Document:

Exhibit
      4.1

     

    SENIOR
      SECURED CREDIT AGREEMENT

     

    BETWEEN

     

    KY
      USA ENERGY, INC.,

    a
      Kentucky corporation,

     

    AND

     

    NSES
      12, LLC,

    a
      Delaware limited liability company

     

    Dated
      Effective as of June ____, 2008

     

    
      
        

      

    

     

    SENIOR
      SECURED TERM LOAN OF UP TO $10,000,000

     

    
      

    

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    TABLE
      OF CONTENTS

     

    
      	
              ARTICLE
                I DEFINITIONS AND REFERENCES

            	
              1

            
	
              Section
                1.1.

            	
              Defined
                Terms

            	
              1

            
	
              Section
                1.2.

            	
              Exhibits
                and Schedules

            	
              14

            
	
              Section
                1.3.

            	
              Amendment
                of Defined Instruments

            	
              14

            
	
              Section
                1.4.

            	
              References
                and Titles

            	
              15

            
	
              Section
                1.5.

            	
              Calculations
                and Determinations

            	
              15

            
	
              ARTICLE
                II THE LOANS

            	
              15

            
	
              Section
                2.1.

            	
              The
                Loans.

            	
              15

            
	
              Section
                2.2.

            	
              Interest.

            	
              18

            
	
              Section
                2.3.

            	
              Maturity
                Date

            	
              19

            
	
              Section
                2.4.

            	
              Prepayment
                of the Loans.

            	
              19

            
	
              Section
                2.5.

            	
              Commencement
                of ORRI Payments

            	
              19

            
	
              Section
                2.6.

            	
              Application
                of Receipts

            	
              19

            
	
              Section
                2.7.

            	
              Control
                Account.

            	
              20

            
	
              Section
                2.8.

            	
              Time
                and Place of Payments.

            	
              21

            
	
              Section
                2.9.

            	
              Use
                of Proceeds

            	
              21

            
	
              ARTICLE
                III TAXES, YIELD PROTECTION AND ILLEGALITY

            	
              21

            
	
              Section
                3.1.

            	
              Taxes.

            	
              21

            
	
              ARTICLE
                IV REPRESENTATIONS AND WARRANTIES

            	
              22

            
	
              Section
                4.1.

            	
              Representations
                and Warranties of Borrower

            	
              22

            
	
              ARTICLE
                V NOTICE OF CERTAIN EVENTS

            	
              27

            
	
              Section
                5.1.

            	
              Notice
                of Unmatured Event of Default, Event of Default and Other
                Matters

            	
              27

            
	
              Section
                5.2.

            	
              Other
                Information

            	
              27

            
	
              ARTICLE
                VI SECURITY: SPECIAL PROVISIONS RELATING TO EQUIPMENT

            	
              27

            
	
              Section
                6.1.

            	
              Security

            	
              27

            
	
              Section
                6.2.

            	
              Perfection
                and Protection of Security Interests and Liens

            	
              28

            
	
              Section
                6.3.

            	
              Release
                of Collateral

            	
              28

            
	
              Section
                6.4.

            	
              Account
                Debtors

            	
              28

            
	
              Section
                6.5.

            	
              Location;
                Records

            	
              29

            
	
              Section
                6.6.

            	
              Maintenance

            	
              29

            
	
              Section
                6.7.

            	
              Dispositions

            	
              29

            
	
              ARTICLE
                VII COVENANTS OF BORROWER

            	
              29

            
	
              Section
                7.1.

            	
              Affirmative
                Covenants

            	
              29

            
	
              Section
                7.2.

            	
              Negative
                Covenants

            	
              37

            
	
              ARTICLE
                VIII FURTHER RIGHTS OF LENDER

            	
              40

            
	
              Section
                8.1.

            	
              Maintenance
                of Security Interests

            	
              40

            
	
              Section
                8.2.

            	
              Performance
                of Obligations

            	
              40

            
	
              Section
                8.3.

            	
              Access
                to Collateral

            	
              41

            

    

     

    
      
        
        

      

      
        i

        
          

        

      

      
        
        

      

    

     

    
      	
              Section
                8.4.

            	
              Overriding
                Royalty Interest

            	
              41

            
	
              Section
                8.5.

            	
              Set-Off
                Rights

            	
              41

            
	
              ARTICLE
                IX CLOSING; CONDITIONS TO CLOSING

            	
              41

            
	
              Section
                9.1.

            	
              Closing

            	
              41

            
	
              Section
                9.2.

            	
              Conditions
                to Closing

            	
              41

            
	
              Section
                9.3.

            	
              Conditions
                Precedent to Agreement

            	
              43

            
	
              
                ARTICLE
                  X EVENTS OF DEFAULT AND REMEDIES

              

            	
              44

            
	
              Section
                10.1.

            	
              Events
                of Default

            	
              44

            
	
              Section
                10.2.

            	
              Acceleration.

            	
              46

            
	
              Section
                10.3.

            	
              Remedies

            	
              47

            
	
              Section
                10.4.

            	
              INDEMNITY

            	
              47

            
	
              
                ARTICLE
                  XI MISCELLANEOUS

              

            	
              48

            
	
              Section
                11.1.

            	
              Waivers
                and Amendments; Acknowledgments and Admissions.

            	
              48

            
	
              Section
                11.2.

            	
              Assignments;
                Survival of Agreements; Cumulative Nature

            	
              49

            
	
              Section
                11.3.

            	
              Notices

            	
              49

            
	
              Section
                11.4.

            	
              Parties
                in Interest; Transfers

            	
              50

            
	
              Section
                11.5.

            	
              Governing
                Law; Submission to Process.

            	
              51

            
	
              Section
                11.6.

            	
              Limitation
                on Interest

            	
              51

            
	
              Section
                11.7.

            	
              Termination;
                Limited Survival

            	
              52

            
	
              Section
                11.8.

            	
              Severability

            	
              52

            
	
              Section
                11.9.

            	
              Counterparts

            	
              52

            
	
              Section
                11.10.

            	
              Further
                Assurances

            	
              52

            
	
              Section
                11.11.

            	
              WAIVER
                OF JURY TRIAL, PUNITIVE DAMAGES, ETC

            	
              52

            
	
              Section
                11.12.

            	
              EXCULPATION
                PROVISIONS

            	
              53

            
	
              Section
                11.13.

            	
              Controlling
                Provision Upon Conflict

            	
              53

            
	
              Section
                11.14.

            	
              USA
                PATRIOT Act Notice

            	
              53

            
	
              ARTICLE
                XII NOTICE TO BORROWER

            	
              53

            

    

     

    
      
        
        

      

      
        ii

        
          

        

      

      
        
        

      

    

     

    EXHIBITS

     

    
      	
              Exhibit
                A

            	
              Property
                Descriptions

            
	
              Exhibit
                B

            	
              Form
                of Note

            
	
              Exhibit
                C

            	
              Property
                Operating Statement

            
	
              Exhibit
                D

            	
              Request
                for Commitment

            
	
              Exhibit
                E

            	
              Cost
                Certificate

            
	
              Exhibit
                F

            	
              Assignment
                of Overriding Royalty Interest

            
	
              Exhibit
                G

            	
              Initial
                Development Plan

            
	
              Exhibit
                H

            	
              Form
                of Notice of Assignment of Proceeds

            
	
              Exhibit
                I

            	
              Form
                of Guaranty

            
	
              Exhibit
                J

            	
              Form
                of Environmental Indemnity
                Agreement

            

    

     

    SCHEDULES

     

    
      	
              Schedule
                2.1(a)

            	
              Wire
                Transfer Instructions

            
	
              Schedule
                4.1(b)

            	
              Shareholders
                of Borrower

            
	
              Schedule
                4.1(c)

            	
              Borrower
                Equity Interest Obligations

            
	
              Schedule
                4.1(g)

            	
              Borrower’s
                Pro Forma Financial Statements and Cash Flow Statement

            
	
              Schedule
                4.1(h)

            	
              Other
                Obligations and Restrictions

            
	
              Schedule
                4.1(j)

            	
              Litigation

            
	
              Schedule
                4.1(m)

            	
              Unpaid
                Bills

            
	
              Schedule
                4.1(o)

            	
              Subsidiaries

            
	
              Schedule
                4.1(r)

            	
              Compliance
                with Environmental and Other Laws

            
	
              Schedule
                4.1(s)

            	
              Equipment
                Description

            
	
              Schedule
                4.1(t)

            	
              Purchasers
                of Hydrocarbons

            
	
              Schedule
                4.1(u)

            	
              Existing
                Hydrocarbon Sales Agreement

            
	
              Schedule
                4.1(v)

            	
              Existing
                Hedging Agreements

            
	
              Schedule
                4.1(w)

            	
              Agreements
                with Employees

            
	
              Schedule
                7.2(k)

            	
              Existing
                Liens

            

    

     

    
      
        
        

      

      
        iii

        
          

        

      

      
        
        

      

    

     

    SENIOR
      SECURED CREDIT AGREEMENT

     

    THIS
      SENIOR SECURED CREDIT AGREEMENT (“Agreement”)
      is
      made and entered into effective as of the ___ day of June, 2008 by and among
      KY
      USA ENERGY, INC.,
      a
      Kentucky corporation (“Borrower”),
      and
NSES
      12, LLC,
      a
      Delaware limited liability company (“Lender”).

     

    WHEREAS,
      Borrower has requested that Lender make available, and Lender is willing to
      make
      available to Borrower on the terms and conditions hereinafter set forth, a
      loan
      for the development of certain oil and gas properties.

     

    NOW,
      THEREFORE, the parties hereto in consideration of the foregoing and the terms,
      covenants, provisions and conditions hereinafter set forth hereby agree as
      follows:

     

    ARTICLE
      I

    
      
        
          DEFINITIONS
            AND REFERENCES

        

      

    

     

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

     

    “Accounting
      Procedure”
means
      the accounting procedure attached to and incorporated in any Operating
      Agreement.

     

    “Adjusted
      Net Cash Flow”
means,
      unless specified otherwise, the aggregate amount calculated as Gross Receipts
      minus
      (a) the
      aggregate amount calculated as Expenses, (b) approved Working Capital, and
      (c)
      approved capital expenditures (unless funded by an advance under this Facility),
      for any specified period.

     

    “AFE”
means
      Authorization for Expenditures.

     

    “Affiliate(s)”
means,
      as to any Person (as hereinafter defined), any other Person who directly or
      indirectly controls, is under common control with, or is controlled by such
      Person. As used in this definition, “control” (including, with its correlative
      meanings, “controlled by” and “under common control with”) shall mean
      possession, directly or indirectly, of power to direct or cause the direction
      of
      management or policies (whether through ownership of securities, partnership,
      membership or other ownership interests, by contract or otherwise), provided
      that, in
      any event (i) any Person who owns directly or indirectly ten percent (10%)
      or
      more of the securities having ordinary voting power for the election of
      directors or other governing body of a corporation or ten percent (10%) or
      more
      of the partnership, membership or other ownership interests of any other Person
      will be deemed to control such other Person, (ii) any subsidiary of Borrower
      shall be deemed to be an Affiliate of Borrower, and (iii) any direct or indirect
      stockholder or other equity owner of Borrower shall be deemed to be an Affiliate
      of Borrower.

     

    “Agreement”
means
      this Senior Secured Credit Agreement, as the same may be amended restated,
      extended or otherwise modified from time to time.

     

    “Anti-Terrorism
      Laws”
is
      defined in Section
      4.1(z).

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    “Applicable
      Dedication Rate”
means
      the percentage of the Adjusted Net Cash Flow paid to Lender pursuant to
Section
      2.6(a).

     

    “Applicable
      Interest Rate”
means
      the lesser of (a) the Maximum Rate and (b) the fixed per annum simple
      interest rate equal to twelve percent (12.0%).

     

    “Assignment
      of Overriding Royalty Interest”
means
      an assignment in the form of Exhibit F
      pursuant
      to which Borrower conveys to Lender an ORRI from time to time.

     

    “Bankruptcy
      Code”
means
      Title 11 of the United States Code as amended from time to time.

     

    “Borrower”
has
      the
      meaning assigned to such term in the preamble of this Agreement.

     

    “Business
      Day”
means
      for all purposes, a day other than a Saturday, Sunday or legal holiday for
      commercial banks under the laws of the State of New York or the laws of the
      United States of America.

     

    “Change
      of Control”
means
      the occurrence of any event, or series of events, pursuant to
      which:

     

    (a) with
      respect to any Person, the holders of the capital ownership of such Person
      as of
      the date hereof cease to own and control, directly and indirectly, at least
      fifty-one percent (51%) of such Person’s capital ownership; and 

     

    (b) either
      of
      Steven D. Eversole or Clarence G. Collins ceases to be materially involved
      in
      the management of the Borrower, the Parent and the development of the
      Properties, and a replacement reasonably acceptable to Lender is not identified
      to Lender within ninety (90) days and is not employed by Borrower within an
      additional thirty (30) days.

     

    “Charter
      Documents”
means,
      as applicable for any Person that is not an individual, the articles or
      certificate of incorporation or formation, company agreement, certificate of
      limited partnership, regulations, bylaws, partnership or limited partnership
      agreement, and all similar documents related to the formation and governance
      of
      that Person, together with all amendments to any of them.

     

    “Closing”
is
      defined in Section
      9.1.

     

    “Closing
      Costs”
is
      defined in Section
      2.1(a).

     

    “Closing
      Date”
is
      defined in Section
      9.1.

     

    “Collateral”
means
      all property of any kind which, pursuant to any Loan Document, is subject to
      a
      Lien in favor of Lender or is purported or intended to be subject to such a
      Lien, including without limitation, the Properties, Borrower’s interests in the
      Hydrocarbons produced therefrom or attributable thereto, the Equipment
      (including Fixtures), gathering systems, Borrower’s interests in the seismic,
      geological and geophysical data relating thereto, Borrower’s books and records
      relating thereto, the material contracts relating thereto, the accounts relating
      thereto, the insurance policies relating thereto and all products and proceeds
      of any of the foregoing.

     

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

     

    “Collateral
      Coverage Ratio”
means,
      when determined, the ratio derived by dividing (a) (i) the present value
      discounted at ten percent (10%) of Borrower’s Proved Reserves, calculated by
      Lender in connection with the most recent Reserve Report delivered hereunder
      (after being adjusted from time to time to incorporate Lender’s then-current
      assumptions with respect to pricing, Expenses and hedges under Permitted Hedging
      Agreements) plus (ii) Working Capital, by (b) the aggregate principal
      amount of the Loans outstanding at that time (including any Development Loan
      that has been requested but not funded).

     

    “Collateral
      Ratios”
means
      the Current Ratio and the Collateral Coverage Ratio.

     

    “Control
      Account”
means
      that certain bank account maintained by Borrower with JPMorgan Chase Bank,
      N.A.,
      a national banking association, located at Lexington, Kentucky, ABA #021000021,
      Account #745745265.

     

    “Corporate
      Income Taxes”
means
      the amount of United States federal and state income taxes due and payable
      by
      Borrower, with respect to income of Borrower derived from the Properties and
      the
      other Collateral.

     

    “Cost
      Certificate”
is
      defined in Section
      2.1(b)(ii).

     

    “Coverage
      Default”
means
      a
      Collateral Coverage Ratio of less than 1.2 has occurred.

     

    “Coverage
      Deficiency”
means
      that the Collateral Coverage Ratio is less than 1.5 but greater than
      1.2.

     

    “Current
      Assets”
means,
      on any date of determination, the consolidated current assets that would, in
      accordance with GAAP, be classified as of that date as current assets, less
      any
      on-cash amount required to be included in Current Assets as the result of the
      applicable of FASB Statement 133 or FASB Statement 143 (or any successor GAAP
      which serves to amend, supplement or replace FASB Statements 133 and
      143).

     

    “Current
      Liabilities”
means,
      on any date of determination, the consolidated obligations that would, in
      accordance with GAAP, be classified as of that date as current liabilities,
      excluding (a) non-cash obligations under FASB Statement 133 or FASB Statement
      143 (or any successor GAAP which serves to amend, supplement or replace FASB
      Statement 133 and 143) and (b) excluding the current portion of the outstanding
      Loans and other long-term Debt.

     

    “Current
      Ratio”
means
      the ratio of Borrower’s consolidated current assets to Borrower’s current
      liabilities as of the end of each calendar quarter.

     

    “Debt”
means
      all indebtedness, liabilities and obligations, whether matured or unmatured,
      liquidated or unliquidated, primary or secondary, direct or indirect, absolute,
      fixed or contingent, and whether or not required to be considered debt pursuant
      to GAAP.

     

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

     

    “Debt
      Service”
means
      the principal and interest due pursuant to the Note for any Interest
      Period.

     

    “Debtor
      Relief Laws”
means
      the Bankruptcy Code and all other applicable liquidation, conservatorship,
      bankruptcy, insolvency, rearrangement, moratorium, reorganization, fraudulent
      transfer or conveyance or similar debtor relief laws affecting the rights of
      creditors generally from time to time in effect.

     

    “Default
      Rate”
means
      the lesser of (i) the Applicable Interest Rate plus two percent (2%) and
      (ii) the Maximum Rate.

     

    “Defensible
      Title”
means
      with respect to the Properties, such title that: (A) with respect to each well
      or Unit located on the Leases, entitles Borrower to receive, free and clear
      of
      all royalties, overriding royalties and net profits interests (except the ORRI),
      or other burdens on or measured by production of Hydrocarbons, not less than
      the
      Net Revenue Interests of Borrower reflected on Exhibit
      A
      for such
      wells or Units for the productive life of such well or Unit (subject only to
      the
      Permitted Encumbrances); and (B) with respect to each well or Unit located
      on
      the Leases, obligates Borrower to bear costs and expenses relating to the
      maintenance, development and operation of such well or Unit in an amount not
      greater than the Working Interests reflected on Exhibit
      A
      for the
      productive life of such well or Unit (subject only to the Permitted
      Encumbrances); free and clear of any Lien, other than the Permitted Encumbrances
      and any Liens in favor of Lender and its Affiliates.

     

    “Deposit
      Account Control Agreement”
means
      that certain agreement dated of even date herewith among Borrower, Lender and
      JPMorgan Chase Bank, N.A. covering the Control Account.

     

    “Development
      Loan”
means
      the loan or loans made or to be made from Lender to Borrower, as evidenced
      by
      the Note, to fund Borrower’s Development Plan Expenditures, including the
      Initial Development Loan.

     

    “Development
      Plan”
means
      a
      plan provided by Borrower and approved by Lender with respect to the drilling,
      sidetracking, deepening, completing, recompleting or reworking activities or
      similar activities proposed by Borrower from time to time prior to the Drawdown
      Termination Date to be conducted on Wells located on any of the Properties.
      A
      Development Plan shall provide for, but not be limited to, the location, timing
      and estimated costs of Wells to be drilled or recompleted as well as names
      of
      key personnel required to undertake those operations and their associated
      responsibilities.

