Document:

<PAGE>   1
                                                                   EXHIBIT 10.19

CONTRACT FOR CRUDE OIL PRODUCTION AND ADDITIONAL EXPLORATION OF HYDROCARBONS IN
THE MARGINAL FIELD TIGUINO

MR. NOTARY:

In your Registry of Public Deeds, kindly enclose a deed that, in addition to
the usual formalities, shall contain the Crude Oil Production and Additional
Exploration of Hydrocarbons in the Marginal Field Tiguino, with the following
clauses:

FIRST: APPEARING PARTIES

The following parties appear for the execution of this Contract: The Government
of Ecuador through Empresa Estatal Petroleos del Ecuador, PETROECUADOR and its
affiliate, PETROPRODUCCION-Empresa Estatal de Exploracion y Produccion de
Petroleos del Ecuador, represented by Messrs. Wilson Pastor Morris and Eng.
Carlos Quiroz Soria, Executive President (CEO) and Manager respectively, duly
authorized by the Board of Directors of PETROECUADOR and the Board of Directors
of PETROPRODUCCION as stated in the annexed documents, hereinafter referred to
as PETROECUADOR, party of the first part and, as party of the second party, the
consortium of companies comprised of Petroleos Colombianos Limited. PETROCOL,
represented by Mrs. Patricia Arbelaes de Vergara, Ph.D., as President;
Ingenieria Ambiental Y Ecologia S.A., IECONTSA, represented by its President
Mr. German Avila V.; Cementaciones Petroleras Venezolanas S.A., CPVEN,
represented by its Attorney-in-fact German Avila V.; and the company
GRANTMINING S.A., represented by its President Mr. Leslie Smith;
representations certified through the documents attached hereto, and the
parties participate legally and jointly undertake all the obligations and
liabilities arising herefrom by waving order of exclusion, hereinafter referred
to as Contractor.

SECOND: BACKGROUND

2.1 Through Law 44 published in Official Gazette No. 326 on November 29, 1993,
amended by Law 49, published in Official Gazette 346 on December 28, 1993, the
amendments to the Law on Hydrocarbons included the contractual type Crude Oil
Production Contract and Additional Exploration on Hydrocarbons in Marginal
Fields, whereby PETROECUADOR delegates Contractor the authority to perform the
production and additional exploration activities in marginal production fields
that are currently being produced by PETROPRODUCCION.

2.2 According to Article 2 of the Law on Hydrocarbons, as amended, the Ministry
of Energy and Mines, by means of Ministerial Agreement Order 090 of January 12,
1998, published in Official Gazette 255 on February 11, 1998, designated
TIGUINO as a marginal field, subject to Public Bidding No. 010-UCCM-98, based
on the Financial, Technical and Legal Study on Reservoir Management in relation
to the qualification of Marginal Fields submitted by PETROECUADOR under
official letter No. 256-PEP-UCP-PPR-97/116805 of December 22, 1997 and on the
reports of the National Bureau of Hycrocarbons and the Legal Advisory Bureau of
the Ministry of Energy and Mines contained in memoranda
980091-DNH-CO-PT-Y-008-98 and 008-DAJ-JE-98 of January 8 and 9, 1998,
respectively, in accordance with Executive Order No. 1327-A, as published in
the Supplement to the Official Gazette No. 305 on April 27, 1998, attached
hereto.

                                  Page 1 of 38
<PAGE>   2

2.3 On April 1998, the Special Bidding Committee (CEL) called for the First
Bidding Round for the Crude Oil Production and Additional Exploration of
Marginal Fields in national territory.

2.4 After the qualification process and the selection of companies qualified to
operate marginal field areas, the Executive President of PETROECUADOR under
official letters numbers 200-UCP-99-2658 of July 19, 1999 and 193-UCP-99 of
July 9, 1999 requested the report of the Attorney General about this
contracting and the opinion of the Joint Command of the Armed Forces, which are
stated in the official letters numbers 06679 of August 11, 1999 and No.
990147-DIN-Y of July 20, 1999, respectively, attached hereto.

2.5 The Special Bidding Committee (CEL) through Resolution No. 610-CEL-99 of
September 21, 1999, awarded this contract for the Production of Crude Oil and
Additional Exploration of Hydrocarbons in the TIGUINO Marginal Field, to the
Consortium comprised of PETROCOL-CPVEN-IECONTSA-GRANTMINING whose interest
percentages in this Contract are 25%, 25%, 10% and 40%, respectively, according
to Envelope I of the Bid attached hereto as Exhibit II (III)*.

2.6 The Board of Directors of PETROECUADOR and the Board of Directors of
PETROPRODUCCION, through Resolution No. 367-CAD-99-10-28 of October 28, 1999 and
110-PPR-99-10-22 of October 22, 1999, attached hereto, authorized the Executive
President of PETROECUADOR and the Manager of PETROPRODUCCION to execute this
Contract.

THIRD: INTERPRETATION AND DEFINITIONS

                                  Page 2 of 38
<PAGE>   3

3.1 Conventional Interpretation.- The Parties agree that they shall construe
this Contract according to the provisions of title XIII, Book IV, of the Civil
Code of Ecuador, further stipulating that the headings and the order of the
clauses and sub-clauses are merely for reference and identification purposes.

3.1.1 Any tolerances of the Parties regarding the non-fulfillment of the
obligations set forth in this Contract shall, in no event, involve any change
or alteration of its stipulations, and this fact shall not set a precedent for
the interpretation of this Contract, nor be a source of rights in favor of the
infringing party.

3.1.2 The stipulations contained in this Contract shall prevail, in the event
of a discrepancy, over those contained in the sub-contracts, additional
agreements between the Parties, and in other documents that, due to their
legal, technical or financial nature, can be considered secondary.

3.1.3 The Parties expressly state their acceptance that, in the event that
inconsistencies arise between this Contract and the pertinent provisions of the
laws and regulations, or of the Bidding Specifications, such provisions shall
prevail over this Contract.

3.2 Language.- This Contract has been written by the Parties in the Spanish
language, and said version shall be considered for all effects as the only
valid version. However, Contractor may formally register a version of this
Contract in another language, in the understanding that if there is any
controversy between both versions, the text in Spanish shall prevail.

3.3 For a better interpretation of this Contract, PETROECUADOR and Contractor
agree that the meaning set forth below shall be assigned to the technical or
specialized terms that will frequently appear in this document, either in upper
or lower case, in plural or in singular, as follows:

3.4 Definitions

3.4.1 Contract Area: Shall mean the surface and projection in the sub-soil
where Contractor is authorized, by virtue of this Contract, to perform crude
oil production and additional exploration of hydrocarbons in the Contract Area
of the Tiguino Marginal Field whose boundaries and specifications are detailed
in Exhibit I hereto.

3.4.2 Fiscal Year: Shall mean a twelve-month period comprised between 00h01 of
January 1 and 24h00 of December 31, of each year according to the Gregorian
calendar, both dates inclusive.

3.4.3 Barrel: Shall mean the unit of production of Crude Oil equal, in volume,
to forty-two (42) gallons of the United Governments of America, at a
temperature of sixty degrees (60 degrees) Fahrenheit and a pressure of 14.6959
lbs. per square inch.

3.4.4 Inspection and Delivery Center: Shall mean the location wherein,
PETROPRODUCCION currently measures the Inspected Production of Crude Oil from
the Tiguino Field and Contractor shall continue to do so during the term of
this Contract. It is the place wherein Base Production Curve and Incremental
Production of the above mentioned field operated by Contractor under this
Contract will be determined. If, as a result of the work developed by
Contractor, the production conditions vary, the Parties will agree on new
Inspection and Delivery Centers, which will be approved by the Ministry of
Energy and Mines.

3.4.5 Contractor.- Shall mean the consortium consisting of the following
companies: Petroleos Colombianos Limited (PETROCOL), a subsidiary of Petroleos
Colombianos Limited; Cementaciones Petroleras Venezolanas S.A. (CPVEN), parent
company;

                                  Page 3 of 38
<PAGE>   4

Ingenieria Ambiental y Ecologica S.A. (IECONTSA), parent company; and
Grantmining S.A., a subsidiary of Grantham Resources Inc.

3.4.6 Operating Costs. Shall mean the production costs less amortization and
depreciation. If the operating cost of a period is divided by the inspected
production of that same period, the unit operating cost is obtained.

3.4.7 Base Production Curve.- Shall mean the production log of Crude Oil
obtained in the Mathematic Simulation and other studies of the reservoir
attached hereto as Exhibit II (IV)*.

3.4.8 Dollar: Shall mean the currency of legal tender the United States of
America.

3.4.9 Main Pipelines: Shall mean, in general, the pipelines and other equipment
and facilities necessary to store and transport crude oil from the Inspection
and Delivery Centers to the export terminals or industrialization centers in
the country.

3.4.10 Secondary pipelines: Shall mean the pipelines and other equipment and
facilities that are necessary to transport and store crude oil from storage
tanks in production fields to the Inspection and Delivery Centers or to connect
with the main pipelines.

3.4.11 Effective Date: Shall mean the registration date of this Contract with
the Hydrocarbons Registry at the National Bureau of Hydrocarbons, date on which
this Contract becomes effective and the terms hereof commence.

3.4.12 Force Majeure or Act of God: Shall mean an unforeseen event impossible
to be resisted or uncontrollable event sustained by one or both parties. This
definition includes, but is not limited to, earthquakes, seaquakes, floods,
landslides, storms, fires, explosions, strikes, stoppages, social disturbances,
acts of war (declared or not), acts of sabotage, acts of terrorism, acts or
omissions on the part of any Government authority, agency or entity; any other
circumstance not mentioned in this sub-clause that is likewise impossible to be
resisted, and is beyond the reasonable control of the Party invoking the
occurrence of the event and that may cause the total or partial obstruction or
delay in the performance of such Party's obligations, in accordance with the
stipulations of this Contract, and the concept defined in Article 30 of the
Civil Code of Ecuador.

3.4.13 PETROECUADOR: Shall mean the Government-owned company PETROLEOS DEL
ECUADOR with legal capacity, own assets, administrative, economic, financial
and operating autonomy, with main domicile in the city of Quito. The term
PETROECUADOR shall refer to PETROECUADOR and its affiliates.

3.4.14 Crude Oil: Shall mean the oil in liquid phase at surface conditions,
including the oil originated in condensate gas reservoirs, at the wellhead or
through a conventional field separator.

3.4.15 Development Plan: Shall mean the aggregate of activities and
corresponding estimated investments, that Contractor agrees to perform, if
Contractor found Commercially Productive Crude Oil Reservoirs as a consequence
of the Additional Exploration activities.

3.4.16 Production Investment Plan: Shall mean the detail of activities and
estimated investments, work schedule and production objectives that Contractor
agrees to develop in the Contract Area during the first three years of the term
hereof, including the pertinent budget stated in Exhibit IV (V)*.

3.4.17 Minimum Additional Exploration Investment Plan: Shall mean the offer
submitted by Contractor, which Contractor is required to perform, by its own
account and risk during the first three years of this Contract, counting from
the date of approval of the

                                  Page 4 of 38
<PAGE>   5
Environmental Impact Study by the Ministry of Energy and Mines, which will make
it possible to define new discoveries in the Contract Area as stated in Exhibit
V (VI)*.

3.4.18 Time Periods and Terms: Time Period shall mean the period comprised
between one date and another, including weekends and holidays. When this
Contract refers to terms, only working days shall be counted.

3.4.19 Benchmark Price: Shall mean the last monthly weighted average price for
the immediately preceding month of direct sales of Crude Oil made by
PETROECUADOR, on a cash basis, including spot and long-term sales, and adjusted
in quality to the equivalent of the Crude Oil produced in the Contract Area.
This price shall be stated as FOB Ecuadorian port (main export terminal) and in
Dollars per Production Unit.

3.4.20 Investment Budget: Shall mean the aggregate of investments that
Contractor will make, on an annual basis, according to the Production and
Minimum Additional Exploration Investments Plan according to the offer
submitted for the bidding process of the Tiguino marginal field.

3.4.21 Incremental Production: Shall mean the volume of Crude Oil that exceeds
the Base Production Curve.

3.4.22 Proven Reserves: Shall mean the volume of recoverable hydrocarbons, the
existence of which has been verified by means of reliable information obtained
through drillings, well logs, analysis of cores and fluid production tests that
present a reasonable certainty to be recovered in the future, under current
financial and operating conditions.

3.4.23 Proven developed reserves: Shall mean the Crude Oil volume that can be
recovered through available wells with the existing equipment and operating
conditions plus proven developed reserves that are not producing.

3.4.24 Undeveloped proven reserves: Shall mean the proven reserves expected to
recover through new or existing wells. Said wells must be completed in
non-drilled or non-drained areas.

3.4.25 Total Proven Reserves: Shall mean the aggregate of proven developed
reserves and of undeveloped proven reserves.

3.4.26 Probable reserves: Shall mean the volume of hydrocarbon that through
geological and geophysical interpretation and reservoir engineer studies, are
supposed to exist in areas close to the proven reserves of the same reservoir
and that can be recovered.

3.4.27 Possible reserves: Shall mean the volume of hydrocarbons that might come
from formations identified as apt for the accumulation of hydrocarbons but that
have not yet been drilled.

