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

                	
                  9

                
	 	
                  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

                	
                  22

                
	 	
                  s.

                	
                  Regulatory
      Permits

                	
                  23

                
	 	
                  t.

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

                	
                  23

                
	 	
                  u.

                	
                  Bank
      Accounts

                	
                  24

                
	 	
                  v.

                	
                  Tax
      Status

                	
                  24

                
	 	
                  w.

                	
                  Transactions With
      Affiliates

                	
                  25

                
	 	
                  x.

                	
                  Application of
      Takeover Protections; Rights Agreement

                	
                  25

                


        

         

        
          
            
            

          

          
            
            

            
              

            

          

          
            
            

          

        

         

        
          	 	
                  y.

                	
                  Foreign Corrupt
      Practices

                	
                  25

                
	 	
                  z.

                	
                  Outstanding
      Indebtedness; Liens

                	
                  26

                
	 	
                  aa.

                	
                  Ranking of
      Notes

                	
                  26

                
	 	
                  bb.

                	
                  Real
      Property

                	
                  27

                
	 	
                  cc.

                	
                  Excluded Subsidiaries
      and Velocity Subsidiaries

                	
                  28

                
	 	
                  dd.

                	
                  No Materially Adverse
      Contracts, Etc

                	
                  28

                
	 	
                  ee.

                	
                  Investment
      Company

                	
                  28

                
	 	
                  ff.

                	
                  Stock
      Options

                	
                  28

                
	 	
                  gg.

                	
                  Overrides

                	
                  29

                
	 	
                  hh.

                	
                  Schedules

                	
                  29

                
	 	 	 	 
	
                  4.

                	
                  AFFIRMATIVE
      COVENANTS.

                	
                  29

                
	 	
                  a.

                	
                  Reasonable Best
      Efforts

                	
                  29

                
	 	
                  b.

                	
                  Form D and Blue
      Sky

                	
                  29

                
	 	
                  c.

                	
                  Reporting
      Status

                	
                  29

                
	 	
                  d.

                	
                  Use of
      Proceeds

                	
                  31

                
	 	
                  e.

                	
                  Financial
      Information

                	
                  32

                
	 	
                  f.

                	
                  Internal Accounting
      Controls

                	
                  32

                
	 	
                  g.

                	
                  Reservation of
      Shares

                	
                  33

                
	 	
                  h.

                	
                  Listing

                	
                  33

                
	 	
                  i.

                	
                  Expenses

                	
                  33

                
	 	
                  j.

                	
                  Disclosure of
      Transactions and Other Material Information

                	
                  34

                
	 	
                  k.

                	
                  Pledge of
      Securities

                	
                  35

                
	 	
                  l.

                	
                  Notices

                	
                  35

                
	 	
                  m.

                	
                  Compliance with Laws
      and Maintenance of Permits

                	
                  36

                
	 	
                  n.

                	
                  Inspection and
      Audits

                	
                  37

                
	 	
                  o.

                	
                  Insurance

                	
                  37

                
	 	
                  p.

                	
                  Collateral

                	
                  38

                
	 	
                  q.

                	
                  Taxes

                	
                  39

                
	 	
                  r.

                	
                  Intellectual
      Property

                	
                  39

                
	 	
                  s.

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

                	
                  39

                
	 	
                  t.

                	
                  Drilling Title
      Opinions

                	
                  39

                
	 	
                  u.

                	
                  Security
      Covenants

                	
                  39

                
	 	
                  v.

                	
                  Subsidiary
      Interests

                	
                  41

                
	 	
                  w.

                	
                  Subsidiary
      Restrictions

                	
                  42

                
	 	
                  x.

                	
                  Further Instruments
      and Acts

                	
                  42

                
	 	
                  y.

                	
                  Additional Financial
      Information

                	
                  43

                
	 	
                  z.

                	
                  Amendment of
      Certificate of Incorporation

                	
                  43

                
	 	
                  aa.

                	
                  Certificate of
      Designation

                	
                  43

                
	 	
                  bb.

                	
                  Additional
      Overrides

                	
                  44

                
	 	 	 	 
	
                  5.

                	
                  NEGATIVE
      COVENANTS

                	
                  44

                
	 	
                  a.

                	
                  Prohibition Against
      Variable Priced Securities

                	
                  44

                
	 	
                  b.

                	
                  Status

                	
                  44

                
	 	
                  c.

                	
                  Stay, Extension and
      Usury Laws

                	
                  44

                
	 	
                  d.

                	
                  Payment Restrictions
      Affecting Subsidiaries

                	
                  44

                


        

         

        
          
            
            

          

          
            ii

            
              

            

          

          
            
            

          

        

         

        
          	 	
                  e.

                	
                  Prepayments

                	
                  45

                
	 	
                  f.

                	
                  Indebtedness

                	
                  45

                
	 	
                  g.

                	
                  Liens

                	
                  45

                
	 	
                  h.

                	
                  Sale of
      Collateral

                	
                  46

                
	 	
                  i.

                	
                  Corporate
      Existence

                	
                  47

                
	 	
                  j.

                	
                  Restrictions on Loans;
      Investments; Subsidiary Equity

                	
                  47

                
	 	
                  k.

                	
                  Equipment

                	
                  48

                
	 	
                  l.

                	
                  Affiliate
      Transactions

                	
                  48

                
	 	
                  m.

                	
                  Settling of
      Accounts

                	
                  48

                
	 	
                  n.

                	
                  Executive
      Compensation

                	
                  49

                
	 	
                  o.

                	
                  Limitation on Sale and
      Leaseback Transactions

                	
                  49

                
	 	
                  p.

                	
                  Investment
      Company

                	
                  49

                
	 	
                  q.

                	
                  Leases

                	
                  49

                
	 	
                  r.

                	
                  Restriction on
      Purchases or Payments

                	
                  49

                
	 	
                  s.

                	
                  No Avoidance of
      Obligations

                	
                  49

                
	 	
                  t.

                	
                  Right to Participate
      in Future Financing

                	
                  50

                
	 	
                  u.

                	
                  Limits on Additional
      Issuances

                	
                  51

                
	 	
                  v.

                	
                  No Integrated
      Offering

                	
                  51

                
	 	
                  w.

                	
                  Regulation
      M

                	
                  51

                
	 	
                  x.

                	
                  Fundamental Changes;
      Line of Business

                	
                  51

                
	 	 	 	 
	
                  6.

                	
                  CONDITIONS
      TO THE OBLIGATION OF THE COMPANY TO SELL

                	
                  52

                
	 	 	 
	
                  7.

