Document:

Exhibit 4.1

Exhibit 4.1

	

Number

 

 

 

 

 This

 certifies

 that

 is the owner of

 

 

 

 

 

 

 

 

 

 

 

PRESIDENT
	
 

MARATHON GOLD CORP.

INCORPORATED UNDER THE LAWS OF THE STATE OF  $0.001 

NEVADA 100,000,000 SHARES COMMON STOCK AUTHORIZED,

PAR VALUE

 

 

 

 

FULLY PAID AND NON-ASSESSABLE

SHARES OF COMMON STOCK OF

 

MARATHON GOLD CORP.

transferable on the books of the corporation in person or by duly

authorized attorney upon surrender of this certificate properly

endorsed.  This certificate and the shares represented hereby

are subject to the laws of the State of Nevada, and to the

Articles of Incorporation and Bylaws of the Corporation,

as now or hereafter amended.  This certificate is not valid

unless countersigned by the Transfer Agent.  WITNESS

the facsimile seal of the Corporation and the signature

of its duly authorized officers

 

 

 

[SEAL]
	

Shares

 

 

 

CUSIP _______

SEE REVERSE

FOR

CERTAIN

DEFINITIONS

 

 

 

 

 

 

 

 

 

 

 

SECRETARY

 

 

The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations.

	
TEN COM
	
as tenants in common
	
UNIF GIFT MIN ACT
	
____________
	
Custodian
	
____________

	
TEN ENT
	
as tenants by the entireties
	 	
(Cust)
	 	
(Minor)

	
JT TEN
	
as joint tenants with the right of
	
Act
	
_________________________________

	 	
survivorship and not as tenants
	 	
(State)

	 	
in common
	 	 

Additional abbreviations may also be used though not in the above list.

	
For value received, ______________________________________ hereby sell, assign and transfer unto

	 	
PLEASE INSERT SOCIAL SECURITY OR OTHER
	 
	 	
IDENTIFYING NUMBER OF ASSIGNEE
	 
	 
	
_____________________________________________________________________________________

	
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE)

	 
	
_____________________________________________________________________________________

	 
	
_____________________________________________________________________________________

	 
	
_____________________________________________________________________________________

	 
	
_____________________________________________________________________________ shares of the capital stock represented by the within Certificate, and do hereby irrevocably constitute and appoint

	 
	
_____________________________________________________________________________, Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises.

	 
	
Dated _______________________

	 
	
X ________________________________________________________________________________

	
THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THIS CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER.  THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (Banks, Stockbrokers, Savings and Loan Associations and Credit Unions)

 

SIGNATURE GUARANTEED:

 

 

 

TRANSFER FEE WILL APPLYExhibit 10.1 - PT1 Claim.

Exhibit 10.1

	
[British Columbia Government Logo]
	

	 	 
	 	
Mineral Titles Online Viewer

	 	 
	 	
Public Access

	 	 
	 	
Tenure Detail

	 	 
	 	 
	 	
Tenure Number ID
	
520335
	
View Tenure

	 	
Tenure Type
	
Mineral (M)

	 	
Tenure Sub Type
	
Claim (C)

	 	
Title Type
	
Mineral Cell Title Submission (MCX)

	 	
Mining Division
	 
	 	
Good To Date
	
2006/SEP/22

	 	
Issue Date
	
2005/SEP/22

	 	
Termination Type
	 
	 	
Termination Comments
	 	 
	 	
Termination Date
	 
	 	
Tag Number
	 
	 	
Claim Number
	
PT1

	 	
Old Tenure Code
	 
	 	
Area in Hectares 
	
38.795

	 	 	 
	 	
Map Numbers:

	 	 	
093G

	 	 
	 	
Owners:

	 	 	
145064 GLENGARRY DEVELOPMENTS INC 100.0%

	 	 
	 	
Agents:

	 	 	
116548 FRANCES JEAN MACPHERSON CEXT (4049231)Exhibit 10.2 - Declaration of Trust.

Exhibit 10.2

 

Woodburn Holdings Ltd.

885 Pyrford Road

West Vancouver, British Columbia V7V 2A2

 

 

October 31, 2005

Marathon Gold Corp.

885 Pyrford Road

West Vancouver, British Columbia V7V 2A2

Ladies and Gentlemen:

RE:   Declaration of Trust

Woodburn Holdings Ltd. holds in trust for Marathon Gold Corp., a 100% undivided interest in the following claim:

	
Claim 
	
Number of Units
	
Record Number
	
Expiration Date

	 	 	 	 
	
PT1
	
1
	
520335
	
9-22-2006

Woodburn Holdings Ltd. will deliver full title on demand to Marathon Gold Corp. for as long as the claims are in good standing with the Province of British Columbia.

	 	 	 	 	 	 	
Yours truly,

	 
	 	 	 	 	 	 	
Woodburn Holdings Ltd.

	 
	 	 	 	 	 
	 	 	 	 	 	 	
BY:
	
/s/ Robert M. Baker

	 	 	 	 	 	 	 	
Robert M. Baker, PresidentExhibit 10.1

                                                                  Execution Copy

================================================================================

                                CREDIT AGREEMENT

                                      AMONG

                               CUBIC ENERGY, INC.,
                                   AS BORROWER

                                       AND

                             PETRO CAPITAL V, L.P.,
                                    AS LENDER

================================================================================

                          DATED AS OF FEBRUARY 6, 2006

<PAGE>

                                TABLE OF CONTENTS
                                                                            Page

ARTICLE I. DEFINITIONS.........................................................1
   1.01   Certain Defined Terms................................................1
   1.02   Other Interpretive Provisions........................................9
   1.03   Accounting Principles...............................................10
ARTICLE II. THE CREDIT........................................................10
   2.01   Amounts and Terms of the Loans......................................10
   2.02   Prepayment..........................................................10
   2.03   Repayment...........................................................10
   2.04   Fees................................................................11
   2.05   Computation of Fees and Interest....................................11
   2.06   Payments by Borrower................................................11
   2.07   Taxes...............................................................11
ARTICLE III. SECURITY.........................................................12
   3.01   The Security........................................................12
   3.02   Agreement to Deliver Security Documents.............................12
   3.03   Perfection and Protection of Security Interests and Liens...........13
   3.04   Offset..............................................................13
   3.05   Production Proceeds.................................................13
ARTICLE IV. CONDITIONS PRECEDENT..............................................14
   4.01   Conditions Precedent................................................14
ARTICLE V. REPRESENTATIONS AND WARRANTIES.....................................15
   5.01   Corporate Existence and Power.......................................15
   5.02   Corporate Authorization; No Contravention...........................15
   5.03   Governmental Authorization..........................................16
   5.04   Binding Effect......................................................16
   5.05   SEC Filings; Interim Financial Statements...........................16
   5.06   Litigation..........................................................17
   5.07   No Default..........................................................17
   5.08   ERISA...............................................................17
   5.09   Margin Regulations..................................................17
   5.10   Title to Properties.................................................17
   5.11   Oil and Gas Reserves................................................17
   5.12   Initial Reserve Report..............................................17
   5.13   Gas Imbalances......................................................18
   5.14   Taxes...............................................................18
   5.15   Environmental Matters...............................................19
   5.16   Regulated Entities..................................................19
   5.17   No Burdensome Restrictions..........................................19
   5.18   Solvency............................................................19
   5.19   Subsidiaries/Investments/Ownership..................................19
   5.20   Insurance...........................................................19
   5.21   Full Disclosure.....................................................19
   5.22   Capitalization......................................................19
   5.23   Authorization of Warrants...........................................20
   5.24   Reporting Status, Eligibility to Use Form SB-2......................20
   5.25   Tauren Purchase Agreement...........................................20
ARTICLE VI. AFFIRMATIVE COVENANTS.............................................21
   6.01   Financial Statements................................................21
   6.02   Certificates Other Production and Reserve Information...............21
   6.03   Notices.............................................................22
   6.04   Preservation of Corporate Existence, Etc............................22

                                       i

<PAGE>

   6.05   Maintenance of Property.............................................23
   6.06   Insurance...........................................................23
   6.07   Payment of Obligations..............................................23
   6.08   Compliance with Laws................................................23
   6.09   Maintenance of Books and Records....................................23
   6.10   Environmental Laws..................................................23
   6.11   Use of Proceeds.....................................................23
   6.12   Further Assurances..................................................23
   6.13   Subsidiary Guaranties...............................................24
   6.14   Security Documents..................................................24
   6.15   Debt Service Account................................................24
ARTICLE VII. NEGATIVE COVENANTS...............................................24
   7.01   Limitation on Liens.................................................24
   7.02   Disposition of Assets...............................................25
   7.03   Consolidations and Mergers..........................................26
   7.04   Loans and Investments...............................................26
   7.05   Limitation on Indebtedness..........................................26
   7.06   Financial Covenants.................................................27
   7.07   Transactions with Affiliates........................................27
   7.08   Margin Stock........................................................27
   7.09   Contingent Obligations..............................................27
   7.10   Restricted Payments.................................................28
   7.11   Change in Business, Organization Documents, Name and Address........28
   7.12   Accounting Changes..................................................28
   7.13   Restrictions of Pledges.............................................28
   7.14   Capitalization......................................................28
   7.15   Repayment of Certain Indebtedness...................................28
ARTICLE VIII. EVENTS OF DEFAULT...............................................28
   8.01   Event of Default....................................................28
   8.02   Remedies............................................................30
   8.03   Set-off.............................................................30
   8.04   Payments Set Aside..................................................30
   8.05   Rights Not Exclusive................................................30
ARTICLE IX. MISCELLANEOUS.....................................................30
   9.01   Amendments and Waivers..............................................30
   9.02   Notices.............................................................31
   9.03   No Waiver; Cumulative Remedies......................................31
   9.04   Costs and Expenses..................................................31
   9.05   Indemnity...........................................................32
   9.06   Environmental Indemnification.......................................32
   9.07   Successors and Assigns..............................................33
   9.08   Interest............................................................33
   9.09   Counterparts and Facsimile Signatures...............................34
   9.10   Severability........................................................34
   9.11   Third Party Beneficiaries...........................................34
   9.12   USA PATRIOT Act Notice..............................................34
   9.13   Governing Law.......................................................34
   9.14   Submission To Jurisdiction..........................................35
   9.15   Waiver Of Jury Trial................................................35
   9.16   Entire Agreement....................................................35
   9.17   NO ORAL AGREEMENTS..................................................36

                                       ii
<PAGE>

APPENDIX

Appendix I        Specific Terms, Fees and Conditions

SCHEDULES

Schedule I        Security Documents
Schedule 5.14(c)  Taxes
Schedule 7.01     Liens
Schedule 7.05     Indebtedness
Schedule 7.07     Transactions with Affiliates

EXHIBITS

Exhibit A         Form of Promissory Note
Exhibit B         Form of Warrant
Exhibit C         Form of Compliance Certificate
Exhibit D         Form of Letters-in-Lieu
Exhibit E         Form of Supplement to Mortgage
Exhibit F         Form of Subordination Agreement

                                      iii
<PAGE>

                                CREDIT AGREEMENT
                                ----------------

This CREDIT AGREEMENT, dated as of February 6, 2006, is entered into among CUBIC
ENERGY,  INC., a Texas  corporation  ("Borrower")  and PETRO  CAPITAL V, L.P., a
Texas limited partnership (the "Lender").

         In  consideration  of the mutual  agreements,  provisions and covenants
contained  herein and other good and  valuable  consideration,  the  receipt and
adequacy of which are hereby acknowledged, the parties hereto agree as follows:

                                   ARTICLE I.
                                   DEFINITIONS

         1.01 Certain  Defined  Terms.  In addition to the terms  defined in the
preamble of this  Agreement,  the following  terms have the  following  meanings
herein:

     "Acquisition"  means any transaction or series of related  transactions for
the purpose of or resulting,  directly or indirectly,  in (a) the acquisition of
all or  substantially  all of the  assets of a  Person,  or of any  business  or
division  of a Person,  (b) the  acquisition  of in excess of 50% of the capital
stock of a  corporation  (or similar  entity),  which stock has ordinary  voting
power for the  election of the members of such  entity's  board of  directors or
persons exercising similar functions (other than stock having such power only by
reason of the happening of a  contingency),  or the  acquisition of in excess of
50% of the partnership interests or equity of any Person not a corporation which
acquisition  gives  the  acquiring  Person  the  power to  direct  or cause  the
direction of the  management  and  policies of such  Person,  or (c) a merger or
consolidation  or any  other  combination  with  another  Person  provided  that
Borrower is the surviving entity.

     "Affiliate"  means, as to any Person,  any other Person which,  directly or
indirectly, is in control of, is controlled by, or is under common control with,
such  Person.  A  Person  shall be  deemed  to  control  another  Person  if the
controlling  Person  possesses,  directly or indirectly,  the power to direct or
cause the direction of the management and policies of the other Person,  whether
through the ownership of voting securities, by contract, or otherwise.

     "Agreement" means this Credit Agreement including all Appendices, Schedules
and  Exhibits  attached  hereto,  as same may be amended in writing from time to
time.

     "Alternative Financings" has the meaning set forth under Section 7.05(e).

     "Asset Purchase Agreement" has the meaning set forth under Section 5.25.

     "Assignee" has the meaning specified in Subsection 9.07.

     "Bankruptcy  Code"  means the  Federal  Bankruptcy  Reform  Act of 1978 (11
U.S.C. ss.101, et seq.).

     "Business Day" means any day other than a Saturday,  Sunday or other day on
which  commercial  banks  located  in the city of  Lender's  Payment  Office are
authorized or required by law to close.

     "Capital Lease" means,  when used with respect to any Person,  any lease in
respect of which any of the  obligations  of such Person  thereunder  constitute
Capitalized Lease Obligations.

     "Capitalized  Lease  Obligations"  means, all obligations of such Person to
pay rent or other amounts under any lease of (or other arrangement conveying the
right  to use)  real or  personal  property,  or a  combination  thereof,  which
obligations  shall have been or should be, in accordance with GAAP,  capitalized
on the books of such Person.

                                       1
<PAGE>

     "Cash  Equivalents"  means:  (a) securities  issued or fully  guaranteed or
insured by the United States  Government or any agency thereof and backed by the
full faith and credit of the United  States  having  maturities of not more than
twelve (12) months from the date of  acquisition;  (b)  certificates of deposit,
time deposits,  Eurodollar time deposits, or bankers' acceptances having in each
case a tenor of not more than  three  (3)  months  from the date of  acquisition
issued  by any U.S.  commercial  bank or any  branch  or  agency  of a  non-U.S.
commercial bank licensed to conduct business in the U.S. having combined capital
and surplus of not less than Five Hundred  Million Dollars  ($500,000,000);  (c)
commercial paper of an issuer rated at least A-1 by S&P or P-1 by Moody's at the
time of  acquisition,  and in either case having a tenor of not more than twelve
(12)  months;  and (d) money  market funds that (i) comply with the criteria set
forth in SEC Rule 2a-7 under the Investment  Company Act of 1940, (ii) are rated
AAA by  Standard  and  Poor's  Ratings  Group,  a division  of The  McGraw  Hill
Corporation,  and  Aaa by  Moody's  Investors  Services,  Inc.  and  (iii)  have
portfolio assets of at least $500,000,000.

     "Change  of  Control"  means (a) a purchase  or  acquisition,  directly  or
indirectly,  by any "person" or "group"  within the meaning of Section  13(d)(3)
and 14(d)(2) of the Securities Exchange Act of 1934 (a "Group"),  of "beneficial
ownership"  (as such term is defined in Rule 13d-3  under the  Exchange  Act) of
securities of Borrower which, together with any securities owned beneficially by
any  "affiliates"  or  "associates"  of such Group (as such terms are defined in
Rule 12b-2 under the Exchange  Act),  shall  represent  more than thirty percent
(30%) of the combined voting power of Borrower's  securities  which are entitled
to vote  generally in the election of directors (or  managers,  in the case of a
limited  liability  company) and which are  outstanding on the date  immediately
prior  to the  date of such  purchase  or  acquisition;  or (b) a sale of all or
substantially  all of the assets of  Borrower  taken as a whole to any Person or
Group; or (c) the  liquidation or dissolution of Borrower;  or (d) the first day
on which a majority  of the  directors  (or  managers,  in the case of a limited
liability company) of Borrower are not Continuing Directors (as herein defined).
As herein defined,  "Continuing Directors" means any Director of Borrower who is
a Director of Borrower as of the date of this  Agreement as listed on Appendix I
hereto.

     "Closing"  means the date on which all  conditions  precedent  set forth in
Section 4.01 are satisfied or waived by the Lender.

     "Code" means the Internal Revenue Code of 1986 and regulations  promulgated
thereunder.

     "Collateral"  means all tangible and intangible  assets of Borrower and any
Subsidiary  thereof,  now  existing or  hereafter  acquired,  including  without
limitation,  all Oil and Gas Properties,  the Oil and Gas attributable  thereto,
and the Debt Service Account.

     "Common Stock" means common stock of Borrower, par value $0.05 per share.

     "Compliance  Certificate"  means that  certain  certificate  in the form of
Exhibit C.

     "Confidential Private Placement Memorandum" means that certain Confidential
Private Placement Memorandum dated November 8, 2005.

     "Contingent  Obligation" means, as to any Person without  duplication,  any
direct or indirect  liability of that Person with or without recourse,  (a) with
respect  to any  Indebtedness,  dividend,  letter  of  credit  or other  similar
obligation  (the  "primary   obligations")   of  another  Person  (the  "primary
obligor"), including any Guaranty Obligation of that Person; (b) with respect to
any Surety  Instrument issued for the account of that Person or as to which that
Person is otherwise liable for reimbursement of drawings or payments;  or (c) to
purchase  any  materials,  supplies  or other  property  from,  or to obtain the
services of, another Person if the relevant  contract or other related  document
or  obligation  requires  that  payment  for such  materials.  supplies or other
property, or for such services,  shall be made regardless of whether delivery of
such  materials,  supplies or other  property is ever made or tendered,  or such
services are ever performed or tendered. The amount of any Contingent Obligation
shall,  in the case of  Guaranty  Obligations,  be deemed  equal to the  maximum

                                       2
<PAGE>

stated or determinable amount of the primary obligation in respect of which such
Guaranty Obligation is made or, if not stated or if indeterminable,  the maximum
reasonably  anticipated  liability in respect thereof,  and in the case of other
Contingent  Obligations  shall be equal to the  maximum  reasonably  anticipated
liability in respect thereof..

