SECURITIES
      PURCHASE AGREEMENT

    


    BY
      AND AMONG

    


    SONTERRA
      RESOURCES, INC.

    


    AND

    


    THE
      PERSONS LISTED ON THE SCHEDULE OF BUYERS 

    


    ATTACHED
      HERETO

     

    Dated
      as of November 13, 2008


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    


    TABLE
      OF CONTENTS

     

    
      	
              1.

            	
              PURCHASE
                AND SALE OF NOTES, WARRANTS AND OVERRIDES.

            	
              3

            
	 	
              a.

            	
              Purchase
                and Sale of Notes, Warrants and Overrides

            	
              3

            
	 	
              b.

            	
              The
                Closing Date

            	
              4

            
	 	
              c.

            	
              Form
                of Payment

            	
              4

            
	 	
              d.

            	
              Overrides

            	
              4

            
	 	 	 
	
              2.

            	
              BUYER
                REPRESENTATIONS AND WARRANTIES.

            	
              8

            
	 	
              a.

            	
              Investment
                Purpose

            	
              8

            
	 	
              b.

            	
              Accredited
                Investor Status

            	
              8

            
	 	
              c.

            	
              Reliance
                on Exemptions

            	
              8

            
	 	
              d.

            	
              Information

            	
              8

            
	 	
              e.

            	
              No
                Governmental Review

            	
              9

            
	 	
              f.

            	
              Transfer
                or Resale

            	
              9

            
	 	
              g.

            	
              Legends

            	
              9

            
	 	
              h.

            	
              Authorization;
                Enforcement; Validity

            	
              10

            
	 	
              i.

            	
              Residency
                and Offices

            	
              11

            
	 	 	 
	
              3.

            	
              REPRESENTATIONS
                AND WARRANTIES OF THE COMPANY.

            	
              11

            
	 	
              a.

            	
              Organization
                and Qualification

            	
              11

            
	 	
              b.

            	
              Authorization;
                Enforcement; Validity

            	
              12

            
	 	
              c.

            	
              Capitalization

            	
              13

            
	 	
              d.

            	
              Issuance
                of Securities

            	
              14

            
	 	
              e.

            	
              No
                Conflicts

            	
              15

            
	 	
              f.

            	
              SEC
                Reports; Financial Statements; Public Communications

            	
              16

            
	 	
              g.

            	
              Absence
                of Certain Changes

            	
              17

            
	 	
              h.

            	
              Absence
                of Litigation

            	
              18

            
	 	
              i.

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

            	
              18

            
	 	
              j.

            	
              Acknowledgment
                Regarding Buyers’ Purchase of Securities

            	
              19

            
	 	
              k.

            	
              No
                General Solicitation

            	
              19

            
	 	
              l.

            	
              No
                Integrated Offering

            	
              19

            
	 	
              m.

            	
              Dilutive
                Effect

            	
              19

            
	 	
              n.

            	
              Employee
                Relations

            	
              20

            
	 	
              o.

            	
              Intellectual
                Property Rights

            	
              20

            
	 	
              p.

            	
              Environmental
                Laws

            	
              21

            
	 	
              q.

            	
              Title

            	
              22

            
	 	
              r.

            	
              Insurance

            	
              23

            
	 	
              s.

            	
              Regulatory
                Permits

            	
              24

            
	 	
              t.

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

            	
              24

            
	 	
              u.

            	
              Bank
                Accounts

            	
              25

            
	 	
              v.

            	
              Tax
                Status

            	
              25

            
	 	
              w.

            	
              Transactions
                With Affiliates

            	
              25

            
	 	
              x.

            	
              Application
                of Takeover Protections; Rights Agreement

            	
              26

            


    


    
      
        
        

      

      
        i

        
          

        

      

      
        
        

      

    

    


    
      	 	
              y.

            	
              Foreign
                Corrupt Practices

            	
              26

            
	 	
              z.

            	
              Outstanding
                Indebtedness; Liens

            	
              27

            
	 	
              aa.

            	
              Ranking
                of Notes

            	
              27

            
	 	
              bb.

            	
              Real
                Property

            	
              28

            
	 	
              cc.

            	
              Excluded
                Subsidiaries and Velocity Subsidiaries

            	
              29

            
	 	
              dd.

            	
              No
                Materially Adverse Contracts, Etc

            	
              29

            
	 	
              ee.

            	
              Investment
                Company

            	
              29

            
	 	
              ff.

            	
              Stock
                Options

            	
              29

            
	 	
              gg.

            	
              Overrides

            	
              30

            
	 	
              hh.

            	
              Schedules

            	
              30

            
	 	 	 
	
              4.

            	
              AFFIRMATIVE
                COVENANTS.

            	
              30

            
	 	
              a.

            	
              Reasonable
                Best Efforts

            	
              30

            
	 	
              b.

            	
              Form D
                and Blue Sky

            	
              30

            
	 	
              c.

            	
              Reporting
                Status

            	
              30

            
	 	
              d.

            	
              Use
                of Proceeds

            	
              32

            
	 	
              e.

            	
              Financial
                Information

            	
              33

            
	 	
              f.

            	
              Internal
                Accounting Controls

            	
              33

            
	 	
              g.

            	
              Reservation
                of Shares

            	
              34

            
	 	
              h.

            	
              Listing

            	
              34

            
	 	
              i.

            	
              Expenses

            	
              34

            
	 	
              j.

            	
              Disclosure
                of Transactions and Other Material Information

            	
              35

            
	 	
              k.

            	
              Pledge
                of Securities

            	
              36

            
	 	
              l.

            	
              Notices

            	
              36

            
	 	
              m.

            	
              Compliance
                with Laws and Maintenance of Permits

            	
              37

            
	 	
              n.

            	
              Inspection
                and Audits

            	
              38

            
	 	
              o.

            	
              Insurance

            	
              38

            
	 	
              p.

            	
              Collateral

            	
              39

            
	 	
              q.

            	
              Taxes

            	
              39

            
	 	
              r.

            	
              Intellectual
                Property

            	
              40

            
	 	
              s.

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

            	
              40

            
	 	
              t.

            	
              Drilling
                Title Opinions

            	
              40

            
	 	
              u.

            	
              Security
                Covenants

            	
              40

            
	 	
              v.

            	
              Subsidiary
                Interests

            	
              42

            
	 	
              w.

            	
              Subsidiary
                Restrictions

            	
              43

            
	 	
              x.

            	
              Further
                Instruments and Acts

            	
              43

            
	 	
              y.

            	
              Additional
                Financial Information

            	
              44

            
	 	
              z.

            	
              Amendment
                of Certificate of Incorporation

            	
              44

            
	 	
              aa.

            	
              Certificate
                of Designation

            	
              44

            
	 	
              bb.

            	
              Additional
                Overrides

            	
              44

            
	 	 	 
	
              5.

            	
              NEGATIVE
                COVENANTS

            	
              45

            
	 	
              a.

            	
              Prohibition
                Against Variable Priced Securities

            	
              45

            
	 	
              b.

            	
              Status

            	
              45

            
	 	
              c.

            	
              Stay,
                Extension and Usury Laws

            	
              45

            
	 	
              d.

            	
              Payment
                Restrictions Affecting Subsidiaries

            	
              45

            


    


    
      
        
        

      

      
        ii

        
          

        

      

      
        
        

      

    

    


    
      	 	
              e.

            	
              Prepayments

            	
              46

            
	 	
              f.

            	
              Indebtedness

            	
              46

            
	 	
              g.

            	
              Liens

            	
              46

            
	 	
              h.

            	
              Sale
                of Collateral

            	
              47

            
	 	
              i.

            	
              Corporate
                Existence

            	
              48

            
	 	
              j.

            	
              Restrictions
                on Loans; Investments; Subsidiary Equity

            	
              48

            
	 	
              k.

            	
              Equipment

            	
              49

            
	 	
              l.

            	
              Affiliate
                Transactions

            	
              49

            
	 	
              m.

            	
              Settling
                of Accounts

            	
              49

            
	 	
              n.

            	
              Executive
                Compensation

            	
              50

            
	 	
              o.

            	
              Limitation
                on Sale and Leaseback Transactions

            	
              50

            
	 	
              p.

            	
              Investment
                Company

            	
              50

            
	 	
              q.

            	
              Leases

            	
              50

            
	 	
              r.

            	
              Restriction
                on Purchases or Payments

            	
              50

            
	 	
              s.

            	
              No
                Avoidance of Obligations

            	
              50

            
	 	
              t.

            	
              Right
                to Participate in Future Financing

            	
              51

            
	 	
              u.

            	
              Limits
                on Additional Issuances

            	
              52

            
	 	
              v.

            	
              No
                Integrated Offering

            	
              52

            
	 	
              w.

            	
              Regulation
                M

            	
              52

            
	 	
              x.

            	
              Fundamental
                Changes; Line of Business

            	
              52

            
	 	 	 	 
	
              6.

            	
              CONDITIONS
                TO THE OBLIGATION OF THE COMPANY TO SELL

            	
              53

            
	 	 	 
	
              7.

            	
              CONDITIONS
                TO THE OBLIGATION OF THE BUYERS TO PURCHASE

            	
              53

            
	 	 	 
	
              8.

            	
              INDEMNIFICATION.

            	
              55

            
	 	 	 
	
              9.

            	
              GOVERNING
                LAW; MISCELLANEOUS.

            	
              57

            
	 	
              a.

            	
              Governing
                Law; Jurisdiction; Jury Trial

            	
              57

            
	 	
              b.

            	
              Counterparts

            	
              58

            
	 	
              c.

            	
              Headings

            	
              58

            
	 	
              d.

            	
              Severability

            	
              58

            
	 	
              e.

