Document:

Exhibit 10.32

                              EMPLOYMENT AGREEMENT

     This  Employment  Agreement (the  "Agreement") is made as of the 9th day of
September 2005, by and between Triad Guaranty Inc., a Delaware  corporation (the
"Company"), and Mark K. Tonnesen ("Employee").

                                   WITNESSETH:

     WHEREAS,  the Company desires to employ Employee and Employee is willing to
accept such employment, all upon the terms and conditions hereinafter set forth.

     NOW,  THEREFORE,  in  consideration of the mutual covenants and obligations
hereinafter set forth, the parties hereto agree as follows:

1.   EMPLOYMENT  AND TERM.  The Company  hereby  employs  Employee  and Employee
     accepts  employment  with the  Company  as  President  and Chief  Executive
     Officer of the Company, on the terms and conditions herein set forth, for a
     period  commencing  on September  14, 2005,  and expiring on September  30,
     2008,  and  thereafter  for  successive six (6) month periods unless either
     party gives written notice of the nonrenewal of this Agreement at least one
     year prior to the commencement of any such additional six (6) month period.
     Employee  shall have such  duties,  responsibilities  and  authority  as is
     commensurate  with his  position,  and shall  report to the Chairman of the
     Company's  Board of Directors  (the  "Board").  Employee shall also perform
     such  other  or  additional  duties  on  behalf  of  the  Company  and  its
     subsidiaries  and  affiliates as may be  reasonably  assigned to him by the
     Board from time to time.

2.   EXTENT OF  SERVICES.  During the term  hereof,  Employee  shall  devote his
     entire attention and energy to the business and affairs of the Company on a
     full-time  basis and shall not be engaged in any other  business  activity,
     regardless of whether such business activity is pursued for gain, profit or
     other pecuniary advantage,  unless the Company otherwise consents; but this
     shall not be construed as preventing  Employee from investing his assets in
     such  form or  manner  as will  not  require  any  services  on the part of
     Employee in the  operation  of the affairs of the  companies  in which such
     investments are made and will not otherwise conflict with the provisions of
     this Agreement. Full-time, as used above, shall mean a forty (40) hour work
     week, or such longer work week, as the Board shall from time to time adopt.
     The foregoing shall not be deemed to prevent Employee from participating in
     any  charitable  or  not-for-profit  organization  to a reasonable  extent,
     provided  however  that  Employee  does not  receive  any  salary  or other
     remuneration  from such charity or  not-for-profit  organization.  Employee
     will be subject to and shall  comply with all codes of  conduct,  personnel
     policies and  procedures  applicable  to senior  executives  of the Company
     including,  without  limitation,   policies  regarding  sexual  harassment,
     conflicts of interest and insider trading,  of which he shall have received
     in writing.

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3.   COMPENSATION.

     (a)  SALARY.  During  the term of this  Agreement,  the  Company  shall pay
          Employee  an  annual  salary  of not less  than  $450,000.00  ("Annual
          Salary"),  payable in accordance  with the Company's  regular  payroll
          procedures.  During each year that this  Agreement  is in effect,  the
          Company will review possible  increases in Employee's  salary at least
          annually,  with any such increases subject to the determination of the
          Board.

     (b)  BONUS. In addition to his Annual Salary, Employee shall be eligible to
          receive  an  annual  bonus in an amount  as may be  determined  by the
          Board,  pursuant  to a bonus  plan  which  may  then be in  effect  or
          otherwise.  For calendar year 2005,  the cash bonus shall be $200,000.
          For  calendar  year  2006,  the  cash  bonus  shall  not be less  than
          $450,000. For calendar years after 2006 the Company intends to adopt a
          bonus plan, and Employee shall be entitled to participate in any bonus
          plan for senior executives that the Company adopts.

4.   BENEFITS.  Employee  shall be  entitled to  participate  in all medical and
     other  employee  plans of the  Company,  if any, on the same basis as other
     executives of the Company,  subject in all cases to the respective terms of
     such plans.

5.   PTO. Employee shall be entitled to paid time off ("PTO") in accordance with
     the  Company's  PTO  policy  in  effect  at the time the PTO is taken as if
     Employee had at least ten (10) years of service  with the  Company.  In the
     event that the full PTO is not taken by Employee,  no PTO time shall accrue
     for use in future  years,  except in  accordance  with the  Company's  then
     existing policy for the carry forward of accrued PTO.

6.   EXPENSES.  Employee  shall be  entitled  to  prompt  reimbursement  for all
     reasonable  expenses  incurred by him in furtherance of the business of the
     Company in connection  with his  performance  of his duties  hereunder,  in
     accordance  with the  policies and  procedures  established  for  executive
     officers of the Company,  and provided  Employee properly accounts for such
     expenses.

7.   TERMINATION.

     (a)  DEATH.  This  Agreement  and  Employee's  employment  hereunder  shall
          terminate  immediately  upon  Employee's  death.  In such  event,  the
          Company  shall be obligated to pay only (i)  Employee's  salary to the
          end of the month in which he dies;  and (ii) a lump sum death  benefit
          to Employee's  estate equal to Employee's Annual Salary at the time of
          his death.

     (b)  INCAPACITY. To the extent permitted by law, if Employee is absent from
          his  employment  for  reasons of illness or other  physical  or mental
          incapacity which renders him unable to perform the essential functions
          of his position,  with or without reasonable  accommodation,  for more
          than an aggregate of ninety (90) days, whether or not consecutive,  in
          any period of twelve (12) consecutive months, then upon at least sixty

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          (60) days' prior  written  notice to Employee,  if such is  consistent
          with  applicable  law, the Company may  terminate  this  Agreement and
          Employee's  employment  hereunder,  unless, within that notice period,
          Employee shall have resumed  performance of the essential functions of
          his positions, with or without reasonable accommodation.  In the event
          of a termination  of employment  under this Section 7(b),  the Company
          shall be  obligated  to pay  Employee his salary from the date of such
          termination  until  the  earlier  of (i) the  date on  which  coverage
          commences under the long-term  disability  insurance policy maintained
          by the Company for the benefit of  Employee,  if any, or (ii) the date
          two (2) months after the date of such termination.

     (c)  TERMINATION BY THE COMPANY.

          (i)  The  Company  may  terminate   this   Agreement  and   Employee's
               employment  hereunder  at any time  for  Cause.  As used  herein,
               "Cause" shall mean:

               (A)  a material  breach by Employee of his duties and obligations
                    hereunder,  including but not limited to gross negligence in
                    the  performance of his duties and  responsibilities  or the
                    willful failure to follow the Board's directions;  provided,
                    however,  that Cause shall not exist  unless the Company has
                    provided  Employee  with written  notice  setting  forth the
                    existence  of the  non-performance,  failure  or breach  and
                    Employee  shall not have cured same within  thirty (30) days
                    after receiving such notice;

               (B)  willful  misconduct  by  Employee  which  in the  reasonable
                    determination  of the Board has caused or is likely to cause
                    material  injury  to  the  reputation  or  business  of  the
                    Company;

               (C)  any  act  of  fraud,  material   misappropriation  or  other
                    dishonesty by Employee; or

               (D)  Employee's conviction of a felony.

          In the event of termination for Cause,  the Company shall pay Employee
          his salary up to the date that is thirty (30) days after the  delivery
          to him of the  notice  of  termination,  which  date  shall be for all
          purposes  of this  Section  7(c)(i)  the  date of  termination  of his
          employment,  unless there has been a cure under Section 7(c)(i)(A). In
          the event of  termination  for Cause,  Employee  shall not receive any
          previously  unpaid bonus or bonuses except any earned but unpaid bonus
          with  respect  to  any  calendar  year  ended  prior  to the  date  of
          termination.

