8, Seller and eachthird-party operator of any of the Assets, are in possession of all franchises, grants,authorizations, licenses, permits, easements, variances, exemptions, consents, certificates,approvals and orders necessary to own, lease and operate its Assets and to carry on its businesswith respect to the Assets as it is now being conducted (collectively, the “Permits”) and there isno action, proceeding or investigation pending or threatened regarding suspension or cancellationof any of the Permits. Seller is not and each third party operator of the Assets is not inconflict with, or in default or violation of, (a) any Law to which any of the Assets is bound orsubject or (b) any of the Permits.     **Section 4.11****Payments for Production.**     All proceeds from the sale of Seller’s interest in Hydrocarbons attributable to the Leases arecurrently being paid in full. Further, Seller is not obligated by virtue of a take or pay payment,advance payment or other similar payment (other than royalties, overriding royalties and similararrangements reflected on Exhibit “A”, respecting the First Transaction or Exhibit“C”, respecting the Second Transaction), to deliver Hydrocarbons, or proceeds from the salethereof, attributable to the Leases at some future time without receiving payment therefor at orafter the time of delivery, and no take or pay credits must be provided before natural gas can betransported through any interstate carrier under FERC Order 500, et al, and there are noobligations on the Properties under FERC Order 451.
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     **Section 4.12****Properties**.     (a) All Leases and other agreements pursuant to which Seller leases or otherwiseacquires or obtains operating rights affecting the Assets are in good standing, valid andeffective, and all royalties, rentals and other payments and expenses due by Seller to anylessor of any such Leases have been timely paid by Seller or a third-party operator of theAssets.     (b) Except for Hydrocarbon sales contracts with a term not greater than ninety (90)days, no Hydrocarbons produced from the Assets are subject to a sales contract or otheragreement relating to the marketing of Hydrocarbons, and no person has any call upon, optionto purchase or similar rights with respect to such Assets or the rights therefrom.     (c) With respect to the Assets, Seller has the ability and right to obtain access to,produce, treat, transport, process, or otherwise market Hydrocarbons from the Wells, Units,and Leases without the need for any additional agreements.     (d) As of each Effective Time, Seller has no gas, pipeline or other productionimbalances with any Person related to the Properties.     (e) With respect to the Assets, Seller has caused all oil and gas properties to bemaintained and operated in a reasonable and prudent manner in accordance with typical andcustomary standards of the oil and gas industry.     (f) There are no suspense funds held by Seller for the account of a third party or anAffiliate that are associated with the Assets.     (h) There are no unpaid invoices for goods supplied or services rendered to the Assetsthat have been in Seller’s possession for more than thirty (30) days .     **Section 4.13****Consents and Preferential Purchase Rights.**     Except as shown in the Disclosure Schedule, none of the Leases are subject to any preferentialrights to purchase or restrictions on assignment or required third-party consents to assignment,which may be applicable to the transactions contemplated by this Agreement.     **Section 4.14****Contracts.**     Neither Seller nor any other party is in default under any Contract. There are no Contractswith Affiliates of Seller which will be binding on the Assets after Closing. Except for area ofmutual interest agreements, there are no agreements or arrangements that will be binding onPurchaser or the Assets after Closing which restrict the ability of the owner of the Assets tocompete with any person or in any geographic area or engage in any line of business. There are nocontracts for the purchase, sale, treating, gathering, processing, storage, exchange, and/ortransportation of oil, gas or other Hydrocarbons or their products that will be binding onPurchaser or the Assets after each Closing that Purchaser will not be entitled to terminate at willwithout penalty on 90 days notice or less. The owner of the Assets is not subject to any
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obligation to guarantee or act as surety for any obligation of another person or to indemnifyor insure another person against loss or third party claim, which obligation will be binding onPurchaser or the Assets after each Closing. None of the Contracts consist of, nor are the Assetssubject to any, hedge contracts, futures contracts, swap contracts, option contracts, or similarderivatives contracts.     **Section 4.15****Wells.**     All Wells have been located, drilled and completed in substantial compliance with all Lawsapplicable thereto.     **Section 4.16****Receipt of Payments for Production.**     Seller is currently receiving from all purchasers of production from the Wells, Units orLeases not less than the net revenue interest described in the Exhibit “A” with respectthereto without suspense or any indemnity other than the normal division order warranty of title.Seller is not delinquent with respect to its obligations to bear costs and expenses relating to thedevelopment of and operations of the Properties.     **Section 4.17****Facilities.**     The Facilities are in working order subject to ordinary wear and tear, and are suitable forthe purposes for which such Facilities were constructed, obtained or are being used. There are norestrictions imposed by any Governmental Authority or other Person that would prevent the use ofthe Facilities (and any necessary interconnection thereto) for the gathering, transporting andprocessing of production from properties other than the Properties. Seller has acquired allmaterial easements, rights-of-way, licenses, approvals and consents from appropriate GovernmentalAuthorities reasonably necessary to access, construct, operate, maintain and repair the Facilitiesin compliance with all applicable laws. Seller is in substantial compliance with all sucheasements, rights-of-way, permits, licenses, approvals, consents and law.     **Section 4.18****Wells to Be Plugged and Abandoned.**     There are no Wells that: (i) Seller is currently obligated by applicable Law, in effect as ofthe applicable Effective Time, or contract to plug and abandon; (ii) Seller would be obligated byLaw or contract to plug and abandon with the lapse of time or upon notice or both because suchWells are not currently capable of producing Hydrocarbons in commercial quantities; (iii) aresubject to exceptions to a requirement to plug and abandon issued by a Governmental Authorityhaving jurisdiction over its Assets; or (iv) have been plugged and abandoned in a manner that doesnot comply with all applicable requirements of each Governmental Authority having jurisdiction overits Assets.     **Section 4.19****Rights of First Refusal.**     No rights of first refusal, preemptive rights of purchase or similar rights exist with respectto the Assets whereby any Person, other than Purchaser has the right to acquire or purchase all orany portion of such Assets.
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     **Section 4.20****Intellectual Property.**     Seller possesses all necessary rights or licenses to so use such copyrights, patents,trademarks and trade names, and all other software, and other trade secrets used by Seller in theownership and/or operation of the Assets (the “Intellectual Property”) and (i) the Assets includeall such rights and licenses to use the Intellectual Property, (ii) the occurrence of each Closingwill not affect the validity, continuation, or effectiveness of any such rights or licenses ontheir present terms and (iii) such rights or licenses are transferable to Purchaser without paymentof a fee. There are no infringements or unauthorized or unlawful use of such Intellectual Propertyby a Seller or any allegations that Seller’s use of such Intellectual Property has infringedsimilar properties of others.     **Section 4.21****Non-Consents and Elections Not to Participate.**     Seller has not non-consented or otherwise elected not to participate in the drilling,completing, sidetracking, deepening, reworking, equipping, plugging and abandoning or otheroperation requiring an AFE of or with respect to any well on the properties, nor has Seller electednot to participate (or failed to affirmatively elect which has resulted in a deemed election not toparticipate) in any lease or other interest acquired under any Area of Mutual Interest affectingthe Properties.     **Section 4.22****No Knowledge of Material Inaccuracies or Misstatements.**     Seller has no knowledge of any inaccuracies or incompleteness of any data, information,reports, records or other information furnished or otherwise made available by any Seller toPurchaser in connection with the transactions contemplated by this Agreement..     **Section 4.23****No Adverse Changes**. Since the Effective Time, the Assets have beenoperated in the ordinary course of business consistent with past practice and there has been no:     (a) material damage, destruction, or loss to the Assets (whether or not covered byinsurance); or     (b) material adverse change in the business, financial condition, operations, value orprospects of the Assets other than as a result of general economic or industry-wideconditions.     **Section 4.24****Bankruptcy**.     Neither Seller nor any of Seller’s Affiliates has filed or is contemplating the filing of anyproceeding under the United States Bankruptcy Code seeking protection from creditors and, toSeller’s knowledge, no such involuntary proceeding against Seller is threatened.
