Document:

<PAGE>

                                                                    Exhibit 10.6

                                 GROUND LEASE

                                    between

                       [______________________________,]

                                 as Landlord,

                                      and

                Fairfield Inn by Marriott Limited Partnership,

                                  as Tenant.
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                               TABLE OF CONTENTS

                                                         Page
                                                         ----

ARTICLE I - DEFINITIONS

       1.01   Definition of Terms......................    1

ARTICLE  II - LEASE

       2.01   Lease of Premises........................    8

ARTICLE III - TERM AND TERMINATION

       3.01   Term.....................................    9
       3.02   Termination Because of Management
              Agreement................................    9
       3.03   Tenant's Option to Purchase Landlord's
              Interest.................................    9
       3.04   Tenant's Right of First Refusal..........   13
       3.05   Procedure on Termination or Expiration...   16
       3.06   Disputes.................................   16

ARTICLE IV -  RENTAL
        4.01  Rental...................................   17
        4.02  Payment of Rental........................   17
        4.03  Place and Method of Payment of Rental....   19
        4.04  Adjustment to Percentage Rental..........   19
        4.05  Records and Reports of Gross Revenues....   19
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                                                         Page
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ARTICLE V - USE AND OCCUPANCY

        5.01  Quiet Possession.........................   21
        5.02  Use and Indemnification..................   22
        5.03  Permits..................................   22
        5.04  Easements................................   22
        5.05  Improvements and Personal Property.......   23
        5.06  Liens....................................   24
        5.07  Licenses and Permits.....................   24
        5.08  Maintenance..............................   24
        5.09  Compliance with Laws.....................   25
        5.10  Impositions..............................   25
        5.11  Utility Payments.........................   27
        5.12  Right to Contest Impositions and
              Utility Payments.........................   27
        5.13  Failure to Make Payments.................   27
        5.14  Change in Use............................   28

ARTICLE VI - LEASEHOLD MORTGAGES

        6.01  Leasehold Mortgages......................   30
        6.02  Rights of Leasehold Mortgagees...........   30
        6.03  Right to a New Lease.....................   34
        6.04  Limitation on Leasehold Mortgagees.......   34
        6.05  Communications with Leasehold Mortgagees.   35
        6.06  Termination by Tenant....................   35
        6.07  No Merger................................   35

                                    - ii -
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                                                         Page
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        6.08  Mortgage Fees and Expenses...............   36
        6.09  Equipment Leasing........................   36

ARTICLE VII - INSURANCE, DAMAGE, AND DESTRUCTION

        7.01  General Liability and Workers'
              Compensation.............................   37
        7.02  Property and Business Interruption
              Insurance.................................  37
        7.03  Coverage and Certificates.................  38
        7.04  Management Agreement; Insurance Following
              Change of Use.............................  38
        7.05  Damage or Destruction.....................  39
        7.06  No Abatement of Rent......................  40

ARTICLE VIII - CONDEMNATION

        8.01  Definitions...............................  41
        8.02  Notice of Taking; Representation..........  42
        8.03  Total Taking..............................  43
        8.04  Substantial Taking........................  43
        8.05  Partial Taking............................  43
        8.06  Temporary Taking..........................  44
        8.07  Disputes in Division of Award.............  44
        8.08  Leasehold Mortgagee to Hold Awards........  44

                                    - iii -
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                                                         Page
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ARTICLE IX - ARBITRATION; APPRAISAL

        9.01  Arbitration..............................   45
        9.02  Appraisal................................   46

ARTICLE X - DEFAULT

       10.01  Events of Default........................   48
       10.02  Landlord's Rights Upon an Event of
              Default..................................   48
       10.03  Tenant's Rights Upon an Event of Default.   49
       10.04  Implied Waiver...........................   49

ARTICLE XI - ASSIGNMENT AND SUBLETTING

       11.01  Binding Effect...........................   50
       11.02  Assignment...............................   50
       11.03  Subletting...............................   51

ARTICLE XII - MISCELLANEOUS

       12.01  Brokers' Fees............................   52
       12.02  Gender and Number........................   52
       12.03  Notices..................................   53
       12.04  Applicable Law...........................   53
       12.05  Partial Invalidity.......................   53
       12.06  Authority to Execute.....................   53
       12.07  Recording................................   53

                                    - iv -
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                                                         Page
                                                         ----
       12.08  Headings.................................   53
       12.09  No Partnership...........................   53
       12.10  Estoppel Certificates; Other
              Information..............................   54
       12.11  Holding Over.............................   54
       12.12  Limited Liability........................   55
       12.13  Attorneys' Fees..........................   55
       12.14  Exhibits.................................   55
       12.15  Entire Agreement; Merger; Amendment......   55
       12.16  Successors and Assigns...................   55
       12.17  Conveyance by Landlord...................   56

EXHIBIT A - Rental

EXHIBIT B - Leased Premises

EXHIBIT C - Encumbrances

                                     - v -
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                                  GROUND LEASE

             This GROUND LEASE (this "Lease") is executed as of the ____ day of
_______________, 19__ (the "Effective Date") by ____________________, a
Delaware corporation with offices at 10400 Fernwood Road, Bethesda, Maryland
20817 (the "Landlord"), and FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP, a
Delaware limited partnership with its principal offices at 10400 Fernwood Road,
Bethesda, Maryland 20817 (the "Tenant").

                                   ARTICLE I

                                  Definitions
                                  -----------

             1.01.  Definition of Terms
                    -------------------

             As used in this Lease, the following terms have the meanings
indicated below:

                    "Accounting Period" means a four (4) week accounting
                     -----------------
period, the first of which during any full Fiscal Year shall begin on the first
day (Saturday) of such Fiscal Year and shall end on the fourth following Friday.
There shall be thirteen (13) consecutive four-week Accounting Periods in each
full Fiscal Year, except that the last Accounting Period in a Fiscal Year may
occasionally contain five (5) weeks when necessary to conform the accounting
system to the calendar. During any Partial Fiscal Year, the beginning and
ending dates of the Accounting Periods shall be determined as if such Partial
Fiscal Year had begun or ended as a full Fiscal Year. Any period between the
Effective Date and the beginning of the first full Accounting Period thereafter
and any period between the end of the last full Accounting Period and the
expiration or termination of this Lease shall be considered a "Partial
                                                               -------
Accounting Period."
-----------------

                    "Affiliate" means, as to any party, any Person that owns or
                     ---------
controls, is owned or controlled by, or is under common control with such party
or any successor to such party or its respective subsidiary(ies) or parent(s).

                    "Award" has the meaning given it in Section 8.01(f).
                     -----

                    "Bans Fide Institutional Lender" means (i) a state or
                     ------------------------------
federally chartered bank, trust company, savings and loan association, or
building loan association (whether acting individually or in any fiduciary
capacity) or any foreign
<PAGE>

chartered bank, trust company or financial institution qualified to do business
in the United States of America or any political subdivision thereof (whether
acting individually or in any fiduciary capacity), (ii) an insurance company,
(iii) an educational institution, (iv) a profit-sharing or employees' pension
trust or fund or the like, (v) a real estate investment trust, (vi) a federal,
state, or local government or quasi-governmental department, agency, or other
subdivision thereof, (vii) Landlord or an Affiliate of Landlord, or (viii)
Tenant or an Affiliate of Tenant or any subsequent tenant that takes back a
mortgage or deed of trust in connection with an assignment of Tenant's interest
in this Lease under Article XI.

                  "Business Day" means any day other than Saturday,
                   ------------
Sunday, or a legal holiday in the state in which the Leased Premises are
located.

                  "Closing Date" has the meaning given it in Section 3.03(a)(1).
                   ------------

                  "Conversion Date" has the meaning given it in Section 5.14(a).
                   ---------------

                  "Default" has the meaning given it in Section 10.01.
                   -------

                  "Default Date" has the meaning given it in Section 6.02(a).
                   ------------

                  "Effective Date" has the meaning given it in the Preamble.
                   --------------

                  "Election Period" has the meaning given it in Section 3.04.
                   ---------------

                  "Equipment Lessor" has the meaning given it in Section 6.09.
                   ----------------

                  "Event of Default" has the meaning given it in Section 10.01.
                   ----------------

                  "Exercise Notice" has the meaning given it in Section 3.03(a).
                   ---------------

                  "FF&E" means furniture, furnishings, fixtures, vehicles,
                   ----
carpeting and equipment, including communication and computer systems, located
on the Leased Premises and used or useful in the operation of the Hotel.

                                      -2-
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                  "Fee Mortgage" has the meaning given it in Section 5.01(b).
                   ------------

                  "Fiscal Year" means a fifty-two (52) or fifty-three (53)
                   -----------
week period that ends at midnight on the Friday closest to December 31st; the
next Fiscal Year begins on the Saturday immediately following said Friday. Any
period between the Effective Date and the beginning of the first full Fiscal
Year thereafter and any period between the end of the last full Fiscal Year and
the expiration or termination of this Lease shall be considered a "Partial
                                                                   -------
Fiscal Year." Landlord may change the Fiscal Year; provided, however, if
-----------                                        --------  -------
Landlord's Year is changed, appropriate adjustments to this Lease's accounting
and reporting procedures and the procedures for the payment of Rental and other
sums due and payable hereunder shall be made. No such change or adjustment,
however, shall in any way alter the Term or increase or reduce the Rental due
Landlord or materially alter the frequency and amounts of any payments due
hereunder.

                  "Governmental Authority" means any nation or government, any
                   ----------------------
state, local, or political subdivision thereof, any court, and any entity
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to any government, including, without limitation,
all commissions, boards, bureaus, arbitrators and arbitrations panels, agencies,
and any corporation, authority or other entity owned or controlled (through
stock or capital ownership or otherwise) by any of the foregoing.

                  "Gross Revenues" means, for each Fiscal Year or Partial
                   --------------
Fiscal Year and for all Accounting Periods to date within each Fiscal Year or
Partial Fiscal Year, all revenues and receipts of every kind derived from
operating the Hotel and all departments and parts thereof, including but not
limited to: income (from both cash and credit transactions), before commissions
and discounts for prompt or cash payments, from rental of rooms, meeting rooms,
and space of every kind; license, lease and concession fees and rentals (not
including gross receipts of any licensees, lessees and concessionaires); income
from vending, facsimile and copy machines; wholesale and retail sales of
merchandise (except as otherwise provided in Section 8.02C of the Management
Agreement (or any similar provision of any replacement agreement) with respect
to the sale of FF&E and except for wholesale sales of merchandise not generally
related to the operation of the Hotel), service charges, and proceeds, if any,
from business interruption or other loss of income insurance, all determined in
accordance with generally accepted accounting principles; provided,
                                                          --------

                                      -3-
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however, that Gross Revenues shall not include (i) gratuities to
-------
employees of the Hotel or of the Management Company (or any successor or
replacement manager); (ii) federal, state or municipal excise, sales or use
taxes or similar assessments or Impositions collected directly from patrons or
guests or included as part of the sales price of any goods or services; (iii)
Net Refinancing Proceeds (as defined in the Management Agreement) or Net Sales
Proceeds (as defined in the Management Agreement); (iv) proceeds from the sale
of FF&E or other personal property used in the operation of the Hotel; (v)
interest received or accrued with respect to the funds in the FF&E Reserve (as
defined in the Management Agreement) or the other operating accounts of the
operation of the Hotel; or (vi) any refunds, rebates, discounts and credits of a
similar nature, given, paid or returned in the course of obtaining Gross
Revenues or components thereof (including, without limitation, commissions and
discounts for prompt or cash payments).

             "Hotel" means the Fairfield Inn hotel constructed on the
              -----
Leased Premises, together with all structures, improvements and support and
service facilities related thereto and with any and all fixtures, equipment and
machinery of every kind and nature whatsoever now or hereafter affixed or
attached thereto, or now or hereafter used or procured for use in connection
with the operation, use or occupancy thereof, and the appurtenances thereto.

             "Impositions" has the meaning given it in Section 5.10(a).
              -----------

             "Improvements" means the Hotel and/or any Subsequent Improvements.
              ------------

             "Landlord" has the meaning given it in the Preamble.
              --------

             "Landlord's Interest" has the meaning given it in Section 3.03(a).
              -------------------

             "Landlord's Option" has the meaning given it in Section 6.10(a).
              -----------------

             "Lease Interest Rate" means the prime rate of interest announced
              -------------------
from time to time by The First National Bank of Chicago as its prime or base
lending rate, plus one (1) percentage point.

                                      -4-

<PAGE>

         "Leased Premises" means the parcel of land described in Exhibit B,
          ---------------                                        ---------
together with all of the rights, and easements appurtenant thereto, but not
including the Improvements.

         "Leasehold Mortgage" has the meaning given it in Section 6.01(a).
          ------------------

         "Leasehold Mortgagee" has the meaning given it in Section 6.01(a).
          -------------------

         "Leasehold Mortgagee's Notice" has the meaning given it in Section
          ----------------------------
6.10(a).

         "Major Casualty" has the meaning given to it in Section 7.05.
          --------------

         "Management Agreement" means that certain Management Agreement by and
          --------------------
between Fairfield Management Corporation, as Management Company, and Tenant, as
Owner, dated as of __________ __, 1989.

         "Management Company" has the meaning given it in the Management
          ------------------
Agreement.

         "Minimum Rental" has the meaning given it in Exhibit A.
          --------------                              ---------

         "Mortgage Amount" means for all Leasehold Mortgages (i) the outstanding
          ---------------
principal amount of, plus accrued and unpaid interest and any penalties due on,
all notes, bonds, or other amounts secured by Leasehold Mortgages given to
evidence loan advances made to provide funds intended for the acquisition,
construction, or refurbishing of the Improvements. FF&E, or other personal
property or to be used for the business conducted on the Leased Premises and
(ii) all other charges under such Leasehold Mortgages reasonably allocable to
the Leased Premises and the Leasehold Mortgagee's reasonable costs and expenses
of enforcing or collecting any of the foregoing (including, without limitation,
reasonable attorneys' fees and expenses).

         "Notice of Intended Taking" has the meaning given it in Section
          -------------------------
 8.01(e).

         "Offering Notice" has the meaning given it in Section 3.04(a).
          ---------------

         "Other Ground Leases" has the meaning given it in Section 4.02(d).
          -------------------

                                     - 5 -
<PAGE>

         "Other Hotels" has the meaning given it in Section 4.02(d).
          ------------

         "Partial Accounting Period" has the meaning given it in the definition
          -------------------------
of "Accounting Period".
    -----------------

         "Partial Fiscal Year" has the meaning given it in the definition of
          -------------------
"Fiscal Year".
 -----------

         "Partial Taking" has the meaning given it in Section 8.01(d).
          --------------

         "Percentage Rental" means for each Fiscal Year or Partial Fiscal Year
          -----------------
during the Term, an amount equal to Gross Revenues for such Fiscal Year or
Partial Fiscal Year multiplied by the percentage shown for such Fiscal Year or
Partial Fiscal Year in Exhibit A.
                       ---------

         "Permitted Title Exceptions" has the meaning given it in Section
          --------------------------
5.01(a).

         "Person" means any individual, corporation, partnership, trust,
          ------
business trust, joint stock company, unincorporated association, joint venture,
Governmental Authority, or other entity of whatever nature.

         "Price Index" means at any time the "Consumer Price Index for All
          -----------
Consumers (CPI-U); U.S. City Average, 1982-84=100, all Items" (or appropriate
substitute index if such index is no longer published) for the later of (a)
January 1990 or (b) the January immediately preceding the time the Price Index
is to be determined.

         "Qualified Arbitrator" has the meaning given it in Section
          --------------------
9.01(c).

         "Rental" means for any Fiscal Year or Partial Fiscal Year the greater
          ------
of Minimum Rental or Percentage Rental for such Fiscal Year or Partial Fiscal
Year, as provided in Article IV and Exhibit A.
                                    ----------

         "Subsequent Improvements" means improvements of any kind made after
          -----------------------
the Effective Date on the Leased Premises, including any additions,
replacements, renovations, or construction or reconstruction of (i) the Hotel
building's structure or its mechanical, electrical, heating, ventilating, air
conditioning, plumbing, or vertical transportation systems, or (ii) any other
structure or improvement located on the Leased Premises, together with any and
all fixtures, equipment

                                     - 6 -
<PAGE>

and machinery of every kind and nature whatsoever now or hereafter affixed or
attached thereto, or now or hereafter used or procured for use in connection
with the operation, use or occupancy thereof, and the appurtenances thereto.

         "Substantial Taking" has the meaning given it in Section 8.01(c).
          ------------------

         "Taking" has the meaning given it in Section 8.01(a).
          ------

         "Tenant" means Fairfield Inn by Marriott Limited Partnership, a
          ------
Delaware limited partnership (which is sometimes hereinafter referred to as the
"initial Tenant"), its successors and assigns.

         "Tenant's Net Cash Flow" shall mean, for purposes of Fiscal Years 1993,
          ----------------------
1994, 1995 and 1996 and all Accounting Periods to date in each such Fiscal Year,
an amount (which may be a negative number) equal to (a) Operating Profit (or
Operating Loss, as the case may be, in which case such loss shall be treated as
a negative number) of the Hotel and the Other Hotels for such Fiscal Year; minus
                                                                           -----
(b) the Rental hereunder and under the Other Ground Leases for such Fiscal Year;

minus (c) Qualifying Debt Service for such Fiscal Year; minus (d) an allowance
-----                                                    -----
of $315,000 for 1993, $330,000 for 1994, $345,000 for 1995 and $360,000 for
1996. Tenant's Net Cash Flow is computed after any advances under the Limited
Debt Service Guarantee (as defined in the Management Agreement). For purposes
hereof, the terms "Operating Profit," "Operating Loss" and "Qualifying Debt
Service" have the meanings given them in the Management Agreement.

         "Term" has the meaning given it in Section 3.01.
          ----

         "Total Taking" has the meaning given it in Section 8.01(b).
          ------------

                                END OF ARTICLE I

                                     - 7 -
<PAGE>

                                  ARTICLE II

                                     Lease
                                     -----

         2.01  Lease of Premises
               -----------------

         In consideration of the Rental to be paid and the mutual covenants and
agreements contained in this Lease, Landlord leases to Tenant and Tenant leases
from Landlord the Leased Premises, on and subject to the terms and conditions of
this Lease.

                               END OF ARTICLE II

                                     - 8 -
<PAGE>

                                   ARTICLE III

                              Term and Termination
                              --------------------

         3.01  Term
               ----

         This Lease shall begin on the Effective Date and shall continue, unless
sooner terminated, until November 30, 2088 (the "Term").

         3.02  Termination Because of Management Aareement
               -------------------------------------------

         In the event that the Management Agreement (a) expires or (b) is
terminated (i) as a result of a default by the Management Company thereunder or
(ii) pursuant to Section 4.02 of the Management Agreement (or any successor
provision), and Tenant shall elect to cease to have the Leased Premises operated
as a Hotel, Tenant shall have the option, exercisable within sixty (60) days
before or after such event and on no less than thirty (30) days prior written
notice to Landlord, to terminate this Lease as of the date set forth in such
notice. Upon such termination, Tenant shall (x) obtain the release of any
Leasehold Mortgages and (y) pay Landlord all Rental and other sums due under
this Lease to the date of such termination. The parties shall cooperate in
executing promptly and recording any documents necessary for a smooth
termination of this Lease and in effectuating, at Tenant's expense, all steps
necessary to convey or reconvey to Landlord the Improvements and the full
interest in the Leased Premises that Landlord had before the execution of this
Lease. In the event that the Lease is terminated pursuant to this Section 3.02
in connection with a default by the Management Company under the Management
Agreement, Landlord shall pay to Tenant promptly upon the conveyance of the
Improvements to Landlord the fair market value of the Improvements as of the
date of termination of this Lease. In the event the parties cannot agree to the
fair market value of the Improvements within thirty (30) days after Landlord's
receipt of Tenant's notice delivered hereunder, such fair market value shall be
determined in accordance with Section 9.02 hereof.

         3.03  Tenant's Option to Purchase Landlord's Interest
               -----------------------------------------------

         3.03(a) At any time after September 30, 1999, in connection with a sale
by the initial Tenant of the Improvements, the initial Tenant (or, in the event
Sumitomo Trust & Banking Co. (U.S.A.) ("Sumitomo") becomes the Tenant hereunder,
Sumitomo, but no assignee thereof and, except as provided in Section 3.03(c), no
subsequent Tenant) shall have the option to purchase all of Landlord's right,
title and

                                     - 9 -
<PAGE>

interest in and to the Leased Premises, as encumbered by this Lease, and
Landlord's residual interest in the Improvements ("Landlord's Interest"). Tenant
(which, for purposes of this Section 3.03 only, shall mean the initial Tenant or
a subsequent Tenant only under the conditions set forth in Section 3.03(c), as
the context may require) shall give Landlord at least thirty (30) days prior
written notice (the "Exercise Notice") of Tenant's intent to exercise its option
to purchase Landlord's Interest. Landlord shall then sell the Landlord's
Interest to Tenant, and Tenant shall purchase the Landlord's Interest, as set
forth below:

          (1) The closing of the purchase and sale of Landlord's Interest shall
occur on the date set forth in the Exercise Notice or on such other date as the
parties may agree (the "Closing Date") at the Landlord's principal place of
business or at such other place as the parties may agree;

          (2) The purchase price shall be equal to the greater of (i) the amount
of ____________________ Dollars ($_______), increased annually by the actual
percentage increase in the Price Index from January 1, 1990 plus one percentage
point, or (ii) $__________, and shall be paid in cash or immediately available
funds on the Closing Date;

          (3) Landlord shall convey to the Tenant or Tenant's designee good and
marketable fee simple title to the Leased Premises by special warranty deed (or
other similar deed containing covenants against acts of the grantor customary in
the State where the Leased Premises are located or, in the event it is customary
in such State to use a general warranty deed, by a general warranty deed or
similar deed containing the full English covenants of title), subject only to
(i) Permitted Title Exceptions, (ii) any other liens, encumbrances, easements,
or restrictions Tenant or Tenant's designee may agree to in writing after the
Effective Date or which are attributable to or arise from acts or omissions of
third parties, other than Landlord or its Affiliates (other than Tenant), after
the Effective Date and for which Tenant or Tenant's designee may be responsible
under applicable law, excluding any mortgages or other monetary liens that are
the responsibility of Landlord, which shall be removed of record and satisfied
by Landlord at the closing, and (iii) condemnation, rezoning or other acts of
the police power of any Governmental Authority having jurisdiction over the
Leased Premises;

          (4) Landlord shall provide Tenant or Tenant's designee with any
affidavit or other documentation reasonably requested by Tenant under Section
1445 of the Internal Revenue

                                     - 10 -

<PAGE>

Code of 1986 (or related or successor provisions of the Internal Revenue Code)
to establish that Landlord is not a foreign person for the purposes of such Act;

          (5) Tenant or Tenant's designee shall have obtained the release of all
Leasehold Mortgages affecting the Leased Premises or the consent of all
Leasehold Mortgagees under any Leasehold Mortgages not so released, as required
by Section 6.07; and

          (6) Landlord may elect to structure Tenant's or Tenant's designee's
acquisition of the Leased Premises pursuant to this Section 3.03 as a tax-
deferred like-kind exchange under Section 1031 of the Internal Revenue Code of
1986, as amended, or any similar future provision, and Tenant agrees to use
reasonable good faith efforts to help or cause Tenant's designee to help
accomplish Landlord's tax-deferred like-kind exchange and to take all
reasonable and appropriate actions, including acquiring real property designated
by Landlord; provided, however, that (i) such like exchange will in no way
restrict, impede, delay or otherwise be inconsistent with the sale by Tenant of
the Improvements, (ii) Tenant's or Tenant's designee's costs of acquisition of
Landlord's Interest shall not thereby be increased, (iii) Landlord shall
indemnify Tenant or Tenant's designee for any losses, liabilities, obligations,
or claims that Tenant or Tenant's designee, acting in good faith, incurs or
suffers solely as a result of its execution of any document in connection with
or in any way being involved with such like-kind exchange, and (iv) Tenant or
Tenant's designee shall not incur any cost or expense related to such exchange
unless simultaneously reimbursed therefor by Landlord.

         3.03(b) At the closing of the sale of Landlord's Interest, Landlord and
Tenant (or Tenant's designee) each shall represent and warrant with respect to
itself, as applicable, that:

          (1) It is duly organized, validly existing, and in good standing under
the laws of its state of organization and that it is qualified to do business,
to the extent required, in the state where the Leased Premises are located;

          (2) It has the full right and power to enter into and perform its
obligations related to the purchase and sale of Landlord's Interest;

          (3) The execution of any documents related to the purchase and sale of
Landlord's Interest and of the transactions contemplated thereby do not violate
any law or any

                                     - 11 -
<PAGE>

order of any court or Governmental Authority with proper jurisdiction; result in
a breach or default under any contract or other binding commitment; or require
any consent or vote that has not been taken or given, or at the time of the
transaction involved, shall not have been taken or given; and

          (4) It is not aware of any suits, arbitrations, proceedings, or
investigations of any Governmental Authority that are pending or threatened
against it that may adversely and materially affect its right to enter into and
consummate such transaction in accordance with the terms of this Lease.

         3.03(c) The initial Tenant (and any subsequent Tenant acquiring the
Improvements prior to September 30, 1999) may assign its right to purchase
Landlord's Interest to a purchaser of the Improvements sold subject to this
Lease prior to September 30, 1999, in which event the right to purchase
Landlord's Interest may be exercised by such purchaser or its successors or
assigns at any time during the period from September 30, 1999 to September 30,
2001 on the same terms as set forth in Sections 3.03(a) and 3.03(b) as if such
purchaser were the initial Tenant hereunder. Subsequent to September 30, 2001,
such purchaser or its successors or assigns shall have no right to purchase
Landlord's Interest.

         3.03(d) Except as set forth in Section 3.03(c), the option to purchase
set forth in this Section 3.03 shall survive for so long as Tenant leases the
Leased Premises; provided, however, that if the duration of such period would
render the provisions of this Section 3.03 or the rights of Tenant hereunder
invalid or unenforceable under the rule against perpetuities as applied in the
jurisdiction in which the Leased Premises are located, then this option to
purchase shall be effective only until the expiration of the longest of the
following periods which shall be valid under the rule against perpetuities as
applied in such jurisdiction: (i) the period ending twenty-one (21) years after
the death of the last to survive of the legitimate natural or adopted children
and grandchildren of U.S. Presidents Kennedy, Johnson, Nixon, Ford, Carter,
Reagan and Bush alive on the date hereof; (ii) twenty-one (21) years after the
Effective Date; or (iii) such other term as may be statutorily prescribed in
such jurisdiction. It is the express intent of Landlord and Tenant that the
provisions of this Section 3.03 and the rights of Tenant hereunder shall be
exercisable and enforceable by Tenant to the fullest extent permitted by the
laws of such jurisdiction.

                                     - 12 -
<PAGE>

         3.04  Tenant's Right of First Refusal
               -------------------------------

         3.04(a) Landlord shall not sell or transfer, or attempt to sell or
transfer, any right, title or interest in the Leased Premises, or any part
thereof, without first offering such right, title or interest to Tenant in
accordance with the provisions of this Section 3.04, any such sale or transfer
without compliance in full with the terms of this Section 3.04 being hereby
rendered null and void. Subject to the terms of this Section 3.04, if Landlord
receives a bona fide offer from a Person which is not an Affiliate (a "third-
party offer") to purchase or acquire any right, title or interest in the Leased
Premises or any part thereof, and Landlord intends to accept such offer,
Landlord shall cause such offer to be reduced to writing and shall give written
notice thereof to Tenant stating the name of the prospective purchaser and the
price and all conditions of such proposed sale, together with a copy of the
third-party offer and all other information reasonably requested by Tenant and
reasonably available to Landlord (the "Offering Notice"). Within thirty (30)
days after the date of receipt of Landlord's written notice and such other
information (the "Election Period"), Tenant shall elect, by written notice to
Landlord, one of the following alternatives:

          (1) To purchase Landlord's Interest at the same price and on the same
terms and conditions (including timing and manner of payment) as those set forth
in the third-party offer or on other terms mutually acceptable to Landlord and
Tenant, in which event Landlord and Tenant shall promptly enter into an
agreement for such sale consistent with the terms and conditions of the third-
party offer and shall finalize the sale within the time period allowed in such
third-party offer (but in no event earlier than ninety (90) days after the end
of the Election Period); provided, however, Tenant shall not be required to
                         --------- -------
acquire the Leased Premises upon terms and conditions of any third-party offer
the consideration for which is not practicably obtainable by Tenant (such as, by
way of example, but not of limitation, specified land, stock in a closely-held
corporation, or stock in a publicy-held corporation that cannot be acquired by
Tenant without an increase in the trading price thereof or without registration
or filing under any federal or state securities laws), but Tenant shall have the
right to acquire the Leased Premises upon terms and conditions (including
consideration) reasonably equivalent to those contained in such offer; and the
failure of Tenant to acquire the Leased Premises on such reasonably equivalent
terms or conditions shall not permit Landlord to transfer the Leased Premises
pursuant to Section 3.04(b).

                                     - 13 -
<PAGE>

          (2) To consent to such sale and to the assignment of this Lease to
such purchaser, provided that (A) such sale shall be made at a price which is
not less than 98% of the price and otherwise on terms and conditions not less
favorable to Landlord than those set forth in the Offering Notice (but no such
sale may be made at a price less than 98% of the price or on terms and
conditions less favorable to Landlord than those set forth in the Offering
Notice without delivering to Tenant a revised Offering Notice in which event
Tenant shall have the right for ten (10) Business Days to purchase at the
revised price or on the revised terms and (B) concurrently with the consummation
thereof the purchaser shall, by appropriate instrument in form and content
reasonably satisfactory to Tenant, assume all of Landlord's obligations
hereunder. If a sale is not effected in accordance with the foregoing condition,
Tenant shall again be entitled to receive an Offering Notice before Landlord
transfers any interest in the Leased Premises to a Person other than an
Affiliate. Landlord shall not have the right to sell a partial interest in its
estate, and any sale not made in compliance with the provisions of this Section
3.04(a)(2) shall be void and of no force or effect. Neither the consent by
Tenant to the sale by Landlord of Landlord's Interest, nor such sale, shall
relieve Landlord from its obligations under this Lease for any acts or omissions
of Landlord before consummation of such approved sale and assignment and such
sale shall not relieve the purchaser of its obligations as a successor to
Landlord under this Lease, including, without limitation, the obligations set
forth in Sections 3.03 and 3.04. An executed original of such assumption
agreement and any purchase and sale agreement between Landlord and such
purchaser shall be delivered promptly to Tenant.

         3.04(b) If Tenant shall fail to elect either of the above alternatives
within the Election Period as set forth in Section 3.04(a), Tenant shall be
conclusively deemed to have elected the option set forth under Section
3.04(a)(2), and the provisions thereof shall prevail as if Tenant had consented
in writing thereto.

         3.04(c) The closing date of any acquisition of the Leased Premises by
Tenant hereunder shall be on the date fixed in the third-party offer unless
such date would occur prior to the expiration of ninety (90) days after the last
day of the Election Period, in which event the closing date shall occur on the
Business Day on or next following such ninetieth (90th) day or on such other
date to which Tenant and Landlord may agree.

                                     - 14 -
<PAGE>

         3.04(d) If Tenant shall fail to elect to acquire the Leased Premises
pursuant to Section 3.04(a)(1), or shall fail to close the acquisition on the
date required by Section 3.04(c)(other than any failure resulting from causes
outside Tenant's reasonable ability to control), then Landlord shall be free,
for a period of one hundred fifty (150) days after either such failure, to
transfer the Leased Premises (or right or interest therein), subject to this
Lease, to the bona fide third-party offeror for the price and on the terms and
conditions contained in the third-party offer. If the Leased Premises (or right
or interest therein) are not so transferred by the Landlord within such one
hundred fifty (150) day period, all rights of the Landlord to transfer the
Leased Premises (or right or interest therein) free of the foregoing
restrictions shall terminate and the Leased Premises again shall be subject to
the provisions of this Section 3.04.

         3.04(e) Unless otherwise expressly waived by Tenant in writing, the
provisions of this Section 3.04 shall remain in effect and the rights granted
hereunder shall be exercisable and enforceable by Tenant during the period
commencing on the Effective Date and ending on the earlier of the date that
Landlord first ceases to hold any right, title, or interest (including an
interest as a creditor) in or to the Leased Premises; provided, however, that if
                                                      --------- -------
the duration of such period would render the provisions of this Section 3.04 or
the rights of Tenant hereunder invalid or unenforceable under the rule against
perpetuities as applied in the jurisdiction in which the Leased Premises are
located, then such period shall continue only until the expiration of the
longest of the following periods which shall be valid under the rule against
perpetuities as applied in such jurisdiction: (i) the period ending twenty-one
(21) years after the death of the last to survive of the legitimate natural or
adopted children and grandchildren of U.S. Presidents Kennedy, Johnson, Nixon,
Ford, Carter, Reagan and Bush alive on the date hereof; (ii) twenty-one (21)
years after the Effective Date; or (iii) such other term as may be statutorily
prescribed in such jurisdiction. It is the express intent of Tenant and Landlord
that the provisions of this Section 3.04 and the rights of Tenant hereunder
shall be exercisable and enforceable by Tenant to the fullest extent permitted
by the laws of such jurisdiction.

         3.04(f) Any failure of Tenant to exercise its right to purchase under
this Section 3.04 shall have no effect on the option of Tenant and its
successors to purchase the Leased Premises set out in Section 3.03, and the
provisions of said Section 3.03 shall survive any sale or transfer of any right,
title or interest in the Leased Premises.

                                     - 15 -
<PAGE>

         3.05  Procedure on Termination or Expiration
               --------------------------------------

         3.05(a) Except in the event of (i) a Total Taking, (ii) an Event of
Default committed by Landlord, or (iii) a Termination of this Lease under
Sections 3.03 or 3.04, upon the termination or expiration of this Lease for any
reason, including termination under Section 3.02 or 7.05, Tenant shall:

          (1) Safeguard the Improvements (and if any of them are damaged or
destroyed, protect the remainder from further harm) and convey them to Landlord,
or

          (2) At Landlord's option, if, but only if, the Hotel no longer exists
on the Leased Premises (or did not exist immediately prior to a casualty under
Section 7.05), remove all Improvements and restore the Leased Premises to
substantially the same unimproved condition as existed immediately before the
construction of the Hotel.

         3.05(b) If (i) Tenant has complied with all its obligations hereunder,
(ii) this Lease remains in effect until the expiration of its full Term on
November 30, 2088, and (iii) the Hotel or any portion thereof is still on the
Leased Premises at that time, Landlord may not require the Hotel's removal.

         3.06  Disputes
               --------

         Any dispute under this Article III shall be settled by arbitration as
provided in Section 9.01.

                               END OF ARTICLE III

                                     - 16 -
<PAGE>

                                   ARTICLE IV

                                     Rental
                                     ------

         4.01  Rental
               ------

         4.01(a) The obligation of Tenant to pay Rental shall commence on the
Effective Date. Tenant shall pay Rental to Landlord for the Leased Premises
beginning with the Effective Date and continuing for the remainder of the Term
in the amounts set forth in Exhibit A, subject to the provisions of Section
                            ---------
4.02(d) hereof.

         4.01(b) Provided an Event of Default by Landlord shall not have
occurred and be continuing hereunder, Tenant shall pay Rental to Landlord
without setoff or deduction of any kind, and except as provided in Article VI,
Landlord shall not be obligated to join in the execution of any Leasehold
Mortgage.

         4.02  Payment of Rental
               -----------------

         4.02(a) Minimum Rental shall be paid twenty (20) days following the end
of each Accounting Period or Partial Accounting Period, commencing with the
first Accounting Period or Partial Accounting Period ending immediately after
the Effective Date. Minimum Rental for any Partial Accounting Period shall be
computed by multiplying the annual Minimum Rental for the Fiscal Year of which
the Partial Accounting Period is a part by a fraction, the numerator of which is
the number of days in such Partial Accounting Period and the denominator of
which is three hundred and sixty-five (365).

         4.02(b) Any Minimum Rental due for any Partial Fiscal Year between the
Effective Date and the beginning of the first full Fiscal Year shall be paid in
the amounts and at the times as though such Partial Fiscal Year were a part of
such first full Fiscal Year.