     "Contract Rate" has the meaning specified in Appendix I.

     "Contractual  Obligation"  means,  as to any Person,  any  provision of any
security  issued by such  Person  or of any  agreement,  undertaking,  contract,
indenture, mortgage, deed of trust or other instrument, document or agreement to
which such Person is a party or by which it or any of its property is bound.

     "Current  Management" means the current  executive  officers of Borrower as
specified in Appendix I.

     "Debt Service Account" has the meaning specified in Section 6.15.

     "Debt Service Amount" means the amount set forth under Appendix I.

     "Default" means any event or circumstance which, with the giving of notice,
the lapse of time,  or both,  would (if not cured or otherwise  remedied  during
such time) constitute an Event of Default.

     "Default Rate" is defined on Appendix I.

     "Dollars", "dollars" and "$" each mean lawful money of the United States.

     "EBITDA"  means with respect to Borrower,  for any fiscal  period,  without
duplication (i) Net Income plus (ii) depreciation,  depletion,  amortization and
other non-cash  items reducing Net Income plus (iii) Interest  Expense plus (iv)
income tax expense.

     "Effective  Amount" means on any date, the outstanding  principal amount of
the Loans after giving  effect to any  prepayments  or  repayments  of the Loans
occurring on such date.

     "Environmental  Claims"  means  all  material  claims  by any  Governmental
Authority or other Person alleging  potential  liability or  responsibility  for
violation of any Environmental Law, or for release or injury to the environment.

     "Environmental  Laws"  means all  material  federal,  state or local  laws,
statutes, common law duties, rules, regulations,  ordinances and codes, together
with all material administrative orders, requests, licenses,  authorizations and
permits of, and agreements  with,  any  Governmental  Authorities,  in each case
relating to environmental, health, and safety matters.

     "ERISA"  means the Employee  Retirement  Income  Security Act of 1974,  and
regulations promulgated thereunder.

     "ERISA Affiliate" means any trade or business (whether or not incorporated)
under common control with Borrower  within the meaning of Section  414(b),  (c),
(m) or (o) of the Code.

     "ERISA  Event" means (a) a Reportable  Event with respect to a Plan;  (b) a
withdrawal  by Borrower or any ERISA  Affiliate  from a Plan  subject to Section
4063 of ERISA  during a plan  year in which it was a  substantial  employer  (as
defined in Section  4001(a)(2) of ERISA) or a cessation of  operations  which is
treated as such a withdrawal  under Section 4062(e) of ERISA;  (c) a complete or
partial  withdrawal by Borrower or any ERISA Affiliate from a Multiemployer Plan
or notification that a Multiemployer Plan is in  reorganization;  (d) the filing
of a notice of intent to terminate  (other than  pursuant to Section  4041(b) of
ERISA), the treatment of a Plan amendment as a termination under Section 4041(c)
or 4041A of ERISA, or the commencement of proceedings by the PBGC to terminate a
Plan or Multiemployer  Plan; (e) an event or condition which might reasonably be
expected to constitute  grounds under Section 4042 of ERISA for the  termination
of, or the  appointment  of a trustee to administer,  any Plan or  Multiemployer
Plan; or (f) the imposition of any liability under Title IV of ERISA, other than
PBGC premiums due but not delinquent under Section 4007 of ERISA,  upon Borrower
or any ERISA Affiliate.

     "Event of Default"  means any of the events or  circumstances  specified in
Section 8.01.

                                       3
<PAGE>

     "Exchange Act" means the  Securities  Exchange Act of 1934, as amended from
time to time, and regulations promulgated thereunder.

     "FRB" means the Board of Governors of the Federal Reserve  System,  and any
Governmental Authority succeeding to any of its principal functions.

     "Fixed Charges" means, with respect to Borrower, for any fiscal period, the
sum of Interest  Expense plus scheduled  principal  payments of any Indebtedness
for borrowed money.

     "Fixed Charge  Coverage  Ratio" means, as of the end of any fiscal quarter,
the ratio of (a) Borrower's EBITDA for the twelve month period then ended to (b)
Borrower's Fixed Charges for the twelve month period then ended.

     "GAAP" means generally accepted  accounting  principles set forth from time
to time 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.

     "Governmental Authority" means any nation or government, any state or other
political  subdivision  thereof,  any  central  bank  (or  similar  monetary  or
regulatory  authority) thereof,  any entity exercising  executive,  legislative,
judicial, regulatory or administrative functions of or pertaining to government,
and any  corporation  or other  entity  owned or  controlled,  through  stock or
capital ownership or otherwise, by any of the foregoing.

     "Guaranty  Obligations"  means with respect to any Indebtedness,  dividend,
letter of credit or other  similar  obligation  (the "primary  obligations")  of
another Person (the "primary obligor"),  including any obligation of that Person
(i) to purchase, repurchase or otherwise acquire such primary obligations or any
security therefor, (ii) to advance or provide funds for the payment or discharge
of any such primary obligation, or to maintain working capital or equity capital
of the primary obligor or otherwise to maintain the net worth or solvency or any
balance  sheet  item,  level of income or  financial  condition  of the  primary
obligor,  (iii) to purchase  property,  securities or services primarily for the
purpose of assuring the owner of any such primary  obligation  of the ability of
the  primary  obligor  to make  payment  of  such  primary  obligation,  or (iv)
otherwise to assure or hold  harmless the holder of any such primary  obligation
against loss in respect thereof.

     "Hedge Agreements" means all future contracts, forward contracts, swap, cap
or collar  contracts,  option  contracts,  hedging contracts or other derivative
contracts or similar  agreements  covering Oil and Gas  commodities or prices or
financial, monetary or interest rate instruments.

     "Highest  Lawful  Rate"  means,  as  of  a  particular  date,  the  maximum
nonusurious  interest rate that under applicable  federal and Texas law may then
be  contracted  for,  charged or received by the Lender in  connection  with the
Obligations.

     "Hydrocarbon  Interests"  means  leasehold and other  interests in or under
oil, gas and other liquid or gaseous  hydrocarbon leases with respect to Oil and
Gas wherever  located,  mineral fee  interests,  overriding  royalty and royalty
interests,  net profit interests,  production  payment interests relating to Oil
and Gas  wherever  located,  including  any  beneficial,  reserved  or  residual
interest of whatever nature.

     "Indebtedness"  of  any  Person  means,   without   duplication,   (a)  all
indebtedness  for borrowed  money;  (b) all  obligations  issued,  undertaken or
assumed as the deferred purchase price of property or services (other than trade
payables entered into in the ordinary course of business on ordinary terms); (c)
all non-contingent  reimbursement or payment  obligations with respect to Surety
Instruments;  (d) all  obligations  evidenced  by notes,  bonds,  debentures  or
similar instruments,  including  obligations so evidenced incurred in connection
with the  acquisition of property,  assets or businesses;  (e) all  indebtedness
created  or  arising  under  any  conditional  sale  or  other  title  retention
agreement,  or incurred as  financing,  in either case with  respect to property
acquired  by the Person  (even  though the rights and  remedies of the seller or

                                       4
<PAGE>

bank under such agreement in the event of default are limited to repossession or
sale of such property) including,  without limitation,  production payments, net
profit  interests and other  Hydrocarbon  Interests  subject to repayment out of
future  Oil and Gas  production;  (f) all  obligations  with  respect to Capital
Leases;  (g) all  indebtedness  referred  to in clauses  (a)  through  (f) above
secured by (or for which the holder of such  Indebtedness has an existing right,
contingent  or  otherwise,  to be  secured  by) any  Lien  upon  or in  property
(including accounts and contracts rights) owned by such Person, even though such
Person has not assumed or become  liable for the  payment of such  Indebtedness;
and (i) all Guaranty  Obligations in respect of  indebtedness  or obligations of
others of the kinds referred to in clauses (a) through (g) above.

     "Indemnified  Environmental  Liabilities"  has  the  meaning  specified  in
Section 9.06.

     "Indemnified Liabilities" has the meaning specified in Section 9.05.

     "Indemnified Person" has the meaning specified in Section 9.05.

     "Independent Auditor" means a recognized independent public accounting firm
retained by Borrower and approved by the Lender.

     "Initial Loan Amount" means the amount set forth under Appendix I.

     "Initial  Reserve  Report"  means the Reserve  Report  described in Section
4.01(c).

     "Insolvency  Proceeding" means (a) any case, action or proceeding  relating
to   bankruptcy,   reorganization,    insolvency,   liquidation,   receivership,
dissolution,  winding up or relief of debtors, or (b) any general assignment for
the benefit of creditors,  composition,  marshalling of assets for creditors, or
other,  similar  arrangement  in  respect  of  its  creditors  generally  or any
substantial  portion of its creditors;  undertaken under U.S. Federal,  state or
foreign law, including the Bankruptcy Code.

     "Interest Expense" means, with respect to Borrower,  for any fiscal period,
the  aggregate  amount of all costs,  fees and expenses paid by Borrower in such
fiscal  period  which  are  classified  as  interest  expense  on the  financial
statements of Borrower.

     "Interest  Payment  Date"  means the first  Business  Day of each  calendar
month.

     "IRS" means the Internal  Revenue Service,  and any Governmental  Authority
succeeding to any of its principal functions under the Code.

     "Knowledge of Borrower"  (or similar  language to that effect) means to the
knowledge, after due inquiry, of any executive officer of Borrower.

     "Lender's Payment Office" means the principal address for the Lender as set
forth on Appendix I hereof or such other  address as the Lender may from time to
time specify.

     "Lien"  means any  security  interest,  mortgage,  deed of  trust,  pledge,
hypothecation,  assignment,  charge or deposit  arrangement,  encumbrance,  lien
(statutory  or  other)  or  preferential  arrangement  of  any  kind  or  nature
whatsoever in respect of any property (including those created by, arising under
or evidenced by any conditional sale or other title retention  agreement and the
interest  of a  lessor  under a  Capital  Lease),  any  financing  lease  having
substantially the same economic effect as any of the foregoing, or the filing of
any financing statement naming the owner of the asset to which such Lien relates
as debtor,  under the  Uniform  Commercial  Code or any  comparable  law and any
contingent or other agreement to provide any of the foregoing.

     "Loans"  means  collectively,  each  extension  of credit by the  Lender to
Borrower under Section 2.01.

     "Loan  Documents"  means  this  Agreement,  the  Note,  the  Warrants,  the
Registration  Rights  Agreement,   the  Security  Documents,  the  Subordination
Agreement  and  all  other  documents  delivered  to the  Lender  in  connection
herewith.

     "Margin  Stock" means "margin  stock" as such term is defined in Regulation
T, U or X of the FRB.

                                       5
<PAGE>

     "Material  Adverse  Effect"  means (a) a material  adverse  change in, or a
material adverse effect upon, the operations,  business, properties or financial
condition of Borrower;  (b) a material  impairment of the ability of Borrower to
perform  under any Loan  Document;  or (c) a material  adverse  effect  upon the
legality,  validity,  binding effect or  enforceability  against Borrower of any
Loan Document.

     "Maximum Loan Amount" means the amount set forth under Appendix I.

     "Mortgages" means any "Mortgage,  Deed of Trust,  Assignment of Production,
Security Agreement and Financing  Statement" from Borrower to the Lender (or any
comparable  instrument)  and  all  supplements,   assignments,   amendments  and
restatements  thereto (or any  agreement  in  substitution  therefor)  which are
executed and delivered to the Lender pursuant to Article III of this Agreement.

     "Mortgage Matching Schedule" means, a schedule  maintained by the Lender or
its counsel  correlating and reconciling the wells and related working interests
and net revenue interests  constituting the Mortgaged  Properties  against those
for the Oil and Gas  Properties  covered by Borrower's  most recently  delivered
Reserve Report.

     "Mortgaged  Properties"  means the Oil and Gas  Properties  and such  other
properties  upon which  Borrower  has  purported to grant a Lien in favor of the
Lender pursuant to the Mortgages.

     "Multiemployer  Plan" means a  "multiemployer  plan," within the meaning of
Section  4001(a)(3) of ERISA, to which Borrower or any ERISA Affiliate makes, is
making, or is obligated to make contributions or, during the preceding seven (7)
calendar years, has made, or been obligated to make, contributions.

     "Net Income" means, for any fiscal period,  the net income (or net loss) of
such Person for such period.

     "Note" means the promissory  note specified in Section 2.01,  substantially
in the same form as Exhibit  A,  issued by  Borrower  hereunder  to the  Lender,
including any amendment, modification, renewal or replacement of such promissory
note.

     "Obligations"   means  the  aggregate   amount  of  all  advances,   debts,
liabilities,  obligations,  covenants  and duties of Borrower  arising under any
Loan  Document  or owing by Borrower  to the Lender or any  Indemnified  Person,
whether direct or indirect (including those acquired by assignment), absolute or
contingent, due or to become due, now existing or hereafter arising.

     "Oil and Gas" means petroleum,  natural gas and other related  hydrocarbons
or minerals or any of them and all other  substances  produced or  extracted  in
association therewith.

     "Oil and Gas Properties" means Hydrocarbon Interests now owned or hereafter
acquired by Borrower,  or any  Subsidiary  thereof,  and  contracts  executed in
connection  therewith  and  all  tenements,  hereditaments,  appurtenances,  and
properties  belonging,  affixed or  incidental  to such  Hydrocarbon  Interests,
including, without limitation, any and all property, real or personal, now owned
or hereafter  acquired by Borrower and situated upon or to be situated upon, and
used,  built for use, or useful in  connection  with the  operating,  working or
developing of such Hydrocarbon Interests, including, without limitation, any and
all petroleum and/or natural gas wells,  structures,  field  separators,  liquid
extractors,  plant compressors,  pumps,  pumping units, field gathering systems,
tank and tank  batteries,  fixtures,  valves,  fittings,  machinery  and  parts,
engines, boilers, liters, apparatus,  equipment,  appliances, tools, implements,
cables, wires, towers, tubing and rods, surface leases, rights-of-way, easements
and servitudes, and all additions, substitutions, replacements for, fixtures and
attachments  to any and all of the  foregoing  owned  directly or  indirectly by
Borrower and its Subsidiaries.

     "Operating  Lease" means an operating  lease  determined in accordance with
GAAP.

     "Organization  Documents"  means,  for any  corporation:  the  articles  of
incorporation,  the bylaws,  any  certificate  of  determination  or  instrument
relating to the rights of the shareholders of such corporation,  any shareholder
rights agreement,  and all applicable  resolutions of the board of directors (or

                                       6
<PAGE>

any committee  thereof) of such corporation;  for any limited liability company:
the  articles  of   organization,   the  regulations  or  operating   agreement,
certificate of  organization  and all  applicable  resolutions of the members of
such  company;  and for any  limited  partnership:  the  certificate  of limited
partnership,  the limited partnership  agreement and all Organization  Documents
for  its  general  partner  as  any  of  the  foregoing  have  been  amended  or
supplemented from time to time.

     "Other  Taxes"  means  any  present  or  future   mortgage  tax,  stamp  or
documentary  taxes or any other  excise or  property  taxes,  charges or similar
levies  which  arise from any  payment  made  hereunder  or from the  execution,
delivery or registration of, or otherwise with respect to, this Agreement or any
other Loan Documents.

     "Partners" means each general and limited partner of Petro Capital V, L.P.

     "PBGC" means the Pension Benefit Guaranty Corporation,  or any Governmental
Authority succeeding to any of its principal functions under ERISA.

     "Pension  Plan" means a pension  plan (as defined in Section 3(2) of ERISA)
subject to Title IV of ERISA,  other than a Multiemployer  Plan,  which Borrower
sponsors,  maintains,  or to which it makes, is making,  or is obligated to make
contributions,  or in the case of a Multiemployer  Plan (as described in Section
4064(a)  of ERISA) has made  contributions  at any time  during the  immediately
preceding five (5) plan years.

   "Permitted Liens" has the meaning set forth in Section 7.01.

     "Person"   means   an   individual,   partnership,   limited   partnership,
corporation,  limited liability  company,  business trust,  joint stock company,
trust, unincorporated association, joint venture or Governmental Authority.

     "Plan" means an employee benefit plan (as defined in Section 3(3) of ERISA)
which is subject to ERISA,  other than a Multiemployer  Plan, and which Borrower
sponsors or maintains or to which Borrower makes, is making,  or is obligated to
make contributions and includes any Pension Plan.

     "Principal Business" means the business of the exploration for, development
of, and the acquisition, production, gathering and upstream marketing of Oil and
Gas.

     "Production  Sales  Contracts"  mean  those  agreements  now  or  hereafter
executed in connection with the sale by Borrower of Oil and Gas  attributable to
the Oil and Gas Properties as same may be amended from time to time.

     "Quarterly  Principal  Payment  Amount"  means the amount  set forth  under
Appendix I.

     "Quarterly  Principal Payment Date" means on or before the last day of each
calendar quarter, commencing on the date set forth under Appendix I.

     "Registration  Rights  Agreement"  means that certain  Registration  Rights
Agreement of even date herewith between Borrower and the Lender.

     "Regulation  U" and  "Regulation  X" means  Regulation U and  Regulation X,
respectively, of the FRB.

     "Requirement  of  Law"  means,  as to any  Person,  any law  (statutory  or
common),  treaty,  rule or regulation or  determination of an arbitrator or of a
Governmental  Authority,  in each case applicable to or binding upon such Person
or any of its  property  or to  which  such  Person  or any of its  property  is
subject.

     "Reserves"  means those  quantities of Oil and Gas which are anticipated to
be  commercially  recovered from known  accumulations  from a given date forward
including  "Proved  Reserves,"  "Probable  Reserves" and "Possible  Reserves" as
those reserves are  denominated  and  determined in accordance  with the methods
commonly  accepted by the Society of Petroleum  Engineers for evaluating Oil and
Gas reserves.

