PURCHASE
      AND SALE AGREEMENT


     

    AMONG

     

    UHC
      NEW MEXICO CORPORATION

    as
      Seller,

    CANO
      PETRO OF NEW MEXICO, INC.,

    as
      Buyer,

    and

    CANO
      PETROLEUM, INC.,

    for
      Certain Limited Purposes

    


    


    


    March
      30, 2007

    


     

    
 

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    Table
      Of Contents

    

      
        	 	
                Page

              
	 	 
	
                ARTICLE
                  I.
                  DEFINITIONS AND INTERPRETATION

              	
                
                  1

                

              
	
                1.1

              	
                Defined
                  Terms.

              	
                1

              
	
                1.2

              	
                References.

              	
                1

              
	
                1.3

              	
                Articles
                  and Sections.

              	
                1

              
	
                1.4

              	
                Number
                  and Gender.

              	
                2

              
	 	 
	
                ARTICLE
                  II.
                  PURCHASE AND SALE

              	
                
                  2

                

              
	
                2.1

              	
                Purchase
                  and Sale.

              	
                
                  2

                

              
	
                2.2

              	
                Excluded
                  Assets.

              	
                5

              
	
                2.3

              	
                Consideration.

              	
                6

              
	
                2.4

              	
                Assumption
                  of Obligations.

              	
                7

              
	
                2.5

              	
                Retained
                  Liabilities.

              	
                10

              
	
                2.6

              	
                Possession;
                  Risk of Loss.

              	
                11

              
	
                2.7

              	
                Allocation
                  of Adjusted Consideration.

              	
                11

              
	
                2.8

              	
                Restricted
                  Securities.

              	
                12

              
	 	 
	
                ARTICLE
                  III.
                  REPRESENTATIONS AND WARRANTIES

              	
                
                  12

                

              
	
                3.1

              	
                Representations
                  and Warranties of Seller.

              	
                12

              
	
                3.2

              	
                Restricted
                  Shares.

              	
                17

              
	
                3.3

              	
                Accredited
                  Investor; Purchase Entirely For Own Account.

              	
                18

              
	
                3.4

              	
                Disclosure
                  of Information.

              	
                18

              
	
                3.5

              	
                Investment
                  Experience.

              	
                18

              
	
                3.6

              	
                General
                  Solicitation.

              	
                19

              
	
                3.7

              	
                Reliance.

              	
                19

              
	
                3.8

              	
                Representations
                  and Warranties of Buyer and Parent.

              	
                19

              
	
                3.9

              	
                Disclaimers.

              	
                21

              
	 	 
	
                ARTICLE
                  IV.
                  ACCESS; DUE DILIGENCE

              	
                
                  22

                

              
	
                4.1

              	
                Access
                  to Records.

              	
                22

              
	
                4.2

              	
                Operation
                  and Environmental Assessment.

              	
                22

              
	
                4.3

              	
                Defects,
                  Environmental Conditions and Related Adjustments.

              	
                22

              
	 	 
	
                ARTICLE
                  V.
                  OTHER MATTERS PRIOR TO CLOSING

              	
                
                  24

                

              
	
                5.1

              	
                Operations.

              	
                24

              
	
                5.2

              	
                Imbalances
                  and Other Matters.

              	
                25

              
	
                5.3

              	
                Publicity.

              	
                25

              
	
                5.4

              	
                Compliance
                  with Conditions.

              	
                26

              
	
                5.5

              	
                Maintenance
                  of Existence.

              	
                26

              
	
                5.6

              	
                Mutual
                  Assurances.

              	
                26

              
	
                5.7

              	
                Notification
                  of Certain Matters.

              	
                26

              
	
                5.8

              	
                Designation
                  as Operator.

              	
                27

              
	 	 
	
                ARTICLE
                  VI.
                  CONDITIONS; TERMINATION; REMEDIES

              	
                
                  27

                

              
	
                6.1

              	
                Conditions
                  Precedent to Seller’s Obligation to Close.

              	
                27

              
	
                6.2

              	
                
                  Conditions
                    Precedent to Buyer’s and Parent’s Obligation to Close.

                

              	
                28

              


      

       

      
        
          
          

        

        
          i

          
            

          

        

        
          
          

        

      

       

      
        	
                6.3

              	
                Termination.

              	
                29

              
	
                6.4

              	
                Remedies.

              	
                29

              
	 	 	 
	
                ARTICLE
                  VII.
                  CLOSING

              	
                
                  30

                

              
	
                7.1

              	
                Closing.

              	
                30

              
	
                7.2

              	
                Preliminary
                  Settlement Statement.

              	
                30

              
	
                7.3

              	
                Actions
                  at Closing.

              	
                30

              
	
                7.4

              	
                Records.

              	
                31

              
	
                 

              	 
	
                ARTICLE
                  VIII.
                  POST CLOSING MATTERS

              	
                
                  30

                

              
	
                8.1

              	
                Settlement
                  Statement.

              	
                32

              
	
                8.2

              	
                Further
                  Cooperation.

              	
                32

              
	
                8.3

              	
                Undisbursed
                  Revenues and Payment of Vendor Claims.

              	
                32

              
	
                8.4

              	
                Holdback.

              	
                32

              
	
                8.5

              	
                Transitional
                  Matters.

              	
                33

              
	 	 
	
                ARTICLE
                  IX.
                  SURVIVAL; INDEMNIFICATION

              	
                
                  33

                

              
	
                9.1

              	
                Survival.

              	
                34

              
	
                9.2

              	
                Indemnity
                  as Sole Remedy.

              	
                34

              
	
                9.3

              	
                Indemnities
                  of Buyer.

              	
                34

              
	
                9.4

              	
                Indemnities
                  of Seller.

              	
                34

              
	
                9.5

              	
                Assertion
                  of Claims; Notices; Defense; Settlement.

              	
                35

              
	
                9.6

              	
                Limitation
                  on Damages.

              	
                35

              
	 	 	 
	
                ARTICLE
                  X.
                  MISCELLANEOUS

              	
                
                  37

                

              
	
                10.1

              	
                Exhibits.

              	
                37

              
	
                10.2

              	
                Expenses.

              	
                37

              
	
                10.3

              	
                Proration
                  of Taxes.

              	
                37

              
	
                10.4

              	
                Assignment.

              	
                37

              
	
                10.5

              	
                Notices.

              	
                38

              
	
                10.6

              	
                ENTIRE
                  AGREEMENT; CONFLICTS.

              	
                39

              
	
                10.7

              	
                Amendment.

              	
                39

              
	
                10.8

              	
                Waiver;
                  Rights Cumulative.

              	
                39

              
	
                10.9

              	
                GOVERNING
                  LAW; CONSENT TO JURISDICTION.

              	
                40

              
	
                10.10

              	
                Severability.

              	
                40

              
	
                10.11

              	
                Arbitration.

              	
                40

              
	
                10.12

              	
                Counterparts.

              	
                41

              


      

       

      
        
          
          

        

        
          ii

          
            

          

        

        
          
          

        

      

    

     

    
      
        	SCHEDULES	 	 
	
                Schedule
                  1.1

              	
                -

              	
                Defined
                  Terms 

              
	
                Schedule
                  3.1(d)

              	
                -

              	
                Claims
                  and Litigation - Seller

              
	
                Schedule
                  3.1(e)

              	
                -

              	
                Preferential
                  Purchase Rights; Required Third Person Consents to
                  Assignment

              
	
                Schedule
                  3.1(f)

              	
                -

              	
                Required
                  Governmental Consents - Seller

              
	
                Schedule
                  3.1(i)

              	
                -

              	
                AMIs,
                  “Payout”, Reversion/Conversion, and Similar Provisions;
                  Tax Partnerships

              
	
                Schedule
                  3.1(g)

              	
                -

              	
                Leases
                  Excluded From Representation

              
	
                Schedule
                  3.1(k)

              	
                -

              	
                Wells
                  to be Plugged and Abandoned

              
	
                Schedule
                  3.1(m)

              	
                -

              	
                Imbalances

              
	
                Schedule
                  3.1(n)

              	
                -

              	
                Vendor
                  Claims

              
	
                Schedule
                  3.1(r)

              	
                -

              	
                Insurance
                  Coverage

              
	
                Schedule
                  3.2(g)

              	
                -

              	
                Required
                  Governmental Consents - Buyer

              
	 	 	 
	
                EXHIBITS

              	 	 
	
                Exhibit
                  A

              	
                -

              	
                Leases

              
	
                Exhibit
                  B

              	
                -

              	
                Wells;
                  Working Interests and Net Revenue Interests; Allocated
                  Values

              
	
                Exhibit
                  C

              	
                -

              	
                Real
                  Property Interests

              
	
                Exhibit
                  D

              	
                -

              	
                Personal
                  Property

              
	
                Exhibit
                  E

              	
                -

              	
                Contracts

              
	
                Exhibit
                  F

              	
                -

              	
                Permits;
                  Transferable Permits

              
	
                Exhibit
                  G

              	
                -

              	
                Form
                  of Assignment, Bill of Sale, and Conveyance

              
	
                Exhibit
                  H

              	
                -

              	
                Form
                  of Transitional Matters Agreement

              
	
                Exhibit
                  I

              	
                -

              	
                Form
                  of Seller’s Opinion of Counsel
                  Letter

              


      

    

     

    
      
        
        

      

      
        iii

        
          

        

      

      
        
        

      

    

     

    ASSET
      PURCHASE AND SALE AGREEMENT

     

    THIS
      ASSET PURCHASE AND SALE AGREEMENT (“Agreement”)
      is
      executed as of this 13th day of March 2007, by UHC
      NEW
      MEXICO
      CORPORATION, a New Mexico CORPORATION (“Seller”),
      CANO
      PETRO OF NEW MEXICO, INC., a Texas corporation, or its designated Affiliate
      (“Buyer”)
      and
      CANO PETROLEUM, INC., a Delaware corporation, the parent of Buyer (“Parent”).

     

    RECITALS

     

    WHEREAS,
      Seller is the owner of certain oil and gas properties and assets located in
      the
      State of New Mexico described more particularly herein;

     

    WHEREAS,
      Seller desires to sell and convey, and Buyer desires to purchase and pay for,
      all of such oil and gas properties and assets on the terms set forth
      herein.

     

    NOW,
      THEREFORE, for and in consideration of the mutual promises contained herein,
      the
      benefits to be derived by each Party hereunder, and other good and valuable
      consideration, the receipt and sufficiency of which are hereby acknowledged,
      Seller, Buyer and Parent, for the limited purpose of the Parent Restricted
      Stock, agree as follows:

     

    ARTICLE
      I.

    DEFINITIONS
      AND INTERPRETATION

     

    1.1 Defined
      Terms.
      In
      addition to the terms defined in the introductory paragraph and the Recitals
      of
      this Agreement, for purposes hereof, the capitalized expressions and terms
      set
      forth in Schedule
      1.1
      shall
      have the meanings set forth therein, unless expressly indicated otherwise.
      Other
      terms may be defined elsewhere in this Agreement and shall, for purposes hereof,
      have the meanings so specified, unless expressly indicated otherwise.


     

    1.2 References.
      The
      words
“hereby,” “herein,” “hereinabove,” “hereinafter,” “hereinbelow,” “hereof,”
“hereto,” “hereunder,” and words of similar import when used in this Agreement
      shall refer to this Agreement as a whole and not to any particular article,
      section, or provision of this Agreement. References in this Agreement to
      articles, sections, exhibits, or schedules are to such articles, sections,
      exhibits, or schedules of this Agreement unless otherwise
      specified.

     

    1.3 Articles
      and Sections.
      This
      Agreement, for convenience only, has been divided into articles and sections.
      The rights and other legal relations of the parties hereto shall be determined
      from this Agreement as an entirety and without regard to the aforesaid division
      into articles and sections and without regard to headings prefixed to such
      articles and sections.

     

    
      
        
        

      

      
        1

        
          

        

      

      
        
        

      

    

     

    1.4 Number
      and Gender.
      Whenever
      the context requires, reference herein made to a single number shall be
      understood to include the plural; and likewise, the plural shall be understood
      to include the singular. Words denoting sex shall be construed to include the
      masculine, feminine, and neuter, when such construction is appropriate; and
      specific enumeration shall not exclude the general but shall be construed as
      cumulative. Definitions of terms defined in the singular or plural shall be
      equally applicable to the plural or singular, as applicable, unless otherwise
      indicated.

     

    ARTICLE
      II.

    PURCHASE
      AND SALE

     

    2.1 Purchase
      and Sale.
      Subject
      to the terms hereof, Seller agrees to sell and convey to Buyer, and Buyer agrees
      to purchase from Seller and pay for, the following properties and assets
      (collectively, the “Assets”):
      

     

    (a) the
      undivided Working Interests, associated Net Revenue Interests, and other
      interests set forth on Exhibit
      B,
      together with any and all other rights, titles, and interests of Seller
      (including in each case, without limitation, fee mineral interests, leasehold
      interests, royalty interests, overriding royalty interests, production payments,
      net profits interests, carried interests, reversionary interests, possibilities
      of reverter, and conversion rights and options) in, to, under, or derived from
      (i) the oil and gas leases described more particularly on Exhibit
      A
      and the
      leasehold estates created thereby, as to all lands and depths covered thereby
      or
      the applicable part or portion thereof if specifically limited in depth and/or
      areal extent in Exhibit
      A
      (collectively, the “Leases”),
      (ii)
      the lands covered by the Leases or otherwise described on Exhibit
      A,
      (iii)
      all units created by the pooling, unitization, and communitization agreements
      in
      effect with respect to the Leases and the lands covered thereby or otherwise
      described on Exhibit
      A,
      and
      (iv) the oil and gas leases and lands included in any units with which the
      Leases or the lands covered thereby or otherwise described on Exhibit
      A
      may have
      been pooled, unitized, or communitized, and all other rights, interests,
      privileges, benefits, and powers of any kind or character conferred upon Seller
      as the owner of any of such interests; 

     

    (b) the
      undivided Working Interests and the associated Net Revenue Interests set forth
      in Exhibit
      B,
      together with any and all other rights, titles, and interests of Seller, in
      and
      to the wells for the production of Hydrocarbons that are located on the Leases
      or on other leases or lands with which the Leases or the lands covered thereby
      or otherwise described on Exhibit
      A
      may have
      been pooled, unitized, or communitized, also described more particularly on
      Exhibit_B
      (collectively, the “Wells”);

     

    (c) all
      of
      Seller’s rights, titles, and interests in and to all crude oil, natural gas,
      condensate, distillate, natural gasoline, natural gas liquids, plant products,
      refined petroleum products, other liquid or gaseous hydrocarbons (including,
      without limitation, coalbed methane), sulphur, other gases (including, without
      limitation, hydrogen and carbon dioxide), and every other mineral or substance,
      or any of them, the right to explore for which, or an interest in which, is
      granted pursuant to the Leases or the other interests described herein
      (“Hydrocarbons”)
      (i)
      produced from or allocable to the interests of Seller described in clauses
      (a)
      and (b) of this Section
      2.1
      and
      existing in pipelines, storage tanks, or other processing or storage facilities
      upstream of the delivery points to the relevant purchasers as of the Effective
      Time, and (ii) produced from or allocable to such interests of Seller from
      and
      after the Effective Time;

     

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

     

    (d) all
      of
      Seller’s rights, titles, and interests in and to all fee surface interests in
      land, surface leases, easements, rights-of-way, servitudes, licenses,
      franchises, road, railroad, and other surface use permits or agreements, and
      similar rights and interests (if any) located on the lands covered by the Leases
      or otherwise described on Exhibit
      A
      or on
      any units with which the Leases or the lands covered thereby or otherwise
      described on Exhibit
      A
      may have
      been pooled, unitized, or communitized, or that otherwise relate to, used in
      connection with or obtained for use in connection with the interests of Seller
      described in clauses (a) and (b) of this Section
      2.1,
      described more particularly on Exhibit
      C
      (collectively, the “Real
      Property Interests”);

     

    (e) all
      of
      Seller’s rights, titles, and interests in and to all equipment, machinery,
      fixtures, inventory, improvements, and other personal, mixed, or movable
      property, located on or off the lands covered by the Leases or otherwise
      described on Exhibit
      A
      or with
      which the Leases or the lands covered thereby or otherwise described on
Exhibit
      A
      have
      been pooled, unitized, or communitized, to the extent used in connection with
      or
      attributable to the interests of Seller described in clauses (a) and (b) of
      this
Section
      2.1
      (except
      for any such personal property leased from third Persons), including, without
      limitation: water wells; saltwater disposal wells and facilities; injection
      wells and facilities; well equipment; casing; rods; tanks and tank batteries;
      boilers; tubing; pumps; pumping units and engines; platforms; Christmas trees;
      derricks; production facilities (whether surface or sub-sea); compressors and
      compression equipment; dehydration units and facilities; heater-treaters;
      processing, fractionation, treatment, and separation plants and facilities;
      testing and sampling equipment; sulfur recovery units and facilities; valves;
      gauges; meters; generators; motors; gun barrels; flow lines; water lines; gas
      lines; gathering lines, laterals and trunk lines, and other pipe lines; gas
      systems (for gathering, treatment, and compression); chemicals; solutions;
      water
      systems (for treatment, disposal, and injection); power plants; poles; lines;
      transformers; starters and controllers; machine shops; tools; storage yards
      and
      equipment, materials, and supplies stored therein, to the extent charged or
      reasonably chargeable to the interests of Seller described in clauses (a) and
      (b) of this Section
      2.1;
      vehicles; trailers; boats; buildings and camps; office furnishings and
      equipment; telegraph, telephone, remote telemetry, and other communication
      systems; loading docks, loading racks, and shipping facilities; spare parts;
      and
      any and all additions or accessions to, substitutions for, and replacements
      of
      any of the foregoing, wherever located, together with all attachments,
      components, parts, equipment, and accessories installed thereon or affixed
      thereto, all as described more particularly on Exhibit
      D
      (collectively, the “Personal
      Property”);

     

    (f) all
      fees,
      rentals, proceeds, payments, revenues, and other rights and economic benefits
      of
      every kind and character accruing or payable to the owners of the Assets that
      are attributable to the period from and after the Effective Time; 

     

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

     

    (g) all
      of
      Seller’s rights, titles, and interests in and to all Contracts, the transfer of
      which is not prohibited or restricted by a preferential right to purchase,
      required consent to assignment, right of first refusal, right of first offer,
      or
      similar provision or as to which the required waivers or consents have been
      obtained, or the appropriate time period for asserting such rights has expired,
      in either case as of the Closing Date (collectively, the “Transferred
      Contracts”);
      

     

    (h) all
      Permits that are transferable by Seller to Buyer, described more particularly
      on
Exhibit
      F;
      

     

    (i) all
      of
      Seller’s rights, titles, and interests in and to all intangible rights, inchoate
      rights, transferable rights under warranties made by prior owners,
      manufacturers, vendors, and third Persons, and rights accruing under applicable
      statutes of limitation or prescription, insofar only as the foregoing rights
      and
      interests relate or are attributable to the items listed in this Section
      2.1,
      and do
      not constitute Excluded Assets, but including, without limitation, all Claims
      of
      Seller with respect to underproduction accounts or credits pertaining to
      Imbalances in existence as of the Effective Time (collectively, “Intangible
      Rights”);
      

     

    (j) all
      files, records (including, without limitation, land and title records, plats,
      surveys, abstracts of title, title insurance policies, title opinions, and
      title
      curative, lease, contract, division order, marketing, correspondence,
      operations, environmental, insurance, production, accounting, regulatory, and
      facility and well records and files), and other information that relate in
      any
      way to any of the items listed in this Section
      2.1,
      are in
      the possession of Seller, and the disclosure and transfer of which is not
      prohibited by confidentiality or other contractual arrangements in existence
      on
      the Closing Date (collectively, the “Records”);
      and


     

    (k) all
      of
      Seller’s rights, titles, and interests in and to all maps, logs, geological,
      geophysical, reserve engineering, and other scientific and technical
      information, reports, and data (including, without limitation, conventional
      and
      3-D seismic data) that relate in any way to the items listed in this
Section
      2.1,
      are
      owned by Seller, do not constitute Excluded Assets, and the disclosure and
      transfer of which is not prohibited by confidentiality or other contractual
      arrangements in existence on the Closing Date (collectively, the “Transferable
      Data”);
      

     

    LESS AND EXCEPT
      the
      Excluded Assets. The conveyance of the Assets shall be effective as of the
      Effective Time, except for the assumption by Buyer of certain Liabilities
      associated with the Assets that are provided, in Section
      2.4,
      to be
      assumed as of the Possession Time.

