Document:

Unassociated Document

    

    AMENDMENT
      NO. 1 TO

    POOLING
      AND SERVICING AGREEMENT

    

    Dated
      as
      of July 12, 2005

    

    Among

    

    FIRST
      HORIZON ASSET SECURITIES INC.

    

    Depositor

    

    

    FIRST
      HORIZON HOME LOAN CORPORATION

    

    Master
      Servicer

    

    and

    

    

    THE
      BANK
      OF NEW YORK

    

    Trustee

    

    With
      respect to that certain

    

    POOLING
      AND SERVICING AGREEMENT

    

    Dated
      as
      of June 1, 2005

    

    

    FIRST
      HORIZON ALTERNATIVE MORTGAGE SECURITIES TRUST 2005-FA5

     

    MORTGAGE
      PASS-THROUGH CERTIFICATES, SERIES 2005-FA5

    

    

     

    
      
         

      

      
        1

        
          

        

      

      
         

      

    

    THIS
      AMENDMENT NO. 1 TO POOLING AND SERVICING AGREEMENT dated as of July 12,
      2005 (this “Amendment No. 1”), is executed among FIRST HORIZON ASSET
      SECURITIES INC., a Delaware corporation, as depositor (the “Depositor”), FIRST
      HORIZON HOME LOAN CORPORATION, a Kansas corporation, as master servicer (the
      “Master Servicer”), and THE BANK OF NEW YORK, a banking corporation organized
      under the laws of the State of New York, as trustee (the “Trustee”).

     

    R E C I T A L S
      :

    

    A. The
      Depositor, the Master Servicer and the Trustee are parties to that certain
      Pooling and Servicing Agreement dated as of June 1, 2005 (the “Agreement”),
      by and among the Depositor, the Master Servicer and the Trustee.

     

    B. The
      Depositor, the Master Servicer and the Trustee desire to amend the Agreement
      to
      describe the loss allocation provisions applicable to the Class III-A-1 and
      Class III-A-2 Certificates and designate the Class III-A-1 and Class III-A-2
      Certificates as “Super Senior Certificates” and “Senior Mezzanine Certificates,”
      respectively.

     

    C. The
      amendments contemplated hereby are permitted under Section 11.1 of the
      Agreement.

     

    D. The
      Trustee has received an Opinion of Counsel from Andrews Kurth LLP in
      substantially the form attached hereto as Annex
      A,
      to the
      effect that this Amendment No. 1 will not cause the imposition of any tax on
      the
      Certificateholders or any REMIC created under the Agreement or cause any REMIC
      to fail to qualify as a REMIC at any time that any Certificates are
      outstanding.

     

    E. The
      holder of the Class III-A-1 and Class III-A-2 Certificates has executed a
      Consent of Certificateholders to Amendment No. 1 to Pooling and Servicing
      Agreement in substantially the form attached hereto as Annex
      B
      to
      consent to and adopt this Amendment No. 1.

     

    

    W I T N E S E T H T H A T 

    

    ARTICLE
      I

    

    AMENDMENT
      TO AGREEMENT

    

    

    The
      following defined terms under the Preliminary Statement of the Agreement are
      hereby amended and restated in their entirety for all purposes of the Agreement
      to read as follows:

     

    
      	
               

              Senior
                Mezzanine

              Certificates

            	
               

              The
                Class I-A-7, Class I-A-8 and Class III-A-2
                Certificates.

            
	
               

              Super
                Senior Certificates

            	
               

              The
                Class I-A-4, Class I-A-6 and Class III-A-1
                Certificates.

            

    

    

    
      
         

      

      
        2

        
          

        

      

      
         

      

    

     

    Section
      4.4(c) of the Agreement is hereby amended and restated in its entirety for
      all
      purposes of the Agreement to read as follows:

     

    
      	 	
              (c)

            	
              Commencing
                on the Cross-over Date, the applicable Non-PO Percentage of the principal
                portion of any Realized Loss for a Mortgage Pool will be allocated
                among
                the outstanding classes of Senior Certificates of the related Certificate
                Group entitled to principal distributions (other than (i) the Class
                I-A-4
                Certificates, as long as the Class I-A-8 Certificates are outstanding,
                (ii) the Class I-A-6 Certificates, as long as the Class I-A-7 Certificates
                are outstanding, (iii) the Class III-A-1 Certificates, as long as
                the
                Class III-A-2 Certificates are outstanding, (iv) the Notional Amount
                Certificates, and (v) the Class PO Certificates), pro
                rata,
                based upon their Class Certificate
                Balances.

            

    

     

    Section
      4.4(d) of the Agreement is hereby amended and restated in its entirety for
      all
      purposes of the Agreement to read as follows:

     

    
      	 	
              (d)

            	
              After
                the Cross-over Date, the principal portion of Realized Losses (other
                than
                Excess Losses) on the Mortgage Loans allocable to the Class I-A-4
                Certificates will instead be borne first by the Class I-A-8 Certificates
                until their Class Certificate Balance is reduced to zero (in addition
                to
                other Realized Losses allocated to the Class I-A-8 Certificates),
                and not
                by the Class I-A-4 Certificates, for so long as the Class Certificate
                Balance of the Class I-A-8 Certificates is greater than zero. Also,
                after
                the Cross-over Date, the principal portion of Realized Losses (other
                than
                Excess Losses) on the Mortgage Loans allocable to the Class I-A-6
                Certificates will instead be borne first by the Class I-A-7 Certificates
                until their Class Certificate Balance is reduced to zero (in addition
                to
                other Realized Losses allocated to the Class I-A-7 Certificates),
                and not
                by the Class I-A-6 Certificates, for so long as the Class Certificate
                Balance of the Class I-A-7 Certificates is greater than zero. In
                addition,
                after the Cross-over Date, the principal portion of Realized Losses
                (other
                than Excess Losses) on the Mortgage Loans allocable to the Class
                III-A-1
                Certificates will instead be borne first by the Class III-A-2 Certificates
                until their Class Certificate Balance is reduced to zero (in addition
                to
                other Realized Losses allocated to the Class III-A-2 Certificates),
                and
                not by the Class III-A-1 Certificates, for so long as the Class
                Certificate Balance of the Class III-A-2 Certificates is greater
                than
                zero.

            

    

     

    ARTICLE
      II

    

    MISCELLANEOUS

    

    SECTION
      2.1 
      Ratification. 

     

    The
      terms
      and provisions set forth in this Amendment No. 1 shall modify and supersede
      all inconsistent terms and provisions set forth in the Agreement, and, except
      as
      expressly modified and superseded by this Amendment No. 1, the terms and
      provisions of the Agreement are ratified and confirmed and shall continue in
      full force and effect. The Agreement as so modified by this Amendment No. 1
      shall be read, taken and construed as one and the same instrument. 

     

    
      
         

      

      
        3

        
          

        

      

      
         

      

    

    SECTION
      2.2 Reference
      to Agreement; Capitalized Terms. 

     

    The
      Agreement and all other agreements, documents or instruments now or hereafter
      executed and delivered pursuant to the terms hereof or pursuant to the terms
      of
      the Agreement as amended hereby, are hereby amended so that any reference in
      such agreements, documents, or instruments to the Agreement shall mean a
      reference to the Agreement as amended hereby. All other initially capitalized
      terms used and not otherwise defined herein shall have the meaning assigned
      to
      such terms in the Agreement.

     

    SECTION
      2.3 Successors
      and Assigns. 

     

    This
      Amendment No. 1 is binding upon and shall inure to the benefit of the Depositor,
      the Master Servicer and the Trustee and their respective successors and
      assigns.

     

    SECTION
      2.4 Governing
      Law. 

     

    THIS
      AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE SUBSTANTIVE
      LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED
      IN THE STATE OF NEW YORK AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES
      HERETO AND THE CERTIFICATEHOLDERS SHALL BE DETERMINED IN ACCORDANCE WITH SUCH
      LAWS.

     

    SECTION
      2.5 Counterparts.
      

     

    This
      Amendment No. 1 may be executed in one or more counterparts, each of which
      when
      so executed shall be an original, but such counterparts when taken together
      shall constitute one and the same instrument.

     

    SECTION
      2.6 Subordination of the Certificates.

     

    For
      federal income tax purposes, the subordination of the Class III-A-2 Certificates
      to the Class III-A-1 Certificates as provided in Section 4.4(d) of the
      Agreement, as hereby amended, will be treated as a limited recourse guarantee
      running from the Class III-A-2 Certificates for the benefit of the Class III-A-1
      Certificates.

     

    SECTION
      2.7 Trustee.
      

     

    The
      Trustee is entering into this Amendment No. 1 at the request and direction
      of
      the Depositor and the Master Servicer. This Amendment No. 1 is not intended
      to
      benefit or adversely affect the Trustee. The Trustee does not pass upon the
      benefit or adverse affect of this Amendment No. 1 on any other party to the
      Agreement or Certificateholders and this Amendment No. 1 is entered into by
      the
      Trustee subject to the terms of Section 11.1 of the Agreement.

     

    
      
         

      

      
        4

        
          

        

      

      
         

      

    

    SECTION
      2.8 Effective
      Date. 

     

    This
      Amendment No. 1 shall be effective as of June 30, 2005.

     

     

    IN
      WITNESS WHEREOF, the Depositor, the Trustee and the Master Servicer have caused
      their names to be signed hereto by their respective officers thereunto duly
      authorized as of the day and year first above written.

     

    FIRST
      HORIZON ASSET SECURITIES INC.,

    as
      Depositor

    

    

    By:  /s/
      Alfred Chang     

    Alfred
      Chang

    Vice
      President

    

    THE
      BANK
      OF NEW YORK,

    not
      in
      its individual capacity, but solely as Trustee

    

    

    By: /s/
      Diane Pickett    

    Diane
      Pickett,

    Vice
      President 

    

    

    FIRST
      HORIZON HOME LOAN CORPORATION,

    as
      Master
      Servicer 

    

    

    By:
       /s/
      Alfred Chang    

      
Alfred
      Chang

    Vice
      President

    

    

    

     

    
      
         

      

      
        5

        
          

        

      

      
         

        
        

      

    

    ANNEX
      A

    

    (begins
      on next page)

    

    
      
         

      

      
         

        
          

        

      

      
         

        
        

      

    

    ANNEX
      B

    

    (begins
      on next page)Exhibit 10.1

                                CREDIT AGREEMENT

                            Dated as of July 15, 2005

                                      Among

                            CRIMSON EXPLORATION INC.,

                                  as Borrower,

                     WELLS FARGO BANK, NATIONAL ASSOCIATION,
                   as Lead Arranger and Administrative Agent,

                                       and

                          THE LENDERS SIGNATORY HERETO

<PAGE>

<TABLE>
<CAPTION>

                                TABLE OF CONTENTS
                                -----------------
                                                                                                               Page
                                                                                                               ----
<S>                                                                                                              <C>
ARTICLE I                  Definitions and Accounting Matters.....................................................1
     Section 1.01          Terms Defined Above....................................................................1
     Section 1.02          Certain Defined Terms..................................................................1
     Section 1.03          Accounting Terms and Determinations...................................................19

ARTICLE II                 Commitments...........................................................................19
     Section 2.01          Loans and Letters of Credit...........................................................19
     Section 2.02          Borrowings, Continuations and Conversions, Letters of Credit..........................20
     Section 2.03          Changes of Commitments................................................................22
     Section 2.04          Fees..................................................................................22
     Section 2.05          Several Obligations...................................................................23
     Section 2.06          Notes.................................................................................23
     Section 2.07          Prepayments...........................................................................23
     Section 2.08          Borrowing Base........................................................................24
     Section 2.09          Assumption of Risks...................................................................26
     Section 2.10          Obligation to Reimburse and to Prepay.................................................27
     Section 2.11          Lending Offices.......................................................................28

ARTICLE III                Payments of Principal and Interest....................................................29
     Section 3.01          Repayment of Loans....................................................................29
     Section 3.02          Interest..............................................................................29

ARTICLE IV                 Payments; Pro Rata Treatment; Computations; Etc.......................................30
     Section 4.01          Payments..............................................................................30
     Section 4.02          Pro Rata Treatment....................................................................30
     Section 4.03          Computations..........................................................................31
     Section 4.04          Non-receipt of Funds by the Agent.....................................................31
     Section 4.05          Set-off, Sharing of Payments, Etc.....................................................31
     Section 4.06          Taxes.................................................................................32
     Section 4.07          Disposition of Proceeds...............................................................35

ARTICLE V                  Capital Adequacy and Additional Costs.................................................35
     Section 5.01          Capital Adequacy and Additional Costs.................................................35
     Section 5.02          Limitation on LIBOR Loans.............................................................37
     Section 5.03          Illegality............................................................................37
     Section 5.04          Base Rate Loans Pursuant to Sections 5.01, 5.02 and 5.03..............................37
     Section 5.05          Compensation..........................................................................38
     Section 5.06          Replacement Lenders...................................................................38

ARTICLE VI                 Conditions Precedent..................................................................39
     Section 6.01          Initial Funding.......................................................................39
     Section 6.02          Initial and Subsequent Loans and Letters of Credit....................................42
     Section 6.03          Conditions Precedent for the Benefit of Lenders.......................................42
     Section 6.04          No Waiver.............................................................................42

ARTICLE VII                Representations and Warranties........................................................43

</TABLE>

                                       2

<PAGE>

<TABLE>
<CAPTION>

                                TABLE OF CONTENTS
                                -----------------
                                   (Continued)
                                                                                                               Page
                                                                                                               ----
<S>                                                                                                              <C>
     Section 7.01          Corporate Existence...................................................................43
     Section 7.02          Financial Condition...................................................................43
     Section 7.03          Litigation and Judgments..............................................................44
     Section 7.04          No Breach.............................................................................44
     Section 7.05          Authority.............................................................................44
     Section 7.06          Approvals.............................................................................44
     Section 7.07          Use of Loans..........................................................................44
     Section 7.08          ERISA.................................................................................45
     Section 7.09          Taxes.................................................................................46
     Section 7.10          Titles, Etc...........................................................................46
     Section 7.11          No Material Misstatements.............................................................46
     Section 7.12          Investment Company Act................................................................47
     Section 7.13          Public Utility Holding Company Act....................................................47
     Section 7.14          Subsidiaries..........................................................................47
     Section 7.15          Location of Business and Offices......................................................47
     Section 7.16          Defaults..............................................................................47
     Section 7.17          Environmental Matters.................................................................47
     Section 7.18          Compliance with the Law...............................................................48
     Section 7.19          Insurance.............................................................................49
     Section 7.20          Hedging Agreements....................................................................49
     Section 7.21          Restriction on Liens..................................................................49
     Section 7.22          Material Agreements...................................................................50
     Section 7.23          Solvency..............................................................................50
     Section 7.24          Gas Imbalances........................................................................50
     Section 7.25          Madisonville and Elgin Holdings.......................................................50
     Section 7.26          Intentionally Omitted.................................................................51
     Section 7.27          Name Changes..........................................................................51
     Section 7.28          Taxpayer Identification Number........................................................51
     Section 7.29          State of Formation....................................................................51

ARTICLE VIII               Affirmative Covenants.................................................................51
     Section 8.01          Reporting Requirements................................................................51
     Section 8.02          Litigation............................................................................53
     Section 8.03          Maintenance, Etc......................................................................53
     Section 8.04          Environmental Matters.................................................................55
     Section 8.05          Further Assurances....................................................................56
     Section 8.06          Performance of Obligations............................................................56
     Section 8.07          Engineering Reports...................................................................56
     Section 8.08          Title Information and Mortgage Coverage...............................................57
     Section 8.09          Collateral............................................................................58
     Section 8.10          Cash Collateral Account Agreement.....................................................59
     Section 8.11          Mortgage Title Opinions...............................................................59
     Section 8.12          ERISA Information and Compliance......................................................59
     Section 8.13          Joinder and Guaranty Agreements.......................................................60

</TABLE>

                                       3

<PAGE>

<TABLE>
<CAPTION>

                                TABLE OF CONTENTS
                                -----------------
                                   (Continued)
                                                                                                               Page
                                                                                                               ----
<S>                                                                                                              <C>
     Section 8.14          Hedging...............................................................................60

ARTICLE IX                 Negative Covenants....................................................................60
     Section 9.01          Debt..................................................................................60
     Section 9.02          Liens.................................................................................61
     Section 9.03          Investments, Loans and Advances.......................................................62
     Section 9.04          Dividends, Distributions and Redemptions..............................................62
     Section 9.05          Sales and Leasebacks..................................................................63
     Section 9.06          Nature of Business....................................................................63
     Section 9.07          Limitation on Leases..................................................................63
     Section 9.08          Mergers, Acquisitions, Etc............................................................63
     Section 9.09          Proceeds of Notes; Letters of Credit..................................................63
     Section 9.10          ERISA Compliance......................................................................64
     Section 9.11          Sale or Discount of Receivables.......................................................65
     Section 9.12          Capital Expenditures..................................................................65
     Section 9.13          Current Ratio.........................................................................65
     Section 9.14          Tangible Net Worth....................................................................65
     Section 9.15          Interest Coverage Ratio...............................................................65
     Section 9.16          Sale of Mortgaged Properties..........................................................66
     Section 9.17          Sale of Oil and Gas Properties........................................................66
     Section 9.18          Environmental Matters.................................................................66
     Section 9.19          Transactions with Affiliates..........................................................66
     Section 9.20          Subsidiaries..........................................................................66
     Section 9.21          Negative Pledge Agreements............................................................67
     Section 9.22          Take-or-Pay or Other Prepayments......................................................67
     Section 9.23          Ownership of Subsidiaries.............................................................67
     Section 9.24          Change in Borrower's, any of its Subsidiaries' or any Guarantor's Name or
                           State of Formation....................................................................67
     Section 9.25          Intentionally Omitted.................................................................67
     Section 9.26          Intentionally Omitted.................................................................67
     Section 9.27          Deposit Account.......................................................................67
     Section 9.28          Limitation on Hedging.................................................................67

ARTICLE X                  Events of Default;  Remedies..........................................................68
     Section 10.01         Events of Default.....................................................................68
     Section 10.02         Remedies..............................................................................70

ARTICLE XI                 The Agent.............................................................................71
     Section 11.01         Appointment, Powers and Immunities....................................................71
     Section 11.02         Reliance by Agent.....................................................................71
     Section 11.03         Defaults..............................................................................72
     Section 11.04         Rights as a Lender....................................................................72
     Section 11.05         Indemnification.......................................................................72
     Section 11.06         Non-Reliance on Agent and other Lenders...............................................72

</TABLE>

                                       4

<PAGE>

<TABLE>
<CAPTION>

                                TABLE OF CONTENTS
                                -----------------
                                   (Continued)
                                                                                                               Page
                                                                                                               ----
<S>                                                                                                              <C>

     Section 11.07         Action by Agent.......................................................................73
     Section 11.08         Resignation or Removal of Agent.......................................................73

ARTICLE XII                Miscellaneous.........................................................................73
     Section 12.01         Waiver................................................................................73
     Section 12.02         Notices...............................................................................74
     Section 12.03         Payment of Expenses, Indemnities, Etc.................................................74
     Section 12.04         Amendments, Etc.......................................................................76
     Section 12.05         Successors and Assigns................................................................76
     Section 12.06         Assignments and Participations........................................................76
     Section 12.07         Invalidity............................................................................78
     Section 12.08         Counterparts..........................................................................78
     Section 12.09         References; Use of Word "Including"...................................................78
     Section 12.10         Survival..............................................................................79
     Section 12.11         Captions..............................................................................79
     Section 12.12         No Oral Agreements....................................................................79
     Section 12.13         Governing Law; Submission to Jurisdiction.............................................79
     Section 12.14         Interest..............................................................................80
     Section 12.15         Confidentiality.......................................................................81
     Section 12.16         Effectiveness.........................................................................82
     Section 12.17         Exculpation Provisions................................................................82
     Section 12.18         Arbitration...........................................................................82

</TABLE>

                                       5

<PAGE>

ANNEXES, EXHIBITS AND SCHEDULES

Annex I  - List of Percentage Shares and Maximum Credit Amounts

Exhibit A     - Form of Revolving Credit Note
Exhibit B     - Form of Borrowing, Continuation and Conversion Request
Exhibit C     - Form of Compliance Certificate
Exhibit D     - List of Security Instruments
Exhibit E     - Form of Assignment Agreement
Exhibit F     - Intentionally Deleted
Exhibit G     - Joinder Agreement
Exhibit H     - Guaranty Agreement

Schedule 7.02 - Liabilities
Schedule 7.03 - Litigation  and Judgments
Schedule 7.09 - Taxes
Schedule 7.10 - Titles, etc.
Schedule 7.14 - Subsidiaries, Partnerships, Locations, Jurisdictions, Taxpayer
                I.D. Numbers
Schedule 7.17 - Environmental Matters
Schedule 7.19 - Insurance
Schedule 7.20 - Hedging Agreements
Schedule 7.22 - Material Agreements
Schedule 7.24 - Gas Imbalances
Schedule 7.27 - Name Changes
Schedule 7.28 - Guarantors Tax I.D. Numbers and State of Formation
Schedule 9.01 - Debt
Schedule 9.02 - Liens
Schedule 9.03 - Investments, Loans and Advances

                                       6

<PAGE>

                                CREDIT AGREEMENT

          THIS  CREDIT  AGREEMENT  dated  as of July 15,  2005 is among  CRIMSON
EXPLORATION INC., a Delaware  corporation  formed under the laws of the State of
Delaware  (the  "Borrower");  each of the lenders that is a signatory  hereto or
which  becomes a signatory  hereto as provided in Section  12.06  (individually,
together with its  successors  and assigns,  a "Lender" and,  collectively,  the
"Lenders");  and WELLS  FARGO BANK,  NATIONAL  ASSOCIATION,  a national  banking
association  (in its  individual  capacity,  "Wells  Fargo"),  as Agent  for the
Lenders (in such capacity,  together with its  successors in such capacity,  the
"Agent").

                                 R E C I T A L S
                                 ---------------

     A.   The Borrower has requested that the Lenders  provide  certain loans to
and extensions of credit on behalf of the Borrower; and

     B.   The Lenders  have agreed to make such loans and  extensions  of credit
subject to the terms and conditions of this Agreement.

     C.   In  consideration  of  the  mutual  covenants  and  agreements  herein
contained  and of the loans,  extensions of credit and  commitments  hereinafter
referred to, the parties hereto agree as follows:

                                   ARTICLE I

                       DEFINITIONS AND ACCOUNTING MATTERS

     Section 1.01 Terms  Defined  Above.  As used in this  Agreement,  the terms
defined in the opening  paragraph and the Recitals above shall have the meanings
indicated therein.

     Section 1.02 Certain  Defined Terms.  As used herein,  the following  terms
shall have the  following  meanings  (all terms  defined in this Article I or in
other  provisions of this Agreement in the singular to have equivalent  meanings
when used in the plural and vice versa):

     "Active  Subsidiary" shall mean a Subsidiary of the Borrower that is not an
Inactive Subsidiary.

     "Additional  Costs"  shall have the meaning  assigned  such term in Section
5.01(c).

     "Affected Loans" shall have the meaning assigned such term in Section 5.04.

     "Affiliate" of any Person shall mean (i) any Person  directly or indirectly
controlled by, controlling or under common control with such first Person,  (ii)
any  director  or officer of such first  Person or of any Person  referred to in
clause (i) above and (iii) if any  Person in clause (i) above is an  individual,
any member of the immediate family (including  parents,  spouse and children) of
such individual and any trust whose principal  beneficiary is such individual or
one or more members of such immediate family and any Person who is controlled by

                                       7

<PAGE>

any such member or trust. For purposes of this definition, any Person which owns
directly or indirectly  10% or more of the  securities  having  ordinary  voting
power for the election of directors or other  governing body of a corporation or
10% or more of the partnership or other ownership  interests of any other Person
(other  than as a  limited  partner  of such  other  Person)  will be  deemed to
"control" (including, with its correlative meanings,  "controlled by" and "under
common control with") such corporation or other Person.

     "Agreement" shall mean this Credit Agreement,  as the same may from time to
time be amended or supplemented.

     "Aggregate  Maximum  Revolving  Credit Amounts" at any time shall equal the
sum of the Maximum Revolving Credit Amounts of the Lenders ($100,000,000.00), as
the same may be reduced pursuant to Section 2.03(b). As of the Closing Date, the
Aggregate Maximum Revolving Credit Amounts equal $100,000,000.00.

     "Aggregate Revolving Credit Commitments" at any time shall equal the amount
calculated in accordance with Section 2.03.

     "Applicable  Lending  Office" shall mean, for each Lender and for each Type
of Loan,  the lending  office of such Lender (or an  Affiliate  of such  Lender)
designated  for such Type of Loan on the  signature  pages  hereof or such other
offices of such Lender (or of an  Affiliate  of such  Lender) as such Lender may
from time to time  specify to the Agent and the  Borrower as the office by which
its Loans of such Type are to be made and maintained.

     "Applicable  Margin" shall mean the  applicable  per annum  percentage  set
forth at the  appropriate  intersection  in the table shown below,  based on the
Borrowing Base Utilization as in effect from time to time:

<TABLE>
<CAPTION>

  -----------------------------------------------------------------------------------------------------------------
<S>                                                 <C>                      <C>                    <C>
         Borrowing Base Utilization                       Applicable Margin
  ----------------------------------------- ----------------------- ---------------------- ------------------------
                                                 LIBOR Loans           Base Rate Loans        Revolving Credit
                                                                                               Commitment Fee
  ----------------------------------------- ----------------------- ---------------------- ------------------------
  Less than 50%                                     1.25%                    0%                     .375%
  ----------------------------------------- ----------------------- ---------------------- ------------------------
  Greater than or equal to 50%, but less            1.50%                   .125%                   .375%
  than 75%
  ----------------------------------------- ----------------------- ---------------------- ------------------------
  Greater than or equal to 75%, but less            1.75%                   .25%                    .375%
  than 90%
  ----------------------------------------- ----------------------- ---------------------- ------------------------
  Greater than or equal to 90%                      2.00%                   .50%                    .375%
  ----------------------------------------- ----------------------- ---------------------- ------------------------

</TABLE>

Each change in the  Applicable  Margin  resulting from a change in the Borrowing
Base Utilization  shall take effect on the day such change in the Borrowing Base
Utilization occurs.

     "Assignment" shall have the meaning assigned such term in Section 12.06(b).

     "Base Rate" shall mean,  with  respect to any Base Rate Loan,  for any day,
the higher of (i) the Federal Funds Rate for any such day plus 1/2 of 1% or (ii)
the Prime Rate for such day.  Each  change in any  interest  rate  provided  for
herein based upon the Base Rate  resulting  from a change in the Base Rate shall

                                       8

<PAGE>

take effect at the time of such change in the Base Rate.

     "Base Rate Loans"  shall mean Loans that bear  interest at rates based upon
the Base Rate.

     "Beneficiaries"  shall mean the Agent,  the Lenders,  each Issuing Bank and
each  Affiliate  of a  Lender  that is a party  to a Hedge  Agreement  with  the
Borrower.

     "Board of Directors"  means the Board of Directors of the Borrower,  or any
authorized committee of the Board of Directors.

     "Borrowing  Base"  shall  mean at any time an  amount  equal to the  amount
determined in accordance with Section 2.08.

     "Borrowing  Base  Utilization"  shall mean the sum of (i)(a) the  aggregate
outstanding  principal amount of the Loans plus (b) the aggregate face amount of
all undrawn and  uncancelled  Letters of Credit,  plus (c) the  aggregate of all
amounts  drawn  under all Letters of Credit and not yet  reimbursed,  divided by
(ii) the Borrowing Base.

     "Business  Day"  shall  mean any day other  than a day on which  commercial
banks are authorized or required to close in Houston Texas, and, where such term
is used in the  definition  of  "Quarterly  Date"  or if such day  relates  to a
borrowing  or  continuation  of, a payment  or  prepayment  of  principal  of or
interest on, or a  conversion  of or into,  or the Interest  Period for, a LIBOR
Loan  or a  notice  by the  Borrower  with  respect  to any  such  borrowing  or
continuation,  payment, prepayment, conversion or Interest Period, any day which
is also a day on which dealings in Dollar deposits are carried out in the London
interbank market.

     "Cash Collateral Account Agreement" shall mean that certain Cash Collateral
Account Agreement, if any, between the Borrower, its Subsidiaries and the Agent,
in form  and  substance  satisfactory  to the  Agent  covering  and  granting  a
perfected, first priority security interest to the Agent in the cash collateral,
and subject only to Liens or any other encumbrances satisfactory to Agent.

     "Closing Date" shall mean July 15, 2005.

     "Code" shall mean the Internal  Revenue Code of 1986,  as amended from time
to time and any successor statute.

     "Commitment"  shall mean, for any Lender,  its obligation to make Loans and
to  participate  in the Letters of Credit as provided in Section  2.01 up to the
lesser  of (i)  such  Lender's  Maximum  Revolving  Credit  Amount  and (ii) the
Lender's  Percentage  Share of the amount equal to the then effective  Borrowing
Base.

     "Consolidated  Net Income"  shall mean with respect to the Borrower and its
Consolidated  Subsidiaries,  for any period, the aggregate of the net income (or
loss) of the Borrower and its  Consolidated  Subsidiaries  after  allowances for
taxes for such period,  determined on a  consolidated  basis in accordance  with
GAAP;  provided that there shall be excluded from such net income (to the extent
otherwise  included therein) the following:  (i) the net income of any Person in
which  the  Borrower  or any  Consolidated  Subsidiary  has an  interest  (which

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<PAGE>

interest  does not cause the net income of such other Person to be  consolidated
with  the net  income  of the  Borrower  and its  Consolidated  Subsidiaries  in
accordance  with  GAAP),  except to the  extent of the  amount of  dividends  or
distributions  actually paid in such period by such other Person to the Borrower
or to a  Consolidated  Subsidiary,  as the case may be; (ii) the net income (but
not loss) of any  Consolidated  Subsidiary to the extent that the declaration or
payment of  dividends  or similar  distributions  or  transfers or loans by that
Consolidated  Subsidiary is not at the time  permitted by operation of the terms
of  its  charter  or  any  agreement,  instrument  or  Governmental  Requirement
applicable  to such  Consolidated  Subsidiary,  or is  otherwise  restricted  or
prohibited in each case determined in accordance with GAAP; (iii) the net income
(or loss) of any Person acquired in a  pooling-of-interests  transaction for any
period prior to the date of such transaction;  (iv) any  extraordinary  gains or
losses,  including  gains or losses  attributable  to Property  sales not in the
ordinary  course  of  business;  and (v) the  cumulative  effect  of a change in
accounting  principles and any gains or losses attributable to writeups or write
downs of assets.

     "Consolidated Subsidiaries" shall mean each Subsidiary of a Person (whether
now existing or hereafter created or acquired) the financial statements of which
shall be (or should have been)  consolidated  with the  financial  statements of
such Person in accordance with GAAP. Unless otherwise indicated,  each reference
to the term "Consolidated  Subsidiary" shall mean a Subsidiary consolidated with
the Borrower.

     "Continuing  Directors" means, as of any date of determination,  any member
of the board of directors of the Borrower:  (a) who was a member of the Board of
Directors on the Closing Date, (b) whose nomination for election to the Board of
Directors  was made  with the  approval  of, or whose  election  to the Board of
Directors was ratified by, at least two-thirds of the directors who were members
of the Board of  Directors  on the  Closing  Date or who were so  elected to the
Board of Directors thereafter, or (c) whose membership on the Board of Directors
was consented to by the Majority Lenders.

     "Current Assets" shall have the meaning assigned such term in Section 9.13.

     "Current  Liabilities" shall have the meaning assigned such term in Section
9.13.

     "Debt"  shall  mean,  for  any  Person  the sum of the  following  (without
duplication): (i) all obligations of such Person for borrowed money or evidenced
by bonds,  debentures,  notes or other similar instruments (including principal,
interest,  fees and  charges);  (ii) all  obligations  of such  Person  (whether
contingent or otherwise) in respect of bankers' acceptances,  letters of credit,
surety or other bonds and similar  instruments;  (iii) all  obligations  of such
Person to pay the deferred  purchase  price of Property or services  (other than
for borrowed money); (iv) all obligations under leases which shall have been, or
should have been, in accordance with GAAP, recorded as capital leases in respect
of which such Person is liable (whether contingent or otherwise);  (vi) all Debt
(as described in the other clauses of this definition) and other  obligations of
others  secured by a Lien on any asset of such Person,  whether or not such Debt
is assumed by such Person;  (vii) all Debt (as described in the other clauses of
this definition) and other obligations of others guaranteed by such Person or in
which such Person  otherwise  assures a creditor  against  loss of the debtor or
obligations of others;  (viii) all obligations or undertakings of such Person to
maintain or cause to be maintained the financial position or covenants of others
or to purchase the Debt or Property of others; (ix) obligations to deliver goods

                                       10

<PAGE>

or services including Hydrocarbons in consideration of advance payments,  except
as permitted by Section 9.22 and disclosed by Section  8.07(c);  (x) obligations
to pay for goods or services  whether or not such goods or services are actually
received or utilized by such  Person;  (xi) any capital  stock of such Person in
which such Person has a mandatory obligation to redeem such stock; and (xii) any
Debt of a Special  Entity for which such Person is liable either by agreement or
because of a Governmental  Requirement;  and (xiii) the undischarged  balance of
any production  payment created by such Person or for the creation of which such
Person  directly or indirectly  received  payment;  and (xiv) all obligations of
such Person under Hedging Agreements  excluding Hedging Agreements with Agent or
any other Lender.

     "Default"  shall mean an Event of Default or an event  which with notice or
lapse of time or both would become an Event of Default.

     "Dollars" and "$" shall mean lawful money of the United States of America.

     "EBITDAX" shall mean, for any period,  the sum of  Consolidated  Net Income
for such period plus the  following  expenses or charges to the extent  deducted
from   Consolidated  Net  Income  in  such  period:   interest,   income  taxes,
depreciation,  depletion and amortization and exploration expense; and all other
non-cash items (including hedging gains and losses under FAS 133, non-cash asset
writedowns or FAS 143 charges  and/or any non-cash  share based payment  charges
under FAS 123R).

     "Effective  Date"  shall  have the  meaning  assigned  such term in Section
12.16.

     "Elgin Holdings" shall mean Elgin Holdings,  LLC, a Texas limited liability
company and its successors and assigns.

     "Engineering  Reports" shall have the meaning assigned such term in Section
2.08.

