Document:

AMENDMENT No. 
      1

    

    dated
      as
      of October 12, 2007

    

    to
      an
      existing LICENSE AGREEMENT (dated 2 February 2006)

    

    _____________________________

    

    Between:

    

    IBt
      a
      Societe
      Anonyme incorporated in Belgium, having its registered office at 7180 Seneffe,
      

    Rue
      Jules
      Bordet 1, Zone Industrielle C, Belgium,

    

    hereby
      duly represented by its legal representatives John Carden, 

    hereinafter
      referred to as “IBt”,

    

    And:

    

    IsoRay
      Medical Inc.,
      incorporated in Washington, USA, having its registered office at Richland,
      WA
      99354-5411, 350 Hills Street, 

    Suite
      106,

    

    hereby
      duly represented by its legal representatives Roger Girard,

    hereinafter
      referred to as “ISO”,

    

    IBt
      and
      ISO are hereinafter separately referred to as “Party”
      and
      jointly as “Parties”.

     

    WHEREAS,

    

    ISO
      and
      IBt are parties to an existing license Agreement dated 2 February 2006 regarding
      IBt’s polymer technology (the “License Agreement”) according to which IBt grants
      to ISO a license to produce certain products under certain intellectual property
      rights.

    

    The
      parties wish to amend the License Agreement with the intent to modify the terms
      of the compensation
      paid by ISO in connection with the usage of IBt’s polymer
      technology.

     

    NOW,
      THEREFORE,

    

    In
      consideration of the premises and mutual covenants hereinafter
      contained

    

     IT
      HAS BEEN AGREED AS FOLLOWS:

    

    1      DEFINITIONS

    

    Unless
      the context requires otherwise, capitalized words and expressions in this
      agreement shall have the meaning set forth in the License Agreement. In
      addition, in this Amendment Agreement, the
      following capitalized words and expressions shall have the following meanings
      whether used in the
      singular or in the plural:

    

    “Amendment
      Agreement” means
      the
      present amendment agreement to the License Agreement. 

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    “License
      Agreement” the
      license Agreement entered into between the Parties on 2 February
      2006

    regarding
      IBt’s polymer technology (including its Schedules).

    

    
      	 	
              2

            	
              AMENDMENT
                TO THE LICENSE AGREEMENT

            

    

    

    
      	 	
              2.1

            	
              The
                parties further agree to amend and restate Article 5 in its entirety
                as
                follows:

            

    

    

    “5.
      LICENCE FEES AND PAYMENT IN LIEU OF ROYALTY

     

    In
      consideration for the rights granted to ISO pursuant to this Agreement, ISO
      shall pay to IBt the following amounts:

    

    
      	
            	5.1.	
              License
                Fee:

            

    

    

    The
      License Fee amounts to $275,000 including the upfront payment of $50,000 as
      referred to in former Article 5.7 and a payment of $225,000 to be made no later
      than March 5, 2006 as referred to in the former Article 5.1; both of which
      payments have been made in their entirety.

    

    The
      License Fee shall not be refundable for whatever reason and shall in all cases
      be and remain the sole property of IBt.

    

    5.2
      Payment in lieu of Royalty:

    

    On
      the date of execution of the Amendment Agreement, ISO shall pay to IBt an amount
      of $225,000.

    

    The
      Payment in lieu of Royalty shall not be refundable for whatever reason and
      shall
      in all cases be and remain the sole property of IBt.

    

    
      	 	
              5.4.

            	
              Payments:

            

    

    

    The
      License Fee and the Payment in lieu of Royalty shall be paid to IBt in USD
      in
      Belgium on account number _________ at ING bank with IBAN number __________
      with mention “License Agreement”.

    

    
      	 	
              5.5

            	
              Payment
                of Purchase Price:

            

    

    

    All
      amounts due under this Agreement shall, if overdue, automatically bear interest
      until payment at a per annum rate of eight percent (8%) above the prime rate
      in
      effect at the European Central Bank published on the due date. The payment
      of
      such interest shall not foreclose IBt from exercising any other rights it may
      have resulting from any late payment.

    

    
      	 	
              5.6

            	
              Failure:

            

    

    

    Any
      failure or any delay by ISO of more than [30] days to fully pay any amount
      owed
      to IBt as specified in this Article 5 shall entitle IBt to terminate the
      Agreement in accordance with Article 14.1 below. In this case, IBt shall have
      a
      first right of refusal to purchase from ISO all of the equipment for production
      of the Products at book value and shall have access to the relevant records
      and
      books of ISO to check that book value, as provided in Article
      6.”

    

    
      	 	
              2.2

            	
              The
                Parties agree to delete Articles 6.2 and 6.3 in their
                entirety.

            

    

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    
      	 	
              3

            	
              CONSTRUCTION
                AND ABSENCE OF RETROACTIVE
                EFFECT

            

    

    

    
      	
            	3.1	
              All
                provisions of the License Agreement which are not affected by the
                Amendment Agreement remain in full force and
                effect.

            

    

    

    
      	 	
              3.2

            	
              The
                Amendment Agreement enters into force on the date of its execution
                by the
                Parties.

            

    

    

    
      	
            	3.3	
              The
                parties acknowledge and agree that the Amendment Agreement has no
                retroactive effect. As a consequence, none of the Parties will be
                entitled
                to claim reimbursement of any amount already paid as a result of
                the
                performance of the License Agreement so far or to set-off of any
                payment
                already made under the License Agreement as amended by the Amendment
                Agreement with any amount which is or will be due by any of them
                in the
                future.

            

    

    

    
      	
            	4	
              GOVERNING
                LAW AND JURISDICTION 

            

    

    

    This
      Amendment Agreement shall be governed by and construed and interpreted in
      accordance with the laws of the Grand Duchy of Luxemburg. Any litigation
      relating to the conclusion, validity, interpretation or performance of this
      Amendment Agreement, or of subsequent contracts or operations derived herefrom,
      as well as any other litigation concerning or related to the this Agreement,
      without any exception, shall be submitted to the exclusive jurisdiction of
      the
      Luxembourg Courts.

    

    AS
      WITNESS the
      hands
      of the duly authorized representatives of the Parties hereto the day and year
      first above written.

    

    Signed
      in Richland on 12 October 2007, in two original copies, each Party
      acknowledging having received one of these copies,

     

     

     

     

    

    
      	  
	 	  

	
              IBt

            	 	
              Iso

            
	 	 	 	 	 
	
              By

            	
                /s/
                John
                Carden

            	 	
              By

            	
                /s/
                Roger
                Girard

            
	 	 	 	 	 
	
              Name

            	
                John
                Carden

            	 	
              Name

            	
                Roger
                Girard

            
	 	 	 	 	 
	
              Capacity

            	
                Chairman
                of the
                Board

            	 	
              Capacity

            	
                Chairman/
                CEO

            

    

     

     

    

    ______________________________________TERM
        CREDIT AGREEMENT

       

      BETWEEN

       

      RANCHER
        ENERGY CORP.

      a
        Nevada corporation,

      as
        Borrower

       

      AND

       

      GASROCK
        CAPITAL LLC,

      a
        Delaware limited liability company, 

      as
        Lender

       

       

      Dated
        as of October 16, 2007 

       

       

      

       

      

       

      

        
          	 
	
                   

                  TERM
                    LOAN OF UP TO $12,240,000

                   

                

        

      

       

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

      

        
          	
                  TABLE
                    OF CONTENTS

                
	 	 	
                  Page

                
	
                  ARTICLE
                    I DEFINITIONS AND REFERENCES

                	
                  1

                
	
                  Section
                    1.1

                	
                  Defined
                    Terms

                	
                  1

                
	
                  Section
                    1.2

                	
                  Exhibits
                    and Schedules

                	
                  20

                
	
                  Section
                    1.3

                	
                  Amendment
                    of Defined Instruments

                	
                  20

                
	
                  Section
                    1.4

                	
                  References
                    and Titles

                	
                  20

                
	
                  Section
                    1.5

                	
                  Calculations
                    and Determinations

                	
                  21

                
	 	
                   

                
	
                  ARTICLE
                    II THE LOANS

                	
                  21

                
	
                  Section
                    2.1

                	
                  The
                    Loan

                	
                  21

                
	
                  Section
                    2.2

                	
                  Interest

                	
                  22

                
	
                  Section
                    2.3

                	
                  Repayment
                    of the Loans

                	
                  22

                
	
                  Section
                    2.4

                	
                  Prepayment
                    of the Loans

                	
                  22

                
	
                  Section
                    2.5

                	
                  Commencement
                    of ORRI

                	
                  23

                
	
                  Section
                    2.6

                	
                  Application
                    of Receipts

                	
                  23

                
	
                  Section
                    2.7

                	
                  Gross
                    Receipts Paid to Lender Account

                	
                  25

                
	
                  Section
                    2.8

                	
                  Use
                    of Proceeds

                	
                  26

                
	 	
                   

                
	
                  ARTICLE
                    III TAXES AND YIELD PROTECTION

                	
                  26

                
	
                  Section
                    3.1

                	
                  Taxes

                	
                  26

                
	
                  Section
                    3.2

                	
                  Inability
                    to Determine LIBOR Rate

                	
                  27

                
	 	
                   

                
	
                  ARTICLE
                    IV REPRESENTATIONS AND WARRANTIES

                	
                  27

                
	
                  Section
                    4.1

                	
                  Representations
                    and Warranties of Borrower

                	
                  27

                
	 	
                   

                
	
                  ARTICLE
                    V NOTICE OF CERTAIN EVENTS

                	
                  33

                
	
                  Section
                    5.1

                	
                  Notice
                    of Default, Event of Default and Other Matters

                	
                  33

                
	
                  Section
                    5.2

                	
                  Other
                    Information

                	
                  34

                
	 	
                   

                
	
                  ARTICLE
                    VI SECURITY AND COLLATERAL.

                	
                  34

                
	
                  Section
                    6.1

                	
                  Security;
                    Guaranty

                	
                  34

                
	
                  Section
                    6.2

                	
                  Perfection
                    and Protection of Security Interests and Liens

                	
                  35

                
	
                  Section
                    6.3

                	
                  Release
                    of Collateral

                	
                  35

                
	
                  Section
                    6.4

                	
                  Account
                    Debtors

                	
                  35

                
	
                  Section
                    6.5

                	
                  Location;
                    Records

                	
                  35

                
	
                  Section
                    6.6

                	
                  Maintenance

                	
                  36

                
	 	
                   

                
	
                  ARTICLE
                    VII COVENANTS OF BORROWER

                	
                  36

                
	
                  Section
                    7.1

                	
                  Affirmative
                    Covenants

                	
                  36

                
	
                  Section
                    7.2

                	
                  Negative
                    Covenants

                	
                  43

                
	 	
                   

                
	
                  ARTICLE
                    VIII FURTHER RIGHTS OF LENDER

                	
                  46

                
	
                  Section
                    8.1

                	
                  Maintenance
                    of Security Interests

                	
                  46

                
	
                  Section
                    8.2

                	
                  Performance
                    of Obligations

                	
                  46

                
	
                  Section
                    8.3

                	
                  Access
                    to Collateral

                	
                  47

                
	
                  Section
                    8.4

                	
                  Overriding
                    Royalty Interest

                	
                  47

                
	
                  Section
                    8.5

                	
                  Right
                    to Repurchase

                	
                  47

                
	
                  Section
                    8.6

                	
                  Set-Off
                    Rights

                	
                  48

                

        

         

        
          
            
            

          

          
            i

            
              

            

          

          
            
            

          

        

         

        
          	 	 
	
                  ARTICLE
                    IX CLOSING; CONDITIONS TO CLOSING

                	
                  48

                
	
                  Section
                    9.1

                	
                  Closing

                	
                  48

                
	
                  Section
                    9.2

                	
                  Conditions
                    to Closing

                	
                  48

                
	
                  Section
                    9.3

                	
                  Conditions
                    Precedent to Agreement

                	
                  50

                
	 	
                   

                
	
                  ARTICLE
                    X EVENTS OF DEFAULT AND REMEDIES

                	
                  51

                
	
                  Section
                    10.1

                	
                  Events
                    of Default

                	
                  51

                
	
                  Section
                    10.2

                	
                  Acceleration

                	
                  53

                
	
                  Section
                    10.3

                	
                  Remedies

                	
                  53

                
	
                  Section
                    10.4

                	
                  Indemnity

                	
                  54

                
	 	
                   

                
	
                  ARTICLE
                    XI MISCELLANEOUS

                	
                  54

                
	
                  Section
                    11.1

                	
                  Waivers
                    and Amendments; Acknowledgments and Admissions

                	
                  54

                
	
                  Section
                    11.2

                	
                  Amendments

                	
                  55

                
	
                  Section
                    11.3

                	
                  Assignments;
                    Survival of Agreements; Cumulative Nature

                	
                  55

                
	
                  Section
                    11.4

                	
                  Notices

                	
                  56

                
	
                  Section
                    11.5

                	
                  Parties
                    in Interest; Transfers

                	
                  56

                
	
                  Section
                    11.6

                	
                  Governing
                    Law; Submission to Process

                	
                  57

                
	
                  Section
                    11.7

                	
                  Limitation
                    on Interest

                	
                  57

                
	
                  Section
                    11.8

                	
                  Termination;
                    Limited Survival

                	
                  57

                
	
                  Section
                    11.9

                	
                  Severability

                	
                  58

                
	
                  Section
                    11.10

                	
                  Counterparts

                	
                  58

                
	
                  Section
                    11.11

                	
                  Waiver
                    of Jury Trial, Punitive Damages, Etc.

                	
                  58

                
	
                  Section
                    11.12

                	
                  Controlling
                    Provision Upon Conflict

                	
                  58

                
	
                  Section
                    11.13

                	
                  Patriot
                    Act

                	
                  59

                
	 	
                   

                
	
                  ARTICLE
                    XII ARBITRATION

                	
                  59

                
	
                  Section
                    12.1

                	
                  Arbitration

                	
                  59

                
	 	
                   

                
	
                  ARTICLE
                    XIII NOTICE TO BORROWER

                	
                  61

                

        

      

    

     

    
      
        
        

      

      
        ii

        
          

        

      

      
        
        

      

    

     

    

      
        	
                EXHIBITS

              	 
	
                Exhibit
                  A

              	
                Property
                  Descriptions

              
	
                Exhibit
                  B

              	
                Form
                  of Note

              
	
                Exhibit
                  C

              	
                Form
                  of Property Operating Statement

              
	
                Exhibit
                  D

              	
                Form
                  of Compliance Certificate

              
	 	 
	
                SCHEDULES

              	 
	
                Schedule
                  1

              	
                Contact
                  Information 

              
	
                Schedule
                  2.1

              	
                Wire
                  Transfer Instructions

              
	
                Schedule
                  2.1(a)

              	
                Approved
                  D&A Operations

              
	
                Schedule
                  4.1(b)

              	
                Consents

              
	
                Schedule
                  4.1(d)

              	
                Subsidiaries
                  and Record Holders of Equity Interests

              
	
                Schedule
                  4.1(e)

              	
                Pro
                  Forma Financial Statements

              
	
                Schedule
                  4.1(f)

              	
                Unpaid
                  Bills

              
	
                Schedule
                  4.1(h)

              	
                Litigation

              
	
                Schedule
                  4.1(i)

              	
                Names
                  and Places of Business

              
	
                Schedule
                  4.1(k)

              	
                Equipment

              
	
                Schedule
                  4.1(n)

              	
                Environmental
                  Disclosures

              
	
                Schedule
                  4.1(o)

              	
                Hydrocarbon
                  Purchasers and Sales Agreements

              
	
                Schedule
                  4.1(p)

              	
                Swap
                  Agreements and Material Contracts

              
	
                Schedule
                  4.1(q)

              	
                Employee
                  Matters

              
	
                Schedule
                  4.1(s)

              	
                Employee
                  Benefit Plans

              
	
                Schedule
                  7.1(e) 

              	
                Reserve
                  Report Parameters and Guidelines

              
	
                Schedule
                  7.2(e)

              	
                Existing
                  Indebtedness

              

      

    

     

    
      
        
        

      

      
        iii

        
          

        

      

      
        
        

      

    

    

      TERM
        CREDIT AGREEMENT

       

      THIS
        TERM
        CREDIT AGREEMENT (“Agreement”)
        is
        entered into as of October 16, 2007 between RANCHER
        ENERGY CORP.,
        a
        Nevada corporation (“Borrower”),
        and
GASROCK
        CAPITAL LLC,
        a
        Delaware limited liability company (“Lender”).

       

      RECITALS

       

      A. Borrower
        has requested that Lender extend credit to Borrower on the terms and conditions
        set out in this Agreement to finance the development of certain oil and gas
        properties.

       

      B. Lender
        has agreed to extend credit to Borrower for such purposes on the terms and
        conditions set out in this Agreement.

       

      IN
        CONSIDERATION of the mutual covenants and undertakings, Borrower and Lender
        hereby agree as follows: 

       

      ARTICLE
        I

      DEFINITIONS
        AND REFERENCES

       

      Section
        1.1 Defined
        Terms.
        As used
        in this Agreement, each of the following terms has the meaning given it in
        this
Section 1.1
        or in
        the sections and subsections referred to below:

       

      “AAA”
means
        the American Arbitration Association located at 1331 Lamar, Suite 1180, Houston,
        Texas 77010.

       

      “Account
        Debtor”
is
        defined in Section
        6.4.

       

      “Administration
        Fee”
means
        the fee set out in Section
        7.1(o)(ii)
        paid
        quarterly by Borrower to Lender to cover Lender’s costs and overhead of
        administering this Agreement.

       

      “Advance
        Period”
means
        the period beginning on the Closing Date and ending October 19,
        2007.

       

      “Affiliate”
of
        any
        Person means (a) any Person which, directly or indirectly, is in control
        of, is
        controlled by, or is under common control with such Person, or (b) any Person
        who is a director, manager, managing member, general partner or officer (i)
        of
        such Person, (ii) of any Subsidiary of such Person or (iii) of any Person
        described in clause
        (a)
        above.
        For purposes of this definition, control of a Person means the power, direct
        or
        indirect, (A) to vote 50% or more of the Equity Interests having ordinary
        voting
        power for the election of directors of such Person or other Persons performing
        similar functions for any such Person, or (B) to direct or cause the direction
        of the management and policies of such Person whether by ownership of Equity
        Interests, contract or otherwise.

       

      “Agreement”
means
        this Term Credit Agreement, together with all exhibits and schedules, in
        each
        case, as the same may be amended, or restated or supplemented from time to
        time.

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

      “Anti-Terrorism
        Laws”
means
        any Applicable Laws relating to terrorism or money laundering, including
        Executive Order No. 13224, the USA PATRIOT Act, the Applicable Laws comprising
        or implementing the Bank Secrecy Act, and the Applicable Laws administered
        by
        the United States Treasury Department’s Office of Foreign Asset Control (as any
        of the foregoing Applicable Laws may from time to time be amended, renewed,
        extended, or replaced).

       

      “Applicable
        Law”
means
        any law, statute, code, ordinance, order, determination, rule, regulation,
        judgment, decree, injunction, franchise, permit, certificate, license,
        authorization or other directive or requirement of any Governmental Authority,
        whether now or hereafter in effect, including Environmental Laws, energy
        regulations and the occupational, safety and health standards or
        controls.

       

      “Approved
        Counterparty”
means
        a
        counterparty to a Permitted Swap Agreement that is approved by Lender in
        writing. As of the Closing Date BP Corporation North America Inc. is approved
        by
        Lender as an Approved Counterparty.

       

      “Arbitration
        Notice”
is
        defined in Section 12.1(c).

       

      “Benefit
        Plans”
is
        defined in Section
        4.1(s).

       

      “Borrower”
is
        defined in the preamble of this Agreement.

       

      “Borrower
        Operating Account”
means
        that certain bank account maintained by Borrower with Wells Fargo Bank, National
        Association, ABA #121000248, Account #4121341861.

       

      “Business
        Day”
means
        for all purposes, a day other than a Saturday, Sunday, or legal holiday on
        which
        commercial banks are authorized or required to be closed in Houston, Texas
        and
        Denver, Colorado and, if such Business Day relates to any LIBOR Rate such
        day
        must also be a day in which dealings in U.S. dollar deposits are conducted
        in
        the London interbank Eurodollar market.

       

      “Change
        of Control”
means
        (a) the occurrence of any event (whether in one or more transactions) which
        results in a transfer of control of Borrower to a Person or Persons other
        than
        those Persons which control the Borrower as of the Closing Date, (b) the
        occurrence of any event (whether in one or more transactions) which results
        in
        any Person, or two or more Person acting in concert, acquiring beneficial
        ownership of 40% or more of the Equity Interests having ordinary voting power
        for the election of directors of Borrower, (c) any merger or consolidation
        of or
        with Borrower which results in a transfer of control of Borrower, or (d)
        the
        sale of all or substantially all of the property or assets of Borrower. For
        purposes of this definition (i) “control of Borrower” means the power, direct or
        indirect to vote 40% or more of the Equity Interests having ordinary voting
        power for the election of directors of Borrower, (ii) “beneficial ownership” has
        the meaning given in Rule 13-d-3 of the Exchange Act, and (iii) the Delaware
        Reorganization shall not be deemed a Change of Control. 

       

      “Closing”
is
        defined in Section
        9.1.

       

      
        
          
          

        

        
          2

          
            

          

        

        
          
          

        

      

      “Closing
        Costs”
means
        all third-party and out-of-pocket costs, fees and expenses incurred by Lender
        in
        connection with this Agreement including the expenses and fees described
        in
Section
        7.1(n).
        

       

      “Closing
        Date”
is
        defined in Section 9.1. 

       

      “Code”
means
        the Internal Revenue Code of 1986, as the same may be amended or supplemented
        from time to time, and any successor statute of similar import, and the rules
        and regulations thereunder, as from time to time in effect.

       

      “Collateral”
means
        all property of any kind which, pursuant to any Security Document, is subject
        to
        a Lien in favor of Lender or is purported or intended to be subject to such
        a
        Lien, including (a) the Properties, (b) Borrower’s interest in the Hydrocarbons
        produced from or attributable to the Properties, (c) the Equipment (including
        fixtures) and gathering systems used for the operation of the Properties,
        (d)
        Borrower’s interests in the seismic, geological and geophysical data relating
        thereto, (e) all Equity Interests issued by any Person and owned by Borrower,
        and (f) Borrower’s books and records relating to, and all products and proceeds
        of, any of the foregoing. 

       

      “Commitment”
means,
        the obligation of Lender to make a Loan in the original principal amount
        not to
        exceed the Committed Amount.

       

      “Committed
        Amount”
means
        $12,000,000.

       

      “Compliance
        Certificate”
means
        a
        certificate substantially in the form of Exhibit
        D.

       

      “Confidential
        Information”
is
        defined in Section
        7.1(d)(ii).

       

      “D&A
        Operations”
means
        the development and acquisition activities proposed to be undertaken by Borrower
        or, in the case of Non-Operated Properties, participated in by Borrower,
        including (a) drilling, sidetracking, deepening, fracturing, refracturing,
        completing, recompleting or reworking activities or similar activities to
        be
        conducted on the Properties, (b) maintenance and reclamation of wells and
        other
        fixtures and equipment that are part of the Properties, (c) acquisition and
        installation of gathering and compression assets, (d) installation and
        construction of pipeline assets, (e) acquisition of one or more additional
        Oil
        and Gas Properties, including undeveloped lease acquisitions, and (f) geological
        and geophysical examinations, aerial mapping, test well drilling and other
        operations in order to explore an area and evaluate the existing structural
        or
        stratigraphic traps and includes bulldozing, road building, surveying and
        all
        work necessarily connected therewith. 

       

      “Debt
        Service”
means,
        for any Interest Period, the accrued and unpaid interest and that portion
        of the
        Principal Amount due for such period. 

       

      “Debtor
        Relief Laws”
means
        Title 11 of the United States Code and all other applicable liquidation,
        conservatorship, bankruptcy, fraudulent transfer, fraudulent conveyance,
        assignment for the benefit of creditors, moratorium, rearrangement,
        receivership, insolvency, reorganization, suspension of payments, or similar
        debtor relief Laws of the United States or other applicable jurisdictions
        from
        time to time in effect and affecting the rights of creditors
        generally.