     

    2.2 Excluded
      Assets.
      Seller
      excepts, reserves, and retains to itself the following properties and assets
      (collectively, the “Excluded
      Assets”):
      

     

    (a) all
      corporate, financial, legal, and tax records of Seller;

     

    
      
        
        

      

      
        4

        
          

        

      

      
        
        

      

    

     

    (b) all
      deposits, cash, checks in process of collection, cash equivalents, and funds
      attributable to Seller’s interest in the Assets for the period prior to the
      Effective Time, except as provided for in Section
      8.3;

     

    (c) all
      Hydrocarbons produced from or allocable to the Assets prior to the Effective
      Time, except for those Hydrocarbons described in Section
      2.1(c)(i);

     

    (d) all
      documents and records of Seller subject to the attorney/client privilege,
      confidentiality agreements, claims of privilege, or other restrictions on
      access;

     

    (e) all
      rights, interests, and Claims that Seller may have under any policy of insurance
      or indemnity, surety bond, or any insurance or condemnation proceeds or
      recoveries from third Persons relating to property damage or casualty loss
      affecting the Assets occurring prior to the Possession Time; 

     

    (f) all
      Claims, whether in contract, in tort, or arising by operation of Law, and
      whether asserted or unasserted as of the Possession Time, that Seller may have
      against any Person arising out of acts, omissions, or events, or injury to
      or
      death of Persons or loss or destruction of or damage to property, relating
      in
      any way to, the Assets that occurred prior to the Possession Time; provided,
      however, that no such Claim may be settled, compromised, or otherwise resolved
      in a manner that results in an obligation borne by Buyer or the Assets from
      and
      after the Possession Time without the prior written consent of Buyer;


     

    (g) all
      exchange traded futures contracts and over-the-counter derivative contracts
      of
      Seller as to which Seller has an open position as of the Effective Time;


     

    (h) any
      and
      all rights to use Seller’s name, marks, trade dress or insignia, or to use the
      name of any Affiliate of Seller, and all of Seller’s intellectual property,
      including, without limitation, proprietary or licensed computer software;
      patents; trade secrets; copyrights; geological and geophysical information
      and
      data (including, without limitation, conventional and 3-D seismic data) licensed
      from third Persons, and such Seller’s proprietary interpretations thereof;
      economic analyses; and pricing forecasts;

     

    (i) all
      amounts due or payable to Seller as adjustments to insurance premiums related
      to
      the Assets for periods prior to the Effective Time;

     

    (j) all
      Claims of Seller for refunds of or any loss carry-forwards with respect to
      Property-Related Taxes and income or franchise taxes relating to the Assets
      for
      periods prior to the Effective Time; 

     

    (k) all
      audit
      rights and all amounts due or payable to Seller as refunds, adjustments, or
      settlements of disputes arising under the Leases, the Real Property Interests,
      the Permits, and the Contracts for periods prior to the Effective Time;


     

    
      
        
        

      

      
        5

        
          

        

      

      
        
        

      

    

     

    (l) all
      trade
      credits and the proceeds of all accounts receivable, notes receivable,
      instruments, general intangibles, and other receivables due or payable to Seller
      relating to the Assets that accrued prior to the Effective Time; 

     

    (m) except
      as
      otherwise provided herein, all fees, rentals, proceeds, payments, revenues,
      rights, and economic benefits of every kind and character (and all security
      or
      other deposits made) payable to the owners of the Assets and that are
      attributable to the period prior to the Effective Time; and

     

    (n) all
      interests, rights, property, and assets of Seller not located on or used in
      connection with the Assets or otherwise specifically included in the definition
      of the Assets.

     

    2.3 Consideration.
      (a)
      The
      purchase price for the Properties shall be (i) $7,000,000, subject to adjustment
      as provided in Section
      2.3(b)
      (the
      "Cash
      Purchase Price"),
      and
      (ii) 404,204 shares of restricted common stock of the Parent (the “Parent
      Stock Consideration”)
      (such
      actual shares being issued to Seller being referred to as the “Parent
      Restricted Stock”).
      The
      Cash Purchase Price and the Parent Stock Consideration is referred to in this
      Agreement as the “Base
      Purchase Price”
and
      the
      Cash Purchase Price, as adjusted pursuant to Section 2.3(b) and (c), is referred
      to in this Agreement as the "Adjusted
      Cash Purchase Price"
      and the
      Base Consideration, as adjusted by the Adjusted Cash Purchase Price, is referred
      to in this Agreement as the “Adjusted
      Base Consideration.”

     

    (b) The
      Cash
      Purchase Price shall be adjusted upward
      by the
      following:

     

    
      	 	
              (i)

            	
              the
                amount of the value of all merchantable Hydrocarbons produced from
                or
                allocable to the Assets existing in pipelines, storage tanks, or
                other
                processing or storage facilities (including, without limitation,
                unsold
                inventories of plant products owned by Seller, if any) upstream of
                the
                delivery points to the relevant purchasers as of the Effective Time,
                the
                value to be based on the contract price applicable to such Hydrocarbons
                in
                effect as of the Effective Time (or the market value, if there is
                no
                contract price, in effect as of the Effective Time), less amounts
                payable
                as royalties, overriding royalties, and other burdens upon such
                Hydrocarbons and Property-Related Taxes deducted by the purchaser
                of such
                Hydrocarbons;

            


    

     

    
      
        
        

      

      
        6

        
          

        

      

      
        
        

      

    

     

    
      	 	
              (ii)

            	
              the
                amount of all direct capital, operating, and other expenditures and
                costs
                and all prepaid costs and expenses attributable to the Assets (exclusive
                of Property-Related Taxes) incurred and actually paid by or on behalf
                of
                Seller in the ordinary course of owning and operating the Assets
                that are
                attributable to the period from the Effective Time through the Possession
                Time, including,
                without
                limitation,
                (A) royalties, overriding royalties, and other similar burdens on
                production, (B) rentals, shut-in well payments, and other lease
                maintenance payments made under the terms of the Leases, (C) except
                as
                otherwise provided below in clause (D)(1) of this paragraph, the
                direct
                overhead and other charges and expenses billed to Seller by the operator
                or operators (including, without limitation, Seller or its Affiliates)
                of
                the Assets under applicable operating agreements, including, without
                limitation, unreimbursed expenses paid by Seller on behalf of third
                Persons to which Seller is entitled to reimbursement under such operating
                agreements, and (D) premiums paid by Seller with respect to any policy
                of
                insurance or indemnity or any surety bond directly related to the
                Assets
                and allocable to the period from the Effective Time through the Possession
                Time, but exclusive of
                (1) direct overhead and other charges billed by Seller or its Affiliate
                as
                operator of an Asset, to Seller, to the extent that such charges
                exceed
                the like charges invoiced by Seller or its Affiliate to other co-owners
                of
                interests in the relevant Asset, (2) expenses incurred by Seller
                in
                connection with the cure or remediation of Defects or Environmental
                Conditions pursuant to Section
                4.3,
                and
                (3) the general, administrative, and office overhead expenses of
                Seller;

            


    

     

    
      	 	
              (iii)

            	
              any
                increase required as the result of the proration of Property-Related
                Taxes
                under Section
                10.3;

            


    

     

    
      	 	
              (iv)

            	
              the
                amount of the value of any Imbalance as to which Seller is in an
“under”
                position as of the Effective Time, as agreed upon by Seller and Buyer
                pursuant to Section
                5.4;
                and

            


    

     

    
      	 	
              (v)

            	
              any
                other amount provided for elsewhere in this Agreement or otherwise
                agreed
                upon by Seller and Buyer as being an increase to the Cash Purchase
                Price.

            


    

     

    (c) The
      Cash
      Purchase Price shall be adjusted downward
      by:


     

    
      	 	
              (i)

            	
              reductions
                (if any) provided for in Sections
                4.3
                and 5.2;
                

            


    

     

    
      	 	
              (ii)

            	
              the
                proceeds received by Seller from the sale of Hydrocarbons produced
                from or
                allocable to the Assets during the period from the Effective Time
                through
                the Closing Date, less amounts payable as royalties, overriding royalties,
                and other burdens upon such Hydrocarbons and Property-Related Taxes
                deducted by the purchaser of such Hydrocarbons;


            


    

     

    
      
        
        

      

      
        7

        
          

        

      

      
        
        

      

    

     

    
      	 	
              (iii)

            	
              all
                other fees, rentals, proceeds from any permitted sale, salvage, or
                other
                disposition, and other revenues pertaining to the Assets that are
                attributable to, and were received by Seller during, the period from
                the
                Effective Time through the Closing Date (excluding overhead reimbursements
                to Seller under applicable operating agreements under which Seller
                is the
                operator);

            


    

     

    
      	 	
              (iv)

            	
              the
                amount of the value of any Imbalance as to which Seller is in an
“over”
                position as of the Effective Time, as well as the amount of the value
                of
                any Hydrocarbons produced from or allocable to the Assets that third
                Persons may otherwise be entitled to receive out of Seller’s interest in
                such Assets after the Effective Time without making full payment
                therefore
                at or after the time of delivery as the result of a “take-or-pay”,
                prepayment, forward sale, production payment, deferred production,
                or
                similar arrangement in existence as of the Effective Time, such value
                to
                be as agreed upon by Seller and Buyer pursuant to Section
                5.4;

            


    

     

    
      	 	
              (v)

            	
              any
                reduction required as the result of the proration of Property-Related
                Taxes under Section 10.3; and

            


    

     

    
      	 	
              (vi)

            	
              any
                other amount provided for elsewhere in this Agreement or otherwise
                agreed
                upon by Seller and Buyer as being a reduction in the Cash Purchase
                Price.

            


    

     

    (d)
       The
      Cash
      Purchase Price, as adjusted pursuant to Sections
      2.3(b)
      and
2.3(c),
      shall
      be referred to herein as the “Adjusted
      Cash Purchase Price”.
      All
      adjustments to the Cash Purchase Price provided for in Sections
      2.3(b)
      and
2.3(c)
      shall be
      determined without duplication and on an accrual basis, in accordance with
      generally accepted accounting principles consistently applied. 

     

    2.4 Assumption
      of Obligations.
      Subject
      to the terms of this Agreement, upon the Closing, Buyer assumes and agrees
      to
      pay, perform, and discharge the following duties, obligations, and Liabilities
      (collectively, the “Assumed
      Liabilities”),
      effective as of the Effective Time or the Possession Time, as applicable, as
      set
      forth below: 

     

    (a) the
      performance of the terms, conditions, and covenants of, and the discharge of
      Seller’s duties, obligations, and liabilities (other than obligations or
      liabilities for the payment of money) arising under the terms of, the Leases,
      the Real Property Interests, the Permits, and the Transferred Contracts for
      the
      period from and after the Possession Time; 

     

    
      
        
        

      

      
        8

        
          

        

      

      
        
        

      

    

     

    (b) all
      obligations and Liabilities of Seller for the payment of money with respect
      to
      the Assets (including, without limitation, the payment of Seller’s costs and
      expenses incurred in connection with the Assets and the payment of Seller’s
      royalties, overriding royalties, and other similar burdens on production, as
      well as all rentals, shut-in well payments, minimum royalties, and other lease
      maintenance payments under the terms of the Leases) for the period from and
      after the Effective Time; 

     

    (c) all
      obligations of Seller regarding the plugging and abandonment of all Wells and
      Personal Property and the performance of all related salvage, site clearance,
      and surface restoration operations in accordance with applicable Law and the
      terms of the Leases and applicable Transferred Contracts;

     

    (d) ALL
      ASSUMED ENVIRONMENTAL LIABILITIES;

     

    (e) EXCEPT
      FOR RETAINED LIABILITIES, ALL OTHER CLAIMS AND LIABILITIES FOR INJURY TO OR
      DEATH OF ANY PERSON, PERSONS, OR OTHER LIVING THINGS, OR LOSS OR DESTRUCTION
      OF
      OR DAMAGE TO PROPERTY AFFECTING OR RELATING TO THE ASSETS, REGARDLESS OF WHETHER
      SUCH CLAIM OR LIABILITY RESULTS, IN WHOLE OR IN PART, FROM THE NEGLIGENCE OR
      STRICT LIABILITY OF SELLER OR ITS AFFILIATES, EMPLOYEES, AGENTS, OR
      REPRESENTATIVES, TO THE EXTENT THAT SUCH CLAIM OR LIABILITY, OR THE ACTS,
      OMISSIONS, EVENTS, OR CONDITIONS GIVING RISE THERETO, ARISES, OCCURS, OR EXISTS
      AT OR AFTER THE POSSESSION TIME; 

     

    (f) all
      obligations of Seller owed to other Persons with respect to Imbalances (if
      any)
      in existence at or arising after the Effective Time; 

     

    (g) all
      Claims and Liabilities relating to the payment of taxes (including interest,
      penalties, and additions to tax) for which Buyer has agreed to be responsible
      under the terms hereof;

     

    (h) all
      obligations of Seller (if any) relating to the accounting for and distribution
      or payment of proceeds from the sale of the Hydrocarbons produced from or
      allocable to the Assets, including, without limitation, the distribution or
      payment of funds held in suspense as of the Closing Date and transferred to
      Buyer pursuant to Section
      8.3;
      

     

    (i) the
      responsibility for compliance with applicable Laws relating to the Assets,
      and
      the maintenance and, when necessary, procurement of Permits required by any
      Governmental Authority in connection with the Assets, in each case for the
      period from and after the Possession Time;

     

    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    

     

    (j) all
      Claims and Liabilities arising out of, resulting from, or relating in any way
      to
      Environmental Conditions, on or relating to the Assets that become Assumed
      Liabilities by operation of Section
      4.3;
      and

     

    (k) all
      other
      duties, obligations, Liabilities, and Claims, whether in contract, in tort,
      or
      arising by operation of Law, accruing or resulting from, arising out of, or
      otherwise associated with the Assets for the period from and after the
      Possession Time.

     

    2.5 Retained
      Liabilities.
      Subject
      to the terms of this Agreement, Seller hereby expressly retains and agrees
      to
      pay, perform, and discharge the following duties, obligations, and Liabilities
      (collectively, the “Retained
      Liabilities”):
      

     

    (a) the
      performance of the terms, conditions, and covenants of, and the discharge of
      Seller’s duties, obligations, and Liabilities (other than obligations or
      Liabilities for the payment of money) arising under the terms of, the Leases,
      the Real Property Interests, the Transferable Permits, and the Contracts for
      the
      period prior to the Possession Time; 

     

    (b) except
      for Assumed Liabilities, all obligations and Liabilities of Seller for the
      payment of money with respect to the Assets (including, without limitation,
      the
      payment of Seller’s costs and expenses incurred in connection with the Assets
      and the payment of Seller’s royalties, overriding royalties, and other similar
      burdens on production, as well as all rentals, shut-in well payments, minimum
      royalties, and other lease maintenance payments under the Leases) for the period
      prior to the Effective Time; 

     

    (c) all
      Claims and Liabilities relating to the payment of taxes (including interest,
      penalties, and additions to tax) for which Seller has agreed to be responsible
      hereunder;

     

    (d) except
      for Assumed Liabilities, all Claims and Liabilities, whether in contract, in
      tort, or arising by operation of Law, against or suffered by Seller that relate
      in any way to, the Assets (INCLUDING,
      WITHOUT LIMITATION, INJURY TO OR DEATH OF ANY PERSON, PERSONS, OR OTHER LIVING
      THINGS, OR LOSS OR DESTRUCTION OF OR DAMAGE TO PROPERTY AFFECTING OR RELATING
      TO
      THE ASSETS, REGARDLESS OF WHETHER SUCH CLAIM OR LIABILITY RESULTS, IN WHOLE
      OR
      IN PART, FROM THE NEGLIGENCE OR STRICT LIABILITY OF BUYER OR ITS AFFILIATES,
      EMPLOYEES, AGENTS, OR REPRESENTATIVES),
      to
      extent that any such Claim or Liability, or the acts, omissions, events, or
      conditions giving rise thereto, arose, occurred, or existed prior to the
      Possession Time, regardless of whether such Claim or Liability has been asserted
      as of the Possession Time; 

     

    (e) all
      Claims (if any) of third Persons, whether as the result of audits or otherwise,
      to refunds, adjustments, settlements of disputes, or other amounts of any kind
      due under the terms of the Leases, the Real Property Interests, the Transferable
      Permits, or the Contracts and attributable to the period prior to the Effective
      Time; 

     

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

     

    (f) all
      amounts payable by Seller under the terms of all exchange traded futures
      contracts and over-the-counter derivative contracts to which Seller is a party
      as of the Effective Time, including, without limitation, all breakage costs
      (if
      any) incurred by Seller under the terms of any such agreement as the result
      of
      the transactions contemplated in this Agreement; 

     

    (g) all
      indebtedness (if any) of Seller, whether or not encumbering all or any portion
      of the Assets; 

     

    (h) ALL
      RETAINED ENVIRONMENTAL LIABILITIES; and 

     

    (i) except
      for Assumed Liabilities, all other duties, obligations, Claims, and Liabilities,
      whether in contract, in tort, or arising by operation of Law, accruing or
      resulting from, arising out of, or otherwise associated with (i) the Assets
      for
      the period prior to the Possession Time, and (ii) the Excluded
      Assets.

