Document:

REOSTAR ENERGY CORP - Exhibit 10.3

EXHIBIT 10.3

THIS WARRANT AND THE UNDERLYING SHARES OF COMMON STOCK HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE
SECURITIES LAWS. THIS WARRANT AND, IF EXERCISED, THE UNDERLYING SHARES OF COMMON
STOCK, HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO THEIR DISTRIBUTION
OR RESALE, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE
REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER THE SECURITIES ACT AND APPLICABLE
STATE SECURITIES LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION
THAT SUCH REGISTRATION IS NOT REQUIRED. 

 

  

REOSTAR ENERGY CORPORATION 

  WARRANT TO PURCHASE COMMON STOCK 

   

	No. 	 	
       ________, 2007

    
	 	
      Void after ________, 2009 

    	 

THIS CERTIFIES THAT, for value received ______________ residing at _______________
or his assigns (the "Holder"), is entitled to subscribe for and purchase at the
Exercise Price (defined below) from REOSTAR ENERGY CORPORATION, a Nevada corporation,
or its successor entity (the "Corporation") an amount of common stock equal to
__________ shares. 

1. Definitions. AS USED HEREIN, THE FOLLOWING TERMS SHALL HAVE THE FOLLOWING RESPECTIVE
MEANINGS: 

(a) "Exercise Period" shall mean the period commencing with the date hereof and
ending two years from the date hereof, unless sooner terminated as provided below.

(b) "Exercise Price" shall mean $1.50 per share, subject to adjustment pursuant
to Section 5 below. 

(c) "Exercise Shares" shall mean the shares of Common Stock issuable upon exercise
of this Warrant. 

2. Exercise of Warrant. The rights represented by this Warrant may be exercised
in whole or in part at any time during the Exercise Period, by delivery of the
following to the Corporation at its address set forth above (or at such other
address as it may designate by notice in writing to the Holder): 

(a) An executed Notice of Exercise in the form attached hereto; 

(b) Payment of the Exercise Price either in cash or by check; and 

(c) This Warrant. 

  

Upon the exercise of the rights represented by this Warrant, a
certificate or certificates for the Exercise Shares so purchased, registered in
the name of the Holder or persons affiliated with the Holder, if the Holder so
designates, shall be issued and delivered to the Holder within a reasonable time
after the rights represented by this Warrant shall have been so exercised. 

The person in whose name any certificate or certificates for Exercise Shares are
to be issued upon exercise of this Warrant shall be deemed to have become the
holder of record of such shares on the date on which this Warrant was surrendered
and payment of the Exercise Price was made, irrespective of the date of delivery
of such certificate or certificates, except that, if the date of such surrender
and payment is a date when the stock transfer books of the Corporation are closed,
such person shall be deemed to have become the holder of such shares at the close
of business on the next succeeding date on which the stock transfer books are
open. 

3. Covenants of the Corporation. 

3.1 Covenants as to Exercise Shares. The Corporation covenants and agrees that
all Exercise Shares that may be issued upon the exercise of the rights represented
by this Warrant will, upon issuance, be validly issued and outstanding, fully
paid and nonassessable, and free from all taxes, liens and charges with respect
to the issuance thereof. Subject to the immediately preceding paragraph, the Corporation
further covenants and agrees that the Corporation will at all times during the
Exercise Period, have authorized and reserved, free from preemptive rights, a
sufficient number of shares of its Common Stock to provide for the exercise of
the rights represented by this Warrant. If at any time during the Exercise Period
the number of authorized but unissued shares of Common Stock shall not be sufficient
to permit exercise of this Warrant, the Corporation will take such corporate action
as may, in the opinion of its counsel, be necessary to increase its authorized
but unissued shares of Common Stock to such number of shares as shall be sufficient
for such purposes. 

3.2 No Impairment. Except and to the extent as waived or consented to by the Holder,
the Corporation will not, by amendment of its Articles of Incorporation or through
any reorganization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed hereunder
by the Corporation, but will at all times in good faith assist in the carrying
out of all the provisions of this Warrant and in the taking of all such action
as may be necessary or appropriate in order to protect the exercise rights of
the Holder against impairment. 

3.3 Notices of Record Date. In the event of any taking by the Corporation of a
record of the holders of any class of securities for the purpose of determining
the holders thereof who are entitled to receive any dividend (other than a cash
dividend which is the same as cash dividends paid in previous quarters) or other
distribution, the Corporation shall mail to the Holder, at least ten (10) days
prior to the date specified herein, a notice specifying the date on which any
such record is to be taken for the purpose of such dividend or distribution. 

4. Representations of Holder. 

4.1 Acquisition of Warrant for Personal Account. The Holder represents and warrants
that it is acquiring the Warrant solely for its account for investment and not
with a view to or for sale or distribution of said Warrant or any part thereof.
The Holder also represents that the entire legal and beneficial interests of the
Warrant and Exercise Shares the Holder is acquiring is being acquired for, and
will be held for, its account only. 

4.2 Securities Are Not Registered. 

(a) The Holder understands that the Warrant and the Exercise Shares have not been
registered under the Securities Act of 1933, as amended (the "Act"), on the basis
that no distribution or public offering of the stock of the Corporation is to
be effected. The Holder realizes that the basis for the exemption may not be present
if, notwithstanding its representations, the Holder has a present intention of
acquiring the securities for a fixed or determinable period in the future, selling
(in connection with a distribution or otherwise), granting any participation in,
or otherwise distributing the securities. The Holder has no such present intention.

(b) The Holder recognizes that the Warrant and the Exercise Shares must be held
indefinitely unless they are subsequently registered under the Act or an exemption
from such registration is available. 

(c) The Holder is aware that neither the Warrant nor the Exercise Shares may be
sold pursuant to Rule 144 adopted under the Act unless certain conditions are
met, including, among other things, the existence of a public market for the shares,
the availability of certain current public information about the Corporation,
the resale following the required holding period under Rule 144 and the number
of shares being sold during any three month period not exceeding specified limitations.

4.3 Disposition of Warrant and Exercise Shares. The Holder understands and agrees
that all certificates evidencing the shares to be issued to the Holder may bear
the following legend: 

	 	 	THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER
      THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THEY MAY NOT BE SOLD,
      OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
      REGISTRATION STATEMENT AS TO THE SECURITIES UNDER THE ACT, UNLESS AN EXEMPTION
      FROM REGISTRATION IS AVAILABLE. 

 

5. Adjustment of Exercise Price. In the event of changes in the outstanding Common
Stock of the Corporation by reason of stock dividends, split-ups, recapitalizations,
reclassifications, combinations or exchanges of shares, separations, reorganizations,
liquidations, or the like prior to the exercise of this Warrant (or portion thereof),
the number and class of shares available under the Warrant (or portion thereof)
in the aggregate and the Exercise Price shall be correspondingly adjusted to give
the 

Holder of the Warrant (or portion thereof), on exercise for the
same aggregate Exercise Price, the total number, class, and kind of shares as
the Holder would have owned had the Warrant (or portion thereof) been exercised
immediately prior to the event and had the Holder continued to hold such shares
until after the event requiring adjustment. The form of this Warrant need not
be changed because of any adjustment in the number of Exercise Shares subject
to this Warrant. 

6. Fractional Shares. No fractional shares shall be issued upon the exercise of
this Warrant as a consequence of any adjustment pursuant hereto. All Exercise
Shares (including fractions) issuable upon exercise of this Warrant may be aggregated
for purposes of determining whether the exercise would result in the issuance
of any fractional share. If, after aggregation, the exercise would result in the
issuance of a fractional share, the Corporation shall, in lieu of issuance of
any fractional share, pay the Holder otherwise entitled to such fraction a sum
in cash equal to the product resulting from multiplying the then current fair
market value of an Exercise Share by such fraction. 

7. No Stockholder Rights. This Warrant in and of itself shall not entitle the
Holder to any voting rights or other rights as a stockholder of the Corporation.