       

      
        
          
          

        

        
          3

          
            

          

        

        
          
          

        

      

      “Default”
means
        any event, circumstance, or condition which, with the giving of notice or
        the
        passage of time, or both, would constitute an Event of Default.

       

      “Default
        Rate”
means
        the lesser
        of
        (a)
        the applicable Interest Rate, plus
        4%
        per
        annum, and (b) the Maximum Rate.

       

      “Defensible
        Title”
means
        with respect to the Properties, such title that: (a) with regard to Leasehold
        Interests (i) with respect to each Well or Unit located on or pooled with
        the
        Leases entitles Borrower to receive, free and clear of all royalties, overriding
        royalties and net profits interests (except the ORRI), or other burdens on
        or
        measured by production of Hydrocarbons, not less than the Net Revenue Interests
        of Borrower reflected on Exhibit A
        for such
        Wells or Units for the productive life of such Well or Unit (subject only
        to the
        Permitted Encumbrances); and (ii) with respect to each Well or Unit located
        on
        or pooled with the Leases obligates Borrower to bear costs and expenses relating
        to the maintenance, development and operation of such Well or Unit in an
        amount
        not greater than the Working Interests reflected on Exhibit A
        for
        the
        productive life of such Well or Unit free and clear of any Lien (subject
        only to
        Permitted Encumbrances), and (b) with regard to Fee Interests, entitles
        Borrower to receive production of Hydrocarbons equal to the undivided fee
        interest owned by Borrower as reflected on Exhibit A.

       

      “Delaware
        Reorganization”
means
        (a) the formation of a wholly-owned Subsidiary of Borrower organized in the
        State of Delaware and (b) the merger of Borrower into such wholly-owned
        Subsidiary with such wholly-owned Subsidiary being the continuing or surviving
        entity for the purpose of reorganizing such Borrower in the State of Delaware
        (the “Reorganized
        Borrower”).

       

      “Deposit
        Account Control Agreement”
means
        a
        deposit account control agreement among Borrower, Lender and Wells Fargo
        Bank,
        National Association in form and substance reasonably acceptable to Lender
        which
        covers the Borrower Operating Account.

       

      “Development
        Operations”
means
        those activities described in parts (a) and (b) of the definition of D&A
        Operations.

       

      “Direct
        Taxes”
means,
        without duplication, (a) Property Taxes, (b) Severance Taxes, (c) ad
        valorem taxes, (d) conservation taxes, and (e) any other taxes of any kind,
        excluding only income taxes, margin taxes, gross income taxes, backup
        withholding taxes and franchise taxes, imposed on Borrower or any producer
        in
        connection with or as a result of its ownership of interests in the
        Properties.

       

      “Engineers”
means
        an independent petroleum engineering firm reasonably acceptable to Lender,
        provided
        that
        Lender’s
        approval of any independent petroleum engineering firm on any date does not
        constitute acceptance of such firm at any future date. As of the Closing
        Date,
        Lender approves Ryder Scott Company and Netherland & Sewell as
        Engineers.

       

      “Environmental
        Law”
means
        any Applicable Laws relating to land use, zoning, health, chemical use, safety
        and sanitation laws, statutes, ordinances and codes relating to the protection
        of the environment or governing the use, storage, treatment, generation,
        transportation, processing, handling, production, or disposal of Hazardous
        Substances, the preservation of natural resources or the reclamation of natural
        resources, in each case in effect in any and all jurisdictions in which the
        Borrower is conducting or at any time has conducted business, or where any
        Property is located, including, the Oil Pollution Act of 1990 (“OPA”),
        the
        Clean Air Act, the Comprehensive Environmental, Response, Compensation, and
        Liability Act of 1980 (“CERCLA”),
        the
        Federal Water Pollution Control Act, the Occupational Safety and Health Act
        of
        1970, the Resource Conservation and Recovery Act of 1976 (“RCRA”),
        the
        Safe Drinking Water Act, the Toxic Substances Control Act, the Superfund
        Amendments and Reauthorization Act of 1986, the Hazardous Materials
        Transportation Act, and other Applicable Laws in respect of environmental
        conservation or protection. 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, the terms “solid
        waste”
and
        “disposal”
(or
        “disposed”)
        have
        the meanings specified in RCRA and the term “oil and gas waste” shall have the
        meaning specified in Section 91.1011 of the Texas Natural Resources Code
        (“Section
        91.1011”);
        provided that
        (a) in the event either OPA, CERCLA, RCRA or Section 91.1011 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
        (b)
        to the extent the laws of the state or other jurisdiction in which any Property
        of the Borrower is located establish a meaning for “oil,”
        “Hazardous
        Substance,”
        “release,”
        “solid
        waste,”
        “disposal”
or
        “oil
        and gas waste”
which
        is broader than that specified in either OPA, CERCLA, RCRA or
        Section 91.1011, such broader meaning shall apply.

       

      
        
          
          

        

        
          4

          
            

          

        

        
          
          

        

      

      “Environmental
        Report”
means
        any Phase I Environmental Site Assessment or similar report in respect of
        the
        Properties and, to the extent required under the terms of this Agreement,
        means
        a Phase 1 Environmental Site Assessment prepared by a qualified “environmental
        professional,” as such term is defined by the Environmental Protection
        Agency.

       

      “Equipment”
means
        all equipment (as defined in the UCC) of Borrower used for or in the operation
        of the Properties, whether or not located on the Properties, now or hereafter
        owned by Borrower or in which Borrower may now or hereafter have any interest
        (to the extent of such interest), together with all additions and accessions
        thereto, all replacements and all accessories and parts therefor, all logs
        and
        records in connection therewith, all rights against suppliers, warrantors,
        manufacturers, sellers or others in connection therewith, and together with
        all
        substitutes and replacements for any of the foregoing, including (a) all
        pipelines, well and lease equipment and surface equipment, casing, tubing,
        connections, rods, pipe, machines, other compressors, gathering systems,
        meters,
        motors, pumps, tankage, fixtures, storage and handling equipment and (b)
        the
        items listed on Schedule
        4.1(k).

       

      “Equity
        Interests”
of
        any
        Person means any and all shares, rights to purchase, options, warrants, general,
        limited or limited liability partnership interests, member interests,
        participation or other equivalents of or interest in (regardless of how
        designated) equity of such Person, whether voting or nonvoting, including
        common
        stock, preferred stock, convertible securities or any other “equity security”
(as such term is defined in Rule 3a11-1 of the General Rules and Regulations
        promulgated by the SEC under the Exchange Act).

       

      “ERISA”
means
        the Employee Retirement Income Security Act of 1974, as amended from time
        to
        time, together with all rules and regulations promulgated with respect
        thereto.

       

      
        
          
          

        

        
          5

          
            

          

        

        
          
          

        

      

      “ERISA
        Affiliate”
means
        each trade or business (whether or not incorporated) which together with
        the
        Borrower 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
        Plan”
means
        any pension benefit plan or multiemployer plan which is maintained by any
        Person
        and which is subject to Title IV of ERISA or ERISA Section 302 or Code Section
        412.

       

      “ERISA
        Event”
means
        (a) a “Reportable Event” described in section 4043 of ERISA and the regulations
        issued thereunder, (b) the withdrawal of the Borrower 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, (c) 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, (d) the institution of proceedings to terminate a
        Plan by
        the PBGC, (e) receipt of a notice of withdrawal liability pursuant to Section
        4202 of ERISA or (f) 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”
is
        defined in Section
        10.1.

       

      “Exchange
        Act”
means
        the Securities Exchange Act of 1934, as amended.

       

      “Excluded
        Amounts”
is
        defined in Section
        2.7.

       

      “Executive
        Order No. 13224”
means
        the Executive Order No. 13224 on Terrorist Financing, effective September
        24,
        2001, as the same has been, or shall hereafter be, renewed, extended, amended
        or
        replaced.

       

      “Expenses”
means,
        in connection with the Properties, Borrower’s share of costs and expenses
        relating to, without duplication, Operating Expenses, Direct Taxes (other
        than
        Property Taxes), royalties and overriding royalty interests (in existence
        as of
        the date of this Agreement or expressly permitted to be granted by the terms
        of
        this Agreement), associated Swap Settlement Payables, and one-twelfth
        (1/12th)
        of the
        estimated annual Property Taxes.

       

      “Facility
        Fees”
means
        the fees owed by Borrower to Lender as consideration, in part, for Lender’s
        assistance to Borrower in structuring the transactions contemplated under
        this
        Agreement and the other Loan Documents in an amount equal to 2% of the principal
        amount of the Loan when it is funded.

       

      “Federal
        Funds Effective Rate”
for
        any
        day means the rate per annum (based on a year of 360 days and actual days
        elapsed and rounded upward to the nearest 1/100 of 1%) announced by the Federal
        Reserve Bank of New York (or any successor) on such day as being the weighted
        average of the rates on overnight federal funds transactions arranged by
        federal
        funds brokers on the previous trading day, as computed and announced by such
        Federal Reserve Bank (or any successor) in substantially the same manner
        as such
        Federal Reserve Bank computes and announces the weighted average it refers
        to as
        the “Federal Funds Effective Rate” as of the date of this Agreement; provided,
        if such Federal Reserve Bank (or its successor) does not announce such rate
        on
        any day, the “Federal Funds Effective Rate” for such day shall be the Federal
        Funds Effective Rate for the last day on which such rate was
        announced.

       

      
        
          
          

        

        
          6

          
            

          

        

        
          
          

        

      

      “Fee
        Interest”
means
        a
        Hydrocarbon Interest arising from ownership relating to a mineral fee
        interest.

       

      “Financial
        Statements”
means
        the financial statements of Borrower required to be delivered pursuant to
        Section
        7.1(c).

       

      “Fiscal
        Quarter”
means
        the three-month period ending on each of March 31, June 30, September 30
        or
        December 31 of any year.

       

      “Fiscal
        Year”
means
        a
        twelve-month period ending on March 31 of any year.

       

      “Forward
        NYMEX Market Prices”
means
        no less than 85% of the then-current NYMEX futures prices for natural gas
        or
        crude oil, as the case may be, for the applicable month of future production.
        Lender shall determine such percentage at or above 85% in its sole reasonable
        discretion.

       

      “GAAP”
means
        generally accepted accounting principles in the United States set out in
        the
        opinions and pronouncements of the Accounting Principles Board and the American
        Institute of Certified Public Accountants and statements and pronouncements
        of
        the Financial Accounting Standards Board or such other principles as may
        be
        approved by a significant segment of the accounting profession in the United
        States, that are applicable to the circumstances as of the date of
        determination, consistently applied. 

       

      “Gas”
or
        “gas”
means
        and includes, in each case, natural gas, casinghead gas, coal bed methane
        gas,
        coal mine methane gas and all methane gas found in the coal seams or other
        strata in communication with the coal.

       

      “Governing
        Body”
means,
        (a) in the case of a corporation, its board of directors, (b) in the case
        of a
        limited liability company, its members or its managers, depending on how
        the
        management is allocated in its Organizational Documents, (c) in the case
        of a
        general partnership or joint venture, the partners or the joint venturers,
        respectively, (d) in the case of a limited partnership, the applicable Governing
        Body of the general partner thereof, if such general partner is not a natural
        person, and (e) in the case of any other entity not specified in this Agreement,
        the designees thereof that, pursuant to its Organizational Documents, fulfill
        the responsibilities typically discharged by a board of directors of a
        corporation.

       

      “Governmental
        Authority”
means
        the government of the United States of America, any other nation or any
        political subdivision thereof, whether state or local, and any agency,
        authority, instrumentality, regulatory body, court, central bank or other
        entity
        exercising executive, legislative, judicial, taxing, regulatory or
        administrative powers or functions of or pertaining to government over the
        Borrower, any of its Properties, Lender.

       

      “Gross
        Receipts”
means
        all amounts received by Borrower from the Properties and Permitted Swap
        Agreements (a) including Swap Settlement Proceeds, proceeds under gas sales
        agreements, oil sales agreements, natural gas liquids sales agreements, gas
        processing agreements, gas gathering agreements, Operating Agreements, saltwater
        disposal agreements, and service agreements (including receipts pursuant
        to the
        accounting procedure attached to and incorporated in any Operating Agreement),
        and (b) excluding the proceeds of Collateral governed separately by Section
        2.4(b).

       

      
        
          
          

        

        
          7

          
            

          

        

        
          
          

        

      

      “Guarantee”
means,
        as to any Person, (a) any obligation, contingent or otherwise, of such Person
        guaranteeing or having the economic effect of guaranteeing any Indebtedness
        or
        other obligation payable or performable by another Person (the “primary
        obligor”)
        in any
        manner, whether directly or indirectly, and including any obligation of such
        Person, direct or indirect, (i) to purchase or pay (or advance or supply
        funds
        for the purchase or payment of) such Indebtedness or other obligation, (ii)
        to
        purchase or lease property, securities or services for the purpose of assuring
        the obligee in respect of such Indebtedness or other obligation of the payment
        or performance of such Indebtedness or other obligation, (iii) to maintain
        working capital, equity capital or any other financial statement condition
        or
        liquidity or level of income or cash flow of the primary obligor so as to
        enable
        the primary obligor to pay such Indebtedness or other obligation, or (iv)
        entered into for the purpose of assuring in any other manner the obligee
        in
        respect of such Indebtedness or other obligation of the payment or performance
        thereof or to protect such obligee against loss in respect thereof (in whole
        or
        in part), or (b) any Lien on any assets of such Person securing any Indebtedness
        or other obligation of any other Person, whether or not such Indebtedness
        or
        other obligation is assumed by such Person (or any right, contingent or
        otherwise, of any holder of such Indebtedness to obtain any such Lien). The
        amount of any Guarantee shall be deemed to be an amount equal to the stated
        or
        determinable amount of the related primary obligation, or portion thereof,
        in
        respect of which such Guarantee is made or, if not stated or determinable,
        the
        maximum reasonably anticipated liability in respect thereof as determined
        by the
        guaranteeing Person in good faith. The term “Guarantee” as a verb has a
        corresponding meaning.

       

      “Guarantor”
means
        (a) each Subsidiary of Borrower, and (b) any other Person which executes
        a
        Guaranty to Guarantee the Obligation.

       

      “Guaranty”
means
        a
        Guaranty Agreement in form and substance reasonably satisfactory to Lender,
        (as
        amended, restated or supplemented from time to time) under which any Guarantor
        Guarantee’s the Obligations.

       

      “Hazardous
        Substance”
is
        defined in the definition of Environmental Law.

       

      “Hydrocarbons”
means
        oil, Gas, drip gasoline, natural gasoline, condensate, distillate, liquid
        hydrocarbons, gaseous hydrocarbons, and all products refined or separated
        therefrom. 

       

      “Hydrocarbon
        Interests”
means
        Leasehold Interests, Fee Interests and other interests in or under oil, Gas
        and
        other liquid or gaseous hydrocarbon deeds, leases or farm-out agreements
        (including the Leases) with respect to Hydrocarbons wherever located, mineral
        fee interests, overriding royalty and royalty interests, net profit interests,
        production payment interests relating to Hydrocarbons wherever located,
        including any beneficial, reserved or residual interest of whatever
        nature.

       

      
        
          
          

        

        
          8

          
            

          

        

        
          
          

        

      

      “Indebtedness”
means,
        as to any Person, without duplication, (a) obligations of such Person for
        borrowed money, (b) obligations of such Person evidenced by bonds, debentures,
        notes or other similar instruments, (c) obligations of such Person in respect
        of
        the deferred purchase price of property or services (other than trade payables
        incurred in the ordinary course of business on terms customary in the trade),
        (d) obligations of such Person under any conditional sale or other title
        retention agreement(s) relating to property acquired by such Person, (e)
        capitalized lease obligations of such Person, (f) obligations, contingent
        or
        otherwise, of such Person in respect of letters of credit, acceptances or
        similar extensions of credit, (g) guaranties by such Person of the type of
        indebtedness described in clauses
        (a)-(f)
        above,
        (h) all indebtedness of a third party secured by any Lien on property owned
        by
        such Person, whether or not such indebtedness has been assumed by such Person,
        (i) all obligations of such Person, contingent or otherwise, to purchase,
        redeem, retire or otherwise acquire for value any Equity Interest of such
        Person, (j) off-balance sheet liability retained in connection with asset
        securitization programs, synthetic leases, sale and leaseback transactions
        or
        other similar obligations arising with respect to any other transaction which
        is
        the functional equivalent of or takes the place of borrowing but which does
        not
        constitute a liability on the consolidated balance sheet of such Person and
        its
        subsidiaries and (k) net obligations under any derivative contract including
        any
        Swap Agreement, commodity agreement, interest rate agreement or foreign exchange
        agreement, excluding any non-cash mark-to-market adjustments.

       

      “Indemnified
        Taxes”
is
        defined in Section
        3.1(b).

       

      “Industry
        Agreement”
means
        any farm-out, farm-in, joint operating, development, participation or similar
        agreement commonly used in the oil and gas exploration and production
        industry.

       

      “Intercreditor
        Agreement”
means
        that certain Intercreditor Agreement among Lender, Borrower, and the Approved
        Counterparty under the initial Permitted Swap Agreement and executed and
        delivered pursuant to Section 6.1
        in
        substantially the form of Exhibit
        D.

       

      “Interest
        Period”
means
        each monthly period beginning on (and including) the Repayment Date in one
        calendar month and ending on (but not including) the Repayment Date in the
        next
        following calendar month, provided that
        the
        first Interest Period shall begin on the date the Loan is first funded under
        this Agreement and ending on the immediately following Repayment
        Date.

       

      “Interest
        Rate”
means
        the lesser
        of (a)
        the Maximum Rate and (b) the greater of (i) the LIBOR Rate plus
        the
        LIBOR Margin, and (ii) a fixed annual rate of 12%.

       

      “Interest
        Reserve”
is
        defined in Section
        2.6(c).

       

      “Investment”
means,
        for any Person (a) the acquisition (whether for cash, property, services
        or
        securities or otherwise) of Equity Interests of any other Person or any
        agreement to make any such acquisition (including any “short sale” or any sale
        of any securities at a time when such securities are not owned by the Person
        entering into such short sale), (b) the making of any deposit with, or advance,
        loan or capital contribution to, assumption of Indebtedness of, purchase
        or
        other acquisition of any other Indebtedness or equity participation or interest
        in, or other extension of credit to, any other Person (including the purchase
        of
        Property from another Person subject to an understanding or agreement,
        contingent or otherwise, to resell such Property to such Person, but excluding
        any such advance, loan or extension of credit having a term not exceeding
        90
        days representing the purchase price of inventory or supplies sold by such
        Person in the ordinary course of business), (c) the purchase or acquisition
        (in
        one or a series of transactions) of property of another Person that constitutes
        a business unit, or (d) the entering into of any Guarantee of, or other
        contingent obligation (including the deposit of any Equity Interests to be
        sold)
        with respect to, Indebtedness or other liability of any other Person and
        (without duplication) any amount committed to be advanced, lent or extended
        to
        such Person.

       

      
        
          
          

        

        
          9

          
            

          

        

        
          
          

        

      

      “JIBs”
is
        defined in Section
        7.1(c)(iii).

       

      “Lease”
or
        “Leases”
means,
        whether one or more, (a) those certain oil, gas, coal bed methane and/or
        mineral
        deeds or leases or farm-out agreements set out in the description of the
        Property on Exhibit A
        and any
        other interests in such deeds, leases or farm-out agreements, whether now
        owned
        or hereafter acquired by Borrower, and any extension, renewals, corrections,
        modifications, elections or amendments of any such deeds or leases or farm-out
        agreements, or (b) other oil, gas and/or mineral deeds or leases or farm-out
        agreements or other interests pertaining to the Properties which may now
        and
        hereafter be made (or intended or purported to be made) subject to the lien
        of
        any of the Security Documents and any extension, renewals, corrections,
        modifications, elections or amendments of any such deeds or leases or farm-out
        agreements.

       

      “Leasehold
        Interest”
means
        a
        Hydrocarbon Interest arising from ownership relating to an oil, gas and/or
        mineral lease.

       

      “Lender
        Account”
is
        defined in Section
        2.7.

       

      “Lender
        Tax”
means,
        for Lender, any Tax imposed on or measured by Lender’s income (including any
        franchise or similar tax imposed on Lender in lieu of income taxes), by the
        Governmental Authority in the jurisdiction in which Lender is organized or
        maintains a lending office. 

       

      “Lender”
is
        defined in the preamble of this Agreement and includes its successors and
        assigns.

       

      “Letters
        in Lieu”
means
        those certain letters in lieu of transfer orders, duly executed by Borrower,
        in
        the form reasonably satisfactory to Lender.

       

      “LIBOR
        Margin”
means
        6% per annum.

       

      “LIBOR
        Rate”
means
        for any day the fluctuating rate of interest equal to the one-month London
        interbank offered rate as published in the “Money Rates” section of The
        Wall Street Journal
        as
        stated on the first Business Day of the calendar month in which such day
        lies,
provided
        that
        in any
        event, LIBOR Rate for any non-Business Day will be the LIBOR Rate in effect
        on
        the immediately preceding Business Day, even if such Business Day is in the
        previous calendar month. In the event The
        Wall Street Journal
        is no
        longer published or no longer publishes the LIBOR Rate in its “Money Rates”
table, Lender shall choose a substitute LIBOR Rate that is based upon comparable
        information subject, however, to Section
        3.2.

       

      
        
          
          

        

        
          10

          
            

          

        

        
          
          

        

      

      “Lien”
means,
        with respect to any property or assets, any right or interest therein of
        a
        creditor to secure Indebtedness owed to it or any other arrangement with
        such
        creditor which provides for the payment of such Indebtedness out of such
        property or assets or which allows it to have such Indebtedness satisfied
        out of
        such property or assets prior to the satisfaction of general creditors of
        the
        owner of such property or assets, including any lien, mortgage, security
        interest, pledge, deposit, production payment, rights of a vendor under any
        title retention or conditional sale agreement or lease substantially equivalent
        thereto, tax lien, mechanic’s or materialman’s lien, or any other charge or
        encumbrance for security purposes, whether arising by law or agreement or
        otherwise, but excluding any right of offset which arises without agreement
        in
        the ordinary course of business. “Lien” also means any filed financing
        statement, any registration of a pledge (such as with an issuer of unregistered
        securities), or any other arrangement or action which would serve to perfect
        a
        Lien described in the preceding sentence, regardless of whether such financing
        statement is filed, such registration is made, or such arrangement or action
        is
        undertaken before or after such Lien exists.

       

      “Loan”
means,
        without duplication, the amounts advanced under Section
        2.1,
        and any
        additional the Administration Fees and Facility Fees advanced under this
        Agreement.

       

      “Loan
        Documents”
means
        this Agreement, the Note, each ORRI Conveyance, each Mortgage, the Security
        Agreement, the Guaranty, the Letters in Lieu, the Notices of Assignment of
        Proceeds, the Deposit Account Control Agreement, Permitted Swap Agreements,
        the
        Intercreditor Agreement, each Pledge Agreement and all other security
        agreements, deeds of trust, mortgages, chattel mortgages, pledges, guaranties,
        financing statements, continuation statements, extension agreements and other
        agreements or instruments, in as many counterparts as Lender may require,
        now,
        heretofore or hereafter delivered by Borrower to Lender in connection with
        this
        Agreement or any transaction contemplated hereby to secure or guarantee the
        payment of any part of the Obligations.

       

      “Loan
        to Value Ratio”
means,
        when determined, the ratio derived by dividing (a) the Principal Amount,
        by (b)
        the PW10 of Borrower’s Proved Developed Producing Reserves in the Properties,
        net to Borrower’s interest, and calculated by Lender in connection with the most
        recent Reserve Report delivered under this Agreement (after being adjusted
        from
        time to time to incorporate Lender’s then-current assumptions with respect to
        pricing, Expenses and hedges under Permitted Swap Agreements). Lender’s
        then-current assumptions will include forward price assumptions consisting
        of
        the Forward NYMEX Market Prices.