                                       7
<PAGE>

     "Reserve Report" means a report,  acceptable to the Lender, covering proved
developed,  proved undeveloped and probable Oil and Gas reserves attributable to
the Oil and Gas  Properties  and setting forth (i) the total  quantity of proved
developed and proved undeveloped reserves  (separately  classified as producing,
shut-in,  behind pipe, and undeveloped),  (ii) the estimated future net revenues
and future net income and  cumulative  estimated  future net revenues and future
net income,  (iii) the discounted  present value of future net income,  and (iv)
such other  information  and data with respect to the Oil and Gas  Properties as
the Lender may reasonably request.

     "Responsible  Officer" means the chief executive  officer,  chief financial
officer  or  president  of  Borrower  or  such  other  Person  designated  as  a
Responsible Officer by Borrower.

     "SEC" means the Securities and Exchange Commission.

     "SEC Filings"  means all forms,  reports,  schedules,  statements and other
documents  required to be filed by Borrower under the Securities  Act,  Exchange
Act, and the rules and regulations promulgated thereunder.

     "Securities Act" means the Securities Act of 1933, as amended.

     "Security Documents" means the Mortgages, collateral assignments,  security
agreements,  pledges,  assignments,  control  agreements,  and related financing
statements listed on Schedule I as same may be amended, supplemented or modified
from time to time and any and all other instruments now or hereafter executed in
connection with or as security for the payment of the Obligations.

     "Solvent"  means,  as to any Person at any time, that (a) the fair value of
all of the property of such Person is greater  than the amount of such  Person's
liabilities  (including  disputed,  contingent and unliquidated  liabilities) as
such value is  established  and  liabilities  evaluated  for purposes of Section
101(32) of the  Bankruptcy  Code;  (b) the present fair saleable value of all of
the property of such Person is not less than the amount that will be required to
pay the probable  liability of such Person on its debts as they become  absolute
and  matured;  (c) such Person does not intend to, and does not believe  that it
will,  incur debts or  liabilities  beyond such Person's  ability to pay as such
debts and liabilities  mature; and (d) such Person is not engaged in business or
a  transaction,  and is not about to engage in  business or a  transaction,  for
which such Person's property would constitute unreasonably small capital.

     "Stated  Maturity Date" means the date set forth on Appendix I stated to be
the maturity date for the Note.

     "Status Report" means a status report prepared  periodically  (as specified
on Appendix I) by Borrower in form, scope and content  acceptable to the Lender,
setting forth as of such period then ended (i) detailed production data from the
Oil and Gas  Properties  by  property,  including,  the  volumes  of Oil and Gas
produced and saved, the volumes of Oil and Gas sold,  gross revenue,  Net Income
of Borrower,  related leasehold  operating  expenses,  severance taxes,  capital
costs and any production imbalances incurred during such period (ii) all new Oil
and Gas Properties acquired by Borrower since the date of Borrower's last Status
Report,  (iii) the current list of purchasers of  production  including  mailing
address and the wells covered by such Production Sales Contracts,  and (iv) such
additional  information with respect to any of the Oil and Gas Properties as may
be reasonably requested by the Lender.

     "Subordination  Agreement"  means a Subordination  Agreement in the form of
Exhibit F hereto, by and among Borrower, Lender and Tauren.

     "Subsidiary" of a Person means any corporation,  association,  partnership,
joint  venture  or other  business  entity of which  more than 50% of the voting
stock  or  other  equity   interests   (in  the  case  of  Persons   other  than
corporations),  is owned or controlled  directly or indirectly by the Person, or
one or more of the Subsidiaries of the Person, or a combination thereof.  Unless
the context  otherwise  clearly  requires,  references  herein to a "Subsidiary"
refer to a Subsidiary of Borrower.

                                       8
<PAGE>

     "Surety  Instruments"  means all  letters  of credit  (including  standby),
banker's acceptances, bank guaranties,  shipside bonds, surety bonds and similar
instruments.

     "Tangible Net Worth" means,  at any date,  the net worth of Borrower  after
subtracting therefrom the aggregate amount of treasury stock, goodwill, deferred
development  costs,  franchises,  licenses,  patents,  trademarks,  trade names,
copyrights, service marks and brand names and all other intangible assets (other
than Oil and Gas  leases to the  extent  classified  as  intangible  assets)  of
Borrower classified as such under GAAP.

     "Tauren"  means  Tauren  Exploration,  Inc.,  an  affiliate  of  the  chief
executive officer of Borrower.

     "Taxes"  means  any and all  present  or  future  taxes,  levies,  imposts,
deductions,  charges or withholdings,  and all liabilities with respect thereto,
excluding such taxes (including  income taxes or franchise taxes) as are imposed
on or measured by the Lender's Net Income by the  jurisdiction (or any political
subdivision  thereof)  under  the laws of  which  the  Lender  is  organized  or
maintains a lending office.

     "Tax Return" means any return, report, information return or other document
(including any related or supporting  information) relating to Taxes,  including
without limitation all information  returns, any claims for refunds of Taxes and
any amendments or supplements to any of the foregoing.

     "Termination  Date" means the earlier of (a) the Stated  Maturity  Date, or
(b) the date on which the  Loans  are due and  payable  in  accordance  with the
provisions of this Agreement.

     "United States" and "U.S." each means the United States of America.

     "Warrants" means 5-year detachable warrants to acquire  unregistered shares
of  Common  Stock of  Borrower  substantially  in the same form as  attached  as
Exhibit D.

     "Warrant  Shares"  means the  shares of  Common  Stock or other  securities
issuable upon the exercise of the Warrants

     "West  Texas  Properties"  means  currently  owned  Oil and Gas  Properties
located in Callahan, Eastland and Palo Pinto Counties, Texas.

         1.02 Other Interpretive  Provisions.  The meanings of defined terms are
equally applicable to the singular and plural forms of the defined terms. Unless
otherwise  specified  or the  context  clearly  requires  otherwise,  the  words
"hereof",  "herein",  "hereunder" and similar words refer to this Agreement as a
whole and not to any particular  provision of this  Agreement;  and  Subsection,
Section,  Schedule  and  Exhibit  references  are to this  Agreement.  The  term
"documents"   includes   any  and  all   instruments,   documents,   agreements,
certificates,  indentures,  notices and other writings,  however evidenced.  The
term  "including" is not limiting and means "including  without  limitation." In
the  computation of periods of time from a specified  date to a later  specified
date,  the word "from"  means "from and  including";  the words "to" and "until"
each mean "to but  excluding",  and the word "through" means "to and including."
Unless  otherwise  expressly  provided  herein,  (i)  references  to  agreements
(including this Agreement) and other contractual  instruments shall be deemed to
include all subsequent  amendments and other modifications  thereto, but only to
the extent such  amendments  and other  modifications  are not prohibited by the
terms of any Loan Document, and (ii) references to any statute or regulation are
to  be  construed  as  including  all  statutory   and   regulatory   provisions
consolidating, amending, replacing, supplementing or interpreting the statute or
regulation.  The captions and headings of this Agreement are for  convenience of
reference only and shall not affect the  interpretation of this Agreement.  This
Agreement and the other Loan Documents are the result of negotiations  among and
have been reviewed by counsel to the Lender and  Borrower,  and are the products
of all parties.  Accordingly,  they shall not be construed against Borrower,  or
the  Lender  merely  because  of the  Lender's  involvement  in the  preparation
thereof.

                                       9
<PAGE>

         1.03 Accounting Principles.

         (a) Unless the context otherwise clearly requires, all accounting terms
not expressly defined herein shall be construed,  and all financial computations
required  under  this  Agreement   shall  be  made  in  accordance   with  GAAP,
consistently applied.

         (b)  References  herein to "fiscal year" and "fiscal  quarter" refer to
such fiscal periods of Borrower.

         (c)  References  herein to Borrower's  financial  statements or balance
sheets  shall mean,  respectively,  the  consolidated  financial  statements  or
consolidated balance sheets of Borrower and its Subsidiaries, if any.

                                   ARTICLE II.
                                   THE CREDIT

         2.01 Amounts and Terms of the Loans.  The Lender  agrees,  on the terms
and  conditions  set forth herein,  to lend to Borrower the Initial Loan Amount,
which  shall be funded to  Borrower  at  Closing,  except  for the Debt  Service
Amount,  which shall be funded into the Debt Service  Account.  The Lender shall
have the option,  exercisable in its sole discretion within sixty (60) days from
Closing and upon Borrower's written request, to lend to Borrower an amount up to
the amount  equal to the  difference  between  the  Maximum  Loan Amount and the
Initial Loan Amount.  The  obligation of Borrower to repay the Loans made by the
Lender, together with interest accruing thereon, shall be evidenced by the Note.
If Borrower pays or prepays any portion of the Loans under this Agreement,  then
such portion may not be reborrowed.

         2.02 Prepayment.  In addition to mandatory repayments of the Note under
Section 2.03,  Borrower may, at any time prepay the Loans in full, or in minimum
amounts of $100,000.00 or integral multiples thereof, upon irrevocable notice to
the Lender of not less than five (5) Business  Days;  provided  that a notice of
prepayment  delivered by the Borrower may state that such notice is  conditioned
upon the effectiveness of other credit facilities, in which case such notice may
be  revoked  by  Borrower  (by  notice to  Lender  on or prior to the  specified
effective date) if such condition is not satisfied.

         2.03 Repayment.

         (a) Principal. Borrower shall repay the outstanding principal under the
Note as follows:

                  (i) Subject to the Quarterly Principal Payment Deferral Option
         set forth on Appendix I, on each Quarterly  Principal  Payment Date, an
         amount  equal to the  Quarterly  Principal  Payment  Amount  (each such
         payment a "Quarterly Principal Payment"); and

                  (ii)  On  the  Termination   Date,  an  amount  equal  to  any
         outstanding  principal under the Note remaining on such date,  together
         with all accrued but unpaid interest and outstanding expenses hereunder
         or under the Loan Documents.

         (b) Interest.

                  (i) Principal  outstanding  under the Note shall bear interest
         from  Closing  at a rate  per  annum  equal  to the  lesser  of (a) the
         Contract Rate, or (b) the Highest Lawful Rate.

                                       10
<PAGE>

                  (ii)  Interest  shall accrue at the Contract Rate on principal
         outstanding  under  the  Note  and  shall  be paid in  arrears  on each
         Interest  Payment Date and any accrued but unpaid interest shall be due
         and payable in full on the Termination Date.

                  (iii) Notwithstanding  Subsection 2.03(b)(i),  (A) immediately
         while any Default  under Section 7.06 or Event of Default under 8.01(a)
         exists and (B)  following  thirty  (30) days  written  notice  from the
         Lender  while any other  Event of Default  exists;  Borrower  shall pay
         interest  (after as well as before  entry of  judgment  thereon  to the
         extent  permitted by law) on the  outstanding  principal  amount of the
         Loans,  at a rate per  annum  equal to the  Default  Rate  until  paid,
         regardless whether payment is made before or after entry of a judgment.

         2.04 Fees.

         (a)  Commitment  Fee.  Borrower  shall pay to the  Lender at  Closing a
Commitment Fee in the amount set forth on Appendix I hereto.  Borrower shall pay
to the  Lender at the time of any  additional  Loan made  pursuant  to  Lender's
option in Section  2.01, a Commitment  Fee in the amount set forth on Appendix I
hereto.

         (b)  Warrants.  Borrower  shall  deliver to the Lender at  Closing,  in
connection  with  the  Initial  Loan,  Warrants  for the  number  of  shares  of
Borrower's  Common Stock set forth on Appendix I. Borrower  shall deliver to the
Lender at the time of any  additional  Loan made pursuant to Lender's  option in
Section 2.01, Warrants for the number of shares equal to 33.34% of the amount of
such Loan.

         (c) Other  Fees.  Borrower  shall pay such  other  fees at  Closing  as
required under Section 4.01(d) and as Borrower shall be required to pay pursuant
to any separate agreement  executed by Borrower and Administrative  Agent or any
of its Affiliates  setting forth the  compensation to be paid to  Administrative
Agent and/or its Affiliates in consideration of providing services in connection
with this Agreement.

         (d) Fees Fully Earned. Borrower agrees that as of Closing all such fees
and Warrants as provided under this Section 2.04 shall be fully earned.

         2.05 Computation of Fees and Interest. All computations of interest for
the  Loans  and all  other  computations  of fees  shall be made on the basis of
actual days elapsed  (including  the first day but  excluding  the last day) but
computed as if each month  consisted of 30 days and each calendar year consisted
of 360 days.

         2.06 Payments by Borrower.

         (a) All  payments to be made by  Borrower  shall be made to the Lender,
without  set-off,  recoupment  or  counterclaim.  Except as otherwise  expressly
provided  herein,  all  payments  by  Borrower  shall be made to the  Lender  at
Lender's  Payment  Office,  and  shall  be made in  dollars  and in  immediately
available  funds,  no later than 11:00 a.m.  (Central time) on the date due. Any
payment  received by the Lender  later than 11:00 a.m.  (Central  time) shall be
deemed to have been  received on the following  Business Day and any  applicable
interest or fee shall continue to accrue.

         (b)  Whenever  any  payment is due on a day other than a Business  Day,
such payment shall be made on the following  Business Day, and such extension of
time shall in such case be included in the  computation  of interest or fees, as
the case may be.

         2.07 Taxes.

                                       11
<PAGE>

         (a) Any and all payments by Borrower  hereunder or under the Note shall
be made free and  clear of and  without  deduction  for any and all  present  or
future Taxes.  If Borrower  shall be required by law to deduct any Taxes from or
in respect of any sum payable  hereunder  or under the Note to the Lender,  then
(i) the sum payable  shall be increased as may be necessary so that after making
all required  deductions  (including  deductions  applicable to additional  sums
payable under this Section 2.07) the Lender  receives an amount equal to the sum
they would have received had no such  deductions  been made, (ii) Borrower shall
make such  deductions,  and (iii) Borrower shall pay the full amount deducted to
the relevant taxation authority or other authority in accordance with applicable
law.

         (b) In addition, Borrower agrees to pay any Other Taxes.

         (c) Borrower will  indemnify the Lender for the full amount of Taxes or
Other Taxes (including,  without limitation, any Taxes or Other Taxes imposed by
any  jurisdiction on amounts payable under this Section 2.07) paid by the Lender
or any liability  (including  penalties and interest)  arising therefrom or with
respect  thereto,  whether or not such Taxes or Other  Taxes were  correctly  or
legally asserted.  This indemnification  shall be made within five (5) days from
the date the Lender makes written demand therefor.

         (d)  Within 30 days after the date of any  payment  of Taxes,  Borrower
will furnish to the Lender,  at its  principal  address set forth in Appendix I,
the original or a certified copy of a receipt evidencing payment thereof.

         (e)  Without  prejudice  to the  survival  of any  other  agreement  of
Borrower hereunder, the agreements and obligations of Borrower contained in this
Section  2.07  shall  survive  the  termination  of the  commitments  under this
Agreement and the payment in full of the Obligations.

                                  ARTICLE III.
                                    SECURITY

         3.01 The Security.  The Obligations will be secured by a Lien on all of
the Collateral,  now or hereafter  acquired,  including  without  limitation the
Collateral described in Schedule I under the Security Documents.

         3.02 Agreement to Deliver Security Documents. Borrower agrees to notify
the Lender of any additional interests acquired by Borrower or any Subsidiary in
Oil and Gas  Properties  or other  Collateral  and to  deliver  to the Lender to
further secure the Obligations,  deeds of trust,  mortgages,  chattel mortgages,
security agreements,  financing statements,  letters in lieu of production,  and
other  Security  Documents  in form and  substance  satisfactory  to the  Lender
covering all of the  Collateral,  for the purpose of granting,  confirming,  and
perfecting first and prior Liens or security interests.  Borrower also agrees to
deliver,  whenever requested by the Lender,  favorable title opinions from legal
counsel acceptable to the Lender or such other evidence of title satisfactory to
the Lender with respect to the Oil and Gas Properties  designated by the Lender,
based upon abstract or record  examinations  to dates  acceptable to the Lender,
(a) evidencing  that Borrower has good and defensible  title to such Oil and Gas
Properties,  free and clear of all Liens except  Permitted Liens, (b) confirming
that such Oil and Gas  Properties  are subject to Liens granted  under  Security
Documents  securing the Obligations and such Security  Documents  constitute and
create legal,  valid and duly perfected first deed of trust or mortgage Liens in
such Oil and Gas  Properties  and first  priority  assignments  of and  security
interests in the Oil and Gas attributable to such Oil and Gas Properties and the
proceeds  thereof,  and (c)  covering  such  other  matters  as the  Lender  may
reasonably request.

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<PAGE>

         3.03  Perfection  and  Protection  of  Security  Interests  and  Liens.
Borrower will from time to time deliver to the Lender any financing  statements,
amendments,  assignments and continuation  statements,  extension agreements and
other  documents,  properly  completed (and executed  and/or  acknowledged  when
required) by Borrower in form and substance  satisfactory  to the Lender,  which
the Lender requests for the purpose of perfecting, confirming, or protecting any
Liens or other rights in Collateral  securing any  Obligations.  Borrower hereby
authorizes the Lender to file, in any applicable  jurisdiction  where the Lender
deems it necessary,  a financing statement or statements,  and at the request of
the  Lender,  Borrower  will join  Lender  in  executing  one or more  financing
statements   pursuant  to  the  applicable   Uniform  Commercial  Code  in  form
satisfactory  to the Lender,  and will pay the cost of filing or recording  such
instrument, as a financing statement, in all public offices at any time and from
time to time whenever  filing or recording of any financing  statement is deemed
by the Lender to be necessary or reasonable.

         3.04  Offset.  To secure the  repayment  of the  Obligations,  Borrower
hereby grants the Lender a security interest, Lien, and right of offset, each of
which  shall be in  addition to all other  interests,  Liens,  and rights of the
Lender at common law, under the Loan  Documents or otherwise,  and each of which
shall be upon and against (a) any and all moneys,  securities or other  property
(and the proceeds therefrom) of Borrower now or hereafter held or received by or
in transit to the  Lender  from or for the  account  of  Borrower,  whether  for
safekeeping, custody, pledge, transmission, collection or otherwise, and (b) any
other  credits and claims of Borrower at any time  existing  against the Lender.
Upon the occurrence of any Event of Default,  the Lender is hereby authorized to
foreclose  upon,  offset,  appropriate,  and apply, at any time and from time to
time,  without  notice to Borrower,  any and all items  hereinabove  referred to
against the Obligations then due and payable.