                	
                  CONDITIONS
      TO THE OBLIGATION OF THE BUYERS TO PURCHASE

                	
                  52

                
	 	 	 
	
                  8.

                	
                  INDEMNIFICATION.

                	
                  54

                
	 	 	 
	
                  9.

                	
                  GOVERNING
      LAW; MISCELLANEOUS.

                	
                  56

                
	 	
                  a.

                	
                  Governing Law;
      Jurisdiction; Jury Trial

                	
                  55

                
	 	
                  b.

                	
                  Counterparts

                	
                  57

                
	 	
                  c.

                	
                  Headings

                	
                  57

                
	 	
                  d.

                	
                  Severability

                	
                  57

                
	 	
                  e.

                	
                  Entire Agreement;
      Amendments

                	
                  57

                
	 	
                  f.

                	
                  Notices

                	
                  58

                
	 	
                  g.

                	
                  Successors and
      Assigns

                	
                  59

                
	 	
                  h.

                	
                  No Third Party
      Beneficiaries

                	
                  59

                
	 	
                  i.

                	
                  Survival

                	
                  59

                
	 	
                  j.

                	
                  Further
      Assurances

                	
                  59

                
	 	
                  k.

                	
                  Termination

                	
                  59

                
	 	
                  l.

                	
                  No Strict
      Construction

                	
                  60

                
	 	
                  m.

                	
                  Remedies

                	
                  60

                
	 	
                  n.

                	
                  Rescission and
      Withdrawal Right

                	
                  60

                
	 	
                  o.

                	
                  Payment Set
      Aside

                	
                  60

                
	 	
                  p.

                	
                  Transfer Agent
      Instructions

                	
                  61

                
	 	
                  q.

                	
                  Interpretative
      Matters

                	
                  61

                
	 	
                  r.

                	
                  Independent Nature of
      the Buyers

                	
                  61

                


        

      


      
        
          
          

        

        
          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. 


      
        
          
          

        

        
          4

          
            

          

        

        
          
          

        

      


      (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.


      
        
          
          

        

        
          5

          
            

          

        

        
          
          

        

      

       

      (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”).



      
        
          
          

        

        
          6

          
            

          

        

        
          
          

        

      


      (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. 


      
        
          
          

        

        
          8

          
            

          

        

        
          
          

        

      

       

      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.

       

      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.


      
        
          
          

        

        
          12

          
            

          

        

        
          
          

        

      


      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).


      
        
          
          

        

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

       

      
        
          
          

        

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

       

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

       

      
        
          
          

        

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

       

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

       

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

       

      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. 

       

      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.


      
        
          
          

        

        
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      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. 

       

      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.


      
        
          
          

        

        
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      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). 

       

      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. 


      
        
          
          

        

        
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      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.

       

      
        	
              	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. 


      
        
          
          

        

        
          54

          
            

          

        

        
          
          

        

      


      (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.


      
        
          
          

        

        
          55

          
            

          

        

        
          
          

        

      


      (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.


      
        
          
          

        

        
          56

          
            

          

        

        
          
          

        

      


      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.


      
        
          
          

        

        
          57

          
            

          

        

        
          
          

        

      


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

       

      If to the
Company:

      


      Sonterra
Resources, Inc.

      523 North
Sam Houston Parkway East, Suite 175

      Houston,
Texas 77060

      Facsimile:
281-741-0895

      Attention:
D. E. Vandenberg

      


      With a
copy to:

      


      Duane
Morris LLP

      3200
Southwest Freeway, Suite 3150

      Houston,
Texas 77027

      Facsimile:
713-402-3901

      Attention:
Charles E. Harrell

      


      If to 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.


      
        
          
          

        

        
          58

          
            

          

        

        
          
          

        

      


      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).


      
        
          
          

        

        
          59

          
            

          

        

        
          
          

        

      


      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. 


      
        
          
          

        

        
          60

          
            

          

        

        
          
          

        

      


      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.


      
        
          
          

        

        
          61

          
            

          

        

        
          
          

        

      


      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:

              	
                /s/
      D. E. Vandenberg 

              	 
	
                Name:

              	
                D.
      E. Vandenberg

              	 
	
                Title:
      

              	
                President

              	 


      

      


      BUYER:

      


      LONGVIEW MARQUIS MASTER FUND,
L.P.,


      a British
Virgin Island limited partnership

      


      By:
Viking Asset Management, LLC

      Its:
Investment Adviser

      


      
        	
                By:

              	
                /s/
      Peter T. Benz

              	 
	
                Name:

              	
                Peter
      T. Benz

              	 
	
                Title:

              	
                Chairman

              	 


      


      
        
          
          

        

        
          62

          
            

          

        

        
          
          

        

      


      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

                FacsimileNumber

                (to receivecopies 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.

              


      

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

    

     

    
      SCHEDULE
2A(c)

       

      North
Texas Financial Information

      


      
        
          
             


          

          
            1

            
              

            

          

          
             


          

        

      

      

        NORTH
TEXAS DRILLING

        SERVICES,
INC.

        


        Reviewed
Financial Statements

        For
the Quarter Ended September 30, 2008


        
          
             


          

          
            2

            
              

            

          

          
             


          

        


        NORTH
TEXAS DRILLING SERVICES, INC.

        (a
Texas Corporation)

        Table
of Contents

        


        
          
            	 
      	
                    Page No.

                  
	
                    Accountant’s
      Report

                  	
                    4

                  
	
                    Financial
      Statements

                  	 
      
	
                    Balance
      Sheet

                  	
                    5

                  
	
                    Statement
      of Income

                  	
                    6

                  
	
                    Statement
      of Changes in Stockholder’s Equity

                  	
                    7

                  
	
                    Statement
      of Cash Flows

                  	
                    8

                  
	
                    Notes
      to Financial Statements

                  	
                    9

                  


          

        

         

        
          
             


          

          
            3

            
              

            

          

          
             


          

        


        

        


        To the
Board of Directors

        North
Texas Drilling Services, Inc.

        Weatherford,
Texas

        


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

        


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

        


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

        


        

         

        Snow,
Garrett & Company, CPA's

        October
27, 2008

        


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


        
          
             


          

          
            4

            
              

            

          

          
             


          

        

        


        NORTH
TEXAS DRILLING SERVICES, INC.