            	
              Entire
                Agreement; Amendments

            	
              58

            
	 	
              f.

            	
              Notices

            	
              58

            
	 	
              g.

            	
              Successors
                and Assigns

            	
              60

            
	 	
              h.

            	
              No
                Third Party Beneficiaries

            	
              60

            
	 	
              i.

            	
              Survival

            	
              60

            
	 	
              j.

            	
              Further
                Assurances

            	
              60

            
	 	
              k.

            	
              Termination

            	
              60

            
	 	
              l.

            	
              No
                Strict Construction

            	
              61

            
	 	
              m.

            	
              Remedies

            	
              61

            
	 	
              n.

            	
              Rescission
                and Withdrawal Right

            	
              61

            
	 	
              o.

            	
              Payment
                Set Aside

            	
              61

            
	 	
              p.

            	
              Transfer
                Agent Instructions

            	
              62

            
	 	
              q.

            	
              Interpretative
                Matters

            	
              62

            
	 	
              r.

            	
              Independent
                Nature of the Buyers

            	
              62

            


    


    
      
        
        

      

      
        iii

        
          

        

      

      
        
        

      

    

     

    SECURITIES
      PURCHASE AGREEMENT

     

    SECURITIES
      PURCHASE 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”),
      and
      the investors listed on the Schedule
      of Buyers
      attached
      hereto (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. Buyers,
      severally and not jointly, wish to purchase from the Company, and the Company
      wishes to sell to Buyers, on the Closing Date (as defined in Section
      1(b)),
      upon
      the terms and conditions stated in this Agreement, (1) senior secured notes,
      in
      the form attached as Exhibit
      A,
      in an
      original aggregate principal amount of $8,875,000 (such notes, together with
      any
      promissory notes 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 “Notes”),
      (2)
      warrants, in the form attached as Exhibit
      B,
      to
      acquire an aggregate of 1,050,000 shares 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 warrants and any warrants issued
      pursuant to Section
      1(d)(ii),
      together with any warrants 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 “Warrants”;
      and
      the shares of Common Stock issuable from time to time upon exercise of any
      Warrants being referred to as the “Warrant
      Shares”),
      and
      (3) limited conveyances of overriding royalty interests granting the Buyers
      perpetual overriding royalty interests in the hydrocarbon production of all
      of
      the Company’s and the Subsidiaries’ current and future interest in all of their
      then current Real Property (as defined in Section
      3(bb))
      (such
      Real Property, the “Current
      Override Properties”),
      each
      in the form attached as Exhibit
      C
      (such
      limited conveyances of overriding royalty interests and any limited conveyances
      of overriding royalty interests issued pursuant to Section
      4(bb),
      as any
      of the same may be amended, supplemented, restated or otherwise modified and
      in
      effect from time to time, the “Overrides”).

     

    D. Contemporaneously
      with the closing of the purchase and sale of the Notes and the Warrants (the
      “Closing”),
      the
      parties hereto and the Included Subsidiaries (as defined in Section
      3(a))
      will
      execute and deliver a Security Agreement, in the form attached as Exhibit D
      (as the
      same may be amended, supplemented, restated or modified and in effect from
      time
      to time, the “Security
      Agreement”),
      pursuant to which the Company and the Subsidiaries will agree to provide the
      Collateral Agent (as defined in the Security Agreement, the “Collateral
      Agent”)),
      as
      agent for Buyers, with a security interest in all of the assets of the
      Company.


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    


    E. Contemporaneously
      with the Closing, the Collateral Agent, the Company and each of the Subsidiaries
      (other than the Excluded Subsidiaries) will execute and deliver one or more
      Deposit Account Control Agreements, in the form attached hereto as Exhibit E
      (together with the Supplemental Account Control Agreement (as defined herein)
      and as the same may be amended, supplemented, restated or modified and in effect
      from time to time, each an “Account
      Control Agreement”
and
      collectively, the “Account
      Control Agreements”),
      pursuant to which the Company and each of the Subsidiaries that maintains bank,
      brokerage or other similar accounts with any banks, brokerage firms and/or
      any
      other financial institutions (collectively, “Banks”)
      will
      agree to enable Buyers to perfect their security interest in all of the
      Company’s and such Subsidiary’s right, title and interest in certain accounts
      and in all collateral from time to time credited to such accounts.

     

    F. Contemporaneously
      with the Closing, the Subsidiaries (other than the Excluded Subsidiaries) will
      execute and deliver a Guaranty, in the form attached hereto as Exhibit F
      (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”).
      

     

    G. Contemporaneously
      with the Closing, the parties hereto (and the Subsidiaries (other than the
      Excluded Subsidiaries), as applicable) will execute and deliver one or more
      Pledge Agreements, in the form attached hereto as Exhibit G
      (collectively, as the same may be amended, supplemented, restated or modified
      and in effect from time to time, together, the “Pledge
      Agreement”),
      pursuant to which the Company (and the Subsidiaries, as applicable) will agree
      to pledge all of the Capital Stock and other equity in the Subsidiaries to
      the
      Collateral Agent as collateral for the Notes.

     

    H. Contemporaneously
      with the Closing, Buyers and the Debtors (as defined in the Security Agreement)
      will execute and deliver one or more mortgages, deeds of trust, assignments
      of
      production, security agreements, fixture filings and financing statements,
      in
      the form attached hereto as Exhibit H
      (the
“Mortgages”),
      pursuant to which the Debtors will agree to grant to Buyers security interests
      in certain real and personal property, rights, titles, interests and estates
      described therein.

     

    I. Contemporaneously
      with the Closing, Longview Marquis Master Fund, L.P., a British Virgin Island
      limited partnership (“Marquis”),
      The
      Longview Fund, L.P., a California, limited partnership (“Longview”),
      and
      the Company will execute and deliver a Securities Exchange Agreement, in the
      form attached hereto as Exhibit
      I
      (as the
      same may be amended, supplemented, restated or modified and in effect from
      time
      to time, the “Securities
      Exchange Agreement”), pursuant
      to which the Company shall issue to (1) Marquis, in exchange for all of the
      issued and outstanding shares (the “North
      Texas Shares”)
      of
      common stock, par value $0.001 per share, of North Texas Drilling Services,
      Inc., a Texas corporation (“North
      Texas”),
      and
      that certain Ninth Amended and Restated Senior Secured Note, dated October
      3,
      2008, in the original principal amount of $8,575,000, issued by North Texas
      (such note, including all outstanding principal thereof plus accrued but unpaid
      interest thereon of approximately $845,000 through the date hereof, the
“North
      Texas Note”),
      an
      unsecured subordinated promissory note in an original aggregate principal amount
      of $9,440,000, and a warrant to purchase 1,000,000 shares (subject to
      adjustment) of Common Stock, and (2) Longview, in exchange for that certain
      Amended and Restated Senior Secured Note, dated February 14, 2008 (amended
      and
      restated May 16, 2008), (no. SSN-001) and that certain Senior Secured Note,
      dated May 22, 2008 (no. SSN-002) (together, the “Old Notes”),
      each
      issued by the Company, in the aggregate outstanding principal amount of
      $2,000,000 (giving effect to the payment by the Company to Longview of
      $1,000,000 of the principal thereof as provided in Section
      4(d))
      and
      including accrued but unpaid interest thereon through the Closing Date (the
      aggregate amount of such interest, the “Accrued
      Interest Amount”)
      and
      Longview’s surrender of warrants with respect to 3,000,000 shares of Common
      Stock, an unsecured subordinated promissory note of the Company in an original
      aggregate principal amount equal to the sum of $2,000,000 plus the Accrued
      Interest Amount.


    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    


    J. Contemporaneously
      with the Closing, Collateral Agent and the Company will execute and deliver
      a
      Deposit Account Control Agreement in the form attached as Exhibit
      J
      (as the
      same may be amended, supplemented, restated or modified and in effect from
      time
      to time, together, the “Supplemental
      Account Control Agreement”),
      covering a Bank account of the Company (the “Acquisition
      Account”)
      in
      which a portion of the proceeds from the sale of Notes, Warrants and Overrides
      hereunder shall be retained for release solely in connection with Agreed
      Acquisitions by the Company as set forth herein.

     

    K. Contemporaneously
      with the Closing, the Company, North Texas, Marquis and Longview will execute
      and deliver a Subordination Agreement in the form attached as Exhibit
      K
      (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 Notes, but
      no
      payments of principal may be made on the Sub Notes (except in the form of junior
      securities) until the Notes have been repaid in full.

     

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

     

    1. PURCHASE
      AND SALE OF NOTES,
      WARRANTS AND OVERRIDES.

     

    a. Purchase
      and Sale of Notes,
      Warrants and Overrides.
      Subject
      to the satisfaction (or waiver) of the conditions set forth in Sections
      6
      and
7
      below,
      the Company shall issue and sell to each Buyer, and each Buyer severally agrees
      to purchase from the Company (i) Notes in the respective principal amounts
      set
      forth opposite such Buyer’s name on the Schedule
      of Buyers,
      (ii)
      Warrants exercisable for the respective number of Warrant Shares set forth
      opposite such Buyer’s name on the Schedule
      of Buyers,
      which
      Notes and Warrants shall be issued to the Buyers on the Closing Date (as defined
      in Section
      1(b)),
      (iii)
      Overrides as provided in Section
      1(d)(i).
      The
      purchase price (the “Purchase
      Price”)
      for
      the Notes, Warrants and Overrides purchased by each Buyer shall be the
product
      of
      $8,075,000, multiplied by such Buyer’s allocation percentage (as set forth
      opposite such Buyer’s name on the Schedule
      of Buyers
      (such
      Buyer’s “Allocation
      Percentage”))
      (representing an aggregate purchase price of $8,075,000 for the aggregate Notes,
      Warrants and Overrides to be purchased by the Buyers at the
      Closing.