         4.02(c) Percentage Rental, if due and payable, shall be paid within
twenty (20) days following the end of the third, sixth, ninth, and last
Accounting Periods in each Fiscal Year (each a "Percentage Rental Payment Date")
and shall be subject to annual adjustment pursuant to Section 4.05 hereof. For
purposes of determining whether Percentage Rental is due and payable on a
Percentage Rental Payment Date, Gross Revenues for the applicable Fiscal Year
shall be determined on a cumulative basis.

                                     - 17 -
<PAGE>

         4.02(d) Notwithstanding anything to the contrary contained herein, in
the event that Tenant's Net Cash Flow for 1993, 1994, 1995 or 1996 is less than
$8,417,879 (which amount shall be prorated among the Accounting Periods to date
in each such Fiscal Year) for any such Fiscal Year, then the Rental payable
hereunder for such Fiscal Year (or all Accounting Periods to date in such Fiscal
Year) shall be reduced by an amount equal to the excess, if any, of the Hotel's
pro rata share (calculated in the manner described below) of such shortfall in
Tenant's Net Cash Flow over the Hotel's pro rata share of Base Management Fees
(as defined in the Management Agreement) that are not required to be paid
currently for such Fiscal Year as a result of the operation of Section 5.01D of
the Management Agreement; provided, however, that such reduction in Rental
hereunder shall not exceed an amount equal to (A) the maximum available amount
remaining under the Development Fee Adjustment mechanism at the time of its
expiration pursuant to Section 2.10 of the Purchase Agreement (but in no event
greater than $8,000,000), minus (b) the total amount of Base Management Fees and
                          -----
Rentals hereunder and under the Other Ground Leases that is not paid currently
during such four (4) Fiscal Year period as a result of the operation of this
Section 4.02(d), Section 4.02(d) of the Other Ground Leases and Section 5.01D of
the Management Agreement, respectively. Within forty (40) days after the end of
each Fiscal Year, Landlord and Tenant shall make any necessary adjustments in
the amount of Rental reductions required hereunder based upon the entire Fiscal
Year. Any Rental which is not paid currently as a result of the operation of
this Section 4.02(d) shall be payable, without adjustment for interest, out of
the Hotel's pro rata share of any Capital Proceeds (as defined in the Management
Agreement) from the Hotel or any Other Hotel to the extent remaining after
initial Tenant's applications thereof in accordance with Sections 5.03 (1), (2),
(3), and (4) of the Management Agreement. For purposes of this Section 4.02(d),
the term "pro rata share" shall mean a fraction, the numerator of which is the
amount of Rental payable hereunder for the Fiscal Year or portion thereof in
question but for the provisions of this Section 4.02(d), and the denominator of
which is the Rental payable hereunder and under the Other Ground Leases for the
Fiscal Year or portion thereof in question but for the provisions of this
Section 4.02(d) and Section 4.02(d) of the Other Ground Leases. For purposes
hereof, the term "Other Ground Leases" means the Ground Leases between initial
Tenant and Landlord relating to other Fairfield Inn by Marriott properties that
are in effect between initial Tenant and Landlord at the time of any
determination under this Section 4.02(d), and "Other Hotels" means the Fairfield
Inn by Marriott properties leased under the Other Ground Leases. The provisions
of this Section 4.02(d) shall apply only so long as the Leased Premises are
leased hereunder by the initial Tenant.

                                     - 18 -
<PAGE>

         4.03 Place and Method of Payment of Rental
              -------------------------------------

         All Rental shall be paid in lawful money of the United States and shall
be paid to Landlord at Landlord's address for receipt of notices or to such
other Persons or addresses as Landlord may from time to time designate in
writing.

         4.04  Adjustment to Percentage Rental
               -------------------------------

         If at any time under the law of the state where the Leased Premises are
located it shall be illegal for Tenant to pay Percentage Rental based on its
revenues from certain items (such as liquor sales), the parties shall exclude
such items from the calculation of Gross Revenues and shall make a one (1) time
adjustment in the percentage paid on the remainder of Gross Revenues in an
amount sufficient for Percentage Rental to equal as closely as possible what it
would have equaled absent such exclusion. Any dispute under this Section 4.04
shall be settled by arbitration in accordance with the provisions of Section
9.01.

         4.05  Records and Reports of Gross Revenues
               -------------------------------------

         4.05(a) Tenant shall keep at its principal office records of Gross
Revenues for a period of not less than three (3) years after the expiration of
the Partial Fiscal Year or Fiscal Year to which such records relate and on
request shall furnish Landlord, at Tenant's expense, true and accurate
statements thereof. Within ninety (90) days following the close of each Fiscal
Year or Partial Fiscal Year after the Effective Date, Tenant shall deliver to
Landlord a statement from Tenant's chief accounting officer or his designee
certifying the Gross Revenues for such Fiscal Year. The parties shall promptly
by cash payment make any adjustments in the total Rental paid for such Fiscal
Year necessary because of the final Gross Revenues figures set forth in such
statement. If Landlord desires at its own expense to audit such statement of
Gross Revenues and supporting records, Landlord shall begin such audit within
ninety (90) days following its receipt of such statement and complete such audit
within ninety (90) days thereafter. If Landlord does not make such an audit,
then such statement shall be deemed to be conclusively accepted by Landlord as
being correct, and Landlord shall have no right thereafter, absent fraud on the
part of Tenant or except as provided in Section 4.05(b), to question or examine
the same. If the audit discloses an understatement of Gross Revenues, Tenant
shall promptly pay Landlord any additional Rental found to be due, plus interest
thereon at the Lease Interest Rate from the date such additional Rental should
have been paid

                                     - 19 -
<PAGE>

(except to the extent that the failure to pay such Rental was the responsibility
of the Management Company under the Management Agreement or of any other manager
which is an Affiliate of Landlord under any replacement management agreement).
If, however, the audit discloses that Tenant has overpaid Rental, the excess
plus interest thereon at the Lease Interest Rate from the date of overpayment
shall be applied to any amounts then due Landlord by Tenant, and the balance, if
any, shall be promptly refunded by Landlord to Tenant. Any dispute concerning
the correctness of an audit shall be settled by arbitration in accordance with
Section 9.01.

         4.05(b) If Landlord's audit discloses an error in total payment of
Rental for any Partial Fiscal Year or Fiscal Year so audited that is in excess
of five percent (5%) of the Rentals due for such Fiscal Year or Partial Fiscal
Year, Tenant shall pay for the reasonable cost of Landlord's audit (except to
the extent that the failure to pay such Rental was the responsibility of the
Management Company under the Management Agreement or of any other manager which
is an Affiliate of Landlord under any replacement management agreement). In
addition, in such event, Landlord may audit the statement of Gross Revenues and
supporting records for the two (2) preceding Fiscal Years. Landlord shall bear
the cost of such audit, except for the cost for any such Fiscal Year in which
the audit discloses an error in excess of five percent (5%) in the payment of
Rental. Any error or dispute shall be handled as set forth in Section 4.05(a).

         4.05(c) This Section 4.05 shall not require Tenant to maintain records
of Gross Revenues for any period after Tenant no longer uses the Leased Premises
as a Hotel in accordance with Section 5.14.

         4.05(d) Landlord shall keep all information regarding Gross Revenues in
confidence and shall not divulge such information to third parties, except that
Landlord may disclose such information (i) to Landlord's lenders and other
parties, such as Landlord's auditors, who have a reasonable need for it, and
(ii) as required by law; provided, however, that Landlord shall use its
                         --------- -------
reasonable best efforts to secure the agreement of any Person to whom such
information is disclosed to keep such information in confidence.

                               END OF ARTICLE IV

                                     - 20 -
<PAGE>

                                   ARTICLE V

                               Use and Occupancy
                               -----------------

         5.01. Quiet Possession
               ----------------

         5.01(a) Quiet possession of the Leased Premises shall be delivered to
Tenant on the Effective Date, and Tenant shall thereafter quietly hold, occupy,
and enjoy the Leased Premises throughout the Term without any hindrance,
ejection, or molestation by [any Person] [Landlord or any Person claiming or to
claim by, through, or under Landlord]. Attached as Exhibit C is a list of
                                                   ---------
existing encumbrances to Landlord's fee title to the Leased Premises which
Tenant has accepted (the "Permitted Title Exceptions").

         5.01(b) Landlord may mortgage its fee interest in the Leased Premises
or its interest in the Rental and any other payments due under this Lease. The
lien of any mortgage now or hereafter placed upon the fee title to the Premises
(each a "Fee Mortgage") shall be subject and subordinate to this Lease or any
new lease made pursuant to Section 6.03 and to the leasehold estates created
hereby or thereby and to any amendments of this Lease or any such new lease;
provided, however, that so long as any Fee Mortgage shall constitute a lien on
the fee title to the Premises, no agreement hereafter made amending this Lease
or any such new lease so as to (i) reduce the amount of the Minimum Rental
payable hereunder, (ii) relieve Tenant from the obligation to make payment of
any Imposition or to take out, pay for and maintain any of the insurance
provided for in Article VII, (iii) make any change in this lease relating to the
distribution of insurance proceeds or condemnation awards, or (iv) shorten or
extend the term of this Lease or any such new lease, shall be binding upon the
holder of any Fee Mortgage or upon grantee of any deed given in lieu of the
foreclosure of any Fee Mortgage, or their successors or assigns, and any such
holder or purchaser or grantee or their successors or assigns shall be entitled
to enforce this Lease or any such new lease in accordance with its terms in
effect prior to any such amendment. No holder of any Fee Mortgage shall disturb
Tenant or any of Tenant's Leasehold  Mortgagees, unless and only so long as an
Event of Default by Tenant shall have occurred and be continuing hereunder. If
Landlord so requests, Tenant shall agree, (x) to provide the holder of each Fee
Mortgage with any notice it gives or is required to give Landlord under this
Lease, provided Tenant is provided within an accurate address for the sending
of such notice, (y) not to amend or otherwise modify this Lease in the respects
set forth in clauses (i) through (iv) of the

                                     - 21 -
<PAGE>

immediately preceding sentence, without obtaining the prior written consent of
the holder of each Fee Mortgage, which consent shall not be unreasonably
withheld, conditioned, or delayed, and (z) to provide any other reasonable
assistance to to the holder of any Fee Mortgage as may be reasonably requested,
provided that such assistance does not adversely affect Tenant's rights under
this Lease or expose Tenant to any actual or potential liability or obligation
other than as provided in this Lease.

         5.02  Use and Indemnification
               -----------------------

         5.02(a) Tenant shall use and occupy the Leased Premises for any lawful
purposes in accordance with Section 5.09 and with the requirements of any
insurer providing the coverage required by this Lease.

         5.02(b) Tenant shall indemnify, defend, and hold Landlord harmless from
any and all claims or liabilities arising out of Tenant's possession or use of
the Leased Premises, except those arising from acts or omissions of Landlord or
Landlord's Affiliates (other than Tenant) or the employees, officers, directors,
representatives, agents or contractors thereof. Landlord shall indemnify,
defend, and hold Tenant harmless from any and all claims or liabilities arising
out of the use, ownership or occupancy of the Leased Premises prior to the
Effective Date or after the expiration or earlier termination of this Lease or
arising from acts or omissions of Landlord or Landlord's Affiliates (other than
Tenant) or the employees, officers, directors, representatives, agents or
contractors thereof.

         5.03  Permits
               -------

         At Tenant's request, Landlord shall join in or consent to any
application for any sign or other permits to which Landlord's consent may be
necessary or which may otherwise be reasonably requested by Tenant.

         5.04  Easements
               ---------

         Landlord shall grant (or join in granting) and, if necessary, modify or
abandon such rights-of-way, easements, and other interests as may be required
to provide the Leased Premises with ingress and egress, and/or electric,
telephone, gas, water, sewer, and/or other public utilities useful or necessary
for the proper development and operation of the Improvements.

                                     - 22 -
<PAGE>

         5.05  Improvements and Personal Property
               ----------------------------------

         5.05(a) Tenant shall have the right upon Landlord's prior consent
(which consent shall pertain only to the methods and quality of the demolition,
construction, or other work to be conducted on the Leased Premises and which
consent shall not be unreasonably withheld, conditioned or delayed), subject to
full compliance with applicable law, at any time and from time to time during
the Term, to construct, alter, repair, remodel, or replace any Improvements and
to demolish, raze, or otherwise remove the same; provided, however, that
                                                 --------- -------

Landlord's consent shall not be necessary if, following any such construction,
alteration, repair, remodelling or replacement, the Improvements will continue
to be operated as a Hotel. Title to all Improvements shall be vested in Tenant
throughout the Term, and Tenant shall retain all rights to depreciation
deductions and tax credits and all other rights and interests of whatever kind
arising from or incidental to the ownership thereof. Nevertheless, subject to
Sections 3.02, 3.03, 3.04 and 3.05(b) and Section 5.05(b) below, any
Improvements remaining as of the expiration or termination of this Lease shall
become part of the realty and the sole and absolute property of Landlord and
shall be surrendered to Landlord at that time, free and clear of the liens of
mortgages, deeds of trust, mechanics, laborers, or materialmen, and all other
liens and encumbrances other than the Permitted Title Exceptions or any other
liens or encumbrances incurred by or agreed to by Landlord or created under
Section 5.04.

         5.05(b) If a new lease is given to a Leasehold Mortgagee as provided in
Section 6.03, title to the Improvements shall vest in the Leasehold Mortgagee,
its successors, and assigns. Upon expiration or termination of such new lease,
title to any remaining Improvements shall vest in Landlord, except as set forth
in any provision in such new lease similar to Sections 3.03, 3.04 or 3.05(b)
hereof or this Section 5.05(b).

         5.05(c) All items of FF&E and other items of personal property
purchased by Tenant for use on the Leased Premises shall be Tenant's property.
Provided an Event of Default by Tenant shall not have occurred and be
continuing, Tenant may remove from the Leased Premises all such FF&E and other
items of personal property during the Term and shall repair at Tenant's cost any
damage to the Leased Premises caused by such removal.

         5.06  Liens
               -----

         If at any time during the Term, any liens of mechanics, laborers, or
materialmen shall be filed against the

                                     - 23 -
<PAGE>

Leased Premises or any part thereof relating to work performed on behalf of
Tenant on the Leased Premises, Tenant shall, at its expense, cause the same to
be discharged, by payment, bond, or otherwise as provided by law, within
forty-five (45) days after Tenant receives notice that the lien was filed,
except for such liens that may have been incurred by Landlord or which may arise
from the acts or omissions of Landlord or Landlord's employees, officers,
directors, representatives, agents or contractors. Nothing herein shall in any
way prejudice the rights of Tenant to contest to final judgment or decree any
such lien before payment thereof. Tenant, upon reasonable notice and written
request from Landlord, shall also defend for Landlord, at Tenant's expense, any
action, suit, or proceeding that may be brought against Landlord on or for the
enforcement of any such lien and shall pay damages and satisfy and discharge any
judgment entered in such action, suit, or proceeding and save Landlord harmless
from any liability, claim, or damages resulting therefrom where such lien,
judgment, suit, or proceeding arises from the acts of Tenant, its agents (other
than the Management Company), employees, directors, officers, representatives or
contractors and not from the acts or omissions of the Management Company or the
Landlord or any of their employees, officers, directors, representatives,
agents, or contractors.

         5.07  Licenses and Permits
               --------------------

         Tenant shall at its expense apply for and use its reasonable best
efforts to keep in force all permits or licenses necessary for the operation of
the Improvements. Landlord agrees on request of Tenant to sign promptly and
without charge any applications for such licenses and permits as may be required
by Tenant for the construction, conduct, or operation on the Leased Premises of
the Improvements and generally to cooperate with Tenant, at Tenant's sole cost
and expense, in making application for such licenses and permits at Tenant's
reasonable request. Tenant shall save Landlord harmless from all liabilities,
claims, costs, and expenses that Landlord may incur by reason of having signed
any such application.

         5.08  Maintenance
               -----------

         Except as otherwise specifically provided herein, Tenant shall keep and
maintain the Leased Premises and all Improvements in good repair and in a safe,
clean, and sanitary condition, ordinary wear and tear excepted.

                                     - 24 -
<PAGE>

         5.09  Compliance with Laws
               --------------------

         5.09(a) Tenant shall comply in all material respects with all laws and
regulation5 of governmental entities having jurisdiction Over the Leased
Premises.

         5.09(b) Tenant may, after written notice to Landlord, by appropriate
proceedings at Tenants expense, in Tenant's name, and/or wherever necessary in
Landlord's name, contest in good faith the validity or enforcement of any such
law or regulation, and Tenant may defer compliance with the same during such
contest, provided Tenant diligently prosecutes such contest to a final
determination by the authority having jurisdiction thereof, and provided such
contest and deferment do not subject Landlord to any fine, cost or penalty,
unless Tenant promptly pays such fine, cost or penalty (or posts sufficient bond
to prevent Landlord from being subject to such liability), or to any other civil
or criminal liability. In any such proceeding, Landlord shall provide Tenant, if
so requested, reasonable assistance at Tenant's expense.

         5.10 Impositions
              -----------

         5.10(a) Subject to the other provisions of this Section 5.10,
commencing as of the Effective Date, Tenant shall pay all real estate and
personal property taxes, levies, assessments, and similar charges on or relating
to the Leased Premises and the Improvements and taxes based on the Rental paid
hereunder, whether assessed against Landlord or Tenant (the Impositions") for
the remainder of the Term, and Tenant shall save Landlord harmless from any such
charges and liability therefor. Subject to Section 5.12, provided Tenant is
provided with bills or invoices therefor no fewer than fifteen (15) days before
any Imposition is due, Tenant shall pay Impositions directly to the taxing
authority making such levy, and, if Impositions may be paid in installments,
Tenant may do so. Upon request, Tenant shall promptly deliver to Landlord copies
of the official receipts of such taxing authorities or other proof evidencing
timely satisfaction of Tenant's obligation to pay Impositions. Landlord shall
cause the Leased Premises to be assessed as a separate and distinct tax lot and
shall promptly forward any and all tax bills or related correspondence to
Tenant. Notwithstanding the foregoing, it shall not be an Event of Default
hereunder if any Imposition is not paid because the Management Company is in
default of the Management Company's obligations under Section 13.01 of the
Management Agreement.

         5.10(b) Tenant may endeavor at any time or times to obtain a reduction
in the assessed valuation of the Leased

                                    - 25 -
<PAGE>

Premises for the purpose of reducing Impositions payable with respect thereto
and, in such event. Landlord will Cooperate with Tenant, at Tenant's sole cost
and expense, in effecting such a reduction, Any tax refund collected as a result
of such reduction and attributable to the period within the Term hereof shall be
delivered to and remain the Property of Tenant. Landlord shall not be required
to join in any such action unless required by law and, in the event that
Landlord does join in such action at the request of Tenant, Tenant shall
indemnify and hold Landlord harmless from all costs, expenses, claims, losses,
damages, or liabilities incurred by Landlord as a result thereof.

         5.10(c) To the extent that the same may be permitted under applicable
law, Tenant shall have the right to apply for the conversion of any assessment
for local improvements assessed during the Term in order to cause the same to be
payable in annual installments, and Landlord agrees to permit any such
application for conversion to be filed in Landlord's name (if necessary or
desirable under applicable law) and to Cooperate with Tenant in connection
therewith, In the event Tenant elects to pay Impositions in installments, Tenant
shall be required to pay only such installments as may become due during the
term of this Lease as the same respectively become due and before any interest
or penalties may be added thereto for nonpayment thereof; and provided further,
that any Imposition relating to a fiscal period of a taxing authority, a part of
which period is included within the Term and a part of which is included in a
period of time before the Effective Date or after the termination of this Lease,
other than a termination of this Lease pursuant to an Event of Default under
Article X shall (whether or not such Imposition shall be assessed, levied,
Confirmed, imposed or become a lien upon the Leased Premises, or shall become
payable, during the term of this Lease) be appropriately prorated between
Landlord and Tenant,

         5.10(d) Notwithstanding anything in this Lease to the contrary, Tenant
shall not be required to pay any Imposition in the nature of an income or gross
receipts tax imposed because of (i) Landlord's receipt of Rental payments from
Tenant, (ii) Landlord's ownership of the fee title to the Leased Premises, or
(iii) Landlord's interest in this Lease nor any municipal, state, or federal
capital levy, excess profits, gift, estate, succession, inheritance or transfer
taxes imposed on Landlord, nor any corporation franchise taxes imposed upon
Landlord,

         5.10(e) Tenant shall comply with the provisions of any Leasehold
Mortgage that requires the payment of Impositions into a separate tax escrow.

                                    - 26 -
<PAGE>

         5.11  Utility Payments
               ----------------

         Subject to Section 5.12, Tenant shall pay all charges, assessments, or
taxes for gas, electricity, water, sewer, telephone, and other utility services
incurred for the Leased Premises during the Term.

         5.12  Right to Contest Impositions and Utility Payments
               -------------------------------------------------

         Tenant may at any time in good faith and on reasonable grounds contest
the validity of the whole or any part of any Impositions or utility payments or
penalties and claims with respect thereto on the Leased Premises and the
Improvements, defend against the same, and diligently conduct any necessary
proceedings to prevent or avoid the same. Tenant shall not, during the
prosecution of such proceedings, be deemed in Default hereunder so long as
Tenant complies with the provisions of this Section 5.12. Any rebate made on
account of any impositions or utility payments shall be repaid to the party
making such payment. Landlord agrees to render to Tenant any and all reasonable
assistance at no cost to Tenant, in contesting the validity or amount of any
Impositions or utility payments, including (if required) joining in the signing
of any protests or pleadings that Tenant may reasonably deem advisable to file;
provided, however, if Landlord incurs reasonable out-of-pocket expenses in
--------- -------
rendering Tenant such assistance, Tenant promptly shall reimburse Landlord for
same. During any such contest, Tenant shall (by payment or bonding of such
disputed Impositions or utility payments, if necessary): (i) prevent any
foreclosure of, or any divesting thereby of Landlord's interest in the Leased
Premises; (ii) prevent the public sale or foreclosure of any lien for any
Impositions or utility payments; and (iii) take whatever action is necessary to
prevent Landlord from incurring or being exposed to any criminal or civil
liability for any Impositions or utility payments. Landlord shall promptly
reimburse Tenant for any such payment made by Tenant for Impositions or utility
payments attributable to the Leased Premises that are the responsibility of
Landlord hereunder, including any payments applicable to any period before the
Effective Date or after termination of this Lease.

         5.13  Failure to Make Payments
               ------------------------

         5.13(a) Subject to Sections 5.10(a) and 5.13(b) and Tenant's right of
contest under Section 5.12, if Tenant fails to pay when due without penalty any
(i) Impositions, (ii) utilities charges, (iii) principal and interest on any
Leasehold Mortgage (after any applicable notice and grace

                                    - 27 -
<PAGE>

period provided in such Leasehold Mortgage), (iv) insurance premiums described
in Article VII, or (v) any other amounts required under this Lease (after any
applicable notice and grace periods), then, in any of such events, Landlord may
make all such payments.

         5.13(b) Landlord shall provide Tenant and (provided Tenant shall have
given Landlord the name and address of the first Leasehold Mortgagee) the first
Leasehold Mortgagee, if any, notice of its intention to make any payment under
Section 5.13(a) and give Tenant and any such Leasehold Mortgagee fifteen (15)
days (or such lesser period as shall be necessary to avoid a loss of Tenant's
interest in the Leased Premises) from the receipt of such notice to make payment
itself. If Tenant or such Leasehold Mortgagee makes payment after receipt of
such notice, it shall promptly provide evidence to Landlord that it has done so.
Landlord shall not have to give any notice or delay in making any payment under
this Section 5.13(b) if by so doing it would significantly increase the risk
that it would lose its interest in the Leased Premises, whether by foreclosure
sale or otherwise.

         5.13(c) Subject to any right of redemption Tenant may have under
applicable law, Landlord may at any time redeem the Leased Premises from a
foreclosure sale for the non-payment of any Impositions or other charges.

         5.13(d) Landlord need not inquire into the validity of any Impositions,
other charges, or tax sale before making any payment under this Section 5.13.
Landlord may require Tenant to repay Landlord the amount of such payments on
demand or may treat the amount of such payments as additional Rental after the
date of such payments, and if Tenant does not make such payment, Landlord shall
have the same rights and remedies with respect thereto as Landlord has for the
nonpayment of Rental. All such payments shall bear interest at the Lease
Interest Rate from the date of payment by Landlord until reimbursement (unless
the failure to pay was caused by the Management Company under the Management
Agreement or by any substitute or replacement manager which is an Affiliate of
Landlord under any subsequent management agreement).

         5.14  Chance in Use
               -------------

         From and after the date on which Tenant notifies Landlord of its intent
to cease to operate the Leased Premises as a Hotel (the "Conversion Date"),
annual Rental shall not be calculated in accordance with Exhibit A but instead
                                                         ---------
shall equal the greater of (a) the average annual Rental that was paid

                                    - 28 -
<PAGE>

during the last two (2) full Fiscal Years preceding the Conversion Date or
(b) the fair market rental value of the Leased Premises (assuming the new use of
the Leased Premises to be its highest and best use), which fair market rental
value shall be agreed to by the parties within thirty (30) days after the
Conversion Date; provided, however, if the parties cannot so agree within such
                 --------- -------
thirty (30) day period, the fair market rental value of the Leased Premises,
given such use, shall be determined by appraisal in accordance with Section
9.02. All annual Rental due after the Conversion Date shall be paid in advance
in twelve (12) equal monthly installments payable on the first Business Day of
each month.

                                END OF SECTION V

                                    - 29 -
<PAGE>

                                  ARTICLE VI

                              Leasehold Mortgages
                              -------------------

         6.01  Leasehold Mortgages
               -------------------

         6.01(a) Tenant may, without Landlord's consent, from time to time
pledge, deed in trust, mortgage, or encumber its interest in this Lease and/or
the leasehold estate demised hereunder. Each such pledge, deed of trust,
mortgage, or encumbrance, as the same may be extended, modified, amended, or
replaced, shall be a "Leasehold Mortgage," and its holder or its holder's
designee or nominee, a "Leasehold Mortgagee."

         6.01(b) Subject to Section 6.04, there shall be no limitation on the
number of Leasehold Mortgages or on the principal amount and other sums secured
thereby, and such principal amount and other sums may also be secured by other
mortgages, deeds of trust, or security agreements. Any Leasehold Mortgage may
secure loans for any purpose, and a Leasehold Mortgage may secure loans for the
improvement of other properties in other locations. Any Leasehold Mortgage shall
by its terms be made expressly subject to all of Landlord's rights under this
Lease. Landlord shall recognize any Leasehold Mortgagee and deliver to same any
notices given under this Lease, provided such Leasehold Mortgagee or Tenant
shall have notified Landlord in writing of the existence of such Leasehold
Mortgage and of the name and address of such Leasehold Mortgagee.

         6.02  Rights of Leasehold Mortgagees
               ------------------------------

         Landlord agrees with and for the benefit of each Leasehold Mortgagee
and its heirs, personal representatives, successors, and assigns:

         6.02(a) When giving any notice to Tenant, including, without
limitation, any notice as to (i) any Default under this Lease, (ii) an Event of
Default, or (iii) any exercise of any right to terminate this Lease, Landlord
shall also give a copy of such notice to each Leasehold Mortgagee; provided
Landlord shall not be required to give such notice to any Leasehold Mortgagee
the identity and address of which Tenant has not provided to Landlord. No such
notice to Tenant shall be effective unless it is also given to each Leasehold
Mortgagee, but Landlord shall not incur any liability to any Leasehold Mortgagee
for failure to give such notice. The date on which Tenant and all Leasehold
Mortgagees receive any such notice shall be a "Default Date."

                                    - 30 -
<PAGE>

         6.02(b) If a Default by Tenant occurs under this Lease, any Leasehold
Mortgagee may cure such Default, and Landlord shall accept performance by such
Leasehold Mortgagee as though it were performed by Tenant. After receiving a
notice of a Default, in addition to the time that Tenant would have to cure
after the receipt of notice thereof, Leasehold Mortgagee shall have an
additional cure period of thirty (30) days. In the event of a Default, or if
termination is sought by reason of an Event of Default, other than the payment
of Minimum Rental or any other definite sum due Landlord, that cannot reasonably
be cured within said period, the time for cure shall be extended for so long as
any Leasehold Mortgagee is diligently attempting to cure such Default, provided
that such Leasehold Mortgagee has begun proceedings to cure the Default within
said period.

         6.02(c) In addition, if to cure any Default of Tenant under this Lease
a Leasehold Mortgagee must perform any act other than the payment of any Minimum
Rental or other definite sum due Landlord, no Event of Default will be deemed to
exist, and Landlord shall have no right to terminate this Lease until Leasehold
Mortgagee has had a reasonable opportunity either:

             (1) To cure such Default, if the Default is reasonably susceptible
of cure by Leasehold Mortgagee after Leasehold Mortgagee obtains possession of
the Leased Premises by appointment of a receiver, institution of foreclosure
proceedings, or otherwise, or

             (2) To institute and with due diligence complete foreclosure or
other appropriate proceedings to acquire possession of Tenant's interest in this
Lease, if the Default is not reasonably susceptible of being cured by Leasehold
Mortgagee even after it obtains possession.

         6.02(d) In the event of foreclosure under Section 6.02(c), Leasehold
Mortgagee shall deliver to Landlord, no later than thirty (30) days after the
expiration of the applicable grace period set forth in Subsection 6.02(b), an
instrument by which Leasehold Mortgagee undertakes that:

             (1) During the pendency of any such foreclosure or other
proceedings and until the interest of Tenant in this Lease shall terminate and
Leasehold Mortgagee shall obtain possession of the Leased Premises, Leasehold
Mortgagee shall pay Landlord, as it becomes due, all Rental; and

                                    - 31 -
<PAGE>

             (2) When, as, and if Leasehold Mortgagee shall obtain possession of
the Leased Premises whether voluntarily, as a result of foreclosure proceedings,
or otherwise, Leasehold Mortgagee shall (i) thereafter perform all of Tenant's
obligations under this Lease accruing from and after the date Leasehold
Mortgagee takes possession, provided that the Leasehold Mortgagee shall not be
responsible to perform or see to the performance of any obligation of Tenant
accruing before such date, except as set forth in Section 6.02(g), and (ii) pay
all Rental accruing thereafter.

         6.02(e) For any Accounting Period as to which Leasehold Mortgagee
cannot obtain sufficient information as to Gross Revenues so as to determine
Percentage Rental, Percentage Rental shall be calculated (and paid, if more than
Minimum Rental) in an amount equal to the average Percentage Rental due in the
thirteen (13) previous Accounting Periods. If and when such information becomes
available, Leasehold Mortgagee shall promptly calculate the amount of Percentage
Rental actually due, and Landlord or Leasehold Mortgagee, as the case may be,
shall promptly remit to the other any amounts owed without interest. No
Percentage Rental shall be payable by Leasehold Mortgagee for any period before
the applicable Default Date.

         6.02(f) If before the sale in any foreclosure proceeding instituted by
a Leasehold Mortgagee, or if before the date on which Tenant's interest in this
Lease shall otherwise be extinguished, the Default as to which Landlord shall
have given any notice shall have been cured, the undertaking of Leasehold
Mortgagee provided for in Section 6.02(d) shall automatically terminate and be
without further force and effect.

         6.02(g) Notwithstanding Sections 6.02(c), (d), and (e), any Default of
Tenant under any provision of this Lease that is not reasonably susceptible of
being cured by a Leasehold Mortgagee shall be deemed to have been waived by
Landlord upon completion of foreclosure proceedings or when Leasehold Mortgagee
or a purchaser at a foreclosure sale shall otherwise acquire title to Tenant's
interest in this Lease. Any Default that is reasonably susceptible of being
cured after such completion or acquisition shall thereafter be cured with due
diligence. Without limiting the generality of the foregoing, as used in this
paragraph, a Default or an Event of Default, or unfulfilled obligation, not
"reasonably susceptible" of being cured or performed by a Leasehold Mortgagee or
a new tenant shall include, but not be limited to, (i) the failure to pay
Percentage Rental for any period before

                                    - 32 -
<PAGE>

a Default Date relating thereto; (ii) the failure by Tenant to keep books and
records and deliver statements as required by this Lease (except to the extent
of information in Leasehold Mortgagee's or such new tenant's possession);
(iii) the failure of Tenant to comply with the time requirements of any term or
provision of this Lease; (iv) any bankruptcy, insolvency, or receivership or
similar event related to Tenant; or (v) failure of Tenant to give any required
notices or certificates to Landlord.

         6.02(h) A Leasehold Mortgagee may become the owner of Tenant's interest
under this Lease, including Tenant's interest in all Improvements, by
foreclosure or other enforcement proceedings, or by obtaining an assignment of
this Lease in lieu of foreclosure or through settlement of or arising out of any
pending or threatened foreclosure proceeding, without Landlord's consent and
without any obligation to assume this Lease, but subject to its applicable terms
and provisions. In such event, Leasehold Mortgagee shall have the right
thereafter to assign this Lease under Article XI. Upon the delivery to Landlord
of a duplicate original of an instrument of assignment containing the assignee's
assumption of this Lease, such assignee of Leasehold Mortgagee shall become
Tenant, and shall be substituted for Leasehold Mortgagee as the owner and holder
of this Lease for all purposes as of the effective date of such assignment; from
and after the effective date of such assignment, Leasehold Mortgagee shall be
released from all liability under this Lease thereafter arising (it being
understood that nothing herein shall be deemed to create any personal liability
on the part of Leasehold Mortgagee).

         6.02(i) If Tenant fails to perform any of its obligations under this
Lease, a Leasehold Mortgagee may perform such obligations on behalf of Tenant,
whether or not Tenant is in Default under this Lease.

         6.02(j) No Leasehold Mortgagee shall be required to commence or
continue any foreclosure or other proceedings or to obtain or continue
possession of the Leased Premises, except to the extent specified as a
prerequisite for exercise or preservation of Leasehold Mortgagee's rights.

         6.02(k) Tenant may delegate to the first Leasehold Mortgagee the right
to exercise any and all rights of Tenant under the Lease.

                                    - 33 -
<PAGE>

         6.03  Right to a New Lease
               --------------------

         6.03(a) In the event of the termination of this Lease or of any new
lease made under the provisions of this Section 6.03 before its stated
expiration date, Landlord shall notify the first leasehold Mortgagee and certify
in writing to the first Leasehold Mortgagee all amounts then due to Landlord
under this Lease (or such new lease), and, at the first Leasehold Mortgagee's
request, Landlord will enter into a new lease of the Leased Premises with the
first Leasehold Mortgagee for the remainder of the Term, to commence as of the
date of the termination of this Lease (or any new lease) at the same Rental and
on all of the other terms of this Lease, on condition that:

             (1) The first Leasehold Mortgagee shall make written request to
Landlord for such new lease not later than thirty (30) days from the date such
notice of all amounts due Landlord is given to the first Leasehold Mortgagee;
and

             (2) The first Leasehold Mortgagee shall pay to Landlord at the time
of the execution and delivery of said new lease all sums that, as of the date of
execution and delivery of such new lease, were past due and owing under this
Lease or such prior new lease, except for Percentage Rental that is not then
calculable, but which shall be paid in accordance with Section 6.02(e).

         6.03(b) Of the amounts owed by Tenant under the prior lease, any net
income that Landlord shall have received from the Leased Premises after the
termination of this Lease shall be deducted from the amounts payable to Landlord
under the new lease. Upon the execution and delivery of such new lease, all
subleases or concession agreements that previously had been assigned and
transferred to Landlord shall thereupon be assigned and transferred without
recourse by Landlord to the new tenant together with (i) all monies held by
Landlord as security for the performance by any subtenant or other occupant of
its respective obligations under its sublease or concession agreement and (ii)
such other funds, if any, held by Landlord to which Tenant under this Lease
would have been entitled but for the termination of this Lease and to which a
successor in interest of Tenant would be legally entitled.