        (a
Texas Corporation)

        Balance
Sheet

        September
30, 2008

        


        
          
            
              
                
                  
                    
                      
                        
                          
                            
                              
                                
                                  
                                    
                                      
                                        
                                          
                                            
                                              
                                                
                                                  
                                                    
                                                      
                                                        
                                                          
                                                            
                                                              
                                                                
                                                                  
                                                                    
                                                                      	
                                                                              ASSETS

                                                                            	 	 	 
	
                                                                              Current
      Assets

                                                                            	 	 	 
	
                                                                              Cash
      and cash equivalents

                                                                            	 	$	44,304	 
	
                                                                              Accounts
      receivable

                                                                            	 	 	175,650	 
	 	 	 	 	 
	
                                                                              Total
      current assets

                                                                            	 	 	219,954	 
	 	 	 	 	 
	
                                                                              Property,
      Plant and Equipment - at Cost

                                                                            	 	 	5,223,722	 
	
                                                                              Less
      accumulated depreciation

                                                                            	 	 	(456,591	)
	 	 	 	 	 
	
                                                                              Total
      property and equipment

                                                                            	 	 	4,767,131	 
	
                                                                              Other
      Assets

                                                                            	 	 	 	 
	
                                                                              Debt
      issuance costs, net of amortization

                                                                            	 	 	61,111	 
	
                                                                              Deferred
      federal income tax

                                                                            	 	 	1,664,366	 
	 	 	 	 	 
	
                                                                              Total
      other assets

                                                                            	 	 	1,725,477	 
	 	 	 	 	 
	
                                                                              Total
      Assets

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

                                                                            	 	 	 	 
	 
      	 	 	 	 
	
                                                                              Current
      Liabilities

                                                                            	 	 	 	 
	
                                                                              Accounts
      payable

                                                                            	 	$	466,613	 
	
                                                                              Accrued
      expenses

                                                                            	 	 	753,462	 
	
                                                                              Texas
      margin tax payable

                                                                            	 	 	10,490	 
	
                                                                              Payable
      to Equity Source Partners

                                                                            	 	 	129,970	 
	
                                                                              Current
      maturities of long-term notes payable

                                                                            	 	 	4,008,750	 
	 	 	 	 	 
	
                                                                              Total
      current liabilities

                                                                            	 	 	5,369,285	 
	 	 	 	 	 
	
                                                                              Long-Term
      Liabilities

                                                                            	 	 	 	 
	
                                                                              Long-term
      notes payable, net of current maturities

                                                                            	 	 	4,491,250	 
	
                                                                              Deferred
      income tax liability

                                                                            	 	 	156,951	 
	 	 	 	 	 
	
                                                                              Total
      long-term liabilities

                                                                            	 	 	4,648,201	 
	 	 	 	 	 
	
                                                                              Total
      Liabilities

                                                                            	 	 	10,017,486	 
	
                                                                              Stockholder’s
      Equity

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

                                                                            	 	 	3	 
	
                                                                              Treasury
      stock, 2,000 shares at cost

                                                                            	 	 	(361,000	)
	
                                                                              Retained
      earnings

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

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

                                                                            	 	$	6,712,562	 


                                                                    

                                                                  

                                                                

                                                              

                                                            

                                                          

                                                        

                                                      

                                                    

                                                  

                                                

                                              

                                            

                                          

                                        

                                      

                                    

                                  

                                

                              

                            

                          

                        

                      

                    

                  

                

              

            

          

        

        


        See
accompanying notes and accountant’s report.


        
          
             


          

          
            5

            
              

            

          

          
             


          

        


        NORTH
TEXAS DRILLING SERVICES, INC.

        (a
Texas Corporation)

        Statement
of Income

        For
the Quarter Ended September 30, 2008

        


        
          
            
              	
                      Revenues

                    	 	 	 
	
                      Drilling
      revenue

                    	 	$	394,081	 
	
                      Shop
      service revenue

                    	 	 	3,215	 
	
                      Total
      Revenues

                    	 	 	397,296	 
	
                      General
      and Administrative Expenses

                    	 	 	943,237	 
	
                      Net
      loss from operations

                    	 	 	(545,941	)
	
                      Other
      Income (Expense)

                    	 	 	 	 
	
                      Interest
      expense

                    	 	 	(266,137	)
	
                      Total
      other income (expense)

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

                    	 	 	(812,078	)
	
                      Provision
      for Income Taxes

                    	 	 	 	 
	
                      Federal

                    	 	 	 	 
	
                      Deferred
      tax benefit

                    	 	 	272,613	 
	
                      Total
      Income tax benefit

                    	 	 	272,613	 
	
                      Net
      Loss

                    	 	$	(539,465	)


            

          

        

        


        See
accompanying notes and accountant’s report.


        
          
             


          

          
            6

            
              

            

          

          
             


          

        


        NORTH
TEXAS DRILLING SERVICES, INC.

        (a
Texas Corporation)

        Statement
of Changes in Stockholder’s Equity

        For
the Quarter Ended September 30, 2008

        


        
          
            
              
                
                  
                    
                      
                        
                          
                            	 
      	 	
                                    Common

                                  	 	 	
                                    Treasury

                                  	 	 	
                                    Retained

                                  	 	 	 	 
	 
      	 	
                                    Stock

                                  	 	 	
                                    Stock

                                  	 	 	
                                    Earnings

                                  	 	 	
                                    Total

                                  	 
	
                                    Balance
      at beginning of quarter

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

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

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


                          

                        

                      

                    

                  

                

              

            

          

        

        


        See
accompanying notes and accountant’s report.


        
          
             


          

          
            7

            
              

            

          

          
             


          

        


        NORTH
TEXAS DRILLING SERVICES, INC.

        (A
Texas Corporation)

        Statement
of Cash Flows

        For
the Quarter Ended September 30, 2008

        


        
          
            
              
                
                  
                    
                      
                        
                          
                            
                              
                                
                                  
                                    
                                      
                                        
                                          
                                            
                                              	
                                                      Cash
      Flows from Operating Activities:

                                                    	 	 	 
	
                                                      Net
      loss

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

                                                    	 	 	 	 
	
                                                      Depreciation
      and amortization

                                                    	 	 	120,778	 
	
                                                      Deferred
      income taxes

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

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

                                                    	 	 	190,496	 
	 	 	 	 	 
	
                                                      Net
      Cash Used by Operating Activities

                                                    	 	 	(676,454	)
	 	 	 	 	 
	
                                                      Cash
      Flows from Investing Activities:

                                                    	 	 	 	 
	
                                                      Acquisition
      of property and equipment

                                                    	 	 	(44,553	)
	 	 	 	 	 
