SECURITIES EXCHANGE
AGREEMENT


     

    BY AND AMONG


     

    SONTERRA RESOURCES,
INC.,

     

    THE LONGVIEW FUND,
L.P.

     

    AND

     

    LONGVIEW MARQUIS MASTER FUND,
L.P.

     

    Dated as of November 13,
2008

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    


    TABLE OF
CONTENTS

    

      
        	 	 	 	
                Page

              
	 	 	 	 
	
                1.

              	
                EXCHANGE
      OF WARRANT AND NORTH TEXAS SHARES.

              	 	
                3

              
	 	
                a.

              	
                Exchange

              	 	
                3

              
	 	
                b.

              	
                The Closing
      Date

              	 	
                3

              
	 	 	 	 
	
                2.

              	
                BUYER
      REPRESENTATIONS AND WARRANTIES.

              	 	
                3

              
	 	
                a.

              	
                Investment
      Purpose

              	 	
                3

              
	 	
                b.

              	
                Accredited Investor
      Status

              	 	
                4

              
	 	
                c.

              	
                Reliance on
      Exemptions

              	 	
                4

              
	 	
                d.

              	
                Information

              	 	
                4

              
	 	
                e.

              	
                No Governmental
      Review

              	 	
                4

              
	 	
                f.

              	
                Transfer or
      Resale

              	 	
                5

              
	 	
                g.

              	
                Legends

              	 	
                5

              
	 	
                h.

              	
                Authorization;
      Enforcement; Validity

              	 	
                6

              
	 	
                i.

              	
                Residency and
      Offices

              	 	
                6

              
	 	
                j.

              	
                Title to
      Units

              	 	
                6

              
	 	
                k.

              	
                No
      Conflict

              	 	
                6

              
	 	
                2A.

              	
                MARQUIS
      REPRESENTATIONS AND WARRANTIES REGARDING NORTH
    TEXAS.

              	 	
                7

              
	 	
                a.

              	
                Organization and
      Qualification

              	 	
                7

              
	 	
                b.

              	
                Capitalization

              	 	
                7

              
	 	
                c.

              	
                Financial
      Information

              	 	
                8

              
	 	
                d.

              	
                Absence of
      Litigation

              	 	
                8

              
	 	
                e.

              	
                Tangible
      Assets

              	 	
                8

              
	 	 	 	 
	
                3.

              	
                REPRESENTATIONS
      AND WARRANTIES OF THE COMPANY.

              	 	
                8

              
	 	
                a.

              	
                Organization and
      Qualification

              	 	
                9

              
	 	
                b.

              	
                Authorization;
      Enforcement; Validity

              	 	
                9

              
	 	
                c.

              	
                Capitalization

              	 	
                10

              
	 	
                d.

              	
                Issuance of
      Securities

              	 	
                11

              
	 	
                e.

              	
                No
      Conflicts

              	 	
                12

              
	 	
                f.

              	
                SEC Reports; Financial
      Statements; Public Communications

              	 	
                13

              
	 	
                g.

              	
                Absence of Certain
      Changes

              	 	
                14

              
	 	
                h.

              	
                Absence of
      Litigation

              	 	
                15

              
	 	
                i.

              	
                Full Disclosure; No
      Undisclosed Events, Liabilities, Developments or
      Circumstances

              	 	
                15

              
	 	
                j.

              	
                Acknowledgment
      Regarding Buyers’ Purchase of Securities

              	 	
                16

              
	 	
                k.

              	
                No General
      Solicitation

              	 	
                15

              
	 	
                l.

              	
                No Integrated
      Offering

              	 	
                16

              
	 	
                m.

              	
                Dilutive
      Effect

              	 	
                17

              
	 	
                n.

              	
                Employee
      Relations

              	 	
                17

              
	 	
                o.

              	
                Intellectual Property
      Rights

              	 	
                18

              
	 	
                p.

              	
                Environmental
      Laws

              	 	
                19

              


      

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      
        	 	
                q.

              	
                Title

              	 	
                20

              
	 	
                r.

              	
                Insurance

              	 	
                20

              
	 	
                s.

              	
                Regulatory
      Permits

              	 	
                21

              
	 	
                t.

              	
                Internal Accounting
      Controls; Disclosure Controls and Procedures; Books and
      Records

              	 	
                21

              
	 	
                u.

              	
                Bank
      Accounts

              	 	
                22

              
	 	
                v.

              	
                Tax
      Status

              	 	
                22

              
	 	
                w.

              	
                Transactions With
      Affiliates

              	 	
                22

              
	 	
                x.

              	
                Application of
      Takeover Protections; Rights Agreement

              	 	
                23

              
	 	
                y.

              	
                Foreign Corrupt
      Practices

              	 	
                23

              
	 	
                z.

              	
                Outstanding
      Indebtedness; Liens

              	 	
                23

              
	 	
                aa.

              	
                Ranking of
      Notes

              	 	
                24

              
	 	
                bb.

              	
                Real
      Property

              	 	
                25

              
	 	
                cc.

              	
                Excluded
      Subsidiaries

              	 	
                26

              
	 	
                dd.

              	
                No Materially Adverse
      Contracts, Etc

              	 	
                26

              
	 	
                ee.

              	
                Investment
      Company

              	 	
                26

              
	 	
                ff.

              	
                Stock
      Options

              	 	
                26

              
	 	
                gg.

              	
                Schedules

              	 	
                27

              
	 	 	 	 
	
                4.

              	
                AFFIRMATIVE
      COVENANTS.

              	 	
                27

              
	 	
                a.

              	
                Reasonable Best
      Efforts

              	 	
                27

              
	 	
                b.

              	
                Form D and Blue
      Sky

              	 	
                27

              
	 	
                c.

              	
                Reporting
      Status

              	 	
                27

              
	 	
                d.

              	
                [Reserved]

              	 	
                29

              
	 	
                e.

              	
                Financial
      Information

              	 	
                29

              
	 	
                f.

              	
                Internal Accounting
      Controls

              	 	
                29

              
	 	
                g.

              	
                Reservation of
      Shares

              	 	
                29

              
	 	
                h.

              	
                Listing

              	 	
                30

              
	 	
                i.

              	
                Expenses

              	 	
                30

              
	 	
                j.

              	
                Disclosure of
      Transactions and Other Material Information.

              	 	
                30

              
	 	
                k.

              	
                Pledge of
      Securities

              	 	
                32

              
	 	
                l.

              	
                Notices

              	 	
                32

              
	 	
                m.

              	
                Compliance with Laws
      and Maintenance of Permits

              	 	
                33

              
	 	
                n.

              	
                Inspection and
      Audits

              	 	
                33

              
	 	
                o.

              	
                Insurance

              	 	
                33

              
	 	
                p.

              	
                [Reserved]

              	 	
                34

              
	 	
                q.

              	
                Taxes

              	 	
                34

              
	 	
                r.

              	
                Intellectual
      Property

              	 	
                34

              
	 	
                s.

              	
                Patriot Act, Investor
      Secrecy Act and Office of Foreign Assets Control

              	 	
                34

              
	 	
                t.

              	
                Drilling Title
      Opinions

              	 	
                34

              
	 	
                u.

              	
                [Reserved

              	 	
                35

              
	 	
                v.

              	
                [Reserved]

              	 	
                35

              
	 	
                w.

              	
                Subsidiary
      Restrictions

              	 	
                35

              
	 	
                x.

              	
                Further Instruments
      and Acts

              	 	
                36

              
	 	
                y.

              	
                Additional Financial
      Information

              	 	
                36

              
	 	
                z.

              	
                Cancellation of Old
      Notes

              	 	
                36

              


      

       

      
        
          
          

        

        
          ii

          
            

          

        

        
          
          

        

      

       

      
        	 	
                aa.

              	
                Repayment of North
      Texas Demand Note

              	 	
                36

              
	 	
                bb.

              	
                Release of
      Liens

              	 	
                36

              
	 	 	 	 
	
                5.

              	
                NEGATIVE
      COVENANTS

              	 	
                37

              
	 	
                a.

              	
                Prohibition Against
      Variable Priced Securities

              	 	
                37

              
	 	
                b.

              	
                Status

              	 	
                37

              
	 	
                c.

              	
                Stay, Extension and
      Usury Laws

              	 	
                37

              
	 	
                d.

              	
                Payment Restrictions
      Affecting Subsidiaries

              	 	
                38

              
	 	
                e.

              	
                Prepayments

              	 	
                38

              
	 	
                f.

              	
                Indebtedness

              	 	
                38

              
	 	
                g.

              	
                Liens

              	 	
                39

              
	 	
                h.

              	
                [Reserved]

              	 	
                39

              
	 	
                i.

              	
                Corporate Existence;
      Leases

              	 	
                39

              
	 	
                j.

              	
                Restrictions on Loans;
      Investments; Subsidiary Equity

              	 	
                39

              
	 	
                k.

              	
                [Reserved]

              	 	
                40

              
	 	
                l.

              	
                Affiliate
      Transactions

              	 	
                40

              
	 	
                m.

              	
                [Reserved]

              	 	
                40

              
	 	
                n.

              	
                Executive
      Compensation

              	 	
                40

              
	 	
                o.

              	
                Limitation on Sale and
      Leaseback Transactions

              	 	
                40

              
	 	
                p.

              	
                Investment
      Company

              	 	
                40

              
	 	
                q.

              	
                Leases

              	 	
                41

              
	 	
                r.

              	
                Restriction on
      Purchases or Payments

              	 	
                41

              
	 	
                s.

              	
                No Avoidance of
      Obligations

              	 	
                41

              
	 	
                t.

              	
                [Reserved].

              	 	
                41

              
	 	
                u.

              	
                Limits on Additional
      Issuances

              	 	
                41

              
	 	
                v.

              	
                No Integrated
      Offering

              	 	
                42

              
	 	
                w.

              	
                Regulation
      M

              	 	
                42

              
	 	 	 	 
	
                6.

              	
                CONDITIONS
      TO THE OBLIGATION OF THE COMPANY TO ISSUE

              	 	
                42

              
	 	 	 	 
	
                7.

              	
                CONDITIONS
      TO THE OBLIGATION OF THE BUYERS TO ACQUIRE

              	 	
                43

              
	 	 	 	 
	
                8.

              	
                INDEMNIFICATION

              	 	
                45

              
	 	 	 	 
	
                9.

              	
                GOVERNING
      LAW; MISCELLANEOUS.

              	 	
                46

              
	 	
                a.

              	
                Governing Law;
      Jurisdiction; Jury Trial

              	 	
                46

              
	 	
                b.

              	
                Counterparts

              	 	
                47

              
	 	
                c.

              	
                Headings

              	 	
                47

              
	 	
                d.

              	
                Severability

              	 	
                47

              
	 	
                e.

              	
                Entire Agreement;
      Amendments

              	 	
                48

              
	 	
                f.

              	
                Notices

              	 	
                48

              
	 	
                g.

              	
                Successors and
      Assigns

              	 	
                50

              
	 	
                h.

              	
                No Third Party
      Beneficiaries

              	 	
                51

              
	 	
                i.

              	
                Survival

              	 	
                51

              
	 	
                j.

              	
                Further
      Assurances

              	 	
                51

              
	 	
                k.

              	
                Termination

              	 	
                51

              


      

       

      
        
          
          

        

        
          iii

          
            

          

        

        
          
          

        

      

       

      
        	 	
                l.

              	
                No Strict
      Construction

              	 	
                50

              
	 	
                m.

              	
                Remedies

              	 	
                51

              
	 	
                n.

              	
                Rescission and
      Withdrawal Right

              	 	
                51

              
	 	
                o.

              	
                Payment Set
      Aside

              	 	
                51

              
	 	
                p.

              	
                Transfer Agent
      Instructions

              	 	
                51

              
	 	
                q.

              	
                Interpretative
      Matters

              	 	
                52

              
	 	
                r.

              	
                Independent Nature of
      the Buyers

              	 	
                52

              


      

    

     

    
      
        
        

      

      
        iv

        
          

        

      

      
        
        

      

    

     

    SECURITIES EXCHANGE
AGREEMENT

     

    SECURITIES EXCHANGE
AGREEMENT (the
“Agreement”), dated
as of November 13, 2008, by and among Sonterra Resources, Inc., a Delaware
corporation, with principal offices located at 523 North Sam Houston Pkwy. East,
Suite 175, Houston, Texas 77060 (together with its predecessors, the
“Company”), The
Longview Fund, L.P., a California limited partnership (“Longview”) and
Longview Marquis Master Fund, L.P., a British Virgin Island limited partnership
(“Marquis” and,
together with Longview, each a “Buyer” and,
collectively, the “Buyers”).

     

    WHEREAS:

     

    A. The
Company and Buyers are executing and delivering this Agreement in reliance upon
the exemption from securities registration afforded by Rule 506 of
Regulation D (“Regulation D”) as
promulgated by the United States Securities and Exchange Commission (the
“SEC”) under
the Securities Act of 1933, as amended (the “1933 Act”).

     

    B. Marquis
is the owner of (i) all of the issued and outstanding shares of common stock,
par value $0.001 per share, of North Texas (the “North Texas Shares”) and
(ii) that certain Ninth Amended and Restated Senior Secured Note, dated October
3, 2008, in the principal outstanding amount of $8,575,000 (such note, including
all outstanding principal thereof, plus, all accrued but outstanding interest
thereon through the Closing Date, the “North Texas Note”),
issued by North Texas Drilling Services, Inc., a Texas corporation (together
with its predecessors, “North Texas”).

     

    C. Longview
is the owner of the Amended and Restated Senior Secured Note, dated February 14,
2008 (amended and restated May 16, 2008), (no. SSN-001) and the Senior Secured
Note, dated May 22, 2008, (no. SSN-002), in the aggregate outstanding principal
amount of $3,000,000 (of which principal amount $1,000,000 shall be paid by the
Company to Longview pursuant to the Securities Purchase Agreement (as defined
below)), issued by the Company (each an “Old Note” and,
together, the “Old Notes”), and a
warrant to purchase 4,958,678 shares of Common Stock (as defined below) (the
“Old Warrant” and,
together with the North Texas Shares, the North Texas Note and the Old Notes,
each an “Exchanged Security” and,
collectively, the “Exchanged
Securities”).

     

    D. Marquis
wishes to acquire from the Company, and the Company wishes to issue to Marquis,
on the Closing Date (as defined in Section
1(b)), upon
the terms and conditions stated in this Agreement, (i) an unsecured subordinated
promissory note, in the form attached as Exhibit A, in an
original aggregate principal amount of $9,440,000 (such note, together with any
promissory note or other securities issued in exchange or substitution therefor
or replacement thereof, and as any of the same may be amended, supplemented,
restated or modified and in effect from time to time, the “Marquis Note”) and
(ii) a warrant, in the form attached as Exhibit B, to
acquire 1,000,000 shares (subject to adjustment) of the Company’s common stock,
par value $0.001 per share (“Common Stock”), at an
initial exercise price per share of $0.01 (such warrant, together with any
warrant or other securities issued in exchange or substitution therefor or
replacement thereof, and as any of the same may be amended, supplemented,
restated or modified and in effect from time to time, being referred to as the
“Warrant”; and
the shares of Common Stock issuable from time to time upon exercise of the
Warrant being referred to as the “Warrant Shares”), in
exchange for the North Texas Shares and the North Texas Note.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    E. Longview
wishes to acquire from the Company, and the Company wishes to issue to Longview,
on the Closing Date (as defined in Section
1(b)), upon
the terms and conditions stated in this Agreement, an unsecured subordinated
promissory note, in the form attached as Exhibit A, in an
original aggregate principal amount equal to the sum of $2,000,000 plus the
aggregate amount of all accrued and unpaid interest on the Old Notes through the
Closing Date (such note, together with any promissory note or other securities
issued in exchange or substitution therefor or replacement thereof, and as any
of the same may be amended, supplemented, restated or modified and in effect
from time to time, the “Longview Note” and,
together with the Marquis Note, each a “Sub Note” and,
collectively, the “Sub Notes”), in
exchange for the Old Notes and Longview’s surrender of the Old Warrant with
respect to 3,000,000 shares of Common Stock.

     

    F. Contemporaneously
with the closing of the purchase and sale of the Sub Notes and the Warrant (the
“Closing”), the
Company will execute and deliver a Securities Purchase Agreement, in the form
attached as Exhibit C (as the
same may be amended, supplemented, restated or modified and in effect from time
to time, the “Securities Purchase
Agreement” and,
together with each of the documents and agreements entered into pursuant
thereto, the “Securities Purchase
Documents”),
pursuant to which the Company shall sell to Marquis and any other purchasers
named therein, and Marquis and any other purchasers named therein shall purchase
from the Company, senior secured promissory notes issued by the Company (the
“Senior Notes”) and
warrants to acquire 1,050,000 shares of Common Stock, upon the terms and
conditions stated in the Securities Purchase Documents, the proceeds of such
sale to be used in part to pay $1,000,000 in principal of the Old
Notes.

     

    G. Contemporaneously
with the Closing, each of the Subsidiaries will execute and deliver a Guaranty,
in the form attached hereto as Exhibit D (as the
same may be amended, supplemented, restated or modified and in effect from time
to time, together, the “Guaranty”),
pursuant to which the Subsidiaries will agree to guaranty certain obligations of
the Company (the guarantees under the Guaranty, including any such guarantee
added after the Closing, being referred to herein as the “Guarantees”).


     

    H. Contemporaneously
with the Closing, the Company, North Texas, Marquis and Longview will execute
and deliver a Subordination Agreement in the form attached as Exhibit E (as the
same may be amended, supplemented, restated or modified and in effect from time
to time, together, the “Subordination
Agreement”),
pursuant to which the parties thereto shall agree, among other things, that
interest may be paid on the Sub Notes (as defined in the Securities Exchange
Agreement) only so long as there is no event of default under the Senior Notes,
but no payments of principal may be made on the Sub Notes (except in the form of
junior securities) until the Senior Notes have been repaid in full.

     

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

     

    I.
 For
purposes of this Agreement, “Transaction
Documents” means
this Agreement, the Sub Notes, the Warrant, the Guaranty, the Subordination
Agreement, the Irrevocable Transfer Agent Instructions and each of the other
agreements or instruments to which the Company or any of its Subsidiaries are a
party or by which they are bound and which are entered into by the parties
hereto in connection with the transactions contemplated hereby and thereby.


     

    NOW THEREFORE, the
Company, North Texas and each of the Buyers, severally and not jointly, hereby
agree as follows:

     

    1. EXCHANGE OF WARRANT AND
NORTH TEXAS SHARES.

     

    a. Exchange. Subject
to the satisfaction (or waiver) of the conditions set forth in Sections
6 and
7 below,
the Company shall (i) issue to (A) Marquis, in exchange for the North Texas
Shares and the North Texas Note, the Marquis Note and the Warrant and (B)
Longview, in exchange for the Old Notes and the agreement to surrender the Old
Warrant as provided in Section 4(cc), the Longview Note, and (ii) pay to
Longview $1,000,000 of the principal amount owed under the Old Notes.


     

    b. The Closing
Date. The
date and time of the Closing (the “Closing Date”) shall
be 10:00 a.m., New York City time, on the first Business Day following the date
of this Agreement, subject to the satisfaction (or waiver) of all of the
conditions to the Closing set forth in Sections
6 and
7 (or such
later or earlier date as is mutually agreed to by the Company and Marquis). The
Closing shall occur on the Closing Date at the offices of Katten Muchin Rosenman
LLP, 525 West Monroe Street, Suite 1900, Chicago, Illinois 60661, or at such
other place as the Company and Marquis may designate in writing. As used in this
Agreement, “Business Day” means
any day other than Saturday, Sunday or other day on which commercial banks in
the New York City are authorized or required by law to remain
closed.

     

    2. BUYER REPRESENTATIONS AND
WARRANTIES.

     

    Each
Buyer, individually and not jointly and severally, represents and warrants, as
of the date of this Agreement and the Closing Date, with respect to only itself,
that:

     

    a. Investment
Purpose. Such
Buyer (i) is acquiring the Sub Notes (along with the related Guarantees) and the
Warrant acquired by such Buyer hereunder, (ii) upon any exercise of the Warrant,
will acquire the Warrant Shares issuable upon such exercise thereof, and (iii)
upon any exercise of the Investor Share Option (as defined in each of the Sub
Notes), will acquire the shares of Common Stock issuable upon such exercise
thereof (the “Option Shares” and,
collectively with the Sub Notes, the Guarantees, the Warrant and the Warrant
Shares, the “Securities”) for
its own account and not with a view towards, or for resale in connection with,
the public sale or distribution thereof, except pursuant to sales registered
under, or exempted from the registration requirements of, the 1933 Act;
provided,
however, that by making the representations herein, such Buyer does not agree to
hold any of the Securities acquired by it for any minimum or other specific term
and reserves the right to dispose of the Securities at any time in accordance
with or pursuant to an effective registration statement or an exemption from
registration under the 1933 Act.

     

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

     

    b. Accredited Investor
Status. Such
Buyer is an “accredited investor” as that term is defined in Rule 501(a) of
Regulation D.

     

    c. Reliance on
Exemptions. Such
Buyer understands that the Securities are being offered and sold to it in
reliance on specific exemptions from the registration requirements of the
securities laws and that the Company is relying in part upon the truth and
accuracy of, and such Buyer’s compliance with, the representations, warranties,
agreements, acknowledgments and understandings of such Buyer set forth herein in
order to determine the availability of such exemptions and the eligibility of
such Buyer to acquire the Securities. For purposes hereof, “securities laws” means
the securities laws, legislation and regulations of, and the instruments,
policies, rules, orders, codes, notices and interpretation notes of, the
securities regulatory authorities (including the SEC) of the United States and
any applicable states and other jurisdictions. 

     

    d. Information. Such
Buyer and its advisors, if any, have been furnished with all materials relating
to the business, finances and operations of the Company and the Subsidiaries and
materials relating to the offer and sale of the Securities that have been
requested by such Buyer. Such Buyer and its advisors, if any, have been afforded
the opportunity to ask questions of the Company. Neither such inquiries nor any
other due diligence investigations conducted by such Buyer or its advisors, if
any, or its representatives shall modify, amend or affect such Buyer’s right to
rely on the Company’s representations and warranties contained in Section 3 below or
contained in any of the other Transaction Documents. Such Buyer understands that
its investment in the Securities involves a high degree of risk. Such Buyer has
sought such accounting, legal and tax advice as it has considered necessary to
make an informed investment decision with respect to its acquisition of the
Securities. 

     

    e. No Governmental
Review. Such
Buyer understands that no Governmental Entity has passed on or made any
recommendation or endorsement of the Securities or the fairness or suitability
of an investment in the Securities nor have such authorities passed upon or
endorsed the merits of the offering of the Securities. As used in this
Agreement, “Governmental
Entity” means
the government of the United States or any other nation, or any political
subdivision thereof, whether state, provincial or local, or any agency
(including any self-regulatory agency or organization), authority,
instrumentality, regulatory body, court, central bank or other entity exercising
executive, legislative, judicial, taxing, regulatory or administration powers or
functions of or pertaining to government over the Company or any of the
Subsidiaries, or any of their respective properties, assets or
undertakings.

     

    
      
        
        

      

      
        4

        
          

        

      

      
        
        

      

    

     

    f. Transfer or
Resale. Such
Buyer understands that: (i) the Securities have not been and are not being
registered under the 1933 Act or any other securities laws, and may not be
offered for sale, sold, assigned or transferred unless (A) subsequently
registered thereunder, (B) such Buyer shall have delivered to the Company an
opinion of counsel, in a generally acceptable form, to the effect that such
Securities to be sold, assigned or transferred may be sold, assigned or
transferred pursuant to an exemption from such registration, or (C) such
Buyer provides the Company with reasonable assurance that such Securities can be
sold, assigned or transferred pursuant to Rule 144 promulgated under the
1933 Act, as amended (or a successor rule thereto) (“Rule 144”);
(ii) any sale of the Securities made in reliance on Rule 144 may be made
only in accordance with the terms of Rule 144, and further, if Rule 144 is not
applicable, any resale of the Securities under circumstances in which the seller
(or the Person through whom the sale is made) may be deemed to be an underwriter
(as that term is defined in the 1933 Act) may require compliance with some other
exemption under the 1933 Act or any other securities laws; and
(iii) neither the Company nor any other Person is under any obligation to
register the Securities under the 1933 Act or any other securities laws.
Notwithstanding the foregoing, the Securities may be pledged in connection with
a bona fide margin account or other loan or financing arrangement secured by the
Securities. As used in this Agreement, “Person” means
an individual, a limited liability company, a partnership, a joint venture, a
corporation, a trust, an unincorporated organization or a Governmental Entity or
any other legal entity.

     

    g. Legends. Such
Buyer understands that the certificates or other instruments representing the
Securities, except as set forth below, shall bear a restrictive legend in the
following form (the “1933 Act Legend”) (and a
stop-transfer order may be placed against transfer of such
certificates):

     

    THE
SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE
SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE
ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS OR (B)
AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT
REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS OR (II) UNLESS SOLD
PURSUANT TO RULE 144 UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE
SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER
LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.

     

    
      
        
        

      

      
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    Upon the
written request to the Company of a holder of a certificate or other instrument
representing any Securities, the 1933 Act Legend shall be removed and the
Company shall issue a certificate without the 1933 Act Legend to the holder of
the Securities upon which it is stamped, if (i) such Securities are registered
for resale under the 1933 Act, (ii) in connection with a sale transaction, such
holder provides the Company with an opinion of counsel, in a generally
acceptable form, to the effect that a public sale, assignment or transfer of the
Securities may be made without registration under the 1933 Act, (iii) such
holder provides the Company with reasonable assurances that the Securities can
be sold pursuant to Rule 144 without compliance with Rule 144(e) or Rule 144(f)
(or successors thereto), (iv) such holder provides the Company reasonable
assurances that the Securities have been or are being sold pursuant to Rule 144,
or (v) such holder certifies, on or after the date that is six (6) months after
the date on which such holder acquired the Securities (or is deemed to have
acquired the Securities under Rule 144), that such holder is not an “affiliate”
of the Company (as defined in Rule 144). Any Option Shares issued pursuant to
the Investor Share Option on or after the date that is six (6) months after the
Closing Date to any Buyer that certifies that such Buyer is not an affiliate of
the Company, as defined in Rule 144, shall be issued without the 1933 Act
Legend. The Company shall be responsible for the fees of its transfer agent and
all of The Depository Trust Company (the “DTC”) fees
associated with such issuance. The Company acknowledges that a breach by it of
its obligations hereunder will cause irreparable harm to the holders of the
Securities. Accordingly, the Company acknowledges that the remedy at law for a
breach of its obligations under this Section
3(g) will be
inadequate and agrees that, in the event of a breach or threatened breach of
this Section
3(g), such
holder shall be entitled, in addition to all other available remedies, to an
injunctive order and/or injunction restraining any breach and requiring
immediate issuance and transfer, without the necessity of showing economic loss
and without any bond or other security being required. 

     

    h. Authorization; Enforcement;
Validity. Such
Buyer is a validly existing limited partnership and has the requisite limited
partnership power and authority to purchase the Securities pursuant to this
Agreement. This Agreement has been duly and validly authorized, executed and
delivered on behalf of such Buyer and is the valid and binding agreement of such
Buyer enforceable against such Buyer in accordance with its terms. Each of the
Transaction Documents and the other documents entered into and executed by such
Buyer in connection with the transactions contemplated hereby and thereby as of
the Closing will have been duly and validly authorized, executed and delivered
on behalf of such Buyer as of the Closing Date, and will constitute valid and
binding agreements of such Buyer, enforceable against such Buyer in accordance
with their respective terms.

     

    i. Residency and
Offices. Such
Buyer is a resident of that jurisdiction specified below its name and address on
the Schedule of
Buyers.

     

    j. Title to
Units. Such
Buyer immediately prior to Closing will have good and marketable title to each
of the Exchanged Securities owned by it, free and clear of any Liens. There are
no preemptive, conversion, subscription or other rights, options, warrants or
agreements granted or issued by, or binding upon, such Buyer for the purchase or
acquisition of any of the Exchanged Securities. Upon delivery to the Company by
such Buyer of the Exchanged Securities owned by it, good and marketable title to
such Exchanged Securities (in the case of the Old Warrant, only with respect to
3,000,000 shares of Common Stock subject thereto) will be sold, assigned,
conveyed, transferred and delivered to the Company, free and clear of all Liens.


     

    k. No
Conflict. Neither
the execution and delivery of this Agreement or any Transaction Document by such
Buyer nor the performance by such Buyer of the transactions contemplated hereby
or thereby will, directly or indirectly, contravene, conflict with, or result in
(with or without notice or lapse of time) a violation or breach of any of the
Exchanged Securities owned by it, or give any Person the right (with or without
notice or lapse of time) to declare a default or exercise any remedy under, or
to accelerate the maturity or performance of, or to cancel, terminate, modify,
withdraw or suspend any of the Exchanged Securities owned by it.

     

    
      
        
        

      

      
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    2A. MARQUIS REPRESENTATIONS AND
WARRANTIES REGARDING NORTH TEXAS.


     

    Marquis
hereby represents and warrants, as of the date hereof and as of the Closing
Date, that:

     

    a. Organization and
Qualification. North
Texas is a corporation duly organized and validly existing in good standing
under the laws of the State of Texas and has the requisite corporate power and
authority to own its properties and to carry on its business as now being
conducted and as proposed to be conducted by North Texas. North Texas does not
have any subsidiaries. North Texas is duly qualified to do business and is in
good standing in every jurisdiction in which such qualification is required,
except to the extent that the failure to be so qualified or be in good standing
could not have and could not be, individually or in the aggregate, reasonably be
expected to have any material adverse effect on (i) the business, properties,
assets, operations, results of operations, condition (financial or otherwise),
credit worthiness or prospects of North Texas, (ii) the transactions
contemplated hereby or the agreements and instruments to be entered into in
connection herewith, or (iii) the authority or ability of North Texas to enter
into the Transaction Documents and perform its obligations thereunder.


     

    b. Capitalization. As of
the date of this Agreement and as of the Closing Date, (i) the authorized
Capital Stock of North Texas consists of (A) 10,000,000 shares of common stock,
of which 1,000 shares are issued and outstanding, and (B) 1,000,000 shares of
preferred stock, of which no shares are issued and outstanding, (ii) no shares
of common stock or preferred stock of North Texas are reserved for issuance
under any plan or agreement other than as set forth on Schedule
2(A)(b), and
(iii) other than the North Texas Note and as set forth on Schedule
2(A)(b), there
are no other securities of North Texas issued, outstanding or reserved for
issuance. All of such outstanding or issuable shares have been, or upon issuance
will be, validly issued and are, or upon issuance will be, fully paid and
nonassessable. (A) Except as set forth on Schedule
2(A)(b), no
shares of the Capital Stock of North Texas are subject to preemptive rights or
any other similar rights or any Liens suffered or permitted by North Texas; (B)
there are no outstanding options, warrants, scrip, rights to subscribe to, calls
or commitments of any character whatsoever relating to, or securities or rights
convertible into or exercisable for, any shares of Capital Stock of North Texas,
or contracts, commitments, understandings or arrangements by which North Texas
is or may become bound to issue additional shares of Capital Stock of North
Texas or options, warrants, scrip, rights to subscribe to, calls or commitments
of any character whatsoever relating to, or securities or rights convertible
into or exercisable for, any shares of Capital Stock of North Texas; (C) there
are no agreements or arrangements under which North Texas is obligated to
register the sale of any of its securities under the 1933 Act; (D) there are no
outstanding securities or instruments of North Texas that contain any redemption
or similar provisions, and there are no contracts, commitments, understandings
or arrangements by which North Texas is or may become bound to redeem a security
of North Texas, and there are no other stockholder agreements or similar
agreements to which North Texas or any holder of North Texas’ Capital Stock is a
party; (E) North Texas does not have any stock appreciation rights or “phantom
stock” plans or agreements or any similar plan or agreement; and (F) no officer
or director or beneficial owner of any of North Texas’ outstanding Capital Stock
has pledged such Capital Stock in connection with a margin account or other loan
secured by such Capital Stock. Buyer has furnished to the Company true and
correct copies of the North Texas’ Articles of Incorporation and Bylaws, in each
case as amended and in effect on the date of this Agreement.

     

    
      
        
        

      

      
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    c. Financial
Information.
Schedule
2A(c) hereto
sets forth the balance sheet of North Texas as of September 30, 2008. Such
balance sheet is consistent with the financial books and records of North Texas
and fairly presents such information as of the date presented. 

     

    d. Absence of
Litigation. During
the past five (5) years there has not been any Litigation (as defined below)
before or by any court, public board, Governmental Entity, self-regulatory
organization or body pending or, to Buyer’s knowledge, threatened against or
affecting North Texas. To Buyer’s knowledge, no director or officer of North
Texas has been involved in securities-related Litigation during the past five
(5) years. 

     

    e. Tangible
Assets. North
Texas has good and defensible title to all of its tangible assets, all of which
are free and clear of any Lien, other than Permitted Liens and Liens of Viking
Asset Management, LLC to be released contemporaneously with the Closing. There
are no existing agreements, options, commitments or rights with, of or to any
Person to acquire any such assets, or any interests therein (other than this
Agreement).