     "Environmental  Laws"  shall  mean  any and all  Governmental  Requirements
pertaining  to  health,  safety  or the  environment  in  effect  in any and all
jurisdictions,  including  nations (and states),  and  international  waters, in
which the Borrower or any  Subsidiary is conducting or at any time has conducted
business,  or where any Property of the Borrower or any  Subsidiary  is located,
including  without  limitation,  the Oil Pollution Act of 1990, 33 U.S.C.A.  ss.
2701 et seq.  ("OPA"),  as amended,  the Clean Air Act, 42 U.S.C.A.  ss. 7401 et
seq., as amended, the Comprehensive  Environmental Response,  Compensation,  and
Liability Act of 1980  {Superfund  Amendments  and  Reauthorization  Act of 1986
("SARA")}, 42 U.S.C.A. ss. 9601 et seq. ("CERCLA"), as amended, the Coastal Zone
Management Act of 1972, 16 U.S.C.A.  ss. 1451 et seq. ("CZMA"),  as amended, the
Emergency  Planning and Community  Right-to-Know  Act of 1986,  42 U.S.C.A.  ss.
11001 et seq.  ("EPCRTKA"),  as amended,  the Endangered Species Act of 1973, 16
U.S.C.A.  ss. 1531 et seq.  ("ESA"),  as amended,  the Federal  Water  Pollution
Control Act ("FWPCA"),  as amended, the Clean Water Act, 33 U.S.C.A. ss. 1251 et
seq.  ("CWA"),  as  amended,  the  Low-Level  Radioactive  Waste  Policy Act, 42
U.S.C.A. ss. 2014 et seq.  ("LLRWPA"),  as amended, the Marine Mammal Protection
Act of 1972, 16 U.S.C.A. ss.ss. 1361-62, 1371-89, 1401-07, 1411-18, 1421-21h, et
seq. ("MMPA"), as amended, the Marine Protection,  Research, and Sanctuaries Act
of 1972 (Ocean Dumping), 33 U.S.C.A. ss. 1401 et seq. ("MPRSA"), as amended, the
Act to Prevent Pollution from Ships, 33 U.S.C.A.  ss. 1901 et seq. ("APPS"),  as
amended, the National  Environmental Policy Act of 1969, 42 U.S.C.A. ss. 4321 et
seq. ("NEPA"),  as amended,  the Noise Control Act of 1972, 42 U.S.C.A. ss. 4901
et seq. ("NCA"), as amended,  the Nonindigenous  Aquatic Nuisance Prevention and

                                       11

<PAGE>

Control Act of 1990, 16 U.S.C.A.  ss. 4701 et seq.  ("NANPCA"),  as amended, the
Occupational Safety and Health Act of 1970 ("OSHA"),  as amended,  the Pollution
Prevention Act of 1990, 42 U.S.C.A.  ss. 13101 et seq. ("PPA"), as amended,  the
Public  Health  Service Act ("PHSA")  {Safe  Drinking  Water Act  ("SDWA")},  42
U.S.C.A.  ss. 300f et seq.,  as amended,  the Shore  Protection  Act of 1988, 33
U.S.C.A.  ss. 2601 et seq.  ("SPA"),  as amended,  the Soil and Water  Resources
Conservation Act of 1977, 16 U.S.C.A.  ss. 2001 et seq.  ("SWRCA"),  as amended,
the Solid Waste Disposal Act ("SWDA") Resource  Conservation and Recovery Act of
1976 ("RCRA"),  42 U.S.C.A.  ss. 6901 et seq., as amended,  the Toxic Substances
Control Act, 15 U.S.C.A.  ss. 2601 et seq. ("TSCA"),  as amended,  the Hazardous
Materials Transportation Act, Pub.L. 93-633, 88 Stat. 2156 ("HMTA"), as amended,
the Federal  Insecticide,  Fungicide,  and Rodenticide Act, 7 U.S.C. ss. 136, et
seq.  ("FIFRA"),  as amended,  the United  States  Public  Vessel  Medical Waste
Anti-Dumping  Act of  1988,  33  U.S.C.A.  ss.  2501 et seq.  ("USPVMWADA"),  as
amended, and any corresponding  international,  national, state or local laws or
ordinances and regulations, rules, guidelines, or standards promulgated pursuant
to such laws, statutes and regulations, including specifically those relating to
hazardous wastes, hazardous substances, toxic substances,  asbestos, lead paint,
lead in  water  supply,  mold  and  biological  hazards,  radon  or  radioactive
materials,  insecticide,  herbicide,  rodenticide,  and fungicide, as such laws,
treaties,  statutes,  regulations,  rules, guidelines, and standards are amended
from time to time, and other  environmental,  health,  safety,  conservation  or
protection  laws.  The term "oil" shall have the meaning  specified  in OPA, the
terms  "hazardous  substance" and "release" (or  "threatened  release") have the
meanings  specified in CERCLA,  and the terms "solid waste" and  "disposal"  (or
"disposed") have the meanings specified in RCRA; provided,  however, that (i) in
the event either OPA,  CERCLA or RCRA is amended so as to broaden the meaning of
any term defined  thereby,  such broader  meaning shall apply  subsequent to the
effective date of such amendment and (ii) to the extent the laws of the state or
jurisdiction  in which any Property of the Borrower or any Subsidiary is located
establish a meaning for "oil," "hazardous  substance,"  "release," "solid waste"
or  "disposal"  which is broader than that  specified  in either OPA,  CERCLA or
RCRA, such broader meaning shall apply.  The term  "hazardous  substance"  shall
also include any substance,  product,  waste, or other material that any person,
their  employees  and agents,  and their  equipment  and  property may come into
contact  with or be  exposed  to,  which is or  becomes  listed,  regulated,  or
addressed  as  being  polluting,   flammable,  toxic,  corrosive  or  hazardous,
including  toxic or  hazardous  wastes or  substances,  carcinogens,  pollutants
(including,  but not limited to, any solid, liquid,  gaseous or thermal irritant
or contaminant),  smoke,  vapor, soot, fumes or smells,  mold,  fungus,  noises,
vibrations,  electromagnetic and ionizing radiation, changes in temperature, any
other sensory phenomena,  or other materials of any and all kinds and character,
whether at the Property, from a neighboring site, or along and/or across a route
to or from the Property,  which  material(s) or  substance(s),  due to quantity,
concentration, or physical, chemical, or infectious characteristic, may cause or
significantly  contribute to an increase in mortality or an increase in serious,
irreversible,  or  incapacitatingly  irreversible  illness or pose a substantial
present or potential  harm to human health or the  environment  when  improperly
used, treated, stored,  transported,  disposed of, or otherwise managed, has the
ability to cause  injury to biologic  tissue,  or  otherwise  has the ability to
cause a health threat or similarly  harmful  substance  under any  Environmental
Law, including without limitation: (i) polychlorinated biphenyls; (ii) petroleum
products;  (iii) underground  storage tanks,  whether empty, filled or partially
filled with any substance;  (iv) any radioactive  materials,  urea  formaldehyde
foam insulation,  radon;  and (v) any other chemical,  material or substance the
exposure  to which is  prohibited,  limited  or  regulated  by any  Governmental
Authority  on the basis that such  chemical,  material  or  substance  is toxic,
hazardous or harmful to human health or the environment. The presence of any one

                                       12

<PAGE>

of the following criteria establishes a substance as a hazardous  substance:  1)
ignitability  (posing fire hazard); 2) corrosivity  (ability to corrode standard
containers);  3)  reactivity  (instability  with a tendency  to explode or react
violently);  or 4) EP toxicity  (presence of certain  toxic  chemicals at levels
greater  than  specified  in RCRA  regulations).  Said  definition  of the terms
defined  herein also includes all applicable  definitions in the  regulations of
the U.S.  Environmental  Protection  Agency  and  those of any  state or  nation
(including  common  law,  whether  state,  national,  or  international)  in the
broadest sense,  including several hundred processed wastes and chemicals listed
in the US-EPA  regulations,  or which exhibit the  characteristics  of toxicity,
corrosivity,  ignitability,  and/or reactivity, as referred to above. In case of
conflict in any of the Environmental  Laws, the most stringent  definition shall
apply.

     "ERISA" shall mean the Employee  Retirement Income Security Act of 1974, as
amended from time to time and any successor statute.

     "ERISA  Affiliate"  shall  mean  each  trade or  business  (whether  or not
incorporated) which together with the Borrower or any Subsidiary would be deemed
to be a "single  employer" within the meaning of Section  4001(b)(1) of ERISA or
subsections (b), (c), (m) or (o) of Section 414 of the Code.

     "ERISA Event" shall mean (i) a "Reportable Event" described in Section 4043
of ERISA and the  regulations  issued  thereunder,  (ii) the  withdrawal  of the
Borrower,  any Subsidiary or any ERISA  Affiliate from a Plan during a plan year
in which it was a  "substantial  employer" as defined in Section  4001(a)(2)  of
ERISA,  (iii)  the  filing of a notice  of  intent  to  terminate  a Plan or the
treatment of a Plan amendment as a termination under Section 4041 of ERISA, (iv)
the  institution of proceedings to terminate a Plan by the PBGC or (v) any other
event or condition  which might  constitute  grounds under Section 4042 of ERISA
for the termination of, or the appointment of a trustee to administer, any Plan.

     "Event of  Default"  shall have the meaning  assigned  such term in Section
10.01.

     "Excepted  Liens"  shall mean:  (i) Liens for taxes,  assessments  or other
governmental  charges or levies not yet due or which are being contested in good
faith  by  appropriate   action  and  for  which  adequate  reserves  have  been
maintained;  (ii) Liens in connection with workmen's compensation,  unemployment
insurance  or  other  social  security,  old age  pension  or  public  liability
obligations  not  yet  due or  which  are  being  contested  in  good  faith  by
appropriate  action and for which  adequate  reserves  have been  maintained  in
accordance with GAAP; (iii)  operators',  vendors',  carriers',  warehousemen's,
repairmen's,  mechanics', workmen's,  materialmen's,  construction or other like
Liens arising by operation of law in the ordinary course of business or incident
to the  exploration,  development,  operation  and  maintenance  of Oil  and Gas
Properties  or  statutory  landlord's  liens,  each of  which is in  respect  of
obligations  that have not been  outstanding more than ninety (90) days or which
are being  contested  in good  faith by  appropriate  proceedings  and for which
adequate  reserves have been  maintained in accordance with GAAP; (iv) any Liens
reserved  in  leases  or  farmout  agreements  for  rent  or  royalties  and for
compliance  with the terms of the  farmout  agreements  or leases in the case of
leasehold  estates,  to the extent that any such Lien referred to in this clause
does not materially  impair the use of the Property covered by such Lien for the
purposes for which such  Property is held by the Borrower or any  Subsidiary  or
materially  impair the value of such Property subject thereto;  (v) encumbrances

                                       13

<PAGE>

(other  than to secure the payment of borrowed  money or the  deferred  purchase
price of Property or services),  easements,  restrictions,  servitudes, permits,
conditions,  covenants, exceptions or reservations in any rights of way or other
Property of the Borrower or any Subsidiary for the purpose of roads,  pipelines,
transmission lines,  transportation lines, distribution lines for the removal of
gas, oil, coal or other minerals or timber, and other like purposes,  or for the
joint or common use of real estate, rights of way, facilities and equipment, and
defects,  irregularities,  zoning  restrictions and deficiencies in title of any
rights of way or other Property which in the aggregate do not materially  impair
the use of such rights of way or other  Property  for the purposes of which such
rights of way and other  Property are held by the Borrower or any  Subsidiary or
materially  impair the value of such Property subject thereto;  (vi) deposits of
cash or securities to secure the performance of bids, trade  contracts,  leases,
statutory  obligations  and other  obligations of a like nature  incurred in the
ordinary course of business;  (vii) Liens permitted by the Security Instruments;
(viii)  preferential  rights to  purchase  and  similar  contractual  provisions
affecting  an Oil and Gas  Property;  (ix) all  lessors'  royalties,  overriding
royalties,  net  profits  interests,  carried  interests,  production  payments,
reversionary  interests and other burdens on or deductions  from the proceeds of
production  with respect to each Oil and Gas Property (in each case) that do not
operate to reduce the net revenue  interest  for such Oil and Gas  Property  (if
any) as  reflected in any Reserve  Report or increase  the working  interest for
such Oil and Gas  Property  (if any) as  reflected  in any  Mortgage  or Reserve
Report  without  a  corresponding  increase  in the  corresponding  net  revenue
interest; (x) production sales contracts;  division orders;  contracts for sale,
purchase,  or  exchange  of oil or gas;  operating  agreements;  area of  mutual
interest  agreements;  and production handling  agreements;  in each case to the
extent  the same:  (a) are  ordinary  and  customary  to the oil,  gas and other
mineral exploration,  development, processing or extraction business, (b) do not
otherwise cause any other express  representation or warranty of the Borrower in
any of the Loan Documents to be untrue, and (c) do not operate to reduce the net
revenue  interest  for such Oil and Gas  Property  (if any) as  reflected in any
Reserve Report,  or increase the working  interest for such Oil and Gas Property
(if any) as reflected in any Reserve Report without a corresponding  increase in
the  corresponding  net revenue  interest;  (xi) all defects and  irregularities
affecting an Oil and Gas Property  that do not operate to reduce the net revenue
interest  for such Oil and Gas  Property  (if any) as  reflected  in any Reserve
Report,  or increase the working interest for such Oil and Gas Property (if any)
as  reflected  in any Reserve  Report  without a  corresponding  increase in the
corresponding  net revenue interest or otherwise  interfere  materially with the
operation,  value or use of such Oil and Gas Property;  and (xii) judgment Liens
arising by operation of law or as the result of the abstracting of a judgment or
similar  action  under the laws of any  jurisdiction  and not giving  rise to an
Event of Default,  in respect of judgments that are not final and non-appealable
judgments so long as any appropriate  legal proceedings which may have been duly
initiated for the review of such judgment shall not have been finally terminated
or the period  within which such  proceedings  may be  initiated  shall not have
expired.

     "Federal  Funds Rate" shall mean,  for any day, the rate per annum (rounded
upwards, if necessary, to the nearest 1/100 of 1%) equal to the weighted average
of the  rates on  overnight  federal  funds  transactions  with a member  of the
Federal  Reserve  System  arranged  by federal  funds  brokers  on such day,  as
published  by the  Federal  Reserve  Bank of New York on the  Business  Day next
succeeding such day,  provided that (i) if the date for which such rate is to be
determined  is not a Business  Day, the Federal Funds Rate for such day shall be
such  rate  on  such  transactions  on the  next  preceding  Business  Day as so
published on the next  succeeding  Business Day, and (ii) if such rate is not so

                                       14

<PAGE>

published  for any day, the Federal Funds Rate for such day shall be the average
rate charged to the Agent on such day on such  transactions as determined by the
Agent.

     "Final Maturity Date" shall mean the earlier to occur of (i) June 30, 2008,
and (ii) the date that the Notes are prepaid in full  pursuant  to Section  2.07
and neither the Agent nor any Lender is obligated to make Revolving Credit Loans
or advance  other funds to Borrower  hereunder,  and (iii)  termination  of this
Agreement.

     "Financial  Statements" shall mean the financial statement or statements of
the  Borrower  and its  Consolidated  Subsidiaries  described  or referred to in
Section 7.02.

     "GAAP" shall mean generally  accepted  accounting  principles in the United
States of America in effect from time to time.

     "Governmental Authority" shall include the country, the state, county, city
and  political  subdivisions  in which any Person or such  Person's  Property is
located  or which  exercises  valid  jurisdiction  over any such  Person or such
Person's Property, and any court, agency, department,  commission, board, bureau
or instrumentality of any of them including monetary authorities which exercises
valid  jurisdiction  over any such  Person  or such  Person's  Property.  Unless
otherwise specified,  all references to Governmental Authority herein shall mean
a  Governmental  Authority  having  jurisdiction  over,  where  applicable,  the
Borrower,  its Subsidiaries or any of their Property or the Agent, any Lender or
any Applicable  Lending Office,  including  jurisdiction  over the Environmental
Laws.

     "Governmental  Requirement"  shall  mean any law,  treaty,  statute,  code,
ordinance, order, determination, rule, regulation, judgment, decree, injunction,
franchise, permit, certificate, license, authorization,  standard, guideline, or
other  directive or  requirement,  including  those found in common law (whether
international,  national, state, or local), whether now existing or hereafter in
effect (whether or not having the force of law), including,  without limitation,
Environmental  Laws, energy  regulations and occupational,  safety,  health, and
industrial   hygiene  standards  or  controls,   and  personnel   licensing  and
certifications,  or environmental  conditions on, under, above, around,  within,
for,  or  about  any  Person  or such  Person's  Property,  of any  Governmental
Authority.

     "Guarantor"  shall  mean,  individually  and  collectively,  each and every
Subsidiary  of Borrower and all of their  Subsidiaries  (and so on and so forth)
existing as of the date hereof;  and (iii) each and every  Subsidiary and all of
their  Subsidiaries  (and so on and so forth)  hereafter  created,  acquired  or
otherwise owned by Borrower,  and shall include,  without limitation,  SETEX Oil
and Gas  Company,  a Texas  corporation;  RigWest  Well  Service,  Inc., a Texas
corporation;  Southeast  Texas Oil & Gas Co.,  LLC,  a Texas  limited  liability
company;  GulfWest  Development  Company,  a Texas  corporation;  DutchWest  Oil
Company, a Texas  corporation;  GulfWest Oil & Gas Company, a Texas corporation;
LTW Pipeline Co., a Texas  corporation;  GulfWest Oil & Gas Company  (Louisiana)
LLC, a Louisiana  limited  liability  company;  GulfWest Texas Company,  a Texas
corporation; and S.G.C. Transmission, LLC, a Texas limited liability company.

     "Guaranty  Agreement" shall mean any agreement executed by any Guarantor in
form and  substance  satisfactory  to the  Agent  guarantying,  unconditionally,
payment of the Obligations, as the same may be amended, modified or supplemented
from time to time.

                                       15

<PAGE>

     "Hedging  Agreements"  shall mean any commodity,  interest rate or currency
swap,  cap,  floor,  collar,  forward  agreement or other exchange or protection
agreements or any option with respect to any such transaction.

     "Highest Lawful Rate" shall mean, with respect to each Lender,  the maximum
nonusurious  interest rate, if any, that at any time or from time to time may be
contracted  for,  taken,  reserved,  charged or  received on the Notes or on any
other  Obligations  under laws  applicable to such Lender which are presently in
effect or, to the extent  allowed by law, under such  applicable  laws which may
hereafter  be in effect and which allow a higher  maximum  nonusurious  interest
rate than applicable laws now allow.

     "Hydrocarbon  Interests"  shall  mean all  rights,  titles,  interests  and
estates now or  hereafter  acquired in and to oil and gas leases,  oil,  gas and
mineral  leases,  or other  liquid or gaseous  hydrocarbon  leases,  mineral fee
interests,  overriding royalty and royalty  interests,  net profit interests and
production  payment  interests,  including any reserved or residual interests of
whatever nature.

     "Hydrocarbons" shall mean oil, gas, casinghead gas, drip gasoline,  natural
gasoline, condensate,  distillate, liquid hydrocarbons, gaseous hydrocarbons and
all products refined or separated therefrom.

     "Inactive   Subsidiary"   shall  mean  GulfWest  Texas  Company,   a  Texas
corporation,  LTW Pipeline Co., a Texas  corporation,  Southeast Texas Oil & Gas
Co., LLC, a Texas limited liability  company,  and S.G.C.  Transmission,  LLC, a
Texas limited liability company,  and any other Subsidiary of the Borrower:  (i)
that has assets of less than  $1,000,000.00;  (ii) that no longer  actively does
business;  and (iii)  that has been  designated  in  writing to the Agent by the
Borrower as an Inactive  Subsidiary  and  approved in writing by the Agent as an
Inactive Subsidiary.

     "Indemnified  Parties" shall have the meaning assigned such term in Section
12.03(a)(ii).

     "Indemnity  Matters"  shall mean any and all  actions,  suits,  proceedings
(including any  investigations,  litigation or inquiries),  claims,  demands and
causes  of  action  made or  threatened  against  a Person  and,  in  connection
therewith,  all losses,  liabilities,  damages  (including,  without limitation,
consequential  damages) or  reasonable  costs and expenses of any kind or nature
whatsoever  incurred by such  Person  whether  caused by the sole or  concurrent
negligence of such Person seeking indemnification.

     "Initial  Funding"  shall mean the funding of the initial Loans or issuance
of the initial  Letters of Credit upon  satisfaction of the conditions set forth
in Sections 6.01 and 6.02.

     "Initial Reserve Report" shall mean the report of PGH Engineers,  Inc. with
respect to the Oil and Gas  Properties  of the Borrower as of January 1, 2005, a
copy of which has been delivered to the Agent.

     "Interest  Coverage Ratio" shall have the meaning  ascribed to such term in
Section 9.15.

                                       16

<PAGE>

     "Interest  Period" shall mean,  with respect to any LIBOR Loan,  the period
commencing  on the date such LIBOR  Loan is made and  ending on the  numerically
corresponding  day  in  the  first,   second,  third  or  sixth  calendar  month
thereafter,  as the  Borrower  may select as provided  in Section  2.02 (or such
longer  period as may be requested by the Borrower and agreed to by the Majority
Lenders),  except that each Interest Period which commences on the last Business
Day of a  calendar  month  (or on any  day for  which  there  is no  numerically
corresponding day in the appropriate subsequent calendar month) shall end on the
last Business Day of the appropriate subsequent calendar month.

     Notwithstanding  the  foregoing:  (i) no Interest  Period may end after the
Final  Maturity Date;  (ii) no Interest  Period for any LIBOR Loan may end after
the due date of any installment,  if any, provided for in Section 2.07(b) to the
extent  that such LIBOR  Loan would need to be prepaid  prior to the end of such
Interest  Period in order for such  installment  to be paid when due; (iii) each
Interest  Period which would  otherwise end on a day which is not a Business Day
shall end on the next  succeeding  Business  Day (or,  if such  next  succeeding
Business Day falls in the next succeeding  calendar month, on the next preceding
Business  Day);  and (iv) no Interest  Period shall have a duration of less than
one month and, if the Interest Period for any LIBOR Loans would otherwise be for
a shorter period, such Loans shall not be available hereunder.

     "Issuing Bank" shall mean Wells Fargo.

     "LC Commitment" at any time shall mean $3,000,000.00.

     "LC  Exposure"  at any time  shall  mean  the  difference  between  (i) the
aggregate face amount of all undrawn and uncancelled  Letters of Credit plus the
aggregate  of all  amounts  drawn  under  all  Letters  of  Credit  and  not yet
reimbursed,  minus (ii) the aggregate  amount of all cash  securing  outstanding
Letters of Credit pursuant to Section 2.10(b).

     "Lender  Affiliate" means, (a) with respect to any Lender, (i) an Affiliate
of such Lender or (ii) any Person that is engaged in making, purchasing, holding
or  otherwise  investing in bank loans and similar  extensions  of credit in the
ordinary course of its business and is administered or managed by a Lender or an
Affiliate of such Lender and (b) with respect to any Lender that is a fund which
invests  in bank loans and  similar  extensions  of credit,  any other fund that
invests in bank  loans and  similar  extensions  of credit and is managed by the
same  investment  advisor as such Lender or by an Affiliate  of such  investment
advisor.

     "Lender  Termination  Date" shall have the meaning assigned to such term in
Section 5.06(c).

     "Letter of Credit  Agreements"  shall mean the  written  agreements  of the
Borrower or any of its Subsidiaries with the Issuing Bank, as issuing lender for
any Letter of Credit,  executed in  connection  with the issuance by the Issuing
Bank of the  Letters of Credit,  such  agreements  to be on the  Issuing  Bank's
customary  form for letters of credit of  comparable  amount and purpose as from
time to time in effect or as otherwise agreed to by the Borrower and the Issuing
Bank.

     "Letters  in Lieu"  shall  mean each and  every  letter in lieu in form and
substance  reasonably  satisfactory  to Agent  executed  by the  Borrower or any
Subsidiary,  as applicable, to each of the purchasers of the Hydrocarbons of the
Borrower  or  any  Subsidiary  produced  from  the  Borrower's  and  any  of its
Subsidiaries' Oil and Gas Properties.

                                       17

<PAGE>

     "Letters  of Credit"  shall mean the letters of credit  issued  pursuant to
Section 2.01(b) and all reimbursement obligations pertaining to any such letters
of credit,  and  "Letter of Credit"  shall mean any one of the Letters of Credit
and the reimbursement obligations pertaining thereto.

     "Letter of Credit  Application" shall mean a letter of credit  application,
in form and substance  satisfactory to the Issuing Bank,  delivered to the Agent
requesting  the  issuance,  reissuance,  extension  or  renewal of any Letter of
Credit and containing the information set forth in Section 2.02.

     "LIBOR" shall mean, for each Interest Period for any LIBOR  borrowing,  the
rate per annum  (rounded  upwards,  if necessary,  to the nearest  1/16th of 1%)
equal to the average of the offered  quotations  appearing on Telerate Page 3750
(or if such  Telerate  Page shall not be  available,  any  successor  or similar
service as may be selected  by Agent and  Borrower)  as of 11:00 a.m.,  Houston,
Texas time (or, as soon thereafter as  practicable)  two (2) LIBOR Business Days
prior to the first day of such Interest  Period for deposits in Dollars having a
term  comparable  to such  Interest  Period and in an amount  comparable  to the
principal  amount of the LIBOR  borrowing to which such Interest Period relates.
If none of such  Telerate  Page 3750 nor any  successor  or  similar  service is
available,  then "LIBOR" shall mean, with respect to any Interest Period for any
applicable LIBOR borrowing,  the rate of interest per annum, rounded upwards, if
necessary, to the nearest 1/16th of 1%, quoted by Agent at or before 11:00 a.m.,
Houston,  Texas time (or,  as soon  thereafter  as  practicable),  two (2) LIBOR
Business Days before the first day of such Interest Period, to be the arithmetic
average of the prevailing  rates per annum at the time of  determination  and in
accordance  with the then existing  practice in the applicable  market,  for the
offering  to  Agent by one or more  prime  banks  selected  by Agent in its sole
discretion,  in the London interbank market, of deposits in Dollars for delivery
on the first day of such  Interest  Period and  having a  maturity  equal (or as
nearly equal as may be) to the length of such  Interest  Period and in an amount
equal  (or as  nearly  equal as may be) to the  LIBOR  borrowing  to which  such
Interest  Period  relates.  Each  determination  by  Agent  of  LIBOR  shall  be
conclusive and binding,  absent  manifest  error,  and may be computed using any
reasonable averaging and attribution method.

     "LIBOR Loans" shall mean Loans the interest  rates on which are  determined
on the basis of rates referred to in the definition of "LIBOR Rate".

     "LIBOR  Rate" shall mean,  with respect to any LIBOR Loan, a rate per annum
(rounded  upwards,  if necessary,  to the nearest 1/16 of 1%)  determined by the
Agent to be equal to the  quotient  of (i) LIBOR for such Loan for the  Interest
Period for such Loan  divided by (ii) 1 minus the Reserve  Requirement  for such
Loan for such Interest Period.

     "Lien" shall mean any interest in Property  securing an obligation owed to,
or a claim by, a Person  other  than the  owner of the  Property,  whether  such
interest  is based on the common law,  statute or  contract,  and  whether  such
obligation or claim is fixed or contingent, and including but not limited to (i)
the lien or security  interest  arising  from a mortgage,  encumbrance,  pledge,
security agreement, conditional sale or trust receipt or a lease, consignment or
bailment for security purposes or (ii) production  payments and the like payable
out of Oil and Gas  Properties.  The term  "Lien"  shall  include  reservations,
exceptions,  encroachments,  easements,  rights of way,  covenants,  conditions,
restrictions,  leases and other  title  exceptions  and  encumbrances  affecting

                                       18

<PAGE>

Property.  For the purposes of this  Agreement,  the Borrower or any  Subsidiary
shall be deemed to be the owner of any  Property  which it has acquired or holds
subject to a conditional  sale  agreement,  or leases under a financing lease or
other  arrangement  pursuant to which title to the Property has been retained by
or vested in some other Person in a transaction intended to create a financing.

     "Loan  Documents"  shall mean this  Agreement,  the Notes,  all  Letters of
Credit, all Letter of Credit Agreements, all Letter of Credit Applications,  and
the Security Instruments.

     "Loans" shall mean the loans as provided for by Section 2.01.

     "Lockbox "shall mean the lockbox, if any,  established pursuant to the Cash
Collateral Account Agreement and subject to the Lockbox Agreement.

     "Lockbox  Agreement"  shall mean that certain  Lockbox  Agreement,  if any,
between the  Borrower,  its  Subsidiaries,  and the Agent in form and  substance
satisfactory  to Agent  which shall  grant a security  interest in the  contents
therein  and  shall  include  a  financing   statement  in  form  and  substance
satisfactory to Agent covering the contents therein.

     "Madisonville "shall mean The Madisonville  Project,  Ltd., a Texas limited
partnership and its successors and assigns.

     "Majority  Lenders" shall mean, at any time while no Loans are outstanding,
Lenders  having at least  sixty-six  and  two-thirds  percent  (66-2/3%)  of the
Aggregate  Revolving  Credit  Commitments  and,  at any  time  while  Loans  are
outstanding, Lenders holding at least sixty-six and two-thirds percent (66-2/3%)
of the outstanding  aggregate  principal  amount of the Loans (without regard to
any sale by a Lender of a  participation  in any Loan under  Section  12.06(c));
provided,  however,  Agent alone,  shall  constitute the Majority Lenders at any
time  that  Agent  is the sole  Lender  hereunder  and if there  are two or more
Lenders,  it shall take at least two Lenders  including  the Agent to constitute
the "Majority Lenders."

     "Material  Adverse  Effect" shall mean any set of  circumstances  or events
that (i) has or could  reasonably  be expected to have any  material and adverse
effect  whatsoever  upon,  or result in or reasonably be expected to result in a
material adverse change in, (a) the assets,  liabilities,  financial  condition,
business,  operations or affairs of the Borrower and its Subsidiaries taken as a
whole  different  from those  reflected in the Financial  Statements or from the
facts  represented or warranted in any Loan Document,  or (b) the ability of the
Borrower and its Subsidiaries taken as a whole to carry out their business as at
the Closing  Date or as proposed as of the Closing  Date to be conducted or meet
their  obligations  under the Loan  Documents  on a timely  basis,  (ii) impairs
materially or could be reasonably  expected to impair  materially the ability of
the Borrower and its  Subsidiaries  to duly and punctually pay and perform their
obligations  under  the Loan  Documents  or (iii)  impairs  materially  or could
reasonably be expected to impair  materially  the ability of the Agent or any of
the Lenders, to the extent permitted,  to enforce its legal remedies pursuant to
the Loan Documents.

     "Material Agreements" shall mean all agreements listed on Schedule 7.22.

     "Maximum Revolving Credit Amount" shall mean, as to each Lender, the amount
set forth  opposite  such  Lender's  name on Annex I under the caption  "Maximum

                                       19

<PAGE>

Revolving  Credit  Amounts"  (as the same may be  reduced  pursuant  to  Section
2.03(b) pro rata to each Lender based on its Percentage Share), as modified from
time to time to reflect any assignments permitted by Section 12.06(b).

     "Mortgage" shall mean,  whether one or more, each Mortgage,  Deed of Trust,
Assignment  of  Production,  Security  Agreement,  Fixture  Filing and Financing
Statement executed by the Borrower and each Guarantor, dated effective as of the
date of this Agreement,  and granting a Lien in favor of the Agent to secure the
Obligations in the Oil and Gas Properties,  now owned or hereafter existing,  of
the  Borrower  and  the  Guarantors,  as  from  time  to  time  may be  amended,
supplemented, restated or otherwise modified.

     "Mortgaged  Property"  shall mean the Property owned by the Borrower and/or
the Guarantors and which is subject to the Liens existing and to exist under the
terms of the Security Instruments and/or Mortgages.

     "Multiemployer  Plan" shall mean a Plan defined as such in Section 3(37) or
4001(a)(3) of ERISA.

     "Notes" shall mean the Notes  provided for by Section  2.06,  together with
any and all  renewals,  extensions  for any period,  increases,  rearrangements,
modifications,  consolidations,  substitutions, amendments, and/or modifications
thereof.

     "Notice  of  Termination"  shall  have the  meaning  assigned  such term in
Section 5.06(a).

     "Obligations"  shall mean all indebtedness,  obligations and liabilities of
the  Borrower  or any  Subsidiary  to any of the  Lenders,  any of the  Lenders'
Affiliates,  the Agent,  or the  Issuing  Bank,  individually  or  collectively,
existing  on the  date  of this  Agreement  or  arising  thereafter,  direct  or
indirect,  joint or  several,  absolute  or  contingent,  matured or  unmatured,
liquidated or unliquidated,  secured or unsecured, arising or incurred under any
Hedging Agreement, under this Agreement or any of the other Loan Documents or in
respect of any of the Loans made or reimbursement obligations incurred or any of
the Notes,  Letters of Credit or other  instruments  at any time  evidencing any
thereof,  including interest accruing  subsequent to the filing of a petition or
other action concerning  bankruptcy or other similar proceedings,  overdrafts to
the Agent or ACH  obligations to the Agent,  or any other  obligations  incurred
under  this  Agreement  or any of the  Security  Instruments  and all  renewals,
extensions, refinancings and replacements for the foregoing.

     "Oil and Gas Properties" shall mean Hydrocarbon  Interests;  the Properties
now or hereafter  pooled or unitized with Hydrocarbon  Interests;  all presently
existing or future  unitization,  pooling  agreements and declarations of pooled
units and the units created  thereby  (including  without  limitation  all units
created under orders, regulations and rules of any Governmental Authority) which
may  affect all or any  portion  of the  Hydrocarbon  Interests;  all  operating
agreements,   contracts  and  other  agreements  which  relate  to  any  of  the
Hydrocarbon Interests or the production,  sale, purchase, exchange or processing
of  Hydrocarbons  from  or  attributable  to  such  Hydrocarbon  Interests;  all
Hydrocarbons in and under and which may be produced and saved or attributable to
the Hydrocarbon Interests, including all oil in tanks, the lands covered thereby
and all rents, issues, profits, proceeds,  products,  revenues and other incomes
from or attributable to the Hydrocarbon Interests; all tenements, hereditaments,
appurtenances and Properties in any manner appertaining,  belonging,  affixed or

                                       20

<PAGE>

incidental to the Hydrocarbon  Interests;  and all Properties,  rights,  titles,
interests  and estates  described  or referred to above,  including  any and all
Property, real or personal, now owned or hereinafter acquired and situated upon,
used,  held for use or useful  in  connection  with the  operating,  working  or
development of any of such Hydrocarbon Interests or Property (excluding drilling
rigs,  automotive  equipment  or other  personal  property  which may be on such
premises for the purpose of drilling a well or for other similar temporary uses)
and including any and all oil wells,  gas wells,  injection wells or other wells
(including those used for either  environmental  sampling or remedial purposes),
buildings,   structures,  fuel  separators,   liquid  extraction  plants,  plant
compressors,  pumps,  pumping units,  field  gathering  systems,  tanks and tank
batteries,  fixtures,  valves, fittings,  machinery and parts, engines, boilers,
meters,  apparatus,  equipment,  appliances,  tools, implements,  cables, wires,
towers,  casing, tubing and rods, surface leases,  rights-of-way,  easements and
servitudes together with all additions, substitutions,  replacements, accessions
and attachments to any and all of the foregoing.

     "OPA" shall mean the Oil Pollution Act which can be found at 33 U.S.C.  ss.
27.01 et seq.

     "Other Taxes" shall have the meaning assigned such term in Section 4.06(b).

     "PBGC" shall mean the Pension  Benefit  Guaranty  Corporation or any entity
succeeding to any or all of its functions.

     "Percentage  Share" shall mean (with respect to any Lender) the  percentage
of the  Aggregate  Revolving  Credit  Commitments  to be provided by such Lender
under this  Agreement as indicated on Annex I hereto,  as modified  from time to
time to reflect any assignments permitted by Section 12.06(b).

     "Person"  shall  mean  any  individual,   corporation,  company,  voluntary
association,  partnership,  joint venture, trust, unincorporated organization or
government or any agency,  instrumentality or political  subdivision thereof, or
any other form of entity.

     "Plan" shall mean any employee  pension benefit plan, as defined in Section
3(2) of ERISA,  which (i) is  currently or hereafter  sponsored,  maintained  or
contributed to by the Borrower, any Subsidiary or an ERISA Affiliate or (ii) was
at any time during the preceding  six calendar  years  sponsored,  maintained or
contributed to, by the Borrower, any Subsidiary or an ERISA Affiliate.

     "Post-Default  Rate" shall mean, in respect of any principal of any Loan or
any other amount  payable by the Borrower under this Agreement or any other Loan
Document,  a rate  per  annum  during  the  period  commencing  on the  date  of
occurrence  of an Event of  Default  until  such  amount  is paid in full or all
Events of Default are cured or waived  equal to two percent (2%) per annum above
the Base Rate as in effect  from time to time  plus the  Applicable  Margin  (if
any), but in no event to exceed the Highest Lawful Rate; provided,  however, for
a LIBOR  Loan,  the  "Post-Default  Rate" for such  principal  shall be, for the
period commencing on the date of occurrence of an Event of Default and ending on
the earlier to occur of the last day of the Interest Period therefor or the date
all Events of Default are cured or waived,  two percent (2%) per annum above the
interest rate for such Loan as provided in Section 3.02(a)(ii),  but in no event
to exceed the Highest Lawful Rate.

                                       21

<PAGE>

     "Prime Rate" shall mean the  variable per annum rate of interest  then most
recently  announced within Wells Fargo at its principal office in San Francisco,
California,  as its "prime  rate",  with the  understanding  that Wells  Fargo's
"prime  rate" is one of its base  rates  and  serves  as the  basis  upon  which
effective  rates of interest are  calculated  for those loans  making  reference
thereto,  and is evidenced by the recording  thereof after its  announcement  in
such internal  publication or  publications  as Wells Fargo may designate.  Each
change in any  interest  rate  provided  for  herein  based  upon the Prime Rate
resulting  from a change  in the Prime  Rate  shall  take  effect on the day the
change is announced  within Wells Fargo for all Prime  Rate-based  loans without
notice to the Borrower at the time of such change in the Prime Rate.

     "Principal Office" shall mean the principal office of the Agent,  presently
located at 1000 Louisiana, Ninth Floor, Houston, Texas, 77002.

     "Property" or "Properties"  shall mean any interest in any kind of property
or asset, whether real, personal or mixed, or tangible or intangible.

     "Quarterly  Dates"  shall  mean  the  last  day of  each  June,  September,
December,  and March,  in each year,  the first of which shall be September  30,
2005;  provided,  however,  that if any such  day is not a  Business  Day,  such
Quarterly Date shall be the next succeeding Business Day.

     "Redetermination  Date" shall mean the date that the redetermined Borrowing
Base becomes effective subject to the notice  requirements  specified in Section
2.08(e) both for scheduled redeterminations and unscheduled redeterminations.

     "Regulation  D" shall mean  Regulation  D of the Board of  Governors of the
Federal  Reserve  System  (or any  successor),  as the  same may be  amended  or
supplemented from time to time.

     "Regulatory  Change"  shall mean,  with  respect to any Lender,  any change
after the Closing Date in any Governmental  Requirement (including Regulation D)
or the adoption or making after such date of any interpretations,  directives or
requests applying to a class of lenders (including such Lender or its Applicable
Lending Office) of or under any Governmental  Requirement (whether or not having
the force of law) by any Governmental  Authority charged with the interpretation
or administration thereof.

     "Reliance  Letters"  shall  mean  letters  satisfactory  to the  Agent  and
addressed  to  the  Agent  from  the  title  attorneys  who  are  not  providing
supplemental  title  opinions  which  allow  the  Agent to rely on  their  prior
opinions in extending credit to the Borrower and/or its Subsidiaries.

     "Replacement  Lenders"  shall  have the  meaning  assigned  to such term in
Section 5.06(b).

     "Required  Payment"  shall have the meaning  assigned  such term in Section
4.04.

     "Reserve Report" shall mean a report, in form and substance satisfactory to
the Agent,  setting  forth,  as of each January 1 and September 1 (or such other
date  in the  event  of an  unscheduled  redetermination);  (i)  the oil and gas
reserves attributable to the Borrower's and its Active Subsidiaries' Oil and Gas
Properties  together with a projection of the rate of production  and future net
income, taxes,  operating expenses and capital expenditures with respect thereto

                                       22

<PAGE>

as of such date, based upon the pricing  assumptions  determined by Agent at the
time and (ii) such other  information as the Agent may reasonably  request.  The
term "Reserve  Report" shall also include the  information to be provided by the
Borrower pursuant to Section 8.07(a).

     "Reserve  Requirement"  shall mean,  for any Interest  Period for any LIBOR
Loan,  the average  maximum  rate at which  reserves  (including  any  marginal,
supplemental  or emergency  reserves) are required to be maintained  during such
Interest Period under Regulation D by member banks of the Federal Reserve System
in  New  York  City  with  deposits   exceeding  one  billion   Dollars  against
"Eurocurrency  liabilities"  (as such  term is used in  Regulation  D).  Without
limiting the effect of the foregoing,  the Reserve Requirement shall reflect any
other  reserves  required to be maintained by such member banks by reason of any
Regulatory  Change  against  (i) any  category  of  liabilities  which  includes
deposits  by  reference  to which LIBOR is to be  determined  as provided in the
definition  of "LIBOR" or (ii) any  category  of  extensions  of credit or other
assets which include a LIBOR Loan.