          (ii) Notwithstanding  anything  contained herein to the contrary,  the
               Company  also  may  terminate   this   Agreement  and  Employee's
               employment hereunder for any reason whatsoever, upon no less than
               sixty (60) days' prior written  notice to Employee.  In the event
               that  the  Company  terminates  this  Agreement  pursuant  to the
               provisions of this Section  7(c)(ii),  Employee shall be entitled
               to receive (i) his salary up to the date of termination set forth
               in the notice of termination,  and (ii) a severance payment equal
               to the greater of $1.8 million or two hundred  percent  (200%) of
               the total  Annual  Salary paid to Employee by the Company  during
               each of the two calendar  years prior to the year of  termination

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               (the "Severance  Payment").  Subject to Section 13(c) hereof,  at
               the option of the Company, the Severance Payment shall be payable
               either in a lump sum cash payment or in twenty-four  (24) monthly
               installments  commencing on the first day of the month  following
               termination  of this  Agreement.  If for  any  reason  any  court
               determines  that any of the  restrictions  contained in Section 8
               hereof are not enforceable,  the Company shall have no obligation
               to pay the Severance Payment or any remaining installment thereof
               to Employee.

          (iii)If the Company is obligated by law (including the WARN Act or any
               similar  state or foreign law) to pay Employee  severance  pay, a
               termination  indemnity,   notice  pay,  or  the  like,  then  any
               Severance  Payments  hereunder  shall be reduced by the amount of
               any such other severance pay, termination  indemnity,  notice pay
               or the like, as applicable.

          (iv) Notwithstanding  anything herein to the contrary,  the payment of
               any Severance  Payments hereunder to Employee shall be subject to
               the  execution  by Employee  (and failure to revoke) of a general
               release of the Company and its  affiliates  of any and all claims
               under this  Agreement or related to or arising out of  Employee's
               employment  hereunder,  in a form and manner  satisfactory to the
               Company and Employee.

     (d)  TERMINATION BY EMPLOYEE. Employee may terminate this Agreement and his
          employment  hereunder  for any  reason  whatsoever,  upon no less than
          sixty (60) days' prior  written  notice to the  Company.  In the event
          that Employee  terminates this Agreement pursuant to the provisions of
          this  Section  7(d)  without  "Good  Reason" as  hereinafter  defined,
          Employee  shall be  entitled  to receive  his salary up to the date of
          termination set forth in the notice of termination, and in such event,
          Employee  shall not receive  any  previously  unpaid  bonus or bonuses
          except any earned but unpaid bonus with  respect to any calendar  year
          ended prior to the date of termination.  If Employee  resigns for Good
          Reason, then Employee's  termination shall be treated as a termination
          by the Company without Cause pursuant to Section 7(c)(ii)  hereof.  As
          used herein, "Good Reason" shall mean:

          (i)  a material  breach by the Company of its  obligations  hereunder,
               including but not limited to a material and adverse change in the
               status or position of  Employee  as an  executive  officer of the
               Company including,  without limitation,  a material diminution in
               duties,  responsibilities or authority, except in connection with
               the  incapacity of Employee,  or  non-payment of Annual Salary or
               other compensation due hereunder; or

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          (ii) the Company,  without  Employee's consent (such consent not to be
               unreasonably  withheld),  transfers  or  relocates  the office of
               Employee which would, after the initial  relocation  contemplated
               by this Agreement,  require  Employee to be based more than fifty
               (50) miles  distance  from his initial  office in  Winston-Salem,
               North Carolina;

          provided,  however,  that Good Reason shall not exist unless  Employee
          has  provided  the Company  with a written  notice  setting  forth the
          reasons for the  existence of Good  Reason,  and Company has not cured
          the reasons for the  existence of Good Reason  within thirty (30) days
          after receiving such notice.

8.   RESTRICTIVE COVENANT. During the term of this Agreement and for a period of
     two (2) years after the  termination  of this  Agreement  by the Company or
     Employee,  except  pursuant to the provisions of Section 1 above,  Employee
     shall not, either as an individual on his own account; as a partner,  joint
     venturer,  employee,  agent,  or salesman  for any  person;  as an officer,
     director or  stockholder  (other than a beneficial  holder of not more than
     five percent (5%) of the  outstanding  voting stock of a company  having at
     least  two  hundred  and  fifty  (250)   holders  of  voting  stock)  of  a
     corporation; or otherwise, directly or indirectly:

     (a)  enter into or engage in the private mortgage insurance business or any
          other  credit  enhancement  business in which,  as of the date of such
          termination, the Company is then engaged or actively considering being
          engaged within:

          (i)  any area of the United States or any foreign country in which the
               Company is then doing business;

          (ii) in the event that any court determines that the area set forth in
               the preceding  subparagraph is too broad to be enforceable,  each
               and every state of the United States or foreign  country in which
               the Company had a market  share,  based on industry  data,  of at
               least four percent (4%) of net new mortgage  insurance written as
               of the end of the quarter next  preceding the date of termination
               of this Agreement; or

          (iii)in the event  that any court  determines  that the area set forth
               in the preceding  subparagraphs  is too broad to be  enforceable,
               each and every metropolitan statistical area of the United States
               or any foreign  country in which the Company had a market  share,
               based on industry  data, of at least four percent (4%) of net new
               mortgage  insurance  written  as of the end of the  quarter  next
               preceding the date of termination of this Agreement; or

          (iv) in the event that any court determines that the area set forth in
               the preceding  subparagraphs is too broad to be enforceable,  the
               States of Florida, Illinois and North Carolina; or

          (v)  in the event that any court determines that the area set forth in
               the preceding  subparagraphs is too broad to be enforceable,  the
               State of North Carolina.

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     (b)  solicit  or  attempt  to solicit  any of the  Company's  customers  or
          prospective  customers with whom Employee has had substantive business
          communications as an employee of the Company in the performance of his
          duties and  responsibilities  hereunder  with the intent or purpose to
          perform for such  customer the same or similar  services or to sell to
          such  customer the same or similar  products,  including  other credit
          enhancement  products,  which  Employee  performed for or sold to such
          customer during the term of his employment hereunder; or

     (c)  solicit or  recruit  any  person  who is an  employee  or agent of the
          Company,  for employment in the private mortgage insurance business or
          any other credit enhancement business or for the purpose of soliciting
          or attempting to solicit any of the Company's customers or prospective
          customers as prohibited by Section 8(b) above.

          Employee and the Company agree and  acknowledge  that the Company does
          business on a nationwide basis, with customers located  throughout the
          United States,  and may do business world wide with customers  located
          throughout   the  world  and  that  any  breach  by  Employee  of  the
          restrictive   covenant   contained   herein  would   immeasurably  and
          irreparably  damage the Company.  Employee  and the Company  agree and
          acknowledge  that the duration,  scope and geographic areas applicable
          to the noncompetition covenants in this Section 8 are fair, reasonable
          and necessary to protect legitimate business interests of the Company,
          and that adequate  compensation has been received by Employee for such
          obligations.

9.   CONFIDENTIAL  INFORMATION AND DISCOVERIES.  Employee  acknowledges  that he
     will, as a result of his duties as an employee of the Company,  have access
     to and be in a position  to  receive  confidential  information,  including
     trade secrets,  relating to the Company.  Therefore,  Employee  agrees that
     during his employment by the Company and thereafter he will not divulge to,
     or use for the benefit of,  himself or any other  person,  any  information
     concerning any inventions, discoveries,  improvements,  processes, methods,
     trade  secrets,  research or secret data  (including,  without  limitation,
     customer  or  supplier  lists,   formulas,   computer  programs,   software
     development or executive monitor systems),  or other  confidential  matters
     possessed,  owned or used by the Company that may be obtained or learned by
     Employee in the course of or as a result of his employment hereunder unless
     (i) such  disclosure is authorized by the Company,  (ii) such  confidential
     information  becomes generally  available to and known by the public (other
     than as a result of  disclosure  directly or indirectly by the Employee) or
     (iii) such  confidential  information  becomes  available  to Employee on a
     nonconfidential  basis  from  a  source  other  than  the  Company,  or its
     employees or agents,  provided that such source is not and was not bound by
     a  confidentiality  agreement  with or other  obligation  of secrecy to the
     Company. The expiration or termination of employment shall not be deemed to
     release Employee from his duties hereunder not to convert to his own use or
     the use of others  the rights or  properties  of the  Company as  described
     herein.