     

    “Development
      Plan Expenditures”
means
      the costs associated with each Development Plan.

     

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

     

    
      
        
        

      

      
        4

        
          

        

      

      
        
        

      

    

     

    “Drawdown
      Termination Date”
means
      the earlier of (i) the second anniversary of the Closing Date or (ii) the date
      upon which Lender determines that no additional funds are available pursuant
      to
      this Agreement.

     

    “Engineers”
means,
      unless specifically provided otherwise, an independent petroleum engineering
      firm to be mutually acceptable to Borrower and Lender; provided
      that any
      prior acceptance by a party of any independent petroleum engineering firm does
      not necessarily denote acceptance by such party of such firm at any future
      time
      or date.

     

    “Environmental
      Indemnity Agreement”
is
      defined in Section
      9.2(q).

     

    “Environmental
      Laws”
means
      any and all federal, state or local statutes, laws (including common law),
      regulations, ordinances, rules, judgments, orders, decrees, permits, grants,
      franchises, licenses, agreements or other governmental restrictions relating
      to
      the environment or to emissions, discharges, releases or threatened releases
      of
      pollutants, contaminants, chemicals or industrial, toxic or hazardous substances
      or wastes into the environment including ambient air, surface water, ground
      water, or land, or otherwise relating to the manufacture, processing,
      distribution, use, treatment, storage, disposal, transport or handling of
      pollutants, contaminants, chemicals or industrial, toxic or hazardous substances
      or wastes. For purposes of this definition, “chemicals” includes all substances
      referred to in the second sentence of the definition herein of “Hazardous
      Materials.”

     

    “Environmental
      Report”
means
      that certain Phase I Environmental Site Assessment, which will be prepared
      by an
      entity acceptable to Lender and delivered to Lender in compliance with
Section
      7.1(z),
      and
      which report shall cover the Properties described on Exhibit
      A.

     

    “Equipment”
means
      all equipment of Borrower more particularly described in Schedule 4.1(s),
      and all
      other equipment of Borrower, used for or in the operation of the Properties
      which may not be described in Schedule 4.1(s),
      of
      every kind and nature whether located on the Properties or located elsewhere,
      including but not limited to, pipelines, well and lease equipment and surface
      equipment, casing, tubing, connections, rods, pipe, machines, compressors,
      gathering systems, meters, motors, pumps, tankage, fixtures, storage and
      handling equipment and all other equipment or movable property of any kind
      and
      nature and wherever situated now or hereafter owned by Borrower or in which
      Borrower may now or hereafter have any interest (to the extent of such
      interest), together with all additions and accessions thereto, all replacements
      and all accessories and parts therefor, all logs and records in connection
      therewith, all rights against suppliers, warrantors, manufacturers, sellers
      or
      others in connection therewith, and together with all substitutes and
      replacements for any of the foregoing.

     

    “Equity
      Interests”
means
      shares of capital stock, partnership interests, membership interests in a
      limited liability company, beneficial interests in a trust or other equity
      ownership interests in a Person, and any warrants, options or other rights
      entitling the holder thereof to purchase or acquire any such Equity
      Interest.

     

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

     

    
      
        
        

      

      
        5

        
          

        

      

      
        
        

      

    

     

    “ERISA
      Plan”
means
      any employee pension benefit plan which is maintained by any Person subject
      to
      Title IV of ERISA.

     

    “Event
      of Default”
is
      defined in Section
      10.1.

     

    “Executive
      Order”
is
      defined in Section
      4.1(z).

     

    “Expenses”
means,
      in connection with the Properties, Borrower’s share of costs and expenses
      relating to, without duplication, (a) approved Operating Expenses, (b) Direct
      Taxes, (c) royalties, (d) overriding royalty interests, including the ORRI,
      (e)
      approved general and administrative expenses, and (f) accrued and unpaid
      interest and fees under this Facility.

     

    “Facility”
means
      the senior, first-priority, secured facility created pursuant to this
      Agreement.

     

    “Facility
      Fees”
means
      the fees owed by Borrower to Lender as consideration, in part, for Lender’s
      assistance to Borrower in structuring the transactions contemplated under this
      Agreement and the other Loan Documents in an amount equal to Two Hundred
      Thousand Dollars ($200,000), being equal to two percent (2%) of the Maximum
      Loan
      Amount.

     

    “FASB”
means
      the Financial Accounting Standards Board.

     

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

     

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

     

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

     

    “GAAP”
means
      those generally accepted accounting principles and practices which are
      recognized as such by the Financial Accounting Standards Board (or any generally
      recognized successor).

     

    “Governmental
      Authority”
means
      any nation or government, any state or other political subdivision thereof,
      any
      agency, authority, instrumentality, regulatory body, court, administrative
      tribunal, central bank or other entity exercising executive, legislative,
      judicial, taxing, regulatory or administrative powers or functions of or
      pertaining to government.

     

    “Gross
      Receipts”
means,
      in relation to and arising from the Properties and Permitted Hedging Agreements,
      all sums received by Borrower, including, but not limited to, Hedge Settlement
      Proceeds and proceeds under gas sales agreements, oil sales agreements, natural
      gas liquids sales agreements, gas processing agreements, gas gathering
      agreements, transportation agreements, Operating Agreements, including, but
      not
      limited to receipts pursuant to Accounting Procedures, and any other receipts
      relating to or arising from the Collateral (other than the proceeds of
      Collateral governed separately by Section
      2.4(b)).

     

    
      
        
        

      

      
        6

        
          

        

      

      
        
        

      

    

     

    “Guarantee”
shall
      include any agreement, whether such agreement is on a contingency basis or
      otherwise, to purchase, repurchase or otherwise acquire any Debt or liability
      of
      any other Person, or to purchase, sell or lease, as lessee or lessor, property
      or services in any such case primarily for the purpose of enabling another
      Person to make payment of any such Debt or liability, or to make any payment
      (whether as a capital contribution, purchase of any equity interest or
      otherwise) to assure a minimum equity, asset base, working capital or other
      balance sheet or financial condition, in connection with Debt or liability
      of
      another Person, or to supply funds to or in any manner invest in another Person
      in connection with such Person’s Debt or liability.

     

    “Guarantors”
means
      Parent and all future subsidiaries of Borrower.

     

    “Guaranty
      Agreement”
is
      defined in Section
      9.2(p).

     

    “Hazardous
      Materials”
means
      any substances regulated under any Environmental Law, whether as pollutants,
      contaminants or chemicals, or as industrial, toxic or hazardous substances
      or
      wastes, or otherwise. “Hazardous Materials” also includes (a) any petroleum, any
      fraction of petroleum, natural gas, natural gas liquids, liquefied natural
      gas
      and synthetic gas usable for fuel (including any mixtures of the foregoing)
      that
      has been or may be emitted, discharged or released into the environment, and
      (b)
      any drilling fluids, produced waters and other wastes associated with the
      exploration, development or production of crude oil, natural gas or geothermal
      reserves.

     

    “Hedge
      Settlement Payables”
means
      any settlement amounts payable by Borrower under the terms of any executed
      Permitted Hedging Agreement.

     

    “Hedge
      Settlement Proceeds”
means
      any settlement amounts paid to Borrower under the terms of any executed
      Permitted Hedging Agreement.

     

    “Hedging
      Agreement”
means
      

     

    (a) Any
      and
      all rate swap transactions, basis swaps, credit derivative transactions, forward
      rate transactions, commodity swaps, commodity options, forward commodity
      contracts, equity or equity index options, swaps or options, bond or bond price
      or bond index swaps or options or forward bond or forward bond price or forward
      bond index transactions, interest rate options, forward foreign exchange
      transactions, cap transactions, floor transactions, collar transactions,
      currency swap transactions, cross-currency rate swap transactions, currency
      options, spot contracts or any other similar transactions or any combination
      of
      any of the foregoing (including any options to enter into any of the foregoing),
      whether or not any such transaction is governed by or subject to any Master
      Agreement (as defined in paragraph (b) below); and

     

    (b) any
      and
      all transactions of any kind, and the related confirmations, which are subject
      to the terms and conditions of, or governed by, any form of master agreement
      published by the International Swaps and Derivates Association, Inc. or any
      International Foreign Exchange Master Agreement (any such master agreement,
      together with any related schedules, a “Master
      Agreement”),
      including any such obligations or liabilities under any Master
      Agreement.

     

    
      
        
        

      

      
        7

        
          

        

      

      
        
        

      

    

     

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

     

    “Hydrocarbons”
means
      crude oil, condensate, natural gas, natural gas liquids and other
      hydrocarbons.

     

    “Initial
      Development Loan”
is
      defined in Section
      2.1(a).

     

    “Initial
      Development Plan”
means
      the Development Plan regarding the drilling an agreed number of Wells provided
      to Lender by Borrower prior the execution and delivery of this Agreement, which
      is attached as Exhibit
      G
      hereto.

     

    “Initial
      Loan”
is
      defined in Section
      2.1(a).

     

    “Intercreditor
      Agreement
      any
      intercreditor agreement among Lender, Borrower and any other counterparty
      approved by Lender in form and content acceptable to Lender and entered into
      in
      connection with a Permitted Hedging Agreement.

     

    “Interest
      Period”
means
      each monthly period beginning on (but not including) the Repayment Date in
      one
      calendar month and ending on (and including) the Repayment Date in the calendar
      month immediately thereafter; provided
      that the
      first Interest Period for the Note and Loans shall begin on the date a Loan
      is
      first funded hereunder and end on the Repayment Date in October
      2008.

     

    “Investment”
in
      any
      Person means the amount paid or committed to be paid or the value of property
      or
      wages contributed or committed to be contributed by the Person making the
      Investment on its account for or in connection with its acquisition of any
      stock, bonds, notes, debentures, partnership or other ownership interest or
      any
      other security of the Person in whom such Investment is made or any evidence
      of
      Debt of such Person in whom the Investment is made.

     

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

     

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

     

    “Lender”
shall
      have the meaning assigned to such term in the preamble of this Agreement, and
      its successors and assigns.

     

    
      
        
        

      

      
        8

        
          

        

      

      
        
        

      

    

     

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

     

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

     

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

     

    “Loans”
means,
      collectively, the Initial Loan, the Development Loans, and the Facility Fees
      advanced hereunder and “Loan” means, individually, the Initial Loan and any
      Development Loan as described in Section
      2.1
      and any
      Facility Fee advanced hereunder.

     

    “Material
      Adverse Effect”
means
      any effect, event or matter: 

     

    (a) which
      is
      materially adverse to:

     

    (i) the
      business, assets, liabilities, ownership, management or condition (financial
      or
      otherwise) of Borrower or Parent; or

     

    (ii) the
      ability of Borrower or Parent to perform any payment obligations under any
      Loan
      Documents; or

     

    (b) which
      could reasonably be expected to result in any Security Document not providing
      to
      Lender the Liens and/or security interests in the assets expressed to be secured
      under any Loan Documents.

     

    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    

     

    “Maturity
      Date”
means
      with respect to Loans advanced hereunder, the earlier of (a) the third
      anniversary of the Closing Date, (b) the date on which all Obligations of
      Borrower under the Loan Documents (other than the Assignment of Overriding
      Royalty Interest) have been paid and performed in full and Lender’s obligation
      (if any) to advance any Loans has terminated, or (c) the date on which Lender
      notifies Borrower of the acceleration of payment of any portion or all of the
      Obligations because of the occurrence of an Event of Default.

     

    “Maximum
      Loan Amount”
means
      Ten Million Dollars ($10,000,000).

     

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

     

    “Mortgage”
is
      defined in Section
      6.1.

     

    “Net
      Revenue Interest”
and
      “NRI”
means
      (i) with respect to a Unit for which a net revenue interest is stated, that
      interest in the applicable Hydrocarbons produced, saved and sold from such
      unitized area which is afforded to Borrower by virtue of its ownership of the
      Leases included in whole or in part in such area after deducting all burdens
      against the production therefrom, and (ii) with respect to a Well for which
      a
      net revenue interest is stated, that interest in the applicable Hydrocarbons
      produced, saved and sold from the Well which is afforded to Borrower by virtue
      of its ownership of the Lease on which such Well is located after deducting
      all
      burdens against the production therefrom; provided,
      however,
      that,
      except with regard to the representation set forth in the last sentence in
      Section
      4.1(n), any
      representation, warranty or covenant in relation to Borrower’s Net Revenue
      Interest shall be deemed to refer to such interest net of the ORRI granted
      to
      Lender.

     

    “Note”
is
      defined in Section
      2.1(c).

     

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

     

    “Obligations”
means
      all Debt and all obligations from time to time owing from Borrower to Lender
      or
      any of Lender’s Affiliates under or pursuant to any of the Loan Documents in
      connection with this Agreement or any transaction contemplated hereby, including
      without limitation, all principal, interest, fees, expenses, costs and
      indemnities.

     

    “OFAC”
is
      defined in Section
      4.1(z).

     

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

     

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

     

    “Operating
      Agreements”
means
      operating agreements to which Borrower is a party or by which Borrower is bound,
      now or hereafter relating to the Properties, each of which shall be reasonably
      satisfactory in form and substance to Lender.

     

    “Operating
      Expenses”
means
      (a) direct lease operating expenses and well maintenance expenses, which arise
      from Borrower’s Working Interests in the wells that are subject to the Mortgage,
      that are billed to Borrower by the Operator or incurred by Borrower, as
      Operator, of the Properties, and (b) Borrower’s Working Interest share of
      expenses incurred in the repair, maintenance and replacement of damaged or
      obsolete Equipment.

     

    “Operating
      Report”
is
      defined in Section
      7.1(u).

     

    “Operator”
means
      any operators, including contract operators, of the Properties (as such terms
      are generally understood in the oil and gas industry).

     

    “ORRI”
means,
      with respect to the Properties, a cost-free overriding royalty interest from
      Borrower’s proportionately reduced Working Interest in Hydrocarbons in, under
      and to be produced from or attributable to the Leases constituting the
      Properties (including after-acquired Properties) conveyed to Lender pursuant
      to
      the Assignment of Overriding Royalty Interest, including, but not limited to,
      the ORRI to be conveyed pursuant to Section
      8.4.

     

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

     

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

     

    “Parent”
means
      Kentucky USA Energy, Inc, a Delaware corporation.

     

    “Permitted
      Encumbrances”
      means:

     

    Liens
      pursuant to any Loan Document;

     

    Liens
      existing on the date hereof and listed on Schedule
      7.2(k)
      hereto;

     

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    

     

    Liens
      for
      taxes, assessments, or other governmental charges or levies not yet due or
      which
      are being contested in good faith and by appropriate proceedings diligently
      conducted, if adequate reserves with respect thereto are maintained on the
      books
      of the applicable Person in accordance with GAAP; purchase money liens incident
      to the purchase of new Equipment which have a cumulative value of no more than
      One Hundred Thousand Dollars ($100,000) in the aggregate; operators,’
non-operators,’ vendors,’ carriers,’ warehousemen’s, mechanics,’ materialmen’s,
      repairmen’s or other like Liens arising in the ordinary course of business or
      which are incident to the exploration, development, operation, and maintenance
      of the Properties, not overdue for a period of more than thirty days or which
      are being contested in good faith and by appropriate proceedings diligently
      conducted, if adequate reserves with respect thereto are maintained on the
      books
      of the applicable Person in accordance with GAAP; pledges or deposits in the
      ordinary course of business or Liens in connection with workers’ compensation,
      unemployment insurance and other social security legislation, other than any
      Lien imposed by ERISA; deposits to secure the performance of bids, trade
      contracts and leases (other than Debt), statutory obligations, surety bonds
      (other than bonds related to judgments or litigation), performance bonds and
      other obligations of a like nature incurred in the ordinary course of business;
      and easements, rights-of-way, restrictions, servitudes, permits, conditions,
      covenants, exceptions, or reservations and other similar encumbrances, defects,
      irregularities, minor imperfections and deficiencies in title affecting real
      property which, in the aggregate, are not substantial in amount, and which
      do
      not in any case materially detract from the value of the property subject
      thereto or materially interfere with the ordinary conduct of the business of
      the
      applicable Person; and Liens permitted under Section
      6.1
      that are
      granted by Borrower to counterparties under Permitted Hedging Agreements.

     

    “Permitted
      Hedging Agreement”
means
      a
      Hedging Agreement approved in form and substance by Lender where the
      counterparties to such Hedging Agreement have executed and delivered an
      Intercreditor Agreement to Lender.

     

    “Person”
means
      an individual, corporation, partnership, association, joint stock company,
      trust
      or trustee thereof, estate or executor thereof, unincorporated organization
      or
      joint venture, court or governmental unit or any agency or subdivision thereof,
      or any other legally recognizable entity.

     

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

     

    “Properties”
means
      all Oil and Gas Properties of Borrower, now owned or hereafter acquired,
      including, without limitation, the interests in those certain Leases and
      properties and other the oil and gas assets described in Exhibit A,
      as
Exhibit
      A
      may be
      modified, amended or supplemented from time to time.

     

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

     

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

     

    “Proved
      Developed Non-Producing Reserves”
means
      Proved Reserves that are estimated to be recoverable by existing wells that
      are
      not yet capable of producing such reserves without completions or recompletions
      being conducted within the existing wellbores thereof.

     

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

     

    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

    

     

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

     

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

     

    “Purchasers
      of Hydrocarbons”
means
      the Persons listed on Schedule
      4.1(t)
      and all
      other Persons who, now or may in the future, purchase Hydrocarbons attributable
      or allocable to Borrower’s Net Revenue Interests in the Properties. Lender,
      in its sole reasonable discretion, shall have the right, but not the obligation,
      to disapprove any Purchaser of Hydrocarbons, and Borrower shall, from time
      to
      time, provide Lender with details, in form and substance satisfactory to the
      Lender, of any Purchaser of Hydrocarbons not listed on Schedule
      4.1(t).

     

    “Repayment
      Date”
means,
      prior to the satisfaction of all Obligations, the first day of each calendar
      month, commencing with the month of October 2008 and ending on the Maturity
      Date.

     

    “Request
      for Commitment”
means
      a
      written request, in the form of Exhibit
      D
      attached
      hereto, to
      Lender
      from Borrower, signed by an authorized representative of Borrower as specified
      in the resolutions and incumbency certificate to be delivered pursuant to
Section
      9.2(a)
      hereof,
      for an advance of funds under the Facility.

     

    “Reserve
      Report”
is
      defined in Section
      7.1(e).

     

    “Security
      Agreement”
means
      a
      security agreement (covering, without limitation, Accounts, Equipment, General
      Intangibles and Inventory of Borrowers as those terms are defined in the Uniform
      Commercial Code adopted by the State of New York) executed by Borrower as debtor
      in favor of Lender as secured party dated as of the date hereof, in form and
      substance satisfactory to Lender, as the same may be modified, amended or
      supplemented pursuant to the terms of this Agreement.