	
                                                      Net
      Cash Used by Investing Activities

                                                    	 	 	(44,553	)
	
                                                      Cash
      Flows from Financing Activities:

                                                    	 	 	 	 
	
                                                      Proceeds
      from long-term debt

                                                    	 	 	650,000	 
	 	 	 	 	 
	
                                                      Net
      Cash Provided by Financing Activities

                                                    	 	 	650,000	 
	 	 	 	 	 
	
                                                      Net
      Decrease in Cash and Cash Equivalents

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

                                                    	 	 	115,311	 
	 	 	 	 	 
	
                                                      Cash
      and Cash Equivalents at End of Quarter

                                                    	 	$	44,304	 
	 	 	 	 	 
	
                                                      Supplemental
      Disclosure of Cash Flow Information:

                                                    	 	 	 	 
	 	 	 	 	 
	
                                                      Interest
      Paid

                                                    	 	$	6,635	 


                                            

                                          

                                        

                                      

                                    

                                  

                                

                              

                            

                          

                        

                      

                    

                  

                

              

            

          

        

        


        See
accompanying notes and accountant's report.


        
          
             


          

          
            8

            
              

            

          

          
             


          

        


        NORTH
TEXAS DRILLING SERVICES, INC.

        (a
Texas Corporation)

        Notes
to Financial Statements

        September
30, 2008

        


        Note A - Summary of
Significant Accounting Policies

        


        The
significant accounting policies are as follows:

        


        Nature and Organization of
Business

        


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

        


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

        


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

        


        Property, Plant and
Equipment

        


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

        


        
          
            
              	
                      Building
      Improvements

                    	 	
                      15
      years      

                    
	
                      Furniture
      and Equipment

                    	 	
                      5 -
      10 years

                    


            

          

        

        


        Cash and Cash
Equivalents

        


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

         

        Allowance
for Bad Debts

        


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

        


        Use of
Estimates

        


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


        
          
             


          

          
            9

            
              

            

          

          
             


          

        


        NORTH
TEXAS DRILLING SERVICES, INC.

        (a
Texas Corporation)

        Notes
to Financial Statements

        September
30, 2008

        


        Note A - Summary of
Significant Accounting Policies - continued

        


        Amortization

        


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

        


        Advertising

        


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

        


        Income
Taxes

        


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

        


        Note B -
Property. Plant and Equipment

        


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

        


        
          
            
              
                
                  
                    
                      
                        
                          
                            	
                                    Building
      Improvements

                                  	 	$	21,165	 
	
                                    Furniture
      and Equipment

                                  	 	 	4,332,773	 
	
                                    Transportation
      Equipment

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

                                  	 	 	(456,591	)
	 	 	 	 	 
	
                                    Total
      Property, Plant and Equipment

                                  	 	$	4,767,131	 


                          

                        

                      

                    

                  

                

              

            

          

        

        


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


        
          
             


          

          
            10

            
              

            

          

          
             


          

        

        


        NORTH
TEXAS DRILLING SERVICES, INC.

        (a
Texas Corporation)

        Notes
to Financial Statements

        September
30, 2008

        


        Note C - Long-Term Notes
Payable

        


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

        


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

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

                                              	 	 	150,000	 
	 	 	 	 	 
	
                                                Total
      Long-term Notes Payable

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

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

                                              	 	$	4,491,250	 


                                      

                                    

                                  

                                

                              

                            

                          

                        

                      

                    

                  

                

              

            

          

        

        


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

        


        
          
            
              
                	
                        Twelve
      Months Ended September30,

                      	 	 	 
	
                        2009

                      	 	$	4,008,750	 
	
                        2010

                      	 	 	4,491,250	 
	 
      	 	$	8,500,000	 


              

            

          

        

        


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


        
          
             


          

          
            11

            
              

            

          

          
             


          

        


        NORTH
TEXAS DRILLING SERVICES, INC.

        (a
Texas Corporation)

        Notes
to Financial Statements

        September
30, 2008

        


        Note D - Income
Taxes

        


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

        


        
          
            
              
                	
                        Federal
      Deferred Tax Benefit

                      	 	$	272,613	 
	
                        Total
      Benefit for Income Taxes

                      	 	$	272,613	 


              

            

          

        

        


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

        


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

        


        
          
            
              
                	
                        Total
      Deferred Tax Asset - Noncurrent

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

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

                      	 	$	1,507,415	 


              

            

          

        

        


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

        


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


        
          
             


          

          
            12

            
              

            

          

          
             


          

        


        NORTH
TEXAS DRILLING SERVICES, INC.

        (a
Texas Corporation)

        Notes
to Financial Statements

        September
30, 2008

        


        Note E - General and
Administrative Expenses

        


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

        


        
          
            
              
                	
                        Advertising
      and Promotion

                      	 	$	165	 
	
                        Amortization

                      	 	 	16,667	 
	
                        Auto
      Expense

                      	 	 	2,091	 
	
                        Bank
      Charges

                      	 	 	55	 
	
                        Depreciation
      Expense

                      	 	 	104,111	 
	
                        Environmental
      Service

                      	 	 	1,384	 
	
                        Equipment
      Rental

                      	 	 	58,135	 
	
                        Finance
      Charges

                      	 	 	427	 
	
                        Fuel
      Expense

                      	 	 	36,050	 
	
                        Insurance
      Expense

                      	 	 	68,474	 
	
                        Legal
      and Accounting Fees

                      	 	 	22,564	 
	
                        Meals
      and Entertainment

                      	 	 	20,549	 
	
                        Office
      Supplies and Expense

                      	 	 	8,930	 
	
                        Oil
      Rig Supplies and Equipment

                      	 	 	60,749	 
	
                        Payroll
      Expenses

                      	 	 	420,950	 
	
                        Registration
      Fees

                      	 	 	1,852	 
	
                        Rent
      Expense

                      	 	 	17,250	 
	
                        Repairs
      and Maintenance

                      	 	 	43,072	 
	
                        Safety
      Training and Equipment

                      	 	 	953	 
	
                        Shop
      Supplies and Equipment

                      	 	 	882	 
	
                        Transportation
      Service

                      	 	 	401	 
	
                        Travel

                      	 	 	34,424	 
	
                        Utilities

                      	 	 	6,188	 
	
                        Vehicle
      Registration

                      	 	 	274	 
	
                        Welding
      Services

                      	 	 	16,640	 
	
                        Total
      General and Administrative Expenses

                      	 	$	943,237	 


              

            

          

        


        
          
             


          

          
            13

            
              

            

          

          
             


          

        


        NORTH
TEXAS DRILLING SERVICES, INC.