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**ARTICLE 5. REPRESENTATIONS AND WARRANTIES OF PURCHASER**     Purchaser represents and warrants to Seller the following:     **Section 5.1****Existence and Qualification.**     Purchaser is a limited liability company duly organized, validly existing and in good standingunder the laws of the State of Delaware and Purchaser is duly qualified to do business as a foreignentity in every jurisdiction in which it is required to qualify in order to conduct its businessexcept where the failure to so qualify would not have a Material Adverse Effect on Purchaser or itsproperties.     **Section 5.2****Power.**     Purchaser has all requisite corporate power and authority to enter into and perform thisAgreement and consummate the transactions contemplated by this Agreement and to own, lease andoperate the Assets.     **Section 5.3****Authorization and Enforceability.**     The execution, delivery and performance of this Agreement, and the performance of thetransaction contemplated hereby, have been duly and validly authorized by all necessary actions onthe part of Purchaser. This Agreement has been duly executed and delivered by Purchaser (and alldocuments required hereunder to be executed and delivered by Purchaser at each Closing will be dulyexecuted and delivered by Purchaser) and this Agreement constitutes, and at each Closing suchdocuments will constitute, the valid and binding obligations of Purchaser, enforceable inaccordance with their terms except as such enforceability may be limited by applicable bankruptcyor other similar laws affecting the rights and remedies of creditors generally as well as togeneral principles of equity (regardless of whether such enforceability is considered in aproceeding in equity or at law).     **Section 5.4****No Conflicts.**     The execution, delivery and performance of this Agreement by Purchaser, and the transactionscontemplated by this Agreement will not (i) violate any provision of the certificate oforganization or bylaws of Purchaser, (ii) result in a material default (with due notice or lapse oftime or both) or the creation of any lien (other than any lien created in connection with thefinancing of the transactions contemplated herein) or encumbrance or give rise to any right oftermination, cancellation or acceleration under any of the terms, conditions or provisions of anynote, bond, mortgage, indenture, license or agreement to which Purchaser is a party, (iii) violateany judgment, order, ruling, or regulation applicable to Purchaser as a party in interest, or (iv)violate any Laws applicable to Purchaser or any of its assets, or (v) require any filing with,notification of or consent, approval or authorization of any Governmental Authority.     **Section 5.5****Liability for Brokers’ Fees;**     Seller shall not directly or indirectly have any responsibility, liability or expense, as aresult of undertakings or agreements of Purchaser, for brokerage fees, finder’s fees, agent’s
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commissions or other similar forms of compensation in connection with this Agreement or anyagreement or transaction contemplated hereby.     **Section 5.6****Litigation.**     There are no actions, suits or proceedings pending, or threatened in writing before anyGovernmental Authority against Purchaser or any subsidiary of Purchaser.     **Section 5.7****Purchase for Own Account.**     Purchaser intends to acquire the Assets for its own benefit and account and it is notacquiring said Assets with the intent of distributing fractional undivided interests therein suchas would be subject to regulation by federal or state securities laws, and that if, in the future,it should sell, transfer or otherwise dispose of said interests or fractional undivided intereststherein, it will do so in compliance with any applicable federal and state securities laws.**ARTICLE 6. COVENANTS OF THE PARTIES**     **Section 6.1****Access.**     Seller will give Purchaser and its representatives access to the Assets and access to and theright to copy the Records in Seller’s possession, for the purpose of conducting an investigation ofthe Assets. Such access by Purchaser shall be limited to Seller’s normal business hours, andPurchaser’s investigation shall be conducted in a manner that minimizes interference with theoperation of the Assets. Purchaser at its option and expense may conduct a Phase I environmentalaudit of any or all of the Assets. Seller shall have no obligation to provide Purchaser suchaccess to any data or information which (i) Seller considers proprietary or is subject to aconfidentiality agreement preventing disclosure by Seller, or (ii) Seller cannot legally providePurchaser because of third-party restrictions on Seller; provided that upon Purchaser’s request,Seller and Purchaser shall work together in good faith to attempt to remove such third partyrestrictions or obtain appropriate waivers, consents or licenses with respect to any geological orgeophysical data which are subject to requirements which prevent Seller from delivering same toPurchaser. Purchaser shall keep all materials and data obtained confidential until the SecondClosing Date. Purchaser shall take all reasonable steps necessary to ensure that Purchaser’srepresentatives comply with the provisions of this Section 6.1. Upon termination of this Agreementwithout Closing, Purchaser shall return to Seller any and all materials and data relating to anyproperties not purchased at Closing and shall destroy any and all of Purchaser’s notes and workpapers derived therefrom in accordance with the terms of said confidentiality agreement.     **Section 6.2****Public Announcements.**     Until the Second Closing, neither Party shall make any press release or other publicannouncement regarding the existence of this Agreement, the contents hereof or the transactionscontemplated hereby without the prior written consent of the other Party; provided, however, theforegoing shall not restrict disclosures by Purchaser or Seller which are required by applicablesecurities or other Laws or the applicable rules of any stock exchange having jurisdiction over thedisclosing party or its Affiliates.