8. Transfer of Warrant. Subject to applicable laws, the restriction on transfer
set forth on the first page of this Warrant, this Warrant and all rights hereunder
are transferable, by the Holder in person or by duly authorized attorney, upon
delivery of this Warrant and the form of assignment attached hereto to any transferee
designated by Holder. The transferee shall sign an investment letter in form and
substance satisfactory to the Corporation. 

9. Lost, Stolen, Mutilated or Destroyed Warrant. If this Warrant is lost, stolen,
mutilated or destroyed, the Corporation may, on such terms as to indemnity or
otherwise as it may reasonably impose (which shall, in the case of a mutilated
Warrant, include the surrender thereof), issue a new Warrant of like denomination
and tenor as the Warrant so lost, stolen, mutilated or destroyed. Any such new
Warrant shall constitute an original contractual obligation of the Corporation,
whether or not the allegedly lost, stolen, mutilated or destroyed Warrant shall
be at any time enforceable by anyone. 

10. Notices, etc. All notices and other communications required
or permitted hereunder shall be in writing and shall be sent by telex, telegram,
express mail or other form of rapid communications, if possible, and if not then
such notice or communication shall be mailed by first-class mail, postage prepaid,
addressed in each case to the party entitled thereto at the following addresses:
(a) if to the Corporation, to ReoStar Energy Corporation, Attention: Chief Executive
Officer, at 5416 Birchman Ave., Fort Worth, Texas 75107 and (b) if to the Holder,
________________ residing at ___________________________, or at such other address
as one party may furnish to the other in writing. Notice shall be deemed effective
on the date dispatched if by personal delivery, telecopy, telex or telegram, two
days after mailing if by express mail, or three days after mailing if by first-class
mail. 

11. Acceptance. Receipt of this Warrant by the Holder shall constitute acceptance
of and agreement to all of the terms and conditions contained herein. 

12. Governing Law. This Warrant and all rights, obligations and liabilities hereunder
shall be governed by the laws of the State of California. 

IN WITNESS WHEREOF, the Corporation has caused this Warrant to be executed by
its duly authorized officer as of the date first set forth above. 

	 	REOSTAR ENERGY CORPORATION 
	 	

        
	 	By: 

      Name: Mark S. Zouvas 

      Title: Chief Executive Officer 

NOTICE OF EXERCISE

TO: REOSTAR ENERGY CORPORATION 

(1) The undersigned hereby elects to purchase ______________ shares of the Common
Stock of REOSTAR ENERGY CORPORATION (the "Corporation") pursuant
to the terms of the attached Warrant, and tenders herewith payment of the exercise
price in full, together with all applicable transfer taxes, if any. 

(2) Please issue a certificate or certificates representing said shares of Common
Stock in the name of the undersigned or in such other name as is specified below:

________________________

  (Name)

  ________________________ 

  

  ________________________ 

  (Address)

(3) The undersigned represents that (i) the aforesaid shares of Common Stock are
being acquired for the account of the undersigned for investment and not with
a view to, or for resale in connection with, the distribution thereof and that
the undersigned has no present intention of distributing or reselling such shares;
(ii) the undersigned is aware of the Corporation's business affairs and financial
condition and has acquired sufficient information about the Corporation to reach
an informed and knowledgeable decision regarding its investment in the Corporation;
(iii) the undersigned is experienced in making investments of this type and has
such knowledge and background in financial and business matters that the undersigned
is capable of evaluating the merits and risks of this investment and protecting
the undersigned's own interests; (iv) the undersigned understands that the shares
of Common Stock issuable upon exercise of this Warrant as of the date of the issuance
of the Warrant have not been registered under the Securities Act of 1933, as amended
(the "Securities Act"), by reason of a specific exemption from the registration
provisions of the Securities Act, which exemption depends upon, among other things,
the bona fide nature of the investment intent as expressed herein, and, because
such securities have not been registered under the Securities Act, they must be
held indefinitely unless subsequently registered under the Securities Act or an
exemption from such registration is available; (v) the undersigned is aware that
the aforesaid shares of Common Stock may not be sold pursuant to Rule 144 adopted
under the Securities Act unless certain conditions are met and until the undersigned
has held the shares for the number of years prescribed by Rule 144, that among
the conditions for use of the Rule is the availability of current information
to the public about the Corporation; and (vi) the undersigned agrees not to make
any disposition of all or any part of the aforesaid shares of Common Stock unless
and until there is then in effect a registration statement under the Securities
Act covering such proposed disposition and such disposition is made in 

accordance with said registration statement, or the undersigned has provided the
Corporation with an opinion of counsel satisfactory to the Corporation, stating
that such registration is not required. 

	_________________________________ 

      (Print Name) 	 	____________________________ 

      (Signature) 

 

Date: ____________________________ 

ASSIGNMENT FORM 

  

  (To assign the foregoing Warrant, 

  execute this form and supply 

  required information. Do not use 

  this form to purchase shares.)

FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby
are hereby assigned to 

Name:   _________________________________________________________________________________________________________

(Please Print)

Address: ________________________________________________________________________________________________________

(Please Print)

Dated: _________________ 

Holder's Signature: _____________________________________ 

Holder's Address: _____________________________________ 

                           
_____________________________________ 

 The signature to this Assignment Form must correspond with the
name as it appears on the face of the Warrant, without alteration or enlargement
or any change whatever. Officers of corporations and those acting in a fiduciary
or other representative capacity should file proper evidence of authority to assign
the foregoing Warrant.REOSTAR ENERGY CORP - Exhibit 10.7

EXHIBIT 10.4

 
JOINT OPERATING AGREEMENT

	STATE OF TEXAS	}	
      KNOW ALL MEN BY THESE PRESENTS: 

    
		}	
	COUNTY OF TARRANT	}	

THIS AGREEMENT, entered into by and between TEXAS MOR, INC., hereinafter designated
and referred to as "Operator", and the signatory party or parties other than Operator,
sometimes hereinafter referred to individually herein as "Non-Operator", and collectively
as "Non-Operators". 

WITNESSETH: 

WHEREAS, the parties to this agreement are owners of oil and gas leases and/or
oil and gas interests in the land identified in Annex "I", and the parties hereto
have reached an agreement to explore and develop the lands covered by such leases
and/or oil and gas interests for the production of oil and gas in accordance with
this agreement and as hereinafter provided; and 

WHEREAS, the parties hereto desire to enter into this Operating Agreement with
respect to such interests; 

NOW, THEREFORE, it is agreed as follows: 

ARTICLE I. 

DEFINITIONS 

As used in this agreement, the following words and terms shall have the meanings
here ascribed to them: 

A. The term "oil and gas" shall mean oil, gas, casing head gas, gas condensate,
and all other liquid or gaseous hydrocarbons and other marketable substances produced
therewith, unless an intent to limit the inclusiveness of this term is specifically
stated. 

B. The terms "oil and gas lease", "lease" and "leasehold" shall mean the oil and
gas leases covering tracts of land lying within the Contract Area which are owned
by the parties to this agreement. 

C. The term "oil and gas interests" shall mean unleased fee and mineral interests
in tracts of land lying within the Contract Area which are owned by parties to
this agreement. 

D. The term "non-contract parties" shall mean any owner of minerals or leases
covering tracts of land lying within the Contract Area by parties not subject
to this agreement. 

E. The term "Contract Area" shall mean all of the lands covered by the oil and
gas leasehold interests intended to be developed and operated for oil and gas
purposes under this agreement. Such lands, oil and gas leasehold interests and
oil and gas interests are described in Annex I. 

F. The term "drilling unit" shall mean the area fixed for the drilling of one
well by order or rule of any state or federal body having authority. If a drilling
unit is not fixed by any such rule or order, a drilling unit shall be the drilling
unit as established by the pattern of drilling in the 

  

Contract Area or as fixed by express agreement of the Drilling
Parties. 

G. The term "drillsite" shall mean the oil or gas lease or interest on which a
proposed well is to be located. 

H. The terms "Drilling Party" shall mean a party who agrees to join in and pay
its share of the cost of any operation conducted under the provisions of this
agreement. 

Unless the context otherwise clearly indicates, words used in the singular include
the plural, the plural includes the singular, and the neuter gender includes the
masculine and the feminine. 

ARTICLE II. 