       

      “Lockbox”
means
        the lockbox established with the lending institution where the Lender Account
        is
        maintained and to which, upon Lender’s exercise of its option under Section
        2.7(a),
        Gross
        Receipts of Borrower that are not wire-transferred into the Lender Account
        will
        be directed for subsequent transfer into the Lender Account.

       

      “Material
        Adverse Effect”
means
        a
        material adverse change in, or material adverse effect on (a) the business,
        operations, assets, liabilities (actual or contingent), prospects, or condition
        (financial or otherwise) of the Borrower and its Subsidiaries taken as a
        whole
        (b) the ability of the Borrower to perform any of its obligations under any
        Loan
        Document to which it is a party, (c) the validity or enforceability of any
        Loan
        Document, or (d) the rights and remedies of or benefits available to Lender
        under any Loan Document.

       

      
        
          
          

        

        
          11

          
            

          

        

        
          
          

        

      

      “Material
        Contracts”
means
        (a) any agreement or arrangement to which Borrower is a party or by which
        Borrower is bound (other than the Loan Documents) for which Borrower’s breach or
        non-performance could be reasonably expected to have a Material Adverse Effect,
        (b) the contracts listed on Schedules
        4.1(o) and
        (p),
        and (c)
        the
        Operating Agreements.

       

      “Maturity
        Date”
means
        the earliest of (a) October 31, 2008, (b) the date on which all Obligations
        (other than the obligations under any ORRI Conveyance and indemnity obligations
        and similar obligations that expressly survive the termination of the Loan
        Documents) have been paid in full and this Agreement has terminated, and
        (c) the date on which Lender notifies Borrower of the acceleration of
        payment of all or any portion of the Obligations based on the occurrence
        of an
        Event of Default. 

       

      “Maximum
        Loan Amount”
means
        $12,240,000.

       

      “Maximum
        Rate”
means
        the maximum non-usurious rate of interest that Lender is permitted under
        Applicable Law to contract for, take, charge, or receive from
        Borrower.

       

      “Mortgage”
means
        a
        Mortgage, Security Agreement, Financing Statement, and Assignment of Production
        covering the Properties and securing the Obligations, executed by Borrower
        for
        the benefit of Lender, and which is in form and substance reasonably acceptable
        to Lender. 

       

      “Net
        Revenue”
means,
        for any period, (unless specified otherwise), Gross Receipts minus
        Expenses.

       

      “Net
        Revenue Interest”
and
        “NRI”
means
        in relation to Leasehold Interests (a) with respect to a Unit for which a
        net
        revenue interest is stated, that interest in the applicable Hydrocarbons
        produced, saved and sold from such unitized area which is afforded to Borrower
        by virtue of its ownership of the Hydrocarbon Interests included in whole
        or in
        part in such area after deducting all burdens against the production therefrom,
        and (b) with respect to a Well for which a net revenue interest is stated,
        that
        interest in the applicable Hydrocarbons produced, saved and sold from the
        Well
        which is afforded to Borrower by virtue of its ownership of the Hydrocarbon
        Interests after deducting all burdens against the production therefrom;
provided
        that,
        any
        representation, warranty or covenant in relation to Borrower’s Net Revenue
        Interest shall be deemed to refer to such interest net of the ORRI granted
        to
        Lender.

       

      “Non-Operated
        Properties”
means
        the Properties for which Borrower does not serve as Operator.

       

      “Note”
means
        the promissory note in the form of Exhibit
        B
        as
        appropriately completed, executed by Borrower and made payable to Lender
        in an
        amount equal to the Maximum Loan Amount. 

       

      “Notice
        of Assignment of Proceeds”
is
        defined in Section 6.4.

       

      
        
          
          

        

        
          12

          
            

          

        

        
          
          

        

      

      “Obligations”
means
        all Indebtedness and all obligations from time to time owing from Borrower
        to
        Lender or any of Lender’s Affiliates under or pursuant to any of the Loan
        Documents in connection with this Agreement or any transaction contemplated
        hereby, including all principal, interest, fees, expenses, costs and
        indemnities.

       

      “Oil
        and Gas Properties” means
        each of the following owned by Borrower: (a) Hydrocarbon Interests, (b) the
        Properties now or hereafter pooled or unitized with Hydrocarbon Interests,
        (c)
        all presently existing or future unitization, pooling agreements and
        declarations of pooled units and the units created thereby (including all
        units
        created under orders, regulations and rules of any Governmental Authority)
        which
        may affect all or any portion of the Hydrocarbon Interests, (d) all operating
        agreements, contracts and other agreements, including production sharing
        contracts and agreements, which relate to any of the Hydrocarbon Interests
        or
        the production, sale, transport by pipeline operations, purchase, exchange
        or
        processing of Hydrocarbons from or attributable to such Hydrocarbon Interests,
        (e) all Hydrocarbons in and under and which may be produced and saved or
        attributable to the Hydrocarbon Interests, including all oil in tanks, and
        all
        rents, issues, profits, proceeds, products, revenues and other incomes from
        or
        attributable to the Hydrocarbon Interests, (f) all tenements, hereditaments,
        appurtenances and Properties in any manner appertaining, belonging, affixed
        or
        incidental to the Hydrocarbon Interests, and (g) all rights, titles, interests
        and estates described or referred to above, including any and all property,
        real
        or personal, now owned or in this 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 Properties (excluding drilling rigs,
        automotive equipment, rental 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, buildings, structures, fuel separators, liquid extraction
        plants, nitrogen removal units, 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.

       

      “Operating
        Agreements”
means,
        whether one or more, operating agreements relating to the Properties to which
        Borrower is currently a party or by which Borrower is currently bound, and
        operating agreements related to the Properties to which Borrower hereafter
        becomes a party or by which Borrower hereafter becomes bound, which later
        operating agreements shall be reasonably satisfactory in form and substance
        to
        Lender.

       

      “Operating
        Expenses”
means
        (a) in relation to Leasehold Interests, Borrower’s proportionate share of
        (i) direct lease operating expenses and well maintenance expenses which arise
        from Borrower’s Working Interests in the Wells that are subject to the Mortgage,
        that are billed to Borrower by the Operator, or incurred by Borrower as
        Operator, of the Properties and (ii) Borrower’s Working Interest share of
        expenses incurred in the repair, maintenance and replacement of damaged or
        obsolete Equipment and (b) in relation to Fee Interests, Borrower’s direct
        operating expenses and well maintenance expenses, which arise from Borrower’s
        fee interests in the Wells that are subject to the Mortgage, that are billed
        to
        Borrower by the Operator or incurred by Borrower, as Operator, of the Properties
        and Borrower’s expenses incurred in the repair, maintenance and replacement of
        damaged or obsolete Equipment. Without Lender’s prior written consent, Operating
        Expenses may not include well maintenance expenses or equipment repair,
        maintenance and replacement expenses to the extent they exceed $60,000.00
        per
        event or $400,000 in any Fiscal Year. 

       

      
        
          
          

        

        
          13

          
            

          

        

        
          
          

        

      

      “Operating
        Report”
means
        a
        monthly forecast of Borrower’s revenue and its lease and other operating expense
        and capital expenditure in respect of Borrower’s interest in the Properties for
        the immediately following 12-month period.

       

      “Operator”
means,
        with regard to the Properties, any operator, including any contract operator,
        as
        such terms are generally understood in the oil and gas industry.

       

      “Organizational
        Documents”
means
        (a) in the case of a corporation, its certificate of incorporation or formation,
        articles of incorporation and bylaws, as amended, (b) in the case of a limited
        liability company, its certificate of formation, its limited liability company
        agreement, and its operating agreement or regulations (or similar documentation
        as denominated under the laws of the jurisdiction in which it is formed),
        (c) in
        the case of a general partnership or joint venture, the applicable partnership
        agreement or joint venture agreement, (d) in the case of a limited partnership,
        its certificate of formation and partnership agreement, and (e) in the case
        of
        any other entity not specified in this Agreement, the applicable documentation
        typically used in the jurisdiction where such entity has been formed for
        purposes of initially forming such entity according to the laws of such
        jurisdiction and thereafter operating and managing such entity.

       

      “ORRI”
means,
        with respect to each of the Properties, a cost free overriding royalty interest
        from Borrower’s proportionately reduced Working Interest and other Hydrocarbon
        interests in Hydrocarbons and other minerals in, under and to be produced
        from
        or attributable to the Properties conveyed to Lender pursuant to any ORRI
        Conveyance, including any ORRI to be conveyed pursuant to Section
        8.4.

       

      “ORRI
        Conveyance”
means
        an assignment in form and substance reasonably acceptable to Lender pursuant
        to
        which Borrower conveys an ORRI to Lender.

       

      “ORRI
        Letters in Lieu”
means
        those certain letters in lieu of transfer orders in relation to any ORRI,
        duly
        executed by Borrower, in the form satisfactory to Lender.

       

      “Permitted
        Encumbrances”
        means:

       

      (a) Liens
        pursuant to any Loan Document;

       

      (b) Liens
        for
        taxes, assessments, or other governmental charges or levies not yet delinquent
        or which are being contested in good faith and by appropriate proceedings
        diligently conducted, if adequate reserves with respect thereto are maintained
        on the books of the applicable Person in accordance with GAAP;

       

      (c) operators’,
        non-operators’, vendors’, carriers’, warehousemen’s, mechanics’, materialmen’s,
        repairmen’s or other like Liens arising in the ordinary course of business or
        which are incident to the exploration, development, operation, and maintenance
        of the Properties, not overdue for a period of more than 60 days or which
        are
        disputed in good faith and by appropriate proceedings diligently conducted,
        if
        adequate reserves with respect thereto are maintained on the books of the
        applicable Person in accordance with GAAP;

       

      
        
          
          

        

        
          14

          
            

          

        

        
          
          

        

      

      (d) Liens
        in
        connection with workers’ compensation, unemployment insurance and other social
        security legislation as provided by any Applicable Law, other than any Lien
        imposed by ERISA;

       

      (e) deposits
        to secure the performance of trade contracts, statutory obligations, surety
        bonds (other than bonds related to judgments or litigation), performance
        bonds
        and other obligations of a like nature incurred in the ordinary course of
        business;

       

      (f) easements,
        rights-of-way, restrictions, servitudes, permits, conditions, covenants,
        exceptions, or reservations and other similar encumbrances, defects,
        irregularities, minor imperfections and deficiencies in title affecting real
        property which, in the aggregate, are not substantial in amount, and which
        do
        not in any case materially detract from the value of the property subject
        thereto or materially interfere with the ordinary conduct of the business
        of the
        applicable Person;

       

      (g) Liens
        securing Purchase Money Indebtedness to the extent it is Permitted Indebtedness;
        

       

      (h) Liens
        permitted under Section
        6.1
        that are
        granted by Borrower to counterparties under Permitted Swap
        Agreements;

       

      (i) the
        Leases; 

       

      (j) with
        respect to Oil and Gas Properties, imperfections of title as described in
        Title
        Opinions which are acceptable to Lender;

       

      (k) Liens
        for
        royalties, overriding royalties, net profit interests, reversionary interests,
        and other similar interests, properties, arrangements and agreements as they
        relate to the Hydrocarbon Interests of Borrower, to the extent such Liens
        arise
        under Industry Agreements or are customary in the oil and gas business, are
        incurred in the ordinary course of business, do not secure Indebtedness for
        borrowed money and which secure sums which are not then required to be
        paid;

       

      (l) Liens
        in
        favor of collecting or payor banks having a right of setoff, revocation,
        refund
        or chargeback with respect to money or instruments of Borrower on deposit
        with
        or in possession of such bank securing cash management, operating account,
        and
        investment account arrangements and Permitted Indebtedness; 

       

      (m) non-consensual
        statutory Liens on pipelines or pipeline facilities, Hydrocarbons or properties
        or assets of Borrower which arise out of operation of law and are not in
        connection with the borrowing of money; and

       

      
        
          
          

        

        
          15

          
            

          

        

        
          
          

        

      

      (n) Liens
        not
        expressly permitted under this Agreement which secure Permitted
        Indebtedness.

       

      “Permitted
        Indebtedness”
means
        (a) the Obligations under this Agreement, (b) Indebtedness incurred under
        any Permitted Swap Agreement, (c) trade payables incurred in the ordinary
        course
        of Borrower’s business, (d) Purchase Money Indebtedness which does not at any
        time exceed $100,000 in the aggregate, (e) Indebtedness incurred in respect
        of
        financing unpaid insurance premiums (to the extent of the premiums being
        financed; (f) Indebtedness existing on the Closing Date and listed on
Schedule
        7.2(e)
        (as
        amended and renewed but not increased), (g) Indebtedness not to exceed $50,000
        per transaction and an aggregate amount not to exceed $150,000 at any time
        outstanding with regard to direct costs and expenses incurred in the operation
        of the Properties, and (h) without duplication, unsecured Indebtedness which
        in
        the aggregate does not at any time exceed $500,000.

       

      “Permitted
        Investments”
means
        (a) Investments in negotiable instruments for collection, (b) advances made
        in
        connection with purchases of goods or services in the ordinary course of
        business, (c) Investments made in the ordinary course of the oil and gas
        business, agreed to by Lender in writing and in its sole discretion, as a
        means
        of actively exploiting, exploring for, acquiring, developing, processing,
        gathering, marketing or transporting oil and gas through agreements,
        transactions, interests or arrangements which permit Borrower to share risks
        or
        reduce costs, comply with regulatory requirements regarding local mineral
        leases, processing agreements, farm-out and farm-in agreements, division
        orders,
        contracts for the sale, transportation or exchange of oil and natural gas,
        unitization and pooling declarations and agreements and area of mutual interest
        agreements, production sharing agreements or other similar or customary
        agreements, transactions, properties, interests, and investments and
        expenditures in connection therewith; provided
        that
        for
        purposes of this clause
        (c),
        an
        Investment in the Equity Interests of a Person shall not constitute a Permitted
        Investment, (d) Investments in overnight funds, certificates of deposit and/or
        other obligations of (i) national banks, (ii) any trust company having capital,
        surplus and undivided profits of at least $100,000,000, (iii) issuers of
        commercial paper rated not less than A-1 by Standard & Poors or P-1 by
        Moody’s Investors Service at the time of purchase by Borrower and/or (iv)
        obligations of the United States government or any agency thereof, (e) the
        current, but not additional, Investments in Subsidiaries in existence as
        of the
        date of this Agreement, and (f) other Investments approved by Lender in writing
        and in its sole discretion.

       

      “Permitted
        Swap Agreement”
means
        a
        Swap Agreement with an Approved Counterparty on terms and conditions, and
        in a
        form reasonably acceptable to Lender, including a master swap agreement on
        International Swap Dealers Association forms and the schedules thereto and
        any
        confirmations thereunder which Borrower enters into with an Approved
        Counterparty on terms reasonably acceptable to Lender.

       

      “Person”
means
        any individual, sole proprietorship, general partnership, limited partnership,
        corporation, business trust, joint stock company, trust, unincorporated
        organization, association, limited liability company, limited liability
        partnership, institution, public benefit corporation, joint venture, entity
        or
        Governmental Authority (whether federal, state, county, city, municipal or
        otherwise, including any instrumentality, division, agency, body or department
        thereof). 

       

      
        
          
          

        

        
          16

          
            

          

        

        
          
          

        

      

      “Pledge
        Agreement”
means
        (a) a pledge agreement (covering, without limitation, all of the Equity
        Interests of Borrower’s Subsidiaries) executed by Borrower, as debtor, in favor
        of Lender, and (b) a pledge agreement executed by any Subsidiary of Borrower,
        as
        debtor, in favor of Lender, in each case in form and substance reasonably
        acceptable to Lender, as the same may be amended, restated, or supplemented
        pursuant to the terms of this Agreement.

       

      “Principal
        Amount”
means,
        when determined, the principal amount of Loans outstanding at such
        time.

       

      “Pro
        Forma Financial Statements”
is
        defined in Section
        4.1(e).

       

      “Properties”
means
        all Oil and Gas Properties and the other oil and gas assets of Borrower
        described in Exhibit A,
        as
Exhibit A
        may be
        amended, restated, or supplemented from time to time.

       

      “Property
        Operating Statement”
means
        the monthly statement, in the form of Exhibit C, or
        another form mutually acceptable to Lender and Borrower (but containing at
        a
        minimum the same information) to be prepared and delivered by Borrower to
        Lender
        pursuant to Section
        2.6.

       

      “Property
        Taxes”
means
        taxes imposed periodically on Borrower by the applicable Governmental Authority
        which are based on or measured by the estimated value (at the time such taxes
        are assessed) of any Hydrocarbons or other assets situated within the
        Properties.

       

      “Proved
        Developed Non-Producing Reserves”
means
        Proved Reserves that are estimated to be recoverable by existing Wells that
        are
        not yet capable of producing such reserves without completions or recompletions
        being conducted within the existing wellbores thereof; and shall include
        reserves classified as proved developed behind-pipe reserves in a Reserve
        Report.

       

      “Proved
        Developed Producing Reserves”
means
        Proved Reserves that are estimated to be recoverable by existing Wells that
        are
        then capable of producing such reserves.

       

      “Proved
        Reserves”
means
        the current estimated quantity of Hydrocarbons which analysis of geologic
        and
        engineering data demonstrate with reasonable certainty to be recoverable
        in the
        future from known oil and gas reservoirs under existing economic and operating
        conditions based on either actual production or conclusive formation
        tests.

       

      “Proved
        Undeveloped Reserves”
means
        Proved Reserves that are estimated to be recoverable from wells to be drilled
        in
        the future.

       

      “Purchasers
        of Hydrocarbons”
means
        the Persons listed on Schedule
        4.1(o)
        and all
        other Persons who, now or may in the future, purchase Hydrocarbons attributable
        or allocable to Borrower’s Hydrocarbon Interests in the Properties.

       

      “Purchase
        Money Indebtedness”
means
        Indebtedness (other than the Obligations, but including capitalized lease
        obligations), incurred at the time of, or within 20 days after (or such other
        period as may be agreed to by Lender), the acquisition of any fixed assets
        for
        the purpose of financing all or any part of such asset’s acquisition
        cost.

       

      
        
          
          

        

        
          17

          
            

          

        

        
          
          

        

      

      “PW10”
means
        the present worth of future net cash flow, discounted to present value at
        the
        simple interest rate of 10% per year.

       

      “Repayment
        Date”
means
        the last Business Day of each month beginning November 2007 and ending on
        the
        Maturity Date.

       

      “Reorganized
        Borrower”
is
        defined in the definition of Delaware Reorganization.

       

      “Reserve
        Report”
means
        a
        petroleum engineering report in a form reasonably satisfactory to
        Lender.

       

      “SEC”
means
        the Securities and Exchange Commission or any successor thereto.

       

      “Security
        Agreement”
means
        a
        security agreement (covering, without limitation Accounts, Equipment, General
        Intangibles and Inventory of Borrower as those terms are defined in the UCC)
        executed by Borrower, as debtor, in favor of Lender, in form and substance
        reasonably satisfactory to Lender, as the same may be amended, restated or
        supplemented pursuant to the terms of this Agreement.

       

      “Security
        Documents”
means
        each Mortgage, Security Agreement, Deposit Account Control Agreement, Pledge
        Agreement, and all other security agreements, deeds of trust, mortgages,
        chattel
        mortgages, pledges, guaranties, financing statements, continuation statements,
        extension agreements and other agreements or instruments now, heretofore,
        or
        hereafter delivered to Lender in connection with this Agreement or any
        transaction contemplated hereby to secure or guarantee the payment of any
        part
        of the Obligations, as the same may be amended, restated or supplemented
        from
        time to time pursuant to this Agreement.

       

      “Severance
        Taxes”
means
        state taxes imposed by the applicable Governmental Authority at the time
        any
        Hydrocarbon is produced from a well which are based on or measured by the
        amount
        or value of such production.

       

      Subordinated
        Indebtedness
        means
        Indebtedness of Borrower which has been subordinated to the Obligations on
        terms
        satisfactory to Lender.

       

      “Subsidiary”
means
        (a) as to any Person, a corporation or other entity of whose Equity Interests
        having ordinary voting power (other than Equity Interests having such power
        only
        by reason of the happening of a contingency) to elect a majority of the
        directors of such corporation, or other Persons performing similar functions
        for
        such entity, are owned, directly or indirectly, by such Person, (b) any Person
        of which at least a majority of the outstanding Equity Interests having by
        the
        terms thereof ordinary voting power to elect a majority of the board of
        directors, manager or other governing body of such Person (irrespective of
        whether or not at the time Equity Interests of any other class or classes
        of
        such Person 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
        the Borrower or one or more of its Subsidiaries or by the Borrower and one
        or
        more of its Subsidiaries, and (c) any partnership of which the Borrower or
        any
        of its Subsidiaries is a general partner. Unless otherwise indicated in this
        Agreement, each reference to the term “Subsidiary”
means
        a
        Subsidiary of the Borrower.

       

      
        
          
          

        

        
          18

          
            

          

        

        
          
          

        

      

      “Swap
        Agreement”
means
        (a) any interest rate or currency swap, rate cap, rate collar, forward agreement
        and other exchange or rate protection agreements or any option with respect
        to
        any such transaction and (b) any swap agreement, cap, collar, floor,
        exchange transaction, forward agreement or exchange or protection agreement
        related to Hydrocarbons or any option with respect to such
        transaction.

       

      “Swap
        Settlement Payables”
means
        any settlement amounts payable by Borrower under the terms of any executed
        Permitted Swap Agreement, after giving effect to any netting provisions of
        such
        agreement.

       

      “Swap
        Settlement Proceeds”
means
        any settlement amounts paid to Borrower under the terms of any executed
        Permitted Swap Agreement, after giving effect to any netting provisions of
        such
        agreement.

       

      “Tax
        Claim”
means
        any claim by a taxing authority that Borrower owes or that Borrower’s interest
        in any of the Properties is subject to a Lien securing any amount of taxes
        of
        any kind.

       

      “Taxes”
means,
        for any Person, all present or future taxes, levies, imposts, duties,
        deductions, withholdings, assessments, fees or other charges imposed by any
        Governmental Authority, including any interest, additions to tax or penalties
        applicable thereto imposed upon that Person, its income, or any of its
        properties, franchises or assets.

       

      “Title
        Documents”
means
        copies of Title Opinions and other documents and instruments supporting
        Borrower’s title in and to some or all of the Properties and any related
        reports, abstracts and analyses to be delivered by Borrower to Lender from
        time
        to time.

       

      “Title
        Opinions”
means
        those certain title opinions to be delivered by Borrower to Lender from time
        to
        time providing evidence of title satisfactory to Lender in its sole and absolute
        discretion.

       

      “Trading
        with the Enemy Act”
means
        the foreign assets control regulations of the United States Treasury Department
        (31 CFR, Subtitle B, Chapter V, as amended) and any enabling legislation
        or
        executive order relating thereto.

       

      “Triggering
        Event”
means
        (a) the occurrence of an Event of Default, (b) that on or before June 30,
        2008,
        Borrower fails to deliver to Lender a written status report regarding Borrower’s
        efforts to refinance the Obligations under this Agreement, or (c) that on
        or
        before July 31, 2008, Borrower fails to deliver to Lender a signed commitment
        letter or term sheet from a financial institution setting out the terms on
        which
        such financial institution will refinance the Obligations under this Agreement.
        

       

      “UCC”
means
        the Uniform Commercial Code in effect, from time to time, in any applicable
        jurisdiction.

       

      “Unit”
means,
        in respect of each Well or group of related Wells, Borrower’s interest in Oil
        and Gas Properties covering the lands attributed to each such respective
        Well or
        group of related Wells for pooling, unitization and/or proration purposes,
        from
        time to time, whether so attributed to such Well or group of related Wells
        in
        order to comply with the terms of the applicable deed, oil and gas leases,
        farm-out agreements, coal bed methane leases, pooling or unitization agreements,
        unit operating agreements or the like or in order to comply with the applicable
        rules and regulations of applicable Governmental Authorities related to pooling,
        unitization, well spacing or the like and, including any pooled (compulsory
        or
        voluntary) unit, proration unit, production unit, regulatory unit, field-wide
        unit, or other similar designation or allocation of lands to such Well or
        group
        of related Wells; provided that, to the extent lands have not been attributed
        to
        any such Well or group of related Wells either by any such deed or contractual
        or regulatory authority, then the applicable Unit will consist of all of
        Borrower’s interest in Oil and Gas Properties supporting Borrower’s right to
        receive production or proceeds of production from such Well or Wells without
        geographic limitations.