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     **Section 6.3****Operation of Business.**     Until a new operator shall have been selected and assumed its duties, Seller agrees that itwill (i) operate and administer the Assets pursuant to the Operating Agreement dated September 1,2006, as amended on July 5, 2007, in a good and workmanlike manner consistent with recent pastpractices, (ii) except as directed by Purchaser, not propose or commit to participate in thedrilling of any well, or make or enter into any other commitments reasonably anticipated to requirefuture capital expenditures by Seller in excess of $25,000, (iii) not terminate, materially amend,or extend any material Contracts affecting the Assets, or enter into or commit to enter into anynew material contract or agreement relating to the Assets, or settle, compromise or waive anymaterial right relating to the Assets, (iv) maintain insurance coverage on the Assets in theamounts and of the types presently in force, (v) maintain in full force and effect the Leases andother Assets, and pay all costs and expenses and perform all material obligations of the owner ofthe Assets promptly when due, (vi) maintain all Permits, (vii) not transfer, sell, farmout,hypothecate, encumber, or otherwise dispose of any Assets except for sales and dispositions ofHydrocarbons made in the ordinary course of business consistent with past practices, (viii) notgrant or create any preferential right to purchase, right of first opportunity or other transferrestriction or requirement with respect to the Assets except in connection with the renewal orextension of Assets after the applicable Effective Time if granting or creating such right orrequirement is a condition of such renewal or extension, (ix) not elect to become a nonconsentingparty in any operation proposed by any other Person with respect to the Assets, (x) maintain theEquipment in at least as good a condition as it is on the date hereof, ordinary wear and tearexcepted, (xi) not make any change in any method of accounting or accounting practice or policywith respect to the Assets and (xii) not agree to extend any statute of limitations with respect toTaxes or any extension of time with respect to a Tax assessment or deficiency for any Taxes, ormake any change in any Tax elections with respect to the Assets. In the event of an emergency,Seller may take such action with respect to the Assets as a prudent operator would take and shallnotify Purchaser of such action promptly thereafter. From and after the First Closing, Seller willconsult with and coordinate its activities as Operator of the Assets with Paladin Petroleum III,LLC. Seller shall immediately notify Purchaser of any proposal to drill or rework any well or toconduct any operation requiring a consent election under the applicable Joint OperatingAgreement(s) and shall make such election as Purchaser may direct upon Purchaser’s undertaking topay or reimburse Seller for the cost of such operation.     **Section 6.4****Material Developments.**     Seller shall promptly notify Purchaser of, and furnish Purchaser any information it mayreasonably request with respect to (a) any written notice of default under any Contract or of anyaction to alter, terminate, or rescind or procure a judicial reformation of any Contract receivedor given by Seller, (b) any written notice of any pending action or action threatened in writingrelating to the Assets, received or given by Seller, (c) any damage, destruction or loss to anymaterial portion of the Assets or (d) any event or condition between the date of this Agreement andthe Second Closing Date that reasonably could be expected (i) to cause a material adverse change inthe business, operations, financial condition or results of operations of the Assets, taken as awhole (a “Material Adverse Change”) other than a change which is the result of
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general economic or industry-wide conditions, or (ii) to cause any of the conditions toPurchaser’s obligation to consummate the purchase and sale of the Assets not to be fulfilled.     **Section 6.5****Confidentiality Obligations.**     Seller and Purchaser shall each keep confidential and cause their respective Affiliates, andtheir respective officers, directors, employees and representatives to keep confidential allinformation of a confidential nature relating to the Assets, except as required by applicable Law,administrative process or the applicable rules of any stock exchange to which Seller or Purchaseror their respective Affiliates are subject and except for information which is available to thepublic on the date hereof or thereafter becomes available to the public other than as a result of abreach by Seller, Purchaser or any such other Person of this Section 6.5. The covenant containedin this Section 6.5 shall survive each Closing for a period of two (2) years from the applicableClosing Date, provided, however, that notwithstanding the termination of the covenant set forth inthis Section 6.5, any confidentiality provision in any Contract which is binding on Seller,Purchaser or any such other Person shall remain in full force and effect in accordance with itsterms.     **Section 6.6****Consents and Preferential Rights.**     Seller shall promptly prepare and send (i) notices to the holders of any required consents toassignment which are set forth on Section 6.6 of the Disclosure Schedule requesting such consentsand (ii) notices to the holders of any applicable preferential rights to purchase which are setforth on the Disclosure Schedule requesting waivers of such preferential rights to purchase. Theconsideration payable under this Agreement for any particular Asset for purposes of preferentialpurchase right notices shall be the Allocated Value for such Asset. Seller shall use commerciallyreasonable efforts to cause such consents and waivers of preferential rights to purchase (or theexercise thereof) to be obtained and delivered prior to each Closing. Purchaser shall cooperatewith Seller in seeking to obtain such consents and waivers of preferential rights.     **Section 6.7****Tax Matters; First Transaction.**     Subject to Section 11.2 and as specified below, Seller shall be responsible for all Taxes(other than ad valorem, property, severance, production and similar Taxes based upon or measured bythe ownership or operation of the Leases or the production of Hydrocarbons therefrom, which areaddressed in Section 1.3) attributable to any period of time at or prior to the First Closingincluding, without limitation, income Taxes arising as a result of the gain recognized on thetransfer of the Assets. Purchaser shall be responsible for twenty-five percent of all such Taxesattributable to any period of time after the First Closing, twenty-five percent of all sales or usetaxes occasioned by the consummation of the First Transaction contemplated by this Agreement andall documentary, filing and recording fees occasioned by the First Transaction contemplated by thisAgreement. Regardless of which party is responsible, Seller shall handle payment to theappropriate Governmental Authority of all Taxes with respect to the Assets which are required to bepaid prior to the First Closing (and shall file all returns with respect to such Taxes).
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     **Section 6.8****Tax Matters; Second Transaction.**     Purchaser shall be responsible for all Taxes attributable to any period of time after theSecond Closing, all sales or use taxes occasioned by the consummation of the Second Transactioncontemplated by this Agreement and all documentary, filing and recording fees occasioned by theconsummation of the Second Transaction contemplated by this Agreement. Regardless of which partyis responsible, Seller shall handle payment to the appropriate Governmental Authority of all Taxeswith respect to the Assets which are required to be paid prior to Second Closing (and shall fileall returns with respect to such Taxes).     **Section 6.9****Further Assurances.**     After each Closing, Seller and Purchaser agree to take such further actions and to execute,acknowledge and deliver all such further documents as are reasonably requested by the other Partyfor carrying out the purposes of this Agreement or of any document delivered pursuant to thisAgreement, including, without limitation, such assignments and other forms as may be required bythe State Mineral Board of the State of Louisiana in order to effect the transfer of Seller’sinterest in the State of Louisiana Mineral Leases which are included in the Leases.**ARTICLE 7. CONDITIONS TO CLOSING**     **Section 7.1****Conditions of Seller to First Closing.**     The obligations of Seller to consummate the First Transaction contemplated by this Agreementare subject, at the option of Seller, to the satisfaction on or prior to the First Closing of eachof the following conditions:     (a) Representations. The representations and warranties of Purchaser set forthin Article 5 shall be true and correct in all material respects as of the date of thisAgreement and as of the First Closing Date as though made on and as of the First ClosingDate;     (b) Performance. Purchaser shall have performed and observed, in all materialrespects, all covenants and agreements to be performed or observed by it under thisAgreement prior to or on the First Closing Date;     (c) Pending Litigation. No suit, action or other proceeding seeking torestrain, enjoin or otherwise prohibit the consummation of the transactions contemplated bythis Agreement shall be pending before any Governmental Authority;     (d) Deliveries. Purchaser shall have delivered to Seller duly executedcounterparts of the First Conveyance and the other documents and certificates to bedelivered by Purchaser under Section 8.3;     (e) Payment. Purchaser shall have paid the First Closing Payment (as definedin Section 8.4(a) subject to the provisions of Section 8.3(a)).
