Document:

CONVERTIBLE LOAN AGREEMENT

                          DATED AS OF OCTOBER 15, 2003

                                  BY AND AMONG

                               GASCO ENERGY, INC.

                                   AS BORROWER

                                       AND

               RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.

                                       AND

                  RENAISSANCE US GROWTH & INVESTMENT TRUST PLC

                                       AND

                      BFSUS SPECIAL OPPORTUNITIES TRUST PLC

                                    AS LENDER

                                       AND

                            RENN CAPITAL GROUP, INC.

                             AS AGENT FOR THE LENDER

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                                TABLE OF CONTENTS
                                                                            Page

ARTICLE I. - DEFINITION OF TERMS...............................................1

   SECTION 1.01       DEFINITIONS..............................................1
   SECTION 1.02       OTHER DEFINITION PROVISIONS..............................8

ARTICLE II. - LOAN PROVISIONS..................................................9

   SECTION 2.01       THE LOAN.................................................9
   SECTION 2.02       USE OF PROCEEDS..........................................9
   SECTION 2.03       INTEREST RATE AND INTEREST PAYMENTS......................9
   SECTION 2.04       MATURITY................................................10
   SECTION 2.05       MANDATORY PRINCIPAL REPAYMENT...........................10
   SECTION 2.06       REDEMPTION..............................................10
   SECTION 2.07       CONVERSION..............................................10
   SECTION 2.08       FEES AND EXPENSES.......................................10
   SECTION 2.09       FINDER'S FEES...........................................10
   SECTION 2.10       TAXES...................................................10
   SECTION 2.11       SUBSIDIARY GUARANTY, THE MORTGAGE.......................11

ARTICLE III. - CONDITIONS PRECEDENT...........................................12

   SECTION 3.01       CLOSING CONDITIONS......................................12

ARTICLE IV. - REPRESENTATIONS AND WARRANTIES OF BORROWER......................14

   SECTION 4.01       ORGANIZATION AND GOOD STANDING..........................14
   SECTION 4.02       AUTHORIZATION AND POWER.................................14
   SECTION 4.03       NO CONFLICTS OR CONSENTS................................15
   SECTION 4.04       ENFORCEABLE OBLIGATIONS.................................15
   SECTION 4.05       NO LIENS................................................15
   SECTION 4.06       FINANCIAL CONDITION.....................................15
   SECTION 4.07       NO DEFAULT..............................................15
   SECTION 4.08       MATERIAL AGREEMENTS.....................................16
   SECTION 4.09       NO LITIGATION...........................................16
   SECTION 4.10       TAXES...................................................16
   SECTION 4.11       CAPITALIZATION..........................................16
   SECTION 4.12       USE OF PROCEEDS.........................................17
   SECTION 4.13       EMPLOYEE MATTERS........................................17
   SECTION 4.14       EMPLOYEE BENEFIT PLANS..................................17
   SECTION 4.15       COMPLIANCE WITH LAWS....................................18
   SECTION 4.16       LICENSES AND PERMITS....................................18
   SECTION 4.17       CONTRACTS...............................................18
   SECTION 4.18       SHARES ISSUABLE UPON CONVERSION.........................19
   SECTION 4.19       INSIDER.................................................19
   SECTION 4.20       SUBSIDIARIES............................................19
   SECTION 4.21       CASUALTIES..............................................20
   SECTION 4.22       INVESTMENT COMPANY ACT..................................20
   SECTION 4.23       SUFFICIENCY OF CAPITAL, ADEQUACY OF DRILLING PROGRAM....20
   SECTION 4.24       CORPORATE NAMES.........................................20
   SECTION 4.25       INSURANCE...............................................20
   SECTION 4.26       INTELLECTUAL PROPERTY...................................20

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   SECTION 4.27       PROPERTY, OIL AND GAS PROPERTY..........................21
   SECTION 4.28       ENVIRONMENTAL...........................................21
   SECTION 4.29       PUBLIC REPORTS, SECURITIES LAW COMPLIANCE...............23
   SECTION 4.30       FULL DISCLOSURE.........................................23

ARTICLE V. - AFFIRMATIVE COVENANTS OF BORROWER................................23

   SECTION 5.01       FINANCIAL STATEMENTS, REPORTS AND DOCUMENTS.............24
   SECTION 5.02       ANNUAL FINANCIAL STATEMENTS.............................25
   SECTION 5.03       QUARTERLY FINANCIAL STATEMENTS..........................25
   SECTION 5.04       THE DRILLING PROGRAM, OIL AND GAS REPORTS...............25
   SECTION 5.05       PAYMENT OF TAXES AND OTHER INDEBTEDNESS.................26
   SECTION 5.06       MAINTENANCE OF EXISTENCE AND RIGHTS; CONDUCT OF BUSINESS26
   SECTION 5.07       SEC FILINGS.............................................26
   SECTION 5.08       NOTICE..................................................26
   SECTION 5.09       COMPLIANCE WITH LOAN DOCUMENTS..........................27
   SECTION 5.10       COMPLIANCE WITH MATERIAL AGREEMENTS.....................27
   SECTION 5.11       ADDITIONAL CAPITAL, ADDITIONAL COLLATERAL...............27
   SECTION 5.12       OPERATIONS AND PROPERTIES...............................27
   SECTION 5.13       BOOKS AND RECORDS; ACCESS...............................27
   SECTION 5.14       COMPLIANCE WITH LAW.....................................28
   SECTION 5.15       INSURANCE...............................................28
   SECTION 5.16       AUTHORIZATIONS AND APPROVALS............................28
   SECTION 5.17       ERISA COMPLIANCE........................................28
   SECTION 5.18       FURTHER ASSURANCES......................................28
   SECTION 5.19       INDEMNITY BY BORROWER...................................28
   SECTION 5.20       RESERVATION OF SHARES...................................29
   SECTION 5.21       OWNERSHIP OF SUBSIDIARIES...............................29
   SECTION 5.22       SUBSEQUENTLY FORMED SUBSIDIARIES........................30

ARTICLE VI. - NEGATIVE COVENANTS OF BORROWER..................................30

   SECTION 6.01       LIMITATION ON INDEBTEDNESS..............................30
   SECTION 6.02       LIMITATION ON LIENS.....................................30
   SECTION 6.03       LIMITATION ON INVESTMENTS...............................30
   SECTION 6.04       TRANSACTIONS WITH AFFILIATES............................30
   SECTION 6.05       LIMITATIONS ON ACQUISITION OF NONRELATED BUSINESS.......31
   SECTION 6.06       LIMITATION ON SALE OF PROPERTIES........................31
   SECTION 6.07       FISCAL YEAR AND ACCOUNTING METHOD.......................31
   SECTION 6.08       LIQUIDATION.............................................31
   SECTION 6.09       MATERIAL AMENDMENTS TO ARTICLES OF INCORPORATION
                        OR BYLAWS.............................................31
   SECTION 6.10       EXECUTIVE COMPENSATION..................................31
   SECTION 6.11       RESTRICTED PAYMENTS.....................................32
   SECTION 6.12       CONSOLIDATION OR MERGER.................................32

ARTICLE VII. - COVENANTS OF MAINTENANCE OF FINANCIAL STANDARDS................32

   SECTION 7.01       FINANCIAL RATIOS........................................32

ARTICLE VIII. - EVENTS OF DEFAULT.............................................33

   SECTION 8.01       EVENTS OF DEFAULT.......................................33
   SECTION 8.02       REMEDIES UPON EVENT OF DEFAULT..........................34
   SECTION 8.03       PERFORMANCE BY THE LENDER...............................34
   SECTION 8.04       PAYMENT OF EXPENSES INCURRED BY THE LENDER..............35
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ARTICLE IX. - REGISTRATION RIGHTS.............................................35

   SECTION 9.01       "PIGGY-BACK" REGISTRATION...............................35
   SECTION 9.02       SHELF REGISTRATION......................................36
   SECTION 9.03       OBLIGATIONS OF BORROWER.................................37
   SECTION 9.04       FURNISH INFORMATION.....................................38
   SECTION 9.05       EXPENSES OF REGISTRATION................................38
   SECTION 9.06       INDEMNIFICATION REGARDING REGISTRATION RIGHTS...........38
   SECTION 9.07       REPORTS UNDER THE 1934 ACT..............................40
   SECTION 9.08       ASSIGNMENT OF REGISTRATION RIGHTS.......................41
   SECTION 9.09       OTHER MATTERS...........................................41
   SECTION 9.10       REPRESENTATIONS OF LENDER...............................42

ARTICLE X. - BOARD OF DIRECTORS...............................................44

   SECTION 10.01      BOARD REPRESENTATION OR ATTENDANCE BY OBSERVER..........44
   SECTION 10.02      LIMITATION OF AUTHORITY OF PERSONS DESIGNATED AS A
                        DIRECTOR NOMINEE......................................44
   SECTION 10.03      NONLIABILITY OF THE LENDER..............................44

ARTICLE XI. - AGENCY PROVISIONS...............................................45

   SECTION 11.01      THE LENDER'S REPRESENTATIONS AND WARRANTIES TO AGENT....45
   SECTION 11.02      WAIVER OF LOAN PROVISIONS OR INTEREST OR
                        PRINCIPAL PAYMENTS....................................45
   SECTION 11.03      AGENCY..................................................45

ARTICLE XII. - MISCELLANEOUS..................................................47

   SECTION 12.01      STRICT COMPLIANCE.......................................47
   SECTION 12.02      WAIVERS AND MODIFICATIONS...............................47
   SECTION 12.03      LIMITATION ON LIABILITY.................................47
   SECTION 12.04      CHOICE OF FORUM; CONSENT TO SERVICE OF PROCESS
                        AND JURISDICTION......................................47
   SECTION 12.05      INVALID PROVISIONS......................................48
   SECTION 12.06      MAXIMUM INTEREST RATE...................................48
   SECTION 12.07      PARTICIPATIONS AND ASSIGNMENTS OF THE DEBENTURES........49
   SECTION 12.08      CONFIDENTIALITY.........................................49
   SECTION 12.09      BINDING EFFECT..........................................50
   SECTION 12.10      NO THIRD PARTY BENEFICIARY..............................50
   SECTION 12.11      ENTIRETY................................................50
   SECTION 12.12      HEADINGS................................................51
   SECTION 12.13      SURVIVAL................................................51
   SECTION 12.14      MULTIPLE COUNTERPARTS...................................51
   SECTION 12.15      KNOWLEDGE OF BORROWER...................................51
   SECTION 12.16      NOTICES.................................................51
   SECTION 12.17      TAX RESIDENCE...........................................53
   SECTION 12.18      GOVERNING LAW...........................................53

ARTICLE XIII. - SCHEDULES TO CONVERTIBLE LOAN AGREEMENT.......................55

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          THIS  CONVERTIBLE  LOAN  AGREEMENT  (this  "Agreement"),  dated  as of
October  15,  2003,  by and  among  Gasco  Energy,  Inc.,  a Nevada  corporation
("Borrower"),  and RENAISSANCE  CAPITAL GROWTH & INCOME FUND, III, INC., a Texas
corporation  (individually  referred to as "Renaissance III") and RENAISSANCE US
GROWTH & INVESTMENT  TRUST PLC, a public limited  company  registered in England
and Wales (individually referred to as "RUSGIT") and BFSUS SPECIAL OPPORTUNITIES
TRUST PLC, a public limited  company  registered in England and Wales  ("BFSUS")
(Renaissance  III,  RUSGIT and BFSUS,  together with any permitted  assignees or
successors  in interest  referred to as the  "Lender")  and RENN CAPITAL  GROUP,
INC., a Texas corporation, as agent for the Lender (the "Agent"). All references
herein to Borrower shall include the Subsidiaries,  unless the context otherwise
requires.

                                   WITNESSETH:

          WHEREAS,  Borrower seeks to borrow a total of Two Million Five Hundred
Thousand Dollars ($2,500,000) from the Lender; and

          WHEREAS,  Borrower has requested  that the Lender provide such loan as
herein provided, and that the Lender is willing to furnish such to Borrower upon
the terms and subject to the conditions and for the  considerations  hereinafter
set forth;

          NOW,  THEREFORE,  in  consideration  of  the  mutual  promises  herein
contained and for other valuable consideration, receipt and sufficiency of which
is acknowledged, the parties hereto agree as follows:

ARTICLE I. - DEFINITION OF TERMS

Section 1.01      Definitions.

          For the purposes of this Agreement, the following terms shall have the
respective  meanings  assigned  to them in this  Article I or in the  section or
recital referred to below:

          "Affiliate"  with  respect  to any  Person  shall  mean a person  that
directly  or  indirectly,  through  one or more  intermediaries,  controls or is
controlled by, or is under common control with, such Person.

          "Agreement" shall have the meaning assigned in the preamble hereto.

          "BFSUS"  shall mean BFSUS  Special  Opportunities  Trust PLC, a public
limited company registered in England and Wales.

          "Capital  Expenditure"  shall mean an  expenditure  for assets that is
properly classifiable as a capital expenditure in accordance with GAAP.

          "Capital  Lease" shall mean any lease of  property,  real or personal,
which would be properly classifiable as a capital lease in accordance with GAAP.

          "Closing  Fee" shall mean that amount equal to 1.0% of the  commitment
amount,  which equals Twenty Five Thousand Dollars ($25,000),  to be paid at the
Loan Closing in accordance with Section 2.08.

          "Closing  Expense  Fee" shall mean that  amount  equal to 0.50% of the
commitment  amount which equals Twelve Thousand Five Hundred Dollars  ($12,500),
of which Ten Thousand  Dollars has been  previously  deposited by Borrower  with
Lender's bank in escrow prior to the date hereof pursuant to separate  agreement
among the parties, and which Lender shall be entitled to apply, pursuant to such
agreement,  to Lender's reasonable closing costs and out-of-pocket  expenses, in
the event that the Closing shall occur, or to Lender's  reasonable out of pocket
expenses,  including  attorneys  fees and  expenses,  if Closing shall not occur
other than as a result of a default by Lender.

                                       1
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          "Code"  shall mean the  Internal  Revenue  Code of 1986,  as  amended,
together with all of the rules and regulations issued thereunder.

          "Collateral"  shall mean the real and personal property of Borrower or
any  Subsidiary  of Borrower  pledged  pursuant to the  Mortgage or otherwise to
secure the performance of any Obligation.

          "Commitment  Fee"  shall  mean  that  amount  equal  to  1.0%  of  the
commitment amount,  which equals Twenty Five Thousand Dollars  ($25,000),  to be
paid at the Loan Closing in accordance with Section 2.08.

          "Common Stock" shall mean Borrower's  common stock, par value $.0.0001
per share.

          "Consolidated  Capitalization"  means with respect to any person, at a
particular   date,  the  sum  of  the  amount  which  would  be  included  under
stockholders'  equity on a  consolidated  balance  sheet of such  person and its
subsidiaries determined on a consolidated basis in accordance with GAAP plus all
Indebtedness  of such person and its  subsidiaries  determined on a consolidated
basis in accordance with GAAP.

          "Consolidated  EBITDA"  means  with  respect  to any  person,  for any
period, the sum (without  duplication) of (i) Net Income plus (ii) to the extent
that any of the following  shall have been taken into account in determining Net
Income, (A) all income taxes of such person and its subsidiaries paid or accrued
in accordance  with GAAP for such period,  (B)  Consolidated  Interest,  (C) all
amortization, depreciation, depletion and impairment expenses, and (D) all other
non-cash  items reducing Net Income,  all as determined on a consolidated  basis
for such person and its subsidiaries in accordance with GAAP.

          "Consolidated  Interest"  means with  respect to any  person,  for any
period, all interest expense of such person and its subsidiaries paid or accrued
in accordance with GAAP for such period,  including all capitalized interest and
the interest portion of any deferred payment obligations for such period.

           "Conversion"  or  "Conversion  Rights" shall mean exchange of, or the
rights to exchange,  the Principal Amount of the Loan, or any part thereof,  for
fully paid and nonassessable  Common Stock on the terms and conditions  provided
in the Debentures.

          "Debentures"  shall  mean the  Debentures  executed  by  Borrower  and
delivered  pursuant to the terms of this Agreement,  together with any renewals,
extensions or modifications thereof.

          "Debtor Laws" shall mean all applicable liquidation,  conservatorship,
bankruptcy, moratorium, arrangement, receivership, insolvency, reorganization or
similar  laws from time to time in effect  affecting  the rights of creditors or
debtors generally.

          "Default" or "Event of Default" shall mean any of the events specified
in Section 8.01.

          "Dividends,"  in  respect  of any  corporation,  shall  mean  (i) cash
distributions  or any other  distributions  on, or in  respect  of, any class of
capital  stock of such  corporation,  except for  distributions  made  solely in
shares of stock of the same  class,  and (ii) any and all funds,  cash and other
payments made in respect of the  redemption,  repurchase or  acquisition of such
stock,  unless such stock shall be redeemed or acquired  through the exchange of
such stock with stock of the same class.

                                       2
<PAGE>

          "Drilling  Program" shall mean the program of drilling and development
described in Schedule 2.02 hereto  pursuant to which  Drilling  Subsidiary  will
explore for and seek to develop  natural gas  prospects  using the proceeds from
the sale of the Debentures.

          "Drilling  Subsidiary" shall mean Pannonian  Energy,  Inc., a Delaware
corporation and wholly owned Subsidiary of Borrower.

          "Due Diligence Fee" shall mean a non-refundable  due diligence fee, in
the amount of Ten Thousand Dollars  ($10,000),  all of which has been previously
deposited with Lender pursuant to a separate  agreement among the parties and to
be applied to Lender's due diligence expense.

          "ERISA"  shall mean the  Employee  Retirement  Income  Security Act of
1974,  as  amended,  together  with all rules and  regulations  issued  pursuant
thereto.

          "GAAP"  shall  mean  United  States  generally   accepted   accounting
principles  applied on a  consistent  basis,  set forth in the  Opinions  of the
Accounting  Principles  Board of the  American  Institute  of  Certified  Public
Accountants or the Financial  Accounting  Standards  Board or their  successors,
which are applicable in the  circumstances  as of the last date of the financial
period in  question.  The  requirement  that such  principles  be  applied  on a
consistent basis shall mean that the accounting principles observed in a current
period are  comparable in all material  respects to those applied in a preceding
period.

          "Governmental  Authority"  shall mean any government (or any political
subdivision  or  jurisdiction   thereof),   court,   bureau,   agency  or  other
governmental  authority having jurisdiction over Borrower or a Subsidiary or any
of its or their businesses, operations or properties.

          "Guaranty"  of any  Person  shall  mean  any  contract,  agreement  or
understanding of such Person pursuant to which such Person in effect  guarantees
the payment of any  Indebtedness of any other Person (the "Primary  Obligor") in
any manner,  whether  directly or  indirectly,  including,  without  limitation,
agreements:  (i) to purchase  such  Indebtedness  or any  property  constituting
security therefor;  (ii) to advance or supply funds primarily for the purpose of
assuring the holder of such  Indebtedness  of the ability of the Primary Obligor
to make payment;  or (iii) otherwise to assure the holder of the Indebtedness of
the Primary  Obligor  against loss in respect  thereof,  except that  "Guaranty"
shall not include the  endorsement  by Borrower or a Subsidiary  in the ordinary
course of  business  of  negotiable  instruments  or  documents  for  deposit or
collection.

          "Guarantor"  shall mean any Subsidiary which shall become a party to a
Guaranty for the benefit of Lender with respect to any Obligation.