     

    3. REPRESENTATIONS AND
WARRANTIES OF THE COMPANY.

     

    The
Company represents and warrants, as of the date of this Agreement and on the
Closing Date, to each Buyer, that:

     

    
      
        
        

      

      
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    a. Organization and
Qualification.
(i) The
Company was incorporated on July 1, 1999. Set forth on Schedule
3(a) is a
true and correct list of the Subsidiaries and the jurisdiction in which each is
organized or incorporated, together with the percentage of the outstanding
Capital Stock or other equity interests of each such entity that is held by the
Company or any of the Subsidiaries. Other than with respect to the entities
listed on Schedule
3(a), the
Company does not directly or indirectly own any security or beneficial ownership
interest, in any other Person (including through joint venture or partnership
agreements) or have any interest in any other Person. Each of the Company and
the Subsidiaries is a corporation, limited liability company, partnership or
other entity and is duly organized or formed and validly existing in good
standing under the laws of the jurisdiction in which it is incorporated or
organized and has the requisite corporate, partnership, limited liability
company or other organizational power and authority to own its properties and to
carry on its business as now being conducted and as proposed to be conducted by
the Company and the Subsidiaries. Each of the Company and the Subsidiaries is
duly qualified to do business and is in good standing in every jurisdiction in
which its ownership of property or the nature of the business conducted makes
such qualification necessary, except to the extent that the failure to be so
qualified or be in good standing could not have and could not be, individually
or in the aggregate, reasonably be expected to have a Material Adverse Effect.
Except as set forth on Schedule
3(a), the
Company holds all right, title and interest in and to 100% of the Capital Stock,
equity or similar interests of each of the Subsidiaries, in each case, free and
clear of any Liens (as defined below), including any restriction on the use,
voting, transfer, receipt of income or other exercise of any attributes of free
and clear ownership by a current holder, and no such Subsidiary owns Capital
Stock or holds an equity or similar interest in any other Person. As used in
this Agreement, “Material Adverse
Effect” means
any material adverse effect on (i) the business, properties, assets, operations,
results of operations, condition (financial or otherwise), credit worthiness or
prospects of the Company and the Subsidiaries, taken as a whole, (ii) the
transactions contemplated hereby or the agreements and instruments to be entered
into in connection herewith, or (iii) the authority or ability of the Company or
any other Person (other than Buyers) party to any of the Transaction Documents
to enter into the Transaction Documents and perform its obligations thereunder.
The Company holds all right, title and interest in and to 100% of the Capital
Stock, equity or similar interests of each of the Subsidiaries, in each case,
free and clear of any Liens (as defined below), including any restriction on the
use, voting, transfer, receipt of income or other exercise of any attributes of
free and clear ownership by a current holder (other than restrictions arising
under federal or state securities laws), and no such Subsidiary owns Capital
Stock or holds an equity or similar interest in any other Person. As used in
this Agreement, “Lien” means
with respect to any asset, any mortgage, lien, pledge, hypothecation, charge,
security interest, encumbrance or adverse claim of any kind and any
restrictive covenant, condition, restriction or exception of any kind that has
the practical effect of creating a mortgage, lien, pledge, hypothecation,
charge, security interest, encumbrance or adverse claim of any kind
(including any of the foregoing created by, arising under or evidenced by any
conditional sale or other title retention agreement, the interest of a lessor
with respect to a Capital Lease Obligation, or any financing lease having
substantially the same economic effect as any of the foregoing); “Subsidiary” means
any entity in which the Company, directly or indirectly, owns Capital Stock or
holds an equity or similar interest (at the time of this Agreement or at any
time hereafter); “Capital Lease
Obligation” means,
as to any Person, any obligation that is required to be classified and accounted
for as a capital lease on a balance sheet of such Person prepared in accordance
with U.S. generally accepted accounting principles (“GAAP”), and
the amount of such obligation shall be the capitalized amount thereof,
determined in accordance with GAAP; and “Capital Stock” means
any and all shares, interests, participations or other equivalents (however
designated) of capital stock of a corporation, any and all equivalent ownership
interests in a Person (other than a corporation) and any and all warrants,
rights or options to purchase any of the foregoing

     

    b. Authorization; Enforcement;
Validity. The
Company and each of the Subsidiaries have the requisite corporate power and
authority to enter into and perform their obligations under each of the
Transaction Documents, and solely with respect to the Company, to issue the
Securities in accordance with the terms hereof and thereof. The execution and
delivery of the Transaction Documents by the Company and each of the
Subsidiaries and the consummation by the Company and each of the Subsidiaries of
the transactions contemplated hereby and thereby, including the issuance of the
Sub Notes and the Warrant and the reservation for issuance and the issuance of
the Warrant Shares issuable upon exercise of the Warrant and the Option Shares
upon the exercise of any Investor Share Option, have been duly authorized by the
respective boards of directors, members, managers, stockholders or other
equityholders, as applicable, of the Company and each of the Subsidiaries and no
further consent or authorization is required by the Company, any of the
Subsidiaries or any of their respective boards of directors, members, managers,
stockholders or other equityholders, as applicable. This Agreement and the other
Transaction Documents dated of even date herewith to which the Company or any
Subsidiary is a party have been duly executed and delivered by the Company and
such Subsidiary, and constitute the valid and binding obligations of the Company
and each such Subsidiary, enforceable against the Company and each such
Subsidiary in accordance with their respective terms, except as may be limited
by bankruptcy, insolvency, fraudulent conveyance or similar laws affecting
creditors’ rights generally and general principles of equity. As of the Closing,
the Transaction Documents dated after the date of this Agreement and on or prior
to the Closing Date shall have been duly executed and delivered by the Company
and each Subsidiary party thereto and shall constitute the valid and binding
obligations of the Company and each such Subsidiary, enforceable against the
Company and each such Subsidiary in accordance with their respective terms,
except as may be limited by bankruptcy, insolvency, fraudulent conveyance or
similar laws affecting creditors’ rights generally and general principles of
equity.

     

    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    

     

    c. Capitalization. As of
the date of this Agreement and as of the Closing Date, (i) the authorized
Capital Stock of the Company consists of 50,000,000 shares of Common Stock, of
which 26,347,359 shares are issued and outstanding and no shares of preferred
stock, (ii) no shares of Common Stock or Preferred Stock are reserved for
issuance under any plan or agreement, other than shares of Common Stock with
respect to the Warrant, the Investor Share Option, the Override Exchange (as
defined in the Securities Purchase Agreement), the Warrants (as defined in the
Securities Purchase Agreement, the “SPA Warrants”), the
Preferred Override Exchange Shares (as defined in the Securities Purchase
Agreement) and the Company’s 2007 Non-Qualified Stock Option Plan and 2008
Sonterra Resources, Inc. Equity Compensation Plan (together, the “Company Equity Compensation
Plan”), and
(iii) there are no other securities of the Company issued, outstanding or
reserved for issuance. As of the date of the Preferred Authorization (as defined
in the Securities Purchase Agreement), the authorized Capital Stock of the
Company will also consist of 50,000,000 shares of preferred stock, par value
$0.001 per share (the “Preferred Stock”), none
of which will be reserved for issuance under any plan or agreement, other than
the Preferred Override Exchange Shares. All of the outstanding or issuable
shares have been, or upon issuance will be, validly issued and are, or upon
issuance will be, fully paid and nonassessable. Except as set forth on
Schedule
3(c),
(A) no shares of the Capital Stock of the Company or any of the
Subsidiaries are subject to preemptive rights or any other similar rights or any
Liens suffered or permitted by the Company or any of the Subsidiaries; (B) there
are no outstanding options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into or exercisable for, any shares of Capital Stock of the Company
or any of the Subsidiaries, or contracts, commitments, plans, understandings or
arrangements by which the Company or any of the Subsidiaries is or may become
bound to issue additional shares of Capital Stock of the Company or any of the
Subsidiaries or options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into or exercisable for, any shares of Capital Stock of the Company
or any of the Subsidiaries; (C) there are no agreements or arrangements
under which the Company or any of the Subsidiaries is obligated to register the
sale of any of their securities under the 1933 Act; (D) there are no outstanding
securities or instruments of the Company or any of the Subsidiaries that contain
any redemption or similar provisions, and there are no contracts, commitments,
understandings or arrangements by which the Company or any of the Subsidiaries
is or may become bound to redeem a security of the Company or any of the
Subsidiaries, and there are no other stockholder agreements or similar
agreements to which the Company, any of the Subsidiaries, or, to the Company’s
Knowledge, any holder of the Company’s Capital Stock is a party; (E) there
are no securities or instruments containing anti-dilution or similar provisions
that will or may be triggered by the issuance of the Securities; (F) the Company
does not have any stock appreciation rights or “phantom stock” plans or
agreements or any similar plan or agreement; and (G) to the Company’s Knowledge,
no officer or director or beneficial owner of any of the Company’s outstanding
Common Stock, has pledged Common Stock in connection with a margin account or
other loan secured by such Common Stock. The Company has furnished to Buyers
true and correct copies of the Company’s Certificate of Incorporation, as
amended and as in effect on the date of this Agreement and each date this
representation is made (the “Certificate of
Incorporation”), and
the Company’s Bylaws, as amended and as in effect on the date of this Agreement
and each date this representation is made (the “Bylaws”), the
organizational documents of each of the Subsidiaries, as amended and in effect
on the date of this Agreement, and all documents and instruments containing the
terms of all securities, if any, that are convertible into, or exercisable or
exchangeable for, Common Stock, and the material rights of the holders thereof
in respect thereto. All of the equity interests of each of the Subsidiaries are
certificated or otherwise represented in tangible form. “To the Company’s
Knowledge” and
similar language means the actual knowledge of Donald E. Vandenberg, Gary L.
Lancaster or Donald J. Sebastian or any other currently employed officer of the
Company and the knowledge any such Persons would be expected to have after
reasonable due diligence and inquiry.

     

    
      
        
        

      

      
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    d. Issuance of
Securities. At
least 5,550,000 shares of
Common Stock (subject to adjustment pursuant to the Company’s covenant set forth
in Section
4(g) below or
otherwise for any stock split, stock dividend, stock combination or similar
transaction) have been duly authorized and reserved for issuance upon exercise
of the Warrant, the Investor Share Option, the Override Exchange, the Preferred
Override Exchange Shares and the SPA Warrants. Upon the Preferred Authorization,
at least 2,000,000 shares Preferred Stock (subject to adjustment for any stock
split, stock dividend, stock combination or similar transaction) will have been
duly authorized and reserved for issuance as Preferred Override Exchange Shares.
Upon exercise in accordance with the Warrant, the Investor Share Option, the SPA
Warrants or the Preferred Override Exchange Shares, or upon issuance in
accordance with the Override Exchange, as the case may be, the Warrant Shares,
Option Shares, Warrant Shares (as defined in the Securities Purchase Agreement),
or Override Exchange Shares (as defined in the Securities Purchase Agreement),
as applicable, will be validly issued, fully paid and nonassessable and free
from all taxes and Liens with respect to the issuance thereof, with the holders
being entitled to all rights accorded to a holder of shares of Common Stock or
Preferred Stock, as applicable. The Sub Notes and the Warrant are duly
authorized and, upon issuance in accordance with the terms hereof, shall be (i)
free from all taxes and Liens with respect to the issuance thereof and (ii)
entitled to the rights set forth in the Sub Notes and the Warrant, as
applicable. Assuming the accuracy of the representations and warranties of
Buyers set forth in Section 2 above,
the issuance by the Company of the Securities is exempt from registration under
the 1933 Act and any other applicable securities laws. 

     

    
      
        
        

      

      
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    e. No
Conflicts. Except
as set forth on Schedule
3(e), the
execution and delivery of this Agreement and the other Transaction Documents by
the Company and each of the Subsidiaries, the performance by the Company and
each of the Subsidiaries of their respective obligations hereunder and
thereunder and the consummation by the Company and each of the Subsidiaries of
the transactions contemplated hereby and thereby (including the reservation for
issuance and issuance of the Warrant Shares and the Option Shares) will not: (i)
result in a violation of the charter, certificate or articles of incorporation,
certificate or articles of organization, bylaws, operating agreement,
partnership agreement or any other governing documents, as applicable, of any
such Person; (ii) conflict with, or constitute a breach or default (or an
event which, with the giving of notice or passage of time or both, constitutes
or would constitute a breach or default) under, or give to others any right of
termination, amendment, acceleration or cancellation of, or other remedy with
respect to, any agreement, indenture or instrument to which any such Person is a
party; (iii) result in a violation of any law, rule, regulation, order,
judgment or decree (including securities laws and the rules and regulations, if
any, of the Principal Market (as defined in Section
3(s))
applicable to any such Person or by which any property or asset of any such
Person is bound or affected. Neither the Company nor any of the Subsidiaries is
in violation of any term of its charter, certificate or articles of
incorporation, certificate or articles of organization, bylaws, operating
agreement, partnership agreement or any other governing document, as applicable.
Neither the Company nor any of the Subsidiaries is or has been in violation of
any term of or in default under (or with the giving of notice or passage of time
or both would be in violation of or default under) any contract, agreement,
mortgage, indebtedness, indenture, instrument, judgment, decree or order or any
Law applicable to the Company or the Subsidiaries, except where such violation
or default could not reasonably be expected to have a Material Adverse Effect or
to result in the acceleration of any Indebtedness or other obligation. The
business of the Company and the Subsidiaries has not been and is not being
conducted, in violation of any Law of any Governmental Entity except as could
not, individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect. Except for the filing of instruments to perfect security
interests and filings to be made pursuant to Section 4(b)
hereof,
and as set forth on Schedule
3(e), neither
the Company nor any of the Subsidiaries is or has been required to obtain any
consent, authorization or order of, or make any filing or registration with, any
court or Governmental Entity in order for it to execute, deliver or perform any
of its obligations under, or contemplated by, the Transaction Documents in
accordance with the terms hereof or thereof. All consents, authorizations,
orders, filings and registrations that the Company or any of the Subsidiaries is
or has been required to obtain as described in the preceding sentence have been
obtained or effected on or prior to the date of this Agreement or shall be
obtained prior to the Closing Date, in both cases prior to the date of the
effectiveness of such requirement. Except as set forth on Schedule
3(e), the
Company and the Subsidiaries are in all material respects in compliance with the
applicable provisions of the Sarbanes-Oxley Act of 2002, as amended, and the
rules and regulations thereunder (collectively, “Sarbanes-Oxley”). As
used in this Agreement, “Laws” means
all present or future federal, state local or foreign laws, statutes, common law
duties, rules, regulations, ordinances and codes, together with all
administrative or judicial orders, consent agreements, directed duties,
requests, licenses, authorizations and permits of, and agreements with, any
Governmental Entity; “Indebtedness” of any
Person means, without duplication (A) all indebtedness for borrowed money, (B)
all trade accounts payable and other obligations issued, undertaken or assumed
as the deferred purchase price of property or services, (C) all reimbursement or
payment obligations with respect to letters of credit, surety bonds and other
similar instruments, (D) all obligations evidenced by notes, bonds, debentures,
redeemable Capital Stock or similar instruments, including obligations so
evidenced incurred in connection with the acquisition of property, assets or
businesses, (E) all indebtedness created or arising under any conditional sale
or other title retention agreement, or incurred as financing, in either case
with respect to any property or assets acquired with the proceeds of such
indebtedness (even though the rights and remedies of the seller, bank or other
financing source under such agreement in the event of default are limited to
repossession or sale of such property), (F) all Capital Lease Obligations, (G)
all indebtedness referred to in clauses (A) through (F) above secured by (or for
which the holder of such indebtedness has an existing right, contingent or
otherwise, to be secured by) any mortgage, lien, pledge, charge, security
interest or other encumbrance upon or in any property or assets (including
accounts and contract rights) owned by such Person, even though such Person has
not assumed or become liable for the payment of such indebtedness, and (H) all
Contingent Obligations in respect of indebtedness or obligations of others of
the kinds referred to in clauses (A) through (G) above; and “Contingent
Obligation” means,
as to any Person, any direct or indirect liability, contingent or otherwise, of
that Person with respect to any indebtedness, lease, dividend or other
obligation of another Person if the primary purpose or intent of the Person
incurring such liability, or the primary effect thereof, is to provide assurance
to the obligee of such liability that such liability will be paid or discharged,
or that any agreements relating thereto will be complied with, or that the
holders of such liability will be protected (in whole or in part) against loss
with respect thereto.

     

    
      
        
        

      

      
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    f. SEC Reports; Financial
Statements; Public Communications. Except
as set forth in Schedule
3(f), since
December 31, 2005, the Company has filed all reports, schedules, forms,
statements and other documents required to be filed by it with the SEC pursuant
to the reporting requirements of the 1934 Act (all of the foregoing filed since
December 31, 2005 and prior to the date this representation is made (including
all exhibits included therein and financial statements and schedules thereto and
documents incorporated by reference therein) being referred to herein as the
“SEC Documents” and the
Company’s consolidated balance sheet as of June 30, 2008, as included in the
Company’s quarterly report on Form 10-Q for the period then ended, as filed with
the SEC on August 15, 2008, being referred to herein as the “Latest Balance
Sheet”). A
complete and accurate list of the SEC Documents is set forth on Schedule
3(f). The
Company has made available to each Buyer or its respective representatives true
and complete copies of the SEC Documents. Each of the SEC Documents was filed
with the SEC within the time frames prescribed by the SEC for filing of such SEC
Documents (including any extensions of such time frames permitted by Rule 12b-25
under the 1934 Act pursuant to timely filed Forms 12b-25) such that each filing
was timely filed (or deemed timely filed pursuant to Rule 12b-25 under the 1934
Act) with the SEC. As of their respective dates, the SEC Documents complied in
all material respects with the securities laws. Except as set forth on
Schedule
3(f), none of
the SEC Documents, at the time they were filed with the SEC, contained any
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading. Except as
set forth on Schedule
3(f), since
the filing of each of the SEC Documents, no event has occurred that would
require an amendment or supplement to any such SEC Document and as to which such
an amendment has not been filed and made publicly available on the SEC’s EDGAR
system no less than five (5) Business Days prior to the date the representation
is made. The Company has not received any written comments from the SEC staff
that have not been resolved to the satisfaction of the SEC staff. As of their
respective dates, the consolidated financial statements of the Company and the
Subsidiaries included in the SEC Documents (including the notes thereto, the
“Financial
Information”)
complied as to form in all material respects with applicable accounting
requirements and the securities laws with respect thereto. Such consolidated
financial statements have been prepared in accordance with GAAP, consistently
applied, during the periods involved (except (i) as may be otherwise indicated
in such financial statements or the notes thereto, or (ii) in the case of
unaudited interim statements, to the extent they may exclude footnotes or may be
condensed or summary statements) and fairly present in all material respects the
financial position of the Company and the Subsidiaries as of the dates thereof
and the results of their operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments that are not material individually or in the aggregate). As of the
date hereof and as of the Closing Date, the Financial Information is true,
accurate and complete, has been prepared in accordance with GAAP, is consistent
with the books and records of the Company and its predecessors (which are true,
accurate and complete), and fairly presents such information as of the dates,
and for the periods, presented. Since the date of the Latest Balance Sheet,
there has been no change in the Company’s reserve or accrual amounts or
policies. Schedule
3(f) lists
all press releases, analyst reports, advertisements and other written
communications with stockholders or other investors, or potential stockholders
or other potential investors, on behalf of the Company or any of the
Subsidiaries or otherwise relating to the Company or any of the Subsidiaries,
issued, made, distributed, paid for or approved since December 31, 2005 by the
Company, any of the Subsidiaries or any of their respective officers, directors
or Affiliates (as defined in Section
3(k)), by any
Person engaged by (or otherwise acting on behalf of) the Company, any of the
Subsidiaries or any of their respective officers, directors or Affiliates, or,
to the Company’s Knowledge, by any stockholder of the Company. None of the
Company, the Subsidiaries and their respective officers, directors and
Affiliates or, to the Company’s Knowledge, any stockholder of the Company has
made any filing with the SEC, issued any press release or made, distributed,
paid for or approved (or engaged any other Person to make or distribute) any
other public statement, report, advertisement or communication on behalf of the
Company or any of the Subsidiaries or otherwise relating to the Company or any
of the Subsidiaries that contains any untrue statement of a material fact or
omits any statement of material fact necessary in order to make the statements
therein, in the light of the circumstances under which they are or were made,
not misleading or has provided any other information to any Buyer, including
information referred to in Section
2(d), that,
considered in the aggregate, contains any untrue statement of a material fact or
omits to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they are or were made,
not misleading. Except as set forth on Schedule
3(f), none of
the Company, the Subsidiaries and their respective officers, directors,
employees or agents has provided any Buyer with any material, non-public
information. The Company is not required to file and will not be required to
file any agreement, note, lease, mortgage, deed or other instrument entered into
prior to the date this representation is made and in effect on the date this
representation is made and to which the Company or any Subsidiary is a party or
by which the Company or any Subsidiary is bound that has not been previously
filed as an exhibit (including by way of incorporation by reference) to the
Company’s reports filed or made with the SEC under the 1934 Act. The accounting
firm that has expressed its opinion with respect to the consolidated financial
statements included in the Company’s most recently filed annual report on Form
10-K or 10-KSB (the “Audit Opinion”) is
independent of the Company pursuant to the standards set forth in Rule 2-01 of
Regulation S-X promulgated by the SEC and such firm was otherwise qualified to
render the Audit Opinion under applicable securities laws. Each other accounting
firm that since such filing has conducted or will conduct a review or audit of
any of the Company’s consolidated financial statements is independent of the
Company pursuant to the standards set forth in Rule 2-01 of Regulation S-X
promulgated by the SEC and is otherwise qualified to conduct such review or
audit and render an audit opinion under applicable securities laws. There is no
transaction, arrangement or other relationship between the Company and an
unconsolidated or other off-balance-sheet entity that is required to be
disclosed by the Company in its reports pursuant to the 1934 Act that has not
been so disclosed in the SEC Documents. Since December 31, 2003, except as set
forth on Schedule
3(f), neither
the Company nor any of the Subsidiaries nor any director, officer or employee,
of the Company or any of the Subsidiaries has received or otherwise had or
obtained Knowledge of any material complaint, allegation, assertion or claim,
whether written or oral, regarding the accounting or auditing practices,
procedures, methodologies or methods of the Company or any of the Subsidiaries
or its internal accounting controls, including any complaint, allegation,
assertion or claim that the Company or any of the Subsidiaries has engaged in
questionable accounting or auditing practices. No attorney representing the
Company or any of the Subsidiaries, whether or not employed by the Company or
any of the Subsidiaries, has reported evidence of a material violation of
securities laws, breach of fiduciary duty or similar violation by the Company or
any of the Subsidiaries or any of their respective officers, directors,
employees or agents to their respective boards of directors or any committee
thereof or pursuant to Section 307 of the Sarbanes-Oxley Act of 2002, and the
SEC’s rules and regulations promulgated thereunder. Since December 31, 2001,
there have been no internal or SEC investigations regarding accounting or
revenue recognition discussed with, reviewed by or initiated at the direction of
any executive officer, board of directors or any committee thereof of the
Company or any of the Subsidiaries. As of the date of this Agreement, the
Company is not, and at no time since February 14, 2008 has been, a “shell
company” (as defined in Rule 12b-2 under the Exchange Act).

     

    
      
        
        

      

      
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    g. Absence of Certain
Changes. Neither
the Company nor any of the Subsidiaries has taken any steps, and neither the
Company nor any such Subsidiary expects to take any steps to seek protection
pursuant to any bankruptcy law, and neither the Company nor any Subsidiary has
received any written notice or has any other knowledge or reason to believe that
the creditors of such Person intend to initiate involuntary bankruptcy
proceedings against the Company or any of the Subsidiaries or any knowledge of
any fact that would reasonably lead a creditor to do so. Neither the Company nor
any Subsidiary is as of the date this representation is made, nor after giving
effect to the transactions contemplated hereby or by any of the other
Transaction Documents, will be Insolvent (as defined below). As used in this
Agreement, “Insolvent” means,
with respect to any Person, (i) the present fair saleable value of such Person’s
assets is less than the amount required to pay such Person’s total indebtedness,
contingent or otherwise, (ii) such Person is unable to pay its debts and
liabilities, subordinated, contingent or otherwise, as such debts and
liabilities become absolute and matured, (iii) such Person intends to
incur, prior to the second anniversary of the date this representation is made,
or believes that it will incur, prior to the second anniversary of the date this
representation is made, debts that would be beyond its ability to pay as such
debts mature or (iv) such Person has unreasonably small capital with which
to conduct the business in which it is engaged as such business is now conducted
and is proposed to be conducted. Except as disclosed on Schedule
3(g), since
December 31, 2005, neither the Company nor any of the Subsidiaries has declared
or paid any dividends or sold any assets outside of the ordinary course of
business. Except as disclosed on Schedule
3(g), since
February 14, 2008, neither the Company nor any of the Subsidiaries has had
any capital expenditures outside the ordinary course of its
business.

     

    
      
        
        

      

      
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    h. Absence of
Litigation. Except
as disclosed on Schedule
3(h), (i)
during the past five (5) years there has not been any action, suit, proceeding,
inquiry or investigation (“Litigation”) before
or by any court, public board, Governmental Entity, self-regulatory organization
or body pending or, to the Company’s Knowledge, threatened against or affecting
the Company or any of the Subsidiaries or any of their respective assets, and
(ii) no officer of the Company nor, to the Company’s Knowledge, any officer or
director of the Company or holder of more than five percent (5%) of the
outstanding securities of the Company or any of the Subsidiaries has been
involved in securities-related Litigation during the past ten (10) years. No
Litigation disclosed on Schedule
3(h) has, has
had or, if determined adversely to the Company or any of the Subsidiaries, could
reasonably be expected to have a Material Adverse Effect.

     

    i. Full Disclosure; No
Undisclosed Events, Liabilities, Developments or
Circumstances. Except
as set forth on Schedule
3(i), since
December 31, 2003, there has been no Material Adverse Effect and no
circumstances exist that could reasonably be expected to be, cause or have a
Material Adverse Effect. Other than the liabilities and obligations under this
Agreement or as set forth on Schedule
3(i), the
only liabilities of the Company or any Subsidiary (whether fixed or unfixed,
known or unknown, absolute or contingent, asserted or unasserted, choate or
inchoate, liquidated or unliquidated, or secured or unsecured, and regardless of
when any action, claim, suit or proceeding with respect thereto is instituted)
are the liabilities reflected on Schedule
3(i), as of
the date of this Agreement, all of which will be reflected on the Pro Forma
Balance Sheet (as defined in Section
4(y)). As of
the Closing Date, the only liabilities of the Company (whether fixed or unfixed,
known or unknown, absolute or contingent, asserted or unasserted, choate or
inchoate, liquidated or unliquidated, or secured or unsecured, and regardless of
when any action, claim, suit or proceeding with respect thereto is instituted)
are the liabilities reflected on Schedule
3(i), as of
the date of this Agreement, all of which will be reflected on the Pro Forma
Balance Sheet. As of the Closing Date, the only liabilities of the Company
(whether fixed or unfixed, known or unknown, absolute or contingent, asserted or
unasserted, choate or inchoate, liquidated or unliquidated, or secured or
unsecured, and regardless of when any action, claim, suit or proceeding with
respect thereto is instituted) will be those reflected on the Latest Balance
Sheet or Schedule
3(i), those
assumed or created pursuant to, or as a result of, this Agreement and the other
Transaction Documents and the consummation of the Closing, and liabilities and
obligations of not more than $50,000 for
operating expenses incurred in the ordinary course of business consistent with
past practices subsequent to June 30, 2008, all of which will be reflected on
the Pro Forma Balance Sheet. No representation or warranty or other statement
made by the Company or the Subsidiaries in this Agreement or any of the other
Transaction Documents, the Schedules hereto or any certificate or instrument
delivered pursuant to this Agreement contains any untrue statement or omits to
state a material fact necessary to make any such statement, in light of the
circumstances in which it was made, not misleading.

     

    
      
        
        

      

      
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    j. Acknowledgment Regarding
Buyers’ Purchase of Securities. The
Company acknowledges and agrees that each Buyer is acting solely in the capacity
of an arm’s length purchaser with respect to the Company in connection with this
Agreement and the other Transaction Documents and the transactions contemplated
hereby and thereby. The Company further acknowledges that each Buyer is not
acting as a financial advisor or fiduciary of any party to this Agreement or any
of the other Transaction Documents (or in any similar capacity) with respect to
this Agreement and the other Transaction Documents and the transactions
contemplated hereby and thereby, and any advice given by any Buyer or any of its
representatives or agents in connection with the Transaction Documents and the
transactions contemplated hereby and thereby is merely incidental to such
Buyer’s purchase of the Securities. The Company further represents to each Buyer
that the decision of each of the Company and each of the Subsidiaries to enter
into the Transaction Documents has been based solely on the independent
evaluation by such Person and its representatives.

     

    k. No General
Solicitation. Except
as set forth on Schedule
3(k), neither
the Company nor any of its Affiliates, nor any Person acting on the behalf of
any of the foregoing, has engaged or will engage in any form of general
solicitation or general advertising (within the meaning of Regulation D
under the 1933 Act), including advertisements, articles, notices, or other
communications published in any newspaper, magazine or similar media or
broadcast over radio, television or internet or any seminar meeting whose
attendees have been invited by general solicitation or general advertising, in
connection with the offer or sale of the Securities. As used in this Agreement,
“Affiliate” means,
with respect to any Person, a second Person (A) in which the first Person owns a
five percent (5%) equity interest, or (B) that, directly or indirectly,
(i) has a five percent (5%) equity interest in such first Person, (ii) has
a common ownership with such first Person, (iii) controls such first
Person, (iv) is controlled by such first Person or (v) shares or is under common
control with such first Person; and “control” or
“controls” means
that a Person has the power, direct or indirect, to conduct or govern the
policies of another Person; provided however,
that Longview shall not be considered to be an Affiliate of the Company for
purposes of this Section
3(k).

     

    l. No Integrated
Offering. Neither
the Company nor any Subsidiaries, Affiliates of the foregoing or any Person
acting on the behalf of any of the foregoing, has, directly or indirectly, made
any offers or sales of any security or solicited any offers to purchase any
security, under circumstances that would require registration of any of the
Securities under the 1933 Act or cause this offering of the Securities to be
integrated with prior offerings by the Company for purposes of the 1933 Act or
any applicable stockholder approval requirements of any authority, nor will the
Company, any Subsidiaries, any Affiliates of the foregoing, or any Person acting
on behalf of any of the foregoing, take any action or steps that would require
registration of the issuance of any of the Securities under the 1933 Act or
cause the offering of the Securities to be integrated with other offerings for
purposes of the 1933 Act or any applicable stockholder approval requirements of
any authority.

     

    
      
        
        

      

      
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    m. Dilutive
Effect. The
Company understands and acknowledges that the number of Warrant Shares that the
Company is obligated to issue upon exercise of the Warrant will increase in
certain circumstances. The Company further acknowledges that its obligation to
issue the Warrant Shares upon exercise of the Warrant is absolute and
unconditional regardless of the dilutive effect that such issuance may have on
the ownership interests of other stockholders of the Company. Taking the
foregoing into account, the Company’s board of directors has determined in its
good faith business judgment that the issuance of the Warrant and the
consummation of the other transactions contemplated hereby and by the other
Transaction Documents are in the best interests of the Company and its
stockholders.

     

    n. Employee
Relations. Except
as set forth on Schedule
3(n), neither
the Company nor any of the Subsidiaries is involved in any labor union dispute
nor, to the Knowledge of the Company, is any such dispute threatened. None of
the employees of either the Company or any of the Subsidiaries is or has been a
member of a union that relates to such employee’s relationship with the Company
or of any of the Subsidiaries. Neither the Company nor any of the Subsidiaries
is a party to a collective bargaining agreement. Except as set forth on
Schedule
3(n), no
executive officer (as defined in Rule 3b-7 under the 1934 Act) nor any other
individual whose termination would be required to be disclosed on a Current
Report on Form 8-K but that has not been so reported, has notified the Company
or any of the Subsidiaries that such individual intends to leave the Company or
any of the Subsidiaries or otherwise terminate such individual’s employment or
relationship with the Company or any of the Subsidiaries. No such individual, to
the Company’s Knowledge, is, has been, or is expected to be, in violation of any
material term of any employment contract, confidentiality, disclosure or
proprietary information agreement or non-competition agreement, or any other
contract or agreement or any restrictive covenant, and the continued employment
of each such individual does not, has not and will not subject the Company or
any of the Subsidiaries to any liability with respect to any of the foregoing
matters. Except as set forth on Schedule
3(n), the
Company and each of the Subsidiaries is and has been in compliance with all Laws
relating to employment and employment practices, terms and conditions of
employment and wages and hours. 

     

    
      
        
        

      

      
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    o. Intellectual Property
Rights. Except
as set forth on Schedule
3(o), the
Company and the Subsidiaries own or possess adequate rights or licenses to use
all trademarks, trademark applications and registrations, trade names, service
marks, service mark registrations, service names, patents, patent rights, patent
applications, copyrights (whether or not registered), inventions, licenses,
approvals, governmental authorizations, trade secrets and other intellectual
property rights (collectively, “Intellectual
Property”)
necessary to conduct their respective businesses as conducted as of the date
this representation is made. Schedule
3(o) contains
a complete and accurate list of all patented and registered Intellectual
Property owned by the Company and the Subsidiaries and all pending patent
applications and applications for the registration of other Intellectual
Property owned or filed by the Company or any of the Subsidiaries. Schedule
3(o) also
contains a complete and accurate list of all material licenses and other rights
granted by the Company or any Subsidiaries to any third party with respect to
Intellectual Property and material licenses and other rights with respect to
Intellectual Property granted by any third party to the Company or any of the
Subsidiaries. Except as set forth on Schedule
3(o), (i)
none of the rights of the Company and the Subsidiaries in their Intellectual
Property have expired or terminated, or are expected to expire or terminate
within five (5) years from the date of this Agreement, except to the extent such
termination would not and would not reasonably be expected to have a Material
Adverse Effect, (ii) there are no third parties who have rights to any of the
Intellectual Property owned or licensed by the Company or any of the
Subsidiaries, except for the rights retained by the owners of the Intellectual
Property that is licensed to the Company or any of the Subsidiaries, and there
are no third parties who have rights to any of the Intellectual Property owned
or licensed by the Company or any of the Subsidiaries, except for the rights
retained by the owners of the Intellectual Property that is licensed to the
Company or any of the Subsidiaries, (iii) there has been no infringement by the
Company or any of the Subsidiaries or any of the Company’s or the Subsidiaries’
licensors or licensees of any Intellectual Property rights of others and the
Company has no Knowledge of any infringement by the Company or any of the
Subsidiaries or any of their licensors or licensees of any Intellectual Property
rights of others, (iv) there has been no infringement by any third parties of
any Intellectual Property owned or licensed by the Company or any of the
Subsidiaries, or of any development of similar or identical trade secrets or
technical information by others, (v) there is no claim, action or proceeding
against, or being threatened against, the Company, any of the Subsidiaries or
any of their respective licensors regarding its Intellectual Property or
infringement of other Intellectual Property rights, and there is no claim,
action or proceeding against or being threatened against the Company, any of the
Subsidiaries or any of their respective licensors regarding its Intellectual
Property or infringement of other Intellectual Property rights, (vi) there are
no facts or circumstances that could reasonably be expected to give rise to any
of the foregoing, (vii) there is no patent or patent application which contains
claims that interfere with the issued or pending claims of any of the
Intellectual Property owned or licensed by the Company or any of the
Subsidiaries, and there is no patent or patent application which contains claims
that interfere with the issued or pending claims of any of the Intellectual
Property owned or licensed by the Company or any of the Subsidiaries, and (viii)
none of the technology employed by the Company or any of the Subsidiaries has
been obtained or is being used by the Company or any of the Subsidiaries in
violation of any material contractual obligation binding on the Company or any
of the Subsidiaries or is being used by any of the officers, directors or
employees of the Company or any of the Subsidiaries on behalf of the Company or
any of the Subsidiaries in violation of the rights of any Person or Persons. The
Company and the Subsidiaries have taken reasonable security measures to protect
the secrecy, confidentiality and value of all of their material Intellectual
Property. 