    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    


    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.

     

    c. Form
      of Payment.
      On the
      Closing Date, (i) Buyers shall pay the Purchase Price to the Company for the
      Notes and Warrants to be issued and sold to Buyers on the Closing Date, by
      transfer of immediately available funds in accordance with the Company’s written
      wire instructions (less any amount deducted and paid in accordance with
Section
      4(d)
      and/or
Section
      4(i)),
      which
      instructions shall (among other things) specify that an aggregate of $5,000,000
      of the Purchase Price shall be wired into the Acquisition Account, and (ii)
      the
      Company shall deliver to Buyers the Notes and Warrants, in each case duly
      executed on behalf of the Company and registered in the names of
      Buyers.

     

    d. Overrides.
      

     

    (i) On
      the
      Closing Date, the Company shall, and shall cause each of the Subsidiaries that
      own any Real Property (as defined in Section
      3(bb))
      to,
      deliver to each of the Buyers Overrides, each duly and validly executed by
      the
      Company and each of the Subsidiaries (as applicable), providing such Buyer
      with
      perpetual overriding royalty interests, effective from the Closing Date, in
      the
      hydrocarbon production of all of the Company’s and the Subsidiaries’ current and
      future interest in all of the Current Override Properties equal to three percent
      (3%), multiplied by such Buyer’s Allocation Percentage. 


    
      
        
        

      

      
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    (ii) During
      the period commencing on (and including) the one-year anniversary of the Closing
      Date and terminating on (and excluding) the two-year anniversary of the Closing
      Date, the Company shall have the right to purchase from the Buyers all (but
      not
      less than all) of the Overrides issued to the Buyers prior to the one-year
      anniversary of the Closing Date (the Override
      Exchange”),
      by
      delivery of a written notice of election (the date of delivery of the written
      notice, the “Override
      Exchange Election Date,”
and
      each such written notice, an “Override
      Exchange Notice”)
      to
      each of the Buyers, provided that the Conditions to Override Exchange (as set
      forth in Section
      1(d)(iii))
      are
      satisfied (or waived in writing by each of the Buyers). An Override Exchange
      Notice shall be irrevocable by the Company. The Company shall not be entitled
      or
      permitted to effect the Override Exchange, or deliver any Override Exchange
      Notice, unless the Company takes the same action, at the same time, with respect
      to all of the Overrides. No later than ten (10) Business Days following the
      Override Exchange Election Date, each of the Company and Buyers holding a
      majority in interest of the outstanding Overrides shall select an oil and gas
      industry recognized appraiser, independent of the Company, the Subsidiaries
      and
      each of the Buyers (each, an “Appraiser”
and
      together, the “Appraisers”),
      to
      determine the Fair Market Value of the Overrides held by each of the Buyers.
      The
      designation of an Appraiser by the Company and by Buyers holding a majority
      in
      interest of the outstanding Overrides, respectively, shall not be made without
      the prior consent of the other, which consent shall not be unreasonably
      withheld. Each Appraiser shall be directed to deliver a written report (each,
      a
“Valuation
      Report”)
      to the
      Company and each of the Buyers as to such Appraiser’s valuation of the Overrides
      (in the aggregate and as to those held by each Buyer) as promptly as
      practicable, and in no event later than forty-five (45) days after the Override
      Exchange Election Date (the “Valuation
      Deadline”).
      No
      later than three (3) Business Days prior to the Override Exchange Date, each
      Buyer shall deliver to the Company a written notice (an “Override
      Exchange Election Notice”)
      as to
      Buyer’s election (A) to receive Override Exchange Shares as (I) Common Override
      Exchange Shares or (II) on or after the Preferred Authorization (as defined
      in
Section
      4(z)),
      Preferred Override Exchange Shares, or a combination of Common Override Exchange
      Shares and Preferred Override Exchange Shares and, if a combination, as to
      the
      respective proportions thereof; or (B) to receive Warrants (“Override
      Warrants”)
      to
      purchase Warrant Shares (“Override
      Warrant Shares”)
      at an
      initial exercise price per share of $0.01. If the Company has delivered an
      Override Exchange Notice in accordance with this Section
      1(d)(ii) and
      each
      of the Conditions to Override Exchange (as set forth in Section
      1(d)(iii))
      are
      satisfied (or waived in writing by the Buyers), then, on the Override Exchange
      Date, the Company shall deliver to each of the Buyers a number (rounded to
      the
      nearest whole number, with 0.5 being rounded up) of Override Exchange Shares
      (or, if so elected by such Buyer in its Override Election Notice, Override
      Warrants to purchase a number of Warrant Shares) equal to the quotient of (X)
      the Fair Market Value of the Overrides held by such Buyer, divided by (Y) the
      arithmetic average of the closing price per share of the Common Stock on the
      Principal Market (as defined in Section
      3(s))
      on each
      of the twenty (20) consecutive Trading Days immediately preceding the Override
      Exchange Date (the “Applicable
      Average Share Price”).
      The
      failure of the Company to deliver the Override Exchange Shares (or Override
      Warrants, as applicable) in full on the Override Exchange Date shall constitute
      an Event of Default (as defined in the Notes). For purposes hereof, the
“Fair
      Market Value”
of
      the
      Overrides shall mean (I) if both Valuation Reports have been delivered on or
      prior to the Valuation Deadline, the arithmetic average of the valuations of
      the
      Overrides set forth in the Valuation Reports, (II) if only one Valuation Report
      is delivered on or prior to the Valuation Deadline, the valuation set forth
      in
      such Valuation Report, and (III) if neither Valuation Report has been delivered
      by the Valuation Deadline, the valuation set forth in the first Valuation Report
      delivered after the Valuation Deadline (the date that is two (2) Business Days
      after the Valuation Deadline, or, if neither Valuation Report has been delivered
      by the Valuation Deadline, the date that is two (2) Business Days after delivery
      of the first Valuation Report, being referred to herein as the “Valuation
      Determination Date”);
      “Override
      Exchange Date”
shall
      mean the twenty-first (21st) Trading Day after the Valuation Determination
      Date;
“Override
      Exchange Shares”
means,
      at each Buyer’s election as set forth in such Buyer’s Override Exchange Election
      Notice, shares of Common Stock (“Common
      Override Exchange Shares”),
      and/or, at any time on or after the Preferred Authorization, shares of
      convertible preferred stock of the Company having terms as provided in
Section
      1(d)(iv)
      (“Preferred
      Override Exchange Shares”);
      provided
      that, if
      any Buyer fails to deliver an Override Exchange Election Notice as required
      hereby, it shall be deemed to have elected to receive all of its Override
      Exchange Shares as Preferred Override Exchange Shares if the Preferred
      Authorization has occurred, or as Override Warrants if it has not; and
“Trading
      Day”
means
      any day on which the Common Stock is traded on its Principal Market;
provided
      that
“Trading Day” shall not include any day on which the Principal Market is open
      for trading for less than 4.5 hours.


    
      
        
        

      

      
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    (iii) For
      purposes of this Section
      1(d),
      “Conditions
      to Override Exchange”
means
      the following conditions: on each day during the period beginning on and
      including the Override Exchange Election Date and ending on and including the
      Override Exchange Date, (A) the Common Stock is quoted on the OTC Bulletin
      Board
      or listed on a national securities exchange and the Common Stock has not been
      suspended from trading on any such market or exchange nor (I) shall delisting
      or
      suspension by any such market or exchange have been threatened in writing by
      such exchange or (II) shall the Company have fallen below the minimum listing
      maintenance requirements of such exchange, and the Company otherwise satisfies
      all of the requirements for continued listing of the Common Stock on such
      exchange, (B) the Company and each of the Subsidiaries is (I) incorporated
      or
      organized and validly existing under the laws of the jurisdiction of its
      incorporation or organization and (II) in good standing under the requirements
      of any applicable regulatory authority, (C) the Company has filed all reports
      and other materials required to be filed under the Securities Exchange Act
      of
      1934 (the “1934
      Act”),
      (D)
      there does not exist any Event of Default (as defined in the Notes), (E) the
      arithmetic average of the daily dollar trading volume of the Common Stock on
      the
      Principal Market on each of the twenty (20) consecutive Trading Days immediately
      following the Override Exchange Election Date is at least $400,000, and (F)
      the
      Override Exchange Shares (or Override Warrant Shares, as applicable) have been
      registered for public resale by the Buyers pursuant to an effective registration
      statement under the 1933 Act, in accordance with a registration rights agreement
      in form and substance acceptable to each of the Buyers. In the event that any
      of
      the Conditions to Override Exchange shall not be satisfied (and such failure
      is
      not waived in writing by all of the Buyers), the Override Exchange Notice shall
      be void and the Override Exchange contemplated thereby shall not be given any
      force or effect.

