Document:

Exhibit 10.1

                                CREDIT AGREEMENT

                                 by and between

                               CUBIC ENERGY, INC.

                                       and

                        WELLS FARGO ENERGY CAPITAL, INC.

                            Dated as of March 5, 2007

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                                TABLE OF CONTENTS

                                                                            Page
ARTICLE 1         DEFINITIONS AND ACCOUNTING TERMS.............................1
         1.1      Defined Terms................................................1
         1.2      Accounting Terms............................................16
         1.3      Number and Gender of Words..................................16

ARTICLE 2         TERMS OF FACILITY...........................................16
         2.1      Revolving Facility..........................................17
         2.2      Term Loan...................................................17
         2.3      Advances and Payments Under the Notes.......................17
         2.4      Use of Proceeds.............................................18
         2.5      Repayment Provisions........................................18
         2.6      Borrowing Base Determinations...............................20
         2.7      Interest Rates..............................................21
         2.8      General Provisions Relating to Interest.....................21
         2.9      Facility Fees...............................................22
         2.10     Increase in Borrowing Base Fee..............................22
         2.11     Loans to Satisfy Obligations................................22
         2.12     Prepayment of Term Note.....................................22
         2.13     Mandatory Prepayment or Actions in Lieu Thereof.............23
         2.14     Net Profits Interests.......................................23
         2.15     Conversion of Term Note.....................................25
         2.16     Warrant.....................................................25
         2.17     Increased Costs.............................................26
         2.18     Taxes.......................................................26

ARTICLE 3         CONDITIONS PRECEDENT........................................27
         3.1      Conditions to Execution by Lender and All Advances..........27
         3.2      Further Conditions to Each Advance Pursuant to
                  Section 2.1.................................................30

ARTICLE 4         REPRESENTATIONS AND WARRANTIES..............................31
         4.1      Existence and Good Standing.................................31
         4.2      Due Authorization...........................................31
         4.3      Valid and Binding Obligations...............................32
         4.4      Scope and Accuracy of Financial Statements..................32
         4.5      Liabilities and Litigation..................................32
         4.6      Title to Assets.............................................32
         4.7      Existing Subject Properties.................................32
         4.8      Authorizations and Consents.................................32
         4.9      Compliance with Laws........................................32
         4.10     Proper Filing of Tax Returns and Payment of Taxes Due.......33
         4.11     ERISA Compliance............................................33
         4.12     Investment Company Act Compliance...........................34
         4.13     Lien Priority...............................................34
         4.14     Use of Proceeds.............................................34
         4.15     Full Disclosure.............................................34
         4.16     Places of Business..........................................34
         4.17     Identification Numbers......................................34
         4.18     Subsidiaries................................................34

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ARTICLE 5         AFFIRMATIVE COVENANTS.......................................35
         5.1      Maintenance and Access to Records...........................35
         5.2      Quarterly Financial Statements..............................35
         5.3      Annual Financial Statements.................................35
         5.4      Compliance Certificates.....................................35
         5.5      Reserve Reports.............................................35
         5.6      EDGAR Filings...............................................36
         5.7      Sales and Production Reports................................36
         5.8      Subject Areas Information...................................36
         5.9      Liens on Newly Acquired Property............................36
         5.10     Title Opinions..............................................37
         5.11     Statement of Material Adverse Effect........................37
         5.12     Title Defects...............................................37
         5.13     Additional Information......................................37
         5.14     Compliance with Laws and Payment of Taxes...................37
         5.15     Maintenance of Existence and Good Standing..................37
         5.16     Further Assurances..........................................37
         5.17     Maintenance of Tangible Property............................38
         5.18     Maintenance of Insurance....................................38
         5.19     Right of Inspection.........................................38
         5.20     Notice......................................................38
         5.21     Collateral Protection.......................................38
         5.22     ERISA Information and Compliance............................39
         5.23     Drilling, Completing and Workover Obligations...............39
         5.24     Reservation of Shares; Valid Issuance.......................40

ARTICLE 6         NEGATIVE COVENANTS..........................................40
         6.1      Other Debt of Borrower......................................40
         6.2      Derivative Contracts........................................40
         6.3      Guaranty of Payment or Performance..........................41
         6.4      Loans, Advances or Investments..............................41
         6.5      Mortgages or Pledges of Assets..............................41
         6.6      Cancellation of Insurance...................................41
         6.7      Sales of Property...........................................41
         6.8      Dividends and Distributions.................................42
         6.9      Changes in Company Structure................................42
         6.10     Payment of Accounts Payable.................................42
         6.11     Transactions with Affiliates................................42
         6.12     Nature of Business..........................................42
         6.13     Negative Pledge Agreements..................................42
         6.14     Gas Imbalances, Take or Pay or Other Prepayments............42
         6.15     No Subsidiaries.............................................42
         6.16     ERISA Compliance............................................42

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ARTICLE 7         EVENTS OF DEFAULT...........................................43
         7.1      Events of Default...........................................43
         7.2      Rights Upon Occurrence of Unmatured Event of Default........46
         7.3      Rights Upon Occurrence of an Event of Default...............46

ARTICLE 8         MISCELLANEOUS...............................................47
         8.1      Notices.....................................................47
         8.2      Amendments and Waivers......................................48
         8.3      Expenses, Indemnity, Damage Waiver..........................48
         8.4      Survival of Agreements......................................50
         8.5      Successors and Assigns......................................50
         8.6      Invalidity..................................................50
         8.7      Renewal, Extension or Rearrangement.........................50
         8.8      Waivers.....................................................51
         8.9      Cumulative Rights...........................................51
         8.10     Exhibits; Conflicts.........................................51
         8.11     Titles of Articles, Sections and Subsections................51
         8.12     Jurisdiction................................................51
         8.13     Counterparts................................................51
         8.14     Effectiveness...............................................52
         8.15     Documents...................................................52
         8.16     Rights of Third Person......................................52
         8.17     Announcements...............................................52
         8.18     Survival of Certain Covenants...............................52
         8.19     JURY TRIAL WAIVED...........................................52
         8.20     GOVERNING LAW...............................................52
         8.21     Arbitration.................................................53
         8.22     USA Patriot Act Notice......................................54
         8.23     Entire Agreement............................................55

         EXHIBITS

         EXHIBIT I         Form of Revolving Note
         EXHIBIT II        Form of Term Note
         EXHIBIT III       Form of Compliance Certificate
         EXHIBIT IV        Form of Revolving Facility Borrowing Request
         EXHIBIT V         Southern Area
         EXHIBIT VI        Existing Southern Properties
         EXHIBITVII        Northern Area
         EXHIBIT VIII      Existing Northern Properties
         EXHIBIT IX        Initial Borrowing Base Properties
         EXHIBIT X         Form of Assignment of Net Profits Interests
         EXHIBIT XI        Form of Conversion Notice
         EXHIBIT XII       Antidilution Provisions
         EXHIBIT XIII      Registration Rights Agreement
         EXHIBIT XIV       Form of Warrant
         EXHIBIT XV        Form of Supplemental Warrant

         SCHEDULES

         SCHEDULE 4.5      Litigation
         SCHEDULE 7.1      Current Management and Current Directors

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<PAGE>

                                CREDIT AGREEMENT
                                ----------------

     This CREDIT  AGREEMENT,  dated as of March 5, 2007, is by and between CUBIC
ENERGY,  INC.,  a Texas  corporation  (the  "Borrower"),  and WELLS FARGO ENERGY
CAPITAL, INC., a Texas corporation (the "Lender").

                          W I T N E S S E T H  T H A T:
                          ----------------------------

     The Borrower has  requested the Lender to extend credit to the Borrower (a)
in  the  form  of a  revolving  credit  facility  not to  exceed  $20,000,000.00
outstanding at any time (subject to the limitations as herein set forth) and (b)
in the form of a  convertible  term loan in the  amount of  $5,000,000.00,  with
proceeds  from such  facilities to be used by the Borrower to repay certain debt
and to develop certain oil and gas properties.

     NOW,  THEREFORE,  in  consideration  of the mutual covenants and agreements
herein  contained and of the loans and commitment  hereinafter  referred to, the
Borrower and the Lender agree as follows:

                                    ARTICLE 1
                        DEFINITIONS AND ACCOUNTING TERMS

     1.1 Defined Terms. As used in this Agreement,  the following terms have the
following meanings:

          "Acceptable Counter-party" means (i) the Lender, (ii) any Affiliate of
     the Lender,  or (iii) any other  counter-party  who has, or arranges  for a
     guarantor of the obligation of the  counter-party  who has, at the time the
     contract  is  made,  long-term  obligations  rated  BBB or Baa2 or  better,
     respectively, by Standard & Poor's Rating Group, a division of McGraw Hill,
     Inc.,  or Moody's  Investors  Service,  Inc. (or a successor  credit rating
     agency).

          "Advance"  means a Revolving  Advance or the Term Loan and  "Advances"
     means more than one Advance.

          "Affiliate"  means any  Person  controlling,  controlled  by, or under
     common  control with,  any other Person.  For purposes of this  definition,
     "control" (including "controlled by" and "under common control with") means
     the possession, directly or indirectly, of the power to direct or cause the
     direction of the  management and policies of such Person,  whether  through
     the ownership of voting securities or otherwise.

          "Agreement" means this Credit Agreement and all exhibits and schedules
     hereto, as the same may be amended from time to time according to the terms
     hereof.

                                       1
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          "Antidilution  Provisions"  means  those  provisions  relating  to the
     adjustment of the Conversion Price provided in the Antidilution  Provisions
     attached as Exhibit XII.

          "Bankruptcy Code" means the Federal  Bankruptcy Reform Act of 1978 (11
     U.S.C.  ss.  101,  et  seq.),  as  amended,  and  regulations   promulgated
     thereunder.

          "Base Rate" means,  for any day, the  fluctuating  rate of interest in
     effect  for such day which  rate per annum  shall be equal to the higher of
     (a) the rate of interest as publicly  announced  from time to time by Wells
     Fargo Bank at its  principal  office in San  Francisco,  California  as its
     "prime rate" (the "prime rate" is a rate set by Wells Fargo Bank based upon
     various  factors  including  costs and  desired  return,  general  economic
     conditions and other factors,  and is used as a reference point for pricing
     some loans,  which may be priced at, above, or below such announced  rate),
     or (b)  one-half of one percent  (0.50%) per annum above the Federal  Funds
     Rate in effect from time to time. Any change in the "prime rate"  announced
     by Wells Fargo Bank shall take effect at the opening of business on the day
     specified in the public announcement of such change.

          "Borrower" has the meaning indicated in the opening paragraph hereof.

          "Borrowing  Base" means the maximum value,  for loan purposes,  of the
     Borrowing Base Properties, as determined, at the sole good faith discretion
     of the Lender in accordance with its customary lending practices, from time
     to  time in  accordance  with  Section  2.6 of  this  Agreement;  provided,
     however, at any time that any Oil and Gas Property that is a Borrowing Base
     Property  ceases,  for any reason,  to be a Borrowing  Base  Property,  the
     Lender,  at its sole good faith discretion in accordance with its customary
     lending  practices,  may  redetermine  the Borrowing  Base by excluding the
     value, for loan purposes, of such Oil and Gas Property, which determination
     shall be made by the Lender at its sole good faith discretion in accordance
     with its customary lending practices, and which redetermined Borrowing Base
     shall become effective upon notice to the Borrower by the Lender.

          "Borrowing  Base Period"  means the period  commencing on the day that
     the  conditions  to Advances  under Section 3.1 are satisfied and ending on
     August  31,  2007,  and  thereafter  each six (6) month  period  commencing
     September 1 and March 1 of each year.

          "Borrowing  Base  Properties"  means at any time,  any and all Subject
     Properties that cover or relate to Proved Reserves and that have been given
     value by the Lender in the then most recent  determination of the Borrowing
     Base,  and which shall be on the Closing  Date the Subject  Properties  set
     forth on Exhibit IX attached hereto.

                                       2
<PAGE>

          "Business  Day"  means a day other  than a  Saturday,  Sunday or legal
     holiday for commercial banks in the State of Texas.

          "Casing Point" means the point in time at which a Well has reached its
     proposed  total depth and has been logged and tested and a decision must be
     made to plug or  abandon  the  Well,  proceed  to  attempt  to set pipe and
     complete  the Well or plug  back and  kick-out  to  complete  the Well at a
     different bottom hole location.

          "Change  in Law" means (a) the  adoption  of any Law after the date of
     this  Agreement,  (b) any  change  in any Law or in the  interpretation  or
     application thereof by any Tribunal after the date of this Agreement or (c)
     compliance  by the Lender,  by any  lending  office of the Lender or by the
     Lender's holding company with any request,  guideline or directive (whether
     or not having the force of law) of any  Tribunal  made or issued  after the
     date of this Agreement.

          "Change of Control" means (a) a purchase or  acquisition,  directly or
     indirectly,  by any  "person"  or  "group"  within  the  meaning of Section
     13(d)(3)  and 14(d)(2) of the  Exchange  Act (a  "Group"),  of  "beneficial
     ownership"  (as such term is defined in Rule 13d-3 under the Exchange  Act)
     of securities of the Borrower  which,  together with any  securities  owned
     beneficially  by any  "affiliates"  or  "associates" of such Group (as such
     terms are defined in Rule 12b-2 under the Exchange  Act),  shall  represent
     more  than  fifty  percent  (50%)  of  the  combined  voting  power  of the
     Borrower's  securities which are entitled to vote generally in the election
     of directors and which are outstanding on the date immediately prior to the
     date of such purchase or acquisition; or (b) a sale of all or substantially
     all of the  assets of the  Borrower  to any  Person  or  Group;  or (c) the
     liquidation or dissolution of the Borrower.

          "Closing  Date" means the date when all the  conditions  precedent set
     forth in Section 3.1 of this Agreement have been fulfilled or waived by the
     Lender.

          "Code"  means the  Internal  Revenue  Code of 1986,  as  amended,  and
     regulations promulgated thereunder.

          "Collateral"  means the Property now or at any time hereafter securing
     the Obligations.

          "Common Stock" means the Borrower's  common stock, par value $0.05 per
     share.

                                       3
<PAGE>

          "Completion Costs" means amounts owed to third Persons that are not an
     Affiliate of the  Borrower  incurred by the Borrower (or incurred by Fossil
     Operating  and  passed  on to  the  Borrower)  after  Casing  Point  in the
     completion of a Well and the equipping for production of such Well.

          "Compliance  Certificates"  means the  certificates  of a  Responsible
     Officer  submitted  to the  Lender  from  time  to  time  pursuant  to this
     Agreement,  which  certificates shall be substantially in the form attached
     hereto as Exhibit III.

          "Contested in Good Faith" means contested in good faith by appropriate
     and lawful proceedings diligently conducted, reasonably satisfactory to the
     Lender,  (a) in  which  foreclosure,  distraint,  sale,  forfeiture,  levy,
     execution or other similar proceedings have not been initiated or have been
     stayed and  continue to be stayed,  (b) in which a good faith  contest will
     not  materially  detract from the value of the  Collateral,  jeopardize the
     Rights of the Lender  with  respect  to the  Collateral,  interfere  in any
     material  respect with the  operation by the Borrower of its  business,  or
     otherwise  have a  Material  Adverse  Effect,  and (c) for  which  matter a
     reserve or other  appropriate  provision has been established in accordance
     with the requirements of GAAP.

          "Conversion  Date" means the date the conversion of the Term Loan into
     Common Stock is effective.

          "Conversion  Notice"  shall have the meaning  provided  in  Subsection
     2.15(a).

          "Conversion  Price" means the price for  conversion  of the  principal
     amount of the Term Loan into shares of the Borrower's  Common Stock. On the
     Closing Date, the Conversion  Price shall be One Dollar ($1.00),  but shall
     be  subject  to  subsequent  adjustment  as  provided  in the  Antidilution
     Provisions.

          "Current  Management" means the Persons(s) and their respective office
     held in the Borrower as set forth on Schedule 7.1 attached hereto.

          "Debt" of any Person means, to the extent of such Person's  liability,
     (a)  all  items  of  indebtedness  for  borrowed  money,  obligations,  and
     liabilities  (whether  matured or unmatured,  liquidated  or  unliquidated,
     direct or indirect,  joint or several,  contingent or otherwise),  which in
     accordance with GAAP should be classified upon such Person's  balance sheet
     as liabilities,  but in any event including liabilities secured by any Lien
     existing on Property of such Person or a Subsidiary of such Person, (b) the
     deferred  purchase  price of Property or services and direct and contingent
     obligations  incurred  in  connection  with  letters of credit and  similar

                                       4

<PAGE>

     agreements  and  obligations  as a lessee under leases which have been,  or
     which  in  accordance  with  GAAP  should  be,  capitalized  for  financial
     reporting  purposes,  (c) all  obligations  under  operating  leases  which
     require such Person or its Affiliate to make payments over the term of such
     lease,  including  payments at termination,  based on the purchase price or
     appraisal  value of the  Property  subject  to such  lease  plus a marginal
     interest  rate,  and used  primarily  as a  financing  vehicle  for,  or to
     monetize,  such Property,  but excluding any delay rental  payments made in
     the ordinary course of business;  (d) all guaranties,  endorsements  (other
     than for  collection or deposit in the ordinary  course of  business),  and
     other contingent  obligations of such Person with respect to obligations of
     other  Persons  of the types  described  in  clauses  (a),  (b)  and/or (c)
     preceding,  (e) liabilities of unfunded vested benefits under any Plan, (f)
     all  net  obligations  with  respect  to  Derivative  Contracts,   (g)  all
     obligations  to supply funds to, invest in or maintain  working  capital or
     equity capital of any other Person,  or otherwise to maintain the net worth
     or solvency or any balance  sheet  condition of any other  Person,  (h) any
     Debt of a  partnership  for which such Person is liable either by agreement
     or by  operation  of Laws but only to the  extent  of such  liability,  (i)
     Disqualified  Capital  Stock  and  (j)  the  undischarged  balance  of  any
     production payment created by such Person or for the creation of which such
     Person directly or indirectly received payment.

          "Debtor  Relief  Laws"  means  the  Bankruptcy   Code  and  all  other
     applicable   liquidation,    conservatorship,    bankruptcy,    moratorium,
     rearrangement,  receivership, insolvency, reorganization, or similar debtor
     relief  Laws or general  equitable  principles  from time to time in effect
     affecting the Rights of creditors generally.

          "Default Rate" means a varying rate of interest per annum equal to the
     Base Rate,  from time to time in effect,  plus five percent (5.0 %), but in
     no event to exceed the Highest Lawful Rate.

          "Derivative Contracts" means all future contracts,  forward contracts,
     swap, cap or collar contracts, option contracts, hedging contracts or other
     derivative contracts or similar agreements covering oil and gas commodities
     or prices or financial, monetary or interest rate instruments.

          "Disqualified  Capital  Stock" means any Equity  Interest that, by its
     terms (or by the terms of any security into which it is  convertible or for
     which it is exchangeable) or upon the happening of any event, matures or is
     mandatorily  redeemable  for any  consideration  other  than  other  Equity
     Interests (which would not constitute Disqualified Capital Stock), pursuant
     to  a  sinking  fund   obligation  or  otherwise,   or  is  convertible  or
     exchangeable for Debt or redeemable for any consideration  other than other
     Equity Interests (which would not constitute Disqualified Capital Stock) at
     the option of the holder  thereof,  in whole or in part, on or prior to the
     date that is one year after the  earlier of (a) the  Maturity  Date and (b)
     the  date on which  there  are no  Loans  or  other  obligations  hereunder
     outstanding.