         3.05 Production Proceeds.

         (a) Borrower shall provide to the Lender undated  letters,  in the form
of Exhibit D attached  hereto,  in blank to each  purchaser  of  production  and
disburser  of proceeds  of  production  from or  attributable  to the  Mortgaged
Properties,  with the  addressees  left blank,  authorizing  and  directing  the
addressees  to  make  future  payments   attributable  to  Borrower's  share  of
production from the Mortgaged Properties directly to the Lender.

         (b)   Borrower   hereby   designates   the  Lender  as  its  agent  and
attorney-in-fact,  to act in its  name,  place,  and stead  for the  purpose  of
completing and delivering any and all of the letters in lieu of transfer  orders
delivered  by  Borrower,  as  applicable,  to  the  Lender,  including,  without
limitation,  completing  any blanks  contained  in such  letters  and  attaching
exhibits thereto  describing the relevant  Collateral.  Borrower hereby ratifies
and confirms all that the Lender shall lawfully do or cause to be done by virtue
of this power of attorney  and the rights  granted with respect to such power of
attorney.  This power of attorney is coupled  with the interest of the Lender in
the Collateral, shall commence and be in full force and effect as of Closing and
shall  remain in full force and effect and shall be  irrevocable  so long as any
Obligation remains  outstanding or unpaid. The powers conferred on the Lender by
this  appointment  are solely to protect the  interests  of the secured  parties
under  the Loan  Documents  and  shall not  impose  any duty upon the  Lender to
exercise any such powers.  THE LENDER SHALL BE ACCOUNTABLE ONLY FOR AMOUNTS THAT
IT ACTUALLY RECEIVES AS A RESULT OF THE EXERCISE OF SUCH POWERS AND SHALL NOT BE
RESPONSIBLE  TO BORROWER OR ANY OTHER  PERSON FOR ANY ACT OR FAILURE TO ACT WITH
RESPECT TO SUCH POWERS,  EXCEPT FOR THE  LENDER'S  GROSS  NEGLIGENCE  OR WILLFUL
MISCONDUCT.

         (c) Notwithstanding that under the Mortgages,  Borrower has assigned to
the Lender all of the proceeds of  production  accruing to  Borrower's  share of
production from the Mortgaged Properties covered thereby,  until such time as an
Event of Default  shall  have  occurred  and be  continuing,  Borrower  shall be

                                       13
<PAGE>

entitled to receive from the purchasers or disbursers of its production all such
proceeds,  subject  however to the Liens created under the  Mortgages.  Upon the
occurrence  and during the  continuance  of an Event of Default,  the Lender may
deliver to the  addressees the  letters-in-lieu  described in Section 3.05 above
and may exercise all rights and remedies granted under the Mortgages,  including
the right to obtain  possession of all proceeds of runs then held by Borrower or
to receive  directly from the purchaser or disburser of production such proceeds
of production.

         (d) In no case shall any failure,  whether  intentional or inadvertent,
by the Lender to collect  directly any such  proceeds of runs  constitute in any
way a waiver,  rescission  or release of any of its rights under the  Mortgages,
nor shall any  release  of any other  proceeds  of runs or of any  rights of the
Lender to collect other proceeds of runs thereafter.

                                   ARTICLE IV.
                              CONDITIONS PRECEDENT

         4.01  Conditions  Precedent.  The  obligation of the Lender to make the
initial Loan is subject to the condition that the Lender shall have received the
following, in form and substance satisfactory to the Lender:

         (a) Credit  Agreement and Other Loan  Documents.  This  Agreement,  the
Note, the Warrants,  the Registration Rights Agreement,  the Security Documents,
the Subordination  Agreement and such other Loan Documents made a part hereof to
be executed and delivered at Closing,  executed by each party thereto, and where
appropriate, properly acknowledged and notarized;

         (b)  Secretary's  Certificate.   A  certificate  of  the  Secretary  or
Assistant  Secretary  of  Borrower,  certifying  as of the date of Closing:  (i)
resolutions of the board of directors of Borrower  authorizing the  transactions
contemplated  hereby;  (ii) the names and genuine  signatures of the Responsible
Officers of Borrower authorized to execute,  deliver and perform, as applicable,
this  Agreement,  the  Security  Documents,  and all other Loan  Documents to be
delivered hereunder;  (iii) the Organization  Documents of Borrower as in effect
on the date of Closing; (iv) the good standing certificate for Borrower from its
state of incorporation, formation or organization, as applicable, evidencing its
qualification to do business in such state as of a date no more than thirty (30)
days prior to  Closing;  (v) as  applicable,  certificate(s)  of  authority  for
Borrower from foreign  states wherein  Borrower  conducts  business,  evidencing
Borrower's  qualification to do business in such state as of a date no more than
thirty (30) days prior to Closing;  (vi)  resolutions of the Special  Committee;
and (vii) the fairness opinion from the Financial Advisor.

         (c)  Reserve  Report.  Receipt and  satisfactory  review of the current
Reserve Report prepared by Netherland,  Sewell and Associates,  Inc. dated as of
June  30,  2005,  covering  the Oil and Gas  Properties  (the  "Initial  Reserve
Report");

         (d)  Payment of Lender's  Fees.  Payment by Borrower of all accrued and
unpaid fees,  costs and expenses owed  pursuant to this  Agreement to the extent
then due and  payable at Closing  including  such fees set forth on  Appendix I,
together with attorney costs of the Lender to the extent invoiced prior to or at
Closing, plus such additional amounts of attorney costs and filing fees as shall
constitute  the  Lender's  estimate  of same  incurred  or to be  incurred by it
through Closing (provided that such estimate shall not thereafter preclude final
settling of accounts between Borrower and the Lender); including any such costs,
fees and expenses arising under or referenced in Sections 2.04 and 9.04;

         (e) Other Documents.  Each additional document,  instrument, or item of
information requested by the Lender, including without limitation:

                                       14
<PAGE>

                  (i) satisfactory title information acceptable to the Lender in
         its sole discretion,  verifying Borrower's good and defensible title to
         the Oil and Gas  Properties  free and  clear of all  Liens  other  than
         Permitted Liens;

                  (ii)  copies of all  environmental  assessments,  reports  and
         other information with contents and findings reasonably satisfactory to
         the Lender with respect to the Oil and Gas Properties;

                  (iii)  copies  of  all  Joint  Operating  Agreements,  Farmout
         Agreements,  long term  marketing or Production  Sales  Contracts,  and
         other  material  contracts  entered  into  by  Borrower  to the  extent
         requested by Lender to the extent not already  provided to Lender prior
         to Closing;

                  (iv)  certificates of insurance for Borrower as required under
         Section 6.06 of this Agreement;

                  (v) opinion of Borrower's  Texas counsel in form  satisfactory
         to the  Lender  including,  among  other  matters,  the due  formation,
         standing and authorization of Borrower and as to the  enforceability of
         the Loan  Documents  (other than any Mortgage to be recorded in a state
         other than the State of Texas), issuance of the Warrants and perfection
         of the Security Documents;

                  (vi)  opinion  of   Borrower's   Louisiana   counsel  in  form
         satisfactory to Lender as to the  enforceability  and perfection of the
         Mortgages to be filed in various parishes in Louisiana; and

                  (f) Additional Conditions Precedent. Borrower shall deliver or
         cause to be  delivered  such  additional  documentation  and such other
         conditions shall be satisfied as set forth on Appendix I hereto.

                                   ARTICLE V.
                         REPRESENTATIONS AND WARRANTIES

Borrower represents and warrants to the Lender that:

         5.01 Corporate Existence and Power.  Borrower:  (a) is validly existing
and in good standing under the laws of the State of Texas; (b) has the power and
authority and all material governmental licenses,  authorizations,  consents and
approvals to own its assets, carry on its business as currently conducted and to
execute,  deliver, and perform its obligations under the Loan Documents,  (c) is
duly  qualified as a foreign  company and is licensed and in good standing under
the  laws of each  jurisdiction  where  its  ownership,  lease or  operation  of
property or the conduct of its business requires such  qualification or license;
and (d) is in compliance in all material respects with all Requirements of Law.

         5.02 Corporate Authorization; No Contravention. The execution, delivery
and  performance  by Borrower of this  Agreement and each other Loan Document to
which it is a party,  have  been  duly  authorized  by all  necessary  corporate
action,  and do not  and  will  not:  (a)  contravene  the  terms  of any of its
Organization   Documents;   (b)  conflict  with  or  result  in  any  breach  or
contravention of, or the creation of any Lien under, any document evidencing any
Contractual Obligation to which it is a party or any order, injunction,  writ or
decree of any Governmental  Authority to which it or its property is subject; or
(c) violate any Requirement of Law.

                                       15
<PAGE>

         5.03  Governmental  Authorization.  No  approval,  consent,  exemption,
authorization,   or  other  action  by,  or  notice  to,  or  filing  with,  any
Governmental   Authority  is  necessary  or  required  in  connection  with  the
execution,  delivery or performance by, or enforcement against, Borrower of this
Agreement or any other Loan Document to which it is a party.

         5.04 Binding  Effect.  This  Agreement  and each other Loan Document to
which Borrower is a party constitute the legal, valid and binding obligations of
Borrower,  enforceable  against  Borrower in  accordance  with their  respective
terms,  except  as  enforceability  may be  limited  by  applicable  bankruptcy,
insolvency,  or similar laws  affecting the  enforcement  of  creditors'  rights
generally or by equitable principles relating to enforceability.

         5.05 SEC Filings; Interim Financial Statements.

         (a) Since June 30, 2002,  Borrower and its Subsidiaries have filed with
the SEC all forms, reports, schedules,  statements, and other documents required
to be filed by it under the Securities Act and the Exchange Act. Each SEC Filing
was  prepared  in  accordance  with,  and at the time of filing  complied in all
material respects with, the requirements of the Securities Act, the Exchange Act
or other  applicable  federal  securities  laws and the  rules  and  regulations
promulgated  thereunder,  as  applicable  to such  SEC  Filing.  None of the SEC
Filings,  including,  without limitation,  any financial statements or schedules
included  therein,  at the time  filed,  contained  any  untrue  statement  of a
material  fact or  omitted  to state any  material  fact  required  to be stated
therein or necessary in order to make the statements contained therein, in light
of  the  circumstances   under  which  they  were  made,  not  misleading.   The
consolidated  financial statements  (including,  in each case, any related notes
thereto)  contained in the SEC Filings (i) have been prepared in conformity with
GAAP applied on a  consistent  basis  (except as described  therein or the notes
thereto),  (ii)  comply in all  material  respects  as to form  with  applicable
requirements and rules and regulations of the SEC with respect thereto and (iii)
present  fairly  the  consolidated   financial  position  of  Borrower  and  its
consolidated  Subsidiaries at the respective  dates thereof and the consolidated
results of its  operations  and  changes in cash flows for the period  indicated
(subject  to normal  year-end  audit  adjustments  in the case of any  unaudited
interim financial statements).

         (b) Philip Vogel & Co. P.C., Borrower's current public accounting firm,
is an independent  public  accounting  firm with respect to Borrower and has not
resigned or been  dismissed as independent  public  accountants of Borrower as a
result of or in connection  with any  disagreement  with Borrower on a matter of
accounting  principles or practices,  financial statement disclosure or auditing
scope or procedure.

         (c) Borrower is in compliance with any and all applicable  requirements
of the  Sarbanes-Oxley Act of 2002 that are effective as of the date hereof, and
any and all applicable  rules and regulations  promulgated by the SEC thereunder
that are effective as of the date hereof,  except where such noncompliance would
not have, individually or in the aggregate, a Material Adverse Effect.

         (d) The information  included in or  incorporation  by reference in the
Confidential  Private  Placement  Memorandum in connection  with the  securities
offering  does not contain any untrue  statement  of a material  fact or omit to
state any material fact  required to be stated  therein or necessary to make the
statements therein, in light of the circumstances under which they are made, not
misleading. If, at any time prior to Closing, any event with respect to Borrower
shall  occur  which is  required to be  described  in the  Confidential  Private
Placement  Memorandum in order for the Confidential Private Placement Memorandum
not to contain  any  untrue  statement  of a material  fact or omit to state any
material fact required to be stated  therein or necessary to make the statements
therein,  in  light  of  the  circumstances  under  which  they  are  made,  not
misleading,  such event shall be so described,  and an appropriate  amendment or
supplement shall be prepared by Borrower.

                                       16
<PAGE>

         5.06 Litigation.  Except to the extent  expressly  disclosed in the SEC
Filings there are no actions, suits, proceedings, claims or disputes pending or,
to the Knowledge of Borrower,  threatened  against or involving  Borrower or any
Subsidiary (or any of their respective  directors or officers in connection with
the  business  or affairs of  Borrower or any  Subsidiary)  that are  reasonably
likely to have a Material  Adverse Effect.  As of the date hereof,  there are no
actions, suits, proceedings,  claims or disputes pending or, to the Knowledge of
Borrower,  threatened  seeking  to  restrain,  prohibit,  or obtain  damages  in
connection with this Agreement or the transactions contemplated hereby.

         5.07 No  Default.  No Default  or Event of  Default  exists or would be
reasonably expected to result from the incurring of any Obligations by Borrower.
As of the date on which Closing occurs, Borrower is not in default under or with
respect to any  Contractual  Obligation in any respect  which,  individually  or
together with all such defaults, would reasonably be expected to have a Material
Adverse Effect.

         5.08 ERISA.

         (a)  Borrower  has not had and  currently  does not have or  maintain a
Plan.

         (b) Borrower does not sponsor, maintain or contribute to, or has at any
time in the preceding six calendar years,  sponsored,  maintained or contributed
to, any Multiemployer Plan.

         5.09 Margin Regulations. The proceeds of the Loans shall be used solely
for the purposes set forth in and  permitted  by Section  6.11.  Borrower is not
generally  engaged in the  business of  purchasing  or selling  Margin  Stock or
extending credit for the purpose of purchasing or carrying Margin Stock.

         5.10 Title to Properties. Borrower has good and defensible title to the
Oil and Gas  Properties  and all other real  property  necessary  or used in the
ordinary conduct of its business. As of Closing, the Collateral is subject to no
Liens, other than Permitted Liens.

         5.11 Oil and Gas Reserves.  Borrower is and will hereafter be the owner
of the Oil and Gas that it  purports  to own from  time to time in and under the
Oil and Gas  Properties,  together with the right to produce the same.  Such Oil
and Gas Properties are not subject to any Lien other than Permitted  Liens.  All
Oil and Gas has been and will  hereafter  be  produced,  sold and  delivered  in
accordance with all applicable  laws and regulations of Governmental  Authority;
Borrower has  complied and will comply with all material  terms of each oil, gas
and  mineral  lease  comprising  the  Oil  and  Gas  Properties  and  all  other
Contractual  Obligations  related  thereto;  and all such oil,  gas and  mineral
leases  have been and will  hereafter  be  maintained  in full force and effect.
Provided,  however that nothing in this Section 5.11 shall prevent Borrower from
abandoning any well or forfeiting,  surrendering,  releasing or defaulting under
any lease in the ordinary course of business which is not disadvantageous in any
way to the Lender and which, in the opinion of Borrower, is in the best interest
of  Borrower,  and  Borrower is and will  hereafter  be in  compliance  with all
obligations hereunder.

         5.12  Initial  Reserve  Report.  To the  knowledge  of Borrower (i) the
assumptions  stated or used in the preparation of the Initial Reserve Report are
reasonable,  (ii) all  information  furnished in the  preparation of the Initial
Reserve  Report was accurate in all material  respects,  (iii) there has been no
material  adverse change in the amount of the estimated Oil and Gas shown in the
Initial  Reserve  Report since the date  thereof,  except for changes which have
occurred as a result of production  from and after the effective date thereof in
the ordinary  course of business,  and (iv) the Initial  Reserve Report does not
omit  any  statement  or  information  necessary  to  cause  the  same not to be
misleading to the Lender.

                                       17
<PAGE>

         5.13 Gas Imbalances. Except as disclosed to the Lender in writing prior
to the date of this  Agreement,  there  are no gas  imbalances  in excess of two
percent (2%) of monthly projected  deliveries from the Oil and Gas Properties in
the aggregate,  and no take or pay or other  prepayments with respect to the Oil
and Gas Properties  which would require Borrower to deliver Oil and Gas produced
from any of the Oil and Gas  Properties  at some future time  without  receiving
full payment therefor within sixty (60) days of such production.

         5.14 Taxes. Since January 1, 2002, except as specifically identified in
the SEC Filings:

         (a)  Borrower  and  each  of its  Subsidiaries  (hereinafter  sometimes
referred to  collectively  as the  "Taxpayers" or  individually as a "Taxpayer")
have timely filed with the appropriate Tax authorities all Tax Returns  required
to be filed  by each of them,  and such Tax  Returns  are  true,  complete,  and
correct in all material respects.

         (b) The  Taxpayers  have duly paid in full all material  Taxes that are
payable by each such Taxpayer on or prior to Closing, and have accrued Taxes for
any period that begins prior to Closing and ends after Closing in the Taxpayers'
financial records and in the financial  statements  contained in the SEC Filings
to the  extent  that  such  Taxes  are not  required  to be paid on or  prior to
Closing.

         (c) There is no audit or other  matter in  controversy  with respect to
any Taxes due and owing by any Taxpayer, and there is no Tax deficiency or claim
assessed or, to the  Knowledge of Borrower,  proposed or  threatened  in writing
against any Taxpayer,  other than in respect of any such audits,  controversies,
deficiencies,  assessments,  or proposed assessments that are being contested in
good faith and, if the amount in controversy exceeds $100,000,  are disclosed in
Schedule 5.14.

         (d) The  Taxpayers  each have withheld all material  Taxes  required to
have been withheld and paid by them on their behalf in  connection  with amounts
paid or owing to any employee, independent contractor, creditor, shareholder, or
other third  party,  and such  withheld  Taxes have either been duly paid to the
proper Governmental Authority or set aside in accounts for such purpose.

