Document:

AMENDED AND RESTATED

                               OPERATING AGREEMENT

                                       OF

                              VAQUERO PARTNERS LLC

            AMENDED AND RESTATED OPERATING AGREEMENT dated as of May 18, 2004 by
and among the Members executing this Agreement as Members.

            WHEREAS, the Members formed a limited liability company pursuant to
the LLC Law (as hereinafter defined);

            WHEREAS, the Members previously had entered into an Operating
Agreement dated August 22, 2003 (the "Prior Agreement");

            WHEREAS, the Members desire to amend the Prior Agreement and to
restate their respective rights and obligations as members of the Company
herein.

            NOW, THEREFORE, in consideration of the agreements and obligations
set forth herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Members hereby agree as
follows.

                                    ARTICLE I
                                   DEFINITIONS

            Section 1.1 Definitions. Capitalized terms used in this Agreement
and not defined elsewhere herein shall have the respective meanings ascribed to
such terms as set forth below.

            "Additional Capital Contribution" shall mean any additional
Contribution to the capital of the Company made by a Member as contemplated in
Section 4.2 hereof.

            "Agreement" shall mean this Operating Agreement as amended from time
to time.

            "Available Cash" shall have the meaning ascribed to such term in
Section 5.3 hereof.

            "Bankruptcy" shall have the meaning ascribed to such term in the LLC
Law (or any successor section thereto).

            "Capital Account" shall mean the account established for each Member
as contemplated in Section 5.1 hereof.

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            "Capital Contribution" shall mean the aggregate amount of the
Initial Capital Contribution plus all Additional Capital Contributions, if any,
contributed to the capital of the Company by a Member as contemplated in
Sections 4.1 and 4.2 hereof.

            "Code" shall mean the Internal Revenue Code of 1986, as amended.

            "Company" shall mean Vaquero Partners LLC, a Texas limited liability
company.

            "Dune" shall mean Dune Energy, Inc., a Delaware corporation.

            "Initial Capital Contribution" shall mean the initial contribution
to the capital of the Company made by a Member as contemplated in Section 4.1
hereof.

            "Interest" shall mean the respective share of a Member in the
profits and losses of the Company and the respective right of a Member to
receive distributions of the Company's assets. The Interests of the Members
shall be Dune - 85% and Vaquero - 15%. A Member's Interest shall be reflected in
the books and records of the Company, and may be further evidenced by a
Certificate of Limited Liability Company Interest in such form as approved by
the required vote of the Members.

            "LLC Law" shall mean the Texas Limited Liability Company Act or any
successor statute as in effect from time to time.

            "Manager" shall mean Alan Gaines and any additions or replacements
selected by the Members in accordance with the provisions of this Agreement.

            "Members" shall mean Dune and Vaquero.

            "Person" shall mean a natural person, partnership (whether general
or limited), limited liability company, trust, estate, association, corporation,
company, custodian, nominee or other individual, entity or organization in its
own or any representative capacity.

            "Producing Well" shall mean an oil and or gas well drilled on lands
leased from the Welder family under that certain Welder Lease as defined herein,
including any amendments thereto or options to lease additional lands from the
Welder family granted thereunder, that shall have been drilled and completed as
a producing well and tied-in to an oil and or gas pipeline and or other similar
delivery system and shall include the acreage and depths allocated to such well
as provided under the Welder Lease.

            "Profit" or "Loss" of the Company means an amount equal to the
Company's taxable income or loss, adjusted as follows: (a) there shall be added
any income exempt from federal income tax and (b) there shall be subtracted any
expenditures that are neither deductible nor chargeable to capital accounts for
Federal income tax purposes.

            "Transfer" shall have the meaning ascribed to such term in Section
10.2 hereof.

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            "Treasury Regulations" shall mean regulations promulgated by the
United States Department of the Treasury under the Code.

            "Vaquero" and "VOG" shall mean Vaquero Oil & Gas, Inc.

            "Welder Lands" shall mean those properties covered under the Welder
Lease and "Option Acreage" included thereunder, all as more particularly
described therein.

            "Welder Lease" shall mean that certain Oil and Gas Lease and Option
Agreement dated August 21,2003, a Memorandum of which is recorded at File
#200314718 of the Official Public Records of Victoria County, Texas, as amended
by Amendment to Oil and Gas Lease and Option Agreement dated February 5, 2003, a
Memorandum of which is recorded at File #200402184 of the Official Public
Records of Victoria County, Texas, and as may be amended from time to time
hereafter.

            "Welder Prospect" shall mean all of the oil and gas interests
subject to the Welder Lease including any renewals or extensions thereof, as
well as the "Option Acreage" identified thereunder, and including the area of
mutual interest covering the existing producing properties and undeveloped
acreage on the Welder Lands heretofore identified by the parties hereto,
together with the related seismic and other data owned by the Company or owned
and developed in the future with respect to the Welder Lands.

                                   ARTICLE II

                               FORMATION AND TERM

            Section 2.1 Formation. The Company was formed as a Texas limited
liability company upon the filing of the Company's original Certificate of
Organization (the "Articles of Organization") on August 7, 2003, with the
Secretary of State of the State of Texas in accordance with the LLC Law.

            Section 2.2 Name. The name of the Company shall be Vaquero Partners
LLC or such other name as may be determined by the required vote of the Members.

            Section 2.3 Term. The term of the Company commenced on August 7,
2003, and shall continue in full force and effect until the earliest to occur of
the following:

            (i)   the dissolution of the Company by a vote of all of the
                  Members;

            (ii)  the retirement, resignation, withdrawal or expulsion of a
                  Member from the Company, the death, legal incompetence,
                  Bankruptcy or insolvency of a Member, the termination,
                  dissolution or liquidation of a Member (without prompt
                  reconstitution or reformation of such Member), or the

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                  occurrence or existence of any other event or condition which
                  shall terminate the continued membership of a Member of the
                  Company as provided in the LLC Law, unless the business of the
                  Company shall be continued by a majority in Interest of the
                  remaining Members within 180 days following the occurrence or
                  existence of any such event or condition (which such remaining
                  Members shall have the right to do); or

            (iii) the entry of a decree of judicial dissolution under the LLC
                  Law.

            Section 2.4 Office. The office of the Company shall be located at
1330 Post Oak Blvd., Suite 1600, Houston, Texas 77056. So long as it remains a
Member, the office of Vaquero shall be located at such location as shall be
approved by the Manager. At any time, the Manager may change the location of the
Company's and Vaquero's office.

                                   ARTICLE III

                               BUSINESS AND POWERS

            Section 3.1 Business. The Company's business and purpose shall be to
engage in the acquisition, development and marketing of oil and gas from the
Welder Lands, as well as to engage in and carry on any lawful business, purpose,
act or activity for which a limited liability company may be organized under the
LLC Law.

            Section 3.2 Powers. The Company shall have the powers, privileges
and authority to take in its name all lawful actions and exercise all powers
granted by this Agreement, the LLC Law and any other law, together with any
powers incidental thereto, which are necessary, useful, appropriate, advisable,
desirable or convenient to the conduct, promotion and attainment of the
business, purposes and activities of the Company.

                                   ARTICLE IV

                CAPITAL CONTRIBUTIONS AND FINANCIAL TRANSACTIONS

            Section 4.1 Initial Capital Contributions. Set forth opposite each
Member's name on Schedule 1 hereto is the amount of such Member's Initial
Capital Contribution. Such amount may be contributed (i) in cash or (ii) upon
the vote of all the Members, in other property having a fair market value (as
agreed among the Members) equal to the amount set forth opposite such Member's
name on Schedule 1 hereto. Such other property may consist of securities or
other interests in corporations, partnerships, limited liability companies or
other Persons.

            Section 4.2 Additional Capital Contributions. From time to time,
upon the request of the Manager, Dune shall be required to contribute Additional
Capital Contributions for costs to develop oil and gas prospects, in an
aggregate amount not to exceed $400,000. Such Additional Capital Contributions

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may be in made in cash or, subject to the provisions of the last two sentences
of Section 4.1 hereof, other property. Notwithstanding the foregoing, an
obligation of the Company to pay, contribute or advance monies to any third
party shall not be construed to obligate the Manager to determine that any
Additional Capital Contributions shall be called. The obligation of Dune to make
Additional Capital Contributions to the Company as contemplated herein is not
intended to, and shall not, create any rights in, or give rise to any benefits
to, any third parties.