                                       5
<PAGE>

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

          "Dry Hole Costs" means  amounts owed to third  Persons that are not an
     Affiliate of the  Borrower  incurred by the Borrower (or incurred by Fossil
     Operating  and  passed on to the  Borrower)  in the  drilling  of a Well to
     Casing Point.

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

          "ERISA" means the Employee  Retirement Income Security Act of 1974, as
     amended, and regulations promulgated thereunder.

          "ERISA  Affiliate"  means  any  trade  or  business  (whether  or  not
     incorporated)  under common control with the Borrower within the meaning of
     Section 414(b) or (c) of the Code (and Sections  414(m) and (o) of the Code
     for purposes of provisions relating to Section 412 of the Code).

          "ERISA  Event" means (as) a  Reportable  Event with respect to a Plan;
     (b) a withdrawal by the Borrower or any ERISA Affiliate from a Plan subject
     to Section 4063 of ERISA  during a plan year in which it was a  substantial
     employer  (as defined in Section  4001(a)(2)  of ERISA) or a  cessation  of
     operations  which is treated as such a withdrawal  under Section 4062(e) of
     ERISA;  (c) a complete or partial  withdrawal  by the Borrower or any ERISA
     Affiliate from a Multiemployer  Plan or  notification  that a Multiemployer
     Plan  is in  reorganization;  (d) the  filing  of a  notice  of  intent  to
     terminate (other than pursuant to Section 4041(b) of ERISA),  the treatment
     of a Plan  amendment as a  termination  under  Section  4041(c) or 4041A of
     ERISA,  or the  commencement of proceedings by the PBGC to terminate a Plan
     or Multiemployer  Plan; (e) an event or condition which might reasonably be
     expected  to  constitute  grounds  under  Section  4042  of  ERISA  for the
     termination of, or the appointment of a trustee to administer,  any Plan or
     Multiemployer  Plan; or (f) the imposition of any liability  under Title IV
     of ERISA,  other than PBGC  premiums due but not  delinquent  under Section
     4007 of ERISA, upon the Borrower or any ERISA Affiliate.

          "Event of Default"  means any of the events  specified in Section 7.1,
     provided that the requirements, if any, for the giving of notice, the lapse
     of time, or both, or any other condition specified in Section 7.1 have been
     satisfied.

                                       6
<PAGE>

          "Exchange  Act" means the  Securities  and  Exchange  Act of 1934,  as
     amended, and regulations promulgated thereunder.

          "Excluded  Taxes"  means,  with  respect to the  Lender,  or any other
     recipient of any payment to be made by or on account of any  obligation  of
     the  Borrower  hereunder  or under any other Loan  Document,  (a) income or
     franchise  taxes  imposed on (or  measured by) its net income by the United
     States of America or such other  jurisdiction  under the laws of which such
     recipient is organized or in which its  principal  office is located or, in
     the case of the Lender, in which its applicable  lending office is located,
     (b)  windfall  profits  or other  excess  profits  that are  imposed on the
     Lender,  and (c) any branch  profits  taxes imposed by the United States of
     America or any similar tax imposed by any other  jurisdiction  in which the
     Borrower is located.

          "Existing  Debt"  means  the  Debt  governed  by that  certain  Credit
     Agreement between the Borrower, as borrower,  and Petro Capital V, L.P., as
     lender, dated as of February 6, 2006, as amended, restated, supplemented or
     modified from time to time.

          "Facility  Rate" means on any day a varying rate of interest per annum
     equal to the Base Rate, from time to time in effect,  plus two percent (2.0
     %), but in no event to exceed the Highest Lawful Rate.

          "Federal  Funds Rate"  means,  for any day,  the rate set forth in the
     weekly  statistical  release  designated  as  H.15(519),  or any  successor
     publication,  published  by the  Federal  Reserve  Bank of New  York on the
     preceding  Business Day opposite the caption  "Federal funds  (Effective)";
     or,  if for any  relevant  day such  rate is not so  published  on any such
     preceding  Business  Day,  the rate for  such  day will be the  average  as
     determined by the Lender of the rates for the last transaction in overnight
     federal funds arranged prior to 9:00 a.m. (New York, New York time) on that
     day by each of three leading  brokers of federal funds  transactions in New
     York, New York selected by the Lender.

          "Financial Statements" means statements of financial condition,  as at
     the point in time and for the period indicated,  and consisting of at least
     a balance sheet and related  statements of  operations,  owners' equity and
     cash flow.

          "Fossil Operating" means Fossil Operating, Inc., a Texas corporation.

                                       7
<PAGE>

          "Hazardous Substances" means any flammables,  explosives,  radioactive
     materials,  hazardous wastes, asbestos or any material containing asbestos,
     polychlorinated  biphenyls (PCB's),  toxic substances or related materials,
     petroleum  and  petroleum  products  and  associated  oil  or  natural  gas
     exploration, production and development wastes or any substances defined as
     "hazardous substances," "hazardous materials," "hazardous wastes" or "toxic
     substance"   under  the  Oil  Pollution  Act,  as  amended;   Comprehensive
     Environmental  Response,  Compensation  and Liability Act, as amended;  the
     Superfund  Amendments and  Reauthorization  Act, as amended;  the Hazardous
     Materials  Transportation  Act, as amended;  the Resource  Conservation and
     Recovery Act, as amended;  the Toxic Substances Control Act, as amended; or
     any  other  law,  statute,  ordinance,  rule,  regulation  or order  now or
     hereafter  enacted  or  promulgated  by  any  governmental  authority  with
     jurisdiction and relating to the protection of the environment.

          "Highest  Lawful  Rate" means the maximum  rate (or, if the context so
     permits or  requires,  an amount  calculated  at such rate) of interest (if
     any) that, at the time in question, would not cause the interest charged on
     the  Obligations  owed to the Lender to exceed the maximum  amount that the
     Lender would be allowed to contract for, charge,  take,  reserve or receive
     under  applicable Law after taking into account,  to the extent required by
     applicable Law, all relevant payments and charges under the Loan Documents.

          "Indemnified Taxes" means Taxes other than Excluded Taxes.

          "Investment"  means, for any Person: (a) the acquisition  (whether for
     cash, Property, services or securities or otherwise) of Equity Interests of
     any other Person or any agreement to make any such acquisition  (including,
     without  limitation,  any "short sale" or any sale of any  securities  at a
     time when such  securities  are not owned by the Person  entering into such
     short sale) or any capital contribution to any other Person; (b) the making
     of any deposit with, or advance,  loan or other extension of credit to, any
     other  Person  (including  the  purchase of Property  from  another  Person
     subject to an  understanding  or agreement,  contingent  or  otherwise,  to
     resell  such  Property  to such  Person;  or (c) the  entering  into of any
     guarantee of, or other contingent  obligation (including the deposit of any
     Equity  Interests to be sold) with  respect to, Debt or other  liability of
     any other  Person and  (without  duplication)  any amount  committed  to be
     advanced, lent or extended to such Person.

          "Johnson 19 Well" means that certain oil and gas well  commonly  known
     as the S.E. Johnson 19 #1 Well and located on the Southern Properties.

          "Johnson 20 Well" means that certain oil and gas well  commonly  known
     as the S.E. Johnson 20 #1 Well and located on the Southern Properties.

                                       8
<PAGE>

          "Johnson 29 Well" means that certain oil and gas well  commonly  known
     as the S.E. Johnson 29 #1 Well and located on the Southern Properties.

          "Kraemer 24 Well" means that certain oil and gas well  commonly  known
     as the Kraemer 24 #1 Well and located on the Southern Properties.

          "Laws"  means  all  applicable  statutes,  laws,  ordinances,   rules,
     rulings,    interpretations,    regulations,    judgments,    requirements,
     governmental  authorizations (including licenses,  permits,  franchises and
     other  governmental  consents  necessary  for the ownership or operation of
     Property), orders, writs, injunctions or decrees (or interpretations of any
     of  the  foregoing)  of any  political  subdivision,  state,  commonwealth,
     nation, country,  territory,  possession,  county, parish,  municipality or
     Tribunal.

          "Lender" has the meaning indicated in the opening paragraph hereof.

          "Lien"  means  any  lien,  charge,   claim,   restriction,   mortgage,
     mechanic's lien, materialmen's lien, pledge, hypothecation,  inchoate lien,
     assignment, deposit arrangement,  conditional sale or other title retention
     agreement,  financing lease, security interest, security agreement or other
     encumbrance,  whether  arising  by  contract  or under  Law,  and  includes
     reservations,   exceptions,   encroachments,    easements,   rights-of-way,
     covenants,  conditions, leases and other title exceptions and the filing of
     any financing  statement under the Uniform  Commercial Code of the State of
     Texas or comparable Law of any jurisdiction perfecting any such Lien.

          "Liquid  Investments"  means Investments in (a) debt securities issued
     or directly and fully guaranteed or insured by the United States Government
     or any agency or instrumentality  thereof,  with maturities of no more than
     one year,  (b) commercial  paper of a domestic  issuer rated at the date of
     acquisition  at least  P-2 by  Moody's  Investor  Service,  Inc.  or A-2 by
     Standard and Poor's  Corporation  and with  maturities  of no more than one
     year from the date of acquisition,  (c) repurchase agreements covering debt
     securities or commercial  paper of the type  described in this  definition,
     certificates  of  deposit,  demand  deposits,   eurodollar  time  deposits,
     overnight bank deposits and bankers' acceptance, with maturities of no more
     than one year from the date of  acquisition,  issued by or acquired from or
     through The American  National Bank of Texas,  any Affiliate of the Lender,
     or any bank or trust company  organized under the laws of the United States
     or any state  thereof  and having  capital  surplus and  undivided  profits
     aggregating at least  $500,000,000,  and (d)  Investments  in  money-market
     funds sponsored or administered by Persons acceptable to the Administrative
     Agent and which funds invest in  short-term  Investments  similar in nature
     and degree of risk to those described in clause (b) above.

                                       9
<PAGE>

          "Litigation"   means   any   proceeding,    claim,   lawsuit,   and/or
     investigation conducted, or threatened and known to the Person in question,
     by or before any Tribunal.

          "Loan  Documents"  means  this  Agreement,  the  Notes,  the  Security
     Documents,  the  assignments  of Net  Profits  Interests,  all  agreements,
     documents  and  instruments  governing or related to  Derivative  Contracts
     entered into  between the  Borrower and the Lender or any  Affiliate of the
     Lender, the Warrant,  the Supplemental  Warrants,  the Registration  Rights
     Agreement,  and all other notes, mortgages,  deeds of trust,  restatements,
     ratifications  and  amendments  of  mortgages,  deeds of  trust,  financing
     statements,  guaranties, security agreements, pledge agreements, documents,
     instruments and other agreements now or hereafter delivered pursuant to the
     terms of, or in connection with, this Agreement, the Obligations and/or the
     Collateral,   and  all  renewals,   extensions  and  restatements  of,  and
     amendments and supplements to any or all of the foregoing.

          "Loans"  means the loans and  extensions of credit by the Lender to or
     for the account of the Borrower pursuant to this Agreement.

          "Marketable Title" means title free and clear from reasonable doubt as
     to  matters  of law and fact such that a  prudent  operator  of Oil and Gas
     Properties,  advised  of the  facts  and their  legal  significance,  would
     willingly accept, and specifically  includes rights to acquire title to Oil
     and Gas  Properties  from  record  title  owners  under  farm-in or similar
     agreements  that are customary in the industry and which are  acceptable to
     prudent operators of Oil and Gas Properties.

          "Material Adverse Effect" means any material and adverse effect on (a)
     the  business,   assets,   liabilities,   financial  condition,   business,
     operations or affairs of the Borrower taken as a whole,  (b) the ability of
     the Borrower to meet its  Obligations  under any of the Loan Documents on a
     timely basis as provided  herein or therein or (c) the legality,  validity,
     binding effect or enforceability  against the Borrower of any Loan Document
     to which it is a party.

          "Mortgaged  Properties"  means Oil and Gas  Properties of the Borrower
     subject to the Liens of the Security  Documents from time to time to secure
     the Debt evidenced by the Notes.

          "Moseley 25 Well" means that certain oil and gas well  commonly  known
     as the Moseley 25 #1 Well and located on the Southern Properties.

          "Moseley 26 Well" means that certain oil and gas well  commonly  known
     as the Moseley 26 #1 Well and located on the Southern Properties.

                                       10
<PAGE>

          "Multiemployer Plan" means a "multiemployer  plan," within the meaning
     of  Section  4001(a)(3)  of  ERISA,  to which  the  Borrower  or any  ERISA
     Affiliate  makes,  is making,  or is  obligated to make  contributions  or,
     during the preceding three (3) calendar years,  has made, or been obligated
     make, contributions.

          "Net  Profits  Interests"  means any of the net profits  interests  in
     certain Oil and Gas Properties of the Borrower to be conveyed to the Lender
     by the Borrower pursuant to Section 2.14.

          "Northern Area" means all of the lands within the area outlined on the
     map attached hereto as Exhibit VII.

          "Northern Properties" means any Oil and Gas Properties of the Borrower
     in the  Northern  Area,  including,  without  limitation,  the  Oil and Gas
     Properties  described  on Exhibit  VIII  attached  hereto.  Any Oil and Gas
     Property hereafter acquired by the Borrower in the Northern Area shall be a
     Northern Property at the time of such acquisition.

          "Notes" means the Revolving  Note and the Term Note,  and "Note" means
     any one of the Notes.

          "Obligations"   means  all   present  and  future   loans,   advances,
     indebtedness,  obligations,  covenants,  duties  and  liabilities,  and all
     renewals for any period,  increases  and  extensions  thereof,  or any part
     thereof,  now or  hereafter  owing to the Lender and any  Affiliate  of the
     Lender  by the  Borrower  arising  from  or  pursuant  to  any of the  Loan
     Documents,   together  with  all  interest  accruing  thereon,  and  costs,
     expenses,  and  attorneys'  fees incurred in the  enforcement or collection
     thereof,  whether  such  indebtedness,  obligations,  and  liabilities  are
     direct,  indirect,  fixed,  contingent,  liquidated,  unliquidated,  joint,
     several, or joint and several.

          "Oil and Gas Properties" means fee, leasehold or other interests in or
     under mineral estates,  or oil, gas and other liquid or gaseous hydrocarbon
     leases with respect to properties situated in the United States, including,
     without  limitation,  overriding royalty and royalty  interests,  leasehold
     estate interests,  net profits interests,  production payment interests and
     mineral fee  interests,  together  with  contracts  executed in  connection
     therewith and all tenements,  hereditaments,  appurtenances and properties,
     real or personal, appertaining, belonging, affixed or incidental thereto.

          "Other Taxes" means any and all present or future stamp or documentary
     taxes or any other  excise or  Property  taxes,  charges or similar  levies
     arising from any payment made hereunder or from the execution,  delivery or
     enforcement  of, or otherwise with respect to, this Agreement and any other
     Loan Document.

                                       11
<PAGE>

          "PBGC"  means  the  Pension  Benefit  Guaranty  Corporation,   or  any
     governmental  entity  succeeding  to any of its principal  functions  under
     ERISA.

          "Pension  Plan" means a pension  plan (as  defined in Section  3(2) of
     ERISA) subject to Title IV of ERISA, other than a Multiemployer Plan, which
     the  Borrower  sponsors,  maintains,  or to which the  Borrower  makes,  is
     making, or is obligated to make contributions, or in the case of a multiple
     employer  plan  (as  described  in  Section  4064(a)  of  ERISA)  has  made
     contributions  at any time during the  immediately  preceding five (5) plan
     years.

          "Permitted Liens" means: (a) Liens for Taxes, not yet due or which are
     being  Contested  in Good  Faith;  (b) Liens in  connection  with  workers'
     compensation,  unemployment  insurance or other social security (other than
     Liens  created  by  Section  4068 of  ERISA),  old age  pension  or  public
     liability obligations which are not yet due or which are being Contested in
     Good  Faith;   (c)  vendors',   carriers',   warehousemen's,   repairmen's,
     mechanics', workmen's,  materialmen's,  construction or other similar Liens
     arising by operation of Law in the ordinary  course of business or incident
     to  the   construction  or  improvement  of  any  Property  in  respect  of
     obligations  which  are not yet due or which are  being  Contested  in Good
     Faith;  (d) Liens to  operators  and  non-operators  under joint  operating
     agreements  arising in the  ordinary  course of business to secure  amounts
     owing,  which amounts are not yet due or are being Contested in Good Faith;
     (e) Liens under production  sales  agreements,  division orders,  operating
     agreements and other  agreements  customary in the oil and gas business for
     processing,  producing and selling hydrocarbons; (f) Liens created in favor
     of the Lender  securing  Obligations  hereunder  and other Liens  expressly
     permitted  under the  Security  Documents;  (g)  easements,  rights-of-way,
     restrictions and other similar encumbrances, and minor defects in the chain
     of  title  which  are  customarily  accepted  in the oil and gas  financing
     industry  or which  are  reasonably  expected  to be cured in the  ordinary
     course of business,  none of which  interfere in any material  respect with
     the  ordinary  conduct  of the  business  of the owner of the  Property  or
     materially  detract  from the value or use of the  Property  to which  they
     apply;  (h) Liens of record under terms and provisions of the leases,  unit
     agreements,  assignments and other transfer of title documents in the chain
     of title  under  which the owner of the  relevant  Property  acquired  such
     Property;  and (i) Liens  securing  the  purchase  price or existing  under
     conditional  sale of title retention  contracts for equipment  purchased in
     the normal  course of business  of the  Borrower,  provided  that such Lien
     shall not extend to or cover any other Property of the Borrower.

                                       12
<PAGE>

          "Person" means any individual, sole proprietorship, firm, corporation,
     trust, association,  institution,  partnership,  joint venture, Tribunal or
     other entity.

          "Plan"  means an employee  benefit plan (as defined in Section 3(3) of
     ERISA)  which is subject to ERISA,  other than a  Multiemployer  Plan,  and
     which the Borrower  sponsors,  maintains or to which the Borrower makes, is
     making or is obligated to make contributions and includes any Pension Plan.

          "Property"  means  any  interest  in any kind of  property  or  asset,
     whether real, personal or mixed, tangible or intangible.

          "Proved Developed Producing Reserves" means those reserves denominated
     as such and determined in accordance with the methods commonly  accepted by
     the Society of Petroleum Engineers for evaluating oil and gas reserves.

          "Proved  Reserves"  means  those  reserves  denominated  as  such  and
     determined in accordance with the methods commonly  accepted by the Society
     of Petroleum Engineers for evaluating oil and gas reserves.

          "Registration Rights Agreement" means that form of Registration Rights
     Agreement attached to this Agreement as Exhibit XIII.

          "Reportable  Event"  means  any of the  events  set  forth in  Section
     4043(b) of ERISA or the regulations  thereunder,  other than any such event
     for which the 30-day  notice  requirement  under  ERISA has been  waived in
     regulations issued by the PBGC.

          "Responsible  Officer" means the president,  chief executive  officer,
     chief financial officer or any vice president of the Borrower.

          "Revolving  Advance" means a direct  advance of immediately  available
     funds by the Lender to the Borrower or funds advanced to another Person for
     and on behalf of the Borrower pursuant to Section 2.1.

          "Revolving Commitment" means the obligation of the Lender as set forth
     herein from the Closing Date through the Termination  Date to extend credit
     to the  Borrower by means of Revolving  Advances,  with the sum of all such
     Revolving  Advances  made pursuant to Section 2.1 not to exceed at any time
     the Revolving Commitment Limit.

          "Revolving  Commitment  Limit"  means at any time  the  lesser  of (a)
     $20,000,000.00 or (b) the then existing Borrowing Base.

                                       13
<PAGE>

          "Revolving  Facility Borrowing Request" means a written application by
     the  Borrower  for  a  Revolving  Advance.  Each  such  Revolving  Facility
     Borrowing  Request  shall specify the  requested  amount of such  Revolving
     Advance,  the requested date of such Revolving Advance and the purposes for
     which proceeds for such Revolving Advance will be used.