     "Responsible  Officer"  shall mean, as to any Person,  the Chief  Executive
Officer, the President or any Vice President of such Person and, with respect to
financial  matters,  the term  "Responsible  Officer"  shall  include  the Chief
Financial Officer of such Person. Unless otherwise specified,  all references to
a Responsible Officer herein shall mean a Responsible Officer of the Borrower.

     "Revolving Credit Commitment" shall mean, for any Lender, its obligation to
make Loans and  participate  in the issuance of Letters of Credit as provided in
Section  2.01 up to the lesser of (i) such  Lender's  Maximum  Revolving  Credit
Amount and (ii) such Lender's  Percentage Share of the then effective  Borrowing
Base.

     "Revolving Credit Loans" shall mean Loans made pursuant to Section 2.01(a).

     "Revolving  Credit Notes" shall mean the promissory  note or notes (whether
one or more) of the Borrower  described in Section 2.06 and being in the form of
Exhibit A.

     "Revolving  Credit  Period"  shall mean the period from the Closing Date to
and ending on the Revolving Credit Termination Date.

     "Revolving Credit  Termination Date" shall mean the earlier to occur of (i)
June 30,  2008 or (ii)  the date  that the  Commitments  are  sooner  terminated
pursuant to Sections 2.03(b) or 10.02.

     "Scheduled  Redetermination Date" shall have the meaning assigned such term
in Section 2.08(d).

     "SEC" shall mean the  Securities  and Exchange  Commission or any successor
Governmental Authority.

     "Security  Instruments"  shall mean the  Letters  of Credit,  the Letter of
Credit  Agreements,  the agreements or  instruments  described or referred to in
Exhibit D, and any and all other  agreements  or  instruments  now or  hereafter
executed  and  delivered  by  the  Borrower  or any  other  Person  (other  than
participation or similar  agreements  between any Lender and any other lender or
creditor  with  respect  to any  Obligations  pursuant  to  this  Agreement)  in

                                       23

<PAGE>

connection with, or as security for the payment or performance of, the Notes, or
this Agreement,  or reimbursement  obligations  under the Letters of Credit,  as
such agreements may be amended, supplemented or restated from time to time.

     "Special Entity" shall mean any joint venture, limited liability company or
partnership,  general or limited partnership or any other type of partnership or
company other than a  corporation  in which a Person or one or more of its other
Subsidiaries is a member, owner, partner or joint venturer and owns, directly or
indirectly,  at least a majority of the equity of such  entity or controls  such
entity,   but  excluding  any  tax  partnerships  that  are  not  classified  as
partnerships under state law. For purposes of this definition,  any Person which
owns directly or indirectly an equity  investment in another Person which allows
the first Person to manage or elect managers who manage the normal activities of
such second Person will be deemed to "control"  such second Person (e.g., a sole
general partner controls a limited partnership).

     "Subsidiary"  shall mean (i) any corporation or other legally formed entity
of  which  at  least a  majority  of the  outstanding  shares  of stock or other
ownership  interest having by the terms thereof ordinary voting power to elect a
majority  of the  board of  directors  or other  governing  body of such  entity
(irrespective  of  whether  or not at the  time  stock  or any  other  ownership
interest of any other  class or classes of such entity  shall have or might have
voting  power by  reason of the  happening  of any  contingency)  is at the time
directly or indirectly  owned or controlled by another  Person or one or more of
such Person's Subsidiaries or by such Person and one or more of its Subsidiaries
and (ii) any Special Entity.  Unless otherwise  indicated herein, each reference
to the term "Subsidiary" shall mean a Subsidiary of the Borrower.

     "Tangible Net Worth" shall mean,  as at any date,  the sum of the following
for  the  Borrower  and  its  Consolidated   Subsidiaries   determined  (without
duplication) in accordance with GAAP:

     (i)  the amount of preferred  stock and common stock at par plus the amount
of additional paid in capital of the Borrower, plus

     (ii) the retained  earnings (or, in the case of retained  earnings deficit,
minus the amount of such deficit), minus

     (iii) the sum of the following:  cost of treasury shares and the book value
of all assets of the Borrower and its Consolidated  Subsidiaries which should be
classified as intangibles (without duplication of deductions in respect of items
already  deducted  in  arriving  at  additional  paid in  capital  and  retained
earnings)  but in  any  event  including  as  such  intangibles  the  following:
goodwill,  research and development costs, trademarks,  trade names, copyrights,
patents and franchises,  unamortized debt discount and expense, all reserves and
any writeup in the book value of assets resulting from a revaluation  thereof or
resulting from any changes in GAAP subsequent to December 31, 2004, minus

     (iv) any  obligations  due from owners,  employees,  and/or  Affiliates  of
Borrower, any Subsidiary, or any Guarantor.

     "Taxes" shall have the meaning assigned such term in Section 4.06(a).

     "Terminated  Lender"  shall have the meaning  assigned such term in Section
5.06(a).

                                       24

<PAGE>

     "Type"  shall mean,  with  respect to any Loan, a Base Rate Loan or a LIBOR
Loan.

     "Wells Fargo" shall mean Wells Fargo Bank, National Association, a national
banking association.

     Section  1.03  Accounting  Terms  and   Determinations.   Unless  otherwise
specified  herein,  all accounting  terms used herein shall be interpreted,  all
determinations  with respect to accounting  matters hereunder shall be made, and
all financial  statements and certificates  and reports as to financial  matters
required  to be  furnished  to the  Agent  or the  Lenders  hereunder  shall  be
prepared,  in  accordance  with  GAAP,  applied on a basis  consistent  with the
audited financial statements of the Borrower referred to in Section 7.02 (except
for changes concurred with by the Borrower's independent public accountants).

                                   ARTICLE II

                                   COMMITMENTS

     Section 2.01   Loans and Letters of Credit.
                    ----------------------------

          (a)  Revolving  Credit Loans.  Each Lender  severally  agrees,  on the
     terms and  conditions  of this  Agreement,  to make  loans to the  Borrower
     during the period  from and  including  (i) the  Closing  Date or (ii) such
     later date that such Lender  becomes a party to this  Agreement as provided
     in Section  12.06(b),  to and up to, but  excluding,  the Revolving  Credit
     Termination  Date  in  an  aggregate  principal  amount  at  any  one  time
     outstanding up to, but not exceeding, the amount of such Lender's Revolving
     Credit Commitment as then in effect; provided,  however, that the aggregate
     principal amount of all such Loans by all Lenders hereunder at any one time
     outstanding  together  with the LC Exposure  shall not exceed the Aggregate
     Revolving  Credit  Commitments.  Subject  to the  terms of this  Agreement,
     during the period from the Closing  Date to and up to, but  excluding,  the
     Revolving  Credit  Termination  Date,  the Borrower  may borrow,  repay and
     reborrow the amount described in this Section 2.01(a).

          (b)  Letters of  Credit.  During the  period  from and  including  the
     Closing Date to, but excluding,  the Final Maturity Date, the Issuing Bank,
     as issuing bank for the Lenders, agrees to extend credit for the account of
     the Borrower or any Active  Subsidiary at any time and from time to time by
     issuing,  renewing,  extending  or reissuing  Letters of Credit;  provided,
     however,  the LC Exposure at any one time outstanding  shall not exceed the
     lesser of (i) the LC  Commitment  or (ii) the  Aggregate  Revolving  Credit
     Commitments, as then in effect, minus the aggregate principal amount of all
     Loans then  outstanding.  The Lenders shall  participate in such Letters of
     Credit according to their respective Percentage Shares. Each of the Letters
     of Credit shall (i) be issued by the Issuing Bank,  (ii) contain such terms
     and provisions as are reasonably required by the Issuing Bank, (iii) be for
     the  account of the  Borrower or an Active  Subsidiary  and (iv) expire not
     later than ten (10) days before the Revolving Credit Termination Date.

          (c)  Limitation  on Types of Loans.  Subject  to the  other  terms and
     provisions of this Agreement,  at the option of the Borrower, the Loans may
     be Base Rate Loans or LIBOR Loans; provided that, without the prior written
     consent of the  Majority  Lenders,  no more than six (6) LIBOR Loans may be
     outstanding at any time.

                                       25

<PAGE>

     Section 2.02  Borrowings, Continuations and Conversions, Letters of Credit.
                   -------------------------------------------------------------

          (a)  Borrowings.  The  Borrower  shall  give the  Agent  (which  shall
     promptly notify the Lenders) advance notice as hereinafter provided of each
     borrowing  hereunder,  which shall specify (i) the aggregate amount of such
     borrowing, (ii) the Type and (iii) the date (which shall be a Business Day)
     of the  Loans to be  borrowed,  and (iv) (in the case of LIBOR  Loans)  the
     duration of the Interest Period therefor.

          (b)  Minimum  Amounts.  All  Base  Rate  Loan  borrowings  shall be in
     amounts of at least  $200,000.00 or the remaining  balance of the Aggregate
     Revolving Credit Commitments, if less, or any whole multiple of $100,000.00
     in excess  thereof,  and all LIBOR  Loans  shall be in  amounts of at least
     $2,000,000.00 or any whole multiple of $1,000,000.00 in excess thereof.

          (c)  Notices.  All borrowings,  continuations  and  conversions  shall
     require  advance  written notice to the Agent (which shall promptly  notify
     the  Lenders)  in the form of  Exhibit  B (or  telephonic  notice  promptly
     confirmed  by  such  a  written  notice),  which  in  each  case  shall  be
     irrevocable,  from the  Borrower to be received by the Agent not later than
     11:00 a.m., Houston, Texas time at least one Business Day prior to the date
     of each Base Rate Loan  borrowing and three Business Days prior to the date
     of each LIBOR Loan borrowing,  continuation  or conversion.  Without in any
     way limiting the Borrower's obligation to confirm in writing any telephonic
     notice,  the Agent may act without  liability  upon the basis of telephonic
     notice believed by the Agent in good faith to be from the Borrower prior to
     receipt of written  confirmation.  In each such case,  the Borrower  hereby
     waives  the  right to  dispute  the  Agent's  record  of the  terms of such
     telephonic  notice  except  in the  case of  gross  negligence  or  willful
     misconduct by the Agent.

          (d)  Continuation  Options.  Subject  to the  provisions  made in this
     Section 2.02(d),  the Borrower may elect to continue all or any part of any
     LIBOR Loan  beyond  the  expiration  of the then  current  Interest  Period
     relating thereto by giving advance notice as provided in Section 2.02(c) to
     the Agent  (which  shall  promptly  notify the  Lenders) of such  election,
     specifying the amount of such Loan to be continued and the Interest  Period
     therefor. In the absence of such a timely and proper election, the Borrower
     shall be deemed to have  elected to convert  such LIBOR Loan to a Base Rate
     Loan pursuant to Section 2.02(e).  All or any part of any LIBOR Loan may be
     continued as provided  herein,  provided that (i) any  continuation  of any
     such Loan shall be (as to each Loan as continued for an applicable Interest
     Period) in  amounts  of at least  $2,000,000.00  or any whole  multiple  of
     $1,000,000.00 in excess thereof and (ii) no Default shall have occurred and
     be  continuing.  If a Default shall have occurred and be  continuing,  each
     LIBOR  Loan shall be  converted  to a Base Rate Loan on the last day of the
     Interest Period applicable thereto.

          (e)  Conversion Options.  The Borrower may elect to convert all or any
     part of any LIBOR Loan on the last day of the then current  Interest Period
     relating  thereto to a Base Rate Loan by giving advance notice to the Agent

                                       26

<PAGE>

     (which shall promptly notify the Lenders) of such election.  Subject to the
     provisions made in this Section 2.02(e),  the Borrower may elect to convert
     all or any part of any Base  Rate Loan at any time and from time to time to
     a LIBOR Loan by giving advance notice as provided in Section 2.02(c) to the
     Agent (which shall promptly  notify the Lenders) of such  election.  All or
     any part of any  outstanding  Loan may be  converted  as  provided  herein,
     provided  that (i) any  conversion  of any Base Rate Loan into a LIBOR Loan
     shall be (as to each such  Loan into  which  there is a  conversion  for an
     applicable  Interest  Period) in amounts of at least  $2,000,000.00  or any
     whole multiple of $1,000,000.00 in excess thereof and (ii) no Default shall
     have  occurred and be  continuing.  If a Default shall have occurred and be
     continuing, no Base Rate Loan may be converted into a LIBOR Loan.

          (f)  Advances.  Not later than 11:00 a.m., Houston,  Texas time on the
     date  specified  for each  borrowing  hereunder,  each  Lender  shall  make
     available  the  amount  of the  Loan to be  made by it on such  date to the
     Agent,  to an  account  which  the  Agent  shall  specify,  in  immediately
     available funds,  for the account of the Borrower.  The amounts so received
     by the Agent shall,  subject to the terms and conditions of this Agreement,
     be made  available to the Borrower by depositing  the same, in  immediately
     available funds, in an account of the Borrower,  designated by the Borrower
     and maintained at the Principal Office.

          (g)  Letters of Credit.  The  Borrower  shall  give the  Issuing  Bank
     (which  shall  promptly  notify  the  Lenders  of such  request  and  their
     Percentage Share of such Letter of Credit),  a Letter of Credit Application
     to be  received by the  Issuing  Bank not later than 11:00  a.m.,  Houston,
     Texas time not less than  three (3)  Business  Days  prior  thereto of each
     request for the  issuance,  and at least thirty (30) Business Days prior to
     the date of the renewal or extension, of a Letter of Credit hereunder which
     request  shall  specify (i) the amount of such  Letter of Credit,  (ii) the
     date (which shall be a Business Day) such Letter of Credit is to be issued,
     renewed or extended,  (iii) the duration thereof, (iv) the name and address
     of the beneficiary  thereof,  (v) the form and type of the Letter of Credit
     and (vi) such other information as the Issuing Bank may reasonably request,
     all of which shall be reasonably  satisfactory to the Issuing Bank. Subject
     to the terms and  conditions of this  Agreement,  on the date specified for
     the issuance,  renewal or extension of a Letter of Credit, the Issuing Bank
     shall  issue,  renew or extend  such  Letter  of Credit to the  beneficiary
     thereof.

          In  conjunction  with the  issuance  of each  Letter  of  Credit,  the
     Borrower and the Active  Subsidiary,  if the account party, shall execute a
     Letter  of  Credit  Agreement.  In the event of any  conflict  between  any
     provision of a Letter of Credit Agreement and this Agreement, the Borrower,
     the  Issuing  Bank,  the  Agent  and the  Lenders  hereby  agree  that  the
     provisions of this Agreement shall govern.

          The  Issuing   Bank  will  send  to  the  Borrower  and  each  Lender,
     immediately upon issuance of any Letter of Credit, or an amendment thereto,
     a true and  complete  copy of such  Letter  of  Credit,  or such  amendment
     thereto.

     Section 2.03   Changes of Commitments.
                    -----------------------

          (a)  The Aggregate  Revolving Credit Commitments shall at all times be
     equal to the lesser of (i) the Aggregate  Maximum  Revolving Credit Amounts
     after adjustments  resulting from reductions pursuant to Section 2.03(b) or
     (ii) the Borrowing Base as determined from time to time.

                                       27

<PAGE>

          (b)  The  Borrower  shall have the right to terminate or to reduce the
     amount of the Aggregate  Maximum  Revolving  Credit Amounts at any time, or
     from time to time, upon not less than three (3) Business Days' prior notice
     to the  Agent  (which  shall  promptly  notify  the  Lenders)  of each such
     termination  or reduction,  which notice shall  specify the effective  date
     thereof and the amount of any such reduction  (which shall not be less than
     $5,000,000.00 or any whole multiple of $1,000,000.00 in excess thereof) and
     shall be irrevocable and effective only upon receipt by the Agent.

          (c)  The Aggregate Maximum Revolving Credit Amounts once terminated or
     reduced may not be reinstated.

     Section 2.04   Fees.
                    ----

          (a)  Revolving  Credit  Commitment  Fee. The Borrower shall pay to the
     Agent for the account of each Lender a Revolving  Credit  Commitment fee on
     the daily average  unused amount of the Borrowing  Base for the period from
     and  including  the Closing Date up to, but  excluding,  the earlier of the
     date the Aggregate Revolving Credit Commitments are terminated or the Final
     Maturity  Date at a rate per annum  equal to the  amount  reflected  on the
     appropriate  intersection  in the  table  set  forth in the  definition  of
     "Applicable  Margin."  Accrued  Revolving  Credit  Commitment fees shall be
     payable  quarterly in arrears on each  Quarterly Date and on the earlier of
     the date the Aggregate  Revolving Credit  Commitments are terminated or the
     Final Maturity Date.

          (b)  Intentionally Deleted.
               ----------------------

          (c)  Letter of Credit Fees.
               ----------------------

               (i) The Borrower agrees to pay the Agent, for the account of each
     Lender,  commissions for issuing the Letters of Credit on the daily average
     outstanding of the maximum liability of the Issuing Bank existing from time
     to time under such Letter of Credit (calculated  separately for each Letter
     of Credit) at the Applicable  Margin for LIBOR Loans determined on the date
     of issuance of the applicable Letter of Credit. Each Letter of Credit shall
     be deemed to be  outstanding  up to the full face  amount of the  Letter of
     Credit until the Issuing Bank has received the canceled Letter of Credit or
     a written cancellation of the Letter of Credit from the beneficiary of such
     Letter of Credit in form and  substance  acceptable to the Issuing Bank, or
     for any reductions in the amount of the Letter of Credit (other than from a
     drawing),  written  notification  from the  beneficiary  of such  Letter of
     Credit.  Such  commissions are payable in advance at issuance of the Letter
     of Credit for the first year thereof and  thereafter,  quarterly in arrears
     on each  Quarterly  Date and upon  cancellation  or expiration of each such
     Letter of Credit.

               (ii) The  Borrower  shall pay to the  Issuing  Bank,  for its own
     account, a fronting fee equal to the greater of: (x) .125% of the Letter of
     Credit, and (y) $500.00.

               (iii) Upon each amendment, transfer, or negotiation of any Letter
     of Credit,  the Borrower  shall pay the Issuing Bank,  for its own account,
     such fees that are in accordance with such Issuing Bank's  then-current fee
     policy.

                                       28

<PAGE>

          (d)  Other Fees.  The Borrower  shall pay to the Agent for its account
     such other  fees as are set forth in the fee letter  from the Lender to the
     Borrower on the dates specified therein to the extent not paid prior to the
     Closing Date.

     Section  2.05  Several  Obligations.  The failure of any Lender to make any
Loan to be made by it or to provide funds for  disbursements  or  reimbursements
under  Letters of Credit on the date  specified  therefor  shall not relieve any
other Lender of its  obligation  to make its Loan or provide funds on such date,
but no Lender shall be responsible for the failure of any other Lender to make a
Loan to be made by such other Lender or to provide  funds to be provided by such
other Lender.

     Section 2.06   Notes. The Revolving Credit Loans made  by each Lender shall
be evidenced by a single  promissory note of the Borrower in  substantially  the
form of Exhibit A, dated (i) the Closing Date or (ii) the  effective  date of an
Assignment pursuant to Section 12.06(b),  payable to the order of such Lender in
a principal amount equal to its Maximum Revolving Credit Amount as originally in
effect and otherwise  duly  completed and such  substitute  Notes as required by
Section 12.06(b).  The date, amount,  Type, interest rate and Interest Period of
each Loan made by each Lender, and all payments made on account of the principal
thereof,  shall be recorded by such Lender on its books for its Note, and, prior
to any transfer may be endorsed by such Lender on the schedule  attached to such
Note or any  continuation  thereof or on any separate record  maintained by such
Lender.  Failure to make any such  notation  or to attach a  schedule  shall not
affect any Lender's or the  Borrower's  rights or obligations in respect of such
Loans or affect the validity of such transfer by any Lender of its Note.

     Section 2.07   Prepayments.
                    ------------

          (a)  Voluntary  Prepayments.  The  Borrower  may  prepay the Base Rate
     Loans upon not less than one (1)  Business  Day's prior notice to the Agent
     (which shall promptly  notify the Lenders),  which notice shall specify the
     prepayment  date  (which  shall be a  Business  Day) and the  amount of the
     prepayment  (which  shall  be  at  least  $500,000.00  and  a  multiple  of
     $100,000.00 or the remaining aggregate principal balance outstanding on the
     Notes) and shall be  irrevocable  and  effective  only upon  receipt by the
     Agent,  provided  that interest on the  principal  prepaid,  accrued to the
     prepayment  date,  shall be paid on the  prepayment  date. The Borrower may
     prepay LIBOR Loans on the same  conditions  as for Base Rate Loans  (except
     that prior  notice to the Agent  shall be not less than three (3)  Business
     Days for LIBOR Loans) and in addition such prepayments of LIBOR Loans shall
     be subject to the terms of Section  5.05 and shall be in an amount equal to
     all of the LIBOR Loans for the Interest Period prepaid.

          (b)  Mandatory Prepayments.
               ----------------------

               (i)  If, after giving effect to any  termination  or reduction of
     the Aggregate Maximum Revolving Credit Amounts pursuant to Section 2.03(b),
     the outstanding  aggregate  principal  amount of the Revolving Credit Loans
     plus  the LC  Exposure  exceeds  the  Aggregate  Maximum  Revolving  Credit
     Amounts,  the Borrower  shall (i) prepay the Revolving  Credit Loans on the
     date of such  termination  or reduction in an  aggregate  principal  amount
     equal to the excess,  together with  interest on the principal  amount paid

                                       29

<PAGE>

     accrued to the date of such prepayment and (ii) if any excess remains after
     prepaying all of the Revolving Credit Loans because of LC Exposure,  pay to
     the Agent on behalf of the Lenders an amount equal to the excess to be held
     as cash collateral as provided in Section 2.10(b) hereof.

               (ii) Upon any redetermination of the amount of the Borrowing Base
     in accordance with Section 2.08, if the redetermined Borrowing Base is less
     than the aggregate  outstanding  principal  amount of the Revolving  Credit
     Loans plus the LC Exposure, then the Borrower shall within thirty (30) days
     of such Borrowing  Base  redetermination  do one or any  combination of the
     following:  (i) prepay the Loans in an aggregate  principal amount equal to
     such excess, together with interest on the principal amount paid accrued to
     the date of such  prepayment,  (ii)  notify  the Agent that  Borrower  will
     prepay, in five (5) equal monthly installments  commencing thirty (30) days
     after such  Borrowing Base  redetermination  and continuing on the same day
     the next four months (unless there is no corresponding day, in which event,
     it will be paid on the last day of such  month),  the Loans in an aggregate
     principal  amount  equal to such  excess,  together  with  interest  on the
     principal  amount  paid  accrued to the date of such  prepayment;  or (iii)
     provide  additional  collateral  acceptable  to the Agent to  increase  the
     Borrowing  Base to an amount at least  equal to the  aggregate  outstanding
     principal amounts of the Loans, and if a Borrowing Base deficiency  remains
     after  prepaying all of the Revolving  Credit Loans because of LC Exposure,
     the  Borrower  shall pay to the Agent on  behalf of the  Lenders  an amount
     equal to such  Borrowing Base  deficiency to be held as cash  collateral as
     provided in Section 2.10(b).

          (c)  Generally.  Prepayments  permitted or required under this Section
     2.07 shall be without premium or penalty,  except as required under Section
     5.05 for prepayment of LIBOR Loans. Any prepayments on the Revolving Credit
     Loans may be reborrowed subject to the then effective  Aggregate  Revolving
     Credit Commitments.

     Section 2.08   Borrowing Base.
                    ---------------

          (a)  The Borrowing Base shall be determined in accordance with Section
     2.08(b) by the Agent with the  concurrence  of the Majority  Lenders and is
     subject to  redetermination  in accordance with Section  2.08(d).  Upon any
     redetermination of the Borrowing Base, such redetermination shall remain in
     effect until the next  successive  Redetermination  Date. So long as any of
     the  Commitments  are in effect or any LC Exposure or Loans are outstanding
     hereunder,  this facility shall be governed by the then effective Borrowing
     Base.  During the period  from and after the  Closing  Date until the first
     redetermination pursuant to Section 2.08(d) or adjusted pursuant to Section
     8.08(c), the amount of the Borrowing Base shall be $20,000,000.00.

          (b)  Upon  receipt of the reports  required  by Section  8.07 and such
     other reports,  data and supplemental  information as may from time to time
     be reasonably requested by the Agent (the "Engineering Reports"), the Agent
     will redetermine the Borrowing Base. Such  redetermination  will be made by
     the Agent and the applicable number of required Lenders, as provided below,
     in accordance with their normal and customary procedures for evaluating oil
     and gas reserves and other related assets as such exist at that  particular
     time. The Agent, in its sole discretion, may make adjustments to the rates,
     volumes and prices and other  assumptions  set forth  therein in accordance

                                       30

<PAGE>

     with  its  normal  and  customary  procedures  for  evaluating  oil and gas
     reserves and other related  assets as such exist at that  particular  time.
     The Agent shall propose to the Lenders a new  Borrowing  Base within twenty
     (20) days following receipt by the Agent and the Lenders of the Engineering
     Reports. Lenders holding 100% of the Aggregate Revolving Credit Commitments
     must approve  increases to the  Borrowing  Base,  while the approval of the
     Majority  Lenders  (which must  include the Agent) is required to approve a
     decrease in, or maintain,  the Borrowing Base. After having received notice
     of such proposal by the Agent,  all of the Lenders shall have ten (10) days
     to agree or  disagree  with  such  proposal.  If at the end of the ten (10)
     days, any Lender shall have not  communicated  its approval or disapproval,
     such silence shall be deemed to be an approval of the Agent's proposal, and
     the Agent's  proposal shall be the new Borrowing  Base. If however,  within
     the time prescribed by the preceding sentence, (i) all the Lenders have not
     approved (or have not been deemed to have  approved)  the Agent's  proposal
     with  respect to an increase in the  Borrowing  Base,  or (ii) the Majority
     Lenders  (which must include the Agent) have not approved (or have not been
     deemed to have  approved)  the Agent's  proposal with respect to a decrease
     in, or  maintenance  of, the Borrowing  Base, the Agent and, as applicable,
     either all the Lenders (with respect to an increase in the Borrowing  Base)
     or the Majority  Lenders  (which must include the Agent) (with respect to a
     decrease  in, or  maintenance  of, the  Borrowing  Base)  shall,  within an
     additional ten (10) days, agree upon a new Borrowing Base.

          If the  Agent  and,  as  applicable,  either  all the  Lenders  or the
     Majority Lenders (which must include the Agent) cannot otherwise agree on a
     redetermination  of the Borrowing Base within such  additional ten (10) day
     period  then no later  than  five  days  after the end of such ten (10) day
     period, the Lenders shall submit to the Agent in writing,  and/or the Agent
     shall  poll the  Lenders,  for their  individual  recommendations  for such
     redetermined  Borrowing Base in accordance with their respective  customary
     practices and  standards  for oil and gas loans,  whereupon the Agent shall
     designate the Borrowing Base at the largest  amount  approved by all of the
     Lenders (for any increase) or by the Majority  Lenders (for  maintenance of
     the Borrowing Base at its current level or for any decrease).  However, the
     amount of the  Borrowing  Base shall never be increased at any time without
     the unanimous consent of the Lenders,  notwithstanding anything else herein
     to the contrary.

          (c)  The Agent may  exclude  any Oil and Gas  Property  or  portion of
     production  therefrom  or any  income  from  any  other  Property  from the
     Borrowing Base, at any time,  because title information is not satisfactory
     to the Lender in its sole discretion exercised in good faith.

          (d)  So long as any of the Commitments are in effect and until payment
     in full of all Loans hereunder, on or around the first Business Day of each
     December  and June,  commencing  December 1, 2005 (each being a  "Scheduled
     Redetermination  Date"),  the Lenders shall  redetermine  the amount of the
     Borrowing Base in accordance  with Section  2.08(b).  In addition,  (i) the
     Borrower may initiate a redetermination  of the Borrowing Base at any other
     time as it so elects  by  specifying  in  writing  to the  Agent  (who will
     promptly notify the Lenders) the date by which the Borrower will furnish to
     the Agent  and the  Lenders a Reserve  Report in  accordance  with  Section
     8.07(b) and the date by which such  redetermination  is requested to occur;

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<PAGE>

     provided, however, that the Borrower may initiate only one such unscheduled
     redetermination between Scheduled  Redetermination Dates and (ii) the Agent
     may initiate a  redetermination  of the Borrowing Base at any other time as
     it so elects by specifying in writing to the Borrower the date by which the
     Borrower is to furnish a Reserve Report in accordance  with Section 8.07(b)
     and the date on which such redetermination is to occur; provided,  however,
     that the  Agent  may  initiate  only one such  unscheduled  redetermination
     between Scheduled Redetermination Dates.

          (e)  The Agent shall  promptly  notify in writing the Borrower and the
     Lenders of the new Borrowing  Base.  Any  redetermination  of the Borrowing
     Base  shall not be in  effect  until  written  notice  is  received  by the
     Borrower.

     Section 2.09   Assumption  of Risks.  The  Borrower  assumes  all  risks of
the  acts or  omissions  of any  beneficiary  of any  Letter  of  Credit  or any
transferee thereof with respect to its use of such Letter of Credit. Neither the
Issuing Bank (except in the case of gross  negligence  or willful  misconduct on
the part of the Issuing Bank or any of its employees),  its  correspondents  nor
any Lender shall be responsible for the validity,  sufficiency or genuineness of
certificates  or  other  documents  or any  endorsements  thereon,  even if such
certificates   or  other   documents   should  in  fact  prove  to  be  invalid,
insufficient,  fraudulent or forged;  for errors,  omissions,  interruptions  or
delays  in  transmissions  or  delivery  of any  messages  by  mail,  telex,  or
otherwise,  whether  or not they be in code;  for errors in  translation  or for
errors in  interpretation of technical terms; the validity or sufficiency of any
instrument  transferring  or assigning or  purporting  to transfer or assign any
Letter of Credit or the rights or benefits  thereunder or proceeds  thereof,  in
whole or in part,  which may prove to be invalid or ineffective  for any reason;
the  failure of any  beneficiary  or any  transferee  of any Letter of Credit to
comply  fully  with  conditions  required  in order to draw  upon any  Letter of
Credit;  or for any other  consequences  arising from causes  beyond the Issuing
Bank's control or the control of the Issuing Bank's correspondents. In addition,
neither the Issuing Bank, the Agent nor any Lender shall be responsible  for any
error, neglect, or default of any of the Issuing Bank's correspondents; and none
of the above shall  affect,  impair or prevent the vesting of any of the Issuing
Bank's,  the Agent's or any  Lender's  rights or powers  hereunder  or under the
Letter  of Credit  Agreements,  all of which  rights  shall be  cumulative.  The
Issuing Bank and its correspondents  may accept  certificates or other documents
that  appear on their face to be in order,  without  responsibility  for further
investigation  of any  matter  contained  therein  regardless  of any  notice or
information  to the  contrary.  In  furtherance  and  not in  limitation  of the
foregoing provisions,  the Borrower agrees that any action, inaction or omission
taken or not taken by the Issuing Bank or by any  correspondent  for the Issuing
Bank in good  faith in  connection  with any Letter of  Credit,  or any  related
drafts, certificates, documents or instruments, shall be binding on the Borrower
and shall not put the Issuing  Bank or its  correspondents  under any  resulting
liability to the Borrower.

     Section 2.10   Obligation to Reimburse and to Prepay.
                    --------------------------------------

          (a)  If a disbursement by the Issuing Bank is made under any Letter of
     Credit,  the Borrower  shall pay to the Agent within two (2) Business  Days
     after  notice of any such  disbursement  is received by the  Borrower,  the
     amount of each such  disbursement made by the Issuing Bank under the Letter
     of Credit (if such payment is not sooner  effected as may be required under
     this  Section  2.10 or under  other  provisions  of the Letter of  Credit),
     together with interest on the amount  disbursed from and including the date

                                       32

<PAGE>

     of disbursement until payment in full of such disbursed amount at a varying
     rate per annum equal to (i) the then applicable interest rate for Base Rate
     Loans through the second Business Day after notice of such  disbursement is
     received by the Borrower and (ii)  thereafter,  the  Post-Default  Rate for
     Base Rate Loans (but in no event to exceed the Highest Lawful Rate) for the
     period from and including the third Business Day following the date of such
     disbursement  to and  including  the  date  of  repayment  in  full of such
     disbursed amount. The obligations of the Borrower under this Agreement with
     respect  to each  Letter of Credit  shall be  absolute,  unconditional  and
     irrevocable and shall be paid or performed  strictly in accordance with the
     terms of this  Agreement  under all  circumstances  whatsoever,  including,
     without limitation,  but only to the fullest extent permitted by applicable
     law,   the   following   circumstances:   (i)  any  lack  of   validity  or
     enforceability  of this  Agreement,  any  Letter  of  Credit  or any of the
     Security  Instruments;  (ii) any  amendment  or  waiver of  (including  any
     default),  or any consent to departure from this  Agreement  (except to the
     extent  permitted by any amendment or waiver),  any Letter of Credit or any
     of the Security  Instruments;  (iii) the  existence of any claim,  set-off,
     defense or other rights which the Borrower may have at any time against the
     beneficiary  of any  Letter of Credit or any  transferee  of any  Letter of
     Credit (or any Persons for whom any such beneficiary or any such transferee
     may be  acting),  the  Issuing  Bank,  the  Agent,  any Lender or any other
     Person,  whether in connection with this  Agreement,  any Letter of Credit,
     the  Security  Instruments,  the  transactions  contemplated  hereby or any
     unrelated transaction;  (iv) any statement,  certificate,  draft, notice or
     any other document presented under any Letter of Credit proves to have been
     forged, fraudulent, insufficient or invalid in any respect or any statement
     therein proves to have been untrue or inaccurate in any respect whatsoever;
     (v)  payment  by the  Issuing  Bank  under any  Letter  of  Credit  against
     presentation of a draft or certificate which appears on its face to comply,
     but does not comply,  with the terms of such Letter of Credit; and (vi) any
     other circumstance or happening  whatsoever,  whether or not similar to any
     of the foregoing.

          Notwithstanding  anything  in  this  Agreement  to the  contrary,  the
     Borrower  will not be liable for payment or  performance  that results from
     the gross  negligence or willful  misconduct  of the Issuing  Bank,  except
     where the  Borrower or any  Subsidiary  actually  recovers the proceeds for
     itself or the  Issuing  Bank of any  payment  made by the  Issuing  Bank in
     connection with such gross negligence or willful misconduct.

          (b)  In the event of the occurrence of any Event of Default, a payment
     or  prepayment  pursuant to Section  2.07(b) or the  maturity of the Notes,
     whether by  acceleration  or otherwise,  an amount equal to the LC Exposure
     (or the  excess  in the  case of  Section  2.07(b)  shall be  deemed  to be
     forthwith due and owing by the Borrower to the Issuing Bank,  the Agent and
     the  Lenders  as of the date of any  such  occurrence;  and the  Borrower's
     obligation to pay such amount shall be absolute and unconditional,  without
     regard  to  whether  any  beneficiary  of any such  Letter  of  Credit  has
     attempted to draw down all or a portion of such amount under the terms of a
     Letter of Credit,  and, to the fullest extent  permitted by applicable law,
     shall not be subject to any  defense or be  affected by a right of set-off,
     counterclaim  or  recoupment  which the Borrower may now or hereafter  have
     against any such  beneficiary,  the Issuing Bank, the Agent, the Lenders or
     any other Person for any reason whatsoever.  Such payments shall be held by
     the Issuing Bank on behalf of the Lenders as cash  collateral  securing the
     LC  Exposure in an account or accounts  at the  Principal  Office;  and the
     Borrower  hereby  grants to and by its deposit with the Agent grants to the

                                       33

<PAGE>

     Agent a security  interest  in such cash  collateral.  Upon  request by the
     Agent, the Borrower shall immediately  execute and deliver to the Agent the
     Cash Collateral Account Agreement.  In the event of any such payment by the
     Borrower of amounts  contingently owing under outstanding Letters of Credit
     and in the event  that  thereafter  drafts  or other  demands  for  payment
     complying  with the terms of such  Letters  of Credit are not made prior to
     the respective  expiration dates thereof,  the Agent agrees, if no Event of
     Default  has  occurred  and  is  continuing  or if  no  other  amounts  are
     outstanding under this Agreement, the Notes or the Security Instruments, to
     remit  to  the  Borrower  amounts  for  which  the  contingent  obligations
     evidenced by the Letters of Credit have ceased.

          (c)  Each Lender  severally and  unconditionally  agrees that it shall
     promptly  reimburse  the  Issuing  Bank an  amount  equal to such  Lender's
     Percentage  Share of any  disbursement  made by the Issuing  Bank under any
     Letter of Credit that is not reimbursed according to this Section 2.10.

          (d)  Notwithstanding  anything to the contrary contained herein, if no
     Default exists and subject to  availability  under the Aggregate  Revolving
     Credit  Commitments  (after  reduction for LC Exposure),  to the extent the
     Borrower has not  reimbursed  the Issuing Bank for any drawn upon Letter of
     Credit within one (1) Business Days after notice of such  disbursement  has
     been  received  by the  Borrower,  the  amount  of such  Letter  of  Credit
     reimbursement  obligation shall automatically be funded by the Lenders as a
     Revolving  Credit Loan hereunder and used by the Lenders to pay such Letter
     of Credit reimbursement obligation. If an Event of Default has occurred and
     is  continuing,  or if the funding of such  Letter of Credit  reimbursement
     obligation as a Revolving  Credit Loan would cause the aggregate  amount of
     all Revolving  Credit Loans  outstanding to exceed the Aggregate  Revolving
     Credit Commitments (after reduction for LC Exposure), such Letter of Credit
     reimbursement  obligation  shall not be funded as a Revolving  Credit Loan,
     but instead shall accrue interest as provided in Section 2.10(a).