            Section 4.3 Borrowing and Lending by the Company. Subject to the
provisions of Section 4.4 hereof, the Company shall have the power and right to
borrow money or property from any Member or other Person (including any Person
which shall be affiliated or associated with the Company or any Member) on such
terms as may be determined by the required vote of the Members. In no event and
at no time shall a creditor of or lender to the Company acquire any rights or
interests, directly or indirectly, in the Company or in the capital, property,
income, gain, profit, loss, deduction or credit of the Company by virtue of
being a creditor of or lender to the Company. The Company shall have the power
and right to lend money or property to any Member or other Person (including any
Person which shall be affiliated or associated with the Company or any Member)
on such terms as may be determined by the required vote of the Members.

            Section 4.4 Advances by Members. If a Member shall advance money or
property to the Company pursuant to Section 4.3 hereof or otherwise (other than
as provided in Sections 4.1 and 4.2 hereof), the amount of such advance shall
not be an Additional Capital Contribution by such Member and shall not increase
such Member's Interest in the Company or entitle such Member to an increase in
such Member's share of the income, gain or profits of the Company, nor subject
such Member to any greater portion of any loss or liability which the Company
may sustain; instead, the amount of such advance shall be indebtedness due from
the Company to such Member, and, except as provided otherwise in Section 4.3
hereof, such indebtedness shall be subject to such terms and shall bear interest
at such rate as determined by the required vote of the Members. Unless otherwise
determined by the required vote of the Members, any such indebtedness shall be
repaid as soon as practicable to such Member, with interest to be paid prior to
the repayment of principal.

            Section 4.5 Withdrawals. Except as determined by the required vote
of the Members, no Member shall have the right to:

            (i)   withdraw all or any portion of such Member's Capital
                  Contribution;

            (ii)  receive any return or interest on any portion of such Member's
                  Capital Contribution; or

            (iii) retire, resign, withdraw or terminate such Member's membership
                  from the Company.

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Notwithstanding the above, each or any of the Members shall be entitled to
require the Company to assign from time to time a working interest in each
Producing Well equal to their proportionate share of the Company's interest in
said Producing Well. For example, if the Company owns a 50% working interest in
a particular well, then Dune may request an assignment of a working interest
equal to 85% of 50%, and Vaquero may request an assignment of a working interest
equal to 15% of 50%. Such assignments of working interests shall be subject to
all leasehold burdens of record.

            Section 4.6 Return of Capital Contributions. Subject to the last two
sentences of Section 4.5, no Member shall be entitled to the return of all or
any portion of such Member's Capital Contribution unless and until:

            (i)   affirmatively approved by the required vote of all of the
                  Members; or

            (ii)  all liabilities of the Company (except liabilities to Members
                  on account of their Capital Contributions) have been paid, and
                  the Company shall have been dissolved without reformation in
                  accordance with Section 2.3 or Article XI hereof and Articles
                  of Dissolution shall have been filed with the Department of
                  State of the State of Texas in accordance with the LLC Law.

                                    ARTICLE V

                  CAPITAL ACCOUNTS; ALLOCATIONS; DISTRIBUTIONS

            Section 5.1 Capital Accounts. A Capital Account shall be established
in the Company's books and records for each Member in accordance with the rules
of Treasury Regulation Section 1.704-l(b)(2)(iv). Consistent therewith, each
Capital Account shall be:

            (i)   increased by (a) the Member's Capital Contributions in the
                  form of cash, (b) the fair market value of the Member's
                  Capital Contributions in the form of property (net of
                  liabilities securing such contributed property that the
                  Company is considered to assume or take subject to), and (c)
                  the amounts allocated to the Member for such Member's share of
                  the income, gain and profits of the Company; and

            (ii)  decreased by (a) the amounts allocated to the Member for such
                  Member's share of the losses and deductions of the Company,
                  (b) the amount of money distributed to the Member by the
                  Company, and (c) the fair market value of property distributed
                  to the Member by the Company (net of liabilities securing such
                  contributed property that such Member is considered to assume
                  or take subject to).

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            Section 5.2 Allocations. Profit and Loss shall be determined and
allocated periodically as the Manager shall determine, but in all events no less
frequently than on an annual basis coinciding with the Company's fiscal year.

      (a)   Profits shall; be allocated as follows:

            (i)   First, among those Members having negative balances in their
                  capital accounts in proportion to and to the extent of such
                  negative balances, then
            (ii)  Next, among the Members in proportion to the excess of the
                  cumulative amount of Losses previously allocated to them
                  pursuant to 5.2 (b)(i) over the cumulative amount of Profits
                  previously allocated to them pursuant to this clause
                  5.2(a)(ii);then
            (iii) Next, 85% to Dune and 15% to Vaquero

      (b)   Losses shall be allocated as follows:

            (i)   First, among the Members in proportion to and to the extent of
                  the positive balances in their Capital Accounts, then
            (ii)  Next 100% to Dune.

            Section 5.3 Distributions. (a) Commencing March 2005, provided the
Company has cash on hand in excess of the amount reasonably anticipated for the
needs of the Company for the immediate future ("Available Cash") the Manager
shall cause the Company to distribute on a quarterly basis an amount of cash
sufficient for the Members (or the principals thereof) to satisfy their
respective income tax obligations arising out of the allocations of Profit made
pursuant to Section 5.2. Subject to the foregoing, distributions shall be made
to the Members as the Manager shall determine. Except as otherwise provided in
Section 11.3 all distributions to the Members pursuant to this Section shall be
made 85% to Dune and 15% to Vaquero.

            (b) Upon the completion of each and every Producing Well as defined
      herein, the Company shall distribute to each Member its proportionate
      interest in such well in the form of an assignment of working interest.
      For example, if the Company owns a 50% working interest in a particular
      well, then the Company shall deliver an assignment of a working interest
      to Dune equal to 85% of 50%, and the Company shall deliver an assignment
      of working interest to Vaquero equal to 15% of 50%. Such assignments of
      working interest shall be subject to all leasehold burdens of record. For
      purposes of such a distribution the proportionate interest of a Member in
      a producing property shall equal such Member's Interest in the Company as
      of the date of distribution

            Section 5.4 Return of Capital Contributions. Except as set forth or
contemplated in Sections 4.5 and 4.6, no Member shall have any right to demand
the return of such Member's Capital Contribution and any profits added thereto
except upon the termination and dissolution of the Company. No Member shall be
paid interest on such Member's Capital Contribution or on such Member's Capital
Account.

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                                   ARTICLE VI

             RIGHTS, LIABILITIES, POWERS AND OBLIGATIONS OF MEMBERS

            Section 6.1 Company Property; No Compensation. Except as set forth
or contemplated in Sections 4.5 and 4.6, a Member shall have no interest in
specific Company property, unless determined by the required vote of the
Members. No Member, in its capacity as such, shall be entitled to any salary,
draw or other compensation from the Company.

            Section 6.2 Powers. The powers of the Members shall include all
powers provided or contemplated in the LLC Law and all powers as generally
pertain thereto or are necessarily incidental thereto. No Member shall have the
authority to bind the Company.

            Section 6.3 Limitations on Liability. Subject to Section 4.3 hereof
and the other provisions of this Section 6.3, no Member personally, solely by
reason of being a member of the Company or acting (or omitting to act) in such
capacity or participating in the conduct of the business of the Company, shall
be liable for all or any portion of the debts, obligations or liabilities of the
Company or the other Member (whether arising in tort, contract or otherwise);
and such debts, obligations and liabilities shall be solely those of the Company
or the other Member, as the case may be, and shall be the responsibility of the
Company or the other Member, as the case may be. Except as otherwise provided in
Section 4.3 hereof, a Member shall have no liability to any other Member or the
Company when acting pursuant to such Member's authority granted pursuant to this
Agreement, except to the extent such Member's acts or omissions shall be
determined to constitute willful misconduct or gross negligence.