     

    
      
        
        

      

      
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    p. Environmental
Laws. Except
as set forth on Schedule
3(p), each of
the Company and the Subsidiaries and each Person that has operated any Real
Property (as defined in Section
3(bb)) (i) is,
and has at all times been, in compliance with any and all Environmental Laws (as
defined below) and has not violated any Environmental Laws, (ii) has no,
and has never had any, liability for failure to comply with any Environmental
Law, (iii) has received all permits, licenses or other approvals required of it
under applicable Environmental Laws to conduct its business as presently
conducted, and (iv) is in compliance with all terms and conditions of any
such permit, license or approval except as could not reasonably be expected to
have a Material Adverse Effect. Except as set forth on Schedule
3(p), with
respect to each Real Property, (I) there has not occurred an event in the use
and operation of any Real Property and there does not exist on any Real Property
a condition which constitutes a violation of any Environmental Laws, (II) there
have been timely filed all required reports, there have been obtained all
required approvals and permits, and there have been generated and maintained all
required data, documentation and records under all applicable Environmental
Laws, (III) there are no environmental investigations, studies or audits with
respect to any Real Property owned or commissioned by, or in the possession of,
the Company that have not been disclosed to Buyers, and (IV) no Hazardous
Material or solid wastes (as such terms are defined under any Environmental Law)
generated from any Real Property have been sent to a site which, pursuant to
CERCLA or any similar state law, or other Environment Law has been placed, or is
proposed to be placed, on the “National Priority List” of hazardous waste sites
or which is subject to a claim, an administrative order or other request to take
any cleanup, removal or remedial action or to pay for any costs relating to such
site. All Hazardous Material or solid wastes generated from any Real Property
and requiring disposal have, to the extent required by any Environmental Law,
been transported only by carriers maintaining valid authorizations and been
treated, stored and disposed of only at facilities maintaining valid
authorizations. As used in this Agreement, “Environmental Laws” means
all Laws relating to any matter arising out of or relating to public health and
safety, or pollution or protection of the environment (including ambient air,
surface water, groundwater, land surface or subsurface strata) or workplace,
including any of the foregoing relating to the presence, use, production,
generation, handling, transport, treatment, storage, disposal, distribution,
discharge, emission, release, threatened release, control or cleanup of any
Hazardous Materials, including the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, 42 U.S.C. §9601 et seq., as amended
(“CERCLA”), the Resource Conservation and Recovery Act of 1976, as amended, 42
U.S.C. §6901, et seq., the Clean Air Act, 42 U.S.C. §7401, et seq., as amended,
the Federal Water Pollution Control Act, 33 U.S.C. §1251, et seq., as amended,
the Oil Pollution Act of 1990, 33 U.S.C. §2701, et seq., and the Toxic
Substances Control Act, 15 U.S.C. §2601, et seq.; and “Hazardous
Materials” means
any hazardous, toxic or dangerous substance, materials and wastes, including
hydrocarbons (including naturally occurring or man-made petroleum and
hydrocarbons), flammable explosives, asbestos, urea formaldehyde insulation,
radioactive materials, biological substances, polychlorinated biphenyls,
pesticides, herbicides and any other kind and/or type of pollutants or
contaminants (including materials which include hazardous constituents), sewage,
sludge, industrial slag, solvents and/or any other similar substances,
materials, or wastes and including any other substances, materials or wastes
that are or become regulated under any Environmental Law (including any that are
or become classified as hazardous or toxic under any Environmental Law).


     

    
      
        
        

      

      
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    q. Title. Except
as set forth on Schedule
3(q), neither
the Company nor any of the Subsidiaries has any interest in any real property or
any oil, gas or other mineral drilling, exploration or development rights. The
Company and each Subsidiary has good and valid title to all personal property
currently possessed by them that is material to the business of such Person, in
each case free and clear of all Liens except such as are described on
Schedule 3(q). The
Company and each of the Subsidiaries has good, marketable and defensible title
in fee simple to all real property owned (rather than leased) by such Person
(the “Owned Real
Property”) as set
forth on Schedule
3(q), in each
case free and clear of all Liens, other than Permitted Liens, except such as are
described on Schedule
3(q) and
Liens of Viking Asset Management, LLC to be released contemporaneously with the
Closing. As used in this Agreement, “Permitted Lien” means
(I) Liens created by the “Security Documents” (as
defined in the Securities Purchase Agreement); (II) Liens for taxes or other
governmental charges not at the time due and payable, or (if foreclosure,
distraint sale or other similar proceeding shall not have been initiated) which
are being contested in good faith by appropriate proceedings diligently
prosecuted, so long as foreclosure, distraint, sale or other similar proceedings
have not been initiated, and in each case for which the Company and the
Subsidiaries maintain adequate reserves in accordance with GAAP in respect of
such taxes and charges; (III) Liens arising in the ordinary course of business
in favor of carriers, warehousemen, mechanics and materialmen, or other similar
Liens imposed by law, which remain payable without penalty or which are being
contested in good faith by appropriate proceedings diligently prosecuted, which
proceedings have the effect of preventing the forfeiture or sale of the property
subject thereto, and in each case for which adequate reserves in accordance with
GAAP are being maintained; (IV) Liens arising in the ordinary course of business
in connection with worker’s compensation, unemployment compensation and other
types of social security (excluding Liens arising under ERISA); (V) attachments,
appeal bonds (and cash collateral securing such bonds), judgments and other
similar Liens, for sums not exceeding $100,000 in the aggregate for the Company
and the Subsidiaries, arising in connection with court proceedings, provided that the
execution or other enforcement of such Liens is effectively stayed; (VI)
easements, rights of way, restrictions, minor defects or irregularities in title
and other similar Liens arising in the ordinary course of business and not
materially detracting from the value of the property subject thereto and not
interfering in any material respect with the ordinary conduct of the business of
the Company or any of the Subsidiaries; (VII) surety bonds, bids, performance
bonds, and similar obligations (exclusive of obligations for the payment of
borrowed money) obtained by the Company and the Subsidiaries in the ordinary
course of business for the purpose of satisfying federal, state, provincial and
territorial and/or local legal requirements for owning and operating their oil
and gas properties, in an aggregate amount not to exceed $100,000 outstanding at
any time; (VIII) Liens arising solely by virtue of any statutory or common law
provision relating to banker’s liens, rights of set-off or similar rights and
remedies and burdening only deposit accounts or other funds maintained with a
creditor depository institution, provided that no
such deposit account is a dedicated cash collateral account or is subject to
restrictions against access by the depositor in excess of those set forth by
regulations promulgated by the Board of Governors of the U.S. Federal Reserve
System and that no such deposit account is intended by the Company or any of the
Subsidiaries to provide collateral to the depository institution; and (IX) the
FNBW Security Interest (but only so long as the FNBW Indebtedness remains
outstanding). 

     

    r. Insurance. The
Company and each of the Subsidiaries are insured by insurers of recognized
financial responsibility against such losses and risks and in such amounts as
management of the Company believes to be prudent and customary in the businesses
in which the Company and the Subsidiaries are engaged. Neither the Company nor
any Subsidiary has been refused any insurance coverage sought or applied for,
and neither the Company nor any Subsidiary has any reason to believe that it
will not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not reasonably be
expected to have a Material Adverse Effect.

     

    
      
        
        

      

      
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    s. Regulatory
Permits. Except
as set forth on Schedule
3(s) or as
could not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect or a material adverse effect on the production,
extraction, transportation or sale of oil, gas, minerals or other hydrocarbons
from any portion of any Real Property (as defined in Section
3(bb)) that is
producing oil, gas, minerals and/or other hydrocarbons at the time this
representation is made, the Company and the Subsidiaries possess all
certificates, authorizations, approvals, licenses and permits issued by the
appropriate federal, state or foreign regulatory authorities necessary to
conduct their respective businesses as conducted at the time this representation
is made (“Permits”), and
neither the Company nor any Subsidiary has received any notice of proceedings
relating to the revocation or modification of any such Permit. Without limiting
the foregoing, except as set forth on Schedule
3(s), the
Company and the Subsidiaries possess all Permits necessary to produce, extract,
transport and sell the oil, gas and other minerals in that portion of Real
Property that is producing oil, gas, minerals and/or other hydrocarbons at the
time this representation is made. Except as set forth on Schedule
3(s) or as
could not reasonably be expected to have a Material Adverse Effect, the Company
and the Subsidiaries do not have any reason to believe that they will not be
able to obtain necessary Permits as and when necessary to enable the Company to
produce, extract, transport and sell the oil, gas, minerals and other
hydrocarbons in any Real Property. Except as set forth on Schedule
3(s), the
Company is not in violation of any of the rules, regulations or requirements of
the OTC Bulletin Board (the “Principal Market”;
provided however,
that, if after the date of this Agreement the Common Stock is listed on a
national securities exchange, the “Principal Market” shall
mean such national securities exchange) and the Company has no Knowledge of any
facts or circumstances which would reasonably lead to delisting or suspension,
or termination of the trading of, the Common Stock by or on the Principal Market
in the foreseeable future. Except as set forth on Schedule
3(s), since
December 31, 2005, (i) the Company’s Common Stock has been quoted on the
Principal Market, (ii) trading in the Common Stock has not been suspended by the
SEC or the Principal Market and (iii) the Company has received no communication,
written or oral, from the SEC or the Principal Market regarding the suspension
or delisting, or termination of the trading, of the Common Stock by or on the
Principal Market. 

     

    t. Internal Accounting
Controls; Disclosure Controls and Procedures; Books and
Records. The
Company has, and has caused each of the Subsidiaries to, at all times keep
books, records and accounts with respect to all of such Person’s business
activities, in accordance with sound accounting practices and GAAP consistently
applied. The Company and each of the Subsidiaries maintains a system of internal
accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management’s general or specific
authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with GAAP and to maintain
asset and liability accountability, (iii) access to assets or incurrence of
liability is permitted only in accordance with management’s general or specific
authorization and (iv) the recorded accountability for assets and liabilities is
compared with the existing assets and liabilities at reasonable intervals and
appropriate action is taken with respect to any differences. Except as set forth
on Schedule
3(t), the
Company has timely filed (or has been deemed to have timely filed pursuant to
Rule 12b-25 under the 1934 Act) and made publicly available on the SEC’s EDGAR
system no less than five (5) days prior to the date hereof, all certifications
and statements required by (A) Rule 13a-14 or Rule 15d-14 under
the 1934 Act and (B) Section 906 of Sarbanes Oxley with respect to any SEC
Documents. The Company maintains disclosure controls and procedures required by
Rule 13a-15 or Rule 15d-15 under the 1934 Act; except as set
forth on Schedule
3(t), such
disclosure controls and procedures are, and at all times have been, effective to
ensure that the information required to be disclosed by the Company in the
reports that it files with or submits to the SEC (X) is recorded,
processed, summarized and reported accurately within the time periods specified
in the SEC’s rules and forms and (Y) is accumulated and communicated to the
Company’s management, including its principal executive officer and principal
financial officer, as appropriate to allow timely decisions regarding required
disclosure. Except as set forth on Schedule
3(t), the
Company maintains internal control over financial reporting required by
Rule 13a-14 or Rule 15d-14 under the 1934 Act; such internal
control over financial reporting is, and has at all times been, effective and
does not contain, and has not contained, any material weaknesses. 

     

    
      
        
        

      

      
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    u. Bank
Accounts. Except
as set forth on Schedule
3(u), neither
the Company nor any of the Subsidiaries maintains, or has any interest in, any
bank account, brokerage account or other similar account. Schedule 3(u)
sets
forth the funds (and any securities) contained in any such account as of the
date hereof. As of the date that this representation is made, all funds (and
securities) of the Company and the Subsidiaries will be held in bank (or
brokerage) accounts in the United States subject to Account Control Agreements,
and all other bank accounts, brokerage accounts or other similar accounts of the
Company and the Subsidiaries will have been closed. 

     

    v. Tax
Status. Except
as set forth on Schedule
3(v), the
Company and each of the Subsidiaries (i) has made or filed all foreign, federal
and state income and all other tax returns, reports and declarations required by
any jurisdiction to which it is subject, (ii) has paid all taxes and other
governmental assessments and charges that are material in amount, shown or
determined to be due on such returns, reports and declarations, except those
being contested in good faith and for which the Company has made appropriate
reserves on its books, and (iii) has set aside on its books provisions
reasonably adequate for the payment of all taxes for periods subsequent to the
periods to which such returns, reports or declarations (referred to in clause
(i) above) apply. Except as set forth on Schedule
3(v), there
are no unpaid taxes in any material amount claimed in writing to be due from the
Company or any of the Subsidiaries by the taxing authority of any jurisdiction,
and there is no basis for any such claim. Neither the Company nor any of the
Subsidiaries is, or after giving effect to the transactions contemplated by this
Agreement and the other Transaction Documents will be, a “United States real
property holding corporation” (“USRPHC”) as
that term is defined in Section 897(c)(2) of the Internal Revenue Code of 1986,
as amended, and the Treasury Regulations promulgated thereunder.

     

    w. Transactions With
Affiliates. Except
for transactions consummated pursuant to this Agreement and the other
Transaction Documents, and except as set forth on Schedule
3(w), no
Related Party (as defined below) of the Company or any of the Subsidiaries, nor
any Affiliate thereof, is presently, has been within the past three (3) years,
or will be as a result of the transactions contemplated by this Agreement and
the other Transaction Documents, a party to any transaction, contract,
agreement, instrument, commitment, understanding or other arrangement or
relationship with the Company or any of the Subsidiaries, whether for the
furnishing of services to or by, providing for rental of real or personal
property to or from, or otherwise requiring payments or consideration to or
from, any such Related Party. Except as set forth on Schedule
3(w), no
Related Party of the Company or any of the Subsidiaries, or any of their
respective Affiliates, has any direct or indirect ownership interest in any
Person (other than ownership of less than two percent (2%) of the outstanding
common stock of a publicly traded corporation) in which the Company or any of
the Subsidiaries has any direct or indirect ownership interest or with which the
Company or any of the Subsidiaries competes or has a business relationship.
“Related Party” means
the Company’s or any of the Subsidiary’s officers or directors, individuals who
were officers or directors of any such Person at any time during the previous
two (2) years, stockholders of any such Person (other than any holder of less
than five percent (5%) of the outstanding shares of any such Person), or
Affiliates of any such Person, or any individual related by blood, marriage or
adoption to any such individual or any entity in which any such entity or
individual owns a beneficial interest. 

     

    
      
        
        

      

      
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    x. Application of Takeover
Protections; Rights Agreement. The
Company and the Board have taken all necessary action, if any, in order to
render inapplicable any control share acquisition, business combination, or
other similar anti-takeover provision under the Certificate of Incorporation or
any certificates of designations or the laws of the jurisdiction of its
formation or incorporation to the transactions contemplated by this Agreement,
the Company’s issuance of the Securities in accordance with the terms hereof and
any Buyer’s ownership of the Securities. Except as set forth on Schedule
3(x), the
Company has not adopted a stockholder rights plan or similar arrangement
relating to accumulations of beneficial ownership of Common Stock or a change in
control of the Company. 

     

    y. Foreign Corrupt
Practices. Neither
the Company, nor any of the Subsidiaries, nor any director, officer, agent,
employee or other person acting on behalf of the Company or any of the
Subsidiaries has, in the course of its actions for, or on behalf of, the
Company, used any corporate funds for any unlawful contribution, gift,
entertainment or other unlawful expenses relating to political activity; made
any direct or indirect unlawful payment to any foreign or domestic government
official or employee from corporate funds; violated or is in violation of any
provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended; or made
any unlawful bribe, rebate, payoff, influence payment, kickback or other
unlawful payment to any foreign or domestic government official or
employee.

     

    z. Outstanding Indebtedness;
Liens.
Payments of principal and other payments due under the Sub Notes will, upon
issuance at the Closing, rank senior to all other Indebtedness of the Company or
any of the Subsidiaries (other than the Indebtedness under the Senior Notes and
the FNBW Indebtedness) and, by virtue of their secured position, and to the
extent of the Collateral, to all trade account payables of the Company, and the
obligations of the Subsidiaries under the Guaranty will, upon issuance of the
Sub Notes at the Closing, rank senior to all other Indebtedness of the
Subsidiaries other than the Senior Notes and, by virtue of the secured position
of the Guaranty and to the extent of the Collateral, to all trade account
payables of any of the Subsidiaries. Except as set forth on Schedule 3(z), (i)
neither the Company nor any of the Subsidiaries has any, and upon consummation
of the transactions contemplated hereby and by the other Transaction Documents
will not have any, outstanding Indebtedness other than (A) pursuant to the
Senior Notes, the Securities Purchase Documents and the Transaction Documents,
(B) the FNBW Indebtedness and (C) the Vandenberg Indebtedness, (ii) there are
no, and upon consummation of the transactions contemplated hereby and by the
other Transaction Documents there will not be any, Liens on any of the assets of
the Company or the Subsidiaries, other than (X) pursuant to the Security
Documents and (Y) the FNBW Security Interest, and (iii) there are no, and upon
consummation of the transactions contemplated hereby and by the Senior Notes,
the Securities Purchase Documents and the Transaction Documents there will not
be any, financing statements securing obligations of any amounts filed against
the Company or any of the Subsidiaries or any of their respective assets, other
than under the Security Documents. As used in this Agreement, “FNBW Note” means
that certain promissory note, dated July 11, 2008, in the outstanding principal
amount of $150,000 (as in effect as of the date hereof, without any increase in
the principal thereof or the interest rate thereon, and without any waiver,
amendment, supplement, restatement or modification thereof, other than to the
extend the term thereof) issued by North Texas to the First National Bank of
Weatherford (“FNBW”);
“FNBW Indebtedness” means
the obligation evidenced by the FNBW Note; “FNBW Security
Interest” means
the security interest granted by North Texas in certain of its vehicles, as
specified on Schedule
3(z), in
favor of FNBW, as security for the FNBW Indebtedness (as such security interest
is in effect on the date hereof, without any waiver, amendment, supplement,
restatement or modification after the date hereof); “Vandenberg Note” means
that certain promissory note, dated July 8, 2006, in the outstanding principal
amount of $75,000 (as in effect as of the date hereof, without any increase in
the principal thereof or the interest rate thereon, and without any waiver,
amendment, supplement, restatement or modification thereof, other than to the
extend the term thereof) issued by Velocity Energy Partners LP to Donald
E. Vandenberg; and “Vandenberg
Indebtedness” means
the obligation evidenced by the Vandenberg Note.

     

    
      
        
        

      

      
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    aa. Ranking of
Notes. No
Indebtedness (as defined in the Notes) of the Company (other than the FNBW
Indebtedness and the Indebtedness under the Senior Notes) is, or will be upon
consummation of the transactions contemplated hereby and by the other
Transaction Documents, senior to or ranks or will rank pari passu with the
Sub Notes in right of payment, whether with respect of payment of redemptions,
interest or damages or upon liquidation or dissolution or otherwise; provided
that, the fees owing under this Agreement pursuant to Section
4(i) shall
rank first in priority and ahead of the Sub Notes.

     

    
      
        
        

      

      
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    bb. Real
Property.
Schedule
3(bb) contains
a complete and correct list of all the real property; leasehold interests; fee
interests; oil, gas and other mineral drilling, exploration and development
rights; royalty, overriding royalty, and other payments out of or pursuant to
production; other rights in and to oil, gas and other minerals, including
contractual rights to production, concessions, net profits interests, working
interests and participation interests (including all Hydrocarbon Property (as
defined in the Mortgages (as defined in the Securities Purchase Agreement)));
any other contractual rights for the acquisition or earning of any of such
interests in the real property; facilities; fixtures; equipment that (i) are
leased or otherwise owned or possessed by the Company or any of the
Subsidiaries, (ii) in connection with which the Company or any of the
Subsidiaries has entered into an option agreement, participation agreement or
acquisition and drilling agreement or (iii) the Company or any of the
Subsidiaries has agreed to lease or otherwise acquire or may be obligated to
lease or otherwise acquire in connection with the conduct of its business
(collectively, including any of the foregoing acquired after the date of this
Agreement, the “Real Property”), which
list identifies all of the Real Property and specifies which of the Company or
the Subsidiaries leases, owns or possesses each of the Real Properties or will
do so upon consummation of the Purchases. Schedule
3(bb) also
contains a complete and correct list of all leases and other agreements with
respect to which the Company or any of the Subsidiaries is a party or otherwise
bound or affected with respect to the Real Property, except easements, rights of
way, access agreements, surface damage agreements, surface use agreements or
similar agreements that pertain to Real Property that is contained wholly within
the boundaries of any owned or leased Real Property otherwise described on
Schedule
3(bb) (the
“Real Property
Leases”).
Except as set forth on Schedule
3(bb), the
Company or one of the Subsidiaries is the legal and equitable owner of a
leasehold interest in all of the Real Property, and possesses good, marketable
and defensible title thereto, free and clear of all Liens (other than Permitted
Liens) and other matters affecting title to such leasehold that could impair the
ability of the Company or the Subsidiaries to realize the benefits of the rights
provided to any of them under the Real Property Leases. Except as set forth on
Schedule
3(bb), all of
the Real Property Leases are valid and in full force and effect and are
enforceable against all parties thereto. Except as set forth on Schedule
3(bb), neither
the Company nor any of the Subsidiaries nor, to the Company’s Knowledge, any
other party thereto is in default in any material respect under any of such Real
Property Leases and no event has occurred which with the giving of notice or the
passage of time or both could constitute a default under, or otherwise give any
party the right to terminate, any of such Real Property Leases, or could
adversely affect the Company’s or any of the Subsidiaries’ interest in and title
to the Real Property subject to any of such Real Property Leases. No Real
Property Lease is subject to termination, modification or acceleration as a
result of the transactions contemplated hereby or by the other Transaction
Agreements. Except as set forth on Schedule
3(bb), all of
the Real Property Leases will remain in full force and effect upon, and permit,
the consummation of the transactions contemplated hereby (including the granting
of leasehold mortgages). The Real Property is permitted for its present uses
under applicable zoning laws, is permitted conforming structures and complies
with all applicable building codes, ordinances and other similar Laws. Except as
set forth on Schedule
3(bb), there
are no pending or threatened condemnation, eminent domain or similar
proceedings, or litigation or other proceedings affecting the Real Property, or
any portion or portions thereof. Except as set forth on Schedule
3(bb), there
are no pending or threatened requests, applications or proceedings to alter or
restrict any zoning or other use restrictions applicable to the Real Property
that would interfere with the conduct of the Company’s or any of the
Subsidiaries’ business as conducted or proposed to be conducted (including as
described to Buyers) at the time this representation is made. Except as set
forth on Schedule
3(bb), there
are no restrictions applicable to the Real Property that would interfere with
the Company’s or any Subsidiary’s making an assignment or granting of a
leasehold or other mortgage to Sonterra Buyers as contemplated by the Security
Documents, including any requirement under any Real Property Leases requiring
the consent of, or notice to, any lessor of any such Real Property. Except as
set forth on Schedule
3(bb), all of
the Real Property is located in the State of Texas. Except as set forth on
Schedule
3(bb), all of
the wells on the Real Property have been drilled and completed at legal
locations within the boundaries of the appropriate Real Property Lease; and no
such well is subject to penalties on allowables after the date hereof because of
any overproduction or violation of applicable laws, rules, regulations, permits
or judgments, orders or decrees of any court or governmental body or agency
which would prevent such well from being entitled to its full legal and regular
allowance from and after the date hereof as prescribed by any court or
Governmental Entity. Except as set forth on Schedule
3(bb), there
are no joint operating agreements applicable to the Real Property. Neither the
Company nor any of the Subsidiaries will be obligated, as of the Closing Date or
thereafter, including by virtue of a prepayment arrangement, make-up right under
a production sales contract containing a “take or pay” or similar provision,
production payment, buydowns, buyouts, or any other arrangement, (i) to deliver
hydrocarbons, or proceeds from the sale thereof, attributable to any of the Real
Property at some future time without then or thereafter receiving the full
contract price therefore, or (ii) to deliver oil or gas (or cash in lieu
thereof) from the Real Property to other owners of interests as a result of past
production by any such owner, the Company or the Subsidiaries or any of their
respective predecessors in excess of the share to which it was entitled with
respect to such Real Property. Except as set forth on Schedule
3(bb), no
Person has any call upon, option to purchase or similar right to obtain
production from the portion of the Real Property. To the Company’s Knowledge,
the Real Property Leases will by their terms remain in effect for at least as
long as oil, gas or other minerals are produced in paying quantities or they are
otherwise maintained by operations. For purposes of this Agreement,
“Sonterra Buyers” means
the “Buyers” as defined in the Securities Purchase Agreement. 

     

    
      
        
        

      

      
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    cc. Excluded Subsidiaries and
Velocity Subsidiaries. All of
the assets and liabilities of each of River Reinsurance Limited, a Barbados
exempt insurance company (“River Sub”), River
Capital Holdings Limited, a Barbados exempt corporation (“Holdings Sub”; and
together with River Sub, the “Excluded
Subsidiaries”),
Velocity Energy Limited LLC, a Texas limited liability company (“VEL”),
Velocity Energy Partners LP, a Delaware limited partnership (“VEP”), and
Velocity Energy Offshore LP, a Delaware limited partnership (together with VEL
and VEP, the “Velocity
Subsidiaries”), are
set forth on Schedule
3(cc). Except
as set forth on Schedule
3(cc), no
Excluded Subsidiary or Velocity Subsidiary has employed any employees or engaged
in any business operations or other activities. No Excluded Subsidiary or
Velocity Subsidiary has or is authorized to maintain, except as set forth on
Schedule
3(u), any
bank account, brokerage account or other similar account, possesses any cash or
other assets or has any other means to acquire cash or to use or spend cash or
credit. 

     

    dd. No Materially Adverse
Contracts, Etc. Neither
the Company nor any Subsidiary is subject to any charter, contract, agreement,
instrument, corporate or other legal restriction, or any judgment, decree,
order, rule, regulation or other Law that in the judgment of the Company’s
officers, respectively, has, or is expected in the future to have, a Material
Adverse Effect.

     

    ee. Investment
Company. Neither
the Company nor any Subsidiary is, or upon Closing will be, an “investment
company,” a company controlled by an “investment company,” or an “affiliated
person” of, or “promoter” or “principal underwriter” for, an “investment
company,” as such terms are defined in the Investment Company Act of 1940, as
amended (the “Investment Company
Act”).

     

    ff. Stock
Options. Except
as set forth on Schedule
3(ff), every
Option issued by the Company (I) has (or, if no longer outstanding, had), with
respect to each share of Common Stock into which it was or is convertible or for
which it was or is exercisable or exchangeable, an exercise price equal to or
greater than the fair market value per share of Common Stock on the date of
grant of such Option, (II) was issued in compliance with the terms of the plan
under which it was issued and in compliance with applicable Laws, rules and
regulations, including the rules and regulations of the Principal Market, and
(III) has been accounted for in accordance with GAAP and otherwise been
disclosed accurately and completely and in accordance with the requirements of
the securities laws, including Rule 402 of Regulation S-B promulgated under the
1933 Act and Rule 402 of Regulation S-K promulgated under the 1933 Act, as
applicable, and the Company has paid, or properly reserved for, all taxes
payable with respect to each such Option (including with respect to the issuance
and exercise thereof), and has not deducted any amounts from its taxable income
that it is not entitled to deduct with respect to any such stock option
(including the issuance and exercise thereof). As used in this Agreement,
“Options” means
any rights, warrants or options to subscribe for or purchase Common Stock or
Convertible Securities; and “Convertible
Securities” means
any stock or securities (other than Options) directly or indirectly convertible
into or exchangeable or exercisable for Common Stock.

     

    
      
        
        

      

      
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    gg. Schedules. Each
Schedule with respect to the statements made in Section 3
accurately indicates, as applicable, the Person (e.g., the Company or the
specific Subsidiary) to which the disclosures thereon apply.

     

    4. AFFIRMATIVE
COVENANTS.

     

    a. Reasonable Best
Efforts. Each
party shall use its reasonable best efforts to timely satisfy each of the
conditions to be satisfied by it as provided in Sections
6 and
7 of this
Agreement.

     

    b. Form D and Blue
Sky. The
Company agrees to timely file a Form D with respect to the Securities as
required under Regulation D and to provide a copy thereof to Buyers
promptly after such filing. The Company shall, on or before the Closing Date,
take such action as the Company shall reasonably determine is necessary in order
to obtain an exemption for, or to qualify the Securities for, sale to Buyers at
the Closing to occur on the Closing Date pursuant to this Agreement under
applicable securities or “Blue Sky” laws of the states of the United States, and
shall provide to Buyers evidence of any such action so taken on or prior to the
Closing Date. The Company shall make all filings and reports relating to the
offer and sale of the Securities required under applicable securities or “Blue
Sky” laws of the states of the United States following the Closing Date.


     

    c. Reporting
Status.


     

    (i) Until the
latest of (i) the first date on which no Notes remain outstanding, (ii) the date
on which the Security Agreement has terminated, and (iii) the date on which the
Buyers no longer own any Securities (the period ending on such latest date, the
“Reporting Period”), the
Company shall timely file all reports required to be filed with the SEC pursuant
to the 1934 Act, and the Company shall not terminate its status as an issuer
required to file reports under the 1934 Act, even if the securities laws would
otherwise permit such termination. 

     

    (ii) With a
view to making available to the holders of the Securities the benefits of Rule
144, the Company agrees to, during the Reporting Period, (A) make and keep
public information available, as those terms are understood and defined in Rule
144; (B) file with the SEC in a timely manner all reports and other documents
required of the Company under the 1934 Act; and (C) furnish to each holder of
Securities so long as such holder of Securities owns Securities, promptly upon
request, (1) a written statement by the Company, if true, that it has complied
with the reporting requirements of Rule 144 and the 1934 Act, (2) a copy of the
most recent annual or quarterly report of the Company and such other reports and
documents so filed by the Company if such reports are not publicly available via
EDGAR, and (3) such other information as may be reasonably requested to permit
the holders of Securities to sell such Securities pursuant to Rule 144 without
registration.

     

    
      
        
        

      

      
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    (iii) If the
Company at any time, during the period commencing on the date that is six (6)
months after the Closing Date and ending on the first date on which (A) no
shares of Common Stock may be issued pursuant to an Investor Share Option or
upon exercise of the Warrant and (B) all of the Warrant Shares and the Option
Shares may be sold by the holders thereof pursuant to Rule 144 without
limitation and without compliance with the current public information
requirement thereof, fails to timely file with the SEC an annual report on Form
10-K or a quarterly report on Form 10-Q (i.e., fails to file any such report on
or before the applicable filing deadline therefor, without giving effect to any
extensions of time that may be permitted by Rule 12b-25 under the 1934 Act (or
successor thereto)), or on any day hereafter sales of all of the Securities
cannot be made as a result of a breach or violation of this Section
4(c), then,
as partial relief for the damages to any holder of Securities by reason of any
reduction of its ability to sell the Securities (which remedy shall not be
exclusive of any other remedies available hereunder, at law or in equity), the
Company shall pay to each such holder an amount in cash equal to two percent
(2%) of the Aggregate Market Value of the Warrant Shares and the Option Shares
held by (or issuable upon exercise (without regard to any limitation thereon) of
the Warrant or any Investor Shares Option held by) such holder with respect to
each thirty (30) day period occurring on and after such failure, breach or
violation and prior to the date that the applicable annual or quarterly report
is filed with the SEC or the breach or violation is cured, as applicable (in
each case, pro rated for periods totaling less than thirty (30) days). The
payments to which a holder shall be entitled pursuant to this Section
4(c) are
referred to herein as “Filing Delay
Payments.” Filing
Delay Payments shall be paid on the earlier of (I) the last day of the calendar
month during which such Filing Delay Payments are incurred and (II) the third
Business Day after the failure, breach or violation giving rise to the Filing
Delay Payments is cured. Notwithstanding the foregoing, no Filing Delay Payments
shall accrue with respect to any period after the later of (A) the one-year
anniversary of the date hereof, and (B) the first date after the Override
Exchange Date (or, if the Company fails to deliver an Override Exchange Notice
by the two-year anniversary of the Closing Date, the first date after such
two-year anniversary) as of which the holders of Securities may sell all of the
Securities pursuant to Rule 144 without the requirement for compliance with Rule
144(c) (or successor thereto). In the event the Company fails to make Filing
Delay Payments in a timely manner, such Filing Delay Payments shall bear
interest, in each case until paid in full, at the rate of one and one-half
percent (1.5%) per month, prorated for partial months. For purposes hereof, (i)
“Market Value” of any
of the Warrant Shares or the Option Shares means the arithmetic average of the
Weighted Average Price of the Common Stock on the Principal Market (X) on each
of the five (5) Trading Days immediately preceding the date of original issuance
of such Warrant Share or Option Share, pursuant to the Warrant or the Investor
Share Option, as applicable, or (Y) if not yet issued but issuable upon exercise
(without regard to any limitation thereon) of the Warrant or the Investor Share
Option, on each of the five (5) Trading Days immediately preceding the date of
the failure, breach or violation initially giving rise to the Filing Delay
Payments; (ii) “Aggregate Market
Value” of the
Warrant Shares and the Option Shares held by any holder thereof means the sum of
the respective Market Values of all of the Warrant Shares and the Option Shares
held by such holder; and (iii) “Trading Days” means
any day on which the Common Stock is traded on its Principal Market (as defined
in Section
3(s));
provided however,
that “Trading Day” shall not include any day on which the Common Stock is
scheduled to trade, or actually trades, on its Principal Market for less than
4.5 hours.

     

    
      
        
        

      

      
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    d. [Reserved]

     

    e. Financial
Information. The
Company agrees to send the following to each Buyer during the Reporting Period
(i) unless the following are filed with the SEC through EDGAR and are
immediately available to the public through the EDGAR system, within one (1)
Business Day after the filing thereof with the SEC, a copy of each of its
quarterly reports on Form 10-Q and annual reports on Form 10-K (each, a
“Periodic Report”),
Current Reports on Form 8-K, registration statements (other than on Form S-8)
and amendments and supplements to each of the foregoing, (ii) unless immediately
available through Bloomberg Financial Markets (or any successor thereto),
facsimile copies of all press releases issued by the Company or any of the
Subsidiaries, contemporaneously with the issuance thereof, and (iii) copies of
any notices and other information made available or given to the stockholders of
the Company generally, contemporaneously with the making available or giving
thereof to the stockholders. 