     Section 2.11   Lending  Offices. The Loans of each Type made by each Lender
shall be made and  maintained at such  Lender's  Applicable  Lending  Office for
Loans of such Type.

                                  ARTICLE III

                       PAYMENTS OF PRINCIPAL AND INTEREST

     Section 3.01   Repayment of Loans.
                    -------------------

               (a)  Revolving Credit Loans. On the Revolving Credit  Termination
     Date the  Borrower  shall  repay the  outstanding  principal  amount of the
     Revolving Credit Notes.

               (b)  Generally.  The  Borrower  will  pay to the  Agent,  for the
     account of each Lender,  the  principal  payments  required by this Section
     3.01.

     Section 3.02   Interest.
                    ---------

               (a)  Interest Rates.  The Borrower will pay to the Agent, for the
     account of each  Lender,  interest on the unpaid  principal  amount of each

                                       34

<PAGE>

     Loan made by such Lender for the period commencing on the date such Loan is
     made to, but  excluding,  the date such Loan shall be paid in full,  at the
     following rates per annum:

                    (i)  if such a Loan is a Base Rate  Loan,  the Base Rate (as
     in effect from time to time) plus the Applicable Margin, but in no event to
     exceed the Highest Lawful Rate; and

                    (ii) if such a Loan  is a  LIBOR  Loan,  for  each  Interest
     Period relating  thereto,  the LIBOR Rate for such Loan plus the Applicable
     Margin (as in effect at the date such Loan is  requested  by the  Borrower)
     except  that if such Loan is  converted  to a Base  Rate Loan or  continued
     beyond the initial  Interest  Period,  then the Applicable  Margin shall be
     that  Applicable  Margin as in effect from time to time during the relevant
     Interest Period, but in no event to exceed the Highest Lawful Rate.

               (b)  Post-Default  Rate.   Notwithstanding  the  foregoing,   the
     Borrower will pay to the Agent,  for the account of each Lender interest at
     the applicable  Post-Default Rate on any principal of any Loan made by such
     Lender,  and (to the fullest  extent  permitted by law) on any other amount
     payable by the  Borrower  hereunder,  under any Loan  Document or under any
     Note held by such Lender to or for account of such  Lender,  for the period
     commencing  on the date of an Event of  Default  until  the same is paid in
     full or all Events of Default are cured or waived.

               (c)  Due Dates.  Accrued  interest  on Base Rate  Loans  shall be
     payable monthly on the last day of each month commencing on the last day of
     July, 2005, and accrued interest on each LIBOR Loan shall be payable on the
     last day of the Interest  Period  therefor and, if such Interest  Period is
     longer than three months at three-month  intervals  following the first day
     of such Interest  Period,  except that interest payable at the Post-Default
     Rate shall be payable from time to time on demand and interest on any LIBOR
     Loan that is converted  into a Base Rate Loan  (pursuant  to Section  5.04)
     shall be  payable  on the date of  conversion  (but  only to the  extent so
     converted).  Any accrued and unpaid interest on the Revolving  Credit Loans
     on the Revolving Credit Termination Date shall be paid on such date.

               (d)  Determination of Rates.  Promptly after the determination of
     any  interest  rate  provided for herein or any change  therein,  the Agent
     shall notify the Lenders to which such interest is payable and the Borrower
     thereof.  Each  determination  by the  Agent  of an  interest  rate  or fee
     hereunder  shall,  except in cases of manifest error, be final,  conclusive
     and binding on the parties.

                                   ARTICLE IV

                PAYMENTS; PRO RATA TREATMENT; COMPUTATIONS; ETC.

     Section 4.01 Payments.  Except to the extent otherwise provided herein, all
payments of  principal,  interest  and other  amounts to be made by the Borrower
under this Agreement,  the Notes,  and the Letter of Credit  Agreements shall be
made in Dollars, in immediately available funds, to the Agent at such account as
the Agent shall specify by notice to the Borrower  from time to time,  not later

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<PAGE>

than 11:00 a.m.,  Houston,  Texas time on the date on which such payments  shall
become due (each such payment made after such time on such due date to be deemed
to have been made on the next  succeeding  Business Day). Such payments shall be
made  without (to the fullest  extent  permitted  by  applicable  law)  defense,
set-off or  counterclaim  and in  connection  therewith,  the  Borrower and each
Guarantor  hereby waives (to the fullest extent permitted by applicable law) all
defenses,  rights of set-off and  counterclaims it may have with respect to such
payments.  Each payment  received by the Agent under this  Agreement or any Note
for account of a Lender  shall be paid  promptly  to such Lender in  immediately
available  funds.  Except as otherwise  provided in the  definition of "Interest
Period",  if the due date of any payment under this  Agreement or any Note would
otherwise  fall on a day which is not a Business Day such date shall be extended
to the next  succeeding  Business  Day and  interest  shall be  payable  for any
principal  so  extended  for the period of such  extension.  At the time of each
payment to the Agent of any  principal  of or  interest  on any  borrowing,  the
Borrower  shall notify the Agent of the Loans to which such payment shall apply.
In the  absence  of such  notice the Agent may  specify  the Loans to which such
payment shall apply,  but to the extent possible such payment or prepayment will
be applied first to the Loans comprised of Base Rate Loans.

     Section 4.02 Pro Rata Treatment.  Except to the extent  otherwise  provided
herein  each Lender  agrees  that:  (i) each  borrowing  from the Lenders  under
Section 2.01 and each  continuation  and conversion  under Section 2.02 shall be
made from the Lenders pro rata in accordance with their Percentage  Share,  each
payment of  commitment  fee or other fees under  Section  2.04 shall be made for
account of the Agent or the Lenders pro rata in accordance with their Percentage
Share, and each termination or reduction of the amount of the Aggregate  Maximum
Revolving  Credit  Amounts  under  Section  2.03(b)  shall  be  applied  to  the
Commitment of each Lender,  pro rata  according to the amounts of its respective
Revolving  Credit  Commitment;  (ii) each  payment of  principal of Loans by the
Borrower  shall be made for account of the Lenders pro rata in  accordance  with
the respective  unpaid  principal  amount of the Loans held by the Lenders;  and
(iii)  each  payment  of  interest  on Loans by the  Borrower  shall be made for
account of the Lenders pro rata in  accordance  with the amounts of interest due
and  payable  to the  respective  Lenders;  and (iv) each  reimbursement  by the
Borrower of  disbursements  under Letters of Credit shall be made for account of
the Issuing Bank or, if funded by the  Lenders,  pro rata for the account of the
Lenders,  in accordance  with the amounts of  reimbursement  obligations due and
payable to each respective Lender.

     Section  4.03  Computations.  Interest  on LIBOR  Loans  and fees  shall be
computed on the basis of a year of 360 days and actual days  elapsed  (including
the first day but excluding the last day) occurring in the period for which such
interest is payable,  unless such  calculation  would exceed the Highest  Lawful
Rate,  in which case  interest  shall be  calculated on the per annum basis of a
year of 365 or 366 days,  as the case may be.  Interest on Base Rate Loans,  and
the  commitment  fee,  Letter of Credit fees and other fees under  Section  2.04
shall be computed on the basis of a year of 365 or 366 days, as the case may be,
and actual days elapsed  (including  the first day but  excluding  the last day)
occurring in the period for which such interest is payable.

     Section 4.04 Non-receipt of Funds by the Agent. Unless the Agent shall have
been  notified  by a Lender  or the  Borrower  prior  to the date on which  such
notifying  party is  scheduled  to make  payment  to the Agent (in the case of a
Lender) of the  proceeds  of a Loan or a payment  under a Letter of Credit to be
made by it hereunder or (in the case of the Borrower) a payment to the Agent for
account of one or more of the  Lenders  hereunder  (such  payment  being  herein

                                       36

<PAGE>

called the "Required  Payment"),  which notice shall be effective  upon receipt,
that it does not intend to make the Required Payment to the Agent, the Agent may
assume that the  Required  Payment has been made and may, in reliance  upon such
assumption (but shall not be required to), make the amount thereof  available to
the intended  recipient(s)  on such date and, if such Lender or the Borrower (as
the case may be) has not in fact made the  Required  Payment to the  Agent,  the
recipient(s) of such payment shall, on demand,  repay to the Agent the amount so
made available  together with interest thereon in respect of each day during the
period  commencing  on the date such amount was so made  available  by the Agent
until,  but  excluding,  the date the Agent  recovers  such amount at a rate per
annum which,  for any Lender as  recipient,  will be equal to the Federal  Funds
Rate, and for the Borrower as recipient, will be equal to the Base Rate plus the
Applicable Margin.

     Section 4.05   Set-off, Sharing of Payments, Etc.
                    ----------------------------------

          (a)  The Borrower agrees that, in addition to (and without  limitation
     of) any  right of  set-off,  bankers'  lien or  counterclaim  a Lender  may
     otherwise  have,  each Lender  shall have the right and be entitled  (after
     consultation  with the Agent), at its option, to offset balances held by it
     or by any of its  Affiliates  for account of the Borrower or any Subsidiary
     at any of its  offices,  in Dollars or in any other  currency,  against any
     principal of or interest on any of such Lender's Loans, or any other amount
     payable to such Lender hereunder, which is not paid when due (regardless of
     whether such balances are then due to the Borrower), in which case it shall
     promptly  notify the Borrower  and the Agent  thereof,  provided  that such
     Lender's failure to give such notice shall not affect the validity thereof.

          (b)  If  any  Lender  shall  obtain  payment  of any  principal  of or
     interest on any Loan made by it to the Borrower  under this  Agreement  (or
     reimbursement as to any Letter of Credit) through the exercise of any right
     of set-off,  banker's lien or  counterclaim  or similar right or otherwise,
     and, as a result of such payment, such Lender shall have received a greater
     percentage  of the  principal  or  interest  (or  reimbursement)  then  due
     hereunder  by the Borrower to such Lender than the  percentage  received by
     any other  Lenders,  it shall  promptly (i) notify the Agent and each other
     Lender thereof and (ii) purchase from such other Lenders  participation  in
     (or, if and to the extent  specified by such Lender,  direct  interests in)
     the Loans (or  participations  in  Letters  of  Credit)  made by such other
     Lenders (or in interest due thereon,  as the case may be) in such  amounts,
     and make such other adjustments from time to time as shall be equitable, to
     the end that all the Lenders shall share the benefit of such excess payment
     (net of any  expenses  which may be incurred by such Lender in obtaining or
     preserving  such excess  payment)  pro rata in  accordance  with the unpaid
     principal  and/or  interest  on the Loans held by each of the  Lenders  (or
     reimbursements  of Letters of Credit).  To such end all the  Lenders  shall
     make   appropriate   adjustments   among   themselves  (by  the  resale  of
     participations  sold or  otherwise)  if such  payment is  rescinded or must
     otherwise be restored.  The Borrower agrees that any Lender so purchasing a
     participation  (or direct  interest) in the Loans made by other Lenders (or
     in interest  due  thereon,  as the case may be) may  exercise all rights of
     set-off, banker's lien, counterclaim or similar rights with respect to such
     participation  as fully as if such Lender were a direct holder of Loans (or
     Letters of Credit) in the amount of such  participation.  Nothing contained
     herein shall  require any Lender to exercise any such right or shall affect
     the right of any Lender to exercise, and retain the benefits of exercising,

                                       37

<PAGE>

     any such right with respect to any other  indebtedness or obligation of the
     Borrower. If under any applicable  bankruptcy,  insolvency or other similar
     law, any Lender receives a secured claim in lieu of a set-off to which this
     Section  4.05  applies,  such  Lender  shall,  to the  extent  practicable,
     exercise its rights in respect of such secured claim in a manner consistent
     with the rights of the Lenders  entitled  under this  Section 4.05 to share
     the benefits of any recovery on such secured claim.

     Section 4.06   Taxes.
                    ------

          (a)  Payments  Free and Clear.  Any and all  payments by the  Borrower
     hereunder shall be made, in accordance with Section 4.01, free and clear of
     and  without  deduction  for any and all present or future  taxes,  levies,
     imposts,  deductions,  charges or  withholdings,  and all liabilities  with
     respect thereto,  excluding,  in the case of each Lender,  the Issuing Bank
     and the Agent,  taxes imposed on its income, and franchise or similar taxes
     imposed on it, by (i) any jurisdiction (or political  subdivision  thereof)
     of which the Agent, the Issuing Bank or such Lender, as the case may be, is
     a citizen or  resident or in which such  Lender has an  Applicable  Lending
     Office,  (ii) the  jurisdiction (or any political  subdivision  thereof) in
     which the Agent, the Issuing Bank or such Lender is organized, or (iii) any
     jurisdiction (or political  subdivision  thereof) in which such Lender, the
     Issuing  Bank or the Agent is  presently  doing  business  which  taxes are
     imposed solely as a result of doing business in such jurisdiction (all such
     non-excluded taxes, levies, imposts, deductions,  charges, withholdings and
     liabilities  being  hereinafter  referred to as  "Taxes").  If the Borrower
     shall be  required  by law to deduct any Taxes from or in -----  respect of
     any sum payable hereunder to the Lenders, the Issuing Bank or the Agent (i)
     the sum payable  shall be increased  by the amount  necessary so that after
     making  all  required  deductions   (including   deductions  applicable  to
     additional  sums payable under this Section 4.06) such Lender,  the Issuing
     Bank or the Agent (as the case may be) shall receive an amount equal to the
     sum it would have  received  had no such  deductions  been  made,  (ii) the
     Borrower  shall make such  deductions  and (iii) the Borrower shall pay the
     full amount deducted to the relevant taxing authority or other Governmental
     Authority in accordance with applicable law.

          (b)  Other Taxes.  In  addition,  to the fullest  extent  permitted by
     applicable  law, the Borrower  agrees to pay any present or future stamp or
     documentary taxes or any other excise or property taxes, charges or similar
     levies that arise from any payment made  hereunder  or from the  execution,
     delivery or registration  of, or otherwise with respect to, this Agreement,
     any  Assignment  or any  Security  Instrument  (hereinafter  referred to as
     "Other Taxes").

          (c)  Indemnification.  To the fullest  extent  permitted by applicable
     law, the Borrower will  indemnify  each Lender and the Issuing Bank and the
     Agent for the full  amount of Taxes and  Other  Taxes  (including,  but not
     limited to, any Taxes or Other Taxes imposed by any Governmental  Authority
     on amounts  payable  under this  Section  4.06)  paid by such  Lender,  the
     Issuing Bank or the Agent (on their behalf or on behalf of any Lender),  as
     the case may be,  and any  liability  (including  penalties,  interest  and
     expenses)  arising  therefrom or with respect thereto,  whether or not such
     Taxes or Other Taxes were correctly or legally  asserted unless the payment
     of such Taxes was not  correctly  or  legally  asserted  and such  Lender's
     payment of such Taxes or Other Taxes was the result of its gross negligence

                                       38

<PAGE>

     or willful misconduct.  Any payment pursuant to such indemnification  shall
     be made within thirty (30) days after the date any Lender, the Issuing Bank
     or the Agent,  as the case may be, makes written  demand  therefor.  If any
     Lender,  the  Issuing  Bank or the  Agent  receives  a refund  or credit in
     respect of any Taxes or Other Taxes for which such Lender,  Issuing Bank or
     the Agent has received  payment from the Borrower it shall promptly  notify
     the Borrower of such refund or credit and shall, if no Default has occurred
     and is  continuing,  within  thirty (30) days after receipt of a request by
     the Borrower  (or  promptly  upon  receipt,  if the Borrower has  requested
     application for such refund or credit pursuant hereto), pay an amount equal
     to such refund or credit to the  Borrower  without  interest  (but with any
     interest so refunded or credited),  provided  that the  Borrower,  upon the
     request of such  Lender,  the Issuing  Bank or the Agent,  agrees to return
     such refund or credit (plus  penalties,  interest or other charges) to such
     Lender or the Agent in the event such  Lender or the Agent is  required  to
     repay such refund or credit.

          (d)  Lender Representations.
               -----------------------

               (i)  Each  Lender  represents  that it is  either  (1) a  banking
     association or corporation organized under the laws of the United States of
     America or any state  thereof or (2) it is entitled  to complete  exemption
     from  United  States  withholding  tax  imposed  on or with  respect to any
     payments,  including  fees, to be made to it pursuant to this Agreement (a)
     under an  applicable  provision  of a tax  convention  to which the  United
     States of America is a party or (b) because it is acting  through a branch,
     agency or office in the  United  States of  America  and any  payment to be
     received by it hereunder is effectively  connected with a trade or business
     in the  United  States  of  America.  Each  Lender  that  is not a  banking
     association or corporation organized under the laws of the United States of
     America or any state  thereof  agrees to provide  to the  Borrower  and the
     Agent on the Closing Date, or on the date of its delivery of the Assignment
     pursuant to which it becomes a Lender,  and at such other times as required
     by United  States  law or as the  Borrower  or the Agent  shall  reasonably
     request,  two accurate and complete  original  signed  copies of either (a)
     Internal  Revenue Service Form W-8ECI (or successor  form)  certifying that
     all payments to be made to it hereunder will be effectively  connected to a
     United  States trade or business (the "Form W-8ECI  Certification")  or (b)
     Internal Revenue Service Form W-8BEN (or successor form) certifying that it
     is entitled to the benefit of a provision of a tax  convention to which the
     United  States of America is a party which  completely  exempts from United
     States  withholding  tax all payments to be made to it hereunder (the "Form
     W-8BEN  Certification").  In  addition,  each  Lender  agrees  that  if  it
     previously  filed  a Form  W-8ECI  Certification,  it will  deliver  to the
     Borrower and the Agent a new Form W-8ECI  Certification  prior to the first
     payment date occurring in each of its subsequent  taxable years;  and if it
     previously  filed  a Form  W-8BEN  Certification,  it will  deliver  to the
     Borrower and the Agent a new certification  prior to the first payment date
     falling  in  the  third  year   following  the  previous   filing  of  such
     certification.  Each Lender also agrees to deliver to the  Borrower and the
     Agent such other or supplemental  forms as may at any time be required as a
     result of changes in  applicable  law or  regulation in order to confirm or
     maintain  in  effect  its  entitlement  to  exemption  from  United  States
     withholding tax on any payments hereunder,  provided that the circumstances
     of such Lender at the relevant time and applicable laws permit it to do so.
     If a  Lender  determines,  as a  result  of  any  change  in  either  (i) a
     Governmental  Requirement or (ii) its  circumstances,  that it is unable to

                                       39

<PAGE>

     submit any form or certificate  that it is obligated to submit  pursuant to
     this  Section  4.06,  or that it is required to withdraw or cancel any such
     form or certificate  previously  submitted,  it shall  promptly  notify the
     Borrower  and the Agent of such fact.  If a Lender is  organized  under the
     laws of a  jurisdiction  outside the United  States of America,  unless the
     Borrower and the Agent have  received a Form W-8BEN  Certification  or Form
     W-8ECI  Certification  satisfactory to them indicating that all payments to
     be  made  to  such  Lender  hereunder  are not  subject  to  United  States
     withholding  tax, the Borrower  shall  withhold taxes from such payments at
     the  applicable  statutory  rate.  Each Lender agrees to indemnify and hold
     harmless  the  Borrower or Agent,  as  applicable,  from any United  States
     taxes, penalties, interest and other expenses, costs and losses incurred or
     payable by (i) the Agent as a result of such Lender's failure to submit any
     form or certificate that it is required to provide pursuant to this Section
     4.06 or (ii) the Borrower or the Agent as a result of their reliance on any
     such form or certificate which such Lender has provided to them pursuant to
     this Section 4.06.

               (ii) For any period with  respect to which a Lender has failed to
     provide the Borrower with the form required  pursuant to this Section 4.06,
     if any,  (other than if such  failure is due to a change in a  Governmental
     Requirement occurring subsequent to the date on which a form originally was
     required  to  be   provided),   such  Lender   shall  not  be  entitled  to
     indemnification  under  Section 4.06 with  respect to taxes  imposed by the
     United  States which taxes would not have been imposed but for such failure
     to  provide  such  forms;  provided,  however,  that if a Lender,  which is
     otherwise  exempt  from or subject to a reduced  rate of  withholding  tax,
     becomes  subject to taxes because of its failure to deliver a form required
     hereunder,  the  Borrower  shall  take  such  steps  as such  Lender  shall
     reasonably request to assist such Lender to recover such taxes.

               (iii) Any Lender claiming any additional amounts payable pursuant
     to this Section 4.06 shall use reasonable  efforts  (consistent  with legal
     and regulatory  restrictions) to file any certificate or document requested
     by  the  Borrower  or  the  Agent  or to  change  the  jurisdiction  of its
     Applicable  Lending  Office or to contest  any tax imposed if the making of
     such a filing or change or contesting  such tax would avoid the need for or
     reduce the amount of any such additional amounts that may thereafter accrue
     and would not,  in the sole  determination  of such  Lender,  be  otherwise
     disadvantageous to such Lender.

     Section 4.07 Disposition of Proceeds.  The Mortgage  contains an assignment
by the Borrower unto and in favor of the Agent for the benefit of the Lenders of
all production and all proceeds  attributable thereto which may be produced from
or allocated to the Mortgaged  Property,  and the Mortgage  further  provides in
general  for  the  application  of  such  proceeds  to the  satisfaction  of the
Obligations  and  other  indebtedness,  liabilities  and  obligations  described
therein and secured  thereby.  Notwithstanding  the assignment  contained in the
Mortgage,  until the  occurrence of an Event of Default,  the Lenders agree that
they will neither notify the purchaser or purchasers of such production nor take
any other action to cause such  proceeds to be remitted to the Lenders,  but the
Lenders will instead permit such proceeds to be paid to the Borrower.

                                       40

<PAGE>

                                   ARTICLE V

                      CAPITAL ADEQUACY AND ADDITIONAL COSTS

     Section 5.01   Capital Adequacy and Additional Costs.
                    --------------------------------------

          (a)  The Borrower  shall pay directly to each Lender from time to time
     on request  such  amounts as such Lender may  determine  to be necessary to
     compensate such Lender or its parent or holding company for any costs which
     it determines  are  attributable  to the  maintenance by such Lender or its
     parent or holding company,  pursuant to any change in, or the introduction,
     adoption,  reinterpretation  or phase-in of, any  Governmental  Requirement
     after the Closing Date, of capital in respect of its  Commitment or making,
     funding or maintaining any Loans or Letters of Credit (such compensation to
     include,  without limitation,  an amount equal to any reduction of the rate
     of return on assets  or  equity  of such  Lender or its  parent or  holding
     company to a level  below  that which such  Lender or its parent or holding
     company could have achieved but for such  Governmental  Requirement).  Each
     Lender  will  notify  the  Borrower  that it is  entitled  to  compensation
     pursuant  to this  Section  5.01(a) as  promptly  as  practicable  after it
     determines to request such compensation.

          (b)  Determinations and allocations by any Lender for purposes of this
     Article V shall be conclusive, absent manifest error and provided that such
     determinations and allocations are made on a reasonable basis.

          (c)  LIBOR  Regulations,  etc. The Borrower shall pay directly to each
     Lender from time to time such  amounts as such Lender may  determine  to be
     necessary to compensate  such Lender for any costs which it determines  are
     attributable  to its making or maintaining of any LIBOR Loans or issuing or
     participating  in Letters of Credit hereunder or its obligation to make any
     LIBOR Loans or issue or participate in any Letters of Credit hereunder,  or
     any reduction in any amount  receivable by such Lender hereunder in respect
     of any of such  LIBOR  Loans,  Letters of Credit or such  obligation  (such
     increases in costs and reductions in amounts receivable being herein called
     "Additional  Costs"),  resulting  from any  Regulatory  Change  which:  (i)
     changes the basis of taxation of any amounts  payable to such Lender  under
     this Agreement or any Note in respect of any of such LIBOR Loans or Letters
     of Credit  (other  than  taxes  imposed on the  overall  net income of such
     Lender or of its  Applicable  Lending Office for any of such LIBOR Loans by
     the  jurisdiction  in  which  such  Lender  has  its  principal  office  or
     Applicable  Lending  Office);  or (ii)  imposes or  modifies  any  reserve,
     special  deposit,  insurance,  minimum  capital,  capital  ratio or similar
     requirements  relating to any  extensions  of credit or other assets of, or
     any deposits with or other liabilities of such Lender, or the Commitment or
     Loans of such Lender or the LIBOR  interbank  market;  or (iii) imposes any
     other  condition  affecting  this  Agreement  or any  Note  (or any of such
     extensions of credit or liabilities) or such Lender's  Commitment or Loans.
     Each Lender will notify the Agent and the  Borrower of any event  occurring
     after the  Closing  Date which will  entitle  such  Lender to  compensation
     pursuant  to this  Section  5.01(c) as  promptly  as  practicable  after it
     obtains knowledge thereof and determines to request such compensation,  and
     will designate a different  Applicable Lending Office for the Loans of such
     Lender affected by such event if such  designation will avoid the need for,
     or reduce  the  amount  of,  such  compensation  and will not,  in the sole
     opinion of such Lender, be  disadvantageous  to such Lender,  provided that

                                       41

<PAGE>

     such Lender shall have no obligation to so designate an Applicable  Lending
     Office located in the United States.  If any Lender  requests  compensation
     from the Borrower under this Section  5.01(c),  the Borrower may, by notice
     to such Lender,  suspend the  obligation of such Lender to make  additional
     Loans of the Type with  respect to which  such  compensation  is  requested
     until the  Regulatory  Change  giving rise to such request  ceases to be in
     effect (in which case the provisions of Section 5.04 shall be applicable).

          (d)  Regulatory Change.  Without limiting the effect of the provisions
     of  Section  5.01(c),  in the  event  that at any  time (by  reason  of any
     Regulatory Change or any other circumstances arising after the Closing Date
     affecting  (a) any  Lender,  (b) the  LIBOR  interbank  market  or (c) such
     Lender's  position in such  market),  the LIBOR Rate, as determined in good
     faith by such Lender,  will not  adequately  and fairly reflect the cost to
     such Lender of funding its LIBOR Loans,  then, if such Lender so elects, by
     notice to the Borrower and the Agent, the obligation of such Lender to make
     additional  LIBOR Loans shall be suspended until such Regulatory  Change or
     other circumstances ceases to be in effect (in which case the provisions of
     Section 5.04 shall be applicable).

          (e)  Capital  Adequacy.  Without  limiting the effect of the foregoing
     provisions  of this Section 5.01 (but  without  duplication),  the Borrower
     shall pay  directly to any Lender from time to time on request such amounts
     as such Lender may reasonably  determine to be necessary to compensate such
     Lender or its parent or holding  company for any costs which it  determines
     are attributable to the maintenance by such Lender or its parent or holding
     company (or any Applicable  Lending  Office),  pursuant to any Governmental
     Requirement  following any Regulatory  Change, of capital in respect of its
     Commitment, its Note, or its Loans or any interest held by it in any Letter
     of Credit,  such  compensation to include,  without  limitation,  an amount
     equal to any  reduction  of the rate of  return on assets or equity of such
     Lender or its parent or holding company (or any Applicable  Lending Office)
     to a level  below that which such  Lender or its parent or holding  company
     (or any  Applicable  Lending  Office)  could  have  achieved  but for  such
     Governmental  Requirement.  Such Lender will notify the Borrower that it is
     entitled to  compensation  pursuant to this Section  5.01(e) as promptly as
     practicable after it determines to request such compensation.

          (f)  Compensation Procedure.  Any Lender notifying the Borrower of the
     incurrence of Additional Costs under this Section 5.01 shall in such notice
     to the Borrower and the Agent set forth in reasonable  detail the basis and
     amount of its request for compensation.  Determinations  and allocations by
     each  Lender  for  purposes  of  this  Section  5.01 of the  effect  of any
     Regulatory  Change  pursuant to Section 5.01(c) or (d), or of the effect of
     capital  maintained  pursuant to Section  5.01(e),  on its costs or rate of
     return  of  maintaining  Loans  or its  obligation  to make  Loans or issue
     Letters of Credit,  or on amounts  receivable  by it in respect of Loans or
     Letters of Credit,  and of the amounts  required to compensate  such Lender
     under this Section 5.01,  shall be conclusive  and binding for all purposes
     absent manifest error,  provided that such  determinations  and allocations
     are made on a reasonable  basis.  Any request for  additional  compensation
     under this Section 5.01 shall be paid by the  Borrower  within  thirty (30)
     days of the receipt by the Borrower of the notice described in this Section
     5.01(f).

                                       42

<PAGE>

     Section 5.02  Limitation  on LIBOR Loans.  Anything  herein to the contrary
notwithstanding,  if, on or prior to the determination of any LIBOR Rate for any
Interest Period:

               (i)  the  Agent   determines   (which   determination   shall  be
     conclusive,  absent  manifest  error) that quotations of interest rates for
     the  relevant  deposits  referred to in the  definition  of "LIBOR Rate" in
     Section  1.02 are not being  provided  in the  relevant  amounts or for the
     relevant maturities for purposes of determining rates of interest for LIBOR
     Loans as provided herein; or

               (ii) the  Agent   determines   (which   determination   shall  be
     conclusive,  absent  manifest  error) that the  relevant  rates of interest
     referred  to in the  definition  of "LIBOR  Rate" in Section  1.02 upon the
     basis of which  the rate of  interest  for LIBOR  Loans  for such  Interest
     Period is to be determined are not sufficient to adequately  cover the cost
     to the Lenders of making or maintaining LIBOR Loans;

then the Agent shall give the Borrower prompt notice thereof, and so long as
such condition remains in effect, the Lenders shall be under no obligation to
make additional LIBOR Loans.

     Section  5.03  Illegality.  Notwithstanding  any  other  provision  of this
Agreement,  in the  event  that  it  becomes  unlawful  for  any  Lender  or its
Applicable  Lending  Office to honor its  obligation  to make or maintain  LIBOR
Loans hereunder, then such Lender shall promptly notify the Borrower thereof and
such Lender's  obligation to make LIBOR Loans shall be suspended until such time
as such  Lender  may again  make and  maintain  LIBOR  Loans (in which  case the
provisions of Section 5.04 shall be applicable).

     Section 5.04 Base Rate Loans Pursuant to Sections  5.01,  5.02 and 5.03. If
the obligation of any Lender to make LIBOR Loans shall be suspended  pursuant to
Sections 5.01, 5.02 or 5.03 ("Affected  Loans"),  all Affected Loans which would
otherwise  be made by such Lender shall be made instead as Base Rate Loans (and,
if an event  referred to in Section  5.01 or Section  5.03 has occurred and such
Lender so requests by notice to the Borrower,  all Affected Loans of such Lender
then outstanding  shall be  automatically  converted into Base Rate Loans on the
date  specified by such Lender in such notice) and, to the extent that  Affected
Loans are so made as (or  converted  into)  Base Rate  Loans,  all  payments  of
principal which would otherwise be applied to such Lender's Affected Loans shall
be applied instead to its Base Rate Loans.

     Section 5.05  Compensation.  The Borrower  shall pay to each Lender  within
thirty  (30) days of receipt of written  request of such Lender  (which  request
shall set forth, in reasonable detail, the basis for requesting such amounts and
which shall be conclusive and binding for all purposes absent manifest error and
provided that such  determinations are made on a reasonable basis),  such amount
or  amounts  as shall  compensate  it for any  actual  loss,  cost,  expense  or
liability which such Lender determines are attributable to:

               (i)  any  payment,  prepayment  or  conversion  of a  LIBOR  Loan
     properly  made by such Lender or the  Borrower  for any reason  (including,
     without  limitation,  the  acceleration  of the Loans  pursuant  to Section
     10.01) on a date  other than the last day of the  Interest  Period for such
     Loan; or

               (ii) any failure by the  Borrower for any reason  (including  but
     not limited to, the failure of any of the conditions precedent specified in

                                       43

<PAGE>

     Article VI to be  satisfied)  to borrow,  continue  or convert a LIBOR Loan
     from such Lender on the date for such borrowing, continuation or conversion
     specified in the relevant notice given pursuant to Section 2.02(c).

     Section 5.06   Replacement Lenders.
                    --------------------

          (a)  If any  Lender has  notified  the  Borrower  and the Agent of its
     incurring  Additional Costs under Section 5.01 or has required the Borrower
     to make  payments for Taxes under  Section  4.06,  then the  Borrower  may,
     unless  such  Lender  has  notified  the  Borrower  and the Agent  that the
     circumstances  giving rise to such notice no longer  apply,  terminate,  in
     whole but not in part,  the Commitment of any Lender (other than the Agent)
     (the  "Terminated  Lender") at any time upon five (5) Business  Days' prior
     written notice to the Terminated Lender and the Agent (such notice referred
     to herein as a "Notice of Termination").

          (b)  In order to  effect  the  termination  of the  Commitment  of the
     Terminated  Lender, the Borrower shall: (i) obtain an agreement with one or
     more  Lenders to  increase  their  Commitment  or  Commitments  and/or (ii)
     request any one or more other  banking  institutions  to become  parties to
     this Agreement in place and instead of such Terminated  Lender and agree to
     accept a Commitment or  Commitments;  provided,  however,  that such one or
     more other banking institutions are reasonably  acceptable to the Agent and
     become  parties by executing an  Assignment  (the Lenders or other  banking
     institutions that agree to accept in whole or in part the Commitment of the
     Terminated  Lender being referred to herein as the "Replacement  Lenders"),
     such  that the  aggregate  increased  and/or  accepted  Commitments  of the
     Replacement  Lenders under clauses (i) and (ii) above equal the  Commitment
     of the Terminated Lender.

          (c)  The  Notice  of  Termination   shall  include  the  name  of  the
     Terminated  Lender,  the date  the  termination  will  occur  (the  "Lender
     Termination  Date"), and the Replacement  Lender or Replacement  Lenders to
     which the Terminated  Lender will assign its Commitment  and, if there will
     be more than one Replacement Lender, the portion of the Terminated Lender's
     Commitment to be assigned to each Replacement Lender.

          (d)  On the Lender  Termination  Date, (i) the Terminated Lender shall
     by execution  and delivery of an  Assignment  assign its  Commitment to the
     Replacement Lender or Replacement  Lenders (pro rata, if there is more than
     one  Replacement  Lender,  in proportion  to the portion of the  Terminated
     Lender's Commitment to be assigned to each Replacement Lender) indicated in
     the Notice of  Termination  and shall assign to the  Replacement  Lender or
     Replacement  Lenders  each of its  Loans  (if  any)  then  outstanding  and
     participation  interests in Letters of Credit (if any) then outstanding pro
     rata as  aforesaid),  (ii) the  Terminated  Lender shall  endorse its Note,
     payable without  recourse,  representation  or warranty to the order of the
     Replacement  Lender or Replacement  Lenders (pro rata as aforesaid),  (iii)
     the Replacement Lender or Replacement  Lenders shall purchase the Note held
     by the  Terminated  Lender (pro rata as  aforesaid) at a price equal to the
     unpaid  principal  amount thereof plus interest and facility and other fees
     accrued and unpaid to the Lender Termination Date, and (iv) the Replacement
     Lender or  Replacement  Lenders  will  thereupon  (pro  rata as  aforesaid)
     succeed to and be  substituted  in all respects for the  Terminated  Lender
     with like effect as if  becoming a Lender  pursuant to the terms of Section

                                       44

<PAGE>

     12.06(b), and the Terminated Lender will have the rights and benefits of an
     assignor under Section 12.06(b).  To the extent not in conflict,  the terms
     of  Section  12.06(b)  shall  supplement  the  provisions  of this  Section
     5.06(d).  For each assignment made under this Section 5.06, the Replacement
     Lender  shall pay to the Agent the  processing  fee provided for in Section
     12.06(b).  The Borrower will be  responsible  for the payment of any actual
     breakage costs associated with termination and Replacement  Lenders, as set
     forth in Section 5.05.

                                   ARTICLE VI

                              CONDITIONS PRECEDENT

     Section 6.01   Initial Funding.
                    ----------------

     The obligation of the Lenders to make the Initial Funding is subject to the
receipt by the Agent and the  Lenders of all fees  payable  pursuant  to Section
2.04 on or before the Closing Date and the receipt by the Agent of the following
documents (in sufficient original  counterparts,  other than the Notes, for each
Lender) and satisfaction of the other conditions  provided in this Section 6.01,
each of which shall be satisfactory to the Agent in form and substance:

          (a)  A certificate  of the Secretary or an Assistant  Secretary of the
     Borrower  setting  forth (i)  resolutions  of its board of  directors  with
     respect to the  authorization  of the  Borrower  to execute and deliver the
     Loan  Documents  to which it is a party and to enter into the  transactions
     contemplated in those documents,  (ii) the officers of the Borrower (y) who
     are  authorized to sign the Loan Documents to which Borrower is a party and
     (z) who will, until replaced by another officer or officers duly authorized
     for that  purpose,  act as its  representative  for the purposes of signing
     documents and giving notices and other  communications  in connection  with
     this Agreement and the  transactions  contemplated  hereby,  (iii) specimen
     signatures of the authorized officers, and (iv) the articles or certificate
     of  incorporation  and bylaws of the Borrower,  certified as being true and
     complete.  The  Agent  and  the  Lenders  may  conclusively  rely  on  such
     certificate until the Agent receives notice in writing from the Borrower to
     the contrary.

          (b)  A certificate of the Secretary or an Assistant  Secretary of each
     Guarantor  setting  forth (i)  resolutions  of its board of directors  with
     respect to the  authorization  of such Guarantor to execute and deliver the
     Loan  Documents  to which it is a party and to enter into the  transactions
     contemplated  in those  documents,  (ii) the officers of such Guarantor (y)
     who are authorized to sign the Loan Documents to which Guarantor is a party
     and (z) who will,  until  replaced  by  another  officer or  officers  duly
     authorized for that purpose,  act as its representative for the purposes of
     signing documents and giving notices and other communications in connection
     with  this  Agreement  and  the  transactions  contemplated  hereby,  (iii)
     specimen  signatures of the authorized  officers,  and (iv) the articles or
     certificate of  incorporation  and bylaws of such  Guarantor,  certified as
     being true and complete. The Agent and the Lenders may conclusively rely on
     such  certificate  until they receive notice in writing from such Guarantor
     to the contrary.