            Section 6.4 Liability for Capital Contributions and Returns of
Capital Contributions and Distributions. A Member shall be liable to the Company
for:

            (i)   any difference between such Member's Capital Contribution
                  actually made to the Company and the amount agreed to be made
                  to the Company by such Member as stated in this Agreement
                  (including Schedule 1 hereto) or any other instrument signed
                  by such Member;

            (ii)  any Capital Contribution which such Member shall have agreed
                  in this Agreement (including Schedule 1 hereto) or any other
                  instrument signed by such Member to make to the Company in the
                  future at the time and on the conditions stated herein or
                  therein; or

            (iii) any Capital Contribution or distribution returned, paid or
                  distributed to such Member as and to the extent provided in
                  the LLC Law or except as set forth or contemplated in Sections
                  4.5 and 4.6,.

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            Any liability of a Member to the Company under this Article VI may
be waived or compromised pursuant to the required vote of the Members, unless
such waiver or compromise would adversely affect the rights or claims of any
creditor of the Company who extended credit to the Company in reasonable
reliance on the obligation of a Member or the Members to make a Capital
Contribution or to return a Capital Contribution or property to the Company. A
Member who shall be subject to an obligation to repay any Capital Contribution,
payment or distribution to the Company as required by this Agreement or the LLC
Law shall make such repayment on demand by any Member.

            No Member shall be liable to the Company or its creditors or any
other Member with respect to any amounts paid to such Member as profit sharing,
advance or loan repayment, interest, salary, wage, compensation, rental,
royalty, fee or other payment for value given which shall not be paid to such
Member as a return of such Member's Capital Contribution or as a distribution.

            Section 6.5 Transactions with the Company; Compensation. A Member or
any Person affiliated or associated with a Member may act as surety, guarantor,
endorser or provider of collateral for the Company. A Member may not transact
business with the Company unless the terms and conditions of such transaction
are approved by the other Member. Nothing in this Agreement shall be construed
to preclude a Member from serving the Company in any other capacity as an
employee, agent, contractor or otherwise and receiving compensation and expense
reimbursement therefor, provided that such service, the terms and conditions
thereof, and such compensation and expense reimbursement shall be approved by
the other Member. Contributions of capital and distributions in accordance with
the terms hereof shall not be deemed to be the transaction of business with the
Company.

            Section 6.6 Other Business Activities. For so long as Vaquero shall
be a Member and for a period of three years thereafter, Vaquero, together with
its principals Rick Trapp and Paul Williams, shall not engage in or possess
directly or indirectly, any interest in other businesses and ventures of any
kind, nature or description, independently or with others, relating in any
manner to the Welder Lease, the Welder Lands and all areas contemplated under
that certain Area of Mutual Interest Agreement dated as of November 17, 2004.
Vaquero, Trapp and Williams shall not be required to devote their full time,
effort and resources to the Company's business, and except as prohibited in the
first sentence of this Section 6.6, Vaquero, Trapp and Williams may (i) engage
in oil and gas exploration activities which may be competitive with the Company
or its business and (ii) participate in oil and gas opportunities offered from
third parties without the need to first offer the Company the opportunity to
participate with such third party.

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            Section 6.7. Limitations on Power of Members. Notwithstanding
anything stated herein to the contrary, no Member shall not have authority
hereunder to cause the Company to engage in the following transactions without
first obtaining the unanimous vote or written consent of the Members:

            (i)   to do any act in contravention of this Operating Agreement;

            (ii)  to possess the Company's property or assign, transfer,
                  mortgage, pledge, or grant a security interest in and/or a
                  deed of trust with respect to the Company's property for other
                  than a Company purpose, except as otherwise expressly set
                  forth herein; or

            (iii) to enter into, amend, modify or waive any rights with respect
                  to any contract, agreement or transaction with any Member.

                                   ARTICLE VII

                            MANAGEMENT OF THE COMPANY

            Section 7.1 Management. The ordinary and usual decisions concerning
the business and affairs of the Company shall be made by the Manager. The
Manager shall exercise all powers of the Company and do all lawful acts and
things for, on behalf of, and in the name of, the Company. The Manager of the
Company shall be Alan Gaines.

            Section 7.2 Term of Office as Manager. The Manager shall not have
any contractual right to such position. The Manager shall be appointed by the
required vote of the Members and shall serve until his removal by the required
vote of the Members.

            Section 7.3 Authority; Designation of Agents. Only the Manager and
agents expressly authorized in writing by the Manager shall have the authority
to bind the Company. The Manager may designate one or more agents of the
Company. Agents shall possess and exercise the powers and authority and perform
the duties as shall be determined by the required vote of the Manager. The
Members may engage and compensate, on behalf of the Company and from Company
funds, such advisers, attorneys, accountants, auditors and other providers of
services (any or all of which may be Persons affiliated or associated with the
Company or any Member) as shall be determined by the required vote of the
Members.

            Section 7.4 Compensation. The salaries or other compensation of the
agents of the Company shall be determined by the Manager, provided that no
compensation shall be paid to Dune or any of its affiliates unless the terms and
conditions on which such compensation is paid are approved by Vaquero.

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                                  ARTICLE VIII

                                 MEMBER MATTERS

            Section 8.1 Meetings of Members; Notice. Meetings of the Members for
any purpose may be called at any time by the Manager. Any Member may request a
meeting of the Members by delivering written notice to the Manager. Not later
than ten (10) days following receipt of such request, the Manager shall call a
meeting of the Members at the place specified in the Member's request. If the
Manager shall not call a meeting within said time period, then a Member may call
a meeting of the Members by delivering written notice to the other Member at
least ten (10) days prior to the date of the requested meeting. Meetings of the
Members need not take place within the state of Texas.

            Section 8.2 Proxies. At all meetings of the Members, a Member may
vote in person, by an authorized agent or attorney-in-fact or by a proxy
executed in writing by such Member or by such Member's authorized agent or
attorney-in-fact.

            Section 8.3 Quorum and Required Vote at Meetings of Members. Members
holding not less than 51% of the Interests in the Company, present in person or
represented by an authorized agent or attorney-in-fact or by a proxy, shall
constitute a quorum for the transaction of all business by the Members at a
meeting of the Members. The affirmative vote of Members holding not less than
51% of the Interests in the Company, present in person or represented by an
authorized agent or attorney-in-fact or by a proxy, at a meeting of the Members
at which a quorum is present, shall be the act of the Members with respect to
any and all matters voted or agreed upon, consented to or approved. Whenever any
reference shall be made in this Agreement to action, consent, agreement or
approval by the required vote of the Members, such reference shall mean the
affirmative vote of Members holding not less than 51% of the Interests in the
Company as required by this Section 8.3.

            Section 8.4 Action by Members Without a Meeting. Any action required
or permitted to be taken at a meeting of the Members may be taken by the Members
without a meeting if the action shall be evidenced by one or more written
consents describing the action taken and signed by Members having the required
vote to approve the action so taken. Written consent of the Members pursuant to
this Section 8.4 shall have the same force and effect as a vote of the Members,
and may be stated as such in any document. Prompt notice of the taking of any
action without a meeting by less than unanimous consent of the Members shall be
given to the Members who did not so consent in writing to such action.

            Section 8.5 Telephone Meetings of Members. Members may participate
in a meeting of the Members by means of conference telephone or similar
communications equipment by means of which all Members participating in the
meeting can hear each other. Participation by Members by such means shall
constitute presence in person of such Members at such meeting.

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                                   ARTICLE IX

                         BOOKS AND RECORDS; FISCAL YEAR

            Section 9.1 Books of Account and Records. At all times during the
term of the Company, the Company shall keep or cause to be kept, at the office
of the Company indicated in Section 2.4 hereof, all books, records, documents
and instruments of the Company, including without limitation such as are
required pursuant to the LLC Law or other applicable law.

            Section 9.2 Inspection. All books, records, documents and
instruments required to be maintained under Section 9.1 hereof and pursuant to
the LLC Law or otherwise shall be made available to a Member or such Member's
authorized agent or attorney-in-fact, upon reasonable demand, during ordinary
business hours for inspection and copying at the reasonable expense of such
Member.