3.4.28 Emergency situations: Shall mean extraordinary circumstances qualified
as such by the Ministry of Energy and Mines, that occur or can foreseeably
occur within or outside the Republic of Ecuador, which require immediate
actions necessary in order to prevent damages that affect or might affect
normal operations under this Contract or the persons rendering services to
either of the parties or their property or third parties or their property,
notwithstanding the provisions of the Law on Hydrocarbons and the National
Security Law.

3.4.29 Sucre: Shall mean the currency of legal tender of the Republic of
Ecuador.

3.4.30 Production Rate: Shall mean the rate of maximum efficiency, determined
on the basis of individual characteristics and size of the reservoirs,
production characteristics and number of wells and facilities so that it be
maintained during a determined time period, under the principle of a balanced
reserves-production ratio, under technical and financial parameters according
to the procedure set forth by the National Bureau of Hydrocarbons, attached
hereto as Exhibit VI(VII)*.

                                  Page 5 of 38

<PAGE>   6
3.4.31 Calendar quarter: Shall mean a period of three consecutive months
starting on January 1, April 1, July 1 and October 1 of each Fiscal Year.

3.4.32 Production Unit: Shall mean the barrel as defined in Clause 3.4.3.

3.4.33 In the case of definitions not included in this Contract, the Parties
shall abide by the provisions of the Law, Regulations, Bidding Specifications
and the definitions accepted in the international oil industry.

FOURTH: PURPOSE

4.1 The purpose of this Contract is the Production of Crude Oil and Additional
Exploration of Hydrocarbons in the Tiguino Marginal Field, in order to increase
current production and incorporate new reserves.

In order to comply with the purpose of this Contract, Contractor, under its
exclusive responsibility and risk, must carry out the activities and make the
necessary investments with the use of adequate technology.

FIFTH: RIGHTS OF THE PARTIES

5.1 The hydrocarbon reservoirs located in Ecuadorian territory are national
resources that belong to the Government and are controlled by it; therefore,
the Ecuadorian Government is the sole and unconditional owner of all
hydrocarbon reservoirs and associated substances, in any physical condition,
located in national territory.

5.2 This Contract does not grant or assign Contractor any property rights on
the surface, subsoil or any natural or other resource existing in the Contract
Area, nor on the Areas expropriated in favor of PETROECUADOR for the
performance of this Contract, or on their easements, or on the work performed
thereon. The delimitation of the Contract Area has the sole purpose of
determining the surface area and its projection in the subsoil where Contractor
must operate.

5.3 Contractor shall have the right to payment and participation in the
production set forth in Clause Nine, under the conditions indicated in this
Contract. However, the rights of Contractor resulting from this Contract do
not include property rights on the discovered hydrocarbons nor on the
production and reserves resulting from the production and additional
exploration work.

5.4 Contractor has the exclusive right to carry out the activities that are the
subject matter of this Contract.

5.5 Contractor will be entitled to use the infrastructure that PETROECUADOR
currently keeps in the Contract Area, and Contractor is responsible for the
possession, proper use, maintenance and replacement of the above mentioned
infrastructure so that, upon termination of the contract, Contractor returns to
PETROECUADOR the field with the whole infrastructure and fixed assets in
similar conditions as Contractor received them, except for wear and tear due to
normal use.

5.6 Contractor shall use, at no cost, the volume of Crude Oil of the Contract
Area that is technically necessary for its field operations.

5.7 During the performance of its activities and work Contractor will have full
autonomy for its management and administration.

SIXTH: OBLIGATIONS OF THE PARTIES

6.1 Contractor agrees to undertake the following obligations:

                                  Page 6 of 38

<PAGE>   7
6.1.1  To perform the technical, financial and administrative operations as
well as to comply with all obligations derived from the Law, Regulations,
Bidding Specifications and this Contract, under its responsibility and
assuming all risks inherent in the production and additional exploration
operations in the marginal field TIGUINO. The technical failures and its
consequences caused by the action of Contractor or its subcontractors, shall be
Contractor's exclusive responsibility.

6.1.2  To perform the Work Schedule and Production Investment Plan undertaken
for the first three years, as stated in Exhibit IV (V)*, in order to increase
the Base Production Curve of Crude Oil in the Tiguino Marginal Field that until
the Effective Date of this Contract equals TWO THOUSAND (2000) barrels per day,
average annual production.

In case the actual production falls below the Base Curve, the difference will
be set off by taking the pertinent amount of Contractor's share in incremental
production.

6.1.3  To perform during the first three years of this Contract a Minimum
Additional Exploration Plan, as stated in Exhibit V (VI)*, making it possible
to discover more crude oil and, therefore, increase the Contract Areas reserves.

6.1.4  To increase Crude Oil production beyond the Base Production Cure levels
indicated in Exhibit III (IV)*, using modern techniques that, in comparison to
the technology currently used, shall represent a greater degree of technical and
financial efficiency in the operation.

6.1.5  To contribute with capital or financial resources provided for in the
Work Schedule and Production and Additional Exploration Investment Plans
according to the Yearly Programs and Budgets, resources that together with the
furnishing of machinery, equipment and instruments are required for the
fulfillment of its obligations.

6.1.6  To preserve the environment applying the most recommended techniques of
international oil practices strictly in accordance with the legal, regulatory
and administrative provisions, as well as international agreements ratified by
Ecuador on environmental pollution control and prevention, and on preservation
of the ichthyiological resources and agricultural industry, that are currently
in force.

6.1.7  To immediately perform clean-up work in the event of environmental
pollution caused during the course of its activities notwithstanding other
responsibilities to third parties or any competent authority. To this effect,
Contractor shall take out the relevant insurance policies covering all risks
pertaining to environmental protection. In any case, Contractor shall take all
necessary precautions, since it will be exclusively liable for any
environmental impact.

6.1.8  To comply with and develop, permanently and uninterruptedly, the
activities set forth in the Work Schedule and Production Investment Plan and in
the Minimum Additional Exploration Plan and in the approved Annual Work
Schedule and Investment Budget, except if they must be suspended or interrupted
due to Force Majeure, Acts of God or Emergency Situations.

                                  Page 7 of 38

<PAGE>   8
6.1.9 In the event that Contractor affects the formation due to reconditioning
or treatment of wells, existing at the time of execution of this Contract, and
therefore, Crude Oil production decreases considerably or is lost, Contractor,
at its own expense, shall drill a twin well at its own cost to the same depth of
the affected well.

6.1.10 To permanently provide PETROECUADOR, though its affiliate PETROPRODUCCION
and Unidad de Contratacion Petrolera (Petroleum Contracts Unit), with the
information concerning the development of all activities performed during the
term of the Contract. To that effect, Contractor shall submit periodic reports
according to the stipulations of Hydrocarbon Operation Regulations; furthermore,
it shall submit copies or originals, as the case may be, of electric,
radioactive, sonic and other logs, seismic tapes and lines, well samples, cores,
formation samples, maps, cross-sections, topographic, geological, geophysical,
geochemical and drilling reports, geological and geophysical interpretations,
reports on the evaluation of reservoirs found in the Contract Area; and, in
general, any other scientific, technical, financial, environmental and legal
information obtained through its work.

6.1.11 To provide the authorized officials of the Ecuadorian Government or of
PETROECUADOR with the necessary facilities for the fulfillment of their
obligations and duties related to this Contract, including, in the field
operation, facilities for transportation, lodging, food and other services, in
the same conditions that Contractor offers its staff, taking into account the
facilities available for the efficient fulfillment and performance of its
obligations. The costs incurred by Contractor for furnishing such facilities
will be recovered, as applicable, according to the Accounting Regulations.
Government or PETROECUADOR officials must comply with the Industrial Safety and
Environmental Protection Rules of Contractor.

6.1.12 To keep detailed accounting records of all technical and environmental
operations performed under this Contract.

6.1.13 To respect industrial property rights, and to indemnify and hold
PETROECUADOR harmless from claims or compensation payments resulting from the
non-fulfillment or breach of Contractor's obligations.

6.1.14 To take all necessary measures while performing its operations to
safeguard health, conservation and safety of life, property, vegetation,
fisheries, navigation, disposition of waters, effluents, as well as the health
and safety of the staff at its own expense.

6.1.15 To admit college students or graduates with technical or higher education
diplomas related to the oil industry to carry out practices and studies in the
work fields of the Contract Area and at Contractor's offices in Ecuador, without
assuming any liability for their risks. In relation to the performance of such
practices, students shall be covered by the accident insurance policy that
Contractor has for its own employees. Contractor shall pay for transportation,
lodging, food, minor medical care and emergency care, which shall be provided
under the exact same conditions as those afforded to Contractor's personnel in
Ecuador.

                                  Page 8 of 38

<PAGE>   9

The duration of such practices and studies and the number of persons doing them
shall be agreed in such a way that they do not interfere with the performance
of the activities of Contractor. Contractor shall, additionally, provide
monthly financial aid to the students in an amount not lower than two minimum
vital wages. It shall be understood that there is no employment relationship
between Contractor or PETROECUADOR and those engaged in such practices or
studies. Students or graduates shall prepare the corresponding reports on such
practices and studies and submit a copy to Contractor. Upon carrying out the
activities at Contractor's facilities, students must abide by the industrial
safety and environmental protection rules of Contractor.

6.1.16 To take the appropriate or pertinent necessary actions in Emergency
Situations and to notify PETROECUADOR thereof within three days.

6.1.17 To indemnify and hold PETROECUADOR harmless from any legal action or
claim resulting from the non-fulfillment or breach of any of the obligations
hereunder, whether to its workers, subcontractors, providers, or third parties
related or unrelated to this contract.

6.1.18 According to the offer, Contractor shall deliver PETROECUADOR the amount
of US$ 30,000 (thirty thousand dollars) per year for training purposes during
the first three years of the Contract. This contribution shall be effective in
January of each year.

6.1.19 To pay all contributions and dues set forth in the Laws and Regulations
and stated in the Accounting Regulations.

6.1.20 To register this Contract with the Hydrocarbon Registry at the National
Bureau of Hydrocarbons within the first 30 days from the date of execution.

6.2 PETROECUADOR agrees to undertake the following obligations:

6.2.1 To pay Contractor the stipulated compensation, in accordance with the
manner, terms, amount and other conditions set forth in Clause 9 hereof.

6.2.2 To provide Contractor with the property, equipment, machinery and
facilities according to the corresponding inventory.

6.2.3 To see, in a timely manner, to Contractor's requests, proposals and
requirements and to introduce modifications or grant corresponding approvals
within the terms and time periods set forth herein.

6.2.4 To provide access in favor of Contractor to existing or future
communication and transportation means.

6.2.5 To provide the fuel required by Contractor for its operations, through
PETROCOMERCIAL, at the domestic market price.

6.2.6 To communicate to Contractor, as soon as PETROECUADOR becomes aware, of
any claims or legal proceedings that may affect Contractor's rights hereunder,
so that it may adopt the measures deemed most appropriate to defend its
interests.

6.2.7 To provide Contractor, free of charge, any existing technical and
financial information associated to the Contract Area, as well as existing
technical information on other areas, at no charge other than the fee set by
the Petroproduccion's Board of Directors. Contractor shall pay any costs to
reproduce said information.

                                  Page 9 of 38
<PAGE>   10
6.3 OBLIGATIONS COMMON TO THE PARTIES:

6.3.1 If proven reserves increase, and the total production of the Marginal
Field, which is the subject matter of this Contract, exceeds 300% of the Base
Production Curve, as a result of the Work Schedule and Production Investment
Plan and/or the performance of the Additional Exploration Plan for the Marginal
Field, Contractor's share shall be determined according to the X3 balance
factor stated in Exhibit II (III)*.

6.3.2 To construe and perform this Contract in good faith.

6.3.3 To comply with the requirements of the Ministry of Energy and Mines and
other Government agencies related to the performance of this Contract.

6.3.4 To execute additional and amending Contracts as well as other Contracts
which are deemed suitable to their interests.

6.3.5 All other obligations set forth by the Laws, Regulations, Bidding
Specifications and this Contract.

6.4 Responsibilities

6.4.1 Contractor assumes full responsibility vis-a-vis the Government and
PETROECUADOR with respect to the obligations undertaken hereunder. Contractor
assumes like responsibility with respect to the obligations of its
subcontractors and Related Companies in activities relating to the performance
of this Contract. Likewise the Government of Ecuador and PETROECUADOR assume
full responsibility for their contractual obligations.

SEVENTH: TERM

7.1 This Contract shall have a term of 20 years from the Effective Date.

7.2 The production operations of Contractor shall start and continue
uninterruptedly in the Contract Area within the first eight-(8) days counting
from the Contract's registration date with the Hydrocarbon Registry.
PETROPRODUCCION and Contractor shall coordinate the taking over of operations
and will adopt precautionary measures to ensure that production will not be
interrupted. The Additional Exploration Activities will have a three-year time
period, which shall not be extended, from the date on which the Ministry of
Energy and Mines approves the Environmental Impact Study submitted by
Contractor, which will be conducted within the first six months after
registration of the Contract with the DNH.