       

      
        
          
          

        

        
          19

          
            

          

        

        
          
          

        

      

      “USA
        PATRIOT Act”
means
        the Uniting and Strengthening America by Providing Appropriate Tools Required
        to
        Intercept and Obstruct Terrorism Act of 2001, Public Law 107-56, as the same
        has
        been, or shall hereafter be, renewed, extended, amended or
        replaced.

       

      “Well”
means
        a
        well producing or capable of producing Hydrocarbons, including those described
        or referred to in Exhibit A
        or on
        any exhibit to any Security Document, as
        such
Exhibit A
        or other
        exhibit may be amended, restated or supplemented from time to time.

       

      “Wire
        Transfer Instructions”
means
        the instructions described on Schedule
        2.1 relating
        to the disbursements by Lender of the amounts constituting the Loans (other
        than
        the Facility Fee and the initial Administration Fee).

       

      “Working
        Interest”
and
        “WI”
means
        (a) with respect to a Unit for which a working interest is stated, Borrower’s
        share of the costs of operations conducted thereon, and (b) with respect
        to a
        Well for which a working interest is stated, Borrower’s share of costs of the
        operation thereof.

       

      Section
        1.2 Exhibits
        and Schedules.  All
        exhibits and schedules attached to this Agreement are incorporated in this
        Agreement by reference and made a part of this Agreement for all
        purposes.

       

      Section
        1.3 Amendment
        of Defined Instruments.  Unless
        the context otherwise requires or unless otherwise provided in this Agreement,
        the terms defined in this Agreement which refer to a particular exhibit,
        schedule, agreement, instrument, document or Applicable Law also refer to
        and
        include all renewals, extensions, amendments, restatements and supplements
        of
        such exhibit, schedule, agreement, instrument, document, or Applicable Law,
        provided that
        nothing
        contained in this Section shall be construed to authorize any such renewal,
        extension, modification, amendment or restatement.

       

      Section
        1.4 References
        and Titles.  All
        references in this Agreement to exhibits, schedules, articles, sections,
        subsections and other subdivisions refer to the exhibits, schedules, articles,
        sections, subsections and other subdivisions of this Agreement unless otherwise
        expressly provided. Section and subdivision headings are for convenience
        only,
        do not constitute any part of such sections or subdivisions and shall be
        disregarded in construing the language contained in such sections or
        subdivisions. The words “this Agreement,” “this instrument,” “herein,” “hereof,”
“hereby,” “hereunder” and words of similar import refer to this Agreement as a
        whole and not to any particular sections or subdivisions unless expressly
        so
        limited. The phrases “this section” and “this subsection” and similar phrases
        refer only to the sections or subsections of this Agreement in which such
        phrases occur. The word “or” is not exclusive, and the word “including” (in its
        various forms) means “including, but not limited to.” Pronouns in masculine,
        feminine and neuter genders shall be construed to include any other gender,
        and
        words in the singular form shall be construed to include the plural and vice
        versa, unless the context otherwise requires.

       

       

      
        
          
          

        

        
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      Section
        1.5 Calculations
        and Determinations.
        Unless
        otherwise expressly provided in this Agreement or Lender otherwise consents
        in
        writing, all Financial Statements and reports to be furnished to Lender under
        the Loan Documents shall be prepared and all financial computations and
        determinations made pursuant to the Loan Documents, and with respect to the
        Financial Statements, shall be made in accordance with GAAP.

       

      ARTICLE
        II

      THE
        LOANS

       

      Section
        2.1 The
        Loan.
        

       

      (a) Subject
        to the terms and conditions under this Agreement (including Lender’s right to
        terminate its obligations if an Event of Default or a Default occurs), Lender
        agrees that during the Advance Period it will make a single advance to Borrower
        in an amount up to the Committed Amount to be applied as follows: 

       

      (i) Borrower’s
        $75,000 expense advance will be applied to reimburse Borrower and Lender
        for (or
        advance to Borrower or Lender amounts to pay) that portion of the Closing
        Costs
        remaining after applying the $75,000 expense advance delivered to Lender
        by
        Borrower to reduce the amount of the Closing Costs;

       

      (ii) $240,000
        to be used to pay a Facility Fee in respect of Lender’s funding of the
        Loans;

       

      (iii) $300,000
        to be used to pay the fee for Borrower’s financial advisor;

       

      (iv) $5,000
        to
        pay the initial Administration Fee;

       

      (v) $5,000
        as
        a reserve for reimbursable closing costs incurred by Lender;

       

      (vi) $367,200
        to be used to pay the Interest Reserve;

       

      (vii) $225,000
        to be used to pay for the cost of Title Opinions; 

       

      (viii) $823,717
        to pay trade payables and similar unsecured Indebtedness incurred in the
        ordinary course of business; 

       

      
        
          
          

        

        
          21

          
            

          

        

        
          
          

        

      

      (ix) $4,500,000
        to be used for the D&A
        Operations described on Schedule 2.1(a);
        and

       

      (x) $5,774,083
        to be held by Borrower as a cash reserve to be used for D&A Operations
        described on Schedule 2.1(a),
        for
        interest expense, and for general working capital purposes (including general
        and administrative expense in an amount not to exceed $450,000 each
        month).

       

      (b) The
        Loan
        advanced under this Agreement, once repaid, may not be reborrowed. 

       

      (c) The
        Loans
        described in this Section 2.1
        and
        all
        other amounts due under this Agreement shall be evidenced by the Note. The
        final
        maturity date of such Note shall be the Maturity Date and all amounts evidenced
        by the Note shall be secured by the Security Documents and shall be entitled
        to
        the benefits of any Guaranty.

       

      Section
        2.2 Interest.

       

      (a) While
        no
        Event of Default exists, the outstanding Principal Amount shall accrue interest
        at an annual rate equal to the Interest Rate. While an Event of Default exists
        (either before or after acceleration), the outstanding Principal Amount shall
        accrue interest at an annual rate equal to the Default Rate. 

       

      (b) Interest
        shall be due and payable in arrears on each Repayment Date (and at such other
        times as may be specified in this Agreement) as set out in Section
        2.6.

       

      (c) Interest
        due and payable under this Agreement is due before and after judgment, and
        before and after the commencement of any proceeding under any applicable
        Debtor
        Relief Law. 

       

      (d) All
        computations of interest and all fees for a given period shall be made by
        multiplying the applicable annual rate times a fraction the numerator of
        which
        shall be the actual number of days elapsed during such period and the
        denominator of which shall be 360. Interest shall accrue on the day on which
        the
        Loan is made, but shall not accrue on the day on which the Loan or such portion
        thereof is paid, provided
        that
        any Loan
        that is repaid on the same day on which it is made shall accrue interest
        for one
        day. Accrued interest shall be compounded monthly.

       

      Section
        2.3 Repayment
        of the Loans.
        Except
        as otherwise provided in Section
        2.6,
        the
        Principal Amount, plus
        all
        accrued and unpaid interest thereon, shall be due and payable on the Maturity
        Date. 

       

      Section
        2.4 Prepayment
        of the Loans.

       

      (a) Voluntary
        Prepayments.  Borrower
        may prepay the Principal Amount in whole (and terminate this Agreement pursuant
        to Section
        11.8)
        or in
        part, at any time, without penalty and without premium, provided
        that
        (i)
        Borrower shall give Lender at least 3 Business Days’ prior written notice of
        such prepayment, (ii) Borrower shall pay all accrued and unpaid interest
        on the
        amount of principal being prepaid, and (iii) Borrower shall have granted
        to
        Lender any ORRI Conveyance which Lender is entitled to receive but which
        Borrower has not yet granted. The requirement to provide advance written
        notice
        of prepayment shall not apply to prepayments under Section
        2.4(b) below.

       

      
        
          
          

        

        
          22

          
            

          

        

        
          
          

        

      

      (b) Mandatory
        Prepayment.
        

       

      (i) 
        Promptly, but in no event later than three Business Days after Borrower’s
        receipt of such net proceeds, Borrower shall deliver to Lender 100% of the
        net
        proceeds of any disposition of Collateral and 50% of the proceeds of any
        issuance of Subordinated Indebtedness or Equity Interests, and such amounts
        shall be applied to reduce the Principal Amount until the Obligations have
        been
        paid in full. Provided no Event of Default exists, such prepayment of the
        proceeds of Equipment shall not be required to the extent Borrower reinvests
        the
        net proceeds from the disposition of such Equipment, or a portion thereof,
        in
        productive assets of a kind then used or usable by Borrower in its business,
        within 180 days after the date Borrower receives such proceeds.

       

      (ii) Borrower
        shall use 100% of all insurance proceeds to promptly acquire new or replacement
        assets which are contemporaneously subjected to a first priority Lien in
        favor
        of Lender on terms satisfactory to Lender and its counsel, provided,
        that,
        if
        (i) an Event of Default exists when Borrower receives such proceeds, or
        (ii) Borrower has not acquired such replacement assets within 90 days after
        its receipt of such proceeds, then, in each case, Borrower shall deliver
        such
        proceeds to Lender and such amount shall be applied to reduce the Principal
        Amount. Borrower agrees to promptly execute and deliver to Lender a Mortgage
        and
        any other Security Documents described in Section 6.1
        to grant
        Lender, a first priority lien, subject only to the Permitted Encumbrances,
        in
        any such replacement property, and further agrees that if such property is
        a
        replacement Oil and Gas Property not previously subject to an ORRI, to promptly
        execute and deliver an ORRI Conveyance to Lender on the Business Day following
        Borrower’s acquisition of such property.

       

      (c) Prepayments
        Generally.
        Any
        principal prepaid pursuant to this Section 2.4
        shall be
        in addition to, and not in lieu of, all payments otherwise required to be
        paid
        under the Loan Documents at the time of such prepayment. 

       

      (d) Character
        of Fees.
        Borrower agrees that if the Principal Amount is prepaid in full, all fees
        paid
        under this Agreement, including the Facility Fees, shall constitute prepayment
        penalties and shall not be deemed to be interest.

       

      Section
        2.5 Commencement
        of ORRI.  The
        ORRI will be effective with respect to that portion of the Hydrocarbons produced
        from or attributable to the Properties from and after the first
        day
        of the month in which the Closing Date occurs, as more particularly described
        in
        the ORRI Conveyance.

       

      Section
        2.6 Application
        of Receipts.
        

       

      
        
          
          

        

        
          23

          
            

          

        

        
          
          

        

      

      (a) Net
        Revenue shall be calculated each month by Lender based on a Property Operating
        Statement. As soon as practical each month, and in any event no later than
        the
        last Business Day of such month, Borrower shall prepare and deliver to Lender
        a
        monthly Property Operating Statement which details Borrower’s Gross Receipts and
        Expenses with respect to such month and for any other such amounts relating
        to
        any preceding months that were not previously accounted for in a Property
        Operating Statement and shall also detail the production of Hydrocarbons
        from
        the properties as described therein. Borrower shall deliver the first Property
        Operating Statement to Lender no later than the last Business Day of October
        2007; provided
        that
        this
        first Property Operating Statement shall cover the period from the Closing
        Date
        through and including the last Business Day of October 2007, and shall reflect
        Gross Receipts received and Expenses paid for such period which are related
        to
        production for all periods prior to and including the last day of October
        2007,
        to the extent available to Borrower.

       

      (b) Effective
        as of each Repayment Date and at the end of each Interest Period, Gross Receipts
        for such Interest Period shall be applied as follows:

       

      (i) first
        to
        pay all Expenses;

       

      (ii) second,
        

       

      (A) if
        no
        Event of Default then exists, an amount equal to all accrued and unpaid interest
        on the Principal Amount until all such accrued and unpaid interest is paid
        in
        full; or

       

      (B) if
        an
        Event of Default then exists, an amount equal to 100% of the Net Revenue
        for
        such Interest Period with such amounts being be applied first to all accrued
        and
        unpaid interest until all accrued and unpaid interest is paid in full with
        the
        remaining amount being applied to the Principal Amount until the Principal
        Amount is paid in full; 

       

      (iii) third,
        if
        such Repayment Date occurs in a month that is also at the last month in a
        Fiscal
        Quarter, to pay $5,000 to Lender as the Administration Fee (other than the
        initial Administration Fee); and

       

      (iv) fourth,
        if no Event of Default exists, any remaining amounts shall be retained by
        Borrower or, if Gross Receipts are then being deposited in the Lender Account,
        by remitting such sums to the Borrower Operating Account in accordance with
        Section
        2.7(a).

       

      (c) On
        the
        Closing Date, Borrower shall pay to Lender (for deposit into the Lender Account)
        an amount equal to $367,200 (the “Interest
        Reserve”).
        This
        amount approximates 3 months accrued interest on the Principal Amount. If
        on any
        Repayment Date Borrower fails to pay the interest then due, Lender may withdraw
        from the Lender Account an amount equal to the past due interest and apply
        it
        toward the payment due under this Agreement. If the balance of the Lender
        Account is at any time less than an amount equal to 3 months of accrued and
        unpaid interest on the Principal Amount, Lender shall notify Borrower of
        such
        deficit and Borrower shall immediately deposit additional funds into the
        Lender
        Account in an amount sufficient to eliminate such deficit.

       

       

      
        
          
          

        

        
          24

          
            

          

        

        
          
          

        

      

      Section
        2.7 Gross
        Receipts Paid to Lender Account.
        

       

      (a) Upon
        the
        occurrence of a Triggering Event and continuing until all Obligations (other
        than the obligations under any ORRI Conveyance and indemnity obligations
        and
        similar obligations that expressly survive the termination of the Loan
        Documents) have been paid in full and this Agreement and Lender’s commitment to
        make Loans have terminated, Borrower shall direct and cause all Gross Receipts
        to be deposited directly into an account maintained by Lender (the “Lender
        Account”),
        or
        into the Lockbox associated with the Lender Account, by causing all Purchasers
        of Hydrocarbons, the Operators, all counterparties under Swap Agreements,
        all
        Account Debtors of Borrower (including under pipeline transportation contracts),
        and any other customers of Borrower to deposit all payments of any nature
        whatsoever due and owing by such Persons to Borrower into the Lender Account;
        provided
        that
        (i)
        Purchasers of Hydrocarbons, with prior notice to Lender, may make distributions
        to third party royalty interest owners and working interest owners and may
        withhold Severance Taxes (collectively, the “Excluded
        Amounts”),
        and
        (ii) with the written consent of Lender, Borrower may have an amount of the
        Gross Receipts equal to the amount of the Excluded Amounts deposited into
        the
        Borrower Operating Account rather than the Lender Account. 

       

      (b) Borrower
        will have 60 days after the receipt of such Excluded Funds to contest the
        amounts of funds, after which time the amounts released will be deemed
        conclusively correct absent manifest error, provided
        that
        Borrower
        may not contest any such amounts released for any reason after the Maturity
        Date. If Borrower desires to contest any such amount it shall do so by providing
        Lender written notice with a report analyzing its basis regarding any error.
        Lender shall thereafter notify Borrower, within 30 days of receipt of Borrower’s
        analysis, if it agrees with or disputes Borrower’s analysis. If Lender disputes
        Borrower’s analysis, Lender’s notice shall detail the specific basis of the
        dispute and the amount of the dispute. If Lender agrees with Borrower’s
        analysis, Lender will disburse any such amounts to Borrower within 15 days
        of
        the date of Lender’s notice.

       

      (c) Any
        amounts deposited into the Lender Account owing to third-party working interest,
        overriding royalty interest and royalty interest owners whose interests in
        the
        Properties were created prior to the time such Properties became subject
        to any
        of the Security Documents or to taxing authorities for production taxes shall
        be
        released by Lender to Borrower within 3 Business Days after receipt of a
        certificate from Borrower detailing such amounts and the party to be paid
        so
        that Borrower may return such amounts to such third-party working interest,
        overriding royalty interest and royalty interest owners and taxing authorities.
        Lender shall have the right to undertake audit procedures during normal business
        hours and upon reasonable prior notice to periodically confirm that such
        payments and all Expenses have been made by Borrower. Lender shall have the
        right at its option, but not the obligation, to make payments directly for
        Expenses and such other payments directly to the third-party working interest,
        overriding royalty interest and royalty interest holders and taxing authorities
        upon the occurrence of and during the continuance of an Event of Default
        under
        this Agreement. 

       

       

      
        
          
          

        

        
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      Section
        2.8 Use
        of Proceeds.
        

       

      (a) Loan
        proceeds may be used by Borrower for the purposes described in Section 2.1(a)
        (including for working capital and general corporate purposes). In no event
        shall funds from the Loans be used by Borrower, directly or indirectly, for
        personal, family, household or agricultural purposes, or any other purpose
        not
        specifically described in this Section
        2.8
        or in
Section
        2.1.

       

      (b) Borrower
        shall have the right to use funds paid over to the Borrower Operating Account
        for any corporate or business purposes of Borrower. 

       

      ARTICLE
        III

      TAXES
        AND YIELD PROTECTION

       

      Section
        3.1 Taxes.

       

      (a) Any
        and
        all payments by Borrower to or for the account of Lender under any Loan Document
        (other than the ORRI Conveyance) shall be made free and clear of, and without
        deduction by, Borrower for any and all Taxes other than Lender Taxes (except
        to
        the extent required by Applicable Law) and Direct Taxes. To confirm Borrower’s
        ability to comply with the foregoing, Lender represents and warrants to Borrower
        that it is (i) not subject to backup withholding and is otherwise current
        on its
        obligations under the Code, and (ii) not a foreign person within the meaning
        of
        the Code or under any laws of any jurisdiction of which Lender is subject,
        the
        effect of which laws would be to require Borrower to withhold taxes from
        payments made to or for the account of Lender. If Borrower shall be required
        by
        any Applicable Laws to deduct Lender Taxes from or in respect of any sum
        payable
        under any Loan Document to Lender, (i) the sum payable shall be increased
        as
        necessary so that, after making all required deductions (including deductions
        applicable to additional sums payable under this Section), Lender receives
        an
        amount of principal and interest it would have received had no such deductions
        been made, (ii) Borrower shall make such deductions, (iii) Borrower shall
        pay
        the full amount deducted to the relevant taxation authority or other authority
        in accordance with Applicable Laws, and (iv) within 30 days after the date
        of
        such payment, Borrower shall furnish to Lender the original or a certified
        copy
        of a receipt evidencing payment thereof.

       

      (b) To
        the
        extent not duly paid by Borrower, Borrower shall indemnify Lender within
        10 days
        after written demand therefor, for the full amount of Lender Taxes paid by
        Lender on or with respect to any payment by or on account of any obligation
        of
        the Borrower under this Agreement (including Lender Taxes imposed or asserted
        on
        or attributable to amounts payable under this Section
        3.1)
        (“Indemnified
        Taxes”)
        and
        any penalties, interest and reasonable expenses arising therefrom or with
        respect thereto, whether or not such Indemnified Taxes were correctly or
        legally
        imposed or asserted by the relevant Governmental Authority. A certificate
        of
        Lender as to the basis of Lender Taxes and the amount of such payment or
        liability under this Section
        3.1
        shall be
        delivered to the Borrower and shall be conclusive absent manifest
        error.

       

      
        
          
          

        

        
          26

          
            

          

        

        
          
          

        

      

      (c) In
        addition, Borrower agrees to pay any and all present or future stamp, court
        or
        documentary taxes and any other excise or property taxes or charges or similar
        levies which arise from any payment made under any Loan Document or from
        the
        execution, delivery, performance, enforcement or registration of, or otherwise
        with respect to, any Loan Document.

       

      Section
        3.2 Inability
        to Determine LIBOR Rate.  If
        Lender determines in connection with any request for a Loan or continuation
        thereof for any reason that adequate and reasonable means do not exist for
        determining the LIBOR Rate, Lender will promptly so notify Borrower if Lender
        reasonably determines that such event or events have any impact on the
        application of the Interest Rate. In such event, Lender shall use, as the
        LIBOR
        Rate, the average LIBOR Rate for the two immediately preceding months (for
        one-month terms) until Lender notifies Borrower that the circumstances giving
        rise to such determination no longer exist. 

       

      ARTICLE
        IV

      REPRESENTATIONS
        AND WARRANTIES

       

      Section
        4.1 Representations
        and Warranties of Borrower.  To
        confirm Lender’s understanding concerning Borrower and Borrower’s businesses,
        properties and obligations, and to induce Lender to enter into this Agreement
        and to make the Loans, Borrower represents and warrants to Lender that:

       

      (a) Organization
        and Authority.  Borrower
        is a corporation, duly organized and validly existing under the laws of Nevada,
        having all requisite corporate powers necessary to carry on its businesses
        and
        to enter into and consummate the transactions contemplated by the Loan
        Documents. Borrower is authorized to do business in all other jurisdictions
        in
        which the character of the properties owned or held by it or the nature of
        the
        business transacted by it makes such qualification necessary, except where
        the
        failure to so qualify cannot reasonably be expected to have a Material Adverse
        Effect. Borrower has taken all actions necessary to authorize the execution
        and
        delivery of the Loan Documents and to authorize the consummation of the
        transactions contemplated by, and the performance of its obligations under,
        the
        Loan Documents. Borrower is duly authorized to borrow funds under this Agreement
        and generally to conduct all D&A Operations.

       

      (b) No
        Conflicts or Consents.
        

       

      (i) 
        Other
        than obligations or agreements that will be satisfied or terminated prior
        to or
        contemporaneously with Closing, the execution and delivery by Borrower of
        the
        Loan Documents, the performance of its obligations under the Loan Documents,
        and
        the consummation of the transactions contemplated by the Loan Documents does
        not
        and will not (A) conflict with or violate any provision of any Applicable
        Law,
        any of Borrower’s Organizational Documents, or any Material Agreement, the
        violation of which could reasonably be expected to have a Material Adverse
        Effect, (B) result in the acceleration of any Indebtedness owed by Borrower,
        or
        (C) result in or require the creation of any Lien upon any assets or properties
        of Borrower, except as expressly contemplated in the Loan Documents.

       

      
        
          
          

        

        
          27

          
            

          

        

        
          
          

        

      

      (ii) Except
        as
        expressly contemplated in the Loan Documents and except those which have
        been
        obtained, no consent, approval, authorization or order of, and no notice
        to or
        filing with, any Governmental Authority or third party is required for
        Borrower’s execution, delivery or performance of any Loan Document or its
        consummation of any transactions contemplated by the Loan Documents.

       

      (iii) Except
        as
        set out on Schedule
        4.1(b),
        no
        consents, options, rights of first refusal or similar rights are outstanding
        in
        favor of any Person in respect of conducting the D&A Operations, other than
        consents, permits and authorizations required to be obtained or renewed from
        time to time from Governmental Authorities.

       

      (c) Enforceable
        Obligations.  This
        Agreement and the other Loan Documents are the legal, valid and binding
        obligations of Borrower enforceable against Borrower in accordance with their
        respective terms except as such enforcement may be limited by Debtor Relief
        Laws
        or by principles of equity applicable to the enforcement of creditors’ rights
        generally whether in proceeding at law or in equity. 

       

      (d) Capitalization;
        Subsidiaries: Compliance with Security Laws.
        

       

      (i) Schedule
        4.1(d)
        lists
        all Subsidiaries of Borrower, other Persons in which Borrower owns any Equity
        Interests, all Affiliates of Borrower, and all joint ventures or associations
        of
        which Borrower is a venture partner or a member. Other than those listed
        in such
        schedule, Borrower has no Subsidiaries, owns no Equity Interests in any Person,
        has no Affiliates and is not a member of any joint venture or association.
        

       

      (ii) Except
        as
        disclosed on Schedule
        4.1(d),
        Borrower is not (A) subject to any options, warrants, or other rights to
        purchase any Equity Interests of Borrower, (B) subject to any Indebtedness
        or securities convertible into or exchangeable for any Equity Interests of
        Borrower, or (C) under any obligation (contingent or otherwise) to purchase
        or
        otherwise acquire or retire any of its Equity Interests. 