     

    (iv) The
      parties hereto agree that the Preferred Override Exchange Shares shall be
      perpetual, shall not bear dividends, shall be convertible into Common Stock
      on a
      one-for-one basis (i.e., one share of Common Stock for each Preferred Override
      Exchange Share, subject to a limitation on conversion substantially similar
      to
      the limitation on exercise set forth in the Warrants and subject to adjustment
      for stock splits, stock dividends, stock combinations, recapitalizations and
      similar events), shall be senior upon liquidation, winding up or dissolution
      of
      the Company to the Common Stock and any other class of preferred stock of the
      Company and shall have such other designations, powers, preferences and
      relative, participating, optional and other special rights, and qualifications,
      limitations and restrictions as shall be agreed upon by the Company and Marquis
      (all of the designations, powers, preferences and relative, participating,
      optional and other special rights, and qualifications, limitations and
      restrictions of the Preferred Shares being referred to as the “Preferred
      Rights”).
      The
      Company and Marquis agree to negotiate in good faith to agree upon the Preferred
      Rights (other than the Preferred Rights already set forth in this Section
      1(d)(iv))
      prior
      to the Override Exchange Election Date. The Preferred Rights, when and as agreed
      upon by the Company and Marquis, shall be promptly fixed by the board of
      directors of the Company (the “Board”)
      and
      set forth in a Certificate of Designations to be filed with the Secretary of
      State of the State of Delaware after the Preferred Authorization, in a form
      acceptable to each of the Company and Marquis (the “Certificate
      of Designations”).
      


    
      
        
        

      

      
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    (v) Notwithstanding
      anything to the contrary contained in this Agreement, no Buyer will be entitled
      to receive, and the Company will not issue to any Buyer on any date, any Common
      Override Exchange Shares in excess of that number of shares of Common Stock
      that
      would cause such Buyer and its affiliates to beneficially own 4.99% of the
      shares of Common Stock outstanding immediately after such issuance. A Buyer’s
      delivery of an Override Exchange Election Notice shall constitute a
      representation that, upon issuance to such Buyer of the number of Common
      Override Exchange Shares requested in such Override Exchange Election Notice,
      such Buyer and its affiliates will not beneficially own, more than 4.99% of
      the
      shares of Common Stock immediately after giving effect to such issuance, and
      in
      no event shall the Company issue to such Buyer on any Option Exchange Date
      a
      number of shares of Common Stock in excess of the number of Common Override
      Exchange Shares that such Buyer requests in such Buyer’s Override Exchange
      Election Notice. For purposes of the foregoing, the aggregate number of shares
      of Common Stock beneficially owned by a Buyer and its affiliates shall include
      the number of Common Override Exchange Shares to be issued pursuant to this
      Agreement on the applicable Override Exchange Date in accordance with this
      Section
      1(d)(v),
      but
      shall exclude all other shares of Common Stock otherwise issuable to such Buyer
      and its affiliates pursuant to this Agreement and all other shares of Common
      Stock that would be issuable upon exercise, conversion or exchange of the
      unexercised, unconverted or unexchanged portion of any other securities of
      the
      Company beneficially owned by such Buyer and its affiliates (including the
      Warrants and any other warrants or convertible notes or preferred stock) subject
      to a limitation on conversion, exercise or exchange analogous to the limitation
      contained herein. Except as set forth in the preceding sentence, for purposes
      of
      this paragraph, beneficial ownership shall be calculated in accordance with
      Section 13(d) of the 1934 Act. For purposes of this Agreement, in determining
      the number of outstanding shares of Common Stock, a Buyer may rely on the number
      of outstanding shares of Common Stock as reflected in (1) the Company’s most
      recent Periodic Report (as defined in Section
      4(e)),
      (2) a
      more recent public announcement by the Company or (3) any other notice by the
      Company or its transfer agent setting forth the number of shares of Common
      Stock
      outstanding. Upon the written request of any Buyer, the Company shall promptly,
      but in no event later than one (1) Business Day following the receipt of such
      request, confirm in writing to any such Buyer the number of shares of Common
      Stock then outstanding. In any case, the number of outstanding shares of Common
      Stock shall be determined after giving effect to the issuance of Common Override
      Exchange Shares to such Buyer and its affiliates pursuant to this Agreement,
      and
      the conversion, exercise or exchange of securities of the Company by such Buyer
      and its affiliates, since the date as of which such number of outstanding shares
      of Common Stock was reported.


    
      
        
        

      

      
        7

        
          

        

      

      
        
        

      

    


    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 Notes (along with the related Guarantees) and the
      Warrants purchased by such Buyer hereunder, (ii) upon any exercise of the
      Warrants (including any Override Warrants) will acquire the Warrant Shares
      (including Override Warrant Shares, as applicable) issuable upon such exercise
      thereof, (iii) in the event of any Override Exchange will acquire Override
      Exchange Shares or Override Warrants (as applicable), and (iv) upon any
      conversion of any Preferred Override Exchange Shares, will acquire the shares
      of
      Common Stock issuable upon conversion thereof (the “Conversion
      Shares”
and,
      collectively with the Notes, the Guarantees, the Warrants (including any
      Override Warrants) and the Warrant Shares (including any Override 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.

     

    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 (as defined in Section
      3(b)).
      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.


    
      
        
        

      

      
        8

        
          

        

      

      
        
        

      

    


    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.

     

    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):


    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    


    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.

     

    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). 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.


    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    


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

     

    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:

     

    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.


    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    


    b. Authorization;
      Enforcement; Validity.
      The
      Company and each of the Subsidiaries have the requisite corporate power and
      authority to enter into and perform its obligations under each of this
      Agreement, the Notes, the Warrants, the Irrevocable Transfer Agent Instructions,
      the Security Agreement, the Account Control Agreements (including the
      Supplemental Account Control Agreement), the Mortgages, the Guaranty, the Pledge
      Agreement, the Overrides, the Subordination Agreement and each of the other
      agreements or instruments to which it is (or will be) a party or by which it
      is
      (or will be) bound and which it is (or will be) entered into by certain of
      parties hereto in connection with the transactions contemplated hereby and
      thereby (collectively, 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 Notes and the Warrants and the
      reservation for issuance and the issuance of the Warrant Shares issuable upon
      exercise of the Warrants (including the Override Warrant Shares issuable upon
      exercise of any Override Warrants), and the Override Exchange Shares upon any
      Override Exchange, have been (and upon the Preferred Authorization, the
      Conversion Shares issuable upon conversion of any Preferred Override Exchange
      Shares will 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.


    
      
        
        

      

      
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    c. Capitalization.
      (i) 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 are reserved for issuance under any plan
      or agreement, other than shares of Common Stock with respect to the Warrants
      (including the Override Warrants), the Override Exchange, the Preferred Override
      Exchange Shares, the Warrant (as defined in the Securities Exchange Agreement,
      the “SEA
      Warrant”)
      and
      the Investor Share Option (as defined in the Sub Notes) 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, 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 Warrants (including the Override Warrants), the Override Exchange, the
      Preferred Override Exchange Shares, the SEA Warrant and the Investor Share
      Option. Upon the Preferred Authorization, at least 2,000,000 shares of Preferred
      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) will have been duly authorized and reserved for issuance as
      Preferred Override Exchange Shares. Upon exercise in accordance with the
      Warrants (including any Override Warrants), the Preferred Override Exchange
      Shares, the Investor Share Option or the SEA Warrant, or upon issuance in
      accordance with the Override Exchange, as the case may be, the Warrant Shares
      (including any Override Warrant Shares), Override Exchange Shares, Warrant
      Shares (as defined in the Securities Exchange Agreement) or Option Shares (as
      defined in the Securities Exchange 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 Notes and the Warrants 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 Notes and the Warrants, 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 (including the Override Warrant
      Shares) and the Override Exchange 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).


    
      
        
        

      

      
        16

        
          

        

      

      
        
        

      

    


    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.


    
      
        
        

      

      
        17

        
          

        

      

      
        
        

      

    


    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.

     

    m. Dilutive
      Effect.
      The
      Company understands and acknowledges that the number of Warrant Shares
      (including any Override Warrant Shares, as applicable) that the Company is
      obligated to issue upon exercise of the Warrants (including any Override
      Warrants) will increase in certain circumstances. The Company further
      acknowledges that its obligation to issue the Warrant Shares (including any
      Override Warrant Shares) upon exercise of the Warrants including any Override
      Warrants), respectively, 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 Warrants (including any Override Warrants) 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.


    
      
        
        

      

      
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    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. 

     

    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 below); (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). As used in this Agreement, “Security
      Documents”
means
      the Security Agreement, the Guaranty, the Account Control Agreements (including
      the Supplemental Account Control Agreement), the Pledge Agreement, the Mortgages
      and any other agreements, documents and instruments executed concurrently
      herewith or at any time hereafter pursuant to which the Company, the
      Subsidiaries, or any other Person either (i) guarantees payment or
      performance of all or any portion of the obligations hereunder or under any
      other instruments delivered in connection with the transactions contemplated
      hereby and by the other Transaction Documents, and/or (ii) provides, as security
      for all or any portion of such obligations, a Lien on any of its assets in
      favor
      of Buyers, as any or all of the same may be amended, supplemented, restated
      or
      otherwise modified from time to time. 


    
      
        
        

      

      
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    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.


    
      
        
        

      

      
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    z. Outstanding
      Indebtedness; Liens.
      Payments of principal and other payments due under the Notes will, upon issuance
      at the Closing, rank senior to all other Indebtedness of the Company or any
      of
      the Subsidiaries (other than 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 Notes at the Closing, rank senior to all
      other Indebtedness of the Subsidiaries 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
      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 other 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.

     

    aa. Ranking
      of Notes.
      No
      Indebtedness (as defined in the Notes) of the Company (other than the FNBW
      Indebtedness) 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
      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 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)); 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 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.


    
      
        
        

      

      
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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. Overrides.
      The
      Overrides, upon execution and delivery by the parties thereto, (i) will
      legally and effectively convey perpetual overriding royalty interests in the
      hydrocarbon production of all of the Company’s and the Subsidiaries’ current and
      future interest in all of their then current Real Property, in the percentages
      and as otherwise described in such conveyances, in each of the respective
      jurisdictions in which such Real Property is located, and (ii) will provide
      legal descriptions of the Subject Lands (as defined in each of the Overrides)
      sufficient to satisfy all requirements relating to such descriptions in each
      of
      such jurisdictions. 