         (e) None of the  Taxpayers  (i) has  waived  any  statutory  period  of
limitations  for the  assessment of any Taxes or agreed to any extension of time
with respect to a Tax  assessment  or  deficiency  other than in the case of any
such waivers or  extensions in respect of an assessment or deficiency of Tax the
liability of which has been satisfied or settled or has expired,  (ii) has filed
a consent under  Internal  Revenue Code Section  341(f)  concerning  collapsible
corporations,  or (iii) has any  liability  for the Taxes of any other person as
defined  in Section  7701(a)(1)  of the  Internal  Revenue  Code under  Treasury
Regulation ss.  1.1502-6 (or any similar  provision of state,  local, or foreign
law), as a transferee,  successor or by contract  other than with respect to the
other Taxpayers.

         (f) No claim has been made in any taxable year which remains open by an
authority in a jurisdiction where a Taxpayer does not file Tax Returns that such
Taxpayer is or may be subject to taxation by that jurisdiction.

         (g) None of the  Taxpayers  has  agreed to or is  required  to make any
adjustment  pursuant  to Internal  Revenue  Code  Section  481(a) by reason of a
change in accounting method initiated by such Taxpayer,  and to the Knowledge of
Borrower,  the IRS has not proposed any such  adjustment or change in accounting
method.

         (h) None of the Taxpayers has any  obligation  under any Tax allocation
or sharing agreement,  and after Closing, no Taxpayer shall be a party to, bound
by or have any obligation under any Tax allocation or sharing  agreement or have
any  liability  thereunder  for amounts  due in respect of periods  prior to and
including Closing.

                                       18
<PAGE>

         (i) None of the Taxpayers (i) has made any payments,  (ii) is obligated
to make any  payments  (whether  as a result  of the  transactions  contemplated
hereby or  otherwise),  and (iii) is a party to any agreement as of Closing that
could  obligate  it to  make  any  payments,  in each  case,  that  will  not be
deductible under Internal Revenue Code Section 280G.

         5.15 Environmental Matters. Borrower conducts in the ordinary course of
business a review of the effect of existing Environmental Laws and Environmental
Claims, if any, on its business,  operations and properties, and such properties
which it is acquiring or planning to acquire.  Borrower is in  compliance in all
material  respects with all  Environmental  Laws and does not have any liability
for any Environmental Claim.

         5.16  Regulated  Entities.  None of Borrower or any Person  controlling
Borrower,  is an  "Investment  Company"  within the  meaning  of the  Investment
Company  Act of 1940.  Borrower is not  subject to  regulation  under the Public
Utility  Holding  Company Act of 1935,  the Federal  Power Act,  the  Interstate
Commerce  Act, any state public  utilities  code,  or any other Federal or state
statute or regulation limiting its ability to incur Indebtedness.

5.17 No Burdensome Restrictions. Borrower is not a party to or bound by any
Contractual Obligation, or subject to any restriction in any Organization
Document, or any Requirement of Law, which would reasonably be expected to have
a Material Adverse Effect.

         5.18 Solvency. As of the date of Closing, Borrower is Solvent.

         5.19  Subsidiaries/Investments/Ownership.  As of the  date of  Closing,
Borrower has no  Subsidiaries  and no material  equity  investments in any other
corporation or entity.

         5.20 Insurance.  The Oil and Gas Properties and all other properties of
Borrower are insured with financially  sound and reputable  insurance  companies
not Affiliates of Borrower,  in such amounts, with such deductibles and covering
such risks as are customarily carried by companies engaged in similar businesses
and owning similar properties in localities where the Oil and Gas Properties are
located.

         5.21 Full Disclosure. None of the representations or warranties made by
Borrower  in  the  Loan  Documents  as of  the  date  such  representations  and
warranties are made or deemed made, and none of the statements  contained in any
exhibit,  report,  written statement or certificate furnished by or on behalf of
Borrower in connection with the Loan Documents  contains any untrue statement of
a material  fact or omits any  material  fact  required to be stated  therein or
necessary to make the  statements  made therein,  in light of the  circumstances
under which they are made, not misleading as of the time when made or delivered.

         5.22 Capitalization.

         (a) The  authorized  capital  stock of Borrower as of the date  hereof,
consists  solely of  100,000,000  shares of  Common  Stock,  $0.05 par value per
share, and 10,000,000  shares of preferred stock,  $0.01 par value per share. As
of Closing,  (i) 39,771,771  shares of Common Stock were issued and outstanding,
(ii)  2,581,000  shares of Common Stock were reserved for issuance upon exercise
of  Awards  (whether  vested  or  unvested  as of the date  hereof),  and  (iii)
3,635,000  shares of Common Stock were  reserved for issuance  upon  exercise of
outstanding  warrants.  All outstanding shares of Common Stock have been validly
issued and are fully paid and  non-assessable,  conform in all material respects

                                       19
<PAGE>

to the  description  thereof  contained in the  Confidential  Private  Placement
Memorandum and were issued in compliance  with the Securities Act and applicable
state  securities  laws,  and no shares of capital stock of Borrower are subject
to, nor have any been issued in violation of, any preemptive or similar rights.

         (b) Except as set forth in Section 5.22(a) or as otherwise contemplated
by this Agreement, there are outstanding (i) no shares of capital stock or other
voting securities of Borrower;  (ii) no securities of Borrower  convertible into
or  exchangeable  for  shares of capital  stock or other  voting  securities  of
Borrower;  or (iii) no subscriptions,  options,  warrants,  calls,  commitments,
preemptive  rights or other rights of any kind to acquire from Borrower,  and no
obligation  of  Borrower  to issue or sell any shares of capital  stock or other
voting securities of Borrower or any securities of Borrower  convertible into or
exchangeable  for  such  capital  stock  or  voting  securities.  There  are  no
outstanding  contractual  obligations  of  Borrower  to  repurchase,  redeem  or
otherwise acquire any shares of Common Stock or any other securities of the type
described in clauses (i) - (iii) of the preceding  sentence.  Except as provided
in this Agreement,  there are no restrictions upon the voting or transfer of any
share of the capital stock or other voting  securities  of Borrower  pursuant to
the  Organization  Documents of Borrower or any agreement or other instrument to
which  Borrower  is a  party,  other  than  restricted  stock  held  by  certain
employees.

         5.23 Authorization of Warrants. When acquired by the Lender as provided
in this  Agreement,  the Warrant Shares will be duly authorized and reserved for
issuance,  and,  upon  issuance  thereof  upon the  exercise of the  Warrants in
accordance   with  their   terms  will  be  validly   issued,   fully  paid  and
non-assessable  and not subject to, or issued in violation of, any preemptive or
similar rights.

         5.24 Reporting  Status,  Eligibility to Use Form SB-2. The Common Stock
is registered under Section 12(g) of the Exchange Act. Borrower  currently meets
the "registrant eligibility"  requirements set forth in the general instructions
to Form  SB-2 to  enable  the  registration  of the  resale  of the  Registrable
Securities (as defined in the Registration Rights Agreement).

         5.25 Tauren  Purchase  Agreement.  Borrower  has entered  into an asset
purchase agreement (the "Asset Purchase Agreement") with Tauren, an affiliate of
the chief executive officer of Borrower.  The Board of Directors of Borrower has
formed  a  special  committee  (the  "Special  Committee")  composed  solely  of
directors who are  "independent" (as such term is defined in Section 303A of the
New York Stock Exchange Listed Company Manual), with the exception of Jon Stuart
Ross, who is both a director and officer of Borrower.  The Special Committee has
retained Wood & Sartain, LLP, as legal counsel (the "Legal Counsel"), and Howard
Frazier Barker Elliot, Inc., as financial advisor (the "Financial Advisor"),  in
connection with the transactions described in the Asset Purchase Agreement.  The
Legal  Counsel has not  performed  any legal  services for Tauren or Borrower or
their respective  affiliates for the last three years, and the Financial Advisor
has not  performed  any  financial  advisory  or other  services  for  Tauren or
Borrower or their respective  affiliates for the last three years.  Borrower and
Tauren have provided the Special Committee,  the Legal Counsel and the Financial
Advisor  access  to all  material  information  pertaining  to the  transactions
contemplated by the Asset Purchase Agreement. No restrictions were placed in the
information  provided  to, or the scope of work to be  performed  by,  the Legal
Counsel or the Financial  Advisor.  The Special Committee has received a written
opinion from the Financial Advisor (the "Fairness  Opinion") to the effect that,
as of the date of such opinion,  the Asset  Purchase  Agreement is fair,  from a
financial point of view, to Borrower's common shareholders,  and such opinion is
in full force and effect as of the date  hereof  and as of  Closing.  A true and
complete  copy of the  Fairness  Opinion has been  provided  to the Lender.  The
Special Committee has unanimously  approved the Asset Purchase Agreement and the
transactions  contemplated thereby and recommended approval by the full Board of
Directors of Borrower.  True and correct  execution copies of the Asset Purchase

                                       20
<PAGE>

Agreement  and all related  documents  have been  provided  to the Lender.  Such
execution  copies have not been amended or  supplemented.  No party to the Asset
Purchase  Agreement  or any  related  document  has  breached or failed to fully
comply  with its  obligations  under the Asset  Purchase  Agreement  or any such
related document.

                                   ARTICLE VI.
                              AFFIRMATIVE COVENANTS

         So long as the  Loans or  other  Obligations  shall  remain  unpaid  or
unsatisfied, unless the Lender waives compliance in writing:

         6.01  Financial  Statements.   Borrower  shall  maintain  a  system  of
accounting  established and  administered in accordance with GAAP and deliver to
the Lender:

         (a) as soon as  available,  but not  later  than the date  provided  on
Appendix I, commencing  with the first fiscal year ending after Closing,  a copy
of the  annual  financial  statements  of  Borrower  as of the end of such  year
including  the related  balance sheet and  statements  of income,  shareholder's
equity and cash flows for such year,  setting forth in each case in  comparative
form the figures for the previous fiscal year, audited by an Independent Auditor
and  certified  by a  Responsible  Officer as  presenting  fairly the  financial
position of Borrower, for the periods indicated in conformity with GAAP;

         (b) as soon as  available,  but not  later  than the date  provided  on
Appendix  I,  after the close of each of the first  three  quarterly  periods of
Borrower's  fiscal year  commencing  with the first such  quarter  ending  after
Closing,  a copy of the  unaudited  balance  sheets of Borrower as of the end of
such quarter including the related  statements of income,  shareholder's  equity
and cash flows for the period commencing on the first day and ending on the last
day of such quarter,  in comparative form the figures for the same period of the
previous  fiscal  year,  and  certified  by  a  Responsible  Officer  as  fairly
presenting  the  financial  position of Borrower  for the period  indicated,  in
accordance with GAAP; and

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

         6.02 Certificates  Other Production and Reserve  Information.  Borrower
shall furnish to the Lender:

         (a) as soon as  available  on a monthly  basis,  but not later than the
dates provided in Appendix I, Status Reports  executed by a Responsible  Officer
in form reasonably  acceptable to the Lender, as of the last day of the reported
periods;

         (b)  concurrently  with  the  delivery  of each of the  statements  and
reports  referred  to in  Subsections  6.01(a) - (b), a  Compliance  Certificate
executed by a Responsible Officer;

         (c)  a  Reserve  Report  prepared  by  Borrower's   in-house  petroleum
engineer(s)  or at Borrower's  discretion,  an  independent  petroleum  engineer
retained  by  Borrower  and  acceptable  to  Lender  covering  the  Oil  and Gas
Properties  on or  before  and as of each  date  provided  on  Appendix  I, (the
"In-house  Reserve  Report  Due  Date")  and a  Reserve  Report  prepared  by an
independent petroleum engineer retained by Borrower and acceptable to the Lender
covering  the  Oil and Gas  Properties  (all  foregoing  Reserve  Reports  being
acceptable  to Lender) on or before and as of each date  provided  on Appendix I
(the "Third Party Reserve Report Due Date");

                                       21
<PAGE>

         (d)  Concurrently  with the  delivery of each Reserve  Report  provided
under Subsection  6.02(c) above,  Borrower shall provide updated  information to
the Lender's  counsel for the Mortgage  Matching  Schedule  identifying  (i) any
additional wells covered by the new Reserve Report which were not covered by the
immediately  preceding  Reserve  Report  and  (ii)  any  wells  covered  by  the
immediately  preceding  Reserve  Report which are not covered by the new Reserve
Report;

         (e)  promptly  upon the  request  of the  Lender,  such  copies  of all
geological, engineering and related data contained in Borrower' files or readily
accessible to Borrower relating to the Oil and Gas Properties;

         (f) promptly  upon the request by the Lender,  title and mortgage  Lien
evidence  satisfactory to the Lender covering such Oil and Gas Properties as may
be designated by the Lender, covering the Borrower' title thereto and certifying
that the Obligations are secured by Liens and security  interests as provided in
this Agreement and the Security Documents; and

         (g)  promptly  upon  the  request  of  the  Lender,   such   additional
information regarding the business,  operations,  financial or corporate affairs
of Borrower as the Lender may from time to time reasonably request.

         6.03 Notices. Borrower shall promptly notify the Lender:

         (a) of the  occurrence  of any Default or Event of Default,  and of the
occurrence or existence of any event or  circumstance  that would  reasonably be
expected to become a Default or Event of Default;

         (b) of any matter that has  resulted or may  reasonably  be expected to
result in a Material Adverse Effect, including (i) breach or non-performance of,
or any default under, any Contractual Obligation of Borrower;  (ii) any dispute,
litigation,  investigation,  proceeding or suspension  between  Borrower and any
Governmental   Authority;   or  (iii)  the  commencement  of,  or  any  material
development  in, any  litigation or  proceeding  affecting  Borrower  (including
pursuant to any applicable Environmental Laws);

         (c)  of  any  material  change  in  accounting  policies  or  financial
reporting practices by Borrower; and

         (d) of the formation or acquisition by Borrower of any Subsidiary. Each
notice  under this  Section  shall be  accompanied  by a written  statement by a
Responsible Officer setting forth details of the occurrence referred to therein,
and with respect to clauses (a) and (b),  stating what action Borrower  proposes
to take with respect thereto and at what time.

         6.04 Preservation of Corporate Existence, Etc. Borrower shall:

         (a) preserve and maintain in full force and effect its separate,  legal
existence,  and  maintain  its good  standing  under  the  laws of its  state or
jurisdiction of incorporation or organization, as applicable;

         (b)  preserve  and  maintain in full force and effect all  governmental
rights, privileges,  qualifications,  permits, licenses and franchises necessary
for the normal conduct of its business; and

         (c) maintain the trading of its capital stock on an exchange acceptable
to the Lender.

                                       22
<PAGE>

         6.05 Maintenance of Property.  Borrower shall maintain and preserve all
its property  which is used or useful in its business in good working  order and
condition,  ordinary wear and tear excepted, and shall use, and use commercially
reasonable efforts to cause third Persons  conducting  operations on the Oil and
Gas  Properties to use, the reasonably  prudent  standard of care typical in the
industry in the operation and maintenance of its Oil and Gas Properties.

         6.06 Insurance.  Borrower shall maintain,  with  financially  sound and
reputable independent insurers, insurance with respect to its operations and its
Oil and Gas Properties and other  properties and business against loss or damage
of the kinds  customarily  insured  against  by  Persons  engaged in the same or
similar business,  of such types and in such amounts as are customarily  carried
under similar circumstances which insurance shall name the Lender as "additional
insured" and as a "loss payee," as applicable.

         6.07 Payment of  Obligations.  Borrower  shall pay and discharge as the
same shall  become due and  payable,  all of its  obligations  and  liabilities,
including:  (a) all tax  liabilities,  assessments and  governmental  charges or
levies upon it or its properties or assets,  unless the same are being contested
in good faith by  appropriate  proceedings  and adequate  reserves in accordance
with GAAP are being maintained; (b) all lawful claims which, if unpaid, would by
law become a Lien upon its property;  and (c) all Indebtedness,  as and when due
and  payable,  but  subject to any  subordination  provisions  contained  in any
instrument or agreement evidencing such indebtedness.

         6.08  Compliance  with  Laws.  Borrower  shall  comply in all  material
respects  with all  Requirements  of Law of any  Governmental  Authority  having
jurisdiction  over it or its  business  except such as may be  contested in good
faith or as to which a bona fide dispute may exist.

         6.09  Maintenance of Books and Records.  Borrower shall maintain proper
books of  record  and  account,  in which  full,  true and  correct  entries  in
conformity with GAAP consistently  applied shall be made of all of its financial
transactions and matters involving its assets and business.

         6.10 Environmental Laws. Borrower shall conduct its operations and keep
and  maintain and use  commercially  reasonable  efforts to cause third  Persons
conducting  operations  on its Oil and Gas  Properties to keep and maintain such
Oil  and  Gas  Properties  in  compliance  in all  material  respects  with  all
Environmental Laws.

         6.11 Use of Proceeds.  Borrower  shall use the proceeds of the Loans as
provided on Appendix I.

         6.12 Further  Assurances.  Borrower  shall promptly cure any defects in
the  creation and  issuance of the Note and the  execution  and delivery of this
Agreement,   the  Security  Documents,  the  Warrant,  the  Registration  Rights
Agreement,  the other Loan  Documents  or any other  instruments  referred to or
mentioned  herein or  therein  to which  Borrower  is a party.  Borrower  at its
expense  will  promptly  do all acts and  things,  and will  execute and file or
record,  all  instruments  reasonably  requested  by the Lender,  to  establish,
perfect, maintain and continue the perfected security interests of the Lender in
or the Lien of the Lender on the  Collateral.  Borrower will pay the  reasonable
costs and  expenses  of all  filings  and  recordings  and all  searches  deemed
necessary by the Lender to establish and determine the validity and the priority
of the Liens  created or intended to be created by the Security  Documents;  and
Borrower  shall  satisfy all other  claims and charges  which in the  reasonable
opinion of the Lender might  prejudice,  impair or  otherwise  affect any of the
Collateral or any Lien thereon in favor of the Lender.