       

      (iii) Except
        as
        contemplated by this Agreement or as disclosed on Schedule
        4.1(d),
        (A)
        Borrower has complied in all material respects with all applicable state
        corporate laws, and (B) there is no pending or, to the knowledge of Borrower,
        threatened litigation against Borrower involving any federal or state securities
        law claims against Borrower.

       

      (e) Pro
        Forma Financial Statements.  Attached
        as Schedule
        4.1(e)
        are
        unaudited, management-prepared pro forma balance sheet of the Borrower as
        of the
        Closing Date (the “Pro
        Forma Financial Statements”).
        The
        Pro Forma Financial Statements present fairly the pro forma financial condition
        of the Borrower as of the date thereof and are in accordance with the projected
        or actual (as the case may be) performance and books and records of
        Borrower.

       

      
        
          
          

        

        
          28

          
            

          

        

        
          
          

        

      

      (f) Indebtedness;
        Taxes; Unpaid Bills, Restrictions.
        

       

      (i) Except
        for Indebtedness permitted under Section
        7.2(e),
        Borrower does not have any outstanding Indebtedness. 

       

      (ii) No
        Tax
        Claim or other claim for delinquent Property Taxes or Severance Taxes exists.
        Borrower has filed all federal, state and local tax returns and other material
        reports it is required by law to file and has paid all taxes, assessments,
        fees
        and other governmental charges that are due and payable except those which
        are
        being contested in good faith. The provision for taxes on the books of Borrower
        is adequate for all years not closed by applicable statutes, and for its
        current
        fiscal year, and Borrower has no knowledge of any deficiency or additional
        assessment in connection therewith not provided for on its books in accordance
        with GAAP.

       

      (iii) Other
        than those incurred in the ordinary course of business and which are not
        yet
        delinquent and those disclosed on Schedule
        4.1(f),
        Borrower
        has no unpaid bills with respect to improvements to any of the Collateral
        which
        may give rise to mechanic’s, materialman’s or other similar liens arising by
        operation of Applicable Law should such bills remain unpaid. 

       

      (iv) Borrower
        is not subject to or restricted by any franchise, contract, deed, charter
        restriction or other instrument or restriction which could reasonably be
        expected to have a Material Adverse Effect on Borrower’s financial condition, or
        Borrower’s ability to timely pay the Note and the other Obligations, perform its
        obligations under the Loan Documents, or conduct the D&A
        Operations.

       

      (g) Full
        Disclosure.  The
        written information delivered by Borrower, or on behalf of Borrower or any
        Affiliate of Borrower, to Lender in connection with the negotiation of this
        Agreement or in connection with any transaction contemplated hereby is true
        and
        correct in all material respects and does not contain any untrue statement
        of a
        material fact or omit to state any material fact known to Borrower which
        is
        necessary to make the statements contained in this Agreement or therein not
        misleading as of the date made or deemed made; provided
        that
        with
        respect to any projected information (including any projected financial
        information or Hydrocarbon production or Hydrocarbon reserve information),
        Borrower represents only that such information was prepared in good faith
        based
        upon assumptions believed to be reasonable at the time. No facts are known
        to
        Borrower that have not been disclosed to Lender in writing which could
        reasonably be expected to have a Material Adverse Effect on Borrower’s financial
        condition, or Borrower’s ability to timely pay or perform its
        obligations.

       

      
        
          
          

        

        
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      (h) Litigation.  Except
        as disclosed on Schedule
        4.1(h),
        there
        are no actions, suits or legal, equitable, arbitrative or administrative
        proceedings pending, or to the knowledge of Borrower threatened, against
        Borrower or affecting any of the Properties before any Governmental Authority
        or
        arbitrator, and there are no outstanding judgments, injunctions, writs, rulings
        or orders by any such Governmental Authority or arbitrator in respect of
        Borrower or any of the Properties.

       

      (i) Borrower’s
        Business; Names and Places of Business.  Borrower
        is not engaged in any business or activity other than the acquisition,
        ownership, operation and development of properties potentially productive
        of oil
        and/or gas and related activities. During the immediately preceding 3 year
        period, Borrower has not used any trade name or otherwise conducted business
        under any name other than those set out on Schedule 4.(i).

       

      (j) Title
        and Operations.
        

       

      (i) The
        Collateral will be owned by Borrower free and clear of any Lien (other than
        Permitted Encumbrances). 

       

      (ii) Borrower’s
        Working Interests are not greater than, and Borrower’s Net Revenue Interests are
        not less than, those stated on Exhibit
        A.

       

      (iii) Subject
        to Permitted Encumbrances, (A) Borrower will have all legal and beneficial
        rights, title and interest in and to all production from or allocable to
        its Net
        Revenue Interest and other Hydrocarbon Interests in the Properties and have
        the
        exclusive right to sell the same subject to the ORRI, and (B) Borrower will
        have
        good and Defensible Title to the Properties, the Equipment and to its other
        properties and assets. 

       

      (iv) Borrower
        is the operator of record of all the Properties.

       

      (v) Except
        through their respective ownership interests in Borrower, no shareholders
        or any
        Affiliates of Borrower own any interests in the Properties.

       

      (k) Equipment.  All
        material Equipment owned by Borrower as of the Closing Date, except for office
        equipment and fixtures and other Equipment with market value of less than
        $10,000 per item, is listed on Schedule
        4.1(k).
        

       

      (l) Affiliate
        Transactions.   Borrower
        is not party to any contract, agreement, or any transaction of any kind with
        any
        Affiliate of Borrower other than on fair and reasonable terms at least as
        favorable to Borrower as would be obtainable by Borrower at the time in a
        comparable arm’s length transaction with a Person other than an
        Affiliate.

       

      (m)
        Investment
        Company.  Borrower
        is not an “investment company” within the meaning of the Investment Company Act
        of 1940, as amended.

       

      (n) Environmental
        and Other Laws.  Except
        as disclosed on Schedule
        4.1(n),
        (i) Borrower is conducting its business in material compliance with all
        Applicable Laws, including Environmental Laws, and has been and is in material
        compliance with any licenses and permits required under any such laws which
        affect or relate to the Collateral; (ii) none of the operations or properties
        of
        Borrower is the subject of federal, state or local investigation evaluating
        whether any material remedial action is needed to respond to a release of
        any
        Hazardous Substances into the environment or to the improper storage or disposal
        (including storage or disposal at offsite locations) of any Hazardous
        Substances; (iii) Borrower has not filed or received any notice under any
        federal, state or local law indicating that it is or may be responsible for
        the
        improper release into the environment, or the improper storage or disposal,
        of
        any Hazardous Substances or that any Hazardous Substances have been improperly
        released, or are improperly stored or disposed of, upon the Properties; and
        (iv)
        Borrower is not aware of material contingent liability under any Environmental
        Laws or in connection with the release into the environment, or the storage
        or
        disposal, of any Hazardous Substances, upon the Properties.

       

      
        
          
          

        

        
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      (o) Hydrocarbon
        Purchasers and Sales Agreements.  Schedule
        4.1(o)
        lists
        (i) all of the Purchasers of Hydrocarbons produced from or allocated to the
        Properties, and the most recent address of each such Persons as shown in
        Borrower’s records and the contact information for each such Purchaser of
        Production, and (ii) all existing agreements that are binding on Borrower
        or the
        Properties for the sale, purchase, (including calls on production and
        preferential rights to purchase production) gathering, transportation, handling,
        processing, treating and/or storage of Hydrocarbons and which are not terminable
        upon fewer than 31 days notice.

       

      (p) Swap
        Agreements; Material Contracts.  Schedule
        4.1(p) sets
        out
        (i) all existing Swap Agreements or other hedge agreements to which Borrower
        is
        a party or by which Borrower is bound, (ii) all the volumes, notional or
        physical, of the Hydrocarbons hedged under the existing Swap Agreements and
        the
        terms and the fixed, floating and collar prices and any other applicable
        prices,
        and (iii) all Material Contracts of Borrower. There have been no amendments
        to
        or modifications of the existing Swap Agreements or the Material Contracts,
        except as set out on Schedule
        4.1(p).

       

      (q) Employees.  Except
        as set out on Schedule
        4.1(q),
        neither
        Borrower nor any ERISA Affiliate is a party to any existing employment
        agreements, deferred compensation, stock option, bonus, consulting or retirement
        agreements or plans, or other employee benefit plans of any kind, including
        any
        pension or welfare benefit plans with any employee which are not terminable
        at-will. No employees of Borrower is represented by any labor union or
        collective bargaining agreement, nor is any union organization effort pending
        or
        threatened against Borrower.

       

      (r) Insolvency.  After
        giving effect to the execution and delivery of the Loan Documents and the
        making
        of the Loans under this Agreement, Borrower will not be “insolvent,” within the
        meaning of such term as defined in § 101 of Title 11 of the United States Code,
        as amended from time to time, or be unable to pay its debts generally as
        such
        debts become due, or have an unreasonably small capital to engage in any
        business or transaction, whether current or contemplated. 

       

      
        
          
          

        

        
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      (s) ERISA
        Liabilities.
        

       

      (i) Schedule
        4.1(s)
        sets out
        a list of all employee benefit plans and programs of the Borrower and its
        ERISA
        Affiliates which benefit the employees of the Borrower or its ERISA Affiliates,
        including, plans and programs providing for pension, retirement, profit-sharing,
        savings, bonus, 401(k), deferred or incentive compensation, hospitalization,
        medical, dental, vision, pharmaceutical, life or disability insurance, vacation
        and paid holiday, termination or severance pay, deferred compensation,
        restricted stock, stock option or stock appreciation rights benefit plans
        (the
“Benefit
        Plans”).
        Neither Borrower nor any ERISA Affiliate maintains, has ever maintained or
        has,
        or ever has had or could have any liability with respect to employee benefit
        plan that is subject to Title IV of ERISA, a “multiemployer plan” within the
        meaning of Section 3(37) of ERISA or any plan subject to Section 302 of ERISA
        or
        Section 412 of the Code. Borrower and its ERISA Affiliates, if any, are in
        compliance in all material respects with ERISA and all Applicable Laws,
        including the Consolidated Omnibus Budge Reconciliation Act of 1985, as amended,
        applicable to any employee benefit plan or program which is maintained or
        contributed to by Borrower or its ERISA Affiliate, or to which Borrower or
        its
        ERISA Affiliate has any responsibility or fixed or contingent
        liability.

       

      (ii) Neither
        Borrower nor any ERISA Affiliate maintains or has ever maintained (or has
        ever
        had any liability with respect to) any plan subject to Section 302 of ERISA
        or
        Section 412 of the Code. Borrower and its ERISA Affiliates are in compliance
        in
        all material respects with ERISA, the Code, and all Applicable Laws, including
        the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended,
        applicable to any Benefit Plan or any employee benefit plan or program which
        is
        maintained or contributed to by Borrower or its ERISA Affiliate, or to which
        Borrower or its ERISA Affiliate has any responsibility or fixed or contingent
        liability. Each Benefit Plan that is intended to be tax qualified under Code
        Section 501 or Code Section 401 has received a favorable determination letter
        as
        to its tax qualified status for all amendments for which such letter may
        be
        received from the Internal Revenue Service, and no event has occurred that
        would
        negatively affect the qualified status of such plan. There is no prohibited
        transaction under ERISA or Code Section 4975 which are not otherwise exempt
        under ERISA or the Code with respect to any Benefit Plan.

       

      (t) Anti-Terrorism
        Laws.
        

       

      (i) Neither
        Borrower nor any Affiliate of Borrower is in violation of any Anti-Terrorism
        Law
        or engages in or conspires to engage in any transaction that evades or avoids,
        or has the purpose of evading or avoiding, or attempts to violate, any of
        the
        prohibitions set forth in any Anti-Terrorism Law.

       

      (ii) Borrower
        has not engaged, nor does it intend to engage, in any business or activity
        prohibited by the Trading with the Enemy Act.

       

      
        
          
          

        

        
          32

          
            

          

        

        
          
          

        

      

      (iii) Borrower
        is not (A) a Person whose property or interest in property is blocked or
        subject
        to blocking pursuant to Section 1 of Executive Order 13224, (B) engaged in any
        dealings or transactions prohibited by Section 2 of Executive Order 13224,
        or
        otherwise associated with any such Person in any manner violative of Section
        2,
        or (C) a Person on the list of Specially Designated Nationals and Blocked
        Persons or subject to the limitations or prohibitions under any other U.S.
        Department of Treasury’s Office of Foreign Assets Control regulation or
        executive order.

       

      (iv) No
        part
        of the proceeds of the Loans will be used, directly or indirectly, for any
        payments to any governmental official or employee, political party, official
        of
        a political party, candidate for political office, or anyone else acting
        in an
        official capacity, in order to obtain, retain or direct business or obtain
        any
        improper advantage, in violation of the United States Foreign Corrupt Practices
        Act of 1977, as amended.

       

      (u) No
        Default.  No
        Event of Default or Default exists.

       

      ARTICLE
        V

      NOTICE
        OF CERTAIN EVENTS

       

      Until
        all
        Obligations (other than the obligations under any ORRI Conveyance and indemnity
        obligations and similar obligations that expressly survive the termination
        of
        the Loan Documents) have been paid in full and this Agreement and Lender’s
        commitment to make Loans have terminated, Borrower shall deliver to Lender
        or
        notify Lender of, as the case may be, the following items:

       

      Section
        5.1 Notice
        of Default, Event of Default and Other Matters.  Borrower
        shall promptly notify Lender of any of the following (in any event not later
        than 3 Business Days after becoming aware of the existence of any of the
        following):

       

      (a) any
        Default or Event of Default; 

       

      (b) any
        developments or other information which could reasonably be expected to have
        a
        Material Adverse Effect;

       

      (c) any
        material dispute (including tax liability disputes) that may arise between
        Borrower and any Governmental Authority;

       

      (d) the
        commencement of any material litigation or proceeding affecting Borrower
        or any
        Collateral (whether by the filing of a complaint, service of process or by
        attachment or arrest of any asset);

       

      (e) any
        investigation or proceeding before or by any Governmental Authority in respect
        of Borrower or any Collateral;

       

      (f) any
        labor
        dispute or controversy resulting in or likely to result in a strike or work
        stoppage against Borrower;

       

      
        
          
          

        

        
          33

          
            

          

        

        
          
          

        

      

      (g) any
        proposal by any Governmental Authority to acquire any assets or business
        of
        Borrower;

       

      (h) the
        location of any Collateral other than at the places indicated in or as permitted
        under the Loan Documents;

       

      (i) any
        proposed or actual change of the name, identity or structure of
        Borrower;

       

      (j) any
        material loss or damage to any of Borrower’s property, business or
        operations;

       

      (k) any
        potentially material environmental situation, circumstance or condition that
        causes or may cause Section
        4.l(n)
        to be
        false;

       

      (l) any
        other
        matter which has resulted or may reasonably be expected to result in a material
        adverse change in the financial condition, prospects, operations or assets
        of
        Borrower; 

       

      (m) any
        destruction or substantial damage to any of the Collateral and of the occurrence
        of any condition or event which has caused, or may cause, material loss or
        depreciation in the value of a material portion of the Collateral;
        or

       

      (n) Borrower
        or any ERISA Affiliate having any obligation or liability with respect to
        an
        ERISA Plan or any prohibited transaction as defined in ERISA or Code Section
        4975 with respect to any Benefit Plan or the occurrence of an ERISA Event
        that,
        in any such case, could reasonably be expected to have a Material Adverse
        Effect.

       

      Section
        5.2 Other
        Information.  Borrower
        shall provide such other information regarding Borrower’s financial condition or
        assets as Lender may reasonably request from time to time.

       

      ARTICLE
        VI

      SECURITY
        AND COLLATERAL.

       

      Section
        6.1 Security;
        Guaranty.
        

       

      (a) The
        Obligations will be secured by first priority Liens on the Collateral (subject
        only to the Permitted Encumbrances). 

       

      (b) Any
        time
        Borrower obtains any new Property after the Closing Date, Borrower agrees
        to
        promptly execute and deliver to Lender, (i) a Mortgage and any other Security
        Documents to grant Lender a first priority Lien (subject only to the Permitted
        Encumbrances) on such Property, and (ii) an ORRI Conveyance as required under
        Sections 8.4.
        

       

      (c) Lender
        will permit the counterparty under a Permitted Swap Agreement to obtain Liens
        from Borrower covering, all or a portion of, the Properties that are
pari
        passu
        with the
        first priority liens held by Lender; provided
        that,
        Borrower, Lender and such counterparty shall enter into an Intercreditor
        Agreement, reasonably satisfactory to Lender.

       

       

      
        
          
          

        

        
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      Section
        6.2 Perfection
        and Protection of Security Interests and Liens.  Borrower
        will from time to time deliver to Lender any security agreements, financing
        statements, continuation statements, extension agreements, amendments,
        confirmations and other documents, properly completed and executed (and
        acknowledged when required) in form and substance reasonably satisfactory
        to
        Lender, which Lender reasonably requests for the purpose of perfecting,
        confirming, protecting or establishing the priority of any Liens or other
        rights
        in the Collateral securing any Obligations.

       

      Section
        6.3 Release
        of Collateral.  Upon
        the payment and performance in full by Borrower of all Obligations (other
        than
        those arising under the ORRI Conveyance and indemnity obligations and similar
        obligations that expressly survive the termination of the Loan Documents),
        Lender shall deliver or cause to be delivered to Borrower, at Borrower’s
        expense, releases and satisfactions, or transfers without warranty, of all
        Collateral, including releases of deeds of trust and mortgages, financing
        statements, and other registrations of security with respect to the Collateral
        and a release of the Deposit Account Control Agreement, and Borrower shall
        deliver to Lender a general release of all of Lender’s liabilities and
        obligations including under the Loan Documents (other than those arising
        under
        the ORRI Conveyance, and indemnity obligations and similar obligations that
        expressly survive the termination of the Loan Documents) and an acknowledgment
        that the same have been terminated. 

       

      Section
        6.4 Account
        Debtors.  While
        an Event of Default exists, all account debtors (including any Operator,
        Purchasers of Hydrocarbons and counterparties under Permitted Swap Agreements)
        relating to the Working Interests, Net Revenue Interests and other Hydrocarbon
        Interests in the Properties, under pipeline transportation agreements and
        relating to Permitted Swap Agreements (collectively, “Account
        Debtors”)
        will
        receive notification from Lender (as assignee), and Borrower (as assignor)
        (the
“Notice
        of Assignment of Proceeds”)
        to
        make payment of all amounts owed from time to time by the Account Debtor
        to the
        Borrower for sales of all production from or allocable to Borrower’s interest in
        the Properties and all other Gross Receipts into the Lockbox or directly
        into
        the Lender Account. Borrower shall use commercially reasonable efforts to
        obtain
        and deliver, within 30 days after Lender’s written request, from all Account
        Debtors, an executed Notice of Assignment of Proceeds which will instruct
        the
        Account Debtors to remit all proceeds from sales of all production from or
        allocable to the Net Revenue Interest in the Properties and all other Gross
        Receipts into the Lockbox or directly into the Lender Account. Lender may
        prohibit Borrower from selling any Hydrocarbon production to a purchaser
        that
        refuses to execute and deliver to Lender a Notice of Assignment of Proceeds.
        If
        Borrower receives any Gross Receipts after Notices of Assignment of Proceeds
        have been sent, Borrower shall promptly notify Lender and follow Lender’s
        instructions regarding submitting such proceeds to the Lockbox or the Lender
        Account, and, until received by Lender, Borrower shall hold such proceeds
        in
        trust for Lender.

       

      Section
        6.5 Location;
        Records.  Except
        to the extent it is being used or transported in the ordinary course of
        business, all Equipment owned by or on behalf of Borrower will be kept at
        its
        current location. Borrower shall be permitted to change the location of any
        Equipment if within 5 Business Days after such Equipment is relocated Borrower
        gives written notice of the new location to Lender and Borrower has taken
        all
        actions necessary to maintain the perfection and priority of any Liens in
        favor
        of Lender against such Equipment. Borrower will at all times hereafter keep
        correct and accurate records itemizing and describing the location, kind,
        and
        type of all Equipment currently owned or hereafter acquired by Borrower,
        Borrower’s cost therefor, all of which records shall be available during
        Borrower’s usual business hours upon demand of any officer, employee, Lender or
        representative of Lender.

       

       

      
        
          
          

        

        
          35

          
            

          

        

        
          
          

        

      

      Section
        6.6 Maintenance.  Borrower
        will use commercially reasonable efforts to (a) keep all of its Equipment
        in
        good condition, repair, and working order (ordinary wear and tear excepted),
        substantially in accordance with any manufacturer’s manual, if applicable; (b)
        not misuse, abuse, waste, destroy or endanger the Equipment; (c) promptly
        make
        or cause to be made all repairs, replacements or other improvements to the
        Equipment that are sufficient to continue the operation of Borrower’s business;
        and (d) will not use any Equipment in violation of any law, statute, ordinance,
        or legislation or allow it to be so used. 

       

      ARTICLE
        VII

      COVENANTS
        OF BORROWER

       

      Section
        7.1 Affirmative
        Covenants.  Borrower
        warrants, covenants and agrees that until all Obligations (other than the
        obligations under any ORRI Conveyance and indemnity obligations and similar
        obligations that expressly survive the termination of the Loan Documents)
        have
        been paid in full and this Agreement and Lender’s commitment to make Loans have
        terminated, it will comply with the following covenants, or where such
        compliance is dependent on the Operator of any Properties for which Borrower
        is
        not the Operator, it will use commercially reasonable efforts to cause the
        Operator to comply with the following covenants:

       

      (a) Payment
        of Obligations and Trade Debt.
        

       

      (i) Subject
        to Section
        2.6,
        Borrower will pay all amounts due to Lender
        under
        the
        Loan Documents in accordance with the terms of this Agreement and the other
        Loan
        Documents and will observe, perform and comply with every covenant, term
        and
        condition in the Loan Documents and will use its commercially reasonable
        efforts
        to cause each Affiliate to observe, perform and comply with every covenant,
        term
        and condition in the Loan Documents to which it is a party.

       

      (ii) Borrower
        will (A) timely pay all Taxes imposed upon it or upon its income, profits
        or
        property, except those being contested in good faith and by appropriate
        proceedings diligently conducted, if adequate reserves with respect thereto
        are
        maintained on the books of Borrower in accordance with GAAP, (B) within 30
        days after the same becomes due pay all Indebtedness (other than the
        Obligations) owed by it, and (C) maintain appropriate accruals and reserves
        for
        all of the foregoing Indebtedness in accordance with GAAP.

       

      (b) Compliance
        with Tax Laws.  Borrower
        shall comply with all federal, state or local laws and regulations regarding
        the
        collection, payment and deposit of employee income, employment, and social
        security and sales and use Taxes and royalty payments. 

       

      
        
          
          

        

        
          36

          
            

          

        

        
          
          

        

      

      (c) Books,
        Financial Statements and Reports.  Borrower
        will at all times maintain complete and accurate books of account and records
        and a standard system of accounting and will furnish the following statements
        and reports to Lender at Borrower’s expense:

       

      (i) As
        soon
        as available, and in any event within 120 days after the end of each Fiscal
        Year, complete consolidated audited financial statements of Borrower, prepared
        in reasonable detail in accordance with GAAP by an independent certified
        accounting firm reasonably acceptable to Lender. These financial statements
        shall contain a balance sheet as of the end of such Fiscal Year and statements
        of operations, and cash flows, and changes in shareholders’ capital accounts for
        such Fiscal Year, subject to changes resulting from normal year-end adjustments,
        each setting out in comparative form the corresponding figures for the preceding
        Fiscal Year, all in reasonable detail.

       

      (ii) As
        soon
        as available, and in any event within 45 days after the end of each Fiscal
        Quarter,
        unaudited consolidated financial statements of Borrower for the period from
        the
        beginning of the then current Fiscal Year to the end of such Fiscal Quarter,
        all
        in reasonable detail. These financial statements shall contain a balance
        sheet
        as of the end of such Fiscal Quarter and statements of operations, and cash
        flows, and changes in shareholders’ capital accounts for such Fiscal
        Quarter.