          "Holder" shall mean the owner of Registrable Securities.

          "Indebtedness"  shall  mean,  with  respect  to  any  Person,  without
duplication,  the following  indebtedness,  obligations  and liabilities of such
Person: (i) indebtedness for borrowed money; (ii) all obligations of such Person
in respect of any Guaranty;  (iii) all  obligations of such Person in respect of
any Capital Lease, (iv) all obligations, indebtedness and liabilities secured by
any lien or any security interest on any property or assets of such Person,  but
only to the extent so secured;  and (v) all preferred  stock of such Person that
is  subject,  at  the  time  of  calculation  of  Indebtedness,  to a  mandatory
redemption  requirement,  valued at the  greater of its  involuntary  redemption
price or  liquidation  preference  plus  accrued and unpaid  dividends,  and all
extensions, renewals, modifications and amendments thereto.

                                       3
<PAGE>

          "Indemnified Taxes" shall have the meaning assigned in Section 2.10.

          "Interest  Coverage  Ratio"  means  for any  period,  the ratio of (a)
Borrower's  consolidated  net  income  after  taxes for such  period  (excluding
Borrower's  after tax gains or losses on the sale of assets (other than the sale
of Inventory in the ordinary  course of business) and excluding  other after tax
extraordinary gains or losses), plus depletion,  depreciation,  amortization and
impairment  deducted in  determining  net income for such period,  plus interest
expense  for  such  period  to (b)  interest  expense  for such  period,  all as
determined on a consolidated basis in accordance with GAAP.

          "Investment" in any Person shall mean any investment, whether by means
of share purchase,  loan, advance,  capital contribution or otherwise,  in or to
such  Person,   the  Guaranty  of  any  Indebtedness  of  such  Person,  or  the
subordination  of any claim  against such Person to other  Indebtedness  of such
Person;  provided however,  that  "Investment"  shall not include (i) any demand
deposits in a duly  chartered  state or national  bank or other cash  equivalent
investments, (ii) any loans permitted by Section 6.12, or (iii) any acquisitions
of equity in any other Person.

          "Lien" shall mean any lien,  mortgage,  security  interest,  tax lien,
pledge,  encumbrance,  conditional sale or title retention  arrangement,  or any
other  interest in property  designed to secure the  repayment of  Indebtedness,
whether arising by agreement or under any statute or law, or otherwise.

          "Loan"  shall  mean  the  money  lent  to  Borrower  pursuant  to this
Agreement, along with any accrued, unpaid interest thereon.

          "Loan Closing" shall mean the disbursement of Loan funds.

          "Loan  Closing  Date"  shall mean the day upon which the Loan  Closing
shall occur.

          "Loan  Documents"  shall  mean this  Agreement,  the  Debentures,  the
Subsidiary Guaranty, the Mortgage and any other agreements or documents required
to be executed or delivered by Borrower or any of its  Subsidiaries  pursuant to
the  terms of this  Agreement  (and any  amendments  or  supplements  hereto  or
modifications hereof).

          "Lock-Up  Agreement" shall mean the "lock-up" agreement in the form of
Exhibit A hereto.

          "Material  Adverse Effect" or "Material Adverse Change" shall mean (i)
any change,  factor or event that shall (a) have a material  adverse effect upon
the  validity  or  enforceability  of any Loan  Documents,  (b) have a  material
adverse effect upon the financial  condition,  results of operations,  business,
properties,  operations  or assets of  Borrower or its  Subsidiaries  taken as a
whole,  or (c) have a material  adverse  effect  upon the ability of Borrower to
fulfill its obligations under the Loan Documents,  or (ii) any event that causes
an Event of  Default  or  which,  with  notice  or lapse of time or both,  could
reasonably be expected to become an Event of Default.

          "Mortgage" shall mean the Deed of Trust and Security Agreement of even
date  herewith  executed and  delivered by the Drilling  Subsidiary  in favor of
Lender  and any  other  agreement,  pledge  agreement,  assignment  of rents and
royalties  or  similar  instrument  executed  and  delivered  in the future by a
Guarantor with respect to Collateral.

                                       4
<PAGE>

          "Net Income" shall mean,  for any Person for any period,  consolidated
net income of such  Person and its  consolidated  Subsidiaries  for such  period
which would be reflected in accordance  with GAAP, but excluding (a) any gain or
loss arising from the sale of capital assets,  (b) any gain or loss arising from
any  write-up  or  write-down  of  assets,  (c)  income  or loss of any  Person,
substantially  all of the assets of which have been  acquired  by such Person in
any  manner,  to the extent that such  earnings or losses were  realized by such
other  Person prior to the date of such  acquisition,  (d) income or loss of any
Person in which the Person has any ownership  interests (other than consolidated
subsidiaries  of such Person),  unless such earnings have actually been received
or paid by the  Person  or its  consolidated  Subsidiaries  in the  form of cash
distributions  or  additional  cash  calls,  (e) income or loss of any Person to
which  assets of the  Person or its  consolidated  subsidiaries  shall have been
sold, transferred or disposed of, or into which the Person shall have merged, to
the extent that such  earnings or losses of any other  Person arise prior to the
date of such  transaction,  (f) any gain or loss arising from the acquisition of
any securities of the Person or any of its  consolidated  subsidiaries,  and (g)
any  extraordinary  gain  or  loss  realized  by  such  Person  or  any  of  its
consolidated subsidiaries during such period.

          "Obligation"  shall mean:  (i) all  present  and future  Indebtedness,
obligations and  liabilities of Borrower to the Lender arising  pursuant to this
Agreement, regardless of whether such Indebtedness,  obligations and liabilities
are direct, indirect,  fixed, contingent,  joint, several, or joint and several;
(ii) all  present  and  future  Indebtedness,  obligations  and  liabilities  of
Borrower to the Lender arising  pursuant to or represented by the Debentures and
all interest  accruing thereon,  and reasonable  attorneys' fees incurred in the
enforcement or collection  thereof;  (iii) all present and future  Indebtedness,
obligations  and  liabilities  of Borrower  and any  Subsidiary  evidenced by or
arising  pursuant to any of the Loan  Documents;  (iv) all costs incurred by the
Lender or Agent including,  but not limited to,  reasonable  attorneys' fees and
legal expenses related to this transaction; and (v) all renewals, extensions and
modifications of the indebtedness  referred to in the foregoing clauses,  or any
part thereof.

          "Oil and Gas  Collateral"  shall  mean Oil and Gas  Property  which is
Collateral.
          "Oil and Gas Property" shall mean fee, leasehold,  or other interests,
to the  extent  of the  interest  if it shall be a part of a whole,  in or under
mineral estates or oil, gas, and other liquid or gaseous hydrocarbon leases with
respect to  Property  situated  in the  continental  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 Property appertaining,  belonging,
affixed, or incidental thereto.

          "Other Taxes" shall have the meaning assigned in Section 2.10.

          "Permits" shall have the meaning set forth in Section 4.16.

          "Permitted Indebtedness" shall mean Indebtedness outstanding as of the
Loan Closing Date or Indebtedness that constitutes (i) obligations under Capital
Leases, (ii) letters of credit, (iii) debt associated with Permitted Liens, (iv)
Subordinated   Debt,  (v)  purchase  money   Indebtedness,   (vi)   intercompany
Indebtedness,  (vii) Indebtedness under this Agreement or the Debentures, (viii)
in-kind obligations related to net gas balancing,  (ix) Indebtedness  related to
Production Sharing Agreements, including a net profits interest, contemplated to
be entered into with Schlumberger,  Halliburton and other entities designated by
such parties  ("Senior  Obligations"),  and (x) any  refunding,  refinancing  or
extension of any of the above.

          "Permitted  Liens"  shall  mean:  (i) Liens (if any)  granted  for the
benefit of the Lender;  (ii) Liens to secure the Permitted  Indebtedness;  (iii)
pledges or deposits made to secure  payment of worker's  compensation  insurance

                                       5
<PAGE>

(or  to  participate  in any  fund  in  connection  with  worker's  compensation
insurance),  unemployment insurance,  pensions or social security programs; (iv)
Liens imposed by mandatory provisions of law such as for carriers',  landlord's,
materialmen's,  mechanics',  warehousemen's,  vendors' and other like, (v) Liens
arising in the ordinary course of business,  securing Indebtedness whose payment
is made within 30 days of the date such Lien arises, or that are being contested
in good faith by appropriate proceedings as to which adequate reserves have been
established to the extent  required by GAAP;  (vi) Liens for taxes,  assessments
and  governmental  charges or levies imposed upon a Person or upon such Person's
income or profits or property, if the same are not yet due and payable or if the
same are being  contested in good faith and as to which  adequate  cash reserves
have been  provided or if an extension is obtained with respect  thereto;  (vii)
Liens arising from good faith deposits in connection with tenders,  leases, bids
or contracts (other than contracts involving the borrowing of money), pledges or
deposits to secure public or statutory obligations and deposits to secure (or in
lieu of)  surety,  stay,  appeal or  customs  bonds and  deposits  to secure the
payment of taxes,  assessments,  customs duties or other similar charges; (viii)
encumbrances  consisting  of  zoning  restrictions,   easements,   reservations,
licenses,   covenants  and  other  minor   irregularities   of  title  or  other
restrictions  on the use of real property  (whether  owned or leased),  provided
that such items do not materially impair the intended use of such property,  and
none of which is violated by  Borrower's  existing  structures or land use; (ix)
mortgages, financing statements, equipment leases or other encumbrances incurred
in connection  with the  acquisition of property or equipment or the replacement
of existing property or equipment,  provided that such liens shall be limited to
the property or equipment then being acquired and shall not encumber Oil and Gas
Collateral;  (ix) Liens which secure Senior  Obligations and (x) Liens listed in
Schedule 4.05.

          "Person" shall include an individual, a corporation,  a joint venture,
a general or limited partnership,  a trust, an unincorporated  organization or a
government or any agency or political subdivision thereof.

          "Plan" shall mean an employee benefit plan or other plan maintained by
Borrower for employees of Borrower and/or any  Subsidiaries and covered by Title
IV of ERISA,  or subject to the minimum  funding  standards under Section 412 of
the IRS Code.

          "Prescribed  Forms" means any applicable  form or document that may be
required by (a) an income tax treaty to which the United States is a party,  (b)
the Code, (c) section  2.10(e) or section 12.17,  herein,  or (d) any applicable
rule or  regulation  under  such a treaty  or the  Code,  in order to allow  the
Borrower to make a payment hereunder without any deduction or withholding for or
on account of any Tax or with such  deduction or  withholding at a reduced rate,
and that is accurate,  completed in a manner that is acceptable to Borrower, and
executed and delivered with any required certification.

          "Principal  Amount"  shall mean,  as of any time,  the then  aggregate
outstanding  face amount of the Debentures  after any conversions or redemptions
and after giving effect to any installment payments received by the Lender.

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

          "PV 10" shall mean,  with respect to the Oil and Gas Collateral  owned
by the Borrower or its Subsidiaries, (i) the net present value of the Borrower's
and its Subsidiaries' share of oil and gas to be produced therefrom,  calculated
using a discount rate of ten percent  (10.00%) per annum for a period not longer
than ten years,  less (ii) the amount of any obligations to make future payments
with respect to the Oil and Gas Collateral,  including Senior Obligations,  such
as royalties or overrides which the Borrower or its  Subsidiaries  are obligated
to pay or deduct therefrom.

                                       6
<PAGE>

          "Registrable Securities" shall mean (a) the Common Stock issuable upon
Conversion of the  Debentures  and (b) any Common Stock issued upon the exercise
of any  warrant,  right or other  security  that is issued  with  respect to the
Common Stock by way of (i) a stock dividend;  (ii) any other  distribution  with
respect to, or in exchange for, or in replacement of Common Stock; (iii) a stock
split;  and (iv) in connection  with a combination of shares,  recapitalization,
merger or consolidation  excluding in all cases,  however, any Common Stock that
is not a Restricted Security and any Registrable  Securities sold or transferred
by a Person in a  transaction  in which the rights under this  Agreement are not
assigned.

          "Registrable  Securities Then Outstanding"  shall mean the Registrable
Securities then outstanding.

          "Renaissance  III" shall mean  Renaissance III Capital Growth & Income
Fund III, Inc., a Texas corporation.

          "Renaissance  Group"  shall mean RENN  Capital  Group,  Inc.,  a Texas
          corporation.

          "Restricted  Security"  shall  mean a  security  that has not been (i)
registered under the 1933 Act or (ii) distributed to the public pursuant to Rule
144 (or any similar provisions that are in force) under the 1933 Act.

          "RUSGIT" shall mean  Renaissance  US Growth & Investment  Trust PLC, a
public limited company registered in England and Wales.

          "SEC" shall mean the Securities and Exchange Commission,  or any other
federal agency at the time administering the 1933 Act and the 1934 Act.

          "1933 Act" shall refer to the Securities  Act of 1933, as amended,  or
any similar federal statute and rules and  regulations  promulgated  thereunder,
all as the same may be in effect from time to time.

          "1934 Act" shall  refer to the  Securities  Exchange  Act of 1934,  as
amended,  or any similar federal  statute and rules and regulations  promulgated
thereunder, all as the same may be in effect from time to time.

          "1940 Act"  shall  refer to the  Investment  Company  Act of 1940,  as
amended,  or any similar federal  statute and rules and regulations  promulgated
thereunder, all as the same may be in effect from time to time.

          "Solvent" shall mean, with respect to any Person on a particular date,
that on such date:  (i) the fair  value of the assets of such  Person is greater
than the total amount of liabilities of such Person;  (ii) the estimated present
fair salable value,  in the ordinary  course of business,  of the assets of such
Person is not less than the amount  that will be  required  to pay the  probable
liability of such Person on its debts as they become absolute and matured; (iii)
such  Person  is able to  realize  upon its  assets  and pay its debts and other
liabilities,  contingent obligations and other commitments as they mature in the
normal  course of  business;  (iv) such  Person does not intend to, and does not
believe that it will, incur debts or liabilities beyond such Person's ability to
pay as such debts and liabilities  mature; and (v) such Person is not engaged in
business  or a  transaction,  and  is not  about  to  engage  in  business  or a
transaction,  for which such Person's assets would constitute unreasonably small
capital  after  giving  due  consideration  to the  prevailing  practice  in the
industry in which such Person is engaged.  In computing the amount of contingent
liabilities at any time, it is intended that such  liabilities  will be computed
at the amount  which,  in light of all the facts and  circumstances  existing at
such time,  represents  the amount that can  reasonably be expected to become an
actual or matured liability.

                                       7
<PAGE>

          "Subordinated Debt" shall mean any unsecured  indebtedness of Borrower
or any Subsidiaries,  now existing or hereafter incurred, which indebtedness is,
by its terms, junior in right of repayment to the payment of the Debentures.

          "Subsidiary" or  "Subsidiaries"  shall mean any or all corporations or
entities,  whether now  existing or  hereafter  acquired,  of which over 50% the
Voting Shares or equity interests are owned, directly or indirectly, by Borrower
or with respect to which Borrower has the authority,  directly or indirectly, to
elect  or  otherwise  designate  a  majority  of the  members  of the  board  of
directors, managers or other governing body or positions.

          "Subsidiary  Documents"  shall mean the  Subsidiary  Guaranty  and the
Mortgage  and any other  agreements  or  documents  required  to be  executed or
delivered by any  Subsidiary  pursuant to the terms of this  Agreement  (and any
amendments or supplements hereto or modifications hereof).

          "Subsidiary  Guaranty"  shall mean the Subsidiary  Guaranty  Agreement
entered into  contemporaneously  herewith among the Lender, Agent and Guarantor,
together with any amendments or supplements  thereto,  and any other  agreement,
and any  amendments  or  supplements  thereto,  pursuant  to  which  any real or
personal property becomes Collateral.

          "Taxes" shall have the meaning assigned in Section 2.10.

          "Voting Shares" of any  corporation  shall mean shares of any class or
classes (however designated) having ordinary voting power for the election of at
least a majority of the members of the Board of  Directors  (or other  governing
bodies) of such corporation,  other than shares having such power only by reason
of the happening of a contingency.

Section 1.02      Other Definition Provisions.

          (a) All terms defined in this Agreement  shall have the  above-defined
meanings when used in the Debentures or any other Loan  Documents,  certificate,
report or other document made or delivered  pursuant to this  Agreement,  unless
the context therein shall otherwise require.

          (b) Defined terms used herein in the singular  shall import the plural
and vice versa.

          (c) The words "hereof," "herein,"  "hereunder" and similar terms, when
used in this Agreement,  shall refer to this Agreement as a whole and not to any
particular provision of this Agreement.

          (d) References to financial  statements and reports shall be deemed to
be a reference to such statements and reports prepared in accordance with GAAP.

          (e) Accounting terms not specifically  defined above in this Agreement
shall be construed in accordance with GAAP.

                                       8
<PAGE>

ARTICLE II. - LOAN PROVISIONS

Section 2.01      The Loan.

          Subject  to the  terms  and  conditions  of  this  Agreement,  and the
compliance with such terms and conditions by all parties,  Lender agrees to lend
to Borrower,  and Borrower agrees to borrow from the Lender, the total Principal
Amount of Two Million Dollars ($2,500,000) as follows:

         Entity                                                       Amount
         Renaissance Capital Growth & Income Fund III, Inc.          $625,000
         Renaissance US Growth & Investment Trust PLC                $625,000
         BFSUS Special Opportunities Trust PLC                     $1,250,000

          (b) The Loan shall be disbursed at Loan Closing,  expected to occur on
or before October 20, 2003, subject to the conditions  provided  hereunder,  and
shall be evidenced by the Debentures,  in the Principal  Amount specified above.
The Debentures  shall rank pari passu with all  Indebtedness of Borrower,  other
than the Senior Obligations or Subordinated Debt, if any.

          (c) Unless otherwise mutually agreed, the Loan Closing shall be at the
offices of Renaissance  Group,  8080 N. Central  Expressway,  Suite 210, Dallas,
Texas.

          (d) If, within 10 days of the date of this Agreement, (i) Borrower has
failed to comply with the conditions  precedent to the Loan Closing as specified
in Article III hereof  (unless  compliance  with such  conditions in whole or in
part has been waived or modified by the Lender in its sole  discretion)  or (ii)
the Loan Closing has not occurred (unless the date of such Loan Closing has been
mutually  extended),  other than as a result of any  failure of Lender to comply
with the terms of this Agreement,  then, in either such case, the obligations of
the Lender under this Agreement shall terminate.

Section 2.02      Use of Proceeds.

          (a) Borrower  intends to use the Loan proceeds to conduct the Drilling
Program in accordance with the plan of operations set forth on Schedule 2.02.

          (b) Borrower hereby  acknowledges that the entire proceeds of the Loan
shall be advanced to or contributed  as capital to a Guarantor  pledging Oil and
Gas  Collateral to be utilized for the purpose of funding the Drilling  Program.
Notwithstanding  the  foregoing,  until such time as funds are  required  by the
Drilling Subsidiary in connection with the Drilling Program,  the Borrower shall
not be  required  to  segregate  the Loan  proceeds  and may  utilize  such Loan
proceeds for working capital purposes.

          (c) Borrower hereby acknowledges that the proceeds from the Loan shall
be of benefit to Borrower for the growth of its business by providing capital to
invest  in its  Subsidiary,  Drilling  Subsidiary,  which in turn  will  benefit
Borrower by enhancing  the value of its  investment in Drilling  Subsidiary  and
provide additional opportunities for Borrower generally.