          (c)  A certificate  of the Secretary or an Assistant  Secretary of any
     Subsidiary that is a corporation or a limited  liability company (an "LLC")

                                       45

<PAGE>

     setting forth (i) resolutions of its board of directors with respect to the
     authorization  of such Subsidiary to execute and deliver the Loan Documents
     to which it is a party and to enter into the  transactions  contemplated in
     those  documents,  (ii)  the  officers  of  such  Subsidiary  (y)  who  are
     authorized to sign the Loan  Documents to which such  Subsidiary is a party
     and (z) who will,  until  replaced  by  another  officer or  officers  duly
     authorized for that purpose,  act as its representative for the purposes of
     signing documents and giving notices and other communications in connection
     with  this  Agreement  and  the  transactions  contemplated  hereby,  (iii)
     specimen  signatures of the authorized  officers,  and (iv) the articles or
     certificate  of  incorporation  and  bylaws  (and the  Regulations  if such
     Subsidiary  is an LLC) of the  Subsidiary,  certified  as  being  true  and
     complete.  The  Agent  and  the  Lenders  may  conclusively  rely  on  such
     certificate until they receive notice in writing from the Subsidiary to the
     contrary.

          (d)  Certificates  of the  appropriate  state agencies with respect to
     the  existence,  qualification  and  good  standing  of  the  Borrower  and
     Guarantor(s)/Subsidiaries.

          (e)  A compliance certificate which shall be substantially in the form
     of Exhibit C, duly and properly executed by a Responsible Officer and dated
     as of the date of the Initial Funding.

          (f)  The Notes, duly completed and executed.

          (g)  The Security Instruments, including those described on Exhibit D,
     duly  completed  and  executed in  sufficient  number of  counterparts  for
     recording, if necessary.

          (h)  An opinion of Akin Gump Strauss  Hauer & Feld LLP,  Texas counsel
     (and  such  other  out of state  counsel  as Agent  shall  require)  to the
     Borrower,   its   Subsidiaries   and   Guarantors  in  form  and  substance
     satisfactory to the Agent and its counsel,  as to such matters  incident to
     the  transactions  herein  contemplated  as the Agent and its  counsel  may
     request, including, without limitation, the enforceability of the Mortgages
     and other Security  Instruments and the validity and means of perfection of
     the liens created thereby.  (i) A certificate of insurance  coverage of the
     Borrower evidencing that the Borrower its Subsidiaries,  and the Guarantors
     are carrying insurance in accordance with Section 7.19.

          (j)  Title  information as the Agent may require  (including,  without
     limitation,  title  opinions)  from  attorneys  satisfactory  to the  Agent
     setting  forth the  status of title to at least 80% of the value of the Oil
     and Gas Properties included in the Initial Reserve Report.

          (k)  The  Security   Instruments  and  related  financing   statements
     covering the Mortgaged Property shall have been properly filed and recorded
     in the appropriate  offices to establish and perfect the Liens and security
     interests  created thereby and the Agent shall have been advised in writing
     by the attorneys who have  furnished the title  opinions  called for in (j)
     above  that  there  has been no change  in the  status  of title  from that
     reflected  in such  opinions  through  the filing and  recordation  of such
     Security Instruments.

          (l)  Letters  in  Lieu   executed   by  the   Borrower,   any  of  its

                                       46

<PAGE>

     Subsidiaries,  and  any  Guarantor,  as  applicable,  and  a  list  of  the
     purchasers of the  Hydrocarbons of the Borrower,  any of its  Subsidiaries,
     and  any   Guarantor,   produced  from  the   Borrower's  and  any  of  its
     Subsidiaries' or Guarantors' Oil and Gas Properties.

          (m)  The Agent shall have been furnished with  appropriate  UCC search
     certificates  reflecting the filing of all financing statements required to
     perfect the Liens  granted by the Security  Instruments  and  reflecting no
     prior  Liens,  except  Excepted  Liens or other Liens  permitted by Section
     9.02.

          (n)  The organizational chart of Borrower,  its Subsidiaries,  and the
     Guarantors.

          (o)  All consents in form and  substance  satisfactory  to all Lenders
     and of all Persons required by the Lenders.

          (p)  Agent shall have received from the Borrower, each Guarantor,  and
     each Subsidiary of Borrower,  reviewed,  and be satisfied,  in Agent's sole
     discretion,  of  the  Borrower,  each  Guarantor  and  each  of  Borrower's
     Subsidiaries:

               (i)  existing   corporate,   limited   liability   company,   and
     partnership documents;

               (ii) annual financial statements;

               (iii) most recent interim financial statements;

               (iv) valuation  information  of assets  proposed by the Borrower,
     each Guarantor, and each Subsidiary of Borrower to secure the Obligations;

               (v)  all  lien  searches  covering  any and all of the  Mortgaged
     Property;

               (vi) other material documents and agreements (including,  without
     limitation,  all: (1) Material  Agreements listed on Schedule 7.22, and (2)
     all  other  material  documents  and  agreements  as the Agent  shall  have
     requested); and

               (vii) the legal, corporate, partnership, and capital structure of
     the  Borrower,  each  Guarantor,  and each  Subsidiary  of  Borrower on the
     Closing  Date and  after  giving  effect to the  transactions  contemplated
     hereby.

          (q)  Such  other  documents,  in form and  substance  satisfactory  to
     Agent,  as the Agent or any  Lender  or  special  counsel  to the Agent may
     reasonably request, including, without limitation, (i) documentation of all
     environmental and title matters relating to each of the Borrower's, each of
     the  Guarantor's  and  each  of the  Borrower's  Subsidiaries'  Oil and Gas
     Properties including, without limitation, the Mortgaged Properties and (ii)
     all Material Agreements.

     Section  6.02  Initial  and  Subsequent  Loans and  Letters of Credit.  The
obligation  of the Lenders to make Loans to the  Borrower  upon the  occasion of
each  borrowing  hereunder  and to issue,  renew,  extend or reissue  Letters of
Credit  for the  account  of the  Borrower  and for the  account  of any  Active
Subsidiary  of the Borrower  (including  the Initial  Funding) is subject to the
further conditions precedent that, as of the date of such Loans and after giving
effect thereto:

                                       47

<PAGE>

          (a)  no Default shall exist;

          (b)  no Material Adverse Effect shall have occurred;

          (c)  the  representations  and  warranties  made  by the  Borrower  in
     Article VII and in the Security  Instruments shall be true on and as of the
     date of the  making  of such  Loans  or  issuance,  renewal,  extension  or
     reissuance  of a Letter of Credit with the same force and effect as if made
     on and as of such  date and  following  such new  borrowing,  except to the
     extent such  representations  and  warranties  are expressly  limited to an
     earlier date or the Majority  Lenders may  expressly  consent in writing to
     the contrary; and

          (d)  after giving effect to the requested borrowing or borrowings,  no
     Default will exist under the Credit Agreement or any other Loan Document.

     Each request for a borrowing or issuance,  renewal, extension or reissuance
of a Letter of Credit by the Borrower hereunder shall constitute a certification
by the Borrower to the effect set forth in Section  6.02(c) (both as of the date
of such notice and,  unless the Borrower  otherwise  notifies the Agent prior to
the date of and  immediately  following  such  borrowing or  issuance,  renewal,
extension or reissuance of a Letter of Credit as of the date thereof).

     Section  6.03  Conditions   Precedent  for  the  Benefit  of  Lenders.  All
conditions  precedent  to the  obligations  of the  Lenders to make any Loan are
imposed  hereby  solely for the benefit of the Lenders,  and no other Person may
require  satisfaction  of any such condition  precedent or be entitled to assume
that  the  Lenders  will  refuse  to make  any  Loan in the  absence  of  strict
compliance with such conditions precedent.

     Section 6.04 No Waiver. No waiver of any condition precedent shall preclude
the Agent or the Lenders from requiring such condition to be met prior to making
any subsequent  Loan.  Without  limiting the  generality of the  foregoing,  the
making of a Loan shall not be construed  as a waiver of any Default,  regardless
of  whether  the  Administrative  Agent or any  Lender  may have had  notice  or
knowledge of such Default at the time.

                                  ARTICLE VII

                         REPRESENTATIONS AND WARRANTIES

     The  Borrower  represents  and  warrants to the Agent and the Lenders  that
(each  representation  and  warranty  herein is given as of the Closing Date and
shall be deemed  repeated  and  reaffirmed  on the dates of each  borrowing  and
issuance,  renewal, extension or reissuance of a Letter of Credit as provided in
Section 6.02):

     Section 7.01 Corporate Existence. Each of the Borrower and each Subsidiary:
(i) is a  corporation  or limited  liability  company  duly  organized,  legally
existing  and in  good  standing  under  the  laws  of the  jurisdiction  of its
organization;  (ii) has all  requisite  corporate or limited  liability  company
power, and has all material governmental licenses, authorizations,  consents and
approvals  necessary to own its assets and carry on its business as now being or
as  proposed  to be  conducted;  and (iii) is  qualified  to do  business in all
jurisdictions  in which the nature of the  business  conducted  by it makes such
qualification  necessary  and where  failure so to qualify would have a Material
Adverse Effect.

                                       48

<PAGE>

     Section 7.02 Financial Condition. The audited consolidated balance sheet of
the Borrower and its Consolidated  Subsidiaries as at December 31, 2004, and the
related consolidated statement of income,  stockholders' equity and cash flow of
the Borrower and its Consolidated Subsidiaries for the fiscal year ended on said
date, with the opinion thereon of Weaver & Tidwell,  L.L.P. heretofore furnished
to each of the  Lenders  and the  unaudited  consolidated  balance  sheet of the
Borrower  and its  Consolidated  Subsidiaries  as at March 31,  2005,  and their
related consolidated statements of income, stockholders' equity and cash flow of
the Borrower and its Consolidated  Subsidiaries for the three month period ended
on such date  heretofore  furnished  to the Agent,  are complete and correct and
fairly  present the  consolidated  financial  condition  of the Borrower and its
Consolidated Subsidiaries as at said dates and the results of its operations for
the fiscal year and the three month period on said dates, all in accordance with
GAAP,  as applied on a  consistent  basis  (subject,  in the case of the interim
financial  statements,  to  normal  year-end  adjustments  and  the  absence  of
footnotes).  Neither the Borrower nor any Subsidiary has on the Closing Date any
material Debt, contingent liabilities, liabilities for taxes, unusual forward or
long-term  commitments or unrealized or anticipated  losses from any unfavorable
commitments, except as referred to or reflected or provided for in the Financial
Statements or in Schedule 7.02.  Since March 31, 2005,  there has been no change
or event having a Material  Adverse  Effect.  Since March 31, 2005,  neither the
business  nor  the  Properties  of the  Borrower  or any  Subsidiary  have  been
materially  and  adversely  affected  as  a  result  of  any  fire,   explosion,
earthquake,   flood,  drought,  windstorm,   accident,  strike  or  other  labor
disturbance,  embargo,  requisition  or taking of  Property or  cancellation  of
contracts,   permits  or  concessions  by  any  Governmental  Authority,   riot,
activities of armed forces or acts of God or of any public enemy.

     Section 7.03  Litigation and Judgments.  Except as disclosed to the Lenders
in Schedule 7.03 hereto:  (i) there is no litigation,  legal,  administrative or
arbitral proceeding,  investigation or other action of any nature pending or, to
the knowledge of the Borrower threatened against or affecting the Borrower,  any
of its  Subsidiaries,  or any Guarantor  which  involves the  possibility of any
judgment or liability  against the  Borrower,  any of its  Subsidiaries,  or any
Guarantor  not fully  covered by insurance  (except for normal  deductibles)  or
which  could  result  in a  Material  Adverse  Effect;  and  (ii)  there  are no
outstanding  judgments  against the Borrower,  any of its  Subsidiaries,  or any
Guarantor.

     Section  7.04 No Breach.  Neither the  execution  and  delivery of the Loan
Documents,  nor compliance  with the terms and  provisions  hereof will conflict
with or  result  in a breach  of,  or  require  any  consent  which has not been
obtained as of the Closing  Date under,  the  respective  charter,  by-laws,  or
limited liability  company  agreement of the Borrower or any Subsidiary,  or any
Governmental  Requirement  or any Material  Agreement,  or  constitute a default
under any such  agreement,  or result in the creation or  imposition of any Lien
upon any of the revenues or assets of the Borrower or any Subsidiary pursuant to
the terms of any such  agreement or  instrument  other than the Liens created by
the Loan Documents.

     Section 7.05 Authority. The Borrower and each Subsidiary have all necessary
corporate  power and authority to execute,  deliver and perform its  obligations
under the Loan Documents to which it is a party; and the execution, delivery and
performance  by the Borrower and each  Subsidiary of the Loan Documents to which
it is a party,  have been duly authorized by all necessary  corporate  action on

                                       49

<PAGE>

its part;  and the Loan  Documents  constitute  the  legal,  valid  and  binding
obligations of the Borrower and each Subsidiary,  enforceable in accordance with
their terms.

     Section 7.06 Approvals. No authorizations, approvals or consents of, and no
filings or  registrations  with,  any  Governmental  Authority or any Person are
necessary  for the  execution,  delivery or  performance  by the Borrower or any
Subsidiary of the Loan Documents or for the validity or enforceability  thereof,
except for the recording and filing of the Security  Instruments  as required by
this Agreement.

     Section  7.07 Use of Loans.  The proceeds of the Loans shall be used by the
Borrower to:

          (a)  fund acquisitions; and

          (b)  provide for the working  capital  and general  corporate  purpose
     needs of the Borrower and its Active Subsidiaries.

Neither the Borrower, any Guarantor,  nor any of the Borrower's  Subsidiaries is
engaged principally,  or as one of its important activities,  in the business of
extending credit for the purpose, whether immediate,  incidental or ultimate, of
buying or carrying  margin stock  (within the meaning of Regulation T, U or X of
the  Board  of  Governors  of the  Federal  Reserve  System)  and no part of the
proceeds of any Loan hereunder will be used to buy or carry any margin stock.

     Section 7.08 ERISA.
                  ------

          (a)  The  Borrower,  each  Subsidiary  and each ERISA  Affiliate  have
     complied in all material  respects with ERISA and,  where  applicable,  the
     Code regarding each Plan.

          (b)  Each Plan is, and has been, maintained in substantial  compliance
     with ERISA and, where applicable, the Code.

          (c)  No act,  omission or transaction  has occurred which could result
     in  imposition  on the  Borrower,  any  Subsidiary  or any ERISA  Affiliate
     (whether  directly or  indirectly)  of (i) either a civil penalty  assessed
     pursuant to Section 502(c),  (i) or (l) of ERISA or a tax imposed  pursuant
     to Chapter 43 of  Subtitle D of the Code or (ii) breach of  fiduciary  duty
     liability damages under Section 409 of ERISA.

          (d)  No Plan  (other  than a defined  contribution  plan) or any trust
     created under any such Plan has been terminated since September 2, 1974. No
     liability to the PBGC (other than for the payment of current premiums which
     are not past due) by the Borrower,  any  Subsidiary or any ERISA  Affiliate
     has been or is  expected  by the  Borrower,  any  Subsidiary  or any  ERISA
     Affiliate  to be  incurred  with  respect to any Plan.  No ERISA Event with
     respect to any Plan has occurred.

          (e)  Full  payment  when due has been  made of all  amounts  which the
     Borrower, any Subsidiary or any ERISA Affiliate is required under the terms
     of each Plan or applicable law to have paid as  contributions to such Plan,
     and no accumulated  funding  deficiency (as defined in Section 302 of ERISA
     and Section 412 of the Code), whether or not waived, exists with respect to
     any Plan.

                                       50

<PAGE>

          (f)  The actuarial present value of the benefit liabilities under each
     Plan which is  subject to Title IV of ERISA does not,  as of the end of the
     Borrower's most recently ended fiscal year, exceed the current value of the
     assets (computed on a plan termination basis in accordance with Title IV of
     ERISA)  of such  Plan  allocable  to such  benefit  liabilities.  The  term
     "actuarial present value of the benefit liabilities" shall have the meaning
     specified in Section 4041 of ERISA.

          (g)  None of the  Borrower,  any  Subsidiary  or any  ERISA  Affiliate
     sponsors, maintains, or contributes to an employee welfare benefit plan, as
     defined in Section 3(1) of ERISA, including,  without limitation,  any such
     plan maintained to provide  benefits to former  employees of such entities,
     that may not be  terminated  by the  Borrower,  a  Subsidiary  or any ERISA
     Affiliate  in  its  sole  discretion  at  any  time  without  any  material
     liability.

          (h)  None of the  Borrower,  any  Subsidiary  or any  ERISA  Affiliate
     sponsors,  maintains or contributes to, or has at any time in the preceding
     six  calendar   years,   sponsored,   maintained  or  contributed  to,  any
     Multiemployer Plan.

          (i)  None of the Borrower,  any  Subsidiary or any ERISA  Affiliate is
     required to provide security under Section  401(a)(29) of the Code due to a
     Plan  amendment  that results in an increase in current  liability  for the
     Plan.

     Section  7.09  Taxes.  Except  as set  out in  Schedule  7.09,  each of the
Borrower and its  Subsidiaries  has filed all United States  Federal  income tax
returns  and all other tax  returns  which are  required to be filed by them and
have paid all  material  taxes due  pursuant to such  returns or pursuant to any
assessment received by the Borrower or any Subsidiary. The charges, accruals and
reserves on the books of the Borrower and its  Subsidiaries  in respect of taxes
and other governmental charges are, in the opinion of the Borrower, adequate. No
tax lien has been filed and, to the knowledge of the Borrower, no claim is being
asserted with respect to any such tax, fee or other charge.

     Section 7.10   Titles, Etc.
                    ------------

          (a)  Except as set out in Schedule 7.10,  each of the Borrower and its
     Subsidiaries has good and defensible title to its material (individually or
     in the  aggregate)  Properties,  free and clear of all Liens,  except Liens
     permitted  by Section  9.02.  Except as set forth in Schedule  7.10,  after
     giving  full  effect  to the  Excepted  Liens,  the  Borrower  owns the net
     interests in production attributable to the Hydrocarbon Interests reflected
     in the most  recently  delivered  Reserve  Report and the ownership of such
     Properties  shall not in any material respect obligate the Borrower to bear
     the  costs  and  expenses  relating  to the  maintenance,  development  and
     operations  of each such  Property  in an  amount in excess of the  working
     interest of each Property set forth in the most recently  delivered Reserve
     Report  without a  proportional  increase  in the  associated  net  revenue
     interest.

          (b)  All  leases  and  agreements  necessary  for the  conduct  of the
     business of the Borrower and its Subsidiaries are valid and subsisting,  in
     full force and effect  (including as to depths) and there exists no default
     or event or circumstance  which with the giving of notice or the passage of

                                       51

<PAGE>

     time or both  would  give  rise to a default  by the  Borrower  and/or  its
     Subsidiaries,  and to the best of the Borrower's knowledge, there exists no
     default  or event or  circumstance  which  with the giving of notice or the
     passage  of time or both  would  give rise to a default  by a third  party,
     under any such lease or leases,  which would affect in any material respect
     the conduct of the business of the Borrower and its Subsidiaries.

          (c)  The rights,  Properties and other assets presently owned,  leased
     or  licensed  by the  Borrower  and  its  Subsidiaries  including,  without
     limitation, all easements and rights of way, include all rights, Properties
     and other assets  necessary to permit the Borrower and its  Subsidiaries to
     conduct their  business in all material  respects in the same manner as its
     business has been conducted prior to the Closing Date.

          (d)  All  of  the  assets  and  Properties  of the  Borrower  and  its
     Subsidiaries  which  are  reasonably  necessary  for the  operation  of its
     business are in operable working condition and are maintained in accordance
     with prudent business standards.

     Section 7.11 No Material Misstatements. No written information,  statement,
exhibit, certificate,  document or report furnished to the Agent and the Lenders
(or any of  them) by the  Borrower  or any  Subsidiary  in  connection  with the
negotiation of this  Agreement  contained any material  misstatement  of fact or
omitted to state a material  fact or any fact  necessary  to make the  statement
contained therein not materially misleading in the light of the circumstances in
which made and with  respect to the  Borrower  and its  Subsidiaries  taken as a
whole. To the best of the Borrower's knowledge, there is no fact peculiar to the
Borrower or any Subsidiary  which has a Material Adverse Effect or in the future
could have (so far as the Borrower can now  foresee) a Material  Adverse  Effect
and  which  has not been set forth in this  Agreement  or the  other  documents,
certificates  and  statements  furnished  to the  Agent by or on  behalf  of the
Borrower or any Subsidiary  prior to, or on, the Closing Date in connection with
the transactions contemplated hereby.

     Section  7.12  Investment   Company  Act.  Neither  the  Borrower  nor  any
Subsidiary  is  an  "investment   company"  or  a  company  "controlled"  by  an
"investment  company," within the meaning of the Investment Company Act of 1940,
as amended.

     Section 7.13 Public Utility Holding  Company Act.  Neither the Borrower nor
any Subsidiary is a "holding  company," or a "subsidiary  company" of a "holding
company," or an "affiliate" of a "holding company" or of a "subsidiary  company"
of a "holding  company," or a "public  utility" within the meaning of the Public
Utility Holding Company Act of 1935, as amended.

     Section  7.14  Subsidiaries.  Except as set  forth on  Schedule  7.14,  the
Borrower has no Subsidiaries.

     Section 7.15  Location of Business and Offices.  The  Borrower's  principal
place of business and chief executive  offices are located at the address stated
on the signature  page of this  Agreement.  The principal  place of business and
chief executive office of each Subsidiary are located at the addresses stated on
Schedule 7.14.

     Section  7.16  Defaults.  Neither the  Borrower  nor any  Subsidiary  is in
default nor has any event or circumstance occurred which, but for the expiration

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<PAGE>

of any  applicable  grace  period  or the  giving  of  notice,  or  both,  would
constitute a default by the Borrower and/or its Subsidiaries, and to the best of
the Borrower's  knowledge,  no event or circumstance has occurred which, but for
the expiration of any applicable grace period or the giving of notice,  or both,
would  constitute  a default by a third party under any  Material  Agreement  or
instrument  to which the Borrower or any  Subsidiary  is a party or by which the
Borrower or any Subsidiary is bound which default could have a Material  Adverse
Effect. No Default hereunder has occurred and is continuing.

     Section 7.17 Environmental Matters. Except (i) as provided in Schedule 7.17
or (ii) as would not have a Material Adverse Effect (or with respect to (c), (d)
and (e) below,  where the failure to take such actions would not have a Material
Adverse Effect):

          (a)  Neither any  Property of the Borrower or any  Subsidiary  nor the
     operations  conducted thereon,  or any failure to act, violate any order or
     requirement  of any court or  Governmental  Authority or any  Environmental
     Laws;

          (b)  Without  limitation  of clause  (a)  above,  no  Property  of the
     Borrower or any Subsidiary nor the operations  currently conducted thereon,
     or any failure to act, or, to the best  knowledge of the  Borrower,  by any
     prior owner or operator of such Property or operation,  are in violation of
     or  subject  to  any  existing,   pending  or  threatened   action,   suit,
     investigation, inquiry or proceeding by or before any court or Governmental
     Authority or to any remedial obligations under Environmental Laws;

          (c)  All notices, permits, licenses or similar authorizations, if any,
     required to be obtained or filed in connection with the operation or use of
     any and all Property of the Borrower and each Subsidiary, including without
     limitation  past or present  treatment,  storage,  disposal or release of a
     hazardous  substance  or solid waste into the  environment,  have been duly
     obtained or filed,  and the Borrower and each  Subsidiary are in compliance
     with the terms and  conditions of all such notices,  permits,  licenses and
     similar authorizations;

          (d)  All  hazardous   substances,   solid  waste,   and  oil  and  gas
     exploration  and  production  wastes,  if  any,  generated  at any  and all
     Property  of  the  Borrower  or  any  Subsidiary  have  in  the  past  been
     transported,  treated and disposed of in accordance with Environmental Laws
     and so as not to pose an imminent and  substantial  endangerment  to public
     health or welfare or the  environment,  and, to the best  knowledge  of the
     Borrower, all such transport carriers and treatment and disposal facilities
     have been and are operating in compliance with Environmental Laws and so as
     not to pose an imminent and  substantial  endangerment  to public health or
     welfare  or the  environment,  and  are not the  subject  of any  existing,
     pending or threatened action,  investigation or inquiry by any Governmental
     Authority in connection with any Environmental Laws;

          (e)  The  Borrower  has  taken  all  steps  reasonably   necessary  to
     determine and has determined that no hazardous substances,  solid waste, or
     oil and gas  exploration  and production  wastes,  have been disposed of or
     otherwise  released  and  there  has  been  no  threatened  release  of any
     hazardous  substances  on or  to  any  Property  of  the  Borrower  or  any
     Subsidiary except in material  compliance with Environmental Laws and so as
     not to pose an imminent and  substantial  endangerment  to public health or
     welfare or the environment;

                                       53

<PAGE>

          (f)  To the extent  applicable,  all Property of the Borrower and each
     Subsidiary  currently  satisfies  all  design,   operation,  and  equipment
     requirements  imposed by the OPA or  scheduled as of the Closing Date to be
     imposed by OPA during the term of this Agreement, and the Borrower does not
     have any reason to believe  that such  Property,  to the extent  subject to
     OPA,  will not be able to  maintain  compliance  with the OPA  requirements
     during the term of this Agreement; and

          (g)  Neither the Borrower nor any Subsidiary has any known  contingent
     liability in connection with any generation, storage, release or threatened
     release,  transportation,  or disposal of any oil,  hazardous  substance or
     solid waste into the environment.

     Section  7.18  Compliance  with  the  Law.  Neither  the  Borrower  nor any
Subsidiary  has violated any  Governmental  Requirement  or failed to obtain any
license, permit, franchise or other governmental authorization necessary for the
ownership  of any of  its  Properties  or the  conduct  of its  business,  which
violation  or failure  would have (in the event such  violation  or failure were
asserted by any Person through  appropriate  action) a Material  Adverse Effect.
Except for such acts or  failures  to act as would not have a  Material  Adverse
Effect, the Oil and Gas Properties (and properties unitized therewith) have been
maintained,  operated  and  developed  in a good and  workmanlike  manner and in
conformity with all applicable laws and all rules, regulations and orders of all
duly  constituted  authorities  having  jurisdiction  and in conformity with the
provisions of all leases,  subleases or other contracts comprising a part of the
Hydrocarbon  Interests and other contracts and agreements  forming a part of the
Oil and Gas Properties;  specifically in this connection,  (i) after the Closing
Date, no Oil and Gas Property is subject to having allowable  production reduced
below  the  full  and  regular  allowable  (including  the  maximum  permissible
tolerance)  because  of  any  overproduction   (whether  or  not  the  same  was
permissible  at the time) prior to the  Closing  Date and (ii) none of the wells
comprising  a part  of the  Oil  and  Gas  Properties  (or  properties  unitized
therewith)  are deviated  from the vertical  more than the maximum  permitted by
applicable  laws,  regulations,  rules and orders,  and such wells are, in fact,
bottomed under and are producing from, and the well bores are wholly within, the
Oil and Gas Properties  (or in the case of wells located on properties  unitized
therewith, such unitized properties).

     Section 7.19 Insurance.  Schedule 7.19 attached hereto contains an accurate
and complete description of all material policies of fire, liability,  workmen's
compensation and other forms of insurance owned or held by the Borrower and each
Subsidiary.  All such  policies are in full force and effect,  all premiums with
respect  thereto  covering all periods up to and including the Closing Date have
been paid, and no notice of  cancellation  or termination has been received with
respect to any such policy. Such policies are sufficient for compliance with all
requirements  of  law  and  of all  agreements  to  which  the  Borrower  or any
Subsidiary is a party; are valid, outstanding and enforceable policies;  provide
adequate  insurance  coverage in at least such amounts and against at least such
risks (but  including  in any event  public  liability)  as are usually  insured
against in the same general  area by companies  engaged in the same or a similar
business for the assets and operations of the Borrower and each Subsidiary; will
remain in full  force  and  effect  through  the  respective  dates set forth in
Schedule  7.19 without the payment of additional  premiums;  and will not in any
way be  affected  by, or  terminate  or lapse by  reason  of,  the  transactions

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contemplated by this Agreement.  Schedule 7.19 identifies all material risks, if
any,  which the  Borrower and its  Subsidiaries  and their  respective  Board of
Directors or officers  have  designated  as being self  insured,  including  any
potential environmental liabilities of any kind whatsoever, whether for property
damage,  personal  injury,  remediation,  or  enforcement  matters.  Neither the
Borrower nor any  Subsidiary  has been refused any insurance with respect to its
assets  or  operations,  nor has its  coverage  been  limited  below  usual  and
customary policy limits, by an insurance carrier to which it has applied for any
such  insurance  or with which it has  carried  insurance  during the last three
years.  All such  policies  name Agent as additional  insured,  loss payee,  and
contain endorsements for no cancellation thereof without thirty (30) days' prior
written notice to the Agent and the Lenders on all such policies.

     Section  7.20  Hedging  Agreements.  Schedule  7.20 sets  forth,  as of the
Closing  Date, a true and  complete  list of all Hedging  Agreements  (including
commodity price swap agreements,  forward  agreements or contracts of sale which
provide for  prepayment  for deferred  shipment or delivery of oil, gas or other
commodities)  of the Borrower and each  Subsidiary,  the material  terms thereof
(including the type, term, effective date, termination date and notional amounts
or volumes), the net mark to market value thereof, all credit support agreements
relating  thereto  (including any margin required or supplied),  and the counter
party to each such agreement.

     Section  7.21  Restriction  on Liens.  Neither the  Borrower nor any of its
Subsidiaries  is a party  to any  agreement  or  arrangement  (other  than  this
Agreement and the Security Instruments), or subject to any order, judgment, writ
or decree,  which either  restricts or purports to restrict its ability to grant
Liens  to  other  Persons  on  or in  respect  of  their  respective  assets  or
Properties,  except such restrictions in favor of the holders of Debt secured by
Liens  described  in  Sections  9.01(d)  or  9.01(e),  but only  insofar as such
restrictions pertain to the Property encumbered thereby.

     Section 7.22  Material  Agreements.  Set forth on Schedule 7.22 hereto is a
complete  and  correct  list of all  material  agreements,  leases  (other  than
Hydrocarbon Interests),  indentures, purchase agreements, obligations in respect
of  letters  of  credit,   guarantees,   joint  venture  agreements,  and  other
instruments  in effect or to be in effect as of the  Closing  Date  (other  than
Hedging Agreements) providing for, evidencing, securing or otherwise relating to
any Debt of the Borrower, the Guarantors or any of the Borrower's  Subsidiaries,
and all  obligations  of the Borrower,  the  Guarantors or any of the Borrower's
Subsidiaries  to issuers  of surety or appeal  bonds  issued for  account of the
Borrower or any such Subsidiary, and such list correctly sets forth the names of
the debtor or lessee and  creditor or lessor  with  respect to the Debt or lease
obligations  outstanding  or to be outstanding  and the Property  subject to any
Lien  securing  such Debt or lease  obligation.  Also set forth on Schedule 7.22
hereto is a complete  and  correct  list of all  material  agreements  and other
instruments of the Borrower, the Guarantors and Borrower's Subsidiaries relating
to the purchase, transportation by pipeline, gas processing, marketing, sale and
supply  of  natural  gas and  other  Hydrocarbons,  but in any  event,  any such
agreement  or other  instrument  that  will  account  for  more  than 10% of the
consolidated  sales of the Borrower,  the  Guarantors  and any of the Borrower's
Subsidiaries  during  the  Borrower's  current  fiscal  year  and  which  is not
cancelable on thirty (30) or fewer days notice.

     Section  7.23  Solvency.  Borrower,  its  Subsidiaries,  and  each  of  the
Guarantors and with respect to its Subsidiaries and the Guarantors, after taking
into account each  Subsidiary's and Guarantor's  rights of  contribution,  on an
individual  and  a  consolidated  basis,  are  not  insolvent;  Borrower's,  its

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<PAGE>

Subsidiaries'  and  each of the  Guarantors'  assets  and  with  respect  to its
Subsidiaries and the Guarantors, after taking into account each Subsidiary's and
Guarantor's  rights of contribution  on an individual and a consolidated  basis,
exceed their liabilities,  and neither Borrower, the Guarantors,  nor any of the
Borrower's  Subsidiaries or Guarantors and with respect to its  Subsidiaries and
the  Guarantors,  after taking into account each  Subsidiary's  and  Guarantor's
rights  of  contribution  will  be  rendered  insolvent  by  the  execution  and
performance of this Agreement and the Loan Documents.

     Section 7.24 Gas Imbalances. Except as set forth on Schedule 7.24 or on the
most recent certificate  delivered  pursuant to Section 8.07(c),  on a net basis
there are no gas imbalances,  take or pay or other  prepayments  with respect to
the Borrower's Oil and Gas Properties which (taken together with the imbalances,
take or pay, or other  prepayments on Schedule 7.24 or such  certificate)  would
require the Borrower or its  Subsidiaries  to deliver,  in the aggregate,  after
netting all over-production and under-production,  three percent (3%) or more of
the total volumes of proved,  producing reserves of Hydrocarbons  (calculated on
an mcf equivalent  basis with each barrel of oil being  equivalent to six mcf of
natural gas) reflected in the Initial  Reserve Report or the most recent Reserve
Report delivered  pursuant to Section 8.07, as the case may be, from the Oil and
Gas Properties of Borrower and its Subsidiaries at some future time without then
or thereafter receiving full payment therefor.

     Section 7.25  Madisonville  and Elgin Holdings.  The Initial Reserve Report
does not (nor will any future  Reserve  Report)  include Oil and Gas  Properties
owned by the Borrower or any of its Subsidiaries  through its or their interests
in Madisonville or Elgin Holdings.

     Section 7.26 Intentionally Omitted.
                  ----------------------

     Section  7.27 Name  Changes.  Borrower's  official  name as recorded on its
currently effective  organizational documents which are filed with the Secretary
of State of its State of organization is the same as found on the signature page
of this Agreement.  Borrower has not,  during the preceding five years,  entered
into any contract, agreement, security instrument or other document using a name
other than,  or been known by or  otherwise  used any name other than,  the name
used by Borrower herein and as set forth on Schedule 7.27 attached hereto.

     Section  7.28   Taxpayer   Identification   Number.   Borrower's   Taxpayer
Identification No. is 87-0444770 and each Subsidiary's  Taxpayer  Identification
No. is set forth on Schedule 7.14. Each Guarantor's Taxpayer  Identification No.
is as set forth on Schedule 7.28.

     Section 7.29 State of Formation.  Borrower is a corporation organized under
the laws of the State of Delaware.  The Subsidiaries are  corporations,  limited
liability  corporations,  or partnerships organized under the laws of the states
set forth on Schedule 7.14.  Each  Guarantor's  state of  organization is as set
forth on Schedule 7.28.

                                  ARTICLE VIII

                              AFFIRMATIVE COVENANTS

     The Borrower  covenants and agrees that, so long as any of the  Commitments
are in effect and until  payment in full of all Loans  hereunder,  all  interest
thereon and all other amounts payable by the Borrower hereunder:

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<PAGE>

     Section 8.01 Reporting  Requirements.  The Borrower shall deliver, or shall
cause to be  delivered,  to the  Agent  with  sufficient  copies of each for the
Lenders:

          (a)  Annual  Financial  Statements.  As soon as  available  and in any
     event within 90 days after the end of each fiscal year of the Borrower, the
     audited consolidated statements of income, stockholders' equity, changes in
     financial  position  and cash flows of the  Borrower  and its  Consolidated
     Subsidiaries  for such fiscal year,  and the related  consolidated  balance
     sheet of the Borrower and its  Consolidated  Subsidiaries  as at the end of
     such fiscal year,  and setting forth in each case in  comparative  form the
     corresponding figures for the preceding fiscal year, and accompanied by the
     related unqualified opinion of independent public accountants of recognized
     national standing  acceptable to the Agent,  which opinion shall state that
     said  financial  statements  fairly  present  the  consolidated   financial
     condition and results of  operations  of the Borrower and its  Consolidated
     Subsidiaries  as at the end of,  and for,  such  fiscal  year and that such
     financial statements have been prepared in accordance with GAAP, except for
     such  changes  in  such  principles  with  which  the  independent   public
     accountants  shall have  concurred  and such  opinion  shall not  contain a
     "going  concern" or like  qualification  or exception,  accompanied  by the
     certificate of a Responsible  Officer,  which  certificate shall state that
     said  financial  statements  fairly  present  the  consolidated   financial
     condition and results of  operations  of the Borrower and its  Consolidated
     Subsidiaries  in  accordance  with GAAP,  as at the end of,  and for,  such
     period  (subject  to normal  year-end  audit  adjustments),  together  with
     calculations  confirming  the  Borrower's  compliance  with  all  financial
     covenants, certified by a senior financial officer of Borrower.

          (b)  Quarterly Financial  Statements.  As soon as available and in any
     event  within  45 days  after  the end of each of the  first  three  fiscal
     quarterly  periods  of  each  fiscal  year  of the  Borrower,  consolidated
     statements of income,  stockholders' equity,  changes in financial position
     and cash flows of the Borrower and its  Consolidated  Subsidiaries for such
     period and for the period from the beginning of the respective  fiscal year
     to the end of such period, and the related  consolidated  balance sheets as
     at the end of such period,  and setting  forth in each case in  comparative
     form  the  corresponding  figures  for  the  corresponding  period  in  the
     preceding  fiscal year,  accompanied  by the  certificate  of a Responsible
     Officer,  which  certificate  shall  state that said  financial  statements
     fairly  present  the  consolidated   financial  condition  and  results  of
     operations of the Borrower and its Consolidated  Subsidiaries in accordance
     with  GAAP,  as at the end of,  and for,  such  period  (subject  to normal
     year-end  audit  adjustments),  together with  calculations  confirming the
     Borrower's  compliance with all financial covenants,  certified by a senior
     financial officer of Borrower.