            Section 9.3 Fiscal Year. The fiscal year of the Company shall begin
on January 1st and end on the next following December 31st of each calendar
year, except that the first fiscal year of the Company shall be the period (even
if less than 12 calendar months) beginning as of the date of this Agreement and
ending on the next following December 31st, and the final fiscal year of the
Company shall be the period beginning January 1st of the year of dissolution of
the Company and ending on the date of the filing of the Company's Articles of
Dissolution.

            Section 9.4 Accountings. The auditors, if any, of the Company shall
be determined by the required vote of the Members. The fees of the auditors
shall be an ordinary Company business expense. Notwithstanding the foregoing,
any Member from time to time may request that, at such Member's expense, an
audit of the books and records of the Company be performed by a firm of
independent public accountants of such Member's choice.

                                    ARTICLE X
                           RESTRICTION ON RESIGNATIONS
                           AND TRANSFERS OF INTERESTS

            Section 10.1 Restriction on Resignation. At no time and in no event
may a Member resign, retire, withdraw or otherwise terminate such Member's
membership in the Company without the prior written consent of all other
Members, and any action purporting to effect such resignation, retirement,
withdrawal or termination shall constitute a breach of this Agreement by such
Member.

            Section 10.2 Transfer Restrictions. (a) So long as Vaquero is
performing services for the Company pursuant to the Agreement dated as of the
date hereof (and any amendment, modification, renewal or extension of such
agreement, the "Drilling Agreement") no Member may sell, assign, transfer,
convey, pledge, hypothecate, grant any interest in, encumber or otherwise
dispose of, in whole or in part (each a "Transfer"), such Member's Interest in
the Company without the prior written consent of all other Members, unless such
Transfer shall occur through operation of law and shall be to an heir, executor,

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administrator, guardian, conservator, receiver or trustee of such Member, or
other legal or personal representative or successor in interest of such Member,
and any action or document purporting to effect or evidence a Transfer other
than in accordance herewith shall be null, void and ineffective and shall
constitute a breach of this Agreement by such Member.

            From and after the date on which Vaquero is no longer performing
services for the Company pursuant to the Drilling Agreement, Vaquero may sell
all but not less than all of its interest in the Company to a third party
subject to a 45 day right of first refusal in favor of the Company as provided
in the following subsections.

      (b) If at any time Vaquero proposes to transfer its Interest in the
Company, it (the "Selling Member") shall give the Company written notice of its
intention to make the transfer (the "Transfer Notice"), which Transfer Notice
shall include (i) a description of the Interest to be transferred ("Offered
Interest"), (ii) the identity of the prospective transferee(s), and (iii) the
consideration and the material terms and conditions upon which the proposed
transfer is to be made. The Transfer Notice shall certify that the Selling
Member has received a bona fide offer from the prospective transferee(s) and in
good faith believes a binding agreement for the transfer is obtainable on the
terms set forth in the Transfer Notice. The Transfer Notice shall also include a
copy of any written proposal, term sheet or letter of intent or other agreement
relating to the proposed transfer.

      (c) The Company shall have an option for a period of 30 days from receipt
of the Transfer Notice to elect to purchase the Offered Interest at the same
price and subject to the same material terms and conditions as described in the
Transfer Notice. The Company may exercise such purchase option and, thereby,
purchase all of the Offered Interest by notifying the Selling Member in writing
before expiration of such 30-day period. If the Company gives the Selling
Shareholder notice that it desires to purchase all but not less than all of such
Interest, then payment for the Offered Interest shall be by check or wire
transfer, against delivery of the Offered Interest to be purchased at a place
agreed upon between the parties and at the time of the scheduled closing
therefor, which shall be no later than 45 days after the Company's receipt of
the Transfer Notice, unless the Transfer Notice contemplated a later closing
with the prospective third party transferee(s). If the Company fails to purchase
all of the Offered Interest by exercising the option granted in this Section 5.2
within the period provided, the Selling Member shall have a period of 30
business days from the expiration of the 30-days referred to above in which to
sell the Offered Interest, upon terms and conditions (including the purchase
price) no more favorable to the transferee(s) than those specified in the
Transfer Notice. In the event Selling Member does not consummate the sale or
disposition of the Offered Interest within the 30-day period from the expiration
of these rights, the Company's first refusal rights shall continue to be
applicable to any subsequent disposition of the Offered Interest by Selling
Member until such right lapses in accordance with the terms of this Agreement.

            Section 10.3 Mandatory Redemption of Interests. Upon the occurrence
of any of the following:

                                       13
<PAGE>

            (i)   the death or disability of Trapp or Williams; or

            (ii)  the termination of the Drilling Agreement between the Company,
                  VOG, Trapp and Williams, unless the Drilling Agreement is
                  extended by mutual agreement in writing and signed by all of
                  the parties.

            then the Company shall redeem the full Interest of VOG hereunder in
      exchange for the Company's assignment to VOG of 15% of the Company's
      interest in and to the Company's existing producing properties and
      undeveloped leases on the Welder Lands and related areas of mutual
      interest.

            The parties hereto expressly agree that in the event of a redemption
by the Company of VOG's Interest in the Company, then all rights to operatorship
shall vest exclusively in the Company and the Company shall remain the sole
owner of any license acquired from Seitel with respect to the Welder Lands.

                                   ARTICLE XI

                     DISSOLUTION AND WINDING UP; REFORMATION

            Section 11.1 Dissolution and Winding Up. Upon the occurrence or
existence of an event or condition specified in Section 2.3 hereof, the Company
shall dissolve and its affairs shall be promptly wound up.

            Section 11.2 Authority to Wind Up. Except as otherwise provided in
the LLC Law, in the event that the winding up of the affairs of the Company
shall be required under this Agreement or the LLC Law, the winding up activities
and functions shall be managed and conducted by all Members or a committee
thereof determined by the required vote of the Members for such purpose.

            Section 11.3 Distribution of Assets upon Winding Up. Upon the
winding up of the affairs of the Company, the assets and properties of the
Company shall be distributed as follows:

            (i)   first, to creditors, including Members who are creditors, to
                  the extent permitted by law, in satisfaction of liabilities of
                  the Company, whether by payment or by establishment of
                  adequate reserves, other than liabilities for distributions to
                  Members under the LLC Law, then;
            (ii)  next, to Members and former Members in satisfaction of
                  liabilities for distributions under the LLC Law;
            (iii) next, all remaining properties, shall be distributed to each
                  of the Members in kind in accordance with their respective
                  Interests in the Company, including any existing producing
                  properties and undeveloped leases on the Welder Lands and
                  related areas of mutual interest .

                                       14
<PAGE>

      For purposes of determining the amounts distributed to the Members in
accordance with this Section and the amount of any property to be distributed to
the Members pursuant to clause 11.3(iii), the Company shall engage an
engineering consultant acceptable to both Members to determine the fair market
value of any properties and interests in properties distributed or to be
distributed to the Members.

            Section 11.4 Termination. Upon completion of the distribution of the
Company's assets as provided in this Article XI and the completion of the
winding up of the affairs of the Company, the Company shall be terminated, and
the Members shall cause the filing of the Articles of Dissolution pursuant to
the LLC Law and shall take all other actions as may be necessary to terminate
the Company.

            Section 11.5 Claims of Members. The Members shall look solely to the
Company's assets for the return of their Capital Contributions, and if the
assets of the Company remaining after the payment or discharge of the debts,
claims, obligations, liabilities, losses, damages, costs or expenses of the
Company shall be insufficient to return such Capital Contributions, the Members
shall have no recourse against the Company or any other Member.

            Section 11.6 Reformation. Nothing contained in this Agreement shall
impair, restrict or limit the rights and powers of the Members, under the LLC
Law or the law of any other jurisdiction, to reform and reconstitute themselves
as a limited liability company or other entity either under provisions identical
to those set forth herein or any others which they shall deem appropriate
following the dissolution of the Company.