EIGHTH: FORCE MAJEURE OR ACT OF GOD

8.1 Neither Party shall be held responsible for the nonperformance,
interruption or delay in the performance of the obligations of this Contract,
nor shall it be required to indemnify the other Party for damages caused, when
the default, interruption or delay has been caused by duly proven Force Majeure
or Act of God. In this case, the Party alleging such event shall give notice to
the other Party, with the required justifications, within a term of 10 days.
Force Majeure or Act of God shall involve the number of days justified and
shall apply to the rights and obligations affected by such event.

However, the obligations of the Parties pursuant to this Contract shall not be
extinguished due to the occurrence of Force Majeure or Act of God.

                                 Page 10 of 38
<PAGE>   11
Once Force Majeure or Act of God has been declared by either Party, it will be
immediately validated, although that does not imply the tacit acceptance of the
other Party that has the right to object to it pursuant to the provisions set
forth in this Contract and applicable laws.

8.2 The proof of Force Majeure or Act of God is incumbent upon whoever alleges
it.

8.3 Even in the case of Force Majeure or Act of God, the Parties shall be
entitled to receive their production share pursuant to Clause Nine of this
Contract, should there be production in the Contract Area, except in the event
specified in Chapter IV, Title VII of the Political Constitution of the
Republic of Ecuador.

8.4 The occurrence of Force Majeure or Act of God may give rise to revisions of
the work schedules proposed by Contractor, without prejudice to resuming
compliance with its obligations as soon as possible after the impediment has
ceased. The obligations not affected by Force Majeure or Act of God shall be
performed in due time in accordance with the provisions of this Contract.

If, due to lack of transportation capacity in the main pipelines, Contractor is
unable to transport more than 50% of the Crude Oil volume pertaining to its
share, calculated on the basis of the Field Production Rate, the interruption
or delay in the performance of the Minimum Production Work and Investment
Schedule shall not be deemed a nonperformance of the Contract.

Once the lack of transportation capacity is remedied, Contractor shall be
entitled to recover the loss sustained due to the diminished capacity. The
Parties shall agree upon the most appropriate manner for Contractor to recover
such loss.

8.5 In circumstances of Force Majeure or Act of God or Emergency Situations,
Contractor shall inform the Ministry of Energy and Mines within a maximum term
of ten (10) days and shall take the corresponding actions to resume its
activities as soon as possible. Should Contractor fail to send such notice
within the stipulated term, the alleged Force Majeure or Act of God shall not
be taken into account; therefore, the extension of the term for such cause
shall not be granted.

8.6 If circumstances of Force Majeure, Act of God or other emergency situations
arise that, in Contractor's opinion, require immediate action, Contractor shall
take all actions and shall make all disbursements deemed necessary or advisable
to protect its interests and those of PETROECUADOR as well as those of their
respective workers, even if such disbursements may not have been included in
the Annual Schedule and Budget in effect during the corresponding Fiscal Year.
The actions taken shall be reported to PETROECUADOR and the Ministry of Energy
and Mines within ten days following the taking of the action.

8.7 The time during which the suspension of activities caused by Force Majeure
or Act of God or Emergency Situation last, shall not count towards the
Production period or the Additional Exploration Period, as applicable.
Consequently, the termination dates of such period shall be postponed for a time
equal to the duration of such Force Majeure or Act of God, as applicable. If
Contractor is producing during the Production Period, the extension of such
Production Period shall only occur if the Force Majeure or Act of God decreases
the production or extraction of Crude Oil by more than fifty (50%) percent with
respect to the average daily production in the thirty (30) days prior to the
occurrence of such Force

                                 Page 11 of 38
<PAGE>   12
Majeure or Act of God, in which case Contractor shall maintain its own right to
Production Sharing on the Crude Oil that it has been unable to produce or
extract during the event of Force Majeure or Act of God.

NINTH: COMPENSATION AND METHOD OF PAYMENT

9.-GENERAL DESCRIPTION

9.1 Contractor, by the execution of this Contract, shall receive: a) operating
costs of the Base Production Curve from the Tiguino Marginal Field in US dollars
updated to the corresponding year; b) the amount of Crude Oil corresponding to
offered percentages X1, X2 and X3 balance factor indicated in Exhibit II (III)*
hereof for the increased production over the Base Production Curve.

9.2 To determine payment to Contractor, the following concepts shall be taken
into account:

     BASE PRODUCTION CURVE (QB)

It refers to the production log or crude oil obtained from the mathematical
simulation and other reservoir studies, which is attached hereto as Exhibit III
(IV)*.

     PROVEN RESERVES

It refers to the volume of recoverable hydrocarbons whose existence has been
verified through reliable information, obtained mainly through drilling, well
logs, analysis of production tests, cores and fluids that present reasonable
certainty to be recovered in the future under current financial and operating
conditions.

PROVEN DEVELOPED RESERVES

It refers to the volume of Crude Oil that can be recovered through available
wells with the existing equipment and operating conditions plus proven developed
reserves that are not yet producing. The additional volume of Crude Oil obtained
through the application of improved recovery techniques will only be considered
as proven developed reserves once the results of a pilot project have confirmed
with production that an increase in such reserves has been achieved, or after
the implementation of improved recovery activities, whether or not the pilot
project takes place.

UNDEVELOPED PROVEN RESERVES

It refers to the proven reserves expected to recover through new wells or
through existing wells, for which purpose, these wells must be completed in
areas that are not actually drilled or drained.

TOTAL PROVEN RESERVES

These are comprised by proven developed reserves and undeveloped proven
reserves.

PROBABLE RESERVES

It refers to the volume of hydrocarbon that, according to geological,
geophysical and reservoir engineering studies, supposedly exist in areas near
the proven areas in a same reservoir and that can be recovered.

POSSIBLE RESERVES

It refers to the volume of hydrocarbons that could occur in formations
identified as likely for the accumulation of hydrocarbons but that have not yet
been drilled.

                                 Page 12 of 38
<PAGE>   13
OPERATING COSTS
It refers to the production costs less amortization and depreciation. If the
operating cost of a period is divided by the inspected production of that same
period, the unit operating cost is obtained.

9.3 Contractor's income, in any given period, are calculated according to the
following formula:
I(t)=C(o)(IP(t)/IP(o))QB(t)+(X(t))(QT(t)-QB(t))Pi(t) (1)
According to the mathematical formula and the above mentioned general
principles, we conclude that:
Income per Operating Costs in the Base Production Curve:
ICLB(t)=C(o) (IP(t)/IP(o))QB(t)
Income for Production Sharing in increased production over the Base Production
Curve:
IP(t)=(X(t))(QT(t)-QB(t))Pi(t)
Therefore:
I(t)=ICLB(t)+IP(t)
Where:
I=Contractor's income in a given period.
C(o)=Operating cost of PETROPRODUCCION in US dollars per barrel in the Tiguino
Marginal Field.
IP(t)=Price Index of the United Governments of America for the t period.
IP(o)=Price Index of the United Governments of America for the year preceding
the Effective Date of the Contract.
QB(t)=Base Production Curve of period t, specified in the Contract.
Pi(t)=International Benchmark Price of PETROECUADOR (export FOB) for period t,
adjusted for crude oil quality ((degree)API) produced in the Marginal Field.
QT(t)=Total inspected production of the marginal field during t period.
X(t)=Participation on Contractor in inspected incremental production
(QT(t)-QB(t)) in decimal fraction corresponding to t period.
X(t) is calculated according to the following formula:
     X(t)=X1Q1+X2Q2(t)+X3 Q3(t)         (2)
          ---------------------
  QT(t)-QB(t)

Q1 is a fixed value corresponding to the first increase on the Base Production
Curve QB(t) that shall be specified in the Contract.
     Q1=Q1(t)-QB(t)                      (3)
Q2(t) corresponds to a second production increase according to the following
formula:
     Q2(t)=QT(t)-Q1-QB(t)                (4)
Note that total production equals:
     QT(t)=QB(t)+Q1+Q2(t)+Q3(t)          (5)
The participation values X1 and X2 offered by Contractor comply with the
requirement that X1>X2.
Indexes Ip(t) and Ip(o) will be taken from the Bureau of Labor Statistics Data,
Finished Energy Goods. Seasonally Adjusted, Series ID: WPSSOP 3510 Base Data:
8200.

                                 Page 13 of 38
<PAGE>   14
In order to apply the preceding formulas, and according to the Offer, Bidding
Specifications and other pre-contractual documents, the Operating Cost (Co) for
the Tuguino Marginal Field, the participation percentages of Contractor and
production volume is detailed as follows: C(o) = US$3.10 per barrel, X1 = 64%
for a first increase Q1 = 500 BPPD, X2 = 54% for production increases of up to
300% of the Base Curve (QB) and the balance factor X3 = 49% for increases that
exceed 300% of the Base Curve.

9.4 PROCEDURE
The operating costs of the Base Production Curve shall be provisionally
delivered by PETROECUADOR to Contractor each quarter and they shall be settled
annually.

Contractor shall deliver to PETROECUADOR at the Inspection and Delivery Center
the Crude Oil corresponding to the Base Production Curve on a daily basis with
monthly provisional settlement and annual settlement of accounts.

9.5 DETERMINATION OF CONTRACTOR'S OIL PRICE ADJUSTED FOR (degree)API QUALITY
The parties shall adjust the price of crude oil from the Contract Areas by
(degree)API quality in relation to the benchmark price through the following
quality differential adjustment formula:

Pi(t) = PM (1 + K DC/100)
PM = Average Selling Price of PETROECUADOR
DC = Difference between the quality of crude oil from the Contract Area (CC)
and the average quality of crude oil exported by PETROECUADOR (CM). It is
measured in degrees API.

DC = CC - CM
K = Quality correction coeffiecient (API degrees)
K = 1.1 if 25 degrees API greater than CC greater than 35 degrees API
K = 1.3 if 15 degrees API greater than CC greater than 25 degrees API
K = 1.1 and DC = 10 if CC is greater than or equal to 25 degrees API
CC = Quality of Crude Oil produced in Contract Area.
CM = Average quality of Crude Oil exported by PETROECUADOR.

Coefficient K could be revised by agreement of the parties if, after a
continuous period of at least twelve months, it does not reflect the reality of
the market. If there are any disagreements on this point, such disagreements
shall be submitted to an arbitrator for resolution, who shall render an award
within the stipulated term, according to the proceeding set forth in Clause
Twenty Sixth.

9.6 CONTRACTOR'S TAX BASE
Contractor's tax base for any t period is calculated according to the following
formula:
BI(t) = I(t) = COSTS(t)    (6)
Where:
I(t) = Contractor's income during period (t) calculated according to formula
(1).
COSTS(t) = Costs incurred by Contractor during period t.

                                 Page 14 of 38

<PAGE>   15
9.7 TAXES AND WORKERS (PROFIT) SHARING

Contractor's workers (profit) sharing is calculated according to the following
formula:
PLAB(t) = 0.15BI(t)  (7)
And taxes paid by Contractor are calculated according to the following formula:
TAX(t) = 0.25 (BI(t) - PLAB(t)) (8)

9.8 CONTRACTOR'S NET PROFIT
Contractor's net profit for the year (t) is calculated by the following formula:
UN(t) = BI(t) - PLAB(t) - TAX(t)  (9)

9.9 GENERAL PROVISIONS ON THE FINANCIAL MODEL

9.9.1 Contractor can freely dispose of its share of crude oil production.

9.9.2 If convenient to the Parties, they can agree on the delivery of operating
costs of the Base Production Curve in currency or in kind after establishing
the financial equivalent between Crude Oil costs and prices.

9.9.3 According to Article 33 of the Law on Hydrocarbons, the Ministry of
Energy and Mines may require Contractor to furnish part of its crude to supply
the domestic market or the refining and petrochemical plants in the country. In
this case, Crude Oil shall be valued at the Benchmark Price adjusted according
to quality and transportation.

9.9.4 The Crude Oil volume that the Government receives shall not, under any
circumstances, be inferior to the volume it had received when PETROPRODUCCION
operated the field as a result of the Base Production Curve; this volume shall
be the daily production inspected by the National Bureau of Hydrocarbons and
delivered by Contractor at the Inspection and Delivery Center.

9.9.5 Investments made by Contractor to perform its activities in accordance
with the Minimum Additional Exploration Plan shall be made on its own expense
and risk, therefore, if commercially productive reservoirs are not found,
PETROECUADOR shall not reimburse Contractors for these items.

9.9.6 Contractor shall be entitled to maintain, control and operate bank
accounts in any currency, in the country as well as abroad, and to freely
dispose of the funds of such accounts.

9.9.7 The Benchmark Price is the weighted average price of foreign sales of
Crude Oil made by PETROECUADOR in the last month, of equivalent quality between
exports of PETROECUADOR and the Marginal Field subject matter of this Contract.

9.9.8 If PETROECUADOR did not make foreign sales of crude oil in the respective
period, the Benchmark Price shall be determined on the basis of a basket of
crudes, agreed upon by the Parties, which prices shall be taken from
specialized and well-known publications.

TENTH: TAXES, LIENS AND CHARGES

10.1 Taxation system and workers (profit) sharing: Contractor shall pay income
tax in accordance with the provisions of Title I of the Internal Tax System
Laws. Charges, workers (profit) sharing and other taxes, in force on the date of
execution of this Contract, affecting Contractor's activities, shall be paid by
Contractor according to legal provisions.

                                 Page 15 of 38
<PAGE>   16
10.2 Contractor's gross income: It refers to Contractor's gross income, the
recovery of the operating cost of Base Production Curve paid by PETROECUADOR,
and Contractor's share calculated at sales price.