EXHIBITS 

The following exhibits, as indicated below and attached hereto, are incorporated
to this Agreement and made a part hereof: 

A. Annex "I", shall include the following information: 

(1) Identification of lands subject to this agreement, 

(2) Restrictions, if any, as to depths, formations, or substances, 

(3) Names and Addresses of parties for notice purposes, and 

(4) Percentages or fractional interests of parties to this agreement. 

B. Annex "II", Accounting Procedure. 

C. Annex "III" shall include Operator's insurance and insurance it requires of
its contractors and subcontractors to cover operations on the Contract Area. 

D. Annex "IV" shall include an addendum to Article VI, paragraph C. 

If any provision contained in any exhibit or annex is inconsistent with any provision
contained in the body of this agreement, the provisions in the exhibit or annex
shall prevail. 

ARTICLE III. 

INTERESTS OF PARTIES 

A. Interest of Parties in Costs and Production: 

All production of oil and gas from the Contract Area shall be owned in accordance
with each party's respective interest as set forth in Annex "I" (4) of this Agreement.
Unless otherwise provided in this agreement, all costs and liabilities incurred
in operations hereunder shall be borne and paid, and all equipment and material
acquired in operations on the Contract Area shall be owned by the parties as their
interest appears in Annex "I" (4). With respect to any lease hereby covered, each
party entitled to receive a share of production of oil and gas from the Contract
Area shall bear and cause to be paid or delivered, to the extent of its interest
in such production, any and all royalty, overriding royalty, production payment
or other burden of each

  

lease made subject hereto and all production resulting therefrom.

Nothing contained in this Article III (A) shall be deemed an assignment or cross-assignment
of interests covered hereby. 

B. Oil and Gas Interests: 

If any interest listed in Annex "I" (4) is an unleased oil and gas interest, such
oil and gas interest shall be treated for the purposes of this Agreement as if
it were a leased interest under the form of oil and gas lease or leases subject
to this Agreement and such interest shall be allocated one-eighth to royalty and
seven-eights to leasehold interests. 

C. Excess Royalties, Overriding Royalties and Other Payments: 

Unless changed by other provisions, if the interest of any party covered hereby
is subject to any royalty, overriding royalty, production payment or other burden
on production in excess of the amount stipulated in Annex "I" (4), such party
so burdened shall assume and alone bear all such excess obligations and shall
indemnify and hold the other parties hereto harmless from any and all claims and
demands for payment asserted by owners of such excess burden. 

D. Subsequently Created Interests: 

If any party should hereafter create an overriding royalty, production payment
or other burden payable out of production attributable to its working interest
hereunder, and: 

1. If the burdened party is required to reassign or relinquish under this agreement
to any other party or parties all or a portion of its working interest hereunder
and/or the production attributable thereto, said other party or parties shall
receive said assignment and/or production free and clear of said subsequently
created interest and the burdened party shall indemnify and save said other party
or parties harmless from any claims and demands for payment asserted by owners
of the subsequently created interest; and, 

2. If the burdened party fails to pay, when due, its share of expenses chargeable
hereunder, all provisions of this agreement governing the repayment of such expenses,
including the right to withhold proceeds or to cause the purchaser to withhold
proceeds, shall be enforceable against the subsequently created interest in the
same manner as they are enforceable against the working interest of the burdened
party. 

ARTICLE IV. 

TITLES 

A. Title Examination: 

Title Examination shall be made either on the drillsite of a subject well or upon
the lease(s) to be included in the drilling unit around such well on a complete
abstract record furnished to an outside attorney employed by Operator for this
purpose, and the title to any such lease or leases and the fee title of the lessors
therein must be approved by the examining attorney and accepted by the Operator
prior to the commencement of drilling operations on any well drilled hereunder;
however, in the event any well drilled hereunder is completed as a commercial
producer and the lease on which the well is located is pooled or unitized with
other leases to form either a declared unit or a spacing unit designated by a
governmental authority, Operator shall examine the title to the lease(s) and land
included in said unit on an abstract certified to a date subsequent to the date
on which such well was completed. A good faith effort shall be made by the Operator
to satisfy the examining attorney's title requirements covering the drillsite
tract, 

 

or any lease or leases covered hereby and included in a declared
unit or spacing unit designated by a governmental authority. All title information
necessary for the examination of title shall be obtained by the Operator. All
costs incurred by Operator in procuring abstracts and fees paid attorneys including
original, supplemental and division order title opinions, and the cost of satisfying
any title requirements or curing any title defects, insofar as such costs relate
to leases or land covered by this operating agreement, including the filing of
a lawsuit if deemed necessary by operator's attorney to cure a title defect or
to obtain a lease, shall be charged to the joint account and borne by the Non-Operators
in the proportion that each Non-Operator is responsible f or the payment of all
costs. Operator shall be responsible for the preparation and recording of pooling
designations or declarations as well as the conduct of hearings before governmental
agencies for the securing of spacing or pooling orders. 

B. Failure of Title: 

If after all titles are accepted and approved, any oil and gas interest or lease,
or interest therein, be lost through failure of title, which loss results in a
reduction of interest from that shown on Annex "I", such loss or losses shall
be regarded as joint losses and shall be borne by the Operator and Non-Operators
in proportion to their respective interests in the Contract Area. There shall
be no monetary liability against the Operator, its employees or agents resulting
from such loss nor shall there be any change or adjustment in the interests of
the parties in the remaining portion of the Contract Area. 

C. Loss of Leases For Other Than Title Failure: 

If any lease or interest subject to this agreement be lost through failure to
develop, failure to pay delay rental or shut-in gas payments, or because express
or implied covenants have not been performed, or if any lease be permitted to
expire at the end of its primary term and not be renewed or extended, the loss
shall not be considered a failure of title and all such losses shall be joint
losses and shall be borne by all parties in proportion to their interest and there
shall be no change in, or adjustment of, the interest in the remaining portion
of the Contract Premises. No monetary liability shall result against Operator,
its employees or agents, should loss of title occur due to any of the foregoing
or should minimum royalty or royalty not be paid or be paid erroneously, through
mistake or oversight. In the event such loss requires a revision in the ownership
of an oil and gas interest or lease in the Contract Area, such revision shall
be borne jointly by all Drilling Parties as their respective interests appear
in Annex "I". 

ARTICLE V. 

OPERATOR 

A. Designation and Responsibilities of Operator: 

Rife Oil Properties, Inc. or its designate shall be the Operator of the Contract
Area, and shall conduct and direct and have full control of all operations on
the Contract Area as permitted and required by and within the limits of this agreement.
It shall conduct all such operations in a good and workmanlike manner, but it
shall have no liability as Operator to the other parties for losses sustained
or liabilities incurred, except such as may result from gross negligence or willful
misconduct. Rife Oil Properties, Inc. is hereby named Operator of the Contact
Area even should it not be vested with title or later become divested of title
to the Contract Area. For the purposes of this Agreement, title held by an affiliate
of the Operator or by a party that controls or is controlled by the Operator shall
be deemed an interest owned by Operator and each Non-Operator by execution of
this Agreement hereby agree, consent and acknowledge same. 

B. Resignation or Removal of Operator and Selection of Successor: 

Operator may resign at any time by giving written notice of not
less than sixty (60) days to Non-Operators. In such event, all parties to this
agreement, including Operator if it owns an interest in the Contract Area, shall
by written ballot select by a majority vote in interest, not in numbers, a new
Operator who shall assume the responsibilities and duties on the date hereafter
provided, and shall have the rights prescribed for Operator by this agreement.
Operator shall deliver to its successor all records and information necessary
to the discharge by the new Operator of its duties and obligations within five
(5) business days after the receipt by Operator of a copy of the written ballots
indicating that its successor has been duly chosen and a written acceptance by
the successor of its responsibilities thereunder. Such acceptance shall contain
a provision holding Operator harmless from all liability resulting from any acts
performed in its capacity as Operator. Operator may be removed if it fails or
refuses to carry out its duties hereunder, or becomes insolvent, bankrupt or is
placed in receivership, by the affirmative vote of two (2) or more Non-Operators
owning a majority interest based on ownership as shown on Annex "I" remaining
after excluding the voting interest of Operator. Such resignation or removal shall
become effective at 7:00 a.m. on the first day of the calendar month following
the receipt by Operator of the written acceptance by its successor. In the event
Operator should voluntarily resign while it continues to maintain an interest
in the Contract Area, it shall be bound by the terms hereof as a Non-Operator.