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     **Section 7.2****Conditions of Purchaser to First Closing.**     The obligations of Purchaser to consummate the First Transaction contemplated by thisAgreement are subject, at the option of Purchaser, to the satisfaction on or prior to the FirstClosing of each of the following conditions:     (a) Representations. The representations and warranties of Seller set forth inArticle 4 shall be true and correct in all material respects as of the date of thisAgreement and as of the First Closing Date as though made on and as of the First ClosingDate;     (b) Performance. Seller shall have performed and observed all covenants andagreements to be performed or observed by it under this Agreement prior to or on the FirstClosing Date;     (c) Pending Litigation. No suit, action or other proceeding seeking torestrain, enjoin or otherwise prohibit the consummation of the transactions contemplated bythis Agreement shall be pending before any Governmental Authority;     (d) Deliveries. Seller shall have delivered to Purchaser duly executedcounterparts of the First Conveyance and the other documents and certificates to bedelivered by Seller under Section 8.2; and     (e) Title Defects. The sum of all Title Defect Amounts for Title Defects andall Environmental Defect Amounts for environmental Defects reported under Sections 3.4(a)and 3.5(c), shall be less than fifty-thousand dollars ($50,000.00).     (f) No Material Adverse Change. Since the date of this Agreement, there shallhave occurred no adverse changes in the condition of the Assets having, or reasonably likelyto have, individually or in the aggregate, a Material Adverse Effect on the Assets, taken asa whole, except for the depreciation of Equipment through ordinary wear and tear, thedepletion of Hydrocarbons through normal sales of production at allowable or contract ratesand changes which are the result of general economic or industry-wide conditions.     (g) Liens and Encumbrances. The Assets shall be free of all liens andencumbrances except for Permitted Encumbrances.     **Section 7.3****Conditions of Seller to Second Closing.**     The obligations of Seller to consummate the Second Transaction contemplated by this Agreementare subject, at the option of Seller, to the satisfaction on or prior to Second Closing of each ofthe following conditions:     (a) Representations. The representations and warranties of Purchaser set forthin Article 5 shall be true and correct in all material respects as of the date of thisAgreement and as of the First Closing Date as though made on and as of the Second ClosingDate;
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     (b) Performance. Purchaser shall have performed and observed, in all materialrespects, all covenants and agreements to be performed or observed by it under thisAgreement prior to or on the Second Closing Date;     (c) Pending Litigation. No suit, action or other proceeding seeking torestrain, enjoin or otherwise prohibit the consummation of the transactions contemplated bythis Agreement shall be pending before any Governmental Authority;     (d) Deliveries. Purchaser shall have delivered to Seller duly executedcounterparts of the Second Conveyance and the other documents and certificates to bedelivered by Purchaser under Section 8.7;     (e) Payment. Purchaser shall have paid the Second Closing Payment (as definedin Section 8.8(a) subject to the provisions of Sections 8.7(a)).     **Section 7.4****Conditions of Purchaser to Second Closing.**     The obligations of Purchaser to consummate the Second Transaction contemplated by thisAgreement are subject, at the option of Purchaser, to the satisfaction on or prior to SecondClosing of each of the following conditions:     (a) Representations. The representations and warranties of Seller set forth inArticle 4 shall be true and correct in all material respects as of the date of thisAgreement and as of the Second Closing Date as though made on and as of the Second ClosingDate;     (b) Performance. Seller shall have performed and observed all covenants andagreements to be performed or observed by it under this Agreement prior to or on the SecondClosing Date;     (c) Pending Litigation. No suit, action or other proceeding seeking torestrain, enjoin or otherwise prohibit the consummation of the transactions contemplated bythis Agreement shall be pending before any Governmental Authority;     (d) Deliveries. Seller shall have delivered to Purchaser duly executedcounterparts of the Second Conveyance and the other documents and certificates to bedelivered by Seller under Section 8.6; and     (e) Title Defects. The sum of all Title Defect Amounts for Title Defects andall Environmental Defect Amounts for environmental Defects reported under Sections 3.4(a)and 3.5(c), shall be less than fifty-thousand dollars ($50,000.00).     (f) No Material Adverse Change. Since the date of this Agreement, there shallhave occurred no adverse changes in the condition of the Assets having, or reasonably likelyto have, individually or in the aggregate, a Material Adverse Effect on the Assets, taken asa whole, except for the depreciation of Equipment through ordinary wear and tear, thedepletion of Hydrocarbons through normal sales of production at allowable or contract ratesand changes which are the result of general economic or industry-wide conditions.
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     (g) Liens and Encumbrances. The Assets shall be free of all liens andencumbrances except for Permitted Encumbrances.**ARTICLE 8. CLOSING**     **Section 8.1****Time and Place of First Closing.**     Unless otherwise agreed to in writing by Purchaser and Seller, the First Closing shall takeplace at the offices of Lasso Partners, LLC, located at 1114 Lost Creek Boulevard, Suite 260,Austin, Texas 78746, at 10:00 a.m., local time, on January 18, 2008, or if all conditions inArticle 7.1 and 7.2 to be satisfied prior to First Closing have not yet been satisfied or waived,as soon thereafter as such conditions have been satisfied or waived, subject to the rights of theparties under Article 9.     **Section 8.2****Obligations of Seller at First Closing.**     At the First Closing, Seller shall deliver or cause to be delivered to Purchaser, among otherthings, the following:     (a) Tax certificates evidencing that all 2007 and prior years ad valorem taxes assessedagainst Seller’s interest in the Properties have been paid;     (b) Resolutions of the Board of Directors or other governing body of Seller,certificates of incumbency and other documents reasonably acceptable to Purchaser’s counselto show the satisfaction of those matters set out in Sections 4.1, 4.2, 4.3, 4.4 and 4.7hereof;     (c) A certificate of Seller or duly authorized officer thereof certifying as to thosematters set out in Section 7.2 hereof;     (d) The First Conveyance in sufficient duplicate originals to allow recording in allappropriate jurisdictions and offices, duly executed by Seller;     (e) letters-in-lieu of transfer orders covering the Assets described in the FirstConveyance, duly executed by Seller; and     (f) executed statements described in Treasury Regulation 1.1445-2(b)(2) certifying thatSeller is not a foreign person within the meaning of the Code.     **Section 8.3****Obligations of Purchaser at First Closing.**     At the First Closing, upon the terms and subject to the conditions of this Agreement,Purchaser shall deliver or cause to be delivered to Seller, among other things, the following:     (a) a wire transfer of the First Closing Payment in same-day funds to an accountdesignated by Seller;