Section 2.03      Interest Rate and Interest Payments.

          Interest on the Principal  Amount  outstanding from time to time shall
accrue at the rate of 8.00% per annum,  with the first  installment  of accrued,
unpaid  interest  being due and  payable on  November  15,  2003 and  subsequent
payments of accrued,  unpaid  interest being due and payable on the first day of
each month  thereafter.  Overdue  principal and interest on the Debentures shall
bear  interest at the lesser of 18% or the maximum rate  permitted by applicable
law.  Interest on the Principal  Amount of the  Debentures  shall be calculated,
from time to time, on the basis of the actual days elapsed in a year  consisting
of 365 days.

                                       9
<PAGE>

Section 2.04      Maturity.

          If not sooner  redeemed or converted,  the Debentures  shall mature on
October 15, 2008, at which time all the remaining unpaid principal, interest and
any other  charges  then due under this  Agreement  shall be due and  payable in
full.  The  Debentures  shall be  prepaid  pro  rata  with  any  prepayments  of
Indebtedness.

Section 2.05      Mandatory Principal Repayment.

          The Debentures  shall be subject to mandatory  principal  repayment as
provided in the Debentures.

Section 2.06      Redemption.

          The  Debentures  shall be subject to  redemption  as  provided  in the
Debentures.

Section 2.07      Conversion.

          The  Debentures  shall be subject to  conversion  as  provided  in the
Debentures.

Section 2.08      Fees and Expenses.

          Upon Loan Closing,  Borrower shall pay at Loan Closing to Agent, or at
its  direction,  a Closing Fee equal to 1.0% of the Loan proceeds as well as any
unpaid portion of the Commitment Fee,  Closing Expense Fee and Due Diligence Fee
(which Due  Diligence  Fee has been paid prior to Closing),  all as set forth in
the preliminary terms letter, dated September 16, 2003, between the Borrower and
Renaissance Group.

Section 2.09      Finder's Fees.

          Borrower  represents  to the  Lender  that,  except  as set  forth  in
Schedule 2.09, no placement fees,  commissions,  brokerage or finder's fees were
incurred by Borrower in connection with this Agreement, the Debentures or any of
the transactions contemplated at the Loan Closing. Borrower shall be responsible
for the payment of all such placement fees,  commissions,  brokerage or finder's
fees.

Section 2.10      Taxes.

          Except as  required by law,  any and all  payments  of  principal  and
interest made by the Borrower to the Lender under the  Debentures  shall be made
free and clear of and without deduction for any present or future taxes, duties,
charges or  withholdings,  (excluding,  in the case of the  Lender,  any foreign
taxes, any federal, state or local income taxes and any franchise taxes or taxes
imposed upon it by the jurisdiction, or any political subdivision thereof, under
which the Lender is organized or is qualified to do business or is, or has been,
engaged  in  business),  and all  liabilities  with  respect  thereto  (all such
non-excluded  taxes are  referred to herein as  "Taxes").  If Borrower  shall be
required  by law to deduct any Taxes  from  amounts of  principal  and  interest
payable  to  the  Lender  hereunder  (such  Taxes  are  referred  to  herein  as
"Indemnified  Taxes"):  (i) the amount  payable shall be increased so that after
making all required deductions,  the Lender shall receive an amount equal to the
sum it would have received had no such deductions been made; (ii) Borrower shall
make such  deductions;  and (iii) Borrower shall pay the full amount deducted to

                                       10
<PAGE>

the relevant  taxing  authority or other authority in accordance with applicable
law; provided that Borrower shall not be required to increase the amount payable
in clause (i), hereof,  to the extent any such Indemnified  Taxes would not have
been imposed if such Lender had the  Prescribed  Forms on file with the Borrower
for the taxable year.  Borrower shall be entitled to any refunds or returns from
any such taxing authority.

          (b) Except as otherwise set forth in this  Agreement or the other Loan
Documents,  Borrower shall pay any present or future stamp or documentary  taxes
or any other  excise or property  taxes,  charges or similar  levies which arise
from any  payment  made  hereunder  or  under  the  Loan  Documents  or from the
execution,  delivery or  registration  of, or  otherwise  with  respect to, this
Agreement  or the  other  Loan  Documents  (hereinafter  referred  to as  "Other
Taxes").

          (c)  Borrower  shall  indemnify  the  Lender  for the full  amount  of
Indemnified  Taxes and Other Taxes  reasonably  paid by the Lender  hereunder or
under the Loan Documents  (including any penalties or interest  assessed because
of Borrower's  defaults).  This indemnification shall be made within thirty (30)
days from the date the Lender makes written  demand  therefor.  The Lender shall
subrogate any and all rights and claims relating to such  Indemnified  Taxes and
Other Taxes to Borrower upon payment of said indemnification.  Borrower shall be
entitled to any refunds or returns from the relevant taxing authority.

          (d) Each  Lender  that is not  organized  under the laws of the United
States  or any  political  subdivision  thereof  shall,  if any  payment  on the
Debentures  otherwise  would be subject  to  Indemnified  Taxes,  deliver to the
Borrower,  at the time or times  prescribed  by  applicable  law,  such properly
completed and executed  Prescribed  Forms or other  documentation  prescribed by
applicable  law as is  reasonably  requested  by  Borrower  as will  permit such
payments to be made without withholding or at a reduced rate.

          (e) As  provided  in section  2.07  herein,  the  Debentures  shall be
subject to conversion as provided in the Debentures. Prior to effecting any such
conversion,  the Lender shall provide  Borrower with a notice of  nonrecognition
pursuant to and containing the information  required by Treasury  Regulation ss.
1.1445-2(d)  or such other  document as may be prescribed  under the laws of the
United States at the time of the conversion  that would allow such conversion to
be effected without withholding of any taxes.

          (f)  Without  prejudice  to the  survival  of any other  agreement  of
Borrower  hereunder,  the agreements and obligations of Borrower in this Section
2.10 shall survive until the payment in full of the Obligation.

          (g) Borrower  shall have no liability  or  obligation  with respect to
taxes on income or gain recognized by the Lender with respect to the Debentures.

          (h) If any  additional  amounts become payable by Borrower to a Lender
under Section  2.10(a)(i) or any such Lender becomes entitled to indemnification
pursuant to Section  2.10(c),  such Lender shall use its reasonable best efforts
to avoid the imposition of such Indemnified  Taxes or Other Taxes giving rise to
such additional amounts or such indemnification payments.

Section 2.11      Subsidiary Guaranty, the Mortgage.

          The due and prompt  performance of the  obligations of Borrower to the
Lender under the Loan Documents,  including the Debentures,  shall be guaranteed
by each Subsidiary of the Borrower. In addition, the obligations of Borrower and

                                       11
<PAGE>

Guarantors under the Loan Documents shall be evidenced by the Mortgage  executed
by and between the Lender, the Borrower and each Guarantor pledging  Collateral,
including but not limited to the Drilling Subsidiary. Financing statements shall
be  executed,  from time to time,  in favor of the Lender by  Borrower  and each
Guarantor pledging  Collateral.  From time to time in the future, any Subsidiary
becoming a  Guarantor  shall  execute  and deliver  such  financing  statements,
pledges agreements, mortgages or similar instruments,  including but not limited
to the Mortgage as Lender shall from time to time request in order to create and
perfect its lien in the Collateral. None of the Collateral shall be subject to a
prior  security  interest  other  than  obligations  arising  under  the  Senior
Obligations.

ARTICLE III. -  CONDITIONS PRECEDENT

Section 3.01      Closing Conditions.

          The  obligation  of the Lender to advance funds at the Loan Closing is
subject to the following condition precedent:

(a) Loan  Agreement.  Lender shall have received a duly executed Loan  Agreement
from Borrower  which shall be in form and substance  satisfactory  to Lender and
Borrower.

(b) Debentures.  Lender shall have received three duly executed  Debentures from
Borrower  evidencing  the  Loan,  all of which  shall  be in form and  substance
acceptable to the Lender and its counsel.

(c) the  Mortgage.  Lender shall have  received  duly executed the Mortgage with
respect  to all  Collateral  in  favor  of  Lender,  which  shall be in form and
substance  acceptable  to the Lender and its counsel,  together with evidence of
proper filing thereof in each county or other  jurisdiction  in which any of the
Collateral shall be located or in which filing shall be necessary or appropriate
to the creation of a first  priority lien in the  Collateral,  and all of it, in
favor of Lender.

(d) Subsidiary  Guaranty.  Lender shall have received a duly executed Subsidiary
Guaranty from the Drilling  Subsidiary and each Guarantor which shall be in form
and substance acceptable to the Lender.

(e) CEO's  Certificate.  Lender shall have received a certificate  signed by the
chief executive officer of Borrower and each Guarantor, in his capacity as such,
and dated as of the Loan Closing Date stating  that,  to the best  knowledge and
belief of such officer,  after  reasonable and due  investigation  and review of
matters  pertinent  to the subject  matter of such  certificate:  (i) all of the
representations and warranties contained in Article IV hereof and the other Loan
Documents  are true and correct in all material  respects as of the Loan Closing
Date; and (ii) no event has occurred and is continuing,  or could  reasonably be
expected to result from the Loan, which constitutes,  or with notice or lapse of
time or both would constitute, a Default or an Event of Default.

(f) Secretary's Certificates. Lender shall have received a signed certificate of
the Secretary of Borrower and each  Guarantor  which shall certify (i) copies of
the Articles of Incorporation (or other organizational document) of Borrower and
each Guarantor and all amendments  thereto,  certified by the Secretary of State
of the state of incorporation (or other appropriate  authority) and dated within
ten (10) days prior to Loan  Closing;  (ii) a copy of the Bylaws of Borrower and
each Guarantor and all amendments thereto certified by the Secretary of Borrower
and  such  Guarantor  as of the  date of such  certification;  (iii)  copies  of
resolutions,  as adopted by Borrower's and each Guarantor's  Board of Directors,
approving  the  execution,  delivery and  performance,  as  applicable,  of this
Agreement,  the Debentures,  the Mortgage the Subsidiary  Guaranty and the other

                                       12
<PAGE>

Loan Documents,  including the transactions  contemplated  herein,  stating that
such  resolutions  have been duly adopted,  are true and correct,  have not been
altered or repealed and are in full force and effect;  (iv) certificates of good
standing (or other similar instrument) for Borrower and each Guarantor issued by
the  appropriate  official of the state of  incorporation  of Borrower  and such
Guarantor and certificates of  qualification  and good standing for Borrower and
each  Guarantor  issued by the  appropriate  official  of each of the states for
which  Borrower and such Guarantor is required to be qualified to do business as
a foreign corporation, dated within ten (10) days prior to Loan Closing; and (v)
the names of the officers of Borrower and each Guarantor  authorized to sign the
Loan Documents to be executed by such officer, together with the true signatures
of each such officer.  It is herewith  stipulated and agreed that the Lender may
thereafter  rely   conclusively  on  the  validity  of  this  certificate  as  a
representation of the officers of Borrower and the Guarantors duly authorized to
act with  respect to the Loan  Documents  until  such time as the  Lender  shall
receive a  further  certificate  of the  Secretary  or  Assistant  Secretary  of
Borrower  or a  Guarantor  canceling  or  amending  the  prior  certificate  and
submitting the signatures of the officers  thereupon  authorized in such further
certificate.

(g) Legal  Opinions.  Lender shall have received a legal opinion from counsel to
Borrower and each  Guarantor in form and substance  reasonably  satisfactory  to
Lender.

(h) "Lock-Up"  Agreements.  Lender shall have  received duly executed  "Lock-Up"
Agreements from the individuals set forth on Schedule 3.01(h).

(i) Title  Opinions.  Lender  shall  have  received  a legal  opinion  regarding
ownership of the  Collateral  and such other matters as Lender shall  reasonably
request in form and substance reasonably satisfactory to Lender.

(j) Filings,  Registrations  and Recordings.  Each document  including,  without
limitation,  the Mortgage and any Uniform  Commercial  Code financing  statement
required by this  Agreement,  any related  agreement or under law or  reasonably
requested by the Agent to be filed,  registered  or recorded in order to create,
in favor of Agent, a perfected  security interest in or lien upon the Collateral
shall have been properly filed,  registered or recorded in each  jurisdiction in
which  the  filing,  registration  or  recordation  thereof  is so  required  or
requested,  and Agent  shall have  received  an  acknowledgment  copy,  or other
evidence  reasonably  satisfactory  to it, of each such filing,  registration or
recordation and  satisfactory  evidence of the payment of any necessary fee, tax
or expense relating thereto.

(k) No Litigation.

                  (i) No litigation,  investigation  or proceeding  before or by
any arbitrator or  Governmental  Body shall be continuing or threatened  against
Borrower  or any  Guarantor  or  against  any of their  respective  officers  or
directors (A) in connection with this Agreement, any of the other Loan Documents
or any of the  transactions  contemplated  thereby and which,  in the reasonable
opinion of Agent,  is deemed  material  or (B) which  could,  in the  reasonable
opinion of Agent, have a Material Adverse Effect; and

                  (ii) no injunction,  writ, restraining order or other order of
any nature materially adverse to Borrower, any Guarantor or the conduct of their
respective businesses,  including the Drilling Program, or inconsistent with the
due  consummation of the  transactions  contemplated in connection with the Loan
Closing,  including any conditions  precedent,  or with the business  activities
contemplated in connection  with the Drilling  Program shall have been issued by
any Governmental Body, nor shall there be any proceedings which could reasonably
be expected to result in such an issuance.

                                       13
<PAGE>

(l) Fees.  Agent shall have received the Commitment  Fee,  Closing Fee,  Closing
Expense Fee, Due  Diligence  Fee and any other fees payable to Agent and Lenders
on or prior to the Closing Date hereunder.

(m) Consents. Except as set forth on Schedule 3.01(m), Agent shall have received
(i)  any  and  all  consents   necessary  to  permit  the  effectuation  of  the
transactions  contemplated by this Agreement and the other Loan Documents and to
permit the conduct of the Drilling Program,  and, (ii) such consents and waivers
of such third parties as might assert claims with respect to the Collateral,  as
Agent and its counsel shall reasonably deem necessary.

(n)   Representations,   Warranties  and  Covenants.   The  representations  and
warranties of Borrower provided for in this Agreement and each of the other Loan
Documents shall be true and correct in all material respects,  and each covenant
of Borrower or any of its  Subsidiaries to be performed  before the Loan Closing
or in connection therewith shall have been fully and faithfully performed.

(o) Securities Law  Compliance.  Borrower shall be current in all of its filings
required under the 1933 Act, the 1934 Act and the 1940 Act, and each such filing
within the  preceding  twenty four  calendar  months shall be  complete,  in all
material respects, as to form and shall have been made on or before the due date
thereof.

(p) No Adverse  Material  Change.  Since  June 30,  2001,  there  shall not have
occurred  any event,  condition  or state of facts  relating  to Borrower or its
Subsidiaries,  or their  respective  assets,  business  operations or prospects,
which could reasonably be expected to have a Material Adverse Effect.

ARTICLE IV. - REPRESENTATIONS AND WARRANTIES OF BORROWER

          All   references  in  this  Article  to  Borrower  shall  include  the
Subsidiaries,  unless the context  otherwise  requires.  To induce the Lender to
make the Loan hereunder, Borrower represents and warrants to the Lender that:

Section 4.01      Organization and Good Standing.

          Borrower is duly  organized  and existing in good  standing  under the
laws  of  the  state  of its  incorporation,  is  duly  qualified  as a  foreign
corporation and in good standing in all states in which failure to qualify would
have a Material Adverse Effect, and has the corporate power and authority to own
its  properties  and assets and to transact  the business in which it is engaged
and is or will be  qualified  in those  states  wherein it  proposes to transact
material  business  operations  in the future if the failure to so qualify would
have a Material Adverse Effect.

Section 4.02      Authorization and Power.

          Borrower has the corporate  power and requisite  authority to execute,
deliver and perform the Loan  Documents to be executed by Borrower.  Borrower is
duly authorized to, and has taken all corporate  action  necessary to authorize,
execute,  deliver and perform the Loan Documents executed by Borrower.  Borrower
is and will  continue  to be duly  authorized  to  perform  the  Loan  Documents
executed by Borrower.

                                       14
<PAGE>

Section 4.03      No Conflicts or Consents.

          Except as  disclosed  on  Schedule  4.03,  neither the  execution  and
delivery of the Loan Documents,  nor the consummation of any of the transactions
therein contemplated, nor compliance with the terms and provisions thereof, will
contravene or materially  conflict with any judgment,  license,  order or permit
applicable to Borrower,  or any indenture,  loan  agreement,  mortgage,  deed of
trust, or other agreement or instrument to which Borrower is a party or by which
Borrower is or may become bound,  or to which Borrower is or may become subject,
or violate  any  provision  of the  charter or bylaws of Borrower or trigger any
preemptive  rights or rights of first  refusal of any third  party.  No consent,
approval, authorization or order of any court or governmental authority or third
party is required in  connection  with the execution and delivery by Borrower of
the Loan  Documents or to consummate  the  transactions  contemplated  hereby or
thereby except those that have been obtained.

Section 4.04      Enforceable Obligations.

          The Loan  Documents  have been duly executed and delivered by Borrower
and are the legal,  valid and binding  obligations  of Borrower,  enforceable in
accordance with their respective terms.

Section 4.05      No Liens.

          Except for Permitted  Liens, all of the properties and assets owned or
leased by Borrower are free and clear of all Liens and other  adverse  claims of
any nature,  and Borrower has good and marketable  title to such  properties and
assets.  A true and  complete  list of all known or recorded  liens for borrowed
money is disclosed on Schedule 4.05.

Section 4.06      Financial Condition.

          Borrower  has  made  available  to the  Lender  the  balance  sheet of
Borrower  as of  December  31,  2002,  and  the  related  statement  of  income,
stockholders' equity and statement of cash flow for the year then ended, audited
by  its  independent  certified  public  accountants.  Borrower  has  also  made
available to the Lender the  unaudited  balance sheet of Borrower as of June 30,
2003 and the related  unaudited  statement of income,  stockholders'  equity and
statement  of cash flow for the three (3)  months  then  ended.  Such  financial
statements  fairly present the financial  condition of Borrower as of such dates
and have been prepared in accordance with GAAP (except that unaudited  financial
statements  omit certain  footnotes);  and as of the date  hereof,  there are no
obligations,  liabilities  or  Indebtedness  (including  contingent and indirect
liabilities  and  obligations)  of  Borrower  which  are  (separately  or in the
aggregate)  material  and are not  reflected  in such  financial  statements  or
otherwise  disclosed  herein  or  in  the  Schedules.  Since  the  date  of  the
above-referenced year end financial  statements,  there have not been, except as
disclosed in publicly  available  filings with the SEC or on Schedule  4.06: (i)
any Material Adverse Change;  (ii) any Dividend declared or paid or distribution
made on the capital stock of Borrower or any capital  stock thereof  redeemed or
repurchased,  other  than  Dividends  paid on  Borrower's  outstanding  Series B
Preferred  Stock;  (iii) any incurrence of long-term debt by Borrower;  (iv) any
salary, bonus or compensation increases to any officers, key employees or agents
of Borrower,  other than in the ordinary  course of business and consistent with
past practice;  or (v) any other material  transaction entered into by Borrower,
except in the ordinary course of business and consistent with past practice.

Section 4.07      No Default.