ARTICLE VI. 

DRILLING AND DEVELOPMENT 

A. Initial Well: 

All wells drilled on the Contract Area shall be drilled or caused to be drilled
by Operator at rates customary and usual in the area by contracts with independent
contractors who are doing work of a similar nature in the same geographical area.

Within a reasonable time after the execution hereof, Operator shall commence the
drilling of a well or wells for oil and gas on the Contract Area identified in
Annex "I" in accordance with the terms and conditions of this agreement or any
ancillary agreements between the parties executed prior to or contemporaneously
herewith. In the event of conflict, the terms and provisions of any such ancillary
agreement dated prior to or contemporaneously with this agreement shall control.
Operator shall make reasonable tests of all formations encountered during drilling
which give indication of containing oil and gas in quantities sufficient to test,
unless this agreement shall be limited to a specific formation or formations,
in which event Operator shall be required to test only the formation or formations
to which this agreement may apply. 

B. Subsequent Operations: 

The Operator is authorized on behalf of all Non-Operators to rework, deepen, plug
back or to otherwise engage in subsequent operations with respect to a well drilled
on the Contract Area owned by the Drilling Parties at the joint expense of all
parties and, except to the extent modified hereafter, shall be undertaken without
the prior knowledge or consent of the Non-Operators. The entire cost and risk
of conducting such subsequent operations shall be borne by the Drilling Parties
in proportion to their ownership in the Contract Area and shall include all necessary
expenditures for the reworking, plugging or deepening, testing, completing, recompleting
and equipping of the well, including necessary tankage and/or surface facilities.

An itemized statement of the cost of drilling, deepening, plugging back, testing,
completing, recompleting and equipping the well as set forth above shall be furnished
by the Operator to the Non-Operators and will be included in the monthly billing
within one hundred and twenty (120) days after the completion of any operation
hereunder and as more fully set 

forth in the Accounting Procedure attached hereto as Annex "II".

C. Operations by Less Than All Parties: 

Notwithstanding the foregoing, Operator shall not undertake any single project
reasonably estimated to require an expenditure in excess of fifteen thousand dollars
($15,000.00) in the aggregate without the express written consent of the Drilling
Parties as their respective interest appear in Annex "I". 

In the event Operator or other Drilling Party shall elect to drill another well
on the Contract Area or to rework, deepen or plug back a dry hole or a well not
producing in paying quantities reasonably estimated to require an expenditure
in excess of fifteen thousand dollars ($15,000.00) in the aggregate and not otherwise
agreed to by the Drilling Parties by separate agreement, shall give the other
parties written notice of the proposed operation, specifying the work to be performed,
the location, proposed depth, objective formation and the estimated cost of the
operation. The parties so notified shall have thirty (30) days after the receipt
of the notice within which to notify the party wishing to do the work whether
they elect to participate in the cost of the proposed operation. Failure of a
party to reply within the period above fixed shall constitute an election by that
party not to participate in the cost of the proposed operation. Any telephonic
notice shall be confirmed in writing within seven (7) days. 

Operator shall perform all work for the account of the Consenting Parties; provided,
however, if the Operator (or an affiliate of Operator vested with title in the
Contract Area) is a Non-Consenting Party, the Consenting Parties shall either:
(a) request Operator to perform the work for the Consenting Parties, or (b) designate
one of the Consenting Parties as Operator for the limited purpose of performing
such work. Such operations on the Contract Area shall be in compliance with all
the terms and conditions of this agreement. 

If less than all parties approve any proposed operation, the proposing party,
immediately after the expiration of the notice period, shall advise the Consenting
Parties of the total interest of the parties approving such operation and its
recommendations as to whether the Consenting Parties should proceed with the operation
as proposed. Each Consenting Party shall advise the proposing party of its desire
to limit participation to such party's interest as shown on Annex "I" (4) or to
carry its proportionate share of Non- Consenting Parties interests, and failure
to advise shall be deemed an election to limit participation. The proposing party,
at its election, may withdraw such proposal if there is insufficient participation
and shall promptly notify all parties of such decision. (See Annex "IV" for forfeiture
provisions if operations are necessary to continue lease in force or to drill
well.) 

The entire cost and risk of conducting such operations shall be borne by the Consenting
Parties in the proportions they have elected to bear same under the terms of the
preceding paragraph. Consenting Parties shall keep the leasehold estates involved
in such operations free and clear of all liens and encumbrances of every kind
created by or arising from the operations of the Consenting Parties and shall
hold Non-Consenting Parties harmless from all liabilities resulting therefrom.
If such an operation results in a dry hole, the Consenting Parties shall plug
and abandon the well and restore the surface location at. their sole cost, risk
and expense. If any well drilled, reworked, deepened or plugged back under the
provisions of this article VI (C) result in a producer of oil and/or gas in paying
quantities, the Consenting Parties shall complete and equip the well at their
sole cost and risk and the well shall then be turned over to Operator and shall
be operated by it at the expense and for the account of the Consenting Parties
in accordance with this agreement, including Article VI (G) dealing with the abandonment
of productive wells. 

Upon commencement of operations of the subject well, each Non-Consenting Party
shall be deemed to have relinquished to Consenting Parties, and the Consenting
Parties shall own and be entitled to receive, in proportion to their interests,
all of such Non-Consenting Party's Interest 

in the well and share of production therefrom. Each Non-Consenting
Party shall then assign to the Consenting Party, in accordance with their respective
interests therein and without warranty of any kind, as to title, or as to quantity,
quality or fitness for use of the equipment and material, all of their interest
in the well and its equipment, free of mortgage or lien, together with their interest
in the leasehold estate as to the drilling unit of the well. There shall be no
readjustment of interest in the remaining portion of the Contract Area. After
the assignment, the Non-Consenting Parties shall have no further responsibility,
liability or interest in the operation of or production from the well or the assigned
area surrounding said well. All operations conducted under such Drillsite shall
remain subject to the terms and provisions of this agreement. 

D. Taking Production In Kind: 

Each party shall take in kind or separately dispose of its proportionate share
of all oil and gas produced from the Contract Area. Any extra expenditure incurred
in the taking in kind or separate disposition by any party of its proportionate
share of the production shall be borne by such party. Any party taking its share
of production in kind shall be required to pay for only its proportionate share
of such part of Operator's surface facilities which it uses. Each party shall
execute division orders and contracts as may be necessary for the sale of its
interest in production from the Contract Area, and, except as provided in Article
VII hereof, shall be entitled to receive payment directly from the purchaser thereof
for its share of production. 

In the event any party shall fail to make the arrangements necessary to take in
kind or separately dispose of its proportionate share of the oil and gas produced
from the Contract Area, Operator shall have the right, subject to the revocation
at will by the party owning it, to act as such party's agent for the purpose of
selling it to others at any time and from time to time, for the account of the
non-taking party at the contract price agreed to by Operator and the purchaser
thereof. Any sale by Operator of any other party's share of oil or gas shall be
only for such reasonable periods of time consistent with industry needs, but in
no event for a period of more than one (1) year. Operator shall under no circumstances
make a sale into interstate commerce of any other party's share of gas production
without first giving such party thirty (30) days notice of such intended sale.

E. Access to Contract Area and Information: 

Each party shall have access to the Contract Area at all reasonable times at it
sole cost and risk to inspect or observe operations, and shall have access at
reasonable times to information pertaining to the development or operation thereof,
including Operator's books and records relating thereto. 

F. Surplus Material and Equipment: 

Materials and equipment acquired pursuant hereto, which in the judgment of Operator
are not necessary for the development and operation of the Contract Area, may
be sold by Operator for the joint account to any of the parties hereto, to others,
or to itself for operations unrelated to the Contract Area, at a price determined
in accordance with the Accounting Procedure, set forth in Annex "II", attached
hereto. Proper charges and credit shall be made by Operator as provided in such
Accounting Procedure. 