          (c)  Capital Plan and  Operating  Budget.  As soon as available and in
     any event  within  seventy-five  (75) days after the end of each  preceding
     fiscal year of the  Borrower,  the  Borrower's  capital plan and  operating
     budget for the current fiscal year.

          (d)  Notice of Default,  Etc.  Promptly  after the Borrower knows that
     any Default or any Material  Adverse Effect has occurred,  a notice of such
     Default or  Material  Adverse  Effect,  describing  the same in  reasonable
     detail and the action the Borrower proposes to take with respect thereto.

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<PAGE>

          (e)  Other Accounting  Reports.  Promptly upon receipt thereof, a copy
     of each other report or letter  submitted to the Borrower or any Subsidiary
     by  independent  accountants  in  connection  with any  annual,  interim or
     special  audit  made  by  them  of  the  books  of  the  Borrower  and  its
     Subsidiaries,  including any reference to environmental matters, and a copy
     of any response by the Borrower or any  Subsidiary of the Borrower,  or the
     Board of Directors of the Borrower or any  Subsidiary of the  Borrower,  to
     such letter or report.

          (f)  SEC Filings,  Etc.  Promptly  upon its becoming  available,  each
     financial statement, report, notice or proxy statement sent by the Borrower
     to  stockholders  generally  and each  regular or  periodic  report and any
     registration  statement,  prospectus or written  communication  (other than
     transmittal  letters)  in respect  thereof  filed by the  Borrower  with or
     received  by the  Borrower  in  connection  therewith  from any  securities
     exchange or the SEC or any successor agency.

          (g)  Notices  Under  Other  Loan   Agreements.   Promptly   after  the
     furnishing thereof, copies of any statement,  report or notice furnished to
     any Person pursuant to the terms of any indenture,  loan or credit or other
     similar agreement,  other than this Agreement and not otherwise required to
     be furnished to the Lenders pursuant to any other provision of this Section
     8.01.

          (h)  Production  Reports. As soon as available and in any event within
     sixty  (60)  days  after  the end of each  calendar  quarter,  a  quarterly
     production report including volumes,  revenue, and lease operating expenses
     attributable to the Oil and Gas Properties included in the Borrowing Base.

          (i)  Hedging Agreements.  As soon as available and in any event within
     ten (10)  Business  Days  after the last day of each  calendar  quarter,  a
     report, in form and substance  satisfactory to the Agent,  setting forth as
     of the last Business Day of such calendar  quarter a true and complete list
     of all  Hedging  Agreements  (including  commodity  price swap  agreements,
     forward  agreements or contracts of sale which provide for  prepayment  for
     deferred  shipment  or delivery of oil,  gas or other  commodities)  of the
     Borrower and each  Subsidiary,  the material  terms thereof  (including the
     type,  term,  effective  date,  termination  date and  notional  amounts or
     volumes), the net mark to market value therefor.

          (j)  Other Matters. From time to time such other information regarding
     the  business,  affairs  or  financial  condition  of the  Borrower  or any
     Subsidiary (including,  without limitation,  any Plan or Multiemployer Plan
     and any reports or other  information  required to be filed under ERISA) as
     any Lender or the Agent may reasonably request.

The  Borrower  will furnish to the Agent,  at the time it furnishes  each set of
financial  statements  pursuant to  paragraph  (a) or (b) above,  a  certificate
substantially  in the form of Exhibit C executed  by a  Responsible  Officer (i)
certifying  as to the matters set forth  therein and stating that no Default has
occurred and is continuing  (or, if any Default has occurred and is  continuing,
describing the same in reasonable detail),  and (ii) setting forth in reasonable
detail the  computations  necessary  to  determine  whether  the  Borrower is in
compliance  with  Sections  9.12,  9.13,  9.14,  and 9.15,  as of the end of the
respective fiscal quarter or fiscal year.

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<PAGE>

     Section 8.02  Litigation.  The Borrower  shall  promptly  give to the Agent
notice of: (i) all legal or arbitral proceedings,  and of all proceedings before
any  Governmental  Authority to which the Borrower or any  Subsidiary is a party
and to the best of Borrower's  knowledge,  all legal or arbitral proceedings and
all proceedings before any Governmental  Authority affecting the Borrower or any
Subsidiary,  except proceedings which, if adversely determined, would not have a
Material  Adverse  Effect,  and (ii) of any litigation or proceeding  against or
adversely  affecting the Borrower or any Subsidiary in which the amount involved
is not covered in full by insurance (subject to normal and customary deductibles
and for which the insurer has not assumed the defense),  or in which  injunctive
or  similar  relief is sought.  The  Borrower  will,  and will cause each of its
Subsidiaries  to,  promptly  notify  the  Agent and each of the  Lenders  of all
claims,  judgments,  Liens or other  encumbrances  affecting any Property of the
Borrower or any  Subsidiary  if the value of the claims,  judgments,  Liens,  or
other  encumbrances  affecting  such Property  shall exceed  $500,000.00  in the
aggregate.

     Section 8.03   Maintenance, Etc.
                    -----------------

          (a)  Generally. The Borrower shall and shall cause each Subsidiary to:
     preserve  and  maintain  its  corporate  existence  and all of its material
     rights,  privileges  and  franchises;  keep books of record and  account in
     which  full,  true and  correct  entries  will be made of all  dealings  or
     transactions  in relation to its business and  activities;  comply with all
     Governmental  Requirements if failure to comply with such requirements will
     have a Material  Adverse Effect;  pay and discharge all taxes,  assessments
     and  governmental  charges  or  levies  imposed  on it or on its  income or
     profits  or on any of its  Property  prior to the  date on which  penalties
     attach  thereto,  except for any such tax,  assessment,  charge or levy the
     payment of which is being contested in good faith and by proper proceedings
     and against which adequate reserves are being  maintained;  upon reasonable
     notice,  permit  representatives of the Agent or any Lender,  during normal
     business  hours,  to  examine,  copy and make  extracts  from its books and
     records, to inspect its Properties, and to discuss its business and affairs
     with its officers, all to the extent reasonably requested by such Lender or
     the Agent (as the case may be); and keep,  or cause to be kept,  insured by
     financially  sound and  reputable  insurers  all  Property  of a  character
     usually  insured  by  Persons  engaged  in the  same  or  similar  business
     similarly  situated  against loss or damage of the kinds and in the amounts
     customarily  insured against by such Persons and carry such other insurance
     as is  usually  carried  by such  Persons  including,  without  limitation,
     environmental risk insurance to the extent reasonably available, or provide
     adequate  reserves  for  self-insurance  for any  contingent  environmental
     liability.   The  Borrower  shall  promptly  obtain  endorsements  to  such
     insurance policies naming "Wells Fargo Bank, National Association, as Agent
     for the Lenders" as joint loss payee,  additional  insured,  and containing
     provisions  that such policies will not be canceled  without 30 days' prior
     written notice having been given by the insurance company to the Agent (and
     not that the  insurance  company will merely  endeavor to give the Agent 30
     days' prior  written  notice prior to  cancellation).  Notwithstanding  the
     foregoing,  but subject to the terms of this Agreement,  the Borrower shall
     be allowed to dissolve and liquidate any Inactive Subsidiary; provided that
     any assets  available  for  distribution  following  such  dissolution  and
     liquidation  are  distributed to the Borrower or an Active  Subsidiary.  No

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<PAGE>

     assets  can be  transferred  to any  Inactive  Subsidiary  once it  reaches
     inactive status without the prior written consent of the Agent, nor can any
     Inactive Subsidiary, once it reaches inactive status, make any investments,
     loans, or advances.

          (b)  Proof of  Insurance.  Contemporaneously  with the delivery of the
     financial  statements  required by Section 8.01(a) to be delivered for each
     year,  the Borrower  will furnish or cause to be furnished to the Agent and
     the Lenders a  certificate  of insurance  coverage from the insurer in form
     and substance satisfactory to the Agent and, if requested, will furnish the
     Agent and the Lenders copies of the applicable policies.

          (c)  Operation of  Properties.  The Borrower  will and will cause each
     Subsidiary  to  operate  its  Properties  or cause  such  Properties  to be
     operated in a safe,  careful and efficient  manner in  accordance  with the
     practices of the industry,  in compliance with all applicable contracts and
     agreements and in compliance in all material respects with all Governmental
     Requirements, including the Environmental Laws.

          (d)  Oil and Gas  Properties.  The  Borrower  will and will cause each
     Subsidiary  to,  at its own  expense,  do or cause  to be done  all  things
     reasonably necessary to preserve and keep in good repair, working order and
     efficiency all of its Oil and Gas Properties and other material  Properties
     including, without limitation, all equipment, machinery and facilities, and
     from time to time will make all the reasonably necessary repairs,  renewals
     and  replacements  so that at all times the state and  condition of its Oil
     and Gas Properties and other material  Properties  will be fully  preserved
     and  maintained,  except to the extent a portion of such  Properties  is no
     longer  capable  of  producing  Hydrocarbons  in  economically   reasonable
     amounts. The Borrower will and will cause each Subsidiary to promptly:  (i)
     pay and discharge,  or make reasonable and customary efforts to cause to be
     paid  and   discharged,   all  delay  rentals,   royalties,   expenses  and
     indebtedness  accruing  under the leases or other  agreements  affecting or
     pertaining to its Oil and Gas  Properties,  (ii) perform or make reasonable
     and customary efforts to cause to be performed, in accordance with industry
     standards,  the  obligations  required by each and all of the  assignments,
     deeds, leases, sub-leases, contracts and agreements affecting its interests
     in its Oil and Gas Properties and other  material  Properties,  (iii) cause
     each Subsidiary to do all other things necessary to keep unimpaired, except
     for Liens described in Section 9.02, its rights with respect to its Oil and
     Gas  Properties  and other  material  Properties and prevent any forfeiture
     thereof  or a default  thereunder,  except to the  extent a portion of such
     Properties is no longer capable of producing  Hydrocarbons  in economically
     reasonable  amounts and except for dispositions  permitted by Sections 9.16
     and 9.17.  The Borrower will and will cause each  Subsidiary to operate its
     Oil and Gas  Properties  and  other  material  Properties  or cause or make
     reasonable  and customary  efforts to cause such Oil and Gas Properties and
     other material Properties to be operated in a safe, careful,  and efficient
     manner in  accordance  with the practices of the industry and in compliance
     with all  applicable  contracts  and  agreements  and in  compliance in all
     material  respects  with  all  Governmental  Requirements,   including  the
     Environmental Laws.

     Section 8.04   Environmental Matters.
                    ----------------------

          (a)  Establishment  of  Procedures.  The Borrower  will and will cause
     each Subsidiary to assure that any failure of the following does not have a

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     Material  Adverse  Effect:  (i)  all  Property  of  the  Borrower  and  its
     Subsidiaries and the operations  conducted  thereon and other activities of
     the Borrower and its Subsidiaries are in compliance with and do not violate
     the  requirements  of  any  Environmental  Laws,  (ii)  no  oil,  hazardous
     substances  or solid wastes are disposed of or otherwise  released on or to
     any  Property   owned  by  any  such  party  except  in   compliance   with
     Environmental  Laws, (iii) no hazardous substance will be released on or to
     any such Property in a quantity  equal to or exceeding  that quantity which
     requires  reporting pursuant to Section 103 of CERCLA, and (iv) no oil, oil
     and gas  exploration  and  production  wastes  or  hazardous  substance  is
     released  on  or to  any  such  Property  so as to  pose  an  imminent  and
     substantial  endangerment  to public health or welfare or the  environment.
     Upon  request from the Agent,  the  Borrower  will notify the Agent and the
     Lenders in writing of such  environmental  procedures  as are in effect for
     each Property of Borrower and its Subsidiaries on a quarterly basis.

          (b)  Notice of Action. The Borrower will promptly notify the Agent and
     the  Lenders in  writing  within 30 days of such  notice of any  threatened
     action,  investigation  or inquiry  against or of the  Borrower  and/or any
     Subsidiary  by  any  Governmental  Authority  of  which  the  Borrower  has
     knowledge in connection with any Environmental  Laws and which, if resolved
     adversely  to the  Borrower  and/or any  Subsidiary,  could have a Material
     Adverse Effect, excluding routine testing, but including corrective action.

          (c)  Cure of Environmental Noncompliance.  The Borrower shall cure any
     material environmental  noncompliance or exceptions to any of the Mortgaged
     Properties  or, if  requested  by Agent,  substitute  acceptable  Mortgaged
     Properties with no  environmental  noncompliance  of an equivalent value by
     the  execution  of documents in form and  substance  satisfactory  to Agent
     (together with evidence  satisfactory  to Agent of a first priority deed of
     trust lien and security  interest in such Mortgaged  Properties,  which may
     include opinions of counsel at the request of Agent),  within 30 days after
     a request by the Agent or the Lenders to cure such defects or exceptions.

          (d)  Future  Acquisitions.  The  Borrower  will  and will  cause  each
     Subsidiary  to  obtain  such  Phase  I  environmental  audits  as  would  a
     reasonable and prudent  purchaser of oil and gas properties in the vicinity
     of the Oil and Gas Properties  being acquired in connection with any future
     acquisitions   of  material  Oil  and  Gas  Properties  or  other  material
     Properties.  Such environmental audits shall be performed by scientifically
     trained USA-graduate professional engineers and professional geologists who
     are  licensed in one or more states of the USA,  and shall be  performed in
     accordance  with  applicable  best  professional  standards,  including the
     American  Society  for  Testing  Material  standards,  and,  in addition to
     CERCLA,  shall  also  address  all  hazardous  substances  under  all other
     Environmental Laws.

     Section 8.05  Further  Assurances.  The  Borrower  will and will cause each
Subsidiary  to cure  promptly  any defects in the  creation  and issuance of the
Notes and the  execution  and  delivery  of the  Security  Instruments  and this
Agreement.  The Borrower at its expense will and will cause each  Subsidiary  to
promptly execute and deliver to the Agent upon request all such other documents,
agreements  and  instruments  to comply with or  accomplish  the  covenants  and
agreements  of the  Borrower  or any  Subsidiary,  as the  case  may be,  in the
Security  Instruments and this Agreement,  or to further evidence and more fully

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describe the  collateral  intended as security for the Notes,  or to correct any
omissions  in the  Security  Instruments,  or to state more  fully the  security
obligations set out herein or in any of the Security Instruments, or to perfect,
protect  or  preserve  any  Liens  created  pursuant  to  any  of  the  Security
Instruments,  or to make any  recordings,  to file any  notices  or  obtain  any
consents, all as may be necessary or appropriate in connection therewith.

     Section 8.06  Performance of  Obligations.  The Borrower will pay the Notes
according to the reading,  tenor and effect  thereof;  and the Borrower will and
will cause each  Subsidiary to do and perform every act and discharge all of the
obligations   to  be  performed  and  discharged  by  them  under  the  Security
Instruments  and  this  Agreement,  at the  time  or  times  and  in the  manner
specified.

     Section 8.07   Engineering Reports.
                    --------------------

          (a)  Not less  than  forty-five  (45)  days  prior  to each  Scheduled
     Redetermination Date, commencing with the Scheduled Redetermination Date to
     occur on December 1, 2005,  the Borrower shall furnish to the Agent and the
     Lenders a Reserve Report. The Reserve Report for the June 1 redetermination
     shall be prepared by  certified  independent  petroleum  engineers or other
     independent petroleum consultant(s) acceptable to the Agent and the Reserve
     Report for the December 1 redetermination shall be prepared by or under the
     supervision  of the chief  engineer of the Borrower who shall  certify such
     Reserve  Report  to be true  and  accurate  and to have  been  prepared  in
     accordance with the procedures  used in the  immediately  proceeding June 1
     Reserve Report.

          (b)  In the  event of an  unscheduled  redetermination,  the  Borrower
     shall furnish to the Agent and the Lenders a Reserve Report  prepared by or
     under the  supervision  of the chief  engineer  of the  Borrower  who shall
     certify  such  Reserve  Report  to be true and  accurate  and to have  been
     prepared  in  accordance  with  the  procedures  used  in  the  immediately
     preceding Reserve Report. For any unscheduled  redetermination requested by
     the Majority  Lenders or the  Borrower  pursuant to Section  2.08(d)),  the
     Borrower shall provide such Reserve Report with an "as of" date as required
     by the Agent as soon as  possible,  but in any event no later  than  thirty
     (30) days following the receipt of the request by the Agent.

          (c)  With the delivery of each  Reserve  Report,  the  Borrower  shall
     provide to the Agent and the  Lenders,  a  certificate  from a  Responsible
     Officer  certifying  that, to the best of his knowledge and in all material
     respects:  (i) the historical information delivered in connection therewith
     to the preparers of such report is true and correct,  (ii) the Borrower and
     the Active  Subsidiaries  own good and defensible  title to the Oil and Gas
     Properties evaluated in such Reserve Report and such Properties are free of
     all Liens except for Liens  permitted by Section 9.02, and such  Properties
     comply  with  all  Environmental  Laws  except  for  Environmental  Matters
     permitted by Section  7.17,  (iii) except as set forth on an Exhibit to the
     certificate,  on a net basis  there are no gas  imbalances,  take or pay or
     other  prepayments with respect to its Oil and Gas Properties  evaluated in
     such Reserve Report which would require the Borrower or its Subsidiaries to
     deliver  Hydrocarbons  produced  from such Oil and Gas  Properties  at some
     future time without then or  thereafter  receiving  full payment  therefor,
     (iv) none of its Oil and Gas  Properties  have been sold  since the date of
     the last Borrowing Base determination  except as set forth on an Exhibit to

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     the  certificate,  which  certificate  shall  list  all of its  Oil and Gas
     Properties sold and in such detail as reasonably required by the Agent, (v)
     attached to the  certificate is a list of its Oil and Gas Properties  added
     to and deleted from the immediately prior Reserve Report and a list showing
     any change in working  interest or net revenue  interest in its Oil and Gas
     Properties  occurring and the reason for such change,  (vi) attached to the
     certificate  is a list of all Persons  disbursing  proceeds to the Borrower
     from its Oil and Gas Properties and (vii) except as set forth on a schedule
     attached to the certificate all of the Oil and Gas Properties  evaluated by
     such Reserve Report are Mortgaged Property.

     Section 8.08   Title Information and Mortgage Coverage.
                    ----------------------------------------

          (a)  Delivery.  On or before the delivery to the Agent and the Lenders
     of each Reserve  Report  required by Section  8.07(a),  the  Borrower  will
     deliver title  information  in form and  substance  acceptable to the Agent
     covering  enough of the Oil and Gas  Properties  evaluated  by such Reserve
     Report that were not included in the immediately  preceding Reserve Report,
     so that the Agent  shall have  received  together  with  title  information
     previously  delivered to the Agent,  satisfactory  title  information on at
     least  eighty  percent  (80%) of the  value  of the Oil and Gas  Properties
     evaluated by such Reserve Report.

          (b)  Cure of Title Defects.  The Borrower shall cure any title defects
     or exceptions which are not Excepted Liens or Liens otherwise  permitted by
     Section 9.02 raised by such information, or substitute acceptable Mortgaged
     Properties with no title defects or exceptions except for Excepted Liens or
     Liens otherwise permitted by Section 9.02 covering Mortgaged  Properties of
     an  equivalent  value,  within 90 days  after a request by the Agent or the
     Lenders to cure such defects or exceptions.

          (c)  Failure to Cure Title Defects.  If the Borrower is unable to cure
     any title  defect  requested by the Agent or the Lenders to be cured within
     the 90-day period or the Borrower does not comply with the  requirements to
     provide  acceptable title information  covering eighty percent (80%) of the
     value of the Oil and Gas  Properties  evaluated in the most recent  Reserve
     Report,  such  default  shall not be a Default or an Event of Default,  but
     instead  the Agent and the  Lenders  shall have the right to  exercise  the
     following  remedy  in their  sole  discretion  from  time to time,  and any
     failure to so exercise  this remedy at any time shall not be a waiver as to
     future  exercise of the remedy by the Agent or the  Lenders.  To the extent
     that the Agent or the Lenders are not satisfied with title to any Mortgaged
     Property  after the time  period  in  Section  8.08(b)  has  elapsed,  such
     unacceptable  Mortgaged Property shall not count towards the eighty percent
     (80%) requirement,  and the Agent may send a notice to the Borrower and the
     Lenders  that the then  outstanding  Borrowing  Base shall be reduced by an
     amount as  determined  by all of the Lenders to cause the Borrower to be in
     compliance with the requirement to provide  acceptable title information on
     eighty  percent  (80%) of the value of the proved  Oil and Gas  Properties.
     This new Borrowing Base shall become effective immediately after receipt of
     such notice.

     Section 8.09 Collateral.
                  -----------

          (a)  Collateral. The Obligations shall be secured by a perfected first

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     priority Lien (subject only to Excepted Liens or Liens otherwise  permitted
     by Section 9.02) granted to the Agent for the benefit of the  Beneficiaries
     in at  least  eighty  percent  (80%) in  value  of the  proved  Oil and Gas
     Properties  currently  owned and hereafter  acquired by the Borrower and/or
     any  of its  Active  Subsidiaries  plus  all  other  assets,  exclusive  of
     certificated  vehicles,  of the Borrower and/or any of its Subsidiaries now
     owned or hereafter acquired.

          (b)  Lien in  Acquired  Oil and Gas  Properties.  Should the  Borrower
     acquire any additional  Oil and Gas  Properties or additional  interests in
     its existing Oil and Gas  Properties,  the Borrower will grant to the Agent
     as security for the  Obligations a  first-priority  Lien interest  (subject
     only to Excepted Liens or Liens otherwise permitted by Section 9.02) on the
     Borrower's  interest in eighty percent (80%) of the value of the proved Oil
     and Gas  Properties  acquired,  which Lien will be created and perfected by
     and in  accordance  with the  provisions  of  mortgages,  deeds  of  trust,
     security   agreements   and  financing   statements,   or  other   Security
     Instruments,  all in form and  substance  satisfactory  to the Agent in its
     sole  discretion  exercised in good faith and in  sufficient  executed (and
     acknowledged  where  necessary or appropriate)  counterparts  for recording
     purposes.

          (c)  Title Information.  Concurrently with the granting of the Lien or
     other  action  referred to in Section  8.09(b)  above,  the  Borrower  will
     provide to the Agent title  information in form and substance  satisfactory
     to the Agent in its sole discretion exercised in good faith with respect to
     the Borrower's interests in such Oil and Gas Properties.

          (d)  Legal  Opinions.  Also,  promptly  after  the  filing  of any new
     Security  Instrument  in any state,  upon the  request  of the  Agent,  the
     Borrower  will  provide to the Agent an opinion  addressed to the Agent for
     the benefit of the Lenders in form and substance  satisfactory to the Agent
     and Agent's counsel in their sole  discretion,  from counsel  acceptable to
     Agent and Agent's counsel,  stating that the Security  Instrument creates a
     valid Lien and is valid,  binding,  and  enforceable in accordance with its
     terms in legally  sufficient form for such  jurisdiction,  and the means by
     which to perfect the Lien created by such Security Instruments.

     Section 8.10 Cash Collateral  Account  Agreement.  Upon the occurrence of a
Default,  the  Borrower  and all of its  Subsidiaries  shall cause all  proceeds
arising from its Oil and Gas Properties,  including without  limitation from the
sale of Hydrocarbons,  to be directed to a Lockbox (and in connection therewith,
Borrower  and all of its  Subsidiaries  shall  execute a Lockbox  Agreement  and
financing  statements in form and substance  satisfactory to the Agent) pursuant
to letters  acceptable  to the Agent  stating  that such  directions  may not be
changed  without the written consent of the Agent.  The Cash Collateral  Account
Agreement  and the  Liens  and  security  interests  established  in  such  Cash
Collateral  Account Agreement will continue until all the Obligations under this
Agreement are paid in full and this Agreement is terminated.

     Section 8.11 Mortgage Title Opinions. Within thirty (30) days following the
Initial  Funding,  the  Borrower  shall cause to be delivered to the Agent title
opinions satisfactory to the Agent supplementing the opinions delivered pursuant
to  Section  6.01(j)  above and  showing  the lien of the  Security  Instruments
covering  the  Mortgaged  Property  to be first  and  prior  and  subject  to no
exceptions not reflected in such prior title opinions.

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     Section 8.12 ERISA  Information and Compliance.  The Borrower will promptly
furnish  and will cause the  Subsidiaries  and any ERISA  Affiliate  to promptly
furnish to the Agent with  sufficient  copies to the Lenders (i) promptly  after
the filing  thereof  with the United  States  Secretary  of Labor,  the Internal
Revenue Service or the PBGC, copies of each annual and other report with respect
to each Plan or any trust created  thereunder,  (ii)  immediately  upon becoming
aware of the occurrence of any ERISA Event or of any  "prohibited  transaction,"
as  described  in  Section  406 of  ERISA or in  Section  4975 of the  Code,  in
connection  with any Plan or any trust  created  thereunder,  a  written  notice
signed by a Responsible  Officer specifying the nature thereof,  what action the
Borrower,  the  Subsidiary or the ERISA  Affiliate is taking or proposes to take
with  respect  thereto,  and,  when known,  any action  taken or proposed by the
Internal  Revenue  Service,  the  Department  of Labor or the PBGC with  respect
thereto, and (iii) immediately upon receipt thereof, copies of any notice of the
PBGC's  intention to terminate or to have a trustee  appointed to administer any
Plan. With respect to each Plan (other than a Multiemployer  Plan), the Borrower
will, and will cause each Subsidiary and ERISA Affiliate to, (i) satisfy in full
and in a timely  manner,  without  incurring  any late  payment or  underpayment
charge or penalty and without giving rise to any lien,  all of the  contribution
and funding  requirements of Section 412 of the Code (determined  without regard
to  subsections  (d),  (e),  (f) and (k)  thereof)  and of Section  302 of ERISA
(determined without regard to sections 303, 304 and 306 of ERISA), and (ii) pay,
or cause to be paid, to the PBGC in a timely manner,  without incurring any late
payment or underpayment  charge or penalty,  all premiums  required  pursuant to
sections 4006 and 4007 of ERISA.

     Section 8.13 Joinder and Guaranty Agreements.  The Borrower and each of its
Subsidiaries  will  cause  each of their  Subsidiaries,  whether  newly  formed,
hereafter  acquired,  or otherwise  existing,  upon the creation or  acquisition
thereof,  to become a Guarantor hereunder by way of a Joinder Agreement attached
hereto as  Exhibit  G, a  Guaranty  Agreement  attached  hereto as  Exhibit H, a
Contribution  Agreement by and among the Borrower  and all  Guarantors,  and the
execution of mortgages,  deeds of trust,  security agreements,  pledges, and any
other  instruments  in form and substance  satisfactory  to Agent and in Agent's
sole discretion  covering all of such  Subsidiaries'  assets as security for the
Obligations,  together with evidence  satisfactory to the Agent, in Agent's sole
discretion,  that all such  collateral will be subject to a perfected first Lien
on such collateral,  exclusive of certificated  vehicles, in favor of the Agent,
with  only  such  Liens or  other  encumbrances  of any kind on such  collateral
permitted by Section 9.02 or otherwise permitted by the Agent.

     Section 8.14 Hedging. Agent, in its discretion, may require the Borrower to
hedge a percentage of projected  production  volumes  determined by the Agent in
its sole  discretion,  on terms acceptable to the Agent,  whenever  Borrower has
Loans and LC Exposure  under this  Agreement in excess of  seventy-five  percent
(75%) of the Borrowing Base.

                                   ARTICLE IX

                               NEGATIVE COVENANTS

     The Borrower  covenants and agrees that, so long as any of the  Commitments
are in effect and until payment in full of Loans hereunder, all interest thereon
and all other  amounts  payable by the  Borrower  hereunder,  without  the prior
written consent of the Majority Lenders:

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<PAGE>

     Section  9.01 Debt.  Neither the Borrower  nor any  Subsidiary  will incur,
create, assume or permit to exist any Debt, except (with respect to the Borrower
and any Active Subsidiary):

          (a)  the Notes or other  Obligations  or any guaranty of or suretyship
     arrangement for the Notes or other  Obligations  (provided,  however,  that
     nothing  contained  herein  shall  prohibit any  Inactive  Subsidiary  from
     executing a guaranty  of, or entering a  suretyship  arrangement  for,  the
     Notes or other Obligations);

          (b)  Debt of the Borrower or a Subsidiary existing on the Closing Date
     which is reflected in the Financial  Statements or is disclosed in Schedule
     9.01, and any renewals or extensions (but not increases) thereof;

          (c)  accounts payable (for the deferred  purchase price of Property or
     services),  amounts owed to operators of the  Hydrocarbon  Interests  under
     applicable  joint operating  agreements or other  extensions of credit from
     suppliers or contractors  from time to time incurred in the ordinary course
     of  business  which,  if greater  than 90 days past the  invoice or billing
     date,  are being  contested  in good faith by  appropriate  proceedings  if
     reserves adequate under GAAP shall have been established therefor;

          (d)  Purchase money Debt of the Borrower or any Active  Subsidiary and
     Debt under  capital  leases (as  required to be  reported on the  financial
     statements of the Borrower or any Active  Subsidiary  pursuant to GAAP) not
     to exceed $1,000,000.00 in the aggregate;

          (e)  Debt  associated  with bonds or surety  obligations  required  by
     Governmental  Requirements  in connection with the operation of the Oil and
     Gas Properties, not to exceed $2,000,000 in the aggregate; and

          (f)  Debt of the Borrower and its Active  Subsidiaries  under  Hedging
     Agreements,  but  only  if (i)  it is not a  speculative  hedge;  (ii)  the
     provider of the Hedging Agreements is a Lender or an unsecured counterparty
     acceptable to the Agent;

          (g)  Debt among the Borrower and its Active Subsidiaries, or among the
     Active Subsidiaries,  in the form of intercompany advances not evidenced by
     notes or other  instruments if such Active  Subsidiary is a Guarantor under
     this Agreement;

          (h)  Accrued FAS 143 asset retirement obligations;

          (i)  Revenue  suspense  accounts with respect to the Borrower's or any
     Active Subsidiary's Hydrocarbon Interests;

          (j)  Debt not otherwise  permitted under this Section 9.01, which does
     not exceed at one time an aggregate principal amount of $2,000,000.00.

     Section 9.02 Liens.  Neither the Borrower nor any  Subsidiary  will create,
incur, assume or permit to exist any Lien on any of its Properties (now owned or
hereafter  acquired),  except  (with  respect  to the  Borrower  or  any  Active
Subsidiary):

          (a)  Liens securing the payment of any Obligations (provided, however,

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<PAGE>

     that nothing  contained herein shall prohibit any Inactive  Subsidiary from
     granting Liens to secure the Obligations);

          (b)  Excepted Liens (provided,  however, that nothing contained herein
     shall prohibit any Inactive Subsidiary from creating, incurring,  assuming,
     or permitting  to exist any Excepted  Liens on any of its  Properties  (now
     owned or hereafter acquired));

          (c)  Liens securing  purchase money Debt permitted by Section  9.01(d)
     only to the extent such Liens encumber the Property for which such purchase
     money  Debt  was  incurred,  and  Liens  filed as  precautionary  financing
     statements in connection with leases allowed under Section 9.01(d) but only
     on the  Property  under  the  Lease,  or filed as  precautionary  financing
     statements in connection  with operating  leases,  but only on the Property
     under lease;

          (d)  Liens disclosed on Schedule 9.02; and

          (e)  Liens on cash or  securities  of the  Borrower  securing the Debt
               described in Section 9.01(e).

     Section 9.03 Investments,  Loans and Advances. Neither the Borrower nor any
Subsidiary will make or permit to remain outstanding any loans or advances to or
investments in any Person, except that the foregoing restriction shall not apply
to (with respect to the Borrower or any Active Subsidiary):

          (a)  investments,   loans  or  advances  reflected  in  the  Financial
     Statements or which are disclosed to the Lenders in Schedule 9.03;

          (b)  accounts receivable arising in the ordinary course of business;

          (c)  direct obligations of the United States or any agency thereof, or
     obligations  guaranteed by the United States or any agency thereof, in each
     case maturing within one year from the date of creation thereof;

          (d)  commercial  paper  maturing  within  one  year  from  the date of
     creation   thereof  rated  in  the  highest  grade  by  Standard  &  Poor's
     Corporation or Moody's Investors Service, Inc.;

          (e)  deposits  maturing  within  one year  from  the date of  creation
     thereof with,  including  certificates  of deposit issued by, any Lender or
     any office  located in the United States of any other bank or trust company
     which  is  organized  under  the laws of the  United  States  or any  state
     thereof,  has capital,  surplus and undivided profits  aggregating at least
     $500,000,000  (as of the date of such  Lender's or bank or trust  company's
     most recent  financial  reports) and has a short term deposit  rating of no
     lower  than A2 or P2, as such  rating is set  forth  from time to time,  by
     Standard  &  Poor's  Corporation  or  Moody's  Investors   Service,   Inc.,
     respectively;

          (f)  deposits  in  money  market  funds   investing   exclusively   in
     investments described in Section 9.03(c), 9.03(d) or 9.03(e);

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<PAGE>

          (g)  investments,  loans or advances made by the Borrower in or to its
     Active  Subsidiaries and investments,  loans or advances made by any Active
     Subsidiary in or to the Borrower or another Active  Subsidiary,  as long as
     such Active Subsidiary is a Guarantor under this Agreement.

          (h)  advances to employees  of the  Borrower or any Active  Subsidiary
     for the payment of  expenses in the  ordinary  course of  business,  not to
     exceed $25,000.00 in the aggregate at any one time outstanding;

          (i)  other investments,  loans or advances not to exceed $1,000,000.00
     in the aggregate at any time; and

          (j)  Hedging  Agreements  permitted to be incurred pursuant to Section
     9.01(f).

     Notwithstanding  the foregoing,  the Borrower nor any Subsidiary  will make
     loans or advances to or investments into Madisonville or Elgin Holdings.

     Section 9.04 Dividends,  Distributions  and Redemptions.  The Borrower will
not declare or pay any dividend, purchase, redeem or otherwise acquire for value
any of its stock  now or  hereafter  outstanding  (excluding  dividends  payable
solely in shares of capital  stock and  cashless  exercise  of warrants or stock
options), return any capital to its stockholders or make any distribution of its
assets to its stockholders.

     Section 9.05 Sales and Leasebacks.  Neither the Borrower nor any Subsidiary
will enter into any arrangement, directly or indirectly, with any Person whereby
the  Borrower  or any  Subsidiary  shall sell or transfer  any of its  Property,
whether  now owned or  hereafter  acquired,  and  whereby  the  Borrower  or any
Subsidiary shall then or thereafter rent or lease as lessee such Property or any
part thereof or other Property  which the Borrower or any Subsidiary  intends to
use for  substantially  the same  purpose or  purposes as the  Property  sold or
transferred.

     Section  9.06 Nature of Business.  Neither the Borrower nor any  Subsidiary
will allow any material change to be made in the character of its business as an
oil and gas exploration and production company.

     Section 9.07 Limitation on Leases.  Neither the Borrower nor any Subsidiary
will create,  incur, assume or permit to exist any obligation for the payment of
rent or hire of Property of any kind whatsoever (real or personal, but excluding
capital leases, leases of Hydrocarbon Interests, and other leases of oil and gas
field  production  equipment  entered into in the ordinary  course of business),
under leases or lease  agreements  which would cause the aggregate amount of all
payments made by the Borrower and its Subsidiaries pursuant to all such lease or
lease agreements to exceed  $500,000.00 in any period of twelve (12) consecutive
calendar months during the life of such leases.

     Section  9.08  Mergers,  Acquisitions,  Etc.  Neither the  Borrower nor any
Subsidiary will acquire assets or all or any part of any other Person,  or merge
into or with or  consolidate  with any other  Person  unless (x) the Borrower or
such  Subsidiary  shall  be  the  surviving  entity  in  such  transaction;  (y)
substantially  all of the  assets  of such  Person  shall  consist  of  domestic
undeveloped  Hydrocarbon Interests or domestic developed Oil and Gas Properties;
and (z) no Event of Default under Section  10.01(l) shall result  therefrom,  or

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sell,  lease or otherwise  dispose of (whether in one transaction or in a series
of transactions) all or substantially all of its Property or assets to any other
Person  other than the  Borrower  or an Active  Subsidiary;  provided,  however,
nothing shall prohibit Borrower or any Active Subsidiary from: (i) acquiring (a)
any domestic undeveloped  Hydrocarbon Interests,  (b) domestic developed Oil and
Gas  Properties  or (c)  all of  the  outstanding  capital  stock  of a  Person,
substantially  all of the  Property of which  consists  of domestic  undeveloped
Hydrocarbon  Interests or domestic developed Oil and Gas Properties,  so long as
Borrower or such Active  Subsidiary  pledges and/or mortgages to the Lenders all
such developed Oil and Gas Properties or capital stock acquired pursuant thereto
(to the extent  necessary to maintain  Agent's  Lien in at least eighty  percent
(80%)  by  value  of the  proved  Oil and Gas  Properties  of  Borrower  and its
Subsidiaries)  by execution of documents in form and substance  satisfactory  to
Agent in its sole  discretion,  granting  perfected,  first  priority  Liens and
security  interests  in such Oil and Gas  Properties  subject  only to  Excepted
Liens,  Liens otherwise  permitted by Section 9.02 and other Liens acceptable to
the Lenders;  or (ii) merging  (after  having given Agent thirty (30) days prior
written  notice)  (a) any Active or  Inactive  Subsidiary  into  another  Active
Subsidiary or (b) any Guarantor into Borrower.

     Section 9.09  Proceeds of Notes;  Letters of Credit.  The Borrower will not
permit the proceeds of the Notes or Letters of Credit to be used for any purpose
other than those permitted by Section 7.07.  Neither the Borrower nor any Person
acting on behalf of the  Borrower  has taken or will take any action which might
cause any of the Loan  Documents  to violate  Regulation  T, U or X or any other
regulation of the Board of Governors of the Federal Reserve System or to violate
Section  7 of the  Securities  Exchange  Act of 1934 or any  rule or  regulation
thereunder,  in each case as now in effect or as the same may  hereinafter be in
effect.