     

    2.6 Possession;
      Risk of Loss.
      As
      of the
      Possession Time, Seller shall deliver to Buyer exclusive possession and control
      of the Assets. Seller agrees to cooperate with Buyer to facilitate the
      transition of the ownership and (if applicable) operation of the Assets to
      Buyer. As between Seller and Buyer, and subject to the terms of Sections
      2.4
      and
2.5,
      Seller
      shall, severally according to their respective ownership interests in the Assets
      and not jointly, assume and bear all risk of loss associated with the Assets
      prior to the Possession Time, and Buyer shall assume and bear all risk of loss
      associated with the Assets from and after the Possession Time. 

     

    2.7 Allocation
      of Adjusted Consideration.
      Buyer
      and
      Seller shall use commercially reasonable efforts to agree, on or before the
      Closing Date, upon an allocation of the Adjusted Base Consideration among the
      Assets for financial accounting and tax purposes in accordance with Section
      1060
      of the Code. Buyer and Seller shall each file a Form 8594 (Asset Acquisition
      Statement Under Section 1060) on a timely basis, reporting the allocation of
      the
      Adjusted Base Consideration consistent with such allocation. Buyer and Seller
      shall file, on a timely basis, any amendments required to such Form 8594 as
      a
      result of a subsequent increase or decrease of the Adjusted Base Consideration
      after the Closing Date. Buyer and Seller shall not take any position on their
      respective income tax returns that is inconsistent with the allocation of the
      Adjusted Base Consideration as so agreed, or as adjusted as the result of any
      subsequent increase or decrease in the Adjusted Base Consideration. If Buyer
      and
      Seller are unable to agree on the allocation of the Adjusted Base Consideration
      provided for in this Section
      2.7
      by the
      Closing Date, either Buyer or Seller may initiate arbitration of such dispute
      pursuant to the terms of Section
      10.11.
      In that
      event, the Closing shall be deferred until such dispute is resolved as provided
      in Section
      10.11.

     

    2.8 Restricted
      Securities. 

     

    (a) The
      parties acknowledge that the shares of Parent Restricted Stock shall not have
      been registered and shall be characterized as “restricted securities” under U.S.
      federal securities laws, and, under such laws, such shares may be resold without
      registration under the Securities Act only in certain limited circumstances.
      Each certificate evidencing shares of Parent Restricted Stock to be issued
      pursuant to this Agreement shall bear the following legend as well as any legend
      contemplated by this Agreement or required by the laws of the State of Delaware
      or any other jurisdiction:

     

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    

     

    “THE
      SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND
      HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
      “SECURITIES ACT”). SUCH SHARES MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IN THE
      ABSENCE OF SUCH REGISTRATION WITHOUT AN EXEMPTION UNDER THE SECURITIES ACT
      OR AN
      OPINION OF LEGAL COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY THAT SUCH
      REGISTRATION IS NOT REQUIRED.

     

    THE
      SALE,
      TRANSFER OR OTHER DISPOSITION OF THESE SHARES IS SUBJECT TO RESTRICTIONS AS
      SET
      FORTH IN THE PURCHASE AND SALE AGREEMENT BY AND AMONG UHC NEW MEXICO
      CORPORATION, CANO PETRO OF NEW MEXICO, INC. AND CANO PETROLEUM, INC. DATED
      AS OF
      MARCH 29, 2007, A COPY OF WHICH IS AVAILABLE AT THE PRINCIPAL OFFICE OF THE
      COMPANY”

     

    (b) The
      holder of shares of Parent Restricted Stock shall be restricted from selling,
      transferring or otherwise disposing of any or all of such shares until the
      first
      anniversary of the Closing Date, and, thereafter, in any ninety (90) day period,
      the holder of shares of Parent Restricted Stock, to the extent permitted by
      law,
      may only sell, transfer or otherwise dispose of a maximum of 25% of the total
      number of shares of Parent Restricted Stock the holder received in connection
      with the transactions contemplated herein and each certificate representing
      shares of Parent Restricted Stock to be issued pursuant to this Agreement shall
      contain a legend to that effect. 

     

    ARTICLE
      III.

    REPRESENTATIONS
      AND WARRANTIES

     

    3.1 Representations
      and Warranties of Seller.
      Seller
      represents and warrants to Buyer and Parent as follows:

     

    (a) Seller
      is
      a corporation duly formed, currently existing, and in good standing under the
      Laws of the State of New Mexico. 

     

    (b) Seller
      has full capacity, power, and authority to enter into and perform this Agreement
      and the transactions contemplated herein. The execution, delivery, and
      performance by Seller of this Agreement has been duly and validly authorized
      and
      approved by all necessary action on the part of Seller and Seller’s parent, and
      this Agreement and the documents executed in connection herewith are, or upon
      their execution and delivery will be, the valid and binding obligations of
      Seller and enforceable against Seller in accordance with their terms, subject
      to
      the effects of bankruptcy, insolvency, reorganization, moratorium, and similar
      Laws, as well as to principles of equity (regardless of whether such
      enforceability is considered in a proceeding in equity or at law).

     

    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

    

     

    (c) The
      execution, delivery, and performance by Seller of this Agreement and the
      consummation of the transactions contemplated herein will not (i) conflict
      with
      or result in a breach of any provisions of the organizational documents of
      Seller or Seller’s parent, (ii) result in a default or the creation of any Lien
      or give rise to any right of termination, cancellation, or acceleration under
      any of the terms of any Lease, Contract, Real Property Interest, Permit, note,
      bond, mortgage, indenture, license, or other agreement, document, or instrument
      to which Seller is a party or by which Seller or any of the Assets may be bound,
      or (iii) violate any
      order, writ, injunction, judgment, decree, or Law applicable to Seller or the
      Assets.

     

    (d) Except
      as
      otherwise reflected in Schedule
      3.1(d),
      there
      is no Claim by any Person or Governmental Authority (including, without
      limitation, expropriation or forfeiture proceedings), and no legal,
      administrative, or arbitration proceeding pending or, to Seller’s Knowledge,
      threatened against Seller or the Assets, or to which Seller is a party, that
      reasonably may be expected to (i) impair Seller’s title to any of the
      Assets, (ii) hinder or impede the operation of all or any portion of the
      Assets, (iii) subject the owner or operator of the Assets to liability in
      favor of any Governmental Authority or other Person as the result of the alleged
      violation of, or non-compliance with, any Environmental Law by Seller or any
      Affiliate of Seller with respect to the Assets or require the owner or operator
      of the Assets to remediate, remove, or respond to an Environmental Condition,
      or
      a threatened Environmental Condition, on or affecting the Assets, or
      (iv) otherwise adversely affect the Assets or the ability of Seller to
      consummate the transactions contemplated in this Agreement. Further, except
      as
      otherwise reflected in Schedule
      3.1(d),
      there
      has been no Release or Threatened Release of Environmental Contaminants at,
      to,
      from or about the Assets.

     

    (e) Except
      as
      otherwise reflected in Schedule
      3.1(e),
      none of
      the Leases, Real Property Interests, or Contracts is subject to a preferential
      right to purchase, third Person consent to assignment requirement, right of
      first refusal, right of first offer, or similar right or
      restriction.

     

    (f) Except
      for approvals by Governmental Authorities customarily obtained after the
      Closing, no
      authorization, consent, approval, exemption, franchise, permit, or license
      of,
      or filing with, any Governmental Authority is required to authorize, or is
      otherwise required by any Governmental Authority in connection with, the valid
      execution and delivery by Seller of this Agreement, the transfer of the Assets
      to Buyer, or the performance by Seller of its other obligations
      hereunder.

     

    
      
        
        

      

      
        13

        
          

        

      

      
        
        

      

    

     

    (g) Except
      as
      set forth on Schedule
      3.1(g), each
      Lease
      is in full force and effect. Seller has, in all material respects, fulfilled
      all
      requirements for filings, certificates, consents, approvals, disclosures, and
      similar matters contained in the Leases and applicable Law, and Seller is fully
      qualified to own, operate, and transfer the Leases under the terms thereof
      and
      applicable Law. Seller is not in material breach or material default, and there
      has occurred no event, fact, or circumstance that, with the lapse of time or
      the
      giving of notice, or both, would constitute such a material breach or material
      default by Seller, with respect to any terms of any Lease, and, to Seller’s
      Knowledge, no other Person owning an interest in, or serving as operator of,
      any
      Lease is in material breach or material default with respect to any of its
      obligations thereunder. No lessor under any Lease has given or, to Seller’s
      Knowledge, threatened to give notice of any action to terminate, cancel,
      rescind, repudiate, or procure a judicial reformation of any Lease or any
      provision thereof. The Leases contain no express obligations on the part of
      the
      owner(s) thereof, applicable after the Effective Time, to engage in continuous
      or other development operations in order to maintain any Lease. The Leases
      contain no provisions that increase the royalty share of the lessor thereunder,
      except such increases as are reflected in the Net Revenue Interests for the
      Leases and Wells set forth in Exhibit
      B.
      Seller
      has correctly made, or caused to be correctly made, all payments, including,
      without limitation, royalties, rentals, shut-in well payments, and other lease
      maintenance payments, due in respect of the Leases thereunder.

     

    (h) Each
      of
      the Real Property Interests is in full force and effect. Seller has, in all
      material respects, fulfilled all requirements for filings, certificates,
      consents, approvals, disclosures, and similar matters contained in the Real
      Property Interests and applicable Law, and Seller is fully qualified to own,
      operate, and transfer the Real Property Interests under the terms thereof and
      applicable Law. Seller is not in material breach or material default, and there
      has occurred no event, fact, or circumstance that, with the lapse of time or
      the
      giving of notice, or both, would constitute such a material breach or material
      default by Seller, with respect to any of its obligations under any Real
      Property Interest, and, to Seller’s Knowledge, no other Person owning an
      interest in any Real Property Interest or serving as operator of any Property
      is
      in material breach or material default with respect to any of its obligations
      thereunder. No grantor, lessor, licensor, or other counterparty under any Real
      Property Interest has given or, to Seller’s Knowledge, threatened to give notice
      of any action to terminate, cancel, rescind, repudiate, or procure a judicial
      reformation of any Real Property Interest or any provision thereof. Seller
      has
      correctly made, or caused to be correctly made, all rental and other payments
      due in respect of the Real Property Interests thereunder. 

     

    (i) Seller
      has furnished to Buyer true and correct copies of all of the Contracts described
      on Exhibit
      D,
      and
      there are no contracts, agreements, instruments, or documents affecting the
      Assets other than the Contracts described on Exhibit
      D.
      With
      respect to the Contracts: (i) all Contracts are in full force and effect; (ii)
      Seller is not in material breach or material default, and there has occurred
      no
      event, fact, or circumstance that, with the lapse of time or the giving of
      notice, or both, would constitute such a material breach or material default
      by
      Seller, with respect to the terms of any Contract; (iii) to Seller’s Knowledge,
      no other party is in material breach or material default with respect to the
      terms of any Contract; and (iv) Neither Seller nor, to Seller’s Knowledge, any
      other party to any Contract has given or threatened to give notice of any action
      to terminate, cancel, rescind, or procure a judicial reformation of any Contract
      or any provision thereof. The Assets are not subject to any Contract containing
      an area of mutual interest, maintenance of uniform interest, “before payout” or
“after payout” reversion or conversion, or other provision under which Seller or
      Buyer may be obligated to make assignments to third Persons of interests in
      any
      Asset after the Effective Time, except such assignments of interests as are
      reflected in Schedule
      3.1(i)
      and are
      taken into account in the Working Interests and Net Revenue Interests set forth
      for the Leases and Wells in Exhibit
      B.
      Except
      as otherwise shown on Schedule
      3.1(i),
      the
      Assets are not subject to any tax partnership agreement.

     

    
      
        
        

      

      
        14

        
          

        

      

      
        
        

      

    

     

    (j) The
      Permits described on Exhibit
      E
      constitute all necessary Permits affecting or pertaining to the Assets. All
      Transferable Permits are also described on Exhibit
      E.
      Seller
      or, to Seller’s Knowledge, each operator of the Assets, as applicable, has
      complied in all material respects with all Laws and Permits relating to the
      Assets, including, without limitation, Environmental Laws and Laws requiring
      the
      provision of surety bonds or other forms of security or financial assurance
      with
      respect to the performance of operations (including, without limitation,
      plugging and abandonment operations) on the Assets. Seller or, to Seller’s
      Knowledge, each operator of the Assets, as applicable, has all Permits required
      in connection with the ownership and operation of the Assets (including those
      required under Environmental Laws), and has properly made all filings necessary
      or appropriate to obtain such Permits. All of such Permits and filings are
      in
      full force and effect and to the extent necessary, Seller has filed for renewal
      of any such Permits in a manner so that the expiring Permits remain in full
      force and effect during the pendency of the application for renewal. Neither
      Seller nor, to Seller’s Knowledge, any other Person has received notice from any
      Governmental Authority or other Person that any such applicable Law, Permit,
      or
      filing has been violated or not complied with respect to the Assets by Seller
      or
      other Person.

     

    (k) As
      of the
      date of this Agreement, the Wells described on Exhibit
      B
      are the
      only wells for the production of Hydrocarbons currently located on the Leases.
      All of such Wells have been drilled, completed, and operated within the
      boundaries of the Leases or within the limits otherwise permitted by contract
      and by applicable Law and in compliance with the provisions of the applicable
      Contracts and all applicable Laws. The production of Hydrocarbons from such
      Wells has not been in excess of the allowable production established for each
      Well. Except as otherwise provided in Schedule
      3.1(k),
      none of
      the Wells has been plugged and abandoned.

     

    (l) There
      are
      no calls on production, options to purchase, or similar rights in effect with
      respect to any portion of Seller’s shares of the Hydrocarbons, and all Contracts
      for the sale of Hydrocarbons are terminable without penalty on no more than
      thirty (30) days’ prior notice. Seller is currently receiving the prices
      provided for under such sales Contracts with respect to the Hydrocarbons. All
      proceeds from the sale of Hydrocarbons attributable to the interests of Seller
      in the Assets have been and are being disbursed to Seller under appropriate
      division orders, transfer orders, or similar documents signed by or otherwise
      binding on Seller, and no portion of any such proceeds is being held in
      suspense, subject to a Claim for refund by the purchaser, used as an offset
      or
      as collateral for other obligations (whether disputed or undisputed), or
      otherwise not being paid to Seller as it becomes due in the ordinary course
      of
      business. 

     

    
      
        
        

      

      
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    (m) Except
      as
      shown in Schedule
      3.1(m),
      as of
      the date of execution of this Agreement, Seller has no Claim constituting an
      Asset, or is subject to any obligation constituting an Assumed Liability, with
      respect to any Imbalance that relates to any of the Assets. Except for the
      Imbalances (if any) shown in Schedule
      3.1(m)
      as to
      which Seller is subject to an obligation constituting an Assumed Liability,
      Seller is not on the date of execution of this Agreement, nor will be after
      the
      Effective Time, obligated by virtue of any prepayment made under any sales
      Contract or other Contract containing a "take-or-pay" clause, or under any
      production payment, forward sale, balancing, deferred production, or similar
      arrangement, to deliver Hydrocarbons produced from or allocable to any Asset
      at
      some future time without receiving full payment therefore at or after the time
      of delivery. 

     

    (n) Except
      as
      set forth on Schedule
      3.1(n),
      Seller
      has paid all amounts owed in connection with the Assets for which Seller has
      received invoices from the operator(s) thereof, and there are no outstanding
      calls or payments due from Seller under the terms of the Contracts. Schedule
      3.1(n) contains
      a true and complete list and description, as of the date of execution of this
      Agreement, of all authorities for expenditures, plans of exploration and/or
      development, and other commitments as to which Seller has become obligated
      regarding drilling, reworking, or other operations or other capital expenditures
      on or relating to the Assets for which all of the activities or expenditures
      anticipated in such AFEs, plans, or commitments have not been completed prior
      to
      the date of this Agreement. Except as set forth in Schedule
      3.1(n),
      neither
      the Leases nor the Contracts contain any express contractual obligation to
      drill
      additional Hydrocarbon wells or engage in other operations on the Assets as
      to
      which Seller has become obligated, except for obligations arising under offset
      well provisions and obligations arising under Contracts that allow the parties
      thereto to elect whether to participate. There are no material operations on
      the
      Leases under any of the Contracts with respect to which Seller or any other
      Person has become a non-consenting party, except for those operations set forth
      on Schedule
      3.1(n),
      the
      effects of which are reflected in the Working Interests and Net Revenue
      Interests set forth for the Leases and Wells in Exhibit
      B.
      The
      matters set forth on Schedule
      3.1(n)
      are
      referred to herein as the “Vendor
      Claims.”

     

    (o) Except
      with respect to those Property-Related Taxes prorated between Seller and Buyer
      as provided in Section
      10.3,
      during
      the period of Seller’s ownership of the Assets, all Property-Related Taxes
      imposed or assessed with respect to, measured by, charged against, or
      attributable to the Assets, or the ownership thereof, or the production,
      processing, gathering, treatment, transportation, and marketing of Hydrocarbons
      therefrom or allocable thereto, in each case that became due and payable prior
      to the Effective Time have been properly paid. 

     

    (p) Seller
      has not engaged any financial advisor, broker, or finder, or incurred any
      liability, contingent or otherwise, in favor of any such other Person relating
      to the transactions contemplated in this Agreement. 

     

    (q) There
      are
      no bankruptcy, insolvency, reorganization, or arrangement proceedings pending,
      being contemplated by, or to Seller’s Knowledge, threatened against Seller or
      any Affiliate that controls Seller. 

     

    
      
        
        

      

      
        16

        
          

        

      

      
        
        

      

    

     

    (r) Schedule
      3.1(r)
      lists
      all insurance policies or self-insurance programs maintained in effect by Seller
      or its Affiliates with respect to the Assets as of the date of execution of
      this
      Agreement. Seller, or its Affiliates, have paid all premiums required under,
      and
      are otherwise in compliance with, the terms of all such insurance policies
      or
      self-insurance programs, all of which policies or programs, or renewals thereof,
      have been during the period of Seller’s ownership of the Assets, and are as of
      the date of execution of this Agreement, in full force and effect.

     

    (s) Since
      December 31, 2006, there has not occurred a Material Adverse
      Change.