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10. CHANGE IN CONTROL.

     (a)  CHANGE IN  CONTROL  SEVERANCE  COMPENSATION.  If within  two (2) years
          following a Change in Control (as defined below),  in the event of (i)
          a material and adverse change in the status or position of Employee as
          an executive officer of the Company including,  without limitation,  a
          material   diminution  in  duties  or   responsibilities,   except  in
          connection  with the  incapacity  of  Employee,  (ii) the  transfer or
          relocation  by the  Company  of the  office of  Employee  which  would
          require  Employee  to be based  more  than 50 miles  distant  from the
          location  of  his  office   immediately  prior  to  such  transfer  or
          relocation,  or (iii) the  discontinuance  of any  bonus or  incentive
          compensation plan for which the Company has determined  Employee to be
          eligible and which represents a material portion of Employee's  annual
          compensation,  then  Employee  shall be  entitled  to  terminate  this
          Agreement and his employment  hereunder and receive from the Company a
          payment  equal to the amount of the  Severance  Payment  specified  in
          Section   7(c)(ii)  of  this   Agreement   (the   "Change  in  Control
          Compensation").  Subject to Section 13(c) hereof, at the option of the
          Company, the Change in Control Compensation shall be payable either in
          a lump sum cash payment or in  twenty-four  (24) monthly  installments
          commencing on the first day of the month following termination of this
          Agreement.  If for any  reason  any court  determines  that any of the
          restrictions  contained in Section 8 hereof are not  enforceable,  the
          Company  shall  have  no  obligation  to pay  the  Change  in  Control
          Compensation or any remaining installment thereof to Employee.

     (b)  CHANGE IN CONTROL. For purposes of this Agreement, "Change in Control"
          shall mean the occurrence of any of the following events:

          (i)  any  person or  persons  acting as a group,  other  than a person
               which as of the date of this Agreement is the beneficial owner of
               voting securities of the Company, or any employee benefit plan of
               the Company or its  subsidiaries or affiliates,  or Employee or a
               group including  Employee,  shall become the beneficial  owner of
               securities  of the  Company  representing  the  greater of (i) at
               least  twenty-five  percent (25%) of the combined voting power of
               the Company's then outstanding  securities,  or (ii) at least the
               combined  voting power of the  Company's  outstanding  securities
               then held by Collateral Investment Corp., a Delaware corporation,
               and Collateral  Mortgage,  Ltd., an Alabama limited  partnership,
               and any of their affiliates; or

          (ii) individuals  who at any time  during  the term of this  Agreement
               constitute the board of directors of the Company (the  "Incumbent
               Board")  cease for any reason to  constitute  at least a majority
               thereof,  provided that any person becoming a director subsequent
               to the date hereof whose  election or nomination for election was
               approved by a vote of at least  three-quarters  of the  directors
               comprising  the Incumbent  Board (either by a specific vote or by

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               approval  of the proxy  statement  of the  Company  in which such
               person is named as a nominee for director,  without  objection to
               such  nomination)  shall be, for  purposes  of this  clause  (ii)
               considered  as though such person were a member of the  Incumbent
               Board; or

          (iii)any  consolidation  or merger to which the Company is a party, if
               following  such  consolidation  or  merger,  stockholders  of the
               Company  immediately prior to such  consolidation or merger shall
               not beneficially  own securities  representing at least fifty-one
               percent  (51%) of the combined  voting  power of the  outstanding
               voting securities of the surviving or continuing corporation; or

          (iv) any sale,  lease,  exchange or other transfer (in one transaction
               or in a series of related  transactions) of all, or substantially
               all,  of the assets of the  Company,  other than to an entity (or
               entities) of which the Company or the stockholders of the Company
               immediately prior to such transaction beneficially own securities
               representing  at least  fifty-one  percent  (51%) of the combined
               voting power of the outstanding voting securities.

     (c)  NONDUPLICATION OF BENEFITS. If Employee receives any Change in Control
          Compensation under this Section 10, he or she shall not be entitled to
          receive any Severance Payments under Section 7 hereof.

11.  ENFORCEMENT.  Both parties recognize that the services to be rendered under
     this  Agreement  by  Employee  are  special,  unique  and of  extraordinary
     character  and that in the event of the  breach by  Employee  of any of the
     terms and conditions of Section 8 or 9 of this Agreement to be performed by
     him, then the Company shall be entitled,  if it so elects, to institute and
     prosecute proceedings in any court of competent jurisdiction, either in law
     or in equity,  to obtain damages for any breach  hereof,  or to enforce the
     specific  performance  hereof  by  Employee  or  to  enjoin  Employee  from
     performing  acts  prohibited  above during the period herein  covered,  but
     nothing herein contained shall be construed to prevent such other remedy in
     the courts as the Company may elect to invoke.

12.  RETURN OF DOCUMENTS. Upon the termination of this Agreement for any reason,
     Employee  shall  forthwith  return and deliver to the Company and shall not
     retain any original or copies of any books, papers, price lists or customer
     contracts,  bids or customer lists, files, books of account,  notebooks and
     other  documents  and data relating to the  performance  by Employee of his
     duties  hereunder,  all of which  materials  are  hereby  agreed  to be the
     property of the Company.

13.  TAX  AND  OTHER  RESTRICTIONS.   Notwithstanding  anything  herein  to  the
     contrary:

     (a)  EXCESS  PARACHUTE  PAYMENTS.  In the event that  payment of any amount
          under this  Agreement,  including,  but not limited to, any  Severance
          Payment  under  Section 7(c) or Change in Control  Compensation  under
          Section 10,  would cause  Employee  to be the  recipient  of an excess
          parachute  payment  within  the  meaning  of  section  280G(b)  of the
          Internal Revenue Code of 1986, as amended (the "Code"),  the amount of
          the payments to be made to Employee  pursuant to this Agreement  shall
          be reduced to an amount  equal to one dollar less than the amount that

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          would cause the payments  hereunder to be excess  parachute  payments.
          The  manner in which such  reduction  occurs,  including  the items of
          payment  and  amounts  thereof  to be  reduced,  shall be agreed to by
          Employee and the Company.

     (b)  PAYMENTS IN EXCESS OF $1 MILLION. If any payment hereunder,  including
          but not limited to, a Severance  Payment  under Section 7(c) or Change
          in Control  Compensation  under Section 10, would not be deductible by
          the Company for federal  income tax purposes by reason of Code section
          162(m),  or any similar or successor  statute  (excluding Code section
          280G),  such payment shall be deferred and the amount thereof shall be
          paid to  Employee  at the  earliest  time that such  payment  shall be
          deductible by the Company.