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     (b) a certificate of a duly authorized officer of Purchaser certifying as to thosematters set out in Section 7.1 hereof;     (c) The First Conveyance duly executed by Purchaser; and     (d) letters-in-lieu of transfer orders covering the Assets described in the FirstConveyance, duly executed by Purchaser.     **Section 8.4****Closing Payment and Post-Closing First Purchase Price Adjustments.**     (a) Not later than two(2) Business Days prior to the First Closing Date, Purchasershall prepare and deliver to Seller, using and based upon the best information reasonablyavailable to Purchaser, a preliminary settlement statement estimating the Adjusted FirstPurchase Price after giving effect to all First Purchase Price adjustments set forth inSection 2.2. Subject to any adjustment under Section 3.4(e), the estimate delivered inaccordance with this Section 8.4(a) shall constitute the dollar amount to be paid byPurchaser to Seller at the First Closing (the “First Closing Payment”).     (b) As soon as reasonably practicable after the First Closing but not later than the60th day following the First Closing Date, Purchaser shall prepare and deliver to Seller astatement setting forth the final calculation of the Adjusted First Purchase Price andshowing the calculation of each adjustment, based, to the extent possible on actual credits,charges, receipts and other items before and after the Effective Time. Seller shall atPurchaser’s request supply reasonable documentation available to support any credit, charge,receipt or other item. As soon as reasonably practicable but not later than the 30th dayfollowing receipt of Purchaser’s statement hereunder, Seller shall deliver to Purchaser awritten report containing any changes that Seller proposes be made to such statement. TheParties shall undertake to agree on the final statement of the Adjusted First Purchase Priceno later than 150 days after the First Closing Date (the “First Final Settlement Date”). IfSeller and Purchaser have not so agreed on or before the First Final Settlement Date, thematters that remain in dispute shall be submitted to an arbitrator (the “Accountant”) forreview and resolution. The Accountant shall be a nationally recognized independent publicaccounting firm as shall be agreed upon by Purchaser and Seller in writing. The Accountantshall render a decision resolving the matters in dispute, in a manner consistent with theprovisions of Section 2.2 and the other provisions of this Agreement, within 30 daysfollowing their submission to the Accountant. The determination of the Accountant shall befinal and binding on the parties. The cost of any arbitration (including the fees andexpenses of the Accountant) pursuant to this Section 8.4(b) shall be borne one-half byPurchaser and one-half by Seller. If the First Purchase Price as adjusted in the finalsettlement statement exceeds the First Closing Payment, Purchaser shall pay to Seller thedifference within 30 days after the First Final Settlement Date. If the First ClosingPayment exceeds the First Purchase Price as adjusted in the final settlement statement,Seller will pay to Purchaser the difference within 30 days after the First Final SettlementDate.     (c) If Seller and Purchaser agree, the Parties may postpone the final adjustment of theFirst Purchase Price under Section 8.4(b) until such time as the Second
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Purchase Price is finally adjusted under Section 8.8(b). If Seller and Purchaser soagree, Purchaser shall issue one statement simultaneously setting forth the finalcalculations of the Adjusted First Purchase Price and the Adjusted Second Purchase Price.     **Section 8.5****Time and Place of Second Closing.**     Unless otherwise agreed to in writing by Purchaser and Seller, the Second Closing shall takeplace at the offices of Lasso Partners, LLC, located at 1114 Lost Creek Boulevard, Suite 260,Austin, Texas 78746, at 10:00 a.m., local time, on March 28, 2008. Purchaser may extend the dateof the Second Closing to April 30, 2008, to complete its due diligence review of the Assets. Inthe event Second Closing does not occur on or before April 30, 2008, Purchaser shall forfeit itsright to purchase any further interest in the Assets under this Agreement, but shall have nofurther liability to Seller.     **Section 8.6****Obligations of Seller at Second Closing.**     At the Second Closing, Seller shall deliver or cause to be delivered to Purchaser, among otherthings, the following:     (a) Tax certificates evidencing that all 2007 and prior years ad valorem taxes assessedagainst Seller’s interest in the Properties have been paid;     (b) Resolutions of the Board of Directors or other governing body of Sellercertificates of incumbency and other documents reasonably acceptable to Purchaser’s counselto show the satisfaction of those matters set out in Sections 4.1, 4.2, 4.3, 4.4 and 4.7hereof;     (c) A certificate of Seller or duly authorized officer thereof certifying as to thosematters set out in Section 7.2 hereof;     (d) The Second Conveyance in sufficient duplicate originals to allow recording in allappropriate jurisdictions and offices, duly executed by Seller;     (e) letters-in-lieu of transfer orders covering the Assets, duly executed by Seller;and     (f) executed statements described in Treasury Regulation 1.1445-2(b)(2) certifying thatSeller is not a foreign person within the meaning of the Code.     **Section 8.7****Obligations of Purchaser at Second Closing.**     At the Second Closing, upon the terms and subject to the conditions of this Agreement,Purchaser shall deliver or cause to be delivered to Seller, among other things, the following:     (a) a wire transfer of the Second Closing Payment in same-day funds to an accountdesignated by Seller;
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     (b) a certificate of a duly authorized officer of Purchaser certifying as to thosematters set out in Section 7.1 hereof;     (c) The Second Conveyance duly executed by Purchaser; and     (d) letters-in-lieu of transfer orders covering the Assets, duly executed by Purchaser.     **Section 8.8****Second Closing Payment and Post-Closing Second Purchase Price Adjustments****.**     (a) Not later than five (5) Business Days prior to the Second Closing Date, Purchasershall prepare and deliver to Seller, using and based upon the best information reasonablyavailable to Purchaser, a preliminary settlement statement estimating the Adjusted SecondPurchase Price after giving effect to all Second Purchase Price adjustments set forth inSection 2.3. Subject to any adjustment under Section 3.4(e), the estimate delivered inaccordance with this Section 8.8(a) shall constitute the dollar amount to be paid byPurchaser to Seller at the Second Closing (the “Second Closing Payment”).     (b) As soon as reasonably practicable after the Second Closing but not later than the60th day following the Second Closing Date, Purchaser shall prepare and deliver to Seller astatement setting forth the final calculation of the Adjusted Second Purchase Price andshowing the calculation of each adjustment, based, to the extent possible on actual credits,charges, receipts and other items before and after the Effective Time. Seller shall atPurchaser’s request supply reasonable documentation available to support any credit, charge,receipt or other item. As soon as reasonably practicable but not later than the 30th dayfollowing receipt of Purchaser’s statement hereunder, Seller shall deliver to Purchaser awritten report containing any changes that Seller proposes be made to such statement. TheParties shall undertake to agree on the final statement of the Adjusted Second PurchasePrice no later than 150 days after the Second Closing Date (the “Second Final SettlementDate”). If Seller and Purchaser have not so agreed on or before the Second Final SettlementDate, the matters that remain in dispute shall be submitted to an arbitrator (the“Accountant”) for review and resolution. The Accountant shall be a nationally recognizedindependent public accounting firm as shall be agreed upon by Purchaser and Seller inwriting. The Accountant shall render a decision resolving the matters in dispute, in amanner consistent with the provisions of Section 2.2 and the other provisions of thisAgreement, within 30 days following their submission to the Accountant. The determinationof the Accountant shall be final and binding on the parties. The cost of any arbitration(including the fees and expenses of the Accountant) pursuant to this Section 8.8(b) shall beborne one-half by Purchaser and one-half by Seller. If the Second Purchase Price asadjusted in the final settlement statement exceeds the Second Closing Payment, Purchasershall pay to Seller the difference within 30 days after the Second Final Settlement Date.If the Second Closing Payment exceeds the Second Purchase Price as adjusted in the finalsettlement statement, Seller will pay to Purchaser the difference within 30 days after theSecond Final Settlement Date.