     

    (t) The
      information relating to Seller and the Assets which has been made available
      to
      Buyer is not false or misleading with respect to any material fact and does
      not
      omit any material fact necessary in order to make the statements therein not
      misleading. 

     

    3.2 Restricted
      Shares.The
      Seller understands that: 

     

    (a) the
      shares of Parent Restricted Stock comprising the Parent Stock Consideration
      to
      be delivered pursuant to this Agreement are “restricted securities” under the
      federal securities laws of the United States inasmuch as they have not been
      registered under the Securities Act of 1933, as amended (the “Securities
      Act”),
      and
      shall be acquired from Parent in a transaction exempt from registration under
      the Securities Act pursuant to Section 4(2) thereof or Regulation D promulgated
      thereunder;

     

    (b) the
      shares of Parent Restricted Stock must be held indefinitely unless a subsequent
      disposition thereof is registered under the Securities Act or is exempt from
      registration. In this connection, Seller represents that it is familiar with
      Rule 144 promulgated under the Securities Act, as currently in effect, and
      understands the resale limitations imposed thereby and by the Securities Act;
      

     

    (c) the
      shares of Parent Restricted Stock will bear a legend to such effect;


     

    (d) Purchaser
      will cause its transfer agent to make a notation on its transfer books to such
      effect; and

     

    (e) The
      holder of shares of Parent Restricted Stock shall be restricted from selling,
      transferring or otherwise disposing of any or all of such shares until the
      first
      anniversary of the Closing Date, and, thereafter, in any ninety (90) day period,
      holder of shares of Parent Restricted Stock, to the extent permitted by law,
      may
      only sell, transfer or otherwise dispose of a maximum of 25% of the total number
      of shares of Parent Restricted Stock such holder received in connection with
      the
      transactions contemplated herein. 

     

    
      
        
        

      

      
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    3.3 Accredited
      Investor; Purchase Entirely For Own Account.
      Seller
      is
      an accredited investor as defined in Regulation D under the Securities Act.
      Seller is acquiring the shares of Parent Restricted Stock pursuant to this
      Agreement for investment only for its own account, not as a nominee or agent,
      and not with a view to the resale or distribution of any part thereof and shall
      not offer to sell or otherwise dispose of any of the shares of Parent Restricted
      Stock so acquired by the Seller in violation of the registration requirements
      of
      the Securities Act or the securities laws of any other jurisdiction applicable
      to the transactions contemplated hereby or the Seller. By executing this
      Agreement, the Seller further represents that it does not have any contract,
      undertaking, agreement or arrangement with any person to sell, transfer or
      grant
      participations to such person or to any third person, with respect to any of
      the
      shares of the Parent Restricted Stock.

     

    3.4 Disclosure
      of Information.
      Seller
      represents and warrants to Buyer and Parent as follows:

     

    (a) Seller
      has conducted its own independent investigation, review and analysis of the
      business, operations, assets, liabilities, results of operations, financial
      condition and prospects of Buyer; and

     

    (b) Seller
      acknowledges that, except as set forth in this Agreement, none of Buyer, Parent
      nor any of their affiliates, employees, agents, advisors or representatives
      (collectively, “Buyer
      Affiliates”)
      makes
      or has made any representation or warranty, either express or implied, as to
      the
      accuracy or completeness of any of the information provided or made available
      to
      Seller or any of its affiliates, employees, agents or representatives
      (collectively, “Seller
      Affiliates”).
      Seller further agrees that, to the fullest extent permitted by law, neither
      Buyer, Parent nor any Buyer Affiliate shall have any liability or responsibility
      whatsoever to the Sellers or any Seller Affiliate on any basis (including in
      contract or tort, under federal or state securities laws or otherwise) based
      upon any information provided or made available, or statements made, to Seller
      or Seller Affiliate (or any omissions therefrom), other than (in the case of
      Buyer or Parent) in respect of the specific representations and warranties
      set
      forth in Section
      3.8
      of this
      Agreement.

     

    3.5 Investment
      Experience.
      Seller
      has such knowledge and experience in financial and business matters as to be
      capable of evaluating the merits and risks of the investment in the shares
      of
      Parent Restricted Stock. The Seller is able to bear the economic risk of its
      investment in the shares of Parent Restricted Stock for an indefinite period
      of
      time and can afford a complete loss of his investment in the shares of Parent
      Restricted Stock.

     

    3.6 General
      Solicitation.
      Seller
      was not offered or sold the shares of Parent Restricted Stock, directly or
      indirectly, by means of any form of general solicitation or general
      advertisement.

     

    3.7 Reliance.
      Seller
      understands and acknowledges that: (i) the shares of Parent Restricted Stock
      are
      being offered and sold to it without registration under the Securities Act
      in a
      transaction that is exempt from the registration provisions of the Securities
      Act and (ii) the availability of such exemption depends in part on, and Buyer
      and Parent will rely upon the accuracy and truthfulness of, the foregoing
      representations and the Seller hereby acknowledges and consents to such
      reliance.

     

    
      
        
        

      

      
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    3.8 Representations
      and Warranties of Buyer and Parent.Buyer,
      and Parent, with regard to representations 3.8(b), (c), (d), (e) and (f),
      represents and warrants to Seller as follows:

     

    (a) Buyer
      is
      a corporation duly organized, validly existing, and in good standing under
      the
      Laws of the State of Texas. Buyer has all requisite power and authority to
      own
      and operate its property and to carry on its business as now
      conducted.

     

    (b) Each
      of
      Buyer and Parent has full capacity, power, and authority to enter into and
      perform this Agreement and the transactions contemplated herein. The execution,
      delivery, and performance by Buyer and Parent of this Agreement have been duly
      and validly authorized and approved by all necessary action of Buyer and Parent.
      This Agreement and the documents executed in connection herewith are, or upon
      their execution and delivery will be, the valid and binding obligations of
      Buyer
      and Parent and enforceable against Buyer and Parent in accordance with their
      terms, subject to the effects of bankruptcy, insolvency, reorganization,
      moratorium, and similar Laws, as well as to principles of equity (regardless
      of
      whether such enforceability is considered in a proceeding in equity or at law)
      provided that only the obligations regarding the Parent Restricted Stock are
      valid and binding obligations of Parent. The Parent Stock Consideration when
      issued to the Seller pursuant to this Agreement will constitute duly authorized,
      validly issued, fully paid and non-accessible shares of Parent Restricted
      Stock.

     

    (c) The
      execution, delivery, and performance by Buyer and Parent (for the limited
      purposes relating to the Parent Restricted Stock) of this Agreement and the
      consummation of the transactions contemplated herein will not (i) conflict
      with
      or result in a breach of any provision of the organizational documents of Buyer
      or Parent, (ii) result in a default or the creation of any Lien or give rise
      to
      any right of termination, cancellation, or acceleration under any of the terms
      of any note, bond, mortgage, indenture, license, or other agreement to which
      Buyer or Parent is a party or by which Buyer, Parent, or any of its property
      may
      be bound, or (iii) violate any order, writ, injunction, judgment, decree, or
      Law
      applicable to Buyer or its property.

     

    (d) There
      is
      no Claim by any Person or Governmental Authority (including, without limitation,
      expropriation or forfeiture proceedings), and no legal, administrative, or
      arbitration proceeding pending or, to Buyer’s or Parent’s Knowledge, threatened
      against Buyer, or to which Buyer is a party, that reasonably may be expected
      to
      have a material adverse effect upon the ability of Buyer or Parent to consummate
      the transactions contemplated in this Agreement.

     

    (e) Except
      for approvals by Governmental Authorities customarily obtained after the
      Closing, no
      authorization, consent, approval, exemption, franchise, permit, or license
      of,
      or filing with, any Governmental Authority or any other Person is required
      to
      authorize, or is otherwise required in connection with, the valid execution
      and
      delivery by Buyer and Parent of this Agreement, the performance by Buyer of
      its
      obligations hereunder and thereunder or the performance by Parent of its limited
      obligations hereunder and thereunder regarding the Parent Restricted
      Stock.

     

    
      
        
        

      

      
        19

        
          

        

      

      
        
        

      

    

     

    (f) 
      Buyer
      has not engaged any other financial advisor, broker, agent or finder, or
      incurred any liability, contingent or otherwise, in favor of any other such
      Person relating to the transactions contemplated by this Agreement for which
      Seller would be responsible.

     

    (g) There
      are
      no bankruptcy, insolvency, reorganization, or arrangement proceedings pending,
      being contemplated by, or, to Buyer’s Knowledge, threatened against Buyer or any
      Affiliate that controls Buyer.

     

    (h) Buyer
      is
      acquiring the Assets for its own account, for investment, and not with a view
      to, or for offer or resale in connection with, a distribution thereof
      (including, without limitation, the transfer of fractional undivided interests
      therein) within the meaning of the Securities Act of 1933, as amended, and
      the
      rules and regulations promulgated thereunder, or a distribution thereof in
      violation of any applicable securities Law. If, in the future, Buyer sells,
      transfers, or otherwise disposes of the Assets, or any portion thereof, or
      any
      fractional undivided interest therein, Buyer will do so in full compliance
      with
      any applicable securities Laws. 

     

    (i) Parent
      has filed with the SEC, and has heretofore made available to the Seller true
      and
      complete copies of, each quarterly report, annual report, current report and
      proxy statement required to be filed with the SEC since June 30, 2006 under
      the
      Securities Exchange Act of 1934 (collectively, the “Parent SEC Reports”). As of
      the respective dates such Parent SEC Reports were filed or, if any such Parent
      SEC Reports were amended, as of the date such amendment was filed, each of
      the
      Parent SEC Reports, including any financial statements or schedules included
      therein, (a) complied in all material respects with all applicable
      requirements of the Securities Act of 1933 and the Exchange Act of 1934, as
      the
      case may be, and the applicable rules and regulations promulgated thereunder,
      and (b) did not contain any untrue statement of a material fact or omit 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. 

     

    (j) Buyer
      has
      such knowledge and experience in the ownership and operation of oil and gas
      properties and financial and business matters as to be able to evaluate the
      merits and risks of an investment in the Assets. Buyer is able to bear the
      risks
      of an investment in the Assets and understands risks of, and other
      considerations relating to, a purchase of the Assets.

     

    
      
        
        

      

      
        20

        
          

        

      

      
        
        

      

    

     

    3.9 Disclaimers.
      To
      the
      extent required by applicable Law to be operative, the disclaimers of certain
      warranties contained in this Section
      3.9
      are
“conspicuous disclaimers” for purposes of any applicable Law. THE
      EXPRESS REPRESENTATIONS AND WARRANTIES OF SELLER CONTAINED IN SECTIONS 3.1
      THROUGH 3.8 ABOVE AND THE SPECIAL WARRANTY OF TITLE BY SELLER IN THE CONVEYANCE
      (COLLECTIVELY “SELLER’S
      WARRANTIES”)
      ARE EXCLUSIVE AND ARE IN LIEU OF ALL OTHER REPRESENTATIONS AND WARRANTIES,
      EXPRESS, IMPLIED, STATUTORY OR OTHERWISE. SELLER EXPRESSLY DISCLAIMS ANY AND
      ALL
      SUCH OTHER REPRESENTATIONS AND WARRANTIES. WITHOUT LIMITATION OF THE FOREGOING
      AND EXCEPT FOR SELLER’S WARRANTIES, THE ASSETS SHALL BE CONVEYED PURSUANT HERETO
      WITHOUT (a) ANY WARRANTY OR REPRESENTATION WHETHER EXPRESS, IMPLIED, STATUTORY
      OR OTHERWISE RELATING TO TITLE TO ANY OF THE ASSETS, THE CONDITION, QUANTITY,
      QUALITY, FITNESS FOR A PARTICULAR PURPOSE, CONFORMITY TO THE MODELS OR SAMPLES
      OF MATERIALS OR MERCHANTABILITY OF ANY EQUIPMENT OR ITS FITNESS FOR ANY PURPOSE
      OR (b) ANY OTHER EXPRESS, IMPLIED, STATUTORY OR OTHER WARRANTY OR REPRESENTATION
      WHATSOEVER.

     

    ARTICLE
      IV.

    ACCESS;
      DUE DILIGENCE

     

    4.1 Access
      to Records.
      Through
      the Closing Date, Seller shall provide to Buyer and its representatives full
      access, during normal business hours (and, if reasonably requested, such other
      times as Buyer may deem necessary to complete its due diligence within the
      time
      period provided herein and for a period of one hundred twenty (120) days after
      the closing date) at Seller’s offices, to all books, records, documents, and
      information of every kind and character (including, without limitation,
      originals or photocopies, as available, of the Leases, the Real Property
      Interests, the Contracts, the Permits, the Records, and the Transferable Data)
      in Seller’s possession relating in any way to the Assets. Seller shall also
      cause their employees, counsel, accountants, and other consultants to cooperate
      with and assist Buyer in connection with such due diligence review. Unless
      prohibited from doing so by confidentiality or other contractual arrangements
      between Seller and third Persons, Buyer shall have the right to photocopy such
      books, records, documents, and information, or any portion thereof, at Buyer’s
      expense. If Buyer requests information not in the possession of Seller, Seller
      shall use reasonable efforts to obtain the requested information, at Buyer’s
      expense, from the applicable operators or other Persons. 

     

    4.2 Operation
      and Environmental Assessment.
      Through
      the Closing Date, Seller shall afford, or shall use reasonable efforts to cause
      relevant operators or other Persons to afford, to Buyer and its authorized
      representatives, at reasonable times and at the sole cost, risk, and expense
      of
      Buyer or its representatives, as applicable, reasonable access to and entry
      upon
      all of the Leases, Wells, and Real Property Interests for the purposes of
      Buyer’s on-site inspections and inventories of the Assets (including, without
      limitation, the witnessing of well tests, the examination of well logs and
      other
      geological and geophysical data, and the performance of soil and water tests
      and
      such other tests, inspections, examinations, investigations, and studies as
      Buyer deems necessary to permit Buyer to prepare reserve engineering and other
      reports relating to, and assess the operational and environmental condition
      of,
      the Assets) and reasonable access to any employees or contract personnel that
      have been involved with the operation, maintenance, or development of the
      Assets.

     

    
      
        
        

      

      
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    4.3 Defects,
      Environmental Conditions and Related Adjustments. From
      time
      to time on or before the Closing Date and for one hundred twenty (120) days
      following the Closing Date, Buyer may give to Seller written notice of any
      claimed Defect or Environmental Condition discovered by Buyer. Each such notice
      shall set forth (i) a detailed description of the relevant Defect or
      Environmental Condition and, as applicable, the Asset affected thereby, (ii)
      the
      Defect Amount or Remediation Estimate applicable thereto as determined by Buyer,
      and (iii) the specific documentation or action that Buyer requests to cure
      or
      remedy such Defect or Environmental Condition. In addition, if Seller is aware
      or becomes aware, between the date of execution of this Agreement and the
      Closing Date, of any Environmental Condition affecting any Asset, Seller shall
      provide to Buyer written notice of such fact. Any Environmental Condition thus
      brought to Buyer’s attention by Seller shall be deemed to have been asserted by
      Buyer in a timely manner as provided in this Section
      4.3(a).
      Defects
      and Environmental Conditions discovered by Buyer in its due diligence pertaining
      to the Assets but not asserted in a timely manner as provided in this
Section
      4.3(a)
      shall be
      deemed to have been waived by Buyer, and shall become Assumed Liabilities for
      purposes hereof.

    


    (b) Seller
      shall have the first right and option, but not the obligation, to cure or remedy
      all such Defects or Environmental Conditions at Seller’s sole cost, risk, and
      expense (and in the case of an Environmental Condition, in accordance with
      applicable Environmental Laws) consistent with the current use of the Asset
      and
      in a manner reasonably acceptable to Buyer. If Seller elects to cure or remedy
      a
      Defect or Environmental Condition, Seller shall provide to Buyer written notice
      of such fact no later than three (3) Business Days after their receipt of
      Buyer’s notice. The failure of Seller to give such notice to Buyer within such
      three-Business Day period shall constitute an election by Seller not to cure
      or
      remedy the relevant Defect or Environmental Condition. 

     

    (c) If
      Seller
      elects to cure or remedy a Defect or Environmental Condition, Seller will
      commence such curative activities or remediation as soon as reasonably
      practicable after their receipt of Buyer’s notice and shall promptly and
      diligently continue such efforts until such Defect or Environmental Condition
      has been fully cured or remediated (in the case of an Environmental Condition,
      in accordance with applicable Environmental Laws), but in no event more than
      sixty (60) days after Buyer’s notice. If Seller does not complete such curative
      activities or remediation prior to the expiration of such sixty-day
      period, (i) Buyer may elect to offer Seller an extension of time within which
      to
      complete such curative or remedial actions; or (ii) in the absence of such
      an
      extension, Sections
      4.3(d)
      and
4.3(e),
      or
Section
      4.3(f),
      as
      applicable, will govern.

     

    (d) If
      Seller
      elects, or is deemed to have elected, not to cure a Defect asserted in a timely
      manner under Section
      4.3(a),
      or if
      Seller is unable to cure a Defect in a timely manner as provided in Section
      4.3(c),
      then
      except as provided hereinafter, Buyer shall have the right to an adjustment
      to
      the Adjusted Cash Consideration, by the Defect Amount for such Defect, which
      adjustment shall be accomplished by access to the Holdback, as provided in
      Section
      8.4
      below,
      except that no downward adjustment of the Adjusted Cash Purchase Price on
      account of Defects shall occur unless the aggregate amount of all Defect Amounts
      exceeds $25,000 (the “Defect Amount Threshold”), but if the Defect Amount
      Threshold is met, the Defect Amount for all Defects shall reduce the Cash
      Purchase Price subject to the limits set forth in Section
      8.4.

     

    
      
        
        

      

      
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    (e) If
      Buyer
      purchases at the Closing an Asset burdened by a preferential right to purchase
      or similar right that has not been exercised as of the Closing Date, regardless
      of whether the time period for the exercise of such right has expired, no
      reduction of the Adjusted Consideration paid at the Closing shall be made with
      respect thereto. If, for any reason, such preferential right to purchase or
      similar right is successfully exercised by the holder thereof after the Closing,
      Buyer shall be entitled to retain all proceeds paid for the affected Asset
      by
      the holder of the relevant preferential right to purchase or similar right,
      and
      Seller shall pay to Buyer, in cash, an amount equal to the excess
      (if any)
      of the Allocated Value of such Asset (adjusted as provided in Sections
      2.3(c)(ii)
      and
2.3(d)(ii)
      and net
      of applicable Property-Related Taxes) over
      the
      proceeds received by Buyer from the holder of such preferential right to
      purchase. 