     (c)  DEFERRED COMPENSATION PAYMENTS.  Notwithstanding any provision of this
          Agreement other than this Section 13(c) to the contrary,  no Severance
          Payment  under  Section 7(c) or Change in Control  Compensation  under
          Section 10 will be provided under this Agreement until the earliest of
          (A) the date of Employee's  termination of employment,  or if Employee
          is a "specified  employee" as defined in Code section  409A,  the date
          which is six (6) months after Employee's termination of employment for
          any reason,  other than death or "disability" (as such term is used in
          Code  section  409A(a)(2)(C)),  (B) the  date of  Employee's  death or
          "disability" (as such term is used in Code section  409A(a)(2)(C))  or
          (C) the  effective  date of a "change in the  ownership  or  effective
          control"  of  the  Company   (within  the  meaning  of  Code   section
          409A(a)(2)(A)(v)). The first sentence of this Section 13(c) shall only
          apply to the extent  required to avoid  Employee's  incurrence  of any
          additional tax or interest under Code section 409A or any  regulations
          or Treasury  guidance  promulgated  thereunder.  In  addition,  if any
          provision  of  this  Agreement  (or  of  any  award  of  compensation,
          including  equity  compensation)  would  cause  Employee  to incur any
          additional tax or interest under Code section 409A or any  regulations
          or Treasury guidance promulgated thereunder,  the Company shall reform
          such provision;  provided that the Company shall: (i) maintain, to the
          maximum  extent  practicable,  the original  intent of the  applicable
          provision  without  violating the  provisions of Code section 409A and
          (ii) notify and consult with the Employee regarding such amendments or
          modifications prior to the effective date of any such change.

14.  MISCELLANEOUS.

     (a)  NOTICES.  Any notice  required  or  permitted  to be given  under this
          Agreement  shall be sufficient if in writing and if sent by registered
          or certified  mail to Employee or the Company at the address set forth
          below their  signatures at the end of this  Agreement or to such other
          address as they shall notify each other in writing.

     (b)  ASSIGNMENT.  This  Agreement  shall be  binding  upon and inure to the
          benefit of the Company and its  successors  and permitted  assigns and
          Employee  and  his  personal  representatives,   heirs,  legatees  and
          beneficiaries.  This Agreement may be assigned by the Company with the

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          consent of Employee to a fiscally  responsible entity that assumes the
          obligations set forth herein, but shall not be assignable by Employee.

     (c)  APPLICABLE  LAW. THIS AGREEMENT  shall be construed in accordance with
          the laws of the State of North Carolina in every  respect,  including,
          without  limitation,  validity,  interpretation  and performance.  Any
          dispute between the parties hereto,  arising under or relating to this
          Agreement  or  the  Letter  Agreement  (as  hereinafter  defined),  or
          Employee's  employment  with the Company,  other than for an action by
          the  Company  under  Section  11  hereof  for  specific   performance,
          injunction  or other  equitable  remedy to  enforce  Sections  8 and 9
          hereof  shall  be  settled  by  arbitration  in  Winston-Salem,  North
          Carolina  before  a  single  arbitrator  in  accordance  with the then
          applicable  rules  of  the  American  Arbitration  Association.   Such
          arbitrator  may award the prevailing  party its reasonable  attorneys'
          fees and expenses, and judgment upon the award rendered may be entered
          in any court having jurisdiction thereof.

     (d)  HEADINGS.  Section  headings  and  numbers  herein  are  included  for
          convenience  of  reference  only  and  this  Agreement  is  not  to be
          construed with  reference  thereto.  If there be any conflict  between
          such numbers and headings and the text hereof, the text shall control.

     (e)  SEVERABILITY. If for any reason any portion of this Agreement shall be
          held  invalid or  unenforceable,  it is agreed that the same shall not
          affect the validity or  enforceability  of the remainder  hereof.  The
          portion of the Agreement which is not invalid or  unenforceable  shall
          be considered  enforceable  and binding on the parties and the invalid
          or  unenforceable  provision(s),  clause(s)  or  sentence(s)  shall be
          deemed  excised,  modified or  restricted  to the extent  necessary to
          render  the same valid and  enforceable  and this  Agreement  shall be
          construed as if such invalid or unenforceable provision(s), clause(s),
          or sentences(s) were omitted. The provisions of this Section 14(e), as
          well as Sections 8 and 9 hereof, shall survive the termination of this
          Agreement. The provisions of Section 7(c)(ii) hereof (whether directly
          or  indirectly  as the result of a  resignation  by Employee  for Good
          Reason  pursuant  to  Section  7(d)  hereof)  shall also  survive  the
          termination of this Agreement on account of the failure of the Company
          to renew this Agreement pursuant to Section 1 hereof.

     (f)  ENTIRE AGREEMENT.  This Agreement and the  contemporaneously  executed
          letter  agreement  dated  September 9, 2005 (the  "Letter  Agreement")
          contain  the  entire  agreement  of the  parties  with  respect to its
          subject  matter and  supersedes  all previous  agreements  between the
          parties.  No officer,  employee,  or representative of the Company has
          any authority to make any representation or promise in connection with
          this  Agreement or the Letter  Agreement or the subject matter thereof
          that is not contained therein, and Employee represents and warrants he
          has  not  executed   this   Agreement   in  reliance   upon  any  such
          representation   or  promise,   except  as  contained  in  the  Letter
          Agreement.  No  modification  of  this  Agreement  or  of  the  Letter
          Agreement  shall be valid  unless  made in  writing  and signed by the
          parties hereto.

                                       10
<PAGE>

     (g)  WAIVER  OF  BREACH.  The  waiver  by  either  party of a breach of any
          provision of this Agreement or the Letter Agreement by the other party
          shall not operate or be construed as a waiver of any subsequent breach
          by the breaching party.

     (h)  COUNTERPARTS.   This   Agreement  may  be  executed  in  one  or  more
          counterparts, each of which shall be deemed to be an original, but all
          of which together shall constitute one agreement.

     IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by
its duly  authorized  officer and Employee has signed this  Agreement all on the
day and year first above written.

                                         TRIAD GUARANTY INC.
                                           a Delaware corporation

                                        By: /s/William T. Ratliff, III
                                          ------------------------------------
                                                  William T. Ratliff, III
                                                  Chairman of the Board
                                        Address:  101 South Stratford Road
                                                  Winston-Salem, N. C.   27104

                                         MARK K. TONNESEN

                                          /s/Mark K. Tonnesen
                                         -------------------------------------
                                         Address: 45 Valecrest Drive
                                                  Toronto, Ontario, Canada M9A4P

                                       11
<PAGE>

September 9, 2005

Mr. Mark K. Tonnesen
45 Valecrest Drive
Toronto, Ontario M9A 4P5

Re:  Letter of Agreement

Dear Mr. Tonnesen:

This letter will set forth certain mutual  understandings  between you and Triad
Guaranty  Inc. (the  "Company").  Specifically,  this letter covers  matters not
included in your  Employment  Agreement  executed as of the same date which will
govern the terms of your continuing employment with the Company, and this letter
incorporates by reference that Agreement.

1.  RELOCATION  COST.  The Company  agrees to cover  certain  costs you and your
family will incur in relocating to  Winston-Salem,  North Carolina.  These costs
are to be itemized and estimated on the attached  worksheet,  incorporated  into
this  agreement as Exhibit A. A  significant  portion of these  expenses will be
paid to you in a lump sum in advance. You hereby agree to provide  documentation
of these expenses to the Company and a final  reconciliation of these costs will
be  conducted  once  all  costs  have  been   incurred.   Following  this  final
reconciliation, the Company will also pay to you a one-time payment to reimburse
you for taxes payable on these relocation  expenses.  This payment will equal 55
percent  of the total  taxable  income to you  related  to funds  paid to you in
reimbursement of relocation  related costs and it is agreed by both parties that
all  efforts  will be made to reduce the  taxable  income to you to the  maximum
extent permissible under law and IRS Code provisions. This payment will equal 65
percent  of the total  taxable  income to you with  respect to such funds as are
determined to be taxable by the State of North Carolina as well as by the IRS.