     

    f. Internal Accounting
Controls. During
the Reporting Period, the Company shall, and shall cause each of the
Subsidiaries to (i) at all times keep books, records and accounts with respect
to all of such Person’s business activities, in accordance with sound accounting
practices and GAAP consistently applied, (ii) maintain a system of internal
accounting controls sufficient to provide reasonable assurance that (A)
transactions are executed in accordance with management’s general or specific
authorizations, (B) transactions are recorded as necessary to permit preparation
of financial statements in conformity with GAAP and to maintain asset and
liability accountability, (C) access to assets or incurrence of liability is
permitted only in accordance with management’s general or specific authorization
and (D) the recorded accountability for assets and liabilities is compared with
the existing assets and liabilities at reasonable intervals and appropriate
action is taken with respect to any differences, (iii) timely file and make
publicly available on the SEC’s EDGAR system, all certifications and statements
required by (M) Rule 13a-14 or Rule 15d-14 under the 1934 Act and (N) Section
906 of Sarbanes Oxley with respect to any Company SEC Documents, (iv) maintain
disclosure controls and procedures required by Rule 13a-15 or Rule 15d-15 under
the 1934 Act, (v) cause such disclosure controls and procedures to be effective
at all times to ensure that the information required to be disclosed by the
Company in the reports that it files with or submits to the SEC (X) is recorded,
processed, summarized and reported accurately within the time periods specified
in the SEC’s rules and forms and (Y) is accumulated and communicated to the
Company’s management, including its principal executive officer and principal
financial officer, as appropriate to allow timely decisions regarding required
disclosure, (vi) maintain internal control over financial reporting required by
Rule 13a-14 or Rule 15d-14 under the 1934 Act, and (vii) cause such internal
control over financial reporting to be effective at all times and not contain
any material weaknesses.

     

    g. Reservation of
Shares. The
Company shall take all action necessary to at all times have authorized, and
reserved for the purpose of issuance, no less than 100% of the aggregate number
of shares of Common Stock issuable upon exercise of the Warrant and the Investor
Share Option (without regard to any limitations on exercise
thereof).

     

    
      
        
        

      

      
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    h. Listing. The
Company shall take all actions necessary to cause the Common Stock to remain
eligible for quotation on the OTC Bulletin Board, unless listed on a national
securities exchange. The Company shall use its reasonable commercial efforts to
(i) secure the listing of the Common Stock on a national securities exchange as
promptly as reasonably practicable following the first date on which the Company
meets the quantitative listing standards therefor and (ii) maintain such listing
at all times thereafter. Following such listing, the Company shall not, and
shall cause each of the Subsidiaries not to, take any action that would be
reasonably expected to result in the delisting or suspension or termination of
trading of the Common Stock on the Principal Market. The Company shall pay all
fees and expenses in connection with satisfying its obligations under this
Section
4(h).

     

    i. Expenses. Subject
to Section
9(k) below,
at the Closing, the Company shall pay each Buyer a reimbursement amount equal to
all such Buyer’s legal, due diligence and other expenses (less such amounts
previously paid by the Company) incurred in connection with the Closing,
including without limitation fees and expenses of attorneys, investigative and
other consultants and travel costs and all other expenses relating to
negotiating and preparing the Transaction Documents and consummating the
transactions contemplated thereby. The aggregate amount payable to each Buyer
pursuant to the preceding sentence at Closing shall be withheld as an off-set by
such Buyer from any purchase price to be paid by such Person at Closing pursuant
to any Transaction Document or Securities Purchase Document. Additionally, at
the Closing, the Company shall pay all of its own legal, due diligence and other
expenses, including fees and expenses of attorneys, investigative and other
consultants and travel costs and all other expenses, relating to negotiating and
preparing the Transaction Documents and consummating the transactions
contemplated thereby. In addition to the fee and reimbursement obligations of
the Company set forth above in this Section
4(i), and not
in limitation thereof, following the Closing, the Company shall promptly
reimburse each Buyer, each holder of Securities for all of the respective
out-of-pocket fees, costs and expenses incurred thereby in connection with any
amendment, modification or waiver of any of the Transaction Documents, the
enforcement of such Person’s rights and remedies under any of the Transaction
Documents. 

     

    j. Disclosure of Transactions
and Other Material Information.

     

    (i) Not later
than 5:30 p.m. (New York City time) on the second Business Day following the
execution and delivery of this Agreement, the Company shall file the Announcing
8-K with the SEC. The “Announcing Form
8-K” (A)
shall describe the terms of the transactions contemplated by this Agreement and
the other Transaction Documents to which the Company is a party, including the
issuance of the Sub Notes and the Warrant, (B) shall include as exhibits to such
Form 8-K this Agreement (including the schedules hereto), the form of Sub Note,
the form of Warrant and the form of Guaranty and (C) shall include any other
information required to be disclosed therein pursuant to any securities laws or
other Laws.

     

    (ii) Subject
to the agreements and covenants set forth in this Section
4(j), the
Company shall not issue any press releases or any other public statements with
respect to the transactions contemplated hereby or disclosing the name of any
Buyer; provided,
however, that the Company shall be entitled, without the prior approval of any
Buyer, to make any press release or other public disclosure with respect to such
transactions (A) in substantial conformity with the Announcing Form 8-K and
contemporaneously therewith and (B) as is required by applicable Law, including
as is required by Form 8-K or any successor form thereto (provided that
such Buyer shall be consulted by the Company in connection with any such press
release or other public disclosure prior to its release and shall be provided
with a copy thereof upon request).

     

    
      
        
        

      

      
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    (iii) The
Company represents, warrants and covenants to each Buyer that, from and after
the filing of the Announcing Form 8-K with the SEC (subject to Section
4(n)), such
Buyer shall not be in possession of any material non-public information received
from the Company, any of the Subsidiaries or any of their respective officers,
directors, employees or agents. Notwithstanding any provision herein to the
contrary, the Company shall not, and shall cause each of the Subsidiaries and
its and each of their respective officers, directors, employees and agents not
to, provide any Buyer or Investor (as defined in Section
4(k)) with
any material non-public information regarding the Company or any of the
Subsidiaries from and after the filing of the Announcing Form 8-K with the SEC,
without the express prior written consent of such Buyer or Investor. In the
event of a breach of the foregoing covenant by the Company, any of the
Subsidiaries, or any of its or their respective officers, directors, employees
and agents, in addition to any other remedy provided herein or in the
Transaction Documents, such Buyer or Investor shall have the right to make a
public disclosure in the form of a press release, public advertisement or
otherwise, of such material non-public information without the prior approval by
the Company, the Subsidiaries, or any of its or their respective officers,
directors, employees or agents. Buyers shall not have any liability to the
Company, the Subsidiaries or any of its or their respective officers, directors,
employees, stockholders or agents for any such disclosure. Notwithstanding
anything to the contrary herein, in the event that the Company believes that a
notice or communication to any Buyer or Investor contains material, non-public
information relating to the Company or any of the Subsidiaries, the Company so
shall indicate to such Buyer or Investor contemporaneously with delivery of such
notice or communication, and such indication shall provide such Buyer or
Investor the means to refuse to receive such notice or communication; and in the
absence of any such indication, the holders of the Securities shall be allowed
to presume that all matters relating to such notice or communication do not
constitute material, non-public information relating to the Company or any of
the Subsidiaries. Upon receipt or delivery by the Company or any of the
Subsidiaries of any notice in accordance with the terms of the Transaction
Documents, unless the Company has in good faith determined that the matters
relating to such notice do not constitute material, non-public information
relating to the Company or the Subsidiaries, the Company shall within one (1)
Business Day after any such receipt or delivery publicly disclose such material,
non-public information pursuant to the securities laws.

     

    
      
        
        

      

      
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    k. Pledge of
Securities. The
Company acknowledges and agrees that the Securities may be pledged by Buyers or
their transferees (each, including any such Buyer, an “Investor”) in
connection with a bona fide margin agreement or other bona fide loan secured by
the Securities. The pledge of Securities shall not be deemed to be a transfer,
sale or assignment of the Securities hereunder, and no Investor effecting any
such pledge of Securities shall be required to provide the Company with any
notice thereof or otherwise make any delivery to the Company pursuant to this
Agreement or any other Transaction Document, including Section
2(f) of this
Agreement. The Company hereby agrees to execute and deliver such documentation
as a pledgee of the Securities may reasonably request in connection with a
pledge of the Securities to such pledgee by an Investor.

     

    l. Notices. From
the date of this Agreement until the first date following the Closing Date on
which the Sub Notes are no longer outstanding (the “Sub Note Period”), the
Company shall and shall cause each of the Subsidiaries to: 

     

    (i) Names and Trade
Names. Notify
Buyers in writing (A) at least thirty (30) days in advance of any change in such
Person’s legal name and (B) within ten (10) days of the change of the use of any
trade name, assumed name, fictitious name or division name not previously
disclosed to all Buyers in writing.

     

    (ii) ERISA
Matters.
Promptly notify Buyers of (x) the occurrence of any “reportable event” (as
defined in the Employee Retirement Income Security Act of 1974, as amended
(“ERISA”)),
which might result in the termination by the Pension Benefit Guaranty
Corporation (the “PBGC”) of any
employee benefit plan (“Plan”)
covering any officers or employees of such Person, any benefits of which are, or
are required to be, guaranteed by the PBGC, (y) receipt of any notice from the
PBGC of its intention to seek termination of any Plan or appointment of a
trustee therefor or (z) its intention to terminate or withdraw from any
Plan.

     

    (iii) Environmental
Matters.
Immediately notify Buyers upon becoming aware of any investigation, proceeding,
complaint, order, directive, claim, citation or notice with respect to any
non-compliance with or violation of the requirements of any Environmental Law by
such Person or the generation, use, storage, treatment, transportation,
manufacture handling, production or disposal of any Hazardous Materials in
violation of the requirements of any Environmental Law or any other
environmental, health or safety matter which affects such Person or its business
operations or assets or any properties at which such Person has transported,
stored or disposed of any Hazardous Materials, unless the foregoing could not
reasonably be expected to have a Material Adverse Effect. 

     

    (iv) Default; Material Adverse
Effect.
Promptly advise Buyers of any material adverse change in the business, property,
assets, operations or financial condition of such Person, any other Material
Adverse Effect, or the occurrence of any Event of Default (as defined in any
Note) or the occurrence of any event which, if uncured, will become an Event of
Default after notice or lapse of time (or both). 

     

    All of
the foregoing notices shall be provided by the Company or applicable Subsidiary
to such Buyers in writing.

     

    
      
        
        

      

      
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    m. Compliance with Laws and
Maintenance of Permits. During
the Sub Note Period, the Company shall, and shall cause each of the Subsidiaries
to, maintain all governmental consents, franchises, certificates, licenses,
authorizations, approvals and permits, the lack of which would reasonably be
expected to have a Material Adverse Effect and to remain in compliance with all
Laws (including Environmental Laws and Laws relating to taxes, employer and
employee contributions and similar items, securities, ERISA or employee health
and safety) the failure with which to comply would have a Material Adverse
Effect on such Person. Following any determination by Marquis in its sole
discretion that there is non-compliance, or any condition which requires any
action by or on behalf of the Company or any of the Subsidiaries in order to
avoid non-compliance, with any Environmental Law, Marquis may, at the Company’s
expense, cause an independent environmental engineer reasonably acceptable to
Marquis to conduct such tests of the relevant site(s) as are appropriate and
prepare and deliver to Buyers a report setting forth the results of such tests,
a proposed plan for remediation and an estimate of the costs thereof, and the
Company and/or its applicable Subsidiary(ies) shall promptly undertake such
recommended or necessary remedial actions as shall be necessary to avoid a
Material Adverse Effect

     

    n. Inspection and
Audits. During
the Sub Note Period, the Company shall, and shall cause each of the Subsidiaries
to, permit the holders of the Warrant and the Sub Notes, or any Persons
designated thereby, to call at such Person’s places of business at any
reasonable times and upon prior written notice, and, without unreasonable
hindrance or delay, to inspect, audit, check and make extracts from such
Person’s books, records, journals, orders, receipts and any correspondence and
other data relating to such Person’s business or any transactions between the
parties hereto, and shall have the right to make such verification concerning
such Person’s business as such holder may consider reasonable under the
circumstances. Notwithstanding anything to the contrary herein, upon written
request to the Company by any such holder, the Company shall promptly provide
such holder with any financial, operating or other type of information requested
by such holder, subject to such holder’s execution of a confidentiality
agreement reasonably acceptable to the Company with respect to such information,
which execution shall constitute a waiver, with respect to any material
non-public information regarding the Company and the Subsidiaries provided to
such holder directly in response to such written request, of the restriction
herein on the Company’s disclosure to such holder of material non-public
information. The Company shall pay to any such holder all costs and
out-of-pocket expenses incurred by such holder in the exercise of its rights
hereunder, and all of such fees, costs and expenses shall constitute
Indebtedness under the Sub Notes held by such holder, shall be payable on demand
by the Company to such holder and, until paid, shall bear interest at the
Applicable Interest Rate (as defined in the Sub Notes).

     

    o. Insurance. During
the Sub Note Period, the Company shall, and shall cause each of the Subsidiaries
to maintain, at its expense, such public liability and third party property
damage insurance with companies that regularly insure Persons engaged in
businesses similar to that of the Company or applicable Subsidiary, such
coverage and the premiums payable in respect thereof to be acceptable in scope
and amount to Buyer. Original (or certified) copies of such policies have been
or shall be, no later than ten (10) days prior to the Closing Date, delivered to
Buyer, together with evidence of payment of all premiums therefor. 

     

    
      
        
        

      

      
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    p. [Reserved].


     

    q. Taxes. During
the Sub Note Period, the Company shall and shall cause each of the Subsidiaries
to file all required tax returns and pay all of its taxes when due, subject to
any extensions granted by the applicable taxing authority, including taxes
imposed by federal, state or municipal agencies, and shall cause any Liens for
taxes to be promptly released; provided, that Person shall have the right to
contest the payment of such taxes in good faith by appropriate proceedings so
long as (i) the amount so contested is shown on such Person’s financial
statements; (ii) the contesting of any such payment does not give rise to a Lien
for taxes; (iii) such Person keeps on deposit with the Collateral Agent (such
deposit to be held without interest) an amount of money which, in the sole
judgment of the Collateral Agent, is sufficient to pay such taxes and any
interest or penalties that may accrue thereon; and (iv) if such Person fails to
prosecute such contest with reasonable diligence, the Collateral Agent may apply
the money so deposited in payment of such taxes. If the Company or a Subsidiary
fails to pay any such taxes (other than taxes not yet due, subject to an
extension or subject to a contest) and in the absence of any such contest by
such Person, holders of the Warrant or Sub Notes may (but shall be under no
obligation to) advance and pay any sums required to pay any such taxes and/or to
secure the release of any Lien therefor, and any sums so advanced by such
holders shall constitute Indebtedness of the Company to such holders, shall be
payable by the Company to such holders on demand, and, until paid, shall bear
interest at the Applicable Interest Rate (as defined in the Sub Notes).


     

    r. Intellectual
Property. During
the Reporting Period, the Company shall and shall cause each of the Subsidiaries
to maintain adequate licenses, patents, patent applications, copyrights, service
marks and trademarks to continue its business as presently proposed to be
conducted by it (including as described to Buyers prior to the date hereof) or
as hereafter conducted by it, unless the failure to maintain any of the
foregoing would not reasonably be expected to have a Material Adverse Effect.


     

    s. Patriot Act, Investor
Secrecy Act and Office of Foreign Assets Control. As
required by federal law and each Buyer’s policies and practices, Buyers may need
to obtain, verify and record certain customer identification information and
documentation in connection with opening or maintaining accounts, or
establishing or continuing to provide services, and, from the date of this
Agreement until the end of the Reporting Period, the Company agrees to, and
shall cause each of the Subsidiaries to, provide such information to
Buyers.

     

    t. Drilling Title
Opinions. During
the Sub Note Period, prior to the Company’s or any of the Subsidiaries’ drilling
on any of the Real Property, the Company or such Subsidiary will obtain a
customary drilling title opinion with respect to such drillsite. Upon written
request to the Company by a Buyer, the Company shall promptly provide such Buyer
with a copy of such drilling title opinion, subject to such Buyer’s execution of
a confidentiality agreement reasonably acceptable to the Company with respect
thereto; provided,
however, that any such request shall constitute a waiver, with respect to any
material non-public information regarding the Company and the Subsidiaries
contained in such drilling title opinion, of the restriction herein on the
Company’s disclosure to such Buyer of material non-public
information. 

     

    
      
        
        

      

      
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    u. [Reserved].

     

    v. [Reserved].


     

    w. Subsidiary
Restrictions.


     

    (i) Excluded
Subsidiaries. The
Company shall sell, transfer or otherwise divest itself of all interests in the
Excluded Subsidiaries in a transaction that is negotiated on an arm’s length
basis, is on terms and conditions that the Company reasonably believes are no
less favorable to the Company than those that would have been obtained on an
arm’s length basis from a third party that is not a Related Party (the
“Divestiture”), as
soon as reasonably practicable after the Closing Date and following the
Divestiture shall have no interest in, or obligations with respect to, any of
the assets or liabilities of the Excluded Subsidiaries or the businesses
thereof. The Company shall not incur, or be subject to, any expense or liability
in connection with the Divestiture. As of the date hereof and at all times
thereafter, no Excluded Subsidiary (while it remains a Subsidiary) (A) shall
employ any employees, (B) shall engage in any business operations or other
activities, or (C) except for the Permitted Insurance Sub Accounts and the
Permitted Insurance Sub Funds, shall have, or be authorized to maintain, any
bank account, brokerage account or other account with any financial institution,
or possess any cash or have, or be authorized to have, any other means to
acquire cash or to use or spend cash or credit or lease, own or otherwise
possess any properties or assets (other than the insurance licenses held as of
the date hereof). At no time prior to the Divestiture shall any additional
monies or funds shall be deposited, or be permitted to be deposited, into the
Permitted Insurance Sub Account. As used in this Agreement, the “Permitted Insurance Sub
Accounts” means
the bank accounts of the Excluded Subsidiaries listed on Schedule
3(u) as each
such account exists as of the date of this Agreement; and “Permitted Insurance Sub
Funds” means
funds in the Permitted Insurance Sub Accounts necessary to capitalize the
Excluded Subsidiaries for purposes of maintaining their insurance license, in an
amount not in excess of $135,000. 

     

    (ii) Velocity
Subsidiaries. As of the
date hereof and at all times thereafter until the first date on which (I) all
Liens on the assets of the Velocity Subsidiaries in favor of Amaroil, LLC and
evidenced by UCC financing statements filed with the Delaware Department of
State as of May 5, 2005 have been terminated and (II) the Collateral Agent has a
valid perfected first priority security interest on all of the assets of the
Velocity Subsidiaries (such date, the “Velocity Lien Clearance
Date”), no
Velocity Subsidiary (while it remains a Subsidiary) shall (A) employ any
employees, (B) engage in any business operations or other activities, (C) have
or be authorized to maintain, any bank account, brokerage account or other
account with any financial institution, (D) possess any cash or have, or be
authorized to have, any other means to acquire cash or to use or spend cash or
credit, or (E) lease, own or otherwise possess any properties or assets (other
than any licenses or permits held as of the date hereof). At no time prior to
the Velocity Lien Clearance Date shall any additional monies or funds shall be
deposited, or be permitted to be deposited, into any account of any Velocity
Subsidiary. The Company shall cause the Velocity Lien Clearance Date to be no
later than twenty-five (25) calendar days after the Closing Date. 

     

    
      
        
        

      

      
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    For
purposes of this Agreement and the other Transaction Documents, “Included Subsidiaries” means
all of the Subsidiaries other than the Excluded Subsidiaries and, prior to the
Velocity Lien Clearance Date, the Velocity Subsidiaries. 

     

    x. Further Instruments and
Acts. From
the date of this Agreement until the end of the Reporting Period, upon request
of any Buyer or Investor, and the Company will execute and deliver such further
instruments and do such further acts as may be reasonably necessary or proper to
carry out more effectively the purposes of this Agreement and the other
Transaction Documents. 

     

    y. Additional Financial
Information. The
Company shall deliver to each Buyer, on the Closing Date. a pro forma
consolidated balance sheet (the “Pro Forma Balance
Sheet”) of the
Company and the Subsidiaries dated as of the date of the Latest Balance Sheet,
that gives effect to the transactions contemplated by this Agreement, each of
the other Transaction Documents, the Securities Purchase Agreement and the other
agreements and instruments contemplated thereby, as occurring on or as of the
Closing Date. The Company represents and warrants to Buyers that the Pro Forma
Balance Sheet, (i) shall fairly present such pro forma financial position, (ii)
shall be prepared based upon assumptions that provide a reasonable basis for
presenting the effects of such transactions, and the pro forma adjustments shall
give appropriate effect to such assumptions, (iii) shall be based upon financial
information prepared in accordance with GAAP, (iv) shall be consistent with the
books and records of the Company and the Subsidiaries (which shall be true,
accurate and complete) and (v) shall fairly present such information as of the
date presented.

     

    z. Cancellation of Old
Notes. The
Company shall, immediately following the Closing, cause the Old Notes
surrendered by Longview in exchange for the Longview Note to be irrevocably
cancelled and retired in their entirety.

     

    aa. Repayment of North Texas
Demand Note.
Contemporaneously with the Closing, the Company shall cause North Texas to (and
North Texas shall) repay in full (including all outstanding principal of, and
accrued interest on) those certain demand notes, dated October 30, 2008 and
November 7, 2008, in the original aggregate principal amount of $125,000, issued
by North Texas to Marquis. Such amount shall be withheld by Marquis as an offset
against the purchase price payable by Marquis pursuant to the Securities
Purchase Agreement.

     

    bb. Release of
Liens.
Contemporaneously with the Closing, Marquis shall cause Viking Asset Management,
LLC, as collateral agent, to release all of its Liens on the assets of North
Texas securing the Indebtedness under the North Texas Note and Longview shall
cause Viking Asset Management, LLC, as collateral agent, to release all of its
Liens on the assets of the Company and the Subsidiaries securing the
Indebtedness under the Old Notes, in each case by delivering to the Company such
instruments as shall be reasonably necessary to effect such
release.

     

    
      
        
        

      

      
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    cc. Surrender of Old
Warrant. No
later than five (5) Business Days after the Closing Date, Longview shall deliver
the Old Warrant to the Company, for cancellation with respect to 3,000,000
shares of the Common Stock subject thereto, and the Company shall, within five
(5) Business Days of the date of such delivery, deliver to Longview a new
warrant, duly executed by the Company, containing the same terms and conditions,
and in the same form, as the Old Warrant (such new warrant, the “New Longview
Warrant”),
except that the New Longview Warrant shall represent the right to purchase
1,958,678 shares (subject to adjustment as provided therein) of Common
Stock.

     

    5. NEGATIVE
COVENANTS

     

    a. Prohibition Against Variable
Priced Securities. During
the Reporting Period, the Company shall not in any manner issue or sell any
Options (as defined in Section
3(ff)) or
Convertible Securities (as defined in Section
3(ff) that are
convertible into or exchangeable or exercisable for shares of Common Stock at a
price that varies or may vary with the market price of shares of Common Stock,
including by way of one or more resets to a fixed price or increases in the
number of shares of Common Stock issued or issuable, or at a price that upon the
passage of time or the occurrence of certain events automatically is reduced or
is adjusted or at the option of any Person may be reduced or adjusted, whether
or not based on a formulation of the then current market price of the Common
Stock. Notwithstanding the foregoing, this Section
5(a) shall
not prohibit the issuance of Options or Convertible Securities that contain
customary anti dilution provisions that are no more favorable to the holder
thereof than those contained in the Warrant.

     

    b. Status. During
the Reporting Period, the Company shall not, nor will it permit any of the
Subsidiaries to, become a USRPHC; and upon any Buyer’s request, the Company
shall inform such Buyer whether any of the Securities then held by such Buyer
constitute a U.S. real property interest pursuant to Treasury Regulation Section
1.897-2(h) without regard to Treasury Regulation Section 1.897-2(h)(3).


     

    c. Stay, Extension and Usury
Laws. The
Company covenants (to the extent that it may lawfully do so) that it shall not
at any time insist upon, plead, or in any manner whatsoever claim or take the
benefit or advantage of, any stay, extension or usury law or other law that
would prohibit or forgive it from paying all or any portion of any principal of,
or interest or premium on any of the Sub Notes as contemplated herein or
therein, wherever enacted, now or at any time hereafter in force, or which may
affect the covenants or the performance of any of the Transaction Documents; and
the Company (to the extent it may lawfully do so), on behalf of itself and the
Subsidiaries, hereby expressly waives all benefit or advantage of any such law,
and covenants that it will not, by resort to any such law, hinder, delay or
impede the execution of any power herein granted to any Buyer, but will suffer
and permit the execution of every such power as though no such law has been
enacted.

     

    
      
        
        

      

      
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    d. Payment Restrictions
Affecting Subsidiaries. During
the Sub Notes Period, (i) the Company shall not, nor will it permit any of the
Subsidiaries to, enter into or assume any agreement prohibiting or otherwise
restricting the creation or assumption of any Lien upon its properties or
assets, whether now owned or hereafter acquired, or requiring the grant of any
security for an obligation, except to the extent any such agreement provides for
Permitted Liens; and (ii) except as provided herein, the Company shall not and
shall not cause or permit the Subsidiaries to directly or indirectly create or
otherwise cause or suffer to exist or become effective any consensual
encumbrance or consensual restriction of any kind on the ability of any such
Subsidiary to: (1) pay dividends or make any other distribution on any of such
Person’s Capital Stock owned by the Company or any other Subsidiary; (2) pay any
Indebtedness owed to the Company or any other Subsidiary; (3) make loans or
advances to the Company or any other Subsidiary; or (4) transfer any of its
property or assets to the Company or any other Subsidiary.

     

    e. Prepayments. During
the Reporting Period, the Company shall not, nor will it permit any of the
Subsidiaries to (i) prepay any Indebtedness that is in parity with or
subordinate to the Sub Notes by structure or contract, or (ii) repay, redeem or
make any other payment with respect to any of the Vandenberg Indebtedness
(including any principal thereof or interest or premium thereon).

     

    f. Indebtedness. During
the Sub Notes Period, the Company shall not, and shall cause each of the
Subsidiaries not to, create, incur, assume, extend the term of, become obligated
on or suffer to exist (directly or indirectly), any Indebtedness other than
Indebtedness under the Senior Notes and the Sub Notes, except that the Company
and the Included Subsidiaries may, after the Closing, (i) incur non-convertible
Indebtedness for borrowed money in an aggregate principal amount outstanding not
in excess of $3,000,000, but only to the extent (A) a subordination agreement in
favor of and in form and substance satisfactory to Marquis in its sole and
absolute discretion is executed and delivered to Marquis with respect thereto
(which subordination agreement shall prohibit payments in respect of such
subordinated Indebtedness for so long as any Sub Notes are outstanding), (B) the
terms of such subordinated Indebtedness does not require or permit payment of
principal thereon until at least ninety (90) days after the Maturity Date of any
outstanding Sub Note, and (C) such subordinated Indebtedness is not secured by
any of the assets of the Company or any of the Subsidiaries; (ii) incur purchase
money Indebtedness or Capital Lease Obligations in an aggregate amount not to
exceed $200,000 outstanding at any time; (iii) incur unsecured intercompany
Indebtedness amongst the Company and one or more of its directly or indirectly
wholly-owned domestic Included Subsidiaries that is a party to, and in
compliance with, the Security Agreement and the Guaranty, to the extent such
Indebtedness is evidenced by a promissory note that has been pledged to the
Collateral Agent; (iv) incur Indebtedness of the Company and the Included
Subsidiaries for taxes, assessments, municipal or governmental charges not yet
due; (v) incur obligations of itself and its subsidiaries resulting from
endorsements for collection or deposit in the ordinary course of business; (vi)
incur unsecured account trade payables that are (W) entered into or incurred in
the ordinary course of the Company’s and the Included Subsidiaries’ business,
(X) on terms that require full payment within ninety (90) days from the date
entered into or incurred, (Y) not unpaid in excess of ninety (90) days from the
date entered into or incurred, or are being contested in good faith and as to
which such reserve as is required by GAAP has been made, and (Z) not exceeding
at any one time an aggregate amount among the Company and its Included
Subsidiaries of $500,000; (vii) suffer to exist the FNBW Indebtedness; and
(viii) suffer to exist the Vandenberg Indebtedness. 

     

    
      
        
        

      

      
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    g. Liens. During
the Sub Notes Period, the Company shall not, and shall cause each of the
Subsidiaries not to, grant or suffer to exist (voluntarily or involuntarily) any
Lien, claim, security interest or other encumbrance whatsoever on any of its
assets, other than Permitted Liens.

     

    h. [Reserved].

     

    i. Corporate Existence;
Leases. During
the Reporting Period, the Company shall maintain its corporate existence and
shall not sell all or substantially all of the Company’s assets (including, for
the avoidance of any doubt, all or substantially all of the assets of the
Subsidiaries in the aggregate), except in the event of a merger or consolidation
or sale or transfer of all or substantially all of the Company’s assets
(including, for the avoidance of any doubt, all or substantially all of the
assets of the Subsidiaries in the aggregate) where (i) the surviving or
successor entity in such transaction (A) assumes the Company’s obligations
hereunder and under the agreements and instruments entered into in connection
herewith and (B) is a publicly traded corporation whose common stock is quoted
on the Principal Market or listed on a national securities exchange, (ii)
immediately before and immediately after giving effect to such transaction, no
Event of Default (as defined in the Senior Notes) shall have occurred and be
continuing, and (iii) immediately before and immediately after giving effect to
such transaction, there shall not be a Financial Covenant Test Failure (as
defined in the Senior Notes), and if such transaction had occurred as of the
last day of the period covered by the most recently filed Periodic Report, there
would not have been a Financial Covenant Test Failure.

     

    j. Restrictions on Loans;
Investments; Subsidiary Equity. During
the Sub Notes Period, the Company shall not, and shall not permit any of the
Subsidiaries to, (i) except for Permitted Investments (as defined herein) in
which the holders of the Senior Notes have a valid, perfected first priority
security interest and except that the Company may consummate one or more Agreed
Acquisitions (as defined in the Securities Purchase Agreement) as provided in
Section
4(d) of the
Securities Purchase Agreement, make any loans to, or investments in, any other
person or entity, including through lending money, deferring the purchase price
of property or services (other than trade accounts receivable on terms of ninety
(90) days or less), purchasing any note, bond, debenture or similar instrument,
entering into any letter of credit, guaranteeing (or taking any action that has
the effect of guaranteeing) any obligations of any other person or entity, or
acquiring any equity securities of, or other ownership interest in, or making
any capital contribution to any other entity, other than unsecured intercompany
indebtedness permitted by Section
5(f) (and not
otherwise prohibited hereunder) and capital contributions to Included
Subsidiaries incident to the formation and capitalization of such Included
Subsidiaries in accordance with this Agreement and limited to de minimis amounts
necessary to form and capitalize such Included Subsidiaries, (ii) invest in,
participate in, lease, purchase, obtain or otherwise acquire any real property,
facilities, or oil, gas or other mineral drilling, exploration or development
rights, concessions, working interests or participation interests (collectively,
“Interests”) in
which Buyers are not provided with a valid, perfected first priority security
interest in such Interests, or (iii) issue, transfer or pledge any Capital Stock
or equity interest in any Subsidiary to any Person other than the Company.
“Permitted
Investments” means
any investment in (A) direct obligations of the United States or
obligations guaranteed by the United States, in each case which mature and
become payable within ninety (90) days of the investment by the Company or any
Included Subsidiary, (B) commercial paper rated at least A-1 by Standard &
Poor’s Ratings Service and P-1 by Moody’s Investors Services, Inc., (C) time
deposits with, including certificates of deposit issued by, any office located
in the United States of any bank or trust company which is organized under
the laws of the United States or any State thereof and has capital, surplus
and undivided profits aggregating at least $250,000,000 and which issues (or the
parent of which issues) certificates of deposit or commercial paper with a
rating described in clause (B) above, in each case which mature and become
payable within ninety (90) days of the investment by the Company or any Included
Subsidiary, (D) repurchase agreements with respect to securities described in
clause (A) above entered into with an office of a bank or trust company meeting
the criteria specified in clause (C) above, provided in each
case that such investment matures and becomes payable within ninety (90) days of
the investment by the Company or any Included Subsidiary, or (E) any money
market or mutual fund which invests only in the foregoing types of investments
and the liquidity of which is satisfactory to the Secured Party (as defined in
the Security Agreement).

     

    
      
        
        

      

      
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    k. [Reserved].


     

    l. Affiliate
Transactions. During
the Reporting Period, the Company shall not, and shall cause each of the
Subsidiaries not to, enter into, amend, modify or supplement any transaction,
contract, agreement, instrument, commitment, understanding or other arrangement
with any Related Party, except for transactions with the Collateral
Agent (as
defined in the Securities Purchase Agreement) and intercompany transactions
between or among the Company and its wholly-owned Included Subsidiaries, in each
case as permitted (and not otherwise prohibited) hereunder, and customary
employment arrangements and benefit programs, on reasonable terms, that are not
otherwise prohibited by this Agreement.

     

    m. [Reserved].


     

    n. Executive
Compensation. During
the Reporting Period, the Company shall not, and shall cause each of the
Subsidiaries not to, pay any salary, bonus, management, consulting, incentive or
other compensation, or provide any perquisites or benefits, to any of the
Company’s executive officers except as set forth in their respective employment
agreements and shall not modify or amend any such employment agreement.


     

    o. Limitation on Sale and
Leaseback Transactions. During
the Reporting Period, the Company shall not, and shall cause each of the
Subsidiaries not to, directly or indirectly, enter into any arrangement with any
Person whereby in a substantially contemporaneous transaction the Company or any
of the Subsidiaries sells or transfers all or substantially all of its right,
title and interest in an asset and, in connection therewith, acquires or leases
back the right to use such asset.

     

    p. Investment
Company. During
the Reporting Period, the Company shall not become an “investment company,” a
company controlled by an “investment company,” or an “affiliated person” of, or
“promoter” or “principal underwriter” for, an “investment company,” as such
terms are defined in the Investment Company Act of 1940.

     

    
      
        
        

      

      
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    q. Leases. During
the Sub Notes Period, the Company shall not, and shall cause each of the
Subsidiaries not to, amend, modify, violate, breach or default under in any
respect, or take or fail to take any action that (with or without notice or
lapse of time or both) would constitute a violation or breach of, or default
under, any term or provision of, or would result in a reversion of rights to a
Person under, any Real Property Lease to which the Company or any of the
Subsidiaries is a party, except to the extent such amendment, modification,
violation, breach or default, action or in-action could not reasonably be
expected, either individually or in the aggregate, to have a Material Adverse
Effect. 