                                   ARTICLE XII

                                   AMENDMENTS

            Section 12.1 Amendments. The Articles of Organization and this
Agreement may only be amended upon the affirmative required vote of the Members,
and any such amendment shall be evidenced by a written instrument signed by all
Members, provided that if any such amendment would disproportionately affect any
Member, such amendment shall be deemed effective only upon the affirmative vote
of such Member and no amendment of Articles III-VII, X, XI or XII shall take
place without the consent of all Members. No additional Members may be admitted
without the consent of all of the Members.

                                  ARTICLE XIII

                                     NOTICES

            Section 13.1 Effective Notice. Notices to Members shall be in
writing and may be delivered personally, by certified or registered mail
(postage prepaid, return receipt requested), by courier, or by telecopy (with
prompt telephonic confirmation by the transmitting party of appropriate receipt

                                       15
<PAGE>

by the addressee). Notice shall be deemed to be given when actually delivered to
the address of a Member appearing on Schedule 1 hereto or otherwise on the books
and records of the Company.

            Section 13.2 Waiver of Notice. Whenever notice shall be required to
be given by the LLC Law or this Agreement, a written waiver of notice, signed by
the Member entitled thereto, whether before or after the time stated in the
notice, shall be deemed equivalent to notice. Attendance of a Person at a
meeting shall constitute a waiver of notice of such meeting, except when such
Person shall attend such meeting for the express purpose of objecting, at the
beginning of such meeting, to the transaction of any business because such
meeting is not lawfully called or convened. Neither the business to be
transacted at, nor the purpose of, any meeting of the Members need be specified
in any written waiver of notice.

                                   ARTICLE XIV

                   REPRESENTATIONS, WARRANTIES AND AGREEMENTS

            Section 14.1 Representations, Warranties and Agreements. Each Member
hereby represents and warrants to, and agrees with, the other Members as
follows:

            (1) The Member has full power, authority and legal capacity and is
permitted by applicable laws, rules and regulations to execute, deliver and
perform the Member's obligations under this Agreement.

            (2) This Agreement has been duly executed and delivered by the
Member, constitutes a legal, valid and binding agreement of the Member, and is
enforceable against the Member in accordance with the terms hereof, subject as
to enforceability to applicable bankruptcy, insolvency, reorganization,
moratorium, receivership, conservatorship or other similar laws relating to or
affecting generally the enforcement of creditors' rights and to general
principles of equity (regardless of whether enforceability is considered in a
proceeding at law or in equity).

            (3) The execution, delivery and performance of this Agreement by the
Member do not violate any law, rule, regulation, judgment, order, writ,
injunction or decree binding on or applicable to the Member, and do not conflict
with, result in a breach of or default under, or require any consent under, any
contract, agreement or instrument to which the Member is a party or by which the
Member or the Member's properties are subject.

            (4) No governmental or regulatory consents, authorizations,
licenses, registrations or qualifications are required to be obtained by the
Member with respect to this Agreement.

            (5) The Member is not subject to any law, rule, regulation,
judgment, order, writ, injunction, decree, contractual obligation or duty that
in any way restricts, could violate or could otherwise prevent the Member's

                                       16
<PAGE>

executing, delivering and performing the Member's obligations under this
Agreement, the Member's making the investment contemplated in this Agreement, or
the Member's becoming a member of the Company or carrying out the Member's
obligations and conducting the business operations of the Company.

            (6) The Member acknowledges the significant transfer restrictions on
the Member's Interest in this Agreement, understands the illiquidity of the
investment contemplated in this Agreement, and understands that there is no
market and there may never be a market for the purchase and sale of the Member's
Interest in the Company.

            Section 14.2 Continuing Effect. The representations, warranties and
agreements set forth in Section 14.1 hereof shall be continuing at all times
during the term of this Agreement, and if at any time any event or condition
shall occur or exist which could make any of the foregoing incomplete,
inaccurate or non-complying in any respect, the Member shall immediately give
written notice thereof to the other Members.

                                   ARTICLE XV

                  GOVERNING LAW, ARBITRATION AND INTERPRETATION

            Section 15.1 Governing Law. This Agreement shall be governed by, and
construed and enforced in accordance with, the substantive law of the State of
Texas without reference to its choice of law doctrine.

            Section 15.2 Arbitration. If any claim, controversy or dispute
between or among any Members shall arise with respect to, under or out of, or in
connection with, this Agreement, any matter covered hereby, any breach hereof or
the enforceability hereof, or the business, affairs, operation or management of
the Company, such claim, controversy or dispute shall be settled by binding
arbitration conducted in the State of Texas in accordance with and pursuant to
the Commercial Rules of Arbitration of the American Arbitration Association then
in effect.

            Section 15.3 Severability. If any provision of this Agreement or the
application thereof to any Person or circumstance shall be held to be invalid,
illegal, unenforceable or inconsistent with any present or future law, ruling,
rule or regulation of any court or governmental or regulatory authority having
jurisdiction over the subject matter of this Agreement, such provision shall be
rescinded or modified in accordance with such law, ruling, rule or regulation,
and the remainder of this Agreement, or the application of such provision to the
Persons or circumstances other than those as to which it shall be held
inconsistent, shall not be affected thereby and shall be enforced to the
greatest extent permitted by law.

            Section 15.4 Captions. All captions contained in this Agreement are
for convenience of reference only, and shall not affect the interpretation or
construction of any of the terms hereof.

                                       17
<PAGE>

                                   ARTICLE XVI

                          NO THIRD PARTY BENEFICIARIES

            Section 16.1 No Third Party Beneficiaries. Except as otherwise
provided in this Agreement, a Person not a party to this Agreement shall have no
rights, interests or obligations hereunder. Any agreement to pay any amount
(including any agreement between the Members to make Capital Contributions or to
advance money or property to the Company) and any assumption of liability
contained herein, express or implied, shall only be for the benefit of the
Members; and such agreement or assumption shall not inure to the benefit of the
obligees of any indebtedness or any other Person whomsoever, it being the
intention of the Members that no Person shall be deemed to be a third party
beneficiary of this Agreement.

                                  ARTICLE XVII

                               REMEDIES; NO WAIVER

            Section 17.1 Remedies; No Waiver. No waiver of any breach of this
Agreement or of any objection to any act or omission in connection herewith
shall be implied or claimed by any party hereto or be deemed to constitute a
consent to any continuation of such breach, act or omission, unless in each such
case pursuant to a written instrument signed by all Members, and then only to
the extent set forth therein. A failure or delay by a Member in exercising any
right, power, privilege or remedy in respect of this Agreement shall not be
presumed to operate as a waiver thereof, and a single or partial exercise of any
right, power, privilege or remedy shall not be presumed to preclude any
subsequent or further exercise of that right, power, privilege or remedy or the
exercise of any other right, power, privilege or remedy.

                                       18
<PAGE>

                                  ARTICLE XVIII

                                ENTIRE AGREEMENT

            Section 18.1 Entire Agreement. The Articles of Organization and this
Agreement contain the entire understanding and agreement among the Members with
respect to the subject matter hereof and thereof, and supersede any prior
understandings and agreements (whether written or oral) among the Members with
respect to the subject matter hereof and thereof. If any of the matters covered
by this Agreement were performed or commenced by the Members prior to their
execution and delivery of this Agreement, this Agreement shall be deemed to
govern such prior actions as if it had been executed and delivered by the
Members prior to such action being undertaken.

                                   ARTICLE XIX

                              COUNTERPART EXECUTION

            Section 19.1 Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original instrument and all of
which taken together shall constitute one and the same agreement. Each Member
shall become bound by this Agreement immediately upon such Member's execution
and delivery hereof and independently of the execution and delivery hereof by
the other Members.

            IN WITNESS WHEREOF, this Amended and Restated Operating Agreement of
Vaquero Partners LLC has been duly executed and delivered by or on behalf of the
Members as of the date first set forth above.

DUNE ENERGY, INC.                               VAQUERO OIL & GAS, INC.

By: /s/ Alan Gaines                             By: /s/ Rick Trapp
----------------------------                        ----------------------------
    Name: Alan Gaines                               Name: Rick Trapp
    Title: Chairman                                 Title: President

                                       19VERITY,
INC.