          "Revolving  Note" means that certain  promissory note in the principal
     face  amount  of  $20,000,000.00  dated of even date  herewith  made by the
     Borrower to the order of the Lender, in the form attached hereto as Exhibit
     I,  together with all  deferrals,  renewals or  extensions  thereof,  which
     promissory note shall evidence the Revolving  Advances made to the Borrower
     by the Lender pursuant to Section 2.1.

          "Rights" means rights, remedies, powers and privileges.

          "Section"  or  "Subsection"  means a  section  or  subsection  in this
     Agreement unless specified otherwise.

          "Securities Act" means the Securities Act of 1933, as amended.

          "Security  Documents"  means the  documents  described  in  Subsection
     3.1(a)(7)  of this  Agreement  and all  other  documents  now or  hereafter
     existing  which  provide  the Lender  with  Collateral,  as the same may be
     amended or restated from time to time.

          "Southern Area" means all of the lands within the area outlined on the
     map attached hereto as Exhibit V.

          "Southern Properties" means any Oil and Gas Properties of the Borrower
     in the  Southern  Area,  including,  without  limitation,  the  Oil and Gas
     Properties  described  on  Exhibit  VI  attached  hereto.  Any  Oil and Gas
     Property hereafter acquired by the Borrower in the Southern Area shall be a
     Southern Property at the time of such acquisition.

          "Stock Option Plan" means that certain  Cubic Energy,  Inc. 2005 Stock
     Option Plan.

          "Subject  Areas"  means the Northern  Area and the  Southern  Area and
     "Area" means any one of the Subject Areas.

          "Subject  Properties"  means the Northern  Properties and the Southern
     Properties.

          "Subsidiary"  of  any  Person  means  any  corporation,   association,
     partnership,  joint venture or other business entity of which more than 50%
     of the voting stock or other equity interests (in the case of Persons other
     than  corporations),  is owned or controlled  directly or indirectly by the
     Person,  or one or more of the Subsidiaries of the Person, or a combination
     thereof.

                                       14
<PAGE>

          "Supplemental  Warrant" means a Stock  Purchase  Warrant issued by the
     Borrower to the Lender pursuant to Section 2.12 in the form attached hereto
     as Exhibit XV.

          "Taxes" means all taxes,  assessments,  filing or other fees,  levies,
     imposts,   duties,   deductions,   withholdings,   stamp  taxes,   interest
     equalization taxes,  capital  transaction taxes,  foreign exchange taxes or
     charges,  or other charges of any nature whatsoever from time to time or at
     any time imposed by any Law or Tribunal.

          "Term Loan" means the direct,  single advance of immediately available
     funds made by the Lender to the Borrower pursuant to Section 2.2.

          "Term  Note" means that  certain  convertible  promissory  note in the
     principal amount of  $5,000,000.00  dated of even date herewith made by the
     Borrower to the order of the Lender, in the form attached hereto as Exhibit
     II,  together with all  deferrals,  renewals or extensions  thereof,  which
     promissory  note shall  evidence  the Term Loan made to the Borrower by the
     Lender pursuant to Section 2.2.

          "Termination Date" means March 1, 2010.

          "Tribunal"  means any court,  governmental  department  or  authority,
     commission,  board,  bureau,  agency,  arbitrator or instrumentality of any
     state,  political subdivision,  commonwealth,  nation,  territory,  county,
     parish  or  municipality,   whether  now  or  hereafter  existing,   having
     jurisdiction  over the  Lender,  the  Borrower  or any of their  respective
     Property.

          "Unfunded  Pension  Liability"  means the  excess of a Plan's  benefit
     liabilities  under Section 4001(a) (16) of ERISA, over the current value of
     that Plan's assets,  determined in accordance with the assumptions used for
     funding  the  Pension  Plan  pursuant  to  Section  412 of the Code for the
     applicable Plan year.

          "Unmatured  Event of  Default"  means  any event or  occurrence  which
     solely  with the lapse of time or the  giving of notice or both will  ripen
     into an Event of Default.

          "Warrant"  means the Stock Purchase  Warrant issued by the Borrower to
     the Lender in the form attached hereto as Exhibit XIV.

          "Wells" means the Johnson 19 Well, the Johnson 20 Well, the Johnson 29
     Well,  the Kraemer 24 Well,  the  Moseley 25 Well,  the Moseley 26 Well and
     each of the three wells  described in Subsection  2.1(b),  and "Well" means
     any one of them.

                                       15
<PAGE>

          "Wells  Fargo Bank" means Wells Fargo Bank,  National  Association,  a
     national banking association, and its successors.

          "Workover  Costs" means  amounts owed to third Persons that are not an
     Affiliate of the  Borrower  incurred by the Borrower (or incurred by Fossil
     Operating  and  passed on to the  Borrower)  for  operations  to restore or
     increase  production  on a  previously  completed  well and amounts owed to
     Fossil Operating for overhead charged to the Borrower at a fixed rate basis
     pursuant to the applicable COPAS.

     1.2 Accounting Terms. All accounting and financial terms used in any of the
Loan  Documents  and the  compliance  with each  covenant  contained in the Loan
Documents  that relates to financial  matters  shall be determined in accordance
with GAAP,  except to the extent that a deviation  therefrom is expressly stated
in such Loan Documents.

     1.3 Number and Gender of Words. Whenever the singular number is used in any
Loan  Document,  the same shall include the plural where  appropriate,  and vice
versa;  words of any gender in any Loan Document shall include each other gender
where appropriate; and the words "herein," "hereof," "hereunder" and other words
of similar  import refer to the relevant Loan Document as a whole and not to any
particular part, section or subdivision thereof.

                                    ARTICLE 2
                                TERMS OF FACILITY

     2.1 Revolving  Facility.  Subject to the terms and  conditions  (including,
without  limitation,  the  right  of  the  Lender  to  terminate  the  Revolving
Commitment hereunder upon an Event of Default or Unmatured Event of Default) and
relying on the  representations  and warranties  contained in this Agreement and
the other Loan  Documents,  from time to time until the  Termination  Date,  the
Lender agrees to make Revolving  Advances to the Borrower  following  receipt by
the Lender of a Revolving  Facility  Borrowing  Request on or before  10:00 a.m.
Central  Standard  or  Daylight  Savings  Time,  as the case may be,  three  (3)
Business  Days prior to the date of the  requested  Revolving  Advance,  in such
amounts as the Borrower  may request,  provided,  however,  that each  Revolving
Advance shall be in an amount not less than $50,000.00 and no Revolving  Advance
shall be made which will cause the sum of all outstanding  Revolving Advances to
exceed the Revolving Commitment Limit.

     The Borrower  may transmit  Revolving  Facility  Borrowing  Requests to the
Lender by mail, personal delivery, telefacsimile, telex or other method; but the
Lender shall not be obligated to make  Revolving  Advances on the requested date
unless the Lender has  received,  on or before  10:00 a.m.  Central  Standard or
Daylight Savings Time, as the case may be, three (3) Business Days prior to such
date a Revolving Facility Borrowing Request.

                                       16
<PAGE>

     Subject to the conditions and limitations set forth in this Agreement,  the
Borrower may borrow,  repay without penalty or premium,  and reborrow hereunder,
from the date of this Agreement  until the Termination  Date,  either the entire
Revolving  Commitment Limit or any lesser sum; provided,  however,  the Borrower
shall not request and the Lender  shall not be  obligated  to make more than two
(2) Revolving Advances in any calendar month.

     The Revolving  Advances made by the Lender to the Borrower  pursuant to the
Revolving  Commitment  shall  be  made  at the  office  of the  Lender  at  1000
Louisiana,  9th  Floor,  Houston,  Texas  77002  and shall be  evidenced  by the
Revolving Note.

     2.2 Term Loan.  Contemporaneously  with the execution of this Agreement and
the delivery of the Term Note, but subject to the provisions of this  Agreement,
the  Lender  shall  make  the  Term  Loan  to  the  Borrower  in the  amount  of
$5,000,000.00.

     The Term Loan made by the Lender to the  Borrower  pursuant to this Section
2.2 shall be made at the  office of the  Lender at 1000  Louisiana,  9th  Floor,
Houston, Texas 77002 and shall be evidenced by the Term Note.

     2.3  Advances and Payments  Under the Notes.  The Lender shall  maintain an
account on its books in the name of the  Borrower  reflecting  the amount of all
Advances  and  other  Loans  made by the  Lender  and each  payment  made by the
Borrower with respect to each Note. The aggregate unpaid amount of such Advances
and Loans  reflected  by the  notations  by the Lender on its  records  shall be
deemed  rebuttably  presumptive  evidence of the principal  amounts owing on the
respective  Note. The liability for payment of principal and interest  evidenced
by the respective Note shall be limited to principal  amounts actually  advanced
and  outstanding  pursuant to this  Agreement  and the other Loan  Documents and
interest accrued on such amounts calculated in accordance with this Agreement.

     2.4 Use of Proceeds.

     a)   Contemporaneously with the making of the Term Loan, the Borrower shall
          use all  proceeds  from the Term  Loan  together  with cash on hand to
          repay in full the Existing Debt.

     (b)  Proceeds from Revolving Advances shall be used to pay or reimburse the
          Borrower for:

          (i)  Completion Costs associated with the completion of the Johnson 19
               Well in the Cotton Valley and Hosston formations;

          (ii) Completion Costs associated with the completion of the Johnson 20
               Well in the Cotton Valley and Hosston formations;

          (iii) Completion  Costs  associated with the completion of the Johnson
               29 Well in the Cotton Valley and Hosston formations;

                                       17
<PAGE>

          (iv) Workover  Costs  associated  with the  workover of the Kraemer 24
               Well to increase  hydrocarbon  production  from the Cotton Valley
               formation and Completion  Costs associated with the completion of
               the Kraemer 24 Well in the Hosston formation;

          (v)  Workover  Costs  associated  with the  workover of the Moseley 25
               Well to increase  hydrocarbon  production  from the Cotton Valley
               formation and Completion  Costs associated with the completion of
               the Moseley 25 Well in the Hosston formation;

          (vi) Workover  Costs  associated  with the  workover of the Moseley 26
               Well to increase  hydrocarbon  production  from the Cotton Valley
               formation and Completion  Costs associated with the completion of
               the Moseley 26 Well in the Hosston formation; and

          (vii)Dry Hole Costs and Completion Costs relating to three wells to be
               drilled  after the date of this  Agreement,  at  locations on the
               Southern  Properties  selected  by the  Borrower  and  reasonably
               acceptable  to the  Lender  and deep  enough  to test the  Cotton
               Valley formation or the Haynesville  formation as selected by the
               Borrower and reasonably acceptable to the Lender.

     2.5 Repayment Provisions.

     (a)  All  outstanding  principal Debt evidenced by the Revolving Note shall
          be repayable by the Borrower on the Termination Date.

     (b)  All  interest  as it  accrues  from  the  date  of this  Agreement  on
          principal  amounts  evidenced by the Revolving  Note and calculated as
          provided  herein and in the Revolving Note shall be due and payable by
          the Borrower (i) on the first day of each  calendar  month  commencing
          April 1,  2007,  and  continuing  thereafter  on the first day of each
          succeeding  calendar  month  while  any  amount  remains  owing on the
          Revolving  Note and (ii) on the date the principal  Debt  evidenced by
          the  Revolving  Note is paid in full,  the  interest  payment  in each
          instance to be that which has been earned and remains unpaid.

     (c)  All outstanding  principal Debt evidenced by the Term Note and accrued
          interest  thereon at the  applicable  rate  herein  provided  shall be
          repayable by the Borrower on the Termination Date.

     (d)  All  interest  as it  accrues  from  the  date  of this  Agreement  on
          principal  amounts  evidenced  by the  Term  Note  and  calculated  as
          provided  herein and in the Term Note shall be due and  payable by the
          Borrower (i) on the first day of each calendar month  commencing April
          1, 2007, and continuing thereafter on the first day of each succeeding
          calendar  month  while any amount  remains  owing on the Term Note and
          (ii) on the date the principal Debt evidenced by the Term Note is paid
          in full or converted to Equity  Interests in the Borrower as set forth
          in Section  2.15,  the  interest  payment in each  instance to be that
          which has been earned and remains unpaid.

                                       18
<PAGE>

     (e)  Certain of the Security  Documents  contain an assignment  unto and in
          favor of the Lender of all oil, gas and other minerals produced and to
          be produced from or attributable to the Mortgaged  Properties together
          with all of the revenues and proceeds attributable to such production,
          and such Security Documents further provide that all such revenues and
          proceeds  which may be so  collected  by the Lender  pursuant  to such
          assignment  shall be  applied  to the  payment  of the  Notes  and the
          satisfaction  of  all  other  Debt  to be  secured  by  such  Security
          Documents. The Lender and the Borrower expressly acknowledge and agree
          that so  long as no  Event  of  Default  shall  have  occurred  and be
          continuing,  the Lender shall not enforce such  assignment.  After the
          occurrence  of an Event of Default  hereunder,  the Lender may enforce
          such  assignment  and apply such revenues and proceeds of the Borrower
          to the payment of the Notes and the  satisfaction of all other Debt to
          be secured by such Security Documents,  such application to be made in
          such  manner as the  Lender  may  elect,  regardless  of  whether  the
          application so made shall exceed the payment of principal and interest
          then due as  provided  above.  In  connection  with the  rights of the
          Lender  to  all  proceeds  of  production,  upon  the  occurrence  and
          continuation  of an Event of Default,  the Borrower  hereby grants the
          Lender a power of  attorney,  which power is coupled  with an interest
          and is  irrevocable,  to complete in all  respects  and deliver to the
          addressee the letter  transfer  orders executed in connection with the
          Security Documents.

     (f)  All payments required pursuant to this Agreement on the Debt evidenced
          by the respective Notes shall be made in immediately  available funds;
          shall be  deemed  received  by the  Lender  on the next  Business  Day
          following  receipt if such  receipt is after 2:00 p.m. on any Business
          Day; and shall be made at the offices of the Lender at 1000 Louisiana,
          9th Floor, Houston,  Texas 77002,  provided,  however, the Lender may,
          upon notice to the Borrower,  designate a different  place of payment.
          Whenever any payment  under this  Agreement or any other Loan Document
          shall be stated to be due on a day that is not a  Business  Day,  such
          payment  may be made on the next  succeeding  Business  Day,  and such
          extension of time shall in such case be included in the computation of
          the payment of interest.

     2.6 Borrowing Base Determinations.

     (a)  The initial Borrowing Base is hereby established at $4,000,000.00.

     (b)  The  Borrowing  Base  shall be  redetermined  by the  Lender  for each
          Borrowing Base Period  commencing  September 1, 2007, and effective as
          of the date set forth in a notice of redetermination  delivered to the
          Borrower.

     (c)  The  determination  of the  Borrowing  Base shall be made, at the sole
          discretion of the Lender,  by reviewing the estimates of the projected
          rate of  production  and projected  revenues  from the Borrowing  Base
          Properties   and  such  other  credit  factors   (including,   without
          limitation,  the assets,  liabilities,  cash flow,  current Derivative
          Contracts, business, properties,  prospects,  management and ownership
          of  the  Borrower)  as  the  Lender  in  its  sole  discretion   deems
          significant. The Lender may make adjustments, in good faith and at its
          sole  discretion and in accordance  with its customary  practices,  to
          such  estimates of the  projected  rate of  production  and  projected
          revenues.

                                       19
<PAGE>

     (d)  In addition to scheduled Borrowing Base  redeterminations  pursuant to
          Subsection   2.6(b),   the  Lender  or  the   Borrower   may  cause  a
          redetermination  of the  Borrowing  Base at any one time  during  each
          Borrowing  Base  Period.  In the event the  Borrower  requests  such a
          Borrowing Base  redetermination,  the Borrower  shall deliver  written
          notice of such  request to the Lender  with (i) a report,  in form and
          substance  satisfactory to the Lender,  prepared by Scotia Group, Inc.
          or  another  independent  petroleum  engineer  or  firm  of  engineers
          reasonably  acceptable to the Lender, which report shall set forth, as
          of a date not more than sixty (60)  calendar days prior to the date of
          such  request,  projections  of future  net income  from  hydrocarbons
          classified as "Proved  Reserves"  attributable to all of the Borrowing
          Base Properties,  (ii) such other information  concerning such Oil and
          Gas  Properties  as the  Lender  may  reasonably  request,  including,
          without limitation,  engineering, geological and performance data, and
          (iii) the amount of the  Borrowing  Base  requested by the Borrower to
          become  effective.  Likewise,  in the event the Lender  exercises  its
          option  for  a  Borrowing  Base   redetermination   pursuant  to  this
          Subsection 2.6(d), upon written request and notification by the Lender
          to the Borrower,  the Borrower shall furnish the information described
          above  within  thirty  (30) days of such  request.  The  Lender  shall
          redetermine  the Borrowing Base in accordance  with the procedures set
          forth in Subsection  2.6(c) which  redetermined  Borrowing  Base shall
          then be the effective Borrowing Base until further redetermination.

     (e)  The  Borrower  agrees  to pay  to the  Lender  an  engineering  fee of
          $2,500.00  upon the execution and delivery of this  Agreement and upon
          each redetermination of the Borrowing Base as set forth in Subsections
          2.6 (b) and (d).

     2.7 Interest Rates.  Principal  amounts of Advances  outstanding  under the
Notes shall bear interest at the Facility Rate (but in no event greater than the
Highest Lawful Rate), calculated on the basis of a year consisting of sixty-five
(365) or three hundred  sixty-six (366) days, as the case may be. Should default
occur in the payment of the Notes and collection proceedings be instituted,  all
past due  interest  and  principal  under the Notes  shall bear  interest at the
lesser of the Highest Lawful Rate,  calculated on the basis of a year consisting
of three hundred  sixty-five (365) or three hundred sixty-six (366) days, as the
case may be, or the Default Rate,  calculated on the basis of a year  consisting
of three hundred  sixty-five (365) or three hundred sixty-six (366) days, as the
case may be, and if no Highest  Lawful Rate  exists,  all past due  interest and
principal under the Notes shall bear interest at the Default Rate, calculated on
the  basis of a year  consisting  of  three  hundred  sixty-five  (365) or three
hundred sixty-six (366) days, as the case may be.

     2.8 General  Provisions  Relating to Interest.  It is the  intention of the
parties hereto to comply  strictly with the  applicable  usury Laws as in effect
from time to time; and in this connection, there shall never be taken, reserved,
contracted  for,  collected,  charged  or  received  on any  Loan  or any  other
Obligation  interest in excess of that which would accrue at the Highest  Lawful
Rate.  To the  extent  that the  interest  rate  Laws of the  State of Texas are
applicable to the Loans,  for purposes of Chapter 303 of the Texas Finance Code,
as  amended,  the  Borrower  agrees  that the  Highest  Lawful Rate shall be the
"weekly rate ceiling" as defined in such  chapter,  provided that the Lender may
also rely, to the extent  permitted by applicable  Laws, on alternative  maximum
rates of interest under such other applicable Laws, if greater.