2. INITIAL  STOCK AND STOCK OPTION  AWARDS.  Once you have become  employed full
time by the Company and become  domiciled  in North  Carolina,  you will also be
eligible to receive,  and the Company shall award a one-time grant of restricted
stock equal in value to $1.5 million  pursuant to the Company's  1993  Long-Term
Stock  Incentive  Plan  (the  "LSIP").  The  restricted  stock  granted  will be
calculated  by dividing $1.5 million by the  Applicable  Price.  The  Applicable
Price will be calculated by averaging the closing price of Triad Guaranty common
stock on the last  three  trading  days prior to the date of  execution  of this
agreement.  You will also be eligible for a grant of stock options with a strike
price at the  closing  price of Triad  common  stock on the date of the grant of
such options. You will be eligible to receive three times as many options as the

<PAGE>

Mr. Mark K. Tonnesen
September 9, 2005
Page 2

number of shares of restricted  stock you receive in the grant described  above.
Fifty  percent  of  these  stock  and  option  grants  will  vest at the  second
anniversary  date of your  employment  and fifty  percent will vest at the third
anniversary  date of your  employment  by the  Company.  In the event  that your
employment should be terminated  without cause by the Company or by you for Good
Reason or on account of a Change in Control,  all as defined in your  Employment
Agreement,  (hereinafter,  a  "Qualifying  Termination"),  between the first and
second anniversary dates of your employment,  you will, on the effective date of
such  termination,  vest in one-third of your  restricted  stock and options and
will have thirty (30) days in which to exercise  your  options  from the date of
your termination.

3. SUBSEQUENT  EQUITY AWARDS.  We have also agreed that you will be eligible for
future  equity grants under the LSIP or  subsequent  plans  starting with grants
made in 2007.  With respect to any such grant of stock,  stock  options or other
equity or equity  equivalents  (an  "Equity  Award"),  if there is a  Qualifying
Termination  following  any such  grant,  you will vest pro rata in such  Equity
Award.  The  pro-rata  calculation  will be based  upon the  percentage  of time
elapsed from the  original  date of such grant to the vesting  date,  each award
having multiple vesting dates utilized in the calculation  (e.g. - a grant which
vests  equally in thirds  over a three  year  period  would  have three  vesting
dates.) As an example, the calculation for a stock award which is six (6) months
through a twelve  (12)  month  vesting  timeframe  would  vest 50 percent of its
portion of the  associated  award,  while that which is six (6) months through a
twenty-four (24) month vesting timeframe would vest 25 percent of its portion of
the associated award, and that which is six (6) months through a thirty-six (36)
month vesting  timeframe  would best  one-sixth of its portion of the associated
award.  In the event of such a termination,  any options which might vest as the
result  of your  termination  and any  other  options  already  vested as of the
termination  date must be exercised  within thirty (30) days of your termination
date.

4. SUPPLEMENTAL  BENEFITS. In addition to other cash compensation covered in the
Employment  Agreement  referenced  above,  you will be paid a car  allowance  of
$1,000 per month, reimbursement for financial planning services up to $7,500 per
year, and  reimbursement  for the initiation fee and annual membership dues to a
country club in the Winston-Salem,  North Carolina vicinity. Such initiation fee
to be subject to gross-up  for federal and state tax  purposes on the same terms
as in number one (1) above.

5.  MISCELLANEOUS.  All  compensation  agreements and terms contained herein are
subject to the  limitations  outlined in Section 13 of the Employment  Agreement
referenced  above. This letter is not intended to contradict any of the terms or
conditions of the Employment Agreement but is intended as a supplement thereto.

<PAGE>

Mr. Mark K. Tonnesen
September 9, 2005
Page 3

We have requested and you have agreed to assume the title of President and Chief
Executive  Officer of Triad Guaranty Inc. as of September 14, 2005. Both parties
understand  and  hereby   acknowledge  that  you  will  be  making  all  efforts
practicable  to move your place of domicile to the  Winston-Salem  area and that
your efforts from September 14, 2005,  forward will be dedicated  solely for the
benefit of the  Company  and you will be working  full-time  for the  Company as
defined in your Employment Agreement.

Any  termination or severance  from  employment  with the Company  following the
seventh  anniversary of the date of your employment shall be deemed a retirement
for purposes of this  agreement  and all future awards made under the current or
any  subsequent  long-term  incentive  plans or  equity  award  programs  of the
Company.

Please  acknowledge  your agreement with the terms and arrangements put forth in
this letter by signing  and dating a copy of this  letter in the space  provided
below.  Once  executed,  the  Employment  Agreement of the same date between the
parties and this  letter as a  supplement  thereto  will  constitute  the entire
agreement  between  the parties and can only be amended if done so in writing by
mutual agreement.

                                         TRIAD GUARANTY INC.
                                            a Delaware corporation

                                        By:    /s/William T. Ratliff, III
                                            ------------------------------
                                                 William T. Ratliff, III
                                                 Chairman of the Board
                                        Address: 101 South Stratford Road
                                                 Winston-Salem, N.C. 27104

                                        MARK K. TONNESEN

                                               /s/Mark K Tonnesen
                                            ------------------------------
                                        Address: 45 Valecrest Drive
                                                 Toronto, Ontario, Canada M9ASSET PURCHASE AGREEMENT

         This Asset Purchase  Agreement (the  "Agreement")  is made as of August
31, 2005, between TRANS ENERGY, INC., a Nevada corporation ("Trans Energy"), and
PRIMA OIL  COMPANY,  INC., a Delaware  corporation  ("Prima"),  (also  sometimes
referred to  collectively  herein as "Seller" or "Sellers")  and GEORGE  HILLYER
(also  sometimes  referred  to  herein  as  "Buyer").   For  good  and  valuable
consideration,   the  value,   receipt  and  sufficiency  of  which  are  hereby
acknowledged,  and  in  consideration  of  the  mutual  covenants,   agreements,
representations,  and warranties contained in this Agreement,  the parties agree
as follows:

     1. Basic  Transaction:  Subject to the terms and  conditions  of this Asset
Purchase Agreement (the "Agreement"),  Buyer agrees to purchase from Seller, and
Seller agrees to sell to Buyer certain assets  described in Section 2 below (the
"Purchased Assets").  For purposes of this Agreement,  the term "Business' shall
refer only to the  operations  and results of  operations  of the Marion  County
Leases and the Marion County Wells, as such terms are described below.

     2. Purchased Assets:  Except for the Excluded Assets described in Section 3
below,  the Purchased  Assets shall consist of the following assets of Seller in
connection with the Business:

         a. All those certain  leases for the  production of oil and natural gas
located in Marion County,  West Virginia,  (the "Marion County Leases") and more
particularly  described  in  that  certain  assignment  and  bill of sale by and
between Cobham Gas Industries,  Inc., a West Virginia corporation ("Cobham") and
Belmont Energy, Inc., a Ohio corporation,  as assignors, and Prima, as assignee,
dated  November  5,  2004,  and of record  in the  Office of the Clerk of County
Commission of Marion County, West Virginia in Assignment Book 27, at page 258, a
copy of which is attached hereto as Exhibit A (the "Cobham Assignment");

         b. All those  certain  oil or natural  gas wells  located on the Marion
County Leases,  all as more  particularly  described and set forth on Schedule B
attached hereto (the "Marion County Wells"),  together with all of the equipment
and other tangible  personal property  physically  attached to any of the Marion
County Wells;

         c. All of those  certain  vehicles  and other  equipment  set forth and
described on Schedule C attached  hereto (the  "Equipment"),  together with such
parts  inventories  and hand  tools as shall  be  agreed  upon by Buyer  and Mr.
Clarence Smith on behalf of Seller;

         d. All of Seller's well logs, maps,  production data, sales records and
histories,  royalty payment records and other information  concerning the Marion
County Leases or the Marion County Wells, whether in paper,  electronic or other
format (the "Marion County Information");

         e. Seller's  $50,000.00  reclamation  bond pursuant to which all of the
Marion County Wells, among others, are permitted (the "Bond");

         f.  Seller's  cash  and  trade  accounts  receivable  generated  by the
Business, net of all operating expenses related to the Business,  realized on or
after August 1, 2005 (the "August Business Net Receipts"); and

         g.  All of the  outstanding  capital  common  stock of  Cobham  held by
Seller,  or any related party  thereto,  it being  understood  that in the event

<PAGE>

Cobham is not the  record  holder of the  outstanding  capital  common  stock of
Pennine  Resources,  Inc.  and Belmont  Energy,  Inc.,  then such shares held by
Seller,  or any of their related parties shall also be included among the assets
purchased by Buyer.