        (a
Texas Corporation)

        Notes
to Financial Statements

        September
30, 2008

        


        Note
F - Commitments

        


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

        


        
          
            
              
                
                  
                    
                      
                        
                          
                            
                              	Twelve
      Months Ended September 30, 	 	 	 	 
	
                                      2009

                                    	 	$	63,750	 
	
                                      2010

                                    	 	 	32,000	 
	 
      	 	$	95,750	 


                            

                          

                        

                      

                    

                  

                

              

            

          

        

        


        Note G -
Concentration of Credit Risk

        


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

        


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

        


        Note H -
Related Party Transactions

        


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

         

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

        


        Note I -
Preferred Stock

        


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


        
          
             


          

          
            14

            
              

            

          

          
             


          

        


        NORTH
TEXAS DRILLING SERVICES, INC.

        (a
Texas Corporation)

        Notes
to Financial Statements

        September
30, 2008

        


        Note J - Subsequent
Events

        


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

        


        Note K - Going
Concern

        


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


        
          
             


          

          
            15

            
              

            

          

          
             


          

        

      

      


      SCHEDULE
3(a)

       

      ORGANIZATION
AND QUALIFICATIONS

       

      LIST OF
SUBSIDIARIES

       

      
        
          
            
              
                
                  
                    
                      
                        
                          	
                                  Subsidiary

                                	 
      	
                                  Jurisdictions of

                                  Organization/Incorporation

                                	 
      	
                                  Percentage of Outstanding Capital

                                  Stock/Equity Interests

                                
	 	 	 	 	 
	
                                  River
      Capital Holdings Limited

                                	 
      	
                                  Barbados

                                	 
      	
                                  100%
      held by Sonterra Resources, Inc.

                                
	 	 	 	 	 
	
                                  River
      Reinsurance Limited

                                	 
      	
                                  Barbados

                                	 
      	
                                  100%
      held by River Capital Holdings Limited

                                
	 	 	 	 	 
	
                                  Sonterra
      Operating, Inc.

                                	 
      	
                                  Delaware

                                	 
      	
                                  100%
      held by Sonterra Resources, Inc.

                                
	 	 	 	 	 
	
                                  Velocity
      Energy Inc

                                	 
      	
                                  Delaware

                                	 
      	
                                  100%
      held by Sonterra Resources, Inc.

                                
	 	 	 	 	 
	
                                  Velocity
      Energy Offshore LP

                                	 
      	
                                  Delaware

                                	 
      	
                                  LP
      100% held by Sonterra Resources, Inc.

                                  GP
      100% held by Velocity Energy Limited LLC

                                
	 	 	 	 	 
	
                                  Velocity
      Energy Partners LP

                                	 
      	
                                  Delaware

                                	 
      	
                                  LP
      100% held by Sonterra Resources Inc.

                                  GP
      100% held by Velocity Energy Limited LLC

                                
	 	 	 	 	 
	
                                  Velocity
      Energy Limited LLC

                                	
                                    

                                	
                                  Texas

                                	
                                    

                                	
                                  100%
      held by Sonterra Resources,
Inc.

                                


                        

                      

                    

                  

                

              

            

          

        

      

      


      
        
          
             


          

          
            16

            
              

            

          

          
             


          

        

      

      


      SCHEDULE
3(c)

       

      CAPITALIZATION

       

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

       

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

      


      
        
          
             


          

          
            17

            
              

            

          

          
             


          

        

      

      


      SCHEDULE
3(e)

       

      NO
CONFLICTS

       

      None

       

      
        
          
          

        

        
          18

          
            

          

        

        
          
          

        

      

       

      SCHEDULE
3(f)

       

      SEC
DOCUMENTS

       

      
        	
                 
      

              	
                A.

              	
                Reports
      not filed with the SEC:

              


      

       

      
        	
                 
      

              	
                ·

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

              


      

       

      
        	
                 
      

              	
                B.

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

              


      

       

      
        
          
            
              
                
                  
                    
                      	
                                       Form

                            	 	
                              Filing Date

                            
	
                              PRE
      14C

                            	 	
                              8/28/2008

                            
	
                              10-Q

                            	 	
                              8/15/2008

                            
	
                              NT
      10-Q

                            	 	
                              8/15/2008

                            
	
                              8-K

                            	 	
                              7/23/2008

                            
	
                              8-K

                            	 	
                              6/27/2008

                            
	
                              8-K

                            	 	
                              5/29/2008

                            
	
                              8-K

                            	 	
                              5/23/2008

                            
	
                              8-K

                            	 	
                              5/20/2008

                            
	
                              8-K/A

                            	 	
                              5/16/2008

                            
	
                              10-Q

                            	 	
                              5/15/2008

                            
	
                              8-K/A

                            	 	
                              5/13/2008

                            
	
                              8-K

                            	 	
                              5/12/2008

                            
	
                              10KSB

                            	 	
                              4/14/2008

                            
	
                              8-K

                            	 	
                              4/7/2008

                            
	
                              NT
      10-K

                            	 	
                              3/31/2008

                            
	
                              8-K

                            	 	
                              3/18/2008

                            
	
                              8-K

                            	 	
                              2/14/2008

                            
	
                              DEF
      14C

                            	 	
                              1/11/2008

                            
	
                              PRER14C

                            	 	
                              12/26/2007

                            
	
                              PRER14C

                            	 	
                              11/30/2007

                            
	
                              10QSB

                            	 	
                              11/14/2007

                            
	
                              PRER14C

                            	 	
                              11/6/2007

                            
	
                              PRE
      14C

                            	 	
                              9/19/2007

                            
	
                              10QSB

                            	 	
                              8/14/2007

                            
	
                              8-K

                            	 	
                              8/9/2007

                            
	
                              8-K

                            	 	
                              6/19/2007

                            
	
                              10QSB

                            	 	
                              5/15/2007

                            
	
                              10KSB

                            	 	
                              4/2/2007

                            
	
                              8-K

                            	 	
                              1/8/2007

                            
	
                              10QBS

                            	 	
                              11/14/2006

                            
	
                              10QSB

                            	 	
                              8/14/2006

                            
	
                              8-K/A

                            	 	
                              7/7/2006

                            
	
                              8-K/A

                            	 	
                              6/5/2006

                            


                    

                  

                

              

            

          

        

      

      


      
        
          
             


          

          
            19

            
              

            

          

          
             


          

        

      

       

      
        
          
            
              
                
                  
                    	
                                     Form

                          	 	
                            Filing Date

                          
	
                            10QSB

                          	 	
                            5/15/2006

                          
	
                            10KSB

                          	 	
                            4/13/2006

                          
	
                            NT
      10-K

                          	 	
                            3/30/2006

                          
	
                            8-K

                          	 	
                            2/9/2006

                          
	
                            8-K/A

                          	 	
                            2/9/2006

                          
	
                            8-K

                          	 	
                            1/6/2006

                          


                  

                

              

            

          

        

      

      


      
        
          
             


          

          
            20

            
              

            

          

          
             


          

        

      

      


      SCHEDULE
3(f) - continued

       

      SEC
DOCUMENTS

       

      
        	
                 
      

              	
                C.