         6.04  Limitation on Leasehold Mortgagees
               ----------------------------------

         6.04(a) The provisions of Sections 5.13, 6.02, 6.03, 6.05, 6.06, and
6.07 shall only be for the benefit of Leasehold Mortgagees that are also Bona
Fide Institutional Lenders. In

                                    - 34 -
<PAGE>

addition, they shall only be for the benefit of the holders of Leasehold
Mortgages that shall be, respectively, a first, second, and third lien, except
that (i) if any such holder also holds a Leasehold Mortgage other than a first,
second, or third Leasehold Mortgage, then they shall also be for the benefit of
all such Leasehold Mortgages held by such Leasehold Mortgagee, and (ii) if any
such holder holds more than one of the Leasehold Mortgages constituting a first,
second, or third lien, then such Leasehold Mortgages shall for the purposes of
this paragraph count as one lien. If the holders of more than one such Leasehold
Mortgage shall make written requests to Landlord for a new lease in accordance
with the provisions of Section 6.03, the new lease shall be entered into upon
the request of the holder whose Leasehold Mortgage shall be prior in lien
thereto and thereupon the written requests for a new lease of each holder of a
Leasehold Mortgage junior in lien shall be void and of no force or effect.

                6.04(b) Subject to Section 6.04(a), the holder of any purchase
money mortgage that may be given to a Leasehold Mortgagee or its assignee in
connection with the assignment of this Lease or any new lease made under Section
6.03, or the sale of the leasehold estate created hereunder or thereunder, shall
enjoy all of the rights, powers, and privileges granted in this Lease to
Leasehold Mortgagees.

                6.05  Communications with Leasehold Mortgagees
                      ----------------------------------------

                Any notice or other communication that Landlord or a Leasehold
Mortgagee shall desire or is required to give the other shall be made in
accordance with the provisions of Section 12.03.

                6.06  Termination by Tenant
                      ---------------------

                Landlord shall not modify, cancel, or accept a surrender of this
Lease, nor shall this Lease be terminated by Tenant (including a termination
under the express provisions hereof), without the prior written consent of all
Leasehold Mortgagees. Any such modification, cancellation, surrender,
termination, or option election without the written consent of all Leasehold
Mortgagees shall be void and of no force or effect.

                6.07  No Merger
                      ---------

                No union of the interests of Landlord and Tenant shall result in
a merger of this Lease and the fee interests in the Leased Premises or
any part thereof by reason of the fact that

                                      -35-
<PAGE>

the same Person may own or hold (a) the leasehold estate created by this Lease
or any interest in such leasehold estate, and (b) a fee interest in the Leased
Premises or any part thereof or any interest in such fee estate; and no such
merger shall occur without the prior written consent of all Leasehold Mortgagees
and the execution of a written recordable instrument to such effect executed by
the owner of title to the fee and leasehold interest in the Leased Premises and
each such Leasehold Mortgagee.

         6.08  Mortaaqe Fees and Expenses
               --------------------------

         Tenant shall pay all fees and expenses of every character and
description incurred in connection with the procurement of any Leasehold
Mortgages under this Article VI.

         6.09  Equipment Leasing
               -----------------

         Some of the FF&E or other items of personal property installed on the
Leased Premises may be (i) financed by a third-party lender, (ii) owned by an
equipment rental company or vendor and leased to Tenant either directly or by
way of an equipment sublease or an assignment of equipment lease from an
equipment sublessor, or (iii) otherwise subject to a security interest. Any such
lender, equipment leasing or subleasing company, vendor, or other holder of a
security interest or its assignee shall be referred to as an "Equipment Lessor,"
and Landlord agrees to recognize the rights in any FF&E or other personal
property granted to any Equipment Lessor. Provided that there is no Event of
Default on Tenant's part, Tenant shall have the right at any time to remove any
FF&E or other personal property, whether or not financed, leased, or subject to
a security interest and whether or not affixed to the Leased Premises; to the
extent of its interest therein, an Equipment Lessor shall also have such a
right, regardless of whether Tenant is in Default under this Lease. Tenant or
the other party causing such removal shall repair any damage to the Leased
Premises caused thereby. Landlord waives the right of distraint except as to
Tenant and agrees that any disposal or sale of the FF&E or other personal
property may be made on the Leased Premises during the Term or within twenty
(20) days after the termination or expiration of this Lease.

                               END OF ARTICLE VI

                                      -36-
<PAGE>

                                  ARTICLE VII

                      Insurance, Damage, and Destruction
                      ----------------------------------

         7.01  General Liability and Workers' Compensation
               -------------------------------------------

         Commencing on the Effective Date, Tenant shall procure and maintain
during the Term general liability insurance against claims for personal injury,
death or property damage occuring on, in, or about the Leased Premises and/or
the Improvements with a combined single limit of not less than twenty million
dollars ($20,000,000) (which amount shall be adjusted every three (3) years in
accordance with the Price Index) insuring Landlord, Tenant, and any Leasehold
Mortgagee, which insurance shall contain such limits and other terms as shall be
mutually reasonably agreeable to Tenant and Landlord and as may be reasonably
required by the first Leasehold Mortgagee. Tenant shall carry workers'
compensation and employer's liability insurance as may be required under
applicable workers' compensation laws.

         7.02  Property and Business Interruption Insurance
               --------------------------------------------

         7.02(a) Tenant shall keep the Improvements and FF&E and other personal
property on the Leased Premises continuously insured against loss or damage from
(i) all perils covered by "all risk" (as such term is commonly used in the
insurance industry, excluding earthquake and flood) coverage, in amounts
sufficient to satisfy the requirements of the first Leasehold Mortgagee and not
less than ninety percent (90%) of the replacement cost thereof and (ii)
explosion of boilers, pressure vessels, pressure pipes, and sprinklers installed
at the Leased Premises, to the extent applicable.

         7.02(b) Tenant shall carry business interruption insurance, covering
loss of profits and necessary continuing expenses for interruptions caused by
any occurrence covered by the insurance referred to in Section 7.02(a) during a
period of at least one (1) year after such an occurrence, of a type and in such
amounts as are (i) required under Section 12.01D of the Management Agreement
(for so long as the Hotel is operated under the Management Agreement) or (ii)
reasonable in light of the operations conducted on the Leased Premises (in all
other cases).

         7.02(c) All policies under this Section 702 shall provide that any
insurance proceeds shall be payable to Tenant, Landlord, and any Leasehold
Mortgagees, as their interests may appear; provided, however, any loss payable
                                           --------- -------
under any property

                                      -37-
<PAGE>

insurance policy will be adjusted solely by Tenant with the prior written
consent of the first Leasehold Mortgagee. If the Insurance proceeds are made
payable to Landlord or Tenant and do not include the first Leasehold Mortgagee's
interest, Landlord and Tenant hereby agree to transfer any such payment to the
first Leasehold Mortgagee, if the applicable Leasehold Mortgage so provides;

provided, however, that for so long as the Leased Premises are subject to the
--------- -------
Management Agreement, each Leasehold Mortgage shall provide that, in the absence
of a default thereunder, insurance proceeds shall be made available for repair
and restoration of the Improvements.

         7.03  Coverage and Certificates
               -------------------------

         7.03(a) All. insurance described in Sections 7.01 and

7.02 shall be at Tenant's expense and written by insurance companies of
recognized responsibility (or by Tenant or an Affiliate qualifying as a self
insurer in the state where the Leased Premises are located) and may be
obtained by Tenant under any blanket insurance policies, provided such blanket
policies substantially fulfill the requirements specified herein or, so long as
the Management Agreement is in effect, in the Management Agreement. Any such
blanket policy shall indicate the amounts of coverage applicable to the
Improvements. Such policies shall contain deductible limits and self--insured
retentions as are then generally customary for similar properties. Should
Landlord and Tenant not agree upon what is generally customary, either may
submit the issue to arbitration under Section 9.01.

         7.03(b) If Landlord so requests, Tenant shall furnish Landlord with
certificates of insurance evidencing the coverage required under Sections 7.01
and 7.02 to be in effect. The certificates shall include a provision for thirty
(30) days' advance written notice by the insurer to Landlord and any Leasehold
Mortgagee in the event of any material change or cancellation of such insurance.

         7.04  Management Agreement; Insurance Following Change of Use
               -------------------------------------------------------

         So long as a Hotel is operated on the Leased Premises, and so long as
the Management Agreement shall be in effect, insurance carried under the
Management Agreement shall be deemed to comply under Sections 7.01, 7.02, and
7.03 hereof. If the Leased Premises are no longer used as a Hotel, Tenant shall
carry all such insurance as shall be reasonable to protect Tenant and Landlord
for such new use. In no event shall the insurance for such new use be less than
that required

                                      -38-
<PAGE>

under this Article VII without Landlord's prior written consent, which consent
shall not be unreasonably withheld, conditioned or delayed.

         7.05  Damage or Destruction
               ---------------------

         7.05(a) If the Improvements are damaged by fire, casualty or other
cause so that (i) the Improvements cannot reasonably be repaired or replaced
within one (1) year after such event or (ii) the proceeds of insurance available
are less than ninety percent (90%) of the estimated repair or replacement costs;
or (iii) the cost of the repair or replacement exceeds thirty percent (30%) of
their fair market value immediately preceding such damage, as reasonably
estimated by Tenant, and (A) there are fewer than ten (10) years remaining in
the Term or (B) the remainder of the current term of the Management Agreement
(or replacement management agreement applicable to the Hotel) is less than ten
(10) years and the Management Company (or other manager) fails to agree to
extend such term to a date at least ten (10) years after the estimated date of
completion of such repair or replacement (each, a "Major Casualty"), Tenant may,
with the prior written consent of the first Leasehold Mortgagee, terminate this
Lease upon written notice given within ninety (90) days after such damage. This
Lease shall then terminate upon (i) receipt by Landlord of Tenant's notice of
termination, (ii) satisfactory evidence that any Leasehold Mortgage has been
released, (iii) the safeguarding or razing of the Improvements in accordance
with Section 3.05, and (iv) payment by Tenant to Landlord of all Rental and
other amounts owed Landlord or any other person or entity under this Lease to
the date of termination. The Leased Premises and any Improvements remaining
thereon shall be surrendered to Landlord.

         7.05(b) If Tenant elects to terminate this Lease under this Section
7.05, notwithstanding the provisions of Section 7.02, the proceeds of any
property insurance policy received by Landlord shall not be released to Tenant
or any Leasehold Mortgagee until Landlord has received evidence reasonably
satisfactory to it that such proceeds will be used to make possible Tenant's
compliance with all its obligations under this Section 7.05,

         7.05(c) If Tenant does not elect to terminate this Lease following a
casualty, then Landlord shall have no claim to any insurance proceeds as
provided in this Section 7.05. In addition, the provisions of this Section 7.05
shall not be construed to limit Tenant's rights under Section 3.02.

                                      -39-
<PAGE>

         7.05(d) Landlord shall have no right to terminate this Lease as a
result of any partial or total destruction of the Improvements, FF&E, or other
personal property on the Leased Premises or any part thereof by fire or other
casualty.

         7.06  No Abatement of Rent
               --------------------

         Subject to the provisions of Sections 5.14 and 7.05, no partial or
total destruction of the Improvements, FF&E, or other personal property on the
Leased Premises or any part thereof by fire or other casualty shall permit
Tenant to surrender or terminate this Lease, relieve it from its obligation to
pay in full the Rental and other amounts payable by it, or relieve it from any
other obligation under this Lease.

                               END OF ARTICLE VII

                                      -40-
<PAGE>

                                  ARTICLE VIII

                                  Condemnation
                                  ------------

         8.01  Definitions
               -----------

         The following definitions apply to a taking of or damage to part or all
of the Leased Premises or Improvements or any interest in them by eminent domain
or condemnation or otherwise:

         8.01(a) "Taking" means (a) a taking of any interest in the Leased
                  ------
Premises by eminent domain, condemnation, compulsory acquisition, or similar
proceedings by any competent authority or otherwise for any public or quasi-
public use or purpose or (b) a voluntary conveyance in lieu thereof of title to
or any interest in the Leased Premises under threat of condemnation, in
avoidance of an exercise of eminent domain, or while condemnation proceedings
are pending. A Taking shall be considered to have taken place as of the date on
which Tenant is deprived of possession or use of all or a portion of the Leased
Premises or the Improvements.

         8.01(b) "Total Taking" means the Taking of the fee title to all the
                  ------------
Leased Premises and title to the Improvements.

         8.01(c) "Substantial Taking" means the Taking of the fee title to or
                  ------------------
any interest in a portion of the Leased Premises or title to or any interest in
a portion of the Improvements, or both, if the following conditions result:

             (1) Such Taking (A) materially impedes Tenant's ability to conduct
business on the Leased Premises in substantially the same manner as before the
Taking or (B) is reasonably expected to have a material adverse effect on the
income which Tenant may derive from the Leased Premises through the conduct of
such business, or

             (2) The cost of repairing or replacing the Improvements (or, if no
repair or replacement is feasible, the value of the Improvements taken) exceeds
thirty percent (30%) of the fair market value of the Improvements immediately
before such Taking as reasonably estimated by Tenant.

         8.01(d) "Partial Taking" means any Taking of the fee title to or any
                  --------------
interest in the Leased Premises or title to or any interest in the Improvements
that is not either a Total Taking or a Substantial Taking.

                                      -41-
<PAGE>

         8.01(e) "Notice of Intended Taking" means any notice on which a
                  -------------------------
reasonably prudent person would rely and that he would interpret as expressing
an existing intention of any Person having authority to effect a Taking as
distinguished from a mere preliminary inquiry or proposal. It includes the
service of a condemnation summons and complaint on a party to this Lease. The
notice is considered to have been received when a party to this Lease receives
from the condemning entity a written notice of intent to effect a Taking
containing a description or map of the area affected by the intended Taking,
reasonably defining its extent.

         8.01(f) "Award" means compensation paid for the Taking whether under
                  -----
judgment or by agreement or otherwise, together with all interest thereon.

         8.02  Notice of Taking; Representation
               --------------------------------

         8.02(a) Each party shall promptly give the other notice of the receipt,
contents, and date of any of the following kinds of notices it receives:

               (1)  Notice of Intended Taking;

               (2) Service of any legal process relating to a Taking or intended
Taking of the Leased Premises or Improvements;

               (3) Notice in connection with any proceedings or negotiations
with respect to such a Taking; or

               (4) Notice of intent or willingness to make or negotiate a
private purchase, sale, or transfer in lieu of a Taking.

         8.02(b) Landlord, Tenant, and all persons and entities holding under
Tenant (including each Leasehold Mortgagee) shall each have the right to
represent its respective interest in each proceeding or negotiation with respect
to a Taking or intended Taking and to make full proof of its claim. No
agreement, settlement, sale, or transfer to or with the Taking authority shall
be made without the consent of Landlord, Tenant, and each Leasehold Mortgagee,
if any. Landlord and Tenant each agree to execute and deliver to the other any
instruments that may be required to effectuate or facilitate the provisions of
this Lease relating to Takings.

                                     -42-
<PAGE>

         8.03 Total Taking
              ------------

         Upon the occurrence of a Total Taking, this Lease shall terminate as of
the date Tenant is deprived of possession or use of the Leased Premises and the
Improvements, and Tenant and Landlord each shall be entitled to prosecute a
separate claim for an Award in the amount of the interest of such party which is
taken. In the event an Award is made to only one party, then such Award shall be
allocated to each party in interest in accordance with the value of the interest
taken.

         8.04 Substantial Taking
              ------------------

         In the event of a Substantial Taking, Tenant shall have the option to
terminate this Lease by giving written notice thereof to Landlord not later than
sixty (60) days after the date of the Taking. Tenant and Landlord each shall be
entitled to prosecute a separate claim for an Award in the amount of the
interest of such party which is taken. In the event an Award is made to only one
party, then such Award shall be allocated to each party in interest in
accordance with the value of the interest taken. In the event an Award is made
to only one party, then such Award shall be allocated to each party in interest
in accordance with the value of the interest taken. If Tenant elects not to
terminate, such Taking shall be treated as a Partial Taking.

         8.05 Partial Taking
              --------------

         In the event of a Partial Taking, this Lease shall terminate only as to
the part of the Leased Premises taken and shall continue in full force and
effect for the part not taken without abatement, reduction, or other effect on
the Term or the obligation of Tenant to pay in full Impositions and other sums
to be paid by Tenant with respect to the part of the Leased Premises not so
taken, except that the Minimum Rental shall be reduced by the ratio the fair
market value of the Leased Premises after any restoration of the Improvements
following the Taking bears to the fair market value of the Leased Premises and
Improvements before the Taking. Any Award for a Partial Taking shall be paid to
Landlord, which shall pay such funds to Tenant to repair and restore such
portion of the Improvements not taken so that the same will be in good repair
for the uses intended by this Lease. The balance of any Award shall be allocated
to each party in interest in accordance with the value of the interest taken
(with Tenant's share being reduced by the amount of the Award first paid to
Tenant pursuant to the preceding sentence). In the event an Award is made to
only one party, then such Award shall be allocated to each party in interest in
accordance with the value of the interest taken.

                                      -43-
<PAGE>

         8.06 Temporary Taking
              ----------------

         If all or any portion of the Leased Premises are taken for temporary
use or occupancy, this Lease shall continue in full force and effect without
reduction or abatement of Rental. Tenant shall be entitled to claim and retain
any Awards in the form of Rental or payments in lieu thereof recoverable for
such Taking, except that if it shall be for a period extending beyond the end of
the Term, Landlord shall be entitled to receive such portion of the Award as
shall be attributable to the portion of such period occurring after the Term. In
the event that the Award to Tenant, together with any income derived from the
Leased Premises, is not sufficient for Tenant to pay Rental hereunder and
Tenant's other operating expenses, Tenant shall be entitled to terminate this
Lease after six (6) months upon thirty (30) days' written notice to the
Landlord.

         8.07  Disputes in Division of Award
               -----------------------------

         8.07(a) In case the respective portions of any Award to be received by
Landlord, Tenant, and any Leasehold Mortgagee shall not be fixed in the
proceedings for such Taking and if Landlord, Tenant, and any Leasehold Mortgagee
shall not agree in writing on such respective portions within thirty (30) days
after the date of the final determination of the amount of such Award, the
amounts of such respective portions shall be determined by arbitration in the
manner provided in Section 9.01. Upon the completion of such arbitration
proceeding, such Award or Awards shall be paid to Landlord, Tenant, and any
Leasehold Mortgagee in accordance with the determination of the arbitrators.

         8.07(b) Any dispute concerning fair market value under this Article
shall be resolved in accordance with Section 9.02.

         8.08  Leasehold Mortgagee to Hold Awards
               ----------------------------------

         If this Lease is not terminated in the event of a Taking, the Award to
Tenant shall be paid to the first Leasehold Mortgagee, if any, who shall hold,
apply, and make available the Award as provided in its Leasehold Mortgage.

                              END OF ARTICLE VIII

                                     -44-
<PAGE>

                                  ARTICLE IX

                            Arbitration; Appraisal
                            ----------------------

         9.01 Arbitration
              -----------

         9.01(a) A dispute concerning any issue of fact specifically mentioned
herein as a matter to be decided by arbitration shall be resolved as provided in
this Section 9.01.

         9.01(b) Except as specified below, disputes to be arbitrated hereunder
shall be resolved in accordance with the Commercial Arbitration Rules of the
American Arbitration Association then pertaining. The decision of the
arbitrators shall be binding on the parties. The arbitrators shall have no right
to amend or modify this Lease, and they shall apply the law of the state in
which the Leased Premises are located.

         9.01(c) Within twenty (20) days after a demand by the other to
arbitrate, Landlord and Tenant shall each appoint a fit and impartial person as
arbitrator who shall have had at least ten (10) years' experience in a calling
connected with the subject matter of the dispute (a "Qualified Arbitrator").
Such appointment shall be signed in writing by each party to the other. If
either Landlord or Tenant shall fail to appoint a Qualified Arbitrator for a
period of twenty (20) days after written notice from the other party to make
such appointment, then the party having made such appointment shall apply to the
American Arbitration Association for the appointment of a second Qualified
Arbitrator (subject, however, to the rights of any Leasehold Mortgagee under
Section 9.01(f)) and the two so appointed shall, in the event of their failure
to agree upon any decision within thirty (30) days thereafter, appoint a third
Qualified Arbitrator. If such arbitrators fail to agree on a third arbitrator
within forty-five (45) days after appointment of the second arbitrator, then
the American Arbitration Association shall appoint such third Qualified
Arbitrator.

         9.01(d) The decision of the arbitrators shall be rendered within thirty
(30) days after appointment of the third arbitrator, and such decision shall be
in writing and in duplicate, one counterpart thereof to be delivered to each of
Landlord and Tenant. A judgment of a court of competent jurisdiction may be
entered on the award of the arbitrators.

                                    - 45 -
<PAGE>

         9.01(e) If a dispute shall be submitted to arbitration, notice of
appointment of the arbitrators shall be given to any Leasehold Mortgagee who
prior thereto shall have given Landlord a written notice specifying its name and
address. Such Leasehold Mortgagee shall then have the right to participate in
the arbitration proceedings, provided that such participation shall be in
association with Tenant and shall not (i) entitle such Leasehold Mortgagee to
participate in the appointment of Tenant's arbitrator, (ii) allow it to appoint
an additional arbitrator, or (iii) enlarge Tenant's rights in such arbitration
proceeding.

         9.01(f) If under any provision of this Lease a matter shall be
submitted to arbitration under a procedure requiring the appointment of an
arbitrator by Tenant and Tenant shall fail to appoint an arbitrator, the first
Leasehold Mortgagee, if any, shall have an additional twenty (20) days to
appoint an arbitrator to represent Tenant's interests.

         9.02 Appraisal.
              ---------

         9.02(a) In the event of a dispute as to the fair market value or the
fair market rental value (both the fair market value and the fair market rental
value, as the case may be, being hereinafter referred to as the "fair market
value" for purposes of this Section 9.02) of the Improvements or the Leased
Premises or any interest therein, such fair market value shall be determined in
accordance with the following:

         9.02(b) If the parties hereto cannot agree on the fair market value
within thirty (30) days after either party requests an agreement upon the fair
market value, then each party shall, within fifteen (15) days, appoint an MAI
appraiser having at least ten (10) years' experience in the valuation and
appraisal of commercial hotel properties and shall notify the other party of
such choice. In the event that either party hereto does not designate an
appraiser within said fifteen (15) day period, the other party hereto shall have
the right to appoint the second appraiser; provided, however, that in the event
                                           --------- -------
that the Tenant does not appoint an appraiser within such fifteen (15) day
period, the first Leasehold Mortgagee, if any, shall first have a period of
fifteen (15) days to appoint the appraiser on Tenant's behalf and at Tenant's
sole cost and expense. The two appraisers so selected shall together appoint a
third appraiser of like qualification. If the first two appraisers selected
cannot agree on the third appraiser, the third appraiser shall be selected by
arbitration in accordance with Section 9.01 hereof. In an event of the failure,
refusal or inability of any appraiser to act, a new appraiser shall be

                                    - 46 -
<PAGE>

appointed in his stead, which appointment shall be made in the same manner as
provided for the employment of the appraiser so failing, refusing or being
unable to act. No appraiser shall have, directly or indirectly, any material
interest in or material business or professional relationship with any party or
any of its Affiliates, and the compensation of each such appraiser shall be
determined and embodied in a written contract before any appraisal is prepared.

         9.02(c) Immediately following the selection of the third appraiser, the
three appraisers shall proceed to appraise the fair market value of the interest
to be valued, treating the current or intended use of the Leased Premises as its
highest and best use. The fair market value of the interest appraised shall be
the average of the three appraisals reported, provided, however, that in the
                                              --------  -------
event any appraisal departs from the middle appraisal by more than twenty
percent (20%), such figure shall be disregarded and the fair market value of the
interest appraised shall be the value of the remaining appraisals reported. If
both the high and low appraisals depart from the middle appraisal by more than
twenty percent (20%), the middle appraisal shall be deemed to be the fair market
value of the interest appraised.

         9.02(d) Each party shall pay the fees and expenses of the two original
appraisers appointed by it or on its behalf, and the fees and expenses of the
third appraiser shall be borne equally by the parties.

                               END OF ARTICLE IX

                                    - 47 -
<PAGE>

                                   ARTICLE X

                                    Default
                                    -------

         10.01  Events of Default
                -----------------

         Any of the following shall constitute an "Event of Default" (and any of
the following without the giving of notice or the passage of time or both shall
constitute a "Default"):

         10.01(a) Tenant shall fail to pay any Rental or other sums due Landlord
when due, and such failure shall continue for a period of ten (10) days
following receipt of written notice from Landlord to Tenant that such sums are
past due; provided, however, that it shall not be an Event of Default hereunder
          --------  -------
if Tenant fails to pay Rental or any other sums due hereunder during any period
in which the Management Company is wrongfully withholding any money from the
Tenant under the Management Agreement or during which any "event of default" by
Management Company has occurred and is continuing under the Management
Agreement; or

         10.01(b) Tenant or Landlord shall fail to observe or perform in any
material respect any of the other covenants, terms, or conditions contained in
this Lease, or a warranty made by either Tenant or Landlord shall fail to be
accurate and complete in all material respects, and such failure or inaccuracy
shall continue and not be cured for a period of thirty (30) days after receipt
of written notice from the other party to the defaulting party, provided that if
the default is not reasonably susceptible of being cured within thirty (30)
days, an Event of Default shall only occur if the defaulting party fails
promptly to commence such cure or fails thereafter diligently to pursue such
efforts to completion.

         10.02  Landlord's Rights Upon an Event of Default
                ------------------------------------------

         Upon the occurrence of an Event of Default by Tenant, or at any time
thereafter during the continuance of such Event of Default, in addition to any
other remedies Landlord may have under this Lease, Landlord may, subject to the
provisions of Article VI, elect to terminate this Lease by giving no less than
thirty (30) days' prior written notice thereof to Tenant and to all Leasehold
Mortgagees (provided that if a cure is effected within such 30-day period,
Landlord shall not have the right to terminate this Lease), and upon such
termination Landlord may then or at any time thereafter:

                                    - 48 -
<PAGE>

         l0.02(a) Re-enter and take possession of the Leased Premises or any
part thereof and all Improvements, and may remove Tenant from the Leased
Premises without resort to any legal proceedings and without being deemed guilty
of any trespass or becoming liable for any loss or damage that may be occasioned
thereby, except such loss or damage as may result from Landlord's gross
negligence or willful misconduct (or the gross negligence or willful misconduct
of Landlord's employees, officers, directors, representatives, agents or
contractors); and/or

         10.02(b) Bring an action for summary possession of the Leased Premises
or any part thereof as provided by law.

         10.03  Tenant's Rights Upon an Event of Default
                ----------------------------------------

         Upon the occurrence of an Event of Default by Landlord, or at any time
thereafter during the continuance of such Event of Default, Tenant's remedies
under this Lease shall include, without limitation, an action for damages or
specific performance. Tenant's remedies under this Lease shall be cumulative,
and no remedy expressly provided for herein shall be deemed to exclude any other
remedy allowed by law or equity or by other provisions of this Lease. In the
event that Tenant terminates this Lease as a result of an Event of Default by
Landlord, Landlord shall pay Tenant the fair market value of the Improvements,
as agreed to by Landlord and Tenant within thirty (30) days thereafter (or, if
no such agreement is reached, as determined by appraisal in accordance with
Section 9.02).

         10.04  Implied Waiver
                --------------

         The failure of Landlord or Tenant to insist on strict performance of
any of the covenants or conditions of this Lease, or to exercise any option
herein conferred in any one or more instances shall not be construed as a waiver
or relinquishment for the future of any such covenant, condition, or option, or
a waiver or relinquishment at that time or in the future of any other covenant,
condition, or option, but the same shall be and remain in full force and effect.
Acceptance by Landlord of Rental from Tenant with knowledge of the existence of
a breach of this Lease by Tenant shall not constitute a waiver of such breach,
nor a waiver of the right of Landlord to insist upon Tenant's curing such breach
or default. Payment by Tenant of Rental to Landlord with knowledge of the
existence of a breach of this Lease by Landlord shall not constitute a waiver of
such breach, nor a waiver of the right of Tenant to insist upon Landlord's
curing such breach or Default.

                                END OF ARTICLE X

                                    - 49 -
<PAGE>

                                   ARTICLE XI

                           Assignment and Subletting
                           -------------------------

         11.01  Binding Effect
                --------------

         This Lease shall be binding on and shall inure to the benefit of the
parties hereto and their respective heirs, personal representatives, successors,
and assigns and, except as provided in Sections 11.02 and 11.03, Tenant shall
neither assign its interest in this Lease or Sublet part or all of the Leased
Premises.

         11.02 Assignment
               ----------

         11.02(a) Any Tenant shall be free to assign its interest in this Lease
on condition that:

              (1) Such assignment shall be in writing duly executed and
acknowledged by the assignee in proper form for recording;

              (2) A duplicate original of such assignment shall be delivered to
Landlord, together with an assumption agreement properly executed by the
assignee in form for recording, under which the assignee shall assume all of the
terms, covenants, and conditions of this Lease to be performed by Tenant from
and after the date of such assignment; and

              (3) Such assignee is of good moral character and is not controlled
by persons as to whom Landlord has a reasonable basis for believing either are
engaged in criminal activities or that they are associates or agents of
criminals. Unless Landlord shall have notified Tenant within ten (10) days after
receipt of written notice from Tenant of the name of any proposed assignee of
its objections to such assignee for any of the reasons set forth in this Section
11.02(a)(3), Landlord shall be deemed to have waived any such objections to such
assignee.

         11.02(b) An assignment of this Lease by a Tenant shall not release or
discharge Tenant from any obligation or liability that Tenant may incur under
this Lease before the effective date of the assignment, nor shall it prevent
Landlord from proceeding against the Leased Premises in accordance with
Article X if an Event of Default shall have occurred and be continuing.

                                    - 50 -
<PAGE>

         11.03 Subletting
               ----------

         11.03(a) Tenant may sublet, underlet, or license all or part of the
Leased Premises, provided that such sublease, underlease, or license shall be
subject to this Lease and that in case of a sublease or underlease of all or
substantially all of the Leased Premises, a copy of such sublease or underlease
shall be delivered to Landlord. Any such sublease, underlease, or license shall
by its terms not extend beyond the Term.

         11.03(b) Landlord shall, as provided below, at Tenant's request, agree
with any sublessee of Tenant (i) under a non-disturbance agreement in form
reasonably satisfactory to Tenant not to disturb such sublessee's quiet
enjoyment of the subleased premises upon termination of this Lease (except upon
final termination in 2088), provided that such sublessee is not in default
beyond the expiration of any applicable notice and grace period under its
sublease and that it attorns to Landlord as successor to sublandlord, (ii) while
this Lease remains in effect, to provide to such sublessee copies of all notices
it may give under this Lease, and (iii) to permit such sublessee an additional
five (5) days in the case of a Default involving the non-payment of Rental or
any other sums due and payable hereunder or an additional thirty (30) days in
the case of any other Default (subject to an additional reasonable period if
such Default is not capable of being cured within such thirty (30) day period
but a cure is commenced during such period and thereafter diligently pursued) to
cure any Default on Tenant's behalf. Each such non-disturbance agreement shall
provide that it does not otherwise extend the time for payment of Rental or the
performance of any other act required under this Lease. For so long as the
Leased Premises are used as a hotel, Landlord shall only be required to enter
into a non-disturbance agreement with a sublessee of the entirety of the Leased
Premises. If the Leased Premises are no longer used as a hotel, Landlord shall
only be required to enter into a non-disturbance agreement with any sublessee
of at least ten thousand (10,000) square feet of the heated floor space then
existing on the Leased Premises. In addition, in no event shall Landlord be
required to enter into a non-disturbance agreement with any party that Tenant
could not assign this Lease to under Sections 11.01 and 11.02.

                               END OF ARTICLE XI

                                    - 51 -
<PAGE>

                                  ARTICLE XII

                                 Miscellaneous
                                 -------------

         12.01  Brokers' Fees
                -------------

         No real estate broker or agent has been a party to this transaction.
Each party shall hold the other harmless against the claim of any real estate
broker or agent claiming to have acted on its behalf.

         12.02  Gender and Number
                -----------------

         Words of any gender used in this Lease shall include the other gender,
and words in the singular shall include the plural, when the context requires.

         12.03  Notices
                -------

         Notices and other communications to be given under this Lease shall be
in writing and delivered by hand against receipt or sent by certified mail,
registered mail, Express Mail Service, or other nationally used overnight
delivery service, with postage prepaid and, in the case of registered or
certified mail, return receipt requested, and addressed as follows:

              If to Landlord:
              --------------
              [                    ]
               --------------------
              Law Department
              10400 Fernwood Road
              Bethesda, Maryland 20817
              Attention:  Assistant General Counsel Corporate Finance

              If to Tenant:
              ------------

              Fairfield Inn by Marriott Limited Partnership
              10400 Fernwood Road
              Bethesda, Maryland 20817
              Attention:  Assistant General Counsel Corporate Finance

              With copies to:

              Tenant's Leasehold Mortgagee(s) at the address(es) provided to
              Landlord by Tenant or such Leasehold Mortgagees from time to time

                                    - 52 -
<PAGE>

or at such other address as from time to time designated by the party to receive
the notice. The date of service of such notices shall be the date such notices
are received or refused, as the case may be, as shown on the return receipt.

         12.04 Applicable Law
               --------------

         The laws of the state in which the Leased Premises are situated shall
govern the validity, performance, and enforcement of this Lease.

         12.05 Partial Invalidity
               ------------------

         If any provision of this Lease shall be invalid or unenforceable it
shall not affect the validity of any other provision.

         12.06  Authority to Execute
                --------------------

         The officers of Tenant and Landlord individually and severally are duly
authorized to execute this Lease on behalf of their respective principals.

         12.07 Recording
               ---------

         Landlord and Tenant shall execute for purposes of recordation in the
appropriate recording office a memorandum or short form of this Lease containing
the names of the parties, a description of the Leased Premises, the Term, and
such other provisions as either party may require. Tenant shall bear the cost of
recording the memorandum or short form of this Lease. Each party agrees that it
will not record this Lease in its entirety unless such a recording is required
by any Leasehold Mortgagee or by applicable law.

         12.08 Headings
               --------

         Headings of particular sections are inserted only for convenience, and
are in no way to be construed as a part of this Lease or as a limitation on the
scope of the particular section to which they refer.

         12.09 No Partnership
               --------------

         Although this Lease provides for the payment of Rental based in part on
percentages of Gross Revenues, Landlord shall not be considered a partner or
associate of Tenant in the conduct of Tenant's business, and the relationship
between the parties is and shall at all times remain that of landlord and
tenant.

                                    - 53 -
<PAGE>

         12.10  Estoppel Certificates: Other Information
                ----------------------------------------

         12.10(a) Landlord and Tenant shall, at any time and from time to time
within fifteen (15) days of the request of the other party, a Leasehold
Mortgagee, a prospective Leasehold Mortgagee, or a prospective or actual
mortgagee of Landlord under Section 5.01(b), execute, acknowledge, and deliver
to the requesting entity a certificate stating:

              (1) That this Lease is unmodified and in full force and effect
(or, if there have been modifications, that the same is in full force and effect
as modified and stating such modifications);

              (2) The dates, if any, to which Minimum Rental, Percentage Rental,
and any other sums due Landlord have been paid;

              (3) Whether, to the knowledge of the party making such
certification, there are any existing defaults by the other party, and, if so,
specifying the nature of such defaults;

              (4) The remaining Term hereunder; and

              (5) Such other matters as may be reasonably requested.

         12.10(b) Any such certificate may be relied on by any party to whom it
is directed.

         12.10(c) Landlord agrees to make available to Sumitomo Trust & Banking
Co. (U.S.A.) ("Sumitomo") the information required with respect to Landlord by
Section 8.01(m) of the Credit Agreement by and between the initial Tenant and
Sumitomo in effect as of the date hereof so long as said Credit Agreement, as
amended, modified or replaced from time to time, is in effect.

         12.11 Holding Over
               ------------

         This Lease shall terminate without further notice at expiration of the
Term. Any holding over by Tenant after expiration shall not constitute a renewal
or extension or give Tenant any rights in or to the Leased Premises except as
expressly provided in this Lease.

                                    - 54 -
<PAGE>

         12.12  Limited Liability
                -----------------

         Notwithstanding any other provision of this Lease, the respective
partners (general or limited), shareholders, directors, officers, agents,
representatives and employees of Tenant or its successors and assigns shall be
under no personal liability with respect to any of the provisions of this Lease,
and if Tenant is in breach or Default with respect to its obligations or
otherwise under this Lease, Landlord shall have recourse solely to Tenant's
assets and not to the assets of any such partner, shareholder, director,
officer, agent, representative or employee.