                                       20
<PAGE>

     If under any  circumstances  the aggregate  amount paid on the  Obligations
includes  amounts that are by Law deemed to be interest which exceed the Highest
Lawful Rate (the "excess  interest"),  the Borrower stipulates that such payment
and  collection  will have been and will be deemed to have been,  to the fullest
extent  permitted by applicable  Laws, the result of  mathematical  error on the
part of the Borrower and the Lender,  and the Lender shall  promptly  credit the
amount of such  excess  interest  on the  principal  amount  of the  outstanding
Obligations,  or if the principal amount of the Obligations shall have been paid
in full,  refund  the excess  interest  to the  Borrower.  In the event that the
maturity  of the Notes is  accelerated  by reason of an  election  of the Lender
resulting  from any Event of Default  or by reason of  operation  of  Subsection
7.3(a),  or in the  event  of  any  prepayment,  then  such  consideration  that
constitutes  interest  under Laws  applicable to the Lender may never exceed the
Highest Lawful Rate,  and excess  interest,  if any,  provided for in the Notes,
this Agreement or otherwise shall be cancelled automatically by the Lender as of
the date of such  acceleration or prepayment and, if theretofore  paid, shall be
credited by the Lender on the  principal  amount of the  Obligations,  or if the
principal  amount of the Obligations  shall have been paid in full,  refunded by
the Lender to the Borrower.

     All  sums  paid,  or  agreed  to be  paid,  to  the  Lender  for  the  use,
forbearance,  and  detention of the  proceeds of the Loans shall,  to the extent
permitted by  applicable  Law, be  amortized,  prorated,  allocated,  and spread
throughout  the  full  term of the  Obligations  until  paid in full so that the
actual rate of interest is uniform, but does not exceed the Highest Lawful Rate,
throughout the full term hereof.

     2.9 Facility Fees. Upon the execution and delivery of this Agreement by the
Lender, the Borrower will pay the Lender a facility fee of $90,000.00.

     2.10 Increase in Borrowing  Base Fee. The Borrower  shall pay to the Lender
as a fee for any increase in the Borrowing Base resulting from  redeterminations
under Section 2.6 hereof to an amount  greater than any  previously  established
Borrowing  Base,  a fee equal to one  percent  (1.0%) of the amount by which the
Borrowing  Base was  increased  from the  amount of the  previously  established
highest  Borrowing  Base.  Any fee arising under this Section is to be paid upon
the effective date of the related Borrowing Base increase.

     2.11  Loans to  Satisfy  Obligations.  The  Lender  may,  but  shall not be
obligated to, make Loans and apply proceeds  thereof to the  satisfaction of any
warranty, representation, covenant or other Obligation of the Borrower contained
in this Agreement or the other Loan  Documents and which are  necessary,  in the
commercially reasonable opinion of the Lender, to enforce its Rights, protect or
preserve  the  Collateral  or the Liens  thereon  in favor of the Lender and the
priorities  thereof,  or avoid a Material Adverse Effect, and  contemporaneously
with so doing,  the Lender shall furnish the Borrower  written  notice as to the
amount and date of any such Loan.  Any funds so advanced  and  applied  shall be
evidenced  by the  Revolving  Note,  shall be  payable  on demand and shall bear
interest at the Default  Rate from the time of the making of such Loan until the
time of repayment.

                                       21
<PAGE>

     2.12  Prepayment  of Term  Note.  (a)  Except  as set  forth  below in this
Subsection  2.12(a),  the Borrower shall not have the right and option to prepay
all or any part of the principal balance outstanding on the Term Note.

     Beginning with the  redetermination of the Borrowing Base for the Borrowing
Base Period commencing  September 1, 2008, if the Borrowing Base as redetermined
by the Lender pursuant to Subsection  2.6(b) is less than  $500,000.00 more than
the Borrowing Base as determined for the  immediately  preceding  Borrowing Base
Period pursuant to Subsection 2.6(b), then the Borrower may elect until the next
regularly scheduled  redetermination of the Borrowing Base pursuant to Subection
2.6(b) to prepay all or any portion of the principal  Debt evidenced by the Term
Note.

     Upon any  prepayment  of the principal  Debt  evidenced by the Term Note as
permitted by this Subsection  2.12(a),  the Borrower shall (a) repay in full all
Debt evidenced by the Revolving Note and terminate the Revolving  Commitment and
(b) as a prepayment  penalty,  execute and deliver to the Lender a  Supplemental
Warrant for the purchase of a number of shares of Common Stock which is equal to
one  share of  Common  Stock  for  every  $2.00 of  principal  prepayment.  Such
Supplemental Warrant shall be in form of Exhibit XV attached hereto and executed
and delivered to the Lender at the same time of the corresponding prepayment.

     Except  as set  forth  above in this  Subsection  2.12(a),  such  permitted
prepayment shall be without premium or penalty.

     (b)  In the event of a Change of Control  involving  a Person or Group that
          is not an Affiliate  of the  Borrower,  the Borrower  shall prepay the
          principal  balance  of  the  Term  Loan  then  outstanding  after  any
          conversions as provided in Section 2.15, along with all accrued unpaid
          interest.  This prepayment  shall be made  contemporaneously  with the
          consummation  of the Change of Control and,  notwithstanding  anything
          herein to the contrary, shall be without premium or penalty.

     2.13 Mandatory  Prepayment of Revolving Note or Actions in Lieu Thereof. At
any time the outstanding principal Debt evidenced by the Revolving Note shall be
in  excess  of the  Borrowing  Base  as  then  determined,  the  Borrower  shall
immediately,  but in no event later than thirty (30) days  following  receipt of
written  notice given the Lender to the Borrower of such  determination,  at the
Borrower's  election:  (a) prepay the principal  Debt evidenced by the Revolving
Note in an aggregate  amount at least equal to such excess,  which payment shall
be in addition to any  principal  installment  otherwise due during such period;
(b) give  written  notice to the Lender that the  Borrower  shall elect to repay
such excess in five (5) equal monthly installments;  or (c) add to the Borrowing
Base  additional  Oil and Gas Properties  (reasonably  acceptable to the Lender)
sufficient  to  increase  the  Borrowing  Base to equal  the  cumulative  unpaid
principal  amount  evidenced by the Revolving  Note,  the  determination  of the
value,  title and  environmental  status of the Oil and Gas  Properties so added
shall be made by the Lender, at its sole good faith discretion.

                                       22
<PAGE>

     If the Borrower elects to repay such excess in five (5) installments,  each
of such installments  shall equal one-fifth (1/5th) of such excess, the first of
such installments  shall be due and payable by the Borrower at the same date the
Lender receives written notice of the Borrower's election as set forth above and
such installments shall thereafter be due and payable by the Borrower monthly on
the same day of the month as the first installment was due and payable and shall
continue until such excess no longer exists.

     2.14 Net  Profits  Interests.  As  consideration  for the Loans made by the
Lender pursuant to this  Agreement,  the Borrower agrees to convey to the Lender
upon the repayment in full of the Debt  evidenced by the Revolving  Note and the
repayment  in full or  conversion  of the Debt  evidenced  by the Term  Note and
confirmation  of the title of the Lender to such interest upon conveyance by the
Borrower,  an undivided  five  percent  (5%) net profits  interest in the future
production of  hydrocarbons  from or  attributable  to the Southern  Properties,
which  conveyance  shall be effective  as of the date the Debt  evidenced by the
Revolving  Note is  repaid  in full and the Debt  evidenced  by the Term Note is
repaid in full or converted and evidenced by an instrument  substantially in the
form attached hereto as Exhibit X.

     As  consideration  for  the  Loans  made  by the  Lender  pursuant  to this
Agreement,  if the  proceeds  of any Advance  are made to pay or  reimburse  the
Borrower for Dry Hole Costs,  Completion Costs or Workover Costs for any oil and
gas well located on the Northern  Properties,  the Borrower  agrees to convey to
the Lender upon the  repayment in full of the Debt  evidenced  by the  Revolving
Note and the repayment in full or  conversion of the Debt  evidenced by the Term
Note  and  confirmation  of the  title  of the  Lender  to  such  interest  upon
conveyance by the Borrower,  an undivided five percent (5%) net profits interest
in the future  production of  hydrocarbons  from or attributable to the Northern
Properties,  which  conveyance  shall  be  effective  as of the  date  the  Debt
evidenced by the Revolving  Note is repaid in full and the Debt evidenced by the
Term  Note is  repaid  in full  or  converted  and  evidenced  by an  instrument
substantially in the form attached hereto as Exhibit X.

     Should the Borrower  elect, at any time subsequent to the conveyance of the
Net Profits  Interests,  to sell its interest in any of the Subject  Properties,
then the  Borrower  agrees  to extend to the  Lender,  by way of prompt  written
notice  setting forth the terms of any such  transaction,  the right to sell the
Net Profits  Interests  burdening the relevant Subject  Properties to be sold by
the Borrower on the same terms (including,  without  limitation,  price based on
per unit of production) as those for the sale by the Borrower. Such right may be
exercised at the sole  discretion of the Lender and, should the Lender elect not
to exercise such right, the Subject  Properties so sold shall be conveyed by way
of  instrument(s)  of  conveyance  made  expressly  subject  to the Net  Profits
Interests and the  provisions  of this  Agreement  applicable  thereto and shall
remain subject to the Net Profits Interests.

                                       23
<PAGE>

     2.15 Conversion of Term Note.

     (a)  Conversion.  At or  before  the  maturity  of  the  Term  Loan  on the
          Termination  Date,  the Lender shall have the option of converting all
          or a portion  of the Five  Million  Dollar  ($5,000,000.00)  principal
          amount of the Term Note into shares of Common Stock, at the Conversion
          Price in  effect  on the  Conversion  Date.  So long as the Term  Note
          remains  outstanding,  the Term Note may be  converted  as provided in
          this Section 2.15, provided, however, in no event shall more than five
          (5)  conversions be made by the Lender  pursuant to this Section 2.15.
          This conversion shall be made by the Lender delivering to the Borrower
          notice of the conversion of the Term Note (the "Conversion Notice") in
          the form  attached  as  Exhibit  X. Each  conversion  shall be made in
          multiples  of  One  Hundred  Thousand  Dollars  ($100,000.00)  of  the
          principal balance of the Term Loan then outstanding or the outstanding
          principal of the Term Note if less than One Hundred  Thousand  Dollars
          ($100,000.00).  The Conversion  Date of each  conversion  shall be the
          date the  Conversion  Notice is received by the Borrower or such other
          date  as  provided  in the  Conversion  Notice.  Upon  receipt  of the
          Conversion  Notice,  the Borrower  shall (i) cause its transfer  agent
          promptly to issue to the Lender a stock  certificate  representing the
          shares of Common Stock  issuable to the Lender under this Section 2.15
          and (ii) if any principal amount of the Term Note remains outstanding,
          issue to the Lender a new Term Note dated the  Conversion  Date in the
          principal amount equal to the principal  balance of the Term Loan then
          outstanding  after the conversion.  The Borrower shall pay all accrued
          unpaid  interest on the Term Loan through the Conversion  Date on that
          date or, if the Conversion  Date is not a scheduled  interest  payment
          date, the next payment date.

     (b)  Adjustment  of Conversion  Price;  Number of Shares  Issued.  From the
          Closing Date until  conversion of all of the  principal  amount of the
          Term Note or its repayment at maturity,  the Conversion Price shall be
          subject  to  adjustment  when  and as  provided  in  the  Antidilution
          Provisions. In the event of a partial conversion of the Term Note, the
          Conversion Price shall thereafter be subject to adjustment as provided
          in the  Antidilution  Provisions  with respect to future  conversions.
          Upon conversion of the Term Note, the number of shares of Common Stock
          to be issued to the Lender  shall be the number of shares  obtained by
          dividing  the  principal  amount of the Term Note being  converted  as
          provided in the Conversion Notice by the Conversion Price in effect on
          the  Conversion  Date. No  fractional  shares of Common Stock shall be
          issued, and, in lieu of issuing a fractional share, the Borrower shall
          pay to the Lender the portion of the principal amount of the Term Note
          not  converted  into Common Stock  because the fraction of a share was
          not issued.  The Borrower  agrees to comply with all of the  covenants
          and other provisions set forth in the Antidilution Provisions.

     (c)  Restrictive  Legend.  Until  such time as the  shares of Common  Stock
          issued  to  the  Lender  pursuant  to  this  Section  2.15  have  been
          registered  for  transfer  pursuant to the  Securities  Act, the stock
          certificates  representing  those  shares  shall  bear  the  following
          restrictive legend or a substantially similar legend:

              "THE SHARES  REPRESENTED BY THIS  CERTIFICATE  HAVE NOT BEEN
              REGISTERED  UNDER THE  SECURITIES ACT OF 1933 AND MAY NOT BE
              TRANSFERRED  IN  THE  ABSENCE  OF  SUCH  REGISTRATION  OR AN
              EXEMPTION THEREFROM UNDER SUCH ACT."

                                       24
<PAGE>

     (d)  Registration  Rights.  The shares of Common Stock issued to the Lender
          pursuant to this Section  2.15,  along with any shares of Common Stock
          issued upon exercise of the Warrant or a Supplemental  Warrant,  shall
          be entitled to the  registration  rights set forth in the Registration
          Rights Agreement.

     (e)  Compliance with Other  Provisions.  The Borrower shall comply with its
          covenants and agreements contained in the Registration Right Agreement
          and, if issued,  the Supplemental  Warrant as if those provisions were
          included in this  Agreement.  Notwithstanding  anything  herein to the
          contrary,  the obligation  provided in this  Subsection  2.15(e) shall
          remain  in force and  effect  so long has the  Lender is holder of the
          Warrant, the Supplemental  Warrant(s) or shares of Common Stock issued
          to it pursuant to this  Section  2.15 or shares of Common Stock issued
          upon exercise of the Warrant or a Supplemental Warrant.

     2.16 Warrant. As consideration for the Loans made by the Lender pursuant to
this  Agreement,  the Borrower at the Closing,  shall (a) execute and deliver to
the Lender the Warrant in the form attached  herto as Exhibit XIVand (b) execute
and deliver with the Lender a Registration Rights Agreement in the form attached
hereto as Exhibit XIII.  The Borrower shall comply with the terms and provisions
of the Warrant and the Registration  Rights Agreement so long as that instrument
and those agreements remain in force and effect.

     2.17 Increased Costs.  (a) If the Lender  determines that any Change in Law
regarding capital requirements has or would have the effect of reducing the rate
of return on the  Lender's  capital or on the  capital of the  Lender's  holding
company,  if any, as a  consequence  of this  Agreement or the Loan made by such
Lender to a level below that which the Lender or the  Lender's  holding  company
could have  achieved but for such Change in Law (taking into  consideration  the
Lender's  policies and the policies of the Lender's holding company with respect
to capital adequacy), then from time to time the Borrower will pay to the Lender
such additional  amount or amounts as will compensate the Lender or the Lender's
holding company for any such reduction suffered.

     (b) A  certificate  of the  Lender  setting  forth the  amount  or  amounts
necessary to compensate the Lender or its holding  company,  as the case may be,
as specified in Subsection 2.17(a) and reasonably detailed calculations therefor
shall be  delivered  to the Borrower  and shall be  conclusive  absent  manifest
error.  The  Borrower  shall pay the Lender the amount  shown as due on any such
certificate within ten (10) days after receipt thereof.

     (c)  Failure  or delay on the part of the  Lender  to  demand  compensation
pursuant to this  Section  2.17 shall not  constitute  a waiver of the  Lender's
right to demand  such  compensation;  provided  that the  Borrower  shall not be
required to compensate  the Lender  pursuant to this Section for any  reductions
incurred  more than one  hundred  eighty  (180)  days prior to the date that the
Lender notifies the Borrower of the Change in Law giving rise to such reductions
and of the Lender's intention to claim compensation  therefor;  provided further
that, if the Change in Law giving rise to such reductions is  retroactive,  then
the one hundred  eighty (180) day period  referred to above shall be extended to
include the period of retroactive effect thereof.

                                       25
<PAGE>

     2.18 Taxes.  Any and all payments by or on account of any obligation of the
Borrower  under any Loan  Document  shall be made free and clear of and  without
deduction  for any  Indemnified  Taxes  or  Other  Taxes;  provided  that if the
Borrower shall be required to deduct any  Indemnified  Taxes or Other Taxes from
such payments,  then (i) the sum payable shall be increased as necessary so that
after  making  all  required  deductions  (including  deductions  applicable  to
additional sums payable under this Section), the Lender receives an amount equal
to the sum it would have  received had no such  deductions  been made,  (ii) the
Borrower  shall make such  deductions  and (iii) the Borrower shall pay the full
amount deducted to the relevant Tribunal in accordance with applicable law.

     The  Borrower  shall  pay any  Other  Taxes  to the  relevant  Tribunal  in
accordance with applicable law.

     The Borrower shall indemnify the Lender, within ten (10) days after written
demand  therefor,  for the full amount of any  Indemnified  Taxes or Other Taxes
paid by the Lender as the case may be, on or with  respect to any  payment by or
on account of any obligation of the Borrower  hereunder  (including  Indemnified
Taxes or Other Taxes imposed or asserted on or  attributable  to amounts payable
under this Section) and any penalties,  interest and reasonable expenses arising
therefrom  or with respect  thereto,  whether or not such  Indemnified  Taxes or
Other  Taxes were  correctly  or legally  imposed or  asserted  by the  relevant
Tribunal.  A  certificate  of the  Lender as to the  amount of such  payment  or
liability under this Section and reasonably detailed calculations therefor shall
be delivered to the Borrower and shall be conclusive absent manifest error.

     As soon as  practicable  after any  payment of  Indemnified  Taxes or Other
Taxes  by  the  Borrower  to a  Tribunal,  the  Borrower  shall  deliver  to the
Administrative  Agent the  original or a certified  copy of a receipt  issued by
such Tribunal  evidencing  such  payment,  a copy of the return  reporting  such
payment or other evidence of such payment reasonably satisfactory to the Lender.

                                       26
<PAGE>

                                   ARTICLE 3
                              CONDITIONS PRECEDENT

     3.1  Conditions to Execution by Lender and All Advances.  The execution and
delivery of this Agreement by the Lender and the making of any Advance  pursuant
to Sections 2.1 or 2.2 is subject to the fulfillment of the following conditions
precedent,  with all  documents  to be delivered to the Lender to be in form and
substance satisfactory to the Lender:

     (a)  The Lender shall have received the following documents,  appropriately
          executed and acknowledged and in multiple counterparts as requested by
          the Lender:

               (1)  This Agreement and the Notes executed by the Borrower;

               (2)  Certificates  of the  appropriate  Tribunals of the State of
                    Texas, dated reasonably near the Closing Date, to the effect
                    that attached  thereto are the certificate of  incorporation
                    of the Borrower and all amendments  thereto,  and that it is
                    duly  incorporated  and in good standing with respect to the
                    payment of all franchise and similar Taxes;

               (3)  A copy of the  by-laws of the  Borrower  and all  amendments
                    thereto,   accompanied  by  a  certificate   issued  by  the
                    secretary of the  Borrower  that such copies are correct and
                    complete;

               (4)  Certificate  of incumbency and signatures of all officers of
                    the  Borrower  who will be  authorized  to execute  the Loan
                    Documents to which it is a party on its behalf,  executed by
                    the secretary of the Borrower;

               (5)  A  copy  of  the  corporate  resolutions  of  the  Borrower,
                    approving  the Loan  Documents  to  which it is a party  and
                    authorizing  the  transactions  contemplated  therein,  duly
                    adopted  by its  board of  directors  and  accompanied  by a
                    certificate  of the  secretary of the Borrower to the effect
                    that such  copy is a true and  correct  copy of  resolutions
                    duly adopted by written consent or at a meeting of the board
                    of  directors,  that  such  resolutions  constitute  all the
                    resolutions  adopted with respect to such transactions,  and
                    that such  resolutions  have not been  amended,  modified or
                    revoked in any respect,  and are in full force and effect as
                    of the Closing Date;

               (6)  A copy of the  resolutions  of the special  committee of the
                    board of directors of the Borrower,  evidencing its approval
                    of the matters described in Section 4.2 hereof, duly adopted
                    by such special  committee and  accompanied by a certificate
                    of the  secretary  of the  Borrower  to the effect that such
                    copy is a true and correct copy of resolutions  duly adopted
                    by written consent or at a meeting of such special committee
                    of the board of directors,  that such resolutions constitute
                    all the  resolutions  adopted with respect to such  matters,
                    and that such resolutions have not been amended, modified or
                    revoked in any respect,  and are in full force and effect as
                    of the Closing Date;

                                       27
<PAGE>

               (7)  The following documents creating,  evidencing and perfecting
                    Liens in favor of the Lender to secure the Obligations:

                    (i)  A Mortgage,  Collateral Assignment,  Security Agreement
                         and Financing  Statement  from the Borrower in favor of
                         the Lender covering the Subject Properties  existing as
                         of the date of this Agreement;

                    (ii) Financing   Statements   from  the  Borrower   covering
                         accounts  from  the sale of oil and gas  produced  from
                         such Oil and Gas  Properties  and  equipment  and other
                         personal property associated therewith;

                    (iii) undated letter  transfer  orders directed to the party
                         remitting  to the  Borrower  proceeds  from the sale of
                         production   from  such  Oil  and  Gas  Properties  and
                         instructing  that  such  proceeds  be  remitted  to the
                         Lender for the account of the Borrower;

                    (iv) a Security  Agreement from the Borrower in favor of the
                         Lender  covering  all of the  personal  property of the
                         Borrower; and

                    (v)  Financing  Statements from the Borrower associated with
                         the Security Agreement described in (iv) above.