                                       23
<PAGE>

         6.13  Subsidiary  Guaranties.  If at any  time  after  the date of this
Agreement, Borrower shall create or acquire any other Subsidiary, Borrower shall
cause each such  Subsidiary to execute and deliver to the Lender a guaranty in a
form reasonably acceptable to the Lender.

         6.14 Security Documents. Borrower shall promptly execute and deliver to
the Lender such Security  Documents as may be required  pursuant to Section 3.02
to  ensure  that all of the Oil and Gas  Properties  are  covered  by a Lien and
security  interest  in favor of the Lender for the  benefit of the Lender at all
times.

         6.15 Debt  Service  Account.  Until  the  ratio of  EBITDA to  Interest
Expense  equals 2.00 to 1.00 for three  consecutive  months  (the "Debt  Service
Release Date"),  Borrower shall maintain a reserve for debt service on the Loans
at a bank  mutually  acceptable  to Borrower  and the Lender (the "Debt  Service
Account").  The Debt Service Amount shall be funded from the Initial Loan Amount
into the Debt Service Account at Closing. To the extent that Borrower reasonably
determines  that it is unable  to pay  interest  due to  Lender on any  Interest
Payment  Date,  so long as no Default or Event of Default is then in  existence,
Borrower  may request  that the Lender  release,  and the Lender may agree to so
release, a portion of the Debt Service Amount so that such amount can be applied
on such Interest  Payment Date against interest accrued on the Note through such
date.  In the event  that any  amount has been  released  from the Debt  Service
Account  prior to the Debt Service  Release Date and  Borrower's  EBITDA for any
month is less than  $55,000  for such month,  Borrower  shall  promptly  deposit
sufficient funds into the Debt Service Account to restore it to the Debt Service
Amount.  Notwithstanding  anything  contained  herein to the contrary,  Borrower
shall remain fully liable for payment of interest  under the Note  regardless of
whether or not sufficient funds are maintained in the Debt Service Account.  The
Debt Service  Account  shall be maintained as provided on Appendix I and pledged
to the Lender under the Security Documents.

                                  ARTICLE VII.
                               NEGATIVE COVENANTS

         So long as the Loans or any other  Obligation  shall  remain  unpaid or
unsatisfied, unless the Lender waives compliance in writing:

         7.01 Limitation on Liens. Borrower agrees that it shall not directly or
indirectly, make, create, incur, assume or suffer to exist any Lien upon or with
respect to any part of its  property,  whether now owned or hereafter  acquired,
other than the following ("Permitted Liens"):

         (a) any Lien created under any Loan Document;

         (b) Liens scheduled on Schedule 7.01;

         (c) Liens for taxes, fees,  assessments or other  governmental  charges
which are not delinquent or remain  payable  without  penalty,  or to the extent
that nonpayment thereof is permitted by Section 6.07;

         (d) carriers', warehousemen's,  mechanics', landlords',  materialmen's,
repairmen's  or other similar Liens and  contractual  Liens granted to operators
and non-operators under oil and gas operating agreements arising in the ordinary
course of  business  securing  obligations  which are not  delinquent  or remain
payable  without  penalty  or which are  being  contested  in good  faith and by
appropriate  proceedings,  which  proceedings  have the effect of preventing the
forfeiture or sale of the property subject thereto;

                                       24
<PAGE>

         (e) Liens  consisting  of pledges or deposits  required in the ordinary
course of  business  in  connection  with  workers'  compensation,  unemployment
insurance and other social security legislation;

         (f) Liens securing (i) the  non-delinquent  performance of bids,  trade
contracts  (other  than  for  borrowed  money),   statutory  obligations,   (ii)
contingent  obligations,  Surety  Instruments (other than those providing credit
support for borrowed  money),  and (iii) other  non-delinquent  obligations of a
like nature; in each case, incurred in the ordinary course of business;

         (g) easements, rights-of-way, restrictions, defects or other exceptions
to title and other  similar  encumbrances  incurred  in the  ordinary  course of
business  which,  in the  aggregate,  are not  substantial  in  amount,  are not
incurred to secure Indebtedness, and which do not in any case materially detract
from the value of the property  subject  thereto or interfere  with the ordinary
conduct of Borrower's business;

         (h) Liens  arising  solely by virtue  of any  statutory  or common  law
provision  relating to banker's  liens,  rights of set-off or similar rights and
remedies  as to  deposit  accounts  or other  funds  maintained  with a creditor
depository  institution;  provided  that  (i)  such  deposit  account  is  not a
dedicated cash  collateral  account and is not subject to  restrictions  against
access by Borrower,  and (ii) Borrower  maintains  (subject to such right of set
off) dominion and control over such account(s);

         (i) Judgment  liens in respect of judgments  that do not constitute and
Event of Default under Section 8.01(h); and

         (j) royalties, overriding royalties, reversionary interests and similar
burdens with respect to the Oil and Gas Properties  which are in existence as of
the date hereof with respect to currently owned Oil and Gas Properties or on the
date on which a Mortgage is executed with respect to  subsequently  acquired Oil
and Gas Properties.

         7.02 Disposition of Assets.  Borrower shall not directly or indirectly,
sell, assign, lease, convey, transfer or otherwise dispose of (whether in one or
a series of transactions) (collectively, "Dispositions") any property (including
accounts  and notes  receivable,  with or  without  recourse)  or enter into any
agreement to do any of the foregoing,  except, so long as no Default or Event of
Default results therefrom:

         (a)  Dispositions  of inventory  including  produced Oil and Gas in the
ordinary course of business for cash on a current basis;

         (b) Dispositions of surplus,  unused, obsolete or worn-out equipment in
the ordinary course of business,  provided Borrower shall give the Lender notice
prior to any sale thereof;

         (c)  Dispositions  of Oil and Gas Properties in an amount not to exceed
$10,000 in any fiscal year;

         (d)  Dispositions  of Oil and  Gas  Properties  to  third  parties  not
Affiliates  of  Borrower,  with prior  written  notice to the Lender of any such
Dispositions and provided Borrower receives,  in exchange for such Dispositions,
Oil and Gas  Properties  of like kind and  greater or equal fair  market  value,
which upon acquisition shall be covered by a either a new Mortgage or supplement
to Mortgage substantially in the form of Exhibit E hereto, as applicable;

                                       25
<PAGE>

         (e)  Dispositions  of the West Texas  Properties for fair market value,
with prior written notice to the Lender of any such  Dispositions,  and provided
that upon the Lender's  request,  50% of the proceeds from any such Dispositions
shall be used to repay the Loans; and

         (f) In the event the Purchase Note is not paid in full or refinanced by
Lender on or before  its  maturity  either by an  additional  Loan  pursuant  to
Section 2.01 or additional  equity capital  arranged by Lender or its Affiliates
or a combination  thereof,  then Borrower may make  Dispositions  of Oil and Gas
Properties  at market  value upon fair and  reasonable  terms on an arm's length
basis,  satisfactory  to Lender,  to the extent  necessary to repay the Purchase
Note in full.

         7.03 Consolidations and Mergers.  Borrower shall not merge, consolidate
with or into, or convey, transfer, lease or otherwise dispose of (whether in one
transaction  or in a series of  transactions)  all or  substantially  all of its
assets  (whether now owned or hereafter  acquired) to or in favor of any Person.
Notwithstanding the foregoing,  nothing in this Section 7.03 shall (i) limit the
Dispositions permitted under Section 7.02 or (ii) prohibit Borrower from merging
or consolidating with one or more other Person,  provided that Borrower shall be
the  surviving  entity;   and  further,   provided,   that  no  such  merger  or
consolidation  shall affect the Liens or security interests of the Lender in and
to the Collateral.

         7.04 Loans and  Investments.  Borrower shall not purchase or acquire or
make any  commitment  therefor,  any  capital  stock,  equity  interest,  or any
obligations or other  securities of, or any interest in, any Person,  or make or
commit to make any  Acquisitions,  or make or commit to make any advance,  loan,
extension of credit or capital  contribution to or any other  investment in, any
Person including any Affiliate of Borrower,  except for: (a) investments in Cash
Equivalents;  (b)  extensions of credit in the nature of accounts  receivable or
notes  receivable  arising  from the sale or lease of goods or  services  in the
ordinary  course of business;  and (c) extensions of credit or other advances in
an  amount  not  to  exceed  $10,000  in the  aggregate  in  the  estimation  of
anticipated  travel or other reimbursable  expenses to any employees,  officers,
directors or the Lender.

         7.05  Limitation on  Indebtedness.  Borrower  shall not create,  incur,
assume,  suffer to exist,  or otherwise  become or remain directly or indirectly
liable with respect to any Indebtedness, except:

         (a) Indebtedness incurred pursuant to the Loan Documents,

         (b) Indebtedness  scheduled on Schedule 7.05 and to the extent any such
Indebtedness is a Capital Lease,  extensions,  renewals and replacements thereof
that do not increase the outstanding principal amount thereof;

         (c)  Indebtedness   consisting  of  Contingent   Obligations  permitted
pursuant to Section 7.09;

         (d) current liabilities, taxes and assessments incurred in the ordinary
course of business;

         (e)  Indebtedness in favor of third parties (i) on terms and conditions
first  offered  to the  Lender  which the  Lender  has  declined  to  provide to
Borrower,  (ii) the Lender has  consented to such  Indebtedness  from such third
party lender,  which consent shall not be  unreasonably  withheld,  (iii) at the
time of incurring such Indebtedness, no Default shall exist or would result from
the  incurrence of such  Indebtedness  after giving effect to the  incurrence of
such Indebtedness when included with Borrower's existing Indebtedness, (iv) such
Indebtedness does not have any scheduled  amortization  prior to two years after

                                       26
<PAGE>

the  Termination  Date  and  (v)  such  Indebtedness  shall  be  subject  to  an
intercreditor  agreement  between the Lender and any such third party  lender on
terms  and  conditions  reasonably  satisfactory  to  the  Lender  ("Alternative
Financings").  For the avoidance of doubt,  Borrower may obtain  Indebtedness in
favor of third parties to prepay the Indebtedness  incurred pursuant to the Loan
Documents without first offering such Indebtedness to the Lender;

         (f) Indebtedness  incurred pursuant to that certain  promissory note of
even  date  herewith  in favor of  Tauren in the  original  principal  amount of
$1,300,000.00  (the  "Purchase  Note"),  executed in  connection  with the Asset
Purchase  Agreement,  provided however,  Borrower shall not pay any amount owing
under such note with funds  other than (i) funds made  available  to Borrower by
Lender pursuant to the option  contemplated  under Section 2.01, (ii) funds made
available to Borrower by equity  investments in Borrower  arranged by Lender, or
(iii) Dispositions permitted pursuant to Section 7.02(f);

         (g) in the event (i) the sixty (60) day option set forth in Section 1.1
of the Asset  Purchase  Agreement  is  exercised  by Cubic and the  transactions
contemplated  thereby are consummated by Cubic and Tauren,  and (ii) all amounts
owing in connection  with the note referenced in clause (f) above have been paid
in full,  Indebtedness  incurred  pursuant  to a note to be executed in favor of
Tauren in the original principal amount of $1,500,000.00, in the form of Exhibit
__ to the Asset Purchase  Agreement,  provided such  Indebtedness is at all time
subject to the terms and conditions of the Subordination Agreement; and

         (h)  Indebtedness  other than as described under the preceding  clauses
(a) - (g) in the aggregate amount not to exceed $25,000.

         7.06 Financial Covenants.

         (a) Minimum  Tangible Net Worth.  Borrower will not permit its Tangible
Net Worth at any time to be less than the sum of $3,000,000.00.

         (b) Fixed Charge  Coverage  Ratio.  Borrower shall not permit the Fixed
Charge  Coverage  Ratio as  measured at the end of any four  consecutive  fiscal
quarters,  and being first  measured on June 30,  2007,  to be less than 1.30 to
1.00.

         7.07  Transactions   with  Affiliates.   Except  for  transactions  (a)
contemplated by the Confidential  Private  Placement  Memorandum,  (b) otherwise
disclosed in an SEC Filing,  or (c) set forth on Schedule  7.07,  Borrower shall
document and promptly  disclose to the Lender any transaction  with an Affiliate
where the  consideration,  in cash or other  tangible or  intangible  benefit to
Borrower,  exceeds $10,000, or which otherwise must be disclosed pursuant to the
Securities  Act,  the  Exchange  Act or the  rules and  regulations  promulgated
thereunder.

         7.08 Margin Stock.  Borrower  shall not use any portion of the proceeds
of the Loans, directly or indirectly, (a) to purchase or carry Margin Stock, (b)
to repay or otherwise  refinance  indebtedness of Borrower or others incurred to
purchase  or carry  Margin  Stock,  (c) to  extend  credit  for the  purpose  of
purchasing or carrying any Margin  Stock,  or (d) to acquire any security in any
transaction that is subject to Section 13 or 14 of the Exchange Act.

         7.09 Contingent  Obligations.  Borrower shall not create, incur, assume
or suffer to exist any  Contingent  Obligations  except:  (a)  endorsements  for
collection or deposit in the ordinary course of business;  (b) obligations under
plugging bonds,  performance  bonds and fidelity bonds issued for the account of
Borrower's  obligations  to  indemnify  or make  whole any  surety  and  similar
agreements incurred in the ordinary course of business; and (c) pursuant to this
Agreement.

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<PAGE>

         7.10 Restricted  Payments.  Borrower agrees that it shall not purchase,
redeem or  otherwise  acquire for value any  membership  interests,  partnership
interests, capital accounts, shares of its capital stock or any warrants, rights
or  options to acquire  such  membership  interests,  partnership  interests  or
shares, now or hereafter outstanding from its members,  partners or stockholders
and will not declare or pay any  distribution,  dividend,  return capital to its
members,  partners or  stockholders,  or make any  distribution of assets to its
stockholders, members or partners (collectively "Distributions").

         7.11 Change in  Business,  Organization  Documents,  Name and  Address.
Borrower  shall not engage in any business or activity  other than the Principal
Business.  Borrower  shall not  amend,  supplement  or modify  its  Organization
Documents without the prior written consent of the Lender nor change its name or
principal  business  address  without  thirty days prior  advance  notice to the
Lender.

         7.12 Accounting Changes. Borrower shall not make any significant change
in its accounting treatment or reporting  practices,  except as required by GAAP
or the SEC, or change its fiscal year.

         7.13  Restrictions  of  Pledges.  Borrower  shall  not  enter  into any
contract or agreement  which restricts  Borrower's  ability to (i) pledge any or
all of its assets or, (ii) in the case of any Subsidiary of Borrower, distribute
any or all of its  funds or  assets  to  Borrower;  provided,  however,  nothing
contained in this Section 7.13 shall prohibit Borrower from entering into any of
the Loan Documents.

         7.14  Capitalization.  If at any time after  Closing,  it is determined
that the number of issued and outstanding shares of capital stock of Borrower on
a fully  diluted basis as of Closing  equals an amount  greater than that amount
represented  by Borrower under Section 5.22,  Borrower  agrees to promptly issue
the Lender that  number of shares of Common  Stock  necessary  for the Lender to
maintain its same  percentage  ownership  interest in Borrower as  determined by
dividing the number of Warrant  Shares by the sum of (i) the number of shares of
capital stock of Borrower on a fully diluted basis set forth in Section 5.22 and
(ii) the number of Warrant Shares.

         7.15  Repayment of Certain  Indebtedness.  Borrower  shall not make any
payments  (including  prepayments)  on the  Indebtedness  permitted  pursuant to
Section 7.05(f) prior to the Stated Maturity Date other than regularly scheduled
principal and interest payments.