          No event has occurred and is continuing  which  constitutes,  or, with
notice or lapse of time or both,  would  constitute,  a  Default  or an Event of
Default under this Agreement.

                                       15
<PAGE>

Section 4.08      Material Agreements.

          To  the  best  of  Borrower's  knowledge,  neither  Borrower  nor  any
Subsidiary  nor any other party is in default,  and no event has occurred and is
continuing  which,  with  notice or lapse of time or both,  would  constitute  a
default,  under  any  contract,  lease,  loan  agreement,  indenture,  mortgage,
security agreement,  license agreement or other agreement or obligation to which
it is a  party  or by  which  any of  its  properties  is  subject  which  could
reasonably be expected to have a Material Adverse Effect, except as described on
Schedule  4.08.  To the best of Borrower's  knowledge,  it is not a party to, or
bound by, any contract or  agreement,  the faithful  performance  of which is so
onerous so as to create,  or to likely create,  a Material Adverse Effect on the
business, results of operations or financial condition of Borrower.

Section 4.09      No Litigation.

          Except as disclosed  on Schedule  4.09,  there are no actions,  suits,
investigations,  arbitrations or administrative  proceedings  pending or, to the
best knowledge of Borrower,  threatened, against Borrower, and there has been no
change in the status of any of the actions, suits, investigations, litigation or
proceedings disclosed to the Lender which could reasonably be expected to have a
Material Adverse Effect on Borrower or on any  transactions  contemplated by any
Loan  Document.  Borrower  has not received  any claim that  Borrower  currently
violates any federal, state or local law, ordinance,  rule or regulation,  which
could have an adverse  effect on its  business  and,  to the best of  Borrower's
knowledge, no such claim is or has been threatened;  and, except as disclosed on
Schedule 4.09, there have been no developments  adverse to Borrower with respect
to any pending or threatened claim, action or proceeding of an administrative or
judicial nature.

Section 4.10      Taxes.

          All tax returns  required to be filed by Borrower in any  jurisdiction
have been filed and all taxes (including mortgage recording taxes), assessments,
fees and other governmental charges upon Borrower or upon any of its properties,
income or franchises now due have been paid, in each case, except where the same
are being  contested in good faith by appropriate  proceedings,  as disclosed on
Schedule 4.10.

          Except as  disclosed on Schedule  4.10,  Borrower has not received any
notice of  deficiency  or other  adjustment  from any taxing  authority  that is
unresolved as of the Loan Closing.  No audit or  examination,  claim or proposed
assessment  by any taxing  authority  is pending  or, to the best  knowledge  of
Borrower,  threatened against Borrower or any of its properties.  All ad valorem
and other  property  taxes  imposed  on  Borrower,  or that may become a lien on
Borrower's assets and that are due and payable, have been paid in full. Borrower
has withheld or collected  from each payment made to each of its U.S.  employees
the amount of all taxes  (including  federal  income  taxes,  Federal  Insurance
Contributions Act ("FICA") taxes, and state and local income,  payroll, and wage
taxes, among others) required to be withheld or collected.

Section 4.11      Capitalization.

          The authorized  capital stock of Borrower consists of 5,000,000 shares
of Preferred  Stock,  of which 1,000 shares of Series A  Convertible  Redeemable
Preferred Stock are authorized,  but none of which are  outstanding,  and 20,000
shares of Series B Convertible  Preferred  Stock are  authorized of which 11,339
shares are issued and outstanding as of the date hereof,  and 100,000,000 shares
of Common  Stock,  $0.0001 par value per share,  of which  40,813,800  shares of
Common  Stock are  issued and  outstanding  as of the date  hereof.  All of such
outstanding  shares have been duly authorized and validly issued, are fully paid
and nonassessable,  and were not issued in violation of the preemptive rights or

                                       16
<PAGE>

rights of first  refusal  of any  person.  Schedule  4.11  sets  forth all stock
options,  warrants,  conversion rights,  subscription rights, preemptive rights,
rights of first refusal and other rights or agreements to acquire  securities of
Borrower and any shares held in treasury or reserved for issuance  upon exercise
of such stock options,  warrants or conversion rights,  subscription  rights and
other  rights  or  agreements  to  acquire  securities,  including  the  date of
termination  of such  rights  and the  consideration  therefor.  As of the  Loan
Closing Date, Borrower does not have a class of securities with respect to which
a member of a  national  securities  exchange,  broker or dealer  may  extend or
maintain credit to or for a customer pursuant to rules or regulations adopted by
the Board of Governors of the Federal Reserve System under Section 7 of the 1934
Act.  Borrower has, and will continue to have as long as the Debentures  remains
outstanding,  authorized  and  reserved an  adequate  number of shares of Common
Stock to permit Conversion of the Debentures.

Section 4.12      Use of Proceeds.

          Borrower intends to use proceeds from the Loan as disclosed in Section
2.02 hereof.

Section 4.13      Employee Matters.

          (a) Except as set forth on Schedule  4.13,  Borrower is not a party to
any  collective  bargaining  agreement and is not aware of any activities of any
labor union that is currently seeking to represent or organize its employees;

          (b) To the best knowledge of Borrower,  Borrower is in compliance with
all federal,  state and municipal  laws  respecting  employment  and  employment
practices,  occupational  health and  safety,  and wages and  hours,  and is not
engaged in any unfair labor practice, and there are no arrears in the payment of
wages or social security taxes;

          (c) there is no  unfair  labor  practice  complaint  against  Borrower
pending before the National Labor Relations Board or any state or local agency;

          (d) there is no pending labor strike or other  material  labor trouble
affecting Borrower (including, without limitation, any organizational drive);

          (e) there is no material labor grievance pending against Borrower;

          (f)  there  is  no  pending  representation  question  respecting  the
employees of Borrower before any local, state or federal agency;

          (g)  except  as set  forth on  Schedule  4.13,  there  are no  pending
proceedings arising out of or under any collective bargaining agreement to which
Borrower is a party,  or to the  knowledge  of  Borrower,  any basis for which a
claim may be made under any collective bargaining agreement to which Borrower is
a party; and

          (h) there are no pending  proceedings  arising  out of any  employment
discrimination claim or any basis for which any such claim may be made.

Section 4.14      Employee Benefit Plans.

          Neither  Borrower  nor, to the best  knowledge of Borrower,  any other
person has engaged in a transaction  with respect to (i) any  "employee  benefit
plans" as described in the Employee  Retirement  Income Security Act of 1974, as

                                       17
<PAGE>

amended, and the rules and regulations  promulgated  thereunder ("ERISA") (other
than a defined  contribution  pension plan not  requiring  any  contribution  by
Borrower,  paid  time-off  policy or  vacation/holiday/sick  leave  policy,  and
employee  group life and health plans that are fully funded  through  commercial
insurance);  and (ii) any defined benefit  "employee  pension benefit plans" (as
defined in ERISA) which could subject any such plan, Borrower or the Lender to a
penalty under ERISA or a tax under the Code, except for those transactions which
could not reasonably be expected to have a Material Adverse Effect.  Each of the
employee  benefit plans described in clauses (i) or (ii) above has been operated
and administered in accordance with applicable law, including without limitation
ERISA,  except for any such  failure  which  would not  subject  Borrower or the
Lender to any penalty or other  liability  and except for any such failure which
would not have an adverse  effect upon the  applicable  plan or any  participant
therein.  Borrower  has not  incurred,  nor  presently  expects  to  incur,  any
liability  under Title IV of ERISA that could result in liability to the Lenders
or Borrower.  Each employee  benefit plan described in clauses (i) or (ii) above
that is a group  health  plan within the  meaning of Section  5000(b)(1)  of the
Code, is in  compliance  with the  provisions  of Section  4980B(f) of the Code,
except for any such  non-compliance  which  would not  subject  Borrower  or the
Lender to any penalty or liability  and except for any such failure  which would
not have an adverse effect upon the applicable plan or any participant  therein.
There is not any pending or, to the best knowledge of Borrower, threatened claim
by or on behalf of any employee  benefit plan, by any employee covered under any
such plan or otherwise  involving any employee  benefit plan (other than routine
non-contested claims for benefits).

Section 4.15      Compliance with Laws.

          Each of Borrower  and the  Subsidiaries  has all  requisite  licenses,
permits and certificates including without limitation,  drug,  environmental and
health and safety permits from federal, state and local authorities necessary to
conduct  its  business  and own and  operate its assets and the absence of which
could  reasonably be expected to have a Material  Adverse Effect  (collectively,
the "Permits").  Neither Borrower nor any Subsidiary is in violation of any law,
regulation or ordinance  relating to its  business,  operations  and  properties
which,  individually or in the aggregate,  could have a Material Adverse Effect,
and the business and operations of Borrower or any Subsidiary do not violate, in
any material respect, any federal,  state, local or foreign laws, regulations or
orders.   Borrower  and  the  Subsidiaries  have  not  received  any  notice  or
communication  from  any  federal,  state,  local  or  foreign  governmental  or
regulatory  authority or agency including without limitation,  the U.S. Food and
Drug Administration of any such violation or noncompliance. To the best of their
knowledge,  Borrower and the  Subsidiaries  have not engaged in any practices in
violation of any antitrust law or  regulation  of any federal,  state,  local or
foreign Governmental Authority.

Section 4.16      Licenses and Permits.

          Borrower  and  the  Subsidiaries   have  all  material   licenses  and
franchises  relating to the  operation  of their  respective  businesses  as are
necessary  and required for such  ownership and  operation,  all of which are in
good  standing  and,  except as expressly  set forth on Schedule  4.16,  are not
subject to renewal within less than one (1) year.

Section 4.17      Contracts.

          Schedule   4.17  lists  all   contracts  to  which   Borrower  or  the
Subsidiaries  are a party  involving  obligations in respect of the business for
payment,  performance  of  services or delivery of goods in excess of $25,000 or
which require Borrower to continue to perform for a period of longer than twelve
(12) months (the  "Scheduled  Contracts").  Borrower  has made  available to the
Lender true and  correct  copies of all the  Scheduled  Contracts  (except  that
contracts from  Subsidiary  will be made available  within 5 business days after
closing).  All of such Scheduled  Contracts are valid and binding obligations of

                                       18
<PAGE>

Borrower or the  Subsidiaries,  are in full force and  effect,  and, to the best
knowledge of Borrower or the Subsidiaries,  are enforceable  against the parties
thereto  in  accordance  with  their  respective  terms.  Except as set forth on
Schedule 4.17,  neither  Borrower nor the  Subsidiaries  has received any notice
that the other parties to the Scheduled  Contracts are (i) in default under such
Scheduled  Contracts,  or (ii)  consider  Borrower to be in default  thereunder.
Except as expressly  noted in Schedule 4.17, to the knowledge of Borrower or the
Subsidiaries, no party to any of the Scheduled Contracts intends to terminate or
adversely modify its  agreement(s)  with respect thereto or adversely change the
volume of business done thereunder.

Section 4.18      Shares Issuable Upon Conversion.

          The shares of Common Stock of Borrower  when issued to the Lender upon
conversion of and in accordance  with the  Debentures,  will be duly and validly
issued,  fully paid and  nonassessable  and in  compliance  with all  applicable
securities laws. Such issuance will not give rise to preemptive  rights,  rights
of first refusal or similar rights by any other security holder of Borrower.

Section 4.19      Insider.

          (a) Neither Borrower,  nor any of its executive officers or members of
its Board of Directors is an  "executive  officer,"  "director,"  or  "principal
shareholder"  (as  those  terms  are  defined  in the 1940  Act) of any  Lender.
Attached  hereto as Schedule 4.19 (a) is a list of each person,  entity or group
of persons or entities  acting in concert with respect to the equity  securities
of the  Borrower,  who has filed a report on  Schedule  13D with  respect to the
equity securities of Borrower.

          (b)  Borrower's SEC reports for the 12 months prior to the date hereof
disclose all material  transactions required to be disclosed therein pursuant to
Section 16 of the 1934 Act.

          (c) All agreements between Borrower and any of its officers, directors
and principal  shareholders,  including employment agreements,  are disclosed in
the reports and filings made with the SEC.

Section 4.20      Subsidiaries.

          (a) All of the  Subsidiaries  of Borrower are listed on Schedule 4.20.
Except as  disclosed  on Schedule  4.20,  Borrower  owns all of the  outstanding
capital stock or other equity interests of the  Subsidiaries,  free and clear of
all adverse claims. All of such outstanding capital stock of each Subsidiary has
been duly and validly authorized and issued and is fully paid and nonassessable.
All such Subsidiaries are duly organized and existing in good standing under the
laws of the respective jurisdictions of their incorporation or organization, are
duly qualified as foreign corporations and in good standing in all jurisdictions
in which failure to qualify would have a Material  Adverse Effect,  and have the
corporate power and authority to own their respective  properties and assets and
to transact  the business in which they are engaged and are or will be qualified
in those  jurisdictions  wherein  they  propose to  transact  material  business
operations in the future.

          (b) Except as disclosed on Schedule  4.20,  Borrower  does not own any
equity or long-term debt interest in any other Person, or any right or option to
acquire any such interest in any such Person.

          (c)  There are no  restrictions  on the  payment  of  dividends  by or
advances from any Subsidiary to Borrower.

                                       19
<PAGE>

Section 4.21      Casualties.

          Except as  disclosed  on Schedule  4.21,  neither the business nor the
properties of Borrower is currently affected by any environmental  hazard, fire,
explosion,  accident,  strike, lockout or other labor dispute,  drought,  storm,
hail, earthquake,  embargo, act of God or other casualty (whether or not covered
by insurance).

Section 4.22      Investment Company Act.

          Borrower is not an  "investment  company,"  as defined in Section 3 of
the 1940 Act, nor a company that would be an investment company,  except for the
exclusions  from the definition of an investment  company in Section 3(c) of the
1940 Act, and Borrower is not controlled by such a company.

Section 4.23      Sufficiency of Capital, Adequacy of Drilling Program.

          Borrower  is,  and after  consummation  of this  Agreement  and giving
effect to all Indebtedness incurred and transactions  contemplated in connection
herewith will be, Solvent. Borrower believes that the Drilling Program described
on Schedule  2.02 can be adequately  funded and conducted  utilizing the sources
and amounts of funds contemplated therein.

Section 4.24      Corporate Names.

          Borrower has not,  during the preceding  two (2) years,  done business
under or used any assumed, fictitious or trade names, in its current businesses.

Section 4.25      Insurance.

          All of the  insurable  properties  of  Borrower  are  insured  for its
benefit under valid and  enforceable  policies  issued by insurers of recognized
responsibility  in amounts and against  such risks and losses as is customary in
Borrower's  industry.  Schedule  4.25  sets  forth  all of  Borrower's  property
insurance policies.

Section 4.26      Intellectual Property.

          Borrower owns, or is licensed to use, all material trademarks, service
marks,  trade  names,  patents  and  copyrights  presently  used to conduct  its
business,  except those for which the failure to obtain could not be  reasonably
expected to have a Material Adverse Effect.  To its knowledge,  Borrower has the
right to use such intellectual  property rights without  infringing or violating
the rights of any third parties. No claim has been asserted by any person to the
ownership of or right to use any such rights or challenging  or questioning  the
validity or effectiveness  of any such license or agreement.  Borrower is not in
default of any such license agreements in any material respect, and no event has
occurred and is continuing  which,  with notice or lapse of time or both,  would
constitute  a  material  default.  Each  license  agreement  is  enforceable  in
accordance  with its terms and has not been  canceled,  abandoned or terminated,
nor has Borrower  received notice thereof.  There are no claims for trademark or
copyright   infringement   pending  or  threatened   against   Borrower  or  the
Subsidiaries or their respective officers or directors. Neither Borrower nor any
Subsidiary is currently using  copyrightable  material for which Borrower or any
Subsidiary needs, but does not have, a license to conduct its existing business.
Neither  Borrower nor any Subsidiary is currently using any trademarks for which
Borrower  or any  Subsidiary  needs,  but does not have,  a valid  character  or
trademark license to conduct its existing business.

                                       20
<PAGE>

Section 4.27      Property, Oil and Gas Property.

          (a) Set forth on  Schedule  4.27 is a  description  of all Oil and Gas
Collateral and all other Property constituting Collateral.

          (b) Attached  hereto as a part of Schedule 4.27 is an explanation  and
calculation of the PV 10 as of August 31, 2003, with reference to any supporting
or underlying reports.

          (c) Borrower has made  available to the Lender true and correct copies
of all of its leases or subleases, assignments, farm out and farm in agreements,
joint  operating  agreements and other  agreements or instruments  affecting the
Collateral  or the use of any Property in connection  with the Drilling  Program
(the "Scheduled Documents"),  that require payments or contingent payments by or
to Borrower or any of the  Subsidiaries  subsequent to the date hereof in excess
of  Twenty-Five  Thousand  Dollars  ($25,000).   There  are  no  other  material
agreements,  written or oral, between Borrower and any third parties claiming an
interest in  Borrower's  interest in the  Collateral  or  otherwise  relating to
Borrower's  use or  occupancy of any  Property in  connection  with the Drilling
Program which are not described on Schedule  4.27.  All Scheduled  Documents are
complete and represent  agreements that are valid and binding obligations of the
parties  thereto,  are in full  force and  effect and  enforceable  against  the
parties  thereto in  accordance  with  their  terms;  and no event has  occurred
including,  but not limited to, the executed,  delivery and  performance of this
Agreement and the  consummation of the  transactions  contemplated  hereby which
(whether  with or without  notice,  lapse of time or both)  would  constitute  a
default thereunder.  No Property constituting Collateral is subject to any lien,
encumbrance,  easement,  right-of-way,  building or use restriction,  exception,
variance,  reservation  or limitation not described on Schedule 4.27 which might
reasonably  be expected to materially  interfere  with or impair the present and
continued use thereof in connection  with the Drilling  Program or the usual and
normal conduct of Borrower's business.

          (d) On the Loan Closing  Date,  Borrower  will hold of record good and
indefeasible  title to the Collateral  described in Schedule 4.27 free and clear
of all title defects, liens, pledges,  claims, charges, rights of first refusal,
security  interests  or  other  encumbrances  and  not,  in the case of the real
property,   subject  to  any   rights-of-way,   building  or  use  restrictions,
exceptions,  variances,  reservations  or limitations of any nature  whatsoever,
other than such as would not have a material  adverse  effect on the  Borrower's
business or operations,  except with respect to all such properties, (i) matters
set forth in Schedule 4.27, and (ii) liens for current taxes and assessments not
in default (collectively, the "Permitted Encumbrances").

Section 4.28      Environmental.

          (a) Borrower is currently in compliance  with all  Environmental  Laws
(as  defined  below)  which  compliance  includes,  but is not  limited  to, the
possession  by  Borrower of all  permits  and other  governmental  authorization
required  under  applicable  Environmental  Laws, and compliance in all material
respects  with the terms and  conditions  thereof,  except in any case where the
failure to be in compliance would not have a Material Adverse Effect.

          (b) Except as set forth on  Schedule  4.28,  Borrower  has not stored,
disposed of or arranged for  disposal of any  Hazardous  Substances  (as defined
below)  on  any  of  its  Property,   except  in  compliance   with   applicable
Environmental  Laws and except in any case where the failure to be in compliance
would not have a Material Adverse Effect.

                                       21
<PAGE>

          (c) Except as set forth on Schedule  4.28,  Borrower  has not received
any  communication  (written or oral),  whether from a  governmental  authority,
citizens group, employee or otherwise, that alleges that Borrower is not in full
compliance with Environmental Laws, and to the knowledge of Borrower,  there are
no circumstances  that may prevent or interfere with such full compliance in the
future.  There is no  Environmental  Claim (as  defined  below)  pending  or, to
Borrower's best knowledge,  threatened against, or which has been made known to,
Borrower.