     

    hh. 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. 


    
      
        
        

      

      
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    (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.

     

    (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
      Override Exchange Shares or Override Warrants may be issued pursuant to an
      Override Exchange and no Warrant Shares (including Override Warrant Shares)
      may
      be issued upon exercise of the Warrants (including any Override Warrants) and
      (B) all of the Warrant Shares (including any Override Warrant Shares), the
      Common Override Exchange Shares and the Conversion Shares issued or issuable
      upon conversion of any Preferred Override Exchange 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 (including any Override
      Warrant Shares), the Common Override Exchange Shares and the Conversion Shares
      held by (or issuable upon exercise or conversion (without regard to any
      limitation thereon) of any Warrants (including any Override Warrants) or
      Preferred Override Exchange Shares 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
      (3rd) 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 (including any Override Warrant Shares), the Common
      Override Exchange Shares or the Conversion Shares held by (or issuable upon
      exercise or conversion (without regard to any limitation thereon) of any
      Warrants (including any Override Warrants) or Preferred Override Exchange Shares
      held by) any holder 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
      (including an Override Warrant Share), Common Override Exchange Share or
      Conversion Share, pursuant to the Warrant (including an Override Warrant),
      the
      Override Exchange or the Preferred Override Exchange Shares (as applicable)
      or,
      (Y) if not yet issued but issuable upon exercise or conversion (without regard
      to any limitation thereon) of a Warrant (including an Override Warrant) or
      Preferred Override Exchange Share, 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, the Override Warrant Shares, the Common Override Exchange Shares
      and the Conversion Shares held by any holder thereof means the sum of the
      respective Market Values of all of the Warrant Shares, the Common Override
      Exchange Shares and the Conversion 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
      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. Use
      of
      Proceeds.
      Subject
      to the terms and conditions of the Supplemental Account Control Agreement,
      the
      Company will use the net proceeds from the sale of the Notes, Warrants and
      Overrides as follows: (i) $5 million of the proceeds shall be used to fund
      a
      future acquisitions of oil and gas properties to be agreed upon in writing
      by
      Marquis and
      the
      Company (any such acquisition agreed upon in writing by the Company and Marquis,
      on terms approved by Marquis in its sole discretion and effected in
      compliance with
      this
      Agreement (including Sections
      4(u))
      and
4(bb),
      the
      Security Documents and the other Transaction Documents being referred to as
      an
“Agreed
      Acquisition”);
      (ii)
      $1 million of the proceeds shall be used to pay outstanding principal under
      the
      Old Notes; (iii) an amount equal to the sum of the aggregate outstanding
      principal amount of those certain subordinated demand notes, dated October
      30,
      2008 and November 7, 2008, in an original aggregate principal amount of
      $125,000, issued by North Texas to Marquis, plus the aggregate amount of accrued
      but unpaid interest thereon, shall be used to repay such subordinated demand
      notes in full (and Marquis shall be entitled to withhold such amount from its
      Purchase Price payable at the Closing); and (iv) the remainder of the
      proceeds shall be used to pay expenses and commissions related to the sale
      of
      the Notes and Warrants, for drilling services and other Real Property related
      costs and expenses (including for current and near-term Matagorda Bay wells),
      for general and administrative expenses and otherwise for general working
      capital. The Company shall use its reasonable best efforts to promptly identify
      one or more acquisition opportunities which, in its good faith determination,
      are eligible to be Agreed Acquisitions. Marquis hereby covenants and agrees
      that
      it shall promptly review each acquisition opportunity identified by the Company
      pursuant to the preceding sentence and use good faith efforts to determine
      whether it deems any such opportunity is to be an Agreed Acquisition (including
      considering whether such acquisition provides current cash flow for debt service
      and working capital). If the Company and Marquis agree in writing that any
      such
      acquisition opportunity constitutes an Agreed Acquisition, the Company shall
      use
      its reasonable best efforts to consummate such Agreed Acquisition, and shall
      do
      so only on the terms approved by Marquis and in compliance with this Agreement
      (including Sections
      4(u)
      and
4(bb)),
      the
      Security Documents and the other Transaction Documents. Marquis shall take
      such
      action as shall be necessary to allow use of funds in the Acquisition Account
      for payment of the purchase price for such Agreed Acquisition, on such terms
      and
      in such compliance.


    
      
        
        

      

      
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    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.


    
      
        
        

      

      
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    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 Warrants (including
      any
      Override Warrants), or pursuant to the Override Exchange (without regard to
      any
      limitations on exercise thereof) and, after the Preferred Authorization, no
      less
      than 100% of the aggregate number of shares of Preferred Stock that may be
      issued pursuant to the Override Exchange.

     

    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 its Purchase Price to be paid by it at Closing. 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 and the Collateral Agent 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 and/or any release, termination, amendment or modification
      of any mortgage, Lien or other security interest of any Buyer or holder or
      the
      Collateral Agent in any of the Collateral (as defined in the Security
      Agreement). 


    
      
        
        

      

      
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    j. Disclosure
      of Transactions and Other Material Information. 

     

    (i) Not
      later
      than 5:30 p.m. (New York City time) on the second (2nd)
      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, including the issuance of the Notes and the
      Warrants, (B) shall include as exhibits to such Form 8-K this Agreement
      (including the schedules hereto), the form of Note, the form of Warrant, the
      form of Security Agreement, the form of Guaranty, the form of Pledge Agreement,
      the form of Mortgage, the form of Account Control Agreement, the form of
      Supplemental Account Control Agreement and the form of Conveyance of Limited
      Overriding Royalty Interests, 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).

     

    (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
      no Notes are outstanding and the Security Agreement has terminated (the period
      ending on such latest date, the “Security
      Period”),
      the
      Company shall and shall cause each of the Subsidiaries to:

     

    (i) Locations.
      Promptly (but in no event less than ten (10) days prior to the occurrence
      thereof) notify Buyers of the proposed opening of any new place of business
      or
      new location of Collateral (as defined in the Security Agreement), the closing
      of any existing place of business or location of Collateral, any change in
      the
      location of such Person’s books, records and accounts (or copies thereof), the
      opening or closing of any post office box, the opening or closing of any bank
      account or, if any of the Collateral consists of Goods (as defined in the
      Security Agreement) of a type normally used in more than one state, the use
      of
      any such Goods in any state other than a state in which such Person has
      previously advised a Buyer that such Goods will be used.

     

    (ii) 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.


    
      
        
        

      

      
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    (iii) 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.

     

    (iv) 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. 

     

    (v) 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.

     

    m. Compliance
      with Laws and Maintenance of Permits.
      During
      the Security 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.


    
      
        
        

      

      
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    n. Inspection
      and Audits.
      During
      the Security Period, (i) the Company shall, and shall cause each of the
      Subsidiaries to, permit Buyers, or any Persons designated by a Buyer, 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, examine and
      audit the Collateral and to inspect, audit, check and make extracts from such
      Person’s books, records, journals, orders, receipts and any correspondence and
      other data relating to such Person’s business, the Collateral or any
      transactions between the parties hereto, and shall have the right to make such
      verification concerning such Person’s business as such Buyer may consider
      reasonable under the circumstances; and (ii) each Buyer, through their officers,
      employees or agents shall have the right, at any time and from time to time,
      in
      such Buyer’s name, to verify the validity, amount or any other matter relating
      to any of the Company’s and the Subsidiaries’ Accounts (as defined in the
      Security Agreement), by mail, telephone, telecopy, electronic mail or otherwise.
      Notwithstanding anything to the contrary herein, upon written request to the
      Company by any Buyer, the Company shall promptly provide such Buyer with any
      financial, operating or other type of information requested by such Buyer,
      subject to such Buyer’s execution of a confidentiality agreement reasonably
      acceptable to the Company with respect to such information, which execution
      shall constitute a waiver, with respect to any material non-public information
      regarding the Company and the Subsidiaries provided to such Buyer directly
      in
      response to such written request, of the restriction herein on the Company’s
      disclosure to such Buyer of material non-public information. The Company shall
      pay to such Buyer all costs and out-of-pocket expenses incurred by such Buyer
      in
      the exercise of its rights hereunder, and all of such fees, costs and expenses
      shall constitute Indebtedness under the Note of such Buyer, shall be payable
      on
      demand by the Company to such Buyer and, until paid, shall bear interest at
      the
      Applicable Interest Rate (as defined in the Notes).

     

    o. Insurance.
      During
      the Security Period, the Company shall, and shall cause each of the Subsidiaries
      to:

     

    (i) Keep
      the
      Collateral properly housed (to the extent possible) and insured for the full
      insurable value thereof against loss or damage by fire, theft, explosion,
      sprinklers, collision (in the case of motor vehicles) and such other risks
      with
      companies that regularly insure Persons engaged in businesses similar to that
      of
      such Person, such coverage and the premiums payable in respect thereof to be
      acceptable in scope and amount to the Collateral Agent. Original (or certified)
      copies of such policies of insurance have been or shall be, no later than ten
      (10) days prior to the Closing Date, delivered to Buyers, together with evidence
      of payment of all premiums therefor, and shall contain an endorsement, in form
      and substance reasonably acceptable to Collateral Agent, showing loss under
      such
      insurance policies payable to Collateral Agent. Such endorsement, or an
      independent instrument furnished to the Collateral Agent, shall provide that
      the
      insurance company shall give the Collateral Agent at least thirty (30) days
      written notice before any such policy of insurance is altered or canceled and
      that no act, whether willful or negligent, or default of the Company or the
      applicable Subsidiary or any other Person shall affect the right of the
      Collateral Agent to recover under such policy of insurance in case of loss
      or
      damage. In addition, the Company or the applicable Subsidiary shall cause to
      be
      executed and delivered to the Collateral Agent an assignment of proceeds of
      its
      business interruption insurance policies (if any).