         12.13  Attorneys' Fees
                ---------------

         If either party brings suit in a court of competent jurisdiction
concerning this Lease or submits a matter to arbitration as provided herein, the
substantially prevailing party in said action shall be awarded reasonable
attorneys' and arbitrators' fees, court costs, and other actual out-of-pocket
expenses from the other.

         12.14  Exhibits
                --------

         The exhibits to this Lease shall be incorporated herein and considered
a part hereof. In the event of any conflict between the provisions of Exhibit A
                                                                      ---------
and those of any other provision of this Lease, the provisions of Exhibit A
                                                                  ---------
shall control.

         12.15  Entire Agreement; Merger; Amendment
                -----------------------------------

         This Lease contains all the agreements between the parties with respect
to the matters contained herein and may not be modified other than by an
agreement in writing signed by all the parties or their respective successors or
assigns. All prior written and oral understandings and agreements shall be
deemed to have merged into this Lease and have no further force and effect. This
Lease may be amended or modified only by written instrument signed by the
parties hereto. No amendment or modification hereof shall be effective against
the first Leasehold Mortgagee unless the first Leasehold Mortgagee shall first
have consented thereto in writing.

         12.16  Successors and Assigns
                ----------------------

          The covenants and agreements herein contained shall bind and inure to
the benefit of Landlord and Tenant and their respective successors and assigns.

                                    - 55 -
<PAGE>

         12.17  Conveyance by Landlord.
                ----------------------
         Notwithstanding any other provision of this Lease, for so long as the
initial Tenant is the tenant under this Lease, Landlord covenants and agrees
that it shall not sell, convey, bargain, transfer, grant or assign all or any
part of Landlord's Interest without the prior written consent of the first
Leasehold Mortgage.

         IN WITNESS WHEREOF, the parties have duly executed this Lease as of the
date first written above.

Attest:                            LANDLORD:
                                   [                   ]
                                    -------------------

-------------------------          By:
Assistant Secretary                    -----------------
                                       Vice President

Attest:                            TENANT:

                                   FAIRFIELD INN BY MARRIOTT
                                   LIMITED PARTNERSHIP

                                   By:  Marriott FIBM One
                                        Corporation

                                        General Partner

                                   By:
---------------------                  -----------------
Assistant Secretary                    Vice President

                                    - 56 -
<PAGE>

                                   EXHIBIT A
                                    RENTAL
                                    ------

YEAR            MINIMUM RENTAL          PERCENTAGE RENTAL
----            --------------          -----------------

1989-1994
1995-1999
1999-2002
Thereafter*

* The Minimum Rental will be recalculated for every five year period beginning
  on January 1, 2001, at the greater of (i) the average annual Rental for the
  previous five year period as adjusted by 50% of the increase in the Price
  Index over such five year period; or (ii) 80% of the average annual Rental
  paid during such five year period.
<PAGE>

                                   EXHIBIT B

                                LEASED PREMISES
                                ---------------
<PAGE>

                                  EXHIBIT C

                                 ENCUMBRANCES
                                 ------------<PAGE>

                                                                    EXHIBIT 10.1

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

                               CREDIT AGREEMENT

                                  dated as of

                                  May 8, 2001

                                     among

                             PURE RESOURCES, INC.

                           The Lenders Party Hereto

                          CREDIT SUISSE FIRST BOSTON,
                            as Administrative Agent

                          FIRST UNION NATIONAL BANK,
                             as Syndication Agent

                                      and

                                 BNP PARIBAS,
                            as Documentation Agent

                          ___________________________

                          CREDIT SUISSE FIRST BOSTON,
              as Sole Lead Arranger and Sole Bookrunning Manager

   $200,000,000 Short Term Credit Facility Converting to a 5-Year Term Loan

================================================================================
<PAGE>

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                     Page
                                                                                     ----
<S>                                                                                  <C>
ARTICLE I
        Definitions.................................................................  -1-
        -----------
        SECTION 1.01.   Defined Terms...............................................  -1-
                        -------------
        SECTION 1.02.   Terms Generally............................................. -15-
                        ---------------
        SECTION 1.03.   Accounting Terms; GAAP...................................... -16-
                        ----------------------

ARTICLE II
        The Credits................................................................. -16-
        -----------
        SECTION 2.01    Commitments................................................. -16-
                        -----------
        SECTION 2.02    Borrowing Requests.......................................... -17-
                        ------------------
        SECTION 2.03.   Letters of Credit........................................... -17-
                        -----------------
        SECTION 2.04    Disbursement of Funds....................................... -17-
                        ---------------------
        SECTION 2.05    Notes....................................................... -18-
                        -----
        SECTION 2.06    Interest.................................................... -18-
                        --------
        SECTION 2.07    Interest Periods............................................ -19-
                        ----------------
        SECTION 2.08    Repayment of Loans.......................................... -19-
                        ------------------
        SECTION 2.09    Termination or Reduction of Commitments..................... -20-
                        ---------------------------------------
        SECTION 2.10    Prepayments................................................. -20-
                        -----------
        SECTION 2.11    Continuation and Conversion Options......................... -20-
                        -----------------------------------
        SECTION 2.12    Fees........................................................ -21-
                        ----
        SECTION 2.13    Payments, etc............................................... -21-
                        -------------
        SECTION 2.14    Interest Rate Not Ascertainable, etc........................ -22-
                        ------------------------------------
        SECTION 2.15    Illegality.................................................. -22-
                        ----------
        SECTION 2.16    Increased Costs............................................. -22-
                        ---------------
        SECTION 2.17    Change of Lending Office.................................... -24-
                        ------------------------
        SECTION 2.18    Funding Losses.............................................. -24-
                        --------------
        SECTION 2.19    Sharing of Payments, etc.................................... -24-
                        ------------------------
        SECTION 2.20    Taxes....................................................... -25-
                        -----
        SECTION 2.21    Pro Rata Treatment.......................................... -27-
                        ------------------
        SECTION 2.22    Replacement Lenders......................................... -27-
                        -------------------
        SECTION 2.23    Special Waiver for Hallwood Energy and Pure Partners........ -27-
                        ----------------------------------------------------

ARTICLE III
        Representations and Warranties.............................................. -28-
        ------------------------------
        SECTION 3.01.   Organization; Powers........................................ -28-
                        --------------------
        SECTION 3.02.   Authorization; Enforceability............................... -28-
                        -----------------------------
        SECTION 3.03.   Governmental Approvals; No Conflicts........................ -28-
                        ------------------------------------
        SECTION 3.04.   Financial Condition; No Material Adverse Effect............. -28-
                        -----------------------------------------------
        SECTION 3.05.   Properties.................................................. -29-
                        ----------
        SECTION 3.07.   Compliance with Laws and Agreements......................... -29-
                        -----------------------------------
        SECTION 3.08.   Investment and Holding Company Act Status................... -29-
                        -----------------------------------------
        SECTION 3.09.   Taxes....................................................... -29-
                        -----
        SECTION 3.10.   ERISA....................................................... -29-
                        -----
        SECTION 3.11.   Disclosure.................................................. -29-
                        ----------
</TABLE>

                                      -i-
<PAGE>

<TABLE>
<S>                                                                                              <C>
        SECTION 3.12.  Subsidiaries............................................................. -30-
                       ------------
        SECTION 3.13.  Margin Securities........................................................ -30-
                       -----------------

ARTICLE IV
        Conditions.............................................................................. -30-
        ----------
        SECTION 4.01.  Effective Date........................................................... -30-
                       --------------
        SECTION 4.02.  Each Credit Event........................................................ -31-
                       -----------------
        SECTION 4.03.  Conversion............................................................... -31-
                       ----------

ARTICLE V
        Affirmative Covenants................................................................... -31-
        ---------------------
        SECTION 5.01.  Financial Statements and Other Information............................... -31-
                       ------------------------------------------
        SECTION 5.02.  Notices of Material Events............................................... -32-
                       --------------------------
        SECTION 5.03.  Existence; Conduct of Business........................................... -33-
                       ------------------------------
        SECTION 5.04.  Payment of Obligations................................................... -33-
                       ----------------------
        SECTION 5.05.  Maintenance of Properties; Insurance..................................... -33-
                       ------------------------------------
        SECTION 5.06.  Books and Records; Inspection Rights..................................... -33-
                       ------------------------------------
        SECTION 5.07.  Compliance with Laws, Material Contractual Obligations................... -33-
                        -----------------------------------------------------
        SECTION 5.08.  Use of Proceeds.......................................................... -34-
                       ---------------
        SECTION 5.09.  Additional Subsidiaries.................................................. -34-
                       -----------------------
        SECTION 5.10.  Environmental Matters.................................................... -34-
                       ---------------------

ARTICLE VI
        Negative Covenants...................................................................... -34-
        ------------------
        SECTION 6.01.  Indebtedness............................................................. -34-
                       ------------
        SECTION 6.02.  Liens.................................................................... -35-
                       -----
        SECTION 6.03.  Fundamental Changes...................................................... -36-
                       -------------------
        SECTION 6.04.  Guarantees............................................................... -36-
                       ----------
        SECTION 6.05.  Hedging Agreements....................................................... -36-
                       ------------------
        SECTION 6.06.  Restricted Payments...................................................... -36-
                       -------------------
        SECTION 6.07.  Transactions with Affiliates............................................. -37-
                       ----------------------------
        SECTION 6.08.  Restrictive Agreements................................................... -37-
                       ----------------------
        SECTION 6.09.  Change in Fiscal Year.................................................... -37-
                       ---------------------
        SECTION 6.10.  Asset Sales.............................................................. -38-
                       -----------
        SECTION 6.11.  Sale and Leaseback Transactions.......................................... -38-
                       -------------------------------
        SECTION 6.12.  "Margin Calls" on Hedging Agreements..................................... -38-
                        -----------------------------------
        SECTION 6.13.  Designation of Restricted Subsidiaries................................... -38-
                       --------------------------------------

ARTICLE VII
        Financial Covenants..................................................................... -39-
        -------------------
        SECTION 7.01.  Adjusted Consolidated Net Worth.......................................... -39-
                       -------------------------------
        SECTION 7.02.  Debt Coverage Ratios..................................................... -39-
                       --------------------

ARTICLE VIII
        Events of Default....................................................................... -39-
        -----------------

ARTICLE IX
        The Administrative Agent................................................................ -41-
        ------------------------
</TABLE>

                                     -ii-
<PAGE>

<TABLE>
<S>                                                                                                      <C>
ARTICLE X
      Miscellaneous..................................................................................  -43-
      -------------
      SECTION 10.01.  Notices........................................................................  -43-
                      -------
      SECTION 10.02.  Waivers; Amendments............................................................  -43-
                      -------------------
      SECTION 10.03.  Expenses; Indemnity; Damage Waiver.............................................  -44-
                      ----------------------------------
      SECTION 10.04.  Successors and Assigns.........................................................  -45-
                      ----------------------
      SECTION 10.05.  Survival.......................................................................  -47-
                      --------
      SECTION 10.06.  Counterparts; Integration; Effectiveness.......................................  -47-
                      ----------------------------------------
      SECTION 10.07.  Severability...................................................................  -47-
                      ------------
      SECTION 10.08.  Right of Setoff................................................................  -47-
                      ---------------
      SECTION 10.09.  Governing Law; Jurisdiction; Consent to Service of Process.....................  -48-
                      ----------------------------------------------------------
      SECTION 10.10.  Waiver of Jury Trial...........................................................  -48-
                      --------------------
      SECTION 10.11.  Headings.......................................................................  -48-
                      --------
      SECTION 10.12.  Confidentiality................................................................  -48-
                      ---------------
      SECTION 10.13.  Interest Rate Limitation.......................................................  -49-
                      ------------------------
      SECTION 10.14   UNOCAL.........................................................................  -49-
                      ------
      SECTION 10.15   No Oral Agreements.............................................................  -49-
                      -------------------
</TABLE>

SCHEDULES
---------

Schedule 2.01 -- Commitments
Schedule 3.06 -- Disclosed Matters
Schedule 3.12 -- Subsidiaries
Schedule 6.01 -- Existing Indebtedness
Schedule 6.02 -- Existing Liens
Schedule 6.08 -- Existing Restrictions

EXHIBITS:
--------

Exhibit A -- Form of Assignment and Acceptance
Exhibit B - Form of Note
Exhibit C-1 -- Form of Opinion of Borrower's Counsel
Exhibit C-2 - Form of Opinion of Special Nevada Counsel
Exhibit D - Subsidiary Guaranty Agreement

                                     -iii-
<PAGE>

     CREDIT AGREEMENT dated as of May 8, 2001, among PURE RESOURCES, INC., the
LENDERS party hereto, CREDIT SUISSE FIRST BOSTON, as Administrative Agent, FIRST
UNION NATIONAL BANK, as Syndication Agent, and BNP PARIBAS, as Documentation
Agent.

          The parties hereto agree as follows:

                                   ARTICLE I

                                  Definitions
                                  -----------

          SECTION 1.01. Defined Terms. As used in this Agreement, the following
                        -------------
terms have the meanings specified below:

          "ABR", when used in reference to any Loan or Borrowing, refers to
           ---
whether such Loan, or the Loans comprising such Borrowing, are bearing interest
at a rate determined by reference to the Alternate Base Rate.

          "Adjusted LIBO Rate" means, with respect to any Eurodollar Borrowing
           ------------------
for any Interest Period, an interest rate per annum (rounded upwards, if
necessary, to the nearest 1/100th of 1%) equal to (a) the LIBO Rate for such
Interest Period multiplied by (b) the Statutory Reserve Rate.

          "Administrative Agent" means Credit Suisse First Boston, in its
           --------------------
capacity as administrative agent for the Lenders hereunder.

          "Administrative Questionnaire" means an Administrative Questionnaire
           ----------------------------
in a form supplied by the Administrative Agent.

          "Advance Notice" means written or facsimile notice (or telephonic
           --------------
notice promptly confirmed in writing), which in each case shall be irrevocable,
from the Borrower to be received by the Administrative Agent before 10:00 a.m.
(Houston time), by the number of Business Days in advance of any borrowing,
conversion, continuation or prepayment of any Loan pursuant to this Agreement,
as respectively indicated below:

          (i)  Eurodollar Loans - 3 Business Days; and

          (ii) ABR Loans - same Business Day.

          For the purpose of determining the respectively applicable Loan in the
case of the conversion from one type of Loan into another, the Loan into which
there is to be a conversion shall control.  The Administrative Agent and each
Lender are entitled to rely upon and act upon facsimile notice made or
purportedly made by the Borrower, and the Borrower hereby waives the right to
dispute the authenticity and validity of any such facsimile once the
Administrative Agent or any Lender has advanced funds, absent manifest error.

          "Affiliate" means, with respect to a specified Person, another Person
           ---------
that directly, or indirectly through one or more intermediaries, Controls or is
Controlled by or is under common Control with the Person specified.
<PAGE>

          "Alternate Base Rate" means, for any day, a rate per annum equal to
           -------------------
the greatest of (a) the Prime Rate in effect on such day, and (b) the Federal
Funds Effective Rate in effect on such day plus 1/2 of 1%.  Any change in the
Alternate Base Rate due to a change in the Prime Rate or the Federal Funds
Effective Rate shall be effective from and including the effective date of such
change in the Prime Rate or the Federal Funds Effective Rate, respectively.

          "Applicable Percentage" means, with respect to any Lender, the
           ---------------------
percentage of the total Commitments represented by such Lender's Commitment.  If
the Commitments have terminated or expired, the Applicable Percentages shall be
determined based upon the Commitments most recently in effect, giving effect to
any assignments.

          "Applicable Rate" means (a) for any day during the Availability
           ---------------
Period, with respect to any Eurodollar Loan, the rate per annum equal to 0.625%,
and (b) for any day during the period from and after the close of business on
the Conversion Date up to and including the Final Maturity Date, with respect to
any ABR Loan or Eurodollar Loan, or with respect to the closing fees payable
hereunder, as the case may be, the applicable rate per annum set forth below
under the caption "ABR Spread" or "Eurodollar Spread," as the case may be based
upon the ratings by Moody's and S&P, respectively, applicable on such date to
the Index Debt:

               =============================================
                                     ABR     Eurodollar
               Index Deb Ratings     ---     ----------
               -----------------    Spread     Spread
                 (Moody's/S&P)      ------     ------
               ---------------------------------------------
                "Category 1"
                 ----------
                *Baa1/BBB+           0.00%       0.75%

               ---------------------------------------------
                 "Category 2"
                  ----------
                 = Baa2/BBB          0.00%       1.00%

               ---------------------------------------------
                 "Category 3"
                  ----------
                 = Baa3/BBB-         0.00%       1.25%

               ---------------------------------------------
                 "Category 4"
                  ----------
                 **BaI/BB+           0.00%       1.75%

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

          For purposes of the foregoing, (i) if the Index Debt shall not have
been rated by either Moody's or S&P by the Conversion Date, then the Eurodollar
Spread shall be the rate for Category 4 until it is so rated by at least one of
them, (ii) if one, but not both, of Moody's or S&P fails to have in effect a
rating for the Index Debt (other than by reason of the circumstances referred to
in the last sentence of this definition), then such rating agency shall be
deemed to have established a rating in the same Category as the other rating
agency; (iii) if the ratings established by Moody's and S&P for the Index Debt
shall fall within different Categories, the Applicable Rate shall be based on
the higher of the two ratings unless one of the two ratings is two or more
Categories lower than the other, in which case the Applicable Rate shall be
determined by reference to the Category one rating higher than the lower of the
two ratings; and (iv) if the ratings established or deemed to have been
established by Moody's and S&P for the Index Debt shall be changed (other than
as a result of a change in the rating system of Moody's or S&P), such change
shall be effective as of the date on which it is first announced by the
applicable rating agency.  Each change in the Applicable Rate shall apply during
the period commencing on the effective date of such change and ending on the
date

                                      -2-
<PAGE>

immediately preceding the effective date of the next such change. If the rating
system of Moody's or S&P shall change, or if either such rating agency shall
cease to be in the business of rating corporate debt obligations, the Borrower
and the Lenders shall negotiate in good faith to amend this definition to
reflect such changed rating system or the unavailability of ratings from such
rating agency and, pending the effectiveness of any such amendment, the
Applicable Rate shall be determined by reference to the rating most recently in
effect prior to such change or cessation.

          Notwithstanding the foregoing, if (a) UNOCAL does not own more than a
51% Equity Interest in the Borrower, or (b) insiders or nominees of UNOCAL do
not constitute a majority of the board of directors of the Borrower, then the
Eurodollar Spread for each Category shall be increased by 0.125%.

          "Assignment and Acceptance" means an assignment and acceptance entered
           -------------------------
into by a Lender and an assignee (with the consent of any party whose consent is
required by Section 10.04), and accepted by the Administrative Agent, in the
form of Exhibit A or any other form approved by the Administrative Agent and the
Borrower.

          "Availability Period" means the period from and including the
           -------------------
Effective Date to and including the Conversion Date.

          "Bank Credit Facility" means  either of (a) the $250,000,000 364-day
           --------------------
revolving credit facility under that certain Credit Agreement dated as of
September 29, 2000, among the Borrower, The Chase Manhattan Bank, as
Administrative Agent, First Union National Bank, as Syndication Agent, and the
lenders party thereto, together with any and all amendments and supplements
thereto and restatements or replacements thereof or (b) the $250,000,000 five
year credit facility under that certain Credit Agreement dated as of September
29, 2000, among the Borrower, The Chase Manhattan Bank, as Administrative Agent,
First Union National Bank, as Syndication Agent, and the lenders party thereto,
together with any and all amendments and supplements thereto and restatements or
replacements thereof, and "Bank Credit Facilities" means both thereof.

          "Board" means the Board of Governors of the Federal Reserve System of
           -----
the United States of America.

          "Borrower" means Pure Resources, Inc., a Delaware corporation.
           --------

          "Borrowing" means Loans of the same Type, made, converted or continued
           ---------
on the same date and, in the case of Eurodollar Loans, as to which a single
Interest Period is in effect.

          "Borrowing Request" means a request by the Borrower for a Borrowing in
           -----------------
accordance with Section 2.02.

          "Business Day" means any day that is not a Saturday, Sunday or other
           ------------
day on which commercial banks in New York City are authorized or required by law
to remain closed; provided that, when used in connection with a Eurodollar Loan,
                  --------
the term "Business Day" shall also exclude any day on which banks are not open
          ------------
for dealings in dollar deposits in the London interbank market.

          "Capital Lease Obligations" of any Person means the 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 are required to be classified and
accounted for as capital

                                      -3-
<PAGE>

leases on a balance sheet of such Person under GAAP, and the amount of such
obligations shall be the capitalized amount thereof determined in accordance
with GAAP.

          "Category" means one of the categories labeled as such within the grid
           --------
which is part of the definition of Applicable Rate.

          "Change in Control" means (a) the acquisition of ownership, directly
           -----------------
or indirectly, beneficially or of record, by any Person or group (within the
meaning of the Securities Exchange Act of 1934 and the rules of the Securities
and Exchange Commission thereunder as in effect on the date hereof) other than
UNOCAL, of shares representing more than 35% of the aggregate ordinary voting
power represented by the issued and outstanding capital stock of the Borrower;
(b) occupation of a majority of the seats (other than vacant seats) on the board
of directors of the Borrower by Persons who were neither (i) nominated by the
board of directors of the Borrower nor (ii) appointed by directors so nominated;
or (c) the acquisition of direct or indirect Control of the Borrower by any
Person or group other than UNOCAL.

          "Code" means the Internal Revenue Code of 1986, as amended from time
           ----
to time.

          "Commitment" means, with respect to each Lender, the commitment of
           ----------
such Lender to make Loans, as such commitment may be (a) reduced from time to
time pursuant to Section 2.09 and (b) reduced or increased from time to time
pursuant to assignments by or to such Lender pursuant to Section 10.04.  The
initial amount of each Lender's Commitment is set forth on Schedule 2.01, or in
the Assignment and Acceptance pursuant to which such Lender shall have assumed
its Commitment, as applicable.  The aggregate amount of the Lenders' Commitments
is $200,000,000.00.

          "Consolidated Net Tangible Assets" means the total amount of assets
           --------------------------------
(excluding cash and cash equivalents) of the Borrower and its Restricted
Subsidiaries on a consolidated basis (less applicable reserves and other
properly deductible items) after deducting therefrom (a) all current liabilities
(excluding any which are, by their terms, extendable or renewable at the option
of the obligor thereon to a time more than 12 months after the time as of which
the amount thereof is being computed) and  (b) all goodwill, trade names,
trademarks, patents, unamortized debt premium or discount and expense and other
like intangible assets, determined in accordance with GAAP..

          "Control" means the possession, directly or indirectly, of the power
           -------
to direct or cause the direction of the management or policies of a Person,
whether through the ability to exercise voting power, by contract or otherwise.
"Controlling" and "Controlled" have meanings correlative thereto.
 -----------       ----------

          "Conversion" means the conversion of the Line of Credit Loans to Term
           ----------
Loans pursuant to the terms and conditions of Section 2.01(b) and 4.03.

          "Conversion Date" means July 16, 2001.
           ---------------

          "Debt Coverage Ratio" means the ratio calculated in accordance with
           -------------------
Section 7.02.

          "Default" means any event or condition which constitutes an Event of
           -------
Default or which upon notice, lapse of time or both would, unless cured or
waived, become an Event of Default.

          "Disclosed Matters" means the actions, suits and proceedings and the
           -----------------
environmental matters disclosed in Schedule 3.06.

                                      -4-
<PAGE>

          "dollars" or "$" refers to lawful money of the United States of
           -------      -
America.

          "EBITDAX" shall mean, for any period, the sum of consolidated net
           -------
income for such period plus the following expenses or charges to the extent
deducted from consolidated net income in such period: interest expense, taxes,
depreciation, depletion, amortization and exploration expenses. As used herein,
"consolidated net income" shall mean, for any period, the amount which, in
 -----------------------
conformity with GAAP, would be set forth opposite the caption "net income or
loss" (or any like caption) on a consolidated income statement of the Borrower
and its Restricted Subsidiaries (before deducting minority interests in net
income of Restricted Subsidiaries, but disregarding (a) all noncash
extraordinary or unusual items, (b) write-downs after June 30, 2000 under FASB
Statement No. 19, (c) non-cash write-ups or write-downs of assets after June 30,
2000 under FASB Statement No. 121, (d) non-cash gains, losses or adjustments
under FASB Statement No. 133, in calculating such consolidated net income), and
(e) the effects of common stock of the Borrower being repurchased or being
subject to repurchase under Employment Arrangements accounted for as variable
plans under APB Opinion No. 25 (provided that any new arrangements entered into
after the Effective Date as well as any amendments to arrangements existing on
the Effective Date, shall not be excluded to the extent that such arrangements
materially increase the Borrower's obligations); provided however, that in
                                                 -------- -------
determining consolidated net income for any period of four fiscal quarters that
includes the acquisition by the Borrower or any of its consolidated Restricted
Subsidiaries of Restricted Subsidiaries (whether by purchase, merger or
otherwise) or of producing Oil and Gas Properties, such acquired Restricted
Subsidiaries shall be included in such calculation on a pro forma basis as if
they had been owned by the Borrower and its consolidated Restricted Subsidiaries
throughout such four fiscal quarter period and the revenues attributable to the
oil and gas production from such acquired properties during such four fiscal
quarter period, less the direct operating expenses and severance and ad valorem
taxes incurred with respect to such properties during such four fiscal quarter
period, shall be included in such calculation as part of such consolidated net
income and the revenues attributable to the oil and gas production from any
producing Oil and Gas Properties sold during such four fiscal quarter period,
less the direct operating expenses and severance and ad valorem taxes incurred
with respect to such properties during such four fiscal quarter period, shall be
pro forma deducted from such determination of consolidated net income.

          "Effective Date" means the date on which the conditions specified in
           --------------
Section 4.01 are satisfied (or waived in accordance with Section 10.02).

          "Eligible Transferee" means any financial institution which is a
           -------------------
Lender as of the Effective Date or which is a commercial bank, a financial
institution or an "accredited investor" (as defined in Regulation D) which makes
loans in the ordinary course of its business and that makes or acquires Loans
for its own account in the ordinary course of its business and which has
capital, surplus and undivided profits aggregating at least $250,000,000 (as of
the date of its most recent financial statements).

          "Employment Arrangements" means severance arrangements, employment
           -----------------------
agreements, retention bonus agreements or similar arrangements, whether now
existing or hereafter entered into, with officers and employees of the Borrower
or its Subsidiaries.

          "Environmental Laws" means all laws, rules, regulations, codes,
           ------------------
ordinances, orders, decrees, judgments, injunctions, notices or binding
agreements issued, promulgated or entered into by any Governmental Authority,
relating in any way to the environment, preservation or reclamation of natural
resources, the management, release or threatened release of any Hazardous
Material.

                                      -5-
<PAGE>

          "Environmental Liability" means any liability, contingent or otherwise
           -----------------------
(including any liability for damages, costs of environmental remediation, fines,
penalties or indemnities), of the Borrower or any Subsidiary directly or
indirectly resulting from or based upon (a) violation of any Environmental Law,
(b) the generation, use, handling, transportation, storage, treatment or
disposal of any Hazardous Materials, (c) exposure to any Hazardous Materials,
(d) the release or threatened release of any Hazardous Materials into the
environment or (e) any contract, agreement or other consensual arrangement
pursuant to which liability is assumed or imposed with respect to any of the
foregoing.

          "Equity Interests" means shares of the capital stock, partnership
           ----------------
interests, membership interest in a limited liability company, beneficial
interests in a trust or other equity interests in the Borrower or any Subsidiary
or any warrants, options or other rights to acquire such interests.

          "ERISA" means the Employee Retirement Income Security Act of 1974, as
           -----
amended from time to time.

          "ERISA Affiliate" means any trade or business (whether or not
           ---------------
incorporated) that, together with the Borrower, is treated as a single employer
under Section 414(b) or (c) of the Code or, solely for purposes of Section 302
of ERISA and Section 412 of the Code, is treated as a single employer under
Section 414 of the Code; provided however, that in no event will UNOCAL or any
                         -------- -------
of its subsidiaries (other than Borrower and its Subsidiaries) be considered an
ERISA Affiliate.

          "ERISA Event" means (a) any "reportable event", as defined in Section
           -----------
4043 of ERISA or the regulations issued thereunder with respect to a Plan (other
than an event for which the 30-day notice period is waived); (b) the existence
with respect to any Plan of an "accumulated funding deficiency" (as defined in
Section 412 of the Code or Section 302 of ERISA), whether or not waived; (c) the
filing pursuant to Section 412(d) of the Code or Section 303(d) of ERISA of an
application for a waiver of the minimum funding standard with respect to any
Plan; (d) the incurrence by the Borrower or any of its ERISA Affiliates of any
liability under Title IV of ERISA with respect to the termination of any Plan;
(e) the receipt by the Borrower or any ERISA Affiliate from the PBGC or a plan
administrator of any notice relating to an intention to terminate any Plan or
Plans or to appoint a trustee to administer any Plan; (f) the incurrence by the
Borrower or any of its ERISA Affiliates of any liability with respect to the
withdrawal or partial withdrawal from any Plan or Multiemployer Plan; or (g) the
receipt by the Borrower or any ERISA Affiliate of any notice, or the receipt by
any Multiemployer Plan from the Borrower or any ERISA Affiliate of any notice,
concerning the imposition of Withdrawal Liability or a determination that a
Multiemployer Plan is, or is expected to be, insolvent or in reorganization,
within the meaning of Title IV of ERISA.

          "Eurodollar", when used in reference to any Loan or Borrowing, refers
           ----------
to whether such Loan, or the Loans comprising such Borrowing, are bearing
interest at a rate determined by reference to the Adjusted LIBO Rate.

          "Event of Default" has the meaning assigned to such term in Article
           ----------------
VIII.

          "Exposure" means, with respect to any Lender at any time, the sum of
           --------
the outstanding principal amount of such Lender's Loans at such time.

          "FASB" means the Financial Accounting Standards Board.
           ----

                                      -6-
<PAGE>

          "Federal Funds Effective Rate" means, for any day, the weighted
           ----------------------------
average (rounded upwards, if necessary, to the next 1/100 of 1%) of the rates on
overnight Federal funds transactions with members of the Federal Reserve System
arranged by Federal funds brokers, as published on the next succeeding Business
Day by the Federal Reserve Bank of New York, or, if such rate is not so
published for any day that is a Business Day, the average (rounded upwards, if
necessary, to the next 1/100 of 1%) of the quotations for such day for such
transactions received by the Administrative Agent from three Federal funds
brokers of recognized standing selected by it.

          "Final Maturity Date" means July 16, 2001, unless the Line of Credit
           -------------------
Loans are converted to Term Loans pursuant to Sections 2.01(b) and 4.03, in
which case the Final Maturity Date shall mean July 16, 2006.

          "Financial Officer" means the chief financial officer, principal
           -----------------
accounting officer, treasurer or controller of the Borrower.

          "Funded Indebtedness" means, at any time and without duplication, all
           -------------------
obligations of the Borrower and its Restricted Subsidiaries on a consolidated
basis for (a) borrowed money and any other obligations evidenced by bonds,
debentures, notes, or other similar instruments, (b) all obligations outstanding
for 180 days or more to deliver goods or services including Hydrocarbons in
consideration of advanced payments, (c) the undischarged balance of any
production payment created by such Person or for the creation of which such
Person directly received payment, (d) all Capital Lease Obligations, (e) all
letters of credit issued in connection with Hedging Agreements, (f) all Put
Arrangement Liabilities, and (g) all Guarantees by the Borrower and its
Restricted Subsidiaries on a consolidated basis of the type of obligations
described in clauses (a) through (e) of this definition.

          "GAAP" means generally accepted accounting principles in the United
           ----
States of America.

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

          "Granting Lender" has the meaning specified in Section 10.04(h)
           ---------------
hereof.

          "Guarantee" of or by any Person (the "guarantor") means any
           ---------                            ---------
obligation, contingent or otherwise, of the guarantor guaranteeing or having the
economic effect of guaranteeing any Indebtedness of any other Person (the
"primary obligor") in any manner, whether directly or indirectly, and including
 ---------------
any obligation of the guarantor, direct or indirect, (a) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness or to
purchase (or to advance or supply funds for the purchase of) any security for
the payment thereof, (b) to purchase or lease property, securities or services
for the purpose of assuring the owner of such Indebtedness of the payment
thereof, (c) to maintain working capital, equity capital or any other financial
statement condition or liquidity of the primary obligor so as to enable the
primary obligor to pay such Indebtedness or (d) as an account party in respect
of any letter of credit or letter of guaranty issued to support such
Indebtedness; provided, that the term Guarantee shall not include endorsements
              --------
for collection or deposit in the ordinary course of business.

          "Hallwood" means Hallwood Energy Corporation, a Delaware corporation.
           --------

                                      -7-
<PAGE>

          "Hallwood Acquisition" means the acquisition directly or indirectly by
           --------------------
the Borrower of a majority or more of the capital stock of Hallwood.

          "Hazardous Materials"  means all explosive or radioactive substances
           -------------------
or wastes and all hazardous or toxic substances, wastes or other pollutants,
asbestos or asbestos containing materials, polychlorinated biphenyls, radon gas,
infectious or medical wastes and all other substances or wastes of any nature
regulated pursuant to any Environmental Law and petroleum, petroleum products or
distillates and associated oil or natural gas exploration, production and
development wastes only to the extent that they are not exempted or excluded
from being included as "hazardous substances," "hazardous materials," "hazardous
wastes" and toxic substances under such Environmental Laws.

          "Hedging Agreement" means any interest rate protection agreement,
           -----------------
foreign currency exchange agreement, commodity price protection agreement or
other interest or currency exchange rate or commodity price hedging arrangement.

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

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

          "Indebtedness" of any Person means, without duplication, (a) all
           ------------
obligations of such Person for borrowed money (including principal, interest,
fees and charges), (b) all obligations of such Person evidenced by bonds,
debentures, notes or similar instruments (including principal, interest, fees
and charges), (c) the undischarged balance of any production payment created by
such Person or for the creation of which such Person directly received payment,
(d) all obligations of such Person issued or assumed as the deferred purchase
price of Property or services (excluding trade accounts payable and accrued
obligations incurred in the ordinary course of business so long as the same are
not 180 days overdue or, if overdue, are being contested in good faith and by
appropriate proceedings), (e) all Indebtedness of others secured by (or for
which the holder of such Indebtedness has an existing right, contingent or
otherwise, to be secured by) any Lien on Property owned or acquired by such
Person, whether or not the obligations secured thereby have been assumed, (f)
all Guarantees of Indebtedness of others, (g) all Capital Lease Obligations of
such Person, (h) all recourse obligations of such Person with respect to sales
of accounts receivable which would be shown under GAAP on the balance sheet of
such Person as a liability, (i) all obligations, contingent or otherwise, of
such Person as an account party (including reimbursement obligations to the
issuer of a letter of credit) in respect of bankers' acceptances and letters of
credit guaranteeing Indebtedness, (j) all noncontingent obligations of such
Person as an account party (including reimbursement obligations to the issuer of
a letter of credit) in respect of letters of credit other than those referred to
in clause (i) above, (k) all obligations under leases which require such Person
to make payments over the term of such lease, including payments at termination,
which are substantially equal to at least eighty percent (80%) of the purchase
price of the Property subject to such lease plus interest at an imputed rate of
interest, (l) all obligations or undertakings of such Person to maintain or
cause to be maintained the financial position or covenants of others or to
purchase the Indebtedness or Property of others, (m) obligations outstanding for
180 days or more to deliver goods or services including Hydrocarbons in
consideration of advance payments, (n) any stock of such Person in which such
Person has a mandatory obligation to redeem such stock within two (2) years
after the Final Maturity Date (plus any extension of such date), but excluding
mandatory redemptions in connection with

                                      -8-
<PAGE>

Employment Arrangements, (o) all Indebtedness of any Person shall include the
Indebtedness of any other entity (including any partnership in which such Person
is a general partner) to the extent such Person is liable therefor as a result
of such Person's ownership interest in or other relationship with such entity,
except to the extent the terms of such Indebtedness provide that such Person is
not liable therefor, (p) the undischarged balance of any production payment
created by such Person or for the creation of which such Person directly
received payment; and (q) all obligations of such Person under Hedging
Agreements. The Indebtedness of any Person shall exclude obligations under
leases which are characterized as operating leases.