G. Abandonment of Dry Holes and Wells that have Produced. 

Except for any well in which a Non-Consent operation has been conducted hereunder
which may be plugged and abandoned in accordance with Article VI (C) hereof, any
well which has been drilled, reworked, deepened, or plugged back pursuant to this
agreement on the Contract Area and, in the sole discretion of the Operator, is
considered a dry hole or has been completed as a producer but has become non-commercial,
shall be plugged and abandoned by the Operator without the prior knowledge and
consent of the Drilling Parties. All such wells shall 

be plugged and abandoned in accordance with applicable rules and
regulations governing such activities and at the cost, risk and expense of the
parties who participated in the cost of drilling and/or deepening such well in
proportion to their ownership in the Contract Area. 

In the event a party not subject to this agreement wishes to take over operations
from the Drilling Parties of a well deemed by Operator to be a dry hole or non-commercial,
such party shall tender to the Operator on behalf of all Drilling Parties the
value of the well's salvageable material and equipment, less the estimated cost
of salvaging and the estimated cost of plugging and abandoning as determined by
the Operator, such funds to be treated as a credit to the joint account of the
Drilling Parties in accordance with the provisions of Accounting Procedure attached
hereto as Annex "II". At the request of Operator, each Drilling Party shall then
assign to such party, without warranty of any kind, as to title, or as to quantity,
quality or fitness for use of the equipment and material, all of their interest
in the well and its equipment, free of mortgage or lien, together with their interest
in the leasehold estate as to the drilling unit of the subject well. These assignments
shall have no effect upon the interest in the remaining portion of the Contract
Area. After the assignment, the Drilling Party shall have no further responsibility,
liability or interest in the operation of or production from the well or the assigned
area surrounding said well and the assigned area shall cease to be operated in
accordance with the terms of this agreement. 

ARTICLE VII. 

EXPENDITURES AND LIABILITY OF PARTIES 

A. Leasehold Expenditures: 

Operator shall have full control of the Contract Premises and, subject to the
provisions hereof, shall conduct and manage the development and operation of said
premises for the production of oil and gas. Operator shall pay and discharge all
costs and expenses incurred pursuant hereto, and shall charge each of the parties
hereto with their respective proportionate share thereof upon the basis provided
in the Accounting Procedure attached hereto as Annex "II" and made a part hereof;
provided, however, if any provision of said Annex "II" conflicts with any provision
hereof, the provisions hereof shall control. Operator shall keep an accurate record
of the joint account hereunder showing expenses incurred and charges and credits
made and received. Each non-operating party shall pay to operator its share of
such costs and expenditures within fifteen (15) days after receipt of the Operator's
monthly billing of same. If payment is not made within such time, the unpaid balance
shall bear interest at the maximum rate permitted under Texas law until paid.
Should Operator pay the unpaid amount, it shall, to obtain reimbursement thereof,
be subrogated to the security rights described in the below paragraph. 

In the event of failure or neglect of any Non-Operator to promptly pay its proportionate
part of any costs or expenses of development or operation when due, Operator shall
have the right, without prejudice to other rights or remedies, to withhold the
proceeds from the sale of such Non-Operator's share of oil and/or gas or to direct
the purchaser of the oil and/or gas produced in the Contract Area to deliver such
proceeds to the Operator until the amount owed Operator by such Non-Operator,
plus interest, has been paid. Each purchaser shall be entitled to rely upon Operator's
written statement concerning the amount of default. Alternatively, should production
proceeds be insufficient to repay Operator for the proportionate part of any costs
or expenses of development or operation incurred by a delinquent Non-Operator,
Operator may require the other parties hereto to proportionately contribute to
the payment of such delinquent indebtedness and the parties so contributing shall
be entitled to share, in proportion to their contribution, the lien rights of
Operator as hereafter provided, to secure the payment of any sums so required
to be paid to them. Upon the payment by such delinquent or defaulting party to
Operator of any amount on such delinquent indebtedness, or upon any recovery on
behalf of the parties hereto under the withholding provisions described above
or pursuant to the lien conferred hereinbelow, the amount so paid or recovered
shall be distributed and paid by Operator to the 

other parties hereto in accordance with the contributions made
by them. 

Except as herein otherwise specifically stated, the Operator, at its election,
shall have the right from time to time to demand and receive from the other parties
payment in advance of their respective shares of the estimated amount of the expense
to be incurred in operations hereunder during the next succeeding month, which
right may be exercised only by submission to each such party of an itemized statement
of such estimated expense, together with an invoice for its share thereof. Each
such statement and invoice for the payment in advance of estimated expense shall
be submitted on or before the 15th day after receipt of the billing or by the
first day of the month for which the advance is required, whichever is later.
Each party shall pay to Operator its proportionate share of such estimate within
fifteen (15) days after such estimate and invoice is received. If any party fails
to pay its share of said estimate within said time, the amount due shall bear
interest at the maximum rate provided under Texas law until paid. Proper adjustment
shall be made monthly between advances and actual expense to the end that each
party shall bear and pay its proportionate share of actual expenses incurred,
and no more. 

B. Liens and Payment Defaults: 

Each Non-Operator grants to Operator a first and preferred lien upon its oil and
gas rights in the Contract Area, and a security interest in its share of oil and/or
gas when extracted and its interest in all equipment situated on the leasehold,
to secure payment of its share of expense, together with interest thereon at the
maximum rate provided under Texas law. To the extent Operator has a security interest
under the Uniform Commercial Code or comparable statute in the state where the
Contract Area is situated, Operator shall be entitled to exercise the rights and
remedies of a secured party under the Code. The bringing of a suit and the obtaining
of judgment by Operator for the secured indebtedness shall not be deemed an election
of remedies or otherwise affect the lien rights or security interest as security
for the payment thereof. If Operator should elect to proceed to foreclose the
lien of Operator as against the interest of a Non-Operator having an interest
in the Contract Area, this Operating Agreement shall be deemed to include provisions
for non-judicial sale under the laws of any state so permitting and M. 0. Rife,
III is hereby appointed Trustee for such purpose. The filing for record of this
Operating Agreement, or a memorandum making reference to such Operating Agreement,
duly signed and acknowledged by the defaulting Non-Operator or its attorney-in-fact
in the county where the Contract Area is situated, shall constitute an Operator's
Lien Statement. 

On such default, said Trustee or Operator shall at least 21 days preceding the
date of non-judicial sale serve written notice of the proposed sale by certified
mail on Non-Operator according to the records of Operator. Service of such notice
shall be deemed completed upon deposit of a notice enclosed in a post-paid letter
properly addressed to the Non-Operator and each other party obligated to pay said
obligations at the most recent address or addresses as shown on the records of
Operator in a post office or other official depository under the care and custody
of the United States or other official depository under the care and custody of
the United States Postal Service. The affidavit of any person having knowledge
of the fact of mailing and that such mailing was completed shall be prima facie
evidence of due delivery to Non-Operator. After such notice, said Trustee shall
proceed to sell all or part of the interests of Non-Operator in the Contract Area
at public auction to the highest bidder for cash after having given notice of
the time and place of sale and in the manner and after the advertisement of such
sale as is now required by the statutes of the state where the Contract Area is
situated in making sales of real estate under powers of sale provided in deeds
of trust. Sale of a part of the realty will not exhaust the power of sale and
sales may be made from time to time until all of the property is sold or the obligations
paid in full. Said Trustee shall have authority to appoint an attorney-in-fact
to act as Successor Trustee in conducting the foreclosure sale and executing a
deed to the purchaser; and it is further agreed that said Trustee or his successor
may sell said property together or in lots, parcels, and/or proration units as
he shall deem expedient and after such sales as aforesaid shall make, execute
and deliver to the purchaser or purchasers thereof good and sufficient deeds,
assignments or other lawful conveyances to vest in said purchaser of purchasers
title of the Non-