    
      
        
        

      

      
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    (ii) Maintain,
      at its expense, such public liability and third party property damage insurance
      with companies that regularly insure Persons engaged in businesses similar
      to
      that of such Person, such coverage and the premiums payable in respect thereof
      to be acceptable in scope and amount to the Collateral Agent. 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 Buyers, together with evidence
      of
      payment of all premiums therefor; each such policy shall contain an endorsement
      showing the Collateral Agent as an additional insured thereunder and providing
      that the insurance company shall give Collateral Agent at least thirty (30)
      days
      written notice before any such policy shall be altered or canceled.

     

    (iii) If
      the
      Company or any of the Subsidiaries at any time or times hereafter shall fail
      to
      obtain or maintain any of the policies of insurance required above or to pay
      any
      premium relating thereto, any Buyer, without waiving or releasing any obligation
      or default by the Company hereunder, may (but shall be under no obligation
      to)
      obtain and maintain such policies of insurance and pay such premiums and take
      such other actions with respect thereto as such Buyer deems advisable. Such
      insurance, if obtained by a Buyer, may, but need not, protect the Company’s and
      the Subsidiaries’ interests or pay any claim made by or against the Company and
      the Subsidiaries with respect to the Collateral. Such insurance may be more
      expensive than the cost of insurance the Company and the Subsidiaries may be
      able to obtain on their own and may be cancelled only upon the Company and
      the
      Subsidiaries’ providing evidence that they have obtained the insurance as
      required above. All sums disbursed by Buyers in connection with any such
      actions, including court costs, expenses, other charges relating thereto and
      reasonable attorneys’ fees, shall constitute Indebtedness under the Notes of the
      applicable Buyers, shall be payable on demand by the Company to such Buyers
      and,
      until paid, shall bear interest at the Applicable Interest Rate (as defined
      in
      the Notes).

     

    p. Collateral.
      During
      the Security Period, the Company shall and shall cause the Subsidiaries to
      maintain the Collateral in good condition, repair and order shall make all
      necessary repairs to the Equipment (as defined in the Security Agreement) and
      replacements thereof so that the operating efficiency and the value thereof
      shall at all times be preserved and maintained, subject to normal wear and
      tear
      after the Closing Date.

     

    q. Taxes.
      During
      the Security 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, a Buyer may
      (but
      shall be under no obligation to) advance and pay any sums required to pay any
      such taxes and/or to secure the release of any Lien therefor, and any sums
      so
      advanced by Buyers shall constitute Indebtedness under the Notes of the
      applicable Buyers, shall be payable by the Company to such Buyers on demand,
      and, until paid, shall bear interest at the Applicable Interest Rate (as defined
      in the Notes). 


    
      
        
        

      

      
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    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 Security 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.

     

    u. Security
      Covenants.
      During
      the Security Period, Company shall, and shall cause each of the Subsidiaries
      to,
      at its own respective cost and expense, cause to be promptly and duly taken,
      executed, acknowledged and delivered all such further acts, documents and
      assurances as may from time to time be necessary or as such Buyer or the
      Collateral Agent may from time to time request in order to carry out the intent
      and purposes of this Agreement, the Security Documents and the other Transaction
      Documents and the transactions contemplated hereby and thereby, including all
      such actions to establish, create, preserve, protect and perfect a first
      priority Lien (subject only to Permitted Liens) in favor of the Collateral
      Agent
      for the benefit of such Buyer on the Collateral (as each term is defined in
      the
      Security Agreement, and including Collateral acquired after the date hereof),
      including on any and all assets of the Company and each of the Subsidiaries,
      whether now owned or hereafter acquired.


    
      
        
        

      

      
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    (i) Without
      limiting the generality of the foregoing, in the event that the Company or
      any
      of the Subsidiaries shall, during the Security Period, acquire or form any
      new
      Subsidiary after the date hereof, the Company shall, or shall cause the
      respective Subsidiary to cause such new Subsidiary, upon such acquisition or
      concurrently with such formation, as applicable, (A) to execute, and thereafter
      perform its obligations under, the Security Agreement and the Guaranty and
      to
      take such other action (including authorizing the filing of such UCC financing
      statements and delivering certificates in respect of the equity securities
      of
      such Subsidiary) as shall be necessary or appropriate to establish, create,
      preserve, protect and perfect a first priority Lien (subject only to Permitted
      Liens) in favor of the Collateral Agent for the benefit of the Collateral Agent
      and Buyers on all assets, both real and personal, in which such new Subsidiary
      has or may thereafter acquire any interest, (B) to execute such other Security
      Documents, in form and content acceptable to the Collateral Agent, as may be
      required or requested by the Collateral Agent in connection with the actions
      contemplated by the preceding clause (A), and (C) to deliver such proof of
      corporate (or comparable) action, incumbency of officers, opinions of counsel
      and other documents as the Collateral Agent shall have required or
      requested.

     

    (ii) During
      the Security Period, (A) the Company shall, and shall cause each of the
      Subsidiaries to, take such action from time to time as shall be necessary to
      ensure that each of the Subsidiaries is a wholly-owned Subsidiary, and that
      the
      Collateral Agent shall have, for the benefit of the Collateral Agent and Buyers,
      a first priority Lien on all Capital Stock or other equity securities of each
      of
      the Subsidiaries concurrently with acquisition or formation of such Subsidiary;
      and (B) the Company shall or shall cause each of the Subsidiaries to, deliver
      promptly to the Collateral Agent, to the extent required by the applicable
      Security Documents, the certificates evidencing such securities, accompanied
      by
      undated powers executed in blank and to take such other action as the Collateral
      Agent shall request to perfect the security interest created therein pursuant
      to
      such Security Documents. 

     

    (iii) Concurrently
      with the acquisition by the Company or any of the Subsidiaries, at any time
      during the Security Period, of any real estate or real property leasehold
      interests, the Company shall deliver or cause to be delivered to the Collateral
      Agent, with respect to such real estate, (A) a mortgage or deed of trust, as
      applicable, in form and substance satisfactory to the Collateral Agent, executed
      by the title holder thereof, (B) an ALTA lender’s title insurance policy
      issued by a title insurer reasonably satisfactory to the Collateral Agent in
      form and substance and in amounts reasonably satisfactory to the Collateral
      Agent ensuring the Collateral Agent’s first priority Lien on such real estate,
      free and clear of all defects, encumbrances and Liens except Permitted Liens;
      (C) a current ALTA survey, certified to the Collateral Agent by a licensed
      surveyor, in form and substance satisfactory to the Collateral Agent, (D) a
      certificate, in form and substance acceptable to the Collateral Agent, to the
      Collateral Agent from a national certification agency acceptable to the
      Collateral Agent, certifying that such real estate is not located in a special
      flood hazard area, and (E) in the case of real estate that consists of a
      leasehold estate, such estoppel letters, consents and waivers from the landlords
      and non-disturbance agreements from any holders of mortgages or deeds of trust
      on such real estate as may be requested by the Collateral Agent, all of which
      shall be in form and substance satisfactory to the Collateral
      Agent.


    
      
        
        

      

      
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    (iv) With
      respect to any Production Proceeds (as defined in the Mortgages) received by
      Company or any of the Subsidiaries during the Security Period which constitute
      (A) payment of oil or gas proceeds received on account of, or for the benefit
      of, any third-party owner of oil or gas interests or (B) taxes, charges, costs
      and expenses that are required to be paid on account of such Production Proceeds
      on account of, or for the benefit of, any third-party owner of oil or gas
      interests (the items in clauses (A) and (B), the “Third-Party
      Production Proceeds”),
      the
      Company shall, and shall cause the Subsidiaries to, segregate that portion
      of
      Production Proceeds received on any day constituting Third-Party Production
      Proceeds into a segregated Deposit Account (as defined in the Security
      Agreement) covered by an Account Control Agreement which only has Third-Party
      Production Proceeds on deposit therein at any time. The Company shall, and
      shall
      cause the Subsidiaries to, deposit all Production Proceeds not constituting
      Third-Party Production Proceeds into a Deposit Account of the Company or one
      of
      the Subsidiaries which does not contain Third-Party Production Proceeds or
      any
      other Production Proceeds that are subject to an ownership interest or other
      claim by any third-party. The Company shall provide written notice to the
      holders of the Notes as to which Deposit Account is segregated for Third-Party
      Production Proceeds, and shall not change the Deposit Account segregated for
      Third-Party Production Proceeds without prior written consent of each holder
      of
      the Notes. The Company shall, and shall cause the Subsidiaries to, receive,
      collect and enforce their rights to receive payment of Production Proceeds,
      enforcing liens and security interests in respect thereof and protecting their
      interests in and to all Production Proceeds.

     

    (v) During
      the Security Period, the Company shall, and shall cause each of the Subsidiaries
      to, (A) refrain from engaging to any extent in any business other than the
      ownership and operation of oil, gas and other hydrocarbon drilling, exploration
      and development rights, concessions, working interests and participation
      interests and hydrocarbon transportation facilities and businesses reasonably
      related thereto or in furtherance thereof, and (B) preserve, renew and keep
      in
      full force and effect their respective material rights, privileges and
      franchises necessary or desirable in the normal conduct of their
      business.

     

    v. Subsidiary
      Interests.
      At all
      times following the Closing, all of the equity interests of each of the
      Subsidiaries shall be certificated or otherwise represented in tangible
      form.


    
      
        
        

      

      
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    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. 

     

    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.