          (d) Except as set forth on Schedule  4.28,  during the period in which
any  Property  has been held or  operated by  Borrower,  its  affiliates  or, to
Borrower's knowledge,  its predecessors in interest with respect to any Property
held or  operated  now or in the past by  Borrower,  there have been no actions,
activities,  circumstances,  conditions,  events or incidents including, without
limitation,  the  generation,  handling,  transportation,   treatment,  storage,
release,  emission,  discharge,  presence or disposal of any Hazardous Substance
(as defined below), that could form the basis of any Environmental Claim against
Borrower under any  Environmental Law in effect at, or at any time prior to, the
Loan Closing.

          (e) Without in any way limiting the generality of the foregoing to the
knowledge of Borrower, (i) there are no underground storage tanks located on any
Property  owned or leased by  Borrower  or the  Subsidiaries,  (ii)  there is no
asbestos  contained  in or forming  part of any  building,  building  component,
structure or office space owned or leased by Borrower or the  Subsidiaries,  and
(iii) no  polychlorinated  biphenyls ("PCBs") are used or stored at any property
owned or leased by Borrower or the Subsidiaries.

          The following terms shall have the following meanings:

                  "Environmental  Claim"  means  any  claim,  action,  cause  of
action,  investigation  or  notice  (written  or oral) by any  person  or entity
alleging potential liability (including, without limitation, potential liability
for investigatory  costs,  cleanup costs,  governmental  response costs, natural
resources damages, property damages, personal injuries or penalties) arising out
of,  based  on  or  resulting  from  (a)  the  presence,  or  release  into  the
environment,  of any Hazardous Substances at any location,  whether or not owned
or  operated  by  Borrower,  or  (b)  circumstances  forming  the  basis  of any
violation, or alleged violation, of any Environmental Law.

                  "Environmental  Laws"  means  the  federal,  state  and  local
environmental,  health  or  safety  laws,  regulations,  ordinances,  rules  and
policies  and common law in effect on the date hereof and the Loan  Closing Date
relating  to  the  use,  refinement,   handling,  treatment,  removal,  storage,
production,  manufacture,  transportation  or disposal,  emissions,  discharges,
releases or  threatened  releases of  materials  of  environmental  concern,  or
otherwise  relating  to  protection  of  the  environment  (including,   without
limitation,  ambient air, surface water, groundwater, land surface or subsurface
strata),  as the same may be amended or modified to the date hereof and the Loan
Closing Date including, without limitation, the statutes listed below:

                           Federal  Resources  Conservation  and Recovery Act of
1976, 42 U.S.C. ss. 6901, et seq.

                           Federal Comprehensive  Environmental Response,
Compensation and Liability Act of 1980, 42 U.S.C. ss. 9601, et seq.

                           Federal Clean Air Act, 42 U.S.C. ss. 7401, et seq.

                                       22
<PAGE>

                           Federal Water  Pollution  Control Act,  Federal Clean
Water Act of 1977, 33 U.S.C. ss. 1251, et seq.

                           Federal  Insecticide,  Fungicide and Rodenticide Act,
Federal Pesticide Act of 1978, 7 U.S.C. ss. 136, et seq.

                           Federal Hazardous Materials Transportation Act, 48
U.S.C.ss. 1801, et seq.

                           Federal Toxic Substances Control Act, 15 U.S.C.ss.
2601, et seq.

                           Federal Safe Drinking Water Act, 42 U.S.C.ss. 300f,
et seq.

                  "Hazardous  Substances"  means any toxic or  hazardous  waste,
pollutants  or  substances  including,   without  limitation,   asbestos,  PCBs,
petroleum  products and byproducts,  substances  defined or listed as "hazardous
substance,"  "toxic  substance,"  "toxic  pollutant"  or  similarly   identified
substance or mixture, in or pursuant to any Environmental Law.

Section 4.29      Public Reports, Securities Law Compliance.

          For not less than the preceding twenty four calendar months,  Borrower
has filed all forms,  reports and documents required to be filed pursuant to the
1933 Act,  the 1934 Act or the 1940 Act under  the  circumstances,  all of which
have complied in all material respects with all then applicable  requirements of
such laws and  regulations  and none of which at the time  filed  contained  any
untrue statement of a material fact or omitted to state a material fact required
to be stated  therein or necessary in order to make the statements  therein,  in
light of the  circumstances,  not  misleading.  All of the financial  statements
filed with any of such  reports  were  prepared in  conformity  with GAAP,  on a
consistent basis, except as otherwise noted therein,  and subject in the case of
quarterly  statements  to normal  year-end  audit  adjustments.  Borrower  is in
compliance  with all  applicable  corporate  governance,  reporting  and  record
keeping  provisions  of  the  1934  Act,  and  none  of  Borrower,  any  of  its
Subsidiaries  or to Borrower's  best knowledge any of its officers or directors,
is a party to any contract or arrangement or engaged in any transaction  that is
prohibited thereby.  Borrower has not, during the preceding twenty four calendar
months,  made any press  release  or  distributed  any  public  statements  that
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated  therein or necessary in order to make the statements
therein, in light of the circumstances, not misleading.

Section 4.30      Full Disclosure.

          Neither the  representations or warranties of Borrower,  the schedules
to this Agreement  contains,  as of the date thereon,  any untrue statement of a
material  fact or  omits  to  state  any  material  fact  necessary  to keep the
statements  contained  herein or therein from being  misleading  in any material
respect.

          The  representations  and warranties of Borrower set forth above shall
survive the Loan Closing,  the delivery of the  Debentures  and the Loan Closing
Date and no  investigation  by or on behalf of Lender  shall  diminish  Lender's
right to rely on Borrower's representations and warranties.

ARTICLE V. - AFFIRMATIVE COVENANTS OF BORROWER

          So long as any part of the Debentures,  or any of them,  remain unpaid
or have not been  redeemed  or  converted  hereunder,  and until  such  payment,
redemption or conversion in full,  unless the Lender shall otherwise  consent in
writing, Borrower agrees that:

                                       23
<PAGE>

Section 5.01      Financial Statements, Reports and Documents.

          (a) Borrower shall accurately and fairly maintain its books of account
in  accordance  with  GAAP,  retain  a  firm  of  independent  certified  public
accountants  acceptable  to Borrower  and  approved  by the Lender,  which shall
include  Deloitte  & Touche  LLP,  to make  annual  audits  of its  accounts  in
accordance with generally accepted auditing standards.

          (b) Borrower  shall provide the following  reports and  information to
Lender:

                  (ii) As soon as available, and in any event not later than the
filing  deadline  with respect  thereto  after the close of each fiscal year and
fiscal  quarter,  Borrower's  annual report on Form 10-K or 10KSB, or Borrower's
quarterly  reports on Form 10Q or 10QSB,  as the case may be, with  exhibits for
said periods. Promptly upon filing thereof, any reports on form 8K and all other
filings made with respect to Sections 13, 14 or 15 of the 1934 Act.

                  (iii) Each fiscal quarter, concurrent with the periodic report
required above, a certificate  executed by the Chief Financial  Officer or Chief
Executive  Officer of Borrower  (A) stating that a review of the  activities  of
Borrower  during such fiscal period has been made under his supervision and that
Borrower has observed,  performed and fulfilled  each and every  obligation  and
covenant contained herein and is not in Default under any of the same or, if any
such Default shall have occurred,  specifying the nature and status thereof, and
(B) stating that Borrower and the  Subsidiaries  are in compliance as of the end
of such fiscal  quarter with the agreed minimum  financial  ratios and standards
set forth in Schedule 7.01 to this Agreement.

                  (iv) Promptly (but in any event within ten (10) business days)
upon becoming aware of the existence of any condition or event which constitutes
a Default or which,  with notice or the  passage of time or both would  become a
Default or an Event of Default,  written notice specifying the nature and period
of existence thereof and the action which Borrower is taking or proposes to take
with respect thereto.

                  (v) Promptly (but in any event within ten (10) business  days)
upon the  receipt  thereof by Borrower or the Board of  Directors  of  Borrower,
copies of all reports,  all management  letters and other  detailed  information
submitted to Borrower or the Board by independent accountants in connection with
each  annual or interim  audit or review of the  accounts or affairs of Borrower
made by such accountants.

                  (vi)  Promptly  (but in any  event  within  ten (10)  business
days), such other  information  relating to the finances,  budgets,  properties,
business and affairs of Borrower and each Subsidiary, as the Lender or the Agent
may reasonably request from time to time.

                  (vii) Promptly upon its becoming  available,  one copy of each
financial statement,  report,  press release,  notice or proxy statement sent by
Borrower to  stockholders  generally,  and of each  regular or periodic  report,
registration  statement  or  prospectus  filed by Borrower  with any  securities
exchange  or the SEC or any  successor  agency,  and of any order  issued by any
Governmental Authority in any proceeding to which Borrower is a party.

                  (viii) As soon as available,  and in any event within  fifteen
(15) days after the close of each fiscal  quarter,  a report  setting  forth the
number of stock options,  and their respective  prices and terms,  issued during
such quarter and cumulatively.

                                       24
<PAGE>

Section 5.02      Annual Financial Statements.

          In the event that Borrower shall not be file reports  contemplated  in
Section 5.01(b)(ii), furnish Agent within ninety (90) days after the end of each
fiscal year of Borrower, audited financial statements of Borrower including, but
not limited to, statements of income and stockholders' equity and cash flow from
the beginning of the current  fiscal year to the end of such fiscal year and the
balance sheet as at the end of such fiscal year, all prepared in accordance with
GAAP  applied on a basis  consistent  with prior  practices,  and in  reasonable
detail and  reported  upon without  qualification  by an  independent  certified
public  accounting  firm  selected by Borrower  and  satisfactory  to Agent (the
"Accountants").  The reports shall be accompanied by a certificate of Borrower's
Chief  Financial  Officer  which  shall  state  that,  based  on an  examination
sufficient to permit him to make an informed  statement,  no Default or Event of
Default exists, or, if such is not the case, specifying such Default or Event of
Default,  its nature,  when it occurred,  whether it is continuing and the steps
being taken by Borrower with respect to such event, and such  certificate  shall
have appended thereto  calculations  which set forth Borrower's  compliance with
the requirements or restrictions imposed by Article VII.

Section 5.03      Quarterly Financial Statements.

          In the event that Borrower shall not be file reports  contemplated  in
Section 5.01(b)(ii),  furnish Agent within forty-five (45) days after the end of
each fiscal  quarter,  an  unaudited  balance  sheet of Borrower  and  unaudited
statements  of  income  and  stockholders'  equity  and  cash  flow of  Borrower
reflecting  results of  operations  from the beginning of the fiscal year to the
end of such quarter and for such quarter,  prepared on a basis  consistent  with
prior  practices and complete and correct in all material  respects,  subject to
normal and recurring year end adjustments that individually and in the aggregate
are not material to Borrower's  business.  The reports shall be accompanied by a
certificate signed by the Chief Financial Officer of Borrower, which shall state
that,  based on an  examination  sufficient  to permit  him to make an  informed
statement,  no Default or Event of Default exists,  or, if such is not the case,
specifying  such  Default or Event of  Default,  its nature,  when it  occurred,
whether it is  continuing  and the steps being taken by Borrower with respect to
such default and,  such  certificate  shall have appended  thereto  calculations
which set forth  Borrower's  compliance  with the  requirements  or restrictions
imposed by Article VII.

Section 5.04      The Drilling Program, Oil and Gas Reports.

                  (a) Not less frequently than semi-annually, Borrower agrees to
prepare and submit to Lender a copy of its then  current  budget with respect to
the  Drilling  Program for  subsequent  periods,  itemized in such detail as the
Lender may request. Contemporaneously therewith, Borrower shall submit to Lender
any  amendments  to the  Drilling  Program,  each of which shall  constitute  an
amendment to Schedule 2.02

                  (b) Borrower  shall  furnish to the Lender,  promptly upon the
availability thereof, any reserve reports relating to the Collateral.

                  (c) Borrower  shall furnish to the Lender from time to time as
the Lender shall reasonably request,  run reports, gas sales reports and similar
reports  and  information  relating to sales of oil,  gas or other  hydrocarbons
produced by or relating to Oil and Gas Collateral.

                  (d) Promptly upon the  execution of any agreement  pursuant to
which  any Oil  and  Gas  Collateral  shall  be  encumbered  or  subject  to any
obligation,  including any obligations relating to drilling of wells, pooling of
interests,  sales of  hydrocarbons  or the like,  Borrower  shall provide a copy
thereof, together with all exhibits thereto, to Lender.

                                       25
<PAGE>

                  (e)  Borrower  agrees  that it  will  review  its  operations,
particularly  those  relating to the Drilling  Program,  with Agent from time to
time upon Agent's  request.  Such  operations  reviews will be in such depth and
detail  as  Agent  shall  reasonably  request  and  will be  held as  reasonably
necessary, generally once a fiscal quarter.

Section 5.05      Payment of Taxes and Other Indebtedness.

          Borrower shall, and shall cause its Subsidiaries to, pay and discharge
(i) all taxes, assessments and governmental charges or levies imposed upon it or
upon its  income  or  profits,  or upon any  property  belonging  to it,  before
delinquent,  (ii) all lawful claims (including  claims for labor,  materials and
supplies)  which, if unpaid,  will give rise to a Lien upon any of its property,
other  than a  Permitted  Lien,  and  (iii)  all of its  other  Indebtedness  in
accordance  with  their  respective  terms,  except  as  prohibited   hereunder;
provided,  however,  that Borrower and its  Subsidiaries,  if any,  shall not be
required to pay any such tax, assessment,  charge, levy or other claim if and so
long as the  amount,  applicability  or  validity  thereof  shall  currently  be
contested in good faith by appropriate  proceedings and appropriate accruals and
reserves therefor have been established in accordance with GAAP.

Section 5.06      Maintenance of Existence and Rights; Conduct of Business.

          Subject to Section 6.13, Borrower shall, and shall cause its operating
Subsidiaries to, preserve and maintain their respective  corporate existence and
all of their respective  material rights and privileges  necessary in the normal
conduct  of  their  respective  businesses,  and  to  conduct  their  respective
businesses  in an orderly and  efficient  manner  consistent  with good business
practices  and in  accordance  with all  valid  regulations  and  orders  of any
Governmental  Authority.  Borrower  shall keep its  principal  place of business
within the United States.

Section 5.07      SEC Filings.

          So long as Borrower has a class of securities  registered  pursuant to
Section 12 of the 1934 Act,  Borrower shall duly file, when due, all reports and
proxy  statements  required of a company whose  securities  are  registered  for
public trading under and pursuant to the 1934 Act and any rules and  regulations
issued thereunder.

Section 5.08      Notice.

          Borrower shall promptly notify the Lender of (i) any Material  Adverse
Change,  (ii) any default under any Indebtedness  having an aggregate  principal
amount in excess of Twenty-Five Thousand Dollars ($25,000),  material agreement,
contract  or other  instrument  to  which  it is a party or by which  any of its
properties are bound, or any  acceleration  of the maturity of any  Indebtedness
having an aggregate  principal amount in excess of Twenty-Five  Thousand Dollars
($25,000),  if any,  (iii) any  material  adverse  claim  against  or  affecting
Borrower or its  Subsidiaries,  if any, or any of its  properties,  and (iv) the
commencement  of, and any  determination  in, any material  litigation  with any
third party or any proceeding before any Governmental Authority.

                                       26
<PAGE>

Section 5.09      Compliance with Loan Documents.

          Borrower shall,  and shall cause its  Subsidiaries to, promptly comply
with any and all covenants and provisions of the Loan Documents.

Section 5.10      Compliance with Material Agreements.

          Borrower shall, and shall cause each of its Subsidiaries to, comply in
all  material   respects  with  all  Senior  Documents,   material   agreements,
indentures,  mortgages or documents binding on it or affecting its properties or
business.

Section 5.11      Additional Capital, Additional Collateral.

          (a) Not later than  November  30,  2003,  the Borrower or the Drilling
Subsidiary  shall have issued debt or equity  securities  or shall have conveyed
interest  in Oil and Gas  Properties,  resulting  in net  cash  proceeds  to the
Borrower  or the  Drilling  Subsidiary  of not  less  than  $1,000,000  for  use
exclusively in connection with the Drilling  Program,  it being  understood that
cash  proceeds in excess of  $1,000,000  may be used for purposes  other than in
connection with the Drilling  Program.  No Collateral,  or any interest therein,
shall be impaired or conveyed in connection with the  transactions  contemplated
in the preceding  sentence  without the express  written  consent of the Lender,
which consent shall not be  unreasonably  withheld if following any  transaction
requiring  consent,  the PV 10,  as of a date  not  less  recent  than 90  days,
calculated in a manner  consistent with the  calculations  described on Schedule
4.27, shall be equal to not less than twice the outstanding  principal under the
Debentures.

          (b) Borrower  shall  provide  Lender with such  information  as Lender
shall  reasonably  request from time to time in connection  with  monitoring and
enforcing its rights under this Section 5.12.

Section 5.12      Operations and Properties.

          (a) Borrower shall,  and shall cause each of its  Subsidiaries to, act
prudently and in accordance  with  customary  industry  standards in managing or
operating its assets, properties, business and investments.  Borrower shall, and
shall  cause  each  of its  Subsidiaries  to,  keep in good  working  order  and
condition,  ordinary wear and tear  excepted,  all of its assets and  properties
which are necessary to the conduct of its business.

          (b) Borrower shall diligently pursue the Drilling Program.

Section 5.13      Books and Records; Access.

          Borrower shall,  and shall cause each of its Subsidiaries to, maintain
complete and accurate books and records of its  transactions  in accordance with
good   accounting   practices.   Borrower   shall  give  each  duly   authorized
representative  of the Lender  access  during all normal  business  hours,  upon
reasonable notice, to, and shall permit such representative to examine,  copy or
make excerpts from,  any and all books,  records and documents in the possession
of Borrower and its Subsidiaries and relating to its affairs, and to inspect any
of the  properties  of Borrower and its  Subsidiaries;  provided that the Lender
agrees that any such  inspection  will be performed so as not to interfere  with
Borrower's  normal  business  operations.  Borrower  shall  make a copy  of this
Agreement,  along  with any  waivers,  consents,  modifications  or  amendments,
available  for  review at its  principal  office by the  Lender or the  Lender's
representatives.

                                       27
<PAGE>

Section 5.14      Compliance with Law.

          Borrower shall, and shall cause each of its Subsidiaries to, comply in
all material respects with all applicable laws, rules,  regulations,  ordinances
and all orders and decrees of any Governmental Authority applicable to it or any
of its properties, businesses or operations.
Section 5.15      Insurance.

          Borrower shall,  and shall cause each of its Subsidiaries to, maintain
such worker's compensation  insurance,  liability insurance and insurance on its
properties,  assets and business, now owned or hereafter acquired,  against such
casualties,  risks and  contingencies,  and in such  types and  amounts,  as are
consistent  with  customary  practices  and  standards of  companies  engaged in
similar businesses.

Section 5.16      Authorizations and Approvals.

          Borrower shall,  and shall cause each of its Subsidiaries to, promptly
obtain,  from  time  to time  and at its  own  expense,  all  such  governmental
licenses, authorizations,  consents, permits and approvals as may be required to
enable it to comply  with its  obligations  hereunder  and under the other  Loan
Documents.