     3. Excluded Assets:  All other assets of Seller and Cobham not specifically
set forth and described  herein or on the Exhibits and Schedules hereto shall be
excluded from the Purchased  Assets,  including  without  limitation,  any other
assets of Sellers that are expressly  excluded from the Purchased  Assets in the
Purchase  Agreement,  and all parts and tools  which  Buyer and Mr.  Smith agree
shall be excluded from the purchased assets.

     4. Consideration.

         a. Buyer shall:

                   i. sell,  assign,  convey,  release,  relinquish or otherwise
transfer to Seller (i) all of the capital common stock of Trans Energy issued to
Buyer or to Texas  Energy  Trust  Company on or about  January 31,  2005,  being
approximately 244,633 shares (the "Trans Energy Stock"), which said shares shall
be valued at the closing  price per share of its publicly  traded  shares on the
Closing Date;

                   ii. sell, assign,  convey,  release,  relinquish or otherwise
transfer  all  of  Buyer's  options,  warrants  and  future  rights  to  acquire
securities of Seller or any of their affiliated  entities from any of the Seller
or any of their affiliated entities (the "Securities Rights");

                   iii. allow, and does hereby allow,  Seller to utilize through
December 31, 2005 the Bond to comply with West Virginia bonding requirements for
the  operation of oil and natural gas wells other than the Marion  County Wells,
including without limitation existing and new wells;

                   iv. assume,  and does hereby assume,  responsibility  for the
payment of the BB&T Loan in the  approximate  amount of $79,089,  the three Ford
Motor  Credit  loans  in the  total  approximate  amount  of  $17,750,  plugging
liabilities  related  to the  Marion  County  Wells,  all  expenses  related  to
operation,  maintenance and ownership of the Marion County Leases and the Marion
County Wells  incurred on or after August 1, 2005,  whether paid or not, and all
other liabilities not specifically retained by Seller.

          b. Sellers shall:

                   i. fulfill their remaining payment obligations to Buyer under
the purchase agreement between the parties dated November 5, 2004 (the "Purchase
Agreement");  provided, however, Sellers will be entitled to a $25,000.00 credit
in exchange for one of the John Deere 650 Dozer listed on Schedule C;

                   ii. retain,  and does hereby assume,  responsibility  for the
payment of certain debts of or related to Cobham,  including without  limitation
all accounts or notes  payable to Arvilla  Oilfield  Services,  LLC or any other
entity with whom Trans Energy files consolidated  financial  statements,  all as
more  particularly  set forth and  described  on Schedule D attached  hereto and
further warrant that there are no known trade accounts payable, unpaid royalties
or taxes that have not been retained by Seller

                                      -2-
<PAGE>

          c. The Consideration shall be delivered as follows:

                   i. At the Closing, Buyer shall deliver:

                      1.   all of Buyer's stock  certificates for all of Buyer's
                           Trans Energy Stock,  duly endorsed for transfer,  and
                           accompanied by irrevocable stock transfer powers duly
                           executed by Buyer in  substantially  the same form as
                           Exhibit E;

                      2.   an  executed   release  and   surrender   of  Buyer's
                           Securities  Rights in substantially  the same form as
                           Exhibit F.

                  ii. At the Closing, Seller shall deliver:

                      1.   an executed assignment,  assumption, and bill of sale
                           for the Marion  County Leases and Marion County Wells
                           in substantially the same form as Exhibit G;

                      2.   an  executed  bill  of  sale  for  the  Equipment  in
                           substantially the same form as Exhibit H;

                      3.   all outstanding stock  certificates for Cobham,  duly
                           endorsed for transfer, and accompanied by irrevocable
                           stock  transfer  powers  duly  executed  by Seller in
                           substantially the same form as Exhibit I.

               iii.  Within  ninety  (90) days after the  Closing  date  herein,
Seller shall deliver to Buyer the August Business Net Receipts, together with an
itemization of revenues and expenses  generated by the Business during the month
of August 2005.

         d. Trans Energy, its subsidiaries,  officers and directors will, and do
hereby,  release Mr.  Hillyer and Cobham from all their claims of whatever kind,
whether known or unknown, fixed or contingent, as of July 31, 2005 and as of the
Closing Date,  except as otherwise  specifically set forth herein or agreed upon
in writing.

         e. Mr. Hillyer and Cobham will, and do hereby,  release Sellers,  their
officers,  directors and  subsidiaries  from all their claims of whatever  kind,
whether known or unknown, fixed or contingent, as of July 31, 2005 and as of the
Closing Date,  except as otherwise  specifically set forth herein or agreed upon
in writing.

         f. Mr. Hillyer and Cobham will, and do hereby,  indemnify  Seller,  its
subsidiaries, officers and directors from all losses or claims arising out of or
related to the  ownership  or  operations  of the Marion  County  Leases and the
Marion County Wells, whenever or however so arising.

         g. Mr. Hillyer and Cobham will, and do hereby,  indemnify  Seller,  its
subsidiaries,  officers and directors  from all losses or claims  arising out of
the assumed liabilities provided in Section 4(a)(iv).

     5. No Assumed Liability:  Except as otherwise expressly provided in Section
4(b)(ii),  Seller assumes no liability of Buyer with respect to the operation of
the Purchased Assets or Cobham after the date of the Closing.

                                      -3-
<PAGE>

     6.  Representations  and Warranties of Buyer. Buyer represents and warrants
to Seller as follows:

         a. Power and  Authority.  Buyer has full right,  power and authority to
execute,  deliver and perform this Agreement and to consummate the  transactions
hereby contemplated.

         b.  Conflicting  Instruments.  To  Buyer's  knowledge,  the  execution,
delivery  and  performance  of  this  Agreement  and  the  consummation  of  the
transactions  contemplated herein will not, with or without the giving of notice
or the passage of time,  (i) conflict with or result in the breach of any of the
terms and  provisions of, or constitute a default  under,  any note,  indenture,
mortgage,  deed of trust, agreement, or other instrument or restriction to which
Buyer  is a  party,  (ii)  violate  any  law,  order,  rule,  regulation,  writ,
injunction or decree of any government, governmental instrumentality,  agency or
body,  arbitration tribunal, or court, domestic or foreign,  having jurisdiction
over Buyer or its property,  or (iii) result in the creation of any lien, charge
or encumbrance upon any of the properties of Buyer.

         c.  Brokers.  All  negotiations  relative  to  this  Agreement  and the
transactions contemplated hereunder have been conducted and carried out by Buyer
directly  with Seller and without the  assistance or  intervention  of any other
person so as,  through  action of the parties or otherwise,  to give rise to any
valid claim against Buyer or Seller for a finder's fee, broker's fee, commission
or other like payment.  Buyer has not engaged,  retained or contracted  with any
finder,  broker or similar  person with respect to the purchase of the Assets to
from Seller,  so as to incur any  liability  for a finder's  fee,  broker's fee,
commission or like payment in connection with the execution of this Agreement or
the consummation of the transactions contemplated hereunder.

         d. Trans Energy Stock and  Securities  Rights.  Buyer is not a party to
any agreement,  written or oral,  creating  rights with respect to Buyer's Trans
Energy Stock and Securities Rights in any third person or relating to the voting
of the Trans Energy Stock. Buyer is the lawful owner of the Buyer's Trans Energy
Stock and Securities Rights,  free and clear of all security  interests,  liens,
encumbrances,  equities and other charges. Buyer has disclosed to Seller any and
all of Buyer's existing warrants, options, stock purchase agreements, redemption
agreements,  restrictions  of any nature,  calls or rights to  subscribe  of any
character.