       

      (iii) If
        requested by Lender, within 90 days after the end of each Fiscal Year, a
        comfort
        letter prepared by an independent certified accounting firm reasonably
        acceptable to Lender confirming that such firm has, on behalf of Borrower,
        reviewed the joint interests billings (“JIBs”),
        if
        any, charged to Borrower by the Operator or by Borrower as the Operator during
        the prior Fiscal Year and confirmed that the JIBs presented by Operator
        accurately account for the amounts owed by and to Borrower under the applicable
        Operating Agreements during that period.

       

      (iv) Within
        3
        Business Days after receipt by Borrower, copies of all reports and other
        information provided by any other Person to Borrower in connection with the
        Loan
        Documents. Borrower may arrange for such reports and information to be provided
        directly to Lender by the Person providing the same to Borrower.

       

      (v) Within
        3
        Business Days after the end of each Fiscal Quarter, a report setting out
        any
        change in the list of Purchasers of Hydrocarbons listed on Schedule
        4.1(o).

       

      (vi) Concurrently
        with delivery of the financial statements delivered in accordance with
Section
        7.1(c)(i) and
        (ii),
        Borrower shall deliver a Compliance Certificate. 

       

      (vii) Concurrently
        with the delivery of the financial statements delivered in accordance with
        Section
        7.1(c)(i),
        Borrower shall provide Lender with an Operating Report. Each Operating Report
        shall include a brief discussion by Borrower of operating and financial
        variances from the prior Operating Report delivered to Lender.

       

      
        
          
          

        

        
          37

          
            

          

        

        
          
          

        

      

      (d) Other
        Information and Inspections.
        

       

      (i) Borrower
        will furnish to Lender any information which Lender may from time to time
        reasonably request concerning any covenant, provision or condition of the
        Loan
        Documents or any matter in connection with Borrower’s assets, business and/or
        operations.  Subject to clause (ii) below, Borrower will permit
        representatives appointed by Lender (including independent accountants,
        attorneys, appraisers and any other Persons) to visit and inspect, during
        reasonable business hours and upon 2 Business Days written notice, any of
        Borrower’s property, including its books of account, other books and records,
        and any facilities or other business assets, and to make extra copies therefrom
        and photocopies and photographs thereof, and to write down and record any
        information such representatives obtain, and Borrower shall permit Lender
        or its
        representatives to investigate and verify the accuracy of the information
        furnished to Lender in connection with the Loan Documents and to discuss
        all
        such matters with its officers, employees and representatives. Lender may
        conduct two such inspections in any Fiscal Year at Borrower’s expense;
provided
        that
        any
        inspection while an Event of Default exists shall be at Borrower’s
        expense.

       

      (ii) Lender
        agrees to maintain the confidentiality of the information received from Borrower
        relating to Borrower and its business which is clearly identified at the
        time of
        delivery as confidential (“Confidential
        Information”).
        Information is not confidential if it is available to Lender on a
        non-confidential basis prior to disclosure by Borrower. 

       

      (iii) Confidential
        Information may be disclosed by Lender (or Lender’s representatives, including
        independent accountants, attorneys, appraisers and any other Persons) to
        its
        (A) Affiliates and its Affiliates’ respective partners, directors,
        officers, employees, advisors and representatives, (B) to the extent required
        by
        Applicable Laws or by any subpoena or similar legal process, and (C) in
        connection with the exercise of any remedies under this Agreement or under
        any
        other Loan Document or any action or proceeding relating to this Agreement
        or
        any other Loan Document or the enforcement of rights under this Agreement
        or
        thereunder. In the event that Lender is required to disclose Confidential
        Information pursuant to clause
        (B),
        Lender
        shall give Borrower prompt written notice of such requirement so that Borrower
        may seek a protective order or other appropriate remedy.

       

      (iv) For
        purposes of this Section, any Person required to maintain the confidentiality
        of
        the Confidential Information as provided in this Section shall be considered
        to
        have complied with its obligation to do so if such Person has exercised the
        same
        degree of care to maintain the confidentiality of such Information as such
        Person would accord to its own confidential information.

       

      
        
          
          

        

        
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      (e) Reserve
        Reports.  On
        or before March 31 of each year (but effective as of the preceding December
        31)
        and on or before September 30 of each year (but effective as of the preceding
        June 30), commencing on March 31, 2008, Borrower, at its own expense, shall
        cause the preparation and delivery to Lender of a Reserve Report. Lender
        may in
        its sole discretion also request at least one additional Reserve Report during
        the course of each calendar year, which shall update the last Reserve Report
        previously delivered by Borrower with an effective date of no earlier than
        90
        days prior to the date of delivery of such additional Reserve Report. Each
        Reserve Report to be delivered by Borrower under this Agreement shall be
        prepared by an Engineer. All Reserve Reports required by this Section shall
        be
        prepared at Borrower’s sole expense. Each Reserve Report provided by Borrower
        shall set out updated estimates of Proved Reserves which are further categorized
        as Proved Developed Producing Reserves, Proved Developed Non-Producing Reserves
        or Proved Undeveloped Reserves, and shall also set out projected production
        profiles and overall economics of the Properties in form an substance
        satisfactory to Lender. Furthermore, the additional parameters and guidelines
        set out on Schedule
        7.1(e) shall
        also be applied in the preparation of each Reserve Report provided by Borrower.
        Each Reserve Report provided by Borrower will be based on the following
        assumptions:

       

      (i) Oil
        and
        gas pricing used will be determined by Lender in its sole discretion, based
        in
        part on Forward NYMEX Market Prices reduced by (A) the historical average
        basis
        differential between the pricing employed by independent third-party
        over-the-counter counterparties compared to the prevailing wellhead prices
        at
        the production location and (B) any other adjustments as may be necessary
        including shrink, gathering, transportation, and processing fees.

       

      (ii) Average
        lease or
        other applicable operating expenses and production taxes will be derived
        by the
        Engineer which prepares such report from the Operator’s best estimate and
        historical operating expenses, subject to Lender’s approval.

       

      (f) Maintenance
        of Existence, Rights, and Licenses.  Borrower
        shall (i) maintain and preserve its existence and its material rights and
        franchises in full force and effect and will qualify and/or remain qualified
        to
        do business as a foreign entity in all states or jurisdictions where the
        failure
        to do so could reasonably be expected to have a Material Adverse Effect,
        (ii)
        maintain all material licenses, permits, charters and registrations which
        are
        required for the conduct of its business, and (iii) maintain, preserve, protect
        and keep all of its material contractual and property rights, other than
        in
        connection with the Loan Documents and will not waive, amend or release any
        such
        rights without the prior written consent of Lender, which consent will not
        be
        unreasonably withheld.

       

      (g) 
        Compliance with Applicable Law.  Borrower
        will conduct its business and affairs in compliance with all material laws,
        regulations and orders applicable thereto, including, Environmental Laws,
        ERISA
        and the regulations of any state or federal agency which has jurisdiction
        over
        the exploration and production activities to be conducted on any
        Property.

       

      
        
          
          

        

        
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      (h) Insurance.  Borrower
        shall keep or cause to be kept all of the Collateral that are fixtures or
        personal property insured for their current value (or such coverage as is
        commercially reasonable and customary within the oil and gas industry) by
        insurance companies licensed to do business in the states in which the
        Properties are located against loss or damage by fire or other risk usually
        insured against by owners or users of similar properties in similar businesses
        under extended coverage endorsement and against theft, burglary and pilferage,
        together with other insurance covering such other hazards as Lender may from
        time to time reasonably request, in amounts in accordance with industry
        standards and from companies reasonably satisfactory to Lender. All such
        insurance shall contain endorsements in form reasonably satisfactory to Lender
        showing Lender as a loss payee or additional party insured as its interest
        may
        appear; provided that
        Lender
        shall not be named as an additional insured or loss payee on the policies
        described in this Section 7.1(h)
        to the
        extent such policies apply to vehicles. In addition, the following types
        of
        insurance covering the liabilities incident to the ownership, possession
        and
        operation thereof shall be secured by Borrower or as applicable, by the Operator
        of the Properties, on Borrower’s behalf:

       

      (i) Comprehensive
        general liability insurance with combined single limit of not less than
        $1,000,000 per occurrence, and $2,000,000 in the aggregate and endorsed to
        provide coverage for explosion, collapse and underground damage hazards to
        property of others, contractual liability, products and completed operations,
        and for damage to underground resources, and accidental pollution, bodily
        injury
        and property damage coverage in sufficient amounts to meet umbrella underlying
        requirements;

       

      (ii) Comprehensive
        automobile liability insurance covering all owned, hired or non-owned vehicles
        with a combined single limit of not less than $1,000,000 per
        occurrence;

       

      (iii) Excess
        umbrella liability insurance with a combined single limit of not less than
        $5,000,000 per occurrence and policy aggregate; and

       

      (iv) Pollution
        insurance not less than $1,000,000 per occurrence and $2,000,000 in the
        aggregate.

       

      (i) Policy
        Counterparts or Certificates of Insurance.  Borrower
        shall deliver to Lender valid counterparts of all insurance policies and
        all
        endorsements thereto (or, at its option, valid certificates of such insurance)
        which are required under this Agreement to be obtained and maintained by
        Borrower or the Operator.

       

      (j) Prudent
        Operations; Protection Against Drainage.
        

       

      (i) For
        Non-Operated Properties, Borrower shall use its commercially reasonable efforts
        to cause (A) the Properties to be continuously operated and maintained to
        produce the output from or allocable to such Property over the productive
        life
        thereof in a good and workmanlike manner consistent with prudent operator
        practices, and (B) the Operator to use its property and contractual rights
        as a
        prudent owner in an effort to identify and prevent the occurrence of any
        drainage of Hydrocarbons from the Properties, other than in the ordinary
        course
        of operations in accordance with industry practice and procedure.

       

      
        
          
          

        

        
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      (ii) For
        Borrower-operated Properties, Borrower shall (A) use commercially reasonable
        efforts as a prudent operator to keep and perform all of the terms, conditions
        and covenants of the Leases constituting Properties which are to be kept
        and
        performed by the lessee for the benefit of Lender and the holder of the ORRI,
        and (B) act as a prudent operator in an effort to identify and prevent the
        occurrence of any drainage of Hydrocarbons from the Properties, other than
        in
        the ordinary course of operations in accordance with industry practice and
        procedure.

       

      (k) Weekly
        Field Activity and Production Reports.  Borrower
        shall provide Lender, to the extent possible, by telecopy or e-mail, a weekly
        report on Tuesday of each week detailing all (i) drilling, completions and
        workovers in relation to capital expenditures for the preceding week with
        respect to the Properties and all costs and expenses associated with such
        activities and (ii) quantities and types of Hydrocarbons produced from or
        allocable to each of the Properties; all of the foregoing to be in form and
        substance satisfactory to Lender. 

       

      (l) Monthly
        Review Conference.  At
        Lender’s request, within 14 days after Borrower has submitted to Lender each
        monthly Property Operating Statement pursuant to Section 2.6,
        representatives of Lender and Borrower shall hold a teleconference at a mutually
        acceptable time to conduct a monthly review conference that will focus on,
        among
        other things, the data contained in the most recently submitted Property
        Operating Statement and such other operational and financial data and
        information as Lender may reasonably request. 

       

      (m)  Hydrocarbon
        Production Swap Agreements.  Borrower
        will from time to time, upon 3 Business Days’ notice by Lender, enter into one
        or more Hydrocarbon price swaps pursuant to a Permitted Swap Agreement in
        form
        and substance reasonably satisfactory to Lender (or additional confirmations
        under existing Swap Agreements), such that volumes equal to approximately
        75% of
        Borrower’s Net Revenue Interest share of the Proved Developed Producing Reserves
        scheduled to be produced during the term of this Agreement (based upon the
        most
        recent Reserve Report), but not necessarily beyond the Maturity Date are
        dedicated to the Permitted Swap Agreements or such other price risk management
        program as approved by Lender; provided
        that,
        if
        projected Net Revenue plus any other applicable revenue applied to Debt Service,
        is insufficient to fully amortize the Loans by their stated maturity, Lender
        may
        require that Borrower enter into one or more such swaps for a term or terms
        that
        extend beyond the Maturity Date. Borrower and Lender shall make commercially
        reasonable efforts to agree upon a swap strategy that will most accurately
        reflect the make-up and pricing of the Hydrocarbons produced and sold by
        Borrower, but if the parties are unable to agree on the swap strategy, Borrower
        shall not be released from its obligation to implement the Permitted Swap
        Agreement(s) required by this Section
        7.1(m).

       

      
        
          
          

        

        
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      (n) Expenses.
        

       

      (i) Borrower
        will pay, on or before the Closing Date, all reasonable third-party and
        out-of-pocket costs, fees and expenses incurred by Lender in connection with
        this Agreement, including all title, due diligence, environmental, engineering,
        technical, travel, legal and related expenses incurred by Lender in connection
        with this Agreement and the Loan Documents and the transactions contemplated
        thereunder (to be financed by Lender as a portion of the Loan). 

       

      (ii) Except
        as
        set forth in Section 7.1(d),
        after
        the Closing Date, Borrower will, from time to time, pay or reimburse Lender
        for
        all expenses (including all reasonable legal fees and expenses) incurred
        in
        connection with (A) the administration or amendment of this Agreement, including
        any amendment, mortgage, extension, release or renewal of any Loan Document,
        (B)
        the enforcement of this Agreement or Lender’s rights and remedies under the Loan
        Documents, (C) all continuing or additional title, due diligence, environmental,
        engineering, and technical work, (D) division orders, and (E) travel.

       

      (iii) All
        third-party costs, fees and expenses incurred by Lender for which Borrower
        is
        obligated to pay or reimburse Lender pursuant to the provisions of this
        Agreement (other than those payable on the Closing Date), shall be payable
        within 30 days after Borrower’s receipt of an invoice from either Lender or its
        third-party consultants or vendors, and if not paid within 30 days after
        Borrower’s receipt of such invoice, Borrower shall pay interest on such amounts,
        after as well as before judgment, at the Default Rate from the date payable
        until paid. 

       

      (o) Fees. 

       

      (i) Borrower
        agrees to pay to Lender a Facility Fee in consideration of Lender’s commitment
        to make the Loan. The Facility Fee on the Committed Amount shall be paid
        in
        accordance with Section
        2.1.
        Any
        portion of the Facility Fee that is determined to be interest in excess of
        the
        Maximum Rate shall be automatically credited to the Principal Amount, effective
        as of the date such portion is received by Lender. 

       

      (ii) At
        Closing, and on the first day of each Fiscal Quarter thereafter, Borrower
        shall
        pay to Lender an Administration Fee in the amount of $5,000. The initial
        Administration Fee shall be deemed advanced by Lender to Borrower as part
        of the
        Loans advanced under Section
        2.1
        during
        the Advance Period and paid by Borrower to Lender contemporaneously therewith,
        and each subsequent Administration Fee shall be paid by Borrower to Lender
        pursuant to Section
        2.6.
        Each
        Administration Fee shall be used by Lender for incidental administrative
        matters
        on behalf of Borrower and any such fees shall not be reimbursable to Borrower.
        If such fees exceed $5,000 during any Fiscal Quarter, such expenses shall
        be
        payable by Borrower to Lender pursuant to Section 7.1(n).

       

      
        
          
          

        

        
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      (p) Post-Closing
        Items.
        Borrower will deliver to Lender, within 180 days after the Closing Date,
        Title
        Opinions that are satisfactory to Lender covering Hydrocarbon Interests
        comprising 80% of the PW10 of Borrower’s Proved Developed Producing Reserves in
        the Properties and 80% of the PW10 of Borrower’s other Proved Reserves in the
        Properties, in each case, subject only to (i) a first priority lien created
        by
        the Mortgage in favor of Lender, (ii) the ORRI, and (iii) the
        Permitted Encumbrances.

       

      (q) Further
        Assurances.  Borrower
        agrees, upon request of Lender and at Borrower’s expense, to furnish to Lender
        such information, to execute and deliver to Lender such documents, and to
        do
        such other acts and things, all as Lender may reasonably request.

       

      Section
        7.2 Negative
        Covenants.  Borrower
        warrants, covenants and agrees that until the full and final repayment and
        performance of the Obligations (other than Obligations under the ORRI
        Conveyance, and indemnity obligations and similar obligations that expressly
        survive the termination of the Loan Documents) and the termination of each
        of
        the Loan Documents (other than the ORRI Conveyance):

       

      (a) Disposition
        of Collateral.  Borrower
        may not sell, transfer, lease, exchange, alienate or otherwise dispose of
        any
        Collateral or any interest therein other than (i) sales of Hydrocarbon
        production in the ordinary course of business, (ii) while no Event of
        Default exists and with prior written notice to Lender, dispositions of
        Equipment in accordance with the terms of the applicable Operating Agreements
        and of obsolete, broken or worn Equipment, (iii) dispositions not otherwise
        permitted hereunder which are made for fair market value and if required
        by
Section
        2.4,
        the
        mandatory prepayment of the Principal Amount in the amount of the net proceeds
        of such disposition is made as provided in Section
        2.4
        and (iv)
        dispositions to which Lender has granted its express written consent;
provided
        that,
        (A) in
        respect of dispositions under clause
        (ii),
        proceeds shall be used to purchase substantially similar replacement Equipment
        within 90 days after such disposition or shall be delivered to Lender for
        application under Section
        2.4,
        or (B)
        in respect of dispositions under clauses
        (ii) and (iii),
        Borrower shall do so in an arm’s length transaction, in good faith and by
        obtaining a commercially reasonable price therefor and without impairing
        the
        operating integrity of its remaining Equipment or Properties.

       

      (b) Distributions.  
        Borrower may not, either directly or indirectly, make any dividend to any
        of its
        shareholders.

       

      (c) Credit
        Extensions.  Borrower
        may not extend credit, make advances or make loans to any Person other than
        in
        the ordinary course of business, unless approved by Lender in
        writing.

       

      (d) Compensation.  Borrower
        may not, directly or indirectly, enter into any employment agreement or other
        arrangement with or for the benefit of an officer, director or employee of
        Borrower other than reasonable compensation for services as an officer,
        director, employee or third-party provider of services. 

       

      
        
          
          

        

        
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      (e) Debt.  Borrower
        may not create, incur, assume or suffer to exist any Indebtedness other than
        Permitted Indebtedness. Borrower may not sell, discount or factor its accounts,
        instruments, intangibles, leases or chattel paper.

       

      (f) Guarantees.  Except
        as expressly provided in this Agreement, Borrower may not Guarantee any
        liability of any other Person except for the indemnification contained in
        this
        Agreement and customary indemnification to directors, managers, officers
        and
        employees and normal and customary provisions in contracts entered into in
        the
        ordinary course of business in connection with operating the Oil and Gas
        Properties.

       

      (g)  Mergers
        and Acquisitions.  Borrower
        may not (i) merge into or consolidate with another Person, (ii) sell, lease
        or
        otherwise dispose of all or substantially all of its assets, (iii) acquire
        or
        agree to acquire any of the Equity Interests or material assets of any Person
        other
        than
        (A) such
        acquisitions approved by Lender and made in connection with Borrower’s
        acquisition of any of the Properties, (B) the acquisition of any assets directly
        for use on the Properties in the ordinary course of business, (C) those
        acquisitions permitted as D&A Operations, and (D) the Delaware
        Reorganization, provided that (1) no Default or Event of Default shall have
        occurred and be continuing at the time of the Delaware Reorganization, (2)
        Borrower shall give Lender at least thirty (30) days’ prior written notice of
        the Delaware Reorganization, (3) Borrower shall provide Lender copies of
        all
        documentation to be entered into by Borrower and such wholly-owned Subsidiary
        in
        connection with the Delaware Reorganization, (4) the Reorganized Borrower
        shall
        become a party to this Agreement and the other Loan Documents in a manner
        satisfactory to Lender in its sole discretion in connection with the Delaware
        Reorganization, (5) the Reorganized Borrower shall assume all of the Obligations
        under this Agreement and the other Loan Documents in a manner satisfactory
        to
        Lender in its sole discretion in connection with the Delaware Reorganization,
        and (6) the Reorganized Borrower’s property shall become subject to Lender’s
        Liens in a manner satisfactory to Lender in its sole discretion in connection
        with the Delaware Reorganization.

       

      (h) Cancellation
        of Claims.  Borrower
        may not cancel any claim or Indebtedness owed to Borrower in excess of $15,000
        in the aggregate during any Fiscal Year during the term of this Agreement,
        except for reasonable consideration and in the ordinary course of its
        business.

       

      (i) Defaults.  Borrower
        may not default under any material Indebtedness, lease, mortgage, deed of
        trust
        or lien on real estate owned or leased by Borrower including any default
        that
        would result in a Default or an Event of Default.

       

      (j) Security
        Interests and Liens.  Borrower
        may not permit any Lien to exist or consent to the filing of any instrument
        creating any Lien on any of the Collateral other than the Liens created by
        the
        Loan Documents granted in this Agreement and Permitted
        Encumbrances.

       

      (k) Subsidiary.  Other
        than in respect of the Delaware Reorganization, Borrower may not create any
        direct or indirect Subsidiary or divest itself of any material assets by
        transferring them to any future Subsidiary or by entering into a partnership,
        joint venture or similar arrangement.

       

      
        
          
          

        

        
          44

          
            

          

        

        
          
          

        

      

      (l) Changes
        of Location.  Unless
        Borrower gives Lender 10 Business Days prior written notice, Borrower may
        not
        transfer its principal office or its registered offices from its current
        location or change its name.

       

      (m)  Amendments
        to Formation Documents and Material Contracts.  Borrower
        may not (i) except in connection with the Delaware Reorganization, adopt
        any
        material amendment, modification or waiver of any provision of its
        Organizational Documents, (ii) make any amendment to a Material Contract
        that
        could reasonably be expected to have a Material Adverse Effect, (iii) enter
        into
        any management contract permitting a third party any management rights with
        respect to Borrower’s business, (iv) amend or permit any amendment to any
        contract or lease which releases, qualifies, limits, makes contingent or
        otherwise detrimentally affects the rights and benefits of Lender under or
        acquired pursuant to any Loan Documents, (v) permit any ERISA Affiliate to,
        incur any fixed or contingent obligation to contribute to any ERISA Plan,
        and
        (vi) make any material modification of any Benefit Plan and or establish
        any new
        Benefit Plan, except in the ordinary course of business.

       

      (n) Investments.  Without
        the prior written consent of Lender, Borrower may not make, or suffer to
        exist,
        any Investment other than Permitted Investments. 

       

      (o) Change
        of Operator.  Borrower
        may not cease to be the Operator or permit or suffer its replacement or removal
        as Operator of any of the Properties without Lender’s prior written consent or
        instruction.

       

      (p) Additional
        Operations.  Without
        Lender’s prior written consent, Borrower will not conduct or invest in any
        development activities, including drilling, sidetracking, deepening, completing,
        recompleting or reworking operations other than (i) those described on
Schedule
        2.1(a),
        (ii) the
        prudent maintenance of existing Wells included in the Collateral, and (iii)
        the
        activities required by Section
        7.1(f).

       

      (q) Affiliate
        Transactions.  Borrower
        may not enter into any transactions with any Affiliate of Borrower other
        than
        (i) with the prior written consent of Lender, and (ii) on fair and reasonable
        terms at least as favorable to Borrower as would be obtainable by Borrower
        at
        the time in a comparable arm’s length transaction with a Person other than an
        Affiliate.

       

      
        
          
          

        

        
          45

          
            

          

        

        
          
          

        

      

      (r) Financial
        Covenants.
        

       

      (i) Borrower
        may not at any time permit its current liabilities to exceed its current
        assets
        The calculation of current liabilities shall exclude the Loans and any required
        mark-to-market of unliquidated commodity-hedge contracts required under FASB
        133. The calculation of current assets shall exclude any required mark-to-market
        of unliquidated commodity-hedge contracts required under FASB 133.

       

      (ii) Borrower
        may not at any time permit the Loan to Value Ratio
        to be
        greater than 1.0 to 1.0. 