NONSTATUTORY
STOCK OPTION AGREEMENT

          THIS
NONSTATUTORY STOCK OPTION AGREEMENT (the “Option
Agreement”) is made and entered into as of the date stated on the Notice of Grant of Stock Option which
incorporates this Option Agreement by reference, by and between Verity, Inc.
and the person named on the Notice of Grant
of Stock Option (the “Optionee”).

          The
Company has granted to the Optionee an option to purchase certain shares of
Stock, upon the terms and conditions set forth in this Option Agreement and the
Notice of Grant of Stock Option (the “Option”).

          1.          Definitions and Construction.

                       1.1           Definitions.  Whenever
used herein, the following terms shall have their respective meanings set forth
below:

                                       (a)          “Board” means the Board of Directors of the
Company.  If one or more Committees have
been appointed by the Board to administer the Plan, “Board” also means such
Committee(s).

                                       (b)          “Code” means the Internal Revenue Code of
1986, as amended, and any applicable regulations promulgated thereunder.

                                       (c)          “Committee” means the Compensation
Committee or other committee of the Board duly appointed to administer the Plan
and having such powers as shall be specified by the Board.  Unless the powers of the Committee have been
specifically limited, the Committee shall have all of the powers of the Board
granted herein, including, without limitation, the power to amend or terminate
the Plan at any time, subject to the terms of the Plan and any applicable
limitations imposed by law.

                                       (d)          “Company” means Verity, Inc., a Delaware
corporation, or any successor corporation thereto.

                                       (e)          “Consultant” means any person, including an
advisor, engaged by a Participating Company to render services other than as an
Employee or a Director.

                                       (f)          “Director” means a member of the Board or
of the board of directors of any other Participating Company

                                       (g)          “Disability” means the permanent and total
disability of the Optionee within the meaning of Section 22(e)(3) of the Code.

                                       (h)          “Employee” means any person treated as an
employee (including an officer or a Director who is also treated as an employee)
in the records of a Participating Company; provided, however, that neither
service as a Director nor payment of a director’s fee shall be sufficient to
constitute employment for purposes of the Plan.

1.

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

                                       (j)          “Exercise Price” means the price stated in
the Notice of Grant of Stock Option that
is to be paid per share of Stock issued under this Option, as adjusted from
time to time pursuant to Section 9.

                                       (k)          “Fair Market Value” means, as of any date,
the value of a share of stock or other property as determined by the Board, in
its sole discretion, or by the Company, in its sole discretion, if such
determination is expressly allocated to the Company herein.

                                       (l)          “Initial Exercise Date” means, as
applicable, either the Initial Vesting Date as stated in the Notice of Grant of Stock Option, or if this
Option is granted to an Employee eligible for overtime pay (as determined under
the Fair Labor Standards Act of 1938, as amended), then the later of the
Initial Vesting Date and six (6) months after the Date of Grant set forth in
the Notice of Grant of Stock Option.

                                       (m)          “Number of Option Shares” means the number
of shares of Stock that is stated on the Notice
of Grant of Stock Option as initially being subject to this Option,
as adjusted from time to time pursuant to Section 9.

                                       (n)          “Option Expiration Date” means the date
eight (8) years after the Date of Option Grant.

                                       (o)          “Parent Corporation” means any present or
future “parent corporation” of the Company, as defined in Section 424(e) of the
Code.

                                       (p)          “Participating Company” means the Company
or any Parent Corporation or Subsidiary Corporation.

                                       (q)          “Participating Company Group” means, at any
point in time, all corporations collectively, each of which is then a
Participating Company.

                                       (r)          “Plan” means the Verity, Inc. 1996
Nonstatutory Stock Option Plan.

                                       (s)          “Securities Act” means the Securities Act
of 1933, as amended.

                                       (t)          “Service” means the Optionee’s employment
or service with the Participating Company Group, whether in the capacity of an
Employee, a Director or a Consultant. 
The Optionee’s Service shall not be deemed to have terminated merely
because of a change in the capacity in which the Optionee renders Service to
the Participating Company Group or a change in the Participating Company for
which the Optionee renders such Service, provided that there is no interruption
or termination of the Optionee’s Service. 
The Optionee’s Service shall be deemed to have terminated either upon an
actual termination of Service or upon the corporation for which the Optionee
performs Service ceasing to be a Participating Company.  Subject to the foregoing, the Company, in
its sole discretion, shall determine whether the Optionee’s Service has
terminated and the effective date of such termination.

2.

                                       (u)          “Stock” means the common stock, $0.001 par
value, of the Company, as adjusted from time to time in accordance with Section
4.2 of the Plan.

                                       (v)          “Subsidiary Corporation” means any present
or future “subsidiary corporation” of the Company, as defined in Section 424(f)
of the Code.

                       1.2          Construction. 
Captions and titles contained herein are for convenience only and shall
not affect the meaning or interpretation of any provision of this Option
Agreement.  Except when otherwise
indicated by the context, the singular shall include the plural, the plural
shall include the singular and the term “or” shall include the conjunctive as
well as the disjunctive.

          2.          Tax Consequences.  This Option is intended to be a nonstatutory
stock option and shall not be treated as an “incentive stock option” (within
the meaning of Section 422(b) of the Code). 
Taxation of a nonstatutory stock option is discussed in the prospectus
for the Plan.

          3.          Administration.  All questions of interpretation concerning
this Option Agreement shall be determined by the Board, including any duly
appointed Committee of the Board.  All
determinations by the Board shall be final and binding upon all persons having
an interest in the Option.  Any officer
of a Participating Company shall have the authority to act on behalf of the
Company with respect to any matter, right, obligation, or election which is the
responsibility of or which is allocated to the Company herein, provided the
officer has apparent authority with respect to such matter, right, obligation,
or election.

          4.          Exercise of the Option.

                       4.1          Right to Exercise. 
Except as otherwise provided herein, the Option shall be exercisable on
and after the Initial Exercise Date and prior to the termination of the Option
(as provided in Section 6) in an amount not to exceed a percentage of the
Number of Option Shares that is equal to the Vested Percentage on the date of
exercise for such amount less the number of shares previously acquired upon
exercise of the Option.

                       4.2          Method of Exercise.  Exercise
of the Option shall be by written notice to the Company which must state the
election to exercise the Option, the number of whole shares of Stock for which
the Option is being exercised and such other representations and agreements as
to the Optionee’s investment intent with respect to such shares as may be
required pursuant to the provisions of this Option Agreement.  The written notice must be signed by the
Optionee and must be delivered in person, by certified or registered mail,
return receipt requested, by confirmed facsimile transmission, or by such other
means as the Company may permit, to the Chief Financial Officer of the Company,
or other authorized representative of the Participating Company Group, prior to
the termination of the Option as set forth in Section 6, accompanied by (i)
full payment of the aggregate Exercise Price for the number of shares of Stock
being purchased and (ii) an executed copy, if required by the Company, of any
representation and/or warranty referenced below.  The Option shall be deemed to be exercised upon receipt by the
Company of such written notice, the aggregate Exercise Price, and, if required
by the Company, such executed agreements.

3.

                       4.3          Payment of Exercise Price.

                                      (a)          Forms of Consideration Authorized.  Except as otherwise provided
below, payment of the aggregate Exercise Price for the number of shares of
Stock for which the Option is being exercised shall be made (i) in cash, by
check, or cash equivalent, (ii) by tender to the Company of whole shares of
Stock owned by the Optionee having a Fair Market Value (as determined by the
Company without regard to any restrictions on transferability applicable to
such stock by reason of federal or state securities laws or agreements with an
underwriter for the Company) not less than the aggregate Exercise Price, (iii)
by means of a Cashless Exercise, as defined in Section 4.3(c), (iv) in the
Company’s sole discretion at the time the Option is exercised, by cash for a
portion of the aggregate Exercise Price not less than the par value of the
shares being acquired and the Optionee’s promissory note for the balance of the
aggregate Exercise Price, or (v) by any combination of the foregoing.

                                      (b)          Tender of Stock. 
Notwithstanding the foregoing, the Option may not be
exercised by tender to the Company of shares of Stock to the extent such tender
of Stock would constitute a violation of the provisions of any law, regulation
or agreement restricting the redemption of the Company’s stock.  The Option may not be exercised by tender to
the Company of shares of Stock unless such shares either have been owned by the
Optionee for more than six (6) months or were not acquired, directly or
indirectly, from the Company.