          "Index Debt" means senior, unsecured, non-credit enhanced Indebtedness
           ----------
of the Borrower.

          "Interest Payment Date" means (a) with respect to any ABR Loan, the
           ---------------------
last day of each March, June, September and December, (b) with respect to any
Eurodollar Loan, the last day of the Interest Period applicable to the Borrowing
of which such Loan is a part and, in the case of a Eurodollar Borrowing with an
Interest Period of more than three months' duration, each day prior to the last
day of such Interest Period that occurs at intervals of three months' duration
after the first day of such Interest Period.

          "Interest Period" means  with respect to any Eurodollar Borrowing, the
           ---------------
period commencing on the date of such Borrowing and ending (a) one (1) week
thereafter, or (b) on the numerically corresponding day in the calendar month
that is one week or one, two, three, six or (with the consent of each Lender)
nine or twelve months thereafter, as applicable, as the Borrower may elect;
provided, that (i) if any Interest Period would end on a day other than a
--------
Business Day, such Interest Period shall be extended to the next succeeding
Business Day unless such next succeeding Business Day would fall in the next
calendar month, in which case such Interest Period shall end on the next
preceding Business Day and (ii) any Interest Period that commences on the last
Business Day of a calendar month (or on a day for which there is no numerically
corresponding day in the last calendar month of such Interest Period) shall end
on the last Business Day of the last calendar month of such Interest Period.
For purposes hereof, the date of a Borrowing initially shall be the date on
which such Borrowing is made and thereafter shall be the effective date of the
most recent conversion or continuation of such Borrowing.

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

          "Lenders" means the Persons listed on Schedule 2.01 and any other
           -------
Person that shall have become a party hereto pursuant to an Assignment and
Acceptance, other than any such Person that ceases to be a party hereto pursuant
to an Assignment and Acceptance.

          "Lending Office" means for each Lender the office specified under such
           --------------
Lender's name on its signature page hereto, or in the Assignment and Acceptance
pursuant to which it became a Lender, with respect to each Type of Loan, or such
other office as such Lender may designate in writing from time to time to the
Borrower and the Administrative Agent with respect to such Type of Loan.

          "LIBO Rate" means, with respect to any Eurodollar Borrowing for any
           ---------
Interest Period, the rate appearing on Page 3750 of the Telerate Service (or on
any successor or substitute page of such Service,

                                      -9-
<PAGE>

or any successor to or substitute for such Service, providing rate quotations
comparable to those currently provided on such page of such Service, as
determined by the Administrative Agent from time to time for purposes of
providing quotations of interest rates applicable to dollar deposits in the
London interbank market) at approximately 11:00 a.m., London time, two Business
Days prior to the commencement of such Interest Period, as the rate for dollar
deposits with a maturity comparable to such Interest Period. If for any reason
such rate is not available, the term "LIBO Rate" means, for any Eurodollar
Borrowing for any Interest Period therefor, the rate per annum (rounded upwards,
if necessary, to the nearest 1/100 of 1%) appearing on Reuters Screen LIBO Page
as the London interbank offered rate for deposits in Dollars at approximately
11:00 a.m. (London time) two Business Days prior to the first day of such
Interest Period for a term comparable to such Interest Period; provided,
                                                               --------
however, if more than one rate is specified on Reuters Screen LIBO Page, the
-------
applicable rate shall be the arithmetic mean of all such rates.

          "Lien" means, with respect to any asset, (a) any mortgage, deed of
           ----
trust, lien, pledge, hypothecation, encumbrance, charge or security interest in,
on or of such asset, and (b) the interest of a vendor or a lessor under any
conditional sale agreement, capital lease or title retention agreement (or any
financing lease having substantially the same economic effect as any of the
foregoing) relating to such asset.

          "Line of Credit Loans" means loans made by the Lenders to the Borrower
           --------------------
pursuant to Section 2.01(a).

          "Loan Documents" means this Agreement, the Subsidiary Guaranty
           --------------
Agreements and any and all other agreements or instruments now or hereafter
executed and delivered by the Borrower or any other Person (other than Hedging
Agreements or participation or similar agreements between any Lender and any
other lender or creditor with respect to any Indebtedness pursuant to this
Agreement) in connection with, or as security for the payment or performance of
this Agreement, as such agreements may be amended, supplemented or restated from
time to time.

          "Loan Parties" means the Borrower and the Restricted Subsidiaries.
           ------------

          "Loans" means (a) during the Availability Period, the Line of Credit
           -----
Loans, and (b) from and after the Conversion Date, the Term Loans, as the case
may be.

          "Material Adverse Effect" means a material adverse effect on (a) the
           -----------------------
assets, liabilities, financial condition or operations of the Borrower and the
Restricted Subsidiaries taken as a whole, as indicated in the most recent
quarterly or annual financial statements (excluding decreases in hydrocarbon
prices) delivered pursuant to Section 5.01 or (b) the ability of the Borrower
and the Restricted Subsidiaries to perform their respective monetary obligations
under this Agreement on a timely basis.

          "Material Indebtedness" means Funded Indebtedness (other than the
           ---------------------
Loans) of any one or more of the Borrower and its Restricted Subsidiaries in an
aggregate principal amount exceeding $25,000,000.

          "Material Subsidiary" means any Restricted Subsidiary of the Borrower
           -------------------
whose percentage of the Consolidated Net Tangible Assets represented by such
Restricted Subsidiary's portion of such Consolidated Net Tangible Assets (after
intercompany eliminations) exceeds 5% as of the end of the most recently
completed fiscal quarter.

          "Moody's" means Moody's Investors Service, Inc.
           -------

                                     -10-
<PAGE>

          "Multiemployer Plan" means a multiemployer plan as defined in Section
           ------------------
4001(a)(3) of ERISA.

          "Oil and Gas Properties" means Hydrocarbon Interests; the Properties
           ----------------------
now or hereafter pooled or unitized with Hydrocarbon Interests; all presently
existing or future unitization, pooling agreements and declarations of pooled
units and the units created thereby (including without limitation all units
created under orders, regulations and rules of any Governmental Authority) which
may affect all or any portion of the Hydrocarbon Interests; all operating
agreements, contracts and other agreements which relate to any of the
Hydrocarbon Interests or the production, sale, purchase, exchange or processing
of Hydrocarbons from or attributable to such Hydrocarbon Interests; all
Hydrocarbons in and under and which may be produced and saved or attributable to
the Hydrocarbon Interests, including all oil in tanks, the lands covered thereby
and all rents, issues, profits, proceeds, products, revenues and other incomes
from or attributable to the Hydrocarbon Interests; all tenements, hereditaments,
appurtenances and Properties in any manner appertaining, belonging, affixed or
incidental to the Hydrocarbon Interests; and all Properties, rights, titles,
interests and estates described or referred to above, including any and all
Property, real or personal, now owned or hereinafter acquired and situated upon,
used, held for use or useful in connection with the operating, working or
development of any of such Hydrocarbon Interests or Property (excluding drilling
rigs, automotive equipment or other personal property which may be on such
premises for the purpose of drilling a well or for other similar temporary uses)
and including any and all oil wells, gas wells, injection wells or other wells,
buildings, structures, fuel separators, liquid extraction plants, plant
compressors, pumps, pumping units, field gathering systems, tanks and tank
batteries, fixtures, valves, fittings, machinery and parts, engines, boilers,
meters, apparatus, equipment, appliances, tools, implements, cables, wires,
towers, casing, tubing and rods, surface leases, rights-of-way, easements and
servitudes together with all additions, substitutions, replacements, accessions
and attachments to any and all of the foregoing.

          "Other Taxes" has the meaning set forth in Section 2.20(b).
           -----------

          "Payment Office" means the Administrative Agent's office located at 11
           --------------
Madison Avenue, New York, New York 10010.

          "PBGC" means the Pension Benefit Guaranty Corporation referred to and
           ----
defined in ERISA and any successor entity performing similar functions.

          "Percentage Share" means, as to any Lender, the fraction, expressed as
           ----------------
a percentage, the numerator of which is the amount of such Lender's Commitment
and the denominator of which is the amount of the total Commitments.

          "Permitted Encumbrances" means:
           ----------------------

          (a)  Liens imposed by law for taxes, assessments or other governmental
charges or levies that are not yet due or are being contested in compliance with
Section 5.04;

          (b)  carriers', warehousemen's, mechanics', materialmen's, repairmen's
and other like Liens imposed by law or created in the ordinary course of
business and securing obligations that are not overdue by more than 90 days or
are being contested in compliance with Section 5.04;

                                     -11-
<PAGE>

          (c)  Liens (other than any inchoate lien imposed by ERISA) incurred or
deposits or pledges made in the ordinary course of business in connection with
workers' compensation, unemployment insurance and other types of social
security, old age or other similar obligations, or to secure the performance of
tenders, statutory obligations, surety and appeal bonds, bids, leases,
government contracts, performance and return of money bonds and other similar
obligations;

          (d)  judgment Liens in respect of judgments that do not constitute an
Event of Default under clause (k) of Article VII;

          (e)  easements, rights-of-way, restrictions, servitudes, permits,
reservations, exceptions, conditions, covenants and other similar charges or
encumbrances not interfering with the ordinary conduct of the business of the
Borrower or any of its Restricted Subsidiaries;

          (f)  any Lien securing Indebtedness, neither assumed nor guaranteed by
the Borrower or any of its Restricted Subsidiaries nor on which it customarily
pays interest, existing upon real estate or rights in or relating to real estate
acquired by the Borrower or any Restricted Subsidiary for substation, metering
station, pump station, storage, gathering line, transmission line,
transportation line, distribution line or for right-of-way purposes, and any
Liens reserved in leases for rent and for compliance with the terms of the
leases in the case of leasehold estates, to the extent that any such Lien
referred to in this clause (f) does not materially impair the use of the
Property covered by such Lien for the purposes of which such Property is held by
the Borrower or any of its Restricted Subsidiaries;

          (g)  Liens reserved in oil, gas and/or mineral leases for bonus or
rental payments and for compliance with the terms of such leases and Liens
reserved in operating agreements, farm-out and farm-in agreements, exploration
agreements, development agreements and other similar agreements for compliance
with the terms of such agreements;

          (h)  defects, irregularities and deficiencies in title of any rights
of way or other property of the Borrower or any Restricted Subsidiary which in
the aggregate do not materially impair the use of such rights of way or other
property for the purposes for which such rights of way and other property are
held by the Borrower or any Restricted Subsidiary, and defects, irregularities
and deficiencies in title to any property of the Borrower or its Restricted
Subsidiaries, which defects, irregularities or deficiencies have been cured by
possession under applicable statutes of limitation;

          (i)  royalties, overriding royalties, revenue interests, net revenue
interests, production payments (other than production payments which constitute
Indebtedness), advance payment obligations (other than obligations in respect of
advance payment received by the Borrower or any Restricted Subsidiary in
connection with the borrowing of money) and other similar burdens (i) now
existing on Oil and Gas Properties now owned or (ii) as to Oil and Gas
Properties hereafter acquired, existing at the time of acquisition by the
Borrower or any of its Restricted Subsidiaries or (iii) entered into in the
ordinary course of business;

          (j)  Liens arising out of all presently existing and future division
and transfer orders, advance payment agreements, processing contracts, gas
processing plant agreements, operating agreements, gas balancing or deferred
production agreements, pooling, unitization or communitization agreements,
pipeline, gathering or transportation agreements, platform agreements, drilling
contracts, injection or repressuring agreements, cycling agreements,
construction agreements, salt water or other disposal agreements, leases or
rental agreements (but only as otherwise not prohibited by this Agreement),
farm-out and farm-in

                                     -12-
<PAGE>

agreements, exploration and development agreements, and any and all other
contracts or agreements covering, arising out of, used or useful in connection
with or pertaining to the exploration, development, operation, production, sale,
use, purchase, exchange, storage, separation, dehydration, treatment,
compression, gathering, transportation, processing, improvement, marketing,
disposal or handling of any property of the Borrower or its Restricted
Subsidiaries, provided such agreements are entered into in the ordinary course
of business and contain terms customary for such agreements in the industry;

          (k)  Liens arising from UCC financing statements regarding leases
permitted by this Agreement; and

          (l)  Liens incurred by the Borrower with the consent of the Required
Lenders.

          "Permitted Investments" means:
           ---------------------

          (a)  direct obligations of, or obligations the principal of and
interest on which are unconditionally guaranteed by, the United States of
America (or by any agency thereof to the extent such obligations are backed by
the full faith and credit of the United States of America), in each case
maturing within one year from the date of acquisition thereof;

          (b)  investments in commercial paper maturing within 270 days from the
date of acquisition thereof and having, at such date of acquisition, the highest
or second highest credit rating obtainable from S&P or from Moody's;

          (c)  investments in certificates of deposit, banker's acceptances and
time deposits maturing within one year from the date of acquisition thereof
issued or guaranteed by or placed with, and money market deposit accounts issued
or offered by, any domestic office of any commercial bank organized under the
laws of the United States of America or any State thereof which has a combined
capital and surplus and undivided profits of not less than $500,000,000;

          (d)  fully collateralized repurchase agreements with a term of not
more than 30 days for securities described in clause (a) above and entered into
with a financial institution satisfying the criteria described in clause (c)
above.

          (e)  investments in funds substantially all of the assets of which are
of the type described in clause (a), (b) or (c) above;

          (f)  loans or advances by Borrower or any Restricted Subsidiary to or
investments in Borrower or a Person that is (or that simultaneously becomes) a
Restricted Subsidiary;

          (g)  loans or advances to employees of the Borrower or its
Subsidiaries in the ordinary course of business not to exceed $2,000,000 in the
aggregate at any one time outstanding;

          (h)  loans made to employees of the Borrower or its Subsidiaries for
the purposes of funding the exercise of outstanding options pursuant to the
Borrower's stock option plans not to exceed $55,000,000 in the aggregate at any
one time outstanding; and

          (i)  Guarantees permitted under Section 6.04.

                                     -13-
<PAGE>

          "Person" means any natural person, corporation, limited liability
           ------
company, trust, joint venture, association, company, partnership, Governmental
Authority or other entity.

          "Plan" means any employee pension benefit plan (other than a
           ----
Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section
412 of the Code or Section 302 of ERISA, and in respect of which the Borrower or
any ERISA Affiliate is (or, if such plan were terminated, would under Section
4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of
ERISA.

          "Prime Rate" means the rate of interest per annum publicly announced
           ----------
from time to time by Credit Suisse First Boston as its prime rate in effect at
its principal office in New York City; each change in the Prime Rate shall be
effective from and including the date such change is publicly announced as being
effective.

          "Pure Partners" means Pure Partners, L.P., a Delaware limited
           -------------
partnership.

          "Put Arrangement" means an agreement of Borrower or any Restricted
           ---------------
Subsidiary to repurchase or otherwise make a Restricted Payment in respect of
Equity Interests issued as consideration for
an acquisition by Borrower or any Restricted Subsidiary after the Effective Date
(for example, to repurchase such Equity Interests during a specified option
period if a specified average closing price of such Equity Interests is below a
specified price target).

          "Put Arrangement Liability" means the amount which Borrower or any
           -------------------------
Restricted Subsidiary is obligated to pay in respect of Equity Interests under a
Put Arrangement (whether or not then exercised by the holder thereof) to the
extent such obligation is not contingent and at the time such obligation is not
contingent. For this purpose, an obligation under a Put Arrangement to
repurchase Equity Interests at the option of another Person is not contingent to
the extent and at the time that the option is presently exercisable; provided
                                                                     --------
however, such an option exercisable during a specified future option period will
-------
also be treated as not contingent during the 180-day period immediately
preceding the start of such option period to the extent a liability would have
existed under the Put Arrangement if such 180-day period had been part of such
option period.

          "Register" has the meaning set forth in Section 10.04.
           --------

          "Related Parties" means, with respect to any specified Person, such
           ---------------
Person's Affiliates and the respective directors, officers, employees, agents
and advisors of such Person and such Person's Affiliates.

          "Required Lenders" means, at any time, Lenders having Exposures and
           ----------------
unused Commitments representing at least 51% of the sum of the total Exposures
and unused Commitments at such time.

          "Restricted Investments" means (i) the cash amount or fair value (in
           ----------------------
the case of consideration other than cash) of any loans or advances to or
investments in any Person other than Permitted Investments or (ii) the net asset
value (being the fair value of its assets minus the fair value of its
liabilities) of a Restricted Subsidiary at the time of its designation by
Borrower as an Unrestricted Subsidiary. For purposes of determining "fair value"
in this context, a determination by the board of directors of the Borrower or
the applicable Restricted Subsidiary shall be sufficient with regard to
consideration with fair value not

                                     -14-
<PAGE>

exceeding $20,000,000 and the concurrence of the Administrative Agent shall be
required for consideration in excess of $20,000,000.

          "Restricted Payment" means (a) any dividend or other distribution
           ------------------
(whether in cash, securities or other property) with respect to any shares of
any class of capital stock of the Borrower or any Subsidiary, or any payment
(whether in cash, securities or other property), including any sinking fund or
similar deposit, on account of the purchase, redemption, retirement,
acquisition, cancellation or termination of any such shares of capital stock of
the Borrower or any option, warrant or other right to acquire any such shares of
capital stock of the Borrower, and (b) Restricted Investments.

          "Restricted Subsidiaries" means all Subsidiaries of the Borrower which
           -----------------------
are designated as a Restricted Subsidiary on Schedule 3.12 hereto or pursuant to
Sections 5.09 or 6.13 hereof and which the Borrower has not redesignated as an
Unrestricted Subsidiary pursuant to Section 6.13 hereof.

          "SEC PV-10" means estimated future net revenues from the production of
           ---------
proved oil and gas reserves, net of all production-related taxes, lease
operating expenses and capital costs, discounted by a factor of 10% per annum,
before income taxes and with no price or cost escalation or de-escalation
(except for any contract prices in effect as of the date of the reserve report),
in accordance with guidelines promulgated by the Securities and Exchange
Commission.

          "SPFV" has the meaning specified in Section 10.04(h) hereof.
           ----

          "S&P" means Standard & Poor's.
           ---

          "Statutory Reserve Rate" means a fraction (expressed as a decimal),
           ----------------------
the numerator of which is the number one and the denominator of which is the
number one minus the aggregate of the maximum reserve percentages (including any
marginal, special, emergency or supplemental reserves) expressed as a decimal
established by the Board to which any Lender is subject, with respect to the
Adjusted LIBO Rate, for eurocurrency funding (currently referred to as
"Eurocurrency Liabilities" in Regulation D of the Board). Such reserve
percentages shall include those imposed pursuant to such Regulation D.
Eurodollar Loans shall be deemed to constitute eurocurrency funding and to be
subject to such reserve requirements without benefit of or credit for proration,
exemptions or offsets that may be available from time to time to any Lender
under such Regulation D or any comparable regulation.  The Statutory Reserve
Rate shall be adjusted automatically on and as of the effective date of any
change in any reserve percentage.

          "subsidiary" means, with respect to any Person (the "parent") at any
           ----------                                          ------
date, any corporation, limited liability company, partnership, association or
other entity the accounts of which would be consolidated with those of the
parent in the parent's consolidated financial statements if such financial
statements were prepared in accordance with GAAP as of such date.

          "Subsidiary" means any subsidiary of the Borrower.
           ----------

          "Subsidiary Guaranty Agreement" means an agreement executed by each
           -----------------------------
Restricted Subsidiary guarantying, unconditionally, payment of all amounts owing
and to be owing under or in connection with this Agreement, as the same may be
amended, modified or supplemented from time to time.

          "Taxes" has the meaning set forth in Section 2.20(a).
           -----

                                     -15-
<PAGE>

          "Term Loans" means outstanding Line of Credit Loans converted to term
           ----------
loans pursuant to Sections 2.01(b) and 4.03.

          "Transactions" means the execution, delivery and performance by the
           ------------
Borrower of this Agreement, the borrowing of Loans, the use of the proceeds
thereof.

          "Type", when used in reference to any Loan or Borrowing, refers to
           ----
whether the rate of interest on such Loan, or on the Loans comprising such
Borrowing, is determined by reference to the Adjusted LIBO Rate or the Alternate
Base Rate.

          "UNOCAL" means Union Oil Company of California, or any one of its
           ------
successors or any one of its consolidated subsidiaries.

          "Unrestricted Subsidiary" means any Subsidiary other than a Restricted
           -----------------------
Subsidiary.

          "Withdrawal Liability" means liability to a Multiemployer Plan as a
           --------------------
result of a complete or partial withdrawal from such Multiemployer Plan, as such
terms are defined in Part I of Subtitle E of Title IV of ERISA.

          SECTION 1.02.  Terms Generally.  The definitions of terms herein shall
                         ---------------
apply equally to the singular and plural forms of the terms defined.  Whenever
the context may require, any pronoun shall include the corresponding masculine,
feminine and neuter forms.  The words "include", "includes" and "including"
shall be deemed to be followed by the phrase "without limitation".  The word
"will" shall be construed to have the same meaning and effect as the word
"shall".  Unless the context requires otherwise (a) any definition of or
reference to any agreement, instrument or other document herein shall be
construed as referring to such agreement, instrument or other document as from
time to time amended, supplemented or otherwise modified (subject to any
restrictions on such amendments, supplements or modifications set forth herein),
(b) any reference herein to any Person shall be construed to include such
Person's successors and assigns, (c) the words "herein", "hereof" and
"hereunder", and words of similar import, shall be construed to refer to this
Agreement in its entirety and not to any particular provision hereof, (d) all
references herein to Articles, Sections, Exhibits and Schedules shall be
construed to refer to Articles and Sections of, and Exhibits and Schedules to,
this Agreement and (e) the words "asset" and "property" shall be construed to
have the same meaning and effect and to refer to any and all tangible and
intangible assets and properties, including cash, securities, accounts and
contract rights.

          SECTION 1.03.  Accounting Terms; GAAP.  Except as otherwise expressly
                         ----------------------
provided herein, all terms of an accounting or financial nature shall be
construed in accordance with GAAP, as in effect from time to time; provided
                                                                   --------
that, if the Borrower notifies the Administrative Agent that the Borrower
requests an amendment to any provision hereof to eliminate the effect of any
change occurring after the date hereof in GAAP or in the application thereof on
the operation of such provision (or if the Administrative Agent notifies the
Borrower that the Required Lenders request an amendment to any provision hereof
for such purpose), regardless of whether any such notice is given before or
after such change in GAAP or in the application thereof, then such provision
shall be interpreted on the basis of GAAP as in effect and applied immediately
before such change shall have become effective until such notice shall have been
withdrawn or such provision amended in accordance herewith.

                                     -16-
<PAGE>

                                  ARTICLE II

                                  The Credits
                                  -----------

          SECTION  2.01  Commitments.
                         -----------

          (a) Line of Credit Loans.  Subject to the terms and conditions and
              --------------------
relying on the representations and warranties contained herein, each Lender
severally agrees, on any Business Day, to make Line of Credit Loans to the
Borrower during the Availability Period in an aggregate principal amount at any
one time outstanding up to but not exceeding the amount of such Lender's
Commitment as then in effect; provided, however, that (i) the total Exposures at
                              --------  -------
any one time outstanding shall not exceed the total Commitments, (ii) there
shall only be a single one-time advance under this Agreement (provided that
Borrower may request wire transfers of such advance to multiple locations), and
(iii) any Loans that are prepaid may not be reborrowed.

          (b) Conversion to Term Loans.  Subject to satisfaction of the
              ------------------------
conditions contained in Section 4.03, the aggregate principal amount of all Line
of Credit Loans outstanding immediately prior to the close of the Administrative
Agent's business on the Conversion Date shall automatically convert to Term
Loans maturing on Final Maturity Date.  Any Term Loans that are prepaid may not
be reborrowed.

          (c)  Types of Loans.    The Loans made pursuant hereto by each Lender
               --------------
shall, at the option of the Borrower, be either ABR Loans or Eurodollar Loans
and may be continued or converted pursuant to Section 2.11, provided that,
except as otherwise specifically provided herein, all Loans made pursuant to the
same Borrowing shall be of the same Type.

          (d) Commitments.  (i) Each Lender's Exposure shall not exceed at any
              -----------
one time the amount set forth opposite such Lender's name on Schedule 2.01 under
the caption "Commitment".

              (ii)  Any portion of each Lender's Commitment not utilized on the
     first and only advance under this Agreement shall be permanently cancelled.

              (iii) If the Hallwood Acquisition is not completed on or before
     the Conversion Date, each Lender's Commitment under this Agreement shall be
     permanently cancelled and the Borrower shall forthwith pay in full all
     amounts owing under or in connection with the Agreement or any other Loan
     Document.

          (e) Amounts of Borrowings, etc.  The aggregate principal amount of
              --------------------------
each Borrowing (i) of Eurodollar Loans shall be not less than $5,000,000 and
shall be in an integral multiple of $1,000,000, and (ii) of ABR Loans shall be
not less than $1,000,000 and shall be in an integral multiple of $100,000,
except that any Borrowing of Loans that are ABR Loans may be in the aggregate
amount of the unused total Commitments in effect at such time.  Borrowings of
more than one Type may be outstanding at the same time; provided, however, that
                                                        --------  -------
the Borrower shall not be entitled to request any Borrowing that, if made, would
result in an aggregate of more than 3 separate Borrowings of Eurodollar Loans
being outstanding at any one time.  For purposes of the foregoing, Borrowings
having different Interest Periods, regardless of whether they commence on the
same date, shall be considered separate Borrowings.

                                     -17-
<PAGE>

          SECTION 2.02        Borrowing Requests.
                              ------------------

          (a) Borrowing Requests.  Whenever the Borrower desires to make a
              ------------------
Borrowing hereunder, it shall give Advance Notice in the form of a Borrowing
Request, specifying, subject to the provisions hereof, (i) the aggregate
principal amount of the Loans to be made pursuant to such Borrowing, (ii) the
date of Borrowing (which shall be a Business Day), (iii) whether the Loans being
made pursuant to such Borrowing are to be ABR Loans or Eurodollar Loans, and
(iv) in the case of Eurodollar Loans, the Interest Period to be applicable
thereto.

          (b) Notice by Administrative Agent.  The Administrative Agent shall
              ------------------------------
promptly give each Lender facsimile or telephonic notice (and, in the case of
telephonic notices, confirmed by facsimile or otherwise in writing) of the
proposed Borrowing, of such Lender's Percentage Share thereof and of the other
matters covered by the Advance Notice.  Without in any way limiting the
Borrower's obligation to confirm in writing any telephonic notice, the
Administrative Agent may act without liability upon the basis of telephonic
notice believed by the Administrative Agent in good faith to be from the
Borrower prior to receipt of written confirmation.  In each such case, the
Borrower hereby waives the right to dispute the Administrative Agent's record of
the terms of such telephonic notice, absent manifest error.

          SECTION 2.03.   Letters of Credit.  Notwithstanding anything in this
                          -----------------
Agreement to the contrary, no letters of credit shall be issued in connection
herewith, and any references herein to letters of credit issued under this
Agreement shall be disregarded.

          SECTION 2.04    Disbursement of Funds.
                          ---------------------

          (a) Availability.  No later than 2:00 p.m. (Houston time) on the date
              ------------
of each Borrowing, each Lender will make available to the Administrative Agent
such Lender's Percentage Share of the amount (if any) by which the principal
amount of the Borrowing requested to be made on such date exceeds the principal
amount of Loans (if any) maturing on such date, in Dollars and in immediately
available funds at the Payment Office or pursuant to the Borrower's written
instructions to the Administrative Agent.  The Administrative Agent will make
available to the Borrower at the Payment Office the aggregate of the amounts (if
any) so made available by the Lenders by depositing such amounts, in immediately
available funds, to an account of the Borrower at the Administrative Agent
designated by the Borrower for such purpose.  To the extent that Loans mature on
the date of a requested Borrowing of Loans, the Lenders shall apply the proceeds
of the Loans then being made, to the extent thereof, to the repayment of such
maturing Loans, such Loans intended to be a contemporaneous exchange.

          (b) Funds to the Administrative Agent.  Unless the Administrative
              ---------------------------------
Agent shall have been notified by any Lender prior to the date of a Borrowing
that such Lender does not intend to make available to the Administrative Agent
such Lender's Percentage Share of the Borrowing to be made on such date, the
Administrative Agent may assume that such Lender has made such amount available
to the Administrative Agent on such date, and the Administrative Agent may make
available to the Borrower a corresponding amount.  If such corresponding amount
is not in fact made available to the Administrative Agent by such Lender on the
date of a Borrowing, the Administrative Agent shall be entitled to recover such
corresponding amount on demand from such Lender together with interest at the
Federal Funds Effective Rate.  If such Lender does not pay such corresponding
amount forthwith upon the Administrative Agent's demand therefor, the
Administrative Agent shall promptly notify the Borrower, and the Borrower shall
immediately pay such corresponding amount to the Administrative Agent together
with interest at the rate specified for the Borrowing which includes such amount
paid.  Nothing in this Section shall be deemed to relieve any Lender

                                     -18-
<PAGE>

from its obligation to fulfill its Commitment hereunder or to prejudice any
rights which the Borrower may have against any Lender as a result of any default
by such Lender hereunder.

          (c) Lenders' Responsibilities.  No Lender shall be responsible for any
              -------------------------
default by any other Lender in its obligation to make Loans hereunder, and each
Lender shall be obligated to make the Loans provided to be made by it hereunder,
regardless of the failure of any other Lender to fulfill its Commitment
hereunder.

          SECTION 2.05   Notes.   Any Lender may request that Loans made by it
                         -----
be evidenced by a promissory note (individually, a "Note" and collectively,
                                                    ----
"Notes").  In such event, the Borrower shall prepare, execute and deliver to
------
such Lender a promissory note payable to the order of such Lender (or, if
requested by such Lender, to such Lender and its registered assigns) and in a
form approved by the Administrative Agent.  Thereafter, the Loans evidenced by
such promissory note and interest thereon shall at all times (including after
assignment pursuant to Section 10.04) be represented by one or more promissory
notes in such form payable to the order of the payee named therein (or, if such
promissory note is a registered note, to such payee and its registered assigns).

          SECTION 2.06    Interest.  In all cases subject to Section 10.13:
                          --------

          (a) ABR Loans.  Subject to Section 2.06(c), the Borrower agrees to pay
              ---------
interest in respect of the unpaid principal amount of each ABR Loan from the
date thereof until payment in full thereof at a rate per annum which shall be,
for any day, equal to the sum of the Applicable Rate (ABR Spread) plus the
Alternate Base Rate in effect on such day, but in no event to exceed the Highest
Lawful Rate.  If for any reason the Administrative Agent shall have determined
(which determination shall be conclusive and binding, absent manifest error)
that it is unable to ascertain the Federal Funds Effective Rate for any reason,
including but not limited to the inability of the Administrative Agent to obtain
sufficient bids or publications in accordance with the terms hereof, the
Alternate Base Rate shall be the Prime Rate until the circumstances giving rise
to such inability no longer exist.

          (b) Eurodollar Loans.  Subject to Section 2.06(c), the Borrower agrees
              ----------------
to pay interest in respect of the unpaid principal amount of each Eurodollar
Loan from the date thereof until payment in full thereof at a rate per annum
which shall be the sum of the Applicable Rate (Eurodollar Spread) plus the
relevant Adjusted LIBO Rate, but in no event to exceed the Highest Lawful Rate.

          (c) Default Interest.  Overdue principal and, to the extent permitted
              ----------------
by law, overdue interest in respect of each Loan and all other amounts owing
hereunder shall bear interest for each day that such amounts are overdue at a
rate per annum equal to two percent (2%) in excess of the Adjusted LIBO Rate
plus the Applicable Rate or the Alternate Base Rate, as applicable to such Loan,
in effect for each such day, and all other amounts owing hereunder shall bear
interest for each day that such amounts are overdue at a rate per annum equal to
two percent (2%) in excess of the Alternate Base Rate, but in no event shall any
such rate exceed the Highest Lawful Rate.

          (d) Interest Payment Dates.  Interest on each Loan shall accrue from
              ----------------------
and including the date of such Loan to but excluding the date of payment in full
thereof.  Interest on each Eurodollar Loan shall be payable on the last day of
each Interest Period applicable thereto and, in the case of an Interest Period
in excess of three months, on each day which occurs every three months after the
initial date of such Interest Period, and on any prepayment (on the amount
prepaid), at maturity (whether by acceleration or otherwise) and, after
maturity, on demand.  Interest on ABR Loans shall be payable on each Quarterly
Date,

                                     -19-
<PAGE>

commencing on the first of such days to occur after such Loan is made, at
maturity (whether by acceleration or otherwise) and, after maturity, on demand.

          (e) Notice by the Administrative Agent.  The Administrative Agent,
              ----------------------------------
upon determining the Adjusted LIBO Rate for any Interest Period, shall promptly
notify by telephone (confirmed in writing) or in writing the Borrower and the
Lenders thereof.

          SECTION 2.07    Interest Periods.  In connection with each Borrowing
                          ----------------
of Eurodollar Loans, the Borrower shall elect an Interest Period to be
applicable to such Borrowing, which Interest Period shall begin on and include,
as the case may be, the date selected by the Borrower as of the date of the
Borrowing pursuant to Section 2.02(a), or at conversion from one Type of Loan to
another pursuant to Section 2.11(e), or the date of expiration of the then
current Interest Period applicable thereto, and end on but exclude the date
which is either one, two, three, six or 12 months thereafter, as selected by the
Borrower; provided that:
          --------

          (a) Business Days.  If any Interest Period would otherwise expire on a
              -------------
day which is not a Business Day, such Interest Period shall expire on the next
succeeding Business Day, provided, further, that if any Interest Period (other
                         --------  -------
than in respect of a Borrowing of Eurodollar Loans the Interest Period of which
is expiring pursuant to Section 2.15(b) hereof) would otherwise expire on a day
which is not a Business Day but is a day of the month after which no further
Business Day occurs in such month, such Interest Period shall expire on the next
preceding Business Day;

          (b) Month End.  Any Interest Period which begins on the last Business
              ---------
Day of a calendar month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of such Interest Period)
shall, subject to Section 2.07(c) below, end on the last Business Day of a
calendar month;

          (c) Payment Limitations.  No Interest Period shall extend beyond any
              -------------------
date that any principal payment or prepayment is scheduled to be due unless the
aggregate principal amount of Borrowings which are Borrowings of ABR Loans or
which have Interest Periods which will expire on or before such date, less the
aggregate amount of any other principal payments or prepayments due during such
Interest Period, is equal to or in excess of the amount of such principal
payment or prepayment; and

          (d) Maturity Dates.  No Interest Period with regard to Loans shall
              --------------
extend beyond the Final Maturity Date.

          SECTION 2.08    Repayment of Loans.  The Borrower will pay to the
                          ------------------
Administrative Agent for account of each Lender the outstanding principal amount
of each Loan made by such Lender on or before the Final Maturity Date.

          SECTION 2.09    Intentionally Left Blank.
                          ------------------------

          SECTION 2.10    Prepayments.
                          -----------

                                     -20-
<PAGE>

          (a) Voluntary Prepayments.  The Borrower may, at its option, at any
              ---------------------
time and from time to time, prepay Loans, in whole or in part, without premium
or penalty (other than funding losses, if any, resulting from such prepayment
being made other than on the last day of an Interest Period with respect to any
Eurodollar Loan as provided in Section 2.18), upon giving, in the case of a
Eurodollar Loan, three Business Days' prior written notice to the Administrative
Agent, and, in the case of an ABR Loan, one Business Day's prior written notice
to the Administrative Agent.  Such notice shall be irrevocable and specify the
date and amount of prepayment and the Loan or Loans (including the Type thereof)
to which such prepayment is to be applicable.  The payment amount specified in
such notice shall be due and payable on the date specified.  Each prepayment of
Loans shall be in the minimum principal amount of $1,000,000 or any larger
multiple thereof or the aggregate balance outstanding on the applicable Notes.
Each prepayment made pursuant to this Section shall be subject to Section 2.18
(as applicable) and shall be applied ratably to prepay the Loans of the several
Lenders.