               (8)  The Registration Rights Agreement executed by the Borrower;

               (9)  The Warrant executed by the Borrower; and

               (10) Such other  agreements,  documents,  instruments,  opinions,
                    certificates,  waivers, consents, and evidence as the Lender
                    may reasonably  request in compliance  with or to accomplish
                    the terms and provisions of any of the Loan Documents;

                                       28
<PAGE>

     (b)  The  representations  and  warranties  contained in Article 4 shall be
          true and correct in all material  respects on the date of execution of
          this Agreement;

     (c)  No Event of Default or Unmatured  Event of Default shall have occurred
          and be continuing;

     (d)  The Lender shall have approved in all respects, at its discretion, the
          Subject  Properties  existing  as  of  the  date  of  this  Agreement,
          including,  without limitation,  title to and the environmental status
          of such Subject Properties;

     (e)  The Lender  shall have  received  (i) the  facility  fee  pursuant  to
          Section 2.9, (ii) the engineering  fee pursuant to Subsection  2.6(e),
          (iii) any such costs,  fees and expenses due under Section 8.3 and for
          which the Borrower has received an invoice  prior to or on the Closing
          Date and (iv) estimated fees and expenses  associated  with the filing
          of the Security Documents;

     (f)  The Lender shall have received an insurance  certificate  as set forth
          in Section 5.18;

     (g)  The Debt of the  Borrower  owed to Tauren  Exploration,  Inc.  must be
          repaid in full or converted to Equity Interests;

     (h)  The Lender  shall have  received an opinion of counsel of the Borrower
          as to due formation and authorization to enter into and enforceability
          of the Loan Documents; and

     (i)  All legal matters incident to the execution of this Agreement shall be
          reasonably  satisfactory  to Paul R. Hammon,  special  counsel for the
          Lender.

     3.2 Further  Conditions to Each Advance Pursuant to Section 2.1. The Lender
shall not make any Advance pursuant to Section 2.1 unless the following  further
conditions are satisfied:

     (a)  The  representations  and  warranties  contained in Article 4 shall be
          true and correct in all material respects as of the date of Advance;

     (b)  No Event of Default or Unmatured  Event of Default shall have occurred
          and be continuing  or will have  occurred at the  completion of making
          the Advance;

     (c)  No Material Adverse Effect shall have occurred since the Closing Date;

                                       29
<PAGE>

     (d)  The Lender shall have received a Revolving Facility Borrowing Request;

     (e)  The Lender shall have received  with the  Borrowing  Request a list in
          reasonable detail of the Dry Hole Costs, Completion Costs and Workover
          Costs to be paid with the proceeds of such Advance and be  accompanied
          by  evidence  of such Dry Hole Costs,  Completion  Costs and  Workover
          Costs as is requested by the Lender;

     (f)  As to any subsequently  acquired Subject Properties,  the Lender shall
          have received all Security  Documents (each  substantially in the form
          of the similar  instrument  given pursuant to Subsection  3.1(a)(8) in
          connection with the Subject Properties owned by the Borrower as of the
          date of this Agreement)  executed by the Borrower and delivered to the
          Lender pursuant to Section 5.8; and

     (g)  All legal matters  incident to the  consummation of such Advance shall
          be satisfactory to the then special counsel for the Lender.

                                    ARTICLE 4
                         REPRESENTATIONS AND WARRANTIES

     To induce the Lender to enter into this  Agreement and to make the Advances
hereunder,   the  Borrower   represents   and  warrants  to  the  Lender  (which
representations  and warranties  shall survive the delivery of the Notes and the
making of the Advances) that:

     4.1  Existence  and Good  Standing.  The  Borrower is a  corporation,  duly
organized,  legally existing and in good standing under the Laws of the State of
Texas and is duly qualified and in good standing as a foreign corporation in all
jurisdictions  where the failure to be so  qualified  could result in a Material
Adverse Effect.

     4.2 Due  Authorization.  The execution and delivery by the Borrower of this
Agreement  and the  borrowings  hereunder,  the  execution  and  delivery by the
Borrower of the Notes and the other Loan  Documents to which it is a party,  the
repayment  of the Loans and  interest  and fees  provided  in the Notes and this
Agreement,  the issuance of shares of Common Stock upon  conversion  of the Term
Loan and exercise of the Warrant or a Supplemental  Warrant and the  performance
of all  Obligations  of the  Borrower  under this  Agreement  and the other Loan
Documents,  are  within  the  corporate  power of the  Borrower,  have been duly
authorized  by all necessary  corporate  action on behalf of the Borrower and do
not (a) require the consent of any  Tribunal or other  Person which has not been
obtained, (b) contravene or conflict with any provision of applicable Law or the
certificate  of  incorporation  or  by-laws  of the  Borrower,  (c)  contravene,
conflict with or result in a default under any indenture,  instrument,  contract
or other  agreement to which the Borrower is a party or by which its  Properties

                                       30
<PAGE>

may be presently  bound or encumbered the failure to comply with would result in
a  Material  Adverse  Effect,  or (d)  result  in or  require  the  creation  or
imposition  of any Lien upon any of the  Property  of the  Borrower,  other than
Permitted Liens. In addition,  the Borrower has disclosed to a special committee
of  members  of its  board  of  directors  that  contemporaneously  or in  close
proximity  in time,  the Lender is entering  into certain  transactions  with an
Affiliate of Calvin A. Wallen III, the Borrower's  Chairman of the Board.  After
disclosure of the material  facts relating to these  transactions,  such special
committee has reviewed and considered  such  transactions,  determined that such
transactions  are arm's  length and  recommended  to the full board of directors
that the Borrower  enter into,  execute and deliver this  Agreement and the Loan
Documents and the consummation of the transactions provided herein and therein.

     4.3  Valid and  Binding  Obligations.  This  Agreement  and the other  Loan
Documents constitute valid and binding obligations of the Borrower,  enforceable
in accordance with their  respective  terms,  except as limited by Debtor Relief
Laws.

     4.4 Scope and Accuracy of Financial Statements. The Financial Statements of
the  Borrower as of  September  30,  2006,  including  any  schedules  and notes
pertaining  thereto,  which have been delivered to the Lender have been prepared
in  accordance  with  GAAP and  fairly  and  accurately  present  the  financial
condition and the results of the operations thereof in all material respects, as
of the dates and for the periods stated therein.

     4.5  Liabilities  and  Litigation.  The Borrower does not have any material
liabilities of any nature, direct or contingent, other than the Obligations; and
the Borrower is not in default with respect to any such material  liabilities or
any material  agreements by which it is bound which could reasonably be expected
to have a Material Adverse Effect.

     There is no judgment  against  the  Borrower,  nor,  except as set forth on
Schedule 4.5 attached  hereto,  is there any  Litigation  or other action of any
nature  pending  before  any  Tribunal  or, to the  knowledge  of the  Borrower,
threatened against or affecting the Borrower or its Property.

     4.6  Title to  Assets.  The  Borrower  has  Marketable  Title to all of the
Subject  Properties set forth on Exhibits VI and VIII attached hereto,  free and
clear of all Liens, except for Permitted Liens.

     4.7 Existing  Subject  Properties.  The Oil and Gas Properties set forth on
Exhibit V hereto are all of the Oil and Gas Properties  owned by the Borrower in
the Southern Area as of the date of this  Agreement.  The Oil and Gas Properties
set forth on Exhibit VII hereto are all of the Oil and Gas  Properties  owned by
the Borrower in the Northern Area as of the date of this Agreement.

     4.8  Authorizations  and Consents.  No  authorization,  consent,  approval,
exemption,  franchise,  permit or  license  of, or filing  (except  for  filings
required to perfect and maintain perfection of the Liens created by the Security
Documents)  with, any Tribunal or any third Person is required to authorize,  or
is otherwise  required in connection  with,  the valid  execution,  delivery and
performance by the Borrower of this Agreement, the other Loan Documents to which
it is a party or any other agreement contemplated hereby or the repayment by the
Borrower of the Obligations.

                                       31
<PAGE>

     4.9 Compliance with Laws. Neither the business nor any of the activities of
the Borrower as presently  conducted  violates any applicable Law, the result of
which violation would have a Material Adverse Effect. The Borrower possesses all
licenses, approvals,  registrations,  permits and other authorizations necessary
to  enable  it to  carry  on its  businesses  in all  material  respects  as now
conducted.  All such  licenses,  approvals,  registrations,  permits  and  other
authorizations are in full force and effect. Furthermore,  the Borrower does not
have any reason to believe  that it will be unable to obtain the  renewal of any
such licenses, approvals, registrations, permits and other authorizations in due
course.

     4.10 Proper  Filing of Tax Returns and Payment of Taxes Due.  The  Borrower
has duly and properly  filed all Tax returns  which are required to be filed and
has paid all Taxes due  pursuant to such  returns or pursuant to any  assessment
received,  except such Taxes, if any, as are being Contested in Good Faith.  The
charges  and  reserves  on the  Borrower's  books with  respect to any Taxes are
adequate,  and the Borrower does not owe any deficiency or additional assessment
in a material amount in connection with Taxes.

     4.11 ERISA Compliance.

     (a)  The Borrower has  complied in all  material  respects  with ERISA and,
          where applicable, the Code regarding each Plan.

     (b)  Each Plan is, and has been, maintained in substantial  compliance with
          ERISA and, where applicable, the Code.

     (c)  No act,  omission or  transaction  has occurred  which could result in
          imposition on the Borrower  (whether  directly or  indirectly)  of (i)
          either a civil penalty assessed pursuant to section 502(c), (i) or (1)
          of ERISA or a tax imposed  pursuant to Chapter 43 of Subtitle D of the
          Code or (ii) breach of fiduciary duty liability  damages under section
          409 of ERISA.

     (d)  No Plan (other than a defined  contribution plan) or any trust created
          under any such Plan has been  terminated  since  September 2, 1974. No
          liability to the PBGC (other than for the payment of current  premiums
          which are not past due) by the Borrower has been or is expected by the
          Borrower to be incurred  with respect to any Plan. No ERISA Event with
          respect to any Plan has occurred.

     (e)  Full payment when due has been made of all amounts  which the Borrower
          is  required  under the terms of each Plan or  applicable  law to have
          paid  as  contributions  to  such  Plan,  and no  accumulated  funding
          deficiency  (as defined in section 302 of ERISA and section 412 of the
          Code), whether or not waived, exists with respect to any Plan.

                                       32
<PAGE>

     (f)  The actuarial present value of the benefit liabilities under each Plan
          which is subject  to Title IV of ERISA does not,  as of the end of the
          Borrower's  most recently ended fiscal year,  exceed the current value
          of the assets (computed on a plan termination basis in accordance with
          Title IV of ERISA) of such Plan allocable to such benefit liabilities.
          The term "actuarial  present value of the benefit  liabilities"  shall
          have the meaning specified in section 4041 of ERISA.

     (g)  The Borrower  does not sponsor,  maintain or contribute to an employee
          welfare benefit plan, as defined in section 3(l) of ERISA,  including,
          without  limitation,  any such plan maintained to provide  benefits to
          former  employees  of such  entities,  that may not be  terminated  by
          Borrower  in its sole  discretion  at any time  without  any  material
          liability.

     (h)  The Borrower does not sponsor,  maintain or  contribute  to, or has at
          any time in the preceding six calendar years, sponsored, maintained or
          contributed to, any Multiemployer Plan.

     (i)  The Borrower is not  required to provide  security  under  section 401
          (a)(29)  of the  Code  due  to a Plan  amendment  that  results  in an
          increase in current liability for the Plan.

     4.12 Investment Company Act Compliance.  The Borrower is not an "investment
company"  or  directly or  indirectly  controlled  by or acting on behalf of any
Person which is an  "investment  company"  within the meaning of the  Investment
Company Act of 1940, as amended.

     4.13 Lien  Priority.  The Liens  created in favor of the  Lender  under the
Security  Documents will create Liens to secure the  Obligations in favor of the
Lender,  which, once perfected,  will be subject to no prior,  superior or equal
Liens, subject only to Permitted Liens.

     4.14 Use of  Proceeds.  All  proceeds  of  Advances  made  pursuant to this
Agreement  shall be used generally as set forth in Section 2.4 of this Agreement
and  specifically  as  represented  by the Borrower in each  Revolving  Facility
Borrowing  Request.  The  proceeds  of any  Advance are not and will not be used
directly or indirectly  for the purpose of  purchasing  or carrying,  or for the
purpose of extending credit to others for the purpose of purchasing or carrying,
any  "margin  stock" as that term is  defined  in  Regulation  U of the Board of
Governors  of the Federal  Reserve  System,  as  amended;  and in  violation  of
Regulations G, U or X.

     4.15 Full Disclosure.  All of the Loan Documents and all written statements
furnished by or on behalf of the Borrower in connection with the consummation of
the  transactions  contemplated by this Agreement,  when taken together,  do not
contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements  contained  herein or therein not misleading as
of the date made or deemed made.

                                       33
<PAGE>

     4.16 Places of Business.  The chief executive office and principal place of
business of the Borrower is 9870 Plano Road, Dallas, Texas 75238. All records of
the Borrower are maintained at such offices.

     4.17 Identification Numbers. The Borrower's Federal employer identification
number is 87-0352095 and its organizational identification number is 154912800.

     4.18 Subsidiaries. The Borrower has no Subsidiaries.

                                    ARTICLE 5
                              AFFIRMATIVE COVENANTS

     So long as any Debt  evidenced  by the Notes  remains  unpaid or the Lender
remains  obligated to make  Advances,  and in absence of written  consent of the
Lender to the contrary:

     5.1  Maintenance  and Access to Records.  The Borrower  will keep  adequate
records,  in  accordance  with GAAP, of all of its  transactions  so that at any
time,  and from time to time, its true and complete  financial  condition may be
readily  determined  and,  at the  Lender's  reasonable  request,  make all such
records available for the Lender's  inspection and permit the Lender to make and
take away copies thereof.

     5.2  Quarterly  Financial  Statements.  The  Borrower  will  deliver to the
Lender,  as soon as  available  but in no event later than sixty (60) days after
the end of each of the first three fiscal  quarters of the  Borrower,  quarterly
unaudited  Financial   Statements  of  the  Borrower  reflecting  the  financial
condition and results of operations of the Borrower as at the end of such period
and  from  the  beginning  of such  fiscal  year to the end of such  period,  as
applicable.  Such  Financial  Statements  shall be  certified  by a  Responsible
Officer as having  been  prepared in  accordance  with GAAP and  presenting  the
financial condition and the results of the operations of the Borrower subject to
changes  resulting from year-end audit  adjustments.  Such Financial  Statements
shall also be accompanied by a certificate of a Responsible  Officer showing, in
reasonable detail, the Borrower's Derivative Contract position.

     5.3 Annual Financial Statements. Beginning with the fiscal year ending June
30, 2007,  the Borrower will deliver to the Lender,  as soon as available but in
no event  later than ninety (90) days after the close of each fiscal year of the
Borrower,  annual audited  Financial  Statements of the Borrower  reflecting the
financial  condition of the Borrower,  together with a report and opinion issued
by Philip Vogel & Co.,  P.C. or another  firm of  independent  certified  public
accountants   reasonably   satisfactory  to  the  Lender,  that  such  Financial
Statements  fairly present in all material  respects the financial  position and
results of  operations  of the Borrower for the periods  indicated in accordance
with  GAAP.  Such  statements  shall  be  accompanied  by  a  certificate  of  a
Responsible  Officer showing,  in reasonable detail,  the Borrower's  Derivative
Contract position.

                                       34
<PAGE>

     5.4 Compliance  Certificates.  The Borrower will deliver to the Lender with
each Financial  Statement of the Borrower  delivered pursuant to Sections 5.2 or
5.3 a duly executed Compliance Certificate.

     5.5  Reserve  Reports.   Commencing   August  1,  2007,  and  semi-annually
thereafter,  as soon as available  but in any event no later than February 1 and
August 1 of each year, the Borrower shall deliver to the Lender (a) a report, in
form and substance  satisfactory to the Lender,  prepared by Scotia Group, Inc.,
or  another  independent  petroleum  engineer  or firm of  engineers  reasonably
acceptable to the Lender,  which report shall set forth, as of January 1 or July
1 of such year respectively,  projections of future net income from hydrocarbons
classified as Proved Reserves  attributable to all of the Subject Properties and
(b) such other information  concerning such Oil and Gas Properties as the Lender
may  request,  including,  without  limitation,   engineering,   geological  and
performance data.

     5.6 EDGAR  Filings.  The  Borrower  will  deliver  to the  Lender  promptly
following the filing  thereof,  written notice of each document filed with EDGAR
pertaining to the Borrower.

     5.7 Sales and Production Reports.  The Borrower will deliver to the Lender,
as soon as available  and in any event within  thirty (30) days after the end of
each calendar month, a report  summarizing,  as requested by the Lender, (a) the
gross  volume of sales and actual  production  during such month from all of the
Subject  Properties and current prices being received for such  production,  (b)
the related severance, gross production,  occupation,  excise, sales, recording,
ad valorem,  gathering  and other  similar  taxes,  if any,  deducted from gross
proceeds  during such month,  (c)  production or take or pay  imbalances and (d)
leasehold operating expenses and drilling expenditures  attributable thereto and
incurred during such month.

     5.8 Subject  Areas  Information.  The Borrower  will provide  access to the
Lender,  promptly  upon the Lender's  written  request from time to time to such
information  relating  to the Subject  Areas and any of the Subject  Properties,
including,   without  limitation,  (a)  all  options  to  acquire  Oil  and  Gas
Properties,  Oil and Gas  Properties  and all other  contracts  relating  to the
Subject  Areas,  (b) detailed  maps of the Subject  Areas,  (c) title  materials
relating to the Subject Areas, and (d) AFEs,  drilling  reports,  well tests, or
completion  reports  relating  to any wells  located  within any of the  Subject
Areas.  Promptly upon the Lender's  written  request,  the Borrower will furnish
copies of any such information to the extent that it is reasonable do so.

     The Borrower  will deliver to the Lender,  on or before the first (1st) day
of each calendar quarter (or the next Business Day should the first (1st) day of
the relevant  calendar  quarter not be a Business  Day),  a report,  in form and
substance  reasonably  acceptable to the Lender, of the drilling activity by the
Borrower in the Subject Areas during the previous calendar  quarter,  including,
without  limitation,  pre-drill  estimated  costs,  reserves and  probability of
success compared to the actual costs and reserves determined post-drill.