                                      (c)          Cashless Exercise. 
A “Cashless Exercise”
means the assignment in a form acceptable to the Company of the proceeds of a
sale or loan with respect to some or all of the shares of Stock acquired upon
the exercise of the Option pursuant to a program or procedure approved by the
Company (including, without limitation, through an exercise complying with the
provisions of Regulation T as promulgated from time to, time by the Board of
Governors of the Federal Reserve System). 
The Company reserves, at any and all times, the right, in the Company’s
sole and absolute discretion, to decline to approve or terminate any such
program or procedure.

                                      (d)          Payment by Promissory Note.  No promissory note shall be permitted if an exercise
of the Option using a promissory note would be a violation of any law.  Unless otherwise specified by the Board at
the time the Option is granted, the promissory note permitted in clause (iv) of
Section 4.3(a) shall be for not more than ninety percent (90%) of the aggregate
Exercise Price of the shares of Stock being purchased and shall be a full
recourse note in a form satisfactory to the Company, with principal payable
four (4) years after the date the Option is exercised.  Interest on the principal balance of the promissory
note shall be payable in annual installments at an interest rate no less than
that necessary to both avoid imputed interest pursuant to all applicable
sections of the Code and avoid requiring the Company’s outside auditors to
alter the accounting treatment of the Option. 
Such recourse promissory note shall be secured by the shares of Stock
acquired pursuant to the then current form of security agreement as approved by
the Company.  At any time the Company is
subject to the regulations promulgated by the Board of Governors of the Federal
Reserve System or any other governmental entity affecting the extension of
credit in connection with the Company’s securities, any promissory note shall
comply with such applicable regulations, and the Optionee shall pay the unpaid
principal and accrued interest, if any, to the extent necessary to comply with
such applicable regulations.  Except as
the Company in its sole discretion shall determine, the Optionee shall pay the
unpaid principal balance of the promissory note and any accrued interest
thereon upon termination of the Optionee’s Service with the Participating
Company Group for any reason, with or without cause.

4.

                       4.4          Tax Withholding.  At
the time the Option is exercised, in whole or in part, or at any time thereafter
as requested by the Company, the Optionee hereby authorizes withholding from
payroll and any other amounts payable to the Optionee, and otherwise agrees to
make adequate provision for (including by means of a Cashless Exercise to the
extent permitted by the Company), any sums required to satisfy the federal,
state, local and foreign tax withholding obligations of the Participating
Company Group, if any, which arise in connection with the Option, including,
without limitation, obligations arising upon (i) the exercise, in whole or in
part, of the Option, (ii) the transfer, in whole or in part, of any shares
acquired upon exercise of the Option, (iii) the operation of any law or
regulation providing for the imputation of interest, or (iv) the lapsing of any
restriction with respect to any shares acquired upon exercise of the
Option.  The Optionee is cautioned that
the Option is not exercisable unless the tax withholding obligations of the
Participating Company Group are satisfied. 
Accordingly, the Optionee may not be able to exercise the Option when
desired even though the Option is vested, and the Company shall have no
obligation to issue a certificate for such shares or release such shares from
any escrow provided for herein.

                       4.5          Certificate Registration.  Except
in the event the Exercise Price is paid by means of a Cashless Exercise, the
certificate for the shares as to which the Option is exercised shall be
registered in the name of the Optionee, or, if applicable, in the names of the
heirs of the Optionee.

                       4.6          Restrictions on Grant of the Option and Issuance of Shares.  The grant of the Option and
the issuance of shares of Stock upon exercise of the Option shall be subject to
compliance with all applicable requirements of federal, state or foreign law
with respect to such securities.  The
Option may not be exercised if the issuance of shares of Stock upon exercise
would constitute a violation of any applicable federal, state or foreign securities
laws or other law or regulations or the requirements of any stock exchange or
market system upon which the Stock may then be listed.  In addition, the Option may not be exercised
unless (i) a registration statement under the Securities Act shall at the time
of exercise of the Option be in effect with respect to the shares issuable upon
exercise of the Option or (ii) in the opinion of legal counsel to the Company,
the shares issuable upon exercise of the Option may be issued in accordance
with the terms of an applicable exemption from the registration requirements of
the Securities Act.  THE OPTIONEE IS
CAUTIONED THAT THE OPTION MAY NOT BE EXERCISED UNLESS THE FOREGOING CONDITIONS
ARE SATISFIED. ACCORDINGLY, THE OPTIONEE MAY NOT BE ABLE TO EXERCISE THE OPTION
WHEN DESIRED EVEN THOUGH THE OPTION IS VESTED. The inability of the Company to
obtain from any regulatory body having jurisdiction the authority, if any,
deemed by the Company’s legal counsel to be necessary to the lawful issuance
and sale of any shares subject to the Option shall relieve the Company of any
liability in respect of the failure to issue or sell such shares as to which
such requisite authority shall not have been obtained.  As a condition to the exercise of the
Option, the Company may require the Optionee to satisfy any qualifications that
may be necessary or appropriate, to evidence compliance with any applicable law
or regulation and to make any representation or warranty with respect thereto
as may be requested by the Company.

                       4.7          Fractional Shares.  The
Company shall not be required to issue fractional shares upon the exercise of
the Option.

          5.          Nontransferability of the Option.  The Option may be exercised
during the lifetime of the Optionee only by the Optionee or the Optionee’s
guardian or legal representative and may not be assigned or transferred in any
manner except by will or by the laws of descent and distribution.  Following the death of the Optionee, the
Option, to the extent provided in Section 7, may be exercised by the Optionee’s
legal representative or by any person empowered to do so under the deceased
Optionee’s will or under the then applicable laws of descent and distribution.

5.

          6.          Termination of the Option.  The Option shall terminate and may no
longer be exercised on the first to occur of (a) the Option Expiration Date,
(b) the last date for exercising the Option following termination of the
Optionee’s Service as described in Section 7, or (c) a Transfer of Control to
the extent provided in Section 8.

          7.          Effect of Termination of Service.

                       7.1          Option Exercisability.

                                      (a)          Disability.  If
the Optionee’s Service with the Participating Company Group is terminated
because of the Disability of the Optionee, the Option, to the extent
unexercised and exercisable on the date on which the Optionee’s Service
terminated, may be exercised by the Optionee (or the Optionee’s guardian or
legal representative) at any time prior to the expiration of six (6) months
after the date on which the Optionee’s Service terminated, but in any event no
later than the Option Expiration Date.

                                      (b)          Death.  If
the Optionee’s Service with the Participating Company Group is terminated
because of the death of the Optionee, the Option, to the extent unexercised and
exercisable on the date on which the Optionee’s Service terminated, may be
exercised by the Optionee (or the Optionee’s legal representative, or other
person who acquired the right to exercise the Option by reason of the
Optionee’s death) at any time prior to the expiration of six (6) months after
the date on which the Optionee’s Service terminated, but in any event no later
than the Option Expiration Date.  The
Optionee’s Service shall be deemed to have terminated on account of death if
the Optionee dies within one (1) month after the Optionee’s termination of
Service.

                                      (c)          Other Termination of Service.  If the Optionee’s Service with
the Participating Company Group terminates for any reason, except Disability or
death, the Option, to the extent unexercised and exercisable by the Optionee on
the date on which the Optionee’s Service terminated, may be exercised by the
Optionee within one (1) month (or such other longer period of time as
determined by the Board, in its sole discretion) after the date on which the
Optionee’s Service terminated, but in any event no later than the Option
Expiration Date.

                       7.2          Additional Limitations on Option Exercise. Except as the
Company and the Optionee otherwise agree, exercise of the Option pursuant to
Section 7.1 following termination of the Optionee’s Service may not be made by
delivery of a promissory note as provided in Section 4.3(a).