     

    (f) If
      Seller
      elects, or is deemed to have elected, not to remedy an Environmental Condition
      asserted in a timely manner under Section
      4.3(a),
      or if
      Seller is unable to remedy an Environmental Condition in a timely manner as
      provided in Section
      4.3(c),
      then
      except as provided hereinafter, Buyer shall receive a reduction in the Cash
      Purchase Price equal to the actual costs, including, without limitation,
      Liabilities to Governmental Authorities and other Persons (or in the absence
      of
      actual costs, the Remediation Estimate agreed to by Seller and Buyer or
      determined by arbitration as provided in Section
      4.3(g)),
      to
      remedy the relevant Environmental Condition, in which case, such unremedied
      Environmental Condition shall become an Assumed Liability for purposes
      hereof.

     

    (g) Seller
      and Buyer shall endeavor, in good faith, to agree on the existence of all
      claimed Defects or Environmental Conditions, the methods of curing or remedying
      such Defects or Environmental Conditions, and the Defect Amounts or Remediation
      Estimates applicable thereto. In the event of a dispute concerning any of such
      matters that is not resolved prior to the Closing, either Buyer or Seller may
      initiate arbitration of such dispute pursuant to the terms of Section
      10.11.
      Following the issuance of the arbitrator’s decision, Seller and Buyer shall have
      the rights and options provided in Section
      4.3(d)
      and
Section
      4.3(e),
      or
Section
      4.3(f),
      as
      applicable.

     

    
      
        
        

      

      
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    ARTICLE
      V.

    OTHER
      MATTERS PRIOR TO CLOSING

     

    5.1 Operations.
      Through
      the Possession Time, Seller shall, to the extent within their reasonable
      control: (a) cause the Assets to be maintained and operated in a good and
      workmanlike manner consistent with past practices and in compliance with
      applicable Laws; (b) obtain the prior written consent of Buyer as to all
      material decisions relating to the Assets (other than decisions required for
      safety purposes or by other emergencies), including, without limitation, (i)
      all
      contracts or agreements regarding the sale of Hydrocarbons with terms of ninety
      (90) days or more, (ii) proposed expenditures after the date of this Agreement
      related to any individual Asset in an amount greater than U.S. $25,000.00,
      net
      to Seller’s interests, (iii) all farmout or farmin proposals or agreements, (iv)
      all operations as to which Seller or any other co-owner of an Asset proposes
      not
      to participate, (v) the plugging and abandonment of any Well or Personal
      Property included in the Assets, (vi) the amendment, release, or abandonment
      of
      any Lease, or portion thereof, (vii) the waiver, compromise, or settlement
      of
      any right or Claim pertaining to the Assets, (viii) all amendments to, or
      waivers of rights under, or termination of any Real Property Interest or
      Contract, and (ix) the initiation of any proceeding before any Governmental
      Authority pertaining to the Assets; (c) perform all material obligations of
      Seller under the Leases, Real Property Interests, Contracts, and Permits; (d)
      promptly notify Buyer of (i) any notice or threatened notice of which Seller
      becomes aware relating to any default, inquiry into any possible default, or
      action to alter, terminate, rescind, repudiate, or procure a judicial
      reformation of any Lease, Real Property Interest, Contract, or Permit, or any
      provision thereof, (ii) any new suit, action, or other proceedings before any
      court or Governmental Authority relating to the Assets, and (iii) any other
      event, fact, or circumstance of which Seller becomes aware that may materially
      impair the value of the Assets or the ability of Seller to consummate the
      transactions contemplated herein; (f) maintain all permits in full force and
      effect (including making application for renewal of Permits if required for
      such
      Permits to remain in full force and effect during the pendency of the
      application and make or give all notifications, filings, consents, or approvals
      from, to, or with all Governmental Authorities, and take all other actions
      reasonably requested by Buyer that are necessary for, and cooperate with Buyer
      in obtaining, the issuance, assignment, or transfer, as the case may be, by
      each
      such Governmental Authority of such Permits as may be necessary for Buyer own
      and operate the Assets after the Closing; (g) maintain in effect insurance
      with
      respect to the Assets providing the same type of coverage, in the same amounts,
      and with the same deductibles as the insurance maintained in effect by Seller
      with respect to the Assets and described on Schedule
      3.1(r);
      (h)
      timely pay and discharge when due all costs and expenses incurred in connection
      with the Assets, except to the extent contested in good faith by Seller
      utilizing appropriate actions, and otherwise keep the Assets free of Liens
      that
      do not constitute Permitted Encumbrances; and (i) not mortgage, pledge,
      encumber, dedicate, or sell, or agree to mortgage, pledge, encumber, dedicate,
      or sell, any portion of the Assets except for the disposition of Hydrocarbons
      in
      the ordinary course of Seller’s business pursuant to Contracts in effect on the
      date hereof. 

     

    5.2 Imbalances
      and Other Matters.
      As
      soon
      as reasonably practicable, but in no event later than ten (10) Business Days
      after, the Effective Time, Seller shall provide to Buyer written notice setting
      forth the status and extent of any Imbalances, as well as any “take-or-pay”,
      prepayment, forward sale, production payment, deferred production, and similar
      arrangements, in effect with respect to the Assets as of the Effective Time.
      For
      purposes of the adjustment of the Cash Purchase Price pursuant to Sections
      2.3(b)
      and
2.3(c),
      such
      Imbalances and other arrangements shall be valued based upon the contract price
      applicable to the relevant category of Hydrocarbons (or if there is no contract
      price, the market value thereof) as of the Effective Time. In the event of
      a
      dispute concerning the market value of any such Hydrocarbons that is not
      resolved prior to the Closing, either Buyer or Seller may initiate arbitration
      of such dispute pursuant to the terms of Section
      10.11.
      In that
      event, if necessary, the Closing shall be deferred until three (3) Business
      Days
      after the issuance of the decision of the arbitrators as to such
      dispute.

     

    
      
        
        

      

      
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    5.3 Publicity. Seller,
      Buyer and Parent shall consult with each other with regard to all press releases
      or other public or private announcements issued or made at or after the date
      of
      execution hereof concerning this Agreement or the transactions contemplated
      herein that names the other party, and, except as may be required by applicable
      Laws or the applicable rules and regulations of any stock exchange, neither
      Buyer, Seller nor Parent shall issue any such press release or other publicity
      that names the other party without the prior written consent of the other party,
      which shall not be unreasonably withheld.

     

    5.4 Compliance
      with Conditions.
      Promptly
      following the execution of this Agreement, Seller shall send to the holder
      of
      each preferential right to purchase, right of first refusal, right of first
      offer, or similar right burdening an Asset and each Person whose consent to
      an
      assignment of an Asset is required prior to the Closing such written notice
      concerning the transactions contemplated in this Agreement as is required under
      the terms of the document or instrument creating such right or requiring such
      consent, requesting, as applicable, the waiver of the relevant right or the
      granting of the required consent. In addition, each Party will proceed
      diligently to cause all of the conditions to the other Party’s obligations to
      close to be satisfied. If the conditions to a Party’s obligations to close have
      been satisfied, or expressly waived by such Party, in a timely manner as
      provided herein, and such Party refuses to close, the Party refusing to close,
      at the option of the other Party or Parties, as applicable, shall be deemed
      to
      have breached this Agreement. 

     

    5.5 Maintenance
      of Existence.
      Until
      the
      Closing, Buyer and Seller shall maintain its existence and its rights and
      franchises and procure the extension or renewal of any right, franchise, or
      privilege expiring as the result of the lapse of time.

     

    5.6 Mutual
      Assurances.
      Subject
      to the terms of this Agreement, each Party will use reasonable commercial
      efforts to take, or to cause to be taken, all actions and to do, or cause to
      be
      done, all things necessary, proper, or advisable under applicable Laws to
      consummate and make effective the transactions contemplated by this Agreement,
      including (a) cooperation in determining whether any action, approval, or waiver
      by or in respect of, or filing with, any Governmental Authority is required
      in
      connection with the consummation of the transactions contemplated by this
      Agreement; (b) cooperation in seeking and obtaining any such actions, approvals,
      waivers, or filings; and (c) the execution of any additional instruments
      necessary to consummate the transactions contemplated hereby.

     

    
      
        
        

      

      
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    5.7 Notification
      of Certain Matters.
      Each
      Party shall give prompt notice to the other Party or Parties, as applicable,
      of
      (a) the occurrence or nonoccurrence of any event that would be likely to cause
      any representation or warranty of such Party contained in this Agreement to
      be
      untrue or inaccurate in any material respect at or prior to the Closing Date
      and
      (b) any material failure of such Party to comply with or satisfy any covenant,
      condition, or agreement to be complied with or satisfied by it hereunder;
      provided, however, that the delivery of any notice pursuant to this Section
      5.8
      shall
      not limit or otherwise affect the remedies available hereunder to the Party
      or
      Parties, as applicable, receiving such notice.

     

    5.8 Designation
      as Operator.
      On
      the
      Closing Date, except as provided in Section
      8.5 or
      otherwise agreed by the Parties, Seller shall resign as operator of all Assets
      as to which Seller has served as operator prior to the Closing. Seller does
      not
      warrant or guarantee that, after the Closing, Buyer will become the operator
      of
      any Asset operated by Seller or prior to the Closing as to which there are
      co-owners of the relevant Lease(s). With respect to each such Asset, Seller
      shall support Buyer in Buyer’s efforts to be named replacement operator of such
      Assets under the terms of the applicable Contracts effective as of the
      Possession Time (or as soon thereafter as is reasonably practicable) and will
      use reasonable commercial efforts to obtain the votes of the other co-owners
      in
      the relevant Lease(s) in favor of such election. With respect to each Asset
      owned in its entirety by Seller, within five (5) Business Days after the
      Closing, and with respect to each Asset as to which there are co-owners of
      the
      relevant Lease(s), within five (5) Business Days after Buyer is named
      replacement operator under the terms of the applicable Contracts, Seller and
      Buyer shall make all necessary filings and take all other actions necessary
      to
      cause the resignation of Seller as operator and Buyer’s designation as the
      replacement operator of such Assets to be recognized and, if required, approved
      by all relevant Governmental Authorities. In each case, Seller shall use
      reasonable commercial efforts to assist Buyer in assuming the timely operation
      and management of such Assets. 

     

    ARTICLE
      VI.

    CONDITIONS;
      TERMINATION; REMEDIES

     

    6.1 Conditions
      Precedent to Seller’s Obligation to Close.
      All
      obligations of Seller under this Agreement are subject, at Seller’s option, to
      the fulfillment, on or prior to the Closing Date, of each of the following
      conditions: 

     

    (a) each
      and
      every representation and warranty of Buyer and Parent, with regard to the Parent
      Restricted Stock, under this Agreement shall be true and accurate in all
      material respects (and in all respects, in the case of representations and
      warranties qualified by materiality) as of the date when made and shall be
      deemed to be made again at and as of the Closing Date and shall then be true
      and
      accurate in all material respects (and in all respects, in the case of
      representations and warranties qualified by materiality);

     

    (b) Buyer
      and
      Parent, with regard to the Parent Restricted Stock, shall have performed and
      complied in all material respects with each and every covenant, agreement,
      and
      condition required by this Agreement to be performed or complied with, executed
      and delivered all documents required to be delivered, and otherwise taken all
      actions required to be taken, in each case by Buyer or Parent on or prior to
      the
      Closing Date; 

     

    
      
        
        

      

      
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    (c) no
      suit,
      action, or other proceeding shall be pending or threatened before any court
      or
      arbitration tribunal or any Governmental Authority seeking to enjoin, restrain,
      prohibit, or declare illegal, or seeking substantial damages in connection
      with,
      the transactions contemplated in this Agreement;

     

    (d) Buyer
      and
      Parent shall have received all consents, authorizations, waivers, and approvals
      required to be obtained prior to the Closing by any court or Governmental
      Authority under any applicable Law concerning the transactions contemplated
      herein;

     

    (e) Buyer
      and
      Parent shall have delivered to Seller a certificate, dated and effective as
      of
      the Closing Date, executed by the president or an authorized vice president
      of
      Buyer and Parent, certifying to Seller that on the Closing Date, the
      representations and warranties of Buyer and Parent contained in this Agreement
      are true and correct in all material respects (and in all respects, in the
      case
      of representations and warranties qualified by materiality) and all covenants
      of
      Buyer and Parent contained herein have been performed in all material respects
      provided that Parent’s certificate shall only relate to the Parent Restricted
      Stock;

     

    6.2 Conditions
      Precedent to Buyer’s and Parent’s Obligation to Close.
      All
      obligations of Buyer and Parent under this Agreement are subject, at Buyer’s and
      Parent’s option, to the fulfillment, on or prior to the Closing Date, of each of
      the following conditions: 

     

    (a) each
      and
      every representation and warranty of Seller under this Agreement shall be true
      and accurate in all material respects (and in all respects, in the case of
      representations and warranties qualified by materiality) as of the date when
      made and shall be deemed to be made again at and as of the Closing Date and
      shall then be true and accurate in all material respects (and in all respects,
      in the case of representations and warranties qualified by materiality);


     

    (b) Seller
      shall have performed and complied in all material respects with each and every
      covenant, agreement, and condition required by this Agreement to be performed
      or
      complied with, executed and delivered all documents required to be delivered,
      and otherwise taken all actions required to be taken, in each case by Seller
      on
      or prior to the Closing Date; 

     

    (c) no
      suit,
      action, or other proceeding shall be pending or threatened before any court
      or
      arbitration tribunal or any Governmental Authority seeking to restrain,
      prohibit, or declare illegal, or seeking substantial damages in connection
      with,
      the transactions contemplated in this Agreement; 

     

    (d) Seller
      shall have received all consents, authorizations, waivers, and approvals
      required to be obtained prior to the Closing by any court or Governmental
      Authority under any applicable Law concerning the transactions contemplated
      herein (including, without limitation, all consents and authorizations, if
      any,
      from Governmental Authorities required to be obtained with respect to the
      Transferable Permits prior to the Closing); 

     

    
      
        
        

      

      
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    (e) Seller
      shall have delivered to Buyer all consents to assignment, waivers of
      preferential rights to purchase, and other similar matters (if any) from third
      Persons required to be obtained prior to the Closing under the terms of the
      Leases, the Real Property Interests, and the Contracts, in each case as a result
      of the transactions contemplated in this Agreement;

     

    (f) Seller
      shall have delivered to Buyer and Parent a certificate, dated and effective
      as
      of the Closing Date, executed by the president or an authorized vice president
      of Seller, certifying to Buyer that, on the Closing Date, the representations
      and warranties of Seller contained in this Agreement are true and correct in
      all
      material respects (and in all respects, in the case of representations and
      warranties qualified by materiality) and that all covenants of Seller contained
      herein have been performed in all material respects;

     

    (g) Seller
      shall have delivered to Buyer and Parent an opinion, dated the Closing Date,
      of
      _______________, counsel for Seller, that is in the form set forth on
Exhibit
      I.

     

    (h) Buyer
      shall have completed due diligence reviews satisfactory to Buyer with respect
      to
      the Assets; and

     

    (i) Parent
      shall have received all necessary approvals from the American Stock Exchange
      to
      issue the Parent Restricted Stock.

     

    6.3 Termination.
      This
      Agreement may be terminated, and the transactions contemplated herein may be
      abandoned at any time prior to the Closing:

     

    (a) by
      mutual
      written consent of Seller or Buyer and Parent; 

     

    (b) by
      Seller, at Seller’s option, if any of the conditions applicable to Buyer or
      Parent set forth above in Section
      6.1
      have not
      been satisfied as provided therein on or before the Scheduled Closing Date;
      and

     

    (c) by
      Buyer
      and Parent, at Buyer’s and Parent’s option, if any of the conditions applicable
      to Seller set forth above in Section
      6.2
      have not
      been satisfied as provided therein on or before the Scheduled Closing
      Date.

     

    6.4 Remedies.
      If
      this
      Agreement is terminated by (a) either Seller or Buyer and Parent pursuant
      to Section
      6.3(a),
      (b) Seller pursuant to Section
      6.3(b)
      if the
      condition in Section
      6.1(c)
      is not
      satisfied, or (c) Buyer and Parent pursuant to Section
      6.3(c)
      if the
      condition in Section
      6.2(c),
      Section
      6.2(g),
      Section
      6.2(h),
      or
Section
      6.2(i)
      is not
      satisfied, no Party shall have any further liability to the other as the result
      of such termination. If this Agreement is otherwise terminated pursuant to
      either Section
      6.3(b)
      or
Section
      6.3(c),
      the
      terminating Party shall be entitled to all remedies available at law or in
      equity, including, without limitation, the remedy of specific performance,
      subject to the terms of Section
      9.6.
      If a
      Party resorts to legal proceedings to enforce this Agreement or any part
      thereof, the prevailing Party in such proceedings shall be entitled to recover
      all costs incurred by such Party, including reasonable attorneys’ fees, in
      addition to any other relief to which such Party may be entitled.

     

    
      
        
        

      

      
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    ARTICLE
      VII.

    CLOSING

    


    7.1 Closing.
      The
      Closing shall be held at the offices of Buyer as indicated in Section 10.5
      at
      10:00 A.M., Central Time, on March 30, 2007 (the “Scheduled
      Closing Date”),
      or on
      such other date as may be agreed to by the Parties. The date of the Closing,
      whenever it occurs as provided herein, is referred to herein as the
“Closing
      Date.”
      

     

    7.2 Preliminary
      Settlement Statement.
      No
      later
      than three (3) Business Days prior to the Closing Date, Seller shall prepare
      and
      submit to Buyer a preliminary settlement statement (the “Preliminary
      Settlement Statement”),
      which
      sets forth Seller’s estimate of the Adjusted Consideration, reflecting the
      calculation of the Cash Purchase Price in accordance with Section
      2.3(b)
      and each
      adjustment and proration and its method of calculation made in accordance with
      this Agreement as of the date of preparation of such Preliminary Settlement
      Statement, together with the designation of Seller’s account for the wire
      transfer of such estimated Adjusted Consideration pursuant to Section
      7.3.
      If, for
      any reason, Buyer disputes any information contained in the Preliminary
      Settlement Statement, and Buyer and Seller are unable to resolve such dispute
      prior to the Closing Date, the Parties shall submit the dispute to arbitration
      pursuant to Section
      10.11,
      and the
      Closing shall be deferred until three (3) Business Days after the issuance
      of
      the decision of the arbitrators as to such dispute.

     

    7.3 Actions
      at Closing.
      At
      the
      Closing, Seller, Buyer and Parent shall take the following actions:

     

    (a) Seller
      and Buyer shall each execute and deliver (i) the Conveyance in sufficient
      counterparts to facilitate recording in all relevant jurisdictions and
      (ii) the Preliminary Settlement Statement.