       

      (s) Swap
        Agreements.  Borrower
        may not enter into any Swap Agreement other than a Permitted Swap Agreement
        (i)
        with an Approved Counterparty, and (ii) with the consent of Lender.

       

      (t) Line
        of Business.  Borrower
        may not engage in any business or activity other than the ownership and
        development of Oil and Gas Properties. 

       

      ARTICLE
        VIII

      FURTHER
        RIGHTS OF LENDER

       

      Section
        8.1 Maintenance
        of Security Interests.  Borrower
        authorizes Lender to file any financing statement or file or record any other
        documents or instruments that Lender may reasonably require under Section
        6.2
        to
        perfect, protect or establish any Lien under this Agreement or under any
        Security Documents and further authorizes Lender to sign Borrower’s name on any
        such document. Borrower hereby authorizes Lender, during the continuance
        of any
        Event of Default, to appoint such Person or Persons as Lender may designate
        as
        its agent and attorney-in-fact to endorse the name of Borrower on any checks,
        notes, drafts or other forms of payment or security that may come into the
        possession of either Lender or any Affiliate of Lender, to sign Borrower’s name
        on invoices or bills of lading, drafts against customers, notices of assignment,
        letters in lieu, verifications and schedules and, generally, to do all things
        necessary to carry out this Agreement and the Security Documents. The powers
        granted in this Agreement, being coupled with an interest, are irrevocable
        during the term of this Agreement or so long as any obligations are due and
        owing to Lender. Neither Lender nor the agent and attorney-in-fact shall
        be
        liable for any act or omission, error in judgment or mistake of law so long
        as
        the same is not malicious or grossly negligent. Upon payment and performance
        of
        all Obligations of Borrower to Lender (other than Obligations under the ORRI
        Conveyance and indemnity obligations and similar obligations that expressly
        survive the termination of the Loan Documents), such power of attorney shall
        terminate without any required action by Lender or Borrower.

       

      Section
        8.2 Performance
        of Obligations.  In
        the event that Borrower fails to purchase or maintain insurance in accordance
        with the requirements of this Agreement, or to pay any Tax, except as the
        same
        may be otherwise permitted under this Agreement, or in the event that any
        Lien
        prohibited hereby shall not be paid in full or discharged, or in the event
        that
        Borrower shall fail to perform or comply with any other covenant, promise
        or
        Obligation to Lender under this Agreement or under any Loan Document, Lender
        may, but shall not be required to, perform, pay, satisfy, discharge or bond
        the
        same for the account of Borrower, and all funds so paid by Lender, including
        reasonable attorneys’ fees and disbursements, shall be treated as an additional
        Obligation of Borrower to Lender under this Agreement and under the Loan
        Documents.

       

       

      
        
          
          

        

        
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      Section
        8.3 Access
        to Collateral.  In
        addition to Lender’s rights under Section
        7.1(d),
        upon
        the occurrence and during the continuance of an Event of Default, Lender
        or any
        designee of Lender may (a) enter Borrower’s premises during normal standard
        business hours; and (b) until it completes the enforcement of its rights
        in the
        Equipment or other Collateral subject to its Lien and the sale or other
        disposition of any property subject thereto, take possession of such premises
        without charge, rent or payment therefor, or place custodians in control
        thereof, remain on such premises and use the same and any of Borrower’s
        Equipment and other Collateral for the purpose of completing any work in
        process, preparing any Collateral for disposing of or collecting any
        Collateral.

       

      Section
        8.4 Overriding
        Royalty Interest.
        

       

      (a) On
        the
        Closing Date, Borrower shall grant to Lender an ORRI covering the Leases
        more
        particularly described on Exhibit
        A attached
        hereto, pursuant to the ORRI Conveyance, equal to 2% of 8/8ths proportionately
        reduced to Borrower’s Working Interest.

       

      (b) After
        the
        Closing Date, during the term of this Agreement or so long as the Obligations
        remain outstanding, Borrower shall assign to Lender an ORRI (pursuant to
        an ORRI
        Conveyance) covering each Lease acquired by Borrower after the Closing Date,
        which ORRI shall be equal to 2% of 8/8ths, proportionately reduced to Borrower’s
        Working Interest.

       

      (c) The
        ORRI
        proceeds shall be paid on the same basis as the subject oil and gas lease
        provides and Lender agrees to ratify all Units now existing or to be formed
        in
        connection therewith. 

       

      Section
        8.5 Right
        to Repurchase.  

       

      (a) Prior
        to
        the Maturity Date, the Borrower may purchase from Lender 50% of the entire
        ORRI
        granted or assigned to Lender under an ORRI Conveyance in accordance with
        Section
        8.4,
        so
        that, after giving effect to such purchase, Lender’s ORRI on all Borrower’s
        Leases and Wells will be equal to 1.0% of 8/8ths proportionately reduced
        to
        Borrower’s Working Interest.

       

      (b) 
        Borrower
        shall exercise this right to repurchase by giving Lender written notice prior
        to
        the Maturity Date and delivering concurrently with such notice, the purchase
        price in immediately available funds.

       

      (c) Lender
        shall deliver to Borrower an ORRI Conveyance of the repurchased ORRI within
        15
        Business Days after Lender’s receipt of such notice and of the purchase
        price.

       

      
        
          
          

        

        
          47

          
            

          

        

        
          
          

        

      

      (d) The
        amount of the purchase price for the repurchased ORRI, shall be the
“supplemental amount” needed to cause the following equation to equal 1.2: (i)
        the sum
        of
        (A) the
        Principal Amount paid to Lender, plus
        (B) all
        accrued interest on the Principal Amount paid to Lender, plus
        (C) all
        payments in respect of the ORRI paid to Lender, plus
        (D) the
        supplemental amount, divided
        by
        (ii)
        12,240,000.

       

      (e) Prior
        to
        the Maturity Date, Lender may not assign, transfer, or otherwise dispose
        of the
        ORRI granted in accordance with Section
        8.4
        and any
        attempted assignment, transfer, or disposition of such ORRI by Lender prior
        to
        the Maturity Date shall be void.

       

      Section
        8.6 Set-Off
        Rights.  Upon
        the occurrence and during the continuance of an Event of Default, Lender
        shall
        have the right to set-off and apply against the Obligations in such manner
        as
        Lender may determine, any and all deposits (general or special, time or demand,
        provisional or final) or other sums at any time credited by or owing from
        Lender
        or any depositary to Borrower whether or not the Obligations are then due,
        except for any amounts owing to third-party Working Interest and royalty
        interest owners of which Lender shall have been notified. Lender shall provide
        reasonable notice to Borrower following application of any such funds. As
        further security for the Obligations, Borrower hereby grants to Lender a
        security interest in all money, instruments, and other property of Borrower
        now
        or hereafter held by Lender, including property held in safekeeping. In addition
        to Lender’s or Lender’s right of set-off and as further security for the
        Obligations, Borrower hereby grants to Lender a security interest and lien
        in
        all deposits (general or special, time or demand, provisional or final) and
        other accounts of Borrower now or hereafter on deposit with or held by Lender
        or
        any depositary and all other sums at any time credited by or owing from Lender
        or any depositary to Borrower. The rights and remedies of Lender under this
        Agreement are in addition to other rights and remedies (including other rights
        of set-off) which Lender may have.

       

      ARTICLE
        IX

      CLOSING;
        CONDITIONS TO CLOSING

       

      Section
        9.1 Closing.  Subject
        to the conditions set out in this Agreement, the closing shall occur at a
        mutually agreeable time on or before October 16, 2007 (the “Closing”).
        The
        date the Closing actually occurs is hereby called the “Closing
        Date.”
The
        Closing shall be held at the offices of Lender’s counsel in Houston, Texas, or
        at such other place as Borrower and Lender may agree in writing.

       

      Section
        9.2 Conditions
        to Closing.  As
        conditions precedent to the making of the Loans, Lender shall have obtained
        approval of its management, and Borrower shall deliver, or cause to be
        delivered, to Lender the following items duly executed, notarized (where
        required), in the number of counterparts required by Lender, and, in each
        case,
        in form and substance satisfactory to Lender and its counsel:

       

      (a) this
        Agreement;

       

      (b) the
        Note;

       

      
        
          
          

        

        
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      (c) the
        ORRI
        Conveyance(s), Mortgage, Security Agreement, Guaranty, Letters in Lieu, ORRI
        Letters in Lieu, the Guaranty, and the other Loan Documents and in as many
        counterparts as Lender may require;

       

      (d) a
        certificate of the secretary or assistant secretary of Borrower dated the
        Closing Date, certifying (i) the incumbency of its officers executing this
        Agreement, the Loan Documents and any other documents required hereby, and
        (ii)
        resolutions adopted by the Governing Body of Borrower authorizing Borrower’s
        execution and delivery of this Agreement, the Note, the Security Documents,
        the
        other Loan Documents and all other documents and instruments contemplated
        by
        this Agreement to which it is a party; 

       

      (e) the
        Organizational Documents of Borrower, all certified by an officer of Borrower;
        

       

      (f) a
        certificate of an officer of Borrower dated the Closing Date, certifying
        the
        truth and accuracy of (A) the representations and warranties of Borrower
        set out
        in this Agreement and the other Loan Documents and Borrower’s performance and
        compliance with all agreements and covenants required by this Agreement to
        be
        performed or complied with prior to the making of the Loans, and (B) the
        following lists to be provided by Borrower (1) a list of all mechanics’ and
        materialmen’s liens (and other similar liens), and liens under operating and
        similar agreements, to the extent the same relate to expenses incurred in
        the
        ordinary course of business; (2) a list of statutory liens for taxes which
        are
        not yet delinquent; and (3) a list of all outstanding Indebtedness of Borrower
        and other outstanding Indebtedness of Borrower individually in excess of
        $10,000;

       

      (g) certificates
        of a Governmental Authority, as of the most recent dates practicable, attesting
        to Borrower’s existence and good standing in its state of formation and of its
        good standing and qualification to do business in each state in which Borrower
        is qualified to do business;

       

      (h) the
        written opinions of Borrower’s counsel, in form and substance reasonably
        acceptable to Lender, each dated the Closing Date and addressed to
        Lender;

       

      (i) evidence
        that Borrower has obtained or caused to be obtained insurance in accordance
        with
Sections
        7.1(h)
        and
(i);

       

      (j) Title
        Documents (other than Title Opinions) satisfactory to Lender establishing
        that
        Borrower owns or has acquired Defensible Title to the Properties, subject
        only
        to Permitted Encumbrances and that neither the Properties nor Borrower is
        subject to ongoing or threatened litigation;

       

      (k) the
        Pro
        Forma Financial Statements of Borrower as of the Closing Date;

       

      (l) the
        results of a Uniform Commercial Code search in Borrower’s state of formation
        showing all financing statements and other documents or instruments on file
        against Borrower;

       

      
        
          
          

        

        
          49

          
            

          

        

        
          
          

        

      

      (m) 
        a
        Permitted Swap Agreement under which volumes equal approximately 75% of
        Borrower’s Net Revenue Interest share of the Proved Developed Producing Reserves
        scheduled to be produced during the term of the Permitted Swap Agreement
        (based
        upon the most recent Reserve Report) and having a tenor of at least 2 years;
        and

       

      (n) such
        other documents and instruments as Lender may reasonably request.

       

      Section
        9.3 Conditions
        Precedent to Agreement.  Lender
        shall not make any Loans available unless the following conditions precedent
        have been satisfied.

       

      (a) No
        Event
        of Default, Default or Tax Claim exists;

       

      (b) Borrower’s
        representations and warranties made in any Loan Document shall be true and
        correct in all material respects as if made on the date of such Loan (except
        to
        the extent that (i) the facts upon which such representation are based have
        been changed by the extension of credit under this Agreement or by subsequent
        events and circumstances not constituting violations of the other provisions
        of
        this Agreement, or (ii) if any such representation or warranty is expressly
        stated to have been made as of a specific date, then it shall be true and
        correct as of such date);

       

      (c) With
        respect to all Loans, no Applicable Law is in effect or pending which shall
        enjoin, prohibit or restrain such Loan or impose, or result in the imposition
        of, any adverse condition upon Lender;

       

      (d) With
        respect to all Loans, Lender shall have received all documents and instruments
        which Lender has then reasonably requested as to, (i) the accuracy and validity
        of or compliance with all representations, warranties and covenants made
        by any
        Person in any Loan Document, (ii) the satisfaction of all conditions contained
        in this Agreement or therein, and (iii) all other matters pertaining hereto
        and
        thereto. All such additional documents and instruments shall be satisfactory
        to
        Lender in form, substance, and date;

       

      (e) Lender
        shall have received satisfactory due diligence analysis including financial
        and
        operational data, title and environmental review, data regarding litigation
        matters, all such data to be provided by Borrower; 

       

      (f) Lender
        shall have received satisfactory information regarding existing operating
        agreements and all existing gas sales and oil sales agreements which will
        include, for gas sales on a well-by-well basis, where applicable, transportation
        costs, gathering costs, processing costs, gas stream heating content,
        then-current market prices for gas of similar quality and copies of existing
        sales agreements and for oil sales, individual well specific gravity of produced
        oil at the point of sale, transportation costs, sulfur content, purchase
        bonuses, then-current market prices for oil of similar quality, and copies
        of
        existing sales agreements; 

       

      (g) Lender
        shall have received a fully executed and notarized ORRI Conveyance and Borrower
        is obligated to grant such ORRI Conveyance under Section
        8.4;
        and

       

      
        
          
          

        

        
          50

          
            

          

        

        
          
          

        

      

      (h) No
        event,
        which has had (or could reasonably be expected to have) a Material Adverse
        Effect, shall have occurred.

       

      ARTICLE
        X

      EVENTS
        OF DEFAULT AND REMEDIES

       

      Section
        10.1 Events
        of Default.  Each
        of the following events constitutes an Event of Default under this
        Agreement:

       

      (a) Borrower
        fails to (i) pay any portion of the Obligations (principal, interest, fees
        or
        expenses) when the same is due and payable, whether on a Repayment Date,
        at a
        date for the payment of an installment, or at a date fixed for prepayment
        thereof; provided
        that
        Borrower
        shall not be deemed to have failed to pay an interest payment on a Repayment
        Date if Lender debits such interest payment from the Lender Account on such
        Repayment Date, or (ii) replenish the Interest Reserve in the Lender Account
        within 3 Business Days after Lender debits an interest payment from the Lender
        Account on a Repayment Date;

       

      (b) Projected
        Net Revenue attributable to Proved Reserves based on any of the Reserve Reports
        to be delivered to Lender after the Closing Date (after being adjusted to
        incorporate Lender’s then-current assumptions with respect to pricing (including
        forward price assumptions of Forward NYMEX Market Prices), Expenses, discount
        rates and hedges under Permitted Swap Agreements) is insufficient to fully
        amortize the Principal Amount by the last day of the 48 month period after
        the
        effective date of any such Reserve Report and Borrower is unable to demonstrate
        to Lender’s reasonable satisfaction that Borrower is able to fully satisfy the
        Obligations through a sale of the Borrower’s assets or all of the Equity
        Interest in the Borrower;

       

      (c) Any
        Loan
        Document at any time ceases to be valid, binding and enforceable against
        Borrower for any reason other than its release or subordination made with
        the
        consent of Lender; 

       

      (d) Borrower,
        or any other obligor, asserts that any Loan Document to which it is a party
        is
        not valid, binding and enforceable against any such party;

       

      (e) Borrower
        fails to (i) duly observe, perform or comply with any covenant set out in
        Section
        7.2 or
        (ii)
        enter into the Permitted Swap Agreement as set out in Section
        7.1(m)
        and said
        failure to enter into the Permitted Swap Agreement continues for a period
        of
        10 Business Days after receipt of notice thereof by Borrower;

       

      (f) Any
        “Event of Default” (as defined in any Security Document) (other than an event
        which is referred to in subsections
        (a)
        through
(e)
        above)
        occurs under the Security Document, and the same is not remedied within the
        applicable period of grace (if any) provided in such Security
        Document;

       

      (g) Borrower
        fails (other than as referred to in subsections
        (a)
        through
(f)
        above)
        to duly observe, perform or comply with any covenant, agreement, condition
        or
        provision of any Loan Document, and such failure is not remedied within 30
        days
        of the time at which Borrower receives notice from Lender;

       

      
        
          
          

        

        
          51

          
            

          

        

        
          
          

        

      

      (h) Any
        representation or warranty previously, presently or hereafter made in writing
        by
        or on behalf of Borrower in connection with any Loan Document shall prove
        to
        have been false or incorrect in any material respect on any date on or as
        of
        which made;

       

      (i) Other
        than a Permitted Encumbrance and the other Liens held by Lender against the
        Property or any portion thereof, any Lien for $100,000 or more is asserted
        against Borrower and such assertion is not withdrawn, formally disputed in
        good
        faith, or otherwise disposed of within 60 days thereafter;

       

      (j) Subject
        to Permitted Encumbrances, Lender shall at any time not have a perfected
        first
        priority Lien on all or any part of the Collateral;

       

      (k) The
        Working Interest and/or Net Revenue Interest on the Properties is decreased
        from
        those set out in Exhibit A
        without
        the prior written consent of Lender;

       

      (l) Borrower:

       

      (i) has
        entered against it a judgment, decree or order for relief by a court of
        competent jurisdiction in an involuntary proceeding commenced under any
        applicable Debtor Relief Law, or has any such proceeding commenced against
        it
        and any such judgment, decree, order or proceeding shall not have been dismissed
        within 60 days; or

       

      (ii) commences
        a voluntary case under any applicable Debtor Relief Law; or applies for or
        consents to the entry of an order for relief in an involuntary case under
        any
        such law; or makes a general assignment for the benefit of creditors; or
        fails
        generally to pay (or admits in writing its inability to pay) Indebtedness
        as
        such Indebtedness becomes due; or takes action to authorize any of the
        foregoing; or

       

      (iii) suffers
        the appointment of or taking possession by a receiver, liquidator, assignee,
        custodian, trustee, sequestrator or similar official of all or a substantial
        part of its assets or of any part of the Collateral in a proceeding brought
        against or initiated by it, or such appointment or taking possession is at
        any
        time consented to, requested by or acquiesced to by it and any such appointment
        shall not have been dismissed within 60 days; or

       

      (iv) suffers
        the entry against it of a final judgment for the payment of money in excess
        of
        $100,000, unless the same is discharged within 60 days after the date of
        entry
        thereof or an appeal or appropriate proceeding for review thereof is taken
        within such period and a stay of execution pending such appeal is obtained;
        or

       

      
        
          
          

        

        
          52

          
            

          

        

        
          
          

        

      

      (v) suffers
        a
        writ or warrant of attachment or any similar process to be issued by any
        court
        against all or any substantial part of its assets or any material part of
        the
        Collateral, and such writ or warrant of attachment or any similar process
        is not
        stayed or released within 60 days after the entry or levy thereof or after
        any
        stay is vacated or set aside; or

       

      (vi) fails
        to
        pay any Indebtedness in excess of $100,000 (other than the Obligations) or
        any
        interest or premium thereon, when due (whether at scheduled maturity or by
        acceleration, demand or otherwise) and such failure shall continue after
        the
        applicable grace period, if any, specified in the agreement or instrument
        relating to any such Indebtedness or any other event shall occur and shall
        continue after the applicable grace period, if any, specified in such agreement
        or instrument, if the effect of such default or event is to accelerate or
        to
        permit the acceleration of, the maturity of such Indebtedness (in excess
        of
        $100,000), or if, as the result of such a default, any such Indebtedness
        (in
        excess of $100,000) shall be declared to be due and payable, or is required
        to
        be prepaid, prior to the stated maturity thereof; or

       

      (vii) fails
        to
        perform its obligations under the ORRI Conveyance, or any Permitted Swap
        Agreement and such failure continues beyond any applicable grace period set
        out
        therein; or

       

      (m) a
        Change
        of Control in respect of Borrower.

       

      Section
        10.2 Acceleration.

       

      (a) Automatic
        Acceleration.  Upon
        the occurrence of an Event of Default described in Sections
        10.1(l)(i)-(iii),
        all of
        the Obligations shall be immediately due and payable, without demand,
        presentment, notice of demand or of dishonor and nonpayment, protest, notice
        of
        protest, notice of intention to accelerate, declaration or notice of
        acceleration, or any other notice or declaration of any kind, all of which
        are
        hereby expressly waived by Borrower and each obligor, if any, that at any
        time
        ratifies or approves this Agreement, as a guarantor or otherwise. After any
        acceleration under this subsection, any obligation of Lender to make any
        further
        Loans or advances of any kind under any Loan Document shall be permanently
        terminated.

       

      (b) Other
        Acceleration.  While
        an Event of Default (other than an Event of Default under Section
        10.2(a))
        exists,
        Lender may at any time and from time to time and without notice to Borrower,
        declare any or all of the Obligations immediately due and payable, and all
        such
        Obligations shall thereupon be immediately due and payable, without demand,
        presentment, notice of demand or of dishonor and nonpayment, protest, notice
        of
        protest, notice of intention to accelerate, declaration or notice of
        acceleration, or any other notice or declaration of any kind, all of which
        are
        hereby expressly waived by Borrower.

       

      Section
        10.3 Remedies.  If
        any Event of Default exists, Lender’s obligations to make any Loan(s) shall be
        suspended, Lender may protect and enforce its rights under the Loan Documents
        by
        any appropriate proceedings, including proceedings for specific performance
        of
        any covenant or agreement contained in any Loan Document, and Lender may
        enforce
        the payment of any Obligations due or enforce any other legal or equitable
        right. All rights, remedies and powers conferred upon Lender under the Loan
        Documents shall be deemed cumulative and not exclusive of any other rights,
        remedies or powers available under the Loan Documents or at law or in equity.
        If
        any Event of Default exists, Lender’s obligation to make any Loans shall be
        suspended, so long as any such Event of Default exists. If Lender exercises
        its
        right to foreclose on the Collateral, Borrower shall approve the operator
        designated by Lender and shall cooperate in all respects with Lender in the
        removal of Borrower as the operator of the Properties.

       

       

      
        
          
          

        

        
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      Section
        10.4 Indemnity.  BORROWER
        AGREES TO INDEMNIFY LENDER, UPON DEMAND, FROM AND AGAINST ANY AND ALL
        LIABILITIES, OBLIGATIONS, CLAIMS, LOSSES, DAMAGES, PENALTIES, FINES, ACTIONS,
        JUDGMENTS, SUITS, SETTLEMENTS, COSTS, EXPENSES OR DISBURSEMENTS (INCLUDING
        REASONABLE FEES OF ATTORNEYS, EXPERTS AND ADVISORS) OF ANY KIND OR NATURE
        WHATSOEVER (IN THIS SECTION
        10.4
        COLLECTIVELY CALLED “LIABILITIES AND COSTS”) WHICH TO ANY EXTENT (IN WHOLE OR IN
        PART) MAY BE IMPOSED ON, INCURRED BY OR ASSERTED AGAINST LENDER GROWING OUT
        OF,
        RESULTING FROM OR IN ANY OTHER WAY ASSOCIATED WITH ANY OF THE COLLATERAL,
        THE
        LOAN DOCUMENTS OR THE TRANSACTIONS AND EVENTS INCLUDING THE ENFORCEMENT OR
        DEFENSE THEREOF AT ANY TIME ASSOCIATED THEREWITH OR CONTEMPLATED THEREIN
        (INCLUDING ANY VIOLATION OR NONCOMPLIANCE WITH ANY ENVIRONMENTAL LAWS BY
        ANY
        PERSON OR ANY LIABILITIES OR DUTIES OF ANY PERSON WITH RESPECT TO HAZARDOUS
        MATERIALS FOUND IN OR RELEASED INTO THE ENVIRONMENT). THE FOREGOING
        INDEMNIFICATION SHALL APPLY WHETHER OR NOT SUCH LIABILITIES AND COSTS ARE
        IN ANY
        WAY OR TO ANY EXTENT CAUSED, IN WHOLE OR IN PART, BY ANY NEGLIGENT ACT OR
        OMISSION OF ANY KIND BY LENDER PROVIDED ONLY THAT NO PERSON SHALL BE ENTITLED
        UNDER THIS SECTION
        10.4
        TO
        RECEIVE INDEMNIFICATION FOR THAT PORTION, IF ANY, OF ANY LIABILITIES AND
        COSTS
        WHICH IS CAUSED BY LENDER’S GROSS NEGLIGENCE, FRAUD, OR WILLFUL MISCONDUCT. AS
        USED IN THIS SECTION
        10.4,
        THE
        TERM “LENDER” SHALL REFER NOT ONLY TO LENDER, BUT ALSO TO ITS LENDER AND MEMBERS
        AND, WITH RESPECT TO EACH OF THE FOREGOING, EACH DIRECTOR, OFFICER, AGENT,
        ATTORNEY, EMPLOYEE, REPRESENTATIVE AND AFFILIATE OF SUCH PERSON.