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

              


      

       

      
        	
                 
      

              	
                ·

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

              


      

       

      
        	
                 
      

              	
                ·

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

              


      

       

      
        	
                 
      

              	
                ·

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

              


      

       

      
        	
                 
      

              	
                ·

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

              


      

       

      
        	
                 
      

              	
                ·

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

              


      

       

      
        	
                 
      

              	
                D.

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

              


      

       

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

       

      
        	
                 
      

              	
                E.

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

              


      

      


      
        
          
             


          

          
            21

            
              

            

          

          
             


          

        

      

      


      SCHEDULE
3(g)

       

      ABSENCE
OF CERTAIN CHANGES

       

      None.

      


      
        
          
             


          

          
            22

            
              

            

          

          
             


          

        

      

      


      SCHEDULE
3(h)

       

      ABSENCE
OF LITIGATION

       

      None

      


      
        
          
             


          

          
            23

            
              

            

          

          
             


          

        

      

      


      SCHEDULE
3(i)

       

      FULL
DISCLOSURE; NO UNDISCLOSED EVENTS, LIABILITIES, DEVELOPMENTS OR
CIRCUMSTANCES

       

      None

      


      
        
          
             


          

          
            24

            
              

            

          

          
             


          

        

      

      


      SCHEDULE
3(k)

       

      NO
GENERAL SOLICITATION

       

      No
exceptions

      


      
        
          
             


          

          
            25

            
              

            

          

          
             


          

        

      

      


      SCHEDULE
3(n)

       

      EMPLOYEE
RELATIONS

       

      None

      


      
        
          
             


          

          
            26

            
              

            

          

          
             


          

        

      

      


      SCHEDULE
3(o)

       

      INTELLECTUAL
PROPERTY RIGHTS

       

      None

      


      
        
          
             


          

          
            27

            
              

            

          

          
             


          

        

      

      


      SCHEDULE
3(p)

       

      ENVIRONMENTAL
LAW COMPLIANCE

       

      No
exceptions

      


      
        
          
             


          

          
            28

            
              

            

          

          
             


          

        

      

      


      SCHEDULE
3(q)

       

      Shark
Prospect

       

      
        	
                 
      

              	
                1.

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

              


      

       

      Lease
Interest:

       

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

       

      72.80 WI
/ 57.512% NRI

       

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

       

      30.30% WI
/ 23.55825% NRI

       

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

       

      30.30% WI
/ 23.331% NRI

       

      Well
Interest:

       

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

       

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

       

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

       

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

       

      
        
          
          

        

        
          29

          
            

          

        

        
          
          

        

      

       

      SCHEDULE
3(q) - continued

       

      Ray
Prospect

       

      
        	
                 
      

              	
                2.

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

              


      

       

      Lease
Interest:  30.30% WI / 22.04325% NRI

       

      
        	
                 
      

              	
                3.

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

              


      

       

      Lease
Interest:  30.30% WI / 22.04325% NRI

       

      
        	
                 
      

              	
                4.

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

              


      

       

      Lease
Interest:  30.30% WI / 22.04325% NRI

       

      Starfish
Prospect

       

      
        	
                 
      

              	
                5.

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

              


      

      


      
        
          
             


          

          
            30

            
              

            

          

          
             


          

        

      

      


      SCHEDULE
3(q) - continued

       

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

       

      
        	
                 
      

              	
                6.

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

              


      

       

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

       

      Barracuda
Prospect

       

      
        	
                 
      

              	
                7.

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

              


      

       

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

       

      
        	
                 
      

              	
                8.

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

              


      

       

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

       

      Mackerel
Prospect

       

      
        	
                 
      

              	
                9.

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

              


      

      


      
        
          
             


          

          
            31

            
              

            

          

          
             


          

        

      

      


      SCHEDULE
3(q) - continued

       

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

       

      
        
          	
                	
                  10.

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

                


        

      

       

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

       

      
        	
              	
                11.

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

              


      

       

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

       

      Sydney/150-Deep
Prospect

       

      
        	
              	
                12.

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

              


      

      


      
        
          
             


          

          
            32

            
              

            

          

          
             


          

        

      

      


      SCHEDULE
3(q) - continued

       

      
        	
              	
                13.

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

              


      

       

      
        	
              	
                14.

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

              


      

       

      
        	
              	
                15.

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

              


      

       

      
        	
              	
                16.

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

              


      

       

      
        	
              	
                17.

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

              


      

       

      
        	
              	
                18.

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

              


      

       

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

      


      
        
          
             


          

          
            33

            
              

            

          

          
             


          

        

      

      


      SCHEDULE
3(q) - continued

       

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

       

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

      53.8 % WI
/ 38.3325 % NRI

       

      Unit Well
Interest:

       

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

       

      
        	
                 
      

              	
                A.

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

              


      

      


      
        	
                 
      

              	
                B.

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

              


      

      


      
        	
                 
      

              	
                C.

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

              


      

      


      
        	
                 
      

              	
                D.

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

              


      

       

      Unit
Description:

       

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

       

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

      


      
        
          
             


          

          
            34

            
              

            

          

          
             


          

        

      

      


      SCHEDULE
3(q) - continued

       

      Pipeline:

       

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

      


      End of
Schedule 3(q)

      


      
        
          
             


          

          
            35

            
              

            

          

          
             


          

        

      

      


      SCHEDULE
3(s)

       

      REGULATORY
PERMITS

       

      No
exceptions

      


      
        
          
             


          

          
            36

            
              

            

          

          
             


          

        

      

      


      SCHEDULE
3(t)

       

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

       

      No
exceptions

      


      
        
          
             


          

          
            37

            
              

            

          

          
             


          

        

      

      


      SCHEDULE
3(u)

       

      BANK
ACCOUNTS

       

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

       

      
        
          
            
              	
                      Company

                    	 	
                      Bank

                    	 	
                      Account #

                    	 	 	
                      Balance

                    	 
	 
      	 	 
      	 	 	 	 	 	 
	
                      Sonterra
      Oil & Gas, Inc.