                                  ARTICLE VIII.
                                EVENTS OF DEFAULT

         8.01 Event of Default.  Any of the following shall constitute an "Event
of Default":

         (a)  Non-Payment.  Borrower fails to pay within three (3) Business Days
of when due,  any amount of  principal  or  interest  of any Loans or any fee or
other amount payable by Borrower hereunder or under any other Loan Document; or

         (b)  Representation  or  Warranty.  Any  representation  or warranty by
Borrower  made or deemed made herein,  in any other Loan  Document,  or which is
contained  in any  certificate,  document or  financial  or other  statement  by
Borrower or any Responsible Officer, furnished at any time under this Agreement,
or in or under any other Loan Document,  is incorrect in any material respect on
or as of the date made or deemed made; or

         (c) Specific  Defaults.  Borrower  fails to perform,  observe or comply
with any term,  covenant or agreement  contained in any of Subsection 6.03(a) or
Article VII; or

                                       28
<PAGE>

         (d) Other Defaults.  Borrower fails to perform,  observe or comply with
any other term or covenant  contained in this Agreement other than as identified
under Subsections  8.01(a),  (b) or (c) or any other Loan Document to the extent
not covered under Subsections  8.01(a),  (b) or (c) of this Agreement,  and such
failure  shall  continue  unremedied  for a period of thirty (30) days after the
earlier  of (i) the date upon which a  Responsible  Officer  knew or  reasonably
should  have known of such  failure or (ii) the date upon which  written  notice
thereof is given to Borrower by any Lender; or

         (e)  Cross-Default.  Borrower  (i) fails to make any  payment  when due
(whether by scheduled maturity,  required prepayment,  acceleration,  demand, or
otherwise) in respect of any  Indebtedness  or Contingent  Obligation  having an
aggregate principal amount (including undrawn committed or available amounts and
including amounts owing to all creditors under any combined or syndicated credit
arrangement)  of  more  than  $50,000  and  such  failure  continues  after  the
applicable grace or notice period, if any, specified in the relevant document on
the date of such failure;  or (ii) fails to perform,  observe or comply with any
other condition or covenant,  or any other event shall occur or condition exist,
under  any  agreement  or  instrument  relating  to  any  such  Indebtedness  or
Contingent  Obligation,  if the effect of such failure, event or condition is to
cause, or to permit the holder or holders of such Indebtedness or beneficiary or
beneficiaries  of such  Indebtedness  (or a  trustee  or agent on behalf of such
holder or holders or beneficiary or beneficiaries) to cause such Indebtedness to
be  declared  to be due  and  payable  prior  to its  stated  maturity,  or such
Contingent Obligation to become payable or cash collateral in respect thereof to
be demanded; or (iii) any Indebtedness or Contingent  Obligations of Borrower on
an aggregate  basis in excess of $50,000 shall be declared due and payable prior
to its  stated  maturity  or cash  collateral  is  demanded  in  respect of such
Contingent Obligations; or

         (f) Insolvency; Voluntary Proceedings.  Borrower (i) generally fails to
pay, or admits in writing its  inability  to pay,  its debts as they become due,
subject to  applicable  grace  periods,  if any,  whether at stated  maturity or
otherwise;  (ii) commences any Insolvency  Proceeding with respect to itself; or
(iii) takes any action to effectuate or authorize any of the foregoing; or

         (g) Involuntary Proceedings.  (i) Any involuntary Insolvency Proceeding
is  commenced  or filed  against  Borrower  or any writ,  judgment,  warrant  of
attachment,  execution or similar process,  is issued or levied against all or a
substantial part of Borrower's  properties,  and any such proceeding or petition
shall not be dismissed, or such writ, judgment, warrant of attachment, execution
or similar process shall not be released, vacated or fully bonded within 60 days
after   commencement,   filing  or  levy;  (ii)  Borrower  admits  the  material
allegations  of a  petition  against  it or  any  of  its  Subsidiaries  in  any
Insolvency  Proceeding,  or an order for  relief is  ordered  in any  Insolvency
Proceeding;  or (iii)  Borrower  acquiesces  in the  appointment  of a receiver,
trustee, custodian,  conservator,  liquidator, mortgagee in possession (or agent
therefor),  or other similar  Person for itself or a substantial  portion of its
property or business; or

         (h)  Monetary  Judgments.  One or more  judgments,  orders,  decrees or
arbitration  awards is entered  against  Borrower  involving in the  aggregate a
liability (to the extent not covered by independent  third-party insurance as to
which the insurer does not dispute  coverage) as to any single or related series
of  transactions,  incidents or  conditions  in excess of $50,000,  and the same
shall remain unsatisfied,  unvacated and unstayed pending appeal for a period of
thirty (30) days after the entry thereof; or

         (i) Loss of  Permit.  Any  Governmental  Authority  revokes or fails to
renew any  material  license,  permit or  franchise  of  Borrower  or any of its
Subsidiaries,  or any such  Person for any reason  loses any  material  license,
permit or franchise, or suffers the imposition of any restraining order, escrow,
suspension or impound of funds in connection  with any  proceeding  (judicial or
administrative) with respect to any material license, permit or franchise; or

                                       29
<PAGE>

         (j) Change of Control or Management. There occurs any Change of Control
or a change of management such that any of the Current Management shall cease or
fail for any  reason to serve  and  function  in their  current  capacity  as an
executive  officer of Borrower and shall not be succeeded in such  position by a
Person reasonably acceptable to the Lender; or

         (k) Invalidity of Loan Documents.  The Loan Documents,  or any of them,
after delivery thereof,  shall for any reason, except to the extent permitted by
the terms thereof,  cease to be in full force and effect and valid,  binding and
enforceable  in  accordance  with their terms,  or, with respect to the Security
Documents,  cease to create a valid and perfected Lien or security interest,  as
the case may be,  of the  priority  required  thereby  on any of the  Collateral
purported to be covered thereby,  except to the extent permitted by the terms of
this Agreement, or Borrower shall so state in writing.

         8.02 Remedies.  If any Event of Default  occurs and is continuing,  the
Lender shall:

         (a) exercise  all rights and remedies  available to them under the Loan
Documents or applicable  law without  presentment,  demand,  protest,  notice of
intention to accelerate, notice of acceleration or any other notice of any kind,
all of which are hereby expressly waived by Borrower, and

         (b)  Notwithstanding  the  foregoing,  upon the occurrence of any event
specified in  Subsection  8.01(f),  or (g), the unpaid  principal  amount of the
Loans and all interest and other amounts as aforesaid shall automatically become
due and payable without further act of the Lender.

         8.03  Set-off.  In  addition  to any rights and  remedies of the Lender
provided by law, if an Event of Default exists,  the Lender is authorized at any
time and from time to time,  without  prior notice to Borrower,  any such notice
being  waived by Borrower to the fullest  extent  permitted  by law, set off and
apply any and all deposits (general or special,  time or demand,  provisional or
final) at any time  held by,  and other  indebtedness  at any time  owing by the
Lender to or for the  credit or the  account  of  Borrower  against  any and all
Obligations  owing to the Lender,  now or hereafter  existing,  irrespective  of
whether  the Lender  shall have made  demand  under this  Agreement  or any Loan
Document and although such Obligations may be contingent or unmatured.

         8.04 Payments Set Aside. To the extent that Borrower makes a payment to
the Lender,  the Lender exercises its right of set-off,  and such payment or the
proceeds  of such  set-off or any part  thereof  are  subsequently  invalidated,
declared to be  fraudulent  or  preferential,  set aside or required  (including
pursuant to any settlement  entered into by the Lender in its  discretion) to be
repaid  to a  trustee,  receiver  or any other  party,  in  connection  with any
Insolvency  Proceeding  or  otherwise,  then to the extent of such  recovery the
obligation or part thereof originally  intended to be satisfied shall be revived
and  continued  in full force and effect as if such payment had not been made or
such set-off had not occurred.

         8.05 Rights Not  Exclusive.  The rights  provided for in this Agreement
and the other Loan  Documents are  cumulative and are not exclusive of any other
rights,  powers,  privileges or remedies  provided by law or in equity, or under
any other instrument, document or agreement now existing or hereafter arising.

                                   ARTICLE IX.
                                  MISCELLANEOUS

         9.01 Amendments and Waivers. No amendment or waiver of any provision of
this  Agreement or any other Loan  Document,  and no consent with respect to any
departure by Borrower therefrom,  shall be effective unless the same shall be in
writing  and  signed by the  Lender  and  Borrower  and then any such  waiver or
consent  shall be effective  only in the specific  instance and for the specific
purpose for which given.

                                       30
<PAGE>

         9.02 Notices.

         (a) Subject to the limitations  set forth in Subsection  9.02(d) below,
Borrower is  authorized  to receive on behalf of itself and any  Subsidiary  all
notices from the Lender at the address,  facsimile  number and  electronic  mail
address for  Borrower set out on Appendix I; and all notices to the Lender shall
be sent to the  Lender at its  address,  facsimile  number and  electronic  mail
address set forth on Appendix I.

         (b) All notices,  requests,  consents and other communications required
or permitted  hereunder or under any other Loan Document shall be in writing and
mailed, faxed,  delivered,  or (subject to Subsection 9.02(d) below) transmitted
by electronic mail, to the address, facsimile number, or electronic mail address
specified  for notices;  or, as directed to  Borrower,  the Lender to such other
address as shall be designated  by such Person in a written  notice to the other
parties,  and as directed to any other party,  at such other address as shall be
designated by such party in a written notice to Borrower and the Lender.

         (c) All such notices,  requests,  consents and communications  shall be
deemed to be given or made, and shall be effective, upon the earlier to occur of
(i) actual receipt by the intended recipient or (ii) (A) if delivered by hand or
by  courier,  when  signed  for  by  the  intended  recipient  or an  authorized
representative  of such recipient;  (B) if delivered by mail, the third Business
Day after the date on which such mail, postage prepaid was deposited in the U.S.
mail;  (C) if  delivered  by  facsimile,  when  transmitted  in legible  form by
facsimile  machine;  and (D) if delivered by electronic  mail or via internet or
intranet  websites  (which  form of  delivery  is subject to the  provisions  of
Subsection 9.02(d) below), when delivered;  provided,  however,  that notice and
other communications to Lender pursuant to Article II or Article VI shall not be
effective until actually received by the Lender.

         (d) Electronic mail and internet and intranet websites may be used only
to distribute  routine  communications,  such as financial  statements and other
information,  and to  distribute  Loan  Documents  for  execution by the parties
hereto, and shall not be recognized for any other purpose.

         (e) Any  agreement of the Lender herein to receive  certain  notices by
telephone or facsimile is solely for the  convenience  and at the request of the
Borrower.  The Lender  shall be entitled to rely on the  authority of any Person
purporting  to be a Person  authorized  by  Borrower to give such notice and the
Lender  shall not have any  liability to Borrower on account of any action taken
or not taken by the Lender in reliance upon such telephonic or facsimile notice.
The  obligation  of Borrower to repay the Loans shall not be affected in any way
or to any extent by any failure by the Lender to receive written confirmation of
any  telephonic  or  facsimile  notice  or  the  receipt  by  the  Lender  of  a
confirmation  which is at variance with the terms understood by the Lender to be
contained in the telephonic or facsimile notice.

         9.03 No Waiver;  Cumulative  Remedies.  No failure to  exercise  and no
delay in  exercising,  on the part of the Lender,  any right,  remedy,  power or
privilege hereunder,  shall operate as a waiver thereof; nor shall any single or
partial exercise of any right, remedy, power or privilege hereunder preclude any
other or further  exercise  thereof or the exercise of any other right,  remedy,
power or privilege.

         9.04  Costs  and  Expenses.   Borrower   shall,   whether  or  not  the
transactions  contemplated  hereby are consummated,  pay or reimburse the Lender
within five (5)  Business  Days after  demand (or the date of Closing if sooner)
for all reasonable costs and expenses  incurred by the Lender in connection with

                                       31
<PAGE>

the development, preparation, delivery, administration and execution of, and any
amendment,  supplement,  waiver or modification to (in each case, whether or not
consummated), this Agreement, any Loan Document and any other documents prepared
in connection  herewith or therewith,  and the  consummation of the transactions
contemplated hereby and thereby, including attorney costs incurred by the Lender
with respect thereto.

         9.05 Indemnity. Whether or not the transactions contemplated hereby are
consummated,  Borrower  shall  indemnify  and hold the  Lender,  and each of its
Affiliates,    officers,    directors,    employees,    counsel,    agents   and
attorneys-in-fact  (each, an "Indemnified Person") harmless from and against any
and  all  liabilities,   obligations,   losses,  damages,  penalties,   actions,
judgments,   suits,  costs,  charges,   expenses  and  disbursements  (including
attorneys' fees and expenses) of any kind or nature  whatsoever which may at any
time  (including  at any time  following  repayment of the Loans) be imposed on,
incurred by or asserted against any Indemnified Person in any way relating to or
arising out of this  Agreement  or any document  contemplated  by or referred to
herein, or the transactions  contemplated hereby, or any action taken or omitted
by any  Indemnified  Person under or in  connection  with any of the  foregoing,
including with respect to any investigation, litigation or proceeding (including
any Insolvency  Proceeding or appellate proceeding) related to or arising out of
this Agreement or the Loans or the use of the proceeds  thereof,  whether or not
any Indemnified Person is a party thereto (all the foregoing,  collectively, the
"Indemnified Liabilities") WHETHER OR NOT SUCH INDEMNIFIED LIABILITIES ARISE OUT
OF OR AS A RESULT OF ANY  INDEMNIFIED  PERSON'S  NEGLIGENCE IN WHOLE OR IN PART,
INCLUDING,  WITHOUT LIMITATION,  THOSE CLAIMS WHICH RESULT FROM THE SOLE, JOINT,
CONCURRENT OR COMPARATIVE  NEGLIGENCE OF THE INDEMNIFIED  PERSON,  OR ANY ONE OR
MORE OF THEM, provided, that Borrower shall not have any obligation hereunder to
any  Indemnified  Person with respect to  Indemnified  Liabilities to the extent
same arise from the gross  negligence or willful  misconduct of such Indemnified
Person  as  determined  by a final  judgment  rendered  by a court of  competent
jurisdiction,  or that  arise  solely  by reason  of  claims  among  Indemnified
Persons;  provided,  however,  no indemnity shall be afforded under this Section
9.05 in respect of any  property  for any  occurrence  arising  from the acts or
omissions of the Lender during the period after which  Borrower,  its successors
or assigns, or their agents or  representatives,  shall have obtained possession
of such Property  (whether by  foreclosure  or deed in lieu of  foreclosure,  as
mortgagee-in-possession  or  otherwise).  The  agreements  in this Section shall
survive payment of all other Obligations.

         9.06 Environmental Indemnification. In addition to the indemnifications
hereunder and under any other Loan Documents,  Borrower shall indemnify, protect
and  hold  each  Indemnified  Person  harmless  from  and  against  any  and all
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
claims,  proceedings,   costs,  expenses  (including,  without  limitation,  all
attorneys'  fees  and  legal  expenses  whether  or not  suit  is  brought)  and
disbursements of any kind or nature  whatsoever which may at any time be imposed
on, incurred by, or asserted against such Indemnified Person, with respect to or
as a direct or indirect  result of the violation by Borrower or each  Subsidiary
of any  Environmental  Law; or with respect to or as a direct or indirect result
of Borrower's or each Subsidiary's  use,  generation,  manufacture,  production,
storage,  release,  threatened  release,  discharge,  disposal  or  presence  in
connection  with the Mortgaged  Properties of a hazardous  substance  including,
without limitation,  (a) all damages of any such use,  generation,  manufacture,
production,   storage,  release,  threatened  release,  discharge,  disposal  or
presence, or (b) the costs of any reasonably required or necessary environmental
investigation, monitoring, repair, cleanup or detoxification and the preparation
and  implementation of any closure,  remedial or other plans (all the foregoing,
collectively,  the "Indemnified Environmental Liabilities").  Borrower agrees to
indemnify and hold each Indemnified  Person harmless as provided in this Section
9.06, WHETHER OF NOT THE INDEMNIFIED  ENVIRONMENTAL  LIABILITIES ARISE OUT OF OR
AS A  RESULT  OF ANY  INDEMNIFIED  PERSON'S  NEGLIGENCE  IN  WHOLE  OR IN  PART,

                                       32
<PAGE>

INCLUDING, WITHOUT LIMITATION, THOSE INDEMNIFIED ENVIRONMENTAL LIABILITIES WHICH
RESULT  FROM THE  SOLE,  JOINT,  CONCURRENT  OR  COMPARATIVE  NEGLIGENCE  OF THE
INDEMNIFIED PERSON, OR ANY ONE OR MORE OF THEM provided,  that Borrower and each
Subsidiary  shall not have any obligation  hereunder to any  Indemnified  Person
with respect to Indemnified  Environmental  Liabilities to the extent same arise
from the gross negligence or willful  misconduct of such  Indemnified  Person as
determined by a final  judgment  rendered by a court of competent  jurisdiction.
The provisions of and undertakings and indemnification set forth in this Section
9.06 shall  survive  (x) the  satisfaction  and payment of the  Obligations  and
termination  of this  Agreement,  and (y) the release of any Liens  securing the
Obligations or the extinguishment of such Liens by foreclosure or action in lieu
thereof.

         9.07 Successors and Assigns.  The provisions of this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors  and assigns,  except that Borrower may not assign or transfer any of
its rights or obligations under this Agreement without the prior written consent
of the  Lender.  The  Lender  may at any  time,  with  prior  written  notice to
Borrower,  assign and delegate to one or more Persons (each an "Assignee")  all,
or any ratable  part of, the Loans and the other rights and  obligations  of the
Lender hereunder.

         9.08 Interest.

         (a) It is the intention of the parties hereto to comply with applicable
usury laws;  accordingly,  notwithstanding any provision to the contrary in this
Agreement,  the Note or in any of the other Loan Documents  securing the payment
hereof or otherwise relating hereto, in no event shall this Agreement,  the Note
or such other Loan Documents require the payment or permit the payment,  taking,
reserving, receiving,  collection, or charging of any sums constituting interest
under applicable laws, if any, which exceed the maximum amount permitted by such
laws. If any such excess interest is called for, contracted for, charged, taken,
reserved,  or received in connection  with the Loans evidenced by the Note or in
any of the Loan  Documents  securing the payment  thereof or otherwise  relating
thereto,  or in any  communication by the Lender or any other person to Borrower
or any other  person,  or in the event all or part of the  principal or interest
thereof shall be prepaid or accelerated, so that under any of such circumstances
or under any other  circumstance  whatsoever  the amount of interest  contracted
for, charged,  taken,  reserved, or received on the amount of principal actually
outstanding  from time to time under the Note shall exceed the maximum amount of
interest permitted by applicable usury laws, then in any such event it is agreed
as follows: (i) the provisions of this paragraph shall govern and control,  (ii)
neither  Borrower nor any other person or entity now or hereafter liable for the
payment and performance of the Obligations  shall be obligated to pay the amount
of such interest to the extent such interest is in excess of the maximum  amount
of interest  permitted by applicable  usury laws, (iii) any such excess which is
or has been received  notwithstanding  this paragraph shall be credited  against
the then unpaid principal balance of the Note or, if the Note have been or would
be paid  in  full,  refunded  to  Borrower,  and  (iv)  the  provisions  of this
Agreement, the Note and the other Loan Documents securing the payment hereof and
otherwise relating hereto, and any communication to Borrower,  shall immediately
be deemed  reformed and such excess interest  reduced,  without the necessity of
executing  any  other  document,  to  the  Highest  Lawful  Rate  allowed  under
applicable  laws as now or  hereafter  construed by courts  having  jurisdiction
hereof or thereof.  Without limiting the foregoing, all calculations of the rate
of the  interest  contracted  for,  charged,  taken,  reserved,  or  received in
connection  with the Note or this  Agreement  which are made for the  purpose of
determining  whether such rate exceeds the Highest  Lawful Rate shall be made to
the extent permitted by applicable laws by amortizing, prorating, allocating and
spreading  during the period of the full term of the Loans,  including all prior
and subsequent renewals and extensions, all interest at any time contracted for,
charged,  taken,  reserved,  or received.  The terms of this paragraph  shall be
deemed to be  incorporated in every document and  communication  relating to the
Note, the Loans or any other Loan Document.