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**ARTICLE 9. TERMINATION AND AMENDMENT**     **Section 9.1****Termination.**     This Agreement may be terminated at any time prior to either Closing: (i) by the mutual priorwritten consent of Seller and Purchaser or (ii) by either Purchaser or Seller, if the SecondClosing has not occurred on or before April 30, 2008, provided, however, that no Party shall beentitled to terminate this Agreement under this Section 9.1(ii) if the First Closing has failed tooccur because such Party negligently or willfully failed to perform or observe in any materialrespect its covenants and agreements hereunder.     **Section 9.2****Effect of Termination.**     If this Agreement is terminated pursuant to Section 9.1, prior to the First Closing Date, thisAgreement shall become void and of no further force or effect (except for the provisions ofSections 4.5, 5.5, 6.2, 11.6, 11.8 and 11.16). If this Agreement is terminated pursuant to Section8.5 or Section 9.1 after the First Closing but prior to the Second Closing, this Agreement shallremain in force and effect as to the First Transaction and shall become void and of no furtherforce or effect (except for the provisions of Sections 4.5, 5.5, 6.2, 11.6, 11.8 and 11.16) as tothe Second Transaction.**ARTICLE 10. INDEMNIFICATION; LIMITATIONS**     **Section 10.1****Assumption and Indemnification.**     (a) Upon and after First Closing, Purchaser shall assume and perform twenty-fivepercent of all the rights, duties, obligations and liabilities of ownership and operation ofthe Assets including, without limitation: (i) all of Seller’s express and impliedobligations and covenants after the Effective Time under the terms of the Leases, theContracts, Appurtenant Rights and all other orders, rules and regulations to which theAssets are subject; (ii) responsibility for compliance with all applicable Laws pertainingto the Assets, and the procurement and maintenance of all permits required by publicauthorities in connection with the Assets after the Effective Time; and (iii) all otherobligations assumed by Purchaser under this Agreement. With respect to non-operatinginterests in the Assets being transferred to Purchaser under this Agreement, Purchaser shallassume full responsibility and liability for that portion of the foregoing rights, duties,obligations and liabilities for which non-operators are responsible. Seller remainsresponsible for all costs, expenses and liabilities incurred by Seller in connection withthe ownership or operation of the Assets before the Effective Time, except those arising outof specific matters or claims for which Purchaser has received an adjustment to the PurchasePrice or (iii) those which Purchaser assumes in this Agreement.     (b) Upon and after Second Closing, Purchaser shall assume and perform all the rights,duties, obligations and liabilities of ownership and operation of the Assets including,without limitation: (i) all of Seller’s express and implied obligations and covenants afterthe Effective Time under the terms of the Leases, the Contracts, Appurtenant Rights and allother orders, rules and regulations to which the Assets are subject; (ii) responsibility forall royalties, overriding royalties, rentals, shut-in payments
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and other burdens or encumbrances to which the Assets are subject accruing after theEffective Time; (iii) responsibility for compliance with all applicable Laws pertaining tothe Assets, and the procurement and maintenance of all permits required by publicauthorities in connection with the Assets after the Effective Time; and (iv) all otherobligations assumed by Purchaser under this Agreement. With respect to non-operatinginterests in the Assets being transferred to Purchaser under this Agreement, Purchaser shallassume full responsibility and liability for that portion of the foregoing rights, duties,obligations and liabilities for which non-operators are responsible.     (c) From and after First Closing, Seller shall indemnify, defend and hold harmlessPurchaser and its officers, directors, agents, employees and representatives (collectively,“Purchaser Indemnified Persons” against and from all damages incurred or suffered byPurchaser:     (i) caused by or arising out of or resulting from the ownership, use oroperation of the assets other than Property Costs incurred from the Effective Timeto the First Closing Date (which are addressed in Sections 2.2(b) and 10.2);     (ii) attributable to or arising out of any actions, suits, or proceedings; or     (iii) caused by or arising out of or resulting from Seller’s breach of any ofSeller’s covenants or agreements contained in Article 6, or     (iv) caused by or arising out of or resulting from any breach of anyrepresentation or warranty made by Seller contained in Article 4 of this agreement,     (d) “Damages”, for purposes of this Article 10, shall mean the amount of any actualliability, loss, cost, expense, claim, award or judgment incurred or suffered by anyIndemnified Party arising out of or resulting from the indemnified matter, includingreasonable fees and expenses of attorneys, consultants, accountants or other agents andexperts reasonably incident to matters indemnified against, and the costs of investigationand/or monitoring of such matters, and the costs of enforcement of the indemnity; provided,however, that Purchaser and Seller shall not be entitled to indemnification under thisSection 10.1 for, and “Damages” shall not include, (i) loss of profits or otherconsequential damages suffered by the Party claiming indemnification, or any special orpunitive damages (other than indirect, consequential, special or punitive damages sufferedby third Persons and payable by an Indemnified Person).     (e) Notwithstanding anything to the contrary set forth in this Agreement, Seller shallhave no liability to Purchaser or any Purchaser Indemnified Person or obligation toindemnify Purchaser or any Purchaser Indemnified Person for any specific matter or claim forwhich Purchaser has received an adjustment to the Purchase Price including, withoutlimitation, any adjustment pursuant to Section 3.4.     (f) Purchaser and Seller agree to treat any indemnity payment made pursuant to Section10.1(c) as an adjustment to the Purchase Price for Tax purposes.
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     **Section 10.2****Indemnification Actions.**     All claims for indemnification under Section 10.1 shall be asserted and resolved as follows:     (a) For purposes of this Article 10, the term “Indemnifying Party” when used inconnection with particular Damages shall mean the Party having an obligation to indemnifythe other Party with respect to such Damages pursuant to this Article 10, and the term“Indemnified Party” when used in connection with particular Damages shall mean the Partyhaving the right to be indemnified with respect to such Damages by the other Party pursuantto this Article 10.     (b) To make claim for indemnification under Section 10.1, an Indemnified Party shallnotify the Indemnifying Party of its claim under this Section 10.2, including the specificdetails of and specific basis under this Agreement for its claim (the “Claim Notice”). Inthe event that the claim for indemnification is based upon a claim by a third party againstthe Indemnified Party (a “Claim”), the Indemnified Party shall provide its Claim Noticepromptly after the Indemnified Party has actual knowledge of the Claim and shall enclose acopy of all papers (if any) served with respect to the Claim; provided that the failure ofany Indemnified Party to give notice of a Claim as provided in this Section 10.2 shall notrelieve the Indemnifying Party of its obligations under Section 10.1 except to the extentsuch failure results in insufficient time being available to permit the Indemnifying Partyto effectively defend against the Claim or otherwise materially prejudices the IndemnifyingParty’s ability to defend against the Claim. In the event that the claim forindemnification is based upon an inaccuracy or breach of a representation, warranty,covenant or agreement, the Claim Notice shall specify the representation, warranty, covenantor agreement which was inaccurate or breached.     (c) In the case of a claim for indemnification based upon a Claim, the IndemnifyingParty shall have 30 days from its receipt of the Claim Notice to notify the IndemnifiedParty whether it admits or denies its liability to defend the Indemnified Party against suchClaim at the sole cost and expense of the Indemnifying Party. The Indemnified Party isauthorized, prior to and during such 30-day period, to file any motion, answer or otherpleading that it shall deem necessary or appropriate to protect its interests or those ofthe Indemnifying Party and that is not prejudicial to the Indemnifying Party.     (d) If the Indemnifying Party admits its liability, it shall have the right andobligation to diligently defend, at its sole cost and expense, the Claim. The IndemnifyingParty shall have full control of such defense and proceedings, including any compromise orsettlement thereof. If requested by the Indemnifying Party, the Indemnified Party agrees tocooperate in contesting any Claim which the Indemnifying Party elects to contest. TheIndemnified Party may participate in, but not control, any defense or settlement of anyClaim controlled by the Indemnifying Party pursuant to this Section 10.2(d). AnIndemnifying Party shall not, without the written consent of the Indemnified Party, (i)settle any Claim or consent to the entry of any judgment with respect thereto which admitsliability on the part of the Indemnified Party or which does not include an