                    	 	
                      Sterling
      Bank

                    	 	 	5000183843	 	 	$	47,701.11	 
	 
      	 	 
      	 	 	 	 	 	 	 	 
	
                      Sonterra
      Operating, Inc.

                    	 	
                      Sterling
      Bank

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

                    	 	
                      Sterling
      Bank

                    	 	 	5000389794	 	 	$	-0-	 
	 
      	 	 
      	 	 	 	 	 	 	 	 


            

          

        

      

      


      
        
          
             


          

          
            38

            
              

            

          

          
             


          

        

      

      


      SCHEDULE
3(v)

       

      TAX
STATUS

       

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

      


      
        
          
             


          

          
            39

            
              

            

          

          
             


          

        

      

      


      SCHEDULE
3(w)

       

      TRANSACTIONS
WITH AFFILIATES

       

      
        	
                1.

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

              


      

       

      
        	
                2.

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

              


      

       

      
        	
                3.

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

              


      

       

      
        	
                4.

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

              


      

      


      
        
          
             


          

          
            40

            
              

            

          

          
             


          

        

      

      


      
        	
                 
      

              	
                SCHEDULE
      3(w) - continued

              


      

       

      
        	
                 
      

              	
                TRANSACTIONS
      WITH AFFILIATES

              


      

       

      
        	
                5.

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

              


      

       

      
        	
                6.

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

              


      

       

      
        	
                7.

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

              


      

      


      
        
          
             


          

          
            41

            
              

            

          

          
             


          

        

      

      


      SCHEDULE
3(x)

       

      APPLICATION
OF TAKEOVER PROTECTIONS; RIGHTS AGREEMENT

       

      None

      


      
        
          
             


          

          
            42

            
              

            

          

          
             


          

        

      

      


      SCHEDULE
3(z)

       

      OUTSTANDING
INDEBTEDNESS; LIENS

       

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

       

      
        
          
            
              
                
                  
                    
                      	
                              Sonterra
      Resources

                            	 	 	A/P	 	 	
                              Estimated Liability

                            	 
	
                              Pre-Closing

                            	 	 	 	 	 	 	 
	
                              Baker
      & McKenzie

                            	 	 	 	 	 	 	310,076	 
	
                              CT
      Corp.

                            	 	 	335	 	 	 	 	 
	
                              Thompson
      & Knight

                            	 	 	89,478	 	 	 	55,355	 
	
                              Appleby,
      Spurling & Kemp

                            	 	 	30,284	 	 	 	 	 
	
                              Pearl
      Energy Partners

                            	 	 	 	 	 	 	1,339	 
	
                              Paladin
      Petroleum Partners

                            	 	 	 	 	 	 	669	 
	
                              South
      Texas Oil Co.

                            	 	 	95,255	 	 	 	 	 
	
                              PetroAcct

                            	 	 	 	 	 	 	9,944	 
	
                              Pre-Closing
      Total

                            	 	 	215,352	 	 	 	377,383	 
	 
      	 	 	 	 	 	 	 	 
	
                              Post-Closing

                            	 	 	 	 	 	 	 	 
	
                              Baker
      & McKenzie

                            	 	 	 	 	 	 	310,076	 
	
                              CT
      Corp.

                            	 	 	335	 	 	 	 	 
	
                              Thompson
      & Knight

                            	 	 	89,478	 	 	 	55,355	 
	
                              Appleby,
      Spurling & Kemp

                            	 	 	30,284	 	 	 	 	 
	
                              Pearl
      Energy Partners

                            	 	 	 	 	 	 	1,339	 
	
                              Paladin
      Petroleum Partners

                            	 	 	 	 	 	 	669	 
	
                              South
      Texas Oil Co.

                            	 	 	95,255	 	 	 	 	 
	
                              PetroAcct

                            	 	 	 	 	 	 	9,944	 
	
                              Donald
      E. Vandenberg

                            	 	 	 	 	 	 	79,762	 
	
                              Gary
      L. Lancaster

                            	 	 	 	 	 	 	71,786	 
	
                              Donald
      J. Sebastian

                            	 	 	 	 	 	 	67,500	 
	
                              Estimated
      Lease Operating Expense

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

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

                            	 	 	 	 	 	 	900,000	 
	
                              Estimated
      Legal Bills

                            	 	 	 	 	 	 	75,000	 
	
                              Estimated
      Payroll Taxes

                            	 	 	 	 	 	 	25,000	 
	 
      	 	 	 	 	 	 	 	 
	
                              Total

                            	 	$	215,352	 	 	$	1,801,431	 


                    

                  

                

              

            

          

        

      

      


      
        
          
             


          

          
            43

            
              

            

          

          
             


          

        

      

      


      SCHEDULE
3(z)

       

      OUTSTANDING
INDEBTEDNESS; LIENS

       

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

       

      
        
          
            
              
                
                  
                    
                      
                        
                          
                            	
                                    Pre-Closing

                                  	 	 	 
	
                                    Note
      payable by the Company to The Longview Fund

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

                                  	 	 	75,000	*
	 
      	 	 	 	 
	
                                    Pre-Closing
      Total

                                  	 	$	3,075,000	*
	 
      	 	 	 	 
	
                                    Post-Closing

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

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

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

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

                                  	 	 	9,440,000	 
	 
      	 	 	 	 
	
                                    Deferred
      asset abandonment liabilities

                                  	 	 	124,224	 
	 
      	 	 	 	 
	
                                    Post-Closing
      Total

                                  	 	$	20,724,774.92	*
	*Plus
      accrued and unpaid interest 	 	 	 	 


                          

                        

                      

                    

                  

                

              

            

          

        

      

      


      
        
          
             


          

          
            44

            
              

            

          

          
             


          

        

      

      


      SCHEDULE
3(bb)

       

      REAL PROPERTY –
I.

       

      Interests in Real Property
and Mineral Interests

       

      Shark
Prospect

       

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

       

      Lease
Interest:

       

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

       

      72.80 WI
/ 57.512% NRI

       

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

       

      30.30% WI
/ 23.55825% NRI

       

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

       

      30.30% WI
/ 23.331% NRI

       

      Well
Interest:

       

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

       

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

       

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

       

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

       

      
        
          
          

        

        
          45

          
            

          

        

        
          
          

        

      

       

      SCHEDULE
3(bb) - continued

       

      Ray
Prospect

       

      
        	
                 
      

              	
                2.