          (b) Net Proceeds From the Issuance of Indebtedness or Equity
              --------------------------------------------------------
Securities.  In the event the Borrower issues Indebtedness (excluding the Bank
----------
Credit Facilities and other bank credit not in excess of $25,000,000 in the
aggregate) or equity securities to the capital markets prior to all amounts
owing under or in connection with this Agreement being paid in full, all net
proceeds received by the Borrower in connection with such issuance shall be
forthwith delivered to the Agent for application towards the reduction of all
amounts owing hereunder or under any other Loan Document, until all such amounts
are paid in full.

          (c) Notice by Administrative Agent.  Upon receipt of a notice of
              ------------------------------
prepayment pursuant to clause (a) of this Section, the Administrative Agent
shall promptly notify each Lender of the contents thereof and of such Lender's
ratable share of such prepayment.

          SECTION 2.11   Continuation and Conversion Options.
                         -----------------------------------

          (a) Continuation.  The Borrower may elect to continue all or any part
              ------------
of any Borrowing of Eurodollar Loans beyond the expiration of the then current
Interest Period relating thereto by giving Advance Notice to the Administrative
Agent of such election, specifying the Eurodollar Loan or portion thereof to be
continued and the Interest Period therefor.  In the absence of such a timely and
proper election with regard to Eurodollar Loans, the Borrower shall be deemed to
have elected to convert such Eurodollar Loan to an ABR Loan pursuant to Section
2.11(d).

          (b) Amounts of Continuations.  All or part of any Eurodollar Loan may
              ------------------------
be continued as provided herein, provided that any continuation of such Loan
shall not result in a Borrowing of Eurodollar Loans in an amount other than
$5,000,000 or an integral multiple of $1,000,000 in excess thereof.

          (c) Continuation or Conversion Upon Default.  If no Default shall have
              ---------------------------------------
occurred and be continuing, each Eurodollar Loan may be continued or converted
as provided in this Section.  If a Default shall have occurred and be
continuing, the Borrower shall not have the option to elect to continue any such
Eurodollar Loan pursuant to Section 2.11(a) or to convert ABR Loans pursuant to
Section 2.11(e).

          (d) Conversion to Alternate Base Rate.  The Borrower may elect to
              ---------------------------------
convert any Eurodollar Loan on the last day of the then current Interest Period
relating thereto to an ABR Loan by giving Advance Notice to the Administrative
Agent of such election.

                                     -21-
<PAGE>

          (e) Conversion to Eurodollar Rate.  The Borrower may elect to convert
              -----------------------------
any ABR Loan at any time or from time to time to a Eurodollar Loan by giving
Advance Notice to the Administrative Agent of such election, specifying each
Interest Period therefor.

          (f) Amounts of Conversions.  All or any part of the outstanding Loans
              ----------------------
may be converted as provided herein, provided that any conversion of such Loans
shall not result in a Borrowing of Eurodollar Loans in an amount other than
$5,000,000 or an integral multiple of $1,000,000 in excess thereof.

          SECTION 2.12.   Fees. (a) If Loans are still outstanding under this
                          ----
Agreement at the close of business on the Conversion Date, the Borrower agrees
to pay to the Administrative Agent for the account of each Lender a closing fee,
which shall be equal to one-quarter of one percent (.25%) times the principal
amount of such Lender's Loans that are then outstanding.

          (b) The Borrower agrees to pay to the Administrative Agent, for its
own account, fees payable in the amounts and at the times separately agreed upon
between the Borrower and the Administrative Agent.

          (c) All fees payable hereunder shall be paid on the dates due, in
immediately available funds, to the Administrative Agent. Fees paid shall not be
refundable under any circumstances absent manifest error.

          SECTION 2.13  Payments, etc.
                        -------------

          (a) Without Setoff, etc.  Except as otherwise specifically provided
              -------------------
herein, all payments under this Agreement shall be made to the Administrative
Agent on behalf of the Lenders without defense, set-off or counterclaim to the
Administrative Agent not later than 12:30 p.m. (Houston time) on the date when
due and shall be made in Dollars in immediately available funds at the Payment
Office.  The Administrative Agent will promptly thereafter distribute funds in
the form received relating to the payment of principal or interest or fees
ratably to the Lenders for the account of their respective Lending Offices, and
funds in the form received relating to the payment of any other amount payable
to any Lender to such Lender for the account of its Lending Office.

          (b) Non-Business Days.  Whenever any payment to be made hereunder or
              -----------------
under any Note or any report or information to be delivered hereunder shall be
stated to be due on a day which is not a Business Day, the due date thereof
shall be extended to the next succeeding Business Day (except as otherwise
provided in Section 2.07) and, with respect to payments of principal, interest
thereon shall be payable at the applicable rate during such extension.

          (c) Computations.  All computations of interest shall be made on the
              ------------
basis of a year of 360 days (unless such calculation would result in a usurious
rate, in which case interest shall be calculated on the basis of a year of 365
or 366 days, as the case may be) in the case of Eurodollar Loans, and 365 or 366
days (as the case may be) in the case of ABR Loans, and all computations of fees
shall be made on the basis of a year of 360 days (unless such calculation would
result in a usurious rate, in which case interest shall be calculated on the
basis of a year of 365 or 366 days, as the case may be), in each case for the
actual number of days (including the first day but excluding the last day)
occurring in the period for which such interest or fees are payable.  Each
determination by the Administrative Agent of an interest rate or fee hereunder
shall, except for manifest error, be final, conclusive and binding for all
purposes, provided that such determination shall be made in good faith in a
manner generally consistent with the Administrative Agent's

                                     -22-
<PAGE>

standard practice. If the Administrative Agent and the Borrower determine that
manifest error exists, such parties shall correct such error by way of an
adjustment to the payment due on the next Quarterly Date.

          SECTION 2.14   Interest Rate Not Ascertainable, etc.  In the event
                         ------------------------------------
that the Administrative Agent shall have determined (which determination shall
be reasonably exercised and shall, absent manifest error, be final, conclusive
and binding upon all parties) that on any date for determining the Eurodollar
Rate for any Interest Period, by reason of any changes arising after the date of
this Agreement affecting the interbank Eurodollar market, or any Lender's
position in such market, adequate and fair means do not exist for ascertaining
the applicable interest rate on the basis provided for in the definition of
Eurodollar Rate, then, and in any such event, the Administrative Agent shall
forthwith give notice (by telephone confirmed in writing) to the Borrower and to
the Lenders of such determination.  Until the Administrative Agent notifies the
Borrower that the circumstances giving rise to the suspension described herein
no longer exist, the obligations of the Lenders to make Eurodollar Loans shall
be immediately suspended; any Eurodollar Loan that is requested (by
continuation, conversion or otherwise) shall instead be made as an ABR Loan, and
any outstanding Eurodollar Loan shall be converted, on the last day of the then
current Interest Period applicable thereto, to an ABR Loan.

          SECTION 2.15   Illegality.
                         ----------

          (a) Determinations of Illegality.  In the event that any Lender shall
              ----------------------------
have determined (which determination shall be reasonably exercised and shall,
absent manifest error, be final, conclusive and binding upon all parties) at any
time that the making or continuance of any Eurodollar Loan has become unlawful
due to the introduction of or any change in or in the interpretation of any
applicable law, governmental rule, regulation, guideline or order (whether or
not having the force of law and whether or not failure to comply therewith would
be unlawful), then, in any such event, the Lender shall give prompt notice (by
telephone confirmed in writing) to the Administrative Agent of such
determination (which notice the Administrative Agent shall promptly transmit to
the Borrower and the other Lenders).

          (b) Eurodollar Loans Suspended.  Upon the giving of the notice to the
              --------------------------
Borrower referred to in Section (a) above, (i) the Borrower's right to request
(by continuation, conversion or otherwise) and such Lender's obligation to make
Eurodollar Loans shall be immediately suspended, and any such requested
Eurodollar Loan shall instead be made as an ABR Loan, and (ii) if the affected
Eurodollar Loan or Loans are then outstanding, the Borrower shall immediately,
or if permitted by applicable law, no later than the date permitted thereby,
upon at least one Business Day's written notice to the Administrative Agent and
the affected Lender, convert each such Eurodollar Loan into an ABR Loan,
provided that if more than one Lender is affected at any time, then all affected
Lenders must be treated the same pursuant to this Section.

          SECTION 2.16   Increased Costs.
                         ---------------

          (a) Eurodollar Regulations, etc.  If, by reason of (x) after the date
              ---------------------------
hereof, the introduction of or any change (including, but not limited to, any
change by way of imposition or increase of reserve requirements) in or in the
interpretation of any law or regulation, or (y) the compliance with any
guideline or request made after the date hereof by any central bank or other
governmental authority or quasi-governmental authority exercising control over
banks or financial institutions generally (whether or not having the force of
law):

              (i)   any Lender (or its applicable Lending Office) shall be
     subject to any tax, duty or other charge with respect to its Eurodollar
     Loans or its obligation to make Eurodollar Loans, or

                                     -23-
<PAGE>

     shall change the basis of taxation of payments to any Lender of the
     principal of or interest on its Eurodollar Loans or its obligation to make
     Eurodollar Loans (except for changes in the rate of tax on the overall net
     income or gross receipts of such Lender or its applicable Lending Office
     imposed by the jurisdiction in which such Lender's principal executive
     office or applicable Lending Office is located); or

               (ii)     any reserve (including, but not limited to, any imposed
     by the Board of Governors of the Federal Reserve System), special deposit
     or similar requirement against assets of, deposits with or for the account
     of, or credit extended by, any Lender's applicable Lending Office shall be
     imposed or deemed applicable or any other condition affecting its
     Eurodollar Loans or its obligations to make Eurodollar Loans shall be
     imposed on any Lender or its applicable Lending Office or the interbank
     Eurodollar market or the secondary certificate of deposit market;

     and as a result thereof there shall be any increase in the cost to such
     Lender of agreeing to make or making, funding or maintaining Eurodollar
     Loans (except to the extent already included in the determination of the
     applicable Eurodollar Rate) or there shall be a reduction in the amount
     received or receivable by such Lender or its applicable Lending Office,
     then the Borrower shall from time to time, upon written notice from and
     demand by such Lender (with a copy of such notice and demand to the
     Administrative Agent), pay to such Lender, within 30 days after the date
     specified in such notice and demand, additional amounts determined by such
     Lender in a reasonable manner to be sufficient to indemnify such Lender
     against such increased cost.  A certificate as to the amount of such
     increased cost and the calculation thereof, submitted to the Borrower and
     the Administrative Agent by such Lender, shall, except for manifest error,
     be final, conclusive and binding for all purposes, provided that the
     determination of such amount shall be made in good faith in a manner
     generally consistent with such Lender's standard practice.

          (b)  Costs. If any Lender shall advise the Administrative Agent that
               -----
at any time, because of the circumstances described in clauses (x) or (y) in
Section 2.16(a) or any other circumstances arising after the Effective Date
affecting such Lender or the interbank Eurodollar market or such Lender's
position in such market, the Eurodollar Rate, as determined in good faith by the
Administrative Agent, will not adequately and fairly reflect the cost to such
Lender of funding its Eurodollar Loans, then, and in any such event:

               (i)      the Administrative Agent shall forthwith give notice (by
     telephone confirmed in writing) to the Borrower and to the Lenders of such
     advice; and

               (ii)     the Borrower's right to request and such Lender's
     obligation to make Eurodollar Loans shall be immediately suspended, any
     such Eurodollar Loan that is requested (by continuation, conversion or
     otherwise) shall instead be made as an ABR Loan, and any such outstanding
     Eurodollar Loan shall be converted, on the last day of the then current
     Interest Period applicable thereto, to an ABR Loan.

          (c)  Capital Adequacy. If, by reason of (i) after the date hereof, the
               ----------------
introduction of or any change (including, but not limited to, any change by way
of imposition or increase of reserve requirements) in or in the interpretation
of any law or regulation, or (ii) the compliance with any guideline or request
made after the date hereof by any central bank or other governmental authority
or quasi-governmental authority exercising control over banks or financial
institutions generally (whether or not having the force of law) affects or would
affect the amount of capital required to be maintained by any Lender or any
corporation controlling such Lender, and the amount of such capital is increased
by or based upon the existence of such

                                     -24-
<PAGE>

Lender's Commitment to lend hereunder and other commitments of this type, then,
within 30 days after written request therefor by such Lender (with a copy of
such request to the Administrative Agent), the Borrower shall pay to such
Lender, from time to time as specified by such Lender, additional amounts
sufficient to compensate such Lender for the increased cost of such additional
capital in light of such circumstances, to the extent that such Lender
reasonably determines such increase in capital to be allocable to the existence
of such Lender's Commitment to lend hereunder. A certificate as to such amounts
and the calculation thereof, submitted to the Borrower and the Administrative
Agent by such Lender, shall be conclusive and binding for all purposes, absent
manifest error, provided that the determination of such amount shall be made in
good faith in a manner generally consistent with such Lender's standard
practice.

          (d)  Notice.  The Borrower shall not be obligated to compensate any
               ------
Lender pursuant to this Section 2.16 for any amounts attributable to a period
more than 90 days prior to the giving of notice by such Lender to the Borrower
of its intention to seek compensation under this Section 2.16.

          SECTION 2.17   Change of Lending Office.  Each Lender agrees that it
                         ------------------------
will use reasonable efforts to designate an alternate Lending Office with
respect to any of its Eurodollar Loans affected by the matters or circumstances
described in Sections 2.14, 2.15 or 2.16 to reduce the liability of the Borrower
or avoid the results provided thereunder, so long as such designation is not
disadvantageous to such Lender as determined by such Lender in its sole
discretion.

          SECTION 2.18   Funding Losses.  The Borrower shall compensate each
                         --------------
Lender, upon its written request (which request shall set forth the basis for
requesting such amounts and which request shall be reasonably exercised and
shall, absent manifest error, be final, conclusive and binding upon all of the
parties hereto), for all losses, expenses and liabilities (including, but not
limited to, any interest paid by such Lender to lenders of funds borrowed by it
to make or carry its Eurodollar Loans to the extent not recovered by the Lender
in connection with the re-employment of such funds and including loss of
anticipated profits), which the Lender may sustain (i) if for any reason (other
than a default by such Lender) a Borrowing of Eurodollar Loans does not occur on
the date specified therefor in a Borrowing Request (whether or not withdrawn),
(ii) if any repayment (or conversion pursuant to Section 2.15 or otherwise) of
any of its Eurodollar Loans occurs on a date which is not the last day of an
Interest Period applicable thereto, or (iii) if, for any reason, the Borrower
defaults in its obligation to repay its Eurodollar Loans when required by the
terms of this Agreement.

          SECTION 2.19   Sharing of Payments, etc.  If any Lender shall obtain
                         ------------------------
any payment or reduction (including, but not limited to, any amounts received as
adequate protection of a deposit treated as cash collateral under the Bankruptcy
Code) of any obligation of the Borrower hereunder (whether voluntary,
involuntary, through the exercise of any right of set-off, or otherwise) in
excess of its ratable share of payments or reductions on account of such
obligations obtained by all the Lenders, such Lender shall forthwith (i) notify
each of the other Lenders and the Administrative Agent of such receipt, and (ii)
purchase from the other Lenders such participations in the affected obligations
as shall be necessary to cause such purchasing Lender to share the excess
payment or reduction, net of costs incurred in connection therewith, ratably
with each of them, provided that if all or any portion of such excess payment or
reduction is thereafter recovered from such purchasing Lender or additional
costs are incurred, the purchase shall be rescinded and the purchase price
restored to the extent of such recovery or such additional costs, but without
interest.  The Borrower agrees that any Lender so purchasing a participation
from another Lender pursuant to this Section may, to the fullest extent
permitted by law, exercise all its rights of payment (including the right of
set-off) with respect to such participation as fully as if such Lender were the
direct creditor of the Borrower in the amount of such participation.

                                     -25-
<PAGE>

          SECTION 2.20   Taxes.
                         -----

          (a)  Payments Free and Clear.  Any and all payments by the Borrower
               -----------------------
under this Agreement or any other Financing Document shall be made, in
accordance with Section 2.13, free and clear of and without deduction for any
and all present or future taxes, levies, imposts, deductions, charges or
withholdings, and all liabilities with respect thereto, excluding, in the case
                                                        ---------
of  the Administrative Agent and each Lender, taxes imposed on or measured by
its income or receipts, and franchise or similar taxes imposed on it, by (i) any
jurisdiction (or political subdivision thereof) of which the Administrative
Agent or such Lender, as the case may be, is a citizen or resident or in which
such Lender has a permanent establishment (or is otherwise engaged in the active
conduct of its banking business through an office or a branch) which is such
Lender's applicable Lending Office, (ii) the jurisdiction (or any political
subdivision thereof) in which the Administrative Agent or such Lender is
organized, or (iii) any jurisdiction (or political subdivision thereof) in which
the Administrative Agent or such Lender is presently doing business which taxes
are imposed solely as a result of doing business in such jurisdiction (all such
non-excluded taxes, levies, imposts, deductions, charges, withholdings and
liabilities so arising out of payments by the Borrower being hereinafter
referred to as "Taxes").  If the Borrower shall be required by law to deduct any
                -----
Taxes from or in respect of any sum payable hereunder to the Lenders or the
Administrative Agent (i) the sum payable shall be increased by the amount
necessary so that after making all required deductions (including deductions
applicable to additional sums payable under this Section 2.20) such Lender or
the Administrative Agent (as the case may be) shall receive an amount equal to
the sum it would have received had no such deductions been made, (ii) the
Borrower shall make such deductions, and (iii) the Borrower shall pay the full
amount deducted to the relevant taxing authority or other Governmental Authority
in accordance with applicable law.

          (b)  Other Taxes.  In addition, the Borrower agrees to pay to the
               -----------
relevant Governmental Authority any present or future stamp or documentary taxes
or any other excise or property taxes, charges or similar levies that arise from
any payment made hereunder or from the execution, delivery or registration of,
or otherwise with respect to, this Agreement, any Assignment and Acceptance or
any other Loan Document (hereinafter referred to as "Other Taxes").
                                                     -----------

          (c)  Indemnification.  The Borrower will indemnify each Lender and the
               ---------------
Administrative Agent for the full amount of Taxes and Other Taxes (including,
but not limited to, any Taxes or Other Taxes imposed by any jurisdiction on
amounts payable under this Section 2.20) paid by such Lender or the
Administrative Agent (on their behalf or on behalf of any Lender), as the case
may be, and any liability (including penalties, interest and expenses) arising
therefrom or with respect thereto, whether or not such Taxes or Other Taxes were
correctly or legally asserted, which are paid or arise no more than 90 days
prior to written demand therefor by such Lender or the Administrative Agent.
Any payment pursuant to such indemnification shall be made within 30 days after
the date any Lender or the Administrative Agent, as the case may be, makes
written demand therefor.  If any Lender or the Administrative Agent receives a
refund or credit in respect of any Taxes or Other Taxes for which such Lender,
the Issuing Bank or the Administrative Agent has received payment from the
Borrower hereunder it shall promptly notify the Borrower of such refund or
credit and shall, as promptly as reasonably practicable, pay an amount equal to
such refund or credit to the Borrower without interest (but with any interest so
refunded or credited), provided that the Borrower, upon the request of such
Lender or the Administrative Agent, agrees to return such refund or credit (plus
penalties, interest or other charges) to such Lender or the Administrative Agent
in the event such Lender or the Administrative Agent is required to repay such
refund or credit.

          (d)  Receipts.  Within 30 days after the date of any payment of Taxes
               --------
or Other Taxes withheld by the Borrower in respect of any payment to any Lender
or the Administrative Agent, the Borrower

                                     -26-
<PAGE>

will furnish to the Administrative Agent the original or a certified copy of a
receipt evidencing payment thereof.

          (e)  Survival.  Without prejudice to the survival of any other
               --------
agreement contained herein, the agreements and obligations contained in this
Section 2.20 shall survive the payment in full of principal and interest
hereunder.

          (f)  Lender Representations.  Each Lender represents that it is either
               ----------------------
(i) a corporation organized under the laws of the United States of America or
any state thereof or (ii) entitled to complete exemption from United States
withholding tax imposed on or with respect to any payments, including fees, to
be made to it pursuant to this Agreement (A) under an applicable provision of a
tax convention to which the United States of America is a party or (B) because
it is acting through a branch, agency or office in the United States of America
and any payment to be received by it hereunder is effectively connected with a
trade or business in the United States of America.  Each Lender that is not a
corporation organized under the laws of the United States of America or any
state thereof agrees to provide to the Borrower and the Administrative Agent on
the Effective Date, or on the date of its delivery of the Assignment and
Acceptance pursuant to which it becomes a Lender, and at such other times as
required by United States law or as the Borrower or the Administrative Agent
shall reasonably request, two accurate and complete original signed copies of
either (A) Internal Revenue Service Form 4224 (or successor form) certifying
that all payments to be made to it hereunder will be effectively connected to a
United States trade or business (the "Form 4224 Certification") or (B) Internal
                                      -----------------------
Revenue Service Form 1001 (or successor form) certifying that it is entitled to
the benefit of a provision of a tax convention to which the United States of
America is a party which completely exempts from United States withholding tax
all payments to be made to it hereunder (the "Form 1001 Certification").  In
                                              -----------------------
addition, each Lender agrees that if it previously filed a Form 4224
Certification it will deliver to the Borrower and the Administrative Agent a new
Form 4224 Certification prior to the first payment date occurring in each of its
subsequent taxable years; and if it previously filed a Form 1001 Certification,
it will deliver to the Borrower and the Administrative Agent a new certification
prior to the first payment date falling in the third year following the previous
filing of such certification.  Each Lender also agrees to deliver to the
Borrower and the Administrative Agent such other or supplemental forms as may at
any time be required as a result of changes in applicable law or regulation in
order to confirm or maintain in effect its entitlement to exemption from United
States withholding tax on any payments hereunder, provided that the
                                                  --------
circumstances of the Lender at the relevant time and applicable laws permit it
to do so. If a Lender determines, as a result of any change in either (i)
applicable law, regulation or treaty, or in any official application thereof or
(ii) its circumstances, that it is unable to submit any form or certificate that
it is obligated to submit pursuant to this Section, or that it is required to
withdraw or cancel any such form or certificate previously submitted, it shall
promptly notify the Borrower and the Administrative Agent of such fact.  If a
Lender is organized under the laws of a jurisdiction outside the United States
of America, unless the Borrower and the Administrative Agent have received a
Form 1001 Certification or Form 4224 Certification satisfactory to them
indicating that all payments to be made to such Lender hereunder are not subject
to United States withholding tax, the Borrower shall withhold taxes from such
payments at the applicable statutory rate, provided that such withholding shall
not increase the amount of payments for the account of such Lender to be made by
the Borrower pursuant to Section 2.20(a).  Each Lender agrees to indemnify and
hold harmless from any United States taxes, penalties, interest and other
expenses, costs and losses incurred or payable by (i) the Administrative Agent
as a result of such Lender's failure to submit any form or certificate that it
is required to provide pursuant to this Section or (ii) the Borrower or the
Administrative Agent as a result of their reliance on any such form or
certificate which it has provided to them pursuant to this Section.

                                     -27-
<PAGE>

          (g)  Efforts to Avoid or Reduce.  Any Lender claiming any additional
               --------------------------
amounts payable pursuant to this Section 2.20 shall use reasonable efforts
(consistent with legal and regulatory restrictions) to file any certificate or
document requested by the Borrower or the Administrative Agent or to change the
jurisdiction of its applicable Lending Office or to contest any tax imposed if
the making of such a filing or change or contesting such tax would avoid the
need for or reduce the amount of any such additional amounts that may thereafter
accrue and would not, in the sole determination of such Lender, be otherwise
disadvantageous to such Lender.

          SECTION 2.21   Pro Rata Treatment.  Except as required under Section
                         ------------------
2.15, 2.16 or 2.18, each Borrowing, each payment or prepayment of principal of
any Borrowing, each payment of interest on the Loans, each payment of the fees,
each reduction of the Commitments, and each refinancing of any Borrowing with,
conversion of any Borrowing to or continuation of any Borrowing as a Borrowing
of any Type shall be allocated ratably and pro rata among the Lenders in
accordance with their respective Percentage Shares.  Each Lender agrees that in
computing such Lender's portion of any Borrowing to be made hereunder, the
Administrative Agent may, in its discretion, round each Lender's portion of such
Borrowing to the next higher or lower whole dollar amount.

          SECTION 2.22   Replacement Lenders.  If any Lender elects to pass
                         -------------------
through to the Borrower any charge, cost or tax under Sections 2.16 or 2.20 or
terminates the availability of Eurodollar Loans for any period of time under
Sections 2.14 or 2.15, the Borrower may elect to terminate such Lender as a
party to this Agreement; provided that, prior to or concurrently with such
                         --------
termination, if an Event of Default has occurred which is continuing, the
Borrower must receive the consent of the Administrative Agent and either (i)
pay to the terminated Lender all principal, interest, fees, costs and other
Obligations owed to such Lender and accrued though the date of termination and
terminate such Lender's Commitment to make Advances hereunder, in which event
the total Commitments shall be reduced by the Commitment of the terminated
Lender, or (ii) arrange for one or more Eligible Transferees to purchase the
rights and duties of the terminated Lender pursuant to Section 10.04, in which
event the terminated Lender will assign all of such rights and duties to such
Eligible Transferees.

          SECTION 2.23   Special Waiver for Hallwood and Pure Partners.  The
                         ---------------------------------------------
Lenders hereby agree to the following with respect to Pure Partners and
Hallwood, notwithstanding anything herein to the contrary:

          (a)  Pure Partners shall not be required to execute and deliver a
Subsidiary Guaranty Agreement, and it may enter into and be party to agreements
that prohibit, restrict or impose conditions on its ability to execute and
deliver a Subsidiary Guaranty Agreement.  Hallwood and its subsidiaries shall
not be required to execute and deliver a Subsidiary Guaranty Agreement until the
date provided in Section 5.09.

          (b)  Pure Partners shall not be restricted from complying with the
redemption, liquidation and disposition obligations under its partnership
agreement, and such obligations shall not constitute Put Arrangement Liabilities
or Funded Indebtedness.  Pure Partners shall be permitted to be subject to, and
to comply with, the restrictions on redemptions, liquidations and dispositions
that are in its partnership agreement.

          (c)  Neither loans by Pure Partners nor distributions by Pure Partners
shall be considered to be Restricted Payments.

                                     -28-
<PAGE>

                                  ARTICLE III

                        Representations and Warranties
                        ------------------------------

          The Borrower represents and warrants to the Lenders that:

          SECTION 3.01.  Organization; Powers.  Each of the Borrower and its
                         --------------------
Restricted Subsidiaries is duly organized, validly existing and in good standing
under the laws of the jurisdiction of its organization, has all requisite
corporate power and authority to carry on its business as now conducted and,
where the failure to do so, individually or in the aggregate, would reasonably
be expected to result in a Material Adverse Effect, is qualified to do business
in, and is in good standing in, every jurisdiction where such qualification is
required.

          SECTION 3.02.  Authorization; Enforceability.  The Transactions are
                         -----------------------------
within the Borrower's corporate powers and have been duly authorized by all
necessary corporate action.  This Agreement has been duly executed and delivered
by the Borrower and constitutes a legal, valid and binding obligation of the
Borrower, enforceable in accordance with its terms, subject to applicable
bankruptcy, insolvency, reorganization, moratorium or other laws affecting
creditors' rights generally and subject to general principles of equity,
regardless of whether considered in a proceeding in equity or at law.

          SECTION 3.03.  Governmental Approvals; No Conflicts.  The Transactions
                         ------------------------------------
(a) do not require any consent or approval of, registration or filing with, or
any other action by, any Governmental Authority or other Person, except such as
have been obtained or made and are in full force and effect, (b) will not
violate any applicable law or regulation or the charter, by-laws or other
organizational documents of the Borrower or any of its Restricted Subsidiaries
or any order of any Governmental Authority, (c) will not violate or result in a
default under any indenture, agreement or other instrument binding upon the
Borrower or any of its Restricted Subsidiaries or its assets, or give rise to a
right thereunder to require any payment to be made by the Borrower or any of its
Restricted Subsidiaries, and (d) will not result in the creation or imposition
of any Lien on any asset of the Borrower or any of its Restricted Subsidiaries.

          SECTION 3.04.  Financial Condition; No Material Adverse Effect.   (a)
                         -----------------------------------------------
The Borrower has heretofore furnished to the Lenders its consolidated balance
sheet and statements of income, stockholders equity and cash flows (i) as of and
for the fiscal year ended December 31, 2000, reported on by KPMG, independent
public accountants.  Such financial statements present fairly, in all material
respects, the financial position and results of operations and cash flows of the
Borrower and its consolidated Subsidiaries as of such dates and for such periods
in accordance with GAAP.

          (b) Since December 31, 2000, there has been No Material Adverse
Effect.

          SECTION 3.05.  Properties.  (a)  Each of the Borrower and its
                         ----------
Restricted Subsidiaries has indefeasible title to, or valid leasehold interests
in, all of its real and personal property material to its business, except for
defects in title that do not interfere with its ability to conduct its business
as currently conducted or to utilize such properties for their intended
purposes, free and clear of all Liens except Liens permitted by Section 6.02.

          (b) Each of the Borrower and its Restricted Subsidiaries owns (free
and clear of all Liens except Liens permitted by Section 6.02), or is licensed
to use, all trademarks, tradenames, copyrights, patents and other intellectual
property material to its business, and the use thereof by the Borrower and its

                                     -29-
<PAGE>

Restricted Subsidiaries does not infringe upon the rights of any other Person,
which, individually or in the aggregate, would reasonably be expected to result
in a Material Adverse Effect.

          SECTION 3.06.  Litigation and Environmental Matters.  (a) There are no
                         ------------------------------------
actions, suits or proceedings by or before any arbitrator or Governmental
Authority pending against or, to the knowledge of the Borrower, threatened
against or affecting the Borrower or any of its Subsidiaries which would,
individually or in the aggregate, result in a Material Adverse Effect (other
than the Disclosed Matters).

          (b) Except for the Disclosed Matters, neither the Borrower nor any of
its Subsidiaries (i) has failed to comply with any Environmental Law or to
obtain, maintain or comply with any permit, license or other approval required
under any Environmental Law, (ii) has become subject to any Environmental
Liability, (iii) has received notice of any claim with respect to any
Environmental Liability or (iv) knows of any basis for any Environmental
Liability, which would individually or in the aggregate result in a Material
Adverse Effect.

          SECTION 3.07.  Compliance with Laws and Agreements.  Each of the
                         -----------------------------------
Borrower and its Restricted Subsidiaries is in compliance with all laws,
regulations and orders of any Governmental Authority applicable to it or its
property and all indentures, agreements and other instruments binding upon it or
its property, where the failure to do so, individually or in the aggregate,
would reasonably be expected to result in a Material Adverse Effect.  No Default
has occurred and is continuing.

          SECTION 3.08.  Investment and Holding Company Act Status.  Neither the
                         -----------------------------------------
Borrower nor any of its Subsidiaries is (a) an "investment company" as defined
in, or subject to regulation under, the Investment Company Act of 1940 or (b) a
"holding company" as defined in, or subject to regulation under, the Public
Utility Holding Company Act of 1935.

          SECTION 3.09.  Taxes.  Each of the Borrower and its Restricted
                         -----
Subsidiaries has timely filed or caused to be filed all Tax returns and reports
required to have been filed and has paid or caused to be paid all Taxes required
to have been paid by it to the extent that the failure to do so would reasonably
be expected to result in a Material Adverse Effect, except Taxes that are being
contested in good faith by appropriate proceedings and for which the Borrower or
such Restricted Subsidiary, as applicable, has set aside on its books adequate
reserves.

          SECTION 3.10.  ERISA.  No ERISA Event has occurred or is reasonably
                         -----
expected to occur that, when taken together with all other such ERISA Events for
which liability is reasonably expected to occur, would reasonably be expected to
result in a Material Adverse Effect.

          SECTION 3.11.  Disclosure.  Neither the Information Memorandum dated
                         ----------
September, 2000, nor any of the other reports, financial statements,
certificates or other information furnished by or on behalf of the Borrower to
the Administrative Agent or any Lender in connection with the negotiation of
this Agreement or delivered hereunder (as modified or supplemented by other
information so furnished) contains any material misstatement of fact or omits to
state any material fact necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading (other than
industry-wide risks normally associated with the types of business conducted by
the Borrower); provided that, with respect to projected financial information
               --------
and reserve evaluations, the Borrower represents only that such information was
prepared in good faith based upon assumptions believed to be reasonable at the
time.

                                     -30-
<PAGE>

          SECTION 3.12.  Subsidiaries.  As of the Effective Date, Borrower has
                         ------------
no Subsidiaries other than those listed on Schedule 3.12 hereto.  As of the
Effective Date, Schedule 3.12 sets forth the jurisdiction of incorporation or
organization of each such Subsidiary, the percentage of Borrower's ownership of
the outstanding Equity Interests of each Subsidiary directly owned by Borrower,
and the percentage of each Subsidiary's ownership of the outstanding Equity
Interests of each other Subsidiary.  All of the outstanding Equity Interests of
Borrower and each Subsidiary has been validly issued, are fully paid, and
nonassessable. Except as reflected in the Borrower's financial statements
delivered to the Agent and filings with the Securities and Exchange Commission
as of the time this representation is made or deemed made, there are no
outstanding subscriptions, options, warrants, calls, or rights (including
preemptive rights) to acquire, and no outstanding securities or instruments
convertible into any Equity Interests of the Borrower or any Subsidiary.
Schedule 3.12 also designates all Restricted Subsidiaries existing on the
Effective Date.

          SECTION 3.13.  Margin Securities.  Neither the Borrower nor any
                         -----------------
Restricted Subsidiary is engaged principally, or as one of its important
activities, in the business of extending credit for the purpose of purchasing or
carrying margin stock (within the meaning of Regulations U or X of the Board of
Governors of the Federal Reserve System), and no part of the proceeds of any
Loan will be used to purchase or carry any margin stock or to extend credit to
others for the purpose of purchasing or carrying margin stock in violation of
said Regulations U or X.

                                  ARTICLE IV

                                  Conditions
                                  ----------

          SECTION 4.01.  Effective Date.  The obligations of the Lenders to make
                         --------------
Loans shall not become effective until the date on which each of the following
conditions is satisfied (or waived in accordance with Section 9.02):

          (a) The Administrative Agent (or its counsel) shall have received from
each party hereto either (i) a counterpart of this Agreement signed on behalf of
such party or (ii) written evidence satisfactory to the Administrative Agent
(which may include telecopy transmission of a signed signature page of this
Agreement) that such party has signed a counterpart of this Agreement.

          (b) The Administrative Agent shall have received favorable written
opinions (addressed to the Administrative Agent and the Lenders and dated the
Effective Date) of  Thompson & Knight, L.L.P., counsel for the Borrower,
substantially in the form of Exhibit C-1 and of Woodburn & Wedge, special Nevada
counsel to the Borrower, substantially in the form of Exhibit C-2.  The Borrower
hereby requests such counsel to deliver such opinions.  The Nevada Opinion, if
committed to on May 8, 2001, may be delivered on or before May 11, 2001.

          (c) The Administrative Agent shall have received such documents and
certificates as the Administrative Agent or its counsel may reasonably request
relating to the organization, existence and good standing of the Borrower, the
authorization of the Transactions and any other legal matters relating to the
Borrower, this Agreement or the Transactions, all in form and substance
satisfactory to the Administrative Agent and its counsel.

          (d) The Administrative Agent shall have received a certificate, dated
the Effective Date and signed by the President, a Vice President or a Financial
Officer of the Borrower, confirming compliance with the conditions set forth in
paragraphs (a) and (b) of Section 4.02.

                                     -31-
<PAGE>

          (e) The Administrative Agent shall have received all fees and other
amounts due and payable on or prior to the Effective Date, including, to the
extent invoiced, reimbursement or payment of all out-of-pocket expenses required
to be reimbursed or paid by the Borrower hereunder.

          (f) The Administrative Agent shall have received  a duly executed
Subsidiary Guaranty Agreement from each Restricted Subsidiary (other than Pure
Partners, Hallwood and the subsidiaries of Hallwood) in the form of Exhibit D.