Operator in the Contract Area in fee simple together with all of
the proceeds of production attributable thereto including proceeds of production
held by any party for the payment to Non-Operator. From the proceeds of said sale
and Trustee shall first pay all charges, costs and expenses in executing these
provisions and secondly pay any sums due by the Trustee for taxes in the preservation
of the security and thereafter pay all of the remaining sums to Operator for the
satisfaction of the debts of Non-Operator hereunder and the balance, if any, shall
be paid by the purchaser of the interest to the defaulting Non-Operator. It is
agreed that such sale shall be a perpetual bar against Non-Operator and its heirs,
successors and assigns and legal representatives and all other persons claiming
under him, them or any of them. It is further agreed that said Trustee or any
holder or holders of said obligation of Operator shall have the right to become
the purchaser or purchasers at such sale if the highest bidder or bidders in which
event the bid or bids may be credited upon said indebtedness of Non-Operator.
It is stipulated and agreed that in case of any sale hereunder by Trustee or his
successor, all prerequisites of said sale shall be presumed to have been performed,
and any conveyance given hereunder including all statements of fact or recitals
therein made as to the nonpayment of money secured, or as to any default under
the terms hereof, or as to the request of the Trustee to enforce this trust, or
as to the advertisement of sale or the time, place and terms of sale, or as to
any other preliminary act or thing, shall be taken in all courts of law and equity
as prima facie evidence that the facts so stated are true. Operator may appoint
a substitute or successor Trustee in the event the Trustee above named is unable
or unwilling for any reason to serve. 

C. Liability of Parties: 

The liability of the parties shall be several, not joint or collective. Each party
shall be responsible only for its obligations, and shall be liable only for its
proportionate share of the costs of developing and operating the Contract Area.
Accordingly, the liens granted among the parties in the preceding paragraph are
given to secure only the debts of each severally. It is not the intention of the
parties to create, nor shall this agreement be construed as creating, a mining
or other partnership or association, or to render the parties liable as partners.

D. Rentals, Shut-in Well Payments and Minimum Royalties: 

Rentals, shut-in payments and minimum royalties which may be required under the
terms of any lease shall be paid by the Drilling Parties in proportion to their
ownership in the applicable lease. The Operator shall make any and all payments
for and on behalf of all such parties. In the event of failure to make proper
payment of any rental, shut-in well payment or minimum royalty through mistake
or oversight where such payment is required to continue the lease in force, any
loss which results from such non-payment shall be borne jointly by all Drilling
Parties as their respective interest appear in Annex "I". If any party secures
a new lease covering the terminated interest, such acquisition shall be subject
to the extension and renewal provisions of this agreement. 

E. Taxes: 

Beginning with the first calendar year after the effective date hereof, Operator
shall render for ad-valorem taxation all property subject to this agreement which
by law should be rendered for such taxes, and it shall pay all such taxes assessed
thereon before they become delinquent. Operator shall bill the other parties for
their proportionate shares of all tax payments in the manner provided in Annex
"II". 

If Operator considers any tax assessment improper, Operator may, at its discretion,
protest within the time and manner prescribed by law, and prosecute the protest
to a final determination, unless it elects to abandon such protest prior to final
determination. All legal costs incurred in connection with any administrative
or judicial proceeding relating to tax assessments shall be considered a joint
expense of all parties to this Agreement. 

Operator shall pay or cause to be paid on behalf of all Drilling
Parties all production, severance, excise, gathering and other taxes imposed upon
or with respect to the production or handling of oil and/or gas produced under
the terms of this agreement. 

Each of the parties hereto elects, under the authority of Section 761 (a) of the
Internal Revenue Code of 1954, as amended, and under the authority of the income
tax laws of any state which contain provisions similar to those contained in the
Subchapter of the Internal Revenue Code of 1954, to be excluded from the application
of all of the provisions of Subchapter K of Chapter 1 of Subtitle A of the Internal
Revenue Code of 1954. Each party authorizes and directs Operator to execute such
an election or elections on its behalf and to file the election with the proper
governmental office or agency. If requested by Operator, each party agrees to
execute and join in such election. 

F. Insurance: 

At all times while operations are conducted hereunder, Operator shall comply with
the workmen's compensation law of the state where the operations are being conducted.
Operator shall also carry or provide insurance for the benefit of the joint account
of the parties as outlined in Annex "III" attached to and made a part hereof.
Operator shall require all contractors engaged in work on or for the Contract
Area to comply with the workmen's compensation law of the state where the operations
are being conducted and to maintain such other insurance as Operator may require.

No direct charge shall be made by Operator for premiums paid for Automobile Public
Liability Insurance for automobiles owned solely by Operator. 

ARTICLE VIII. 

ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST 

A. Assignment of Leases: 

Leases will initially be acquired by the Operator. Record title to each such Lease
shall continue to be held in the name of the Operator until a Producing Well is
obtained, at which time the title to the Contract Area will be assigned and conveyed
to the Drilling Parties as their respective interests appear in Annex "I", subject
to the terms of this Operating Agreement and all third party contracts which are
muniments of title in Operator's chain of title. The respective interest to be
assigned to each Non-Operator shall be such party's undivided interest in the
Contract Area as identified in Annex "I". 

B. Surrender of Leases: 

The leases covered by this agreement, insofar as they embrace acreage in the Contract
Area, may be released or surrendered, in whole or in part, by the Operator on
behalf of the Drilling Parties, and Operator shall give written notice to each
Non-Operator within ten (10) business days from the day such lease(s), or portions
thereof, are released or surrendered. Such notice by the Operator to the other
Drilling Parties shall recite that, in its opinion, such leases have become worthless
or that he is under a contractual obligation to release the subject acreage. Accordingly,
each Non-Operator hereby appoints Operator as its attorney-in-fact to execute
an instrument in writing to surrender or release any lease(s) covered by this
agreement without the joinder of Non-Operators, provided it acts in good faith
on behalf of Non-Operators. Any contractual obligation to reassign the lease(s)
covered by the Contract Area may be executed or later ratified by all Non-Operators
at the request of the Operator. 

Any assignment, surrender or release of a lease, or portions thereof, covered
by this 

agreement, shall not change the surrendering party's interest in
the balance of the Contract Area; and the acreage assigned, released or otherwise
surrendered, and subsequent operations thereon, shall not thereafter be subject
to the terms and provisions of this agreement. 

C. Renewal or Extension of Leases: 

If the Operator or other party subject hereto secures a renewal of any oil and
gas lease subject to this agreement, it shall be for the joint account of all
the Drilling Parties, insofar as such lease affects lands within the Contract
Area, subject to the right of Operator or other party to secure a lien and security
interest on the oil and gas rights and production resulting therefrom of each
Non-Operator in the Contract Area pending the reimbursement by each Non-Operator
of their proportionate share of the lease acquisition costs allocated to that
part of such lease within the Contract Area which shall be in proportion to the
interests held at that time by the parties in the Contract Area. Each Non-Operator
who participates in the purchase of a renewal lease in accordance with this agreement
shall be given an assignment of its proportionate interest therein by the acquiring
party. 

The provisions of this Article shall apply to the renewal or extension of leases
whether they are for the entire interest covered by the expiring lease or cover
only a portion of its area or an interest therein. Any renewal or extension lease
taken before the expiration of its predecessor lease, or taken or contracted for
within six (6) months after the expiration of the existing lease shall be subject
to this provision; but any lease taken or contracted for more than six (6) months
after the expiration of an existing lease shall not be deemed a renewal lease
and shall not be subject t the provisions of this Agreement. However, a renewal
or extension secured within one (1) year from the expiration of the existing lease
shall be subject to this provision if the delay in securing such renewal or extension
was done by Operator with the intent of avoiding his obligations under this Article.

D. Maintenance of Uniform Interest: 

For the purpose of maintaining uniformity of ownership in the oil and gas leasehold
interests covered by this agreement, no party shall sell, encumber, transfer or
make other disposition of its interest in the leases embraced within the Contract
Area and in wells, equipment and production unless such disposition covers either:

1. The entire interest of the party in all leases and equipment and production;
or 

2. An EQUAL undivided interest in all leases and equipment and production in the
Contract Area. 

Every such sale, encumbrance, transfer or other disposition made by any party
shall be made expressly subject to this agreement and shall be made without prejudice
to the right of the other parties. 