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

              


      

       

      Lease
Interest:  30.30% WI / 22.04325% NRI

       

      
        	
                 
      

              	
                3.

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

              


      

       

      Lease
Interest:  30.30% WI / 22.04325% NRI

       

      
        	
                 
      

              	
                4.

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

              


      

       

      Lease
Interest:  30.30% WI / 22.04325% NRI

       

      Starfish
Prospect

       

      
        	
                 
      

              	
                5.

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

              


      

      


      
        
          
             


          

          
            46

            
              

            

          

          
             


          

        

      

      


      SCHEDULE
3(bb) - continued

       

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

       

      
        	
                 
      

              	
                6.

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

              


      

       

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

       

      Barracuda
Prospect

       

      
        	
                 
      

              	
                7.

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

              


      

       

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

       

      
        	
                 
      

              	
                8.

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

              


      

       

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

       

      Mackerel
Prospect

       

      
        	
                 
      

              	
                9.

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

              


      

      


      
        
          
             


          

          
            47

            
              

            

          

          
             


          

        

      

      


      SCHEDULE
3(bb) - continued

       

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

       

      
        	
              	
                10.

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

              


      

       

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

       

      
        	
              	
                11.

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

              


      

       

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

       

      Sydney/150-Deep
Prospect

       

      
        	
              	
                12.

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

              


      

      


      
        
          
             


          

          
            48

            
              

            

          

          
             


          

        

      

      


      SCHEDULE
3(bb) - continued

       

      
        	
              	
                13.

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

              


      

       

      
        	
              	
                14.

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

              


      

       

      
        	
              	
                15.

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

              


      

       

      
        	
              	
                16.

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

              


      

      


      
        	
              	
                17.

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

              


      

       

      
        	
              	
                18.

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

              


      

      


      
        
          
             


          

          
            49

            
              

            

          

          
             


          

        

      

      


      SCHEDULE
3(bb) - continued

       

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

       

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

       

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

      53.8 % WI
/ 38.3325 % NRI

      


      Unit Well
Interest:

       

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

       

      
        	
                 
      

              	
                A.

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

              


      

      


      
        	
                 
      

              	
                B.

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

              


      

      


      
        	
                 
      

              	
                C.

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

              


      

      


      
        	
                 
      

              	
                D.

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

              


      

      


      Unit
Description:

       

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

       

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

      


      
        
          
             


          

          
            50

            
              

            

          

          
             


          

        

      

      


      SCHEDULE
3(bb) - continued

       

      CONTRACTS AFFECTING THE
PROPERTIES

       

      
        	
                1.

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

              


      

       

      
        	
                2.

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

              


      

       

      
        	
                3.

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

              


      

       

      
        	
                4.

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

              


      

       

      
        	
                5.

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

              


      

       

      
        	
                6.

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

              


      

       

      
        	
                7.

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

              


      

       

      
        	
                8.

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

              


      

      


      
        
          
             


          

          
            51

            
              

            

          

          
             


          

        

      

      


      SCHEDULE
3(bb) - continued

       

      
        	
                9.

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

              


      

       

      
        	
                10.

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

              


      

       

      
        	
                11.

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

              


      

       

      
        	
                12.

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

              


      

       

      
        	
                13.

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

              


      

       

      
        	
                14.

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

              


      

       

      
        	
                15.

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

              


      

       

      
        	
                16.

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

              


      

       

      
        	
                17.

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

              


      

      


      
        
          
             


          

          
            52

            
              

            

          

          
             


          

        

      

      


      SCHEDULE
3(bb) - continued

       

      
        	
                18.

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

              


      

       

      
        	
                19.

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

              


      

       

      
        	
                20.

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

              


      

       

      
        	
                21.

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

              


      

       

      
        	
                22.

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

              


      

       

      
        	
                23.

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

              


      

       

      
        	
                24.

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

              


      

       

      
        	
                25.

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

              


      

      


      
        
          
             


          

          
            53

            
              

            

          

          
             


          

        

      

      


      SCHEDULE
3(bb) - continued

       

      
        	
                26.

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

              


      

       

      
        	
                27.

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

              


      

       

      
        	
                28.

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

              


      

       

      
        	
                29.

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

                 

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

                 

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

                 

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

              


      

       

      
        	
                30.

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

              


      

       

      
        	
                31.

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

              


      

       

      
        	
                32.

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

              


      

       

      
        	
                33.

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

              


      

      


      
        
          
             


          

          
            54

            
              

            

          

          
             


          

        

      

      


      SCHEDULE
3(bb) - continued

       

      
        	
                34.

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

              


      

       

      
        	
                35.

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

              


      

       

      
        	
                36.

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

              


      

       

      
        	
                37.

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

              


      

       

      
        	
                38.

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

              


      

       

      
        	
                39.

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

              


      

       

      
        	
                40.

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

              


      

       

      
        	
                41.

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

              


      

       

      
        	
                42.

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

              


      

       

      
        	
                43.

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

              


      

       

      
        	
                44.

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

              


      

       

      
        	
                45.

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

              


      

      


      
        
          
             


          

          
            55

            
              

            

          

          
             


          

        

      

      


      SCHEDULE
3(bb) - continued

       

      
        	
                46.

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

              


      

       

      
        	
                47.

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

              


      

       

      
        	
                48.

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

              


      

       

      
        	
                49.

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

              


      

       

      
        	
                50.

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

              


      

       

      
        	
                51.

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

              


      

       

      
        	
                52.

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

              


      

       

      
        	
                53.

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

              


      

       

      PIPELINE

       

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

      


      
        
          
             


          

          
            56

            
              

            

          

          
             


          

        

      

      


      SCHEDULE
3(bb) - continued

       

      CONTRACTS AFFECTING THE
PIPELINE PROPERTY

       

      
        	
                1. 
      

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

              


      

       

      
        	
                2. 
      

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

              


      

       

      
        	
                3. 
      

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

              


      

       

      
        
          	
                  4. 

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

                


        

      

       

      
        
          
          

        

        
          57

          
            

          

        

        
          
          

        

      

       

      SCHEDULE
3(cc)

       

      EXCLUDED
SUBSIDIARIES AND VELOCITY SUBSIDIARIES

       

      None.

       

      
        
          
          

        

        
          58

          
            

          

        

        
          
          

        

      

       

      SCHEDULE
3(ff)

       

      STOCK
OPTIONS

       

      No
exceptions

      


      
        
          
             


          

          
            59