10.3 Method of calculation: Taxable base, workers (profit) sharing and income
tax shall be derived as follows:

10.3.1 The deductions stipulated in Title I of the Internal Tax System Law and
in the Accounting Regulations applicable to Marginal Fields, shall be made from
Contractors gross income, calculated according to Article 9(a) of the
Regulations for the Application of Law No. 44.

10.3.2 Fifteen percent (15%) for workers (profit) sharing shall be applied on
the result indicated in sub-clause 10.3.1, and the balance shall be the taxable
base.

10.3.3 Finally, on this taxable base, a 25% income tax shall be applied.

10.4 Charges for the use of water and building materials: in accordance with
Article 52 of the Law on Hydrocarbons, Contractor shall pay the amount of sixty
thousand Dollars (US$60,000) per year during the Production Period for the
preferential use of water and building materials that belong to the Government
within the Contract Area. Such charges shall be paid in advance in the month of
January of each Fiscal Year through a deposit with the Central Bank of Ecuador
to be credited to the account of PETROECUADOR. Deposits shall be made in Sucres
at the selling exchange rate in force at the time such deposits are made.

10.5 Office of the Superintendent of Companies Fee: Contractor shall pay the
annual fee of one dollar per thousand dollar value (1/1000) on its total asset
base as provided for in article 455 of the Company Law, in accordance with rules
issued by the Superintendent of Companies.

10.6 Municipal taxes payment: Contractor shall pay the one and one-half dollars
per one thousand dollars (1.5/1000) of its total asset base payable to the
municipalities in accordance with Chapter III of the Law No. 006 on Taxation and
Financial Control.

10.7 Proportional payment: In the event that the first or the last payment of
the charges determined in this clause does not correspond to a complete fiscal
year, said charges shall be paid in proportion to the number of months in said
Fiscal Year. When the Production Period does not start on January 1, the first
payments will be made within a thirty-day term from the beginning of the period.
If Contractor fails to pay the amounts on a timely basis on the above mentioned
dates, the corresponding legal interest shall be charged.

10.8 Fund for Regional Amazon Eco-development and Strengthening of Regional
Organizations: Contractor shall pay a tax on its share in the crude oil produced
in the Contract Area, as set forth in Law No. 10 published in Official Gazette
No. 30 of September 21, 1992, as amended set forth in Law No. 20 published in
Official Gazette No. 152 of September 15, 1997.

                                 Page 16 of 38
<PAGE>   17
10.9 Law to Create Replacement Income in the Napo, Esmeraldas and Sucumbios
Provinces: Contractor shall pay a tax on its share in crude oil transported by
the Transecuadorian Pipeline, as set forth in Law No. 40, published in Official
Register No. 248 - Supplement of August 7, 1989.

10.10 Notarial fees: Contractor shall be responsible for payment of notarial
fees and expenses relating to the registration of this Contract in the Notary
Public's official registry of deeds and ten (10) certified copies of the deed
to be delivered to PETROECUADOR.

10.11 Exemptions: According to Article 54 of the Law on Hydrocarbons, as
amended, Contractor is exempted from the payment of entry bonuses, surface
fees, royalties, and compensatory work contributions and from the contribution
to technological research.

10.12 Modification to the tax system: In the event of modification to the
taxation system, including the creation of new taxes or to workers (profit)
sharing, or the interpretation thereof, having consequences for the economics
of this Contract, a correction factor shall be included in the production
sharing percentages to absorb the increase or decrease of the above mentioned
tax burden or of the workers (profit) sharing. This correction factor shall be
calculated by the Parties and approved according to Article 31 of Executive
Decree 1417 published in Official Register No. 364 of January 21, 1994.

ELEVENTH.-ENVIRONMENT

11.1 Within the first six months after the Effective Date of this Contract,
Contractor shall perform, in addition to the execution of Production Operations
but before starting the Additional Exploration activities, an Environmental
Impact Study according to the Terms of Reference delivered by the Ministry of
Energy and Mines, that shall include:

11.1.1 An Inventory and Diagnosis (Base Line) to determine the environmental
situation and pollution levels in the Contract Area, including a description of
existing natural resources, especially forests and wild flora and fauna, as
well as geographic, social, economic, and cultural aspects of the peoples or
communities in the Contract area of influence.

11.1.2 A description and technical evaluation of the foreseeable direct and
indirect effects on the physical, biotic and social environment, in the short
and long term, for each operation planned within the Contract Area.

11.1.3 A detailed environmental management plan, the performance of which
prevents exceeding the maximum permissible levels and decreases the foreseeable
negative effects referred to in the preceding paragraph to an acceptable level,
including a contingency and emergency plan.

11.1.4 A plan to abandon the Contract Area.

                                 Page 17 of 38
<PAGE>   18
11.2 Once an Environmental Impact Study has been submitted by Contractor, the
Ministry of Energy and Mines shall approve or reject it within the time period
of sixty days. If no decision is announced, it shall be understood that the
study has been approved.

11.3 Contractor shall perform, at its own expense, the environmental mitigation
work within the terms and under other conditions set forth in the environmental
audit reports.

11.4 These studies shall be the basis for Socio-Environmental audits to be
performed from time to time by the ministry of Energy and Mines,
Undersecretariat for the Environment, in order to monitor that Contractor's
operations are being carried out according to the Ecuadorian Environmental
Regulations.

11.5 Contractor shall, at its own expense and in a term not longer than ninety
days counting from the Effective Date, an Environmental Audit of the Tiguino
Field, that must be supervised and approved by PETROECUADOR and the Ministry of
Energy and Mines, Undersecretariat for Environmental Protection.

Remediation of pre-existing environmental damages, in the Tiguino field, shall
not be the responsibility of Contractor. However, it shall be possible to agree
with PETROECUADOR the performance of the remediation work by Contractor and the
reimbursement of costs by PETROECUADOR.

11.6 Two years before the end of this Contract, the Parties shall have an
integral environmental audit conducted on the Contract Area, which must be
completed no later than six months before termination of this Contract. The
cost of this final audit shall be paid by the Parties in equal portions.

11.7 The companies conducting such studies and audits must be previously
qualified by the Ministry of Energy and Mines.

TWELFTH: PLANS, SCHEDULES AND BUDGETS

12.1 Contractor shall perform the Production Activities and Investment Plan as
well as the Minimum Additional Exploration Plan. This compliance is mandatory,
as set forth in Envelope No. 2 of Contractor's offer, which is attached hereto
as Exhibit II (VI)* and forms an integral part hereof.

12.2 During the first year of the term of this Contract, or a fraction of the
year, the Annual Budget and Program shall be approved by the Ministry in
charge, within 30 days counting from the Effective Date. If the Effective Date
of the Contract starts after October 31, the annual budget will be added to the
budget for the following Fiscal Year.

12.3 For the following Fiscal Years, Contractor shall submit to the approval of
the Ministry of Energy and Mines, and for PETROECUADOR's information, until
October 31 of each year, and during the term of this Contract, the proposed
Investment Budget it intends to assign the following year to the Contract Area,
indicating the activities it will perform, estimated costs, possible production
and Crude Oil reserves expected to be obtained. The Ministry of Energy and
Mines shall approve or make remarks on the Activities Schedule

                                 Page 18 of 38
<PAGE>   19

and Budget within a term of thirty days after its submission. The remarks, if
any, will be notified to Contractor, and Contractor will submit it again within
thirty days after receiving notice of the Ministry of Energy and Mines. If no
decisions are announced within thirty days after Contractor's submission of the
Budget, it shall be understood that the Schedule and Budget have been approved.

12.4 Contractor will be able to amend the annual schedules and budget after the
approval of the Ministry of Energy and Mines, as long as the obligations
committed to the Production Investment Plan and to the Additional Exploration
Plan are not diminished.

12.5 5-Year Plan: Contractor shall submit to the Ministry of Energy and Mines,
within the first month of each Fiscal Year of the Production Period, the Five
Year Plan stipulated in paragraph K) of Article 31 of the Law on Hydrocarbons.
The Ministry of Energy and Mines shall analyze it and issue an opinion within
thirty days after the date of submission of said Five Year Plan. If the
Ministry of Energy and Mines fails to issue an opinion within the above
mentioned term, it shall be understood that the Plan was approved.

12.6 Development Plan: If, as a result of the Additional Exploration,
Contractor discovered reservoirs that, on its own judgement are commercially
productive, it shall submit to the Ministry of Energy and Mines the
corresponding Development Plan for approval. Production of these reservoirs
shall not exceed the term of the Contract.

12.7 The Development Plan shall contain, among others, the following aspects:

1.-Retained areas

2.-Geological and geophysical interpretation of the structure adjusted to well
   data

3.-Closing and extension of productive area, verified through extension wells

4.-Intervals and depth of saturated zones

5.-Initial production data of the wells

6.-Production mechanisms of reservoirs

7.-Methods for artificial lift of hydrocarbons

8.-Forecast of reservoirs behavior

9.-Number of development wells

10.-Recovery factor

11.-Original oil in place

12.-Reserves

13.-Production log

14.-Investments performed in additional exploration

15.-Work of infrastructure

16.-Production, transportation and marketing costs

17.-Sales price expressed in constant value during the term of Contract

18.-Estimated investments and programs intended to preserve the environment

19.-Estimated economic and financial forecasts

20.-Inspection and Delivery Center, as applicable

21.-Additional Exploration Programs, if applicable

22.-Other activities discussed and approved by the parties

                                 Page 19 of 38

<PAGE>   20
12.8   The Ministry of Energy and Mines shall have a term of 90 days to approve
or reject the Development Plan, counting from the date of submission. If no
decision is announced within this term, the Development Plan shall be approved.

12.9   Once the Development Plan of Contractor has been approved, Contractor
shall start, without delay, the activities and investments scheduled and
undertaken thereunder.

12.10  At Contractor/s request or at the joint request of Contractor and
PETROECUADOR, the Development Plan, once approved by the Ministry of Energy and
Mines may be amended with due justifications.

12.11  Retention of Areas: If Contractor fails to find commercial Hydrocarbon
Reservoirs, as a result of the additional exploration or fails to develop such
reservoirs, Contractor shall return the areas explored to PETROECUADOR, without
any cost, according to article 20 of the Law on Hydrocarbons.

12.12  However, after Contractor has fulfilled the Minimum Additional
Exploration Plan within the three years stipulated in this Contract, and
notwithstanding the stipulations of the preceding clause, Contractor may submit
a new Additional Exploration Plan by attaching a new bond for 20% (twenty per
cent) of the investments Contractor undertakes to perform under such plan,
which bond shall be returned upon fulfillment of the activities undertaken.

THIRTEENTH: PRODUCTION RATE
13.1   Before the production initiation date of a reservoir, Contractor shall
submit to the Ministry of Energy and Mines, for its approval, the Production
Rate proven in conventional studies or reservoir simulation studies in
accordance with Executive Decree No. 543 and the Technical Criteria to
Calculate Production Rates, set forth by the National Bureau of Hydrocarbons
and the Regulations for Hydrocarbon Operations.

13.2   The Ministry of Energy and Mines shall determine the Production Rate.
Until the Ministry of Energy and Mines determines said rate, Contractor shall
temporarily apply Contractor's proposed production rate in accordance with this
Clause.

13.3   Contractor may, at any time, propose the Ministry of Energy and Mines
the revision of the Production Rate according to the procedure set forth in
Executive Decree 543.

13.4   If, for reasons that cannot be attributed to any of the parties, the
Production Rate is reduced in more than 15% (fifteen percent), for an
uninterrupted period exceeding thirty days within a calendar year, regarding
the current Production Rate, the terms and conditions of this Contract shall
be revised by the Parties so that the affected Party may recover the economic
benefits it would have obtained during that same period, if such reduction had
not occurred. This revision shall not occur if the cause of the reduction is a
technical cause duly justified, the result of Force Majeure or Act of God, or
an Emergency Situation, in accordance with the law.

                                 Page 20 of 38

<PAGE>   21
13.5 If the Ministry of Energy and Mines, for legally justified reasons,
imposes a restriction on the Total Production Rate of Ecuador, such restriction
shall be proportionally applied to the production rate of the Contract Area for
each Contractor.

13.6 If well testing is necessary to determine the characteristics of the
reservoir and to estimate production rates; and if, during said testing,
saleable Crude Oil Production is obtained, the financial resources derived from
it shall be recorded as income derived from Inspected Production in the
Contract Area.

13.7 If there is a disagreement regarding the Production Rate, Contractor shall
request the National Bureau of Hydrocarbons to designate an independent
technical expert to render a decision regarding the disagreement. The report of
the expert shall serve as a reference for the Ministry of Energy and Mines to
ratify or rectify the decision. The costs of this contracted audit shall be
borne by Contractor. The National Bureau of Hydrocarbons shall open a Registry
of specialized companies and it shall choose one that, on technical terms,
complies with the necessary requirements to render a decision on the matter.

FOURTEENTH: BENCHMARK PRICE
14.1 The Benchmark Price has been defined in Clause 3.4.19 and is used to
determine prices according to Article 71 of the Law on Hydrocarbons.