     

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

     

    “Severance
      Taxes”
means
      taxes imposed at the time oil or gas is produced from a well which are based
      on
      or measured by the amount or value of such production.

     

    “Subordination
      Agreement”
means
      a
      subordination agreement or agreements in form and substance satisfactory to
      Lender.

     

    
      
        
        

      

      
        13

        
          

        

      

      
        
        

      

    

     

    “Subsidiary”
means
      for any Person any entity of which more than fifty percent (50%) of the issued
      and outstanding securities having ordinary voting power for the election of
      directors or managers is owned, directly or indirectly, by such Person and/or
      one or more of its subsidiaries.

     

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

     

    “Taxes”
is
      defined in Section
      3.1(a).

     

    “Title
      Data”
means
      those certain title opinions and other title related material and data to be
      delivered by Borrower to Lender from time to time, including, but not limited
      to, prior to Closing as required under this Agreement in relation to the
      Properties.

     

    “Unit”
means
      a
      pooled unit or proration or production unit as designated by an effective
      designation of unit, proration unit plan, or other instrument of similar impact
      properly filed with the appropriate governmental authority where
      required.

     

    “Unmatured
      Event of Default”
means
      any event or condition which would, with the giving of any requisite notices
      and/or the passage of any requisite periods of time, constitute an Event of
      Default.

     

    “USA
      PATRIOT Act”
means
      the Uniting and Strengthening America by Producing Appropriate Tools Required
      to
      Intercept and Obstruct Terrorism ( USA PATRIOT) Act of 2001, Pub. L. 707-56,
      as
      amended, and regulations promulgated thereunder as in effect from time to
      time.

     

    “Well”
means
      a
      well producing or capable of producing Hydrocarbons that is described or
      referred to in Exhibit A,
      as
Exhibit
      A
      may be
      modified, amended or supplemented from time to time.

     

    “Wire
      Transfer Instructions”
means
      the instructions described on Schedule
      2.1(a) relating
      to the disbursements by Lender of the amounts constituting the Initial Loan
      (other than the Facility Fee).

     

    “Working
      Capital”
means
      Current Assets minus Current Liabilities.

     

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

     

    Exhibits
      and Schedules.
      All
      exhibits and schedules attached to this Agreement are incorporated herein by
      reference and made a part hereof for all purposes.

     

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

     

    
      
        
        

      

      
        14

        
          

        

      

      
        
        

      

    

     

    References
      and Titles.
      All
      references in this Agreement to exhibits, schedules, articles, sections,
      subsections and other subdivisions refer to the exhibits, schedules, articles,
      sections, subsections and other subdivisions of this Agreement unless otherwise
      expressly provided. Section and subdivision headings are for convenience only,
      do not constitute any part of such sections or subdivisions and shall be
      disregarded in construing the language contained in such sections or
      subdivisions. The words “this Agreement,” “this instrument,” “herein,” “hereof,”
“hereby,” “hereunder” and words of similar import refer to this Agreement as a
      whole and not to any particular sections or subdivisions unless expressly so
      limited. The phrases “this section” and “this subsection” and similar phrases
      refer only to the sections or subsections hereof in which such phrases occur.
      The word “or” is not exclusive, and the word “including” (in its various forms)
      means “including without limitation”. Pronouns in masculine, feminine and neuter
      genders shall be construed to include any other gender, and words in the
      singular form shall be construed to include the plural and vice versa, unless
      the context otherwise requires.

     

    Calculations
      and Determinations.
      Interest shall be calculated on the basis of a 360 day year for the actual
      number of days in the applicable period. Each payment may, at the option of
      Lender, be calculated and applied on an assumption that such payment would
      be
      made on its due date. Unless otherwise expressly provided herein or Lender
      otherwise consents in writing, all Financial Statements and reports to be
      furnished to Lender under the Loan Documents shall be prepared and all financial
      computations and determinations made pursuant to the Loan Documents, and with
      respect to the Financial Statements, shall be made in accordance with
      GAAP.

     

    ARTICLE
      II

    
      THE
        LOANS

    

     

    Section
      2.1. The
      Loans.

     

    The
      Initial Loan.
      Borrower desires to borrow an initial Development Loan in connection with the
      Initial Development Plan (the “Initial
      Development Loan”).
      Borrower also desires to borrow funds to be reimbursed for certain expenses
      incurred (including accounting, legal and other similar fees) or obtain advances
      to pay certain (i) expenses incurred by Borrower relating to land and title
      work, and environmental assessment and review in connection with the Properties,
      (ii) expenses incurred by Borrower and by Lender under Section
      7.1(y) and
      (iii) relating to filing fees which may be required to properly file any
      and all Security Documents (collectively, the “Closing
      Costs”).
      In
      addition to the Closing Costs, Borrower has agreed to pay Lender a Facility
      Fee
      pursuant to Section
      7.1(aa).
      The
      aggregate amount of the advances under this Section
      2.1(a)
      shall be
      equal to Two Million Five Hundred Thousand Dollars ($2,500,000) and shall
      consist of (1) the Initial Development Loan in an amount of Two Million One
      Thousand One Hundred Seventy-Three Dollars ($2,001,173), (2) the payment to
      Greenberg Traurig, LLP for Closing Costs in an amount of Forty Thousand Dollars
      $40,000, (3) the payment of Sam Del Presto for Closing Costs in the amount
      of
      Two Hundred Thousand Dollars ($200,000), (4) the payment of Gottbetter &
Partners, LLP for Closing Costs in the amount of Fifty Thousand One Hundred
      and
      Twelve Dollars ($50,112), (5) the payment of 1st
      West
      Financial Corporation for Closing Costs in the amount of Eight Thousand Seven
      Hundred Fifteen Dollars ($8,715) and (6) the payment for the Facility Fee in
      the
      aggregate amount of Two Hundred Thousand Dollars ($200,000) (collectively,
      the
“Initial
      Loan”).
      Subject to the terms and conditions hereunder, Lender agrees to advance the
      Initial Loan to Borrower and agrees to wire transfer the amount of the Initial
      Loan, less the Facility Fee, to the designated payees noted in the Wire Transfer
      Instructions set forth on Schedule 2.1(a)
      on the
      Closing Date. Borrower irrevocably authorizes Lender to transfer the Facility
      Fee to Lender’s account and the Facility Fee shall be deemed advanced by Lender
      to Borrower and paid by Borrower to Lender contemporaneously with
      Closing.

     

    
      
        
        

      

      
        15

        
          

        

      

      
        
        

      

    

     

    Development
      Loans.

     

    (i) Prior
      to
      the Drawdown Termination Date, Lender may, but shall not be obligated to, make
      additional advances to Borrower of Development Loan(s) up to an aggregate of
      Seven Million Five Hundred Thousand Dollars ($7,500,000) to be used exclusively
      for Development Plan Expenditures. Any Request for Commitment for a Development
      Loan in relation to any Development Plan shall be for a minimum of Two Million
      Five Hundred Thousand Dollars ($2,500,000) and will be subject to Lender’s
      approval in its sole and absolute discretion. Each Request for Commitment shall
      also include a variance allowance not to exceed ten percent (10%) of the
      estimated expenses set forth in the Request for Commitment and supporting
      materials for each Development Plan (such allowance will be available only
      to
      the extent the actual costs of any Development Plan Expenditures exceed one
      hundred percent (100%) of the estimated costs).

     

    (ii) Within
      ten (10) days after the receipt from Borrower prior to the Drawdown Termination
      Date of a Request for Commitment listing all applicable Development Plan
      Expenditures that Borrower desires to make to conduct a Development Plan, Lender
      shall notify Borrower in writing whether in its sole and absolute discretion
      Lender will make an advance equal to the total estimated expenditures shown
      on
      such Request for Commitment. If Lender does not agree to make an advance as
      requested in any such Request for Commitment covering any Development Plan,
      Borrower’s participation in the proposed Development Plan identified in the
      applicable Request for Commitment may not result in an Unmatured Event of
      Default or Event of Default. If Lender agrees to make any such advance for
      a
      Development Plan, then Borrower may participate in the Development Plan proposed
      in their Request for Commitment, and Lender shall advance the funds necessary
      to
      pay Borrower’s share of the costs and expenses attributable to such proposed
      operations (not to exceed the amount requested in the Request for Commitment).
      Any advances to be made by Lender under this Section
      2.1(b),
      if at
      all, shall be made within the latter of (i) fifteen (15) Business Days after
      and
      (ii) the fifth (5th)
      Business Day of the month following receipt from Borrower of a cost certificate
      in the form attached hereto as Exhibit
      E
      (the
“Cost
      Certificate”),
      duly
      executed by an authorized officer of Borrower, certifying the amount of costs
      and expenses that have been incurred by Borrower and are payable in connection
      with such approved Development Plan, together with the supporting documentation
      referred in the form of Cost Certificate, including, without limitation, the
      applicable AFE(s).

     

    
      
        
        

      

      
        16

        
          

        

      

      
        
        

      

    

     

    (iii) Any
      Request for Commitment shall be made by Borrower for business opportunities,
      projects, and/or uses that are described in relation to any Development Plan
      subject, without limitation, to the following:

     

    (1) All
      statements of costs and estimates provided to Lender shall be rendered in
      sufficient detail to give Lender complete and accurate information as to the
      purpose for and amount of all items included therein, and Lender shall be
      entitled to such additional information regarding such expenditures as Lender
      may reasonably request. All such data shall be subject to audit by Lender’s
      representatives at any time mutually agreeable to the parties.

     

    (2) Borrower
      agrees that, subject to any other conditions expressly set forth in this
      Agreement, with respect to any Development Plan consisting of a new-well drill
      or any other operation requiring Borrower to expend more than One Hundred
      Thousand Dollars ($100,000), Lender’s funding of such operation is further
      subject to the requirement as set forth in Section
      7.1(x)
      that
      prior to or contemporaneously with the submission of a Request for Commitment
      covering each such operation Borrower shall submit to Lender a then-current
      Title Opinion relating to the Leases covering the lands relating to such
      operations, unless a current Title Opinion covering such lands has already
      been
      provided hereunder following Closing, which confirms that Borrower owns
      Defensible Title thereto subject only to a first priority lien under the
      Mortgage in favor of Lender and Permitted Encumbrances. If such Development
      Plan
      relates to the acquisition of one or more leases, however, Borrowers only shall
      be required to deliver satisfactory title materials covering such lands covered
      by such lease or leases.

     

    (3) Notwithstanding
      the foregoing or anything herein to the contrary, in no event shall Lender
      be
      obligated to make any Development Loans pursuant to this Section
      2.1(b)
      in
      excess of an aggregate amount of Seven Million Five Hundred Thousand Dollars
      ($7,500,000) for all combined Development Plans approved by Lender.

     

    (iv) No
      Unmatured Event of Default or Event of Default shall have occurred and be
      continuing and no Loan shall be advanced following the Drawdown Termination
      Date.

     

    (v) Upon
      Lender’s receipt of each Request for Commitment for a Development Loan pursuant
      to this Section
      2.1(b),
      the
      Collateral Ratios will be recalculated to determine whether Borrower is in
      compliance with the covenant with respect to Collateral Ratios described in
      Section
      7.2(s)
      below.
      Such calculation will include the amount of the requested Development Loan
      and
      will be based on the most recent Reserve Report delivered
      hereunder.

     

    
      
        
        

      

      
        17

        
          

        

      

      
        
        

      

    

     

    Promissory
      Note.
      The
      Loans described in Section
      2.1 and
      all
      other amounts due under this Agreement shall be evidenced by a promissory note
      (the “Note”)
      issued
      by Borrower to Lender in the face amount of Ten Million Dollars ($10,000,000),
      in the form of Exhibit B,
      appropriately completed. The final maturity date of such Note shall be the
      Maturity Date and all amounts evidenced by the Note shall be secured by the
      Security Documents.

     

    Maximum
      Loan Amount.
      In no
      event shall the sum of the Loans made by Lender to Borrower exceed the Maximum
      Loan Amount; provided,
      however,
      if the
      obligations of Borrower under the Loans exceed the Maximum Loan Amount, all
      obligations nevertheless will constitute Obligations under this Agreement and
      be
      entitled to the benefit of all of Lender’s security interests in, and mortgage
      liens on, the Collateral. All amounts on the Loans will be fully due and payable
      on the Maturity Date. Amounts repaid in respect of the Loans may not be
      reborrowed.

     

    Section
      2.2. Interest.

     

    (a) Subject
      to the provisions of subsection (b) below, each Loan shall bear interest on
      the
      outstanding principal amount thereof at a rate per annum equal to the Applicable
      Interest Rate and shall be payable as set forth in Section
      2.6
      hereof.

     

    (b) If
      any
      amount payable by Borrower (other than interest) under any Loan Document is
      not
      paid when due (without regard to any applicable grace periods), whether at
      stated maturity by acceleration or otherwise, Borrower shall pay to Lender
      a
      late charge on such past-due amount, as liquidated damages and not as a penalty,
      equal to five cents ($0.05) per dollar on, and in addition to, the amount of
      such installment, but not in excess of the maximum amount of interest allowed
      by
      applicable laws. Furthermore, while any Event of Default exists (either before
      or after acceleration), Borrower shall pay interest on the principal amount
      of
      all outstanding Obligations at the Default Rate to the fullest extent permitted
      by applicable laws. Interest and any other charges, which have accrued and
      are
      not paid when due shall be added to and become part of the principal under
      the
      Note.

     

    (c) Interest
      on each Loan shall be due and payable in arrears on the Repayment Date as set
      forth in Section
      2.6(a)
      applicable to each Interest Period, and at such other times as may be specified
      herein. Interest hereunder shall be due and payable in accordance with the
      terms
      hereof before and after judgment, and before and after the commencement of
      any
      proceeding under any applicable bankruptcy, insolvency or other similar law
      of
      any jurisdiction now or hereafter in effect, including the federal Bankruptcy
      Code, as amended from time to time.

     

    (d) All
      computations of interest and all fees shall be made on the basis of a year
      of
      360 days and the actual number of days elapsed. Interest shall accrue on the
      day
      on which the Loan is made, but shall not accrue on the day on which the Loan
      or
      such portion thereof is paid, provided
      that any
      Loan that is repaid on the same day on which it is made shall bear interest
      for
      one day.

     

    
      
        
        

      

      
        18

        
          

        

      

      
        
        

      

    

     

    Maturity
      Date.
      All
      outstanding principal and interest on the Loans, and all other obligations,
      shall be paid in full by the Maturity Date.

     

    Section
      2.3. Prepayment
      of the Loans.

     

    Voluntary
      Prepayments.
      Borrower may prepay the Note, in whole or in part, without premium or penalty
      at
      any time after the Closing Date; provided that
      Borrower shall provide Lender at least three (3) Business Days’ prior written
      notice thereof, except in connection with Section
      2.4(b).
      

     

    Mandatory
      Prepayment.
      Except
      as expressly provided otherwise herein or in Sections
      2.6
      and
6.5,
      Borrower shall apply one hundred percent (100%) of the net proceeds against
      the
      Note of any disposition of Collateral, and any insurance proceeds or the net
      proceeds from the issuance of any Equity Interests of Borrower on the Business
      Day following Borrower’s receipt of such proceeds, unless such proceeds are used
      with the prior written consent of Lender to promptly acquire replacement assets
      which are contemporaneously subjected to a first priority Lien in favor of
      Lender and otherwise on terms satisfactory to Lender; provided,
      however,
      that
      Borrower may, in its sole discretion, use the proceeds from the issuance of
      any
      Equity Interests of Borrower for any other corporate purpose, in which case,
      only such amount of proceeds remaining from the sale of Equity Interests of
      Borrower after use for such corporate purpose shall be applied against the
      Note.

     

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

     

    Commencement
      of ORRI Payments.
      The
      ORRI will be applicable with respect to all Hydrocarbons produced from or
      attributable to the Properties from and after the Closing Date, consistent
      with
Section
      8.4.

     

    Application
      of Receipts.
      

     

    (a) On
      each
      Repayment Date, commencing on October 1, 2008, Borrower will pay to Lender
      eighty-five percent (85%) of the Adjusted Net Cash Flow to be applied as set
      forth in Section
      2.6(c)(ii);
      provided
      that,
      upon the occurrence and continuation of an Event of Default or a Coverage
      Deficiency which Borrower fails to cure within thirty (30) days after the
      occurrence of such Coverage Deficiency, the percentage of the Adjusted Net
      Cash
      Flow to be applied for Debt Service and other Obligations to Lender shall be
      increased to one hundred percent (100%). All amounts to be paid by Borrower
      pursuant to this Section
      2.6(a)
      shall be
      applied as set forth in Section
      2.6(c)
      and paid
      according to Section
      2.8.
      At least
      fifteen (15) days prior to each Repayment Date, Lender shall provide to Borrower
      a statement of the loan balance as of such Repayment Date and all charges
      incurred by the Lender as of the date of such statement.

     

    
      
        
        

      

      
        19

        
          

        

      

      
        
        

      

    

     

    (b) Adjusted
      Net Cash Flow shall be calculated each month by Lender based on the Property
      Operating Statement. Borrower shall prepare and deliver the Property Operating
      Statement to Lender no later than forty (40) days after each month. Such
      Property Operating Statement shall detail Borrower’s Gross Receipts, Expenses,
      Working Capital and capital expenditures for the month prior to the immediately
      preceding month and for any other such amounts relating to any preceding months
      that were not previously accounted for in a Property Operating Statement. The
      first Property Operating Statement shall be delivered on August 10, 2008;
provided, however,
      that
      this first Property Operating Statement shall cover the period from Closing
      through and including such date.

     

    (c) On
      each
      Repayment Date, Gross Receipts for such Interest Period shall be applied as
      follows:

     

    (i) First,
      to
      the amount necessary to pay the Expenses (including accrued and unpaid interest
      under this Facility).

     

    (ii) Second,
      to
      unpaid
      fees which Borrowers are obligated for under the Loan Documents.

     

    (iii) Third,
      to
      principal on the Loan; provided,
      however,
      the
      amounts of any prepayments pursuant to Section
      2.4(a)
      will be
      applied first
      to
      principal on the Loan and second
      to
      accrued interest on the Loan.

     

    Section
      2.4. Control
      Account.

     

    (a) Until
      all
      of Borrower’s Obligations have been fully satisfied, Borrower shall direct and
      cause all Purchasers of Hydrocarbons, the Operator, all account debtors of
      Borrower, and any other customers of Borrower to deposit all payments of any
      nature whatsoever due and owing by such Persons to Borrower directly into the
      Control Account; provided, however,
      that
      Purchasers of Hydrocarbons may make distributions to royalty interest owners
      and
      third-party working interest owners and may withhold Severance
      Taxes.

     

    (b) Subject
      to the terms of the Deposit Account Control Agreement, amounts deposited in
      the
      Control Account shall be used by Borrower for (i) payment of Expenses which
      have
      been incurred and are due and payable wand which are referenced in the most
      recent Property Operating Statement delivered to Lender; (ii) payment of capital
      expenditures relating to Borrower’s approved Development Plans, and (iii)
      payment of Debt Service and other Obligations to Lender, in accordance with
      the
      Applicable Dedication Rate applied as in Section
      2.6(c)
      above.