     

    (b) Buyer
      shall deliver to Seller the estimated Adjusted Consideration reflected in the
      Preliminary Settlement Statement, less the Holdback, by bank wire transfer
      of
      immediately available U.S. funds to the account designated in the Preliminary
      Settlement Statement.

     

    (c) Seller
      shall deliver to Buyer (i) releases of all Liens (if any) encumbering the Assets
      that do not constitute Permitted Encumbrances, (ii) transfer orders or letters
      in lieu thereof, on forms provided by Buyer, directing all purchasers of
      production to make payment to Buyer of proceeds attributable to Hydrocarbons
      produced from the Assets after the Effective Time, (iii) all consents, waivers,
      and other similar matters pertaining to the Assets obtained by Seller prior
      to
      the Closing, and (iv) all undisbursed revenues that Seller is required to
      deliver to Buyer under Section
      8.3.

     

    
      
        
        

      

      
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    (d) Seller
      shall deliver to Buyer and Parent the certificates provided for in Section
      6.2(f).
      

     

    (e) Buyer
      and
      Parent shall deliver to Seller the certificate provided for in Section
      6.1(e).

     

    (f) Seller
      shall deliver to Buyer a statement that satisfies the requirements of Treas.
      Reg. §1.1445-2(b)(2),
      certifying that Seller is not a “foreign” Person for federal income tax
      purposes. 

     

    (g) Parent
      shall have delivered to Seller copies of instructions to Parent’s transfer agent
      directing the transfer agent to issue as soon as possible shares of Parent
      Restricted Stock (registered in the name of such Seller in an aggregate amount
      equal to the Parent Stock Consideration).

     

    (h) Seller
      shall deliver to Buyer, in a form acceptable to Buyer, a letter from its
      majority shareholder, Lothian Oil, Inc., stating that it agrees with the sale
      of
      the Assets and would vote in favor of such sale in a shareholders meeting of
      the
      Seller had such a metting been necessary and been called.

     

    (i) Seller,
      Buyer and Parent shall execute such other documents and take such other actions
      as are provided for elsewhere in this Agreement or as may be necessary to
      consummate the transactions contemplated herein, including, but not limited
      to,
      the Transitional Matters Agreement.

     

    7.4 Records.
      At
      any
      time after the Closing, pursuant to Buyer’s reasonable instructions, Seller
      shall deliver to Buyer the Records. Buyer shall be entitled to all original
      Records affecting all of the Assets. Seller may make and retain, at their
      expense, copies of the Records prior to the delivery thereof to Buyer. Buyer
      agrees to maintain all Records until the fifth (5th)
      anniversary of the Closing Date (or such longer period of time as Seller may
      request for those Records relevant for tax audit purposes), or, if any of such
      Records pertain to a Claim pending at such fifth anniversary date, until such
      Claim is finally resolved and the time for all appeals has been exhausted.
      Buyer
      will provide to Seller reasonable access to the Records for purposes of
      obtaining information for the preparation of tax returns, financial statements,
      and other legitimate business purposes of Seller.

     

    
      
        
        

      

      
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    ARTICLE
      VIII.

    POST
      CLOSING MATTERS

     

    8.1 Settlement
      Statement.
      On
      or
      before one hundred twenty (120) days after the Closing Date, Buyer will prepare
      a final accounting statement, subject to verification by Seller, which sets
      forth the final calculation and amount of the Cash Purchase Price (including
      all
      adjustments thereto) in accordance with Sections
      2.3(b)
      and
2.3(c),
      the
      calculations used to determine such amounts, and the actual proration of all
      other amounts required by this Agreement (the “Final
      Settlement Statement”).
      No
      later than fifteen (15) days after Seller’s receipt of the Final Settlement
      Statement from Buyer (but no earlier than one hundred twenty (120) days after
      the Closing Date), Seller shall deliver to Buyer written notice setting forth
      any changes to the Final Settlement Statement proposed by Seller. On or before
      fifteen (15) days after Buyer’s receipt of Seller’s proposed changes to the
      Final Settlement Statement, Buyer and Seller shall agree on the Final Settlement
      Statement and, as the case may be, shall pay to the other such sums as may
      be
      found to be due in the final accounting. All amounts paid pursuant to this
      Section
      8.1
      shall be
      delivered by wire transfer of immediately available U.S. funds to the account
      specified in writing by the relevant Party. If Buyer and Seller are unable
      to
      agree on the Final Settlement Statement on or before fifteen (15) days after
      Buyer’s receipt of Seller’s proposed changes thereto, then Buyer and Seller
      shall submit all unresolved claims and amounts for arbitration in accordance
      with the terms of Section
      10.11.

     

    8.2 Further
      Cooperation.
      After
      the
      Closing Date, Buyer and Seller shall execute and deliver, or shall cause to
      be
      executed and delivered from time to time, such further instruments of conveyance
      and transfer, and shall take such other actions as either Party may reasonably
      request, to convey and deliver the Assets to Buyer, to perfect Buyer’s title
      thereto, and to accomplish the orderly transfer of the Assets to Buyer in the
      manner contemplated by this Agreement. If, after the Closing Date, either Seller
      or Buyer receives monies belonging to the other, such amounts shall be promptly
      disbursed to the Party entitled to receive them. If an invoice or other evidence
      of an obligation is received by Seller or Buyer, which is either an obligation
      assumed by the other Party or partially an obligation of both Seller and Buyer,
      the Parties shall consult with each other, and an adjustment for such amount
      will be made either on the Final Settlement Statement, or, if the evidence
      of
      the obligation is not received until after the completion of the final
      accounting pursuant to Section
      8.1,
      in cash
      as the Parties may agree. If Seller and Buyer are unable to agree on the
      disposition of such an obligation, Seller and Buyer shall submit the matter
      to
      binding arbitration in accordance with the terms of Section
      10.11.

     

    8.3 Undisbursed
      Revenues and Payment of Vendor Claims.
      No
      later
      than the Closing Date, Seller shall disburse to Buyer all monies (if any)
      relating to the Assets that Seller is obligated to pay or disburse to other
      Persons (including amounts held in suspense by Seller) and that, as of the
      Closing Date, have not been thus paid or disbursed. Buyer shall take and apply
      such funds in a manner consistent with prudent oil and gas business practices
      to
      satisfy the Claims of third Persons with respect to such monies. Seller shall
      cooperate with Buyer following the Closing to assure the proper disbursement
      of
      any such funds. On or before thirty(30) days after the Closing Date, Seller
      shall pay all of the Vendor Claims and all other claims that should have been
      scheduled on Schedule
      3.1(n)
      in order
      to make the representations in Section
      3.1
      true and
      correct. Except with respect to payments necessary for the release of the
      Sterling Bank lien, Seller shall first apply all cash proceeds from the sale
      of
      the Property to Vendors Claims as found on Schedule
      3.1(n),
      until
      all such claims are satisfied.

     

    
      
        
        

      

      
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    8.4 Holdback.
      Buyer
      shall retain Eight Hundred Thousand Dollars ($800,000.00) of the Cash
      Consideration (the “Holdback”)
      following the Closing Date, and Buyer may apply the Holdback to satisfy claims
      of Buyer against Seller under this Agreement or under the Conveyance.
      Notwithstanding any other provision of this Agreement (including without
      limitation Section
      2.5 and
      Section
      9.4),
      Buyer’s
      sole recourse after the Closing Date for any claim against Seller under this
      Agreement or the Conveyance, including claims for Defect Values (collectively,
      all such claims are “Holdback
      Claims”),
      shall
      be to the Holdback, as the Holdback amount may exist from time to time under
      the
      provisions of this Section
      8.4,
      but
      such limitation on Buyer’s recourse shall not limit Seller’s obligations under
      this Article
      VIII
      (including the obligation to pay Vendor Claims). Buyer shall give notice to
      Seller of any application by Buyer of any portion of the Holdback, and any
      dispute regarding such application shall be submitted for arbitration in
      accordance with the terms of Section
      10.11.
      The
      amount of the Holdback shall be decreased on the following schedule, with the
      excess available at each date being paid by Buyer to Seller: (i) forty-five
      days
      after the Closing Date, Buyer shall release to Seller Two Hundred Thousand
      Dollars ($200,000.00), which Seller shall use to pay any remaining unpaid Vendor
      Claims; (ii) sixty (60) days after the Closing Date, Buyer shall release to
      Seller all of the Holdback except for the sum of Four Hundred Thousand Dollars
      ($400,000.00) plus the amount of Holdback Claims identified by Buyer as of
      such
      date; (iii) ninety (90) days after the Closing Date, Buyer shall release to
      Seller all of the Holdback except for the sum of Two Hundred Thousand Dollars
      ($200,000.00) plus the amount of Holdback Claims identified by Buyer as of
      such
      date; and (iv) any portion of the Holdback remaining unapplied after one hundred
      twenty (120) days following the Closing Date shall be paid to Seller. Interim
      accounting for the Holdback shall be provided on the dates noted in the
      preceding sentence and an accounting for the entire Holdback shall be included
      in the
      Final
      Settlement Statement.

     

    8.5 Transitional
      Matters.

     

    From
      the
      Closing Date until the Transitional Matters Agreement is terminated, Seller
      shall perform certain operating and administrative services with respect to
      such
      oil and gas properties as described in the Transitional Matters
      Agreement.

     

    ARTICLE
      IX.

    SURVIVAL;
      INDEMNIFICATION

     

    9.1 Survival.
      All
      representations, warranties, covenants, agreements, and indemnities of Buyer
      (and Parent with regard to the Parent Restricted Stock) and Seller under this
      Agreement shall survive the Closing and the delivery of the Conveyance, shall
      not be merged with or into the Conveyance, and shall remain in force and effect
      as provided in this Section
      9.1,
      as
      applicable, regardless of any investigation at any time made by or on behalf
      of
      Buyer, Parent or Seller, or of any information that Buyer, Parent or Seller
      may
      have with respect thereto. Such survival does not obligate any Party to make
      any
      further representation or warranty after the Closing Date, or to cause any
      representation or warranty made hereunder to remain true and correct after
      the
      Closing Date. 

     

    
      
        
        

      

      
        32

        
          

        

      

      
        
        

      

    

     

    9.2 Indemnity
      as Sole Remedy.
      Except
      to
      the extent otherwise provided in Section
      6.4
      and
Section
      8.4,
      the
      indemnity provided by each Party to the other under this Article
      IX
      shall
      constitute the sole and exclusive remedy for such Party and its Indemnity Group
      after the Closing with respect to (a) the inaccuracy or breach of any
      representation or warranty made by another Party hereunder and (b) a breach
      or default in the performance by such other Party of any covenant or agreement
      of such other Party contained in this Agreement. Except as otherwise provided
      in
Section
      6.4. Section
      8.4 and
      this
Article
      IX,
      each
      Party hereby waives any Claim arising under common law, any statute, or
      otherwise against another Party arising from or out of the inaccuracy or breach
      of any representation or warranty made by the other Party hereunder or the
      breach or default in the performance by such other Party of any covenant or
      agreement of such other Party contained in this Agreement.

     

    9.3 Indemnities
      of Buyer.
      Regardless
      of any investigation made at any time by or on behalf of any Party or any
      information any Party may have, and regardless of the presence or absence of
      insurance, Buyer shall indemnify and hold harmless Seller and its Indemnity
      Group from and against any and all Claims and Liabilities caused by, arising
      out
      of, resulting from, or relating in any way to, and to pay to Seller or its
      Indemnity Group any sum that Seller or its Indemnity Group pays, or becomes
      obligated to pay, on account of: (a) any breach or default in the performance
      by
      Buyer or Parent of any covenant or agreement of Buyer or Parent contained in
      this Agreement or any document executed in connection herewith; (b) any breach
      of a warranty or an inaccurate or erroneous representation made by Buyer or
      Parent in this Agreement (provided, however, that for purposes of this
Section
      9.3,
      all
      qualifications relating to materiality contained in such representations and
      warranties shall be disregarded); and (c) all Assumed Liabilities.

     

    9.4 Indemnities
      of Seller.
      Regardless
      of any investigation made at any time by or on behalf of any Party or any
      information any Party may have, and regardless of the presence or absence of
      insurance, Seller shall indemnify and hold harmless Buyer and its Indemnity
      Group from and against any and all Claims and Liabilities caused by, arising
      out
      of, resulting from, or relating in any way to, and to pay Buyer or its Indemnity
      Group any sum that Buyer or its Indemnity Group pays or becomes obligated to
      pay, on account of: (a) any breach or default in the performance by Seller
      of
      any covenant or agreement of Seller contained in this Agreement or any document
      executed in connection herewith; (b) any breach of a warranty or an inaccurate
      or erroneous representation made by Seller in this Agreement (provided, however,
      that for purposes of this Section
      9.4,
      all
      qualifications relating to materiality contained in such representations and
      warranties, except for Section
      3.1(s),
      shall
      be disregarded); and (c) all Retained Liabilities. 

     

    9.5 Assertion
      of Claims; Notices; Defense; Settlement. (a) Upon
      the
      discovery by a Party entitled to indemnification under any provision of this
      Agreement (the “Indemnified
      Party”)
      of
      facts believed to entitle such Party to indemnification hereunder, including
      the
      receipt by any such Party of notice of a Claim from any third Person, the
      Indemnified Party shall give prompt written notice of any such Claim to the
      Party obligated to provide the requested indemnification (the “Indemnifying
      Party”).
      Each
      such notice shall set forth the facts known to the Indemnified Party pertaining
      to the relevant Claim and shall specify the manner in which the Indemnified
      Party proposes to respond to such Claim. 

     

    
      
        
        

      

      
        33

        
          

        

      

      
        
        

      

    

     

    (b) Within
      ten (10) days after the receipt by the Indemnifying Party of such notice, the
      Indemnifying Party shall state in writing to the Indemnified Party: (i) whether
      the Indemnified Party may proceed to respond to the Claim in the manner set
      forth in its notice, or (ii) whether the Indemnifying Party shall assume
      responsibility for and conduct the negotiation, defense, or settlement of the
      Claim, and if so, the specific manner in which the Indemnifying Party proposes
      to proceed. If the Indemnifying Party assumes control of the Claim, the
      Indemnified Party shall at all times have the right to participate in the
      defense thereof and to be represented, at its sole expense, by counsel selected
      by it. No such Claim shall be compromised or settled by either the Indemnifying
      Party or the Indemnified Party, as applicable, in any manner that admits
      liability on the part of the other Party or that might otherwise adversely
      affect the interest of such other Party without the prior written consent of
      such other Party, which consent will not be unreasonably withheld or delayed.
      As
      a condition precedent to indemnification under this Agreement, the Indemnified
      Party shall assign to the Indemnifying Party, and the Indemnifying Party shall
      become subrogated to, all rights and Claims, up to the amount of
      indemnification, of the Indemnified Party against third Persons arising out
      of
      or pertaining to the matters for which the Indemnifying Party shall provide
      indemnification. The amount of the Indemnified Party’s Claim for indemnification
      shall be reduced by the amount of any insurance reimbursement paid to the
      Indemnified Party pertaining to the Claim.

     

    9.6 Limitation
      on Damages.
      For
      the
      breach or non-performance by any Party of any representation, warranty,
      covenant, or agreement contained in this Agreement, the liability of the obligor
      shall be limited to direct actual damages only, except to the extent that the
      obligee is entitled to specific performance or injunctive relief. AS
      BETWEEN THE PARTIES, NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS AGREEMENT,
      NO PARTY SHALL BE LIABLE TO ANY OTHER PARTY AS THE RESULT OF A BREACH OR A
      VIOLATION OF ANY REPRESENTATION, WARRANTY, COVENANT, AGREEMENT, OR CONDITION
      CONTAINED IN THIS AGREEMENT FOR SPECIAL, CONSEQUENTIAL, INCIDENTAL, PUNITIVE,
      EXEMPLARY, OR INDIRECT DAMAGES, LOST PROFITS, OR OTHER BUSINESS INTERRUPTION
      DAMAGES, IN TORT, IN CONTRACT, UNDER ANY INDEMNITY PROVISION, ARISING BY
      OPERATION OF LAW (INCLUDING, WITHOUT LIMITATION, STRICT LIABILITY), OR
      OTHERWISE. WITH RESPECT TO CLAIMS BY THIRD PERSONS, A PARTY MAY RECOVER FROM
      ANY
      OTHER PARTY ALL COSTS, EXPENSES, OR DAMAGES (INCLUDING, WITHOUT LIMITATION,
      SPECIAL, CONSEQUENTIAL, INCIDENTAL, PUNITIVE, EXEMPLARY, OR INDIRECT DAMAGES),
      LOST PROFITS, AND OTHER BUSINESS INTERRUPTION DAMAGES IN ADDITION TO ACTUAL
      DIRECT DAMAGES PAID OR OWED TO ANY SUCH THIRD PERSON IN SETTLEMENT OR
      SATISFACTION OF CLAIMS AS TO WHICH THE RELEVANT PARTY IS ENTITLED TO
      INDEMNIFICATION HEREUNDER.

     

    
      
        
        

      

      
        34

        
          

        

      

      
        
        

      

    

     

    ARTICLE
      X.

    MISCELLANEOUS

     

    10.1 Exhibits.
      All
      exhibits and schedules referred to in this Agreement are hereby incorporated
      into this Agreement by reference and constitute a part of this Agreement for
      all
      purposes. Each Party and its counsel has received a complete set of exhibits
      and
      schedules prior to and as of the date of execution of this
      Agreement.

     

    10.2 Expenses.
      Except
      as
      otherwise specifically provided herein, all fees, costs, and expenses incurred
      by Buyer and Seller in negotiating this Agreement and in consummating the
      transactions contemplated by this Agreement shall be paid by the Party incurring
      the same, including, without limitation, legal and accounting fees, costs,
      and
      expenses. All required documentary, filing, and recording fees and expenses
      in
      connection with the filing and recording of the Conveyance and other instruments
      required to convey title to the Assets to Buyer shall be borne by
      Buyer.

     

    10.3 Proration
      of Taxes.
      Each
      Party shall assume responsibility for, and shall bear and pay, all federal
      income taxes, state income taxes, franchise taxes, and other similar taxes
      (including any applicable interest or penalties) incurred by or imposed upon
      such Party with respect to the transactions described in this Agreement. Seller
      shall assume responsibility for, and shall bear and pay, all Transfer Taxes
      incurred or imposed with respect to the transfer of the Assets. Seller shall
      assume responsibility for, and shall bear and pay, all Property-Related Taxes
      (including any applicable penalties and interest) based upon or measured by
      the
      ownership of the Assets or the receipt of proceeds therefrom, but exclusive
      of
      income taxes, and assessed against the Assets by any taxing authority for the
      period prior to the Effective Time. Buyer shall be responsible for, and shall
      bear and pay, all such Property-Related Taxes assessed against the Assets by
      any
      taxing authority for any period that begins on or after the Effective Time.
      For
      purposes of this Agreement, the foregoing proration of Property-Related Taxes
      shall be accomplished as an adjustment to the Cash Purchase Price and, in the
      case of ad valorem and other property taxes, shall be based upon the ad valorem
      and other property taxes actually assessed against the Assets for 2006, or,
      in
      the absence of such assessments, the ad valorem and other property taxes
      actually assessed against the Assets for 2005. In the event of a conflict
      between the terms of this Section
      10.3
      and any
      other provision of this Agreement, the terms of this Section
      10.3
      shall
      govern and control.