     7. Conditions to Seller's Obligations.  Each and every obligation of Seller
under this  Agreement  shall be subject  to the  satisfaction,  on or before the
Closing Date, of the following conditions:

         a.   Representations  and  Warranties  True.  The  representations  and
warranties by Buyer in this Agreement or any other instrument delivered by Buyer
under this Agreement or in connection with the transfer of the Purchased  Assets
shall be true and accurate as of the date when made and at and as of the Closing
Date.

         b. Buyer's Performance.  Buyer shall have performed and complied in all
material  respects  with  each and every  covenant,  agreement,  obligation  and
condition required to be performed by it prior to or on the Closing Date.

         c. No Governmental  Proceeding or Litigation.  No order of any court or
administrative  agency  shall be in effect  which  restrains  or  prohibits  the
transactions contemplated hereby, and no suit, action, investigation, inquiry or

                                      -4-
<PAGE>

proceeding by any governmental  body or other person or legal or  administrative
proceeding shall have been instituted or threatened which questions the validity
or  legality  of the  transactions  contemplated  hereby or seeks to impose  any
liability on Seller as a result of the transactions contemplated hereby.

     8. Other Actions.

         a. Control.  Nothing  contained in this Agreement  shall give Buyer the
right to control, direct or supervise the equipment,  personnel or operations of
Seller's  business prior to Closing without the written  consent of Seller.  The
operation of the Seller's  business,  including complete control and supervision
of all  operations,  equipment and employees  prior to Closing shall be the sole
responsibility of Seller, unless otherwise agreed to in writing by the parties.

         b. Cooperation  After Closing.  Each party shall promptly,  at any time
and from time to time  after the  Closing  Date,  upon the  request of the other
party,  do,  execute,  acknowledge,  deliver and perform all such further  acts,
deeds,  instruments,   assignments,   transfers,   conveyances,   registrations,
applications  powers of attorney and assurances as may be required to convey and
transfer to and vest in the other party and  protect  the other  party's  right,
title and interest in and to and  enjoyment of all the assets and  consideration
intended to be assigned, transferred and conveyed to pursuant to this Agreement.

         c. The  Closing:  The  Closing of this sale will take place at Seller's
office at 10:00 a.m.  on August 31,  2005 or such other  place or date as Seller
and Buyer agree upon.  The  purchase and sale of the  Purchased  Assets shall be
effective as of the Closing,  and  possession  of the  Purchased  Assets will be
delivered and accepted as of the Closing.

9. Fees and Expenses:  Each of the parties  hereto will bear all legal and other
expenses  incurred by it or on its behalf in  connection  with the  transactions
contemplated by this Agreement.

     10. Post-Closing Covenants:

         a.  Generally:  In case at any time after the Closing  date any further
action is necessary  or  desirable to carry out the purposes of this  Agreement,
each of the parties will take such further  action  (including the execution and
delivery  of  such  further  instruments  and  documents)  as  the  other  party
reasonably may request, at the sole cost and expense of the requesting party.

         b. Post-Closing Receipts: In the event that any party after the Closing
date  receives  any funds  properly  belonging  to the other party or parties in
accordance with the terms of this  Agreement,  the receiving party will promptly
so advise  such other party or parties,  will  segregate  and hold such funds in
trust for the benefit of such other party or parties and will  promptly  deliver
such funds, together with any interest earned thereon, to an account or accounts
designated in writing by such other party or parties.

         c. Tax  Matters:  Buyer and Seller  shall  cooperate  fully,  as to the
extent reasonably  required by the other party, in connection with the filing of
tax returns  and any audit,  litigation,  or other  proceeding  with  respect to
taxes.  Such cooperation shall include the retention and (upon the other party's
request) the provision of records and information which are reasonably  relevant
to any such audit, litigation or other proceeding and making employees available
on a mutually convenient basis to provide additional information and explanation
of any material provided hereunder.

                                      -5-
<PAGE>

     11. Indemnity by Buyer.

         a. Buyer shall indemnify Seller and the officers, directors, successors
and assigns of Seller  (collectively,  "Seller  Indemnitees"),  and hold each of
them harmless against all claims,  losses,  damages (including natural resources
damages), costs (including environmental contamination and/or pollution response
and clean up costs),  penalties and expenses,  including  reasonable  attorneys'
fees ("Indemnity Amounts") resulting from any breach of Buyer's representations,
warranties,  agreements  and  covenants  contained  in  this  Agreement  and the
documents  delivered  pursuant  hereto.  Indemnity  by Buyer  shall  survive the
Closing and shall be fully enforceable at law or in equity against Buyer and its
successors and assigns by Seller and its successors and assigns.

         b. Seller will give to Buyer,  prompt  written  notice upon learning of
any claim (a "Claim") as to which  indemnity is prescribed by this Section.  The
notice will specify the  circumstances  giving rise to the Claim.  Within twenty
one (21) days after such notification,  Buyer shall pay Seller such amount as is
specified in the notice or inform  Seller in writing that it disagrees  with the
computation of the amount. In the latter case, Buyer and Seller shall proceed in
good faith to determine the correct amount, and Buyer's payment shall be due ten
(10) days after agreement is reached as to the correct amount. Interest shall be
added to any payment made more than thirty (30) days after initial  notification
of Buyer,  commencing  after the end of such 30-day  period.  Interest  shall be
computed at the  time-weighted  average prime rate publicly  announced by Morgan
Guaranty  Bank,  New York,  New York,  and in effect during the period for which
interest is payable.  As to any disputed  claim  involving this  Agreement,  the
parties  agree it shall be  referred to and finally  settled by  arbitration  as
provided in Section 12.

         c. Buyer, at its expense,  shall have the responsibility of contesting,
defending,  litigating or settling the Claim.  Seller or Seller  Indemnitees may
participate  in the  negotiation,  litigation  or  settlement of any such Claim,
provided that  (notwithstanding  any other provision  hereof) if Buyer agrees in
writing promptly after Buyer obtains  knowledge  thereof to be fully responsible
for any such Claim, Seller's participation shall be at its own expense. No Claim
shall be settled by Buyer unless the Seller  Indemnitees are fully released from
all liability  with respect  thereto.  Each of Buyer and the Seller  Indemnitees
agrees that they will cooperate  with the others as they may reasonably  request
in the handling of any Claims.

         d.  Upon the  settlement  of any Claim as  provided  above or the final
resolution of any Claim by a court of competent jurisdiction,  Buyer will notify
Seller promptly.  Buyer promptly will pay such Claim and, in addition,  will pay
to Seller an amount equal to any Indemnity Amounts incurred by any of the Seller
Indemnitees in connection  with such Claim,  and any amount required to make the
Seller  Indemnitees  whole after Taxes,  with respect to the foregoing  payments
taking into account as well any Tax benefits to such Seller Indemnitees.  Seller
agrees to consult  with Buyer prior to writing off or  deducting  the Claims for
Tax purposes.

         e. If Buyer fails to comply with its  obligations  under this  Section,
the Seller  Indemnitees  involved  may  elect,  but shall not be  obligated,  to
contest,  defend, litigate or settle any Claim in good faith, and Buyer promptly
will pay to Seller an amount  equal to any  Indemnity  Amounts  incurred by such
Seller Indemnitees in connection therewith,  and any amount required to make the
Seller Indemnitees whole after Taxes, with respect to the foregoing payments.