    
      
        
        

      

      
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    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 Exchange 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. Amendment
      of Certificate of Incorporation.
      To the
      extent not yet performed, the Company shall promptly, and in no event more
      than
      five (5) business days, after the date that the Company or its counsel is
      satisfied that the SEC has no further comments on the Preliminary Information
      Statement pursuant to Section 14(c) of the 1934 Act filed by the Company with
      the SEC on August 28, 2008, with respect to the Actions to be taken pursuant
      to
      the written consent of a majority of the Company’s stockholders dated August 1,
      2008, file with the SEC and mail a notice of action by written consent and
      a
      Definitive Information Statement pursuant to Section 14(c) of the 1934 Act
      (collectively, the “Definitive
      Information Statement”)
      to all
      of the stockholders of the Company in accordance with applicable law. The
      Company represents, warrants and covenants that the Definitive Information
      Statement (i) shall not contain any statement which is false or misleading
      with
      respect to any material fact, or which omits to state any material fact
      necessary in order to make the statements therein not false or misleading or
      necessary to correct any statement in an earlier communication with respect
      to
      such subject matter which has become false or misleading, and (ii) shall be
      in a
      form compliant with, and the mailing thereof shall comply in all respects with,
      Section 14(c) of the 1934 Act and the rules and regulations thereunder. The
      “Actions”
means
      an amendment to the Certificate of Incorporation to authorize the issuance
      of
      50,000,000 shares of blank check preferred stock, and an amendment to the
      Certificate of Incorporation to change the name of the Company to “Velocity
      Energy Inc.” The Company shall file a certificate of amendment with the
      Secretary of State of the State of Delaware to effect the Actions no later
      than
      twenty-five (25) calendar days after the initial mailing of the Definitive
      Information Statement (such filing being referred to as the “Preferred
      Authorization”).

     

    aa. Certificate
      of Designation.
      After
      the Preferred Authorization, and prior to any Override Exchange, the Company
      shall file with the with the Secretary of State of the State of Delaware the
      Certificate of Designation; provided
      that the
      Company shall not so file the Certificate of Designation until it has received
      written consent of Marquis to
      do so.
      Immediately upon the Preferred Authorization, the Company shall cause to be
      reserved for issuance 100% of the number of Preferred Shares that may be issued
      as Preferred Override Exchange Shares. 

     

    bb. Additional
      Overrides.
      On the
      date of, and contemporaneously with, the consummation of any Agreed Acquisition,
      the Company shall deliver (and/or cause the applicable Subsidiaries to deliver)
      to each of the Buyers Overrides, each duly and validly executed by the Company
      and each of the Subsidiaries (as applicable), providing such Buyer with
      perpetual overriding royalty interests, effective from the Closing Date, in
      the
      hydrocarbon production of all of the Company’s and the Subsidiaries’ current and
      future interest in all of any Real Property acquired by the Company or any
      of
      the Subsidiaries in such Agreed Acquisition (including through the acquisition
      of any Person owning any Real Property) equal to three percent (3%), multiplied
      by such Buyer’s Allocation Percentage.


    
      
        
        

      

      
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    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 Warrants.

     

    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 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.

     

    d. Payment
      Restrictions Affecting Subsidiaries.
      During
      the Security 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.


    
      
        
        

      

      
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    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 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 Security 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 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 Buyers with respect
      thereto (which subordination agreement shall prohibit payments in respect of
      such subordinated Indebtedness for so long as any 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 Notes, 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 Subsidiaries
      for taxes, assessments, municipal or governmental charges not yet due;
      (v) incur obligations of the Company and the Included 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.


     

    g. Liens.
      During
      the Security 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.


    
      
        
        

      

      
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    h. Sale
      of Collateral.
      

     

    (i) Sale
      of Real Property.
      During
      the Security Period, neither the Company nor any of the Subsidiaries shall
      sell,
      transfer, farm-out, assign or dispose of any Real Property (and any of the
      Collateral used in connection with the operation of such Real Property) (a
      “Collateral
      Disposition”),
      except in a good faith, arm’s length transaction with Persons who are not
      officers or directors, provided that (i) the net cash proceeds of the Collateral
      Disposition are immediately deposited into a Deposit Account (as defined in
      the
      Security Agreement) covered by an Account Control Agreement, or, if any of
      the
      consideration consists of Real Property or other assets, the Buyers are provided
      with a valid, perfected first priority security interest therein within two
      (2)
      Business of the Collateral Disposition, (ii) immediately before and immediately
      after giving effect to such Collateral Disposition, no Event of Default (as
      defined in the Notes) shall have occurred and be continuing, and, within the
      ninety (90) days prior to such Collateral Disposition, no event shall have
      occurred that, with the giving of notice or passage of time and without being
      cured would constitute an Event of Default (any such Collateral Disposition,
      a
“Permitted
      Collateral Disposition”),
      and
      (iii) immediately before and immediately after giving effect to such Collateral
      Disposition, there shall not be a Financial Covenant Test Failure (as defined
      in
      the Notes), and if such Collateral Disposition 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.
      

     

    Upon
      a
      Permitted Collateral Disposition, the Buyers shall, and shall cause the
      Collateral Agent (if applicable), at the Company’s sole expense, to promptly
      release any Lien encumbering that portion of the Real Property and any of the
      Collateral used in connection with the operation of such Real Property that
      is
      sold, transferred, farmed-out, assigned, or disposed of, provided that the
      Company and each applicable Subsidiary shall have delivered to the Buyers or
      the
      Collateral Agent (if applicable) a written notice from the Company and each
      applicable Subsidiary, which notice shall contain no material non-public
      information, (1) requesting the release of the Liens encumbering the Real
      Property and Collateral to be sold, transferred, farmed-out, assigned or
      disposed of, (2) describing the proposed Real Property and Collateral sold,
      transferred, farmed-out, assigned or disposed of, (3) stating the purchase
      price
      or other property to be received in consideration for such sale or disposition
      of such Real Property and Collateral, (4) if there is to be a substitution
      of
      Real Property or other assets for the Real Property (and any related Collateral)
      that is subject to the Collateral Disposition, specifying the Real Property
      or
      other assets intended to be substituted therefor, (5) attaching an officer’s
      certificate certifying that the Permitted Collateral Disposition is in
      compliance with each of the requirements of clause (ii) of the immediately
      preceding sentence, and (6) attaching the form of release requested by the
      Company or its applicable Subsidiary to be authorized or, if necessary, executed
      by the Secured Parties (as defined in the Security Agreement) or the Collateral
      Agent, if applicable.


    
      
        
        

      

      
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    (ii) Sale
      of Other Collateral.
      The
      Company shall not, and shall not permit any of the Subsidiaries to, directly
      or
      indirectly consummate any Asset Dispositions. As used in this Agreement,
“Asset
      Disposition”
means
      any sale, lease, license, transfer, assignment or other consensual disposition
      by the Company or any of the Subsidiaries of any asset, but excluding (A)
      dispositions of Inventory or “As extracted Collateral” (as defined in the
      Security Agreement) or used, obsolete, worn-out or surplus Equipment (as defined
      in the Security Agreement), all in the ordinary course of business, (B)
      dispositions of cash and cash equivalents, (C) sales, transfers and other
      dispositions of Accounts (as defined in the Security Agreement) in connection
      with the compromise, settlement or collection thereof in the ordinary course
      of
      business as permitted hereby, (D) any disposition of property or assets to
      any
      Included Subsidiary that is directly or indirectly wholly-owned by the Company,
      and (E) Permitted Collateral Dispositions. 

     

    i. Corporate
      Existence.
      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 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 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 Security 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 Notes have a valid, perfected first priority security
      interest and except that the Company may consummate one or more Agreed
      Acquisitions as provided in Section
      4(d),
      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. Equipment.
      During
      the Security Period, the Company shall not, and shall cause each of the
      Subsidiaries not to, (i) permit any Equipment to become a fixture to Real
      Property unless such Real Property is owned or leased by such Person and is
      subject to a mortgage in favor of the Collateral Agent, for the benefit of
      Buyers, and if such Real Property is leased, is subject to a landlord’s
      agreement in favor of Buyers on terms acceptable to the Collateral Agent, or
      (ii) permit any Equipment to become an accession to any other personal property
      unless such personal property is subject to a first priority perfected Lien
      in
      favor of the Collateral Agent, for the benefit of Buyers and any other holders
      of the Notes. 

     

    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 or
      Marquis 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. Settling
      of Accounts.
      During
      the Security Period, the Company shall not, and shall cause each of the
      Subsidiaries not to, sell, discount, settle or adjust any Account (as defined
      in
      the Security Agreement); provided,
      that
      after the Closing, so long as no Event of Default (as defined in the Notes)
      shall have occurred and be continuing, the Company and the Included Subsidiaries
      may (i) discount or settle past due Accounts on an arm’s length basis in the
      ordinary course of business, and (ii) provide early payment discounts in respect
      of Accounts in the ordinary course of business, consistent with past
      practice.


    
      
        
        

      

      
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    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.

     

    q. Leases. During
      the Security 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 Security 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 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
      Notes or the other Transaction Documents.