     

    (c) In
      the
      event of the occurrence of an Event of Default or Unmatured Event of Default
      which is continuing, all amounts shall remain in the Control Account and no
      amounts may be deposited or otherwise transferred by Borrower without the
      express written consent of Lender.

     

    
      
        
        

      

      
        20

        
          

        

      

      
        
        

      

    

     

    Section
      2.5. Time
      and Place of Payments. 

     

    (a) All
      payments (whether of principal, interest, fees, indemnities or otherwise) to
      be
      made by Borrower to Lender will be made by wire transfer in immediately
      available funds not later than 12:00 p.m. New York, New York time, on each
      Repayment Date, to Lender at:

    

      
        	
                Account:
                  

              	
                22466266

              
	
                Bank:
                  

              	
                Citibank,
                  F.S.B.

              
	 	
                621
                  Main Street

              
	 	
                Ridgefield,
                  CT 06877

              
	
                ABA
                  #:

              	
                221172610

              
	
                Reference:

              	
                New
                  Stream Secured Capital, LP

              

      

    

     

    or
      to any
      other account Lender may designate in writing to Borrower from time to
      time.

     

    (b) If
      any
      payment to be made under this Agreement falls due on a day that is not a
      Business Day, the payment will be payable on the next succeeding Business
      Day.

     

    Use
      of
      Proceeds.
      Initial
      Loan proceeds may be used by Borrower for the purposes described in Section
      2.1(a).
      Development Loan proceeds may be used by Borrower for the purposes of funding
      Borrower’s share of costs and expenses relating to the conduct of Development
      Plans pursuant to Section
      2.1(b),
      and
      approved by Lender in writing. In no event shall funds from the Loans be used
      by
      Borrower, directly or indirectly, for personal, family, household or
      agricultural purposes, or any other purpose not specifically described in this
      Section
      2.8.

     

    ARTICLE
      III

    TAXES,
      YIELD PROTECTION AND ILLEGALITY

     

    Section
      3.1. Taxes.

     

    (a) Any
      and
      all payments by Borrower to or for the account of Lender under any Loan Document
      shall be made free and clear of and without deduction for any and all taxes,
      duties, levies, imposts, deductions, assessments, fees, withholdings or similar
      charges, and all liabilities with respect thereto, but excluding, in the case
      of
      Lender, taxes imposed on or measured by its net income, and franchise taxes
      imposed on it (in lieu of net income taxes), by the jurisdiction (or any
      political subdivision thereof) under the applicable laws of which Lender is
      organized or maintains a lending office (all such non-excluded taxes, duties,
      levies, imposts, deductions, assessments, fees, withholdings or similar charges,
      and liabilities being hereinafter referred to as “Taxes”).
      If
      Borrower shall be required by any applicable laws to deduct any Taxes from
      or in
      respect of any sum payable under any Loan Document to Lender, (i) the sum
      payable shall be increased as necessary so that, after making all required
      deductions (including deductions applicable to additional sums payable under
      this Section), Lender receives an amount of principal and interest it would
      have
      received had no such deductions been made, (ii) Borrower shall make such
      deductions, (iii) Borrower shall pay the full amount deducted to the relevant
      taxation authority or other authority in accordance with applicable laws, and
      (iv) within thirty days after the date of such payment, Borrower shall furnish
      to Lender the original or a certified copy of a receipt evidencing payment
      thereof. To the extent Borrower pays any such Taxes on behalf of Lender to
      a
      taxing authority and any such taxing authority refunds any such Taxes during
      the
      term of this Agreement to Lender, Lender shall return any such amounts to
      Borrower.

     

    
      
        
        

      

      
        21

        
          

        

      

      
        
        

      

    

     

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

     

    ARTICLE
      IV

    REPRESENTATIONS
      AND WARRANTIES

     

    Representations
      and Warranties of Borrower.
      To
      confirm Lender’s understanding concerning Borrower and Borrower’s businesses,
      properties and obligations, and to induce Lender to enter into this Agreement
      and to make the Loans, Borrower represents and warrants to Lender that, as
      applicable on the date such representation and warranty is given:

     

    No
      Default.
      No
      event has occurred and is continuing which would constitute an Event of Default
      or an Unmatured Event of Default.

     

    Organization
      and Good Standing.
      Borrower is a corporation duly organized, validly existing and in good standing
      under the laws of Kentucky, having all powers necessary to carry on its
      businesses and to enter into and consummate the transactions contemplated by
      the
      Loan Documents. Borrower is authorized to do business in all other jurisdictions
      wherein the character of the properties owned or held by them or the nature
      of
      the business transacted by it makes such qualification necessary or desirable,
      except where Borrower’s failure to be so authorized would not reasonably be
      expected to have a Material Adverse Effect. The record holders of the shares
      of
      Borrower consist exclusively of those Persons listed on Schedule
      4.1(b).

     

    Capitalization;
      Compliance with Security Laws.
      Except
      as disclosed on Schedule
      4.1(c),
      Borrower is not subject to any agreement under which there may become
      outstanding, nor are there currently outstanding, any rights to purchase, or
      issue securities convertible into or exchangeable for, any equity interests
      of
      Borrower including, but not limited to, options, warrants or rights. Except
      as
      disclosed on Schedule 4.1(c),
      Borrower is not under obligation (contingent or otherwise) to purchase or
      otherwise acquire or retire any of its equity interests. Except as contemplated
      by this Agreement or as disclosed on Schedule
      4.1(c),
      there
      are no agreements, understandings, plans or arrangements in existence which
      require Borrower to elect any person to its board of directors or
      otherwise pertain
      to the distribution rights, voting, sale or transfer of any equity interests
      of
      Borrower. Except where noncompliance otherwise is specifically permitted in
      this
      Agreement, Borrower has complied with all applicable federal and state corporate
      laws. No Person has any federal or state securities law claims against
      Borrower.

     

    
      
        
        

      

      
        22

        
          

        

      

      
        
        

      

    

     

    Authorization.
      Borrower has taken all actions necessary to authorize the execution and delivery
      of the Loan Documents and to authorize the consummation of the transactions
      contemplated thereby and the performance of its obligations thereunder. Borrower
      is duly authorized to borrow funds hereunder.

     

    No
      Conflicts or Consents.
      Except
      with regard to Borrower’s obligations that will be satisfied prior to or
      contemporaneously with Closing, the execution and delivery by Borrower of the
      Loan Documents, the performance of its obligations under the Loan Documents,
      and
      the consummation of the transactions contemplated by the various Loan Documents
      does not and will not (i) conflict with any provision of (A) any domestic or,
      to
      Borrower’s knowledge, any foreign law, statute, rule or regulation, (B) the
      Charter Documents of Borrower, or (C) any agreement, judgment, license, order
      or
      permit applicable to or binding upon Borrower, except where any such conflict
      would not reasonably be expected to have a Material Adverse Effect,
      (ii) result in the acceleration of any Debt owed by Borrower, or
      (iii) result in or require the creation of any Lien upon any assets or
      properties of Borrower, except as expressly contemplated in the Loan Documents.
      Except as expressly contemplated in the Loan Documents and to Borrower’s
      knowledge, no consent, approval, authorization or order of, and no notice to
      or
      filing with, any Governmental Authority or third party is required in connection
      with the execution, delivery or performance by Borrower of any Loan Document
      or
      to consummate any transactions contemplated by the Loan Documents.

     

    Enforceable
      Obligations.
      This
      Agreement is, and the other Loan Documents when executed and delivered by
      Borrower will be, legal, valid and binding obligations of Borrower enforceable
      in accordance with their terms except as such enforcement may be limited by
      bankruptcy, insolvency or similar laws of general application relating to the
      enforcement of creditors’ rights or by principles of equity applicable to the
      enforcement of creditors’ rights generally. The Mortgage, the UCC-1 Financing
      Statements relating to the Security Documents and the Assignment of Overriding
      Royalty Interest to be filed or recorded in the various jurisdictions are in
      proper form under the laws of such jurisdictions.

     

    Pro
      Forma Financial Statements.
      Attached hereto as Schedule
      4.1(g)
      are,
      with respect to Borrower, Borrower’s unaudited, management-prepared pro forma
      balance sheet as of April 30, 2008 and the pro forma statement of cash flow
      for
      the three month period ending April 30, 2008 (the “Pro
      Forma Financial Statements”)
      and
      the statement of cash flow from the date of Borrower’s formation to October 31,
      2007 (the “Cash
      Flow Statement”).
      The
      Pro Forma Financial Statements and the Cash Flow Statement present fairly the
      pro forma financial condition of Borrower as of the dates thereof and the
      results (pro forma or actual, as the case may be) of operations for the period
      then ended, and are in accordance with the projected or actual (as the case
      may
      be) performance and books and records of Borrower.

     

    Other
      Obligations and Restrictions.
      Except
      as previously disclosed on Schedule
      4.1(h),
      Borrower has no outstanding Debt of any kind (including contingent obligations,
      tax assessments, and forward or long-term commitments), other than Debt under
      the Loan Documents, which is material to Borrower and not disclosed in the
      Pro
      Forma Financial Statements. No Tax Claim or other claim for past due Property
      Taxes or Severance Taxes exists. Borrower is not subject to or restricted by
      any
      franchise, contract, deed, charter restriction or other instrument or
      restriction which could materially and adversely affect Borrower’s financial
      condition, or Borrower’s ability to timely pay the Note and the other
      Obligations and to perform its obligations under the Loan
      Documents.

     

    
      
        
        

      

      
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    Full
      Disclosure.
      No
      certificate, statement or other information delivered herewith or heretofore
      by
      Borrower to Lender in connection with the negotiation of this Agreement or
      in
      connection with any transaction contemplated hereby contains any untrue
      statement of a material fact or omits to state any material fact known to
      Borrower necessary to make the statements contained herein or therein not
      misleading as of the date made or deemed made. No facts are known to Borrower
      that have not been disclosed to Lender in writing which could materially and
      adversely affect Borrower’s financial condition, or Borrower’s ability to timely
      pay or perform their obligations.

     

    Litigation.
      Except
      as disclosed on Schedule
      4.1(j),
      there
      are no actions, suits or legal, equitable, arbitrative or administrative
      proceedings pending, or to the knowledge of Borrower threatened, against
      Borrower before any federal, state, municipal or other court, department,
      commission, body, board, bureau, agency or instrumentality, domestic or foreign,
      and there are no outstanding judgments, injunctions, writs, rulings or orders
      by
      any such governmental entity against Borrower or any of the
      Properties.

     

    ERISA
      Liabilities.
      There
      are no ERISA Plans with respect to which Borrower has any fixed or contingent
      liability, and Borrower is in compliance with ERISA in all material respects,
      if
      applicable.

     

    Names
      and Places of Business.
      Borrower has not during the preceding three (3) years, been known by or used
      any
      other name. The principal office and principal places of business of Borrower
      is
      set forth in Section
      11.3.
      Borrower does not now have and has previously not had any other office or place
      of business. Borrower is not or has not engaged in any business or activity
      other than the acquisition, ownership, operation and development of the
      Properties.

     

    Unpaid
      Bills.
      Except
      as disclosed on Schedule
      4.1(m)
      and
      except as incurred in the ordinary course of business and which are not yet
      due,
      Borrower has no unpaid bills with respect to improvements to any of the
      Collateral which may give rise to mechanic’s, materialman’s or other similar
      liens arising by operation of applicable law should such bills remain
      unpaid.

     

    Title.
      Subject
      to Permitted Encumbrances, (i) Borrower will have all legal and beneficial
      rights, title and interest in and to all production from or allocable to its
      Net
      Revenue Interests in the Properties and has the exclusive right to sell the
      same
      subject to the ORRI and any right in the owners of royalty interest to take
      their royalty interest in kind, and (ii) Borrower will have good and Defensible
      Title to the Properties, the Equipment and to its other properties and assets.
      The Collateral will be owned by Borrower free and clear of any Lien (other
      than
      Permitted Encumbrances). Borrower’s Working Interests are not greater than, and
      Borrower’s Net Revenue Interests are not less than, those stated on Exhibit
      A attached
      hereto.

     

    
      
        
        

      

      
        24

        
          

        

      

      
        
        

      

    

     

    No
      Subsidiaries or Other Owners.
      Except
      as disclosed on Schedule
      4.1(o),
      Borrower does not have any Affiliate or own any equity interest in any other
      Person. Borrower is not a member of any joint venture or association of any
      type
      whatsoever. Borrower is not a party to any transaction of any kind with any
      Affiliate of Borrower other than on fair and reasonable terms substantially
      as
      favorable to Borrower as would be obtainable by Borrower at the time in a
      comparable arm’s length transaction with a Person other than an
      Affiliate.

     

    Omissions
      and Misstatements.
      To
      Borrower’s knowledge after due inquiry, all written data, reports and
      information which Borrower has supplied to Lender or caused to be supplied
      by a
      third party on its behalf in connection with the obtaining of the credit
      facility provided for in this Agreement or in connection with the business
      transactions giving rise to Borrower’s seeking such credit are, taken as a
      whole, complete and accurate in all material respects and contain no material
      omission or misstatement.

     

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

     

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

     

    Equipment.
      Schedule
      4.1(s)
      sets
      forth all of the information described in Section
      6.1
      for all
      Equipment owned by Borrower as of the Closing Date.

     

    Purchasers
      of Hydrocarbons, etc.
      All of
      the Purchasers of Hydrocarbons produced from or allocated to the Properties,
      and
      the most recent address of each such Persons as shown in Borrower’s records, are
      set forth on Schedule
      4.1(t).

     

    Hydrocarbon
      Sales and Related Agreements.
      All
      existing agreements that are binding on Borrower or the Properties and that
      are
      not terminable upon thirty (30) days or less notice for the sale, purchase,
      (including, but not limited to, calls on production and preferential rights
      to
      purchase production) gathering, transportation, handling, processing, treating
      and/or storage of Hydrocarbons are described on Schedule 4.1(u).

     

    
      
        
        

      

      
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    Hedging
      Agreements.
      All
      existing Hedging Agreements to which any Borrower is a party or by which any
      Borrower is bound are described on Schedule
      4.1(v).

     

    Employees.
      Except
      as set forth on Schedule
      Section 4.1(w),
      Borrower is not a party to any existing employment agreements, deferred
      compensation, stock option, bonus, consulting or retirement agreements or plans,
      or other employee benefit plans of any kind, including without limitation any
      pension or welfare benefit plans with any employee of Borrower not terminable
      at-will. Borrower does not maintain nor has Borrower ever maintained an Employee
      Pension Benefit Plan as defined in Section 3(a) of ERISA, or a multi employer
      plan as defined in Section 3(37) of ERISA. No employees of Borrower are
      represented by any labor union or collective bargaining agreement, nor is any
      union organization effort pending or threatened against Borrower.

     

    Operations.
      The
      Operator (i) has obtained all operating rights covering the Properties and
      serves as the Operator therefor and (ii) has obtained all necessary
      qualifications under the laws of Kentucky to serve as Operator.

     

    Ownership
      In Properties.
      Except
      through their respective ownership interests in Borrower, no shareholders of
      Borrower or any Affiliates of shareholders of Borrower own any interests in
      the
      Properties.

     

    Anti-Terrorism
      Laws.
      

    

    (i) Neither
      Borrower nor, to the knowledge of the Borrower, any of its Affiliates, is in
      violation of any laws relating to terrorism or money laundering (“Anti-Terrorism
      Laws”),
      including Executive Order No. 13224 on Terrorist Financing, effective September
      24, 2001 (the “Executive
      Order”),
      and
      the USA PATRIOT Act.

     

    (ii) Neither
      Borrower nor, to the knowledge of the Borrower, any Affiliate, or other agent
      of
      Borrower acting or benefiting in any capacity in connection with the Loans
      is
      any of the following: (i) a person that is listed in the annex to, or is
      otherwise subject to the provisions of, the Executive Order; (ii) a person
      owned
      or controlled by, or acting for or on behalf of, any person that is listed
      in
      the annex to, or is otherwise subject to the provisions of, the Executive Order;
      (iii) a person with which the Lender is prohibited from dealing or otherwise
      engaging in any transaction by any Anti-Terrorism Law; (iv) a person that
      commits, threatens or conspires to commit or supports “terrorism” as defined in
      the Executive Order; or (v) a person that is named as a “specially designated
      national and blocked person” on the most current list published by the U.S.
      Treasury Department Office of Foreign Assets Control (“OFAC”)
      at its
      official website or any replacement website or other replacement official
      publication of such list.

     

    
      
        
        

      

      
        26

        
          

        

      

      
        
        

      

    

     

    (iii) Neither
      Borrower nor, to the knowledge of the Borrower, any agent of any Afffiliate
      acting in any capacity in connection with the Loans (A) conducts any business
      or
      engages in making or receiving any contribution of funds, goods or services
      to
      or for the benefit of any person described in paragraph (ii) above, (B) deals
      in, or otherwise engages in any transaction relating to, any property or
      interests in property blocked pursuant to the Executive Order, or (C) engages
      in
      or conspires to engage in any transaction that evades or avoids, or has the
      purpose of evading or avoiding, or attempts to violate, any of the prohibitions
      set forth in any Anti-Terrorism Law.

     

    ARTICLE
      V

    
      NOTICE
        OF CERTAIN EVENTS

       

    

    So
      long
      as any Obligations are owing to Lender under this Agreement or any other Loan
      Documents (other than indemnity and other obligations which survive
      termination), Borrower shall deliver to Lender or notify Lender of, as the
      case
      may be, the following items:

     

    Notice
      of
      Unmatured Event of Default, Event of Default and Other Matters.
      Borrower shall notify Lender within five (5) Business Days after becoming aware
      of the existence of any Unmatured Event of Default or Event of Default or after
      becoming aware of any developments or other information which may materially
      and
      adversely affect the properties, business, prospects, profits or condition
      (financial or otherwise) of Borrower or its ability to perform its Obligations,
      including, without limitation, the following: any dispute (including tax
      liability disputes) that may arise between Borrower and any Governmental
      Authority; the commencement of any litigation or proceeding affecting Borrower
      (whether by the filing of a complaint, service of process or by attachment
      or
      arrest of any asset); any labor dispute or controversy resulting in or
      threatening to result in a strike or work stoppage against Borrower; any
      proposal by any public authority to acquire any assets or business of Borrower;
      the location of any Collateral other than at the places indicated in or as
      permitted under the Loan Documents; any proposed or actual change of the name,
      identity or structure of Borrower; any material loss or damage to any of
      Borrower’s property, business or operations; any environmental situation,
      circumstance or condition that causes or may cause Section
      4.1(r)
      to be
      false; or any other matter which has resulted or may result in a material
      adverse change in the financial condition, operations or assets of
      Borrower.