                                      -6-
<PAGE>

         f. For purposes of this  section,  "Tax" or "Taxes"  shall mean any tax
(including  any income  tax,  capital  gains tax,  value  added tax,  sales tax,
property tax, gift tax, franchise tax, or estate tax), levy, assessment, tariff,
duty  (including  any customs duty),  deficiency,  or other fee, and any related
charge or amount (including any fine,  penalty,  interest,  or addition to tax),
imposed,  assessed,  or collected by or under the authority of any  governmental
body or payable  pursuant to any  tax-sharing  agreement  or any other  contract
relating to the sharing or payment of any such tax,  levy,  assessment,  tariff,
duty, deficiency, or fee.

     12. Arbitration.

         a. All disputes  arising out of or in connection  with this  Agreement,
including any question regarding its existence,  validity or termination,  shall
be  referred  to  and  finally  settled  by  arbitration  under  the  Commercial
Arbitration  Rules then in effect of the American  Arbitration  Association (the
"Rules") by three (3)  arbitrators  appointed  as follows:  (i) if there are two
parties to the  dispute,  each party  shall  appoint an  arbitrator  (who may be
non-neutral)  and these  arbitrators  shall appoint a third arbitrator to act as
chairman  (provided that if the two party appointed  arbitrators do not agree on
the  appointment  of  the  third  arbitrator  within  thirty  (30)  days  of the
appointment  of the  second of said two party  appointed  arbitrators,  then the
American  Arbitration  Association shall appoint the third arbitrator),  (ii) if
there are three  parties to the  dispute  (for  purposes of this  section  only,
parties  that are  affiliated  parties  are  counted  as  being  one  party  and
affiliated  parties shall mean parties  controlling  or majority  owning,  being
controlled  or  majority  owned by or being  under  common  control or  majority
ownership with or being blood related to other parties hereto), each party shall
appoint one arbitrator (who may be non-neutral), or (iii) if there are more than
three parties to the dispute,  then the three arbitrators (who shall be neutral)
shall be appointed by the American Arbitration Association at the request of any
of the parties to the dispute.

         b. If any party to the dispute fails to nominate an  arbitrator  within
thirty  (30)  days  from  the date  when the  relevant  claimant's  request  for
arbitration has been  communicated to the other party, such appointment shall be
made promptly by the American Arbitration Association, and any party may request
such appointment be made.

         c. At the  request of any party to a  dispute,  the  arbitrators  shall
appoint experts,  including an accountant, to assist them on technical questions
relating to valuation,  accounting principles and practices and similar matters,
provided that such accountant shall be from a leading  accounting firm having an
office in Parkersburg, West Virginia.

         d. Such arbitral  tribunal shall be constituted in accordance with this
section,  and with  respect  to  matters  not  dealt  with in this  section,  in
accordance  with the Rules,  which  Rules are hereby  deemed to be  incorporated
herein by reference except where  inconsistent with the other provisions of this
section.  The  language of the  arbitration  shall be  English.  The seat of the
arbitration shall be Parkersburg, West Virginia except that hearings may be held
at any location  convenient to the parties as shall be  reasonably  agreed among
them and the arbitrators.

         e. The parties  hereby  exclude any  reference to or right of appeal to
any court by any party,  in particular  in  connection  with any question of law
arising in the course of the reference or out of the award,  except if necessary
to compel  arbitration as the parties'  exclusive  remedy in accordance with the
terms of this section or to administer  or enforce any award.  Judgment upon the
award rendered may be entered in any court having jurisdiction thereof or having
jurisdiction over one or more of the parties or their assets, or application may
be made to such  court for a  judicial  acceptance  of the award and an order of
enforcement.

                                      -7-
<PAGE>

     13. Severability:  Whenever possible, each provision of this Agreement will
be interpreted in such manner as to be effective and valid under applicable law,
but if any  provision of this  Agreement is held to be  prohibited by or invalid
under  applicable law, such provision will be ineffective  only to the extent of
such  prohibition  or  invalidity,  without  invalidating  the remainder of this
Agreement.

     14. Descriptive  Headings:  The descriptive  headings of this Agreement are
inserted for convenience only and do not constitute a part of this Agreement.

     15. Notices:  All notices,  demands or other  communications to be given or
delivered  under or by reason of the  provisions  of this  Agreement  will be in
writing.  Such notices,  demands and other  communications will be sent to Buyer
and Seller at the addresses  indicated below (or to such other address or to the
attention  of such other party as the  recipient  party has  specified  by prior
written notice to the sending party):

                 If to Buyer:
                                Mr. George Hillyer
                                Rt. 4, Box 350A
                                P. O. Box 1697
                                Clarksburg West Virginia 26302-1697

                 If to Seller:
                                Mr.  Clarence  E. Smith
                                Trans  Energy,  Inc.
                                Post Office Box 432
                                St. Marys, West Virginia  26170

                 With a copy to:
                                Richard A. Hudson, Esq.
                                Bowles Rice McDavid Graff & Love, LLP
                                P. O. Box 49
                                Parkersburg, West Virginia 26102

     16. No Third-Party Beneficiaries: This Agreement will not confer any rights
or  remedies  upon any person or entity  other  than  Seller and Buyer and their
respective successors and permitted assigns.

     17. Complete  Agreement:  This Agreement  constitutes the entire  agreement
among the  parties  and  supersedes  any  prior  understandings,  agreements  or
representations by or among the parties,  written or oral, that may have related
in any way to the subject matter hereof. This Agreement may be amended or waived
only by a written agreement executed by both Seller and Buyer.

18.  Assignment:  No party  hereto  may  assign  any of such  party's  rights or
obligations  under or in  connection  with this  Agreement  without  the written

                                      -8-
<PAGE>

consent  of the other  party  hereto.  Except as  otherwise  expressly  provided
herein, all covenants and agreements contained in this Agreement will be binding
upon and enforceable  against the respective  heirs,  personal  representatives,
successors and permitted assigns of such party.

     19.  GOVERNING LAW; VENUE AND  JURISDICTION:  ALL QUESTIONS  CONCERNING THE
CONSTRUCTION, VALIDITY AND INTERPRETATION OF THIS AGREEMENT AND THE EXHIBITS AND
SCHEDULES  HERETO  WILL BE  GOVERNED  BY THE  INTERNAL  LAW,  AND NOT THE LAW OF
CONFLICTS,  OF THE STATE OF WEST  VIRGINIA.  EACH OF THE PARTIES  HERETO  HEREBY
IRREVOCABLY AND  UNCONDITIONALLY  WAIVES ANY OBJECTION TO THE LAYING OF VENUE OF
ANY ACTION OR  PROCEEDING  ARISING  OUT OF THIS  AGREEMENT  OR THE  TRANSACTIONS
CONTEMPLATED  HEREBY IN THE COURTS OF THE STATE OF WEST  VIRGINIA  OR THE UNITED
STATES OF AMERICA,  HEREBY FURTHER  IRREVOCABLY AND  UNCONDITIONALLY  WAIVES AND
AGREES  NOT TO  PLEAD  OR CLAIM IN ANY  SUCH  COURT  THAT  ANY  SUCH  ACTION  OR
PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.

                 IN WITNESS WHEREOF,  the undersigned have signed this Agreement
as of the date set forth above.

                                 TRANS ENERGY, INC.

                                 By:      /s/ Clarence E. Smith
                                          --------------------------

                                 Its:     Chief Executive Officer

                                 PRIMA OIL COMPANY, INC.

                                 By:      /s/ Loren E. Bagley
                                          --------------------------

                                 Its:     President

                                 GEORGE HILLYER
                                          /s/ George Hillyer
                                 -----------------------------------

                                      -9-

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