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unconditional written release of the Indemnified Party from all liability in respect ofsuch Claim or (ii) settle any Claim or consent to the entry of any judgment with respectthereto in any manner that may materially and adversely affect the Indemnified Party (otherthan as a result of money damages covered by the indemnity).     (e) If the Indemnifying Party does not admit its liability or admits its liability butfails to diligently prosecute or settle the Claim, then the Indemnified Party shall have theright to defend against the Claim at the sole cost and expense of the Indemnifying Party,with counsel of the Indemnified Party’s choosing, subject to the right of the IndemnifyingParty to admit its liability and assume the defense of the Claim at any time prior tosettlement or final determination thereof. If the Indemnifying Party has not yet admittedits liability for a Claim, the Indemnified Party shall send written notice to theIndemnifying Party of any proposed settlement and the Indemnifying Party shall have theoption for 10 days following receipt of such notice to (i) admit in writing its liabilityfor the Claim and (ii) if liability is so admitted, reject, in its reasonable judgment, theproposed settlement.     (f) In the case of a claim for indemnification not based upon a Claim, the IndemnifyingParty shall have 30 days from its receipt of the Claim Notice to (i) cure the Damagescomplained of, (ii) admit its liability for such Damages or (iii) dispute the claim for suchDamages. If the Indemnifying Party does not notify the Indemnified Party within such 30 dayperiod that it has cured the Damages or that it disputes the claim for such Damages, theamount of such Damages shall conclusively be deemed a liability of the Indemnifying Partyhereunder.     **Section 10.3****Limitation on Actions****.**     (a) The representations and warranties in this Agreement and Seller’s indemnificationobligations shall survive until the earlier of (i) the Second Closing or (ii) April 30,2008, at which time they shall terminate except for matters asserted at or prior thereto andexcept for the representations and warranties contained in Sections 4.1 through 4.6, 4.22,4.24 and 5.1 through 5.6, which will survive indefinitely.     (b) An Indemnified Party’s Damages hereunder shall be deemed reduced by the amount ofany insurance proceeds and any tax benefits received by the Indemnified Party with respectto such Damages.     **Section 10.4****Recording.**     As soon as practicable after each Closing, Purchaser shall record the applicable Conveyance inthe appropriate recording jurisdictions as well as the appropriate Governmental Authorities andprovide Seller with copies of all recorded or approved instruments.
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**ARTICLE 11. MISCELLANEOUS**     **Section 11.1****Receipts Not Reflected in Purchase Price.**     Except as otherwise provided in this Agreement, any production of Hydrocarbons from orattributable to the Assets (and all products and proceeds attributable thereto) and any otherincome, proceeds and receipts earned with respect to the Assets which are not reflected in theadjustments to the Purchase Prices following the final adjustments pursuant to Section 8.4(b) and8.8(b) shall be treated as follows: (a) all production of Hydrocarbons from or attributable to theAssets (and all products and proceeds attributable thereto) and all other income, proceeds andreceipts earned with respect to the Assets to which Purchaser is entitled under Section 1.3 shallbe the sole property and entitlement of Purchaser, and, to the extent received by Seller, Sellershall fully disclose, account for and remit the same promptly to Purchaser, and (b) all productionof Hydrocarbons from or attributable to the Assets (and all products and proceeds attributablethereto) and all other income, proceeds and receipts earned with respect to the Assets to whichSeller is entitled under Section 1.3 shall be the sole property and entitlement of Seller and, tothe extent received by Purchaser, Purchaser shall fully disclose, account for and remit the samepromptly to Seller.     **Section 11.2****Expenses Not Reflected in Purchase Price.**     Except as otherwise provided in this Agreement, any Property Costs which are not reflected inthe adjustments to the Purchase Prices following the final adjustment pursuant to Section 8.4(b)and Section 8.8(b) shall be treated as follows: (a) all Property Costs for which Seller isresponsible under Section 1.3 shall be the sole obligation of Seller and Seller shall promptly pay,or if paid by Purchaser, promptly reimburse Purchaser for and hold Purchaser harmless from andagainst same; and (b) all Property Costs for which Purchaser is responsible under Section 1.3 shallbe the sole obligation of Purchaser and Purchaser shall promptly pay, or if paid by Seller,promptly reimburse Seller for and hold Seller harmless from and against same. Seller is entitledto resolve all joint interest audits and other audits of Property Costs covering periods for whichSeller are responsible under the terms of this Agreement. Purchaser is entitled to resolve alljoint interest audits and other audits of Property Costs covering periods before or after theEffective Times and shall be entitled to any refunds applicable thereto.     **Section 11.3****Counterparts.**     This Agreement may be executed in counterparts, each of which shall be deemed an originalinstrument, but all such counterparts together shall constitute but one agreement.     **Section 11.4****Notices.**     All notices which are required or may be given pursuant to this Agreement shall be sufficientin all respects if given in writing and delivered personally, by telecopy or by registered orcertified mail, postage prepaid, as follows:
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       If to Purchaser: Lasso Partners, LLC    1114 Lost Creek Blvd., Suite 260    Austin, Texas 78746    Attention: Bill R. Orr    Telephone: (512) 327-6122    Telecopy: (512) 327-9626       With a copy to: Cox Smith Matthews Incorporated    112 East Pecan Street, Suite 1800    San Antonio, TX 78205    Attention: Jon R. Ray    Telephone(210) 554-5255    Telecopy: (210) 226-8307       If to Seller: Daybreak Oil and Gas, Inc.    601 West Main Avenue, Suite 1012    Spokane, Washington 99201    Attention: Bob Martin    Telephone: (713) 722-6500    Telecopy: (713) 722-6600     Either Party may change its address for notice by notice to the other in the manner set forthabove. All notices shall be deemed to have been duly given at the time of receipt by the Party towhich such notice is addressed.     **Section 11.5****Sales or Use Tax, Recording Fees and Similar Taxes and Fees.**     Purchaser shall pay any sales, use, excise, documentary, stamp or transfer Taxes, recordingfees and similar Taxes and fees incurred and imposed upon, or with respect to, the propertytransfers or other transactions contemplated hereby. If such transfers or transactions are exemptfrom any such taxes or fees upon the filing of an appropriate certificate or other evidence ofexemption, Purchaser will timely furnish to Seller such certificate or evidence.     **Section 11.6****Expenses.**     All expenses incurred by Seller in connection with or related to the authorization,preparation or execution of this Agreement, the Conveyance delivered hereunder and the Exhibits andSchedules hereto and thereto, and all other matters related to the Closing, including withoutlimitation, all fees and expenses of counsel, accountants and financial advisers employed bySeller, shall be borne solely and entirely by Seller, and all such expenses incurred by Purchasershall be borne solely and entirely by Purchaser.     **Section 11.7****Replacement of Bonds, Letters of Credit and Guarantees.**     The Parties understand that none of the bonds, letters of credit and guarantees, if any,posted by Seller with Governmental Authorities and relating to the Assets are to be transferred toPurchaser. Promptly following Closing, Purchaser shall obtain, or cause to be obtained in the nameof Purchaser, replacements for such bonds, letters of credit and guarantees, to the extent
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such replacements are necessary to permit the cancellation of the bonds, letters of credit andguarantees posted by Seller or to consummate the transactions contemplated by this Agreement.     **Section 11.8****Governing Law.**     This Agreement and the legal relations between the Parties shall be governed by and construedin accordance with the laws of the State of Texas without regard to principles of conflicts of lawsotherwise applicable to such determinations; provided, however, that matters affecting title to theProperties shall be governed by the laws of the State of Louisiana.     **Section 11.9****Captions.**     The captions in this Agreement are for convenience only and shall not be considered a part ofor affect the construction or interpretation of any provision of this Agreement.     **Section 11.10****Waivers.**     Any failure by any Party to comply with any of its obligations, agreements or conditionsherein contained may be waived in writing, but not in any other manner, by the Party to whom suchcompliance is owed. No waiver of, or consent to a change in, any of the provisions of thisAgreement shall be deemed or shall constitute a waiver of, or consent to a change in, otherprovisions hereof (whether or not similar), nor shall such waiver constitute a continuing waiverunless otherwise expressly provided.     **Section 11.11****Assignment.**     Seller shall not assign all or any part of this Agreement or delegate any of its rights orduties hereunder, without the prior written consent of Purchaser and any assignment or delegationmade without such consent shall be void. Purchaser may assign this Agreement in whole or in partto an Affiliate or designee without obtaining Seller’s consent thereto prior to a Closing. Subjectto the foregoing, this Agreement shall be binding upon and inure to the benefit of the Partieshereto and their respective successors and assigns.     **Section 11.12****Entire Agreement.**     This Agreement and the documents to be executed hereunder and the Exhibits and Schedulesattached hereto constitute the entire agreement between the Parties pertaining to the subjectmatter hereof, and supersede all prior agreements, understandings, negotiations and discussions,whether oral or written, of the Parties pertaining to the subject matter hereof.     **Section 11.13****Amendment****.**          (a) This Agreement may be amended or modified only by an agreement in writing executedby both Parties.          (b) No waiver of any right under this Agreement shall be binding unless executed inwriting by the Party to be bound thereby.