     

    Other
      Information.
      Borrower shall provide such other information regarding the financial condition
      of Borrower or any property of Borrower as Lender reasonably may request from
      time to time.

     

    ARTICLE
      VI

    
      SECURITY:
        SPECIAL PROVISIONS RELATING TO EQUIPMENT

       

    

    Security.
      The
      Obligations will be secured by first priority Liens on the Collateral as set
      forth in the various Security Documents concurrently or hereafter delivered,
      including, without limitation, a separate Leasehold Mortgage, Assignment of
      Production, Security Agreement, and Financing Statement, covering the Properties
      (whether one or more, the “Mortgage”),
      the
      Security Agreement and the Pledge Agreement, each in form and substance
      satisfactory to Lender. Lender may in its sole discretion permit the
      counterparty under a Permitted Hedging Agreement to obtain Liens from Borrower
      covering, all or a portion of, the Properties that are pari
      passu
      with
      Lender’s first prior liens; provided,
      however,
      Borrower, Lender and such counterparty shall enter into an Intercreditor
      Agreement. Any time any Borrower obtains any new Property following Closing
      using any Loan proceeds hereunder, Borrower agrees to promptly execute and
      deliver to Lender a Mortgage and any other Security Documents described in
      this
Section
      6.1
      to grant
      Lender a first priority lien in such Property, and further agrees to promptly
      execute and deliver an Assignment of Overriding Royalty Interest as required
      under Section
      8.4.

     

    
      
        
        

      

      
        27

        
          

        

      

      
        
        

      

    

     

    Perfection
      and Protection of Security Interests and Liens.
      Borrower will from time to time deliver to Lender any security agreements,
      financing statements, continuation statements, extension agreements, amendments,
      confirmations and other documents, properly completed and executed (and
      acknowledged when required) in form and substance satisfactory to Lender, which
      Lender reasonably requests for the purpose of perfecting, confirming, protecting
      or establishing the priority of any Liens or other rights in the Collateral
      securing any Obligations. Lender agrees not to submit the Letters in Lieu to
      any
      Purchaser of Hydrocarbons prior to the occurrence of an Event of
      Default.

     

    Release
      of Collateral.
      Upon
      the payment and performance in full by Borrower of all Obligations (other than
      those arising under the Assignment of Overriding Royalty Interest), Lender
      shall
      deliver or cause to be delivered to Borrower, at Borrower’s expense, releases
      and satisfactions of all Mortgages, financing statements, and other
      registrations of security with respect to the Collateral and Borrower shall
      deliver to Lender a general release of all of Lender’s liabilities and
      obligations under the Loan Documents and an acknowledgment that the same have
      been terminated.

     

    Account
      Debtors.
      All
      account debtors (including any Operator, Purchasers of Hydrocarbons, and
      counterparties under Permitted Hedging Agreements) relating to the Working
      Interests and/or Net Revenue Interests in the Properties and relating to
      Permitted Hedging Agreements will receive notification from Lender (as assignee)
      and Borrower, in form and substance as set forth on Exhibit
      H
      attached
      hereto, of the assignment directly into the Control Account of all proceeds
      (the
“Notice
      of Assignment of Proceeds”)
      from
      sales of all production from or allocable to Borrower’s Net Revenue Interests in
      the Properties and all other Gross Receipts directly into the Control Account.
      Borrower shall use commercially reasonable efforts to obtain and deliver, within
      thirty (30) days after the Closing Date, from all Purchasers of Hydrocarbons
      and
      counterparties under Permitted Hedging Agreements, an executed Notice of
      Assignment of Proceeds which will instruct the Purchasers of Hydrocarbons and
      counterparties under Permitted Hedging Agreements to remit all proceeds from
      sales of all production from or allocable to the Net Revenue Interest in the
      Properties and all other Gross Receipts directly into the Control Account.
      Lender may prohibit Borrower from selling any Hydrocarbon production to a
      Purchaser that refuses to execute and deliver to Lender a Notice of Assignment
      of Proceeds. If Borrower receives any Gross Receipts, Borrower shall promptly
      notify Lender and follow Lender’s instructions regarding submitting such
      proceeds to the Control Account, and, until received by Lender, Borrower shall
      hold such proceeds in trust for Lender pursuant to the Obligations due pursuant
      to this Agreement.

     

    
      
        
        

      

      
        28

        
          

        

      

      
        
        

      

    

     

    Location;
      Records.
      Except
      in the ordinary course of business, all Equipment owned by or on behalf of
      Borrower will be kept at its current location, except as permitted by this
      Agreement or by the prior written consent of Lender, and except that, so long
      as
      no Unmatured Event of Default or Event of Default shall have occurred and be
      continuing, Borrower may dispose of Equipment in accordance with the terms
      of
      the applicable Operating Agreements and may dispose of obsolete, broken or
      worn
      Equipment, in either case without Lender’s consent but upon prior written notice
      to Lender if such disposition is not immaterial; provided
      that the
      proceeds of any such disposition shall either (i) be used to purchase
      substantially similar replacement Equipment or (ii) be delivered to Lender
      to be
      applied pursuant to Section
      2.4(b).
      Borrower will at all times hereafter keep correct and accurate records itemizing
      and describing the location, kind, type, age and condition of all Equipment
      currently owned or hereafter acquired by Borrower, Borrower’s cost therefor and
      the accumulated depreciation thereon, all of which records shall be available
      during Borrower’s usual business hours upon demand of any officer, employee,
      agent or representative of Lender.

     

    Maintenance.
      Borrower will keep all of its Equipment in a good state of repair and good
      operating condition, will make all repairs and replacements when and where
      necessary, will not waste or destroy it or any part thereof, and will not be
      negligent in the care or use thereof. Borrower shall repair and maintain all
      of
      its Equipment in a manner sufficient to continue the operation of Borrower’s
      business. Borrower shall use its Equipment in accordance with law and the
      manufacturer’s instructions.

     

    Dispositions.
      Where
      Borrower is permitted to dispose of any Equipment under this Agreement or by
      consent thereto hereafter given by Lender, Borrower shall do so in an arm’s
      length transaction, in good faith and by obtaining the maximum amount of
      recovery practicable therefor and without impairing the operating integrity
      of
      their remaining Equipment or the Properties.

     

    ARTICLE
      VII

    
      COVENANTS
        OF BORROWER

    

     

    Affirmative
      Covenants.
      Borrower warrants, covenants and agrees that until full and final repayment
      and
      performance of the Obligations and the termination of this Agreement (except
      for
      indemnity and other obligations which survive termination), it will comply
      with
      the following covenants, or where such compliance is dependant on the Operator
      of any Properties for which Borrower is not the Operator, it will use
      commercially reasonable efforts to cause the Operator to comply with the
      following covenants:

     

    Payment
      and Performance.
      Borrower will pay all amounts due to Lender under the Loan Documents in
      accordance with the terms thereof and will observe, perform and comply with
      every covenant, term and condition expressed or implied in the Loan
      Documents.

     

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

     

    
      
        
        

      

      
        29

        
          

        

      

      
        
        

      

    

     

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

     

    (i) as
      soon
      as available, and in any event within ninety (90) days after the end of each
      Fiscal Year, complete audited financial statements of Borrower, prepared in
      reasonable detail in accordance with GAAP by a mutually agreeable independent
      accounting firm. These financial statements shall contain a balance sheet as
      of
      the end of such Fiscal Year and statements of earnings, and cash flows for
      such
      Fiscal Year, each setting forth in comparative form the corresponding figures
      for the preceding Fiscal Year.

     

    (ii) as
      soon
      as available, and in any event within sixty (60) days after the end of each
      Fiscal Quarter,
      Borrower’s balance sheet as of the end of such Fiscal Quarter and statements of
      Borrower’s earnings and cash flows for the period from the beginning of the then
      current Fiscal Year to the end of such Fiscal Quarter, all in reasonable detail
      and prepared in accordance with GAAP, subject to changes resulting from normal
      year-end adjustments.

     

    (iii) within
      ninety (90) days after the end of each Fiscal Year, a comfort letter prepared
      by
      a mutually agreeable independent accounting firm confirming that such firm
      has,
      on behalf of Borrower, reviewed the joint interests billings (“JIBs”)
      charged to Borrower by the Operator during the prior Fiscal Year and confirmed
      that the JIBs presented to Borrower by Operator accurately account for the
      amounts owed by and to Borrower under the applicable Operating Agreements during
      that period.

     

    (iv) as
      and
      when furnished, copies of all reports and other information provided by any
      other Person to Borrower in connection with the Loan Documents. Borrower may
      arrange for such reports and information to be provided directly to Lender
      by
      the Person providing the same to Borrower.

     

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

     

    Other
      Information and Inspections.
      Borrower will furnish to Lender any information which Lender may from time
      to
      time reasonably request concerning any covenant, provision or condition of
      the
      Loan Documents or any matter in connection with Borrower’s assets, business
      and/or operations. Borrower will permit representatives appointed by Lender
      (including independent accountants, agents, attorneys, appraisers and any other
      Persons) to visit and inspect, during reasonable business hours and upon two
      (2)
      Business Days written notice, any of Borrower’s property, including its books of
      account, other books and records, and any facilities or other business assets,
      and to make extra copies therefrom and photocopies and photographs thereof,
      and
      to write down and record any information such representatives obtain, and
      Borrower shall permit Lender or its representatives to investigate and verify
      the accuracy of the information furnished to Lender in connection with the
      Loan
      Documents and to discuss all such matters with its officers, employees and
      representatives.

     

    
      
        
        

      

      
        30

        
          

        

      

      
        
        

      

    

     

    Reserve
      Reports.
      On or
      before March 31 of each year (but effective as of the preceding December
      31) and on or before September 30 of each year (but effective as of the
      preceding June 30), Borrower shall cause the preparation and delivery to Lender
      of petroleum engineering reports in a form satisfactory to Lender (collectively,
      the “Reserve
      Reports”
and
      individually, a “Reserve
      Report”).
      Lender shall also have the right to request and receive from Borrower, within
      30
      days of such request, at least one additional Reserve Report during the course
      of each calendar year, which shall update the last Reserve Report previously
      delivered by Borrower with an effective date of no earlier than 90 days prior
      to
      the date of delivery of such additional Reserve Report. Each Reserve Report
      to
      be delivered hereunder shall be prepared by an Engineer. Provided,
      however,
      upon
      sixty (60) days’ prior written notice either Lender or Borrower may indicate
      that it desires to designate a replacement Engineer. Such notice shall designate
      the proposed replacement Engineer, which Engineer must be acceptable to both
      Lender and Borrower. All Reserve Reports required by this paragraph shall be
      prepared at Borrower’s sole expense. Each Reserve Report shall set forth updated
      estimates of Proved Reserves which shall be further categorized as Proved
      Developed Producing Reserves, Proved Developed Non-Producing Reserves, Proved
      Undeveloped Reserves, and shall also set forth projected production profiles
      and
      overall economics of the Properties. Each Reserve Report will be based on the
      following assumptions:

     

    (vi) reserves
      shall be adjusted for cumulative production since the effective date of the
      most
      recent Reserve Report;

     

    (vii) for
      all
      natural gas and crude oil to be sold by Borrower other than natural gas and
      crude oil described in Section
      7.1(e)(iii)
      below,
      the purchase price for each calendar year will be determined by Lender in its
      sole discretion, based on eighty-five percent (85%) of the New York Mercantile
      Exchange pricing for years one through three with eighty-five percent (85%)
      of
      the third year New York Mercantile Exchange price being held flat for years
      four
      and beyond (as adjusted for appropriate quality, transportation and location
      differentials approved by Lender); 

     

    (viii) for
      all
      natural gas and crude oil to be sold by Borrower on a fixed price basis pursuant
      to any bona fide contract or with respect to which the price has been hedged
      pursuant to any New York Mercantile Exchange contract or bona fide price swap
      agreement or arrangement, the purchase price will be the fixed price (as
      adjusted for appropriate quality, transportation and location differentials
      approved by Lender) for the volumes indicated in the contract, agreement or
      arrangement;

     

    (ix) reserves
      will be adjusted to reflect revisions to volume estimates of reserves since
      the
      effective date of the last Reserve Report;

     

    
      
        
        

      

      
        31

        
          

        

      

      
        
        

      

    

     

    (x) projected
      operating expenses and capital expenditures will be adjusted to reflect (A)
      actual expense levels incurred since the effective date of the last Reserve
      Report and (B) projected increases or decreases in anticipated operating
      expenses and capital expenditure levels;

     

    (xi) each
      Reserve Report shall be accompanied with any updates to the then existing
      Development Plan; and

     

    (xii) average
      lease
      operating expenses and production taxes will be derived by the Engineer(s)
      who
      prepare such report from the Operator’s best estimate and historical operating
      expenses, subject to Lender’s approval.

     

    Notice
      of Investigations or Proceedings.
      Borrower shall give Lender immediate written notice of any proceeding at law
      or
      in equity against Borrower, or any investigation or proceeding before or by
      any
      Governmental Authority, after Borrower becomes aware of any such proceeding
      or
      investigation.

     

    Notice
      of Damage to Collateral.
      Borrower shall give Lender prompt written notice of any destruction or
      substantial damage to any of the Collateral and of the occurrence of any
      condition or event which has caused, or may cause, material loss or depreciation
      in the value of any Collateral.

     

    Maintenance
      of Licenses.
      Borrower shall maintain all licenses, permits, charters and registrations which
      are required for the conduct of its businesses, except where Borrower’s failure
      to maintain any such licenses, permits, charters or registrations would not
      reasonably be expected to have a Material Adverse Effect.

     

    Maintenance
      of Rights.
      Borrower will maintain, preserve, protect and keep all of its contractual and
      property rights, other than in connection with the Loan Documents and will
      not
      waive, amend or release any such rights without the prior written consent of
      Lender, except where any such waiver, amendment or release would not reasonably
      be expected to have a Material Adverse Effect.

     

    Maintenance
      of Existence and Qualifications.
      Borrower will maintain and preserve its corporate existence, as applicable,
      and
      their rights and franchises in full force and effect and will qualify and/or
      remain qualified to do business as a foreign corporation in all states or
      jurisdictions where required by applicable law.

     

    Payment
      of Trade Debt.
      Borrower will (i) timely pay all taxes, assessments and other governmental
      charges or levies imposed upon it or upon its income, profits or property;
      (ii)
      within 30 days after the same becomes due pay all Debt (other than the
      Obligations) owed by them; and (iii) maintain appropriate accruals and reserves
      for all of the foregoing Debt in accordance with GAAP.

     

    Creditors.
      Promptly upon Lender’s request, Borrower shall provide Lender with a statement
      showing the identity of Borrower’s creditors, the amount due to each and the
      date each payment is due thereunder. Borrower shall notify Lender immediately
      if
      any Borrower fails to make any payment to lessors, suppliers, vendors, owners
      of
      royalty interest, tax authorities or other Persons, where such nonpayment could
      result in any Lien against any item of Collateral or otherwise interfere with
      or
      jeopardize performance by any Borrower of its obligations under the Loan
      Documents.

     

    
      
        
        

      

      
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    Interest.
      Borrower hereby promise to pay interest to Lender on all Obligations (including
      Obligations to pay fees or to reimburse or indemnify Lender) at the Applicable
      Interest Rate with respect to the principal amount of the Loans as set forth
      in
Section
      2.2 and
      otherwise as stated in Section
      7.1(ee)
      after
      such Obligations become due. Borrower further agrees that any interest, which
      has accrued and is not paid when due, shall be added to and become part of
      the
      principal under the Note.

     

    Compliance
      with Regulations, Orders and Law.
      Borrower will conduct its business and affairs in compliance with all laws,
      regulations and orders applicable thereto, including without limitation,
      Environmental Laws and the regulations of any state or federal agency which
      has
      jurisdiction over the exploration and production activities to be conducted
      on
      any Property.

     

    Insurance.
      Borrower shall keep or cause to be kept all of the Collateral that are fixtures
      or personal property insured for their replacement value (or such coverage
      as is
      commercially reasonable and customary within the oil and gas industry) by
      insurance companies licensed to do business in the states in which the
      Properties are located against loss or damage by fire or other risk usually
      insured against by owners or users of similar properties in similar businesses
      under extended coverage endorsement and against theft, burglary and pilferage,
      together with other insurance covering such other hazards as Lender may from
      time to time reasonably request, in amounts in accordance with industry
      standards and from companies satisfactory to Lender. Borrower shall deliver
      the
      policy or policies of such insurance or certificates of insurance to Lender
      and
      such policies and all proceeds thereof shall be security for all Obligations.
      All such insurance shall contain endorsements in form reasonably satisfactory
      to
      Lender showing Lender as a loss payee and additional party insured as its
      interest may appear; provided
      that
      Lender shall not be named as an additional insured on the policies described
      in
      this Section
      7.1(o)
      to the
      extent such policies apply to vehicles. Each policy shall provide that such
      policy may not be canceled or materially changed except upon thirty (30) days’
prior written notice of intention of non-renewal, cancellation or material
      change to Lender and that no act or thing done by Borrower shall invalidate
      any
      policy as against Lender. The following types of insurance covering the
      Collateral and the interest and liabilities incident to the ownership,
      possession and operation thereof shall be secured by Borrower:

     

    (xiii) Worker’s
      compensation insurance and employer’s liability insurance covering the employees
      of Borrower engaged in operations contemplated hereunder in compliance with
      all
      applicable state and federal law and endorsed to provide all states coverage
      and
      occupational disease coverage, as follows:

     

    
      	
              Workers
                Compensation

            	 	
              Statutory
                Employers Liability

              $500,000
                Each Accident

              $500,000
                Disease Each Employee

            

    

     

    
      
        
        

      

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

     

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

     

    (xvi) Excess
      umbrella liability insurance with a combined single limit of not less than
      Nine
      Million Dollars ($9,000,000) per occurrence and policy aggregate;

     

    (xvii) Property
      insurance on a replacement value basis fully covering the personal property
      and
      fixtures subject to this Agreement; and

     

    (xviii) Pollution
      liability insurance with a combined single limit of not less than Five Hundred
      Thousand Dollars ($500,000).

     

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

     

    Prudent
      Operations.
      Borrower shall prudently develop, and cause the Properties to be continuously
      operated and maintained to produce the output from or allocable to such Property
      over the productive life thereof in a good and workmanlike manner consistent
      with prudent operator practices.

     

    Maintenance
      of Leases.
      Borrower shall use commercially reasonable efforts as a prudent operator to
      keep
      and perform all of the terms, conditions and covenants of the Leases
      constituting Properties which are to be kept and performed by the lessee for
      the
      benefit of the Lender and the holder of the ORRI.