     

    r. Restriction on Purchases or
Payments. During
the Sub Notes Period, the Company shall not, and shall cause each of the
Subsidiaries not to, (i) declare, set aside or pay any dividends on or make any
other distributions (whether in cash, stock, equity securities or property) in
respect of any Capital Stock or split, combine or reclassify any Capital Stock
or issue or authorize the issuance of any other securities in respect of, in
lieu of or in substitution for any Capital Stock; provided however,
that any Included Subsidiary may declare, set aside or pay any dividends on or
make any other distributions (whether in cash, stock, equity securities or
property) in respect of any of its Capital Stock that is held solely by the
Company or by a domestic Included Subsidiary, provided that all of the equity of
such domestic Included Subsidiary is directly or indirectly owned by the
Company, such domestic Included Subsidiary is controlled by the Company and such
domestic Included Subsidiary is a party to the Guaranty (as defined in the
Securities Purchase Agreement) and the Security Agreement, or (ii) purchase,
redeem or otherwise acquire, directly or indirectly, any shares of the Company’s
Capital Stock or the Capital Stock of any of the Subsidiaries.

     

    s. No Avoidance of
Obligations. During
the Reporting Period, the Company shall not, and shall cause each of the
Subsidiaries not to, enter into any agreement which would limit or restrict the
Company’s or any of the Subsidiaries’ ability to perform under, or take any
other voluntary action to avoid or seek to avoid the observance or performance
of any of the terms to be observed or performed by it under, this Agreement, the
Senior Notes or the other Transaction Documents.

     

    t. [Reserved].


     

    u. Limits on Additional
Issuances. Neither
the Company nor any Subsidiary shall, in any manner, until at least 180 days
after the Closing Date, issue or sell any Common Stock, Convertible Securities
or Options (the “Equity Limitation”) or
file any registration statement. The Equity Limitation shall not apply to (i)
any transaction involving the Company’s issuances of securities (A) as
consideration in a merger or consolidation (the primary purpose or material
result of which is not to raise or obtain equity capital or cash), (B) in
connection with any strategic partnership or joint venture (the primary purpose
or material result of which is not to raise or obtain equity capital or cash),
or (C) as consideration for the acquisition of a business, product, license or
other assets by the Company (the primary purpose or material result of which is
not to raise or obtain equity capital or cash) or (ii) Exempted Issuances (as
defined in the Warrant).

     

    
      
        
        

      

      
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    v. No Integrated
Offering. Neither
the Company nor any of the Subsidiaries, nor any Affiliates of the foregoing or
any Person acting on the behalf of any of the foregoing, shall, directly or
indirectly, make any offers or sales of any security or solicit any offers to
purchase any security, under any circumstances that would require registration
of any of the Securities under the 1933 Act or cause the offering of the
Securities to be integrated with prior offerings by the Company for purposes of
the 1933 Act or the rules or requirements of any regulatory or self-regulatory
authority.

     

    w. Regulation
M. Neither
the Company, nor any of the Subsidiaries nor any Affiliates of the foregoing
will take any action prohibited by Regulation M under the 1934 Act, in
connection with the offer, sale and delivery of the Securities contemplated
hereby. 

     

    x. Fundamental Changes; Line of
Business. During
the Reporting Period, the Company shall not, and shall not permit any of the
Subsidiaries to, (i) except as contemplated by Section
4(z) of the
Securities Purchase Agreement, amend its organizational documents or change its
fiscal year unless (A) such actions could not reasonably be expected to have a
Material Adverse Effect; (B) such actions would not adversely affect any Buyer
or any Buyer’s rights and remedies under this Agreement and the other
Transaction Documents; and (C) each Buyer has received at least ten (10) days
prior written notice of such amendment or change; or (ii) engage in any business
other than the business currently conducted by the Company and the Subsidiaries,
as disclosed in the Company's annual report on Form 10-K for the year ended
December 31, 2007, and the business currently conducted by North Texas.


     

    6. CONDITIONS TO THE OBLIGATION
OF THE COMPANY TO ISSUE. The
obligation of the Company to issue the Marquis Note and the Warrant to Marquis
and the Longview Note to Longview at the Closing is subject to the satisfaction,
at or before the Closing Date, of each of the following conditions, provided
that these conditions are for the Company’s sole benefit and may be waived by
the Company at any time in its sole discretion by providing Buyers with prior
written notice thereof:

     

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

     

    b. Marquis
shall have delivered to the Company the North Texas Shares, including stock
powers executed in blank, and the North Texas Note (which thereafter shall be of
no further force or effect and shall be cancelled on the books and records of
North Texas) as consideration for the Marquis Note and the Warrant being
acquired by Marquis at the Closing.

     

    c. Longview
shall have delivered to the Company the Old Notes as consideration for the
Longview Note being acquired by Longview at the Closing.

     

    d. Marquis
shall have delivered to the Company true and correct copies of North Texas’
Articles of Incorporation and Bylaws, and all other books and records of North
Texas.

     

    
      
        
        

      

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

     

    7. CONDITIONS TO THE OBLIGATION
OF THE BUYERS TO ACQUIRE. The
obligation of any Buyer to acquire the Sub Notes (and in the case of Marquis,
the Warrant) from the Company at the Closing is subject to the satisfaction, at
or before the Closing Date, of each of the following conditions, provided that
these conditions are for such Buyer’s sole benefit and may be waived only by
such Buyer at any time in their sole discretion by providing the Company with
prior written notice thereof:

     

    a. Each of
the Company and each other Person (other than such Buyer) party to the
Transaction Documents (other than the Sub Notes and Warrant) shall have executed
and delivered the same to such Buyer.

     

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

     

    c. Longview
shall have received from the Company a payment of $1,000,000 toward the
aggregate outstanding principal amount under the Old Notes.

     

    d. Each
Buyer shall have received the opinion(s) of Duane Morris LLP, dated as of the
Closing Date, which opinion(s) will collectively address, among other things,
certain federal laws and the laws of the States of Delaware and New York
applicable to the transactions contemplated hereby, in form, scope and substance
reasonably satisfactory to such Buyer.

     

    e. The
Company shall have executed and delivered to such Buyer the Sub Note being
acquired by such Buyer and, in the case of Marquis, the Warrant. 

     

    f. The Board
and the board of directors (or other governing body) of each of the Subsidiaries
shall have adopted, and not rescinded or otherwise amended or modified,
resolutions consistent with Section 3(b) above
and in a form reasonably acceptable to Buyers (the “Resolutions”).

     

    g. As of the
Closing Date, the Company shall have reserved out of its authorized and unissued
Common Stock, solely for the purpose of effecting (A) the exercise of the
Warrant and (B) the exercise of the Investor Share Option, at least 5,550,000
shares of Common Stock (such number to be adjusted for any stock splits, stock
dividends, stock combinations or other similar transactions involving the Common
Stock that are effective at any time after the date of this
Agreement).

     

    
      
        
        

      

      
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    h. The
Company shall have delivered to Buyers a certificate evidencing the
incorporation (or other organization) and good standing of the Company and each
Subsidiary in such entity’s state or other jurisdiction of incorporation or
organization issued by the Secretary of State (or other applicable authority) of
such state or jurisdiction of incorporation or organization as of a date within
sixteen (16) days of the Closing Date.

     

    i. The
Company shall have delivered to Buyers a secretary’s certificate, dated as of
the Closing Date, certifying as to (A) the Certificate of Incorporation,
certified as of a date within ten (10) days of the Closing Date, by the
Secretary of State of Delaware, (B) the Bylaws of the Company, (C) the
Resolutions, (D) the certificate or articles of incorporation or other
organizational documents of each of the Company’s Subsidiaries, each certified
as of a date within ten (10) days of the Closing Date, by the Secretary of State
of the state of such entity’s jurisdiction of incorporation or organization, and
(E) the bylaws or other similar documents of each of the Company’s Subsidiaries,
each as in effect at the Closing.

     

    j. The
Company shall have delivered to Buyers a letter from the Company’s transfer
agent certifying the number of shares of Common Stock outstanding as of a date
within five (5) days of the Closing Date.

     

    k. As of the
Closing Date, the Company shall have delivered to Buyers the Pro Forma Balance
Sheet required by Section
4(y).

     

    l. The
Company shall have made all filings under all applicable securities laws
necessary to consummate the issuance of the Securities (including the Sub Notes)
pursuant to this Agreement at the Closing in compliance with such
laws.

     

    m. The
Company shall not have made any public announcement regarding the transactions
contemplated by the Agreement prior to the Closing.

     

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


     

    o. The
Company shall have delivered to Buyers “landman reports,” in form and substance
acceptable to Buyers, with respect to each Real Property (other than the
Producing Property).

     

    p. The
Company shall have delivered to Buyers such other documents relating to the
transactions contemplated by this Agreement as Buyers or their counsel may
reasonably request.

     

    
      
        
        

      

      
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    8. INDEMNIFICATION.


     

    a. In
consideration of each Buyer’s execution and delivery of the Transaction
Documents and acquiring the Securities thereunder and in addition to all of the
Company’s and the Subsidiaries’ other obligations under the Transaction
Documents, the Company shall defend, protect, indemnify and hold harmless such
Buyer and each other holder of the Securities and all of their stockholders,
partners, officers, directors, members, managers, employees and direct or
indirect investors and any of the foregoing Persons’ agents or other
representatives (including those retained in connection with the transactions
contemplated by this Agreement) (collectively, the “Indemnitees”) from
and against any and all actions, causes of action, suits, claims, losses, costs,
penalties, fees, liabilities and damages, and expenses in connection therewith
(irrespective of whether any such Indemnitees is a party to the action for which
indemnification hereunder is sought), and including reasonable attorneys’ fees
and disbursements (the “Indemnified
Liabilities”),
incurred by any Indemnitees as a result of, or arising out of, or relating to
(i) any misrepresentation or breach of any representation or warranty made
by the Company or any of the Subsidiaries in any of the Transaction Documents or
any other certificate, instrument or document contemplated hereby or thereby,
(ii) any breach of any covenant, agreement or obligation of the Company or
any of the Subsidiaries contained in the Transaction Documents or any other
certificate, instrument or document contemplated hereby or thereby,
(iii) any cause of action, suit or claim brought or made by any party
(other than a cause of action, suit or claim that is brought or made by the
Company on its own behalf and is not a stockholder derivative action, suit or
claim) against such Indemnitees and arising out of or resulting from the
execution, delivery, performance or enforcement of the Transaction Documents in
accordance with the terms thereof or any other certificate, instrument or
document contemplated hereby or thereby in accordance with the terms thereof
(other than a cause of action, suit or claim brought or made against an
Indemnitee by such Indemnitee’s owners, investors or Affiliates), (iv) any
other transaction financed or to be financed in whole or in part, directly or
indirectly, with the proceeds of the issuance of the Securities, or (v) the
status of such Buyer or holder of the Securities as an investor in the Company
(other than a cause of action, suit or claim brought by the Company against such
Buyer or holder relating to a breach of any representation or warranty made by
such Buyer or holder herein). To the extent that the foregoing undertaking by
the Company may be unenforceable for any reason, the Company shall make the
maximum contribution to the payment and satisfaction of each of the Indemnified
Liabilities that is permissible under applicable law. 

     

    
      
        
        

      

      
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    b. Promptly
after receipt by an Indemnitee under this Section 8 of
notice of the commencement of any action or proceeding (including any
governmental action or proceeding) involving any Indemnified Liabilities, such
Indemnitee shall, if any claim for Indemnified Liabilities in respect thereof is
to be made against the Company under this Section 8,
deliver
to the Company a written notice of the commencement thereof, and the Company
shall have the right to participate in, and, to the extent the Company so
desires, to assume control of the defense thereof with counsel mutually
satisfactory to the Company and the Indemnitee, as the case may be. In any such
proceeding, any Indemnitee may retain its own counsel, but, except as provided
in the following sentence, the fees and expenses of that counsel will be at the
expense of that Indemnitee, as the case may be, unless (i) the Company and the
Indemnitee, as applicable, shall have mutually agreed to the retention of that
counsel, (ii) the Company does not assume the defense of such proceeding in a
timely manner or (iii) in the reasonable opinion of counsel retained by the
Company, the representation by such counsel for the Indemnitee and the Company
would be inappropriate due to actual or potential differing interests between
such Indemnitee and any other party represented by such counsel in such
proceeding. The Company shall pay reasonable fees for only one separate legal
counsel (plus any local counsel) for the Investors, and such legal counsel shall
be selected by Investors holding at least 2/3 in interest of the outstanding Sub
Notes (or, if no Sub Notes are outstanding, of the outstanding Warrant). The
Indemnitee shall cooperate fully with the Company in connection with any
negotiation or defense of any such action by the Company and shall furnish to
the Company all information reasonably available to the Indemnitee which relates
to such action. The Company shall keep the Indemnitee fully apprised at all
times as to the status of the defense or any settlement negotiations with
respect thereto. The Company shall not be liable for any settlement of any
action, claim or proceeding effected without its prior written consent;
provided,
however, that the Company shall not unreasonably withhold, delay or condition
its consent. The Company shall not, without the prior written consent of the
Indemnitee, consent to entry of any judgment or enter into any settlement or
other compromise with respect to any pending or threatened action or claim in
respect of which indemnification or contribution may be or has been sought
hereunder (whether or not the Indemnitee is an actual or potential party to such
action or claim) which does not include as an unconditional term thereof the
giving by the claimant or plaintiff to such Indemnitee of a release from all
liability in respect to such litigation and such settlement shall not include
any admission as to fault on the part of the Indemnitee. Following
indemnification as provided for hereunder, the Company shall be subrogated to
all rights of the Indemnitee with respect to all third parties, firms or
corporations relating to the matter for which indemnification has been made. The
failure to deliver written notice to the Company within a reasonable time of the
commencement of any such action shall not relieve such Company of any liability
to the Indemnitee under this Section 8, except
to the extent that the Company is prejudiced in its ability to defend such
action.

     

    c. The
indemnification required by this Section 8 shall be
made by periodic payments of the amount thereof during the course of the
investigation or defense, as and when bills are received or Indemnified
Liabilities are incurred.

     

    d. The
indemnity agreements contained herein shall be in addition to (i) any cause of
action or similar right of the Indemnitee against the Company or others, and
(ii) any liabilities the Company may be subject to pursuant to the
law.

     

    9. GOVERNING LAW;
MISCELLANEOUS.

     

    a. Governing Law; Jurisdiction;
Jury Trial. All
questions concerning the construction, validity, enforcement and interpretation
of this Agreement shall be governed by the internal laws of the State of New
York, without giving effect to any choice of law or conflict of law provision or
rule (whether of the State of New York or any other jurisdiction) that would
cause the application of the laws of any jurisdiction other than the State of
New York. Each party hereby irrevocably submits to the exclusive jurisdiction of
the state and federal courts sitting in the New York City, borough of Manhattan,
for the adjudication of any dispute hereunder or in connection herewith or with
any transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is brought in an inconvenient forum or that the
venue of such suit, action or proceeding is improper. Each party hereby
irrevocably waives personal service of process and consents to process being
served in any such suit, action or proceeding by mailing a copy thereof to such
party at the address for such notices to it under this Agreement and agrees that
such service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law. The parties acknowledge that
each Buyer has executed each of the Transaction Documents to be executed by it
in the State of New York and will have made the payment of any purchase price to
be paid by it on the Closing Date pursuant to any Transaction Document from its
bank account located in the State of New York. EACH PARTY HEREBY IRREVOCABLY
WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE
ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR ARISING OUT
OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.

     

    
      
        
        

      

      
        46

        
          

        

      

      
        
        

      

    

     

    b. Counterparts. This
Agreement and any amendments hereto may be executed and delivered in one or more
counterparts, and by the different parties hereto in separate counterparts, each
of which when executed shall be deemed to be an original, but all of which taken
together shall constitute one and the same agreement, and shall become effective
when counterparts have been signed by each party hereto and delivered to the
other parties hereto, it being understood that all parties need not sign the
same counterpart. In the event that any signature to this Agreement or any
amendment hereto is delivered by facsimile transmission or by e-mail delivery of
a “.pdf” format data file, such signature shall create a valid and binding
obligation of the party executing (or on whose behalf such signature is
executed) with the same force and effect as if such facsimile or “.pdf”
signature page were an original thereof. At the request of any party each other
party shall promptly re-execute an original form of this Agreement or any
amendment hereto and deliver the same to the other party. No party hereto shall
raise the use of a facsimile machine or e-mail delivery of a “.pdf” format data
file to deliver a signature to this Agreement or any amendment hereto or the
fact that such signature was transmitted or communicated through the use of a
facsimile machine or e-mail delivery of a “.pdf” format data file as a defense
to the formation or enforceability of a contract, and each party hereto forever
waives any such defense.

     

    c. Headings. The
headings of this Agreement are for convenience of reference and shall not form
part of, or affect the interpretation of, this Agreement.

     

    d. Severability. If any
provision of this Agreement shall be invalid or unenforceable in any
jurisdiction, such invalidity or unenforceability shall not affect the validity
or enforceability of the remainder of this Agreement in that jurisdiction or the
validity or enforceability of any provision of this Agreement in any other
jurisdiction.

     

    
      
        
        

      

      
        47

        
          

        

      

      
        
        

      

    

     

    e. Entire Agreement;
Amendments. This
Agreement, together with the other Transaction Documents, supersedes all other
prior oral or written agreements between each Buyer, the Company, the
Subsidiaries, their Affiliates and Persons acting on their behalf with respect
to the matters discussed herein, and this Agreement, together with the other
Transaction Documents and the other instruments referenced herein and therein,
contains the entire understanding of the parties with respect to the matters
covered herein and therein and, except as specifically set forth herein or
therein, neither the Company nor such Buyer makes any representation, warranty,
covenant or undertaking with respect to such matters. As of the date of this
Agreement, there are no unwritten agreement between the parties with respect to
the matters discussed herein. No provision of this Agreement may be amended,
modified or supplemented other than by an instrument in writing signed by the
Company and the Buyers that purchased at least two-thirds (2/3) of the aggregate
original principal amount of the Sub Notes on the Closing Date or, if prior to
the Closing Date, by the Buyers listed on the Schedule of
Buyers as being
obligated to purchase at least two-thirds (2/3) of the aggregate original
principal amount of the Sub Notes. Any such amendment shall bind all holders of
the Notes and the Warrant. No such amendment shall be effective to the extent
that it applies to less than all of the Notes or Warrant then
outstanding.

     

    f. Notices. Any
notices, consents, waivers or other communications required or permitted to be
given under the terms of this Agreement must be in writing and will be deemed to
have been delivered: (i) upon receipt, when delivered personally; (ii) upon
receipt, when sent by facsimile (provided
confirmation of transmission is mechanically or electronically generated and
kept on file by the sending party); or (iii) one (1) Business Day after deposit
with a nationally recognized overnight delivery service, in each case properly
addressed to the party to receive the same. The addresses and facsimile numbers
for such communications shall be:

     

    If to the
Company:

    


    Sonterra
Resources, Inc.

    523 North
Sam Houston Parkway East, Suite 175

    Houston,
Texas 77060

    Facsimile:
281-741-0895

    Attention:
D. E. Vandenberg

    


    With a
copy to:

    


    Duane
Morris LLP

    3200
Southwest Freeway, Suite 3150

    Houston,
Texas 77027

    Facsimile:
713-402-3901

    Attention:
Charles E. Harrell

    


    If to
Longview Marquis Master Fund, L.P.:

    


    Longview
Marquis Master Fund, L.P., a British Virgin Island limited
partnership

    c/o
Viking Asset Management, LLC

    600
Montgomery Street, 44th Floor

    San
Francisco, CA 94111

    Facsimile:
415-981-5301

    Attention:
Peter T. Benz

     

    
      
        
        

      

      
        48

        
          

        

      

      
        
        

      

    

     

    With
copies to:

    


    Summerline
Asset Management, LLC 

    70 West
Red Oak Lane, 4th
Floor

    White
Plains, New York 10604

    Facsimile:
(914) 697-4767

    Attention:
Robert J. Brantman

    


    and:


    


    Katten
Muchin Rosenman LLP

    525 W.
Monroe Street 

    Chicago,
Illinois 60661-3693

    Facsimile:
(312) 902-1061

    Attention:
Mark D. Wood, Esq.

    


    If to The
Longview Fund, L.P.:

    


    The
Longview Fund, L.P., a California limited partnership

    c/o
Viking Asset Management, LLC

    600
Montgomery Street, 44th Floor

    San
Francisco, CA 94111

    Facsimile:
415-981-5301

    Attention:
S. Michael Rudolph

     

    With a
copy to:

    


    Grushko
& Mittman, P.C.

    551 Fifth
Avenue, Suite 1601

    New York,
NY 10176

    Facsimile:
(212) 697-3575 

    Attention:
Edward M. Grushko

    


    or at
such other address and/or facsimile number and/or to the attention of such other
person as the recipient party has specified by written notice to the other party
at least five (5) Business Days prior to the effectiveness of such change.
Written confirmation of receipt (A) given by the recipient of such notice,
consent, waiver or other communication, (B) mechanically or electronically
generated by the sender’s facsimile machine containing the time, date, recipient
facsimile number and an image of the first page of such transmission or
(C) provided by a nationally recognized overnight delivery service shall be
rebuttable evidence of personal service, receipt by facsimile or deposit with a
nationally recognized overnight delivery service in accordance with clause (i),
(ii) or (iii) above, respectively.

     

    
      
        
        

      

      
        49

        
          

        

      

      
        
        

      

    

     

    g. Successors and
Assigns. This
Agreement shall be binding upon and inure to the benefit of the parties and
their respective successors and assigns, including any purchasers of the
Securities. The Company shall not assign this Agreement or any rights or
obligations hereunder without the prior written consent of the holders of at
least two-thirds (2/3) of the aggregate principal of the Sub Notes then
outstanding, including by merger or consolidation. Buyers may assign some or all
of their rights hereunder without the consent of the Company; provided,
however, that any such assignment shall not release a Buyer from its obligations
hereunder unless such obligations are assumed by such assignee (as evidenced in
writing) and the Company has consented to such assignment and assumption, which
consent shall not be unreasonably withheld. Notwithstanding anything to the
contrary contained in the Transaction Documents, Buyers shall be entitled to
pledge the Securities in connection with a bona fide margin account or other
loan or financing arrangement secured by the Securities. 

     

    h. No Third Party
Beneficiaries. This
Agreement is intended for the benefit of the parties hereto and their respective
permitted successors and assigns and, to the extent provided in Section 8 hereof,
each Indemnitee, and is not for the benefit of, nor may any provision hereof be
enforced by, any other Person.

     

    i. Survival. Unless
this Agreement is terminated under Section
9(k), the
representations and warranties of the Company and Buyers contained in
Sections 2 and
3, the
agreements and covenants set forth in Sections 4,
5 and
9, and the
indemnification and contribution provisions set forth in Section 8, shall
survive the Closing. The Company acknowledges and agrees that the provisions of
Section
15 of the
Sub Notes shall survive the redemption, repayment or surrender of such Sub
Notes.

     

    j. Further
Assurances. Each
party shall do and perform, or cause to be done and performed, all such further
acts and things, and shall execute and deliver all such other agreements,
certificates, instruments and documents, as the other party may reasonably
request in order to carry out the intent and accomplish the purposes of this
Agreement and the consummation of the transactions contemplated
hereby.

     

    k. Termination. In the
event that the Closing shall not have occurred on or before the third Business
Day following the date of this Agreement due to the Company’s or Buyers’ failure
to satisfy the conditions set forth in Sections
6 and
7 above
(and the nonbreaching party’s failure to waive such unsatisfied condition(s)),
the nonbreaching party (i.e., the Company in the case of a breach by a Buyer,
and any Buyer in the case of a breach by the Company) shall have the option to
terminate this Agreement with respect to such breaching party at the close of
business on such date without liability of any party to any other party;
provided,
however, that if this Agreement is terminated pursuant to this Section
9(k), the
Company shall be obligated to pay each Buyer (so long as such Buyer is not a
breaching party) its transaction fees and reimbursement amounts as set forth in
Section
4(i) as if
such Buyer had purchased the Sub Notes (and in the case of Marquis, the
Warrant).

     

    l. No Strict
Construction. The
language used in this Agreement will be deemed to be the language chosen by the
parties to express their mutual intent, and no rules of strict construction will
be applied against any party.

     

    
      
        
        

      

      
        50

        
          

        

      

      
        
        

      

    

     

    m. Remedies. Buyers
and each holder of the Securities shall have all rights and remedies set forth
in the Transaction Documents and all rights and remedies that Buyers and holders
have been granted at any time under any other agreement or contract and all of
the rights that Buyers and holders have under any law. Any Person having any
rights under any provision of this Agreement shall be entitled to enforce such
rights specifically (without any requirement to post a bond or other security or
prove actual damages, which requirements each of the parties waives to the
fullest extent permitted by Law), to recover damages by reason of any breach of
any provision of this Agreement and to exercise all other rights granted by
law.

     

    n. Rescission and Withdrawal
Right.
Notwithstanding anything to the contrary contained in (and without limiting any
similar provisions of) the Transaction Documents, whenever a Buyer exercises a
right, election, demand or option under a Transaction Document and the Company
or any of the Subsidiaries does not timely perform its related obligations
within the periods therein provided, then such Buyer may rescind or withdraw, in
its sole discretion from time to time upon written notice to the Company, any
relevant notice, demand or election in whole or in part without prejudice to its
future actions and rights.

     

    o. Payment Set
Aside. To the
extent that the Company or any of the Subsidiaries makes a payment or payments
to a Buyer pursuant to this Agreement, the Sub Notes, the Guaranty or any other
Transaction Document or a Buyer enforces or exercises its rights hereunder or
thereunder, and such payment or payments or the proceeds of such enforcement or
exercise or any part thereof are subsequently invalidated, declared to be
fraudulent or preferential, set aside, recovered from, disgorged by or are
required to be refunded, repaid or otherwise restored to the Company or any of
the Subsidiaries, by a trustee, receiver or any other Person under any law
(including any bankruptcy law, state or federal law, common law or equitable
cause of action), then to the extent of any such restoration the obligation or
part thereof originally intended to be satisfied shall be revived and continued
in full force and effect as if such payment had not been made or such
enforcement or setoff had not occurred. 

     

    p. Transfer Agent
Instructions. The
Company shall issue irrevocable instructions to its transfer agent in the form
attached hereto as Exhibit F (the
“Irrevocable Transfer Agent
Instructions”), and
any subsequent transfer agent, to issue certificates or credit shares to the
applicable balance accounts at DTC, registered in the name of each Buyer or its
nominee(s), for Warrant Shares upon exercise of the Warrant or Option Shares
upon exercise of the Investor Share Option (as applicable), in such amounts as
specified from time to time by each Buyer to the Company. On or before November
14, 2008, the Company shall deliver to each Buyer a fully executed copy of the
Irrevocable Transfer Agent Instructions (including execution by the Company’s
transfer agent). The Company warrants that no instruction other than the
Irrevocable Transfer Agent Instructions referred to in this Section 9(p)
and stop
transfer instructions to give effect to Section
2(g) will be
given by the Company to its transfer agent and that the Securities shall
otherwise be freely transferable on the books and records of the Company as and
to the extent provided in this Agreement. If any Buyer provides the Company with
an opinion of counsel, in a generally acceptable form, to the effect that a
public sale, assignment or transfer of the Securities may be made without
registration under the 1933 Act or such Buyer provides the Company with
reasonable assurance that the Securities can be sold pursuant to Rule 144
without any restriction as to the number of securities acquired as of a
particular date that can then be immediately sold, the Company shall permit the
transfer and, in the case of the Warrant Shares or the Option Shares, promptly
instruct its transfer agent to issue one or more certificates or credit shares
to the applicable balance accounts at DTC in such name and in such denominations
as specified by such Buyer and without any restrictive legend. The Company
acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to each Buyer by vitiating the intent and purpose of the
transactions contemplated hereby. Accordingly, the Company acknowledges that the
remedy at law for a breach of its obligations under this Section
9(p) will be
inadequate and agrees, in the event of a breach or threatened breach by the
Company of the provisions of this Section
9(p), that
each Buyer shall be entitled, in addition to all other available remedies, to an
injunctive order and/or injunction restraining any breach and requiring
immediate issuance and transfer, without the necessity of showing economic loss
and without any bond or other security being required.

     

    
      
        
        

      

      
        51

        
          

        

      

      
        
        

      

    

     

    q. Interpretative
Matters. Unless
the context otherwise requires, (a) all references to Sections, Schedules
or Exhibits are to Sections, Schedules or Exhibits contained in or attached to
this Agreement, (b) each accounting term not otherwise defined in this Agreement
has the meaning assigned to it in accordance with GAAP, (c) words in the
singular or plural include the singular and plural and pronouns stated in either
the masculine, the feminine or neuter gender shall include the masculine,
feminine and neuter, and (d) the use of the word “including” in this
Agreement shall be by way of example rather than limitation. All references
herein and in each of the other Transaction Documents to “dollars” or
“$” shall
mean the lawful money of the United States of America.

     

    r. Independent Nature of the
Buyers. The
obligations of each Buyer hereunder are several and not joint with the
obligations of any other Buyer, and no Buyer shall be responsible in any way for
the performance of the obligations of any other Buyer hereunder. Each Buyer
shall be responsible only for its own representations, warranties, agreements
and covenants hereunder. The decision of each Buyer to acquire the Securities
pursuant to this Agreement has been made by such Buyer independently of any
other Buyer and independently of any information, materials, statements or
opinions as to the business, affairs, operations, assets, properties,
liabilities, results of operations, condition (financial or otherwise) or
prospects of the Company or any of the Subsidiaries which may have been made or
given by any other Buyer or by any agent or employee of any other Buyer, and no
Buyer or any of its agents or employees shall have any liability to any other
Buyer (or any other Person or entity) relating to or arising from any such
information, materials, statements or opinions. Nothing contained herein, and no
action taken by any Buyer pursuant hereto or thereto, shall be deemed to
constitute the Buyers as a partnership, an association, a joint venture or any
other kind of entity, or create a presumption that the Buyers are in any way
acting in concert or as a group with respect to such obligations or the
transactions contemplated hereby. Each Buyer shall be entitled to independently
protect and enforce its rights, including the rights arising out of this
Agreement, the Bridge Notes and the other Transaction Documents, and it shall
not be necessary for any other Buyer to be joined as an additional party in any
proceeding for such purpose.

     

    s. Waiver of Old Warrant
Anti-Dilution Provisions.
Longview hereby waives any adjustment to the Warrant Exercise Price (as defined
in the Old Warrant (and in the New Longview Warrant)), or to the number of
shares of Common Stock issuable upon exercise of the Old Warrant (or of the New
Longview Warrant), pursuant to Section 8 of the Old Warrant (or of the New
Longview Warrant), solely to the extent that such adjustment would directly
result from the Company’s issuance of the Warrant, the Warrant Shares, the Sub
Notes, the Option Shares, the Warrants (as defined in the Securities Purchase
Agreement), the Warrant Shares (as defined in the Securities Purchase
Agreement), the Override Exchange Shares or the Conversion Shares, all in
accordance with the terms and conditions set forth in this Agreement, the
Securities Purchase Agreement, the Warrants and the Sub Notes.

     

    
      
        
        

      

      
        52

        
          

        

      

      
        
        

      

    

     

    IN WITNESS WHEREOF, Buyers
and the Company have caused this Securities Exchange Agreement to be duly
executed as of the date first written above.

     

    
      	
              COMPANY:

            
	 	 
	
              SONTERRA RESOURCES, INC.,
      a
      Delaware corporation

            
	 	 	 
	
              By:

            	
              /s/
      D. E. Vandenberg

            	 
	
              Name:

            	
              D.
      E. Vandenberg

            	 
	
              Title:
      

            	
              President

            	 
	 	 	 
	
              BUYERS:

            	 
	 	 
	
              LONGVIEW MARQUIS MASTER FUND,
      L.P., a
      British Virgin Island limited partnership

            
	 	 
	
              By:
      Viking Asset Management, LLC

            
	
              Its:
      Investment Adviser

            
	 	 	 
	
              By:

            	
              /s/
      Peter T. Benz

            	 
	
              Name:

            	
              Peter
      T. Benz

            	 
	
              Title:

            	
              Chairman

            	 
	 	 	 
	
              THE LONGVIEW FUND,
      L.P., a
      California limited partnership

            
	 	 
	
              By:
      Viking Asset Management, LLC

            
	
              Its:
      Investment Adviser

            
	 	 	 
	
              By:

            	
              /s/
      S. Michael Rudolph

            	 
	
              Name:

            	
              S.
      Michael Rudolph

            	 
	
              Title:

            	
              Chief
      Financial Officer

            	 


    

     

    
      
        
        

      

      
        53

        
          

        

      

      
        
        

      

    

     

    
      SCHEDULE
2A(b)

       

      Pursuant to the Senior Management
Agreement (the “Trout
Agreement”), dated as of April 15, 2008, between North Texas Drilling
Services, Inc. (“North
Texas”) and Jerry Trout, Nort Texas’ President (“Trout”), North Texas
agreed to issue to Trout 150 restricted shares of North Texas’ common
stock.  The restricted shares have not yet been issued.  If
the restricted shares are issued, 50 of them will vest on each of the first,
second, and third anniversaries of the Trout Agreement, unless Trout is
terminated prior to such respective vesting dates.  Under the Trout
Agreement, either party may terminate the Trout Agreement upon 30 days prior
written notice.

       

      
        
           


        

        
          1

          
            

          

        

        
           


        

      


      SCHEDULE
2A(c)

       

      North
Texas Financial Information

       

      
        
           


        

        
          2

          
            

          

        

        
           


        

      

      

        NORTH
TEXAS DRILLING

        SERVICES,
INC.

        


        Reviewed
Financial Statements

        For
the Quarter Ended September 30, 2008


        
          
             


          

          
            3

            
              

            

          

          
             


          

        


        NORTH
TEXAS DRILLING SERVICES, INC.

        (a
Texas Corporation)

        Table
of Contents

        


        
          
            	 
      	
                    Page No.

                  
	
                    Accountant’s
      Report

                  	
                    5

                  
	
                    Financial
      Statements

                  	 
      
	
                    Balance
      Sheet

                  	
                    6

                  
	
                    Statement
      of Income

                  	
                    7

                  
	
                    Statement
      of Changes in Stockholder’s Equity

                  	
                    8

                  
	
                    Statement
      of Cash Flows

                  	
                    9

                  
	
                    Notes
      to Financial Statements

                  	
                    10

                  


          

        

         

        
          
             


          

          
            4

            
              

            

          

          
             


          

        


        

        


        To the
Board of Directors

        North
Texas Drilling Services, Inc.

        Weatherford,
Texas

        


        We have
reviewed the accompanying balance sheet of North Texas Drilling Services, Inc.,
(a Texas Corporation) as of September 30, 2008, and the related statements of
income, stockholder’s equity and cash flows for the quarter then ended, in
accordance with Statements on Standards for Accounting and Review Services
issued by the American Institute of Certified Public Accountants. All
information included in these financial statements is the representation of the
management of North Texas Drilling Services, Inc.