          (g) The Administrative Agent shall have received such documents and
certificates as the Administrative Agent or its counsel may reasonably request
relating to the organization, existence and good standing of each Restricted
Subsidiary, the authorization of the Transactions and any other legal matters
relating to each Restricted Subsidiary, this Agreement or the Transactions, all
in form and substance satisfactory to the Administrative Agent and its counsel.

The Administrative Agent shall notify the Borrower and the Lenders of the
Effective Date, and such notice shall be conclusive and binding.

          SECTION 4.02.  Each Credit Event.  The obligation of each Lender to
                         -----------------
make a Loan on the occasion of any Borrowing is subject to the satisfaction of
the following conditions:

          (a) The representations and warranties of the Borrower set forth in
this Agreement shall be true and correct on and as of the date of such
Borrowing.

          (b) At the time of and immediately after giving effect to such
Borrowing, no Default shall have occurred and be continuing.

Each Borrowing shall be deemed to constitute a representation and warranty by
the Borrower on the date thereof as to the matters specified in paragraphs (a)
and (b) of this Section.

          SECTION 4.03.  Conversion.  The occurrence of the Conversion and the
                         ----------
obligation of the Lenders to convert the Line of Credit Loans outstanding on the
Conversion Date into Term Loans shall be subject to the following:

          (a) The representations and warranties of the Borrower set forth in
this Agreement and the other Loan Documents shall be true and correct in all
material respects on and as of the Conversion Date (unless such representations
and warranties are stated to relate to a specific earlier date, in which case
such representations and warranties shall be true and correct as of such earlier
date).

          (b) At the time of and immediately after giving effect to the
Conversion no Default shall have occurred and be continuing.

          (c) The Administrative Agent shall have received a certificate, dated
the Conversion Date and signed by a Financial Officer of the Borrower,
confirming compliance with the conditions set forth above in this Section 4.03.

          (d) All fees payable to the Administrative Agent and/or the Lenders in
connection with the Conversion of the Term Loans shall have been duly paid.

                                     -32-
<PAGE>

          (e) There shall have occurred a successful syndication of a
$150,000,000 portion of the Term Loans to the satisfaction of the Administrative
Agent.

          (f) The Administrative Agent shall be entitled to change the amount,
pricing, structure and/or terms of the Loans if the Administrative Agent
determines that such changes are advisable in order to assure a successful
syndication of a $150,000,000 portion of the Loans or an optimal credit
structure thereof.

     The Conversion of the Line of Credit Loans into Term Loans shall be deemed
to constitute a representation and warranty by the Borrower on the date thereof
as to the matters specified in paragraphs (a) and (b) of this Section.

                                   ARTICLE V

                             Affirmative Covenants
                             ---------------------

          Until the Commitments have expired or been terminated and the
principal of and interest on each Loan and all fees payable hereunder shall have
been paid in full, the Borrower covenants and agrees with the Lenders that:

          SECTION 5.01.  Financial Statements and Other Information.  The
                         ------------------------------------------
Borrower will furnish to the Administrative Agent and each Lender:

          (a) within 90 days after the end of each fiscal year of the Borrower,
its audited consolidated balance sheet and related statements of operations,
stockholders' equity and cash flows as of the end of and for such year, setting
forth in each case in comparative form the figures for the previous fiscal year,
all reported on by independent public accountants of recognized national
standing (without a "going concern" or like qualification or exception)
acceptable to Administrative Agent to the effect that such consolidated
financial statements present fairly in all material respects the financial
condition and results of operations of the Borrower and its consolidated
Subsidiaries on a consolidated basis in accordance with GAAP consistently
applied;

          (b) within 45 days after the end of each of the first three fiscal
quarters of each fiscal year of the Borrower, its consolidated balance sheet and
related statements of operations, stockholders' equity and cash flows as of the
end of and for such fiscal quarter and the then elapsed portion of the fiscal
year, setting forth in each case in comparative form the figures for the
corresponding period or periods of (or, in the case of the balance sheet, as of
the end of) the previous fiscal year, all certified by one of its Financial
Officers as presenting fairly in all material respects the financial condition
and results of operations of the Borrower and its consolidated Subsidiaries on a
consolidated basis in accordance with GAAP consis tently applied, subject to
normal year-end audit adjustments and the absence of footnotes;

          (c) concurrently with any delivery of financial statements under
clause (a) or (b) above, a certificate of a Financial Officer of the Borrower
(i) certifying as to whether a Default has occurred and, if a Default has
occurred, specifying the details thereof and any action taken or proposed to be
taken with respect thereto, (ii) setting forth reasonably detailed calculations
demonstrating compliance with Sections 7.01 and 7.02 and (iii) stating whether
any change in GAAP or in the application thereof has occurred since the

                                     -33-
<PAGE>

date of the audited financial statements referred to in Section 3.04 and, if any
such change has occurred, specifying the effect of such change on the financial
statements accompanying such certificate;

          (d) promptly after the same become publicly available, copies of all
periodic and other reports, proxy statements and other materials filed by the
Borrower or any Subsidiary with the Securities and Exchange Commission, or any
Governmental Authority succeeding to any or all of the functions of said
Commission, or with any national securities exchange, or distributed by the
Borrower to its shareholders generally, as the case may be; and

          (e) promptly following any request therefor, such other information
which the Borrower possesses regarding the operations, business affairs and
financial condition of the Borrower or any Subsidiary, or compliance with the
terms of this Agreement, as the Administrative Agent may reasonably request (in
sufficient copies for the Administrative Agent to deliver to all Lenders).

          SECTION 5.02.  Notices of Material Events.  The Borrower, promptly
                         --------------------------
after it becomes aware of the following, will furnish to the Administrative
Agent and each Lender written notice of the following:

          (a)  the occurrence of any Default;

          (b) the filing or commencement of any action, suit or proceeding by or
before any arbitrator or Governmental Authority against or affecting the
Borrower or any Affiliate thereof that, if adversely determined, would
reasonably be expected to result in a Material Adverse Effect;

          (c) the occurrence of any ERISA Event that, alone or together with any
other ERISA Events that have occurred, would reasonably be expected to result in
a Material Adverse Effect;

          (d) one or more judgments for the payment of money in an aggregate
amount in excess of $25,000,000 shall be rendered against the Borrower, any
Subsidiary or any combination thereof and the same shall remain undischarged for
a period of 30 consecutive days during which execution shall not be effectively
stayed, or any action shall be legally taken by a judgment creditor to attach or
levy upon any assets of the Borrower or any Subsidiary to enforce any such
judgment; and

          (e) any other development that results in, or would reasonably be
expected to result in, a Material Adverse Effect.

Each notice delivered under this Section shall be accompanied by a statement of
a Financial Officer or other executive officer of the Borrower setting forth the
details of the event or development requiring such notice and any action taken
or proposed to be taken with respect thereto.

          SECTION 5.03.  Existence; Conduct of Business.  The Borrower will, and
                         ------------------------------
will cause each of its Restricted Subsidiaries to, do or cause to be done all
things necessary to preserve, renew and keep in full force and effect its legal
existence and the rights, licenses, permits, privileges and franchises material
to the conduct of its business where the failure to do so would reasonably be
expected to result in a Material Adverse Effect; provided that the foregoing
                                                 --------
shall not prohibit any merger, consolidation, liquidation or dissolution
permitted under Section 6.03.

                                     -34-
<PAGE>

          SECTION 5.04.  Payment of Obligations.  The Borrower will, and will
                         ----------------------
cause each of its Restricted Subsidiaries to, pay its obligations, including Tax
liabilities, that, if not paid, would reasonably be expected to result in a
Material Adverse Effect before the same shall become delinquent or in default,
except where (a) the validity or amount thereof is being contested in good faith
by appropriate proceedings, (b) the Borrower or such Restricted Subsidiary has
set aside on its books adequate reserves with respect thereto in accordance with
GAAP and (c) the failure to make payment pending such contest would not
reasonably be expected to result in a Material Adverse Effect.

          SECTION 5.05.  Maintenance of Properties; Insurance.  The Borrower
                         ------------------------------------
will, and will cause each of its Restricted Subsidiaries to, (a) keep and
maintain all property material to the conduct of its business in good working
order and condition, ordinary wear and tear excepted, and (b) maintain, with
financially sound and reputable insurance companies, insurance in such amounts
(with no greater risk retention) and against such risks as are customarily
maintained by companies of established repute engaged in the same or similar
businesses operating in the same or similar locations.

          SECTION 5.06.  Books and Records; Inspection Rights.  The Borrower
                         ------------------------------------
will, and will cause each of its Restricted Subsidiaries to, keep proper books
of record and account in which full, true and correct entries are made of all
dealings and transactions in relation to its business and activities.  The
Borrower will, and will cause each of its Restricted Subsidiaries to, permit any
representatives designated by the Administrative Agent or any Lender, upon
reasonable prior notice, to visit and inspect its properties, and to discuss its
affairs, finances and condition with its officers during normal business hours;

provided however, that the Borrower may coordinate such visits and inspection at
-------- -------
reasonable times and interval to include more than one Lender if more than one
Lender requests such visits and inspections.

          SECTION 5.07.  Compliance with Laws, Material Contractual Obligations.
                         ------------------------------------------------------
The Borrower will, and will cause each of its Restricted Subsidiaries to, comply
with all laws, rules, regulations and orders of any Governmental Authority
applicable to it or its property, and all indentures, agreements and other
instruments binding upon it or its property, where the failure to do so,
individually or in the aggregate, would reasonably be expected to result in a
Material Adverse Effect.

          SECTION 5.08.  Use of Proceeds.  The proceeds of the Loans will only
                         ---------------
be used by the Borrower directly or indirectly to finance the Hallwood
Acquisition including the purchase price, acquisition payments , purchase of
Hallwood indebtedness and anticipated closing costs.  No part of the proceeds of
any Loan will be used, whether directly or indirectly, for any purpose that
entails a violation of any of the Regulations of the Board, including
Regulations U and X.

          SECTION 5.09.  Additional Subsidiaries.  If any additional Subsidiary
                         -----------------------
is formed or acquired after the Effective Date, the Borrower will notify the
Administrative Agent and the Lenders thereof and,  if such Subsidiary will be a
Restricted Subsidiary, the Borrower will cause such Subsidiary to execute a
Subsidiary Guaranty Agreement within three Business Days after such Subsidiary
is formed or acquired, provided that Hallwood and its subsidiaries need not
execute any Subsidiary Guaranty Agreement until the earlier of the two following
dates: (a) the fifteenth Business Day after Hallwood's $25,000,000 Senior
Subordinated Notes are repaid or repurchased or (b) the ninetieth day after
Hallwood becomes a Restricted Subsidiary.

          SECTION 5.10.  Environmental Matters.  The Borrower has established
                         ---------------------
and implemented, or will establish and implement, and will cause each of its
Restricted Subsidiaries to establish and implement, such procedures as may be
necessary to continuously determine and assure that any failure of the following

                                     -35-
<PAGE>

does not have a Material Adverse Effect: (i) all property of the Borrower and
its Restricted Subsidiaries and the operations conducted thereon are in
compliance with and do not violate the requirements of any Environmental Laws,
(ii) no oil or solid wastes are disposed of or otherwise released on or to any
property owned by the Borrower or its Restricted Subsidiaries except in
compliance with Environmental Laws, (iii) no hazardous substance will be
released on or to any such property in a quantity equal to or exceeding that
quantity which requires reporting pursuant to Section 103 of CERCLA, and (iv) no
oil or hazardous substance is released on or to any such property so as to pose
an imminent and substantial endangerment to public health or welfare or the
environment.

                                  ARTICLE VI

                              Negative Covenants
                              ------------------

          Until the Commitments have expired or terminated and the principal of
and interest on each Loan and all fees payable hereunder have been paid in full,
the Borrower covenants and agrees with the Lenders that:

          SECTION 6.01.  Indebtedness.  The Borrower will not (i) incur or
                         ------------
assume any Funded Indebtedness either secured by Liens on any property of the
Borrower or consisting of Capital Lease Obligations nor (ii) permit any
Restricted Subsidiary to incur or assume any Funded Indebtedness (whether or not
secured by any Liens on any assets of the Restricted Subsidiary), in an
aggregate principal amount in respect to the Funded Indebtedness under clauses
(i) and (ii) (but without duplication) exceeding $35,000,000 at any one time
outstanding.  The foregoing limitation shall exclude and not limit the
following:

          (a) Funded Indebtedness created under the Loan Documents;

          (b) Funded Indebtedness existing on the date hereof and set forth on
Schedule 6.01 and extensions, renewals and replacements of any such Funded
Indebtedness that do not increase the outstanding principal amounts thereof;

          (c) Funded Indebtedness of any Restricted Subsidiary owing to the
Borrower or to another Restricted Subsidiary;

          (d) Guaranties by any Restricted Subsidiary of Funded Indebtedness of
the Borrower which is not prohibited by this Section;

          (e) Funded Indebtedness of the Borrower secured by Liens permitted
under Section 6.02 (a) through (c);

          (f) Guarantees in respect of Funded Indebtedness permitted under
Section 6.04; and

          (g) Funded Indebtedness of the Borrower under either Bank Credit
Facility.

For purposes hereof, the amount of any such Funded Indebtedness shall be deemed
to be, in the case of clause (i), the lesser of the liability of Borrower in
respect of such Funded Indebtedness or the book value of the property securing
such Funded Indebtedness and, in the case of clause (ii), the liability of the
Restricted Subsidiary in respect of such Funded Indebtedness.

                                     -36-
<PAGE>

          SECTION 6.02.  Liens.  The Borrower will not, and will not permit any
                         -----
Restricted Subsidiary to, create, incur, assume or permit to exist any Lien on
any property or asset now owned or hereafter acquired by it, except:

          (a)  Permitted Encumbrances;

          (b)  any Lien on any property or asset of the Borrower or any
Restricted Subsidiary existing on the date hereof and set forth in Schedule
6.02; provided that (i) such Lien shall not apply to any other property or asset
      --------
of the Borrower or any Restricted Subsidiary and (ii) such Lien shall secure
only those obligations which it secures on the date hereof and extensions,
renewals and replacements thereof that do not increase the outstanding principal
amount thereof;

          (c)  any Lien existing on any property or asset prior to the
acquisition thereof by the Borrower or any Restricted Subsidiary or existing on
any property or asset of any Person that becomes a Restricted Subsidiary after
the date hereof prior to the time such Person becomes a Restricted Subsidiary;
provided that (i) such Lien is not created in contemplation of or in connection
--------
with such acquisition or such Person becoming a Restricted Subsidiary, as the
case may be, (ii) such Lien shall not apply to any other property or assets of
the Borrower or any Restricted Subsidiary and (iii) such Lien shall secure only
those obligations which it secures on the date of such acquisition or the date
such Person becomes a Restricted Subsidiary, as the case may be and extensions,
renewals and replacements thereof that do not increase the outstanding principal
amount thereof;

          (d)  Liens on fixed or capital assets acquired, constructed or
improved by the Borrower or any Restricted Subsidiary; provided that (i) such
                                                       --------
security interests secure Indebtedness permitted under Section 6.01, (ii) such
security interests and the Indebtedness secured thereby are incurred prior to or
within 90 days after such acquisition or the completion of such construction or
improvement, (iii) the Indebtedness secured thereby does not exceed the cost of
acquiring, constructing or improving such fixed or capital assets and (iv) such
security interests shall not apply to any other property or assets of the
Borrower or any Restricted Subsidiary; and

          (e)  Liens securing Indebtedness permitted by Section 6.01.

          SECTION 6.03.  Fundamental Changes.  The Borrower will not, and will
                         -------------------
not permit any Restricted Subsidiary to, merge into or consolidate with any
other Person, or permit any other Person to merge into or consolidate with it,
or sell, transfer, lease or otherwise dispose of (in one transaction or in a
series of transactions) all or any substantial part of its assets, or all or
substantially all of the stock of any of its Subsidiaries (in each case, whether
now owned or hereafter acquired), or liquidate or dissolve, except that, if at
the time thereof and immediately after giving effect thereto no Default shall
have occurred and be continuing (i) any Subsidiary may merge into the Borrower
in a transaction in which the Borrower is the surviving corporation, (ii) any
Subsidiary may merge into any Restricted Subsidiary in a transaction in which
the surviving entity is a Restricted Subsidiary; provided that any such merger
                                                 --------
involving a Person that is not a wholly owned Subsidiary immediately prior to
such merger shall not be permitted unless also permitted by Section 6.06, (iii)
any Subsidiary may sell, transfer, lease or otherwise dispose of its assets to
the Borrower or to another Restricted Subsidiary, (iv) any Subsidiary may
liquidate or dissolve if the Borrower determines in good faith that such
liquidation or dissolution is in the best interests of the Borrower and is not
materially disadvantageous to the Lenders and (v) any Restricted Subsidiary may
merge or may sell, transfer, lease or otherwise dispose of its assets in a
transaction in which a Restricted Subsidiary is not the surviving entity or the
transferee provided that such transaction is permitted under Section 6.06 or
Section 6.10.

                                     -37-
<PAGE>

Borrower will not, and will not permit any of its Restricted Subsidiaries to,
permit any material change in the character of the business of the Borrower and
the Restricted Subsidiaries taken as a whole, as carried on at the date hereof,
except as may be permitted pursuant to this Agreement.

          SECTION 6.04.  Guarantees.  Borrower will not, and will not permit any
                         ----------
Restricted Subsidiary to, create, incur, assume or permit to exist  liability in
respect on a Guarantee of Indebtedness of a Person other than of Borrower or a
Restricted Subsidiary where such liability under all such Guarantees exceeds
$25,000,000 in the aggregate at any one time.

          SECTION 6.05.  Hedging Agreements.  The Borrower will not, and will
                         ------------------
not permit any of its Restricted Subsidiaries to, enter into any Hedging
Agreement, other than Hedging Agreements entered into in the ordinary course of
business to hedge or mitigate risks to which the Borrower or any Restricted
Subsidiary is exposed in the conduct of its business or the management of its
liabilities; provided, however, the Borrower will not and will not permit any
             --------  -------
Restricted Subsidiary to enter into any Hedging Agreement with respect to
Hydrocarbons at any one time outstanding for amounts in the aggregate in excess
of 85% of all gas production and 85% of all oil production from Borrower's
consolidated proved producing properties.

          SECTION 6.06.  Restricted Payments.  (a) The Borrower will not, and
                         -------------------
will not permit any of its Restricted Subsidiaries to, declare or make, or agree
to pay or make, directly or indirectly, any Restricted Payment, except (i) the
Borrower may declare and pay dividends with respect to its capital stock not to
exceed $10,000,000 in the aggregate in any fiscal year, (ii) Restricted
Subsidiaries may declare and pay dividends ratably with respect to their capital
stock, (iii) the Borrower may make Restricted Payments pursuant to and in
accordance with stock option plans or other benefit plans for management or
employees of the Borrower and its Subsidiaries, (iv) Borrower or any Restricted
Subsidiary may make Restricted Payments in respect of Employment Arrangements
(including but not limited to purchase of Equity Interests in Borrower), (v)
Borrower or any Restricted Subsidiary may make a Restricted Payment pursuant to
a Put Arrangement, (vi) Borrower or any Restricted Subsidiary may make dividends
or distributions of common Equity Interests or options or rights to acquire
common Equity Interests, and (vii) Borrower or any Restricted Subsidiary may
make other Restricted Payments (other than cash dividends on its common Stock)
provided that immediately after giving effect to such Restricted Payments under
this clause (vii), the aggregate amount of Restricted Payments made under this
clause (vii) after September 30, 2000 does not exceed the sum of (A) $60,000,000
plus (B) 50% of Borrower's consolidated quarterly net income (if positive) for
each calendar quarter ended during the applicable Calculation Period, plus (C)
all interest and principal payments, dividends, distributions and other proceeds
received by Borrower or any Restricted Subsidiary in respect of any Restricted
Investment during the applicable Calculation Period, plus (D) all Restricted
Investments in any Unrestricted Subsidiary which is redesignated as a Restricted
Subsidiary.  As used above, the applicable "Calculation Period" with respect to
a Restricted Payment means the period (taken as one accounting period) from and
after June 30, 2000 to and including the last day of the fiscal quarter ended
immediately preceding the date of such Restricted Payment.

          (b)  The Borrower will maintain and evidence to the Administrative
Agent a commitment for funding the amount of any Put Arrangement Liability,
which may include, but is not limited to, availability under this Agreement or
under the Bank Credit Facilities.

          SECTION 6.07.  Transactions with Affiliates.  The Borrower will not,
                         ----------------------------
and will not permit any of its Restricted Subsidiaries to, sell, lease or
otherwise transfer any property or assets to, or purchase, lease or otherwise
acquire any property or assets from, or otherwise engage in any other
transactions which

                                     -38-
<PAGE>

involve an outflow of money or other property from the Borrower or its
Restricted Subsidiaries to an Affiliate of the Borrower or its Restricted
Subsidiaries with, any of its Affiliates, except (a) at prices and on terms and
conditions within such transaction taken as a whole that are not materially less
favorable to the Borrower or such Restricted Subsidiary than could be obtained
on an arm's-length basis from unrelated third parties, (b) transactions between
or among the Borrower and its Restricted Subsidiaries not involving any other
Affiliate and (c) any Restricted Payment permitted by Section 6.06.
Notwithstanding the foregoing, the restrictions set forth in this Section shall
not apply to the payment of reasonable and customary fees to directors who are
not employees of the Borrower or the payment of reasonable financial advisory
and similar fees to equity investors in the Borrower or its Subsidiaries who are
not employees.

          SECTION 6.08.  Restrictive Agreements.  The Borrower will not, and
                         ----------------------
will not permit any of its Restricted Subsidiaries to, directly or indirectly,
enter into, incur or permit to exist any agreement or other arrangement that
prohibits, restricts or imposes any condition upon the ability of any Restricted
Subsidiary to pay dividends or other distributions with respect to any shares of
its capital stock or to make or repay loans or advances to the Borrower or any
other Restricted Subsidiary or to Guarantee Indebtedness of the Borrower or any
other Restricted Subsidiary; provided that (i) the foregoing shall not apply to
                             --------
restrictions and conditions imposed by laws, regulations or orders of any
Governmental Authority or by this Agreement, (ii) the foregoing shall not apply
to restrictions and conditions existing on the date hereof identified on
Schedule 6.08 (but shall apply to any extension or renewal of, or any amendment
or modification expanding the scope of, any such restriction or condition),
(iii) the foregoing shall not apply to customary restrictions and conditions
contained in agreements relating to the sale of a Subsidiary pending such sale,
provided such restrictions and conditions apply only to the Subsidiary that is
to be sold and such sale is permitted hereunder, and (iv) the foregoing shall
not prohibit provisions in indentures which relate to Subsidiary Guarantees
which do not prohibit Guarantees contemplated by this Agreement.

          SECTION 6.09.  Change in Fiscal Year.  The Borrower will not change
                         ---------------------
the manner in which either the last day of its fiscal year or the last days of
the first three fiscal quarters of its fiscal year is calculated.

          SECTION 6.10.  Asset Sales.  The Borrower will not, and will not
                         -----------
permit any of the Restricted Subsidiaries to, sell, transfer, lease or otherwise
dispose of any asset, including any Equity Interest in a Restricted Subsidiary
owned by it, nor will the Borrower permit any of Restricted Subsidiaries to
issue any additional Equity Interest in such Restricted Subsidiary, except:

          (a)  sales of inventory, used or surplus equipment and Permitted
Investments in the ordinary course of business;

          (b)  sales, transfers and dispositions by a Subsidiary to the Borrower
or another Restricted Subsidiary;

          (c)  sales of Oil and Gas Properties which have no volumes classified
as proved reserves on the most recent Reserve Report;

          (d)  sales of Oil and Gas Properties or Equity Interests in a
Restricted Subsidiary whose assets consist, in all material respects, of Oil and
Gas Properties which have volumes classified as proved reserves on the most
recent Reserve Report not to exceed:

                                     -39-
<PAGE>

               (i)  in fiscal year ending December 31, 2000, proved reserves
     having a fair market value of $50,000,000; and

               (ii) in fiscal year 2001 and each fiscal year thereafter, 10% of
     the previous year's SEC PV-10 for proved reserves; and

          (e)  other sales, transfers and dispositions not to exceed $10,000,000
in the aggregate in any fiscal year.

          SECTION 6.11.  Sale and Leaseback Transactions.  The Borrower will
                         -------------------------------
not, and will not permit any of the Subsidiaries to, enter into any arrangement,
directly or indirectly, whereby it shall sell or transfer any property, real or
personal, used or useful in its business, whether now owned or hereinafter
acquired, and thereafter rent or lease such property or other property that it
intends to use for substantially the same purpose or purposes as the property
sold or transferred, except for any such sale of any fixed or capital assets
that is made for cash consideration in an amount not less than the cost of such
fixed or capital asset and is consummated within 90 days after the Borrower or
such Subsidiary acquires or completes the construction of such fixed or capital
asset; provided that the aggregate costs of any sales permitted by this Section
       --------
shall not exceed $25,000,000.

          SECTION 6.12.  "Margin Calls" on Hedging Agreements.  With respect to
                          -----------------------------------
Hedging Agreements, neither the Borrower nor any Subsidiary shall post cash or
any other collateral or credit support whatsoever (other than letters of credit)
in response to a call on Borrower or any Subsidiary for credit support or
eligible collateral in an aggregate amount greater than $20,000,000 for all
Hedging Agreements.

          SECTION 6.13.  Designation of Restricted Subsidiaries.  Borrower shall
                         --------------------------------------
not designate a Restricted Subsidiary as an Unrestricted Subsidiary or an
Unrestricted Subsidiary as a Restricted Subsidiary if a Default has occurred
which is continuing or if, after giving effect thereto, a Default shall exist or
shall result from such designation.

                                  ARTICLE VII

                              Financial Covenants
                              -------------------

     Until the Commitments have expired or terminated and the principal of and
interest on each Loan and all fees payable hereunder have been paid in full, and
all other Obligations satisfied in full, the Borrower covenants and agrees with
the Lenders that:

          SECTION 7.01.  Adjusted Consolidated Net Worth.  The Borrower will at
                         -------------------------------
all times maintain Adjusted Consolidated Net Worth (as defined below) in an
amount not less than $300,000,000. As used in this Agreement, "Adjusted
Consolidated Net Worth" means, at any particular time, all amounts which, in
conformity with GAAP, would be included as stockholders' equity on a
consolidated balance sheet of the Borrower, adjusted to exclude (a) the effects
of common stock of the Borrower being repurchased or being subject to repurchase
under employment arrangements accounted for as variable plans under APB Opinion
No. 25 (provided that any new arrangements entered into after the Effective Date
as well as any amendments to arrangements existing on the Effective Date, shall
not be excluded from consideration to the extent that such arrangements
materially increase the Borrower's obligations), and (b) the after tax effects
of the following post-Effective Date events (i) write-downs after June 30, 2000
under FASB Statement No. 19, (ii) non-cash write-ups or write-downs of assets
after June 30, 2000 under FASB Statement No. 121, (iii)

                                     -40-
<PAGE>

non-cash gains, losses or adjustments under FASB Statement No. 133, (iv) non-
cash charges to earnings for options or stock issued and accounted for under APB
Opinion No. 25 or FASB Statement 123, and (v) post-Effective Date changes in
GAAP.

          SECTION 7.02.  Debt Coverage Ratios.  The Borrower shall not at any
                         --------------------
time permit the ratio of  Funded Indebtedness as of such date to cumulative
EBITDAX for the four (4) fiscal quarters most recently ended for which Borrower
has delivered financial statements pursuant to Section 5.01(a) or (b) to exceed
4.0 to 1.0.

                                 ARTICLE VIII

                               Events of Default
                               -----------------

          If any of the following events ("Events of Default") shall occur:
                                           -----------------

          (a)  the Borrower shall fail to pay any principal of any Loan when and
as the same shall become due and payable, whether at the due date thereof or at
a date fixed for prepayment thereof or otherwise;

          (b)  the Borrower shall fail to pay any interest on any Loan or any
fee or any other amount (other than an amount referred to in clause (a) of this
Article) payable under this Agreement, when and as the same shall become due and
payable, and such failure shall continue unremedied for a period of three
Business Days;

          (c)  any representation or warranty made or deemed made by or on
behalf of the Borrower or any Subsidiary in or in connection with this Agreement
or any amendment or modification hereof or waiver hereunder, or in any report,
certificate, financial statement or other document furnished pursuant to or in
connection with this Agreement or any amendment or modification hereof or waiver
hereunder, shall prove to have been incorrect in any material respect when made
or deemed made;

          (d)  the Borrower shall fail to observe or perform any covenant,
condition or agreement contained in Sections 5.02, 5.03 (with respect to the
Borrower's existence) or 5.08 or in Article VI;

          (e)  the Borrower shall fail to observe or perform any covenant,
condition or agreement contained in this Agreement (other than those specified
in clause (a), (b) or (d) of this Article), and such failure shall continue
unremedied for a period of 30 days after notice thereof from the Administrative
Agent to the Borrower (which notice will be given at the request of the Required
Lender);

          (f)  the Borrower or any Restricted Subsidiary shall fail to make any
payment (whether of principal or interest and regardless of amount) in respect
of any Material Indebtedness, when and as the same shall become due and payable
(other than a payment which is contested in good faith by appropriate
proceeding) and such failure shall continue unremedied for a period of three
Business Days;

          (g)  any event or condition occurs that results in any Material
Indebtedness becoming due prior to its scheduled maturity or that enables or
permits the holder or holders of any Material Indebtedness or any trustee or
agent on its or their behalf to cause any Material Indebtedness to become due,
or to require the prepayment, repurchase, redemption or defeasance thereof,
prior to its scheduled maturity and such event or condition shall continue
unremedied beyond any applicable period of grace;

                                     -41-
<PAGE>

          (h)  an involuntary proceeding shall be commenced or an involuntary
petition shall be filed seeking (i) liquidation, reorganization or other relief
in respect of the Borrower or any Material Subsidiary or its debts, or of a
substantial part of its assets, under any  Federal, state or foreign bankruptcy,
insolvency, receivership or similar law now or hereafter in effect or (ii) the
appointment of a receiver, trustee, custodian, sequestrator, conservator or
similar official for the Borrower or any Material Subsidiary or for a
substantial part of its assets, and, in any such case, such proceeding or
petition shall continue undismissed for 60 days or an order or decree approving
or ordering any of the foregoing shall be entered;

          (i)  the Borrower or any Material Subsidiary shall (i) voluntarily
commence any proceeding or file any petition seeking liquidation, reorganization
or other relief under any Federal, state or foreign bankruptcy, insolvency,
receivership or similar law now or hereafter in effect, (ii) consent to the
institution of, or fail to contest in a timely and appropriate manner, any
proceeding or petition described in clause (h) of this Article, (iii) apply for
or consent to the appointment of a receiver, trustee, custodian, sequestrator,
conservator or similar official for the Borrower or any Material Subsidiary or
for a substantial part of its assets, (iv) file an answer admitting the material
allegations of a petition filed against it in any such proceeding, (v) make a
general assignment for the benefit of creditors or (vi) take any action for the
purpose of effecting any of the foregoing;

          (j)  the Borrower or any Material Subsidiary shall become unable,
admit in writing its inability or fail generally to pay its debts as they become
due;

          (k)  one or more judgments for the payment of money in an aggregate
amount in excess of $25,000,000 shall be rendered against the Borrower, any
Restricted Subsidiary or any combination thereof and the same shall remain
undischarged for a period of 30 consecutive days during which execution shall
not be effectively stayed, or any action shall be legally taken by a judgment
creditor to attach or levy upon any assets of the Borrower or any Restricted
Subsidiary to enforce any such judgment;

          (l)  an ERISA Event shall have occurred that, when taken together with
all other ERISA Events that have occurred, results in a Material Adverse Effect;

          (m)  a Change in Control shall occur; or

          (n)  an "Event of Default" shall occur under either Bank Credit
Facility;

then, and in every such event (other than an event with respect to the Borrower
described in clause (h) or (i) of this Article), and at any time thereafter
during the continuance of such event, the Administrative Agent may, and at the
request of the Required Lenders shall, by notice to the Borrower, take either or
both of the following actions, at the same or different times:  (i) terminate
the Commitments, and thereupon the Commitments shall terminate immediately, and
(ii) declare the Loans then outstanding to be due and payable in whole (or in
part, in which case any principal not so declared to be due and payable may
thereafter be declared to be due and payable), and thereupon the principal of
the Loans so declared to be due and payable, together with accrued interest
thereon and all fees and other obligations of the Borrower accrued hereunder,
shall become  due and payable immediately, without presentment, demand, protest
or other notice of any kind, all of which are hereby waived by the Borrower; and
in case of any event with respect to the Borrower described in clause (h) or (i)
of this Article, the Commitments shall automatically terminate and the principal
of the Loans then outstanding, together with accrued interest thereon and all
fees and other obligations of the Borrower accrued hereunder, shall
automatically become due and payable, without presentment, demand, protest or
other notice of any kind, all of which are hereby waived by the Borrower.

                                     -42-
<PAGE>

                                  ARTICLE IX

                           The Administrative Agent
                           ------------------------

          Each of the Lenders  hereby irrevocably appoints the Administrative
Agent as its agent and authorizes the Administrative Agent to take such actions
on its behalf and to exercise such powers as are delegated to the Administrative
Agent by the terms hereof, together with such actions and powers as are
reasonably incidental thereto.

          The bank serving as the Administrative Agent hereunder shall have the
same rights and powers in its capacity as a Lender as any other Lender and may
exercise the same as though it were not the Administrative Agent, and such bank
and its Affiliates may accept deposits from, lend money to and generally engage
in any kind of business with the Borrower or any Subsidiary or other Affiliate
thereof as if it were not the Administrative Agent hereunder.

          The Administrative Agent shall not have any duties or obligations
except those expressly set forth herein.  Without limiting the generality of the
foregoing, (a) the Administrative Agent shall not be subject to any fiduciary or
other implied duties, regardless of whether a Default has occurred and is
continuing, (b) the Administrative Agent shall not have any duty to take any
discretionary action or exercise any discretionary powers, except discretionary
rights and powers expressly contemplated hereby that the Administrative Agent is
required to exercise in writing by the Required Lenders (or such other number or
percentage of the Lenders as shall be necessary under the circumstances as
provided in Section 10.02), and (c) except as expressly set forth herein, the
Administrative Agent shall not have any duty to disclose, and shall not be
liable for the failure to disclose, any information relating to the Borrower or
any of its Subsidiaries that is communicated to or obtained by the bank serving
as Administrative Agent or any of its Affiliates in any capacity.  The
Administrative Agent shall not be liable for any action taken or not taken by it
with the consent or at the request of the Required Lenders (or such other number
or percentage of the Lenders as shall be necessary under the circumstances as
provided in Section 10.02) or in the absence of its own gross negligence or
wilful misconduct.  The Administrative Agent shall be deemed not to have
knowledge of any Default unless and until written notice thereof is given to the
Administrative Agent by the Borrower or a Lender, and the Administrative Agent
shall not be responsible for or have any duty to ascertain or inquire into (i)
any statement, warranty or representation made in or in connection with this
Agreement, (ii) the contents of any certificate, report or other document
delivered hereunder or in connection herewith, (iii) the performance or
observance of any of the covenants, agreements or other terms or conditions set
forth herein, (iv) the validity, enforceability, effectiveness or genuineness of
this Agreement or any other agreement, instrument or document, or (v) the
satisfaction of any condition set forth in Article IV or elsewhere herein, other
than to confirm receipt of items expressly required to be delivered to the
Administrative Agent.

          The Administrative Agent shall be entitled to rely upon, and shall not
incur any liability for relying upon, any notice, request, certificate, consent,
statement, instrument, document or other writing believed by it to be genuine
and to have been signed or sent by the proper Person.  The Administrative Agent
also may rely upon any statement made to it orally or by telephone and believed
by it to be made by the proper Person, and shall not incur any liability for
relying thereon.  The Administrative Agent may consult with legal counsel (who
may be counsel for the Borrower), independent accountants and other experts
selected by it, and shall not be liable for any action taken or not taken by it
in accordance with the advice of any such counsel, accountants or experts.