                                       35
<PAGE>

     5.9 Liens on Newly Acquired Property.  From time to time, but not less than
once every calendar month,  the Borrower shall execute and deliver,  as security
for the  payment  of the Notes and the  performance  of the  Obligations  of the
Borrower under this Agreement,  such Security  Documents (each  substantially in
the form of the similar  instruments  given pursuant to Subsection  3.1(a)(8) in
connection  with  the  Property  owned  by the  Borrower  as of the date of this
Agreement) as necessary to create a Lien which, once perfected,  will be subject
to no prior,  superior  or equal  Liens,  (subject  to  Permitted  Liens) on all
Subject  Properties  acquired by the Borrower and not already  encumbered by the
Security Documents.

     5.10 Title  Opinions.  Upon the request of the Lender,  the Borrower  shall
have  had  prepared,  division  order  title  opinions  in  form  and  substance
reasonably  satisfactory  to the Lender,  evidencing the  Borrower's  Marketable
Title to any of the  Subject  Properties  to which  Proved  Developed  Producing
Reserves are attributed.

     5.11 Statement of Material Adverse Effect. The Borrower will deliver to the
Lender,  promptly upon any officer of the Borrower having knowledge of any Event
of Default or event or  condition  (except  for events or  conditions  as to the
economy of the United  States as a whole or the oil and gas industry as a whole)
causing  or  likely  to  cause a  Material  Adverse  Effect,  a  statement  of a
Responsible  Officer,  setting  forth the Event of Default or event or condition
causing or likely to cause a Material  Adverse  Effect and the steps being taken
with respect thereto.

     5.12 Title Defects. Other than Permitted Liens, the Borrower will clear any
title  defects to the Subject  Properties  or Mortgaged  Properties  material in
value, in the sole reasonable opinion of the Lender,  and, in the event any such
title defects are not cured in a timely  manner,  pay all related costs and fees
incurred by the Lender to do so.

     5.13  Additional  Information.  The  Borrower  will  furnish to the Lender,
promptly upon the Lender's request from time to time, such additional  financial
or  other  information  concerning  the  assets,  liabilities,   operations  and
transactions of the Borrower, as the Lender may reasonably request.

     5.14 Compliance with Laws and Payment of Taxes. The Borrower will comply in
all  material  respects  with all  Laws and pay all  Taxes,  claims  for  labor,
supplies,  rent and other  obligations  which,  if unpaid,  might  become a Lien
against any of the Subject Properties or Mortgaged Properties, except any of the
foregoing being Contested in Good Faith.

     5.15 Maintenance of Existence and Good Standing. The Borrower will maintain
its corporate  existence or qualification  and good standing in its jurisdiction
of incorporation and in all jurisdictions wherein the Property owned or business
conducted by the Borrower makes such qualification necessary.

                                       36
<PAGE>

     5.16 Further  Assurances.  The  Borrower  will  promptly  cure any defects,
errors or omissions in the  execution  and delivery of the Loan  Documents  and,
upon notice,  take such other action and immediately  execute and deliver to the
Lender all such other and further  instruments as may be reasonably  required or
desired by the Lender from time to time in  compliance  with the  covenants  and
agreements  made in this  Agreement  and the other  Loan  Documents,  including,
without limitation, taking such action as may be required to cure or correct any
defects in title to any Mortgaged  Properties  (other than such defects in title
which are  Permitted  Liens) and to create,  perfect and  maintain  Liens on the
Collateral and all other Property intended as security for the Obligations.

     5.17 Maintenance of Tangible  Property.  The Borrower will maintain,  or to
the extent that the right of  operating is vested in others,  will  exercise its
best efforts to require the operator to maintain, all of the producing Mortgaged
Properties in good repair and working order and make all necessary  replacements
thereof and operate the Mortgaged Properties in a good and workmanlike manner.

     5.18  Maintenance of Insurance.  The Borrower will maintain  insurance with
respect to the  Mortgaged  Properties  and business  against  such  liabilities,
casualties,  risks and  contingencies  and in such  amounts  as are  customarily
maintained  in  the  industry.  Such  insurance  shall  name  the  Lender  as an
additional  insured and loss payee. The Borrower will furnish to the Lender,  on
the  Closing  Date  and  annually  thereafter,   certificates   evidencing  such
insurance.

     5.19  Right  of  Inspection.   The  Borrower  will  permit  any  authorized
representative  of the Lender at its sole risk and  expense to visit and inspect
any Collateral at such reasonable times and as often as the Lender may request.

     5.20 Notice.  The Borrower  will  immediately  notify the Lender of (a) the
receipt  of any notice  from,  or the taking of any action by, the holder of any
promissory  note or other  evidence  of Debt of the  Borrower  in the  aggregate
principal  amount in excess of  $25,000.00  with  respect to a claimed  default,
together with a statement  specifying  the notice given or other action taken by
such  holder and what  action the  Borrower  is taking or  proposes to take with
respect thereto; (b) any legal, judicial or regulatory proceedings affecting the
Borrower  in which  the  amount  involved  is  material  and is not  covered  by
insurance  or that  would,  if  adversely  determined,  have a Material  Adverse
Effect; (c) any dispute between the Borrower and any Tribunal or any Person that
would, if adversely determined,  have a Material Adverse Effect; (d) information
that in any way relates to or affects the filing of any  financing  statement or
other security  instrument for the purpose of perfecting or continuing a Lien on
the  Collateral;  (e) any  event  that  materially  and  adversely  affects  the
Collateral or the Rights of the Lender with respect to such Collateral;  (f) the
occurrence of any Event of Default;  and (g) any event or condition  (except for
events or  conditions  to the economy of the United States as a whole or the oil
and gas  industry  as a whole)  which  could  reasonably  be expected to cause a
Material Adverse Effect.

                                       37
<PAGE>

     5.21  Collateral  Protection.  The Borrower  will  purchase and maintain in
effect  hydrocarbon price hedging contracts in volumes,  for periods of time and
with counterparties satisfactory to the Lender.

     Any Debt to the Lender or any  Affiliate of the Lender  incurred  under any
Derivative Contract shall be treated as an Obligation pari passu and secured pro
rata  under the  Security  Documents  with all  Obligations  otherwise  incurred
hereunder or under the other Loan Documents.  Borrower  covenants and agrees the
payment on each and all of such  Derivative  Contracts  with the  Lenders or its
Affiliates is and shall be secured by Liens on the Collateral under the Security
Documents.

     5.22 ERISA  Information and Compliance.  The Borrower will promptly furnish
to the  Lender (i)  promptly  after the filing  thereof  with the United  States
Secretary of Labor,  the Internal  Revenue  Service or the PBGC,  copies of each
annual  and  other  report  with  respect  to  each  Plan or any  trust  created
thereunder,  (ii) immediately upon becoming aware of the occurrence of any ERISA
Event or of any "prohibited  transaction,"  as described in section 406 of ERISA
or in section 4975 of the Code, in connection with any Plan or any trust created
thereunder,  a written  notice signed by a Responsible  Officer  specifying  the
nature  thereof,  what  action the  Borrower  is taking or proposes to take with
respect  thereto,  and, when known, any action taken or proposed by the Internal
Revenue Service,  the Department of Labor or the PBGC, with respect thereto, and
(iii)  immediately  upon  receipt  thereof,  copies  of any  notice of the PBGCs
intention to terminate or to have a trustee  appointed to  administer  any Plan.
With respect to each Plan (other than a Multiemployer  Plan),  the Borrower will
(i) satisfy in full and in a timely manner,  without  incurring any late payment
or  underpayment  charge or penalty and without  giving rise to any lien, all of
the contribution and funding requirements of section 412 of the Code (determined
without regard to subsections  (d), (e), (f) and (k) thereof) and of section 302
of ERISA (determined  without regard to sections 303, 304 and 306 of ERISA), and
(ii) pay, or cause to be paid, to the PBGC in a timely manner, without incurring
any late  payment or  underpayment  charge or  penalty,  all  premiums  required
pursuant to sections 4006 and 4007 of ERISA.

     5.23  Drilling,  Completing  and Workover  Obligations.  The Borrower  will
attempt to and finish all  operations in connection  with the  completion of the
Johnson 19 Well in the Cotton Valley and Hosston  formations  and equipping such
Well for production on or before July 15, 2007.

     The Borrower will attempt to and finish all  operations in connection  with
the  completion  of the  Johnson  20  Well  in the  Cotton  Valley  and  Hosston
formations and equipping such Well for production on or before July 15, 2007.

     The Borrower will attempt to and finish all  operations in connection  with
the  completion  of the  Johnson  29  Well  in the  Cotton  Valley  and  Hosston
formations and equipping such Well for production on or before July 15, 2007.

     The Borrower will attempt to and finish all  operations in connection  with
the workover of the Kraemer 24 Well to increase  hydrocarbon  production  in the
Cotton Valley  formation,  the completion of such Well in the Hosston  formation
and equipping such Well for production on or before July 15, 2007.

     The Borrower will attempt to and finish all  operations in connection  with
the workover of the Moseley 25 Well to increase  hydrocarbon  production  in the
Cotton Valley  formation,  the completion of such Well in the Hosston  formation
and equipping such Well for production on or before July 15, 2007.

                                       38
<PAGE>

     The Borrower will attempt to and finish all  operations in connection  with
the workover of the Moseley 26 Well to increase  hydrocarbon  production  in the
Cotton Valley  formation,  the completion of such Well in the Hosston  formation
and equipping such Well for production on or before July 15, 2007.

     The Borrower will attempt to and finish all  operations in connection  with
the drilling of all three Wells  contemplated by Subsection  2.4(b)(vii) and, if
successful,  the  completion  and equipping  for  production of such Wells on or
before July 15, 2007.

     5.24  Reservation of Shares;  Valid  Issuance.  At all times,  the Borrower
shall reserve a sufficient  number of authorized,  but unissued shares of Common
Stock to permit  conversion  of the Term Note at the  Conversion  Price  then in
effect.  This  obligation  shall be in addition to the Borrower's  obligation to
reserve  shares of Common  Stock for  exercise of the Warrant or a  Supplemental
Warrant as provided in those respective instruments.  All shares of Common Stock
issued upon  conversion  of the Term Loan as  provided in Section  2.15 shall be
duly authorized, validly issued, fully paid and non-assessable with no liability
on the part of the holders thereof.

                                    ARTICLE 6
                               NEGATIVE COVENANTS

     So long as any Debt  evidenced  by the Notes  remains  unpaid or the Lender
remains obligated to make Advances, and in the absence of written consent of the
Lender to the contrary:

     6.1 Other Debt of Borrower.  The Borrower will not incur, create, assume or
suffer to exist any Debt except:  (a) Loans  hereunder,  (b)  unsecured  current
accounts  payable  incurred in the ordinary  course of business,  provided  such
accounts are paid timely or within ninety (90) days of the due date or are being
Contested  in Good Faith,  (c)  pursuant  to  Derivative  Contracts  required or
allowed under this Agreement or (d) other Debt not exceeding  $250,000.00 in the
aggregate at any one time. .

     6.2  Derivative  Contracts.  The  Borrower  shall not enter  into or in any
manner be liable under any Derivative Contract except:

     (a)  Derivative Contracts as required under Section 5.21;

                                       39
<PAGE>

     (b)  Derivative  Contracts  entered  into with the  purpose  and  effect of
          hedging  prices on  hydrocarbons  attributable  to the Borrowing  Base
          Properties  and expected to be produced by the Borrower  provided that
          at all  times:  (i) the  aggregate  of all such  Derivative  Contracts
          limits or reduces  such  market  price risk for a term of no more than
          twenty-four (24) months;  (ii) no such contract,  when aggregated with
          all  Derivative  Contracts  permitted  under this  Section  6.2 and/or
          required under Section 5.21 requires the Borrower to deliver more than
          seventy-five  percent  (75%) of  total  estimated  hydrocarbons  to be
          produced for any month from the proved developed producing Oil and Gas
          Properties  as  so  designated  in  the  most  recent  reserve  report
          furnished  by the  Borrower  under  this  Agreement;  (iii)  each such
          contract shall be with an Acceptable  Counter-party;  and (iv) no such
          contract  with a  counter-party  other than the Lender or Affiliate of
          the Lender  requires the Borrower to put up money,  letters of credit,
          assets, or any other security against the event of its  nonperformance
          prior to actual  default by the  Borrower  in  performing  obligations
          thereunder; and

     (c)  Derivative  Contracts  entered  into with the  purpose  and  effect of
          hedging  interest rates on a principal  amount of Debt of the Borrower
          that is accruing  interest at a variable  rate,  provided that (i) the
          floating rate index of each such contract  generally matches the index
          used to determine the floating rates of interest on the  corresponding
          Debt of Borrower to be hedged by such  contract  and in no event shall
          the term of such contract  extend beyond the  Termination  Date;  (ii)
          each such  contract  shall be with an  Acceptable  Counter-party;  and
          (iii) no such contract with a  counter-party  other than the Lender or
          Affiliate of the Lender requires the Borrower to put up money, letters
          of credit,  assets,  or any other  security  against  the event of its
          nonperformance  prior to actual  default by the Borrower in performing
          obligations thereunder.

     6.3 Guaranty of Payment or Performance  The Borrower will not guarantee any
contract or otherwise be or become liable in connection  with any  obligation of
any  Person,   except  that  the  foregoing   restriction  shall  not  apply  to
endorsements of instruments for collection in the ordinary course of business.

     6.4 Loans, Advances or Investments.  The Borrower will not make or agree to
make  or  allow  to  remain  outstanding  any  Investment,   including,  without
limitation,  any loans or advances or the purchase (for cash or  securities)  of
all or a substantial part of the Property or capital stock of any Person, except
(a) advances or extensions of credit in the form of accounts receivable incurred
in the  ordinary  course of business  and upon terms  common in the industry for
such accounts receivable or (b) Liquid Investments.

     6.5 Mortgages or Pledges of Assets.  The Borrower  will not create,  incur,
assume or permit  to exist  any Lien on any of its Oil and Gas  Properties  (now
owned or hereafter acquired), except Permitted Liens.

     6.6  Cancellation  of Insurance.  The Borrower will not allow any insurance
policy  required to be carried  hereunder  to be  terminated  or lapse or expire
without provision for adequate renewal or replacement thereof.

                                       40
<PAGE>

     6.7 Sales of Property.  The Borrower  will not sell,  transfer or otherwise
dispose of, in one or any series of transactions, any of the Subject Properties.

     6.8 Dividends and Distributions. Except for the issuance of Common Stock as
a result of the grant or  exercise  of  options  granted  pursuant  to the Stock
Option Plan,  the Borrower  will not  declare,  pay or make,  whether in cash or
other  Property,  any  dividend  or  distribution  on,  or  purchase,  redeem or
otherwise acquire for value, any share of its capital stock.

     6.9  Changes in Company  Structure.  The  Borrower  will not enter into any
transaction of  consolidation,  merger or  amalgamation;  liquidate,  wind up or
dissolve (or suffer any liquidation or  dissolution);  or convey,  sell,  lease,
assign,  transfer  or  otherwise  dispose  of  all or  substantially  all of its
Property or business.

     6.10 Payment of Accounts  Payable.  The Borrower will not allow any account
payable to be in excess of ninety (90) days past due and be non-current,  except
such as are being Contested in Good Faith.

     6.11  Transactions  with  Affiliates.  The  Borrower  will not  directly or
indirectly, enter into any transaction (including the sale, lease or exchange of
Property or the  rendering of service)  with any of its  Affiliates,  other than
upon fair and  reasonable  terms no less  favorable than could be obtained in an
arm's length transaction with a Person which was not an Affiliate.

     6.12 Nature of Business.  The Borrower will not make any material change in
the character of its business as carried on at the date hereof.

     6.13  Negative  Pledge  Agreements.  The Borrower  will not create,  incur,
assume or permit to exist any contract,  agreement or understanding  (other than
this  Agreement  or the  Security  Instruments)  which in any way  prohibits  or
restricts the granting,  conveying, creation or imposition of any Lien on any of
its  Property,  or which  requires the consent of or notice to other  Persons in
connection therewith.

     6.14 Gas Imbalances,  Take-or-Pay or Other  Prepayments.  The Borrower will
not allow gas imbalances,  take-or-pay or other  prepayments with respect to the
Oil and Gas  Properties  of the  Borrower  which would  require the  Borrower to
deliver  hydrocarbons  produced  on Oil and Gas  Properties  at some future time
without then or thereafter receiving full payment therefor.

     6.15 No Subsidiaries. The Borrower will not own any Subsidiaries.

                                       41
<PAGE>

     6.16 ERISA Compliance. The Borrower will not at any time:

     (a)  engage in any  transaction in connection with which the Borrower could
          be subjected to either a civil  penalty  assessed  pursuant to section
          502(c), (i) or (1) of ERISA or a tax imposed by Chapter 43 of Subtitle
          D of the Code;

     (b)  terminate any Plan in a manner,  or take any other action with respect
          to any Plan,  which could  result in any  liability to the Borrower to
          the PBGC;

     (c)  fail to make full  payment  when due of all amounts  which,  under the
          provisions of any Plan,  agreement relating thereto or applicable law,
          the Borrower is required to pay as contributions thereto;

     (d)  permit to exist any accumulated  funding deficiency within the meaning
          of  Section  302 of ERISA or section  412 of the Code,  whether or not
          waived, with respect to any Plan;

     (e)  permit the actuarial  present value of the benefit  liabilities  under
          any Plan  maintained by the Borrower which is regulated under Title IV
          of ERISA to exceed the current value of the assets (computed on a plan
          termination  basis in accordance  with Title IV of ERISA) of such Plan
          allocable to such benefit  liabilities  (the term  "actuarial  present
          value of the benefit  liabilities" shall have the meaning specified in
          section 4041 of ERISA);

     (f)  contribute   to  or  assume  an   obligation   to  contribute  to  any
          Multiemployer Plan;

     (g)  acquire an interest in any Person that causes such Person to become an
          ERISA  Affiliate  with  respect to Borrower  if such Person  sponsors,
          maintains or  contributes  to, or at any time in the  six-year  period
          preceding such acquisition has sponsored,  maintained,  or contributed
          to, (i) any Multiemployer Plan, or (ii) any other Plan that is subject
          to Title IV of ERISA under which the  actuarial  present  value of the
          benefit  liabilities  under such Plan exceeds the current value of the
          assets (computed on a plan termination  basis in accordance with Title
          IV of ERISA) of such Plan allocable to such benefit liabilities;

     (h)  incur a liability to or on account of a Plan under sections 515, 4062,
          4063, 4064, 4201 or 4204 of ERISA;

     (i)  contribute  to or assume an  obligation  to contribute to any employee
          welfare benefit plan, as defined in section 3(l) of ERISA,  including,
          without  limitation,  any such plan maintained to provide  benefits to
          former employees of such entities,  that may not be terminated by such
          entities in their sole  discretion  at any time  without any  material
          liability; or

     (j)  amend a Plan  resulting in an increase in current  liability such that
          the  Borrower  is  required  to  provide  security  to such Plan under
          section 401 (a)(29) of the Code.