E. Waiver of Rights to Partition: 

If permitted by the laws of the state or states in which the property covered
hereby is located, each party hereto owning an undivided interest in the Contract
Area waives any and all rights it may have to partition and have set aside to
it in severalty its undivided interest therein. 

F. No Preferential Right to Purchase: 

Any party to this agreement may sell, transfer, mortgage or donate its interest
in the Contract Area to any other party without giving prior notice to any other
party hereunder, it being understood that there shall be no preferential right
to purchase under this agreement. 

ARTICLE IX. 

CLAIMS AND LAWSUITS 

Operator hereunder is entitled on behalf of all Non-Operators to institute a lawsuit
on an alleged cause of action arising out of operations on the Contract Area,
or on an alleged cause of action involving title to any lease or oil and gas interest
subject to this agreement on behalf of the joint account of all parties hereunder
with the prior consent of a majority in interest in the Contract Area. 

If a third party damage claim, a claim involving title to any interest subject
to this agreement, or other suit is made on account of any matter arising from
operations hereunder against any party to this agreement, the claim or suit shall
be treated as a claim or suit involving the joint account. If any Non-Operator
is sued on account of any matter arising from operations hereunder over which
such party has no control because of the rights given Operator by this agreement,
such party shall immediately notify Operator, and the claim or suit shall be treated
as any other claim or suit involving the joint account. 

The prosecution or defense of lawsuits affecting the Contract Area shall be under
the exclusive control of the Operator for the joint account, who shall be responsible
for employing an attorney to represent all interest owners in the Contract Area.
Damage claims, title claims affecting all interest owners in the Contract Area,
or other suits arising out of operations on the Contract Area may be settled or
otherwise compromised during litigation by the Operator on behalf of all parties,
and all attorney fees and other expenses incurred in the prosecution or defense
of suits, together with the amount paid to discharge any final judgement, shall
be considered costs of operations and shall be charged to and paid by all parties
in proportion to their then interests in the Contract Area; provided, however,
that no lawsuit shall be settled or otherwise compromised by the Operator for
an amount in excess of Five Thousand Dollars ($5,000.00) without the prior approval
of a majority in interest of the parties then owning an interest in the Contract
Area. 

The provisions of this paragraph shall not apply in any instance where the loss
which may result from the suit is treated as an individual loss rather than a
joint loss under prior provisions of this agreement or by law, and all such suits
shall be handled by and be the sole responsibility of the party or parties concerned.

ARTICLE X. 

FORCE MAJEURE 

If any party hereto is rendered unable, in whole or in part, by force majeure
to carry out its obligations under this agreement, other than to make money payments
due hereunder, it is agreed that the obligations of such party insofar as they
are affected by such force majeure shall be suspended during the continuance of
such inability but for no longer than, the continuance of the force majeure. The
affected party shall use all reasonable diligence to remove the force majeure
situation as quickly as possible; however, such situations shall be handled within
the complete discretion of the affected party. 

As used herein, the term "force majeure" shall mean an Acts of God, strikes, riots,
epidemics, landslides, lightning, fires, washouts, floods, earthquakes, severe
storms, arrests and restraints of rules and peoples, governmental action, inaction,
delay or restraint, unavailability or difficulty in obtaining necessary materials
or equipment, and any other cause, whether of the kind specifically enumerated
above or otherwise, which is foreseeable or not reasonably within the control
of the party claiming suspension. 

ARTICLE XI. 

NOTICES 

All notices authorized or required between the parties and required by any of
the provisions of this agreement, unless otherwise specifically provided, shall
be given in writing by mail or telegram, postage or charges prepaid, and addressed
to the parties to whom the notice is given at the addresses listed on Annex "I".
The notice given under any provision hereof shall be deemed given and received
when deposited in the mail or with the telegraph company, with postage or charges
prepaid. Each party shall have the right to change its address at any time, and
from time to time, by giving written notice thereof to all other parties. 

ARTICLE XII. 

TERMS OF AGREEMENT 

This agreement shall remain in full force and effect as to the oil and gas leases
and/or oil and gas interests subject hereto for the period of time below; provided,
however, no party hereto shall ever be construed as having any right, title or
interest in or to any lease or oil and gas interest contributed by any other party
beyond the term of this agreement. 

a) So long as any of the oil and gas leases subject to this agreement remain or
are continued unreleased and in full force and effect as to any part of the Contract
Area, whether by production, extension, renewal or otherwise, or until the well
or wells situated on the Contract Area have been plugged and abandoned, whichever
event occurs last. 

b) In the event any part of the Contract Area is assigned to a third party by
a majority in interest including the Operator, this agreement shall be terminated
only insofar as it affects the assigned acreage, but shall remain effective with
respect to the balance of the Contract Area. 

It is agreed, however, that the termination of this agreement shall not relieve
any party hereto from any liability which has accrued or attached prior to the
date of such termination, and the provisions hereof relating to the charging and
payment of costs, the disposition of materials and equipment, and distribution
of proceeds shall remain in force until a final accounting is made. 

ARTICLE XIII. 

COMPLIANCE WITH LAWS AND REGULATIONS 

A. Laws, Regulations and Orders: 

This agreement shall be subject to the conservation laws of the state in which
the Contract Area is located, to the valid rules, regulations, and orders of any
duly constituted regulatory body of said state; and to all other applicable federal,
state, and local laws, ordinances, rules, regulations, and orders. 

B. Governing Law: 

This agreement and all matters pertaining hereto, including, but not limited to,
matters of performance, non-performance, breach, remedies, procedures, rights,
duties and interpretation or construction, shall be governed and determined by
the law of the State of Texas, and exclusive venue shall be Tarrant County, Texas.
All matters pertaining to title to the leasehold estate of the 

Contract Area or other matters which are considered "in rem" actions
at law, shall be governed and determined by the law of the state in which the
Contract Area is located. If the Contract Area is in two or more states, the law
of the state of Texas shall control. 

C. Regulatory Agencies: 

With respect to operations hereunder, Non-Operators agree to release Operator
from any and all losses, damages, injuries, claims and causes of action arising
out of, incident to or resulting directly or indirectly from Operator's interpretation
or application of rules, rulings, regulations or orders of the Department of Energy
or predecessor or successor agencies to the extent such interpretation or application
was made in good faith. In the event the Federal Energy Regulatory Commission
of any other governmental body having jurisdiction, or any court having jurisdiction,
shall require Operator to make any refund on monies received from the sale of
production from the Contract Area, each party hereto agrees to bear and pay his
proportionate part of any such refund, including his proportionate part of any
interest or penalty which must be paid. Payment of all sums which become due and
owing pursuant hereto shall be secured by the lien and other rights of Operator
described above. Non-Operators authorize Operator to prepare and submit such documents
as may be required to be submitted to the purchaser of any crude oil or natural
gas sold hereunder, to any state or federal regulatory agency or to any other
person or entity pursuant to the requirements of any valid regulations or rules
which may be issued by a state or regulatory agency from time to time. Each party
hereto agrees to furnish any and all certifications or other information which
is required to be furnished in a timely manner and in sufficient detail to permit
compliance. 

ARTICLE XIV. 

GENERAL PROVISIONS 

A. Binding Provisions: 

The covenants and agreements contained herein shall be binding upon and inure
to the benefit of the heirs, legal representatives, successors and assigns of
the respective parties hereto. 

B. Counterparts: 

To facilitate execution, this Operating Agreement may be executed in as many counterparts
as may be convenient or required. It shall not be necessary that the signature
and acknowledgment of, or on behalf of each party, or that the signature and acknowledgment
of all persons required to bind any party, appear on each counterpart. All counterparts
shall collectively constitute a single instrument. It shall not be necessary in
making proof of this Operating Agreement to produce or account for more than a
single counterpart containing the respective signatures and acknowledgment of,
or on behalf of, each of the parties hereto. Any signature and acknowledgment
page to any counterpart may be detached from such counterpart without impairing
the legal effect of the signatures and acknowledgments thereon and thereafter
attached to another counterpart identical thereto except having attached to it
additional signatures and acknowledgment pages. 