     

    
      
        
        

      

      
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    t. Right
      to Participate in Future Financing.
      Subject
      to the exceptions described below, during the period beginning on the date
      hereof and ending on the later of (i) the third (3rd)
      anniversary of the Closing and (ii) sixty (60) days after the first date
      following the Closing on which no Notes remain outstanding, the Company shall
      not, and shall cause each of the Subsidiaries not to (x) contract with any
      party
      for any debt or equity financing (including any debt financing with an equity
      component), (y) issue any debt or equity securities of the Company or any
      Subsidiary or securities convertible, exchangeable or exercisable into or for
      debt or equity
      securities of the Company or any Subsidiary (including debt securities with
      an
      equity component) or (z) engage in “farm-out” financing transactions or similar
      transactions which do not have operating obligations by the financing party
      as a
      material component, in any form (a “Future
      Offering”),
      unless, after such Person has received an offer regarding a Future Offering
      that
      it has a bona fide intention to accept, such Person shall have first delivered
      to each Buyer (or designees appointed by respective Buyers) written notice
      (the
“Future
      Offering Notice”)
      reporting that it has received and is prepared to accept such offer and
      providing such Buyer an option (the “Buyer
      Purchase Option”)
      to
      purchase up to twenty-five percent (25%) of the total amount of securities,
      rights or interests to be issued or sold in such Future Offering, multiplied
      by
      such Buyer’s Allocation Percentage (the limitations referred to in this sentence
      are collectively referred to as the “Capital
      Raising Limitations”).
      No
      Future Offering Notice shall contain any material non-public information
      regarding the Company or any of the Subsidiaries. Upon the written request
      of
      any Buyer made within five (5) Business Days after its receipt of a Future
      Offering Notice (an “Additional
      Information Request”),
      the
      Company shall provide each Buyer with such additional information regarding
      the
      proposed Future Offering, including the name of the purchaser, and the terms
      and
      conditions and use of proceeds thereof, as such Buyer shall reasonably request.
      Each Buyer may exercise its Buyer Purchase Option by delivering written notice
      (the “Buyer
      Purchase Notice Date”)
      to the
      Company within five (5) Business Days after the later of (i) the Buyer’s receipt
      of a Future Offering Notice or (ii) the Buyer’s receipt of all of the
      information reasonably requested by the Buyer in an Additional Information
      Request, which notice shall state the quantity or percentage of securities,
      rights or interests being offered in the Future Offering that the Buyer will
      purchase. The Company or the Subsidiary, as appropriate, shall have sixty (60)
      days following the Buyer Purchase Notice Date to sell the securities, rights
      or
      interests of the Future Offering (other than the securities, rights or interests
      to be purchased by Buyers pursuant to this Section
      5(t)),
      upon
      terms and conditions no more favorable to the purchasers thereof than specified
      in the Future Offering Notice. The exercise of a Buyer Purchase Option shall
      be
      contingent upon, and contemporaneous with, the consummation of such Future
      Offering; provided,
      that
      notwithstanding a Buyer’s exercise of the Buyer Purchase Option with respect to
      a particular Future Offering, the determination to complete any such Future
      Offering shall be within the Company’s sole discretion. In connection with such
      consummation, each Buyer (if it exercises its Buyer Purchase Option) shall
      deliver to the Company duly and properly executed originals of any documents
      reasonably required by the Company to effectuate such Future Offering, together
      with payment of the purchase price for the securities, rights or interests
      being
      purchased by such Buyer in such Future Offering, and the Company or the
      Subsidiary, as appropriate, shall promptly issue to such Buyer the securities,
      rights or interests purchased thereby. In the event the Company or the
      Subsidiary, as appropriate, has not sold such securities, rights or interests
      of
      the Future Offering within such 60-day period, then the Company and the
      Subsidiaries shall not thereafter issue or sell such securities, rights or
      interests or any other securities, rights or interests subject to this
Section
      5(t) without
      first offering such securities, rights or interests to such Buyer in the manner
      provided in this Section
      5(t).
      Such
      Buyer shall not be required to participate or exercise its right of
      participation with respect to a particular Future Offering in order to exercise
      its right of participation with respect to later Future Offerings. The Capital
      Raising Limitations shall not apply to (i) any transaction involving the
      Company’s issuances of securities, rights or interests (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 Warrants).



    
      
        
        

      

      
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    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 Warrants). 

     

    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),
      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. 


    
      
        
        

      

      
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    6. CONDITIONS
      TO THE OBLIGATION OF THE COMPANY TO SELL.
      The
      obligation of the Company to issue and sell the Notes and the Warrants to Buyers
      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) Each
      Buyer shall have delivered to the Company the Purchase Price (less the amount
      withheld pursuant to Section
      4(d)
      or
4(i))
      for the
      Notes, Warrants and Overrides being purchased by such Buyer at the Closing
      by
      wire transfer of immediately available funds pursuant to the written
      instructions provided by the Company.

     

    (c) 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 PURCHASE.
      The
      obligation of any Buyer to purchase the Notes and Warrants 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 its
      sole discretion by providing the Company with prior written notice
      thereof:

     

    (a) Each
      of
      the Company and each other Person (other than such Buyer and the Collateral
      Agent) party to the Transaction Documents (other than the Notes, the Warrants
      and the Overrides) 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. Such Buyer shall have received a certificate, executed by the
      chief executive officer of the Company, dated as of the Closing Date, to the
      foregoing effect and as to such other matters as may be reasonably requested
      by
      such Buyer.


    
      
        
        

      

      
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    (c) 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 laws of the States of Delaware, New York and Texas
      applicable to the transactions contemplated hereby and the security interests
      provided pursuant to the Security Agreement, in form, scope and substance
      reasonably satisfactory to such Buyer.

     

    (d) The
      Company and the Subsidiaries, as applicable, shall have executed and delivered
      to such Buyer the Notes, the Warrants and the Overrides purchased by such
      Buyer.

     

    (e) 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”).

     

    (f) 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
      Warrants (including any Override Warrants) and (B) any issuance of Common Stock
      pursuant to the Override Exchange or upon Conversion of any Preferred Override
      Exchange Shares (as if the Preferred Authorization occurred on the Closing
      Date), 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).

     

    (g) 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.

     

    (h) 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.

     

    (i) The
      Company and the Subsidiaries shall have delivered and pledged to Buyers any
      and
      all Instruments, Negotiable Documents, Chattel Paper (each of the foregoing
      terms, as defined in the Security Agreement) and certificated securities
      (accompanied by stock powers executed in blank), duly endorsed and/or
      accompanied by such instruments of assignment and transfer executed by the
      Company and the Subsidiaries, in such form and substance as Buyers may request,
      in each case in accordance with the Security Agreement, the Pledge Agreement
      and
      the other Security Documents.


    
      
        
        

      

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

     

    (k) As
      of the
      Closing Date, the Company shall have delivered to Buyer 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 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 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.

     

    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 Notes (or, if no Notes are outstanding,
      of the outstanding Warrants). 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.


    
      
        
        

      

      
        56

        
          

        

      

      
        
        

      

    


    (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 the Purchase Price
      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.


    
      
        
        

      

      
        57

        
          

        

      

      
        
        

      

    


    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.

     

    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 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 Notes. Any such amendment shall bind all holders of
      the
      Notes and the Warrants. No such amendment shall be effective to the extent
      that
      it applies to less than all of the Notes or Warrants 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:


    
      
        
        

      

      
        58

        
          

        

      

      
        
        

      

    


    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 the
      Buyers:

    


    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

    


    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.


    
      
        
        

      

      
        59

        
          

        

      

      
        
        

      

    


    


    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.

     

    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 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
      19
      of the
      Notes shall survive the redemption, repayment or surrender of such
      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 the 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 Notes (and in the case of Marquis, the Warrants
      and
      the Overrides).


    
      
        
        

      

      
        60

        
          

        

      

      
        
        

      

    


    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.

     

    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 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. 


    
      
        
        

      

      
        61

        
          

        

      

      
        
        

      

    


    p. Transfer
      Agent Instructions.
      The
      Company shall issue irrevocable instructions to its transfer agent in the form
      attached hereto as Exhibit
      L
      (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 (including any Override Warrant Shares) upon
      exercise of the Warrants (including any Override Warrants) or Conversion Shares
      upon conversion of any Preferred Override Exchange Shares (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 (including any Override Warrant
      Shares) and the Conversion 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.

     

    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.


    
      
        
        

      

      
        62

        
          

        

      

      
        
        

      

    


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

     

    COMPANY:

    


    SONTERRA
      RESOURCES, INC.,
      a
      Delaware corporation

    


    
      	
              By:

            	 

	
              Name:

            	 

	
              Title:
                

            	 



    

     

    BUYER:

    


    
      	
              LONGVIEW MARQUIS MASTER FUND, L.P.,

            
	
              a British Virgin Island limited partnership

            
	 
	
              By: Viking Asset Management, LLC

            
	
              Its: Investment Adviser

            
	 	 
	
              By:

            	 

	
              Name:

            	
              Peter
                T. Benz

            
	
              Title:

            	
              Chairman

            


    


    
      
        
        

      

      
        63

        
          

        

      

      
        
        

      

    


    SCHEDULE
      OF BUYERS

    


    
      	
              Buyer’s
                Name 

              and
                Legal Status

            	 	
              Buyer
                Address and 

              Facsimile
                Number

            	 	
              Principal
                

              Amount
                of 

              Notes

            	 	
              Number
                of 

              Warrant
                

              Shares

            	 	
              Allocation
                Percentage

            	 	
              Buyer’s
                

              Representative’s
                

              Address
                and 

              Facsimile
                Number 

              (to
                receive copies of 

              notices)

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

               

              Residence:
                British Virgin Islands

            	 	
              Longview
                Marquis Master Fund, L.P., 

              c/o
                Viking Asset Management, LLC

              600
                Montgomery Street, 44th Floor

              San
                Francisco, CA 94111

              Facsimile:
                415-981-5301

              Attention:
                Peter T. Benz

            	 	
              $8,875,000

            	 	
              1,050,000

            	 	
              100%

            	 	
              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

              Facsimile:
                (312) 577-8858

              Attn:
                Mark D. Wood, Esq.

            


    


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    


    SCHEDULES

    


    EXHIBITS