     

    Weekly
      Production Reports.
      Borrower shall provide Lender with weekly reports on active field operations,
      by
      telecopy or e-mail, setting forth, among other things, the quantities, types
      and
      specifications of Hydrocarbons produced from or allocable to each of the
      Properties, in form and substance reasonably satisfactory to Lender and a report
      detailing all costs and expenses associated with the activities specified in
      the
      reports delivered pursuant to this Section
      7.1(s)
      for the
      preceding week. Active field operations including, but are not limited to:
      location work, drilling, completions, Well workovers, installation, modification
      or repair of surface facilities and flowlines, and pipeline hookups. For
      purposes of this Section
      7.1(s),
      active
      field operations do not include routine maintenance and repairs.

     

    
      
        
        

      

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

     

    Operating
      Reports.
      Within
      thirty (30) days of the Closing, and on a calendar quarterly basis thereafter,
      Borrower shall provide Lender with a rolling revenue, lease operating expense
      and capital expenditure forecast by month covering Borrower’s interest in the
      Properties for the succeeding 12 month period (“Operating
      Report”).
      Such
      Operating Reports shall include a brief discussion by Borrower of operating
      and
      financial variances from the prior Operating Report delivered to
      Lender.

     

    AFEs.
      Borrower shall provide Lender with all AFEs, representing an estimate of work
      to
      be done, each of which shall be supported by appropriate invoices, bids,
      estimates, contracts or other support, prior to commencing the activity
      contemplated by such AFE.

     

    Hydrocarbon
      Production Hedging Agreements.
      Borrower will from time to time, upon thirty (30) days’ notice by Lender, enter
      into one or more Hydrocarbon price swaps pursuant to a Permitted Hedging
      Agreement in form and substance reasonably satisfactory to Lender, such that
      (i)
      individually, (A) up to but not more than ninety-five percent (95%) of the
      volume of Borrower’s Net Revenue Interest share of the Proved Developed
      Producing Reserves, (B) up to but not more than seventy-five percent (75%)
      of
      the volume of Borrower’s Net Revenue Interest share of the Proved Developed
      Non-Producing Reserves, and (C) up to but not more than sixty-five percent
      (65%)
      of the volume of Borrower’s Net Revenue Interest share of the Proved Undeveloped
      Reserves, and (ii) collectively, at least seventy-five percent (75%) of
      Borrower’s Net Revenue Interest share of projected Proved Reserves scheduled to
      be produced during the term of this Agreement, but not beyond the Maturity
      Date
      (based upon the most recent Reserve Report) are dedicated to the Permitted
      Hedging Agreements or such other price risk management program as approved
      by
      Lender; provided, however,
      if
      projected Net Revenue is insufficient to fully amortize the Loans by their
      stated maturity, Lender may require that Borrower enter into one or more such
      swaps for a term or terms that extend beyond the Maturity Date. Borrower and
      Lender shall endeavor to agree upon a swap strategy that will most accurately
      reflect the make-up and pricing of the Hydrocarbons produced and sold by
      Borrower, but if the parties are unable to agree on the swap strategy, Borrower
      shall not be released from their obligation to implement the Permitted Hedging
      Agreement(s) required by this Section
      7.1(w).

     

    
      
        
        

      

      
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    Post-Closing
      Title Data.
      Borrower will deliver to Lender, within sixty (60) days following the Closing
      Date, Title Data covering Leases comprising eighty-five percent (85%) of the
      present value discounted at ten percent (10%) of Borrower’s Proved Developed
      Producing Reserves in the Properties as of Closing showing Defensible Title
      to
      the Properties in Borrower subject only to: (i) a first priority lien created
      by
      the Mortgage in favor of Lender, and (ii) the Permitted Encumbrances, and
      otherwise satisfactory in form and substance to Lender.

     

    Legal
      Fees; etc.
      Borrower will pay, on or before the Closing Date and subject to the submission
      to Borrower of related invoices, all third-party and out-of-pocket costs, fees
      and expenses incurred by Lender in connection with this Agreement, including,
      without limitation, all title, due diligence, environmental, engineering,
      technical, travel, legal and related expenses incurred by Lender in connection
      with this Agreement and the Loan Documents and the transactions contemplated
      thereunder (to be financed by Lender as a portion of the Initial Loan) and,
      thereafter, reimburse Lender for all such expenses incurred in connection
      therewith, including, without limitation, any subsequent amendment, mortgage,
      extension, release or renewal of any Loan Document or the legal expenses
      attributable to the enforcement of the same or continuing or additional due
      diligence.

     

    Environmental
      Compliance.
      Borrower shall deliver the Environmental Report to Lender within thirty (30)
      days after the date upon which seven (7) wells have been drilled on the
      Properties. Within sixty (60) days of delivery of the Environmental Report,
      Borrower shall (i) remedy all matters set forth in the Environmental Report
      and
      any environmental compliance issues listed on Schedule
      4.1(r)
      so as to
      be in compliance with all applicable Environmental Laws and (ii) provide all
      relevant information to Lender in relation thereto.

     

    Facility
      Fee.
      The
      Facility Fee in relation to the Initial Loan shall be earned and payable by
      Borrower to Lender out of the Initial Loan advances evidenced by the Note.
      A
      Loan in the amount of the Facility Fee will be deemed to have been advanced
      by
      Lender to Borrower on the Closing Date, with such Facility Fee having been
      deemed contemporaneously paid by Borrower to Lender.

     

    Development
      Plans.
      Borrower shall submit a Request for Commitment to Lender for each proposed
      Development Plan for which Borrower seeks funding hereunder. With respect to
      all
      Development Plans that are approved by Lender as set forth in Section
      2.1(b),
      Borrower shall conduct all such Development Plans in accordance with and within
      the cost and time parameters specified in the Request for Commitment specific
      to
      those Development Plans; provided
      that
      Lender is not obligated to commit funds for Development Plans except as
      specifically described in Section
      2.1(b)
      for any
      specific Development Plans, including any associated cost overruns; and
provided further
      that if
      Borrower is unable to conduct all such Development Plans within the amounts
      funded as the Development Loans described in the specified Request for
      Commitment, Borrower shall use its own capital to conduct and complete all
      such
      Development Plans. Borrower’s intent, willingness and ability to conduct each of
      the Development Plans and the actual implementation of such Development Plans
      is
      a material inducement to Lender’s entry into this Agreement, in the absence of
      which Lender would not have done so. Time is of the essence in the proposal
      and
      conduct by Borrower of each of the Development Plans approved by
      Lender.

     

    
      
        
        

      

      
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    Protection
      Against Drainage.
      Until
      the Obligations have been fully and finally paid and performed, (i) to the
      extent that Properties are operated by Borrower, Borrower shall act as a prudent
      operator in an effort to identify and prevent the occurrence of any drainage
      of
      Hydrocarbons from the Properties and (ii) to the extent that Properties are
      not
      operated by Borrower, Borrower shall utilize its property and contractual rights
      as a prudent owner in an effort to identify and prevent the occurrence of any
      drainage of Hydrocarbons from the Properties.

     

    Expenditures
      Related to Initial Loan.
      On or
      before thirty (30) days following the Closing Date, Borrower will deliver to
      Lender a report which provides an itemized and detailed description of the
      expenditures paid with the Initial Loan proceeds, together with all relevant
      documentation evidencing such expenditures.

     

    Interest
      on Lender’s Third Party Costs, Expenses and Fees.
      All
      third-party costs, fees and expenses incurred by Lender for which Borrower
      is
      obligated to pay or reimburse Lender pursuant to the provisions of this
      Agreement which are not paid on or before the Closing Date in accordance with
      Section
      7.1(y)
      shall be
      payable within fifteen (15) days after Borrower’s receipt of an invoice therefor
      from either Lender or its third-party consultants or vendors and Borrower shall
      pay interest at the Default Rate from the date payable until paid on all such
      amounts.

     

    (b) Use
      of
      Proceeds; Development of Properties.
      Borrower shall use all amounts advanced under the Facility solely for the
      purposes described in this Agreement and in a manner consistent with the
      Development Plan and other supporting documentation provided to Lender in
      connection with each Request for Commitment. Borrower shall diligently develop
      the Properties in accordance with each applicable Development Plan.

     

    Venue
      for Debtor Relief Proceedings.
      In the
      event Borrower voluntarily commences any proceeding under any Debtor Relief
      Law,
      such Borrower shall initiate and maintain the proceeding in a court within
      the
      Southern District of New York.

     

    Appointment
      of Chief Financial Officer.
      Borrower shall identify and employ a replacement Chief Financial Officer
      reasonably acceptable to Lender within ninety (90) days of the Closing
      Date.

     

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

     

    Negative
      Covenants.
      Borrower warrants, covenants and agrees that until the full and final repayment
      and performance of the Obligations and the termination of each of the Loan
      Documents (other than indemnity and similar obligations which survive
      termination and other than the Assignment of Overriding Royalty
      Interest):

     

    Limitation
      on Sales of Collateral.
      Borrower will not sell, transfer, lease, exchange, alienate or otherwise dispose
      of any Collateral or any interest therein except for: (i) sales of Hydrocarbon
      production in the ordinary course of business, (ii) dispositions expressly
      permitted by other provisions of this Agreement, and (iii) dispositions to
      which Lender has granted its express written consent.

     

    
      
        
        

      

      
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    Limitation
      on Distributions.
      Without
      Lender’s prior written approval, Borrower shall not, either directly or
      indirectly, make any distribution, pay any compensation, or make any advances
      to
      any of its shareholders; provided
      that
      nothing in this subpart (b) shall prevent or prohibit Borrower from (i) making
      payments permitted by Section
      7.2(e)
      to
      officers, directors and employees who are also shareholders, (ii) distributing
      to its shareholders fifteen percent (15%) of the Adjusted Net Cash Flow subject
      to Section
      2.6
      if no
      Unmatured Event of Default or Event of Default then exists or would result
      from
      such distribution, or (iii) to the extent no Event of Default has occurred
      and is continuing, distributions for the payment of Corporate Income
      Taxes.

     

    Limitation
      on Credit Extensions.
      Without
      Lender’s prior written approval, Borrower will not extend credit, make advances
      or make loans to any Person, whether or not as Affiliate of
      Borrower.

     

    Certain
      Contracts; Amendments; ERISA Plans.
      Without
      Lender’s prior written approval, Borrower will not amend or permit any amendment
      to any contract or lease which releases, qualifies, limits, makes contingent
      or
      otherwise detrimentally affects the rights and benefits of Lender under or
      acquired pursuant to any Loan Documents. Borrower will not incur any fixed
      or
      contingent obligation to contribute to any ERISA Plan.

     

    Compensation.
      Borrower shall not, directly or indirectly, enter into any employment agreement
      or other arrangement with or for the benefit of an officer, director or employee
      of Borrower other than reasonable compensation for services as an officer,
      director, employee or third-party provider of services. Notwithstanding the
      foregoing, any such expenses or compensation permitted under this Section
      7.2(e),
      shall
      be payable only out of Adjusted Net Cash Flow distributed to Borrower after
      application of receipts pursuant to Section
      2.6.

     

    Debt.
      Except
      for Debt arising in connection with Permitted Encumbrances or as otherwise
      expressly provided in this Section
      7.2(f),
      Borrower shall not (i) create, incur, assume or suffer to exist any Debt, except
      Obligations to Lender hereunder and trade payables incurred in the ordinary
      course of Borrower’s business, or (ii) sell, discount or factor their accounts,
      instruments, intangibles, leases or chattel paper; provided, however,
      Borrower may incur Debt not to exceed Fifty Thousand Dollars ($50,000) per
      transaction and an aggregate amount not to exceed One Hundred Fifty Thousand
      Dollars ($150,000) at any time outstanding with regard to direct costs and
      expenses incurred in the operation of the Properties.

     

    Guarantees.
      Except
      as expressly provided herein,
      Borrower shall not assume, Guarantee, or endorse or otherwise become directly
      or
      contingently liable in connection with any other liability of any other Person
      except for the indemnification contained herein.

     

    
      
        
        

      

      
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    Acquisition.
      Borrower shall not acquire or commit or agree to acquire any of the stock,
      securities or assets of any other Person other than as disclosed in writing
      to,
      and approved by, Lender in connection with Borrower’s acquisition of any of the
      Properties, which approval shall not be unreasonably withheld.

     

    Cancellation
      of Claims.
      Borrower shall not cancel any claim or Debt in excess of a total of Fifteen
      Thousand Dollars ($15,000) in the aggregate during the term of this Agreement,
      except for reasonable consideration and in the ordinary course of their
      businesses.

     

    Defaults.
      Except
      as previously disclosed to Lender, Borrower shall not cause a default under
      any
      lease, mortgage, Mortgage or lien on real estate owned or leased by Borrower
      including an Unmatured Event of Default or an Event of Default.

     

    Security
      Interests and Liens.
      Borrower shall not suffer to exist any valid lien, encumbrance, mortgage or
      security interest or consent to the filing of any financing statements on any
      of
      the Collateral other than the Liens created by the Loan Documents granted
      herein, Permitted Encumbrances and Liens set forth on Schedule
      7.2(k).

     

    Creation
      of Subsidiary.
      Borrower shall not (i) create any direct or indirect subsidiary or divest
      themselves of any material assets by transferring them to any future subsidiary
      or by entering into a partnership, joint venture or similar arrangement,
      (ii) make any material change in its capital structures, or (iii) enter
      into any management contract permitting a third party any management rights
      with
      respect to Borrower’s business.

     

    Certain
      Changes.
      Borrower shall not transfer their principal office or their registered offices
      from their current locations or change their name or keep Collateral at any
      location(s) other than those at which the same are presently kept or without
      written consent of Lender. Borrower shall not change its Fiscal
      Year.

     

    Loan
      Documents.
      Borrower shall not alter, amend or cause the alteration or amendment of any
      of
      the Loan Documents without the prior written consent of Lender.

     

    Amendments
      to Formation Documents.
      Without
      Lender’s prior written approval, Borrower shall not adopt any amendment,
      modification or waiver of any provision of its Certificates of Incorporation
      or
      Bylaws.

     

    Investments.
      Without
      Lender’s prior written consent, Borrower will not make, or suffer to exist, any
      Investment except Investments in certificates of deposit or other obligations
      of
      a bank or trust company having capital, surplus and undivided profits of at
      least One Hundred Million Dollars ($100,000,000), or obligations of the United
      States government or any agency thereof.

     

    Change
      of Operator.
      Borrower shall not take any action to remove any Operator of any of the
      Properties and shall not take any action to appoint, remove or replace any
      other
      Operator without Lender’s prior written consent.

     

    
      
        
        

      

      
        39

        
          

        

      

      
        
        

      

    

     

    Affiliate
      Transactions.
      Borrower shall not enter into one or more transactions with any Affiliate of
      any
      Borrower, except with Lender’s prior written approval and then only to the
      extent the terms of any such transaction are fair and reasonable (at least
      as
      favorable as would be obtainable by such Borrower at the time in a comparable
      arm’s length transaction with a Person other than an Affiliate).

     

    Collateral
      Ratios.
      Borrower shall not permit at any time (i) the Current Ratio to be less than
      1.0 to 1.0 and (ii) the Collateral Coverage Ratio
      to be
      less than 1.2 to 1.0; provided
      that the
      Collateral Coverage Ratio can be recalculated at any time prior to the Maturity
      Date, with a minimum frequency of every six (6) months and a maximum frequency
      of every three (3) months using the most recent Reserve Report delivered
      hereunder.

     

    ARTICLE
      VIII

    
      FURTHER
        RIGHTS OF LENDER

    

     

    Maintenance
      of Security Interests.
      Borrower authorizes Lender to execute alone any financing statement or other
      documents or instruments that Lender may require under Section
      6.2
      to
      perfect, protect or establish any Lien hereunder or under any Security Documents
      and further authorizes Lender to sign Borrower’s name on the same. Borrower
      hereby authorize Lender, during the continuance of any Event of Default, to
      appoint such Person or Persons as Lender may designate as its agent and
      attorney-in-fact to endorse the name of Borrower on any checks, notes, drafts
      or
      other forms of payment or security that may come into the possession of either
      Lender or any Affiliate of Lender, to sign Borrower’s name on invoices or bills
      of lading, drafts against customers, notices of assignment, verifications and
      schedules and, generally, to do all things necessary to carry out this Agreement
      and the Security Documents. The powers granted herein, being coupled with an
      interest, are irrevocable. Neither Lender nor the agent and attorney-in-fact
      shall be liable for any act or omission, error in judgment or mistake of law
      so
      long as the same is not malicious or grossly negligent. Upon payment and
      performance of all Obligations of Borrower to Lender, such power of attorney
      will become null and void.

     

    Performance
      of Obligations.
      In the
      event that Borrower fails to purchase or maintain insurance in accordance with
      the requirements of this Agreement, or to pay any tax, assessment, government
      charge or levy, except as the same may be otherwise permitted hereunder, or
      in
      the event that any Lien prohibited hereby shall not be paid in full or
      discharged, or in the event that Borrower shall fail to perform or comply with
      any other covenant, promise or Obligation to Lender hereunder or under any
      Loan
      Document, Lender may, but shall not be required to, perform, pay, satisfy,
      discharge or bond the same for the account of Borrower, and all monies so paid
      by Lender, including, without limitation, reasonable attorneys’ fees and
      disbursements, shall be treated as an additional Obligation of Borrower to
      Lender hereunder and under the Loan Documents.

     

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

     

    
      
        
        

      

      
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    Overriding
      Royalty Interest.
      At
      Closing, Borrower shall assign to Lender an ORRI equal to six percent (6%)
      of
      8/8ths proportionately reduced to the Working Interest of Assignor; provided,
      however,
      that if
      Borrower submits a Request for Commitment for a Development Loan pursuant to
      Section
      2.1(b)
      and
      Lender declines to provide such Development Loan, Lender only shall earn a
      six
      percent (6%) ORRI in all of the Wells drilled or in the process of being drilled
      on the Properties as of the date of Lender’s decision to decline to provide such
      Development Loan. In the event Lender declines to provide any such Development
      Loan, Lender shall reconvey to Borrower any portion of the ORRI which should
      revert to Borrower as set forth in this Section
      8.4
      and in
      connection with such declination.

     

    Set-Off
      Rights.
      Upon
      the occurrence and during the continuance of an Event of Default, Lender shall
      have the right to set-off and apply against the Obligations in such manner
      as
      Lender may determine, any and all deposits (general or special, time or demand,
      provisional or final) or other sums at any time credited by or owing from Lender
      or any depositary to Borrower whether or not the Obligations are then due,
      except for any amounts owing to third-party Working Interest and royalty
      interest holders of which Lender shall have been notified. Lender shall provide
      reasonable notice to Borrower following any application of such funds. As
      further security for the Obligations, Borrower hereby grants to Lender a
      security interest in all money, instruments, and other property of Borrower
      now
      or hereafter held by Lender, including, without limitation, property held in
      safekeeping. In addition to Lender’s right of set-off and as further security
      for the Obligations, Borrower hereby grants to Lender a security interest and
      lien in all deposits (general or special, time or demand, provisional or final)
      and other accounts of Borrower now or hereafter on deposit with or held by
      Lender or any depositary and all other sums at any time credited by or owing
      from Lender or any depositary to Borrower. The rights and remedies of Lender
      hereunder are in addition to other rights and remedies (including, without
      limitation, other rights of set-off) which Lender may have.