                       7.3          Extension if Exercise Prevented by Law.  Notwithstanding the foregoing, if the exercise of
the Option within the applicable time periods set forth in Section 7.1 is
prevented by the provisions of Section 4.6, the Option shall remain in effect
and exercisable so that the aggregate period of time that the Option is to be
exercisable as provided under the applicable provision of Section 7.1
(determined by reference to the cause of termination of the Optionee’s Service
with the Participating Company Group), but in no event later than the Option
Expiration Date.

6.

                       7.4          Extension if Optionee Subject to Section 16(b).  Notwithstanding the
foregoing, if a sale within the applicable time periods set forth in Section
7.1 of shares acquired upon the exercise of the Option would subject the
Optionee to suit under Section 16(b) of the Exchange Act, the Option shall
remain exercisable until the earliest to occur of (i) the tenth (10th) day
following the date on which a sale of such shares by the Optionee would no
longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day
after the Optionee’s termination of Service, or (iii) the Option Expiration
Date.

                       7.5          Leave of Absence.  For
purposes of Section 7.1, the Optionee’s Service with the Participating Company
Group shall not be deemed to terminate if the Optionee takes any military
leave, sick leave, or other bona fide leave of absence approved by the Company
of ninety (90) days or less.  In the
event of a leave of absence in excess of ninety (90) days, the Optionee’s
Service shall be deemed to terminate on the ninety-first (91st) day of such
leave unless the Optionee’s right to reemployment with the Participating
Company Group remains guaranteed by statute or contract.  Notwithstanding the foregoing, unless otherwise
designated by the Company (or required by law), a leave of absence shall not be
treated as Service for purposes of determining the Optionee’s Vested
Percentage.

          8.          Transfer of Control.

                       8.1          Definitions.

                                      (a)          An
“Ownership Change Event” shall be
deemed to have occurred if any of the following occurs with respect to the
Company:

	
   
	
  (i)
	
  the direct or indirect sale or exchange in a single
  or series of related transactions by the stockholders of the Company of more
  than fifty percent (50%) of the voting stock of the Company;

	
   
	
   
	
   

	
   
	
  (ii)
	
  a merger or consolidation in which the Company is a
  party;

	
   
	
   
	
   

	
   
	
  (iii)
	
  the sale, exchange, or transfer of all or
  substantially all of the assets of the Company; or

	
   
	
   
	
   

	
   
	
  (iv)
	
  a liquidation or dissolution of the Company.

                                      (b)          A
“Transfer of Control” shall mean
an Ownership Change Event or a series of related Ownership Change Events
(collectively, the “Transaction”)
wherein the stockholders of the Company immediately before the Transaction do
not retain immediately after the Transaction, in substantially the same
proportions as their ownership of shares of the Company’s voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the “Transferee Corporation(s)”), as the case
may be.  For purposes of the preceding
sentence, indirect beneficial ownership shall include, without limitation, an
interest resulting from ownership of the voting stock of one or more
corporations which, as a result of the Transaction, own the Company or the
Transferee Corporation(s), as the case may be, either directly or through one
or more subsidiary corporations.  The
Board shall have the right to determine whether multiple sales or exchanges of
the voting stock of the Company or multiple Ownership Change Events are
related, and its determination shall be final, binding and conclusive.

7.

                                      (c)          Effect of Transfer of Control on Option.  In the event of a Transfer of Control, the
surviving, continuing, successor, or purchasing corporation or parent
corporation thereof, as the case may be (the “Acquiring
Corporation”), may either assume the Company’s rights and
obligations under the Option or substitute for the Option a substantially
equivalent option for the Acquiring Corporation’s stock.  The Option shall terminate and cease to be
outstanding effective as of the date of the Transfer of Control to the extent
that the Option is neither assumed or substituted for by the Acquiring
Corporation in connection with the Transfer of Control nor exercised as of the
date of the Transfer of Control. 
Notwithstanding the foregoing, shares acquired upon exercise of the
Option prior to the date of the Transfer of Control and any consideration
received pursuant to the Transfer of Control with respect to such shares shall
continue to be subject to all applicable provisions of this Option Agreement
except as otherwise provided herein. 
Furthermore, notwithstanding the foregoing, if the corporation the stock
of which is subject to the Option immediately prior to an Ownership Change
Event described in Section 8.1 (a)(i) constituting a Transfer of Control is the
surviving or continuing corporation and immediately after such Ownership Change
Event less than fifty percent (50%) of the total combined voting power of its
voting stock is held by another corporation or by other corporations that are
members of an affiliated group within the meaning of Section 1504(a) of the
Code without regard to the provisions of Section 1504(b) of the Code, the
Option shall not terminate unless the Board otherwise provides in its sole
discretion.

          9.          Adjustments for Changes in Capital Structure.  In the event of any stock dividend,
stock split, reverse stock split, recapitalization, combination,
reclassification, or similar change in the capital structure of the Company,
appropriate adjustments shall be made in the number, Exercise Price and class
of shares of stock subject to the Option. 
If a majority of the shares which are of the same class as the shares
that are subject to the Option are exchanged for, converted into, or otherwise
become (whether or not pursuant to an Ownership Change Event) shares of another
corporation (the “New Shares”),
the Board may unilaterally amend the Option to provide that the Option is
exercisable for New Shares.  In the
event of any such amendment, the Number of Option Shares and the Exercise Price
shall be adjusted in a fair and equitable manner, as determined by the Board,
in its sole discretion.  Notwithstanding
the foregoing, any fractional share resulting from an adjustment pursuant to
this Section 9 shall be rounded up or down to the nearest whole number, as
determined by the Board, and in no event may the Exercise Price be decreased to
an amount less than the par value, if any, of the stock subject to the Option.

          The
adjustments determined by the Board pursuant to this Section 9 shall be final,
binding and conclusive.

          10.        Rights as a Stockholder, Employee or Consultant.  The Optionee shall have no rights as a
stockholder with respect to any shares covered by the Option until the date of
the issuance of a certificate for the shares for which the Option has been
exercised (as evidenced by the appropriate entry on the books of the Company or
of a duly authorized transfer agent of the Company).  No adjustment shall be made for dividends, distributions or other
rights for which the record date is prior to the date such certificate is
issued, except as provided in Section 9 Nothing in this Option Agreement shall
confer upon the Optionee any right to continue in the Service of a
Participating Company or interfere in any way with any right of the
Participating Company Group to terminate the Optionee’s Service as an Employee
or Consultant, as the case may be, at any time.

8.

          11.        Legends. 
The Company may at any time place legends referencing any applicable
federal, state or foreign securities law restrictions on all certificates
representing shares of stock subject to the provisions of this Option
Agreement.  The Optionee shall, at the
request of the Company, promptly present to the Company any and all
certificates representing shares acquired pursuant to the Option in the
possession of the Optionee in order to carry out the provisions of this
Section.

          12.        Binding Effect.  Subject to the restrictions on transfer set forth herein,
this Option Agreement shall inure to the benefit of and be binding upon the
parties hereto and their respective heirs, executors, administrators,
successors and assigns.

          13.        Termination or Amendment.  The Board may terminate or amend the
Plan or the Option at any time; provided, however, that except as provided in
Section 8.2 in connection with a Transfer of Control, no such termination or
amendment may adversely affect the Option or any unexercised portion hereof
without the consent of the Optionee unless such termination or amendment is
necessary to comply with any applicable law or government regulation.  No amendment or addition to this Option
Agreement shall be effective unless in writing.

          14.        Integrated Agreement.  This Option Agreement constitutes the
entire understanding and agreement of the Optionee and the Participating Company
Group with respect to the subject matter contained herein and there are no
agreements, understandings, restrictions, representations, or warranties among
the Optionee and the Participating Company Group with respect to such subject
matter other than those as set forth or provided for herein.  To the extent contemplated herein, the
provisions of this Option Agreement shall survive any exercise of the Option
and shall remain in full force and effect.

          15.        Applicable Law.  This Option Agreement shall be governed by the laws of the
State of California as such laws are applied to agreements between California
residents entered into and to be performed entirely within the State of
California.

          16.        Review and Interpretation.  The Optionee represents that the Optionee
is familiar with the terms and provisions of this Option Agreement and hereby
accepts the Option subject to all of the terms and provisions thereof.  The Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the Board
upon any questions arising under this Option Agreement.

9.

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