     Section 9.10 ERISA Compliance. The Borrower will not at any time:
                  ----------------

          (a)  Engage in, or permit any Subsidiary or ERISA  Affiliate to engage
     in, any transaction in connection  with which the Borrower,  any Subsidiary
     or any  ERISA  Affiliate  could be  subjected  to  either  a civil  penalty
     assessed  pursuant to Section 502(c),  (i) or (l) of ERISA or a tax imposed
     by Chapter 43 of Subtitle D of the Code;

          (b)  Terminate,  or  permit  any  Subsidiary  or  ERISA  Affiliate  to
     terminate,  any Plan in a manner,  or take any other action with respect to
     any  Plan,  which  could  result  in any  liability  to the  Borrower,  any
     Subsidiary or any ERISA Affiliate to the PBGC;

          (c)  Fail to make, or permit any Subsidiary or ERISA Affiliate to fail
     to make,  full payment when due of all amounts which,  under the provisions
     of any Plan,  agreement relating thereto or applicable law, the Borrower, a
     Subsidiary  or any ERISA  Affiliate  is  required  to pay as  contributions
     thereto;

          (d)  Permit to exist,  or allow any  Subsidiary or ERISA  Affiliate to
     permit to exist, any accumulated  funding  deficiency within the meaning of
     Section  302 of ERISA or Section  412 of the Code,  whether or not  waived,
     with respect to any Plan;

          (e)  Permit, or allow any Subsidiary or ERISA Affiliate to permit, the
     actuarial  present  value  of  the  benefit   liabilities  under  any  Plan
     maintained by the Borrower,  any Subsidiary or any ERISA Affiliate which is
     regulated under Title IV of ERISA to exceed the current value of the assets
     (computed on a plan termination basis in accordance with Title IV of ERISA)
     of such Plan  allocable to such benefit  liabilities.  The term  "actuarial

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     present value of the benefit  liabilities" shall have the meaning specified
     in Section 4041 of ERISA;

          (f)  Contribute to or assume an obligation to contribute to, or permit
     any Subsidiary or ERISA  Affiliate to contribute to or assume an obligation
     to contribute to, any Multiemployer Plan;

          (g)  Acquire,  or permit any Subsidiary or ERISA Affiliate to acquire,
     an  interest  in any  Person  that  causes  such  Person to become an ERISA
     Affiliate  with  respect  to the  Borrower,  any  Subsidiary  or any  ERISA
     Affiliate if such Person  sponsors,  maintains or contributes to, or at any
     time in the six-year  period  preceding  such  acquisition  has  sponsored,
     maintained, or contributed to, (1) any Multiemployer Plan, or (2) any other
     Plan that is subject to Title IV of ERISA under which the actuarial present
     value of the benefit  liabilities under such Plan exceeds the current value
     of the assets  (computed on a plan  termination  basis in  accordance  with
     Title IV of ERISA) of such Plan allocable to such benefit liabilities;

          (h)  Incur,  or permit any  Subsidiary or ERISA  Affiliate to incur, a
     liability to or on account of a Plan under sections 515, 4062,  4063, 4064,
     4201 or 4204 of ERISA;

          (i)  Contribute to or assume an obligation to contribute to, or permit
     any Subsidiary or ERISA  Affiliate to contribute to or assume an obligation
     to contribute to, any employee  welfare benefit plan, as defined in Section
     3(1) of ERISA, including,  without limitation,  any such plan maintained to
     provide  benefits to former  employees  of such  entities,  that may not be
     terminated  by such  entities in their sole  discretion at any time without
     any material liability; or

          (j)  Amend or permit any  Subsidiary  or ERISA  Affiliate to amend,  a
     Plan resulting in an increase in current  liability such that the Borrower,
     any  Subsidiary or any ERISA  Affiliate is required to provide  security to
     such Plan under Section 401(a)(29) of the Code.

     Section 9.11 Sale or Discount of Receivables.  Neither the Borrower nor any
Subsidiary  will  discount or sell (with or without  recourse)  any of its notes
receivable  or  accounts  receivable  (other  than a  settlement  on an  account
receivable in the ordinary course of business).

     Section 9.12 Capital  Expenditures.  The Borrower  will not make (or permit
any  Subsidiaries to make) any  expenditures for fixed or capital assets unless:
(a) in the  ordinary  course  of  business  and  (b) it  does  not  violate  the
provisions of Section 9.08.

     Section 9.13 Current  Ratio.  The Borrower will not permit its ratio of (i)
consolidated  Current  Assets  (including,  without  limitation,  Borrowing Base
availability  for  general  corporate  purposes)  to (ii)  consolidated  Current
Liabilities  (excluding current maturities of the Notes) to be less than 1.00 to
1.00 at any time. The current ratio shall be calculated and tested  quarterly as
of the last day of each fiscal  quarter of Borrower,  beginning with the quarter
ending June 30, 2005. As used in this Section 9.13,  "Current Assets" shall have
the meaning of such term as defined by GAAP,  except any availability  under the
Borrowing  Base  shall be  included  in the  definition  of  Current  Assets and
"Current  Liabilities"  shall have the  meaning of such term as defined by GAAP,
except that  current  maturities  of the Notes shall be  excluded  from  Current

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Liabilities.  Current  asset  or  liability  accounts  associated  with  Hedging
Agreements will be excluded from calculations of the Current Ratio.

     Section 9.14 Tangible Net Worth. The Borrower will not permit, at any time,
its Tangible Net Worth to be less than $45,000,000.00,  plus fifty percent (50%)
of positive net income, plus one hundred percent (100%) of the net cash proceeds
of equity  offerings after the Closing Date. For purposes of calculation of this
covenant, the effects of FAS 133, FAS 143, and FAS 123R will be excluded.

     Section 9.15  Interest  Coverage  Ratio.  The Borrower  will not permit its
Interest  Coverage  Ratio as of the end of any fiscal  quarter  of the  Borrower
(calculated  quarterly at the end of each fiscal quarter  commencing with fiscal
quarter  ended June 30, 2005) to be less than 3.00 to 1.00.  For the purposes of
this Section 9.15, "Interest Coverage Ratio" shall mean the ratio of (i) EBITDAX
for the four fiscal quarters ending on such date to (ii) cash interest  payments
made  for  such  four  fiscal  quarters  of the  Borrower  and its  Consolidated
Subsidiaries.  Notwithstanding  the  foregoing  provisions of this Section 9.15,
EBITDAX and cash interest  payments as of June 30, 2005,  shall be calculated as
EBITDAX  and  cash  interest  payments  for the  quarter  ending  on  such  date
multiplied by four (4);  EBITDAX and cash interest  payments as of September 30,
2005,  shall be  calculated  as  EBITDAX  and  cash  interest  payments  for the
two-quarter  period  ending on such date  multiplied by two (2); and EBITDAX and
cash interest  payments as of December 31, 2005,  shall be calculated as EBITDAX
and cash  interest  payments for the  three-quarter  period  ending on such date
multiplied by four (4) and divided by three (3).

     Section 9.16 Sale of Mortgaged Properties.  The Borrower will not, and will
not permit any Subsidiary  to, sell,  assign,  convey or otherwise  transfer any
Mortgaged  Property  or any  interest  in any  Mortgaged  Property,  except  for
Mortgaged  Property  for which the  Borrower has given the Agent at least thirty
(30) days prior  written  notice of the  proposed  transfer  and which shall not
exceed   $1,000,000.00   in  the  aggregate  in  between  any  two   consecutive
Redetermination Dates.

     Section 9.17 Sale of Oil and Gas  Properties.  The  Borrower  will not, and
will not permit any Subsidiary to, sell, assign,  farm-out,  convey or otherwise
transfer  any Oil and Gas  Property or any  interest in any Oil and Gas Property
except for (i) the sale of Hydrocarbons in the ordinary course of business; (ii)
farmouts  of  undeveloped  acreage  and  assignments  in  connection  with  such
farmouts;  (iii) the sale or transfer of equipment  that is no longer  necessary
for the  business of the  Borrower or such  Subsidiary  or is  contemporaneously
replaced by equipment of at least comparable value and use and (iv) sales in the
ordinary  course of business of Oil and Gas  Properties  that are not  Mortgaged
Properties,  which shall not exceed  $200,000.00 in the aggregate in between any
two consecutive Redetermination Dates.

     Section 9.18 Environmental Matters. Neither the Borrower nor any Subsidiary
will cause or permit any of its Property to be in  violation  of, or do anything
or permit  anything  to be done which will cause from any  Property  any actual,
alleged  or  threatened  discharge,   dispersal,   release,   escape,  emission,
transportation,   disposal,   seepage,   exposure,   consumption,   or   contact
(collectively,  "Releases") of, with, to, or from any hazardous  substance under
any Environmental Laws, subject any Property to any enforcement action under any
Environmental  Laws by any  Governmental  Authority  or lawsuit at any  Property
relating to hazardous  substances,  or subject any such Property to any remedial

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obligations by any Governmental Authority under any Environmental Laws, assuming
disclosure  to the  applicable  Governmental  Authority of all  relevant  facts,
conditions  and  circumstances,  if any,  pertaining to such Property where such
Releases,  violations  or  remedial  obligations  would have a Material  Adverse
Effect.

     Section 9.19  Transactions  with  Affiliates.  Neither the Borrower nor any
Subsidiary will enter into any transaction,  including,  without limitation, any
purchase,  sale,  lease or exchange of Property or the rendering of any service,
with any Affiliate unless such  transactions are otherwise  permitted under this
Agreement,  are in the  ordinary  course of its  business  and are upon fair and
reasonable  terms no less  favorable  to it than it would obtain in a comparable
arm's length transaction with a Person not an Affiliate.

     Section 9.20 Subsidiaries. The Borrower shall not, and shall not permit any
Subsidiary  to, create any  additional  Subsidiaries  except in compliance  with
Sections  8.13 and  9.24.  The  Borrower  shall not and  shall  not  permit  any
Subsidiary to sell or to issue any stock or ownership  interest of a Subsidiary,
except to the Borrower or any Guarantor  and except in  compliance  with Section
9.03.

     Section  9.21  Negative  Pledge  Agreements.  Neither the  Borrower nor any
Subsidiary will create, incur, assume or permit to exist any contract, agreement
or understanding (other than this Agreement and the Security  Instruments) which
in  any  way  prohibits  or  restricts  the  granting,  conveying,  creation  or
imposition of any Lien on any of its Property or restricts any  Subsidiary  from
paying dividends to the Borrower,  or which requires the consent of or notice to
other Persons in connection therewith,  except such restrictions in favor of the
holders of Debt secured by Liens described in Sections  9.01(d) or 9.01(e),  but
only insofar as such restrictions pertain to the Property encumbered thereby.

     Section 9.22 Take-or-Pay or Other Prepayments.  The Borrower will not enter
into any  take-or-pay  agreements  with respect to the Oil and Gas Properties of
the Borrower, any of its Subsidiaries,  or any Guarantor which would require the
Borrower,  any of its  Subsidiaries  or any  Guarantor  to deliver  Hydrocarbons
produced  on Oil  and  Gas  Properties  at  some  future  time  without  then or
thereafter receiving full payment therefor.

     Section 9.23  Ownership  of  Subsidiaries.  The Borrower  shall not fail to
pledge,  assign,  deliver,  and  transfer  to the Agent for the  benefit  of the
Lenders,  and grant to the Agent for the benefit of the  Lenders,  a  continuing
security  interest in one hundred percent (100%) of the stock or other ownership
interests  in  the  Subsidiaries   existing  as  of  the  date  hereof  and  any
Subsidiaries the Borrower shall create, acquire or otherwise own hereafter.

     Section  9.24  Change  in  Borrower's,  any  of  its  Subsidiaries'  or any
Guarantor's  Name or State of Formation.  Without the prior written  approval of
Agent,  (a) Borrower will not (nor permit any Subsidiary or Guarantor to) change
its name,  identity  or place of  organization  and (b)  Borrower  will not (nor
permit  any  Subsidiary  or  Guarantor  to)  engage  in any  other  business  or
transaction  under  any name  other  than  Borrower's,  any  Guarantor,  or each
Subsidiary's name, respectively, hereunder. Should Agent approve, prior to doing
any of the  aforesaid,  Borrower  shall  provide  (or cause each  Subsidiary  or
Guarantor  to  provide)  to  Agent  all  assignments,   certificates,  financing
statements,   financing  statement  amendments  or  other  documents  determined
necessary in Agent's sole judgment to protect and continue  Agent's  interest in
the collateral pledged by Borrower, any of its Subsidiaries,  any Guarantor,  or
any other party to secure the Obligations.

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     Section 9.25 Intentionally Omitted.
                  ----------------------

     Section 9.26 Intentionally Omitted.
                  ----------------------

     Section 9.27  Deposit  Account.  The  Borrower  shall not fail to establish
(within ninety (90) days after the date hereof) and maintain,  at all times, its
primary  depository and  disbursement  accounts with Wells Fargo Bank,  N.A. The
Borrower  has  determined  that  it is  beneficial  to use the  proceeds  of the
extensions of credit made  available  hereunder in the manner  described by this
Section 9.27.

     Section 9.28 Limitation on Hedging.  The total notional volume attributable
to any Hedging Agreement with respect to Hydrocarbon  Interests shall not exceed
more than eighty  percent (80%) of scheduled  proved  producing  net  production
quantities as of the most recent  Reserve  Report in any period.  If the Hedging
Agreement is an interest  rate hedge,  the notional  principal  amount shall not
exceed  more  than  seventy-five  percent  (75%)  of  Loans  outstanding  to the
Borrower.

                                   ARTICLE X

                           EVENTS OF DEFAULT; REMEDIES

     Section 10.01 Events of Default.  One or more of the following events shall
constitute an "Event of Default":

          (a)  the Borrower,  any of its  Subsidiaries,  or any Guarantor  shall
     default  in the  payment  or  prepayment  when due of any  principal  of or
     interest on any Loan, or any  reimbursement  obligation  for a disbursement
     made  under any  Letter of Credit  within  the  period  allowed  by Section
     2.10(a),  or any fees or other amount  payable by it hereunder or under any
     Security Instrument; or

          (b)  the Borrower,  any of its  Subsidiaries,  or any Guarantor  shall
     default in the payment  when due of any  principal of or interest on any of
     its other Debt aggregating $1,000,000.00 or more, or any event specified in
     any note, agreement,  indenture or other document evidencing or relating to
     any such Debt shall occur if the effect of such event is to cause, or (with
     the giving of any notice or the lapse of time or both) to permit the holder
     or holders of such Debt (or a trustee or Agent on behalf of such  holder or
     holders) to cause, such Debt to become due prior to its stated maturity; or

          (c)  any representation, warranty or certification made or deemed made
     herein  or  in  any  Security  Instrument  by  the  Borrower,  any  of  its
     Subsidiaries,  or any Guarantor, or any certificate furnished to any Lender
     or the Agent pursuant to the provisions hereof or any Security  Instrument,
     shall  prove to have  been  false  or  misleading  as of the  time  made or
     furnished in any material respect; or

          (d)  the  Borrower  shall  default  in the  performance  of any of its
     obligations  under  Article IX, or Section  8.03,  or Section  8.14, or any
     other Article of this  Agreement  other than under Article VIII (other than

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     as specifically excepted in this subsection); or the Borrower shall default
     in the performance of any of its obligations under Article VIII (other than
     Section 8.03 (other than as  specifically  excepted in this  subsection) or
     Section 8.14) or the Borrower,  any of its  Subsidiaries,  or any Guarantor
     shall  default  in the  performance  of  their  obligations  under  Section
     8.03(c),  or  Section  8.03(d),  or  Section  9.18 as to those  Oil and Gas
     Properties  not operated by the Borrower nor any  Subsidiary and which have
     an aggregate  value of  $1,000,000.00  or more as  determined by the latest
     Engineering Reports provided to the Lender pursuant to Section 2.08 of this
     Agreement, or the Borrower, any of its Subsidiaries, or any Guarantor shall
     default  in  the  performance  of  their  obligations  under  any  Security
     Instrument  (other  than the payment of amounts due which shall be governed
     by Section  10.01(a)) and any such default shall continue  unremedied for a
     period of thirty (30) days after the earlier to occur of (i) notice thereof
     to the Borrower by the Agent or any Lender (through the Agent), or (ii) the
     Borrower otherwise becoming aware of such default; or

          (e)  the  Borrower  shall  admit in writing  its  inability  to, or be
     generally unable to, pay its debts as such debts become due; or

          (f)  the  Borrower  shall (i) apply for or consent to the  appointment
     of, or the  taking of  possession  by, a  receiver,  custodian,  trustee or
     liquidator of itself or of all or a substantial part of its property,  (ii)
     make a general assignment for the benefit of its creditors,  (iii) commence
     a voluntary case under the Federal  Bankruptcy Code (as now or hereafter in
     effect),  (iv) file a petition  seeking to take  advantage of any other law
     relating to bankruptcy, insolvency, reorganization, winding-up, liquidation
     or composition or readjustment of debts, (v) fail to controvert in a timely
     and  appropriate  manner,  or acquiesce  in writing to, any petition  filed
     against it in an  involuntary  case under the Federal  Bankruptcy  Code, or
     (vi) take any  corporate  action for the  purpose of  effecting  any of the
     foregoing; or

          (g)  a proceeding or case shall be commenced,  without the application
     or consent of the Borrower, in any court of competent jurisdiction, seeking
     (i) its  liquidation,  reorganization,  dissolution or  winding-up,  or the
     composition  or  readjustment  of its  debts,  (ii)  the  appointment  of a
     trustee, receiver, custodian, liquidator or the like of the Borrower of all
     or any substantial  part of its assets,  or (iii) similar relief in respect
     of  the  Borrower  under  any  law  relating  to  bankruptcy,   insolvency,
     reorganization, winding-up, or composition or adjustment of debts, and such
     proceeding or case shall  continue  undismissed,  or an order,  judgment or
     decree  approving  or ordering  any of the  foregoing  shall be entered and
     continue unstayed and in effect,  for a period of 60 days; or (iv) an order
     for relief  against the Borrower  shall be entered in an  involuntary  case
     under the Federal Bankruptcy Code; or

          (h)  a judgment  or  judgments  for the  payment of money in excess of
     $100,000.00  in the  aggregate  shall be  rendered  by a court  against the
     Borrower  or any  Subsidiary  and the  same  shall  not be  discharged  (or
     provision  shall not be made for such  discharge),  or a stay of  execution
     thereof  shall not be  procured,  within  thirty (30) days from the date of
     entry thereof and the Borrower or such  Subsidiary  shall not,  within said
     period of 30 days, or such longer period during which execution of the same
     shall have been stayed, appeal therefrom and cause the execution thereof to
     be stayed during such appeal; or

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          (i)  the Loan Documents  after delivery  thereof shall for any reason,
     except to the extent  permitted by the terms  thereof,  cease to be in full
     force and effect and valid,  binding and  enforceable  in  accordance  with
     their terms,  or cease to create a valid and perfected Lien of the priority
     required  thereby on any of the  collateral  in excess of $10,000.00 in the
     aggregate at any one time  purported to be covered  thereby,  except to the
     extent  permitted by the terms of this Agreement,  or the Borrower shall so
     state in writing; or

          (j)  any Letter of Credit  becomes  the  subject  matter of any order,
     judgment,  injunction or any other such determination,  or if the Borrower,
     any of its Subsidiaries,  any Guarantor, or any other Person shall petition
     or apply for or obtain any order restricting payment by the Agent under any
     Letter of Credit or extending  the Lenders'  liability  under any Letter of
     Credit beyond the expiration date stated therein or otherwise  agreed to by
     the Agent; or

          (k)  an event having a Material Adverse Effect shall occur; or

          (l)  the Borrower, or any of its Active Subsidiaries, discontinues its
     usual business,  or any Person other than Oaktree Capital Management LLC or
     its  Affiliates  shall  acquire  50.1%  or  more  than  a  majority  of the
     Borrower's  outstanding  securities  having  ordinary  voting power for the
     election of directors; or

          (m)  fewer than a majority  of the  members of the Board of  Directors
     are Continuing  Directors;  provided  however,  that this section shall not
     constitute an Event of Default if, within the 60 days following such event,
     Persons are  appointed as members of the Board of Directors  such that more
     than a majority of the  members of the Board of  Directors  are  Continuing
     Directors; or

          (n)  any  Guarantor  takes,  suffers  or  permits  to exist any of the
     events or conditions  referred to in  paragraphs  (e), (f) or (g) or if any
     provision of any guaranty  agreement shall for any reason cease to be valid
     and binding on any such Guarantor or if any such  Guarantor  shall so state
     in writing; or

          (o)  if the Borrower, any Guarantor,  or any Subsidiary liquidates any
     hedge without the prior written consent of the Agent; or

          (p)  should  the  Inactive  Subsidiaries  have  assets  in  excess  of
     $3,000,000.00  in the aggregate  when  combined  with the aggregate  assets
     distributed to the Borrower or Active  Subsidiaries from and after the date
     hereof of all dissolved, discontinued,  liquidated, or otherwise terminated
     Subsidiaries.

     Section 10.02  Remedies.
                    ---------

          (a)  In the case of an Event of Default  other than one referred to in
     clauses  (e),  (f) or (g) of Section  10.01 or in clauses (m) or (n) to the
     extent it relates to clauses (e),  (f) or (g),  the Agent,  upon request of
     the  Majority  Lenders,  shall,  by  notice  to the  Borrower,  cancel  the
     Commitments  (in whole or part) and/or  declare the  principal  amount then

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     outstanding  of,  and the  accrued  interest  on,  the  Loans and all other
     amounts  payable by the Borrower  hereunder and under the Notes  (including
     without limitation the payment of cash collateral to secure the LC Exposure
     as provided in Section 2.10(b)) to be forthwith due and payable,  whereupon
     such amounts  shall be  immediately  due and payable  without  presentment,
     demand, protest, notice of intent to accelerate,  notice of acceleration or
     other  formalities of any kind, all of which are hereby expressly waived by
     the Borrower.

          (b)  In the case of the occurrence of an Event of Default  referred to
     in clauses (e), (f) or (g) of Section 10.01 or in clauses (m) or (n) to the
     extent it relates to clauses  (e),  (f) or (g),  the  Commitments  shall be
     automatically  canceled and the principal  amount then  outstanding of, and
     the accrued  interest  on, the Loans and all other  amounts  payable by the
     Borrower  hereunder and under the Notes (including  without  limitation the
     payment of cash collateral to secure the LC Exposure as provided in Section
     2.10(b)) shall become  automatically  immediately  due and payable  without
     presentment,  demand,  protest,  notice of intent to accelerate,  notice of
     acceleration  or other  formalities  of any kind,  all of which are  hereby
     expressly waived by the Borrower.

          (c)  All proceeds  received  after  maturity of the Notes,  whether by
     acceleration  or  otherwise  shall be  applied  first to  reimbursement  of
     expenses and  indemnities  provided for in this  Agreement and the Security
     Instruments; second to accrued interest on the Notes; third to fees; fourth
     pro rata to principal  outstanding on the Notes and any other  Obligations;
     fifth to serve as cash  collateral to be held by the Agent to secure the LC
     Exposure;  and any excess  shall be paid to the  Borrower  or as  otherwise
     required by any Governmental Requirement.

                                   ARTICLE XI

                                    THE AGENT

     Section  11.01  Appointment,  Powers and  Immunities.  Each  Lender  hereby
irrevocably  appoints and authorizes the Agent to act as its Agent hereunder and
under the Security Instruments with such powers as are specifically delegated to
the Agent by the terms of this Agreement and the Security Instruments,  together
with such other powers as are reasonably  incidental  thereto.  The Agent (which
term as used in this  sentence  and in Section  11.05 and the first  sentence of
Section  11.06  shall  include  reference  to its  Affiliates  and  its  and its
Affiliates' officers, directors, employees, attorneys,  accountants, experts and
Agents): (i) shall have no duties or responsibilities except those expressly set
forth in the Loan Documents,  and shall not by reason of the Loan Documents be a
trustee or fiduciary for any Lender; (ii) makes no representation or warranty to
any  Lender  and shall  not be  responsible  to the  Lenders  for any  recitals,
statements, representations or warranties contained in this Agreement, or in any
certificate or other document referred to or provided for in, or received by any
of them  under,  this  Agreement,  or for the  value,  validity,  effectiveness,
genuineness, execution,  effectiveness,  legality, enforceability or sufficiency
of this  Agreement,  any Note or any other document  referred to or provided for
herein or for any failure by the  Borrower or any other  Person  (other than the
Agent) to perform any of its  obligations  hereunder  or  thereunder  or for the
existence,  value,  perfection  or  priority of any  collateral  security or the
financial or other  condition of the  Borrower,  its  Subsidiaries  or any other
obligor or  guarantor;  (iii)  except  pursuant  to Section  11.07  shall not be

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required  to  initiate  or conduct  any  litigation  or  collection  proceedings
hereunder;  and (iv) shall not be responsible for any action taken or omitted to
be taken by it hereunder or under any other  document or instrument  referred to
or provided  for herein or in  connection  herewith  including  its own ordinary
negligence, except for its own gross negligence or willful misconduct. The Agent
may  employ  agents,  accountants,  attorneys  and  experts  and  shall  not  be
responsible  for the  negligence or misconduct of any such agents,  accountants,
attorneys or experts selected by it in good faith or any action taken or omitted
to be taken in good faith by it in  accordance  with the advice of such  agents,
accountants, attorneys or experts. The Agent may deem and treat the payee of any
Note as the holder  thereof for all purposes  hereof  unless and until a written
notice of the assignment or transfer thereof permitted hereunder shall have been
filed with the Agent.  The Agent is  authorized  to release any  collateral,  or
subordinate  any  Lien  on any  collateral,  that  is  permitted  to be  sold or
otherwise disposed of or released pursuant to the terms of the Loan Documents.

     Section 11.02  Reliance by Agent.  The Agent shall be entitled to rely upon
any  certification,  notice or other  communication  (including  any  thereof by
telephone,  telex,  telecopier,  telegram or cable) believed by it to be genuine
and correct and to have been signed or sent by or on behalf of the proper Person
or  Persons,  and upon  advice  and  statements  of legal  counsel,  independent
accountants and other experts selected by the Agent.

     Section 11.03 Defaults.  The Agent shall not be deemed to have knowledge of
the  occurrence  of a Default  (other than the  non-payment  of  principal of or
interest  on Loans or of fees or  failure  to  reimburse  for  Letter  of Credit
drawings)  unless the Agent has  received  notice from a Lender or the  Borrower
specifying  such  Default and stating that such notice is a "Notice of Default."
In the  event  that the Agent  receives  such a notice  of the  occurrence  of a
Default, the Agent shall give prompt notice thereof to the Lenders. In the event
of a payment  Default,  the Agent shall give each Lender  prompt  notice of each
such payment Default.

     Section 11.04 Rights as a Lender.  With respect to its  Commitments and the
Loans made by it and its  participation  in the  issuance  of Letters of Credit,
Wells  Fargo (and any  successor  acting as Agent) in its  capacity  as a Lender
hereunder  shall have the same rights and powers  hereunder  as any other Lender
and may  exercise  the same as though it were not acting as the  Agent,  and the
term  "Lender"  or  "Lenders"  shall,  unless the context  otherwise  indicates,
include the Agent in its  individual  capacity.  Wells Fargo (and any  successor
acting as Agent) and its Affiliates may (without  having to account  therefor to
any Lender) accept deposits from, lend money to and generally engage in any kind
of  banking,  trust  or  other  business  with  the  Borrower  (and  any  of its
Affiliates)  as if it were not  acting as the  Agent,  and  Wells  Fargo and its
Affiliates  may  accept  fees and  other  consideration  from the  Borrower  for
services in  connection  with this  Agreement  or  otherwise  without  having to
account for the same to the Lenders.

     Section 11.05 Indemnification. The Lenders agree to indemnify the Agent and
the Issuing  Bank ratably in  accordance  with their  Percentage  Shares for the
Indemnity Matters as described in Section 12.03 to the extent not indemnified or
reimbursed  by the  Borrower  under  Section  12.03,  but without  limiting  the
obligations  of the Borrower  under said Section 12.03 and for any and all other
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs,  expenses or disbursements of any kind and nature whatsoever which may be
imposed on, incurred by or asserted against the Agent or the Issuing Bank in any
way relating to or arising out of: (i) this Agreement,  the Security Instruments

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or any other documents contemplated by or referred to herein or the transactions
contemplated  hereby,  but  excluding,  unless a  Default  has  occurred  and is
continuing, normal administrative costs and expenses incident to the performance
of its agency duties  hereunder or (ii) the  enforcement  of any of the terms of
this Agreement, any Security Instrument or of any such other documents;  whether
or not any of the foregoing specified in this Section 11.05 arises from the sole
or  concurrent  negligence  of the Agent or the Issuing  Bank,  provided that no
Lender  shall be liable for any of the  foregoing  to the extent they arise from
the gross negligence or willful misconduct of the Agent.

     Section  11.06  Non-Reliance  on  Agent  and  other  Lenders.  Each  Lender
acknowledges and agrees that it has,  independently  and without reliance on the
Agent or any other Lender, and based on such documents and information as it has
deemed  appropriate,  made  its own  credit  analysis  of the  Borrower  and its
decision  to enter  into this  Agreement,  and that it will,  independently  and
without reliance upon the Agent or any other Lender, and based on such documents
and information as it shall deem  appropriate at the time,  continue to make its
own analysis and decisions in taking or not taking action under this  Agreement.
The Agent shall not be required to keep itself informed as to the performance or
observance  by  the  Borrower  of  this  Agreement,   the  Notes,  the  Security
Instruments  or any other  document  referred  to or  provided  for herein or to
inspect the properties or books of the Borrower. Except for notices, reports and
other  documents  and  information  expressly  required to be  furnished  to the
Lenders  by  the  Agent  hereunder,  the  Agent  shall  not  have  any  duty  or
responsibility  to  provide  any  Lender  with any  credit or other  information
concerning the affairs,  financial condition or business of the Borrower (or any
of its Affiliates) which may come into the possession of the Agent or any of its
Affiliates.  In this regard,  each Lender  acknowledges that Winstead Sechrest &
Minick P.C. is acting in this  transaction as special counsel to the Agent only,
except to the extent otherwise expressly stated in any legal opinion or any Loan
Document. Each Lender will consult with its own legal counsel to the extent that
it  deems  necessary  in  connection  with the Loan  Documents  and the  matters
contemplated therein.

     Section 11.07 Action by Agent. Except for action or other matters expressly
required of the Agent hereunder, the Agent shall in all cases be fully justified
in failing or refusing  to act  hereunder  unless it shall (i)  receive  written
instructions  from the  Majority  Lenders  (or all of the  Lenders as  expressly
required  by  Section  12.04)  specifying  the  action to be taken,  and (ii) be
indemnified to its satisfaction by the Lenders against any and all liability and
expenses  which may be incurred by it by reason of taking or  continuing to take
any such action. The instructions of the Majority Lenders (or all of the Lenders
as expressly  required by Section  12.04) and any action taken or failure to act
pursuant  thereto  by the Agent  shall be binding  on all of the  Lenders.  If a
Default has  occurred and is  continuing,  the Agent shall take such action with
respect to such Default as shall be directed by the Majority  Lenders (or all of
the  Lenders as required by Section  12.04) in the  written  instructions  (with
indemnities)  described in this Section 11.07,  provided that,  unless and until
the Agent shall have received such  directions,  the Agent may (but shall not be
obligated to) take such action, or refrain from taking such action, with respect
to such Default as it shall deem advisable in the best interests of the Lenders.
In no event,  however,  shall the Agent be  required  to take any  action  which
exposes the Agent to personal  liability or which is contrary to this  Agreement
and the Security Instruments or applicable law.

     Section 11.08  Resignation or Removal of Agent.  Subject to the appointment
and acceptance of a successor Agent as provided  below,  the Agent may resign at
any time by giving notice thereof to the Lenders and the Borrower, and the Agent

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may be removed at any time with or without cause by the Majority  Lenders.  Upon
any such  resignation or removal,  the Majority  Lenders shall have the right to
appoint a successor Agent. If no successor Agent shall have been so appointed by
the Majority Lenders and shall have accepted such appointment within thirty (30)
days after the retiring  Agent's giving of notice of resignation or the Majority
Lenders'  removal of the retiring Agent,  then the retiring Agent may, on behalf
of the  Lenders,  appoint  a  successor  Agent.  Upon  the  acceptance  of  such
appointment hereunder by a successor Agent, such successor Agent shall thereupon
succeed to and become vested with all the rights, powers,  privileges and duties
of the retiring  Agent,  and the  retiring  Agent shall be  discharged  from its
duties and  obligations  hereunder.  After any retiring  Agent's  resignation or
removal  hereunder as Agent, the provisions of this Article XI and Section 12.03
shall  continue  in effect for its  benefit in respect of any  actions  taken or
omitted to be taken by it while it was acting as the Agent.

                                  ARTICLE XII

                                  MISCELLANEOUS

     Section 12.01 Waiver.  No failure on the part of the Agent or any Lender to
exercise and no delay in  exercising,  and no course of dealing with respect to,
any right, power or privilege under any of the Loan Documents shall operate as a
waiver thereof,  nor shall any single or partial exercise of any right, power or
privilege under any of the Loan Documents preclude any other or further exercise
thereof or the exercise of any other  right,  power or  privilege.  The remedies
provided  herein are  cumulative  and not exclusive of any remedies  provided by
law.

     Section 12.02 Notices.  All notices and other  communications  provided for
herein and in the other  Loan  Documents  (including,  without  limitation,  any
modifications of, or waivers or consents under, this Agreement or the other Loan
Documents) shall be given or made by telex, telecopy, courier or U.S. Mail or in
writing and telexed,  telecopied,  mailed or delivered to the intended recipient
at the "Address for Notices"  specified  below its name on the  signature  pages
hereof or in the Loan  Documents  or, as to any party,  at such other address as
shall be  designated  by such party in a notice to each other  party.  Except as
otherwise  provided in this Agreement or in the other Loan  Documents,  all such
communications  shall be deemed to have been duly  given  when  transmitted,  if
transmitted before 1:00 p.m. local time on a Business Day (otherwise on the next
succeeding  Business Day) by telex or telecopier and evidence or confirmation of
receipt is obtained, or personally delivered or, in the case of a mailed notice,
three (3) Business Days after the date deposited in the mails,  postage prepaid,
in each case given or addressed as aforesaid.

     Section 12.03 Payment of Expenses, Indemnities, Etc.

          (a)  The Borrower agrees:

               (i)  whether  or not the  transactions  hereby  contemplated  are
     consummated,  to pay all expenses of the Agent in the administration  (both
     before and after the execution hereof and including advice of counsel as to
     the rights and duties of the Agent and the Lenders  with  respect  thereto)
     of, and in connection  with the  negotiation,  syndication,  investigation,
     preparation,   execution   and  delivery   of,   recording  or  filing  of,
     preservation   of  rights   under,   enforcement   of,   and   refinancing,
     renegotiation  or  restructuring  of, the Loan Documents and any amendment,

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     waiver or consent relating thereto (including,  without limitation, travel,
     photocopy,  mailing,  courier,  telephone and other similar expenses of the
     Agent,  the  cost  of  environmental  audits,  surveys  and  appraisals  at
     reasonable  intervals,  the fees and  disbursements  of  counsel  and other
     outside consultants for the Agent and, in the case of enforcement, the fees
     and  disbursements  of counsel for the Agent and any of the  Lenders);  and
     promptly reimburse the Agent for all amounts expended, advanced or incurred
     by the Agent or the Lenders to satisfy any obligation of the Borrower under
     this Agreement or any Security  Instrument,  including without  limitation,
     all costs and expenses of foreclosure;

               (ii) to  indemnify  the Agent and each  Lender  and each of their
     Affiliates   and   each   of   their   officers,   directors,    employees,
     representatives,  Agents, attorneys,  accountants and experts ("Indemnified
     Parties") from, hold each of them harmless against and promptly upon demand
     pay or  reimburse  each of them for,  the  Indemnity  Matters  which may be
     incurred by or asserted  against or involve any of them (whether or not any
     of them is designated a party thereto) as a result of, arising out of or in
     any way  related to (i) any actual or proposed  use by the  Borrower of the
     proceeds  of any of the Loans or  Letters of  Credit,  (ii) the  execution,
     delivery and performance of the Loan Documents, (iii) the operations of the
     business  of the  Borrower  and its  Subsidiaries,  (iv) the failure of the
     Borrower  or any  Subsidiary  to  comply  with the  terms  of any  Security
     Instrument or this Agreement, or with any Governmental Requirement, (v) any
     inaccuracy  of any  representation  or any  breach of any  warranty  of the
     Borrower or any Guarantor set forth in any of the Loan  Documents  (vi) the
     issuance,  execution  and  delivery or transfer of or payment or failure to
     pay under any Letter of Credit, or (vii) the payment of a drawing under any
     Letter of Credit notwithstanding the non-compliance,  non-delivery or other
     improper    presentation   of   the   manually    executed   draft(s)   and
     certification(s),  (viii) any assertion  that the Lenders were not entitled
     to receive the proceeds  received  pursuant to the Security  Instruments or
     (ix) any other aspect of the Loan Documents, including, without limitation,
     the fees and  disbursements  of counsel and all other expenses  incurred in
     connection  with  investigating,  defending or preparing to defend any such
     action,  suit,  proceeding  (including  any  investigations,  litigation or
     inquiries) or claim and including all Indemnity  Matters  arising by reason
     of the ordinary  negligence  of any  Indemnified  Party,  but excluding all
     Indemnity Matters arising solely by reason of claims between the Lenders or
     any Lender and the Agent or a Lender's  shareholders  against  the Agent or
     Lender or by reason of the gross  negligence  or willful  misconduct on the
     part of the Indemnified Party; and

               (iii) to  indemnify  and  hold  harmless  from  time to time  the
     Indemnified  Parties  from and  against any and all  losses,  claims,  cost
     recovery  actions,  administrative  orders  or  proceedings,   damages  and
     liabilities  to which any such Person may or is alleged to become  subject:
     (i)  under  any  Environmental  Law  applicable  to  the  Borrower  or  any
     Subsidiary or any of their Properties,  including without  limitation,  the
     treatment or disposal of hazardous  substances on any of their  Properties,
     (ii) as a result of the  breach or  non-compliance,  or  alleged  breach or
     non-compliance,  by the Borrower or any Subsidiary  with any  Environmental
     Law  applicable  to the  Borrower  or any  Subsidiary,  (iii)  due to  past
     ownership by the Borrower or any  Subsidiary of any of their  Properties or

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     past  activity on any of their  Properties  which,  though lawful and fully
     permissible  at the time,  could  result  in  present  liability,  (iv) the
     presence, use, release, storage, treatment,  transportation, or disposal of
     hazardous  substances on or at any of the  Properties  owned or operated by
     the Borrower or any Subsidiary,  or (v) any other environmental,  health or
     safety condition in connection with the Loan Documents;  provided, however,
     no indemnity shall be afforded under this Section  12.03(a)(iii) in respect
     of any  Property for any  occurrence  arising from the acts or omissions of
     the Agent or any Lender or any  purchaser at  foreclosure  or pursuant to a
     deed-in-lieu  thereof  during  the period  after  which  such  Person,  its
     successors  or assigns  shall have  obtained  possession  of such  Property
     (whether   by   foreclosure   or   deed  in   lieu   of   foreclosure,   as
     mortgagee-in-possession or otherwise).