     

    ARTICLE
      IX

    
      CLOSING;
        CONDITIONS TO CLOSING

    

     

    Closing.
      Subject
      to the conditions set forth in this Agreement, the closing shall occur at a
      mutually agreeable time on or before June 30, 2008 (the “Closing”).
      The
      date the Closing actually occurs is hereby called the “Closing
      Date.”
The
      Closing shall be held at the offices of Lender’s counsel in Houston, Texas, or
      at such other place as Borrower and Lender may agree in writing.

     

    Conditions
      to Closing.
      As
      conditions precedent to the making of the Initial Loan hereunder and to the
      making of any other Loans, Lender shall have obtained approval of its management
      and Borrower shall deliver to Lender the following items duly executed (where
      required) and in form and substance satisfactory to Lender and its
      counsel:

     

    
      
        
        

      

      
        41

        
          

        

      

      
        
        

      

    

     

    (a) the
      Note
      and multiple counterparts of this Agreement and satisfactory evidence in
      Lender’s sole discretion that Borrower owns all the
      interests in the Properties;

     

    (b) the
      Assignment of Overriding Royalty Conveyance, the Mortgage, the Security
      Agreement, the Pledge Agreement and the other Loan Documents and in as many
      counterparts as Lender may require;

     

    (c) the
      Subordination Agreements duly executed by __________________;

     

    (d) a
      certificate of the secretary or assistant secretary of Borrower dated the
      Closing Date, certifying the incumbency of their officers executing this
      Agreement and any other documents required hereby and certifying resolutions
      adopted by the board of directors of Borrower authorizing Borrower’s execution
      and delivery of this Agreement, the Note, the Mortgage, the other Loan Documents
      and all other documents and instruments contemplated by this
      Agreement;

     

    (e) a
      certificate of the president or a vice president of Borrower dated the Closing
      Date, certifying (i) the truth and accuracy of the representations and
      warranties of Borrower set forth in this Agreement, (ii) Borrower’s performance
      and compliance with all agreements and covenants required by this Agreement
      to
      be performed or complied with prior to the making of the Loans, (iii) the
      absence of any material litigation regarding Borrower, the Properties or
      Borrower’s material contracts relating to the Properties, and (iv) that no
      material adverse change has occurred with respect to the financial condition,
      results or business of Borrower;

     

    (f) Articles
      of Incorporation of Borrower certified by the Secretary of State of the state
      of
      its formation and its Bylaws certified by the secretary or an assistant
      secretary of Borrower;

     

    (g) certificates,
      as of the most recent date practicable, of the Secretary of State of Kentucky
      attesting to Borrower’s existence, and of each state in which Borrower is
      qualified to do business as a corporation attesting to such
      qualification;

     

    (h) the
      written opinion(s) of Borrower’s counsel dated the Closing Date and addressed to
      Lender;

     

    (i) evidence
      that Borrower has obtained insurance in accordance with Sections
      7.1(o)
      and
(p),
      including an independent insurance report;

     

    (j) title
      materials satisfactory to Lender establishing that Borrower has acquired and/or
      owns Defensible Title to the Properties, subject only to Permitted
      Encumbrances;

     

    (k) the
      Pro
      Forma Financial Statements and Cash Flow Statement of Borrower as of the Closing
      Date;

     

    
      
        
        

      

      
        42

        
          

        

      

      
        
        

      

    

     

    (l) the
      results of a Uniform Commercial Code search showing all financing statements
      and
      other documents or instruments on file against Borrower from the Offices of
      the
      Secretary of State of the State in which Borrower is formed;

     

    (m) evidence
      satisfactory to Lender that it is obtaining first priority security interests
      and liens on the Collateral;

     

    (n) any
      and
      all fees required under this Agreement are paid in full;

     

    (o) the
      initial Reserve Report;

     

    (p) a
      Guaranty Agreement from each Guarantor, guarantying the performance of all
      Obligations of Borrower under this Agreement, substantially in form and
      substance as set forth on Exhibit
      I
      attached
      hereto (the “Guaranty
      Agreement”);

     

    (q) an
      Environmental Indemnity Agreement, pursuant to which Borrower and Parent agree
      to indemnify Lender for various environmental issues with respect to the
      Properties, substantially in form and substance as set forth on Exhibit
      J
      attached
      hereto (the “Environmental
      Indemnity Agreement”);

     

    (r) evidence
      of the resignation or removal of Sam Winer from his position as Chief Financial
      Officer and Director of Parent and Borrower; and

     

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

     

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

     

    (t) There
      is
      no Event of Default, Unmatured Event of Default or Tax Claim;

     

    (u) All
      of
      Borrower’s representations and warranties made in any Loan Document shall be
      true and correct as if made on the date of such Loan (except to the extent
      that
      the facts upon which such representation are based have been changed by the
      extension of credit hereunder);

     

    (v) Borrower
      shall have performed and complied with all agreements and conditions in the
      Loan
      Documents which are required to be performed or complied with by them on or
      prior to the date of such Loans;

     

    (w) No
      law,
      regulation, order, judgment or decree of any governmental authority is in effect
      or pending which shall enjoin, prohibit or restrain such Loan or impose, or
      result in the imposition of, any adverse condition upon Lender;

     

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

     

    
      
        
        

      

      
        43

        
          

        

      

      
        
        

      

    

     

    (y) Lender
      shall have received satisfactory due diligence analysis including, but not
      limited to, financial and operational data, title and environmental review,
      all
      such data to be provided by Borrower;

     

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

     

    (aa) No
      material litigation shall have been initiated regarding Borrower, the Properties
      or any of Borrower’s material contracts related to the Properties; and No
      material adverse change in the financial condition, results or business of
      Borrower shall have occurred;

     

    (bb) Borrower
      shall have delivered the Environmental Report in compliance with Section
      7.1(z);
      and

     

    (cc) Borrower
      shall, in connection with any Permitted Hedging Agreement, deliver to Lender
      an
      Intercreditor Agreement executed by the counterparty to such Permitted Hedging
      Agreement.

     

    ARTICLE
      X

    
      EVENTS
        OF DEFAULT AND REMEDIES

    

     

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

     

    (a) Borrower
      fails to pay any Obligation for principal or interest owing under the Note
      when
      the same is due and payable, whether at a date for the payment of an installment
      or as a contingent or other payment becomes due and payable or as a result
      of
      acceleration or otherwise;

     

    (b) Projected
      Adjusted Net Cash Flow attributable to Proved Reserves, based on any of the
      Reserve Reports to be delivered to Lender after the Closing Date (after being
      adjusted to incorporate Lender’s then-current assumptions with respect to
      pricing, Expenses, discount rates and hedges under Permitted Hedging Agreements)
      is insufficient to fully amortize the Loans by their stated
      maturity;

     

    (c) Any
      Loan
      Document at any time ceases to be valid, binding and enforceable against
      Borrower for any reason other than its release or subordination made with the
      consent of Lender, or Borrower asserts that any Loan Document to which it is
      a
      Party is not valid, binding and enforceable against Borrower;

     

    
      
        
        

      

      
        44

        
          

        

      

      
        
        

      

    

     

    (d) Borrower
      fails to duly observe, perform or comply with any covenant set forth in
Section
      7.2;

     

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

     

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

     

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

     

    (h) Any
      Lien
      against the Property, resulting from a Tax Claim or otherwise, for Fifty
      Thousand Dollars ($50,000) or more is asserted against any Borrower and such
      claim is not withdrawn, formally disputed in good faith, or otherwise disposed
      of within ninety days (90) thereafter;

     

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

     

    (j) The
      Borrower’s Working Interest is increased and/or the Borrower’s Net Revenue
      Interest is decreased from those set forth in Exhibit
      A
      without
      the prior written consent of Lender;

     

    (k) Borrower:

     

    (i) has
      entered against it a judgment, decree or order for relief by a court of
      competent jurisdiction in an involuntary proceeding commenced under any
      applicable bankruptcy, insolvency or other similar law of any jurisdiction
      now
      or hereafter in effect, including the federal Bankruptcy Code, as from time
      to
      time amended, or has any such proceeding commenced against it; or

     

    (ii) commences
      a voluntary case under any applicable bankruptcy, insolvency or similar law
      now
      or hereafter in effect, including the federal Bankruptcy Code, as from time
      to
      time amended; or applies for or consents to the entry of an order for relief
      in
      an involuntary case under any such law; or makes a general assignment for the
      benefit of creditors; or fails generally to pay (or admits in writing its
      inability to pay) Debts as such Debts become due; or takes action to authorize
      any of the foregoing; or

     

    
      
        
        

      

      
        45

        
          

        

      

      
        
        

      

    

     

    (iii) suffers
      the appointment of or taking possession by a receiver, liquidator, assignee,
      custodian, trustee, sequestrator or similar official of all or a substantial
      part of its assets or of any part of the Collateral in a proceeding brought
      against or initiated by it, or such appointment or taking possession is at
      any
      time consented to, requested by or acquiesced to by it; or

     

    (iv) suffers
      the entry against it of a final judgment for the payment of money in excess
      of
      One Hundred Thousand Dollars ($100,000), unless the same is discharged within
      thirty (30) days after the date of entry thereof or an appeal or appropriate
      proceeding for review thereof is taken within such period and a stay of
      execution pending such appeal is obtained; or

     

    (v) suffers
      a
      writ or warrant of attachment or any similar process to be issued by any court
      against all or any substantial part of its assets or any part of the Collateral,
      and such writ or warrant of attachment or any similar process is not stayed
      or
      released within thirty (30) days after the entry or levy thereof or after any
      stay is vacated or set aside; or

     

    (vi) fails
      to
      pay any Debt in excess of Fifty Thousand Dollars ($50,000) (other than the
      Obligations) or any interest or premium thereon, when due (whether at scheduled
      maturity or by acceleration, demand or otherwise) and such failure shall
      continue after the applicable grace period, if any, specified in the agreement
      or instrument relating to any such Debt or any other event shall occur and
      shall
      continue after the applicable grace period, if any, specified in such agreement
      or instrument, if the effect of such default or event is to accelerate or to
      permit the acceleration of, the maturity of such Debt (in excess of Twenty-Five
      Thousand Dollars ($25,000)), or if, as the result of such a default, any such
      Debt (in excess of Twenty-Five Thousand Dollars ($25,000)) shall be declared
      to
      be due and payable, or is required to be prepaid, prior to the stated maturity
      thereof; or

     

    (vii) fails
      to
      perform its obligations under the Assignment of Overriding Royalty Interest
      or
      any Permitted Hedging Agreement and such failure continues beyond any applicable
      grace period set forth therein; or

     

    (viii) a
      Change
      of Control occurs with regard to Borrower; or

     

    (ix) a
      Coverage Default occurs.

     

    Section
      10.2. Acceleration.

     

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

     

    
      
        
        

      

      
        46

        
          

        

      

      
        
        

      

    

     

    Other
      Acceleration.
      Upon
      the occurrence and during the continuance of any Event of Default not described
      in the preceding Section
      10.2(a),
      Lender
      may at any time and from time to time and without notice to Borrower, except
      as
      may otherwise be required hereunder, declare any or all of the Obligations
      immediately due and payable, and all such Obligations shall thereupon be
      immediately due and payable, without demand, presentment, notice of demand
      or of
      dishonor and nonpayment, protest, notice of protest, notice of intention to
      accelerate, declaration or notice of acceleration, or any other notice or
      declaration of any kind, all of which are hereby expressly waived by
      Borrower.

     

    Remedies.
      If any
      Event of Default shall occur and be continuing, Lender’s obligation to make any
      Loan(s) shall be suspended, and Lender may protect and enforce its rights under
      the Loan Documents by any appropriate proceedings, including proceedings for
      specific performance of any covenant or agreement contained in any Loan
      Document, and Lender may enforce the payment of any Obligations due or enforce
      any other legal or equitable right. All rights, remedies and powers conferred
      upon Lender under the Loan Documents shall be deemed cumulative and not
      exclusive of any other rights, remedies or powers available under the Loan
      Documents or at law or in equity. If any Unmatured Event of Default shall occur
      and be continuing, Lender’s obligation to make any Loans shall be suspended, so
      long as any such Unmatured Events of Default or resulting Events of Default
      is
      continuing.

     

    INDEMNITY.
      BORROWER AGREES TO INDEMNIFY LENDER, UPON DEMAND, FROM AND AGAINST ANY AND
      ALL
      LIABILITIES, OBLIGATIONS, CLAIMS, LOSSES, DAMAGES, PENALTIES, FINES, ACTIONS,
      JUDGMENTS, SUITS, SETTLEMENTS, COSTS, EXPENSES OR DISBURSEMENTS (INCLUDING
      REASONABLE FEES OF ATTORNEYS, EXPERTS AND ADVISORS) OF ANY KIND OR NATURE
      WHATSOEVER (IN THIS SECTION
      10.4
      COLLECTIVELY CALLED “LIABILITIES AND COSTS”) WHICH TO ANY EXTENT (IN WHOLE OR IN
      PART) MAY BE IMPOSED ON, INCURRED BY OR ASSERTED AGAINST LENDER GROWING OUT
      OF,
      RESULTING FROM OR IN ANY OTHER WAY ASSOCIATED WITH ANY OF THE COLLATERAL, THE
      LOAN DOCUMENTS OR THE TRANSACTIONS AND EVENTS INCLUDING, WITHOUT LIMITATION,
      THE
      ENFORCEMENT OR DEFENSE THEREOF AT ANY TIME ASSOCIATED THEREWITH OR CONTEMPLATED
      THEREIN (INCLUDING ANY VIOLATION OR NONCOMPLIANCE WITH ANY ENVIRONMENTAL LAWS
      BY
      ANY PERSON OR ANY LIABILITIES OR DUTIES OF ANY PERSON WITH RESPECT TO HAZARDOUS
      MATERIALS FOUND IN OR RELEASED INTO THE ENVIRONMENT). THE FOREGOING
      INDEMNIFICATION SHALL APPLY WHETHER OR NOT SUCH LIABILITIES AND COSTS ARE IN
      ANY
      WAY OR TO ANY EXTENT CAUSED, IN WHOLE OR IN PART, BY ANY NEGLIGENT ACT OR
      OMISSION OF ANY KIND BY LENDER PROVIDED ONLY THAT NO PERSON SHALL BE ENTITLED
      UNDER THIS SECTION
      10.4
      TO
      RECEIVE INDEMNIFICATION FOR THAT PORTION, IF ANY, OF ANY LIABILITIES AND COSTS
      WHICH IS CAUSED BY LENDER’S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. AS USED IN
      THIS SECTION
      10.4,
      THE
      TERM “LENDER” SHALL REFER NOT ONLY TO THE PERSON DESIGNATED AS SUCH IN
SECTION
      1.1,
      BUT
      ALSO TO ITS LENDER(S) AND MEMBERS AND, WITH RESPECT TO EACH OF THE FOREGOING,
      EACH DIRECTOR, OFFICER, AGENT, ATTORNEY, EMPLOYEE, REPRESENTATIVE AND AFFILIATE
      OF SUCH PERSON.

     

    
      
        
        

      

      
        47

        
          

        

      

      
        
        

      

    

     

    ARTICLE
      XI

    MISCELLANEOUS

     

    Section
      11.1. Waivers
      and Amendments; Acknowledgments and Admissions.

     

    Waivers
      and Amendments.
      No
      failure or delay (whether by course of conduct or otherwise) by Lender in
      exercising any right, power or remedy which Lender may have under any of the
      Loan Documents shall operate as a waiver thereof or of any other right, power
      or
      remedy, nor shall any single or partial exercise by Lender of any such right,
      power or remedy preclude any other or further exercise thereof or of any other
      right, power or remedy. No waiver of any provision of any Loan Document and
      no
      consent to any departure therefrom shall ever be effective unless it is in
      writing and signed by Lender, and then such waiver or consent shall be effective
      only in the specific instances and for the purposes for which given and to
      the
      extent specified in such writing. No notice to or demand on Borrower shall
      in
      any case of itself entitle Borrower to any other or further notice or demand
      in
      similar or other circumstances. This Agreement and the other Loan Documents
      set
      forth the entire understanding and agreement of the parties hereto and thereto
      with respect to the transactions contemplated herein and therein and supersede
      all prior discussions and understandings with respect to the subject matter
      hereof and thereof, and no modification or amendment of or supplement to this
      Agreement or the other Loan Documents shall be valid or effective unless the
      same is in writing and signed by the party against whom it is sought to be
      enforced.

     

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

     

    
      
        
        

      

      
        48

        
          

        

      

      
        
        

      

    

     

    Assignments;
      Survival of Agreements; Cumulative Nature.
      Lender
      may assign and/or transfer a portion or all of its rights and privileges under
      the Loan Documents at any time and from time to time, including, but not limited
      to, any collateral assignment to secure any indebtedness of Lender to any other
      Person and shall provide written notice thereof to Borrower. Any assignee of
      any
      of Lender’s rights under any of the Loan Documents shall be subrogated to any
      related rights and remedies that Lender may exercise against Borrower. All
      of
      the various representations, warranties, covenants and agreements of Borrower
      in
      the Loan Documents shall survive the execution and delivery of this Agreement
      and the other Loan Documents and the performance hereof and thereof, including
      the making or granting of the Loans and the delivery of the Note and the other
      Loan Documents, and shall further survive until all of the Obligations are
      paid
      in full to Lender and all of Lender’s obligations to Borrower are terminated.
      The representations, warranties and covenants made by Borrower in the Loan
      Documents, and the rights, powers and privileges granted to Lender in the Loan
      Documents, are cumulative, and, except for expressly specified waivers and
      consents, no Loan Document shall be construed in the context of another to
      diminish, nullify or otherwise reduce the benefit to Lender of any such
      representation, warranty, covenant, right, power or privilege. In particular
      and
      without limitation, no exception set out in this Agreement to any
      representation, warranty or covenant herein contained shall apply to any similar
      representation, warranty or covenant contained in any other Loan Document,
      and
      each such similar representation, warranty or covenant shall be subject only
      to
      those exceptions which are expressly made applicable to it by the terms of
      the
      various Loan Documents.

     

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

     

    For
      delivery to Borrower:

     

    KY
      USA
      Energy, Inc.

    321
      Somerset Road

    London,
      Kentucky 40741

    Telephone:  
      (606)
      877-8533

    Facsimile:    (606)
      877-8553Attention: Steven
      D.
      Eversole

     

    
      
        
        

      

      
        49

        
          

        

      

      
        
        

      

    

     

    with
      copies to:

     

    Fieldstone
      Lester Shear & Denberg

    201
      Alhambra Circle, Suite 601

    Coral
      Gables, Florida 33131

    Telephone: 
      (305)
      357-5548

    Attention:   
      Ronald
      R.
      Fieldstone, P.A.