        


        A review
consists principally of inquiries of Company personnel and analytical procedures
applied to financial data. It is substantially less in scope than an audit in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.

        


        Based on
our review, we are not aware of any material modifications that should be made
to the accompanying financial statements in order for them to be in conformity
with generally accepted accounting principles.

        


        

         

        Snow,
Garrett & Company, CPA's

        October
27, 2008

        


        1207
Santa Fe Drive • Weatherford, Texas 76086 • 817-596-9301 • Fax:
817-596-9304


        
          
             


          

          
            5

            
              

            

          

          
             


          

        

        


        NORTH
TEXAS DRILLING SERVICES, INC.

        (a
Texas Corporation)

        Balance
Sheet

        September
30, 2008

        


        
          
            
              
                
                  
                    
                      
                        
                          
                            
                              
                                
                                  
                                    
                                      
                                        
                                          
                                            
                                              
                                                
                                                  
                                                    
                                                      
                                                        
                                                          
                                                            
                                                              
                                                                
                                                                  
                                                                    
                                                                      	
                                                                              ASSETS

                                                                            	 	 	 
	
                                                                              Current
      Assets

                                                                            	 	 	 
	
                                                                              Cash
      and cash equivalents

                                                                            	 	$	44,304	 
	
                                                                              Accounts
      receivable

                                                                            	 	 	175,650	 
	 	 	 	 	 
	
                                                                              Total
      current assets

                                                                            	 	 	219,954	 
	 	 	 	 	 
	
                                                                              Property,
      Plant and Equipment - at Cost

                                                                            	 	 	5,223,722	 
	
                                                                              Less
      accumulated depreciation

                                                                            	 	 	(456,591	)
	 	 	 	 	 
	
                                                                              Total
      property and equipment

                                                                            	 	 	4,767,131	 
	
                                                                              Other
      Assets

                                                                            	 	 	 	 
	
                                                                              Debt
      issuance costs, net of amortization

                                                                            	 	 	61,111	 
	
                                                                              Deferred
      federal income tax

                                                                            	 	 	1,664,366	 
	 	 	 	 	 
	
                                                                              Total
      other assets

                                                                            	 	 	1,725,477	 
	 	 	 	 	 
	
                                                                              Total
      Assets

                                                                            	 	$	6,712,562	 
	 
      	 	 	 	 
	
                                                                              LIABILITIES AND STOCKHOLDER’S
      EQUITY

                                                                            	 	 	 	 
	 
      	 	 	 	 
	
                                                                              Current
      Liabilities

                                                                            	 	 	 	 
	
                                                                              Accounts
      payable

                                                                            	 	$	466,613	 
	
                                                                              Accrued
      expenses

                                                                            	 	 	753,462	 
	
                                                                              Texas
      margin tax payable

                                                                            	 	 	10,490	 
	
                                                                              Payable
      to Equity Source Partners

                                                                            	 	 	129,970	 
	
                                                                              Current
      maturities of long-term notes payable

                                                                            	 	 	4,008,750	 
	 	 	 	 	 
	
                                                                              Total
      current liabilities

                                                                            	 	 	5,369,285	 
	 	 	 	 	 
	
                                                                              Long-Term
      Liabilities

                                                                            	 	 	 	 
	
                                                                              Long-term
      notes payable, net of current maturities

                                                                            	 	 	4,491,250	 
	
                                                                              Deferred
      income tax liability

                                                                            	 	 	156,951	 
	 	 	 	 	 
	
                                                                              Total
      long-term liabilities

                                                                            	 	 	4,648,201	 
	 	 	 	 	 
	
                                                                              Total
      Liabilities

                                                                            	 	 	10,017,486	 
	
                                                                              Stockholder’s
      Equity

                                                                            	 	 	 	 
	
                                                                              Common
      stock, $.001 par value, 10,000,000 authorized, 3,000 issued and 1,000
      outstanding

                                                                            	 	 	3	 
	
                                                                              Treasury
      stock, 2,000 shares at cost

                                                                            	 	 	(361,000	)
	
                                                                              Retained
      earnings

                                                                            	 	 	(2,943,927	)
	 	 	 	 	 
	
                                                                              Total
      stockholder’s equity

                                                                            	 	 	(3,304,924	)
	 	 	 	 	 
	
                                                                              Total
      Liabilities and Stockholder’s Equity

                                                                            	 	$	6,712,562	 


                                                                    

                                                                  

                                                                

                                                              

                                                            

                                                          

                                                        

                                                      

                                                    

                                                  

                                                

                                              

                                            

                                          

                                        

                                      

                                    

                                  

                                

                              

                            

                          

                        

                      

                    

                  

                

              

            

          

        

        


        See
accompanying notes and accountant’s report.


        
          
             


          

          
            6

            
              

            

          

          
             


          

        


        NORTH
TEXAS DRILLING SERVICES, INC.

        (a
Texas Corporation)

        Statement
of Income

        For
the Quarter Ended September 30, 2008

        


        
          
            
              	
                      Revenues

                    	 	 	 
	
                      Drilling
      revenue

                    	 	$	394,081	 
	
                      Shop
      service revenue

                    	 	 	3,215	 
	
                      Total
      Revenues

                    	 	 	397,296	 
	
                      General
      and Administrative Expenses

                    	 	 	943,237	 
	
                      Net
      loss from operations

                    	 	 	(545,941	)
	
                      Other
      Income (Expense)

                    	 	 	 	 
	
                      Interest
      expense

                    	 	 	(266,137	)
	
                      Total
      other income (expense)

                    	 	 	(266,137	)
	
                      Net
      Loss Before Provision for Income Taxes

                    	 	 	(812,078	)
	
                      Provision
      for Income Taxes

                    	 	 	 	 
	
                      Federal

                    	 	 	 	 
	
                      Deferred
      tax benefit

                    	 	 	272,613	 
	
                      Total
      Income tax benefit

                    	 	 	272,613	 
	
                      Net
      Loss

                    	 	$	(539,465	)


            

          

        

        


        See
accompanying notes and accountant’s report.


        
          
             


          

          
            7

            
              

            

          

          
             


          

        


        NORTH
TEXAS DRILLING SERVICES, INC.

        (a
Texas Corporation)

        Statement
of Changes in Stockholder’s Equity

        For
the Quarter Ended September 30, 2008

        


        
          
            
              
                
                  
                    
                      
                        
                          
                            	 
      	 	
                                    Common

                                  	 	 	
                                    Treasury

                                  	 	 	
                                    Retained

                                  	 	 	 	 
	 
      	 	
                                    Stock

                                  	 	 	
                                    Stock

                                  	 	 	
                                    Earnings

                                  	 	 	
                                    Total

                                  	 
	
                                    Balance
      at beginning of quarter

                                  	 	$	3	 	 	$	(361,000	)	 	$	(2,404,462	)	 	$	(2,765,459	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
                                    Net
      loss

                                  	 	 	-	 	 	 	-	 	 	 	(539,465	)	 	 	(539,465	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
                                    Balance
      at end of quarter

                                  	 	$	3	 	 	$	(361,000	)	 	$	(2,943,927	)	 	$	(3,304,924	)


                          

                        

                      

                    

                  

                

              

            

          

        

        


        See
accompanying notes and accountant’s report.


        
          
             


          

          
            8

            
              

            

          

          
             


          

        


        NORTH
TEXAS DRILLING SERVICES, INC.

        (A
Texas Corporation)

        Statement
of Cash Flows

        For
the Quarter Ended September 30, 2008

        


        
          
            
              
                
                  
                    
                      
                        
                          
                            
                              
                                
                                  
                                    
                                      
                                        
                                          
                                            
                                              	
                                                      Cash
      Flows from Operating Activities:

                                                    	 	 	 
	
                                                      Net
      loss

                                                    	 	$	(539,465	)
	
                                                      Adjustments
      to reconcile net loss to net cash used by operations:

                                                    	 	 	 	 
	
                                                      Depreciation
      and amortization

                                                    	 	 	120,778	 
	
                                                      Deferred
      income taxes

                                                    	 	 	(272,613	)
	
                                                      Increase
      in accounts receivable and due from employees

                                                    	 	 	(175,650	)
	
                                                      Increase
      in accounts payable, accrued expenses and other payables

                                                    	 	 	190,496	 
	 	 	 	 	 
	
                                                      Net
      Cash Used by Operating Activities

                                                    	 	 	(676,454	)
	 	 	 	 	 
	
                                                      Cash
      Flows from Investing Activities:

                                                    	 	 	 	 
	
                                                      Acquisition
      of property and equipment

                                                    	 	 	(44,553	)
	 	 	 	 	 
	
                                                      Net
      Cash Used by Investing Activities

                                                    	 	 	(44,553	)
	
                                                      Cash
      Flows from Financing Activities:

                                                    	 	 	 	 
	
                                                      Proceeds
      from long-term debt

                                                    	 	 	650,000	 
	 	 	 	 	 
	
                                                      Net
      Cash Provided by Financing Activities

                                                    	 	 	650,000	 
	 	 	 	 	 
	
                                                      Net
      Decrease in Cash and Cash Equivalents

                                                    	 	 	(71,007	)
	 	 	 	 	 
	
                                                      Cash
      and Cash Equivalents at Beginning of Quarter

                                                    	 	 	115,311	 
	 	 	 	 	 
	
                                                      Cash
      and Cash Equivalents at End of Quarter

                                                    	 	$	44,304	 
	 	 	 	 	 
	
                                                      Supplemental
      Disclosure of Cash Flow Information:

                                                    	 	 	 	 
	 	 	 	 	 
	
                                                      Interest
      Paid

                                                    	 	$	6,635	 


                                            

                                          

                                        

                                      

                                    

                                  

                                

                              

                            

                          

                        

                      

                    

                  

                

              

            

          

        

        


        See
accompanying notes and accountant's report.


        
          
             


          

          
            9

            
              

            

          

          
             


          

        


        NORTH
TEXAS DRILLING SERVICES, INC.

        (a
Texas Corporation)

        Notes
to Financial Statements

        September
30, 2008

        


        Note A - Summary of
Significant Accounting Policies

        


        The
significant accounting policies are as follows:

        


        Nature and Organization of
Business

        


        The
Company is a Texas Corporation doing business as North Texas Drilling Services,
Inc. organized on May 24, 2007. The Company is engaged in the business of
drilling oil wells.

        


        The
Company contracts its labor from an employee leasing company. The fees paid to
the leasing company are classified as payroll expenses which include all labor
related costs such as worker’s compensation
insurance, payroll taxes and salaries.

        


        The
financial statements of the Company have been prepared using the accrual method
of accounting from information supplied by the Company.

        


        Property, Plant and
Equipment

        


        Property
and equipment are stated at cost. For financial reporting purposes, depreciation
is provided on the straight-line method over the estimated useful lives of the
various classes of assets as follows:

        


        
          
            
              	
                      Building
      Improvements

                    	 	
                      15
      years      

                    
	
                      Furniture
      and Equipment

                    	 	
                      5 -
      10 years

                    


            

          

        

        


        Cash and Cash
Equivalents

        


        For
purposes of the statement of cash flows, the Company considers cash on hand,
cash in demand deposit accounts and instruments with 90 days or less maturity to
be cash equivalents. 

         

        Allowance
for Bad Debts

        


        The
Company provides for estimated losses on accounts receivable based on a review
of existing receivables. Based on these factors, there is no allowance for bad
debts at September 30, 2008.

        


        Use of
Estimates

        


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


        
          
             


          

          
            10

            
              

            

          

          
             


          

        


        NORTH
TEXAS DRILLING SERVICES, INC.

        (a
Texas Corporation)

        Notes
to Financial Statements

        September
30, 2008

        


        Note A - Summary of
Significant Accounting Policies - continued

        


        Amortization

        


        Debt
issuance costs are recorded at cost and amortized over the life of the loan,
which is 3 years. Amortization
expense for the quarter ended September 30, 2008 was $16,667.

        


        Advertising

        


        Advertising
costs are generally charged to expense in the year incurred. Advertising expense
for the quarter ended September 30, 2008 was $165.

        


        Income
Taxes

        


        Income
taxes are provided for tax effects of transactions reported in the financial
statements and consist of taxes currently due plus deferred taxes. Deferred
taxes are recognized for differences between the bases of assets and liabilities
for financial statement and income tax purposes. The differences relate
primarily to the use of different depreciation methods, the use of different
treatments for debt issuance costs, an NOL carryforward and the differing
treatment of the Company’s start-up and organizational costs.

        


        Note B -
Property. Plant and Equipment

        


        Property,
plant and equipment at September 30, 2008 consist of the following:

        


        
          
            
              
                
                  
                    
                      
                        
                          
                            	
                                    Building
      Improvements

                                  	 	$	21,165	 
	
                                    Furniture
      and Equipment

                                  	 	 	4,332,773	 
	
                                    Transportation
      Equipment

                                  	 	 	869,784	 
	 
      	 	 	5,223,722	 
	 	 	 	 	 
	
                                    Less:
      Accumulated Depreciation

                                  	 	 	(456,591	)
	 	 	 	 	 
	
                                    Total
      Property, Plant and Equipment

                                  	 	$	4,767,131	 


                          

                        

                      

                    

                  

                

              

            

          

        

        


        Depreciation
expense for the quarter ended September 30, 2008 was $104,111.


        
          
             


          

          
            11

            
              

            

          

          
             


          

        

        


        NORTH
TEXAS DRILLING SERVICES, INC.

        (a
Texas Corporation)

        Notes
to Financial Statements

        September
30, 2008

        


        Note C - Long-Term Notes
Payable

        


        Notes
payable as of September 30, 2008 are comprised of the following:

        


        
          
            
              
                
                  
                    
                      
                        
                          
                            
                              
                                
                                  
                                    
                                      
                                        	
                                                Note
      payable to the Longview Marquis Master, Fund, LP payable in monthly
      installments of fixed principal of $428,750 and interest at 11.00% as of
      September 30, 2008. The note is secured with cash, accounts receivable,
      and property, plant and equipment. The note matures on April 1,
      2010.

                                              	 	$	8,350,000	 
	 	 	 	 	 
	
                                                Note
      payable to First National Bank of Weatherford, payable in one installment
      of unpaid principal and interest, at 8.75% on January 11, 2009. The note
      is secured with transportation equipment.

                                              	 	 	150,000	 
	 	 	 	 	 
	
                                                Total
      Long-term Notes Payable

                                              	 	 	8,500,000	 
	 	 	 	 	 
	
                                                Less:
      Current Maturities of Long-term Notes Payable

                                              	 	 	(4,008,750	)
	 	 	 	 	 
	
                                                Total
      Long-term Notes Payable, Net of Current Maturities

                                              	 	$	4,491,250	 


                                      

                                    

                                  

                                

                              

                            

                          

                        

                      

                    

                  

                

              

            

          

        

        


        Principal
maturities of Long-Term Notes Payable are as follows:

        


        
          
            
              
                	
                        Twelve
      Months Ended September30,

                      	 	 	 
	
                        2009

                      	 	$	4,008,750	 
	
                        2010

                      	 	 	4,491,250	 
	 
      	 	$	8,500,000	 


              

            

          

        

        


        The notes
described above contain a certain restrictive covenant for the maintenance of
minimum tangible net worth. As of September 30, 2008, the Company was not in
compliance with the net worth covenant.


        
          
             


          

          
            12

            
              

            

          

          
             


          

        


        NORTH
TEXAS DRILLING SERVICES, INC.

        (a
Texas Corporation)

        Notes
to Financial Statements

        September
30, 2008

        


        Note D - Income
Taxes

        


        The
provision for federal income tax for the quarter ended September 30, 2008
consists of the following:

        


        
          
            
              
                	
                        Federal
      Deferred Tax Benefit

                      	 	$	272,613	 
	
                        Total
      Benefit for Income Taxes

                      	 	$	272,613	 


              

            

          

        

        


        The
income tax provision differs from the expense that would result from applying
federal statutory rates to income before income taxes because the Company is
subject to state margin taxes, deferred income taxes are based on average rates,
and officers’ life insurance premiums and a portion of meals and entertainment
are not tax deductible.

        


        The
Company’s total deferred tax assets and liabilities at September 30, 2008 are as
follows:

        


        
          
            
              
                	
                        Total
      Deferred Tax Asset - Noncurrent

                      	 	$	1,664,366	 
	
                        Total
      Deferred Tax (Liability) - Noncurrent

                      	 	 	(156,951	)
	
                        Net
      Deferred Tax Asset (Liability)

                      	 	$	1,507,415	 


              

            

          

        

        


        At
September 30, 2008, the Company had a net operating loss carryforward of
$4,541,305 which may be used to offset future taxable income. This loss
carryforward will expire in 2027 and 2028. A deferred tax asset has been
recognized for the loss carryforward.

        


        No
valuation allowance was established for deferred tax assets at September 30,
2008, since the Company’s management believes that it is more likely than not
the Company will realize the benefit of deductible temporary differences based
on the level of historical taxable income and projected future taxable
income.


        
          
             


          

          
            13

            
              

            

          

          
             


          

        


        NORTH
TEXAS DRILLING SERVICES, INC.

        (a
Texas Corporation)

        Notes
to Financial Statements

        September
30, 2008

        


        Note E - General and
Administrative Expenses

        


        General
and administrative expenses for the quarter ended September 30, 2008 consisted
of the following:

        


        
          
            
              
                	
                        Advertising
      and Promotion

                      	 	$	165	 
	
                        Amortization

                      	 	 	16,667	 
	
                        Auto
      Expense

                      	 	 	2,091	 
	
                        Bank
      Charges

                      	 	 	55	 
	
                        Depreciation
      Expense

                      	 	 	104,111	 
	
                        Environmental
      Service

                      	 	 	1,384	 
	
                        Equipment
      Rental

                      	 	 	58,135	 
	
                        Finance
      Charges

                      	 	 	427	 
	
                        Fuel
      Expense

                      	 	 	36,050	 
	
                        Insurance
      Expense

                      	 	 	68,474	 
	
                        Legal
      and Accounting Fees

                      	 	 	22,564	 
	
                        Meals
      and Entertainment

                      	 	 	20,549	 
	
                        Office
      Supplies and Expense

                      	 	 	8,930	 
	
                        Oil
      Rig Supplies and Equipment

                      	 	 	60,749	 
	
                        Payroll
      Expenses

                      	 	 	420,950	 
	
                        Registration
      Fees

                      	 	 	1,852	 
	
                        Rent
      Expense

                      	 	 	17,250	 
	
                        Repairs
      and Maintenance

                      	 	 	43,072	 
	
                        Safety
      Training and Equipment

                      	 	 	953	 
	
                        Shop
      Supplies and Equipment

                      	 	 	882	 
	
                        Transportation
      Service

                      	 	 	401	 
	
                        Travel

                      	 	 	34,424	 
	
                        Utilities

                      	 	 	6,188	 
	
                        Vehicle
      Registration

                      	 	 	274	 
	
                        Welding
      Services

                      	 	 	16,640	 
	
                        Total
      General and Administrative Expenses

                      	 	$	943,237	 


              

            

          

        


        
          
             


          

          
            14

            
              

            

          

          
             


          

        


        NORTH
TEXAS DRILLING SERVICES, INC.

        (a
Texas Corporation)

        Notes
to Financial Statements

        September
30, 2008

        


        Note
F - Commitments

        


        The
Company leases its office and warehouse space and yard space under lease
agreements expiring at various dates from AES Industries and Toby Nelms,
respectively. The leases require monthly payments of $4,000 and $1,750,
respectively. Rental expense for the quarter ended September 30, 2008 was
$17,250. Future minimum rental payments for the remaining term of the lease are
as follows:

        


        
          
            
              
                
                  
                    
                      
                        
                          
                            
                              	Twelve
      Months Ended September 30, 	 	 	 	 
	
                                      2009

                                    	 	$	63,750	 
	
                                      2010

                                    	 	 	32,000	 
	 
      	 	$	95,750	 


                            

                          

                        

                      

                    

                  

                

              

            

          

        

        


        Note G -
Concentration of Credit Risk

        


        Financial
instruments that potentially subject the Company to credit risk consist
principally of cash and trade receivables. Accounts at each financial
institution in the United States are insured by the Federal Deposit Insurance
Corporation (FDIC) up to $100,000. The Company was adequately secured at
September 30, 2008.

        


        During
the quarter ended September 30, 2008, 49% of the Company’s drilling revenue was
received from one customer.

        


        Note H -
Related Party Transactions

        


        As of
September 30, 2008, the Company has entered into a note agreement with the
Longview Marquis Master Fund, LP (a British Virgin Island Limited Partnership)
which is a 100% stockholder of the Company as of September 30, 2008. There were
no principal or interest payments paid to the Longview
Marquis Master Fund, LP during the quarter ended September 30,
2008.

         

        For
further information related to the note agreement, see Note C - Long-Term Notes
Payable above.

        


        Note I -
Preferred Stock

        


        The
Company has authorized 1,000,000 shares of $.001 par value preferred stock.
There are no shares issued or outstanding as of September 30,
2008.


        
          
             


          

          
            15

            
              

            

          

          
             


          

        


        NORTH
TEXAS DRILLING SERVICES, INC.

        (a
Texas Corporation)

        Notes
to Financial Statements

        September
30, 2008

        


        Note J - Subsequent
Events

        


        On
October 3, 2008, the Company entered into an amended note agreement with the
Longview Marquis Master Fund, LP (a British Virgin Island Limited Partnership).
Under the amended agreement, the principal of the note increased to $8,575,000.
The maturity date of the amended note is April 1, 2010.

        


        Note K - Going
Concern

        


        As shown
in the accompanying financial statements, the Company incurred a net loss of
$539,465 during the quarter ended September 30, 2008, and as of that date, the
Company’s current liabilities exceeded its current assets by $5,149,331. Those
factors, as well as the uncertain conditions that the Company faces regarding
its loan agreements (as discussed in Note C), create an uncertainty about the
Company’s ability to continue as a going concern. Management of the Company is
developing a plan to reduce its liabilities through an increase in drilling
revenue. The ability of the Company to continue as a going concern is dependent
on acceptance of the plan by the Company’s creditors and the plan’s success. The
financial statements do not include any adjustments that might be necessary if
the Company is unable to continue as a going concern.


        
          
             


          

          
            16

            
              

            

          

          
             


          

        

      

       

      SCHEDULE
3(a)

       

      ORGANIZATION
AND QUALIFICATIONS

       

      LIST OF
SUBSIDIARIES

       

      
        
          
            
              
                
                  
                    
                      
                        
                          
                            
                              	
                                      Subsidiary

                                    	 
      	
                                      Jurisdictions of 

                                      Organization/Incorporation

                                    	 
      	
                                      Percentage of Outstanding Capital
      

                                      Stock/Equity Interests

                                    
	 	 	 	 	 
	
                                      River
      Capital Holdings Limited

                                    	 
      	
                                      Barbados

                                    	 
      	
                                      100%
      held by Sonterra Resources, Inc.

                                    
	 	 	 	 	 
	
                                      River
      Reinsurance Limited

                                    	 
      	
                                      Barbados

                                    	 
      	
                                      100%
      held by River Capital Holdings Limited

                                    
	 	 	 	 	 
	
                                      Sonterra
      Operating, Inc.

                                    	 
      	
                                      Delaware

                                    	 
      	
                                      100%
      held by Sonterra Resources, Inc.

                                    
	 	 	 	 	 
	
                                      Velocity
      Energy Inc

                                    	 
      	
                                      Delaware

                                    	 
      	
                                      100%
      held by Sonterra Resources, Inc.

                                    
	 	 	 	 	 
	
                                      Velocity
      Energy Offshore LP

                                    	 
      	
                                      Delaware

                                    	 
      	
                                      LP
      100% held by Sonterra Resources, Inc. GP 100% held by Velocity Energy
      Limited LLC

                                    
	 	 	 	 	 
	
                                      Velocity
      Energy Partners LP

                                    	 
      	
                                      Delaware

                                    	 
      	
                                      LP
      100% held by Sonterra Resources Inc.  GP 100% held by Velocity
      Energy Limited LLC

                                    
	 	 	 	 	 
	
                                      Velocity
      Energy Limited LLC

                                    	 
      	
                                      Texas

                                    	 
      	
                                      100%
      held by Sonterra Resources,
Inc.

                                    


                            

                          

                        

                      

                    

                  

                

              

            

          

        

      


      
        
           


        

        
          17

          
            

          

        

        
           


        

      


      SCHEDULE
3(c)

       

      CAPITALIZATION

       

      Stock
Options:  Stock options issued to management under the 2007
Non-Qualified Stock Option Plan vest incrementally over a period of three years
and have a ten-year life.  On February 14, 2008, options for a total
of 5,140,359 shares of common stock were issued.  These options had
exercise prices that ranged from $.332 to $.453 per share, and were scheduled to
expire in February 2018. None of these options had vested as of June 30,
2008.  These options were forfeited on June 23, 2008, when the
then-current management team resigned from Sonterra Resources, Inc.  A
new management team was employed on June 23, 2008 (Donald E. Vandenberg and
Gary L. Lancaster) and on July 1, 2008 (Donald J. Sebastian), and
options for a total of 3,630,806 shares of common stock were
issued.  These options have exercise prices that range from $1.35 to
$2.025 per share and will expire in June 2018.

       

      Warrants:  As of
June 30, 2008, The Longview Fund, L.P. held outstanding warrants for the
purchase of 4,958,678 shares of common stock at $.302 per share; warrants for
the purchase of 3,000,000 shares of common stock will be relinquished by The
Longview Fund, L.P. thereof at Closing.  The warrants expire in
February 2013.

       

      
        
           


        

        
          18

          
            

          

        

        
           


        

      


      SCHEDULE
3(e)

       

      NO
CONFLICTS

       

      None

       

      
        
          
          

        

        
          19

          
            

          

        

        
          
          

        

      

       

      SCHEDULE
3(f)

       

      SEC
DOCUMENTS

       

      
        	
                 
      

              	
                A.

              	
                Reports
      not filed with the SEC:

              


      

       

      
        	
                 
      

              	
                ·

              	
                8-K
      relating to the merger of Sonterra Oil & Gas, Inc. with the
      Company.

              


      

       

      
        	
                 
      

              	
                B.

              	
                The
      table below sets forth a complete and accurate list of SEC
      Documents.

              


      

       

      
        
          
            
              
                
                  
                    	
                                     Form

                          	 	
                            Filing Date

                          
	
                            PRE
      14C

                          	 	
                            8/28/2008

                          
	
                            10-Q

                          	 	
                            8/15/2008

                          
	
                            NT
      10-Q

                          	 	
                            8/15/2008

                          
	
                            8-K

                          	 	
                            7/23/2008

                          
	
                            8-K

                          	 	
                            6/27/2008

                          
	
                            8-K

                          	 	
                            5/29/2008

                          
	
                            8-K

                          	 	
                            5/23/2008

                          
	
                            8-K

                          	 	
                            5/20/2008

                          
	
                            8-K/A

                          	 	
                            5/16/2008

                          
	
                            10-Q

                          	 	
                            5/15/2008

                          
	
                            8-K/A

                          	 	
                            5/13/2008

                          
	
                            8-K

                          	 	
                            5/12/2008

                          
	
                            10KSB

                          	 	
                            4/14/2008

                          
	
                            8-K

                          	 	
                            4/7/2008

                          
	
                            NT
      10-K

                          	 	
                            3/31/2008

                          
	
                            8-K

                          	 	
                            3/18/2008

                          
	
                            8-K

                          	 	
                            2/14/2008

                          
	
                            DEF
      14C

                          	 	
                            1/11/2008

                          
	
                            PRER14C

                          	 	
                            12/26/2007

                          
	
                            PRER14C

                          	 	
                            11/30/2007

                          
	
                            10QSB

                          	 	
                            11/14/2007

                          
	
                            PRER14C

                          	 	
                            11/6/2007

                          
	
                            PRE
      14C

                          	 	
                            9/19/2007

                          
	
                            10QSB

                          	 	
                            8/14/2007

                          
	
                            8-K

                          	 	
                            8/9/2007

                          
	
                            8-K

                          	 	
                            6/19/2007

                          
	
                            10QSB

                          	 	
                            5/15/2007

                          
	
                            10KSB

                          	 	
                            4/2/2007

                          
	
                            8-K

                          	 	
                            1/8/2007

                          
	
                            10QBS

                          	 	
                            11/14/2006

                          
	
                            10QSB

                          	 	
                            8/14/2006

                          
	
                            8-K/A

                          	 	
                            7/7/2006

                          
	
                            8-K/A

                          	 	
                            6/5/2006

                          


                  

                

              

            

          

        

      

       

      
        
           


        

        
          20

          
            

          

        

        
           


        

      

       

      
        
          
            
              
                	
                                 Form

                      	 	
                        Filing Date

                      
	
                        10QSB

                      	 	
                        5/15/2006

                      
	
                        10KSB

                      	 	
                        4/13/2006

                      
	
                        NT
      10-K

                      	 	
                        3/30/2006

                      
	
                        8-K

                      	 	
                        2/9/2006

                      
	
                        8-K/A

                      	 	
                        2/9/2006

                      
	
                        8-K

                      	 	
                        1/6/2006

                      


              

            

          

        

      


      
        
           


        

        
          21

          
            

          

        

        
           


        

      


      SCHEDULE
3(f) - continued

       

      SEC
DOCUMENTS

       

      
        	
                 
      

              	
                C.

              	
                The
      list below sets forth all press releases, analyst reports, advertisements
      and other written communications with stockholders or other investors, or
      potential stockholders or other potential investors, on behalf of the
      Company or any of its Subsidiaries or otherwise relating to the Company or
      any of the Subsidiaries, issued, made, distributed, paid for or approved
      since December 31, 2005 by the Company or any of the
      Subsidiaries.

              


      

       

      
        	
                 
      

              	
                ·

              	
                Press
      release issued on March 8, 2006, announcing the completion of the
      acquisition of River Reinsurance
Limited.

              


      

       

      
        	
                 
      

              	
                ·

              	
                Press
      release issued on February 19, 2008, to announce completion of securities
      exchange agreement and appointment of new executive officers and
      director.

              


      

       

      
        	
                 
      

              	
                ·

              	
                Press
      release issued on June 25, 2008, announcing Donald Vanderburg’s
      appointment as CEO and President and Gary Lancaster as Vice President,
      Chief Legal Officer.

              


      

       

      
        	
                 
      

              	
                ·

              	
                Press
      release issued on July 21, 2008, announcing a new contract operating
      agreement to operate Sonterra’s Matagorda Bay
  Properties.

              


      

       

      
        	
                 
      

              	
                ·

              	
                The
      Company attended and presented at the annual C.K. Cooper Conference held
      February 20 through February 22,
2008.

              


      

       

      
        	
                 
      

              	
                D.

              	
                SEC
      Written Comments.  In its letter dated July 27, 2007, the
      Associates Chief Accountant indicated that it is not clear why the
      acquisition of River Capital Holdings was not accounted for as a reverse
      merger. The Company does not know
      whether this statement will be made into a formal comment regarding its
      2005 Form 10K-SB.

              


      

       

      In its
letter dated May 14, 2008, the Division of Corporation Finance commented on our
Form 8-K filed on May 12, 2008, to announce the
Company’s change of auditors.  The Company was asked to amend its filing to also
cover the interim period from the date of the Company’s last audited financial
statements to the date of dismissal of the Company’s former accountant and
appointment of new accountant.  On May 19, 2008, the SEC notified the
Company that it had completed its review of the Form 8-K/A that the Company
filed on May 16, 2008 in response to the
original comments, and that the SEC has no
further comments at this time.

       

      
        	
                 
      

              	
                E.

              	
                Delivery
      of Material Nonpublic Information By Company to Buyers.  The
      Company has provided Buyers with material, nonpublic information regarding
      the transactions contemplated by the Transaction
  Documents.

              


      

       

      
        
           


        

        
          22

          
            

          

        

        
           


        

      


      SCHEDULE
3(g)

       

      ABSENCE
OF CERTAIN CHANGES

       

      None.

       

      
        
           


        

        
          23

          
            

          

        

        
           


        

      


      SCHEDULE
3(h)

       

      ABSENCE
OF LITIGATION

       

      None

       

      
        
           


        

        
          24

          
            

          

        

        
           


        

      


      SCHEDULE
3(i)

       

      FULL
DISCLOSURE; NO UNDISCLOSED EVENTS, LIABILITIES, DEVELOPMENTS 

      OR
CIRCUMSTANCES

       

      None

       

      
        
           


        

        
          25

          
            

          

        

        
           


        

      


      SCHEDULE
3(k)

       

      NO
GENERAL SOLICITATION

       

      No
exceptions

       

      
        
           


        

        
          26

          
            

          

        

        
           


        

      


      SCHEDULE
3(n)

       

      EMPLOYEE
RELATIONS

       

      None

       

      
        
           


        

        
          27

          
            

          

        

        
           


        

      


      SCHEDULE
3(o)

       

      INTELLECTUAL
PROPERTY RIGHTS

       

      None

       

      
        
           


        

        
          28

          
            

          

        

        
           


        

      


      SCHEDULE
3(p)

       

      ENVIRONMENTAL
LAW COMPLIANCE

       

      No
exceptions

       

      
        
           


        

        
          29

          
            

          

        

        
           


        

      


      SCHEDULE
3(q)

       

      Shark
Prospect

       

      
        	
                 
      

              	
                1.

              	
                Oil
      and Gas Lease dated July 1, 2003, from the State of Texas, as Lessor, to
      Cinco Natural Resources Corporation, as Lessee, covering Oil and Gas Lease
      No. M-103194, being the South One-Half (S/2) of State Tract 150, Matagorda
      Bay, Calhoun County, Texas, containing approximately 320.0 acres, recorded
      in File No. 82095, Volume 349, Page 1 of the Official Records of Calhoun
      County, Texas.

              


      

       

      Lease
Interest:

       

      Surface
down to 9400' true vertical depth as seen in the Cockrell Corporation –
Aquamarine Unit Well No. 1 (API No. 42-057-31600).

       

      72.80 WI
/ 57.512% NRI

       

      Rights
between 9401' and 50' below the stratigraphic equivalent of the top of the 9800'
Sand, said top of the 9800' Sand being equal to 9790' TVD as seen on the
electric log for the Cockrell Corporation – Aquamarine Unit Well No. 1 (API No.
42-057-31600).

       

      30.30% WI
/ 23.55825% NRI

       

      Rights
below 50' below the stratigraphic equivalent of the top of the 9800' Sand, said
top of the 9800' Sand being equal to 9790' TVD as seen on the electric log for
the Cockrell Corporation – Aquamarine Unit Well No. 1 (API No.
42-057-31600).