                                       42
<PAGE>

                                    ARTICLE 7
                                EVENTS OF DEFAULT

     7.1 Events of Default.  The occurrence of any of the following events shall
constitute an Event of Default:

     (a)  The Borrower  shall fail to pay when due any  installment of principal
          or  interest  on any of the Notes or any  charge  payable  under  this
          Agreement;

     (b)  Default  shall  occur  in the due  observance  or  performance  of any
          affirmative covenant required in this Agreement, the Notes, any of the
          Security  Documents  or any of the  other  Loan  Documents,  and  such
          default  shall  remain  unremedied  for in excess of thirty  (30) days
          after the earlier of (i) notice  given by the  Lender,  or (ii) actual
          knowledge thereof by the Borrower;

     (c)  Default  shall  occur  in the due  observance  or  performance  of any
          negative  covenant  required in this Agreement,  the Notes, any of the
          Security Documents or any of the other Loan Documents;

     (d)  Any Financial Statement, representation,  warranty or certificate made
          or  furnished  by or on  behalf  of  the  Borrower  to the  Lender  in
          connection  with  this  Agreement  or other  Loan  Document,  or as an
          inducement  to the  Lender  to enter  into this  Agreement,  or in any
          instrument  furnished  in  compliance  with  or in  reference  to this
          Agreement  or any other  Loan  Document,  shall be  materially  false,
          incorrect, or incomplete at or as of the time made;

     (e)  Default  shall be made by the Borrower  (as  principal or guarantor or
          other surety) in payment or performance of any bond,  debenture,  note
          or other  evidence of Debt for borrowed  money  having an  outstanding
          principal  amount  in  excess  of  $25,000.00,  or  under  any  credit
          agreement,  loan  agreement,  indenture,  promissory  note or  similar
          agreement  or  instrument  executed  in  connection  with  any  of the
          foregoing,  and such default shall remain  unremedied for in excess of
          the period of grace, if any, with respect thereto,  with the effect of
          accelerating  the maturity of any such Debt or establishing a right to
          accelerate the maturity of such Debt;

     (f)  The  Borrower  shall file a petition  seeking  relief for itself under
          Debtor Relief Laws,  or file an answer  consenting  to,  admitting the
          material allegations of or otherwise not controverting, or fail timely
          to controvert a petition  filed against it seeking relief under Debtor
          Relief Laws;

     (g)  An order for relief shall be entered  against the  Borrower  under any
          Debtor Relief Laws, which order is not stayed, or upon the entry of an
          order,  judgment  or  decree  by  operation  of Law or by a  court  of
          competent  jurisdiction  which is not stayed,  ordering relief against
          the Borrower under, or approving as properly filed, a petition seeking
          relief  against any such  Person  under the  provisions  of any Debtor
          Relief  Laws,   or  appointing  a  receiver,   liquidator,   assignee,
          sequestrator,   trustee  or  custodian  of  the  Borrower  or  of  any
          substantial  part of its  Property,  or ordering  the  reorganization,
          winding up or liquidation of any the Borrower's  affairs,  or upon the
          expiration  of sixty  (60) days  after the  filing of any  involuntary
          petition  against the Borrower  seeking any of the relief specified in
          the preceding Subsection or this Subsection without the petition being
          dismissed prior to that time;

                                       43
<PAGE>

     (h)  The Borrower  shall (i) make a general  assignment  for the benefit of
          its creditors, (ii) consent to the appointment of or taking possession
          by  a  receiver,  liquidator,  assignee,   sequestrator,   trustee  or
          custodian  of such  Person or any  substantial  part of its  Property,
          (iii) admit insolvency or inability to pay its debts generally as such
          debts become due,  (iv) fail  generally to pay its debts as such debts
          become due, or (v) take any action (or an action shall be taken by its
          directors  or majority  stockholders)  looking to the  dissolution  or
          liquidation of it;

     (i)  Final judgment for the payment of money in excess of $25,000.00  shall
          be rendered  against  the  Borrower  and such  judgment  shall  remain
          undischarged  for a period of thirty (30) days during which  execution
          shall not be effectively stayed;

     (j)  The  Security  Documents  shall for any  reason,  except to the extent
          permitted by the terms  thereof,  cease to be in full force and effect
          and valid,  binding and  enforceable  in accordance  with their terms,
          cease to create a valid Lien of the priority  required  thereby on any
          of  the  Collateral   purported  to  be  covered  thereby,   or,  upon
          perfection,  cease  to be a  perfected  Lien on any of the  Collateral
          purported to be covered  thereby,  or the Borrower or any other Person
          who may have granted or purported to grant such Lien shall so state in
          writing;

     (k)  A  judgment  creditor  of any  Person  who is the  owner of any of the
          Collateral  shall obtain  possession  of any of the  Collateral by any
          means, including, without limitation, levy, attachment or self help;

     (l)  The validity or  enforceability  of any of the Loan Documents shall be
          contested by the  Borrower or the Borrower  shall deny that it has any
          or further  liability or Obligation under any of the Loan Documents or
          allege that any of the Loan  Documents  shall be construed or enforced
          other than in accordance with their terms;

     (m)  The  Borrower  shall  have  concealed,  removed,  or  permitted  to be
          concealed  or  removed,  any part of its  Property  with the intent to
          hinder,  delay or defraud  its  creditors  or any of them,  or made or
          suffered a transfer of any of its Property  which is fraudulent  under
          any Debtor  Relief  Laws  (except for such  transfers  in favor of the
          Lender);  or shall have made any transfer  (other than in the ordinary
          course  of  business)  of its  Property  to or for  the  benefit  of a
          creditor at a time when other  creditors  similarly  situated have not
          been paid;

                                       44
<PAGE>

     (n)  A Material Adverse Effect shall have occurred since the Closing Date;

     (o)  There occurs any Change of Control or a change of management such that
          any of the  Current  Management  shall cease or fail for any reason to
          serve and function in their current  capacity as an executive  officer
          of the  Borrower  and shall not be  succeeded  in such  position  by a
          Person acceptable to the Lender.

     7.2 Rights Upon Occurrence of Unmatured Event of Default . At any time that
there  exists an  Unmatured  Event of  Default,  any  obligation  of the  Lender
hereunder  to make  Advances  to or for the  benefit  of the  Borrower  shall be
suspended  unless and until the Lender shall reinstate the same in writing,  the
Unmatured  Event of Default shall have been waived by the Lender or the relevant
Unmatured  Event of Default shall have been remedied  prior to the ripening into
an Event of Default.

     7.3 Rights Upon Occurrence of an Event of Default.

     (a)  Upon the  occurrence of any Event of Default  specified in Subsections
          (f), (g), (h) or (m) of Section 7.1,  immediately  and without notice,
          (i) all Obligations  evidenced by the Notes shall  immediately  become
          due and  payable  without  presentment,  demand,  protest,  notice  of
          protest  or  dishonor,  notice  of  intent  to  accelerate,  notice of
          acceleration  or other notice of any kind,  all of which are expressly
          waived by the Borrower and (ii) all obligations of the Lender, if any,
          under this Agreement  shall  immediately and  automatically  cease and
          terminate  unless  and  until  the  Lender  shall  reinstate  any such
          obligation in writing.

     (b)  Upon the  occurrence  and at any time  during the  continuance  of any
          other Event of Default,  (i) all  obligations  of the Lender,  if any,
          under this Agreement  shall  immediately and  automatically  cease and
          terminate  unless  and  until  the  Lender  shall  reinstate  any such
          obligation in writing and (ii) the Lender may by written notice to the
          Borrower  declare  all  Obligations  evidenced  by  the  Notes  to  be
          immediately  due and payable  without  presentment,  demand,  protest,
          notice of protest or  dishonor,  notice of  intention  to  accelerate,
          notice of  acceleration  or other notice of any kind, all of which are
          expressly waived by the Borrower.

                                       45
<PAGE>

     (c)  The Borrower  acknowledges  and understands that under the Laws of the
          State of Texas, unless waived, the Borrower has the right to notice of
          the Lender's  intent to accelerate  the  Obligations  evidenced by the
          Notes,  the  right  to  notice  of  the  actual  acceleration  of  the
          Obligations  evidenced by the Notes,  and the right to  presentment of
          the  Notes  by  the  Lender's   demand  for   payment.   The  Borrower
          acknowledges that it understands that it can waive these rights and by
          the  Borrower's  execution  of this  Agreement  it agrees to waive its
          right to  notice  of  intent  to  accelerate,  its  right to notice of
          acceleration,  and its  right  to  presentment  or  other  demand  for
          payment.

     (d)  In  addition to the  foregoing,  upon the  occurrence  of any Event of
          Default,  the Lender may exercise any or all of the Rights provided in
          any or all of the Loan Documents.

                                    ARTICLE 8
                                  MISCELLANEOUS

     8.1  Notices.  Any notice  required  or  permitted  to be given under or in
connection with this Agreement or any of the other Loan Documents (except as may
otherwise be expressly required therein) shall be in writing and shall be mailed
by certified mail, return receipt requested,  postage prepaid, or sent by telex,
telegram, telecopy, facsimile, electronically by e-mail or other similar form of
rapid  transmission  confirmed by mailing (by  certified  mail,  return  receipt
requested,  postage prepaid) written confirmation at substantially the same time
as such  rapid  transmission,  or  personally  delivered  to an  officer  of the
receiving party. All such communications shall be mailed, sent, delivered, faxed
or e-mailed,

     (a)  if to the Borrower to:

                                  Cubic Energy, Inc.
                                  9870 Plano Road
                                  Dallas, Texas 75238
                                  Attn: James L. Busby
                                  Telephone: (972) 681-8047
                                  Fax: (972) 681-9687
                                  e-mail: jay@cubicenergyinc.com

or to such other address or to such  individual's or  department's  attention as
the Borrower may have furnished the Lender in writing; and

     (b)  if to the Lender to:

                                   Wells Fargo Energy Capital, Inc.
                                   1000 Louisiana
                                   9th Floor
                                   MAC T5002-090
                                   Houston, Texas 77002
                                   Attn: Gary Milavec
                                   Telephone: (713) 319-1612
                                   Fax:  (713) 652-5874
                                   e-mail:  milavega@wellsfargo.com

or to such other address or to such individual's or department's attention as
the Lender may have furnished the Borrower in writing.

                                       46
<PAGE>

     Any  communication so addressed and mailed shall be deemed to be given when
so mailed, and any notice so sent by rapid transmission is acknowledged, and any
communication  so delivered in person shall be deemed to be given when receipted
for or actually received by an authorized officer of the Borrower or the Lender,
as the case may be.

     8.2 Amendments  and Waivers.  Any provision of this Agreement or any of the
other Loan Documents may be amended or waived if, but only if, such amendment or
waiver is in writing and is signed by the  Borrower  and the Lender  (and/or any
other Person which is a party to any Loan Document being amended or with respect
to which a waiver is being obtained).

     8.3 Expenses,  Indemnity; Damage Waiver.

     (a)  The  Borrower  shall  pay (i) all  reasonable  out-of-pocket  expenses
          incurred by the Lender, including,  without limitation, the reasonable
          fees,   charges  and   disbursements  of  counsel  and  other  outside
          consultants  for  the  Lender  in  connection  with  the  preparation,
          negotiation,  execution,  delivery and administration (both before and
          after the  execution  hereof  and  including  advice of counsel to the
          Lender  with  respect  thereto) of this  Agreement  and the other Loan
          Documents and any amendments,  modifications or waivers of or consents
          related  to the  provisions  hereof  or  thereof  (whether  or not the
          transactions  contemplated  hereby or thereby  shall be  consummated),
          (ii)  all  costs,  expenses,  Taxes,  assessments  and  other  charges
          incurred by the Lender in  connection  with any filing,  registration,
          recording or perfection of any security interest  contemplated by this
          Agreement or any Security  Document or any other document  referred to
          therein,  (iii) upon the occurrence and  continuation  of an Unmatured
          Event of  Default  or Event of  Default,  all  out-of-pocket  expenses
          incurred by the Lender,  including the fees, charges and disbursements
          of any counsel for the Lender,  in connection  with the enforcement or
          protection  of its rights in  connection  with this  Agreement  or any
          other Loan  Document,  including its rights under this Section 8.3, or
          in  connection  with the  Loans  made  hereunder,  including,  without
          limitation,  all  such  out-of-pocket  expenses  incurred  during  any
          workout, restructuring or negotiations in respect of such Loans.

     (b)  THE BORROWER SHALL INDEMNIFY THE LENDER, AND EACH RELATED PARTY OF THE
          LENDER (EACH SUCH PERSON BEING CALLED AN  "INDEMNITEE")  AGAINST,  AND
          HOLD  EACH  INDEMNITEE  HARMLESS  FROM,  ANY AND ALL  LOSSES,  CLAIMS,
          DAMAGES, LIABILITIES AND RELATED EXPENSES, INCLUDING THE FEES, CHARGES
          AND  DISBURSEMENTS  OF ANY COUNSEL FOR ANY INDEMNITEE,  INCURRED BY OR
          ASSERTED AGAINST ANY INDEMNITEE ARISING OUT OF, IN CONNECTION WITH, OR
          AS A RESULT OF (i) THE EXECUTION OR DELIVERY OF THIS  AGREEMENT OR ANY
          OTHER LOAN DOCUMENT OR ANY AGREEMENT OR INSTRUMENT CONTEMPLATED HEREBY
          OR THEREBY,  THE  PERFORMANCE  BY THE PARTIES HERETO OR THE PARTIES TO
          ANY OTHER LOAN DOCUMENT OF THEIR RESPECTIVE  OBLIGATIONS  HEREUNDER OR
          THEREUNDER OR THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED HEREBY
          OR BY ANY OTHER LOAN DOCUMENT,  (ii) THE FAILURE OF THE BORROWER,  ANY
          SUBSIDIARY  TO COMPLY WITH THE TERMS OF ANY LOAN  DOCUMENT,  INCLUDING
          THIS  AGREEMENT,  OR WITH  ANY  GOVERNMENTAL  REQUIREMENT,  (iii)  ANY
          INACCURACY  OF ANY  REPRESENTATION  OR ANY BREACH OF ANY  WARRANTY  OR

                                       47
<PAGE>

          COVENANT OF THE BORROWER OR ANY GUARANTOR SET FORTH IN ANY OF THE LOAN
          DOCUMENTS OR ANY INSTRUMENTS, DOCUMENTS OR CERTIFICATIONS DELIVERED IN
          CONNECTION  THEREWITH,  (iv)  ANY  LOAN  OR THE  USE  OF THE  PROCEEDS
          THEREFROM,  (v) ANY  OTHER  ASPECT  OF THE  LOAN  DOCUMENTS,  (vi) THE
          OPERATIONS OF THE BUSINESS OF THE BORROWER AND ITS SUBSIDIARIES BY THE
          BORROWER AND ITS SUBSIDIARIES, (vii) ANY ASSERTION THAT THE LENDER WAS
          NOT ENTITLED TO RECEIVE THE PROCEEDS RECEIVED PURSUANT TO THE SECURITY
          DOCUMENTS,  (viii) ANY ENVIRONMENTAL LAW APPLICABLE TO THE BORROWER OR
          ANY  SUBSIDIARY  OR  ANY  OF  THEIR   PROPERTIES,   INCLUDING  WITHOUT
          LIMITATION,  THE PRESENCE,  GENERATION,  STORAGE, RELEASE,  THREATENED
          RELEASE,  USE,  TRANSPORT,   DISPOSAL,   ARRANGEMENT  OF  DISPOSAL  OR
          TREATMENT  OF OIL,  OIL AND GAS  WASTES,  SOLID  WASTES  OR  HAZARDOUS
          SUBSTANCES   ON  ANY  OF  THEIR   PROPERTIES,   (ix)  THE   BREACH  OR
          NON-COMPLIANCE   BY  THE   BORROWER   OR  ANY   SUBSIDIARY   WITH  ANY
          ENVIRONMENTAL  LAW APPLICABLE TO THE BORROWER OR ANY  SUBSIDIARY,  (x)
          THE PAST  OWNERSHIP BY THE BORROWER OR ANY  SUBSIDIARY OF ANY OF THEIR
          PROPERTIES OR PAST ACTIVITY ON ANY OF THEIR PROPERTIES  WHICH,  THOUGH
          LAWFUL  AND FULLY  PERMISSIBLE  AT THE TIME,  COULD  RESULT IN PRESENT
          LIABILITY,  (xi)  THE  PRESENCE,  USE,  RELEASE,  STORAGE,  TREATMENT,
          DISPOSAL, GENERATION,  THREATENED RELEASE, TRANSPORT,  ARRANGEMENT FOR
          TRANSPORT  OR  ARRANGEMENT  FOR  DISPOSAL OF OIL,  OIL AND GAS WASTES,
          SOLID WASTES OR HAZARDOUS  SUBSTANCES  ON OR AT ANY OF THE  PROPERTIES
          OWNED OR OPERATED BY THE BORROWER OR ANY  SUBSIDIARY  OR ANY ACTUAL OR
          ALLEGED  PRESENCE  OR RELEASE OF  HAZARDOUS  MATERIALS  ON OR FROM ANY
          PROPERTY OWNED OR OPERATED BY THE BORROWER OR ANY OF ITS SUBSIDIARIES,
          (xii) ANY  ENVIRONMENTAL  LIABILITY RELATED IN ANY WAY TO THE BORROWER
          OR ANY OF ITS SUBSIDIARIES, OR (xiii) ANY OTHER ENVIRONMENTAL,  HEALTH
          OR SAFETY  CONDITION IN CONNECTION WITH THE LOAN  DOCUMENTS,  OR (xiv)
          ANY  ACTUAL  OR  PROSPECTIVE  CLAIM,   LITIGATION,   INVESTIGATION  OR
          PROCEEDING  RELATING  TO  ANY  OF  THE  FOREGOING,  WHETHER  BASED  ON
          CONTRACT,  TORT OR ANY OTHER  THEORY AND  REGARDLESS  OF  WHETHER  ANY
          INDEMNITEE IS A PARTY THERETO, AND SUCH INDEMNITY SHALL EXTEND TO EACH
          INDEMNITEE  NOTWITHSTANDING THE SOLE OR CONCURRENT NEGLIGENCE OF EVERY
          KIND OR CHARACTER  WHATSOEVER,  WHETHER ACTIVE OR PASSIVE,  WHETHER AN
          AFFIRMATIVE  ACT OR AN OMISSION,  INCLUDING  WITHOUT  LIMITATION,  ALL
          TYPES OF NEGLIGENT CONDUCT  IDENTIFIED IN THE RESTATEMENT  (SECOND) OF
          TORTS  OF ONE OR  MORE  OF THE  INDEMNITEES  OR BY  REASON  OF  STRICT
          LIABILITY IMPOSED WITHOUT FAULT ON ANY ONE OR MORE OF THE INDEMNITEES;
          PROVIDED  THAT SUCH  INDEMNITY  SHALL NOT,  AS TO ANY  INDEMNITEE,  BE
          AVAILABLE TO THE EXTENT THAT SUCH LOSSES, CLAIMS, DAMAGES, LIABILITIES
          OR  RELATED   EXPENSES  ARE   DETERMINED   BY  A  COURT  OF  COMPETENT
          JURISDICTION BY FINAL AND NONAPPEALABLE JUDGMENT TO HAVE RESULTED FROM
          THE GROSS  NEGLIGENCE,  WILFUL  MISCONDUCT OR VIOLATION OF LAW OF SUCH
          INDEMNITEE.

                                       48
<PAGE>

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

     (d)  All amounts due under this Section 8.3 shall be payable promptly after
          written demand therefor.

     8.4 Survival of  Agreements.  All  representations  and  warranties  of the
Borrower  herein or in the other Loan Documents and all covenants and agreements
not fully performed  before the effective date or dates of this Agreement or the
other Loan Documents shall survive such date or dates.

     8.5 Successors and Assigns. All covenants and agreements by or on behalf of
the Borrower in this  Agreement and all of the other Loan  Documents  shall bind
its legal representatives, successors and assigns and shall inure to the benefit
of the Lender and its legal representatives, successors and assigns.

     The Borrower may not assign its respective Rights or Obligations  hereunder
or under the Notes without the prior consent of the Lender.