     

    10.4 Assignment.
      Neither
      Seller, Buyer nor Parent shall assign this Agreement, except to an Affiliate
      of
      the assigning Party by assignment, transfer of equity, merger, reorganization,
      or consolidation, without the prior written consent of the non-assigning Party,
      which shall not be unreasonably withheld or delayed. Any such assignment of
      rights shall provide for the assumption by the transferee of the obligations
      of
      the assigning Party under this Agreement. No assignment of any rights hereunder
      shall relieve the assigning Party of any obligations or responsibilities
      hereunder. Upon the assumption by such a transferee of the obligations of the
      assigning Party under this Agreement, such transferee shall become primarily
      liable for all such obligations assumed. Notwithstanding any such assumption,
      however, if such a transferee fails to perform any of the obligations thus
      assumed, the assigning Party shall remain liable for the performance thereof.
      Subject to the foregoing, this Agreement shall be binding upon and inure to
      the
      benefit of the Parties and their respective successors and assigns.

     

    
      
        
        

      

      
        35

        
          

        

      

      
        
        

      

    

     

    10.5 Notices.
      All
      notices and communications required or permitted to be given hereunder shall
      be
      in writing and shall be delivered personally, or sent by bonded overnight
      courier, or by telex or facsimile transmission (provided any such telegram,
      telex, or facsimile transmission is confirmed either orally or by written
      confirmation), addressed to the appropriate Party at the address for such Party
      shown below or at such other address as such Party shall have theretofore
      designated by written notice delivered to the Party giving such
      notice:


     

    
      	
              If
                to Buyer:

               

              Cano
                Petro of New Mexico, Inc.

              Burnett
                Plaza

              801
                Cherry Street

              Suite
                3200, Unit 25

              Fort
                Worth, Texas

              Attn:
                General Counsel

              Telephone
                No: 817 698-0900 

              Facsimile
                No: 817 334-0222 

            	 
	 	 
	
              If
                to Parent:

               

              Cano
                Petroleum, Inc.

              Burnett
                Plaza

              801
                Cherry Street

              Suite
                3200, Unit 25

              Fort
                Worth, Texas

              Attn:
                General Counsel

              Telephone
                No: 817 698-0900 

              Facsimile
                No: 817 334-0222

            	 
	 	 
	
              If
                to Seller:

               

              UHC
                New Mexico Corporation

              200
                N. Lorraine

              Suite
                400

              Midland,
                Texas 79701

              Attn:
                CEO

              Telephone
                No.: 432 686-2618

              Telecopier:
                432 686-2458

            	 


    

    


    
      
        
        

      

      
        36

        
          

        

      

      
        
        

      

    

     

    Any
      notice given in accordance herewith shall be deemed to have been given on the
      Business Day when delivered to the addressee in person or by telex, facsimile,
      or bonded overnight courier; provided, however, that if any such notice is
      received after normal business hours, the notice will be deemed to have been
      given on the next succeeding Business Day. Any Party may change the address,
      telephone number, and facsimile number to which such communications to such
      Party are to be addressed by giving written notice to the other Party in the
      manner provided in this Section
      10.5.

     

    10.6 ENTIRE
      AGREEMENT; CONFLICTS.
      THIS
      AGREEMENT, THE EXHIBITS HERETO, THE CONVEYANCE CONSTITUTE THE ENTIRE AGREEMENT
      AMONG THE PARTIES PERTAINING TO THE SUBJECT MATTER HEREOF AND SUPERSEDE ALL
      PRIOR AGREEMENTS, UNDERSTANDINGS, NEGOTIATIONS, AND DISCUSSIONS, WHETHER ORAL
      OR
      WRITTEN, OF THE PARTIES PERTAINING TO THE SUBJECT MATTER HEREOF. THERE ARE
      NO
      WARRANTIES, REPRESENTATIONS, OR OTHER AGREEMENTS BETWEEN THE PARTIES RELATING
      TO
      THE SUBJECT MATTER THEREOF EXCEPT AS SPECIFICALLY SET FORTH HEREIN OR IN THE
      CONVEYANCE, AND NEITHER BUYER NOR SELLER SHALL BE BOUND BY OR LIABLE FOR ANY
      ALLEGED REPRESENTATION, PROMISE, INDUCEMENT, OR STATEMENT OF INTENTION NOT
      SO
      SET FORTH. IN THE EVENT OF A CONFLICT BETWEEN THE TERMS OF THIS AGREEMENT AND
      THE TERMS OF THE CONVEYANCE, THE TERMS OF THIS AGREEMENT SHALL GOVERN AND
      CONTROL; PROVIDED, HOWEVER, THAT THE INCLUSION IN THE CONVEYANCE OF TERMS NOT
      ADDRESSED IN THIS AGREEMENT SHALL NOT BE DEEMED A CONFLICT, AND ALL SUCH
      ADDITIONAL TERMS SHALL BE GIVEN FULL FORCE AND EFFECT, SUBJECT TO THE TERMS
      OF
      THIS SECTION
      10.6.

     

    10.7 Amendment.
      This
      Agreement may be amended only by an instrument in writing executed by the
      Parties.

     

    10.8 Waiver;
      Rights Cumulative.
      Any
      of
      the terms, covenants, representations, warranties, or conditions hereof may
      be
      waived only by a written instrument executed by or on behalf of the Party
      waiving compliance. No course of dealing on the part of Buyer, Parent or Seller,
      or their respective officers, employees, agents, or representatives, or any
      failure by Buyer, Parent or Seller to exercise any of its rights under this
      Agreement, shall operate as a waiver thereof or affect in any way the right
      of
      such Party at a later time to enforce the performance of such provision. No
      waiver by any Party of any condition, or any breach of any term, covenant,
      representation, or warranty contained in this Agreement, in any one or more
      instances, shall be deemed to be or construed as a further or continuing waiver
      of any such condition or breach or a waiver of any other condition or of any
      breach of any other term, covenant, representation, or warranty. The rights
      of
      Buyer, Parent and Seller under this Agreement shall be cumulative, and the
      exercise or partial exercise of any such right shall not preclude the exercise
      of any other right.

     

    
      
        
        

      

      
        37

        
          

        

      

      
        
        

      

    

     

    10.9 GOVERNING
      LAW; CONSENT TO JURISDICTION.  THIS
      AGREEMENT AND THE LEGAL RELATIONS AMONG THE PARTIES SHALL BE GOVERNED AND
      CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, EXCLUDING ANY
      CONFLICTS OF LAW RULE OR PRINCIPLE THAT MIGHT REFER CONSTRUCTION OF SUCH
      PROVISIONS TO THE LAWS OF ANOTHER JURISDICTION. ALL OF THE PARTIES CONSENT
      TO
      THE EXERCISE OF JURISDICTION IN PERSONAM BY THE COURTS OF THE STATE OF TEXAS
      FOR
      ANY ACTION ARISING OUT OF THIS AGREEMENT. ALL ACTIONS OR PROCEEDINGS WITH
      RESPECT TO, ARISING DIRECTLY OR INDIRECTLY IN CONNECTION WITH, OUT OF, RELATED
      TO, OR FROM THIS AGREEMENT SHALL BE LITIGATED IN COURTS HAVING SITUS IN TARRANT
      COUNTY, TEXAS.

     

    10.10 Severability.
      If
      any
      term or other provision of this Agreement is invalid, illegal, or incapable
      of
      being enforced by any rule of Law or public policy, all other conditions and
      provisions of this Agreement shall nevertheless remain in full force and effect
      so long as the economic or legal substance of the transactions contemplated
      hereby is not affected in any adverse manner to any Party. Upon such
      determination that any term or other provision is invalid, illegal, or incapable
      of being enforced, the Parties shall negotiate in good faith to modify this
      Agreement so as to effect the original intent of the Parties as closely as
      possible in an acceptable manner to the end that the transactions contemplated
      hereby are fulfilled to the extent possible.

     

    10.11 Arbitration.
      

     

    (a) Any
      disagreement, difference, or dispute among the Parties provided in this
      Agreement to be resolved by arbitration shall be resolved pursuant to
      arbitration according to the procedures set forth in this Section
      10.11.
      Any
      Party may commence an arbitration proceeding hereunder by giving written notice
      to the other Party. No later than five (5) Business Days after the delivery
      of
      the notice commencing the arbitration proceeding, Seller and Buyer (including
      on
      behalf of Parent) shall each select an arbitrator. Promptly following their
      selection, the arbitrators selected by Seller and Buyer jointly shall select
      a
      third arbitrator. All arbitrators selected under this Agreement shall have
      at
      least eight (8) years of professional experience in the oil, gas, or accounting
      industries, as applicable, and shall not previously have been employed by any
      of
      the Parties and shall not have a direct or indirect interest in any of the
      Parties or the subject matter of the arbitration. The arbitration hearing shall
      commence as soon as is practical, but in no event later than thirty (30) days
      after the selection of the third arbitrator. If any arbitrator selected under
      this Section
      10.11(a)
      should
      die, resign, or otherwise be unable to perform his duties hereunder, a successor
      arbitrator shall be selected pursuant to the procedures set forth in this
Section
      10.11(a).

     

    (b) The
      arbitrators shall settle all disputes in accordance with the Federal Arbitration
      Act and the Commercial Arbitration Rules of the American Arbitration
      Association, to the extent that such Rules do not conflict with the terms of
      such Act or the terms of this Agreement. Any arbitration hearing shall be held
      in Dallas County, Texas. The decision of the arbitrators shall be final and
      binding on the Parties and, if necessary, may be enforced in any court of
      competent jurisdiction. The Law governing all such disputes shall be the Laws
      of
      the State of Texas,
      including, without limitation, the Uniform Commercial Code as in effect in
      the
      State of Texas,
      as the
      same may be amended from time to time, but without regard to conflicts of laws
      principles. The fees and expenses of the arbitrators shall be shared one-half
      by
      Seller and one-half by Buyer. Any payment to be made as the result of any
      dispute resolved by arbitration hereunder shall be accomplished pursuant to
      the
      Final Settlement Statement, with the final payments due thereunder being
      deferred until the arbitrators have rendered their decisions on all matters
      to
      be resolved by arbitration hereunder. 

     

    
      
        
        

      

      
        38

        
          

        

      

      
        
        

      

    

     

    10.12 Counterparts.
      This
      Agreement may be executed in any number of counterparts, and each such
      counterpart hereof shall be deemed to be an original instrument, but all of
      such
      counterparts shall constitute for all purposes one agreement. This Agreement
      may
      be executed by the Parties in different locations and shall become binding
      upon
      all Parties upon the exchange by the Parties of executed signature pages by
      facsimile; provided, however, that no later than five (5) Business Days after
      such execution hereof by facsimile, the Parties shall have executed and
      delivered each to the other a fully executed original counterpart of this
      Agreement.

     

    *
      * * * * * *

     

    
      
        
        

      

      
        39

        
          

        

      

      
        
        

      

    

     

    IN
      WITNESS WHEREOF, Seller and Buyer have executed this Agreement on the date
      first
      above written.

     

     

    
      	 	 	 
	 	SELLER:
	 	 
	 	UHC
              NEW MEXICO
              CORPORATION 
	 
 	 
 	 
 
	 	By:  	 
	 	
               

              Name:  

            	
              
________________________________________
	 	Title:   	________________________________________


    

     

    
      	 	 	 
	 	BUYER:
	 	 
	 	CANO
              PETRO OF NEW
              MEXICO, INC.
	 
 	 
 	 
 
	 	By:  	 
	 	
              

              Jeff
                Johnson

              President

            
	 	 


    

    
       

      
        	 	 	 
	 	PARENT:
	 	 
	 	CANO
                PETROLEUM,
                INC., (only with regard to the Parent Restricted Stock)
	 
 	 
 	 
 
	 	By:  	 
	 	
                

                
                  Jeff
                    Johnson

                  Chairman
                    and Chief Executive Officer

                

              
	 	 


      

       

      
        
          
          

        

        
          40

          
            

          

        

        
          
          

        

      

    

    
       

    

    SCHEDULE
      1.1

    


    DEFINED
      TERMS

    


    The
      following terms and expressions shall have the meanings set forth in the
      indicated provisions of this Agreement: “Adjusted Base Consideration” ,
Section
      2.3(a);
      "Adjusted Cash Purchase Price", Section
      2.3(a);“Adjusted
      Consideration”, Section 2.3(d);
      “Allocable
      Acreage”,
      Section 6.5;
“AMI”,
      Section 8.4;
      “Assets”, Section 2.1;
      “Assumed Liabilities”, Section 2.4;
“Base
      Purchase Price” and “Cash Purchase Price”, Section
      2.3(a);
      “Closing Date”, Section 7.1;
      “Deposit”, Section 5.3; “Final Settlement Statement”, Section 8.1;
      “Holdback” and “Holdback Claims”, Section
      8.4“Hydrocarbons”,
      Section 2.1(c);
      “Indemnified Party” and “Indemnifying Party”, Section 9.5(a);
      “Intangible Rights”, Section 2.1(i);
      “Leases”, Section 2.1(a);
“Parent
      Restricted Stock” and “Parent Stock Consideration”, Section
      2.3(a);
      “Personal Property”, Section 2.1(e);
      “Preliminary Settlement Statement”, Section 7.2;
“Real
      Property Interests”, Section 2.1(d);
      “Records”, Section 2.1(j);
      “Retained Liabilities”, Section 2.5;
      “Transferred Contracts”, Section 2.1(g);
“Vendor
      Claims”, Section
      3.1(n) and
      “Wells”, Section
      2.1(b).

    


    In
      addition, the following terms and expressions shall have the meanings set forth
      hereinafter:

     

    “Affiliate”
means,
      with respect to a Party, any Person that directly or indirectly controls, is
      controlled by, or is under common control with, the relevant Party. For purposes
      of this definition, the term “control” means the possession, directly or
      indirectly, of the power to direct or cause the direction of the management
      and
      policies of a Person, whether through ownership of voting securities, contract,
      voting trust, membership in management or in the group appointing or electing
      management, or otherwise through formal or informal arrangements or business
      relationships. 

     

    “Allocated
      Value”
means,
      with respect to each Well, Real Property Interest, item of Personal Property,
      and other Asset to which value is allocated herein, the amount set forth on
      Exhibit
      B
      under
      the column styled “Allocated Value” for such Well, Real Property Interest, item
      of Personal Property, or other Asset. For purpose of this Agreement, Seller
      and
      Buyer agree and stipulate that the Allocated Values set forth in Exhibit
      B
      have
      been established solely for use in calculating adjustments to the Cash Purchase
      Price as provided herein, and not for purposes of federal or state income
      taxation, such Allocated Values being solely for the convenience of the
      Parties.

     

    “Assumed
      Environmental Liabilities”
means,
      collectively, ALL
      CLAIMS AND LIABILITIES (INCLUDING, WITHOUT LIMITATION, CLAIMS AND LIABILITIES
      RELATING TO ENVIRONMENTAL CONDITIONS THAT BECOME “ASSUMED ENVIRONMENTAL
      LIABILITIES” BY OPERATION OF SECTION 4.3,
      BUT EXCLUDING THE RETAINED ENVIRONMENTAL LIABILITIES) ARISING OUT OF, RESULTING
      FROM, OR RELATING IN ANY WAY TO THE EXISTENCE OF AN ENVIRONMENTAL CONDITION
      ON
      OR RELATING TO ONE OR MORE ASSETS (INCLUDING, WITHOUT LIMITATION, CLAIMS AND
      LIABILITIES FOR INJURY TO OR DEATH OF ANY PERSON, PERSONS, OR OTHER LIVING
      THINGS, OR LOSS OR DESTRUCTION OF OR DAMAGE TO PROPERTY OCCURRING AS THE RESULT
      THEREOF), REGARDLESS OF WHETHER SUCH ENVIRONMENTAL CONDITION IS KNOWN,
      ANTICIPATED, OR SUSPECTED AS OF THE POSSESSION TIME, OR RESULTS, IN WHOLE OR
      IN
      PART, FROM THE NEGLIGENCE OR STRICT LIABILITY OF ANY SELLER OR ITS RESPECTIVE
      AFFILIATES, EMPLOYEES, AGENTS, OR REPRESENTATIVES, AND REGARDLESS OF WHETHER
      SUCH ENVIRONMENTAL CONDITION, OR THE ACTS, OMISSIONS, EVENTS, OR CONDITIONS
      GIVING RISE THERETO AROSE, OCCURRED, OR EXISTED BEFORE, AT, OR AFTER THE
      POSSESSION TIME.

     

    
      
        
        

      

      
        1

        
          

        

      

      
        
        

      

    

     

    “Business
      Day”
means
      any day other than a Saturday, Sunday, or other day on which commercial banks
      in
Dallas,
      Texas,
      are required or authorized by Law to be closed.

     

    “Claims”,
      for
      purposes of this Agreement, means any and all claims, demands, Liens, notices
      of
      non-compliance or violation, notices of liability or potential liability,
      investigations, actions (whether judicial, administrative, or arbitrational),
      causes of action, suits, and controversies.

     

    “Closing”
means
      the consummation of the transactions contemplated in this
      Agreement.

     

    “Code”
means
      the United States Internal Revenue Code of 1986, as amended.

     

    “Contracts”
means
      all seismic or other exploration agreements; farm-in, farm-out, and
      participation agreements; dry hole, acreage contribution, and bottom hole
      agreements; partnership, joint venture, and similar agreements; Hydrocarbon
      purchase, sale, exchange, gathering, storage, transportation, and marketing
      agreements; acquisition agreements; operating agreements; area of interest
      agreements; balancing agreements; pooling, communization, and unitization
      agreements; processing, fractionation, condensate removal and handling,
      dehydration, treatment, and separation agreements; saltwater, water, and waste
      injection and disposal agreements; options; service agreements; communications,
      facilities, and equipment leases and licenses, to the extent transferable;
      and
      other contracts, agreements, and rights owned by Seller, in whole or in part,
      to
      the extent that they are (i) appurtenant to or affect the properties and rights
      comprising the Assets, or (ii) used or held for use in connection with the
      use,
      ownership, or operation thereof, all as described more particularly on
Exhibit
      E.