       

      30.30% WI
/ 23.331% NRI

       

      Well
Interest:

       

      Flash –
State Tract 150 No. 1 Well, API No. 42-057-31770: 72.80% WI / 57.512% NRI
(Shut-In)

       

      Flash –
State Tract 150 No. 1 ST #1 Well, API No. 42-057-31770: 72.80% WI / 57.512% NRI
(Sidetrack well scheduled for 4th Quarter
2008)

       

      BOSS –
State Tract 150 No. 2 Well, API No. 42-057-31692:  30.30% WI /
23.55825% NRI (Current NRI)

       

      Recompletion
of the State Tract 150 No. 2 Well, API No. 42-057-31692, scheduled in 2009 will
be drilled by shallow owners only and Sonterra’s WI and NRI percentages are as
follows:  72.8% WI / 57.512% NRI (before a negotiated NPI to
deep interest owners).

       

      
        
           


        

        
          30

          
            

          

        

        
           


        

      

       

      SCHEDULE
3(q) - continued

       

      Ray
Prospect

       

      
        	
                 
      

              	
                2.

              	
                Oil
      and Gas Lease dated October 19, 2004, from the State of Texas, by and
      through the Commissioner of the General Land Office of the State of Texas,
      as Lessor, to Cinco Natural Resources Corporation, as Lessee, covering Oil
      and Gas Lease Number M-104265, being the South One-Half (S/2) of Tract
      175, Matagorda Bay, Matagorda and Calhoun Counties, Texas, containing
      approximately 320 acres as shown on the applicable Official Submerged Area
      Map on file in the Texas General Land Office, Austin, Texas, and recorded
      in the Official Records of Matagorda County, Texas, as File No. 050427,
      and recorded in the Official Records of Calhoun County, Texas, as File No.
      91879, Volume 400, Page 525.

              


      

       

      Lease
Interest:  30.30% WI / 22.04325% NRI

       

      
        	
                 
      

              	
                3.

              	
                Oil
      and Gas Lease dated October 19, 2004, from the State of Texas, by and
      through the Commissioner of the General Land Office of the State of Texas,
      as Lessor, to Cinco Natural Resources Corporation, as Lessee, covering Oil
      and Gas Lease Number M-104266, being the South One-Half (S/2) of Tract
      178, Matagorda Bay, Matagorda County, Texas, containing approximately 320
      acres as shown on the applicable Official Submerged Area Map on file in
      the Texas General Land Office, Austin, Texas, and recorded in the Official
      Records of Matagorda County, Texas, as File No.
  050428.

              


      

       

      Lease
Interest:  30.30% WI / 22.04325% NRI

       

      
        	
                 
      

              	
                4.

              	
                Oil
      and Gas Lease dated October 19, 2004, from the State of Texas, by and
      through the Commissioner of the General Land Office of the State of Texas,
      as Lessor, to Cinco Natural Resources Corporation, as Lessee, covering Oil
      and Gas Lease Number M-104267, being the North One-Half (N/2) of Tract
      179, Matagorda Bay, Matagorda County, Texas, containing approximately 320
      acres as shown on the applicable Official Submerged Area Map on file in
      the Texas General Land Office, Austin, Texas, and recorded in the Official
      Records of Matagorda County, Texas, as File No.
  050429.

              


      

       

      Lease
Interest:  30.30% WI / 22.04325% NRI

       

      Starfish
Prospect

       

      
        	
                 
      

              	
                5.

              	
                Oil
      and Gas Lease dated April 5, 2005, from the State of Texas, by and through
      the Commissioner of the General Land Office of the State of Texas, as
      Lessor, to Cinco Energy Corporation, as Lessee, covering Oil and Gas Lease
      Number M-104829, being the South One-Half (S/2) of Tract 96, Matagorda
      Bay, Calhoun County, Texas, containing approximately 320 acres as shown on
      the applicable Official Submerged Area Map on file in the Texas General
      Land Office, Austin, Texas, and recorded in the Official Records of
      Calhoun County, Texas, as File No. 92724, Volume 406, Page
    35.

              


      

       

      
        
           


        

        
          31

          
            

          

        

        
           


        

      


      SCHEDULE
3(q) - continued

       

      Lease
Interest:  30.30% WI / 22.422% NRI (to April 5, 2009)/ 21.6645%
NRI (after April 5, 2009)

       

      
        	
                 
      

              	
                6.

              	
                Oil
      and Gas Lease dated July 19, 2005, from the State of Texas, by and through
      the Commissioner of the General Land Office of the State of Texas, as
      Lessor, to Cinco Resources, Inc., as Lessee, covering Oil and Gas Lease
      Number M-105371, being the North One-Half (N/2) of Tract 104, Matagorda
      Bay, Calhoun County, Texas, containing approximately 320 acres as shown on
      the applicable Official Submerged Area Map on file in the Texas General
      Land Office, Austin, Texas, and recorded in the Official Records of
      Calhoun County, Texas, as File No. 96377, Volume 426, Page
      912.

              


      

       

      Lease
Interest: 36.2874% WI / 26.852676% NRI (to July 19, 2009) / 25.945491%
(after July 19, 2009)

       

      Barracuda
Prospect

       

      
        	
                 
      

              	
                7.

              	
                Oil
      and Gas Lease dated April 5, 2005, from the State of Texas, by and through
      the Commissioner of the General Land Office of the State of Texas, as
      Lessor, to Cinco Energy Corporation, as Lessee, covering Oil and Gas Lease
      Number M-104827, being the North One-Half (N/2) of Tract 94, Matagorda
      Bay, Calhoun County, Texas, containing approximately 320 acres as shown on
      the applicable Official Submerged Area Map on file in the Texas General
      Land Office, Austin, Texas, and recorded in the Official Records of
      Calhoun County, Texas, as File No. 92722, Volume 406, Page
    21.

              


      

       

      Lease
Interest:  30.30% WI / 22.422% NRI (to April 5, 2009)/ 21.6645%
NRI (after April 5, 2009)

       

      
        	
                 
      

              	
                8.

              	
                Oil
      and Gas Lease dated April 5, 2005, from the State of Texas, by and through
      the Commissioner of the General Land Office of the State of Texas, as
      Lessor, to Cinco Energy Corporation, as Lessee, covering Oil and Gas Lease
      Number M-104828, being the South One-Half (S/2) of Tract 94, Matagorda
      Bay, Calhoun County, Texas, containing approximately 320 acres as shown on
      the applicable Official Submerged Area Map on file in the Texas General
      Land Office, Austin, Texas, and recorded in the Official Records of
      Calhoun County, Texas, as File No. 92723, Volume 406, Page
    28.

              


      

       

      Lease
Interest:  30.30% WI / 22.422% NRI (to April 5, 2009)/ 21.6645%
NRI (after April 5, 2009)

       

      Mackerel
Prospect

       

      
        	
                 
      

              	
                9.

              	
                Oil
      and Gas Lease dated July 19, 2005, from the State of Texas, by and through
      the Commissioner of the General Land Office of the State of Texas, as
      Lessor, to Cinco Resources, Inc., as Lessee, covering Oil and Gas Lease
      Number M-105373, being the North One-Half (N/2) of Tract 175, Matagorda
      Bay, Calhoun and Matagorda Counties, Texas, containing approximately 320
      acres as shown on the applicable Official Submerged Area Map on file in
      the Texas General Land Office, Austin, Texas, and recorded in the Official
      Records of Calhoun County, Texas, as File No. 96378, Volume 426, Page 919,
      and recorded in the Official Records of Matagorda County, Texas, as File
      No. 063722.

              


      

       

      
        
           


        

        
          32

          
            

          

        

        
           


        

      


      SCHEDULE
3(q) - continued

       

      Lease
Interest:  36.2874% WI / 26.852676% (to July 19, 2009) /
25.945491% (after July 19, 2009)

       

      
        	
                       
      10.

              	
                Oil
      and Gas Lease dated October 4, 2005, from the State of Texas, by and
      through the Commissioner of the General Land Office of the State of Texas,
      as Lessor, to Cinco Resources, Inc., as Lessee, covering Oil and Gas Lease
      Number M-105679, being the North One-Half (N/2) of Tract 178, Matagorda
      Bay, Matagorda County, Texas, containing approximately 320 acres as shown
      on the applicable Official Submerged Area Map on file in the Texas General
      Land Office, Austin, Texas, and recorded in the Official Records of
      Matagorda County, Texas, as File No.
059741.

              


      

       

      Lease
Interest:  30.30% WI / 22.422% NRI (to October 4, 2009)/
21.6645% NRI (after October 4, 2009)

       

      
        	
                       
      11.

              	
                Oil
      and Gas Lease dated October 4, 2005, from the State of Texas, by and
      through the Commissioner of the General Land Office of the State of Texas,
      as Lessor, to Cinco Resources, Inc., as Lessee, covering Oil and Gas Lease
      Number M-105678, being the South One-Half (S/2) of Tract 176, Matagorda
      Bay, Calhoun and Matagorda Counties, Texas, containing approximately 320
      acres as shown on the applicable Official Submerged Area Map on file in
      the Texas General Land Office, Austin, Texas, and recorded in the Official
      Records of Calhoun County, Texas, as File No. 96971, Volume 429, Page 918,
      and recorded in the Official Records of Matagorda County, Texas, as File
      No. 059740.

              


      

       

      Lease
Interest:  30.30% WI / 22.422% NRI (to October 4, 2009)/
21.6645% NRI (after October 4, 2009)

       

      Sydney/150-Deep
Prospect

       

      
        	
                       
      12.

              	
                Oil
      and Gas Lease dated July 1, 2003, from the State of Texas, by and through
      the Commissioner of the General Land office of the State of Texas, as
      Lessor, to LLOG Exploration Texas, L.P., as Lessee, covering Oil and Gas
      Lease Number M-103190, being the North One-Half (N/2) of Tract 127,
      Matagorda Bay, Calhoun County, Texas, containing approximately 320 acres
      as shown on the applicable Official Submerged Area Map on file in the
      Texas General Land Office, Austin, Texas, and recorded in the Official
      Records of Calhoun County, Texas, as File No. 00081323, Volume 344, Page
      875.

              


      

       

      
        	
                       
      13.

              	
                Oil
      and Gas Lease dated July 1, 2003, from the State of Texas, by and through
      the Commissioner of the General Land office of the State of Texas, as
      Lessor, to LLOG Exploration Texas, L.P., as Lessee, covering Oil and Gas
      Lease Number M-103191, being the South One-Half (S/2) of Tract 127,
      Matagorda Bay, Calhoun County, Texas, containing approximately 320 acres
      as shown on the applicable Official Submerged Area Map on file in the
      Texas General Land Office, Austin, Texas, and recorded in the Official
      Records of Calhoun County, Texas, as File No.0081324, Volume 344, Page
      882.

              


      

       

      
        
           


        

        
          33

          
            

          

        

        
           


        

      


      SCHEDULE
3(q) - continued

       

      
        	
                       
      14.

              	
                Oil
      and Gas Lease dated July 1, 2003, from the State of Texas, as Lessor, to
      Cinco Natural Resources Corporation, as Lessee, covering Oil and Gas Lease
      No. M-103194, being the south one-half (S/2) of State Tract 150, Matagorda
      Bay, Calhoun County, Texas, containing approximately 320.0 acres, recorded
      in File No. 82095, Volume 349, Page 1 of the Official Records of Calhoun
      County, Texas.  (This tract is also in the Shark
      Prospect.)

              


      

       

      
        	
                       
      15.

              	
                Oil
      and Gas Lease dated July 1, 2003, from the State of Texas, by and through
      the Commissioner of the General Land office of the State of Texas, as
      Lessor, to LLOG Exploration Texas, L.P., as Lessee, covering Oil and Gas
      Lease Number M-103195, being the South One-Half (S/2) of Tract 151,
      Matagorda Bay, Calhoun County, Texas, containing approximately 320 acres
      as shown on the applicable Official Submerged  Area Map on file
      in the Texas General Land Office, Austin, Texas, and recorded in the
      Official Records of Calhoun County, Texas, as File No. 00081326, Volume
      344, Page 896.

              


      

       

      
        	
                       
      16.

              	
                Oil
      and Gas Lease dated July 1, 2003, from the State of Texas, by and through
      the Commissioner of the General Land office of the State of Texas, as
      Lessor, to LLOG Exploration Texas, L.P., as Lessee, covering Oil and Gas
      Lease Number M-103192, being the North One-Half (N/2) of Tract 128,
      Matagorda Bay, Calhoun County, Texas, containing approximately 320 acres
      as shown on the applicable Official Submerged Area Map on file in the
      Texas General Land Office, Austin, Texas, and recorded in the Official
      Records of Calhoun County, Texas, as File No. 00081325, Volume 344, Page
      889.

              


      

       

      
        	
                       
      17.

              	
                Oil
      and Gas Lease dated July 6, 2004, from the State of Texas, by and through
      the Commissioner of the General Land office of the State of Texas, as
      Lessor, to LLOG Exploration Texas, L.P., as Lessee, covering Oil and Gas
      Lease Number M-104022, being the North One-Half (N/2) of Tract 150,
      Matagorda Bay, Calhoun County, Texas, containing approximately 320 acres
      as shown on the applicable Official Submerged Area Map on file in the
      Texas General Land Office, Austin, Texas, and recorded in the Official
      Records of Calhoun County, Texas, as File No. 00088242, Volume 381, Page
      433.

              


      

       

      
        	
                       
      18.

              	
                Oil
      and Gas Lease dated July 19, 2005, from the State of Texas, by and through
      the Commissioner of the General Land office of the State of Texas, as
      Lessor, to LLOG Exploration Texas, L.P., as Lessee, covering Oil and Gas
      Lease Number M-105372, being the South One-Half (S/2) of Tract 154,
      Matagorda Bay, Calhoun County, Texas, containing approximately 320 acres
      as shown on the applicable Official Submerged Area Map on file in the
      Texas General Land Office, Austin, Texas, and recorded in the Official
      Records of Calhoun County, Texas, as File No. 00095163, Volume 420, Page
      166.

              


      

       

      Lease
Interest: N/2 ST
150 (SAVE AND EXCEPT the portion excluded from the State Tract 127 No. 1 Unit,
being depths above the stratigraphic equivalent of 100’ below the base of the
9800’ Sand TVD as seen in the Cockrell Corporation Aquamarine Unit Well No. 1
(API No. 42-057-31600) and the S/2 of ST 154: 53.8 % WI / 39.6775 %
NRI

       

      
        
           


        

        
          34

          
            

          

        

        
           


        

      


      SCHEDULE
3(q) - continued

       

      Lease
Interest: INSOFAR
only as to that portion of the N/2 ST 150 excluded from the State Tract 127 No.
1 Unit, being depths above the stratigraphic equivalent of 100’ below the base
of the 9800’ Sand TVD as seen in the Cockrell Corporation Aquamarine Unit Well
No. 1 (API No. 42-057-31600):  74.8 % WI / 55.165% NRI

       

      Lease
Interest: S/2 and
the N/2 of ST 127; N/2 ST 128; and the S/2 of ST 151:

      53.8 % WI
/ 38.3325 % NRI

       

      Unit Well
Interest:

       

      Sonterra – State Tract 127 No. 1 Unit
#1 Well, API No. 42-057-31770:

       

      
        	
                 
      

              	
                A.

              	
                3.558523%
      WI to Casing Point/ 5.113335% NRI to Casing
  Point;

              


      

      


      
        	
                 
      

              	
                B.

              	
                7.025190%
      WI at Casing Point BPO of Raptor and Hayes non-consent WI and BPO Rainier
      4.5% WI / 5.113335% NRI;

              


      

      


      
        	
                 
      

              	
                C.

              	
                6.571999%
      WI APO Rainier 4.5% WI and BPO Raptor and Hayes non-consent WI / 4.783477
      % NRI; and

              


      

      


      
        	
                 
      

              	
                D.

              	
                11.359472%
      WI APO Raptor and Hayes non-consent (and simultaneous back-in to 25% of
      South Texas Oil’s WI/NRI **) / 8.268073 %
NRI

              


      

       

      Unit
Description:

       

      State of
Texas Tract 127 No. 1 Unit Well #1, covering 2,240 acres, consisting of oil and
gas leases covering the S/2 and the N/2 of State Tract 127; the N/2 of State
Tract 128; the S/2 of State Tract 151; the S/2 of State Tract 154;
the  S/2 ST 150, Save and Except depths above the stratigraphic
equivalent of 100' below the base of the 9800' Sand TVD as seen in the Cockrell
Corporation Aquamarine Unit Well No. 1 (API No. 42-057-31600); and the N/2 ST
150 North Half of State Tract 150, Save and Except  the depths above
the stratigraphic equivalent of 100 feet below the base
of the 9800’ Sand TVD as seen in the Cockrell Corporation Aquamarine Unit Well
No. 1 (API No. 42-057-31600) which shall be excluded from the Term Pooling
Agreement described below:

       

      Term
Pooling Agreement from the Commissioner of the General Land Office, as Lessor,
to Sonterra Resources, Inc., as Lessee, dated February 20, 2008, but effective
December 11, 2008, and filed of record on February 28, 2008 as Instrument No.
111111 in the Official Records of Calhoun County, Texas, forming a pooled unit
covering all depths, except from the surface to 10,000’ TVD on all of State
Lease M-103194 and that part of State Lease M-104022 shown on Exhibit “D”
attached thereto encompassing the S/2 of Tract 127 (M-103191);  N/2 of
Tract 127 (M-103190); N/2 of Tract 128 (M-103192); N/2 of Tract 150 (M-104022);
S/2 of Tract 151 (M-103195); and S/2 of Tract 154 (M-105372).

       

      
        
           


        

        
          35

          
            

          

        

        
           


        

      


      SCHEDULE
3(q) - continued

       

      Pipeline:

       

      An
undivided 100.0% interest in and to the seven (7) mile six-inch (6") S80 Gr B
pipeline connecting Matagorda Bay, Calhoun County, Texas State Tract 150 No. 1
line heater platform to the Keller Bay Facility onshore.

      


      End of
Schedule 3(q)

       

      
        
           


        

        
          36

          
            

          

        

        
           


        

      


      SCHEDULE
3(s)

       

      REGULATORY
PERMITS

       

      No
exceptions

       

      
        
           


        

        
          37

          
            

          

        

        
           


        

      


      SCHEDULE
3(t)

       

      INTERNAL
ACCOUNTING CONTROLS, DISCLOSURE CONTROLS & PROCEDURES, BOOKS &
RECORDS

       

      No
exceptions

       

      
        
           


        

        
          38

          
            

          

        

        
           


        

      


      SCHEDULE
3(u)

       

      BANK
ACCOUNTS

       

      The
following table presents the bank accounts of the Company and the Subsidiaries
and the balances of each account as of November 13, 2008:

       

      
        
          
            
              
                	
                        Company

                      	 	
                        Bank

                      	 	
                        Account #

                      	 	 	
                        Balance

                      	 
	 
      	 	 
      	 	 	 	 	 	 
	
                        Sonterra
      Oil & Gas, Inc.

                      	 	
                        Sterling
      Bank

                      	 	 	5000183843	 	 	$	47,701.11	 
	 
      	 	 
      	 	 	 	 	 	 	 	 
	
                        Sonterra
      Operating, Inc.

                      	 	
                        Sterling
      Bank

                      	 	 	5000230884	 	 	$	91,216.95	 
	 
      	 	 
      	 	 	 	 	 	 	 	 
	
                        Sonterra
      Oil & Gas, Inc.

                      	 	
                        Sterling
      Bank

                      	 	 	5000389794	 	 	$	-0-	 


              

            

          

        

      

       

      
        
           


        

        
          39

          
            

          

        

        
           


        

      


      SCHEDULE
3(v)

       

      TAX
STATUS

       

      With
respect to the Company and its Subsidiaries’ 2007 Federal Income Tax returns,
IRS Form 7004 (“Automatic 6 Month Extension of Time to File Certain Business
Income Tax Returns”) was filed for Sonterra Oil & Gas, Inc., and Sonterra
Operating, Inc., the operating Subsidiaries of the Company, on or before March
15, 2008.   The Company estimated a Federal Income Tax liability
of zero for these two operating Subsidiaries and therefore, made no estimated
payment in connection with filing the Forms 7004.  The 2007 Federal
Income Tax Return was filed on September 15, 2008.  Sonterra
Resources, Inc. had a net operating loss and no taxes were due.

       

      
        
           


        

        
          40

          
            

          

        

        
           


        

      


      SCHEDULE
3(w)

       

      TRANSACTIONS
WITH AFFILIATES

       

      
        	
                1.

              	
                Pursuant
      to a service contract, dated July 1, 2006, by and between Concorde Capital
      Limited, a company 100% owned by the Company’s former officer director,
      Howard Taylor, and the Company, the Company paid Concorde Capital Limited
      management and administrative fees totaling $191,087, $125,000 and $95,000
      for the years ended December 31, 2007, 2006 and 2005,
      respectively.  The Company also reimbursed Concorde Capital
      Limited $38,088, $35,082 and $81,273 for out-of-pocket expenses for the
      years ended December 31, 2007, 2006 and 2005, respectively.  The
      Company further paid Concorde Capital Limited management and
      administrative fees and contract termination fees totaling $40,000 for the
      period January 1, 2008 through February 14, 2008.  The Company
      paid to Concorde Capital Limited an additional $962 as reimbursement of
      direct out of pocket expenses for the period January 1, 2008 through May
      21, 2008.

              


      

       

      
        	
                2.

              	
                The
      Company paid Cognate Engineering Services Inc., a company 100% owned by
      the Company’s director William Dickie, management and administrative fees
      totaling $10,000, $4,000 and $24,000 for the years ended December 31,
      2007, 2006 and 2005, respectively.   As of December 31,
      2007 a total of $23,035 was outstanding and due to Cognate Engineering
      Services Inc.  No amounts are currently due to Cognate
      Engineering Services Inc. or Mr.
Dickie.

              


      

       

      
        	
                3.

              	
                The
      Company paid Valco Resource Management Inc., a company 100% owned by Doyle
      Valdez, a director of the Company beginning April 1, 2008, director’s fees
      totaling $1,000 for the period January 1, 2008 through May 30,
      2008.  Additionally, the Company paid Valco Resource Management
      Inc. $6,600 during for the period January 1, 2008 through March 7, 2008,
      for non-director related consulting services.  No amounts are
      currently due to Valco Resource Management Inc. for non-director related
      services.

              


      

       

      
        	
                4.

              	
                The
      Company paid Robert Terry Gill, a current director of the Company since
      April 1, 2008, director’s fees totaling $1,000 for the period January 1,
      2008 through May 30, 2008.

              


      

       

      
        
           


        

        
          41

          
            

          

        

        
           


        

      


      
        	
                 
      

              	
                SCHEDULE
      3(w) - continued

              


      

       

      
        	
                 
      

              	
                TRANSACTIONS
      WITH AFFILIATES

              


      

       

      
        	
                5.

              	
                On
      April 8, 2008, the Company entered into a contract services agreement with
      South Texas Oil Company, the Board of Directors of which Michael J.
      Pawelek serves as chairman.  As Mr. Pawelek also serves as the
      chairman of the Company’s Board of Directors, he abstained from voting on
      the Company’s Board of Director approval of entry into the
      contract.

              


      

       

      
        	
                6.

              	
                On
      July 8, 2008, Sonterra Resources, Inc. acquired Velocity Energy Offshore
      LP and Velocity Energy Partners LP from its two 50% owners, Donald E.
      Vandenberg (CEO, President, and Chairman of the Board) and Gary L.
      Lancaster (Vice President, Chief Legal Officer, and
      Secretary).

              


      

       

      
        	
                7.

              	
                Promissory
      Note from Velocity Energy Partners L.P. to Donald E. Vandenberg dated
      July 8, 2006 in the original principal amount of $75,000.00 plus
      accrued interest at the rate of 8% per
annum.

              


      

       

      
        
           


        

        
          42

          
            

          

        

        
           


        

      


      SCHEDULE
3(x)

       

      APPLICATION
OF TAKEOVER PROTECTIONS; RIGHTS AGREEMENT

       

      None

       

      
        
           


        

        
          43

          
            

          

        

        
           


        

      


      SCHEDULE
3(z)

       

      OUTSTANDING
INDEBTEDNESS; LIENS

       

      The table
below presents the accounts payable of the Company as of November 13,
2008:

       

      
        
          
            
              
                	
                        Sonterra Resources

                      	 	 	A/P	 	 	
                        Estimated Liability

                      	 
	
                        Pre-Closing

                      	 	 	 	 	 	 	 
	
                        Baker
      & McKenzie

                      	 	 	 	 	 	 	310,076	 
	
                        CT
      Corp.

                      	 	 	335	 	 	 	 	 
	
                        Thompson
      & Knight

                      	 	 	89,478	 	 	 	55,355	 
	
                        Appleby,
      Spurling & Kemp

                      	 	 	30,284	 	 	 	 	 
	
                        Pearl
      Energy Partners

                      	 	 	 	 	 	 	1,339	 
	
                        Paladin
      Petroleum Partners

                      	 	 	 	 	 	 	669	 
	
                        South
      Texas Oil Co.

                      	 	 	95,255	 	 	 	 	 
	
                        PetroAcct

                      	 	 	 	 	 	 	9,944	 
	
                        Pre-Closing
      Total

                      	 	 	215,352	 	 	 	377,383	 
	 
      	 	 	 	 	 	 	 	 
	
                        Post-Closing

                      	 	 	 	 	 	 	 	 
	
                        Baker
      & McKenzie

                      	 	 	 	 	 	 	310,076	 
	
                        CT
      Corp.

                      	 	 	335	 	 	 	 	 
	
                        Thompson
      & Knight

                      	 	 	89,478	 	 	 	55,355	 
	
                        Appleby,
      Spurling & Kemp

                      	 	 	30,284	 	 	 	 	 
	
                        Pearl
      Energy Partners

                      	 	 	 	 	 	 	1,339	 
	
                        Paladin
      Petroleum Partners

                      	 	 	 	 	 	 	669	 
	
                        South
      Texas Oil Co.

                      	 	 	95,255	 	 	 	 	 
	
                        PetroAcct

                      	 	 	 	 	 	 	9,944	 
	
                        Donald
      E. Vandenberg

                      	 	 	 	 	 	 	79,762	 
	
                        Gary
      L. Lancaster

                      	 	 	 	 	 	 	71,786	 
	
                        Donald
      J. Sebastian

                      	 	 	 	 	 	 	67,500	 
	
                        Estimated
      Lease Operating Expense

                      	 	 	 	 	 	 	30,000	 
	
                        Estimated
      Completion Costs – Well # 127-1

                      	 	 	 	 	 	 	175,000	 
	
                        Estimated
      Drilling Costs – Well 150-1 ST1

                      	 	 	 	 	 	 	900,000	 
	
                        Estimated
      Legal Bills

                      	 	 	 	 	 	 	75,000	 
	
                        Estimated
      Payroll Taxes

                      	 	 	 	 	 	 	25,000	 
	 
      	 	 	 	 	 	 	 	 
	
                        Total

                      	 	$	215,352	 	 	$	1,801,431	 


              

            

          

        

      

       

      
        
           


        

        
          44

          
            

          

        

        
           


        

      


      SCHEDULE
3(z)

       

      OUTSTANDING
INDEBTEDNESS; LIENS

       

      The table
below presents long-term liabilities of the Company and its Subsidiaries as of
November 13, 2008:

       

      
        
          
            
              
                	
                        Pre-Closing

                      	 	 	 
	
                        Note
      payable by the Company to The Longview Fund

                      	 	 	3,000,000	*
	
                        Note
      dated July 8, 2006 by Velocity Energy Partners L.P. payable to Donald E.
      Vandenberg

                      	 	 	75,000	*
	 
      	 	 	 	 
	
                        Pre-Closing
      Total

                      	 	$	3,075,000	*
	 
      	 	 	 	 
	
                        Post-Closing

                      	 	 	 	 
	
                        Subordinated
      Note dated November 13, 2008 payable by the Company to The Longview Fund,
      L.P.

                      	 	 	2,210,550.92	 
	
                        Note
      dated July 8, 2006 by Velocity Energy Partners L.P. payable to Donald E.
      Vandenberg

                      	 	 	75,000	*
	
                        Senior
      Secured Note dated November 13, 2008 payable by the Company to Longview
      Marquis Master Fund, L.P.

                      	 	 	8,875,000	 
	
                        Subordinated
      Note dated November 13, 2008 payable by the Company to Longview Marquis
      Master Fund, L.P.

                      	 	 	9,440,000	 
	 
      	 	 	 	 
	
                        Deferred
      asset abandonment liabilities

                      	 	 	124,224	 
	 
      	 	 	 	 
	
                        Post-Closing
      Total

                      	 	$	20,724,774.92	*


              

            

          

        

      

      *Plus
accrued and unpaid interest

       

      
        
           


        

        
          45

          
            

          

        

        
           


        

      


      SCHEDULE
3(bb)

       

      REAL PROPERTY –
I.

       

      Interests in Real Property
and Mineral Interests

       

      Shark
Prospect

       

      1.      Oil
and Gas Lease dated July 1, 2003, from the State of Texas, as Lessor, to Cinco
Natural Resources Corporation, as Lessee, covering Oil and Gas Lease No.
M-103194, being the South One-Half (S/2) of State Tract 150, Matagorda Bay,
Calhoun County, Texas, containing approximately 320.0 acres, recorded in File
No. 82095, Volume 349, Page 1 of the Official Records of Calhoun County,
Texas.

       

      Lease
Interest:

       

      Surface
down to 9400' true vertical depth as seen in the Cockrell Corporation –
Aquamarine Unit Well No. 1 (API No. 42-057-31600).

       

      72.80 WI
/ 57.512% NRI

       

      Rights
between 9401' and 50' below the stratigraphic equivalent of the top of the 9800'
Sand, said top of the 9800' Sand being equal to 9790' TVD as seen on the
electric log for the Cockrell Corporation – Aquamarine Unit Well No. 1 (API No.
42-057-31600).

       

      30.30% WI
/ 23.55825% NRI

       

      Rights
below 50' below the stratigraphic equivalent of the top of the 9800' Sand, said
top of the 9800' Sand being equal to 9790' TVD as seen on the electric log for
the Cockrell Corporation – Aquamarine Unit Well No. 1 (API No.
42-057-31600).

       

      30.30% WI
/ 23.331% NRI

       

      Well
Interest:

       

      Flash –
State Tract 150 No. 1 Well, API No. 42-057-31770: 72.80% WI / 57.512% NRI
(Shut-In)

       

      Flash –
State Tract 150 No. 1 ST #1 Well, API No. 42-057-31770: 72.80% WI / 57.512% NRI
(Sidetrack well scheduled for 4th Quarter
2008)

       

      BOSS –
State Tract 150 No. 2 Well, API No. 42-057-31692:  30.30% WI /
23.55825% NRI (Current NRI)

       

      Recompletion
of the State Tract 150 No. 2 Well, API No. 42-057-31692, scheduled in 2009 will
be drilled by shallow owners only and Sonterra’s WI and NRI percentages are as
follows:  72.8% WI / 57.512% NRI (before a negotiated NPI to
deep interest owners).

       

      
        
           


        

        
          46

          
            

          

        

        
           


        

      


      SCHEDULE
3(bb) - continued

      


      Ray
Prospect

       

      
        	
                 
      

              	
                2.

              	
                Oil
      and Gas Lease dated October 19, 2004, from the State of Texas, by and
      through the Commissioner of the General Land Office of the State of Texas,
      as Lessor, to Cinco Natural Resources Corporation, as Lessee, covering Oil
      and Gas Lease Number M-104265, being the South One-Half (S/2) of Tract
      175, Matagorda Bay, Matagorda and Calhoun Counties, Texas, containing
      approximately 320 acres as shown on the applicable Official Submerged Area
      Map on file in the Texas General Land Office, Austin, Texas, and recorded
      in the Official Records of Matagorda County, Texas, as File No. 050427,
      and recorded in the Official Records of Calhoun County, Texas, as File No.
      91879, Volume 400, Page 525.

              


      

       

      Lease
Interest:  30.30% WI / 22.04325% NRI

       

      
        	
                 
      

              	
                3.

              	
                Oil
      and Gas Lease dated October 19, 2004, from the State of Texas, by and
      through the Commissioner of the General Land Office of the State of Texas,
      as Lessor, to Cinco Natural Resources Corporation, as Lessee, covering Oil
      and Gas Lease Number M-104266, being the South One-Half (S/2) of Tract
      178, Matagorda Bay, Matagorda County, Texas, containing approximately 320
      acres as shown on the applicable Official Submerged Area Map on file in
      the Texas General Land Office, Austin, Texas, and recorded in the Official
      Records of Matagorda County, Texas, as File No.
  050428.

              


      

       

      Lease
Interest:  30.30% WI / 22.04325% NRI

       

      
        	
                 
      

              	
                4.

              	
                Oil
      and Gas Lease dated October 19, 2004, from the State of Texas, by and
      through the Commissioner of the General Land Office of the State of Texas,
      as Lessor, to Cinco Natural Resources Corporation, as Lessee, covering Oil
      and Gas Lease Number M-104267, being the North One-Half (N/2) of Tract
      179, Matagorda Bay, Matagorda County, Texas, containing approximately 320
      acres as shown on the applicable Official Submerged Area Map on file in
      the Texas General Land Office, Austin, Texas, and recorded in the Official
      Records of Matagorda County, Texas, as File No.
  050429.

              


      

       

      Lease
Interest:  30.30% WI / 22.04325% NRI

       

      Starfish
Prospect

       

      
        	
                 
      

              	
                5.

              	
                Oil
      and Gas Lease dated April 5, 2005, from the State of Texas, by and through
      the Commissioner of the General Land Office of the State of Texas, as
      Lessor, to Cinco Energy Corporation, as Lessee, covering Oil and Gas Lease
      Number M-104829, being the South One-Half (S/2) of Tract 96, Matagorda
      Bay, Calhoun County, Texas, containing approximately 320 acres as shown on
      the applicable Official Submerged Area Map on file in the Texas General
      Land Office, Austin, Texas, and recorded in the Official Records of
      Calhoun County, Texas, as File No. 92724, Volume 406, Page
    35.

              


      

       

      
        
           


        

        
          47

          
            

          

        

        
           


        

      


      SCHEDULE
3(bb) - continued

       

      Lease
Interest:  30.30% WI / 22.422% NRI (to April 5, 2009)/ 21.6645%
NRI (after April 5, 2009)

       

      
        	
                 
      

              	
                6.