14.2 If PETROECUADOR has not made any foreign sales during the corresponding
period, the Benchmark Price shall be determined on the basis of a basket of
crudes agreed upon by the parties, the prices of which shall be obtained from
specialized and well-known publications.

FIFTEENTH: UNITIZED EXPLOITATION
15.1 If, during the performance of this Contract, there are reservoirs common
to two or more Contract Areas, it shall be mandatory for Contractors, by virtue
of Article 85 of the Law on Hydrocarbons and Article 58 of the Regulations for
Hydrocarbon Operations, to enter into operating agreements for unitized
production in order to achieve greater efficiency and economy in the operations.

15.2 If the Parties fail to agree on the appointment of an operator for the
shared reservoir, the Ministry of Energy and Mines shall temporarily designate
the operator of the unitized field.

15.3 The Parties agree that, for the appointment of the operator, they shall
request the Ministry of Energy and Mines to take into consideration the
following aspects:
A.-The party who made the discovery of the reservoir;
B.-The location of a significant part of recoverable reserves from the common
commercial reservoir within the Contract Area; or
C.-The party who demonstrates more efficiency and economy in the operation.

15.4 All agreements for unitized production of common reservoirs agreed upon by
the Parties shall be approved by the Ministry of Energy and Mines.

                                 Page 21 of 38
<PAGE>   22
SIXTEENTH: INSPECTION AND DELIVERY CENTER
16.1 The Inspection and Delivery Center for inspected production shall be
located in the lot reserved for that effect about 30 meters from the Central
Station of Cononaco.

16.2 At the Inspection and Delivery Center, the Base Production Curve and
Incremental Production volume of the Field operated by Contractor under this
Contract shall be determined.

16.3 Costs and expenses, as well as losses, caused during transportation from
the production gathering center of the Contract Area to the Inspection and
Delivery Center, shall be borne by Contractor.

16.4 Delivery, receipt and settlement of accounts of Crude Oil from the
Contract Area shall be performed according to the proceedings set forth by the
National Bureau of Hydrocarbons.

SEVENTEENTH: TRANSPORTATION
17.1 Contractor may use the existing storage and transportation facilities of
PETROPRODUCCION from the Contract Area to the Inspection and Delivery Centers
after Crude Oil treatment and separation.

17.2 PETROECUADOR shall facilitate, to the extent possible and after payment
pertinent charges, the available storage and transportation facilities from the
Inspection and Delivery Center to the initial Station of a main pipeline or its
interconnection to said pipeline.

17.3 Contractor shall construct, at its own expense, the Crude Oil separation,
treatment and storage facilities, and shall also build transportation pipelines
and Inspection and Delivery Centers if the production conditions so require.

17.4 The transportation fee for main and secondary pipelines belonging to
PETROECUADOR shall be determined by the Ministry of Energy and Mines.

17.5 Transportation fee in pipelines not belonging to PETROECUADOR shall be
agreed upon between Contractor and the operator of said transportation system.
If no agreement has been reached, the Ministry of Energy and Mines shall
determine the fee.

17.6 If, within an area of influence, there is more than one production
company, Contractor shall be able to share the study and construction costs of
flow lines and Secondary Pipelines.

17.7 The Main Pipelines studies shall be submitted to the authorization of the
Ministry of Energy and Mines and its contents shall mainly consider the
following:
-  Crude Oil Reserves in the Contract Area
-  Expected production logs
-  Crude Oil (degree API) quality
-  Geographic location of the area
-  Necessary investments

                                 Page 22 of 38
<PAGE>   23
-  Operation and maintenance costs required by the system

-  Estimated transportation fee

EIGHTEENTH: BONDS

18.1 Contractor shall render in favor of PETROEDUADOR, the bonds set forth by
the Law on Hydrocarbons, Bidding Specifications and this Contract, which shall
be approved and registered according to the Law, Regulations and relevant
procedures. If bonds are granted by a foreign bank, they shall be submitted
through a bank legally established in the country, which shall represent
Contractor to all effects arising from the bond.

18.2 INVESTMENT PERFORMANCE BOND: To guarantee performance of all investment,
production and additional exploration plans, Contractor, upon Contract
execution, shall render in favor of PETROECUADOR, the irrevocable,
unconditional and immediately payable bond issued by a bank and written
according to a format approved by CEL, in U.S. Dollars, for an amount
equivalent to twenty percent of the total amount bid, to carry out the
activities and work undertaken during the first three years in the Contract
Area. This bond, a certified copy is attached hereto as Exhibit VII (VIII)*,
will be reduced, on an annual basis, in direct proportion to the fulfillment of
the schedule of activities and investments undertaken. The original document of
this bond shall be submitted by Contractor to PETROECUADOR according to
paragraph 24, article 31, of the Regulations to the Bidding System for
Production and Additional Exploration of Marginal Fields Contracts.

18.3 JOINT BOND: If the Contract is awarded to an affiliate or subsidiary, the
former company shall have the guarantee of the parent company, while the latter
one shall have the guarantee of the affiliate and the parent company, according
to the Regulations of the Special Bidding System for Production and Additional
Exploration of Marginal Fields Contracts, which is attached hereto as Exhibit
VIII (IX)*.

This bond shall be submitted in a separate document.

18.3.1 The guarantee document shall establish the jurisdiction to which the
guarantors shall submit.

18.3.2 Joint Guarantors may also execute the Contract in such capacity.

18.3.3 The text of all guarantees shall be approved by CEL (Special Building
Committee) before the call for bids and shall be part of the documentation
thereof.

NINETEENTH: INSURANCE

19.1 To the benefit and safeguard of PETROECUADOR, to protect is personnel,
property, machinery, equipment and other assets under its management during the
operation of the Contract Area, Contractor shall take out the necessary
insurance policies, with the limitations, deductibles, terms and other
conditions required by the Law and this Contract.

19.2 Likewise, Contractor shall be required to contract and maintain insurance
policies covering third party liability for personal or property damages
caused, directly or

                                 Page 23 of 38

<PAGE>   24
indirectly, to third parties including officials and employees of the
Government and PETROECUADOR, as a result of the performance of its activities
in the Contract Area, as well as to hold PETROECUADOR harmless from any claim,
assertion or demand regarding liability for damages caused by Contractor or
subcontractors to third parties upon performance hereof.

19.3 Compensation for damages paid, by virtue of the insurance policies taken
out hereunder, shall serve to immediately repair or replace property,
facilities, equipment and other damaged, destroyed or stolen assets, and to
cover any underinsurance, if applicable.

19.4 If the insurance company stops paying any claim for lost or damaged goods,
facilities, equipment and other insured assets, alleging that said damages were
deliberately caused or perpetrated by inexcusable negligence or omission of the
executive or supervisory personnel of Contractor, the costs of reparation or
replacement shall be borne by Contractor.

19.5 Contractor shall take out insurance policies covering contingent liability
and property damages caused by deliberately committed acts, omissions or
inexcusable omissions or negligence of Contractor's personnel, whether or not
of executive or supervisory rank.

19.6 Contractor shall require its insurers to include in all policies, a clause
whereby insurers waive their rights to subrogate against PETROECUADOR.

19.7 All insurance policies, necessary for the complete performance of this
Contract must be subject to the provisions of the Ecuadorian Law, and
furthermore, they must be based on practices generally accepted by the
international oil industry.

19.8 It is the exclusive responsibility of Contractor to require subcontractors
or providers of goods and services that, in order to comply with their
obligations hereunder, they must take out insurance policies as Contractor may
deem necessary.

19.9 In order to afford coverage to property located in the country, Contractor
shall take out all insurance policies in the Ecuadorian market with the
exception of those risks that are not usually covered in the country, in which
case, such insurance policies shall be taken out abroad.

19.10 Contractor shall give PETROECUADOR legalized copies of insurance policies
taken out in Ecuador, and in the case of policies taken out abroad, Contractor
shall hand in, if acceptable to PETROECUADOR, notes of coverage or
certifications of each and every policy taken out, duly granted and executed by
the relevant insurance companies.

19.11 If, due to reasons attributable to Contractor or its sub-contractors, the
necessary insurance policies are not taken out timely, or if Contractor fails
to pay the premiums of such policies, the damages and losses that might be
sustained, as well as risks, will be the exclusive responsibility of
Contractor, who shall cover them immediately, without being able to claim the
right to demand from PETROECUADOR any type of reimbursement.

                                 Page 24 of 38
<PAGE>   25
19.12 Contractor shall require domestic and foreign insurers granting the
pertinent insurance policies, to provide the sufficient evidence, acceptable to
PETROECUADOR, that they are sufficiently backed by the necessary reinsurance.

19.13 Contractor shall maintain the insurance policies in force and effect,
according to values updated on an annual basis.

19.14 Contractor shall, at least, take out the following insurance policies:

- Machinery breakdown

- Third-party liability

- Fire and associated lines

- Theft

- All risk, contractor

- All risk, construction and assembly, including drilling, completion and
  workover of wells

- Electronic equipment

- Transportation

- Blow-out, fire and blow-out and fire of wells, covering normal and
  extraordinary costs of:

  - Fire and/or blow-out control

  - Re-drilling

  - Recompletion

  - Workover

  - Clean up and removal of debris

  - Pollution clean-up of affected area

19.15 Contractor shall also take out, to the satisfaction of PETROECUADOR, the
necessary insurance policies to cover risks of environmental pollution and
impairment to the ecosystem. These policies shall be in force from the beginning
of Contractor's operations until termination of the Contract.

19.16 Contractor may, in its own judgement, maintain other insurance policies
deemed appropriate for the fulfillment of its activities.

TWENTIETH: ACCOUNTING

20.1. Contractor shall keep the accounts of its investments, costs and expenses
relating to or arising from its activities under this Contract in accordance
with the hierarchy and priority of the following laws, Regulations and
proceedings:

A.-Internal Tax System Law

B.-General Regulations for Application of the Internal Tax System Law

C.-Accounting Costs Regulations applicable to this type of contract

D.-The Contract, and,

E.-Accounting Principles generally accepted in the international oil industry.

20.2 The accounting shall be kept in Spanish, shall be in two currencies, and
Sucres and Dollars shall be used in the accounting records, as the case may be.

20.3 The Accounting Regulations determine the accounting rules and procedures by
which Contractor shall abide.

                                 Page 25 of 38
<PAGE>   26

TWENTY FIRST: MONITORING AND CONTROL

21.1 During the term of this Contract, PETROECUADOR shall have the right to
monitor and inspect Contractor's and subcontractor's activities in order to
guarantee the faithful performance of Contractor's obligations. PETROECUADOR
shall have access to the technical documents generated by the activities.

21.2 Investments, costs and expenses incurred in order to perform the
obligations hereunder, are subject to inspections and audits as set forth in the
law, regulations and in this Contract.

21.3 Notwithstanding the provisions of Article 56 of the Law on Hydrocarbons,
audits for each Fiscal Year will start, at the latest, within three months
following the end of the corresponding Fiscal Year to be audited, for which
purpose Contractor is required to make available to the Ministry of Energy and
Mines all documentation related to this Contract. These audits shall be
conducted by the National Bureau of Hydrocarbons or by well-known and qualified
Independent Auditing Companies.

21.4 The Ministry of Energy and Mines, through the Undersecretariat of the
Environment shall perform a socio-environmental control of all operations under
the responsibility of Contractor hereunder.

21.5 The National Bureau of Hydrocarbons will conduct the technical-economic
control of the operations in charge of Contractor.

21.6 The National Bureau of Hydrocarbons shall submit the reports that shall
serve as the basis for tax purposes, according to the procedure indicated in the
Accounting Regulations.

TWENTY-SECOND: SUBCONTRACTS

22.1 Contractor may subcontract under its own responsibility and risk, work or
services necessary to perform this Contract.

22.2 Contractor is required to select its subcontractors from qualified
companies and shall give preference to Ecuadorian companies for the purpose of
encouraging services by national companies, according to Executive Decree No.
976 published in Official Gazette No. 274 of June 29, 1982.

22.3 Selection of subcontractors, negotiation of the terms and conditions of
subcontracts, award and execution of the Contract shall be the exclusive
responsibility of Contractor, notwithstanding the provisions of the Law on
National Security.

22.4 Contractor shall not use the services of subcontractors against whom
PETROECUADOR has duly grounded objections.

22.5 Contractor shall include stipulations in the subcontracts requiring
Subcontractors to comply with all applicable legal provisions in force and the
provisions of this Contract, as applicable.

                                 Page 26 of 38
<PAGE>   27
22.6 Subcontractors in Ecuador shall be subject to the laws, judges, courts and
administrative and judicial procedures of the Republic of Ecuador, especially
regarding labor relations, social security, taxation, payment in foreign
currency and environmental protection, as applicable.

22.7 When Contractor subcontracts foreign companies for the execution of work
or services that, due to the nature thereof, must be carried out in Ecuador,
such companies shall have a domicile in the country or shall appoint an
attorney-in-fact or legal representative whenever required by law.

22.8 The cost of work performed or services rendered by subcontractors shall be
in keeping with current prices on the national or international markets for
comparable services on the date of execution of the respective subcontract.
When the price is determined, all subcontracts shall specify, as the case may
be, the part that must be paid in Dollars, Sucres or in other foreign currency.
In no case shall the value of the subcontract be increased by Contractor by
reason of surcharge (overhead), professional fees, administrative expenses,
additional charges, profits, interest or for any other reason.