Section 5.17      ERISA Compliance.

          Borrower   shall,   at  all  times,(i)  make  prompt  payment  of  all
contributions  required  under all Plans,  if any,  and shall  meet the  minimum
funding standards set forth in ERISA with respect to its Plans subject to ERISA,
if any, (ii) notify the Lender immediately of any fact in connection with any of
its Plans, which might constitute grounds for termination thereof by the Pension
Benefit Guaranty  Corporation or for the appointment,  by the appropriate United
States District  Court,  of a trustee to administer  such Plan,  together with a
statement, if requested by the Lender, as to the reason therefor and the action,
if any,  proposed to be taken with  respect  thereto,  and (iii)  furnish to the
Lender,  upon its request,  such  additional  information  concerning any of its
Plans as may be reasonably requested.

Section 5.18      Further Assurances.

          Borrower  shall,  and shall cause each of its  Subsidiaries  to, make,
execute or endorse,  and acknowledge and deliver or file or cause the same to be
done, all such notices, certifications and additional agreements,  undertakings,
transfers,  assignments  or other  assurances,  and take any and all such  other
action as the Lender may, from time to time, deem reasonably necessary or proper
in connection with any of the Loan Documents,  or the obligations of Borrower or
its Subsidiaries,  if any, thereunder, which the Lender may request from time to
time.

Section 5.19      Indemnity by Borrower.

          Borrower  shall  indemnify,  save and hold harmless the Lender and its
directors,  officers,  lenders,  attorneys and employees (the "Indemnitee") from
and against (i) any and all  claims,  demands,  actions or causes of action that
are asserted  against any  Indemnitee if the claim,  demand,  action or cause of
action,  directly or  indirectly,  relates to this  Agreement and the other Loan
Documents,  the Loan,  the use of  proceeds of the Loan or the  relationship  of
Borrower and the Lender under this  Agreement  or any  transaction  contemplated
pursuant to this Agreement,  (ii) any administrative or investigative proceeding
by any  Governmental  Authority,  directly  or  indirectly,  related to a claim,
demand,  action or cause of action  described in clause (i) above, and (iii) any

                                       28
<PAGE>

and all liabilities,  losses, costs or expenses (including reasonable attorneys'
fees and disbursements) that any Indemnitee suffers or incurs as a result of any
of the  foregoing;  provided,  however,  that Borrower  shall have no obligation
under this  Section  5.19 to the  Lender  with  respect to any of the  foregoing
arising out of the gross  negligence or willful  misconduct of the Lender or its
assignees  or the breach by Lender or its  assignees  of this  Agreement  or any
other Loan Document or other  document  executed in  connection  with any of the
aforesaid,  the breach by the Lender or its  assignees of any  intercreditor  or
participation  agreement or  commitment  with other  parties,  the  violation or
alleged violation of any law, rule or regulation by the Lender or its assignees,
or from the  transfer  or  disposition  by the Lender of any  Debentures  or the
Common Stock issued upon  conversion of the  Debentures.  If any claim,  demand,
action or cause of action is asserted  against any  Indemnitee,  such Indemnitee
shall promptly notify  Borrower,  but the failure to so promptly notify Borrower
shall not affect  Borrower's  obligations under this Section unless such failure
materially  prejudices Borrower's right or ability to participate in the contest
of such claim, demand,  action or cause of action, as hereinafter  provided.  In
the event that such Indemnitee's  failure to properly notify Borrower materially
prejudices  Borrower's  right or ability to  participate  in the contest of such
claim,  demand  action or cause of action,  then said  Indemnitee  shall have no
right  to  receive,   and  Borrower   shall  have  no  obligation  to  pay,  any
indemnification amounts hereunder.  Borrower may elect to defend any such claim,
demand,  action or cause of action (at its own  expense)  asserted  against said
Indemnitee and, if requested by Borrower in writing and so long as no Default or
Event of Default  shall have occurred and be  continuing,  such  Indemnitee  (at
Borrower's  expense) shall, in good faith,  contest the validity,  applicability
and amount of such  claim,  demand,  action or cause of action and shall  permit
Borrower to participate in such contest.  Any Indemnitee that proposes to settle
or compromise  any claim or  proceeding  for which  Borrower may be liable,  for
payment to or on behalf of an Indemnitee hereunder,  shall give Borrower written
notice of the terms of such  proposed  settlement  or  compromise  reasonably in
advance of settling or  compromising  such claim or proceeding  and shall obtain
Borrower's written concurrence  thereto. In the event that said Indemnitee fails
to obtain Borrower's prior written consent to any such settlement or compromise,
said  Indemnitee  shall have no right to  receive,  and  Borrower  shall have no
obligation to pay, any  indemnification  amounts hereunder.  Each Indemnitee may
employ  counsel,  which counsel shall be reasonably  acceptable to Borrower,  in
enforcing  its rights  hereunder  and in  defending  against any claim,  demand,
action or cause of action covered by this Section 5.19; provided,  however, that
each  Indemnitee  shall  endeavor in connection  with any matter covered by this
Section 5.19 which also involves any other Indemnitee, to use reasonable efforts
to avoid  unnecessary  duplication  of effort by  counsel  for all  Indemnitees,
including allowing Borrower to select one lawyer for all parties, such selection
to be subject to the  approval  of such  parties,  which  approval  shall not be
unreasonably withheld. Any obligation or liability of Borrower to any Indemnitee
under this Section 5.19 shall  survive the  expiration  or  termination  of this
Agreement  and the  repayment of the  Debentures.  THE BORROWER  RECOGNIZES  AND
AGREES THAT THE FOREGOING  INDEMNITY MAY RESULT IN ONE OR MORE INDEMNITEES BEING
INDEMNIFIED,  IN  WHOLE  OR IN  PART,  FOR THE  CONSEQUENCES  OF  SUCH  PERSON'S
NEGLIGENCE.

Section 5.20      Reservation of Shares.

          Borrower  shall, at all times,  reserve and keep available  sufficient
authorized  and unissued  shares of Common Stock to effect the conversion of the
Debentures. The Borrower has obtained any necessary approval of its shareholders
to issue to the Lender upon  conversion of the  Debentures  all of the shares of
Common Stock to which it is then entitled.

Section 5.21      Ownership of Subsidiaries.

          Borrower  shall own,  at all times,  all of the  capital  stock of, or
other equity interests in, the Drilling Subsidiary and each Guarantor, except as
disclosed on Schedule 5.21.

                                       29
<PAGE>

Section 5.22      Subsequently Formed Subsidiaries.

          Borrower shall cause all  subsequently  formed  Subsidiaries  having a
record or beneficial interest in any Collateral to execute a Subsidiary Guaranty
and the Mortgage as if such entity had been a Guarantor at the Loan Closing.

ARTICLE VI. - NEGATIVE COVENANTS OF BORROWER

          So long as any  part  of the  Debentures  has  not  been  redeemed  or
converted hereunder, and until such redemption or conversion in full, unless the
Lender shall otherwise consent in writing, Borrower agrees that:

Section 6.01      Limitation on Indebtedness.

          At Loan  Closing,  Borrower  and its  Subsidiaries  shall not have any
outstanding Indebtedness,  except Indebtedness arising under this Agreement, the
Debentures,  the  Guaranties,  or  Permitted  Indebtedness  or as set  forth  in
Schedule  6.01.  Borrower and its  Subsidiaries  will not incur or guarantee any
Indebtedness   without  the  consent  of  the  Lender,   except  for   Permitted
Indebtedness.

Section 6.02      Limitation on Liens.

          Borrower shall not, and shall not permit its  Subsidiaries to, create,
cause,  incur,  permit or suffer to exist any Lien upon any of its properties or
assets, other than Permitted Liens.

Section 6.03      Limitation on Investments.

          Borrower shall not, and shall not permit its  Subsidiaries to, make or
have  outstanding  any  Investments in any Person,  except for Borrower's or any
Subsidiary's  acquisition or ownership of stock of or other equity  interests in
Subsidiaries (including Persons that will be Subsidiaries after giving effect to
such  Investments),  loans  and  other  transactions  between  Borrower  and any
Subsidiaries,    short   term   bank   deposits,   money   market   investments,
investment-grade  commercial paper,  government  securities and such other "cash
equivalent"  investments  as the Lender  may,  from time to time,  approve,  and
customer  obligations and receivables arising out of sales or leases made or the
rendering of services in the ordinary course of business.

Section 6.04      Transactions with Affiliates.

          Except as disclosed in Schedule  6.04,  Borrower  shall not, and shall
not permit its  Subsidiaries  to, enter into any transaction not in the ordinary
course of business  with, or pay any management  fees to, any Affiliate,  except
for  intercompany  transactions,  without the consent of the Lender,  unless the
terms  thereof (i) are no less  favorable  to Borrower or such  Subsidiary  than
those that could be obtained  at the time of such  transaction  in  arm's-length
dealings  with a Person  who is not an  Affiliate,  or (ii) if such  transaction
involves an amount less than Fifty Thousand Dollars ($50,000),  are set forth in
writing  and have been  approved  by a majority  of the  members of the Board of
Directors  having no  personal  stake in the  transaction.  Notwithstanding  the
foregoing,  Borrower  may grant  options to  employees or directors if otherwise
permitted under this Agreement.

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Section 6.05      Limitations on Acquisition of Nonrelated Business.

          Borrower shall not, and shall not permit its  Subsidiaries  to, engage
in any line of  business,  or acquire  any new  product  lines or  business,  or
acquire  any  companies  unless such new  product  line or business  acquired is
primarily  involved  in, or  substantially  similar  or related  to,  Borrower's
current lines of business or extensions thereof.

Section 6.06      Limitation on Sale of Properties.

          Borrower  shall not,  and shall not permit  its  Subsidiaries  to, (i)
pledge, sell, assign, convey, exchange, lease or otherwise dispose of any of the
Collateral,  or  any  interest  therein,  or any of  the  capital  stock  of its
Subsidiaries,  in either case whether now owned or hereafter  acquired,  without
the consent of the Lender,  except in the ordinary  course of business,  or (ii)
sell, assign or discount any accounts receivable,  except in the ordinary course
of business (which shall include  receivable  financing or  securitization),  in
each case without the consent of the Lender.

Section 6.07      Fiscal Year and Accounting Method.

          Borrower shall not, and shall not permit its  Subsidiaries  to, change
its fiscal year or method of accounting, except as permitted by GAAP.

Section 6.08      Liquidation.

          Except that with notice to Lender, Borrower shall be entitled to cause
any  Subsidiary  which  is a  Guarantor  to merge  with  Borrower  or any  other
Guarantor,  Borrower  shall not, and shall not permit its  Subsidiaries  to, (i)
merge,  dissolve or liquidate (except for dissolution or liquidation of inactive
Subsidiaries in the ordinary  course of business),  or (ii) enter into any other
transaction that has a similar effect.

Section 6.09      Material Amendments to Articles of Incorporation or Bylaws.

          Except  that  Borrower  shall  be  entitled  to file  certificates  of
designation  establishing  or amending the rights and  preferences  of preferred
stock  authorized  under its  Articles of  Incorporation  as of the Loan Closing
Date,  and shall also be entitled to increase its authorized  capital,  Borrower
shall not, and shall not permit its  Subsidiaries  to, amend its  Certificate or
Articles of  Incorporation  (or other charter  document) in any material respect
which  requires  a vote of its  equity  security  holders,  including  any  such
amendment or change effected by a merger,  consolidation  or otherwise,  without
the consent of the Lender.

Section 6.10      Executive Compensation.

          (a)  Borrower   will  not  increase  the  salary,   bonus,   or  other
compensation  programs  (whether  in cash,  securities  or other  property,  and
whether payment is deferred or current) of its chief executive officer and chief
financial officer,  unless such compensation  increase is approved by a majority
of the Board or a Compensation  Committee of the Board, a majority of whom shall
be  nonemployee  Directors.  Compensation  to other senior  executive  officers,
including  division  managers,  shall be  consistent  with the  policies  of the
Compensation Committee.

          (b) Borrower  shall not implement any bonus,  profit  sharing or other
incentive  plans,  until such plans are formally  adopted by the majority of the
Board or a  Compensation  Committee  of the Board,  a majority  of whom shall be
nonemployee  Directors.  Borrower's  executive  compensation shall be consistent
with the general compensation policies adopted by the Compensation  Committee of
the Board.

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Section 6.11      Restricted Payments.

          Borrower  shall not (i) without the consent of the Lender,  declare or
pay  any  Dividend  (other  than  stock   dividends)  or  make  any  other  cash
distribution on (a) any Common Stock, (b) any Preferred Stock, if at the time of
such  declaration  or payment,  Borrower is in Default with respect to the Loan,
(ii)  purchase,  redeem or  otherwise  acquire any shares of Common Stock or any
shares of  Preferred  Stock,  without the consent of the Lender,  (iii) make any
payments of Indebtedness which are pari passu or subordinated to the Debentures,
if at the time of such payment, Borrower is in Default with respect to the Loan,
or  (iv)  make  any  prepayments  of  Indebtedness   which  are  pari  passu  or
subordinated to the  Debentures,  unless the Debentures is prepaid on a pro rata
basis,  without  the  consent  of the  Lender.  Borrower  shall not  permit  its
Subsidiaries  to enter into any agreements  restricting the payment of dividends
from the Subsidiaries to Borrower, without the consent of the Lender.

Section 6.12      Consolidation or Merger.

          Borrower  shall not  combine,  consolidate  or merge  with or into any
other business  entity,  unless the surviving  entity,  after such  combination,
merger or  consolidation,  will not be in Default and the surviving entity, as a
condition precedent to such combination, merger or consolidation becomes a party
to this  Agreement  and  each  of the  other  Loan  Documents,  as  appropriate.
Subsidiaries  shall only  combine,  consolidate  with or merge into  Borrower or
another Subsidiary;  provided,  however, that a Subsidiary may combine, merge or
consolidate  with any other entity as long as such  Subsidiary  is the surviving
entity of such  combination,  merger or  consolidation,  and  Borrower is not in
Default.

ARTICLE VII. - COVENANTS OF MAINTENANCE OF FINANCIAL STANDARDS

Section 7.01      Financial Ratios.

          So long as any Debentures  are  outstanding  hereunder,  or unless the
Lender shall otherwise consent in writing,  Borrower,  on a consolidated  basis,
shall be in compliance with the following covenants:

          (a) Consolidated  EBITDA.  Borrower shall have Consolidated EBITDA for
the fiscal quarter ended June 30, 2004 of not less than negative $350,000.

          (b) Ratio of  Indebtedness to  Consolidated  Capitalization.  Borrower
shall not permit  the ratio  (expressed  as a  percentage)  of the  consolidated
Indebtedness  of the Borrower and its  subsidiaries  computed in accordance with
GAAP to  Consolidated  Capitalization  of  Borrower  as at the end of any fiscal
quarter to be greater than 40%.

          (c)  Ratio  of  Consolidated  EBITDA  to  Consolidated  Interest.  The
Borrower  shall not  permit  its ratio of  Consolidated  EBITDA to  Consolidated
Interest to be less than (A) 1.0 to 1.0 for the fiscal  quarter ended  September
30, 2004,  (B) 1.0 to 1.0 for the fiscal quarter ended December 31, 2004 and (C)
2.0 to 1.0 for any fiscal quarter  thereafter  beginning with the fiscal quarter
ended March 31, 2005.

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<PAGE>

ARTICLE VIII. -  EVENTS OF DEFAULT

Section 8.01      Events of Default.

          An "Event of Default"  shall exist if any one or more of the following
events  (herein  collectively  called  "Events of  Default")  shall occur and be
continuing:

          (a) Borrower  shall fail to pay when due (or shall state in writing an
intention not to pay or its inability to pay) any  installment of interest on or
principal  of, any  Debentures  or any fee,  expense or other  payment  required
hereunder;

          (b) Any  representation or warranty made under this Agreement,  or any
of the other Loan  Documents,  or in any  certificate or statement  furnished or
made to Agent  pursuant  hereto  or in  connection  herewith  or with the  Loans
hereunder,  or in any Subsidiary Document shall prove to be untrue or inaccurate
in any material respect as of the date on which such  representation or warranty
was made;

          (c) Default shall occur in the  performance of any of the covenants or
agreements of Borrower or of its Subsidiaries contained herein, or in any of the
other Loan Documents or in any Subsidiary  Document and the Company shall remain
in default for a period of thirty (30) days;

          (d) Default shall occur in the payment of any  Indebtedness  having an
aggregate principal amount in excess of Twenty-Five  Thousand Dollars ($25,000),
or  nonmonetary  default shall occur in respect of any note,  loan  agreement or
credit  agreement  relating to any  Indebtedness  having an aggregate  principal
amount in excess of Twenty-Five  Thousand  Dollars  ($25,000),  and such default
continues for more than the period of grace,  if any,  specified  therein or any
Indebtedness  having an  aggregate  principal  amount  in excess of  Twenty-Five
Thousand  Dollars  ($25,000),  shall  become due before its stated  maturity  by
acceleration of the maturity,  or any indebtedness having an aggregate principal
amount in excess of Twenty-Five Thousand Dollars ($25,000),  shall become due by
its terms and shall not be promptly paid or extended;

          (e) Any of the Loan  Documents  shall  cease to be  legal,  valid  and
binding  agreements  enforceable  against  Borrower,  Guarantor or any of its or
their respective Subsidiaries in accordance with the respective terms, or shall,
in any way, be  terminated  or become or be declared by any court or by Borrower
or any Subsidiary in any legal  proceeding to be ineffective or inoperative,  or
shall in any way  whatsoever  cease to give or provide  the  respective  rights,
titles,  interests,  remedies, powers or privileges stated therein to be created
thereby;

          (f) Borrower,  Guarantor or its or their respective Subsidiaries shall
(i) apply for or consent to the appointment of a receiver,  trustee,  custodian,
intervenor  or  liquidator  of itself,  or of all or  substantially  all of such
Person's assets, (ii) file a voluntary petition in bankruptcy,  admit in writing
that such  Person is unable to pay such  Person's  debts as they  become  due or
generally not pay such Person's  debts as they become due,  (iii) make a general
assignment for the benefit of creditors,  (iv) file a petition or answer seeking
reorganization  or an  arrangement  with  creditors or to take  advantage of any
bankruptcy  or  insolvency  laws,  (v) file an  answer  admitting  the  material
allegations of, or consent to, or default in answering, a petition filed against
such Person in any bankruptcy,  reorganization or insolvency proceeding, or (vi)
take corporate action for the purpose of effecting any of the foregoing;

          (g) An  involuntary  petition  or  complaint  shall be  filed  against
Borrower,  Guarantor  or any of its or  their  respective  Subsidiaries  seeking
bankruptcy or  reorganization  of such Person or the  appointment of a receiver,

                                       33
<PAGE>

custodian,  trustee,  intervenor  or  liquidator  of  such  Person,  or  all  or
substantially all of such Person's assets,  and such petition or complaint shall
not have been  dismissed  within  sixty  (60) days of the  filing  thereof or an
order,  order for relief,  judgment  or decree  shall be entered by any court of
competent  jurisdiction  or other  competent  authority  approving a petition or
complaint  seeking  reorganization of Borrower or its subsidiary or appointing a
receiver, custodian, trustee, intervenor or liquidator of such Person, or of all
or substantially all of such Person's assets;

          (h) Any final  judgment(s)  for the  payment of money in excess of the
sum of One  Hundred  Thousand  Dollars  ($100,000)  in the  aggregate  shall  be
rendered  against  Borrower,  Guarantor  or  any  of  its  or  their  respective
Subsidiaries and such judgment or judgments shall not be satisfied or discharged
prior to the date on which any of its assets  could be lawfully  sold to satisfy
such judgment; or

          (i) Borrower shall fail to issue and deliver shares of Common Stock as
provided herein upon conversion of any of the Debentures.