                                     -43-
<PAGE>

          The Administrative Agent may perform any and all its duties and
exercise its rights and powers by or through any one or more sub-agents
appointed by the Administrative Agent.  The Administrative Agent and any such
sub-agent may perform any and all its duties and exercise its rights and powers
through their respective Related Parties.  The exculpatory provisions of the
preceding paragraphs shall apply to any such sub-agent and to the Related
Parties of the Administrative Agent and any such sub-agent, and shall apply to
their respective activities in connection with the syndication of the credit
facilities provided for herein as well as activities as Administrative Agent.

          Subject to the appointment and acceptance of a successor
Administrative Agent as provided in this paragraph, the Administrative Agent may
resign at any time by notifying the Lenders and the Borrower.  Upon any such
resignation, the Required Lenders shall have the right, in consultation with the
Borrower, to appoint a successor.  If no successor shall have been so appointed
by the Required Lenders and shall have accepted such appointment within 30 days
after the retiring Administrative Agent gives notice of its resignation, then
the retiring Administrative Agent may, on behalf of the Lenders and with the
approval of the Borrower, appoint a successor Administrative Agent; provided,
however Borrower's approval shall not be required if an Event of Default shall
have occurred and be continuing.  Upon the acceptance of its appointment as
Administrative Agent hereunder by a successor, such successor shall succeed to
and become vested with all the rights, powers, privileges and duties of the
retiring Administrative Agent, and the retiring Administrative Agent shall be
discharged from its duties and obligations hereunder.  The fees payable by the
Borrower to a successor Administrative Agent shall be the same as those payable
to its predecessor unless otherwise agreed between the Borrower and such
successor.  After the Administrative Agent's resignation hereunder, the
provisions of this Article and Section 10.03 shall continue in effect for the
benefit of such retiring Administrative Agent, its sub-agents and their
respective Related Parties in respect of any actions taken or omitted to be
taken by any of them while it was acting as Administrative Agent.

          Each Lender acknowledges that it has, independently and without
reliance upon the Administrative Agent or any other Lender and based on such
documents and information as it has deemed appropriate, made its own credit
analysis and decision to enter into this Agreement.  Each Lender also
acknowledges that it will, independently and without reliance upon the
Administrative Agent or any other Lender and based on such documents and
information as it shall from time to time deem appropriate, continue to make its
own decisions in taking or not taking action under or based upon this Agreement,
any related agreement or any document furnished hereunder or thereunder.

                                   ARTICLE X

                                 Miscellaneous
                                 -------------

          SECTION 10.01.  Notices.  Except in the case of notices and other
                          -------
communications expressly permitted to be given by telephone and except for
financial statements and notices to be delivered pursuant to Section 5.01 or
5.02 which may be delivered electronically, all notices and other communications
provided for herein shall be in writing and shall be delivered by hand or
overnight courier service, mailed by certified or registered mail or sent by
telecopy, as follows:

          (a)  if to the Borrower, to it at 500 West Illinois, Midland, Texas
79701, Attention of John L. Benfatti (Telecopy No. (915) 687-4023);

          (b)  if to the Administrative Agent, to it at 11 Madison Avenue, New
York, New York 10010, Attention of Gregory Perry (gregory.perry@csfb.com)
(Telecopy No. (212) 325-8304).

                                     -44-
<PAGE>

          (c)  if to any other Lender, to it at its address (or telecopy number)
set forth under such Lender's name on its signature page hereto.

Any party hereto may change its address or telecopy number for notices and other
communications hereunder by notice to the other parties hereto.  All notices and
other communications given to any party hereto in accordance with the provisions
of this Agreement shall be deemed to have been given on the date of receipt.

          SECTION 10.02.  Waivers; Amendments. (a) No failure or delay by the
                          -------------------
Administrative Agent or any Lender in exercising any right or power hereunder
shall operate as a waiver thereof, nor shall any single or partial exercise of
any such right or power, or any abandonment or discontinuance of steps to
enforce such a right or power, preclude any other or further exercise thereof or
the exercise of any other right or power.  The rights and remedies of the
Administrative Agent  and the Lenders hereunder are cumulative and are not
exclusive of any rights or remedies that they would otherwise have.  No waiver
of any provision of this Agreement or consent to any departure by the Borrower
therefrom shall in any event be effective unless the same shall be permitted by
paragraph (b) of this Section, and then such waiver or consent shall be
effective only in the specific instance and for the purpose for which given.
Without limiting the generality of the foregoing, the making of a Loan shall not
be construed as a waiver of any Default, regardless of whether the
Administrative Agent or any Lender may have had notice or knowledge of such
Default at the time.

          (b)  Neither this Agreement nor any provision hereof may be waived,
amended or modified except pursuant to an agreement or agreements in writing
entered into by the Borrower and the Required Lenders or by the Borrower and the
Administrative Agent with the consent of the Required Lenders; provided that no
                                                               --------
such agreement shall (i) increase  the Commitment of any Lender without the
written consent of such Lender, (ii) reduce the principal amount of any Loan or
reduce the rate of interest thereon, or reduce any fees payable hereunder,
without the written consent of each Lender affected thereby, (iii) postpone the
scheduled date of payment of the principal amount of any Loan, or any interest
thereon, or any fees payable hereunder, or reduce the amount of, waive or excuse
any such payment, or postpone the scheduled date of expiration of any
Commitment, without the written consent of each Lender affected thereby, (iv)
change Sections 2.19 and 2.21 in a manner that would alter the pro rata sharing
of payments required thereby, without the written consent of each Lender, or (v)
change any of the provisions of this Section or the definition of "Required
Lenders" or any other provision hereof specifying the number or percentage of
Lenders required to waive, amend or modify any rights hereunder or make any
determination or grant any consent hereunder, without the  written consent of
each Lender.

          SECTION 10.03.  Expenses; Indemnity; Damage Waiver. (a) The Borrower
                          ----------------------------------
shall pay (i) all reasonable out-of-pocket expenses incurred by the
Administrative Agent and its Affiliates, including the reasonable fees, charges
and disbursements of counsel for the Administrative Agent, in connection with
the syndication of the credit facilities provided for herein, the preparation
and administration of this Agreement or any amendments, modifications or waivers
of the provisions hereof (whether or not the transactions contemplated hereby or
thereby shall be consummated) and (ii) all out-of-pocket expenses incurred by
the Administrative Agent or each Lender, including the reasonable fees, charges
and disbursements of any counsel for the Administrative Agent, in connection
with the enforcement or protection of its rights in connection with this
Agreement, including its rights under this Section, or in connection with the
Loans made, including all such reasonable out-of-pocket expenses incurred during
any workout, restructuring or negotiations in respect of such Loans.

          (b)  THE BORROWER AGREES TO INDEMNIFY THE ADMINISTRATIVE AGENT AND
EACH LENDER, AND EACH RELATED PARTY OF ANY OF THE FOREGOING PERSONS (EACH SUCH
PERSON BEING

                                     -45-
<PAGE>

CALLED AN "INDEMNITEE") AGAINST, AND HOLD EACH INDEMNITEE HARMLESS FROM, ANY AND
           ----------
ALL LOSSES, CLAIMS, DAMAGES, LIABILITIES AND RELATED EXPENSES, INCLUDING THE
REASONABLE FEES, CHARGES AND DISBURSEMENTS OF ANY COUNSEL FOR ANY INDEMNITEE,
INCURRED BY OR ASSERTED AGAINST ANY INDEMNITEE ARISING OUT OF, IN CONNECTION
WITH, OR AS A RESULT OF (I) THE EXECUTION OR DELIVERY OF THIS AGREEMENT OR ANY
AGREEMENT OR INSTRUMENT CONTEMPLATED HEREBY, THE PERFORMANCE BY THE PARTIES
HERETO OF THEIR RESPECTIVE OBLIGATIONS HEREUNDER OR THE CONSUMMATION OF THE
TRANSACTIONS OR ANY OTHER TRANSACTIONS CONTEMPLATED HEREBY, (II) ANY LOAN OR THE
USE OF THE PROCEEDS THEREFROM, (III) ANY ACTUAL OR ALLEGED PRESENCE OR RELEASE
OF HAZARDOUS MATERIALS ON OR FROM ANY PROPERTY OWNED OR OPERATED BY THE BORROWER
OR ANY OF ITS SUBSIDIARIES, OR ANY ENVIRONMENTAL LIABILITY RELATED IN ANY WAY TO
THE BORROWER OR ANY OF ITS SUBSIDIARIES, OR (IV) ANY ACTUAL OR PROSPECTIVE
CLAIM, LITIGATION, INVESTIGATION OR PROCEEDING RELATING TO ANY OF THE FOREGOING,
WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY AND REGARDLESS OF WHETHER
ANY INDEMNITEE IS A PARTY THERETO; PROVIDED THAT SUCH INDEMNITY SHALL NOT, AS TO
                                   --------
ANY INDEMNITEE, BE AVAILABLE TO THE EXTENT THAT SUCH LOSSES, CLAIMS, DAMAGES,
LIABILITIES OR RELATED EXPENSES RESULTED FROM THE GROSS NEGLIGENCE OR WILFUL
MISCONDUCT OF SUCH INDEMNITEE.

          (c)  To the extent that the Borrower fails to pay any amount required
to be paid by it to the Administrative Agent or the Lenders under paragraph (a)
or (b) of this Section, each Lender severally agrees to pay to the
Administrative Agent or the Lenders, as the case may be, such Lender's
Applicable Percentage (determined as of the time that the applicable
unreimbursed expense or indemnity payment is sought) of such unpaid amount;
provided that the unreimbursed expense or indemnified loss, claim, damage,
--------
liability or related expense, as the case may be, was incurred by or asserted
against the Administrative Agent or the Lenders in its capacity as such.

          (d)  To the extent permitted by applicable law, the Borrower shall not
assert, and hereby waives, any claim against any Indemnitee, on any theory of
liability, for special, indirect, consequential or punitive damages (as opposed
to direct or actual damages) arising out of, in connection with, or as a result
of, this Agreement or any agreement or instrument contemplated hereby, the
Transactions, any Loan or the use of the proceeds thereof.

          (e)  THE FOREGOING INDEMNITIES SHALL EXTEND TO THE INDEMNITEES
NOTWITHSTANDING THE SOLE OR CONCURRENT NEGLIGENCE OF EVERY KIND OR CHARACTER
WHATSOEVER (OTHER THAN GROSS NEGLIGENCE OR WILLFUL MISCONDUCT), WHETHER ACTIVE
OR PASSIVE, WHETHER AN AFFIRMATIVE ACT OR AN OMISSION, INCLUDING WITHOUT
LIMITATION, ALL TYPES OF NEGLIGENT CONDUCT IDENTIFIED IN THE RESTATEMENT
(SECOND) OF TORTS OF ONE OR MORE OF THE INDEMNITEES OR BY REASON OF STRICT
LIABILITY IMPOSED WITHOUT FAULT ON ANY ONE OR MORE OF THE INDEMNITEES.  TO THE
EXTENT THAT AN INDEMNITEE IS FOUND TO HAVE COMMITTED AN ACT OF GROSS NEGLIGENCE
OR WILLFUL MISCONDUCT, THIS CONTRACTUAL OBLIGATION OF INDEMNIFICATION SHALL
CONTINUE BUT SHALL ONLY EXTEND TO THE PORTION OF THE CLAIM THAT IS DEEMED TO
HAVE OCCURRED BY REASON OF EVENTS OTHER THAN THE GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT OF THE INDEMNITEE.

          (f)  All amounts due under this Section shall be payable not later
than 30 days after written demand therefor.

                                     -46-
<PAGE>

          SECTION 10.04.  Successors and Assigns. (a) The provisions of this
                          ----------------------
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns permitted hereby, except that the
Borrower may not assign or otherwise transfer any of its rights or obligations
hereunder without the prior written consent of each Lender (and any attempted
assignment or transfer by the Borrower without such consent shall be null and
void).  Nothing in this Agreement, expressed or implied, shall be construed to
confer upon any Person (other than the parties hereto, their respective
successors and assigns permitted hereby and, to the extent expressly
contemplated hereby, the Related Parties of each of the Administrative Agent and
the Lenders) any legal or equitable right, remedy or claim under or by reason of
this Agreement.

          (b)  Any Lender may assign to one or more assignees all or a portion
of its rights and obligations under this Agreement (including all or a portion
of its Commitment and the Loans at the time owing to it); provided that (i)
                                                          --------
except in the case of an assignment to a Lender or a Lender Affiliate, each of
the Borrower and the Administrative Agent must give their prior written consent
to such assignment (which consent shall not be unreasonably withheld), (ii)
except in the case of an assignment to a Lender or a Lender Affiliate or an
assignment of the entire remaining amount of the assigning Lender's Commitment,
the amount of the Commitment of the assigning Lender subject to each such
assignment (determined as of the date the Assignment and Acceptance with respect
to such assignment is delivered to the Administrative Agent) shall not be less
than $5,000,000 unless each of the Borrower and the Administrative Agent
otherwise consent, (iii) each partial assignment shall be made as an assignment
of a proportionate part of all the assigning Lender's rights and obligations
under this Agreement, (iv) the parties to each assignment shall execute and
deliver to the Administrative Agent an Assignment and Acceptance, together with
a processing and recordation fee of $3,500, and (v) the assignee, if it shall
not be a Lender, shall deliver to the Administrative Agent an Administrative
Questionnaire; and provided further that any consent of the Borrower otherwise
                   ----------------
required under this paragraph shall not be required if an Event of Default has
occurred and is continuing. Subject to acceptance and recording thereof pursuant
to paragraph (d) of this Section, from and after the effective date specified in
each Assignment and Acceptance the assignee thereunder shall be a party hereto
and, to the extent of the interest assigned by such Assignment and Acceptance,
have the rights and obligations of a Lender under this Agreement, and the
assigning Lender thereunder shall, to the extent of the interest assigned by
such Assignment and Acceptance, be released from its obligations under this
Agreement (and, in the case of an Assignment and Acceptance covering all of the
assigning Lender's rights and obligations under this Agreement, such Lender
shall cease to be a party hereto but shall continue to be entitled to the
benefits of Section 10.03). Any assignment or transfer by a Lender of rights or
obligations under this Agreement that does not comply with this paragraph shall
be treated for purposes of this Agreement as a sale by such Lender of a
participation in such rights and obligations in accordance with paragraph (e) of
this Section.

          (c)  The Administrative Agent, acting for this purpose as an agent of
the Borrower, shall maintain at one of its offices in The City of New York a
copy of each Assignment and Acceptance delivered to it and a register for the
recordation of the names and addresses of the Lenders, and the Commitment of,
and principal amount of the Loans owing to, each Lender pursuant to the terms
hereof from time to time (the "Register").  The entries in the Register shall be
                               --------
conclusive, and the Borrower, the Administrative Agent and the Lenders may treat
each Person whose name is recorded in the Register pursuant to the terms hereof
as a Lender hereunder for all purposes of this Agreement, notwithstanding notice
to the contrary.  The Register shall be available for inspection by the Borrower
and any Lender, at any reasonable time and from time to time upon reasonable
prior notice.

          (d)  Upon its receipt of a duly completed Assignment and Acceptance
executed by an assigning Lender and an assignee, the assignee's completed
Administrative Questionnaire (unless the assignee

                                     -47-
<PAGE>

shall already be a Lender hereunder), the processing and recordation fee
referred to in paragraph (b) of this Section and any written consent to such
assignment required by paragraph (b) of this Section, the Administrative Agent
shall accept such Assignment and Acceptance and record the information contained
therein in the Register. No assignment shall be effective for purposes of this
Agreement unless it has been recorded in the Register as provided in this
paragraph.

          (e)  Any Lender may, without the consent of the Borrower or the
Administrative Agent, sell participations to one or more banks or other entities
(a "Participant") in all or a portion of such Lender's rights and obligations
    -----------
under this Agreement (including all or a portion of its Commitment and the Loans
owing to it); provided that (i) such Lender's obligations under this Agreement
              --------
shall remain unchanged, (ii) such Lender shall remain solely responsible to the
other parties hereto for the performance of such obligations and (iii) the
Borrower, the Administrative Agent and the other Lenders shall continue to deal
solely and directly with such Lender in connection with such Lender's rights and
obligations under this Agreement.  Any agreement or instrument pursuant to which
a Lender sells such a participation shall provide that such Lender shall retain
the sole right to enforce this Agreement and to approve any amendment,
modification or waiver of any provision of this Agreement.  Subject to paragraph
(f) of this Section, the Borrower agrees that each Participant shall be entitled
to the benefits of Sections 2.14, 2.15, 2.16, 2.18 and 2.20 to the same extent
as if it were a Lender and had acquired its interest by assignment pursuant to
paragraph (b) of this Section.  To the extent permitted by law, each Participant
also shall be entitled to the benefits of Section 10.08 as though it were a
Lender, provided such Participant agrees to be subject to Section 2.19 as though
it were a Lender.

          (f)  A Participant shall not be entitled to receive any greater
payment under Section 2.16 or 2.20 than the applicable Lender would have been
entitled to receive with respect to the participation sold to such Participant.
A Participant that is not a corporation organized under the laws of the United
States of America or any state thereof, shall comply with and be subject to the
provisions of Section 2.20(f) as though it were a Lender hereunder. If such
Participant fails to comply with the provisions of Section 2.20(f), such
Participant shall not be entitled to the benefits of Section 2.20.

          (g)  Any Lender may at any time pledge or assign a security interest
in all or any portion of its rights under this Agreement to secure obligations
of such Lender to a Federal Reserve Bank, and this Section shall not apply to
any such pledge or assignment of a security interest; provided that no such
                                                      --------
pledge or assignment of a security interest shall release a Lender from any of
its obligations hereunder or substitute any such pledgee or assignee for such
Lender as a party hereto.

          (h)  Notwithstanding anything to the contrary contained herein, any
Lender (a "Granting Lender") may grant to a special purpose funding vehicle (a
           ---------------
"SPFV"), identified as such in writing from time to time by the Granting Lender
-----
to the Administrative Agent and the Borrower, the option to provide to the
Borrower all or any part of any Loan that such Granting Lender would otherwise
be obligated to make to the Borrower pursuant to this Agreement; provided that
                                                                 -------------
(i) nothing herein shall constitute a commitment by any SPFV to make any Loan,
(ii) if an SPFV elects not to exercise such option or otherwise fails to provide
all or any part of such Loan, the Granting Lender shall be obligated to make
such Loan pursuant to the terms hereof.  The making of a Loan by an SPFV
hereunder shall utilize the Commitment of the Granting Lender to the same
extent, and as if, such Loan were made by such Granting Lender.  Each party
hereto hereby agrees that no SPFV shall be liable for any indemnity or similar
payment obligation under this Agreement (all liability for which shall remain
with the Granting Lender).  In furtherance of the foregoing, each party hereto
hereby agrees (which agreement shall survive the termination of this Agreement)
that, prior to the date that is one year and one day after the payment in full
of all outstanding commercial paper or other senior indebtedness of any SPFV, it
will not institute against, or join any other person in instituting against,
such

                                     -48-
<PAGE>

SPFV any bankruptcy, reorganization, arrangement, insolvency or liquidation
proceedings under the laws of the United States or any State thereof.  In
addition, notwithstanding anything to the contrary contained in this Section
10.04(h), any SPFV may (i) with notice to, but without the prior written consent
of, the Borrower and the Administrative Agent and without paying any processing
fee therefor, assign all or a portion of its interests in any Loans to the
Granting Lender or to any financial institutions (consented to by the Borrower
and Administrative Agent) providing liquidity and/or credit support to or for
the account of such SPFV to support the funding or maintenance of Loans and (ii)
disclose on a confidential basis any non-public information relating to its
Loans to any rating agency, commercial paper dealer or provider of any surety,
guarantee or credit or liquidity enhancement to such SPFV.  This section may not
be amended without the written consent of the SPFV.

          SECTION 10.05.  Survival. All covenants, agreements, representations
                          --------
and warranties made by the Borrower herein and in the certificates or other
instruments  delivered in connection with or pursuant to this Agreement shall be
considered to have been relied upon by the other parties hereto and shall
survive the execution and delivery of this Agreement and the making of any
Loans, regardless of any investigation made by any such other party or on its
behalf and notwithstanding that the Administrative Agent or any Lender may have
had notice or knowledge of any Default or incorrect representation or warranty
at the time any credit is extended hereunder, and shall continue in full force
and effect as long as the principal of or any accrued interest on any Loan or
any fee or any other amount payable under this Agreement is outstanding and
unpaid and so long as the Commitments have not expired or terminated.  The
provisions of Sections 2.14, 2.15, 2.16, 2.18 and 2.20 and Article VIII shall
survive and remain in full force and effect regardless of the consummation of
the transactions contemplated hereby, the repayment of the Loans and the
Commitments or the termination of this Agreement or any provision hereof.

          SECTION 10.06.  Counterparts; Integration; Effectiveness.  This
                          ----------------------------------------
Agreement may be executed in counterparts (and by different parties hereto on
different counterparts), each of which shall constitute an original, but all of
which when taken together shall constitute a single contract.  This Agreement
and any separate letter agreements with respect to fees payable to the
Administrative Agent constitute the entire contract among the parties relating
to the subject matter hereof and supersede any and all previous agreements and
understandings, oral or written, relating to the subject matter hereof.  Except
as provided in Section 4.01, this Agreement shall become effective when it shall
have been executed by the Administrative Agent and when the Administrative Agent
shall have received counterparts hereof which, when taken together, bear the
signatures of each of the other parties hereto, and thereafter shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and assigns.  Delivery of an executed counterpart of a signature page
of this Agreement by telecopy shall be effective as delivery of a manually
executed counterpart of this Agreement.

          SECTION 10.07.  Severability.  Any provision of this Agreement held to
                          ------------
be invalid, illegal or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such invalidity, illegality or
unenforceability without affecting the validity, legality and enforceability of
the remaining provisions hereof; and the invalidity of a particular provision in
a particular jurisdiction shall not invalidate such provision in any other
jurisdiction.

          SECTION 10.08.  Right of Setoff.  If an Event of Default shall have
                          ---------------
occurred and be continuing, each Lender and each of its Affiliates is hereby
authorized at any time and from time to time, to the fullest extent permitted by
law, to set off and apply any and all deposits (general or special, time or
demand, provisional or final) at any time held and other obligations at any time
owing by such Lender or Affiliate to or for the credit or the account of the
Borrower against any of and all the obligations of the

                                     -49-
<PAGE>

Borrower now or hereafter existing under this Agreement held by such Lender,
irrespective of whether or not such Lender shall have made any demand under this
Agreement and although such obligations may be unmatured. The rights of each
Lender under this Section are in addition to other rights and remedies
(including other rights of setoff) which such Lender may have.

          SECTION 10.09.  Governing Law; Jurisdiction; Consent to Service of
                          --------------------------------------------------
Process.  (a)  This Agreement shall be construed in accordance with and governed
-------
by the law of the State of New York.

          (b)  The Borrower hereby irrevocably and unconditionally submits, for
itself and its property, to the nonexclusive jurisdiction of the courts of the
State of New York or of the United States District Court of the Southern
District of New York, and any appellate court from any thereof, in any action or
proceeding arising out of or relating to this Agreement, or for recognition or
enforcement of any judgment, and each of the parties hereto hereby irrevocably
and unconditionally agrees that all claims in respect of any such action or
proceeding may be heard and determined in such New York State or, to the extent
permitted by law, in such Federal court.  Each of the parties hereto agrees that
a final judgment in any such action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in any other manner
provided by law.  Nothing in this Agreement shall affect any right that the
Administrative Agent or any Lender may otherwise have to bring any action or
proceeding relating to this Agreement against the Borrower or its properties in
the courts of any jurisdiction.

          (c)  The Borrower hereby irrevocably and unconditionally waives, to
the fullest extent it may legally and effectively do so, any objection which it
may now or hereafter have to the laying of venue of any suit, action or
proceeding arising out of or relating to this Agreement in any court referred to
in paragraph (b) of this Section. Each of the parties hereto hereby irrevocably
waives, to the fullest extent permitted by law, the defense of an inconvenient
forum to the maintenance of such action or proceeding in any such court.

          (d)  Each party to this Agreement irrevocably consents to service of
process in the manner provided for notices in Section 10.01.  Nothing in this
Agreement will affect the right of any party to this Agreement to serve process
in any other manner permitted by law.

          SECTION 10.10.  WAIVER OF JURY TRIAL.  EACH PARTY HERETO HEREBY
                          --------------------
WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE
TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF
OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY (WHETHER
BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES
THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED,
EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF
LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT
AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY,
AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.

          SECTION 10.11.  Headings. Article and Section headings and the Table
                          --------
of Contents used herein are for convenience of reference only, are not part of
this Agreement and shall not affect the construction of, or be taken into
consideration in interpreting, this Agreement.

          SECTION 10.12.  Confidentiality. Each of the Administrative Agent and
                          ---------------
the Lenders agrees to maintain the confidentiality of the Information (as
defined below), except that Information may be

                                     -50-
<PAGE>

disclosed (a) to its and its Affiliates' directors, officers, employees and
agents, including accountants, legal counsel and other advisors (it being
understood that the Persons to whom such disclosure is made will be informed of
the confidential nature of such Information and instructed to keep such
Information confidential), (b) to the extent requested by any regulatory
authority, (c) to the extent required by applicable laws or regulations or by
any subpoena or similar legal process, (d) to any other party to this Agreement,
(e) in connection with the exercise of any remedies hereunder or any suit,
action or proceeding relating to this Agreement or the enforcement of rights
hereunder, (f) subject to an executed written agreement containing provisions
substantially the same as those of this Section, to (i) any actual or
prospective assignee of or Participant in any of its rights or obligations under
this Agreement, or (ii) any actual or prospective counterparty (or its advisors)
to any swap or derivative transaction relating to the Borrower and its
obligations, (g) with the written consent of the Borrower or (h) to the extent
such Information (i) becomes publicly available other than as a result of a
breach of this Section or (ii) becomes available to the Administrative Agent or
any Lender on a nonconfidential basis from a source other than the Borrower or a
party to this Agreement. For the purposes of this Section, "Information" means
                                                            -----------
all information received from the Borrower relating to the Borrower or its
business, other than any such information that is available to the
Administrative Agent or any Lender on a nonconfidential basis prior to
disclosure by the Borrower; provided that, in the case of information received
                            --------
from the Borrower after the date hereof, such information is clearly identified
at the time of delivery as confidential.

          SECTION 10.13.  Interest Rate Limitation. Notwithstanding anything
                          ------------------------
herein to the contrary, if at any time the interest rate applicable to any Loan,
together with all fees, charges and other amounts which are treated as interest
on such Loan under applicable law (collectively the "Charges"), shall exceed the
                                                     -------
maximum lawful rate (the "Maximum Rate") which may be contracted for, charged,
                          ------------
taken, received or reserved by the Lender holding such Loan in accordance with
applicable law, the rate of interest payable in respect of such Loan hereunder,
together with all Charges payable in respect thereof, shall be limited to the
Maximum Rate and, to the extent lawful, the interest and Charges that would have
been payable in respect of such Loan but were not payable as a result of the
operation of this Section shall be cumulated and the interest and Charges
payable to such Lender in respect of other Loans or periods shall be increased
(but not above the Maximum Rate therefor) until such cumulated amount, together
with interest thereon at the Federal Funds Effective Rate to the date of
repayment, shall have been received by such Lender.

          SECTION 10.14   UNOCAL. ADMINISTRATIVE AGENT AND LENDERS ACKNOWLEDGE
                          ------
AND AGREE THAT THEY SHALL HAVE NO CLAIM OR RECOURSE TO UNOCAL OR ANY OF ITS
SUBSIDIARIES (OTHER THAN BORROWER AND ITS RESTRICTED SUBSIDIARIES) IN RESPECT OF
ANY OF THE OBLIGATIONS OR LIABILITIES UNDER ANY OF THE LOAN DOCUMENTS.

          SECTION 10.15   No Oral Agreements. THE LOAN DOCUMENTS EMBODY THE
                          -------------------
ENTIRE AGREEMENT AND UNDERSTANDING BETWEEN THE PARTIES AND SUPERSEDE ALL OTHER
AGREEMENTS AND UNDERSTANDINGS BETWEEN SUCH PARTIES RELATING TO THE SUBJECT
MATTER HEREOF AND THEREOF.  THE LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.  THERE ARE NO
UNWRITTEN AGREEMENTS BETWEEN THE PARTIES.

                                     -51-
<PAGE>

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

                                         PURE RESOURCES, INC.

                                         By: /s/ William K. White
                                             -------------------------------
                                             Name:  William K.  White
                                             Title: Vice President and
                                                    Chief Financial Officer

                      [Credit Agreement - Signature Page 1]
<PAGE>

                              CREDIT SUISSE FIRST BOSTON, individually and as
                              Administrative Agent, Sole Lead Arranger and Sole
                              Bookrunning Manager

                              By: /s/ James P. Moran
                                  -----------------------------------
                                      Name:  James P. Moran
                                      Title: Director

                              By: /s/ Brian T. Caldwell
                                  -----------------------------------
                                      Name:  Brian T. Caldwell
                                      Title: Vice President

                              Lending Office for ABR Loans and
                              Eurodollar Loans:

                              11 Madison Avenue
                              New York, New York  10010

                     [Credit Agreement - Signature Page 2]
<PAGE>

                              FIRST UNION NATIONAL BANK, individually and
                              as Syndication Agent

                              By: /s/ David Humphreys
                                  -----------------------------------
                                      Name:  David Humphreys
                                      Title: Vice President

                              Lending Office for ABR Loans and
                              Eurodollar Loans:

                              301 South College Street
                              Charlotte, North Carolina 28288

                              Address for Notice:

                              Business/Credit:
                              First Union National Bank
                              1001 Fannin Street, Suite 2255
                              Houston, Texas 77002
                              Telephone No.: 713/346-2717
                              Telecopier No.: 713/650-6354
                              Attention: David E. Humphreys

                              Administrative:
                              First Union National Bank
                              1001 Fannin Street, Suite 2255
                              Houston, Texas 77002
                              Telephone No.: 713/346-2727
                              Telecopier No.: 713/650-6354
                              Attention: Debbie Blank

                     [Credit Agreement - Signature Page 3]
<PAGE>

                              BNP PARIBAS, individually and
                              as Documentation Agent

                              By: /s/ Brian M. Malone
                                  -----------------------------------
                                      Name:  Brian M. Malone
                                      Title: Managing Director

                              By: /s/ Barton D. Schouest
                                  -----------------------------------
                                      Name:  Barton D. Schouest
                                      Title: Managing Director

                              Lending Office for ABR Loans and
                              Eurodollar Loans:

                              BNP Paribas
                              1200 Smith Street, Suite 3100
                              Houston, Texas 77002

                              Address for Notice:

                              Business/Credit:
                              1200 Smith Street, Suite 3100
                              Houston, Texas  77002
                              Telephone No.: 713/659-4811
                              Telecopier No.: 713/659-6915
                              Attention: Brian Malone

                              Administrative:
                              1200 Smith Street, Suite 3100
                              Houston, Texas  77002
                              Telephone No.: 713/982-1126
                              Telecopier No.: 713/659-5305
                              Attention: Leah Evans Hughes

                              Date on which BNP Paribas became
                              a party hereto:

                              June 1, 2001

                     [Credit Agreement - Signature Page 4]
<PAGE>

                              THE BANK OF NEW YORK

                              By: /s/ Peter Keller
                                  -----------------------------------
                                      Name:  Peter Keller
                                      Title: Vice President

                              Lending Office for ABR Loans and
                              Eurodollar Loans:

                              The Bank of New York
                              101 Barclay Street
                              New York, New York 10286
                              Attn: Bill Barbiero

                              Address for Notice:

                              Business/Credit:
                              The Bank of New York
                              One Wall Street, 19th Floor
                              New York, New York 10286
                              Telephone No.: 212/635-7861
                              Telecopier No.: 212/635-7923
                              Attn.: Peter Keller

                              Administrative:

                              The Bank of New York
                              One Wall Street, 19th Floor
                              New York, New York 10286
                              Telephone No.: 212/635-7532
                              Telecopier No.: 212/635-7923
                              Attn.: Theresa M. Burke

                              Date on which The Bank of New York
                              became a party hereto:

                              June 1, 2001

                     [Credit Agreement - Signature Page 5]
<PAGE>

                              CREDIT LYONNAIS NEW YORK BRANCH

                              By: /s/ Philippe Soustra
                                  -----------------------------------
                                      Name:  Philippe Soustra
                                      Title: Executive Vice President

                              Lending Office for ABR Loans and
                              Eurodollar Loans:

                              Credit Lyonnais New York Branch
                              1301 Avenue of the Americas
                              New York, New York 10019

                              Address for Notice:

                              Business/Credit:
                              Credit Lyonnais
                              1000 Louisiana, Suite 5360
                              Houston, Texas 77002
                              Telephone No.: 713/753-8713
                              Telecopier No.: 713/751-0307
                              Attention: John Grandstaff

                              Administrative:
                              Credit Lyonnais New York Branch
                              1301Avenue of the Americas
                              New York, New York 10019
                              Telephone No.: 212/261-7633
                              Telecopier No.: 917/849-5440
                              Attention: Bindu Menon

                              Date on which Credit Lyonnais New York Branch
                              became a party hereto:

                              June 1, 2001

                     [Credit Agreement - Signature Page 6]
<PAGE>

                              WELLS FARGO BANK TEXAS, N.A.

                              By: /s/ Charles D. Kirkham
                                  -----------------------------------
                                      Name:  Charles D. Kirkham
                                      Title: Vice President

                              Lending Office for ABR Loans and
                              Eurodollar Loans:

                              Wells Fargo Bank Texas, N.A.
                              1445 Ross Avenue, Suite 200,
                              MAC T 5303 - 029
                              Dallas, Texas 75202

                              Address for Notice:

                              Business/Credit:
                              Wells Fargo Bank Texas, N.A.
                              1445 Ross Avenue, Suite 200,
                              MAC T 5303 - 029
                              Dallas, Texas 75202
                              Telephone No.: 214/777-4026
                              Telecopier No.: 214/303-1839
                              Attention: Charles D. Kirkham

                              Administrative:
                              Wells Fargo Bank, N.A.
                              1740 Broadway
                              Denver, Colorado 80274
                              Telephone No.: 303/863-6102
                              Telecopier No.: 303/863-2729
                              Attention: Tanya Ivie

                              Date on which Wells Fargo Bank (Texas), N.A.
                              became a party hereto:

                              June 1, 2001

                     [Credit Agreement - Signature Page 7]
<PAGE>

                              FLEET NATIONAL BANK

                              By: /s/ Stephen J. Hoffman
                                  -----------------------------------
                                      Name:  Stephen J. Hoffman
                                      Title: Vice President

                              Lending Office for ABR Loans and
                              Eurodollar Loans:

                              Fleet National Bank
                              100 Federal Street
                              M/C: MADE10008A
                              Boston, Massachusetts 02211

                              Address for Notice:

                              Business/Credit:
                              Fleet National Bank
                              100 Federal Street
                              M/C: MADE10008A
                              Boston, Massachusetts 02211
                              Telephone No.: 617/434-8849
                              Telecopier No.: 617/434-3652
                              Attention: Stephen Hoffman

                              Administrative:
                              Fleet National Bank
                              One Federal Street
                              M/C: MADE1008A
                              Boston, Massachusetts 02211
                              Telephone No.: 617/434-5092
                              Telecopier No.: 617/434-0201
                              Attention: Francia Castillo

                              Date on which Fleet National Bank
                              became a party hereto:

                              June 1, 2001

                     [Credit Agreement - Signature Page 8]
<PAGE>

                                                                   SCHEDULE 2.01

                                  COMMITMENTS

             Lender                        Commitment          Percentage Share
             -----                        ------------         ----------------

   Credit Suisse First Boston             $ 50,000,000               25%

   First Union National Bank              $ 45,000,000              22.5%

          BNP Paribas                     $ 35,000,000              16.5%

      The Bank of New York                $ 10,000,000                5%

Credit Lyonnaise New York Branch          $ 20,000,000               10%

  Wells Fargo Bank Texas, N.A.            $ 10,000,000                5%

      Fleet National Bank                 $ 30,000,000               15%
                                          ------------          -------------

               Total:                     $200,000,000          100.000000000%

                                      -1-

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