     

    “Conveyance”
means
      the Assignment, Bill of Sale, and Conveyance substantially in the form attached
      hereto as Exhibit
      G.

     

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

     

    “Defect”
means
      any Lien, charge, contract, agreement, obligation, or defect of title, other
      than a Permitted Encumbrance, that causes, or could reasonably be expected
      (in
      Buyer’s good faith judgment) to cause: (a) a loss of title, in whole or in
      part, by Seller with respect to an Asset; (b) the title to an Asset not to
      be good, valid, and indefeasible; (c) an Asset to be subject to a Lien
      other than a Permitted Encumbrance; (d) in the case of a Lease or Well, and
      without limiting clauses (a), (b), and (c) of this definition, (i) Seller
      to receive a percentage of all Hydrocarbons produced, saved, and marketed from
      or allocable to such Lease or Well that is less than the Net Revenue Interest
      set forth in Exhibit
      B
      for such
      Lease or Well, without reduction, suspension, or termination for the productive
      life of such Lease or Well, or (ii) Seller to be obligated to bear a
      percentage of the costs and expenses of operations on and the maintenance and
      development of such Lease or Well that is greater than the Working Interest
      set
      forth for such Lease or Well on Exhibit
      B
      without
      increase for the productive life of such Lease or Well, unless such greater
      Working Interest yields a correspondingly greater Net Revenue Interest; or
      (e) Seller’s interest in any Asset otherwise to be extinguished or the
      operation, use, possession, ownership, or value of Seller’s interest in any
      Asset to be materially affected or interfered with, except for Permitted
      Encumbrances. The term “Defect” shall include a preferential right to purchase,
      right of first refusal, right of first offer, or similar right affecting any
      Asset (including, without limitation, any Contract) that is exercised prior
      to
      the Closing, or a third Person consent to assignment required before an Asset
      may be assigned and that is not obtained prior to the Closing.

     

    “Defect
      Amount”
means:
      (a) if the relevant Defect affects all of Seller’s interest in an Asset, such
      that the Defect results in a complete failure of title with respect thereto,
      the
      Defect Amount shall equal the full Allocated Value for the affected Asset;
      (b)
      if the Defect constitutes undischarged taxes, indebtedness, or Liens encumbering
      all or any portion of any Asset, the Defect Amount shall equal the sum necessary
      to be paid to the obligee to remove the Defect; (c) if the Defect results from
      a
      deficiency in Seller’s actual Net Revenue Interest relative to that shown for
      the affected Lease or Well on Exhibit
      B
      and on
      which the Allocated Value of such Lease or Well is based,
      the Defect Amount shall equal the positive difference
      (if any)
      obtained by subtracting
      (i) the
product
      obtained
      by multiplying
      the
      Allocated Value for the affected Lease or Well by the ratio of
      the
      actual Net Revenue Interest being conveyed to
      the Net
      Revenue Interest set forth for such Lease or Well on Exhibit
      B,
      from
      (ii) the
      Allocated Value for such Lease or Well; (d) if the Defect results from Seller’s
      actual expense-bearing interest in a Lease or Well being greater than the
      Working Interest shown for the affected Lease or Well on Exhibit
      B and
      on
      which the Allocated Value of such Lease or Well is based, and such larger
      expense-bearing interest is not accompanied by a proportionate increase in
      Seller’s Net Revenue Interest in such Lease or Well, the Defect Amount shall
      equal the positive difference
      (if any)
      obtained by subtracting
      (i) a
      recalculated Allocated Value for such Lease or Well using the same production
      rates, pricing, costs, tax forecasts, and discount factors used to calculate
      the
      original Allocated Value for such Lease or Well, adjusted to account for the
      diminution in the net present value of the future cash flows that results from
      the higher expense-bearing interest, from
      (ii) the
      Allocated Value for such Lease or Well set forth on Exhibit
      B;
      and (e)
      if the Defect is one other than the Defects described above in clauses (a),
      (b),
      (c), and (d) of this definition, the Defect Amount shall equal an amount
      determined by Seller and Buyer by evaluating the portion of the Assets affected
      by such Defect, the legal effect of the Defect, and the potential economic
      effect of the Defect over the life of the Assets affected. 

     

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

     

    “Effective
      Time”
means
      7:00 a.m., Central Time, on February 1, 2007.

     

    “Environmental
      Contaminants”
means
      “hazardous substances” and “pollutants or contaminants”, as those terms are
      defined in Section
      101
      of the
      Comprehensive Environmental Response, Compensation and Liability Act
      (“CERCLA”),
      petroleum, including any fraction thereof,” and “natural gas, natural liquids,
      liquefied natural gas, or synthetic gas usable for fuel” as those terms are used
      in Section 101 of CERCLA, any “solid or hazardous waste” as those terms are
      defined or used in the Resource Conservation and Recovery Act, and any wastes
      regulated by applicable rules of the Railroad Commission of Texas. The term
      also
      includes naturally occurring radioactive material (“NORM”)
      concentrated, disposed of, released or present on, resulting from, or in
      association with Hydrocarbon activities.

     

    “Environmental
      Condition”
means:
      (a) any event or condition (including, without limitation, any Release) with
      respect to air, land, soil, surface, subsurface strata, surface water, ground
      water, or sediment that causes the Assets to become subject to (or their owner
      or operator to have Liability or be potentially liable for) any removal,
      remediation, or response action under, or not be in compliance with, any
      Environmental Law or any Permit pursuant to any Environmental Law; (b) the
      existence of any written or oral Claim pending or threatened that reasonably
      may
      be expected to subject the Assets or the owner or the operator of the Assets
      to
      liability in favor of any Governmental Authority as the result of the alleged
      violation by such owner or operator or any other Person of any Environmental
      Law
      as it pertains to the Assets or the existence of any event or condition on
      the
      Assets described in this definition; (c) the failure of the Assets to be in
      compliance, or the owner or operator of the Assets to comply, in each case
      in
      all material respects with all applicable Environmental Laws with respect to
      the
      Assets; (d) the failure of the owner or operator of the Assets to obtain or
      maintain in full force and effect any Permit required under applicable
      Environmental Laws with respect to the Assets; or (e) any event or condition
      described in the preceding clauses (a), (b), (c), and (d) that results, or
      could
      reasonably be expected to result, in Liability to any Governmental Authority
      for
      any removal, remediation, or response action, or any other Person for injury
      to
      or death of any Person, Persons, or other living thing, or damage, loss, or
      destruction of property located on the Assets. An event or circumstance that
      results in the inaccuracy or breach of the representations and warranties
      contained in Section
      3.1(d)(iii)
      or
Section
      3.1(j)
      (insofar
      only as such representation and warranty relates to environmental matters)
      shall
      constitute an Environmental Condition. The term “Environmental Condition”
includes, without limitation, any release, disposal, spilling, leaking, pouring,
      emission, emptying, discharge, injection, escape, transmission, leaching, or
      dumping (collectively, a “Release”),
      or
      any threatened Release, of any Environmental Contaminants from, or related
      in
      any way to the use, ownership, or operation of, the Assets that has not been
      remedied in accordance with all applicable Environmental Laws.

     

    “Environmental
      Laws”
means
      all applicable Laws (including, without limitation, the Comprehensive
      Environmental Response, Compensation, and Liability Act, the Resource
      Conservation and Recovery Act, and the Oil Pollution Act of 1990, the Texas
      Solid Waste Disposal Act, and applicable rules of the Texas Railroad Commission
      relating to the management or disposal of oilfield waste, in each case as
      amended from time to time) relating to the protection of the public health,
      welfare, and environment, worker protection, emergency planning, and/or a
      community’s right to know, including, without limitation, those Laws relating to
      the storage, handling, and use of chemicals and other hazardous materials,
      those
      relating to the Release, generation, processing, treatment, storage,
      transportation, disposal, or other management of waste materials of any kind,
      those relating to the protection of environmentally sensitive areas, and
      employee health and safety.

     

    
      
        
        

      

      
        4

        
          

        

      

      
        
        

      

    

     

    “Governmental
      Authority”
means
      any governmental or quasi-governmental federal, state, provincial, county,
      city,
      or other political subdivision of the United States, any foreign country, or
      any
      department, bureau, agency, commission, court, or other statutory or regulatory
      body or instrumentality thereof. 

     

    “Imbalance”
means
      any imbalance between (a) the quantity of Hydrocarbons produced from any Well
      and allocated to a Person from time to time and the share of such production
      to
      which such Person is actually entitled by virtue of its ownership interest
      in
      such Well, (b) the quantity of Hydrocarbons produced from or allocable to the
      Assets delivered, and the quantity of such Hydrocarbons received, in each case
      for gathering, transportation, or storage for the account of a Person, (c)
      the
      quantity of Hydrocarbons produced from or allocable to the Assets delivered
      for
      processing or refining, and the quantity of products or residue Hydrocarbons
      redelivered, in each case for the account of a Person, and (d) other similar
      types of Hydrocarbon-related imbalances attributable to the Assets.

     

    “Indemnity
      Group”
means,
      for any Party, the Affiliates, officers, directors, managers, members, partners,
      employees, agents, and representatives of the relevant Party and for Buyer,
      Buyer’s Indemnity Group includes Parent and its Indemnity Group.

     

    “Knowledge”,
      when
      used with reference to either Party, means (a) knowledge of those matters of
      which the relevant Party is charged with constructive notice under applicable
      Law, and (b) the actual knowledge of the current directors and officers of
      such
      Party. 

     

    “Laws”
means
      all constitutions, laws, statutes, ordinances, rules, regulations, orders,
      and
      decrees of the United States, any foreign country, and any local, state,
      provincial, or federal political subdivision or agency thereof, as well as
      all
      judgments, decrees, orders, and decisions of courts having the effect of law
      in
      each such jurisdiction, including, without limitation, all Environmental
      Laws.

     

    “Liabilities”
means,
      for purposes of this Agreement, any and all losses, judgments, damages,
      liabilities, injuries, costs, expenses, interest, penalties, taxes, fines,
      obligations, and deficiencies. As used herein, the term “Liabilities” includes,
      without limitation, reasonable attorneys’ fees and other costs and expenses of
      any Party receiving indemnification hereunder incident to the investigation
      and
      defense of any Claim that results in litigation, or the settlement of any Claim,
      or the enforcement by any Party receiving indemnification hereunder of the
      provisions of Article
      IX,
      as
      applicable.

     

    
      
        
        

      

      
        5

        
          

        

      

      
        
        

      

    

     

    “Lien”
means
      any mortgage, deed of trust, pledge, security interest, encumbrance, lien,
      or
      charge of any kind (including any agreement to grant any of the foregoing),
      any
      conditional sale or title retention agreement, any lease in the nature thereof,
      or the filing of or agreement to give any financing statement under the Uniform
      Commercial Code of any jurisdiction.

     

    “Material
      Adverse Change”
means
      an event, occurrence, development, or condition that is materially adverse
      to
      the Assets taken as a whole, excluding (a) any general, regional, industry-wide,
      economic, or political event, occurrence, development, or condition (including,
      without limitation, the price of Hydrocarbons), whether domestic or
      international, and (b) any change in the condition of the Assets during the
      period from the date of this Agreement through the Possession Time resulting
      from normal depletion of Hydrocarbon reserves or the depreciation of the
      Personal Property through ordinary wear and tear.

     

    “Net
      Revenue Interest”
means,
      with respect to each Lease and Well, the interest in and to all Hydrocarbons
      produced and saved from or attributable to the Lease(s) on which such Well
      is
      located, after giving effect to all valid royalties, overriding royalties,
      production payments, net profits interests, carried interests, reversionary
      interests, and other similar interests constituting burdens upon, measured
      by,
      or payable out of Hydrocarbons produced and saved from or attributable to such
      Lease(s) and Wells.

     

    “Parties”
means,
      collectively, Seller, Buyer and Parent.

     

    “Permits”
      means the permits, licenses, authorizations, certificates, registrations, or
      other approvals (other than permits and licenses constituting Real Property
      Interests) granted by any Governmental Authority that pertain or relate in
      any
      way to the Assets, described more particularly on Exhibit
      F.

     

    “Permitted
      Encumbrances”
      means:

     

    (a) preferential
      rights to purchase any Asset (including, without limitation, any Contract),
      required non-governmental, third Person consents to assignment, and similar
      agreements with respect to which, prior to the Closing, (i) waivers or consents
      are obtained from the appropriate Persons, or (ii) the appropriate time period
      for asserting such rights has expired without an exercise of such right;


     

    (b) required
      non-governmental, third Person consents to assignment if such consent is of
      a
      type customarily obtained subsequent to a sale or conveyance, and the failure
      to
      obtain such consent would not have a material adverse effect on the use or
      value
      of the Assets; 

     

    (c) Liens
      for
      taxes or assessments not yet delinquent or, if delinquent, those taxes or
      assessments that are being contested in good faith by proceedings diligently
      conducted in the normal course of business;

     

    (d) all
      rights to consent by, required notices to, filings with, or other actions by
      Governmental Authorities in connection with the sale or conveyance of the Assets
      if the same are customarily obtained, given, or made subsequent to such sale
      or
      conveyance; 

     

    
      
        
        

      

      
        6

        
          

        

      

      
        
        

      

    

     

    (e) the
      Leases, the Contracts, the Permits, and the Real Property
      Interests;

     

    (f) all
      easements, rights-of-way, servitudes, permits, licenses, surface leases, and
      other rights to use the surface (in addition to the Real Property Interests)
      affecting or pertaining to the Assets, but that are not included in the Assets
      and do not interfere materially with the ownership, operation, value, or use
      of
      the Assets; 

     

    (g) lessor’s
      royalties, overriding royalties, division orders, production payments, net
      profits interests, carried interests, rights to recoupment, unitization,
      pooling, proration, and spacing designations, orders, and agreements,
      reversionary interests, and similar burdens, if the net cumulative effect
      thereof does not operate to cause Seller to receive less than the Net Revenue
      Interest set forth on Exhibit
      B
      of all
      Hydrocarbons produced, saved, and marketed from any Lease or Well or bear and
      pay more than the Working Interest shown on Exhibit
      B
      of all
      costs and expenses of operations in respect of such Lease or Well without a
      proportionate increase in the associated Net Revenue Interest; 

     

    (h) any
      operator’s or other inchoate or undetermined Lien or charge, whether statutory
      or contractual, constituting or securing the payment of expenses which were
      or
      will be incurred in the ordinary course of business and incidental to the
      maintenance, development, production, or operation of any Asset, to the extent
      the same secure amounts not yet due and payable or that are being contested
      in
      good faith by proceedings diligently conducted in the normal course of
      business;

     

    (i) any
      Lien
      created under the terms of any Lease, Real Property Interest, or Contract to
      secure the performance of the lessee’s obligations thereunder; 

     

    (j) conventional
      rights of reassignment; 

     

    (k) the
      rights reserved to, vested in, or imposed by any Governmental Authority to
      control, regulate, or monitor the Assets in any manner, and all applicable
      Laws;


     

    (l) Defects
      and Environmental Conditions waived in writing by Buyer; 

     

    (m) any
      matters set forth in the Schedules to this Agreement; and 

     

    (n) all
      other
      Liens, charges, encumbrances, contracts, agreements, instruments, obligations,
      and irregularities affecting any Asset that in the aggregate are not such as
      to
      (i) interfere materially with the ownership, operation, value, or use of
      such Asset for the purposes for which it is held; (ii) prevent Seller from
      receiving any proceeds from the sale of any Hydrocarbons; or (iii) cause
      Seller (A) to receive less than the Net Revenue Interest set forth on
Exhibit
      B
      of all
      Hydrocarbons produced, saved, and marketed from any Lease or Well, or
      (B) bear and pay more than the Working Interest shown on Exhibit
      B
      of all
      costs and expenses of operations in respect of such Lease or Well without a
      proportionate increase in the associated Net Revenue Interest.

     

    
      
        
        

      

      
        7

        
          

        

      

      
        
        

      

    

     

    “Person”
means
      any individual, corporation, limited liability company, partnership, trust,
      unincorporated organization, Governmental Authority, or any other form of
      entity.

     

    “Possession
      Time”
means
      the time on the Closing Date when all of the actions required under Section
      7.3
      to be
      taken by Seller and Buyer at the Closing have been taken.

     

    “Property-Related
      Taxes”
means
      any and all ad valorem, property, severance, generation, conversion, Btu or
      gas,
      transportation, utility, gross receipts, privilege, consumption, excise, lease,
      transaction, and other taxes, franchise fees, governmental charges or fees,
      licenses, fees, permits, and assessments, or increases therein, and any interest
      or penalties thereon, other than Transfer Taxes and taxes based on or measured
      by net income or net worth.

     

    “Remediation
      Estimate”
means,
      with respect to an Environmental Condition, the estimated cost (inclusive of
      Liabilities to Governmental Authorities and other Persons reasonably anticipated
      to be incurred by Seller as the result of such Environmental Condition),
      determined by Buyer in good faith, to remediate the relevant Environmental
      Condition in accordance with applicable Environmental Laws.

     

    “Retained
      Environmental Liabilities”
means
      ALL
      LIABILITIES ARISING OUT OF, RESULTING FROM, OR RELATING IN ANY WAY TO THE
      EXISTENCE OF AN ENVIRONMENTAL CONDITION ON OR RELATING TO ONE OR MORE ASSETS
      (INCLUDING, WITHOUT LIMITATION, LIABILITY FOR INJURY TO OR DEATH OF ANY PERSON,
      PERSONS, OR OTHER LIVING THINGS, OR LOSS OR DESTRUCTION OF OR DAMAGE TO PROPERTY
      OCCURRING AS THE RESULT THEREOF), REGARDLESS OF WHETHER SUCH ENVIRONMENTAL
      CONDITION IS KNOWN, ANTICIPATED, OR SUSPECTED AS OF THE POSSESSION TIME,
TO THE EXTENT ONLY THAT
      SUCH ENVIRONMENTAL CONDITION, OR THE ACTS, OMISSIONS, EVENTS, OR CONDITIONS
      GIVING RISE THERETO, AROSE, EXISTED, OR OCCURRED, IN WHOLE OR IN PART, PRIOR
      TO
      THE POSSESSION TIME.

     

    “Transfer
      Taxes”
means
      any sales, use, stock, stamp, document, filing, recording, registration, and
      similar tax or charge, including, without limitation, any interest or penalties
      thereon.

     

    “Transitional
      Matters Agreement”
means
      the Transitional Matters Agreement substantially in the form attached hereto
      as
Exhibit
      H

     

    “Working
      Interest”
means,
      with respect to each Lease or Well, the interest of Seller that is burdened
      with
      the obligation to bear and pay costs of operations on or in respect of such
      Lease or Well.

     

    
      
        
        

      

      
        8