     8.6  Invalidity.  In the  event  that  any one or  more  of the  provisions
contained  in this  Agreement or any of the other Loan  Documents  shall for any
reason  be  held  invalid,   illegal  or  unenforceable  in  any  respect,  such
invalidity,  illegality or unenforceability shall not affect any other provision
of this Agreement or any other Loan Document.

     8.7 Renewal,  Extension or Rearrangement.  All provisions of this Agreement
and of any other Loan Documents,  as presently existing or as they may hereafter
be amended,  relating to the Notes or other  Obligations  shall apply with equal
force and effect to each and all promissory notes hereinafter  executed which in
whole or in part  represent a renewal,  extension  for any  period,  increase or
rearrangement of any part of the Obligations  originally  evidenced by the Notes
or of any part of such other Obligations.

     8.8  Waivers.  No waiver  by the  Lender of any of its  Rights  under  this
Agreement, the other Loan Documents or otherwise shall be considered a waiver of
any other or subsequent  Right.  No course of dealing on the part of the Lender,
its officers, employees,  consultants or agents, nor any failure or delay by the
Lender with  respect to  exercising  any Right  under any of the Loan  Documents
shall operate as a waiver thereof.

                                       49
<PAGE>

     8.9  Cumulative  Rights.  The  Rights of the Lender  under the Notes,  this
Agreement and each other Loan Document shall be cumulative,  and the exercise or
enforcement  of any such Right shall not preclude the exercise or enforcement of
any other Right.

     8.10  Exhibits;  Conflicts.  The exhibits  attached to this  Agreement  are
incorporated  herein and shall be  considered a part of this  Agreement  for the
purposes stated herein.  In the event of any direct conflict  between any of the
provisions  of  such  exhibits  or any of  the  other  Loan  Documents  and  the
provisions of this Agreement, the provisions of this Agreement shall prevail.

     8.11 Titles of Articles, Sections and Subsections. All titles or heading to
articles,  Sections,  Subsections  or other  divisions of this  Agreement or the
exhibits  hereto are only for the  convenience  of the  parties and shall not be
construed  to have any effect or meaning  with  respect to the other  content of
such  articles,  Sections,  Subsections or other  divisions,  such other content
being controlling as to the agreement between the parties hereto.

     8.12  Jurisdiction.  All actions or proceedings  with respect to the Notes,
this  Agreement  or any of the other Loan  Documents  may be  instituted  in the
courts of the State of Texas, County of Harris, the United States District Court
for the Southern District of Texas, or elsewhere to the extent that jurisdiction
shall exist apart from the provisions of this Section,  as the Lender may elect.
By  execution  and delivery of this  Agreement,  the  Borrower  irrevocably  and
unconditionally  submits to the jurisdiction  (both subject matter and personal)
of each such court, and irrevocably and unconditionally waives (a) any objection
it may now or  hereafter  have to the laying of venue in any of such  courts and
(b) any claim that any action or  proceeding  brought in any of such  courts has
been brought in an inconvenient  forum.  The choice of forum and laying of venue
as set forth in this Section 8.12 were  negotiated in good faith by the Borrower
and the Lender and is a significant term of the bargain between the Borrower and
the Lender governed by this Agreement.  Each party to this Agreement irrevocably
consents  to service of process in the manner  provided  for  notices in Section
8.1.  Nothing  in this  Agreement  will  affect  the  right of any party to this
Agreement to serve process in any other manner permitted by law.

     8.13  Counterparts.   This  Agreement  may  be  executed  in  two  or  more
counterparts and multiple  originals of such  counterparts,  and it shall not be
necessary  that the  signatures  of all parties  hereto be  contained on any one
counterpart  hereof. Any executed Agreement or any counterpart  thereof shall be
deemed an original,  but all of which together shall constitute one and the same
instrument.

     8.14  Effectiveness.  This Agreement shall not be effective until delivered
to, accepted and executed by the Lender and the Borrower.

                                       50
<PAGE>

     8.15 Documents. All Loan Documents and any other certificate,  agreement or
other  document  provided or to be provided  under the terms  hereof shall be in
form and substance reasonably satisfactory to the Lender.

     8.16 Rights of Third Person.  All  provisions of this Agreement are imposed
solely and exclusively for the benefit of the Lender and the Borrower.  No other
Person  shall have  standing  to require  satisfaction  for such  provisions  in
accordance with their terms or be entitled to assume that the Lender will refuse
to perform its  obligations  hereunder in the absence of strict  compliance with
any or all thereof,  and any or all of such  provisions  may be freely waived in
whole or in part by the Lender at any time if in its sole discretion it deems it
advisable to do so.

     8.17  Announcements.  Each party  covenants and agrees with the other that,
subject to applicable law, each party shall promptly advise and consult with the
other and obtain the other's  written  consent  before issuing any press release
with respect to this Agreement or the transactions described herein.

     8.18  Survival  of  Certain  Covenants.   The  covenants,   agreements  and
obligations of the Borrower set forth in Sections 2.14, 2.15, 2.17, 2.18 and 8.3
of this  Agreement,  the Warrant,  a  Supplemental  Warrant or the  Registration
Rights  Agreement  shall  survive  repayment of the Debt  evidenced by the Notes
until  those  covenants,  agreements  and  obligations  are  fully  and  finally
performed.

     8.19 JURY TRIAL WAIVED.  THE BORROWER AND THE LENDER HEREBY AGREE THAT THEY
SHALL AND HEREBY WAIVE,  TO THE FULLEST EXTENT  DETERMINED BY LAW, TRIAL BY JURY
IN ANY ACTION, PROCEEDING OR COUNTERCLAIM,  WHETHER AT LAW OR IN EQUITY, BROUGHT
BY  ANY OF  THEM  OR IN  ANY  MATTER  WHATSOEVER  WHICH  ARISES  OUT OF OR IS IN
CONNECTION IN ANY ANYWAY WITH THIS AGREEMENT.

     8.20 GOVERNING  LAW. THIS  AGREEMENT AND THE OTHER LOAN DOCUMENTS  SHALL BE
GOVERNED BY AND  CONSTRUED IN  ACCORDANCE  WITH THE LAWS OF THE UNITED STATES OF
AMERICA AND THE STATE OF TEXAS  (EXCEPT TO THE EXTENT THE  LOCATION OR NATURE OF
THE COLLATERAL REQUIRES THE APPLICATION OF THE LAWS OF OTHER JURISDICTIONS TO BE
APPLIED AS TO MATTERS OF  CREATION,  PERFECTION  AND  PRIORITY  OF LIENS AND THE
RIGHTS OF THE LENDER UPON DEFAULT).

                                       51
<PAGE>

     8.21 Arbitration.

     (a)  Arbitration.  Upon the  demand  of any  party,  any  dispute  shall be
          resolved by binding  arbitration (except as set forth in (e) below) in
          accordance  with the terms of this  agreement.  A "dispute" shall mean
          any action,  dispute,  claim or  controversy  of any kind,  whether in
          contract or tort,  statutory or common law,  legal or  equitable,  now
          existing or hereafter  arising under or in connection  with, or in any
          way pertaining to, any of the loan documents,  or any past, present or
          future  extensions  of credit and other  activities,  transactions  or
          obligations  of any kind related  directly or indirectly to any of the
          loan documents,  including  without  limitation,  any of the foregoing
          arising in connection with the exercise of any self-help, ancillary or
          other remedies pursuant to any of the loan documents. Any party may by
          summary  proceedings bring an action in court to compel arbitration of
          a dispute.  Any party who fails or  refuses  to submit to  arbitration
          following a lawful  demand by any other party shall bear all costs and
          expenses incurred by such other party in compelling arbitration of any
          dispute.

     (b)  Governing Rules.  Arbitration proceedings shall be administered by the
          American  Arbitration  Association ("AAA") or such other administrator
          as the parties shall  mutually  agree upon in accordance  with the AAA
          commercial  arbitration  rules. All disputes  submitted to arbitration
          shall be  resolved in  accordance  with the  Federal  Arbitration  Act
          (Title 9 of the United States Code),  notwithstanding  any conflicting
          choice of law provision in any of the loan documents.  The arbitration
          shall be conducted at a location in Texas selected by the AAA or other
          administrator.  If there is any inconsistency between the terms hereof
          and any such rules,  the terms and  procedures  set forth herein shall
          control.  All statutes of  limitation  applicable to any dispute shall
          apply to any arbitration proceeding. All discovery activities shall be
          expressly  limited to matters  directly  relevant to the dispute being
          arbitrated.  Judgment upon any award rendered in an arbitration may be
          entered  in any court  having  jurisdiction;  provided  however,  that
          nothing  contained  herein shall be deemed to be a waiver by any party
          that is a lender of the protections  afforded to it under 12 U.S.C. 91
          or any similar applicable state law.

     (c)  No  Waiver;  Provisional  Remedies,   Self-Help  And  Foreclosure.  No
          provision  hereof  shall  limit  the  right of any  party to  exercise
          self-help remedies such as setoff,  foreclosure against or sale of any
          real  or  personal  property  collateral  or  security,  or to  obtain
          provisional  or  ancillary  remedies,   including  without  limitation
          injunctive  relief,  sequestration,  attachment,  garnishment or other
          appointment  of a  receiver,  from a court of  competent  jurisdiction
          before,  after or during  the  pendency  of any  arbitration  or other
          proceeding.  The exercise of any such remedy shall not waive the right
          of any party to compel arbitration hereunder.

     (d)  Arbitrator  Qualifications  And Powers;  Awards.  Arbitrators  must be
          active   members  of  the  Texas  state  bar  with  expertise  in  the
          substantive  laws  applicable  to the subject  matter of the  dispute.
          Arbitrators  are empowered to resolve  disputes by summary  rulings in
          response  to motions  filed  prior to the final  arbitration  hearing.
          Arbitrators  (i) shall  resolve all  disputes in  accordance  with the
          substantive  law of the state of Texas,  (ii) may grant any  remedy or
          relief that a court of the state of Texas could order or grant  within
          the scope  hereof and such  ancillary  relief as is  necessary to make
          effective any award,  and (iii) shall have the power to award recovery
          of all costs and fees,  to  impose  sanctions  and to take such  other
          actions  as they  deem  necessary  to the same  extent  a judge  could
          pursuant to the federal rules of civil  procedure,  the Texas rules of

                                       52
<PAGE>

          civil  procedure  or other  applicable  law.  Any dispute in which the
          amount in  controversy  is  $5,000,000  or less  shall be decided by a
          single  arbitrator  who shall  not  render  an award of  greater  than
          $5,000,000   (including  damages,   costs,  fees  and  expenses).   By
          submission to a single  arbitrator,  each party  expressly  waives any
          right or claim to recover more than  $5,000,000.  Any dispute in which
          the  amount in  controversy  exceeds  $5,000,000  shall be  decided by
          majority vote of a panel of three arbitrators;  provided however, that
          all three  arbitrators  must actively  participate in all hearings and
          deliberations.

     (e)  Judicial Review.  Notwithstanding  anything herein to the contrary, in
          any   arbitration   in  which  the  amount  in   controversy   exceeds
          $25,000,000,  the  arbitrators  shall be  required  to make  specific,
          written findings of fact and conclusions of law. In such  arbitrations
          (i) the  arbitrators  shall not have the power to make any award which
          is not  supported by  substantial  evidence or which is based on legal
          error,  (ii) an award shall not be binding upon the parties unless the
          findings  of  fact  are  supported  by  substantial  evidence  and the
          conclusions of law are not erroneous  under the substantive law of the
          state of Texas,  and (iii) the  parties  shall have in addition to the
          grounds  referred  to in the  federal  arbitration  act for  vacating,
          modifying or correcting  an award the right to judicial  review of (a)
          whether the findings of fact rendered by the arbitrators are supported
          by substantial  evidence,  and (b) whether the  conclusions of law are
          erroneous under the  substantive  law of the state of Texas.  Judgment
          confirming  an award in such a  proceeding  may be  entered  only if a
          court  determines the award is supported by  substantial  evidence and
          not based on legal  error  under the  substantive  law of the state of
          Texas.

     (f)  Miscellaneous.  To  the  maximum  extent  practicable,  the  AAA,  the
          arbitrators and the parties shall take all action required to conclude
          any  arbitration  proceeding  within  180  days of the  filing  of the
          dispute with the AAA. No arbitrator  or other party to an  arbitration
          proceeding  may disclose the  existence,  content or results  thereof,
          except for  disclosures  of  information  by a party  required  in the
          ordinary course of its business,  by applicable law or regulation,  or
          to the extent  necessary to exercise any  judicial  review  rights set
          forth herein. If more than one agreement for arbitration by or between
          the  parties  potentially  applies  to  a  dispute,   the  arbitration
          provision  most directly  related to the loan documents or the subject
          matter of the dispute shall control.  This arbitration provision shall
          survive  termination,  amendment  or  expiration  of any  of the  loan
          documents or any relationship between the parties.

     8.22 USA Patriot Act Notice.  The Lender hereby  notifies the Borrower that
pursuant to the requirements of the USA Patriot Act (Title III of Pub. L. 107-56
(signed into law October 26, 2001)), it is required to obtain, verify and record
information that identifies the Borrower,  which  information  includes the name
and address of the Borrower and other  information that will allow the Lender to
identify the Borrower in accordance with such Law.

     8.23 Entire Agreement.  This Agreement and the other Loan Documents contain
the  entire   agreement   between  the  parties  relating  to  the  transactions
contemplated    hereby.   All   prior   or    contemporaneous    understandings,
representations,  statements and agreements, whether written or oral, are merged
herein and superseded by this  Agreement.  THIS WRITTEN  AGREEMENT AND THE OTHER
TRANSACTION  DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY
NOT BE  CONTRADICTED  BY EVIDENCE OF PRIOR,  CONTEMPORANEOUS  OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES.  THERE ARE NO UNWRITTEN ORAL  AGREEMENTS  BETWEEN THE
PARTIES.

                                       53
<PAGE>

     IN WITNESS  WHEREOF,  the parties hereto have caused this  instrument to be
duly executed effective as of the date first above written.

                                CUBIC ENERGY, INC.

                                 By: /s/ Calvin A. Wallen III
                                     ------------------------
                                         Calvin A. Wallen III
                                         President

                                WELLS FARGO ENERGY CAPITAL, INC.

                                 By: /s/ Gary Milavec
                                     ------------------------
                                         Gary Milavec
                                         Senior Vice PresidentExhibit 10.2

                           CONVERTIBLE PROMISSORY NOTE

$5,000,000.00                  Houston, Texas                      March 5, 2007

     FOR VALUE  RECEIVED  and WITHOUT  GRACE,  in the  installments  hereinafter
provided,  the undersigned ("Maker") promises to pay to the order of WELLS FARGO
ENERGY  CAPITAL,  INC.  (""Payee")  the sum of FIVE  MILLION AND NO/100  DOLLARS
($5,000,000.00),  together  with  interest as set forth in that  certain  Credit
Agreement dated of even date herewith between Maker and Payee (as may be amended
from time to time, the "Credit Agreement").

     All payments of  principal  and interest are payable in lawful money of the
United States of America to Payee at its offices at 1000  Louisiana,  9th Floor,
Houston, Harris County, Texas as set forth in the Credit Agreement.

     Each advance by Payee to Maker and each  payment of principal  hereunder by
Maker  shall be  reflected  by a notation  made by Payee on its  records and the
aggregate unpaid amount of advances  reflected by said notations shall be deemed
rebuttably presumptive evidence of the principal amount owing under this Note.

     This Note is issued pursuant to the Credit Agreement, and reference is made
to the  Credit  Agreement  for  matters  governed  thereby,  including,  without
limitation,  certain  events which will entitle the holder  hereof to accelerate
the maturity of all amounts due hereon.  Capitalized  terms used but not defined
herein shall have the same meanings as in the Credit Agreement.

     It is the  intention  of  Maker  and  Payee  to  comply  strictly  with all
applicable  usury laws as in effect from time to time; and there is no intention
to contract for, nor shall there ever be collected,  charged or received on this
Note,  interest in excess of that which would accrue and be payable on the basis
of the Highest  Lawful Rate.  To the extent that the  interest  rate Laws of the
State of Texas are  applicable to this Note,  for purposes of Chapter 303 of the
Texas Finance Code, as amended, Maker agrees that the maximum rate to be charged
shall be the "weekly rate ceiling" as defined in said Chapter 303; provided that

Payee  may also  rely on  alternative  maximum  rates of  interest  under  other
applicable laws, if greater.

     If under any  circumstances the aggregate amounts paid on this Note include
amounts  which by Law are deemed  interest  and which  would  exceed the maximum
non-usurious amount of interest which could lawfully have been collected on this
Note,  Maker stipulates that such payment and collection will have been and will
be deemed to have been the result of mathematical error on the part of Maker and
Payee or the holder of this Note, and the party  receiving such excess  payments
shall  promptly  refund  the amount of such  excess (to the extent  only of such
interest  payments  above the maximum  non-usurious  amount which could lawfully
have been  collected  and  retained)  upon  discovery of such error by the party
receiving such payment or notice thereof from the party making such payment.

     The  principal  indebtedness  evidenced by this Note is payable on March 1,
2010.  All  interest  accrued  on the  principal  indebtedness  shall be payable
pursuant to the terms of the Credit Agreement, with the last payment thereof due
on or before March 1, 2010. If any  installment of interest  provided for in the
Credit  Agreement is not paid when due, then Payee or the owner or holder hereof
may, at its option,  without notice (including,  without  limitation,  notice of
intention to accelerate  maturity  and/or notice of acceleration of maturity) or
demand,  declare this Note at once matured, due and payable in full, and in such
case the  entire  amount of unpaid  principal  hereunder  and  accrued  interest
thereon shall immediately become due and payable.

<PAGE>

     If  default  is made in the  payment  of this  Note and it is placed in the
hands of an attorney for collection,  or collected through probate or bankruptcy
proceedings,  or if suit is brought on the same,  Maker agrees to pay reasonable
attorneys' fees and other costs of collection.

     Maker and any and all endorsers,  guarantors and sureties  severally  waive
notice  (including,  without  limitation,  notice  of  intention  to  accelerate
maturity  and/or notice of acceleration  of maturity),  demand,  presentment for
payment,  protest  and the  filing  of suit  hereon  for the  purpose  of fixing
liability  and  consent  that the time of  payment  hereof may be  extended  and
reextended  from  time to time  without  notice  to them or any of  them.  Maker
acknowledges and understands  that under the Laws of the State of Texas,  unless
waived,  Maker  has the  right to notice of  Payee's  intent to  accelerate  the
indebtedness  evidenced  by  this  Note,  the  right  to  notice  of the  actual
acceleration  of the  indebtedness  evidenced  by this  Note,  and the  right to
presentment of this Note by Payee's demand for payment.  Maker acknowledges that
it understands  that it can waive these rights and by Maker's  execution of this
Note it agrees to waive its right to notice of intent to  accelerate,  its right
to notice of  acceleration,  and its right to  presentment  or other  demand for
payment.

     Except as set forth in the  Credit  Agreement,  Maker  may not  prepay  the
principal amounts evidenced by this Note.

     This  Note is  convertible  into  shares  of the  common  stock of Maker in
accordance with Section 2.15 of the Credit Agreement

     THIS NOTE SHALL BE GOVERNED  AND  CONTROLLED  BY THE  INTERNAL  LAWS OF THE
STATE OF TEXAS.

                  Without being limited thereto or thereby, this Note is secured
by the Security Documents more particularly described in the Credit Agreement.

                                                  CUBIC ENERGY, INC.

                                                   By:  /s/ Calvin A. Wallen III
                                                        ------------------------
                                                        Calvin A. Wallen III
                                                        President

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