       

      ARTICLE
        XI

      MISCELLANEOUS

       

      Section
        11.1 Waivers
        and Amendments; Acknowledgments and Admissions.

       

      (a) Waivers
        and Acknowledgments.  No
        failure or delay (whether by course of conduct or otherwise) by Lender in
        exercising any right, power or remedy which Lender may have under any of
        the
        Loan Documents shall operate as a waiver thereof or of any other right, power
        or
        remedy, nor shall any single or partial exercise by Lender of any such right,
        power or remedy preclude any other or further exercise thereof or of any
        other
        right, power or remedy. No waiver of any provision of any Loan Document and
        no
        consent to any departure therefrom shall ever be effective unless it is in
        writing and signed by Lender, and then such waiver or consent shall be effective
        only in the specific instances and for the purposes for which given and to
        the
        extent specified in such writing. No notice to or demand on Borrower shall
        in
        any case of itself entitle Borrower to any other or further notice or demand
        in
        similar or other circumstances. No modification or amendment of or supplement
        to
        this Agreement or the other Loan Documents shall be valid or effective unless
        the same is in writing and signed by the party against whom it is sought
        to be
        enforced.

       

      
        
          
          

        

        
          54

          
            

          

        

        
          
          

        

      

      (b) Acknowledgments
        and Admissions.  Borrower
        hereby represents, warrants and acknowledges that (i) it has been advised
        by
        counsel in the negotiation, execution and delivery of the Loan Documents
        to
        which it is a party, (ii) it has made independent decisions to enter into
        this
        Agreement and the other Loan Documents to which it is a party, without reliance
        on any representation, warranty, covenant or undertaking by Lender, whether
        written, oral or implicit, other than as expressly set out in this Agreement
        or
        in another Loan Document delivered on or after the date of this Agreement,
        (iii)
        there are no representations, warranties, covenants, undertakings or agreements
        by Lender to Borrower as to the Loan Documents except as expressly set out
        in
        this Agreement or in another Loan Document delivered on or after the date
        of
        this Agreement, (iv) Lender does not owe any fiduciary duty to Borrower with
        respect to any Loan Document or the transactions contemplated thereby, (v)
        the
        relationship pursuant to the Loan Documents between Borrower, on one hand,
        and
        Lender, on the other hand, is and shall be solely that of debtor and creditor,
        respectively, (vi) no partnership or joint venture exists with respect to
        the
        Loan Documents between Borrower, on one hand, and Lender on the other hand,
        (vii) should an Event of Default or Default occur or exist Lender will, subject
        to the terms of this Agreement, determine in its sole discretion and for
        its own
        reasons what remedies and actions it will or will not exercise or take at
        that
        time, (viii) without limiting any of the foregoing, Borrower is not relying
        upon
        any representation or covenant by Lender, or any representative thereof,
        and no
        such representation or covenant has been made, that Lender will, at the time
        of
        an Event of Default or Default, or at any other time, waive, negotiate, discuss
        or take or refrain from taking any action permitted under the Loan Documents
        with respect to any such Event of Default or Default or any other provision
        of
        the Loan Documents, and (ix) Lender has relied upon the truthfulness of the
        acknowledgments in this Section 11.1(b)
        in
        deciding to execute and deliver this Agreement and to make the
        Loans.

       

      Section
        11.2 Amendments.  Lender
        and the Borrower may enter into agreements supplemental hereto for the purpose
        of adding or amending any provisions to the Loan Documents or changing in
        any
        manner the rights of Lender or Borrower under this Agreement or waiving any
        Event of Default under this Agreement. Any such agreement shall be signed
        by
        both Lender and Borrower; provided
        that
        any
        waiver of an Event of Default may be signed by Lender.

       

      Section
        11.3 Assignments;
        Survival of Agreements; Cumulative Nature.  Lender
        may assign and/or transfer a portion or all of its rights and privileges
        under
        the Loan Documents at any time and from time to time, including any collateral
        assignment to secure any indebtedness of Lender to any other Person. In
        connection with any assignment or transfer by a Lender, Lender is hereby
        authorized to provide any information provided to Lender by Borrower or provided
        by any other Person at Borrower’s request or authorization. Any assignee of any
        of a Lender’s rights under any of the Loan Documents shall be subrogated to any
        related rights and remedies that Lender may exercise against Borrower. All
        of
        the various representations, warranties, covenants and agreements of Borrower
        in
        the Loan Documents shall survive the execution and delivery of this Agreement
        and the other Loan Documents and the performance of this Agreement and thereof,
        including the making or granting of the Loans and the delivery of the Note
        and
        the other Loan Documents, and shall further survive until all of the Obligations
        (other than Obligations under the ORRI Conveyance, and indemnity obligations
        and
        similar obligations that expressly survive the termination of the Loan
        Documents) are paid in full to Lender and all of Lender’s obligations to
        Borrower is terminated. The representations, warranties and covenants made
        by
        Borrower in the Loan Documents, and the rights, powers and privileges granted
        to
        Lender in the Loan Documents, are cumulative, and, except for expressly
        specified waivers and consents, no Loan Document shall be construed in the
        context of another to diminish, nullify or otherwise reduce the benefit to
        Lender of any such representation, warranty, covenant, right, power or
        privilege. In particular and without limitation, no exception set out in
        this
        Agreement to any representation, warranty or covenant in this Agreement
        contained shall apply to any similar representation, warranty or covenant
        contained in any other Loan Document, and each such similar representation,
        warranty or covenant shall be subject only to those exceptions which are
        expressly made applicable to it by the terms of the various Loan
        Documents.

       

       

      
        
          
          

        

        
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      Section
        11.4 Notices.  All
        notices, requests, consents, demands and other communications required or
        permitted under any Loan Document shall be in writing, unless otherwise
        specifically provided in such Loan Document, and shall be deemed sufficiently
        given or furnished to a Person if delivered by personal delivery, by telecopy,
        by delivery service with proof of delivery or by registered or certified
        United
        States mail, postage prepaid, to the address or telecopy number for such
        Person
        set out in Schedule
        1 (unless
        changed by similar notice in writing given by the particular Person whose
        address is to be changed). Any such notice or communication shall be deemed
        to
        have been given (a) in the case of personal delivery or delivery service,
        as of
        the date of delivery at the address and in the manner provided in this
        Agreement, (b) in the case of telecopy, upon receipt, or (c) in the case
        of
        registered or certified United States mail 3 Business Days after deposit in
        the mail.

       

      Section
        11.5 Parties
        in Interest; Transfers.  All
        grants, covenants and agreements contained in the Loan Documents shall bind
        and
        inure to the benefit of the parties thereto and their respective successors
        and
        permitted assigns; provided
        that
        Borrower
        shall not assign or transfer any of its rights or delegate any of its duties
        or
        obligations under any Loan Document without the prior written consent of
        Lender.
        Nothing expressed or referred to in this Agreement shall be construed to
        give
        any Person other than the parties to this Agreement any legal or equitable
        right, remedy, or claim under or with respect to this Agreement or any provision
        of this Agreement. This Agreement and all of its provisions and conditions
        are
        for the sole and exclusive benefit of the parties to this Agreement and their
        successors and permitted assigns.

       

       

      
        
          
          

        

        
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      Section
        11.6 Governing
        Law; Submission to Process.  Except
        to the extent that the law of another jurisdiction is expressly elected in
        a
        Loan Document or mandatorily applies, the Loan Documents shall be deemed
        contracts and instruments made under the laws of the State of Texas and shall
        be
        construed and enforced in accordance with and governed by the laws of the
        State
        of Texas, without regard to principles of conflicts of law. This Agreement
        has
        been entered into in Houston, Texas and shall be performable for all purposes
        in
        Harris County, Texas. Subject to the provisions of Article XII,
        courts
        within the State of Texas shall have jurisdiction over any and all disputes
        between Borrower and Lender, whether in law or equity, including any and
        all
        disputes arising out of or relating to this Agreement or any other Loan
        Document; and venue in any such dispute whether in federal or state court
        shall
        be laid in Harris County, Texas.
   

      Section
        11.7 Limitation
        on Interest.  Lender,
        Borrower, and any other parties to any Loan Documents intend to contract
        in
        strict compliance with applicable usury law from time to time in effect.
        In
        furtherance thereof, the parties stipulate and agree that none of the terms
        and
        provisions contained in the Loan Documents shall ever be construed to create
        a
        contract to pay, for the use, forbearance or detention of money, interest
        in
        excess of the maximum amount of interest permitted to be charged by Applicable
        Law from time to time in effect. Borrower nor any present or future guarantors,
        endorsers or other Persons hereafter becoming liable for payment of any
        Obligation shall ever be liable for unearned interest thereon or shall ever
        be
        required to pay interest thereon in excess of the maximum amount that may
        be
        lawfully charged under Applicable Law from time to time in effect, and the
        provisions of this Section
        11.7
        shall
        control over all other provisions of the Loan Documents which may be in conflict
        or apparent conflict herewith. Lender expressly disavows any intention to
        charge
        or collect excessive unearned interest or finance charges in the event the
        maturity of any Obligation is accelerated. If (a) the maturity of any Obligation
        is accelerated for any reason, (b) any Obligation is prepaid and as a result
        any
        amounts held to constitute interest are determined to be in excess of the
        legal
        maximum, or (c) Lender or any other holder of any or all of the Obligations
        shall otherwise collect fees or other moneys which are determined to constitute
        interest (including any payment of the Facility Fee) which would otherwise
        increase the interest on any or all of the Obligations to an amount in excess
        of
        that permitted to be charged by Applicable Law then in effect, then all such
        sums determined to constitute interest in excess of such legal limit shall,
        without penalty, be promptly applied to reduce the then outstanding principal
        of
        the related Obligations or, at Lender’s or such holder’s option, promptly
        returned to Borrower or the other payor thereof upon such determination.
        In
        determining whether or not the interest paid or payable under any specific
        circumstance exceeds the maximum amount permitted under Applicable Law, Lender
        and Borrower (and any other payors thereof) shall to the greatest extent
        permitted under Applicable Law, (w) characterize any Facility Fee as a
        commitment fee due and payable prior to the date of this Agreement as
        consideration for its commitment to make a Loan, (x) characterize any
        non-principal payment as an expense, fee or premium rather than as interest,
        (y)
        exclude voluntary prepayments and the effects thereof, and (z) amortize,
        prorate, allocate and spread the total amount of interest throughout the
        entire
        contemplated term of the instruments evidencing the Obligations in accordance
        with the amounts outstanding from time to time thereunder and the maximum
        legal
        rate of interest from time to time in effect under Applicable Law in order
        to
        lawfully charge the maximum amount of interest permitted under Applicable
        Law.

       

      Section
        11.8 Termination;
        Limited Survival.  In
        their sole and absolute discretion, Borrower, on one hand, and Lender, on
        the
        other hand, may each, at any time that no Obligations are owing, elect in
        a
        notice delivered to the other to terminate this Agreement. Upon receipt of
        such
        a notice, if no Obligations are then owing (other than Obligations under
        the
        ORRI Conveyance and indemnity obligations and similar obligations that expressly
        survive the termination of the Loan Documents), this Agreement and all other
        Loan Documents shall thereupon be terminated and the parties thereto released
        from any prospective obligations thereunder. Notwithstanding the foregoing
        or
        anything in this Agreement to the contrary, any waivers or admissions made
        by
        Borrower or Lender in any Loan Documents, and any obligations which any Person
        may have to indemnify or compensate Lender shall survive any termination
        of this
        Agreement or any other Loan Document. At the request and expense of Borrower,
        Lender shall prepare and execute all necessary instruments to reflect and
        effect
        such termination of the Loan Documents; provided
        that
        nothing
        in this Section
        11.8
        shall
        affect any and all continuing rights, validity and enforceability of the
        ORRIs.

       

       

      
        
          
          

        

        
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      Section
        11.9 Severability.  If
        any term or provision of any Loan Document shall be determined to be illegal
        or
        unenforceable, all other terms and provisions of the Loan Documents shall
        nevertheless remain effective and shall be enforced to the fullest extent
        permitted by Applicable Law.

       

      Section
        11.10 Counterparts.  This
        Agreement may be separately executed in any number of counterparts and by
        different parties hereto in separate counterparts, each of which when so
        executed shall be deemed to constitute one and the same Agreement. Facsimile
        or
        portable document format (PDF) transmissions of executed counter parts of
        this
        Agreement shall for all purposes be deemed an original.

       

      Section
        11.11 Waiver
        of Jury Trial, Punitive Damages, Etc.  BORROWER
        AND LENDER HEREBY (a) KNOWINGLY, VOLUNTARILY, INTENTIONALLY AND IRREVOCABLY
        WAIVE, TO THE MAXIMUM EXTENT PERMITTED BY LAW, ANY RIGHT THEY MAY HAVE TO
        A
        TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR DIRECTLY OR
        INDIRECTLY AT ANY TIME ARISING OUT OF, UNDER OR IN CONNECTION WITH THE LOAN
        DOCUMENTS OR ANY TRANSACTION CONTEMPLATED THEREBY OR ASSOCIATED THEREWITH,
        BEFORE OR AFTER MATURITY; (b) IRREVOCABLY WAIVE, TO THE MAXIMUM EXTENT PERMITTED
        BY LAW ANY RIGHT THEY 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; (c) 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 (d) ACKNOWLEDGES THAT IT HAS BEEN
        INDUCED TO ENTER INTO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS AND THE
        TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY BY, AMONG OTHER THINGS, THE
        MUTUAL
        WAIVERS AND CERTIFICATIONS CONTAINED IN THIS SECTION
        11.11.

       

      Section
        11.12 Controlling
        Provision Upon Conflict.  Except
        as may be expressly provided otherwise in this Agreement, in the event of
        a
        conflict between the provisions of this Agreement and those of any other
        Loan
        Document or any other instrument referred to in this Agreement or executed
        in
        connection with this Agreement, the provisions of this Agreement shall
        control.

       

      Section
        11.13 Patriot
        Act.  Lender
        hereby notifies the Borrower that if Lender is subject to the USA Patriot
        Act
        and pursuant to Section 326 thereof, it is required to obtain, verify and
        record
        information that identifies the Borrower, including the name and address
        of
        Borrower and other information allowing Lender to identify the Borrower in
        accordance with such act.

       

      
        
          
          

        

        
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      ARTICLE
        XII

      ARBITRATION

       

      Section
        12.1 Arbitration.

       

      (a) Lender,
        Borrower and any other obligor party (the “parties”)
        will
        attempt in good faith to resolve any controversy, claim or dispute arising
        out
        of or relating to this Agreement, including contract and tort disputes, the
        Loan
        Documents or Collateral promptly by negotiations between themselves. The
        negotiation process may be started by the giving of written notice by any
        party
        to the other parties in accordance with the terms of Section
        11.4,
        and the
        parties agree to negotiate in good faith, and select an independent mediator
        to
        facilitate the negotiations and conduct up to eight consecutive hours of
        mediated negotiations in Houston, Texas within 30 days after the notice is
        first
        sent. If, within 10 days after the initial notice, the parties are not able
        to
        agree upon a mediator, the party originally giving the notice shall promptly
        notify AAA and AAA will promptly designate a mediator who is independent
        and
        impartial, and AAA’s decision about the identity of the mediator will be final
        and binding.

       

      (b) No
        arbitration may be commenced by any party unless and until a negotiation
        complying with the foregoing paragraph has been completed, and no litigation
        or
        other proceeding may ever be instituted at any time in any court for the
        purpose
        of adjudicating, interpreting or, except as may be set out in Section
        12.1(h),
        enforcing any rights or obligations of the parties hereto or any rights or
        obligations relating to the subject matter of this Agreement, whether or
        not
        covered by the express terms of this Agreement, or for the purpose of
        adjudicating a breach or determination of the validity of this Agreement,
        or for
        the purpose of appealing any decision of an arbitrator.

       

      (c) If
        a
        controversy, claim or dispute is not resolved after completion of the
        negotiation process described above, then, upon notice by any party to the
        other
        parties (an “Arbitration
        Notice”)
        and to
        AAA, the controversy, claim or dispute shall be submitted to an arbitration
        panel for binding arbitration in Houston, Texas, in accordance with AAA’s
        Commercial Arbitration Rules (the “Rules”).
        The
        parties agree that they will faithfully observe this Agreement and the Rules
        and
        that they will abide by and perform any award rendered by the arbitration
        panel.
        The arbitration shall be governed by the Federal Arbitration Act, 9 U.S.C.
        Section 1-16 (or by the same principles enunciated by such Act in the event
        it
        may not be technically applicable). The statutes of limitations, estoppel,
        waiver, laches and similar doctrines which would otherwise be applicable
        in an
        action brought by a party shall be applicable in any arbitration proceeding
        and
        the commencement of an arbitration proceeding shall be deemed the commencement
        of an action for these purposes. The award or judgment of the arbitration
        panel
        shall be final and binding on all parties and judgment upon the award or
        judgment of the arbitration panel may be entered and enforced by any court
        having jurisdiction. The parties agree to execute a stipulated judgment in
        accordance with the award of the arbitration panel to be filed in any court
        having jurisdiction. If any party becomes the subject of a Debtor Relief
        Law,
        then, to the extent permitted or not prohibited by Applicable Law, any factual
        or substantive legal issues arising in or during the pendency of any such
        proceeding shall be subject to all of the foregoing mandatory mediation and
        arbitration provisions and shall be resolved in accordance therewith. The
        agreements contained in this Agreement have been given for valuable
        consideration, are coupled with an interest and are not intended to be executory
        contracts. The fees and expenses of the arbitration panel will be shared
        by all
        parties engaged in the claim, dispute or controversy on a basis determined
        to be
        fair and equitable by the arbitrator, taking into account the relative fault
        of
        each party, the relative credibility and merit of all claims and defenses
        made
        by each party and the cooperation, speed and efficiency of each party in
        conducting the arbitration proceedings and complying with the Rules and with
        orders and requests of the arbitrator.

       

       

      
        
          
          

        

        
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      (d) Promptly
        after the Arbitration Notice is given, each party will select an independent
        and
        impartial arbitrator who will in turn select an independent and impartial
        third
        arbitrator (each such arbitrator must be experienced in or have extensive
        familiarity with the oil and gas industry). If the arbitrators selected by
        the
        parties are unable to agree on a third arbitrator, then one of the parties
        shall
        notify AAA and AAA shall select the third arbitrator with oil and gas industry
        experience or familiarity. The decision of AAA with respect to the selection
        of
        the arbitrator will be final and binding in such case. Such three arbitrators
        will constitute the arbitration panel.

       

      (e) Within
        10
        days after the selection of the arbitration panel, the parties and their
        counsel
        will appear before the arbitration panel at a place and time in Houston,
        Texas,
        as may be designated by the arbitration panel for the purpose of each party
        making a one hour or less presentation and summary of the case. Thereafter,
        the
        arbitration panel will set dates and times for additional hearings until
        the
        proceeding is concluded. Additionally, the arbitration panel shall establish
        a
        schedule for and limits on the amount of discovery to be requested and performed
        by the parties during the arbitration proceedings. The parties shall strictly
        comply with the schedule and limits set by the arbitrators, and any request
        for
        variance therefrom must be approved by the arbitrators. The desire and goal
        of
        the parties is, and the arbitration panel will be advised that its goal should
        be, to conduct and conclude the arbitration proceeding as expeditiously as
        possible. If any party or his counsel fails to appear at any scheduled hearing,
        the arbitration panel shall be entitled to reach a decision based on the
        evidence which has been presented to it by the parties who did appear. Any
        arbitral award may be confirmed by a Texas state court.

       

      (f) Any
        arbitral award may be enforced 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 parties hereby accept for themselves
        and in
        respect of their property, generally and unconditionally, the nonexclusive
        jurisdiction of the aforesaid courts for said purpose and the parties hereby
        irrevocably waive to the fullest extent permitted by law any objection,
        including, any objection to the laying of venue or based on the grounds of
        forum
        non conveniens, which they may now or hereafter have to the bringing of any
        such
        action or proceeding in such respective jurisdictions.

       

      
        
          
          

        

        
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      (g) The
        arbitration panel will have no authority to award punitive or other damages
        not
        measured by the prevailing party’s actual damages and may not, in any event,
        make any ruling, finding, or award that does not conform to the terms and
        conditions of this Agreement.

       

      (h) For
        the
        avoidance of doubt, and notwithstanding anything to the contrary in Section
        12.1,
        the
        provisions of this Section
        12.1
        relating
        to arbitration or mediation of disputes shall not apply to (i) litigation
        that
        is instituted for the sole purpose of either: (A) compelling a party to
        submit to arbitration in accordance with the provisions of this Section
        12.1,
        or (B)
        obtaining enforcement of any award or judgment of the arbitrator(s) issued
        pursuant to this Section 12.1,
        (ii) Lender’s and the Required Lender’s enforcement of any nonjudicial
        rights or remedies under this Agreement or any of the Security Documents
        arising
        out of an Event of Default, including, taking or disposing of Collateral
        without
        judicial process pursuant to Article 9 of the Uniform Commercial Code as
        adopted
        in the state whose laws govern any security interest in the Collateral created
        under the Security Documents in favor of Lender, or pursuant to the real
        property code or applicable statutes of the state or states where the Properties
        are located, (iii) obtaining injunctive relief or a temporary restraining
        order, including a power of sale, or (iv) obtaining a writ of attachment;
provided
        that
        no such
        act shall constitute a waiver of this arbitration provision or be prohibited
        by
        this arbitration provision.

       

      ARTICLE
        XIII

      NOTICE
        TO BORROWER

       

      THIS
        WRITTEN CREDIT AGREEMENT AND THE OTHER LOAN DOCUMENTS BETWEEN THE PARTIES
        REPRESENT THE FINAL EXPRESSION OF THE AGREEMENTS BETWEEN THE PARTIES. THIS
        WRITTEN CREDIT AGREEMENT AND THE OTHER LOAN DOCUMENTS BETWEEN THE PARTIES
        MAY
        NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
        AGREEMENTS BETWEEN THE PARTIES.

       

      THERE
        ARE
        NO UNWRITTEN, ORAL AGREEMENTS BETWEEN THE PARTIES.

       

      THIS
        WRITTEN AGREEMENT AND THE OTHER LOAN DOCUMENTS SUPERSEDE THAT CERTAIN TERM
        SHEET
        DATED ON OR ABOUT OCTOBER 1, 2007, EXECUTED BY BORROWER AND LENDER AND ALL
        OTHER
        PRIOR AGREEMENTS AND UNDERSTANDINGS, IF ANY, RELATING TO THE SUBJECT MATTER
        HEREOF.

       

      

      (Signatures
        on the following page)

        
          
            
            

          

          
            61

            
              

            

          

          
            
            

          

        

      IN
        WITNESS WHEREOF, this Agreement is executed as of the date first written
        above.

       

      

      BORROWER:

      

      RANCHER
        ENERGY CORP,
        

      a
        Nevada
        corporation

      

      

      By:   /s/
        John Works            

      John
        Works

      President
        & Chief Executive Officer

      

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

      

      LENDER:

      

      GASROCK
        CAPITAL LLC,

      a
        Delaware limited liability company

      

      

      By:   /s/
        Marshall Lynn Bass        

      Marshall
        Lynn Bass

      Principal

       

        

       

       

      Signature
        Page to Term Credit
        Agreement

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