C. Severability of Provisions: 

If for any reason any provision or provisions hereof are determined to be invalid
or unenforceable and contrary to any existing or future law, such invalidity or
unenforceability shall not impair the operation of or affect those portions of
the agreement, which are valid. 

D. Not Entire Agreement: 

This agreement may not constitute the entire agreement among the
parties. This agreement is subject to any letter, joint venture, farm-out or other
prior or contemporaneous agreement or understanding among the parties, but after
its execution, may not be modified or amended in any manner other than as set
forth herein. 

E. Amendments: 

Unless otherwise provided herein, this agreement may be modified or amended upon
the written consent of 75% of the Drilling Parties in interest. However, any amendment
to reflect the admission of a successor Operator must be in compliance with Section
V (B) of this agreement, and such amendment must be signed by the Operator and
the successor operator. 

F. Section Titles: 

Section titles are for descriptive purposes only and shall not control or alter
the meaning of the agreement as set forth in the text. 

G. General: 

1. To the extent deemed necessary by the Operator to pay operating expenses and
make other disbursements to third parties on behalf of Non-Operators, commingling
of funds is expressly permitted pursuant to this agreement. 

2. Nothing herein contained shall in any way be construed in a manner that would
result in the creation of a fiduciary relationship or relationship of trust between
the Operator and Non-Operators. Any party making representations inconsistent
with the terms hereof is acting in express violation of the agreement. Operator
has a duty to act in good faith consistent with the standards of a reasonably
prudent operator. 

3. Non-Operator agrees and understands that Operator is not selling or leasing
any goods or services under the provisions of this Operating Agreement as contemplated
by the Deceptive Trade Practices Act of the State of Texas and it is intended
that the activities of Operator are considered as an accommodation to Non-Operator
to facilitate the payment of expenses and the collection of revenue on the Contract
Area. Accordingly, by execution hereof, the parties to this agreement expressly
waive the rights and remedies to which they are entitled under the Texas Deceptive
Trade Practices-Consumer Protection Act in connection with operations conducted
pursuant to this agreement. 

ARTICLE XV. 

OTHER PROVISIONS 

A. As to all gas production and at the election of Operator, each party agrees
to execute a division order in favor of Operator, entitling him to collect all
production revenues from the first purchaser and to remit all net proceeds thereof
to all Non-Operators. 

B. Operator is hereby authorized to enter into such oil transport agreements,
gas purchase contracts or any other such agreements that will provide for the
marketability of oil, gas and gas liquids from the Contract Area. 

C. Operator may, at its election, withhold or to direct the purchaser thereof
to withhold from any proceeds due to a Non-Operator, any sums due to Operator
from such Non-Operator as more fully provided in this agreement. 

D. Notwithstanding any of the terms and provisions hereof, if it is necessary
for Operator to 

hire or employ outside legal counsel to represent Operator before
the Railroad Commission of the State of Texas, or before any other administrative
agency, in connection with the Contract Area, all costs and expenses incurred
in such representation will be a direct charge to the joint account. 

E. It is understood and agreed by the parties that Operator shall charge to the
joint account all costs and expenses incurred by Operator for following services:
costs of outside royalty disbursement; costs for integrating gas contracts; costs
and expenses by outside vendors incurred in the preparation of all necessary FERC
filings for gas production, if any; and, any charges made by tax consultants incurred
should Operator hire such tax consultants to review and/or protest any ad-valorem
taxes rendered on the interests subject to this agreement. 

F. Each Non-Operator, by execution hereof or by execution of any other document
in which this agreement is attached as an Exhibit or Annex, irrevocably constitutes
and appoints the Operator, Rife Oil Properties, Inc., as its true and lawful Agent
and Attorney-In-Fact, for the limited purpose of executing any documents required,
authorized or deemed advisable in connection with the obligations imposed upon
it as Operator herein. 

G. Each party hereto agrees that any transfer such parties should make of any
interest such party owns in the lands and leases covered hereby shall expressly
recite and reflect that such transfer is subject to the terms of this Operating
Agreement, as may be amended, and agrees to indemnify Operator from any losses
which Operator may suffer if such party should fail to do so. 

H. Any party hereunder selling a portion of his or its interest in the leases
covered hereby shall be solely responsible for securing all assignments , transfer
orders and required recordings to the full satisfaction of the Operator and/or
the first purchaser, as the case may be, and by delivering to such party or parties
a copy of all documents duly executed and recorded where required, including a
written ratification where necessary. Any parties selling a portion of his or
its interest shall remain liable for all operating and other costs of development
incurred prior to the date of the transfer order to buyer. Further, any parties
selling a portion of his or its interest shall be secondarily liable to the Operator
and to other non-selling parties for buyer's performance of all provisions of
this agreement. Such transfer shall be consistent with the terms of this agreement
relating to the Maintenance of Uniform Interest. It is further understood that
this liability shall extend and continue for as long as the selling party retains
an interest in the lease or leases which are presently or hereafter covered by
this agreement. 

I. Notwithstanding anything herein to the contrary, if any Non-Operator neglects
or fails to pay sums due and owing Operator hereunder for a period of 60 days
after receipt of invoice therefore, Operator may notify Non-Operator of its election
to regard such Non-Operating Party as a Non-Consenting Party hereunder as to said
costs, whereupon Operator shall be liable therefore. If Non-Operator fails to
pay such amount within 10 days after receipt of such notice, then Operator's election
shall be effective, Non-Operator shall no longer owe said sum to Operator and
shall be subject to the non-consent provisions hereof the same as if such party
had elected to be a Non-Consenting Party at the inception of the operation with
Operator having all the rights of a Consenting Party, but only with respect to
the sums remaining unpaid by such Non-Operator. Provided, however, this provision
shall not be applicable to any sums owed Operator but which Non-Operator contests
in good faith. 

J. ASSIGNMENT. It is understood that Non-Operator or its assigns may assign a
part of the acreage which results in different ownerships in separate tracts out
of the acres covered by this operating agreement; provided however, such assignments
must be subject to the terms of this operating agreement by the acceptance of
such assignment by the assignee, their heirs, successors and assigns and ratify
and agree that this operating agreement is to be interpreted and construed as
a separate and independent agreement by and between operator and the owners of
such separate tract, the same as if a new and separate operating agreement was
executed covering only the separate tract out of the contract area by and between
operator and the owners of such 

separate tract. 

K. Operator may elect to execute on its own behalf and pursuant to its power of
attorney hereby granted, a recording supplement in the office of the County Clerk
where the land covered by this agreement is located to the end that there shall
be constructive notice of the provisions of this Operating Agreement placed upon
said public records. 

IN WITNESS WHEREOF, this agreement is executed this 1st day of February 2007,
in multiple counterparts, the original of which shall be maintained at the office
of the Operator. 

	
      NON-OPERATOR: 

        

    		
      OPERATOR: 

        

    
	: ReoStar Energy Corporation 

      5416 BIRCHMAN AVE 

      FORT WORTH, TX 76107 

      Fed. Tax ID: 20-8428738 

      

      

      By: ___________________________ 

      Mark Zouvas, CEO		RIFE ENERGY OPERATING, INC. 

      5416 BIRCHMAN AVE 

      FORT WORTH, TX 76107 

      

      

      

      by: ______________________ 

      Joe Bill Bennett, President 
	 	 	 

ACKNOWLEDGMENT 

STATE OF TEXAS            }

COUNTY OF TARRANT  } 

This instrument was acknowledged before me on this day of , 2007, by Joe Bill
Bennett, President of RIFE ENERGY OPERATING, INC., a Texas corporation, on behalf
of said corporation. 

_______________________________ 

Notary Public, State of Texas 

(Personalized Seal) 

ACKNOWLEDGMENT 

STATE OF TEXAS        } 

COUNTY OF DALLAS  } 

This instrument was acknowledged before me on this day of , 2007, by ___________
, (Title) of (Company Name) , a Texas corporation, on behalf of said corporation.

_______________________________ 

Notary Public, State of Texas 

(Personalized Seal)

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