TWENTY THIRD: CONTRACTOR PERSONNEL AND LABOR RELATIONS

23.1 Contractor shall hire the minimum national and foreign personnel necessary
to perform, fully and efficiently, the purpose of this Contract, according to
international oil practices and paragraph a), Article 31 of the Law on
Hydrocarbons.

23.2 Contractor may hire PETROECUADOR's employees who, according to the Law,
have terminated their employment with PETROPRODUCCION, who were rendering
services in the Tiguino Field, which by virtue of this Contract will be
operated by Contractor.

23.3 Contractor and subcontractors are independent companies, therefore their
personnel is on their own account, and they shall be solely responsible for the
fulfillment of labor or employment obligations arising from or relating to the
Labor Code, the Social Security Law, individual or collective bargaining
contracts executed with their personnel; therefore, PETROECUADOR shall not be
liable, not even severally, for any labor claim that could arise as a
consequence of lawsuits or complaints, either individual or collective, by
Contractors' or Subcontractors' workers.

23.4 Contractor and its Subcontractors must deliver to the Joint Command of the
Armed Forces, data cards from all the national and foreign personnel that they
employ, and shall also agree not to hire personnel that have been objected by
the Joint Command of the Armed Forces.

TWENTY FOURTH: GOODS AND IMPORTS

24.1 Contractor is responsible to PETROECUADOR for the supply of goods,
materials, equipment and other fixed assets or property required to perform
this Contract, according to the Production Investment and Activities Plan, the
Minimum Exploration Plan

                                 Page 27 of 38
<PAGE>   28

and the Annual Budget and Work Schedule, that after the third year of the
effective term, must be submitted on an annual basis.

24.2 Contractor shall preferably acquire goods made in Ecuador in the case of
equal technical, financial and availability conditions.

24.3 Imports. Imports or temporary entry of property necessary for Contract
performance shall be made in accordance with the Law on Hydrocarbons, the
Organic Customs Law, and other pertinent legal provisions.

24.4 Property, machinery and equipment to be used temporarily may enter and
leave Ecuador, under the System of Temporary Importation or Admission, or other
similar forms set forth by the applicable law. In these cases, Contractor shall
only record in its books the value of its use in the corresponding proportion,
as well as the cost of the pertinent insurance policies, which amounts shall be
in keeping with similar situations in the international market.

24.5 During the term of this Contract, Contractor shall not remove, encumber or
sell the property, machinery or equipment acquired on behalf of PETROECUADOR,
or those that must be delivered, without previous approval of PETROECUADOR and
authorization of the Ministry of Energy and Mines.

24.6 Contractor will be entitled hereunder to the use of infrastructure and
assets that PETROECUADOR delivers according to the inventory appraised as
stated in Exhibit IX (X)*, and Contractor shall be responsible and required to
make good use, have custody, maintain and replace said items, so that upon
termination of Contract the aforementioned items may be returned in the same
conditions as received except for wear and tear due to normal use, according to
Article 23 of the Regulations for the application of Law No. 44, which amends
the Law on Hydrocarbons.

Likewise, Contractor shall keep in good operating and functioning conditions
any property, machinery, equipment, tools, facilities and other movable and
immovable property acquired for the purposes hereof. To this effect, two years
before the termination of the Contract, or before said date, Contractor shall,
at its own expense, carry out a technical inspection of all facilities existing
in the Contract Area. Contractor shall hire a specialized company and agrees to
make any repairs or replacements resulting from the technical inspection.

24.7 According to Article 29 of the Law on Hydrocarbons, upon termination of
the Contract, any property, machinery and other assets and infrastructure that
Contractor may have acquired or developed for the fulfillment and performance
of this Contract shall be returned to the Government, through PETROECUADOR, or
its affiliate PETROPRODUCCION, without any cost and in good conservation
conditions. Therefore, leasing shall not be allowed during the last five years
of the Contract unless the leasing terms stipulate the mandatory purchase of
such property by Contractor within that term.

TWENTY-FIFTH: INFORMATION AND CONFIDENTIALITY

                                 Page 28 of 38
<PAGE>   29

25.1  The Ecuadorian Government owns any technical and financial information
generated during the performance of this Contract.

25.2  Contractor shall deliver to the Ministry of Energy and Mines, through the
Petroleum Contracts Unit (CEL), with copy to PETROECUADOR, the original
documents of all technical and financial information as generated during
Contract performance. The Parties shall expressly and mutually give notice to
each other about the documents of confidential nature.

25.3  Blueprints, designs, drawings, data, technical and scientific information
and any other data relating to operations and contracted services shall be
deemed confidential by the parties, so that the contents, either in whole or in
part, not be disclosed in any way to third parties, without the previous written
consent of PETROECUADOR. Confidential or privileged documents shall remain as
such five years after termination of the Contract.

25.4  The provisions of the preceding sub-clause shall not apply to the
information that the parties are required to provide according to the law and
this Contract, nor to the information that Contractor must furnish to the
auditors, legal advisors, financial institutions, or to the authorities in
Ecuador or abroad; however, Contractor shall previously inform PETROECUADOR and
the Petroleum Contract Unit about any such disclosure.

25.5  Contractor and PETROECUADOR shall take the necessary measures to guarantee
that their officials, workers, agents, representatives, proxies, arbiters,
consultants, subcontractors etc., comply with the same obligation of
confidentiality regarding the documents qualified as such to which they might
have access.

TWENTY-SIXTH: MEDIATION AND ARBITRATION

26.1  Mediation. Any disagreements between the Parties regarding technical
matters involving financial issues or vice versa, arising from the application
of this Contract, except those that, according to the provisions hereof or the
Law must be decided by arbitration, will be submitted to the legal
Representatives of the Parties for resolution.

If, within the term of fifteen days after the disagreement was submitted, a
solution could not be reached, the Parties shall submit the controversy to the
decision of a mediator specializing in the subject matter of the disagreement.

The mediator shall be appointed by mutual agreement of the Parties within
fifteen (15) days counting from the date on which the legal Representatives
should have resolved the disagreement. If no agreement is reached on the
designation, the mediator shall be appointed according to Article 44 of the Law
on Arbitration and Mediation, published in Official Gazette No. 145 on September
4, 1997; the procedure and the effects of the Mediation Document shall be the
ones set forth in Articles 46 and 47, fifth paragraph, of the Law on Arbitration
and Mediation.

                                 Page 29 of 38
<PAGE>   30

26.2 Arbitration.- If the disagreements relate to any matter not included in
sub-clause 26.1 or if, for any reason the submission of the controversy to
mediator results in a partial resolution, the non-resolved part of the
mediation and the controversies arising from this Contract shall be settled
through arbitration according to the Law on Arbitration and Mediation.

26.3 If the Parties jointly decide to submit the controversy to mediation
and/or arbitration, the costs shall be shared in equal proportions.

26.4 Arbitration Agreement. The Parties expressly state that the contents of
Clause 26 of this Contract, for the purposes of Article 4 of the Law on
Arbitration and Mediation, are considered an Arbitration Agreement; therefore,
they waive ordinary jurisdiction and agree to abide by the award rendered by
the Arbitration Tribunal, they further undertake not to file any type of appeal
against the arbitration award and agree to submit to the resolution of an
Arbitration Tribunal from the Chamber of Commerce of Quito in the domicile of
this Arbitration Tribunal. The arbitration process shall be confidential.

TWENTY-SEVENTH: TRANSFER OR ASSIGNMENT

27.1 Contractor may not transfer or assign any rights or obligations hereunder,
without the previous consent of PETROECUADOR and the authorization of the
Ministry of Energy and Mines. Therefore, any transfer or assignment carried out
without these two essential requirements shall be void and of no effect,
notwithstanding the fact that the applicable Ministry may declare the
cancellation of the Contract in accordance with the Law on Hydrocarbons.

27.2 The Government shall receive a bonus for the transfer or assignment of the
Contract and the beneficiary shall execute a new Contract with PETROECUADOR
according to Executive Decree 809 published in Official Gazette No. 197 of May
31, 1985, amended by Executive Decrees Nos. 2713 and 1179 published in Official
Gazette Nos. 694 and 270 of May 12, 1995 and March 6, 1998 respectively.

TWENTY-EIGHTH: CAUSES FOR TERMINATION AND CANCELLATION

28.1 This Contract shall terminate:

a)   Due to the fulfillment of the Contract's purpose, upon completion of its
     term;

b)   By mutual agreement of the Parties, any time before the term expires;

c)   By declaration of cancellation pronounced by the Ministry of Energy and
     Mines, for the reasons and under the procedure set forth in the Law on
     Hydrocarbons;

d)   If, at the end of the third year of this Contract, the production increase
     is less than 50% on the Base Production Curve.

e)   If, during two consecutive years after the third anniversary of the
     Effective Term, production does not exceed the Base Production Curve for
     the corresponding years.

                                 Page 30 of 38
<PAGE>   31
f) By dissolution of the consortium or by bankruptcy filed by any of the members
   of the consortium affecting performance of the Contract in PETROECUADOR's
   sole discretion.

g) By judicial declaration of competent judge,

h) Due to any other reason provided for in the law.

TWENTY-NINTH: APPLICABLE LAW, DOMICILE, JURISDICTION AND LEGAL PROCEEDINGS

29.1 Applicable law. This Contract shall be exclusively governed by Ecuadorian
law. The laws in force at the time of its execution are understood to be
incorporated herein.

Contractor expressly declares that it is fully aware and has knowledge of the
Ecuadorian laws applicable to Production Sharing Contracts for Crude Oil
Production and Additional Exploration of Hydrocarbons in Marginal Fields.

29.1.1 Legal Framework. The laws applicable to this Contract include, but are
not limited to, the following instruments:

HYDROCARBON LEGISLATION

-  Codification of the Law on Hydrocarbons (DS 2967, RO ("Registro Oficial" -
   Official Gazette) 711:7811.15)

-  Law No. 101 amending the Law on Hydrocarbons (RO 306:82.09.13.)

-  Law No 08 amending the Law on Hydrocarbons (RO 277:85.09.23)

-  Decree-Law No. 24 amending the Law on Hydrocarbons (RO 446:86.05.29)

-  Special Law No. 45, of Empresa Estatal Petroleos del Ecuador (PETROECUADOR)
   and its affiliate companies (OR 283:89.09.26) and applicable regulations.

-  Law No. 44 amending the Law on Hydrocarbons (RO 326:93.11.29)

-  List of errata (RO 344:93.12.24)

-  Law No. 49 amending the Law on Hydrocarbons (RO 346:93.12.28)

-  Law amending the Law on Hydrocarbons (Supplement to RO 523 94.09.09)

-  Law Amending the Law on Hydrocarbons No. 98-89 (RO 12:980826)

-  Regulations of the application of Law 44 (DE 1417 RO 364 94.01.21) as
   amended (DE 2360 RO 595 94.12.22)

-  Regulations of the Special Bidding System for the Contract on Production and
   Additional Exploration of Marginal Fields.

-  Bidding Specifications for the Crude Oil Production and Additional
   Exploration of Hydrocarbons in Marginal Fields of PETROECUADOR (DE 1327-A
   Supplement to RO 305:98.04.27)

-  Regulations on Cost Accounting applicable to the Crude Oil Exploration and
   Additional Hydrocarbon Production of Marginal Fields.

-  Regulations on Hydrocarbon Operations (AM 311 RO 681:87.05.08) as amended
   (AM 189 RO 123:89.02.03)

-  Proceedings to determine production rates (DE 543 RO 135:85.03.01) as
   amended.

                                 Page 31 of 38
<PAGE>   32
-    Regulations to Article 79 of the Law on Hydrocarbons about Assignment of
     Rights and Obligations under Exploration and Production Contracts. (DE 809
     RO 197:85.05.31) as amended.

-    Executive Decree No. 976, published in Official Gazette No. 274 on June 29,
     1982.

-    Regulations for the Scheduling of Crude Oil Shipments (RO 257:98-02-13)

TAXATION LEGISLATION:

-    Tax Code (DS 1016-A RO Supplement 958:75.12.23)

-    Law No. 006 of Financial and Taxation Control (RO 97 88.12.29) and its
     Regulations (DE 393, RO 118:89.01.27)

-    Law No. 56 on the Internal Tax System (RO Supplement 341: 89.12.22) and its
     Regulations.

-    Law No. 63 amending Law No. 006 (RO 366:90.01.30)

-    Law No. 72 (RO 441: 90.05.21)

-    Law No. 40 creating replacement income for the provinces of Napo,
     Esmeraldas and Sucumbios (RO 248S: 89-08-07)

-    Law No. 51 amending the Internal Tax System Law (RO 349:93.12.31)

-    Law No. 05 amending Laws No. 51 and 56 and Taxation Code (RO 396.94.01.10)

-    Law No. 10 of the Fund for Amazon Region Ecodevelopment and Strengthening
     of Sectional Organizations (RO 30:92.09.21) as amended (RO 152: 97.09.15)
     and its Regulations (DE 461 OR121:93.02.03)

-    Law on the Economy Restructuring in the Financial-Taxation Area
     (RO 78:98-12-01)

LEGISLATION REGARDING THE ENVIRONMENT

-    Law on Roads (DS 1351 RO 285:64.07.07 and its Regulations
     (AM 0282 RO 378:71.12.24)

-    Health Code (DS 188 RO 158:71.02.08)

-    Law on Preservation of Reserves and National Parks (DS 1306 RO
     301:71.09.02)

-    Environmental Regulations for Hydrocarbon Activities in Ecuador. (DE 2982
     RO 766:95.08.24)

-    Law on Water Resources (DS 369 RO 69:72.05.30) and its Regulations
     (DS 40.RO 233:73.01.26)

-    Amendment to the Maritime Police Code (DS 945 RO 643:74.09.20)

-    Law on Prevention and Control of Environmental Pollution (DS 374 RO
     097:76.05.31)

-    Instruction for the preparation of reports and environmental impact
     studies (AM 764 RO 330:85.12.09)

-    Law No. 74 Forestry and Conservation of Natural Areas and Wild Life
     (RO 64:81.08.24) as amended and its Regulations (DE 1529 RO 436:83.02.22)
     as amended.