Section 8.02      Remedies Upon Event of Default.

          (a) If an Event of Default shall have occurred and be continuing, then
the Lender may exercise any one or more of the  following  rights and  remedies,
and any other remedies  provided in any of the Loan Documents,  as the Lender in
its sole discretion may deem necessary or appropriate:

                  (i) declare the unpaid Principal Amount (after  application of
any payments or  installments  received by the Lender) of, and all interest then
accrued but unpaid on, the Debentures and any other liabilities  hereunder to be
forthwith  due and payable,  whereupon the same shall  forthwith  become due and
payable  without  presentment,  demand,  protest,  notice of default,  notice of
acceleration  or of intention to accelerate or other notice of any kind,  all of
which Borrower hereby  expressly  waives,  anything  contained  herein or in the
Debentures to the contrary notwithstanding;

                  (ii) reduce any claim to judgment; and

                  (iii) without notice of default or demand,  pursue and enforce
any of the  Lender's  rights  and  remedies  under  the Loan  Documents  and the
Subsidiary Documents,  or otherwise provided under or pursuant to any applicable
law or agreement, all of which rights may be specifically enforced.

          (b) In the event of a violation by Borrower of the negative  covenants
set forth in Article  VI,  the Lender  may,  in its sole  discretion,  (i) waive
compliance with the covenants; or (ii) require Borrower to redeem the Debentures
at the higher of market value or the unpaid  principal amount of the Debentures,
together  with an amount  equal to an 18% annual yield on the  principal  amount
through the Redemption Date, whichever is greater.

Section 8.03      Performance by the Lender.

          Should  Borrower,   Guarantor  or  any  of  its  or  their  respective
Subsidiaries fail to perform any covenant, duty or agreement contained herein or
in any of the other Loan  Documents  or in any  Subsidiary  Document,  Lender or
Agent may perform or attempt to perform  such  covenant,  duty or  agreement  on
behalf of Borrower.  In such event,  Borrower shall, at the request of Lender or
Agent,  promptly pay any amount  reasonably  expended by Lender or Agent in such
performance or attempted performance to Lender or Agent at its principal office,
together  with  interest  thereon,   at  the  interest  rate  specified  in  the
Debentures,  from the date of such expenditure until paid.  Notwithstanding  the
foregoing,  it is expressly understood that Lender or Agent assumes no liability
or  responsibility  for  the  performance  of  any  duties  of  Borrower  or any
Subsidiary  hereunder  or under any of the  other  Loan  Documents  or under any
Subsidiary Document.

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<PAGE>

Section 8.04      Payment of Expenses Incurred by the Lender.

          Upon  the  occurrence  of a  Default  or an Event  of  Default,  which
occurrence is not cured within the notice  provisions,  if any, provided herein,
Borrower  agrees  to pay  and  shall  pay  all  costs  and  expenses  (including
reasonable  attorneys'  fees  and  expenses)  incurred  by  Lender  or  Agent in
connection  with the  preservation  and enforcement of the Lender's rights under
this Agreement,  the Debentures or any other Loan Document  promptly upon demand
therefor.

ARTICLE IX. -  REGISTRATION RIGHTS

Section 9.01      "Piggy-Back" Registration.

          If Borrower  proposes to register  any of its capital  stock under the
1933 Act in connection with an  underwritten  public offering of such securities
for its own  account or for the  account  of its  security  holders,  other than
Holders of Registrable  Securities  pursuant hereto (a "Piggy-Back  Registration
Statement"),  except for a standby underwritten  offering in connection with the
redemption of a class of Borrower's outstanding securities, then:

          (a) Borrower shall give written notice of such  determination  to each
Holder of Registrable  Securities,  and each such Holder shall have the right to
request,  by written  notice  given to Borrower  within 15 days of the date that
such  written  notice was mailed by  Borrower  to such  Holder,  that a specific
number  of  Registrable  Securities  held  by such  Holder  be  included  in the
Piggy-Back Registration Statement (and related underwritten offering) ;

          (b) The notice given to each Holder shall specify the name or names of
the managing  underwriter or underwriters for such offering.  In addition,  such
notice  shall also specify the number of  securities  to be  registered  for the
account of  Borrower  and for the  account of its  shareholders  (other than the
Holders of Registrable Securities), if any;

          (c) Each Holder of Registrable  Securities to be included therein must
agree (i) to sell such  Holder's  Registrable  Securities  on the same  basis as
provided  in the  underwriting  arrangement  approved by  Borrower,  and (ii) to
timely complete and execute all questionnaires, powers of attorney, indemnities,
hold-back  agreements,  lock-up  agreements,  underwriting  agreements and other
documents  required under the terms of such underwriting  arrangements or by the
SEC or by any state securities regulatory body;

          (d) If the managing  underwriter or underwriters  for the underwritten
offering under the Piggy-Back  Registration  Statement determines that inclusion
of all or any  portion of the  Registrable  Securities  in such  offering  would
materially adversely affect the ability of the underwriters for such offering to
sell all of the securities requested to be included for sale in such offering at
the  best  price  obtainable  therefor,  the  aggregate  number  of  Registrable
Securities  that may be sold by the  Holders  shall be limited to such number of
Registrable  Securities,  if any, that the managing  underwriter or underwriters
determine may be included therein without such adverse effect as provided below.
If the number of securities  proposed to be sold in such  underwritten  offering
exceeds the number of securities that may be sold in such offering,  there shall
be included in the offering, first, up to the maximum number of securities to be
sold by Borrower  for its own account and for the account of other  stockholders
(other  than  Holders  of  Registrable  Securities),  as they  may  agree  among
themselves,  and  second,  as to the  balance,  if any,  Registrable  Securities
requested  to be included  therein by the Holders  thereof  (pro rata as between
such Holders based upon the number of Registrable  Securities initially proposed

                                       35
<PAGE>

to be  registered  by  each),  or in  such  other  proportions  as the  managing
underwriter or  underwriters  for the offering may require;  provided,  however,
that in the event  that the  number of  securities  proposed  to be sold in such
underwritten  offering exceeds the number of securities that may be sold in such
offering pursuant to the terms and conditions set forth above and the Piggy-Back
Registration  Statement  is a result  of  public  offering  by  Borrower  of its
securities for its own account, there shall be included in the offering,  first,
up to the  maximum  number  of  securities  to be sold by  Borrower  for its own
account and second,  as to the balance,  if any,  securities  to be sold for the
account of Borrower's  stockholders (both the Holders of Registrable  Securities
requested  and such other  stockholders  of  Borrower  requested  to be included
therein) on a pro rata basis;

          (e) Holders of Registrable Securities shall have the right to withdraw
their Registrable Securities from the Piggy-Back  Registration  Statement,  only
during the time period and on the terms agreed upon among the  underwriters  for
such underwritten offering and the Holders of Registrable Securities;

          (f) The  exercise  of the  registration  rights  of the  Holders  with
respect to any specific underwritten offering shall be subject to a 90-day delay
at the request of the managing underwriter;

          (g) All piggyback  registration  rights of the Holders shall terminate
when all of the Registrable  Securities Then Outstanding may be sold pursuant to
Rule  144(k),  provided  that the  Registrable  Securities  are then listed on a
national securities exchange or traded pursuant to an automatic quotation system
the volume of  transactions on which have averaged for the preceding one hundred
and  eighty  trading  days not less than the  number  of  shares of  Registrable
Securities divided by five.

Section 9.02      Shelf Registration.

          (a) Borrower shall file a registration statement on Form S-1 under the
1933 Act (the "Shelf Registration")  covering all of the Registrable  Securities
within 180 days of the Loan Closing Date,  and Borrower  shall use  commercially
reasonable  efforts to cause the Shelf Registration to be declared effective and
to  keep  the  Shelf  Registration  continuously  effective  until  all  of  the
Registrable  Securities  registered therein cease to be Registrable  Securities.
The  securities  shall  cease to be  Registrable  Securities  (a) when the Shelf
Registration  shall have become effective under the 1933 Act and such securities
shall have been disposed of pursuant to a  registration  statement,  or (b) such
securities  shall have been sold as  permitted by Rule 144 under the 1933 Act or
the  date on which  the  Registrable  Securities  may be sold  pursuant  to Rule
144(k),  whichever is the first to occur.  Borrower  agrees,  if  necessary,  to
supplement or amend the Shelf Registration, as required by the registration form
utilized by Borrower or by the instructions applicable to such registration form
or by the 1933  Act,  and  Borrower  agrees to  furnish  to the  holders  of the
Registrable  Securities  copies of any such supplement or amendment prior to its
being used.

          (b) Notwithstanding the foregoing provisions of this Section 9.02, the
Company may  voluntarily  suspend  the  effectiveness  of any such  registration
statement for a limited time,  which in no event shall be longer than 30 days in
any three-month period and no longer than 90 days in any twelve month period, if
the Company has been advised by counsel or  underwriters to the Company that the
offering of any Offering  Shares  pursuant to the  registration  statement would
materially  adversely  affect,  or would  be  improper  in view of (or  improper
without  disclosure in a prospectus),  a proposed  financing,  a reorganization,
recapitalization,  merger,  consolidation,  or similar transaction involving the
Company. If any event occurs that would cause any such registration statement to
contain a material  misstatement  or omission or not to be effective  and usable
during the period that such  registration  statement is required to be effective
and usable,  the Company shall  promptly  file an amendment to the  registration
statement and use its commercially reasonable efforts to cause such amendment to
be declared effective as soon as practicable thereafter.

                                       36
<PAGE>

Section 9.03      Obligations of Borrower.

          Whenever  required  to  effect  the  registration  of any  Registrable
Securities  pursuant to this  Agreement,  Borrower shall,  as  expeditiously  as
reasonably possible:

          (a)  Prepare  and file  with  the SEC a  registration  statement  with
respect to such Registrable  Securities and use commercially  reasonable efforts
to cause such registration statement to become effective, subject to the receipt
of all  required  information  from  the  Holders,  and keep  such  registration
statement  effective until the sooner of all such Registrable  Securities having
been  distributed,  or until  120 days  have  elapsed  since  such  registration
statement became  effective  (subject to an extension of this period as provided
below);

          (b) Prepare and file with the SEC such  amendments and  supplements to
such  registration  statement and the  prospectus  used in connection  with such
registration  statement as may be necessary to comply with the provisions of the
1933 Act with  respect  to the  disposition  of all  securities  covered by such
registration  statement,  or 120  days  have  elapsed  since  such  registration
statement became effective  (subject to the extension of this period as provided
below);

          (c) Furnish to the  Holders  such  numbers of copies of a  prospectus,
including a preliminary  prospectus,  in conformity with the requirements of the
1933 Act, and such other  documents as they may  reasonably  request in order to
facilitate the disposition of Registrable Securities owned by them;

          (d) Use  commercially  reasonable  efforts to register and qualify the
securities covered by such registration statement under such other securities or
Blue Sky laws of such  jurisdictions  as shall be  reasonably  requested  by the
Holders,  provided that Borrower shall not be required,  in connection therewith
or as a  condition  thereto,  to  qualify  as a  broker-dealer  in any states or
jurisdictions  or to do  business  or to file a general  consent  to  service of
process in any such states or jurisdictions;

          (e) In the event of any underwritten  public offering,  enter into and
perform  its  obligations  under an  underwriting  agreement  with the  managing
underwriter   of  such  offering,   in  usual  and  customary  form   reasonably
satisfactory  to  Borrower  and the  Holders  of a majority  of the  Registrable
Securities to be included in such offering.  Each Holder  participating  in such
underwriting  shall also enter into and  perform its  obligations  under such an
agreement;

          (f)  Notify  each  Holder of  Registrable  Securities  covered by such
registration  statement,  at any time when a  prospectus  relating  thereto  and
covered by such  registration  statement is required to be  delivered  under the
1933 Act,  of the  happening  of any  event as a result of which the  prospectus
included in such registration  statement,  as then in effect, includes an untrue
statement of a material  fact or omits to state a material  fact  required to be
stated therein or necessary to make the statements therein not misleading in the
light of the circumstances then existing; and

          (g) In the event of the  notification  provided for in Section 9.03(f)
above,  Borrower shall use commercially  reasonable  efforts to prepare and file
with  the  SEC  (and  to  provide  copies  thereof  to the  Holders)  as soon as
reasonably  possible an amended prospectus  complying with the 1933 Act, and the
period  during which the  prospectus  referred to in the notice  provided for in
Section 9.03(f) above cannot be used and the time period prior to the use of the
amended  prospectus  referred to in this Section 9.03(g) shall not be counted in
the 120 day period of this Section 9.03.

                                       37
<PAGE>

Section 9.04      Furnish Information.

          (a) It shall be a condition  precedent to the  obligations of Borrower
to take any action  pursuant to this Article IX that the selling  Holders  shall
furnish to Borrower any and all  information  reasonably  requested by Borrower,
its officers,  directors,  employees,  counsel,  agents or representatives,  the
underwriter  or  underwriters,  if any,  and the SEC or any  other  Governmental
Authority,  including,  but not  limited  to:  (i)  such  information  regarding
themselves,  the Registrable Securities held by them, and the intended method of
disposition of such securities,  as shall be required to effect the registration
of their Registrable Securities; and (ii) the identity of and compensation to be
paid to any proposed  underwriter or  broker-dealer to be employed in connection
therewith.

          (b) In connection with the preparation and filing of each registration
statement registering  Registrable Securities under the 1933 Act, Borrower shall
give the Holders of  Registrable  Securities  on whose  behalf such  Registrable
Securities  are to be  registered  and  their  underwriters,  if any,  and their
respective  counsel  and  accountants,  at such  Holders'  sole cost and expense
(except as  otherwise  set forth  herein),  such access to copies of  Borrower's
records and documents and such opportunities to discuss the business of Borrower
with its officers and the independent  public accountants who have certified its
financial  statements  as shall be  reasonably  necessary in the opinion of such
Holders  and such  underwriters  or  their  respective  counsel,  to  conduct  a
reasonable investigation within the meaning of the 1933 Act.

Section 9.05      Expenses of Registration.

          All  expenses,  other  than  underwriting  discounts  and  commissions
applicable to the Registrable  Securities sold by selling  Holders,  incurred in
connection with the registration of the Registrable  Securities pursuant to this
Article,   including,   without   limitation,   all  registration,   filing  and
qualification  fees,  printer's  expenses,  and  accounting  and legal  fees and
expenses of Borrower,  shall be borne by Borrower;  provided,  however,  selling
Holders  shall be  responsible  for all costs of their due  diligence  and legal
counsel and other  advisors in connection  with a  registration  of  Registrable
Securities  and all  underwriting  discounts and  commissions  applicable to the
Registrable Securities sold by the selling Holders.

Section 9.06      Indemnification Regarding Registration Rights.

          If any Registrable Securities are included in a registration statement
under this Article:

          (a) To the extent  permitted by law,  Borrower will indemnify and hold
harmless each Holder, the officers and directors of each Holder, any underwriter
(as  defined  in the 1933 Act) for such  Holder  and each  person,  if any,  who
controls  such Holder or  underwriter  within the meaning of the 1933 Act or the
1934 Act, against any losses, claims, damages, liabilities (joint or several) or
any legal or other costs and expenses  reasonably incurred by them in connection
with  investigating  or defending  any such loss,  claim,  damage,  liability or
action to which  they may  become  subject  under the 1933 Act,  the 1934 Act or
state  law,  insofar  as  such  losses,  claims,  damages,  costs,  expenses  or
liabilities  (or actions in respect  thereof) arise out of or are based upon any
of the following statements,  omissions or violations (each a "Violation"):  (i)
any untrue statement or alleged untrue statement of a material fact with respect
to  Borrower  or  its  securities  contained  in  such  registration  statement,
including any preliminary  prospectus or final prospectus  contained  therein or
any amendments or supplements therein;  (ii) the omission or alleged omission to
state  therein a  material  fact with  respect  to  Borrower  or its  securities
required to be stated  therein or necessary to make the  statements  therein not
misleading;  or (iii) any violation or alleged violation by Borrower of the 1933
Act,  the  1934  Act,  any  state  securities  law or  any  rule  or  regulation
promulgated  under  the 1933  Act,  the 1934 Act or any  state  securities  law.
Notwithstanding the foregoing, the indemnity agreement contained in this Section
9.06(a)  shall not apply and  Borrower  shall not be liable (i) in any such case
for any such loss, claim, damage,  costs,  expenses,  liability or action to the
extent  that it  arises  out of or is based  upon a  Violation  which  occurs in
reliance upon, and in conformity with, written  information  furnished expressly
for  use in  connection  with  such  registration  by  any  such  Holder  or its
authorized agent, underwriter or controlling person, or (ii) for amounts paid in

                                       38
<PAGE>

settlement  of any  such  loss,  claim,  damage,  liability  or  action  if such
settlement  is effected  without the prior  written  consent of Borrower,  which
consent shall not be unreasonably  withheld.  THE BORROWER RECOGNIZES AND AGREES
THAT  THE  FOREGOING  INDEMNITY  MAY  RESULT  IN ONE OR MORE  INDEMNITEES  BEING
INDEMNIFIED,  IN  WHOLE  OR IN  PART,  FOR THE  CONSEQUENCES  OF  SUCH  PERSON'S
NEGLIGENCE.

          (b) To the extent  permitted by law, each Holder who participates in a
registration  pursuant  to the  terms and  conditions  of this  Agreement  shall
indemnify  and hold  harmless  Borrower,  each of its directors and officers who
have signed the  registration  statement,  each  Person,  if any,  who  controls
Borrower within the meaning of the 1933 Act, the 1934 Act, any state  securities
law or any rule or  regulation  promulgated  under the 1933 Act, the 1934 Act or
any state  securities  law, each of Borrower's  employees,  agents,  counsel and
representatives, any underwriter and any other Holder selling securities in such
registration  statement,  or any of its directors or officers, or any person who
controls such Holder,  against any losses, claims,  damages,  costs, expenses or
liabilities  (joint  or  several)  or any  legal or  other  costs  and  expenses
reasonably  incurred by them in connection with  investigating  or defending any
such loss,  claim,  damage,  liability  or action to which  Borrower or any such
director,   officer,   controlling  person,  employee,  agent,   representative,
underwriter or other such Holder,  or director,  officer or  controlling  person
thereof,  may become subject,  under the 1933 Act, the 1934 Act or other federal
or state law, only insofar as such losses, claims,  damages,  costs, expenses or
liabilities  or actions in  respect  thereto  arise out of or are based upon any
Violation,  in each  case to the  extent,  and  only to the  extent,  that  such
Violation  occurs in reliance  upon and in conformity  with written  information
furnished by such Holder expressly for use in connection with such Registration.
Each such Holder will indemnify any legal or other expenses  reasonably incurred
by Borrower or any such  director,  officer,  employee,  agent,  representative,
controlling  person,  underwriter or other Holder,  or officer,  director or any
controlling  person thereof,  in connection with  investigating or defending any
such loss,  claim,  damage,  liability or action;  provided,  however,  that the
indemnity agreement contained in this Section 9.06(b) shall not apply to amounts
paid in settlement of any such loss, claim, damage, costs,  expenses,  liability
or action if such  settlement is effected  without the prior written  consent of
the Holder,  which consent shall not be unreasonably  withheld.  THE HOLDERS, BY
AGREEING TO BECOME HOLDERS, RECOGNIZE AND AGREE THAT THE FOREGOING INDEMNITY MAY
RESULT IN ONE OR MORE INDEMNITEES  BEING  INDEMNIFIED,  IN WHOLE OR IN PART, FOR
THE CONSEQUENCES OF SUCH PERSON'S NEGLIGENCE.