                                       33
<PAGE>

         (b) If the  Contract  Rate exceeds the Highest  Lawful  Rate,  then the
Contract Rate shall be limited to the Highest  Lawful Rate,  but any  subsequent
reductions in the Contract Rate shall not reduce the interest rate thereon below
the Highest  Lawful Rate until the total amount of accrued  interest  equals the
amount of interest  that would have accrued if Contract  Rate had always been in
effect.  If at the  Termination  Date the total interest paid or accrued is less
than the interest  that would have accrued if the Contract  Rate had always been
in effect, then, at that time and to the extent permitted by law, Borrower shall
pay an amount equal to the difference  between:  (a) the lesser of the amount of
interest that would have accrued if the Contract Rates had always been in effect
and the amount of interest  that would have  accrued if the Highest  Lawful Rate
had always  been in  effect;  and (b) the amount of  interest  actually  paid or
accrued on the Note.

         (c) To the extent that the interest rate laws of the State of Texas are
applicable to the Loans,  the applicable  interest rate ceiling is the indicated
(weekly)  ceiling  from  time  to  time  in  affect  under  Texas  Finance  Code
ss.303.001, as limited by Texas Finance Code ss.303.009,  and to the extent that
this  Agreement is deemed an "open end account" as such term is defined in Texas
Finance  Code  ss.301.002(a)(14),  the  Lender  retains  the right to modify the
interest rate in accordance with applicable law.

         9.09  Counterparts  and  Facsimile  Signatures.  This  Agreement may be
executed  in any  number  of  separate  counterparts,  each  of  which,  when so
executed,  shall be  deemed  an  original,  and all of said  counterparts  taken
together shall be deemed to constitute but one and the same instrument. The Loan
Documents may be transmitted  and/or signed by facsimile.  The  effectiveness of
any such documents and  signatures  shall,  subject to applicable  law, have the
same  force and  effect as  manually-signed  originals  and shall be  binding on
Borrower,  the Lender may also require that any such documents and signatures be
confirmed by a manually-signed  original thereof;  provided,  however,  that the
failure to request or deliver the same shall not limit the  effectiveness of any
facsimile document or signature.

         9.10 Severability.  The illegality or unenforceability of any provision
of this Agreement or any instrument or agreement required hereunder shall not in
any way  affect  or impair  the  legality  or  enforceability  of the  remaining
provisions of this Agreement or any instrument or agreement required hereunder.

         9.11 Third Party Beneficiaries. The Lender has been formed for the sole
purpose  of  holding  the  Note  and  exercising  the  rights  and   obligations
contemplated  in this  Agreement and the other Loan Documents for the protection
and legal benefit of the Partners. Notwithstanding the foregoing, this Agreement
and the other Loan  Documents are made and entered into for the sole  protection
and legal  benefit of Borrower,  the Lender,  the  Partners and their  permitted
successors and assigns,  and no other Person shall be a direct or indirect legal
beneficiary  of,  or have any  direct  or  indirect  cause of action or claim in
connection with, this Agreement or any of the other Loan Documents.

         9.12 USA PATRIOT Act Notice.  The Lender hereby notifies  Borrower that
pursuant to the requirements of the USA Patriot Act (Title III of Pub. L. 107-56
(signed  into law October  26,  2001))  (the  "Act"),  it is required to obtain,
verify  and  record  information  that  identifies  Borrower  and  each  of  its
Subsidiaries,  which  information  includes the name and address of Borrower and
each of its  Subsidiaries  and other  information  that will allow the Lender to
identify Borrower and each of its Subsidiaries in accordance with the Act.

         9.13  Governing  Law.  This  Agreement,  the Note,  the  Warrants,  the
Security Documents, and the other Loan Documents shall be governed by, construed
and  interpreted in accordance  with, the laws of the State of Texas,  except to
the extent that federal laws of the United States of America apply.

                                       34
<PAGE>

         9.14 Submission To  Jurisdiction.  With respect to any and all disputes
arising  hereunder,  or under the Note, the Security  Documents,  the other Loan
Documents,  or any of the other instruments and documents executed in connection
herewith  or  therewith  not  settled,  each of Borrower  and the Lender  hereby
irrevocably and unconditionally:

         (a)  submits  for  itself  and its  property  in any  legal  action  or
proceeding relating to this Agreement,  the Note and any document to which it is
a party,  or for  recognition  and enforcement of any judgment in respect of any
thereof, to the non-exclusive general jurisdiction of the courts of the State of
Texas,  the courts of the United States of America for the Northern  District of
Texas, and appellate courts from any thereof;

         (b) consents that any such action or proceeding  may be brought in such
courts,  and waives any objection that it may now or hereafter have to the venue
of any such  action  or  proceeding  in any such  court  (except  to the  extent
applicable  rules  of  procedure  provide  venue  lies  exclusively  in  another
jurisdiction),  or that such action or proceeding was brought in an inconvenient
court and agrees not to plead or claim the same;

         (d) agrees that service of process in any such action or proceeding may
be effected by mailing a copy thereof by  registered  or certified  mail (or any
substantially  similar  form and mail),  postage  prepaid,  to it at its address
specified in Appendix I hereof;

         (e) agrees that nothing herein shall affect the right to effect service
of process in any other manner  permitted by law or shall limit the right to sue
in any other jurisdiction;

         (f) agrees that service upon it or its authorized  agent shall,  to the
fullest  extent  permitted  by law,  constitutes  valid and  effective  personal
service upon it, as the case may be, and that the failure of any such authorized
agent to give any notice of such service to it shall not impair or affect in any
way the  validity  of such  service or any  judgment  rendered  in any action or
proceeding based thereon; and

         (g) waives,  to the fullest  extent  permitted by  applicable  law, any
objection,  including  any  objection  to the  laying  of  venue or based on the
grounds  of forum  non  conveniens,  which it may now or  hereafter  have to the
bringing of any action or  proceeding  in such  jurisdiction  in respect of this
agreement or any document related hereto.

         9.15  Waiver Of Jury Trial.  Borrower  waives,  to the  fullest  extent
permitted by applicable law, its rights to a trial by jury of any claim or cause
of action based upon or arising out of or related to this  Agreement,  the Note,
the  Security  Documents,   the  other  Loan  Documents,   or  the  transactions
contemplated hereby or thereby, in any action, proceeding or other litigation of
any  type  brought  by  any  of the  parties  against  any  other  party  or any
Indemnified  Person,  or  assignee  thereof,  whether  with  respect to contract
claims, tort claims, or otherwise.  Borrower, to the fullest extent permitted by
applicable  law, agrees that any such claim or cause of action shall be tried by
a court trial without a jury.  Without  limiting the  foregoing,  to the fullest
extent permitted by applicable law,  Borrower further agrees that its respective
right  to a trial by jury is  waived  by  operation  of this  section  as to any
action,  counterclaim or other  proceeding  which seeks, in whole or in part, to
challenge  the validity or  enforceability  of this  Agreement or the other Loan
Documents  or any  provision  hereof or thereof.  This waiver shall apply to any
subsequent amendments,  renewals, supplements or modifications to this Agreement
and the other Loan Documents.

         9.16 Entire  Agreement.  This  Agreement,  together with the other Loan
Documents,  embodies the entire agreement and  understanding  among the Borrower

                                       35
<PAGE>

and  Lender  and  supersedes  all  prior  or   contemporaneous   agreements  and
understandings  of such  Persons,  verbal or  written,  relating  to the subject
matter hereof and thereof.

         9.17 NO ORAL  AGREEMENTS.  THIS WRITTEN  AGREEMENT,  TOGETHER  WITH THE
OTHER WRITTEN LOAN  DOCUMENTS  EXECUTED IN CONNECTION  HEREWITH,  REPRESENTS THE
FINAL  AGREEMENT  BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.

           THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

                            [Signature Pages Follow]

                                       36
<PAGE>

         IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their proper and duly  authorized  officers as of
the day and year first above written.

BORROWER:

CUBIC ENERGY, INC.,
a Texas corporation

By: /s/Calvin Wallen, III
   ----------------------
   Calvin Wallen, III
   Chief Executive Officer

<PAGE>

LENDER:

PETRO CAPITAL V, L.P.,
a Texas limited partnership

By: Petro/Cubic Management, LLC,
    a Texas limited ..liability company,
    its General Partner

By: /s/ Tracy Scott Turner
   -----------------------
   Tracy Scott Turner
   Manager

<PAGE>

                                   APPENDIX I

                                CREDIT AGREEMENT

                          dated as of February 6, 2006
                  between Petro Capital V, L.P. (the "Lender")
                       and Cubic Energy, Inc. ("Borrower")

         This Appendix I is attached to and made a part of the Credit Agreement.
All  capitalized  terms not otherwise  defined in this Appendix I are defined in
the Credit Agreement.

Lender:                                                      Principal Address:
------                                                       -----------------

Petro Capital V, L.P.
Attn:  Tracy Scott Turner                                    3838 Oak Lawn Ave.
Phone: (214) 661-7762                                        Suite 1775
Fax:   (214) 661-7760                                        Dallas, Texas 75219
Email: tracy@petro-capital.com

Borrower:                                                    Principal Address:
--------                                                     -----------------

Cubic Energy, Inc.
Attn: Jay Busby                                              9870 Plano Road
Phone: (972) 686-0369                                        Dallas, Texas 75238
Fax:   (972) 681-9687
Email: jay@cubicenergyinc.com

Current Management:

Calvin Wallen, III - President
Jon Stuart Ross - Secretary
James L. Busby - Chief Financial Officer

Current Directors:

Calvin Wallen III
Jon Stuart Ross
Gene Howard
Herbert Bayer
Bob Clements

<PAGE>

1.       LOAN TERMS
         ----------

     A. Maximum Loan Amount - (Section 1.01):                   $7,000,000.00

     B. Initial Loan Amount - (Section 2.01):                   $5,500,000.00

     C. Stated Maturity Date - (Section 1.02):                  February 6, 2009

     D. Debt Service Amount - (Section 2.01)                    $400,000.00

     E. Quarterly Principal Payment Date - (Section 2.03(a))    March 31, 2007

     F. Quarterly Principal Payment Amount - (Section 2.03(a))  $250,000.00

     G. Quarterly Principal Payment Deferral Option - (Section 2.03(a))

                  Provided,  no  Event  of  Default  or  Default  occurs  and is
                  continuing,   and  provided  that  Borrower  is  otherwise  in
                  compliance  with  all of the  terms  and  conditions  of  this
                  Agreement,  Borrower  shall  have the right to defer the first
                  two Quarterly Principal Payments as follows:

                           (i) For the deferral of the first Quarterly Principal
                  Payment,  Borrower  shall  deliver to the Lender,  Warrants to
                  purchase  100,000  shares of common  stock of  Borrower  at an
                  exercise  price equal to the lesser of (a) the exercise  price
                  of the Warrants  issued at Closing in connection  with Section
                  2.04(b) and (b) the thirty (30) day average  closing  price of
                  Borrower's common stock immediately  preceding the due date of
                  such Quarterly Principal Payment; and

                           (ii)  For  the  deferral  of  the  second   Quarterly
                  Principal  Payment,  Borrower  shall  deliver  to the  Lender,
                  Warrants  to  purchase  200,000  shares  of  common  stock  of
                  Borrower at an  exercise  price equal to the lesser of (a) the
                  exercise price of the Warrants issued at Closing in connection
                  with  Section  2.04(b)  and (b) the  thirty  (30) day  average
                  closing price of Borrower's common stock immediately preceding
                  the due date of such Quarterly Principal Payment

     H. Pricing - (Section 2.03(b))

         (i) Contract Rate:                     12.5%

         (ii) Default Rate:                     lesser of:
                                                (i) Contract Rate plus 5% or
                                                (ii) Highest Lawful Rate.

     I. Fees - (Section 2.04)

         (i) Commitment Fee                     2% of Initial Loan Amount.
                                                2% of any additional Loan Amount

<PAGE>

         (ii) Warrants                          1,833,334 shares of Borrower's
                                                Common Stock.

     J. Reporting - (Sections 6.01 and 6.02)

         (i) Annual Audited                     90 days, or sooner to the extent
                                                required by SEC.

         (ii) Quarterly Unaudited               45 days, or sooner to the extent
                                                required by SEC.

         (iii) Status Report                    45 days following the  last day
                                                of each month.

         (iv) Reserve Report                    On or before February 28 of each
                                                year dated as of  December 31 of
                                                the  immediately  preceding year
                                                (in-house)   and  on  or  before
                                                September  30 of each year dated
                                                as  of  June  30  of  such  year
                                                (third party).

     K. Use of Proceeds - (Section 6.11)

              Borrower  shall  use the  proceeds  of the  Loans  (i) to fund the
              acquisition of a 49% working interest in approximately 8,500 acres
              of leasehold  and a 35% working  interest in  approximately  2,500
              acres of leasehold from Tauren,  (ii) for the initial  development
              of such leases,  (iii) for the  acquisition of additional  working
              interests  in the  leases  referenced  in clause  (i)  hereof  and
              additional  leases in Caddo and Desoto Parishes,  Louisiana,  (iv)
              for a drilling  credit to the  principals  of Tauren not to exceed
              $4,500,000 in the  aggregate,  (v) to finance the working  capital
              needs of Borrower and for general  corporate  purposes of Borrower
              in the  ordinary  course of business,  (vi) to finance  Borrower's
              expenses  associated with this  Agreement,  and (vii) to refinance
              Borrower's existing senior secured debt.

2.       ADDITIONAL CLOSING CONDITIONS (Subsection 4.01(f)):
         -----------------------------

         A.       Lender   shall  have   completed  to  its   satisfaction,   an
                  independent engineering review of the Oil and Gas Properties.

         B.       Lender shall have reviewed to its satisfaction, all employment
                  agreements with key management personnel.

         C.       Lender shall have satisfied itself with Borrower's  corporate,
                  legal and tax structure.

         D.       Borrower  shall be current with all required  filings with the
                  SEC and any other  governing  body,  and with the  exchange on
                  which its common stock is traded.

         E.       Borrower  shall have closed on its  acquisition of assets from
                  Tauren.

<PAGE>

         F.       Borrower  shall have repaid its  existing  convertible  senior
                  debt if such debt is not converted on or before  Closing,  and
                  shall have received all  necessary  release  documentation  in
                  connection therewith.

         G.       No Material Adverse Effect shall have occurred with respect to
                  Borrower or the assets to be acquired from Tauren.

         H.       Borrower shall have (i)  established  the Debt Service Account
                  with a bank  mutually  acceptable  to Borrower and the Lender,
                  (ii) entered into a Deposit  Account  Control  Agreement  with
                  such bank in form satisfactory to the Lender,  which names the
                  Lender as the secured party, and (iii) entered into a Security
                  Agreement with the Lender as the secured party,  covering such
                  account.

         I.       The opinion of Financial Advisor and the recommendation of the
                  Special  Committee  described  in Section  5.25 shall not have
                  been withdrawn or modified in any respect.

2.       POST CLOSING CONDITIONS (Subsection 4.02):
         -----------------------

         None.

<PAGE>

                         SCHEDULE I - SECURITY DOCUMENTS

                                CREDIT AGREEMENT
                          dated as of February 6, 2006
                  between Petro Capital V, L.P. (the "Lender")
                       and Cubic Energy, Inc. ("Borrower")

1.       Oil and Gas Properties
         ----------------------

         A.       Mortgage,  Deed of Trust,  Security  Agreement,  Assignment of
                  Production and Financing Statement covering Borrower's Oil and
                  Gas Properties located in:

                            County                      State
                            ------                      -----

                  (i)      Callahan                     Texas

                  (ii)     Eastland                     Texas

                  (iii)    Palo Pinto                   Texas

         B.       Act of Mortgage, Security Agreement,  Assignment of Production
                  and  Financing  Statement  covering  Borrower's  Oil  and  Gas
                  Properties located in:

                           Parish                         State
                           ------                         -----

                  (i)      Caddo                        Louisiana

                  (ii)     Desoto                       Louisiana

2.       Personal Property
         -----------------

         Security  Agreement  from  Borrower in favor of Lender  covering all of
         Borrower's personal property of any kind.

3.       Control Agreement
         -----------------

         Deposit Account Control  Agreement from Borrower in favor of the Lender
         and Depository Bank securing the Debt Service Account to be established
         at a bank mutually  acceptable to Borrower and the Lender  ("Depository
         Bank") for the account of "Cubic Energy,  Inc. Debt Service Account" in
         the original amount of $400,000.00.

4.       Financing Statements
         --------------------

                  Jurisdiction:             Secretary of State of Texas

                  Jurisdiction:             Desoto Parish, Louisiana

<PAGE>

                            SCHEDULE 5.14(c) - TAXES

                                CREDIT AGREEMENT
                          dated as of February 6, 2006
                  between Petro Capital V, L.P. (the "Lender")
                       and Cubic Energy, Inc. ("Borrower")

                                      None.

<PAGE>

                              SCHEDULE 7.01 - Liens

                                CREDIT AGREEMENT
                          dated as of February 6, 2006
                  between Petro Capital V, L.P. (the "Lender")
                       and Cubic Energy, Inc. ("Borrower")

                                      None.

<PAGE>

                          SCHEDULE 7.05 - INDEBTEDNESS

                                CREDIT AGREEMENT
                          dated as of February 6, 2006
                  between Petro Capital V, L.P. (the "Lender")
                       and Cubic Energy, Inc. ("Borrower")

                                      None.

<PAGE>
                  SCHEDULE 7.07 - TRANSACTIONS WITH AFFILIATES

                                CREDIT AGREEMENT
                          dated as of February 6, 2006
                  between Petro Capital V, L.P. (the "Lender")
                       and Cubic Energy, Inc. ("Borrower")

1.       Fossil  Operating,  Inc., a Texas  entity  owned by Calvin  Wallen III,
         President and Chief Executive Officer of Cubic Energy,  Inc., currently
         operates all wells in which Cubic Energy, Inc. owns an interest.  It is
         contemplated  that Fossil  Operating,  Inc.  will  continue to maintain
         operations for Cubic Energy, Inc.

2.       The Office Sharing Agreement,  dated effectively January 1, 2002 and as
         effectively  extended on January 1, 2005,  by and between Cubic Energy,
         Inc. on one hand,  and Tauren,  an entity  owned by Calvin  Wallen III,
         President  and Chief  Executive  Officer of Cubic  Energy,  Inc. on the
         other hand.

3.       Four of Cubic  Energy,  Inc.'s  five  employees  are also  employed  by
         Tauren, an entity owned by Calvin Wallen III..

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