-    Rules for Prevention, Control and Restoration of the Environment in
     Hydrocarbon Exploration and Production Activities in National Parks or
     their Equivalent. (AM 1743 RO 004:88.08.16)

-    Regulations to Prevent and Control Environmental Pollution regarding Water
     Resources (AM 2144 RO 204:89.06.05)

-    Regulations to Prevent and Control Environmental Pollution by Noise
     (AM 7789: RO 560:90.11.12)

-    Regulations to Control and Prevent Pollution regarding Soils (AM 14629.
     OR 989:92.07.30)

                                 Page 32 of 38
<PAGE>   33
-    Regulations to Manage Solid Wastes (AM 14630. RO 991:92.08.03)

-    Law No. 008 creating the Ecuadorian Forestry, Natural Areas and Wildlife
     Institute (INEFAN) (RO 027:92.09.16) and its Regulations (DE 408 RO
     105:93.01.12)

-    Environmental Management Law (RO 245:99-07.30)

MISCELLANEOUS LEGAL PROVISIONS:

-    Political Constitution of the Republic of Ecuador

-    Law on Arbitration and Mediation (RO 145:97.09.04)

-    Law No. 47 on Facilitation of Exports and Water Transportation
     (RO 901:92.03.25)

-    Law No. 99, Organic Customs Law (RO 359:98.07.13)

-    Law on Foreign Affairs (DS 1897 RO 382:71.12.30) and its Regulations
     (DS 1898 RO 720:78.11.28)

-    Law No. 50 on Modernization of the Government, Privatization and Rendering
     of Public Services by Private Initiative (RO 349 93.12.31) and its
     Regulations.

-    General Insurance Law (RO 145:97.09.04)

-    Codification of the National Security Law (DS 275 RO 892: 79.08.09) and
     its regulations (DE 2264 RO 642:91.03.14)

-    Decree on the Streamlining of Central Government Functions
     (DE 601 RO 148:85.03.20)

-    Regulations for the Application of Articles 18 and 57 of the Law on
     Industrial Promotion, 50 and 51 of the Law on Promotion Small Industry
     and 87 and 88 of the Law on Promotion Automotive Industry
     (DE 976. RO 274:82.06.29)

-    Codified Regulations for Determining and Collecting Charges that
     Companies Subject to Control and Supervision of the Office of the
     Superintendent of Companies Pay Annually. (ADM 90154 RO 442:90.05.22)

-    Ministerial Agreement that Determines the Minimum Wage for Workers in the
     Production, Processing, Shipment and Commercialization of Crude Oil and
     Natural Gas.

29.1.2    In the event of any inconsistency among the above mentioned documents,
the order of priority shall be the following: Laws, Regulations, Bidding
Specifications and this Contract.

29:2      Domicile, Jurisdiction and Venue:
The Parties agree to submit to Ecuadorian laws and set their domicile in Quito,
according to the provisions of article 3 of Law No. 44. This provision shall
survive termination of the Contract until the time when Contractor's permission
to operate in Ecuador is legally cancelled regardless of the causes of
termination.

Controversies arising from this Contract, which are not subject to mediators or
arbitrators, in the cases provided for in the Twenty-sixth clause, shall be
heard and settled according to Article 10 of the Law on Hydrocarbons, amended
by Article 3 of Law 44 promulgated in RO 326 on November 29, 1993.

29.2.1    In the event of controversies that may arise as a result of the
application of this Contract, Contractor, in accordance with Ecuadorian laws,
expressly waives the use of diplomatic or consular channels or to resort to any
jurisdictional agency not provided for in

                                 Page 33 of 38
<PAGE>   34
this Contract or in Ecuadorian Law. Failure to perform this provision shall be
a cause for Contract cancellation.

29.2.2 The Parties agree to use the methods set forth in this Contract in order
to settle doubts and controversies that may arise during the term hereof, and
also to observe and abide by the resolutions issued by competent consultants,
arbiters, judges or courts, as the case may be, according to the provisions of
this Contract.

29.3 Communications and Notices:

29.3.1 The documents that Contractor submits by virtue of this Contract to
PETROECUADOR or to the pertinent Ministry shall be subject to the provisions of
article 82 of the Law on Hydrocarbons.

29.3.2 Notices between the Parties shall be made in writing and shall be
written in Spanish and sent to the following addresses:

MINISTRY OF ENERGY AND MINES
Santa Prisca 223
Fax 570-350
Quito-Ecuador
CC/Unidad de Contratacion Petrolera
Av. Amazonas 4600 y Pereira
Edif. Casa Vivanco 6(degree) piso
FAX 593 2 262 375

PETROECUADOR
Edificio Matriz
Alpallana y 6 de Diciembre
FAX 593 2 569738
Telex: 022213
Telephone: 563 060
Apartado Postal: 17.11.5007
Quito, Ecuador

PETROPRODUCCION
Av. 6 de Diciembre 4226 y Gaspar Canero
FAX: 449-000
Telex:
Telephone: 440-333 to 342
Apartado Postal
Quito-Ecuador

CONTRACTOR
Av. Amazonas 477 y Roca
Edificio Rio Amazonas Oficina 801
FAX: 593-2-562 381

                                 Page 34 of 38
<PAGE>   35
Telephones: 593-2-220 906/227-410/525-547/541-145
Apartado Postal 1703-168
E-mail:aserrano@pi.pro.ec
Quito, Ecuador

THIRTY: COMMUNICATIONS

30.01 This Contract has been written in the Spanish language. The translation
hereof into another language may be officially recorded under separate cover.
However, should a controversy arise on the interpretation or meaning of the
terms hereof, the Spanish version shall prevail.

30.2 All communications or notices containing requests, opinions, acceptances,
authorizations, reports, studies, balance sheets, inventories and other
documents exchanged between the Parties or submitted to the Ministry of Energy
and Mines, for purposes of this Contract, shall also be written in the Spanish
language. If there are any technical reports that, owing to their nature, must
be submitted in another language, they shall be translated into Spanish.

THIRTY-FIRST: VALUE AND NOTARIAL EXPENSES

31.1 Given its nature, this Contract is not susceptible to qualification on the
date of its execution. For this reason, the public deed that embodies this
Contract shall be considered of an undetermined value.

31.2 The expenses required for the execution of this Contract, including the
cost of ten certified copies, which will be delivered to the Petroleum
Contract Unit, shall be paid by Contractor.

THIRTY-SECOND: QUALIFYING DOCUMENTS

32.1 The following are the supporting documents of this Contract that are
officially registered:

a)   Certified copies of the appointment of office of PETROECUADOR's Executive
     President and PETROECUADOR's Manager;

b)   Certified copy of the public deeds evidencing the legal existence of the
     companies that constitute the Consortium of Contractor, its legal
     representation, and domicile in Ecuador.

c)   Certified Copy of the Resolution of the Special Bidding Committee
     evidencing approval of this Contract, its award in favor of Contractor and
     approval for execution of the Contract;

d)   Certified Copy of the Board of Directors Resolution of PETROECUADOR
     authorizing the Executive President of PETROECUADOR to execute this
     Contract;

e)   Certified copy of the Resolution of the Board of Directors of
     Petroproduccion authorizing the Manager of this Affiliate to execute this
     Contract.

                                 Page 35 of 38

<PAGE>   36
f)   Certified copies of the legal report of the Attorney General of the
     Government and the opinion of the Joint Command of the Armed Forces about
     this Contract in the aspects set forth by the Law.

THIRTY-THIRD: EXHIBITS

The following documents are made an integral part of this Contract as exhibits
hereto:

I.     Delimitation of the Contract Area and Petroleum Register Map of Ecuador,
       certified by the Military Geographic Institute and the National Bureau
       of Hydrocarbons;

II.    Contractor's offer;

III.   Base Production Curve

IV.    Production Investments and Activities Plan

V.     Minimum Additional Exploration Investment Plan

VI.    Technical Criteria to Calculate Production Rates by the National Bureau
       on Hydrocarbons

VII.   Investment Performance Bond

VIII.  Joint Bond of the Parent Company

IX.    Assessed Inventory of Infrastructure and Assets belonging to PETROECUADOR

X.     Example of Application, Compensation and Method of Payment

XI.    Summarized Minutes of the Negotiations

XII.   Terms of Reference for Environmental Impact Studies

You, Mr. Notary Public, shall add the necessary clauses for the full validity of
this Contract.

Cesar Zumarraga, Esquire, Bar Association License No. 3977

The public deed shall be executed by:

PETROECUADOR             CONTRACTOR

                                 Page 36 of 38

<PAGE>   37
NOTE 1. THE EXHIBITS AND QUALIFYING DOCUMENTS MENTIONED IN THE CONTRACT ARE
OFFICIALLY RECORDED BY THE NOTARY PUBLIC IN AN ORDER OTHER THE ONE STATED
HEREIN. FOR THIS REASON, THE CORRECT ORDER OF THE EXHIBITS IS INDICATED HEREIN
WITH AN ASTERISK (*).

NOTE 2. THE EXHIBITS AND QUALIFYING DOCUMENTS ARE OFFICIALLY RECORDED BY THE
NOTARY PUBLIC IN AN ORDER OTHER THAN THE ONE STATED IN THE CONTRACT, AS FOLLOWS:

QUALIFYING DOCUMENTS:

1.    APPOINTMENT OF PETROECUADOR'S EXECUTIVE PRESIDENT

2.    MINUTES ON THE TAKING OF OFFICE OF PETROECUADOR'S EXECUTIVE PRESIDENT

3.    APPOINTMENT OF PETROPRODUCCION'S MANAGER

4.    ORGANIZATION OF GRANTMINING

5.    DESIGNATION OF GRANTMINING'S REPRESENTATIVE

6.    ORGANIZATION OF IECONTSA

7.    DESIGNATION OF IECONTSA'S REPRESENTATIVE

8.    DOCUMENTS EVIDENCING PETROCOL'S DOMICILE

9.    DESIGNATION OF PETROCOL'S REPRESENTATIVE

10.   DOCUMENTS EVIDENCING CPVEN'S DOMICILE AND POWER OF ATTORNEY

11.   GRANTING OF SPECIAL POWER OF ATTORNEY BY CPVEN'S ATTORNEY IN FACT IN FAVOR
      OF GERMAN AVILA

12.   CERTIFIED COPY OF THE SPECIAL BIDDING COMMITTEE'S RESOLUTION EVIDENCING
      APPROVAL OF THIS CONTRACT, THE AWARD THEREOF IN FAVOR OF CONTRACTOR AND
      APPROVAL FOR EXECUTION

13.   CERTIFIED COPY OF PETROECUADOR'S BOARD OF DIRECTORS RESOLUTION
      AUTHORIZING PETROECUADOR'S EXECUTIVE PRESIDENT TO EXECUTE THIS CONTRACT

14.   CERTIFIED COPY OF PETROPRODUCCION'S BOARD OF DIRECTORS RESOLUTION
      AUTHORIZING THE MANAGER OF THIS AFFILIATE TO EXECUTE THIS CONTRACT

15.   CERTIFIED COPY OF THE LEGAL REPORT ISSUED BY THE ATTORNEY GENERAL OF THE
      GOVERNMENT

16.   CERTIFIED COPY OF THE OPINION ISSUED BY THE JOINT COMMAND OF THE ARMED
      FORCES

EXHIBITS

I.    DELIMITATION OF THE CONTRACT AREA AND PETROLEUM REGISTER MAP OF ECUADOR,
      CERTIFIED BY THE MILITARY GEOGRAPHIC INSTITUTE AND THE NATIONAL BUREAU OF
      HYDROCARBONS

II.   PETROLEUM REGISTER MAP OF ECUADOR, CERTIFIED BY THE MILITARY GEOGRAPHIC
      INSTITUTE AND THE NATIONAL BUREAU OF HYDROCARBONS

III.  SUMMARY OF CONTRACTOR'S OFFER

IV.   BASE PRODUCTION CURVE

V.    PRODUCTION INVESTMENTS AND ACTIVITIES PLAN

VI.   MINIMUM ADDITIONAL EXPLORATION INVESTMENT PLAN

VII.  TECHNICAL CRITERIA TO CALCULATE PRODUCTION RATES BY THE NATIONAL BUREAU
      ON HYDROCARBONS

VIII. INVESTMENT PERFORMANCE BOND

                                 Page 37 of 38
<PAGE>   38
IX.   JOINT BOND OF THE PARENT COMPANY

X.    ASSESSED INVENTORY OF INFRASTRUCTURE AND ASSETS BELONGING TO PETROECUADOR

XI.   EXAMPLE OF APPLICATION, COMPENSATION AND METHOD OF PAYMENT

XII.  SUMMARIZED MINUTES OF THE NEGOTIATIONS

XIII. TERMS OF REFERENCES FOR ENVIRONMENTAL IMPACT STUDIES

                                 Page 38 of 38<PAGE>   1
                                                                     EXHIBIT 4.1

                           CONVERTIBLE PROMISSORY NOTE

$150,000.00                                                      April 11, 2001

         For value received, INTEGRATED SECURITY SYSTEMS, INC., a Delaware
corporation (hereinafter referred to as "Maker"), promises to pay to the order
of FROST NATIONAL BANK FBO RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC., a
Texas corporation (hereinafter referred to as "Payee"), the principal sum of One
Hundred Fifty Thousand Dollars ($150,000.00). The principal of and interest on
this Note shall be due and payable in lawful money of the United States of
America, c/o Security Processing T-8, P. O. Box 2479, San Antonio, Texas
78298-2479. All correspondence and notices should be mailed to the above address
with a copy to the offices of Payee at 8080 N. Central Expressway, Suite 210,
Dallas, Texas 75206, or at such other place as the holder hereof may from time
to time designate by written notice to Maker.