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     **Section 11.14****No Third-Party Beneficiaries.**     Nothing in this Agreement shall entitle any Person other than Purchaser and Seller to anyclaim, cause of action, remedy or right of any kind.     **Section 11.15****References.**     In this Agreement:     (a) References to any gender includes a reference to all other genders;     (b) References to the singular includes the plural, and vice versa;     (c) Reference to any Article or Section means an Article or Section of this Agreement;     (d) Reference to any Exhibit or Schedule means an Exhibit or Schedule to thisAgreement, all of which are incorporated into and made a part of this Agreement;     (e) Unless expressly provided to the contrary, “hereunder”, “hereof”, “herein” andwords of similar import are references to this Agreement as a whole and not any particularSection or other provision of this Agreement;     (f) “Include” and “including” shall mean include or including without limiting thegenerality of the description preceding such term; and     (g) The term “knowledge” shall, in the case of Seller, mean the actual knowledge of TimR. Lindsey, Dale B. Lavigne, Robert N. Martin, Jeffrey R. Dworkin and Thomas C. Kilbourne.     **Section 11.16****Construction.**     Purchaser is a party capable of making such investigation, inspection, review and evaluationof the Assets as a prudent purchaser would deem appropriate under the circumstances, including withrespect to all matters relating to the Assets, their value, operation and suitability. Seller andPurchaser have had substantial input into the drafting and preparation of this Agreement and havehad the opportunity to exercise business discretion in relation to the negotiation of the detailsof the transaction contemplated hereby. This Agreement is the result of arm’s-length negotiationsfrom equal bargaining positions.     **Section 11.17****Limitation on Damages.**     Notwithstanding anything to the contrary contained herein, none of Purchaser, Seller or any oftheir respective Affiliates shall be entitled to special, punitive, indirect or consequentialdamages in connection with this Agreement and the transactions contemplated hereby (other thanspecial, punitive, indirect or consequential damages suffered by third Persons for whichresponsibility is allocated between the Parties) and each of Purchaser and Seller, for itself andon behalf of its Affiliates, hereby expressly waives any right to special, punitive, indirect or
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consequential damages in connection with this Agreement and the transactions contemplatedhereby.     **Section 11.18****Arbitration.**     It is agreed, as a severable and independent arbitration agreement separately enforceable fromthe remainder of this Agreement, that any dispute, controversy or claim arising out of or inrelation to or in connection with this Agreement (other than a dispute, controversy or claimarising out of or in relation to or in connection with the calculation of the Adjusted PurchasePrices, which shall be resolved in accordance with Section 8.4(b) and Section 8.8(b) or relating toTitle Defects, which shall be resolved in accordance with Section 3.4(e)), including, withoutlimitation, any dispute as to the construction, validity, interpretation, enforceability, or breachof this Agreement, shall be exclusively and finally settled by arbitration in accordance with thisSection 11.18. Either Party may submit such a dispute, controversy, or claim to arbitration bynotice to the other Party and the administrator for the American Arbitration Association (“AAA”).The arbitration proceedings shall be conducted in New Orleans, Louisiana, United States of Americain accordance with the International Arbitration Rules of the American Arbitration Association asin effect on the date hereof. The arbitration shall be heard and determined by three (3)arbitrators. Each Party shall appoint an arbitrator of its choice within twenty (20) days of thesubmission of the notice of arbitration. The Party appointed arbitrators shall in turn appoint apresiding arbitrator for the tribunal within twenty (20) days following the appointment of thesecond Party appointed arbitrator. If the Party appointed arbitrators cannot reach agreement on apresiding arbitrator for the tribunal and/or one Party fails to appoint its Party appointedarbitrator within the applicable period, the AAA shall act as appointing authority to appoint anindependent arbitrator with at least ten (10) years experience in the legal and/or commercialaspects of the petroleum industry. None of the arbitrators shall have been an employee of orconsultant to either Party to this Agreement or any of its Affiliates within the seven (7) yearperiod preceding the arbitration, or have any financial interest in the dispute, controversy, orclaim. All decisions of the arbitral tribunal shall be by majority vote. The arbitrators may notaward indirect, consequential, special or punitive damages except those claimed by third Personsother than Indemnified Persons under this Agreement for which responsibility is being allocatedbetween the Parties. Each Party shall pay its own expenses in connection with the arbitration, butthe compensation and expenses of the arbitrators shall be borne in such manner as may be specifiedin the arbitral award. Privileges protecting attorney-client communications and attorney workproduct from compelled disclosure or use in evidence, as recognized by the courts of the State ofLouisiana and United States of America, shall apply to and be binding in any arbitration proceedingconducted under this Section.     **Section 11.19****Records.**     Within five (5) days after each Closing Date, Seller shall deliver or cause to be delivered toPurchaser any Records that are in the possession of Seller or its Affiliates, subject to thefollowing sentence. Seller may retain copies of those Records relating to tax and accountingmatters or ongoing litigation, if any, for which Seller is retaining responsibility and providePurchaser with copies thereof.
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     **IN WITNESS WHEREOF**, this Agreement has been signed by each of the Parties as of the date firstabove written.      **SELLER:**