              	
                Oil
      and Gas Lease dated July 19, 2005, from the State of Texas, by and through
      the Commissioner of the General Land Office of the State of Texas, as
      Lessor, to Cinco Resources, Inc., as Lessee, covering Oil and Gas Lease
      Number M-105371, being the North One-Half (N/2) of Tract 104, Matagorda
      Bay, Calhoun County, Texas, containing approximately 320 acres as shown on
      the applicable Official Submerged Area Map on file in the Texas General
      Land Office, Austin, Texas, and recorded in the Official Records of
      Calhoun County, Texas, as File No. 96377, Volume 426, Page
      912.

              


      

       

      Lease
Interest: 36.2874% WI / 26.852676% NRI (to July 19, 2009) / 25.945491%
(after July 19, 2009)

       

      Barracuda
Prospect

       

      
        	
                 
      

              	
                7.

              	
                Oil
      and Gas Lease dated April 5, 2005, from the State of Texas, by and through
      the Commissioner of the General Land Office of the State of Texas, as
      Lessor, to Cinco Energy Corporation, as Lessee, covering Oil and Gas Lease
      Number M-104827, being the North One-Half (N/2) of Tract 94, Matagorda
      Bay, Calhoun County, Texas, containing approximately 320 acres as shown on
      the applicable Official Submerged Area Map on file in the Texas General
      Land Office, Austin, Texas, and recorded in the Official Records of
      Calhoun County, Texas, as File No. 92722, Volume 406, Page
    21.

              


      

       

      Lease
Interest:  30.30% WI / 22.422% NRI (to April 5, 2009)/ 21.6645%
NRI (after April 5, 2009)

       

      
        	
                 
      

              	
                8.

              	
                Oil
      and Gas Lease dated April 5, 2005, from the State of Texas, by and through
      the Commissioner of the General Land Office of the State of Texas, as
      Lessor, to Cinco Energy Corporation, as Lessee, covering Oil and Gas Lease
      Number M-104828, being the South One-Half (S/2) of Tract 94, Matagorda
      Bay, Calhoun County, Texas, containing approximately 320 acres as shown on
      the applicable Official Submerged Area Map on file in the Texas General
      Land Office, Austin, Texas, and recorded in the Official Records of
      Calhoun County, Texas, as File No. 92723, Volume 406, Page
    28.

              


      

       

      Lease
Interest:  30.30% WI / 22.422% NRI (to April 5, 2009)/ 21.6645%
NRI (after April 5, 2009)

       

      Mackerel
Prospect

       

      
        	
                 
      

              	
                9.

              	
                Oil
      and Gas Lease dated July 19, 2005, from the State of Texas, by and through
      the Commissioner of the General Land Office of the State of Texas, as
      Lessor, to Cinco Resources, Inc., as Lessee, covering Oil and Gas Lease
      Number M-105373, being the North One-Half (N/2) of Tract 175, Matagorda
      Bay, Calhoun and Matagorda Counties, Texas, containing approximately 320
      acres as shown on the applicable Official Submerged Area Map on file in
      the Texas General Land Office, Austin, Texas, and recorded in the Official
      Records of Calhoun County, Texas, as File No. 96378, Volume 426, Page 919,
      and recorded in the Official Records of Matagorda County, Texas, as File
      No. 063722.

              


      

       

      
        
           


        

        
          48

          
            

          

        

        
           


        

      


      SCHEDULE
3(bb) - continued

       

      Lease
Interest:  36.2874% WI / 26.852676% (to July 19, 2009) /
25.945491% (after July 19, 2009)

       

      
        	
                       
      10.

              	
                Oil
      and Gas Lease dated October 4, 2005, from the State of Texas, by and
      through the Commissioner of the General Land Office of the State of Texas,
      as Lessor, to Cinco Resources, Inc., as Lessee, covering Oil and Gas Lease
      Number M-105679, being the North One-Half (N/2) of Tract 178, Matagorda
      Bay, Matagorda County, Texas, containing approximately 320 acres as shown
      on the applicable Official Submerged Area Map on file in the Texas General
      Land Office, Austin, Texas, and recorded in the Official Records of
      Matagorda County, Texas, as File No.
059741.

              


      

       

      Lease
Interest:  30.30% WI / 22.422% NRI (to October 4, 2009)/
21.6645% NRI (after October 4, 2009)

       

      
        	
                       
      11.

              	
                Oil
      and Gas Lease dated October 4, 2005, from the State of Texas, by and
      through the Commissioner of the General Land Office of the State of Texas,
      as Lessor, to Cinco Resources, Inc., as Lessee, covering Oil and Gas Lease
      Number M-105678, being the South One-Half (S/2) of Tract 176, Matagorda
      Bay, Calhoun and Matagorda Counties, Texas, containing approximately 320
      acres as shown on the applicable Official Submerged Area Map on file in
      the Texas General Land Office, Austin, Texas, and recorded in the Official
      Records of Calhoun County, Texas, as File No. 96971, Volume 429, Page 918,
      and recorded in the Official Records of Matagorda County, Texas, as File
      No. 059740.

              


      

       

      Lease
Interest:  30.30% WI / 22.422% NRI (to October 4, 2009)/
21.6645% NRI (after October 4, 2009)

       

      Sydney/150-Deep
Prospect

       

      
        	
                       
      12.

              	
                Oil
      and Gas Lease dated July 1, 2003, from the State of Texas, by and through
      the Commissioner of the General Land office of the State of Texas, as
      Lessor, to LLOG Exploration Texas, L.P., as Lessee, covering Oil and Gas
      Lease Number M-103190, being the North One-Half (N/2) of Tract 127,
      Matagorda Bay, Calhoun County, Texas, containing approximately 320 acres
      as shown on the applicable Official Submerged Area Map on file in the
      Texas General Land Office, Austin, Texas, and recorded in the Official
      Records of Calhoun County, Texas, as File No. 00081323, Volume 344, Page
      875.

              


      

       

      
        	
                       
      13.

              	
                Oil
      and Gas Lease dated July 1, 2003, from the State of Texas, by and through
      the Commissioner of the General Land office of the State of Texas, as
      Lessor, to LLOG Exploration Texas, L.P., as Lessee, covering Oil and Gas
      Lease Number M-103191, being the South One-Half (S/2) of Tract 127,
      Matagorda Bay, Calhoun County, Texas, containing approximately 320 acres
      as shown on the applicable Official Submerged Area Map on file in the
      Texas General Land Office, Austin, Texas, and recorded in the Official
      Records of Calhoun County, Texas, as File No.0081324, Volume 344, Page
      882.

              


      

       

      
        
           


        

        
          49

          
            

          

        

        
           


        

      


      SCHEDULE
3(bb) - continued

       

      
        	
                       
      14.

              	
                Oil
      and Gas Lease dated July 1, 2003, from the State of Texas, as Lessor, to
      Cinco Natural Resources Corporation, as Lessee, covering Oil and Gas Lease
      No. M-103194, being the south one-half (S/2) of State Tract 150, Matagorda
      Bay, Calhoun County, Texas, containing approximately 320.0 acres, recorded
      in File No. 82095, Volume 349, Page 1 of the Official Records of Calhoun
      County, Texas.  (This tract is also in the Shark
      Prospect.)

              


      

       

      
        	
                       
      15.

              	
                Oil
      and Gas Lease dated July 1, 2003, from the State of Texas, by and through
      the Commissioner of the General Land office of the State of Texas, as
      Lessor, to LLOG Exploration Texas, L.P., as Lessee, covering Oil and Gas
      Lease Number M-103195, being the South One-Half (S/2) of Tract 151,
      Matagorda Bay, Calhoun County, Texas, containing approximately 320 acres
      as shown on the applicable Official Submerged  Area Map on file
      in the Texas General Land Office, Austin, Texas, and recorded in the
      Official Records of Calhoun County, Texas, as File No. 00081326, Volume
      344, Page 896.

              


      

       

      
        	
                       
      16.

              	
                Oil
      and Gas Lease dated July 1, 2003, from the State of Texas, by and through
      the Commissioner of the General Land office of the State of Texas, as
      Lessor, to LLOG Exploration Texas, L.P., as Lessee, covering Oil and Gas
      Lease Number M-103192, being the North One-Half (N/2) of Tract 128,
      Matagorda Bay, Calhoun County, Texas, containing approximately 320 acres
      as shown on the applicable Official Submerged Area Map on file in the
      Texas General Land Office, Austin, Texas, and recorded in the Official
      Records of Calhoun County, Texas, as File No. 00081325, Volume 344, Page
      889.

              


      

      


      
        	
                       
      17.

              	
                Oil
      and Gas Lease dated July 6, 2004, from the State of Texas, by and through
      the Commissioner of the General Land office of the State of Texas, as
      Lessor, to LLOG Exploration Texas, L.P., as Lessee, covering Oil and Gas
      Lease Number M-104022, being the North One-Half (N/2) of Tract 150,
      Matagorda Bay, Calhoun County, Texas, containing approximately 320 acres
      as shown on the applicable Official Submerged Area Map on file in the
      Texas General Land Office, Austin, Texas, and recorded in the Official
      Records of Calhoun County, Texas, as File No. 00088242, Volume 381, Page
      433.

              


      

       

      
        	
                       
      18.

              	
                Oil
      and Gas Lease dated July 19, 2005, from the State of Texas, by and through
      the Commissioner of the General Land office of the State of Texas, as
      Lessor, to LLOG Exploration Texas, L.P., as Lessee, covering Oil and Gas
      Lease Number M-105372, being the South One-Half (S/2) of Tract 154,
      Matagorda Bay, Calhoun County, Texas, containing approximately 320 acres
      as shown on the applicable Official Submerged Area Map on file in the
      Texas General Land Office, Austin, Texas, and recorded in the Official
      Records of Calhoun County, Texas, as File No. 00095163, Volume 420, Page
      166.

              


      

       

      
        
           


        

        
          50

          
            

          

        

        
           


        

      


      SCHEDULE
3(bb) - continued

       

      Lease
Interest: N/2 ST
150 (SAVE AND EXCEPT the portion excluded from the State Tract 127 No. 1 Unit,
being depths above the stratigraphic equivalent of 100’ below the base of the
9800’ Sand TVD as seen in the Cockrell Corporation Aquamarine Unit Well No. 1
(API No. 42-057-31600) and the S/2 of ST 154: 53.8 % WI / 39.6775 %
NRI

       

      Lease
Interest: INSOFAR
only as to that portion of the N/2 ST 150 excluded from the State Tract 127 No.
1 Unit, being depths above the stratigraphic equivalent of 100’ below the base
of the 9800’ Sand TVD as seen in the Cockrell Corporation Aquamarine Unit Well
No. 1 (API No. 42-057-31600):  74.8 % WI / 55.165% NRI

       

      Lease
Interest: S/2 and
the N/2 of ST 127; N/2 ST 128; and the S/2 of ST 151:

      53.8 % WI
/ 38.3325 % NRI

      


      Unit Well
Interest:

       

      Sonterra – State Tract 127 No. 1 Unit
#1 Well, API No. 42-057-31770:

       

      
        	
                 
      

              	
                A.

              	
                3.558523%
      WI to Casing Point/ 5.113335% NRI to Casing
  Point;

              


      

      


      
        	
                 
      

              	
                B.

              	
                7.025190%
      WI at Casing Point BPO of Raptor and Hayes non-consent WI and BPO Rainier
      4.5% WI / 5.113335% NRI;

              


      

      


      
        	
                 
      

              	
                C.

              	
                6.571999%
      WI APO Rainier 4.5% WI and BPO Raptor and Hayes non-consent WI / 4.783477
      % NRI; and

              


      

      


      
        	
                 
      

              	
                D.

              	
                11.359472%
      WI APO Raptor and Hayes non-consent (and simultaneous back-in to 25% of
      South Texas Oil’s WI/NRI **) / 8.268073 %
NRI

              


      

      


      Unit
Description:

       

      State of
Texas Tract 127 No. 1 Unit Well #1, covering 2,240 acres, consisting of oil and
gas leases covering the S/2 and the N/2 of State Tract 127; the N/2 of State
Tract 128; the S/2 of State Tract 151; the S/2 of State Tract 154;
the  S/2 ST 150, Save and Except depths above the stratigraphic
equivalent of 100' below the base of the 9800' Sand TVD as seen in the Cockrell
Corporation Aquamarine Unit Well No. 1 (API No. 42-057-31600); and the N/2 ST
150 North Half of State Tract 150, Save and Except  the depths above
the stratigraphic equivalent of 100 feet below the base
of the 9800’ Sand TVD as seen in the Cockrell Corporation Aquamarine Unit Well
No. 1 (API No. 42-057-31600) which shall be excluded from the Term Pooling
Agreement described below:

       

      Term
Pooling Agreement from the Commissioner of the General Land Office, as Lessor,
to Sonterra Resources, Inc., as Lessee, dated February 20, 2008, but effective
December 11, 2008, and filed of record on February 28, 2008 as Instrument No.
111111 in the Official Records of Calhoun County, Texas, forming a pooled unit
covering all depths, except from the surface to 10,000’ TVD on all of State
Lease M-103194 and that part of State Lease M-104022 shown on Exhibit “D”
attached thereto encompassing the S/2 of Tract 127 (M-103191);  N/2 of
Tract 127 (M-103190); N/2 of Tract 128 (M-103192); N/2 of Tract 150 (M-104022);
S/2 of Tract 151 (M-103195); and S/2 of Tract 154 (M-105372).

       

      
        
           


        

        
          51

          
            

          

        

        
           


        

      


      SCHEDULE
3(bb) - continued

       

      CONTRACTS AFFECTING THE
PROPERTIES

       

      
        	
                1.

              	
                The
      spud bonus and overriding royalty interest created under that certain
      Master Geophysical Data-Use License Agreement dated November 15, 2002, by
      and between JEBCO Seismic, L.P. and Cinco, as supplemented by Supplemental
      Agreement No. 1 (Matagorda Bay) dated November 15, 2002 and amended by
      Amendment to Supplemental No. 1 dated July 7, 2004, effective November 15,
      2002.; and Supplemental Agreement No. 2 dated July 7,
  2004.

              


      

       

      
        	
                2.

              	
                Participation
      Agreement dated November 12, 2003, by and between Cinco Natural Resources
      Corporation and Pinon Holdings,
L.L.C.

              


      

       

      
        	
                3.

              	
                Settlement
      Agreement and Release dated effective July 23, 2004, by and between Cinco
      Natural Resources Corporation, Pinon Holdings, L.L.C. and Union Oil
      Company of California, Unocal Corporation, and Union Oil Company of
      California D/B/A/ Spirit Energy 76.

              


      

       

      
        	
                4.

              	
                Trade
      Agreement dated August 1, 2004, by and between Cinco Natural Resources
      Corporation, Pinon Holdings, L.L.C. and Flash Gas & Oil Southwest,
      Inc.

              


      

       

      
        	
                5.

              	
                Operating
      Agreement dated August 1, 2004 by and between Flash Gas & Oil
      Southwest, Inc., as Operator, and Cinco Natural Resources Corporation and
      Pinon Holdings, L.L.C., as Non-Operators, covering the S/2 of ST 150,
      Calhoun County, Texas, limited however as to rights between the surface
      down to 9400' TVD, including the Matagorda Bay ST 150 #1 wellbore (APO
      42-057-31600-00).

              


      

       

      
        	
                6.

              	
                Natural
      Gas Gathering Agreement dated August 1, 2004, by and between Cinco Natural
      Resources Corporation, Pinon Holdings, L.L.C. and Flash Gas & Oil
      Southwest, Inc., which agreement was assigned by Flash Gas & Oil
      Southwest, Inc. November 1, 2007, to Sonterra Resources,
    Inc.

              


      

       

      
        	
                7.

              	
                Transportation
      Service Agreement #001 dated August 1, 2004, by and between Cinco Natural
      Resources Corporation, Pinon Holdings, L.L.C., Shipper, and Flash Gas
      & Oil Southwest, Inc., assigned to Sonterra Resources, Inc. November
      1, 2007.

              


      

       

      
        	
                8.

              	
                Transportation
      Service Agreement #002 dated September 7, 2005, between BOSS Exploration
      & Production Corporation, Shipper, and Flash Gas & Oil Southwest,
      Inc., assigned to Sonterra Resources, Inc. November 1,
    2007.

              


      

       

      
        
           


        

        
          52

          
            

          

        

        
           


        

      


      SCHEDULE
3(bb) - continued

       

      
        	
                9.

              	
                Participation
      Agreement dated September 1, 2004, by and between Cinco Natural Resources
      Corporation, Cibola Exploration Partners, L.P., BOSS Exploration &
      Production Corporation, Orr Exploration, Ltd., Raptor Resources, Inc. and
      Hayes Exploration, Ltd. covering the Matagorda Bay
  Project.

              


      

       

      
        	
                10.

              	
                Purchase
      and Sale Agreement dated effective September 1, 2004, by and between Cinco
      Natural Resources Corporation and Cinco Energy Corporation covering among
      other properties, the Ray Prospect which included the leases covering the
      S/2 of ST 175, S/2 of ST 178 and N/2 of ST 179, Matagorda and Calhoun
      Counties, Texas.

              


      

       

      
        	
                11.

              	
                Participation
      Agreement dated January 21, 2005, by and between Cinco Natural Resources
      Corporation, Cinco Energy Corporation and Gasco L.P. covering the
      Matagorda Bay Project.

              


      

       

      
        	
                12.

              	
                Notice
      of Declaration of Prospect Areas dated April 1, 2005 from Matthew G.
      Gallagher to Cinco Natural Resources Corporation wherein the Barracuda,
      Marlin and Starfish Prospects were developed and submitted to
      Cinco.

              


      

       

      
        	
                13.

              	
                Letter
      Agreement dated June 27, 2005, effective December 1, 2004, by and between
      Cinco Natural Resources Corporation, Cinco Energy Corporation and BOSS
      Exploration & Production Corporation, wherein BOSS agrees to bear its
      proportionate share of the overriding royalty interest entitled to Matthew
      Gallagher in the Matagorda Bay Confidential
  Area.

              


      

       

      
        	
                14.

              	
                Letter
      Agreement dated June 27, 2005, effective December 1, 2004, by and between
      Cinco Natural Resources Corporation, Cinco Energy Corporation and Gasco,
      L.P., wherein Gasco agrees to bear its proportionate share of the
      overriding royalty interest entitled to Matthew Gallagher in the Matagorda
      Bay Confidential Area.

              


      

       

      
        	
                15.

              	
                Letter
      Agreement dated June 27, 2005, effective December 1, 2004, by and between
      Cinco Natural Resources Corporation, Cinco Energy Corporation and Cibola
      Exploration Partners, L.P., wherein Cibola agrees to bear its
      proportionate share of the overriding royalty interest entitled to Matthew
      Gallagher in the Matagorda Bay Confidential
  Area.

              


      

       

      
        	
                16.

              	
                Letter
      Agreement dated June 27, 2005, effective December 1, 2004, by and between
      Cinco Natural Resources Corporation, Cinco Energy Corporation and Orr
      Exploration, Ltd., wherein Orr agrees to bear its proportionate share of
      the overriding royalty interest entitled to Matthew Gallagher in the
      Matagorda Bay Confidential Area.

              


      

       

      
        	
                17.

              	
                Letter
      Agreement dated June 27, 2005, effective December 1, 2004, by and between
      Cinco Natural Resources Corporation, Cinco Energy Corporation and Hardrock
      Partners, Ltd., wherein Hardrock agrees to bear its proportionate share of
      the overriding royalty interest entitled to Matthew Gallagher in the
      Matagorda Bay Confidential Area.

              


      

       

      
        
           


        

        
          53

          
            

          

        

        
           


        

      


      SCHEDULE
3(bb) - continued

       

      
        	
                18.

              	
                Letter
      Agreement dated June 27, 2005, effective December 1, 2004, by and between
      Cinco Natural Resources Corporation, Cinco Energy Corporation and Raptor
      Resources, Inc., wherein Raptor agrees to bear its proportionate share of
      the overriding royalty interest entitled to Matthew Gallagher in the
      Matagorda Bay Confidential Area.

              


      

       

      
        	
                19.

              	
                Letter
      Agreement dated June 27, 2005, effective December 1, 2004, by and between
      Cinco Natural Resources Corporation, Cinco Energy Corporation and Hayes
      Exploration, Ltd., wherein Hayes agrees to bear its proportionate share of
      the overriding royalty interest entitled to Matthew Gallagher in the
      Matagorda Bay Confidential Area.

              


      

       

      
        	
                20.

              	
                Operating
      Agreement dated February 1, 2005, by and between BOSS Exploration &
      Production Corporation, as Operator, and Cinco Natural Resources
      Corporation, et al, as Non-Operators, covering the S/2 of ST 150,
      Matagorda Bay, Calhoun County, Texas, limited however as to rights below
      the stratigraphic equivalent of 9400' true vertical depth as seen in the
      Cockrell Corporation – Aquamarine Unit Well No. 1 (API#
      42-057-31600).

              


      

       

      
        	
                21.

              	
                Purchase
      and Sale Agreement dated effective June 1, 2005, by and between Cinco
      Natural Resources Corporation, as Seller, and Cinco Resources, Inc., as
      Buyer, covering among other properties, the Shark Prospect and wells (S/2
      of ST 150; ST 150 #1 & #2 Wells) and the Manta Prospect (such leases
      have now terminated), Matagorda Bay
Project.

              


      

       

      
        	
                22.

              	
                Designation
      of Prospects dated August 24, 2005, wherein all working interest partners
      in the Matagorda Bay Project, being Cinco Resources, Inc., BOSS
      Exploration & Production Corporation, Cibola Exploration Partners,
      L.P., Gasco, L.P., Raptor Resources, Inc., Orr Exploration, Ltd., Hayes
      Exploration, Ltd., and Hardrock Partners, Ltd. agreed to the designation
      of the Barracuda, Marlin and Starfish
Prospects.

              


      

       

      
        	
                23.

              	
                Notice
      of Declaration of Prospect Areas dated August 30, 2005, from Matthew G.
      Gallagher to Cinco Resources, Inc. wherein the Mackeral Prospect was
      developed and submitted to Cinco.

              


      

       

      
        	
                24.

              	
                Designation
      of Prospect dated October 6, 2005, wherein all working interest partners
      in the Matagorda Bay Project, being Cinco Resources, Inc., BOSS
      Exploration & Production Corporation, Cibola Exploration Partners,
      L.P., Gasco, L.P., Raptor Resources, Inc., Orr Exploration, Ltd., Hayes
      Exploration, Ltd., and Hardrock Partners, Ltd. agreed to the designation
      of the Mackerel Prospect.

              


      

       

      
        	
                25.

              	
                Operating
      Agreement dated November 1, 2005, by and between BOSS Exploration &
      Production Corporation, as Operator, and Cinco Natural Resources
      Corporation, et al, as Non-Operators, covering the S/2 of ST 178, N/2 of
      ST 179 and S/2 of ST 175, Matagorda Bay, Calhoun and Matagorda Counties,
      Texas (Ray Prospect).

              


      

       

      
        
           


        

        
          54

          
            

          

        

        
           


        

      


      SCHEDULE
3(bb) - continued

       

      
        	
                26.

              	
                Letter
      Agreement dated effective June 1, 2006 wherein all working interest
      partners in the Matagorda Bay Project, being Cinco Resources, Inc., BOSS
      Exploration & Production Corporation, Cibola Exploration Partners,
      L.P., Gasco, L.P., Raptor Resources, Inc., Orr Exploration, Ltd., Hayes
      Exploration, Ltd., and Hardrock Partners, Ltd. agreed to grant Matthew
      Gallagher a 0.75% of 8/8ths overriding royalty interest in the S/2 of
      State Tract 150, Matagorda Bay, Calhoun County, Texas, limited however
      as to the interval from 50' below the stratigraphic equivalent of the top
      of the 9800' Sand down to the center of the earth, said top of 9800' Sand
      being equal to 9790' true vertical depth as seen on the electric log for
      the Cockrell Corporation – Aquamarine Unit Well No. 1 (API#
      42-057-31600).

              


      

       

      
        	
                27.

              	
                Agreement
      and Plan of Merger dated effective May 31, 2007, wherein Cinco Natural
      Resources Corporation and Cinco Resources, Inc. merge, Cinco Natural
      Resources Corporation being named as the surviving
  company.

              


      

       

      
        	
                28.

              	
                Independent
      Contractor Agreement dated December 1, 2004, by and between Matthew
      Gallagher and Cinco Natural Resources Corporation, et al, as amended by
      instrument dated June 27, 2005.

              


      

       

      
        	
                29.

              	
                Three
      Assignments of Overriding Royalty Interest from LLOG Exploration Texas, L.
      P. to Rainier Exploration, L. P., as
follows:

              


      

       

      Assignment
of 2% overriding royalty dated effective July 1, 2003, recorded under File No.
00083126, Official Records of Calhoun County, Texas;

       

      Assignment
of 2% overriding royalty dated effective July 6, 2004, recorded under File No.
00090971, Official Records of Calhoun County, Texas; and

       

      
        	 	
                Assignment
      of 2% overriding royalty dated effective July 19, 2005, recorded under
      File No. 00095723, Official Records of Calhoun County,
    Texas.

              


      

       

      
        	
                30.

              	
                Project
      Participation Agreement dated December 1, 2007, between Cinco Natural
      Resources Corporation, Sonterra Resources, Inc. and Sonterra Operating,
      Inc. covering the Sydney/150 Deep
Prospect.

              


      

       

      
        	
                31.

              	
                Project
      Participation Agreement dated December 1, 2007 between Orr Exploration,
      Ltd., Sonterra Resources, Inc. and Sonterra Operating, Inc. covering the
      Sydney/150 Deep Prospect.

              


      

       

      
        	
                32.

              	
                Project
      Participation Agreement dated December 1, 2007, between Gasco, L. P.,
      Sonterra Resources, Inc. and Sonterra Operating, Inc. covering the
      Sydney/150 Deep Prospect.

              


      

       

      
        	
                33.

              	
                Project
      Participation Agreement dated December 1, 2007, between Hardrock Partners,
      Ltd., Sonterra Resources, Inc. and Sonterra Operating, Inc. covering the
      Sydney/150 Deep Prospect.

              


      

       

      
        
           


        

        
          55

          
            

          

        

        
           


        

      


      SCHEDULE
3(bb) - continued

      


       

      
        	
                34.

              	
                Project
      Participation Agreement dated December 1, 2007, between BOSS Exploration
      & Production Corporation, Sonterra Resources, Inc. and Sonterra
      Operating, Inc. covering the Sydney/150 Deep
  Prospect.

              


      

       

      
        	
                35.

              	
                Letter
      Agreement dated October 30, 2007, between Rainier Exploration, L. P.,
      Sonterra Resources, Inc. and Sonterra Operating, Inc., covering the
      Sydney/150 Deep Prospect.

              


      

       

      
        	
                36.

              	
                Project
      Participation Agreement dated May 1, 2008, between Arbol Resources, Inc.,
      Sonterra Resources, Inc. and Sonterra Operating, Inc. covering the
      Sydney/150 Deep Prospect.

              


      

       

      
        	
                37.

              	
                Project
      Participation Agreement dated effective July 1, 2008, between Vinland
      Energy Capital I LP, Sonterra Resources, Inc. and Sonterra Operating, Inc.
      covering the Sydney/150 Deep
Prospect.

              


      

       

      
        	
                38.

              	
                Project
      Participation Agreement and Joint Operating Agreement dated May 1, 2008,
      between JHN Family Investments, LLC, Sonterra Resources, Inc. and Sonterra
      Operating, Inc. covering the Sydney/150 Deep
  Prospect.

              


      

       

      
        	
                39.

              	
                Joint
      Operating Agreement dated November 1, 2007, between Cinco Natural
      Resources Corporation, Sonterra Resources, Inc. and Sonterra Operating,
      Inc. covering the Sydney/150 Deep
Prospect.

              


      

       

      
        	
                40.

              	
                Joint
      Operating Agreement dated November 1, 2007, between Orr Exploration, Ltd.,
      Sonterra Resources, Inc. and Sonterra Operating, Inc. covering the
      Sydney/150 Deep Prospect.

              


      

       

      
        	
                41.

              	
                Joint
      Operating Agreement dated November 1, 2007, between Gasco, L. P., Sonterra
      Resources, Inc. and Sonterra Operating, Inc. covering the Sydney/150 Deep
      Prospect.

              


      

       

      
        	
                42.

              	
                Joint
      Operating Agreement dated November 1, 2007, between Hardrock Partners,
      Ltd., Sonterra Resources, Inc. and Sonterra Operating, Inc. covering the
      Sydney/150 Deep Prospect.

              


      

       

      
        	
                43.

              	
                Joint
      Operating Agreement dated November 1, 2007, between BOSS Exploration &
      Production Corporation, Sonterra Resources, Inc. and Sonterra Operating,
      Inc. covering the Sydney/150 Deep
Prospect.

              


      

       

      
        	
                44.

              	
                Joint
      Operating Agreement dated November 1, 2007, between Rainier Exploration,
      L. P., Sonterra Resources, Inc. and Sonterra Operating, Inc., covering the
      Sydney/150 Deep Prospect.

              


      

       

      
        	
                45.

              	
                Joint
      Operating Agreement dated May 1, 2008, between Arbol Resources, Inc.,
      Sonterra Resources, Inc. and Sonterra Operating, Inc. covering the
      Sydney/150 Deep Prospect.

              


      

       

      
        
           


        

        
          56

          
            

          

        

        
           


        

      


      SCHEDULE
3(bb) - continued

       

      
        	
                46.

              	
                Joint
      Operating Agreement dated effective July 1, 2008, between Vinland Energy
      Capital I LP, Sonterra Resources, Inc. and Sonterra Operating, Inc.
      covering the Sydney/150 Deep
Prospect.

              


      

       

      
        	
                47.

              	
                Joint
      Operating Agreement dated May 1, 2008, between JHN Family Investments,
      LLC, Sonterra Resources, Inc. and Sonterra Operating, Inc. covering the
      Sydney/150 Deep Prospect.

              


      

       

      
        	
                48.

              	
                Contract
      Operating Agreement dated effective June 23, 2008, between Sonterra
      Resources, Inc. with South Texas Oil Company, STO Operating Company, and
      STO Drilling Company covering the Unit as per the Term Pooling Agreement
      dated February 20, 2008.

              


      

       

      
        	
                49.

              	
                Crude
      Oil Purchase/Sale Contract No. 2007-10 effective November 1, 2007, by and
      between Louisiana Oil Marketing Company, LLC and Sonterra Resources, Inc.
      covering State of Texas Tract 150, Matagorda Bay, Calhoun County,
      Texas.

              


      

       

      
        	
                50.

              	
                Keller
      Bay Production Facility Processing & Utilization Agreement dated
      November 1, 2007, by and between Millennium Pipeline, LLC d/b/a Millennium
      Energy, LLC and Sonterra Resources, Inc., covering State of Texas Tract
      150 No. 1 Well (API# 42-057-31600).

              


      

       

      
        	
                51.

              	
                Keller
      Bay Production Facility Processing & Utilization Agreement dated
      November 1, 2007, by and between Millennium Pipeline, LLC d/b/a Millennium
      Energy, LLC and Sonterra Resources, Inc., covering State of Texas Tract
      150 No. 2 Well (API# 42-057-31600).

              


      

       

      
        	
                52.

              	
                Gas
      Purchase Contract dated November 1, 2001, by and between Flash Gas &
      Oil Southwest, Inc., Seller, and Formosa Hydrocarbons Company, Inc.,
      Buyer, covering State of Texas Tract 150 No. 1 Well (API# 42-057-31600),
      assigned by Flash Gas & Oil Southwest, Inc. to Sonterra Resources,
      Inc. on November 1, 2007.

              


      

       

      
        	
                53.

              	
                Gas
      Purchase Contract dated August 24, 2005, by and between BOSS Exploration
      & Production Corporation, Seller, and Formosa Hydrocarbons Company,
      Inc., Buyer, covering State of Texas Tract 150 No. 2 Well (API#
      42-057-31692), assigned by Flash Gas & Oil Southwest, Inc. to Sonterra
      Resources, Inc. on November 1,
2007.

              


      

       

      PIPELINE

       

      An
undivided 100.0% interest in and to the seven (7) mile six-inch (6") S80 Gr B
pipeline connecting Matagorda Bay, Calhoun County, Texas State Tract 150 No. 1
line heater platform to the Keller Bay Facility onshore.

       

      
        
           


        

        
          57

          
            

          

        

        
           


        

      


      SCHEDULE
3(bb) - continued

       

      CONTRACTS AFFECTING THE
PIPELINE PROPERTY

       

      
        	
                1.

              	
                Pipeline
      Easement Agreement dated effective July 27, 2001, from Margaret S. Moss
      and Associates to Millennium Pipeline, LLC d/b/a Millennium Energy, LLC, a
      Memorandum of which is recorded in Volume 285, page 297, Official Public
      Records of Calhoun County, Texas.

              


      

       

      
        	
                2.

              	
                Gas
      Pipeline Easement and Right-of-Way Agreement dated effective June 20,
      2001, from W. H. Bauer, Jr. to Millennium Pipeline, LLC d/b/a Millennium
      Energy, LLC, a Memorandum of which is recorded in Volume 284, page 743,
      Official Public Records of Calhoun County,
  Texas.

              


      

       

      
        	
                3.

              	
                Miscellaneous
      Easement No. ME20040057 dated April 1, 2004, ending March 31, 2014, from
      the State of Texas to Flash Gas & Oil Southwest, Inc., recorded in
      File #00087233, Volume 376, page 275, Official Public Records of Calhoun
      County, Texas, for subsurface easement across State Tract 150, being 35.5
      rods long and 30 feet wide with 15 feet either side of a center line; and
      which said easement was assumed by and assigned to Sonterra Resources,
      Inc. by document dated May 1, 2007, recorded as Document #111379, Official
      Public Records, Calhoun County,
Texas.

              


      

       

      
        	
                4.

              	
                Miscellaneous
      Easement No. ME20010086 dated August 1, 2001, ending July 31, 2011, from
      the State of Texas to Millennium Pipeline, LLC d/b/a Millennium Energy,
      LLC, recorded in File #0070093, Volume 286, page 887, Official Public
      Records of Calhoun County, Texas, for 6" pipeline across State Tracts 100,
      123, 124, 126, 127 and 150, being 1073.59 rods long and 30 feet wide with
      15 feet either side of a center line; and which said easement was assumed
      by and assigned to Sonterra Resources, Inc. by document dated May 1, 2007,
      recorded as Document #111379, Official Public Records, Calhoun County,
      Texas.

              


      

       

      
        
           


        

        
          58

          
            

          

        

        
           


        

      

       

      SCHEDULE
3(cc)

       

      EXCLUDED
SUBSIDIARIES AND VELOCITY SUBSIDIARIES

       

      None.

       

      
        
          
          

        

        
          59

          
            

          

        

        
          
          

        

      

       

      SCHEDULE
3(ff)

       

      STOCK
OPTIONS

       

      No
exceptions

       

      
        
           


        

        
          60