         1. Interest. Interest shall accrue on the unpaid principal balance due
under this Note at an annual rate equal to eight percent (8%). Interest shall
accrue from and including the date of this Note until, but not including, the
day on which it is paid in full. In no event shall the interest charged
hereunder exceed the maximum rate on interest allowed from time to time by law.
Interest shall be due and payable monthly on the first (1st) day of each month.

         2. Payment of Note. The principal balance of, and all accrued unpaid
interest on, this Note shall be due and payable one hundred twenty (120) days
after the date hereof, except as otherwise provided herein ("Maturity Date").

         3. Prepayment. This Note may be prepaid, in whole or in part in any
time, at the option of Maker, without premium or penalty.

         4. Conversion. This Note shall be convertible, at the option of Payee
in its sole and absolute discretion, in whole or in part and at any time or from
time to time, into fully paid and nonassessable shares (the "Conversion Shares")
of Common Stock, $.01 par value (the "Common Stock"), of Integrated Security
Systems, Inc., a Delaware corporation (the "Company"), at the conversion price
of $0.20 per share. If Payee elects to exercise its option, then the following
shall occur:

                  (a) Payee shall deliver to Maker a notice of such election
                  (the "Conversion Notice"), indicating the amount of principal
                  of this Note to be converted (such amount to be converted
                  referred to herein as the "Converted Amount").

                  (b) Promptly upon receipt of the Conversion Notice, Maker
                  shall deliver to the Company (i) a certificate or certificates
                  of Maker's Common Stock representing at least the number of
                  shares issuable to Payee upon conversion of the Converted
                  Amount, duly endorsed in blank or accompanied by a stock
                  transfer power executed in like manner, and (ii) a copy of the
                  Conversion Notice.

                                  Page 5 of 14
<PAGE>   2

                  (c) Upon its receipt of Maker's endorsed Common Stock
                  certificate(s) and the Conversion Notice, the Company shall
                  immediately issue and deliver to Payee or its designated
                  affiliates a certificate or certificates for the number of
                  shares of Common Stock, registered in Payee's or its
                  designated affiliates' name(s), to which Payee shall be
                  entitled upon such conversion, bearing such legends as may be
                  required by applicable state and federal securities laws. The
                  Company shall issue to Maker a certificate representing any
                  shares surrendered by Maker in excess of the shares issued to
                  Payee upon conversion.

                  (d) If this Note is converted in whole, Payee shall deliver
                  this Note to Maker marked "Canceled," and Maker shall
                  immediately pay to Payee all accrued and unpaid interest then
                  due and owing on the date of such conversion. If this Note is
                  converted in part, Maker shall immediately pay to Payee all
                  accrued and unpaid interest then due and owing on the date of
                  such conversion, and Payee shall deliver to Maker a
                  replacement Note for any outstanding principal amount not
                  converted, dated the date of such conversion, with the same
                  Maturity Date and provisions as contained in this Note.

                  (e) No fractional shares will be issued on conversion of this
                  Note.

         5. Adjustment for Issuance of Shares at Less Than the Conversion Price.
If and whenever any Additional Common Stock (herein defined) shall be issued by
Maker (the "Stock Issue Date") for a consideration per share less than the
Conversion Price, then in each such case the initial Conversion Price shall be
reduced to a new Conversion Price in an amount equal to the price per share of
the Additional Common Stock then issued, if issued in connection with a sale of
shares, or the value of the Additional Common Stock then issued, as determined
in accordance with general accepted accounting principles, if issued other than
for cash, and the number of shares issuable to Payee upon conversion shall be
proportionately increased; and, in the case of Additional Common Stock issued
without consideration, the initial Conversion Price shall be reduced in amount
and the number of shares issued upon conversion shall be increased in an amount
so as to maintain for the Payee the right to convert this Note into shares equal
in amount to the same percentage interest in the Common Stock of the Company as
existed for the Payee immediately preceding the Stock Issue Date.

        6.Sale of Shares. In case of the issuance of Additional Common Stock for
a consideration part or all of which shall be cash, the amount of the cash
consideration therefor shall be deemed to be the gross amount of the cash paid
to Maker for such shares, before deducting any underwriting compensation or
discount in the sale, underwriting or purchase thereof by underwriters or
dealers or others performing similar services for any expenses incurred in
connection therewith. In case of the issuance of any shares of Additional Common
Stock for a consideration part or all of which shall be other than cash, the
amount of the consideration therefor, other than cash, shall be deemed to be the
then fair market value of the property received.

        7.Stock Dividends. Shares of Common Stock issued as a dividend or other
distribution on any class of capital stock of Maker shall be deemed to have been
issued without consideration.

         8. Stock Splits, Subdivisions or Combinations. In the event of a stock
split or subdivision of shares of Common Stock into a greater number of shares,
the Conversion Price shall be proportionately decreased, and in the event of a
combination of shares of Common Stock into a smaller number of

                                  Page 6 of 14
<PAGE>   3
shares, the Conversion Price shall be proportionately increased, such increase
or decrease, as the case may be, becoming effective at the record date.

         9. Exceptions. The term "Additional Common Stock" herein shall mean all
shares of Common Stock hereafter issued by Maker (including Common Stock held in
the treasury of Maker), except for (A) Common Stock issued upon the conversion
of this Note; (B) Common Stock issued upon exercise of any outstanding warrants,
options or convertible debt instruments; and (C) Common Stock issued upon
exercise of outstanding employee stock options.

         10. Adjustment for Mergers, Sales and Consolidations. In the event of
any consolidation or merger of the Company with or into, or the sale of all or
substantially all of the properties and assets of the Company, to any person,
and in connection therewith, consideration is payable to holders of Common Stock
in cash, securities or other property, then as a condition of such
consolidation, merger or sale, lawful provision shall be made, and duly executed
documents evidencing the same shall be delivered to the Payee, so that the Payee
shall have the right at any time prior to the maturity of this Note to purchase,
at a total price equal to the Conversion Price immediately prior to such event,
the kind and amount of cash, securities or other property receivable in
connection with such consolidation, merger or sale, by a holder of the same
number of shares of Common Stock as were exercisable by the Payee immediately
prior to such consolidation, merger or sale. In any such case, appropriate
provisions shall be made with respect to the rights and interest of the Payee so
that the provisions hereof shall thereafter be applicable with respect to any
cash, securities or property deliverable upon exercise hereof. Notwithstanding
the foregoing, (i) if the Company merges or consolidates with, or sells all or
substantially all of its property and assets to, any other person, and
consideration is payable to holders of Common Stock in exchange for their Common
Stock in connection with such merger, consolidation or sale which consists
solely of cash, or (ii) in the event of the dissolution, liquidation or winding
up of the Company, then the Payee shall be entitled to receive distributions on
the date of such event on an equal basis with holders of Common Stock as if this
Note had been converted immediately prior to such event, less the Conversion
Price. Upon receipt of such payment, if any, the rights of the Payee shall
terminate and cease and this Note shall expire. In case of any such merger,
consolidation or sale of assets, the surviving or acquiring person and, in the
event of any dissolution, liquidation or winding up of the Company, the Company
shall promptly, after receipt of this surrendered Note, make payment by
delivering a check in such amount as is appropriate (or, in the case of
consideration other than cash, such other consideration as is appropriate) to
such person as it may be directed in writing by the Payee surrendering this
Note.

         11. Adequate Shares. Maker will at times reserve and keep available,
for the purpose of issuance upon conversion, a sufficient number of shares of
Common Stock owned by Maker deliverable upon Payee's exercise of its conversion
rights under this Note.

         12. Default, Enforcement. Upon default in payment of this Note, Payee
may pursue any and all remedies to which Payee may be entitled.

         13. Limitation of Interest. All agreements between Maker and Payee,
whether now existing or hereafter arising and whether written or oral, are
expressly limited so that in no contingency or event whatsoever, whether by
reason of advancement of the proceeds hereof, acceleration or the maturity of
the unpaid principal balance hereof, or otherwise, shall the amount contracted
for, charged, received, paid or agreed to be paid to the holder hereof for the
use, forbearance or detention of the money evidenced by this Note or for the
payment or performance of any covenant or obligation contained herein or in any
other document pertaining to the indebtedness evidenced by this Note

                                  Page 7 of 14
<PAGE>   4
exceed the maximum amount permissible under applicable usury laws. If, from any
circumstance whatsoever, fulfillment of any provision hereof or of any other
agreement shall, at the time fulfillment of such provision be due, involve
transcending the limit of validity prescribed by law which a court of competent
jurisdiction may deem applicable hereto, then, ipso facto, the obligation to be
fulfilled shall be reduced to the limit of such validity; and if from any
circumstance the holder hereof shall ever receive as interest an amount which
would exceed the maximum lawful rate, any amount equal to any excessive interest
shall (a) be applied to the reduction of the unpaid principal balance due
hereunder and not to the payment of interest, or (b) if such excess interest
exceeds the unpaid principal balance of this Note, such excess shall be refunded
to Maker. All sums contracted for, charged or received hereunder 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
throughout the full term of this Note until payment in full so that the rate of
interest on account of such indebtedness is uniform throughout the term hereof.
The terms and provisions of this paragraph shall control and supersede every
other provision of all agreements between Maker and the holder hereof.

         14. Waiver. Except as otherwise expressly provided herein, Maker waives
demand, presentment for payment, notice of intent to accelerate, notice of
acceleration, notice of nonpayment or dishonor, grace, protest, notice of
protest, all other notices, and any and all diligence or delay in collection or
the filing of suit hereon.

         15. Governing Law and Venue. This Note shall be construed according to
and governed by the laws of the State of Texas. The obligations of Maker under
this Note are performable in Dallas County, Texas.

         16. Registration Rights. The shares of Common Stock issued upon
conversion of this Note shall be restricted from transfer by the Payee, unless
the shares are duly registered for sale pursuant to the Securities Act of 1933,
as amended, or the transfer is exempt from registration. The Payee has certain
rights with respect to the registration of shares of Common Stock issued upon
the conversion of this note pursuant to the terms of the Registration Rights
Agreement between Payee and maker dated October 20, 2000.

         17. Security Agreement This Note is secured by the Security Agreement
among Maker, B&B Electromatic, Inc., Golston Company, Inc., Innovative Security
Technologies, Inc. (now named Intelli-Site, Inc.) and Tri-Coastal Systems, Inc.
and Payee and Renaissance Capital Growth and Income Trust III, Inc., dated as of
October 2, 1998, and Payee is entitled to the rights and benefits thereunder.

         18. Stock Pledge Agreement. This Note is secured by the Stock Pledge
Agreement dated as of December 31, 1996, as amended by the First Amendment to
Stock Pledge Agreement, dated May 5, 2000, among Maker, Payee and Renaissance
Capital Growth & Income Fund III, Inc., and Payee is entitled to the rights and
benefits thereunder.

         19. Successors and Assigns. This Note shall bind Maker's successors and
assigns.

         20. Collection Costs. If this Note is collected by legal proceeding or
through a probate or bankruptcy court, or is placed in the hands of an attorney
for collection after default (whether or not suit is filed), Maker agrees to pay
all costs of collection and/or suit, including but not limited to reasonable
attorney's fees incurred by Payee.

                                  Page 8 of 14
<PAGE>   5

         21. Unenforceability. The invalidity or unenforceability in particular
circumstances of any provision of this Note shall not extend beyond such
provision or such circumstances, and no other provision of this Note shall be
affected thereby.

         22. Headings. The paragraph headings of the sections of this Note are
inserted for convenience of reference only and shall not affect the meaning or
interpretation of this Note.

IN WITNESS WHEREOF, Maker has duly executed this Note as of the day and year
first above written.

                                       INTEGRATED SECURITY SYSTEMS, INC.

                                       BY:    /s/ C. A. RUNDELL, JR.
                                              -----------------------
                                              C. A. Rundell, Jr.
                                              President and CEO

                                  Page 9 of 14

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00024-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00024-of-00352.parquet"}]]