          (b)  No  Indemnified  Party may  settle  any  claim to be  indemnified
     without the consent of the indemnitor,  such consent not to be unreasonably
     withheld; provided, that the indemnitor may not reasonably withhold consent
     to any settlement  that an Indemnified  Party  proposes,  if the indemnitor
     does not have the financial ability to pay all its obligations  outstanding
     and asserted  against the  indemnitor  at that time,  including the maximum
     potential claims against the Indemnified  Party to be indemnified  pursuant
     to this Section 12.03.

          (c)  In the  case  of any  indemnification  hereunder,  the  Agent  or
     Lender,  as appropriate shall give notice to the Borrower of any such claim
     or demand being made against the  Indemnified  Party and the Borrower shall
     have the non-exclusive  right to join in the defense against any such claim
     or demand provided that if the Borrower provides a defense, the Indemnified
     Party shall bear its own cost of defense unless there is a conflict between
     the Borrower and such Indemnified Party.

          (d)  The foregoing indemnities shall extend to the Indemnified Parties
     notwithstanding  the  sole  or  concurrent  negligence  of  every  kind  or
     character whatsoever, whether active or passive, whether an affirmative act
     or an  omission,  including  without  limitation,  all  types of  negligent
     conduct  identified in the restatement  (second) of torts of one or more of
     the Indemnified  Parties or by reason of strict  liability  imposed without
     fault on any one or more of the  Indemnified  Parties;  provided,  however,
     that to the extent that an Indemnified  Party is found to have committed an
     act of gross negligence or willful misconduct,  this contractual obligation
     of  indemnification  shall continue but shall only extend to the portion of
     the claim that is deemed to have  occurred  by reason of events  other than
     the gross negligence or willful misconduct of the Indemnified Party.

          (e)  The Borrower's obligations under this Section 12.03 shall survive
     any  termination  of this  Agreement and the payment of the Notes and shall
     continue thereafter in full force and effect.

          (f)  The Borrower  shall pay any amounts due under this Section  12.03
     within  thirty  (30) days of the  receipt by the  Borrower of notice of the
     amount due.

     Section  12.04  Amendments,  Etc. Any  provision  of this  Agreement or any
Security  Instrument may be amended,  modified or waived with the Borrower's and
the Majority  Lenders'  prior written  consent;  provided that (i) no amendment,
modification or waiver which extends the final maturity of the Loans,  increases
the Aggregate  Maximum  Revolving Credit Amounts,  increases the Borrowing Base,

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forgives  the  principal  amount  of  any  Obligations  outstanding  under  this
Agreement,  releases  any  guarantor  of  any  Obligations  or  releases  all or
substantially all of the collateral, reduces the interest rate applicable to the
Loans or the fees payable to the Lenders  generally,  affects  Section  2.03(a),
this Section 12.04 or Section  12.06(a) or modifies the  definition of "Majority
Lenders" shall be effective  without consent of all Lenders;  (ii) no amendment,
modification  or waiver which increases the Maximum  Revolving  Credit Amount of
any Lender shall be effective  without the consent of such Lender;  and (iii) no
amendment,   modification  or  waiver  which  modifies  the  rights,  duties  or
obligations of the Agent shall be effective without the consent of the Agent.

     Section 12.05 Successors and Assigns.  This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their  respective  successors
and permitted assigns.

     Section 12.06  Assignments and Participations.
                    -------------------------------

          (a)  The Borrower may not assign its rights or  obligations  hereunder
     or under the Notes or any Letters of Credit  without  the prior  consent of
     all of the Lenders and the Agent.

          (b)  Any Lender may assign to one or more  assignees  all or a portion
     of  its  rights  and  obligations  under  this  Agreement  pursuant  to  an
     Assignment   Agreement   substantially   in  the  form  of  Exhibit  E  (an
     "Assignment");  provided,  however,  that  (i)  except  in the  case  of an
     assignment to a Lender or a Lender Affiliate, such assignment shall require
     the written  consent of the Agent and, if no Event of Default has  occurred
     and is continuing,  the Borrower  (which  consent will not be  unreasonably
     withheld), (ii) except in the case of an assignment to a Lender or a Lender
     Affiliate,  any  such  assignment  shall  be in  the  amount  of  at  least
     $5,000,000.00  or such lesser  amount to which the  Borrower  and the Agent
     have  consented and if the  assigning  Lender has assigned less than all of
     its Percentage  Share of the Loans,  such  assigning  Lender shall retain a
     Percentage  Share of the Loans equating to at least  $5,000,000.00  or such
     lesser amount to which the Borrower and the Agent have  consented and (iii)
     the  assignee  or  assignor  shall  pay  to  the  Agent  a  processing  and
     recordation fee of $3,000.00 for each assignment.  Any such assignment will
     become  effective  upon the  execution  and  delivery  to the  Agent of the
     Assignment, payment of the recordation fee and, if required, the consent of
     the  Agent  and  the  Borrower.  Promptly  after  receipt  of  an  executed
     Assignment,  the Agent shall send to the  Borrower a copy of such  executed
     Assignment.  Upon receipt of such executed Assignment,  the Borrower, will,
     at its own expense,  execute and deliver new Notes to the  assignor  and/or
     assignee, as appropriate,  in accordance with their respective interests as
     they appear.  Upon the  effectiveness  of any  assignment  pursuant to this
     Section  12.06(b),  the  assignee  will become a "Lender," if not already a
     "Lender," for all purposes of this Agreement and the other Loan  Documents.
     The assignor shall be relieved of its  obligations  hereunder to the extent
     of such assignment (and if the assigning  Lender no longer holds any rights
     or obligations  under this Agreement,  such assigning Lender shall cease to
     be a "Lender"  hereunder  except that its rights under Sections 4.06, 5.01,
     5.05 and 12.03 shall not be  affected).  The Agent will prepare on the last
     Business Day of each month during which an assignment has become  effective
     pursuant to this Section 12.06(b),  a new Annex I giving effect to all such
     assignments  effected during such month, and will promptly provide the same

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     to the Borrower and each of the Lenders.  Any  assignment  or transfer by a
     Lender of rights or  obligations  under this Agreement that does not comply
     with this Section  12.06(b) shall be treated for purposes of this Agreement
     as a sale by such Lender of a participation  in such rights and obligations
     in accordance with Section 12.06(c).

          (c)  Each Lender may,  without the consent of the Borrower,  the Agent
     or the Issuing Bank, transfer, grant or assign participations in all or any
     part of such Lender's interests hereunder pursuant to this Section 12.06(c)
     to any Person,  provided  that: (i) such Lender shall remain a "Lender" for
     all purposes of this  Agreement and the  transferee  of such  participation
     shall not constitute a "Lender" hereunder,  (ii) such Lender's  obligations
     under this Agreement shall remain unchanged,  (ii) such Lender shall remain
     solely  responsible to the other parties hereto for the performance of such
     obligations  and (iv) the  Borrower,  the Agent,  the Issuing  Bank and the
     other Lenders  shall  continue to deal solely and directly with such Lender
     in  connection  with  such  Lender's  rights  and  obligations  under  this
     Agreement.  Any  agreement or  instrument  pursuant to which a Lender sells
     such a  participation  shall provide that such Lender shall retain the sole
     right  to  enforce  the  Loan  Documents  and  to  approve  any  amendment,
     modification  or waiver of any  provision of the Loan  Documents;  provided
     that such  agreement or  instrument  may provide that such Lender will not,
     without  the  consent  of  the   participant,   agree  to  any   amendment,
     modification  or waiver that would (x) forgive any  principal  owing on any
     Obligations  or extend  the final  maturity  of the  Loans,  (y) reduce the
     interest rate (other than as a result of waiving the  applicability  of any
     post-default  increases in interest rates) or fees applicable to any of the
     Commitments  or Loans or  Letters of Credit in which  such  participant  is
     participating,  or postpone the payment of any thereof,  or (z) release any
     guarantor of the  Obligations  or release all or  substantially  all of the
     collateral (except as provided in the Loan Documents) supporting any of the
     Commitments  or Loans or  Letters of Credit in which  such  participant  is
     participating. In the case of any such participation, the participant shall
     not have any rights under this Agreement or any of the Security Instruments
     (the  participant's  rights against the granting  Lender in respect of such
     participation  to be those set  forth in the  agreement  with  such  Lender
     creating  such  participation),  and all  amounts  payable by the  Borrower
     hereunder  shall  be  determined  as if  such  Lender  had  not  sold  such
     participation,  provided that such participant shall be entitled to receive
     additional amounts under Article V on the same basis as if it were a Lender
     and be indemnified under Section 12.03 as if it were a Lender. In addition,
     each agreement  creating any participation must include an agreement by the
     participant to be bound by the provisions of Section 12.15.

          (d)  The Lenders may furnish any  information  concerning the Borrower
     in the  possession  of the  Lenders  from  time to time  to  assignees  and
     participants  (including prospective assignees and participants);  provided
     that, such Persons agree to be bound by the provisions of Section 12.15.

          (e)  Notwithstanding  anything in this Section  12.06 to the contrary,
     any Lender may assign and pledge its Note to any Federal  Reserve  Bank. No
     such assignment  and/or pledge shall release the assigning  and/or pledging
     Lender from its obligations hereunder.

          (f)  Notwithstanding  any other  provisions of this Section 12.06,  no
     transfer or assignment of the interests or obligations of any Lender or any

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     grant of  participations  therein  shall  be  permitted  if such  transfer,
     assignment  or grant  would  require the  Borrower  to file a  registration
     statement with the SEC or to qualify the Loans under the "Blue Sky" laws of
     any state.

     Section  12.07  Invalidity.  In the  event  that  any  one or  more  of the
provisions  contained in any of the Loan Documents or the Letters of Credit, the
Letter of Credit Agreements  shall, for any reason, be held invalid,  illegal or
unenforceable in any respect,  such invalidity,  illegality or  unenforceability
shall not affect any other  provision of the Notes,  this Agreement or any other
Loan Document.

     Section 12.08 Counterparts. This Agreement may be executed in any number of
counterparts,  all of which taken  together  shall  constitute  one and the same
instrument  and any of the parties  hereto may execute this Agreement by signing
any such counterpart.

     Section 12.09  References;  Use of Word  "Including".  The words  "herein,"
"hereof,"  "hereunder"  and  other  words of  similar  import  when used in this
Agreement refer to this Agreement as a whole, and not to any particular article,
Section or  subsection.  Any  reference  herein to a Section or Article shall be
deemed to refer to the applicable  Section or Article of this  Agreement  unless
otherwise stated herein. Any reference herein to an exhibit,  schedule, or other
attachment  shall be deemed to refer to the  applicable  exhibit,  schedule,  or
other  attachment  attached  hereto unless  otherwise  stated  herein.  The word
"including",  "includes" and words of similar import means  "including,  without
limitation".

     Section 12.10 Survival.  The obligations of the parties under Section 4.06,
Article V, and Sections 11.05,  12.03,  and 12.15 shall survive the repayment of
the  Loans  and the  termination  of the  Commitments.  To the  extent  that any
payments  on the  Obligations  or proceeds of any  collateral  are  subsequently
invalidated, declared to be fraudulent or preferential, set aside or required to
be repaid to a trustee, debtor in possession, receiver or other Person under any
bankruptcy  law,  common  law or  equitable  cause,  then  to such  extent,  the
Obligations  so  satisfied  shall be revived and  continue as if such payment or
proceeds had not been received and the Agent's and the Lenders' Liens,  security
interests,  rights,  powers and remedies  under this Agreement and each Security
Instrument shall continue in full force and effect. In such event, each Security
Instrument  shall be  automatically  reinstated and the Borrower shall take such
action as may be  reasonably  requested  by the Agent and the  Lenders to effect
such reinstatement.

     Section 12.11 Captions.  Captions and Section headings appearing herein are
included  solely for convenience of reference and are not intended to affect the
interpretation of any provision of this Agreement.

     Section  12.12 NO ORAL  AGREEMENTS.  THE LOAN  DOCUMENTS  EMBODY THE ENTIRE
AGREEMENT  AND  UNDERSTANDING  BETWEEN  THE  PARTIES  AND  SUPERSEDE  ALL  OTHER
AGREEMENTS  AND  UNDERSTANDINGS  BETWEEN  SUCH  PARTIES  RELATING TO THE SUBJECT
MATTER HEREOF AND THEREOF.  THE LOAN  DOCUMENTS  REPRESENT  THE FINAL  AGREEMENT
BETWEEN  THE  PARTIES  AND  MAY  NOT  BE  CONTRADICTED  BY  EVIDENCE  OF  PRIOR,
CONTEMPORANEOUS  OR  SUBSEQUENT  ORAL  AGREEMENTS  OF THE PARTIES.  THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

     Section 12.13  Governing Law; Submission to Jurisdiction.
                    ------------------------------------------

                                       84

<PAGE>

          (a)  This  Agreement and the Notes shall be governed by, and construed
     in accordance  with,  the laws of the State of Texas,  except to the extent
     that United States federal law permits any Lender to charge interest at the
     rate allowed by the laws of the state where such Lender is located. Ch. 346
     of the Texas Finance Code (which  regulates  certain  revolving credit loan
     accounts  and  revolving  tri-party  accounts)  shall  not  apply  to  this
     Agreement or the Notes. All environmentally related activities or omissions
     shall be  governed  by and  construed  in  accordance  with the laws of the
     United States of America,  and where  applicable,  any U.S. treaty,  or the
     laws (including common law) of the state or jurisdiction where any Property
     is  located,  including  those  located  in  any  foreign  country,  or  in
     international  waters.  In case of conflict  with respect to, and only with
     respect to,  environmentally  related  activities  or  omissions,  the more
     stringent requirement shall govern.

          (b)  Any legal action or proceeding with respect to the Loan Documents
     shall be  brought  in the  courts  of the  State of Texas or of the  United
     States of America for the Southern District of Texas, and, by execution and
     delivery of this Agreement,  the Borrower hereby accepts for itself and (to
     the extent  permitted  by law) in respect of its  Property,  generally  and
     unconditionally,  the  jurisdiction of the aforesaid  courts.  The Borrower
     hereby irrevocably waives any objection, including, without limitation, any
     objection  to the  laying  of venue or based on the  grounds  of forum  non
     conveniens,  which it may now or hereafter have to the bringing of any such
     action or proceeding in such respective  jurisdictions.  This submission to
     jurisdiction is non-exclusive and does not preclude the Agent or any Lender
     from obtaining jurisdiction over the Borrower, any of its Subsidiaries,  or
     any Guarantor in any court otherwise having jurisdiction.

          (c)  The  Borrower  hereby  irrevocably  consents  to the  service  of
     process  of  any  of the  aforementioned  courts  in  any  such  action  or
     proceeding  by the mailing of copies  thereof by  registered  or  certified
     mail, postage prepaid, to the Borrower at its said address, such service to
     become effective thirty (30) days after such mailing.  Nothing herein shall
     affect the right of the Agent,  any Lender or any holder of a Note to serve
     process  in  any  other  manner  permitted  by  law  or to  commence  legal
     proceedings or otherwise  proceed against the Borrower or its Properties in
     any other jurisdiction.

          (d)  The Borrower,  the Agent and each Lender  hereby (i)  irrevocably
     and unconditionally waive, to the fullest extent permitted by law, trial by
     jury in any legal action or  proceeding  relating to this  Agreement or any
     Loan Document and for any counterclaim  therein; (ii) irrevocably waive, to
     the maximum extent not prohibited by law, any right it may have to claim or
     recover  in  any  such  litigation  any  special,  exemplary,  punitive  or
     consequential  damages,  or damages  other than,  or in addition to, actual
     damages;  (iii) certify that no party hereto nor any representative,  agent
     or counsel for any party hereto has represented, expressly or otherwise, or
     implied  that such party  would not,  in the event of  litigation,  seek to
     enforce  the  foregoing  waivers,  and  (iv)  acknowledge  that it has been
     induced to enter into this  Agreement and the other Loan  Documents and the
     transactions  contemplated  hereby and thereby by, among other things,  the
     mutual waivers and certifications contained in this Section 12.13.

     Section 12.14 Interest. It is the intention of the parties hereto that each
Lender shall conform  strictly to usury laws applicable to it.  Accordingly,  if
the  transactions  contemplated  hereby would be usurious as to any Lender under

                                       85

<PAGE>

laws  applicable to it  (including  the laws of the United States of America and
the  State of Texas or any  other  jurisdiction  whose  laws may be  mandatorily
applicable  to  such  Lender   notwithstanding  the  other  provisions  of  this
Agreement), then, in that event, notwithstanding anything to the contrary in any
of the Loan  Documents or any agreement  entered into in  connection  with or as
security  for the  Notes,  it is agreed as  follows:  (i) the  aggregate  of all
consideration which constitutes interest under law applicable to any Lender that
is contracted for, taken, reserved, charged or received by such Lender under any
of the Loan  Documents or agreements  or otherwise in connection  with the Notes
shall  under  no  circumstances  exceed  the  maximum  amount  allowed  by  such
applicable  law,  and  any  excess  shall  be  canceled   automatically  and  if
theretofore paid shall be credited by such Lender on the principal amount of the
Obligations  (or, to the extent  that the  principal  amount of the  Obligations
shall have been or would thereby be paid in full, refunded by such Lender to the
Borrower);  and (ii) in the event that the maturity of the Notes is  accelerated
by reason of an  election  of the  holder  thereof  resulting  from any Event of
Default under this  Agreement or  otherwise,  or in the event of any required or
permitted  prepayment,  then such consideration that constitutes  interest under
law  applicable  to any Lender may never  include  more than the maximum  amount
allowed by such applicable  law, and excess  interest,  if any,  provided for in
this Agreement or otherwise shall be canceled automatically by such Lender as of
the date of such  acceleration or prepayment and, if theretofore  paid, shall be
credited by such Lender on the principal  amount of the Obligations  (or, to the
extent that the  principal  amount of the  Obligations  shall have been or would
thereby be paid in full, refunded by such Lender to the Borrower). All sums paid
or agreed to be paid to any Lender for the use, forbearance or detention of sums
due hereunder  shall, to the extent  permitted by law applicable to such Lender,
be amortized,  prorated,  allocated and spread  throughout  the full term of the
Loans evidenced by the Notes until payment in full so that the rate or amount of
interest on account of any Loans  hereunder  does not exceed the maximum  amount
allowed  by such  applicable  law.  If at any time and from time to time (i) the
amount of  interest  payable to any Lender on any date shall be  computed at the
Highest Lawful Rate applicable to such Lender pursuant to this Section 12.14 and
(ii) in  respect of any  subsequent  interest  computation  period the amount of
interest  otherwise  payable  to such  Lender  would be less than the  amount of
interest  payable to such Lender  computed at the Highest Lawful Rate applicable
to such Lender, then the amount of interest payable to such Lender in respect of
such subsequent interest computation period shall continue to be computed at the
Highest Lawful Rate applicable to such Lender until the total amount of interest
payable to such Lender shall equal the total amount of interest which would have
been payable to such Lender if the total  amount of interest  had been  computed
without giving effect to this Section  12.14.  To the extent that Chapter 303 of
the Texas  Finance Code is relevant for the purpose of  determining  the Highest
Lawful Rate,  such Lender elects to determine the applicable  rate ceiling under
such Chapter by the indicated weekly rate ceiling from time to time in effect.

     Section 12.15  Confidentiality.  In the event that the Borrower provides to
the  Agent  or the  Lenders  written  non-public  information  belonging  to the
Borrower,  the Agent and the Lenders shall thereafter  maintain such information
in confidence in accordance  with the standards of care and diligence  that each
utilizes in maintaining  its own  confidential  information.  This obligation of
confidence shall not apply to such portions of the information  which (i) are in
the public domain,  (ii) hereafter  become part of the public domain without the
Agent or the Lenders  breaching their  obligation of confidence to the Borrower,
(iii) are  previously  known by the Agent or the Lenders  from some source other
than the  Borrower,  (iv) are  hereafter  developed  by the Agent or the Lenders
without  using the  Borrower's  information,  (v) are  hereafter  obtained by or

                                       86

<PAGE>

available to the Agent or the Lenders from a third party who owes no  obligation
of confidence to the Borrower  with respect to such  information  or through any
other means other than through  disclosure by the  Borrower,  (vi) are disclosed
with the  Borrower's  consent,  (vii) must be disclosed  either  pursuant to any
Governmental Requirement,  including compliance under any Environmental Laws, or
to Persons  regulating the activities of the Agent or the Lenders,  or (viii) as
may be required by law or regulation or order of any  Governmental  Authority in
any judicial,  arbitration or governmental  proceeding.  Further, the Agent or a
Lender may disclose any such  information to any other Lender,  any  independent
petroleum   engineers  or   consultants,   any  independent   certified   public
accountants,  any legal counsel  employed by such Person in connection with this
Agreement  or  any  Security  Instrument,   including  without  limitation,  the
enforcement or exercise of all rights and remedies  thereunder,  or any assignee
or participant  (including prospective assignees and participants) in the Loans;
provided, however, that the Agent or the Lenders shall receive a confidentiality
agreement  from the Person to whom such  information is disclosed such that said
Person shall have the same  obligation to maintain the  confidentiality  of such
information   as  is  imposed   upon  the  Agent  or  the   Lenders   hereunder.
Notwithstanding  anything to the contrary  provided  herein,  this obligation of
confidence  shall  cease  three  (3)  years  from the date the  information  was
furnished,  unless the  Borrower  requests in writing at least  thirty (30) days
prior  to  the   expiration   of  such  three  year  period,   to  maintain  the
confidentiality  of such  information for an additional  three year period.  The
Borrower  waives  any and all  other  rights it may have to  confidentiality  as
against the Agent and the Lenders arising by contract, agreement, statute or law
except as expressly stated in this Section 12.15.

     Section 12.16  Effectiveness.  This Agreement  shall not be effective until
the date (the  "Effective  Date") that it is delivered to the Agent in the State
of Texas,  accepted by the Lenders in such State,  and  executed by the Agent in
such State (the "Effective Date").

     Section  12.17   EXCULPATION   PROVISIONS.   EACH  OF  THE  PARTIES  HERETO
SPECIFICALLY  AGREES THAT IT HAS A DUTY TO READ THIS  AGREEMENT AND THE SECURITY
INSTRUMENTS AND AGREES THAT IT IS CHARGED WITH NOTICE AND KNOWLEDGE OF THE TERMS
OF THIS  AGREEMENT AND THE SECURITY  INSTRUMENTS;  THAT IT HAS IN FACT READ THIS
AGREEMENT AND IS FULLY  INFORMED AND HAS FULL NOTICE AND KNOWLEDGE OF THE TERMS,
CONDITIONS  AND  EFFECTS  OF THIS  AGREEMENT;  THAT IT HAS BEEN  REPRESENTED  BY
INDEPENDENT  LEGAL COUNSEL OF ITS CHOICE  THROUGHOUT THE NEGOTIATIONS  PRECEDING
ITS EXECUTION OF THIS AGREEMENT AND THE SECURITY  INSTRUMENTS;  AND HAS RECEIVED
THE ADVICE OF ITS  ATTORNEY IN ENTERING  INTO THIS  AGREEMENT  AND THE  SECURITY
INSTRUMENTS;  AND THAT IT RECOGNIZES THAT CERTAIN OF THE TERMS OF THIS AGREEMENT
AND THE SECURITY INSTRUMENTS RESULT IN ONE PARTY ASSUMING THE LIABILITY INHERENT
IN SOME  ASPECTS  OF THE  TRANSACTION  AND  RELIEVING  THE  OTHER  PARTY  OF ITS
RESPONSIBILITY  FOR SUCH LIABILITY.  EACH PARTY HERETO AGREES AND COVENANTS THAT
IT WILL NOT CONTEST THE VALIDITY OR ENFORCEABILITY OF ANY EXCULPATORY  PROVISION
OF THIS  AGREEMENT AND THE SECURITY  INSTRUMENTS ON THE BASIS THAT THE PARTY HAD
NO  NOTICE  OR  KNOWLEDGE  OF  SUCH  PROVISION  OR  THAT  THE  PROVISION  IS NOT
"CONSPICUOUS."

     Section 12.18  Arbitration.
                    ------------

          (a)  Arbitration.  The parties hereto agree, upon demand by any party,
     to submit to binding  arbitration  all claims,  disputes and  controversies
     between or among them (and their respective employees, officers, directors,
     attorneys,  and other  agents),  whether  in tort,  contract  or  otherwise

                                       87

<PAGE>

     arising  out of or  relating  to in any way (i) the loan and  related  Loan
     Documents  which are the  subject of this  Agreement  and its  negotiation,
     execution,  collateralization,   administration,  repayment,  modification,
     extension,  substitution,  formation,  inducement,  enforcement, default or
     termination; or (ii) requests for additional credit.

          (b)  Governing Rules. Any arbitration proceeding will (i) proceed in a
     location in Texas selected by the American Arbitration Association ("AAA");
     (ii) be  governed  by the  Federal  Arbitration  Act (Title 9 of the United
     States Code),  notwithstanding  any conflicting  choice of law provision in
     any of the  documents  between the  parties;  and (iii) be conducted by the
     AAA, or such other  administrator as the parties shall mutually agree upon,
     in accordance  with the AAA's  commercial  dispute  resolution  procedures,
     unless the claim or  counterclaim  is at least  $1,000,000.00  exclusive of
     claimed interest,  arbitration fees and costs in which case the arbitration
     shall be conducted in accordance  with the AAA's  optional  procedures  for
     large,  complex  commercial  disputes (the  commercial  dispute  resolution
     procedures  or  the  optional  procedures  for  large,  complex  commercial
     disputes to be referred to, as applicable, as the "Rules"). If there is any
     inconsistency  between  the  terms  hereof  and the  Rules,  the  terms and
     procedures set forth herein shall  control.  Any party who fails or refuses
     to submit to  arbitration  following a demand by any other party shall bear
     all  costs  and  expenses  incurred  by  such  other  party  in  compelling
     arbitration of any dispute.  Nothing contained herein shall be deemed to be
     a waiver  by any party  that is a bank of the  protections  afforded  to it
     under 12 U.S.C. ss.91 or any similar applicable state law.

          (c)  No Waiver of Provisional Remedies, Self-Help and Foreclosure. The
     arbitration  requirement  does not  limit  the  right  of any  party to (i)
     foreclose  against  real or personal  property  collateral;  (ii)  exercise
     self-help remedies relating to collateral or proceeds of collateral such as
     setoff or repossession;  or (iii) obtain  provisional or ancillary remedies
     such as replevin,  injunctive  relief,  attachment or the  appointment of a
     receiver,   before  during  or  after  the  pendency  of  any   arbitration
     proceeding.  This  exclusion  does not  constitute a waiver of the right or
     obligation of any party to submit any dispute to  arbitration  or reference
     hereunder,  including  those  arising  from  the  exercise  of the  actions
     detailed in Sections (i), (ii) and (iii) of this paragraph.

          (d)  Arbitrator  Qualifications and Powers. Any arbitration proceeding
     in which the amount in controversy is $5,000,000.00 or less will be decided
     by a single arbitrator  selected  according to the Rules, and who shall not
     render an award of greater  than  $5,000,000.00.  Any  dispute in which the
     amount in controversy  exceeds  $5,000,000.00  shall be decided by majority
     vote of a panel of three  arbitrators;  provided,  however,  that all three
     arbitrators  must actively  participate in all hearings and  deliberations.
     The arbitrator  will be a neutral  attorney  licensed in the State of Texas
     with a minimum of ten years experience in the substantive law applicable to
     the subject  matter of the dispute to be arbitrated.  The  arbitrator  will
     determine  whether or not an issue is arbitratable  and will give effect to
     the statutes of limitation in  determining  any claim.  In any  arbitration
     proceeding the arbitrator  will decide (by documents only or with a hearing
     at the arbitrator's  discretion) any pre-hearing  motions which are similar
     to motions to dismiss  for  failure to state a claim or motions for summary
     adjudication.  The arbitrator shall resolve all disputes in accordance with
     the  substantive  law of Texas and may grant  any  remedy or relief  that a

                                       88

<PAGE>

     court of such state could order or grant  within the scope  hereof and such
     ancillary  relief  as  is  necessary  to  make  effective  any  award.  The
     arbitrator  shall  also have the power to award  recovery  of all costs and
     fees, to impose  sanctions and to take such other action as the  arbitrator
     deems  necessary  to the same extent a judge could  pursuant to the Federal
     Rules of Civil  Procedure,  the  Texas  Rules of Civil  Procedure  or other
     applicable  law.  Judgment upon the award rendered by the arbitrator may be
     entered in any court having  jurisdiction.  The institution and maintenance
     of an action for judicial  relief or pursuit of a provisional  or ancillary
     remedy shall not  constitute a waiver of the right of any party,  including
     the  plaintiff,  to submit the  controversy  or claim to arbitration if any
     other party contests such action for judicial relief.

          (e)  Discovery.  In  any  arbitration  proceeding  discovery  will  be
     permitted in accordance  with the Rules.  All discovery  shall be expressly
     limited to matters  directly  relevant to the dispute being  arbitrated and
     must be  completed  no later than twenty (20) days before the hearing  date
     and within one hundred  and eighty  (180) days of the filing of the dispute
     with the AAA. Any requests for an extension of the  discovery  periods,  or
     any  discovery  disputes,  will be  subject to final  determination  by the
     arbitrator  upon a showing that the request for  discovery is essential for
     the  party's  presentation  and that no  alternative  means  for  obtaining
     information is available.

          (f)  Class  Proceedings  and  Consolidations.  The  resolution  of any
     dispute arising pursuant to the terms of this Agreement shall be determined
     by a  separate  arbitration  proceeding  and  such  dispute  shall  not  be
     consolidated with other disputes or included in any class proceeding.

          (g)  Payment of Arbitration Costs and Fees. The arbitrator shall award
     all costs and expenses of the arbitration proceeding.

          (h)  Miscellaneous.  To the maximum extent  practicable,  the AAA, the
     arbitrators  and the parties shall take all action required to conclude any
     arbitration  proceeding  within one  hundred  and eighty  (180) days of the
     filing of the  dispute  with the AAA.  No  arbitrator  or other party to an
     arbitration  proceeding  may  disclose  the  existence,  content or results
     thereof,  except for  disclosures of information by a party required in the
     ordinary  course of its business or by applicable  law or regulation or the
     rules of any stock exchange on which such party's  securities are listed or
     admitted for trading.  If more than one  agreement  for  arbitration  by or
     between  the  parties  potentially  applies to a dispute,  the  arbitration
     provision most directly related to the Loan Documents or the subject matter
     of the dispute shall  control.  This  arbitration  provision  shall survive
     termination,  amendment or expiration  of any of the Loan  Documents or any
     relationship between the parties.

                         [SIGNATURES BEGIN ON NEXT PAGE]

                                       89

<PAGE>

     The parties hereto have caused this Agreement to be duly executed as of the
day and year first above written.

BORROWER:                                CRIMSON EXPLORATION INC.,
                                         a Delaware corporation

                                         By: /s/ E/ Joseph Grady
                                             -----------------------------------
                                         Name: E. Joseph Grady
                                         Title: Senior Vice President and
                                         Chief Financial Officer

                                         Address for Notices:

                                         Crimson Exploration Inc.
                                         480 N. Sam Houston Parkway E.
                                         Suite 300
                                         Houston, Texas 77060
                                         Telecopier No.: (281) 260-8488
                                         Telephone No.: (281) 820-1919, ext. 330
                                         Attention: E. Joseph Grady

<PAGE>

LENDER AND AGENT:                  WELLS FARGO BANK, NATIONAL
                                   ASSOCIATION

                                   By: /s/ Jeff Dalton
                                      -------------------------------
                                           Jeff Dalton
                                           Vice President

                                   Lending Office for Base Rate and LIBOR Loans:

                                   Wells Fargo Bank, National Association
                                   1000 Louisiana, Ninth Floor
                                   Houston, Texas  77002

                                   Telecopier No.:  (713) 739-1081
                                   Telephone No.:  (713) 319-1368
                                   Attention:  Jeff Dalton

                                   Address for Notices:

                                   Wells Fargo Bank, National Association
                                   1000 Louisiana, Ninth Floor
                                   Houston, Texas  77002

                                   Telecopier No.:  (713) 739-1081
                                   Telephone No.:  (713) 319-1368
                                   Attention:  Jeff Dalton

                                   With copy to:

                                   Winstead Sechrest &Minick P.C.
                                   910 Travis Street, Suite 2400
                                   Houston, Texas 77002
                                   Telecopier No.:  (713) 650-2400
                                   Telephone No.:  (713) 650-2739
                                   Attention:  Benny C. Pace

<PAGE>

LENDERS:

                                  By:
                                     -------------------------------------------
                                  Name:
                                       -----------------------------------------
                                  Title:
                                        ----------------------------------------

                                  Lending Office for Base Rate Loans:

                                  Lending Office for LIBOR Loans:

                                  Address for Notices:

                                  Telecopier No.:
                                  Telephone No.:
                                  Attention:

                                  With copy to:

<PAGE>

                                     ANNEX I

                          LIST OF PERCENTAGE SHARES AND
                          -----------------------------
                        MAXIMUM REVOLVING CREDIT AMOUNTS
                        --------------------------------

--------------------------------------------------------------------------------
         Name of Lender              Percentage Share         Maximum Revolving
                                                                 Credit Amount
--------------------------------------------------------------------------------
Wells Fargo Bank, National Association        100%               $100,000,000.00
--------------------------------------------------------------------------------
                                                  %              $
-----------------------                     ------               ---------------
--------------------------------------------------------------------------------
                                                  %              $
-----------------------                     ------               ---------------
--------------------------------------------------------------------------------
                  TOTAL                       100%               $100,000,000.00
--------------------------------------------------------------------------------

<PAGE>

                                    EXHIBIT A

                          FORM OF REVOLVING CREDIT NOTE

$100,000,000.00                                                    July 15, 2005

     FOR VALUE RECEIVED,  CRIMSON EXPLORATION INC., a Delaware  corporation (the
"Borrower")  hereby  promises to pay to the order of WELLS FARGO BANK,  NATIONAL
ASSOCIATION  (the  "Lender"),  at the  Principal  Office  of WELLS  FARGO  BANK,
NATIONAL  ASSOCIATION (the "Agent"),  at 1000 Louisiana,  Ninth Floor,  Houston,
Texas 77002, the principal sum of ONE HUNDRED MILLION DOLLARS  ($100,000,000.00)
(or such lesser amount as shall equal the aggregate  unpaid  principal amount of
the Loans made by the Lender to the  Borrower  under the  Credit  Agreement,  as
hereinafter  defined),  in lawful  money of the United  States of America and in
immediately  available funds, on the dates and in the principal amounts provided
in the Credit  Agreement,  and to pay interest on the unpaid principal amount of
each such  Loan,  at such  office,  in like  money  and  funds,  for the  period
commencing  on the date of such Loan until  such Loan shall be paid in full,  at
the rates per annum and on the dates provided in the Credit Agreement.

     The date, amount, Type, interest rate, Interest Period and maturity of each
Loan made by the Lender to the Borrower, and each payment made on account of the
principal  thereof,  shall be recorded by the Lender on its books and,  prior to
any  transfer  of this  Revolving  Credit  Note,  endorsed  by the Lender on the
schedules attached hereto or any continuation thereof.

     This  Revolving  Credit Note is one of the Notes  referred to in the Credit
Agreement dated as of July 15, 2005 among the Borrower, the Lenders which are or
become parties thereto  (including the Lender) and the Agent (as the same may be
amended  or  supplemented  from  time to  time,  the  "Credit  Agreement"),  and
evidences Loans made by the Lender  thereunder.  Capitalized  terms used in this
Revolving  Credit  Note have the  respective  meanings  assigned  to them in the
Credit Agreement.

     This Revolving  Credit Note is issued pursuant to the Credit  Agreement and
is  entitled  to the  benefits  provided  for in the  Credit  Agreement  and the
Security Instruments.  The Credit Agreement provides for the acceleration of the
maturity of this Revolving  Credit Note upon the  occurrence of certain  events,
for  prepayments  of Loans upon the terms and conditions  specified  therein and
other provisions relevant to this Revolving Credit Note.

     THIS  REVOLVING  CREDIT  NOTE  SHALL  BE  GOVERNED  BY,  AND  CONSTRUED  IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS.

                                          CRIMSON EXPLORATION INC.

                                          By:
                                          Name:
                                          Title:

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