     

    and

     

    Gottbetter
      & Partners, LLP

    488
      Madison Avenue

    New
      York,
      NY 10022

    Telephone:
      (212)
      400-6900Facsimile: (212)
      400-6901

    Attention:  
      Adam
      S.
      Gottbetter, Esq.

    

    For
      delivery to Lender:

     

    NSES
      12,
      LLC

    38
      Grove
      Street, Building C 

    Ridgefield,
      Connecticut 06877 

    Telephone: 
      (203)
      431-0330 ext.872

    Facsimile:  
      (203)
      702-5587Attention: Roger
      Eustance

     

    with
      copies to:

     

    Greenberg
      Traurig, LLP

    1000
      Louisiana, Suite 1700

    Houston,
      Texas 77002

    Telephone: 
      (713)
      374-3515

    Facsimile:   (713)
      754-3505Attention: Douglas
      C. Atnipp

     

    and

     

    NSES
      12,
      LLC

    38
      Grove
      Street, Building C

    Ridgefield,
      Connecticut 06877

    Telephone: 
      (203)
      431-0330 ext.820

    Facsimile:   (203)
      702-5587Attention: Dennis
      Diczok

     

    Parties
      in Interest; Transfers.
      All
      grants, covenants and agreements contained in the Loan Documents shall bind
      and
      inure to the benefit of the parties thereto and their respective successors
      and
      assigns; provided,
      however,
      that no
      Borrower shall assign or transfer any of its rights or delegate any of its
      duties or obligations under any Loan Document without the prior written consent
      of Lender. Nothing expressed or referred to in this Agreement shall be construed
      to give any Person other than the parties to this Agreement any legal or
      equitable right, remedy, or claim under or with respect to this Agreement or
      any
      provision of this Agreement. This Agreement and all of its provisions and
      conditions are for the sole and exclusive benefit of the parties to this
      Agreement and their successors and permitted assigns.

     

    
      
        
        

      

      
        50

        
          

        

      

      
        
        

      

    

     

    Section
      11.2. Governing
      Law; Submission to Process. 

     

    (a) Except
      to
      the extent that the law of another jurisdiction is expressly elected in a Loan
      Document, the Loan Documents shall be deemed contracts and instruments made
      under the laws of the State of New York and shall be construed and enforced
      in
      accordance with and governed by the laws of the State of New York, without
      regard to principles of conflicts of law. Courts within the State of New York
      shall have jurisdiction over any and all disputes between any Borrower and
      Lender, whether in law or equity, including, but not limited to, any and all
      disputes arising out of or relating to this Agreement or any other Loan
      Document; and venue in any such dispute whether in federal or state court shall
      be laid in New York County, New York. 

     

    (b) Borrower
      and Lender each shall appoint C.T. Corporation as their agent within the State
      of New York for service of process. Such appointment shall commence at Closing
      and continue until the Maturity Date. 

     

    Limitation
      on Interest.
      Lender,
      Borrower and any other parties to any Loan Documents intend to contract in
      strict compliance with applicable usury law from time to time in effect. In
      furtherance thereof, the parties stipulate and agree that none of the terms
      and
      provisions contained in the Loan Documents shall ever be construed to create
      a
      contract to pay, for the use, forbearance or detention of money, interest in
      excess of the maximum amount of interest permitted to be charged by applicable
      law from time to time in effect. No Borrower nor any present or future
      guarantors, endorsers or other Persons hereafter becoming liable for payment
      of
      any Obligation shall ever be liable for unearned interest thereon or shall
      ever
      be required to pay interest thereon in excess of the maximum amount that may
      be
      lawfully charged under applicable law from time to time in effect, and the
      provisions of this Section
      11.6
      shall
      control over all other provisions of the Loan Documents which may be in conflict
      or apparent conflict herewith. Lender expressly disavows any intention to charge
      or collect excessive unearned interest or finance charges in the event the
      maturity of any Obligation is accelerated. If (a) the maturity of any Obligation
      is accelerated for any reason, (b) any Obligation is prepaid and as a result
      any
      amounts held to constitute interest are determined to be in excess of the legal
      maximum, or (c) Lender or any other holder of any or all of the Obligations
      shall otherwise collect moneys which are determined to constitute interest
      which
      would otherwise increase the interest on any or all of the Obligations to an
      amount in excess of that permitted to be charged by applicable law then in
      effect, then all such sums determined to constitute interest in excess of such
      legal limit shall, without penalty, be promptly applied to reduce the then
      outstanding principal of the related Obligations or, at Lender’s or such
      holder’s option, promptly returned to Borrower or the other payor thereof upon
      such determination. In determining whether or not the interest paid or payable
      under any specific circumstance exceeds the maximum amount permitted under
      applicable law, Lender and Borrower (and any other payors thereof) shall to
      the
      greatest extent permitted under applicable law, (x) characterize any
      non-principal payment as an expense, fee or premium rather than as interest,
      (y)
      exclude voluntary prepayments and the effects thereof, and (z) amortize,
      prorate, allocate and spread the total amount of interest throughout the entire
      contemplated term of the instruments evidencing the Obligations in accordance
      with the amounts outstanding from time to time thereunder and the maximum legal
      rate of interest from time to time in effect under applicable law in order
      to
      lawfully charge the maximum amount of interest permitted under applicable
      law.

     

    
      
        
        

      

      
        51

        
          

        

      

      
        
        

      

    

     

    Termination;
      Limited Survival.
      In
      their sole and absolute discretion, Borrower and Lender may each, at any time
      that no Obligations are owing, elect in a notice delivered to the other to
      terminate this Agreement. Upon receipt of such a notice, if no Obligations
      are
      then owing, this Agreement and all other Loan Documents shall thereupon be
      terminated and the parties thereto released from any prospective obligations
      thereunder. Notwithstanding the foregoing or anything herein to the contrary,
      any waivers or admissions made by Borrower or Lender in any Loan Documents,
      and
      any obligations which any Person may have to indemnify or compensate Lender
      shall survive any termination of this Agreement or any other Loan Document.
      At
      the request and expense of Borrower, Lender shall prepare and execute all
      necessary instruments to reflect and effect such termination of the Loan
      Documents; provided, however,
      that
      nothing in this Section
      11.7
      shall
      affect any and all continuing rights, validity and enforceability of the
      ORRI.

     

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

     

    Counterparts.
      This
      Agreement may be separately executed in any number of counterparts and by
      different parties hereto in separate counterparts, each of which when so
      executed shall be deemed to constitute one and the same Agreement.

     

    Further
      Assurances.
      The
      parties agree (a) to furnish upon request to each other such information, (b)
      to
      execute and deliver to each other such documents, and (c) to do such other
      acts
      and things, all as the other party may reasonably request for the purpose of
      carrying out the intent of this Agreement and the Loan Documents.

     

    WAIVER
      OF
      JURY TRIAL, PUNITIVE DAMAGES, ETC.
      EACH OF
      BORROWER AND LENDER HEREBY (a) KNOWINGLY, VOLUNTARILY, INTENTIONALLY AND
      IRREVOCABLY WAIVES, TO THE MAXIMUM EXTENT PERMITTED BY LAW, ANY RIGHT IT MAY
      HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR DIRECTLY
      OR INDIRECTLY AT ANY TIME ARISING OUT OF, UNDER OR IN CONNECTION WITH THE LOAN
      DOCUMENTS OR ANY TRANSACTION CONTEMPLATED THEREBY OR ASSOCIATED THEREWITH,
      BEFORE OR AFTER MATURITY; (b) IRREVOCABLY WAIVES, TO THE MAXIMUM EXTENT
      PERMITTED BY LAW ANY RIGHT THEY MAY HAVE TO CLAIM OR RECOVER IN ANY SUCH
      LITIGATION ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR DAMAGES
      OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES; (c) CERTIFIES THAT NO PARTY
      HERETO NOR ANY REPRESENTATIVE OR AGENT OR COUNSEL FOR ANY PARTY HERETO HAS
      REPRESENTED, EXPRESSLY OR OTHERWISE OR IMPLIED THAT SUCH PARTY WOULD NOT, IN
      THE
      EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS, AND (d) ACKNOWLEDGES
      THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS
      AND THE TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY BY, AMONG OTHER THINGS,
      THE
      MUTUAL WAIVERS AND CERTIFICATIONS CONTAINED IN THIS SECTION
      11.11.

     

    
      
        
        

      

      
        52

        
          

        

      

      
        
        

      

    

     

    EXCULPATION
      PROVISIONS.
      EACH OF
      THE PARTIES AGREES THAT IT HAS A DUTY TO READ THIS AGREEMENT AND EACH OF THE
      OTHER LOAN DOCUMENTS AND AGREES THAT IT IS CHARGED WITH NOTICE AND KNOWLEDGE
      OF
      THE TERMS OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS; THAT IT HAS IN FACT
      READ THIS AGREEMENT AND EACH OF THE OTHER LOAN DOCUMENTS AND IS FULLY INFORMED
      AND HAS FULL NOTICE AND KNOWLEDGE OF THE TERMS AND CONDITIONS CONTAINED IN
      THEM;
      THAT IT HAS BEEN REPRESENTED BY INDEPENDENT LEGAL COUNSEL OF ITS CHOICE
      THROUGHOUT THE NEGOTIATION OF EACH OF THE LOAN DOCUMENTS AND HAS RECEIVED THE
      ADVICE OF ITS LEGAL COUNSEL IN ENTERING INTO THE LOAN DOCUMENTS; AND THAT IT
      RECOGNIZES THAT CERTAIN TERMS OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS
      RESULT IN ONE PARTY ASSUMING THE LIABILITY INHERENT IN SOME ASPECTS OF THE
      TRANSACTION AND RELIEVING THE OTHER PARTY OF ITS RESPONSIBILITY FOR THAT
      LIABILITY. EACH PARTY, AGREES AND COVENANTS THAT IT WILL NOT CONTEST THE
      VALIDITY OR ENFORCEABILITY OF ANY EXCULPATORY PROVISIONS OF THIS AGREEMENT
      OR
      ANY OF THE OTHER LOAN DOCUMENTS ON THE BASIS THAT THE PARTY HAD NO NOTICE OR
      KNOWLEDGE OF THE PROVISION OR THAT THE PROVISIONS IS NOT “CONSPICUOUS.”

     

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

     

    USA
      PATRIOT Act Notice.
      The
      Lender hereby notifies the Borrower that pursuant to the requirements of the
      USA
      PATRIOT Act, it is required to obtain, verify and record information that
      identifies the Borrower and Guarantor, which information includes the name
      and
      address of the Borrower and Guarantor and other information that will allow
      the
      Lender to identify the Borrower and Guarantor in accordance
      therewith.

     

    ARTICLE
      XII

    NOTICE
      TO BORROWER

     

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

     

    
      
        
        

      

      
        53

        
          

        

      

      
        
        

      

    

     

    THERE
      ARE
      NO UNWRITTEN, ORAL AGREEMENTS BETWEEN THE PARTIES.

     

    Signatures
      appear on the following page.

     

    
      
        
        

      

      
        54

        
          

        

      

      
        
        

      

    

     

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

    

      
        	 	
                BORROWER:

              
	 	 
	 	
                KY
                  USA Energy, Inc.,

              
	 	
                a
                  Kentucky corporation

              
	 	 
	 	
                By:

              	 
	 	 	
                Steven
                  D. Eversole, President

              
	 	 
	 	 
	 	
                LENDER:

              
	 	 
	 	
                NSES
                  12, LLC,

              
	 	
                a
                  Delaware limited liability company

              
	 	 
	 	
                By:

              	 
	 	 	
                Roger
                  Eustance, President 

              

      

    

     

    
      
        [Signature
          Page to Senior Secured Credit Agreement]Exhibit
      4.2

     

    TERM
      NOTE

     

    
      	
              US
                $10,000,000

            	
              ________________,
                2008

            

    

     

    FOR
      VALUE
      RECEIVED, the undersigned, KY USA ENERGY, INC., a Kentucky corporation (the
      “Borrower”),
      HEREBY PROMISES TO PAY in accordance with the Credit Agreement referred to
      below, to the order of NSES 12, LLC, a Delaware limited liability company (the
      “Lender”),
      the
      principal sum of TEN MILLION AND NO/100 DOLLARS ($10,000,000), or so much
      thereof as may be advanced to the Borrower from time to time in immediately
      available funds, together with interest on the unpaid principal balance of
      this
      Term Note (this “Note”)
      from
      time to time outstanding at the rate per annum and in the manner set forth
      in
      the Credit Agreement (herein defined); provided
      that in
      no event shall interest on this Note ever be charged, paid, taken or received
      at
      a rate greater than the highest lawful rate. Interest on the principal balance
      outstanding from time to time under this Note shall be calculated in accordance
      with the Credit Agreement and shall be due and payable as set forth in the
      Credit Agreement. Additionally, in the event of prepayment of the principal
      balance of this Note in whole or in part, accrued interest on the principal
      portion prepaid shall also be due and payable at the time of prepayment. Accrued
      interest on any principal balance outstanding hereunder post-maturity (whether
      brought about by acceleration or otherwise) shall be due and payable on demand.
      The final maturity of this Note, unless demanded or accelerated earlier, shall
      be as set forth in the Credit Agreement, at which time all principal and accrued
      interest then unpaid shall be due and payable in full.

     

    This
      Note
      is a Term Note as referred to in, and is subject to and is entitled to the
      benefits of, that certain Senior Secured Credit Agreement dated as of
      ______________, 2008, by and between Borrower and Lender (as amended,
      supplemented or modified from time to time, the “Credit
      Agreement”).
      All
      capitalized terms used herein and not otherwise defined herein shall have the
      meanings given thereto in the Credit Agreement. The Credit Agreement,
      among other things, contains provisions for acceleration of the maturity hereof
      upon the happening of certain stated events. If this Note shall be collected
      by
      legal proceedings or through a bankruptcy court, or shall be placed in the
      hands
      of an attorney for collection after default or maturity (regardless of how
      maturity is brought about), the Borrower agrees to pay all costs of collection,
      including reasonable attorneys’ fees.

     

    
      
        
Initials

    

    
      
        
        

      

      
        Page
          1

        
          

        

      

      
        
        

      

    

     

    It
      is the
      intention of the Borrower and the Lender to comply with applicable state and
      federal usury laws now or hereafter enacted. Accordingly, and notwithstanding
      any provision to the contrary herein or in any Security Document or in any
      other
      document related thereto, in no event shall this Note, any Security Document
      or
      any other document related thereto require payment or permit the collection
      of
      interest in excess of the maximum amount permitted by such laws. If, for any
      reason whatsoever, the interest paid or received on this Note during its full
      term produces a rate which exceeds the highest lawful rate applicable to the
      holder, the holder of this Note shall refund to the Borrower or, at the holder’s
      option, credit against the principal of this Note such portion of said interest
      as shall be necessary to cause the interest paid on this Note to produce a
      rate
      equal to the highest lawful rate. All sums paid or agreed to be paid to the
      holder of this Note for the use, forbearance or detention of the indebtedness
      evidenced hereby shall, to the extent permitted by applicable law, be amortized,
      prorated, allocated and spread in equal parts throughout the full term of this
      Note, so that the interest rate is uniform throughout the full term of this
      Note.

     

    Interest
      shall be calculated on the unpaid principal balance of this Note from time
      to
      time outstanding from the date of each Advance of principal to the date of
      repayment in full of such Advance pursuant to the terms of the Credit
      Agreement.

     

    The
      Borrower hereby authorizes the Lender to enter into Lender’s records the date
      and principal amount of each Advance, and the rate of interest payable thereon,
      which shall be binding on the Borrower absent manifest error; provided
      that the
      failure of the Lender to make any such record entry shall not affect the
      obligation of the Borrower to repay each Advance and to pay interest accrued
      thereon and other sums payable hereunder.

     

    The
      Borrower waives notice (including, but not limited to, notice of protest, notice
      of dishonor, notice of intent to accelerate, notice of acceleration) of
      presentment for payment and protest and any other notice of any kind except
      as
      specifically required by the Credit Agreement. No failure to exercise, and
      no
      delay in exercising any rights hereunder on the part of the holder hereof shall
      operate as a waiver of such rights. The Borrower agrees that its liability
      on or
      with respect to this Note shall not be affected by any release of or change
      in
      any security at any time existing or by any failure to perfect or maintain
      perfection of any lien against or security interest in any such security or
      the
      partial or complete unenforceability of any guaranty or other surety obligation,
      in each case in whole or in part, with or without notice and before or after
      maturity.

     

    BORROWER
      HEREBY UNCONDITIONALLY WAIVES ITS RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE
      OF ACTION BASED UPON OR ARISING OUT OF, DIRECTLY OR INDIRECTLY, THIS NOTE,
      ANY
      OF THE RELATED DOCUMENTS, ANY DEALINGS BETWEEN BORROWER AND LENDER RELATING
      TO
      THE SUBJECT MATTER OF THIS TRANSACTION OR ANY RELATED TRANSACTIONS, AND/OR
      THE
      RELATIONSHIP THAT IS BEING ESTABLISHED BETWEEN LENDER AND BORROWER. THE SCOPE
      OF
      THIS WAIVER IS INTENDED TO BE ALL ENCOMPASSING OF ANY AND ALL DISPUTES THAT
      MAY
      BE FILED IN ANY COURT (INCLUDING, WITHOUT LIMITATION, CONTRACT CLAIMS, TORT
      CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS.)
      THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY
      OR
      IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS,
      SUPPLEMENTS OR MODIFICATIONS TO THIS NOTE, ANY RELATED DOCUMENTS, OR TO ANY
      OTHER DOCUMENTS OR AGREEMENTS RELATING TO THIS TRANSACTION OR ANY RELATED
      TRANSACTION. IN THE EVENT OF LITIGATION, THIS NOTE MAY BE FILED AS A WRITTEN
      CONSENT TO A TRIAL BY THE COURT.

    
       

      
        
          
Initials

      

    

    
      
        
        

      

      
        Page
          2

        
          

        

      

      
        
        

      

    

     

    THE
      OBLIGATIONS OF BORROWER UNDER THIS NOTE ARE TO BE PERFORMED IN THE STATE OF
      NEW
      YORK AND THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
      LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO ITS PRINCIPLES OF
      CONFLICTS OF LAWS.

     

    [The
      Remainder of this Page was Intentionally Left Blank]

    
       

      
        
          
Initials

      

    

    
      
        
        

      

      
        Page
          3

        
          

        

      

      
        
        

      

    

    IN
      WITNESS WHEREOF, Borrower has executed this Note as of the date first above
      written.

     

    
      	
              BORROWER:

            
	 	 
	
              KY
                USA Energy, Inc., a Kentucky corporation

            
	 	 
	
              By:

            	 
	
              Name:

            	 
	
              Title:

            	 

    

    

      [Signature
        Page to Term Note]

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