          (c) Promptly after receipt by an indemnified  party under this Section
9.06 of notice of the  commencement  of any action  (including any  governmental
action),  such  indemnified  party will, if a claim in respect  thereof is to be
made  against any  indemnifying  party under this Section  9.06,  deliver to the
indemnifying  party  a  written  notice  of the  commencement  thereof  and  the
indemnifying  party shall have the right to  participate  in, and, to the extent
the indemnifying  party so desires,  jointly with any other  indemnifying  party
similarly  noticed,   to  assume  the  defense  thereof  with  counsel  mutually
satisfactory to the parties; provided,  however, that an indemnified party shall
have the right to retain its own counsel,  with the reasonable fees and expenses
of such counsel to be paid by the indemnifying  party, if representation of such
indemnified  party by the counsel  retained by the  indemnifying  party would be

                                       39
<PAGE>

inappropriate  due to actual or  potential  conflict of  interests  between such
indemnified  party and any  other  party  represented  by such  counsel  in such
proceeding.  The failure to deliver  written  notice to the  indemnifying  party
within a  reasonable  time of the  commencement  of any such  action  shall  not
relieve the  indemnifying  party of its  obligations  under this  Section  9.06,
except to the extent that the failure  results in a failure of actual  notice to
the indemnifying party and such indemnifying  party is materially  prejudiced in
its ability to defend such action solely as a result of the failure to give such
notice.

          (d) If the  indemnification  provided  for in  this  Section  9.06  is
unavailable to an indemnified party under this Section in respect of any losses,
claims,  damages,  costs,  expenses,  liabilities or actions referred to herein,
then each indemnifying  party, in lieu of indemnifying  such indemnified  party,
shall  contribute to the amount paid or payable by such  indemnified  party as a
result of such losses, claims, damages, costs, expenses,  liabilities or actions
in such  proportion as is appropriate to reflect the relative fault of Borrower,
on the one  hand  and of the  Holder,  on the  other,  in  connection  with  the
Violation  that  resulted in such  losses,  claims,  damages,  costs,  expenses,
liabilities or actions. The relative fault of Borrower,  on the one hand, and of
the Holder,  on the other,  shall be  determined  by  reference  to, among other
things,  whether the untrue or alleged untrue  statement of the material fact or
the  omission  to state a material  fact  relates  to  information  supplied  by
Borrower or by the Holder, and the parties' relative intent,  knowledge,  access
to information and opportunity to correct or prevent such statement or omission.

          (e) Borrower,  on the one hand, and the Holders,  on the other,  agree
that it would not be just and equitable if contribution pursuant to this Section
9.06  were  determined  by a pro  rata  allocation  or by any  other  method  of
allocation which does not take account of the equitable  considerations referred
to in the  immediately  preceding  paragraph.  The amount  paid or payable by an
indemnified  party as a result of  losses,  claims,  damages,  costs,  expenses,
liabilities and actions referred to in the immediately preceding paragraph shall
be deemed to include, subject to the limitations set forth above, any reasonable
legal or other expenses  incurred by such  indemnified  party in connection with
defending  any such  action or claim.  Notwithstanding  the  provisions  of this
Section 9.06,  neither  Borrower nor the Holders shall be required to contribute
any  amount  in excess  of the  amount  by which  the  total  price at which the
securities  were offered to the public  exceeds the amount of any damages  which
Borrower or each such  Holder has  otherwise  been  required to pay by reason of
such Violation.  No person guilty of fraudulent  misrepresentations  (within the
meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from
any person who is not guilty of such fraudulent misrepresentation.

Section 9.07      Reports Under the 1934 Act.

          So long as Borrower has a class of securities  registered  pursuant to
Section 12 of the 1934 Act,  with a view to making  available to the Holders the
benefits of Rule 144  promulgated  under the 1933 Act ("Rule 144") and any other
rule or  regulation  of the SEC  that may at any  time  permit a Holder  to sell
securities  of  Borrower  to the public  without  registration  or pursuant to a
registration  on Form S-3, if applicable,  Borrower agrees to use its reasonable
efforts to:

          (a) Make and keep  public  information  available,  as those terms are
understood and defined in Rule 144, at all times;

          (b)     File with the SEC, in a timely manner,  all reports and other
documents  required of Borrower under the 1933 Act and the 1934 Act;

          (c) Use its best efforts to include all Common  Stock  covered by such
registration  statement  on NASDAQ if the Common Stock is then quoted on NASDAQ;
or list  all  Common  Stock  covered  by  such  registration  statement  on such

                                       40
<PAGE>

securities  exchange or bulletin  board on which any of the Common Stock is then
listed;  or, if the Common  Stock is not then  quoted on NASDAQ or listed on any
national securities exchange or bulletin board, use its commercially  reasonable
efforts to have such Common Stock covered by such registration  statement quoted
on  NASDAQ  or, at the  option of  Borrower,  listed  on a  national  securities
exchange or bulletin board if eligible for listing; and

          (d) Furnish to any Holder,  so long as the Holder owns any Registrable
Securities,  (i)  forthwith  upon  request,  a copy of the most recent annual or
quarterly  report of Borrower and such other SEC reports and  documents so filed
by Borrower, and (ii) such other information (but not any opinion of counsel) as
may be reasonably  requested by any Holder  seeking to avail himself of any rule
or  regulation  of the SEC which  permits  the  selling  of any such  securities
without registration or pursuant to such form.

Section 9.08      Assignment of Registration Rights.

          Subject  to the  terms  and  conditions  of  this  Agreement,  and the
Debentures,  the right to cause  Borrower  to  register  Registrable  Securities
pursuant  to this  Agreement  may be  assigned  by Holder to any  transferee  or
assignee of such securities;  provided that (i) such transferee or assignee is a
transferee  or  assignee  of at  least  ten  percent  (10%)  of the  Registrable
Securities and assumes in writing the  obligations of the transferor  under this
Article  IX, (ii) such  transferee  or assignee is not a Person who is a direct,
material  competitor of Borrower,  (iii)  Borrower is, within a reasonable  time
after such  transfer,  furnished  with written notice of the name and address of
such  transferee  or  assignee  and the  securities  with  respect to which such
registration  rights are being  assigned;  and,  (iv) such  assignment  shall be
effective only if, immediately following such transfer,  the further disposition
of such  securities by the  transferee or assignee is restricted  under the 1933
Act;  it being  the  intention  that,  so long as Holder  holds any  Registrable
Securities  hereunder,  either Holder or its  transferee or assignee of at least
ten percent may exercise the piggy-back  registration  rights  hereunder.  Other
than as set forth above,  the parties hereto hereby agree that the  registration
rights  hereunder  shall not be  transferable  or assigned and any  contemplated
transfer or assignment in  contravention  of this Agreement shall be deemed null
and void and of no effect whatsoever.

Section 9.09      Other Matters.

          (a) Each Holder of Registrable Securities hereby agrees by acquisition
of such  Registrable  Securities  that,  with  respect to each  offering  of the
Registrable  Securities,  whether  each  Holder  is  offering  such  Registrable
Securities in an  underwritten  or  nonunderwritten  offering,  such Holder will
comply with  Regulation M or such other or  additional  anti-manipulation  rules
then in effect  until such  offering has been  completed,  and in respect of any
nonunderwritten offering, in writing will inform Borrower, any other Holders who
are selling  shareholders,  and any national  securities exchange upon which the
securities of Borrower are listed,  that the  Registrable  Securities  have been
sold and will, upon Borrower's  request,  furnish the  distribution  list of the
Registrable  Securities.  In addition, upon the request of Borrower, each Holder
will supply  Borrower  with such  documents  and  information  as  Borrower  may
reasonably request with respect to the subject matter set forth and described in
this Section 9.09.

          (b) Each Holder of Registrable Securities hereby agrees by acquisition
of such Registrable Securities that, upon receipt of any notice from Borrower of
the  happening of any event which makes any statement  made in the  registration
statement,  the  prospectus or any document  incorporated  therein by reference,
untrue in any  material  respect or which  requires the making of any changes in
the registration statement,  the prospectus or any document incorporated therein
by  reference,  in order to make the  statements  therein not  misleading in any
material  respect,  such  Holder  will  forthwith  discontinue   disposition  of
Registrable   Securities   under  the  prospectus   related  to  the  applicable
registration  statement  until  such  Holder's  receipt  of  the  copies  of the
supplemented  or  amended  prospectus,  or until it is  advised  in  writing  by
Borrower that the use of the prospectus may be resumed,  and has received copies
of any additional or supplemental filings which are incorporated by reference in
the prospectus.

                                       41
<PAGE>

Section 9.10      Representations of Lender

          Lender hereby represents and warrants to the Company as follows:

          (a)  Lender is  acquiring  the  Debentures  for its own  account,  for
investment  and not  with a view to,  or for  resale  in  connection  with,  any
distribution  or public  offering  thereof  within the meaning of the Securities
Act, and applicable state securities laws.

          (b)  Lender  understands  that (A) the  Debentures  and the  shares of
Common  Stock into  which  such  Debentures  are  convertible  (1) have not been
registered  under the Securities Act or any state  securities  laws, (2) will be
issued in  reliance  upon an  exemption  from the  registration  and  prospectus
delivery  requirements  of the  Securities  Act  pursuant to Section 4(2) and/or
Regulation D thereof and (3) will be issued in reliance upon exemptions from the
registration and prospectus delivery requirements of state securities laws which
relate to private offerings, and (B) the Lender must therefore bear the economic
risk of such investment  indefinitely unless a subsequent disposition thereof is
registered  under the Securities Act and applicable  state securities laws or is
exempt therefrom.  Lender further  understands that such exemptions depend upon,
among other things,  the bona fide nature of the investment intent of the Lender
expressed herein.  Pursuant to the foregoing,  the Lender  acknowledges that the
certificates  representing  the shares of Common Stock into which the Debentures
are convertible shall bear a restrictive legend substantially as follows:

          "THE  SHARES   REPRESENTED   BY  THIS   CERTIFICATE   ARE  SUBJECT  TO
RESTRICTIONS ON TRANSFER UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND STATE
SECURITIES LAWS, AND MAY NOT BE OFFERED FOR SALE, SOLD,  ASSIGNED,  TRANSFERRED,
PLEDGED OR  OTHERWISE  DISPOSED OF UNLESS (I)  REGISTERED  UNDER THE  APPLICABLE
SECURITIES  LAWS OR (II) AN OPINION OF  COUNSEL,  WHICH  OPINION AND COUNSEL ARE
BOTH REASONABLY  SATISFACTORY TO THE COMPANY,  HAS BEEN DELIVERED TO THE COMPANY
AND SUCH  OPINION  STATES  THAT  THE  SHARES  MAY BE  TRANSFERRED  WITHOUT  SUCH
REGISTRATION."

          (c) The Lender  has  knowledge,  skill and  experience  in  financial,
business and  investment  matters  relating to an investment of this type and is
capable of evaluating the merits and risks of such investment and protecting the
Lender's  interest in connection  with the  acquisition of the  Debentures.  The
Lender  understands  that the  acquisition  of the  Debentures  is a speculative
investment  and  involves  substantial  risks and that the Lender could lose its
entire  investment  in the  Debentures.  To the extent  deemed  necessary by the
Lender,  it has  retained,  at its own  expense,  and relied  upon,  appropriate
professional  advice  regarding  the  investment,   tax  and  legal  merits  and
consequences of purchasing and owning the Debentures. The Lender has the ability
to bear the  economic  risks of its  investment  in the  Borrower,  including  a
complete  loss of the  investment,  and the Lender has no need for  liquidity in
such investment.

          (d) The Lender has been furnished by the Borrower all  information (or
provided  access  to all  information)  regarding  the  business  and  financial
condition of the Borrower,  its expected plans for future  business  activities,
the  attributes of the  Debentures  and the merits and risks of an investment in
the Borrower  which the Lender has  requested or otherwise  need to evaluate the
investment in the Borrower.

                                       42
<PAGE>

          (e) Lender is in receipt of and has carefully read and understands the
following items:

          (i) Annual  Report on Form 10-K for the  period  ending  December  31,
2002, filed by the Company with the Securities and Exchange  Commission on March
31, 2003

          (ii)  Quarterly  Reports on Form 10-Q for each of the  periods  ending
March 31, 2003 and June 30, 2003,  filed by the Company with the  Securities and
Exchange Commission on May 15, 2003 and August 13, 2003, respectively

          (iii)  Definitive  Proxy  Statement on Form 14A,  filed by the Company
with the Securities and Exchange Commission on August 25, 2003; and

          (iv)    Current  Reports on Form 8-K filed by the Company with the
Securities  and Exchange  Commission on April 9, 2003 and June 6, 2003;

          (v)  Term  sheet  with   respect  to  a  proposed   transaction   with
Schlumberger; and

          (vi)  Term  sheet  with  respect  to  a  proposed   transaction   with
Halliburton (collectively, items (i) through (vi), the "Disclosure Documents").

          (f) In making the proposed investment decision,  the Lender is relying
solely on investigations made by the Lender and its  representatives.  The offer
to sell the Debentures was  communicated to the Lender in such a manner that the
Lender was able to ask questions of and receive  answers from the  management of
the Borrower concerning the terms and conditions of the proposed transaction and
that at no time was the Lender  presented  with or  solicited  by or through any
leaflet, public promotional meeting,  television advertisement or any other form
of general or public advertising or solicitation.

          (g) The Lender acknowledges that it has been advised that:

          (i) Neither the  Debentures  nor the shares of Common Stock into which
the Debentures are  convertible  have been approved or disapproved by the SEC or
any  state  securities  commission  nor  has  the  SEC or any  state  securities
commission  passed upon the accuracy or adequacy of any  representations  by the
Borrower. Any representation to the contrary is a criminal offense.

          (ii) Neither the  Debentures nor the shares of Common Stock into which
the Debentures  are  convertible  have been  recommended by any federal or state
securities  commission  or  regulatory  authority.  Furthermore,  the  foregoing
authorities  have not confirmed  the accuracy or determined  the adequacy of any
representation. Any representation to the contrary is a criminal offense.

          (iii) The  Debentures  and the  shares of Common  Stock into which the
Debentures are  convertible are  "Restricted  Securities"  within the meaning of
Rule  144  under  the   Securities   Act,   are  subject  to   restrictions   on
transferability  and  resale  and may not be  transferred  or  resold  except as
permitted  under  the  Securities  Act and  applicable  state  securities  laws,
pursuant to registration or exemption therefrom.

          (h)  The  Lender  further  represents  and  warrants  that  it  is  an
"accredited  investor"  within the meaning of Rule 501 of Regulation D under the
Securities Act.

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<PAGE>

ARTICLE X. - BOARD OF DIRECTORS

Section 10.01     Board Representation or Attendance by Observer.

          (a)  Borrower  herewith  agrees that  subject to  Subsection  10.01(c)
below, the Agent shall have the right, from time to time, to designate a nominee
to serve as a member of the Board of  Directors of  Borrower.  In  addition,  if
while Agent has the right to name a director pursuant to the preceding sentence,
a monetary  Default under Section 8.01 hereof shall occur and remain uncured for
ten (10) days,  the Agent shall have the right to designate  one (1)  additional
nominee to serve as a member of the Board of  Directors  of  Borrower.  Borrower
will  nominate  and  use  its  best  efforts  to  secure  the  election  of such
designee(s)  as  Director(s)  of  Borrower.  During  such  time as Agent has not
exercised such rights,  the Agent shall have the right to designate an observer,
who shall be entitled to attend and  participate  (but not vote) in all meetings
of the Board of  Directors  and to receive all  notices,  reports,  information,
correspondence  and  communications  sent by Borrower to members of the Board of
Directors.  All costs and expenses  incurred by any such designated  Director or
observer, or by Agent on behalf of such Director or observer,  shall be promptly
reimbursed by Borrower, consistent with such reasonable policies with respect to
the reimbursement of expenses as Borrower shall adopt from time to time.

          (b) Any such Director or observer shall, if requested to do so, absent
himself  or  herself  from the  meeting  in the  event of,  and so long as,  the
Directors  are  considering  and acting on matters  pertaining  to any rights or
obligations of Borrower or the Lender under this Agreement, the Debentures,  the
other Loan Documents or the Subsidiary Documents.

          (c)  Notwithstanding  the provisions of Subsection  (a) above,  if the
Lender shall cease to be the beneficial  holder of Common Stock  representing at
least five percent (5%) of the issued and  outstanding  shares of Common  Stock,
the Borrower  shall not be obligated to cause any person who is not an affiliate
of the Agent to be elected to the Board of Directors of the Borrower.

Section 10.02  Limitation of Authority of Persons Designated as a Director
               Nominee.

          It is  provided  and agreed  that the actions and advice of any person
while serving pursuant to Section 10.01 as a Director or an observer at meetings
of the Board of  Directors  shall be  construed  to be the actions and advice of
that person alone and not be construed as actions of the Lender as to any notice
of requirements or rights of Lender under this  Agreement,  the Debentures,  the
other Loan Documents or the Subsidiary Documents nor as actions of the Lender to
approve  modifications,  consents,  amendments or waivers thereof;  and all such
actions or notices  shall be deemed  actions or notices of the Lender  only when
duly  provided in writing and given in  accordance  with the  provisions of this
Agreement.

Section 10.03     Nonliability of the Lender.

          The relationship  between Borrower and the Lender is, and shall at all
times remain,  solely that of borrower and lender. The Lender neither undertakes
nor  assumes  any  responsibility  or  duty  to  Borrower  to  review,  inspect,
supervise,  pass  judgment  upon or inform  Borrower of any matter in connection
with any phase of Borrower's  business,  operations  or condition,  financial or
otherwise.  Borrower  shall rely  entirely upon its own judgment with respect to
such matters, and any review, inspection,  supervision,  exercise of judgment or
information  supplied to Borrower by the Lender, or any  representative or agent
of the Lender,  in connection  with any such matter is for the protection of the
Lender, and neither Borrower nor any third party is entitled to rely thereon.

                                       44
<PAGE>

ARTICLE XI. -  AGENCY PROVISIONS

Section 11.01     The Lender's Representations and Warranties to Agent.

          Lender represents and warrants to the Agent:

          (a) It is legal for it to make the Loan,  and the  making of such Loan
complies with laws applicable to it;

          (b) It has made,  its own  independent  review  (including any desired
investigations and inspections) of, and it accepts and approves,  the Loan, this
Agreement and the  associated  documents  and all other matters and  information
which it deems  pertinent.  It  acknowledges  that  the Loan  Documents  and the
Subsidiary  Documents  are  a  complete  statement  of  all  understandings  and
respective rights and obligations between and among the Lender, Subsidiaries and
Borrower regarding the Loan;

          (c) Lender  has not made any  express  or  implied  representation  or
warranty to any other lender with respect to this transaction;

          (d) It will, independently and without reliance upon any other lender,
and based upon such documents and  information  as it shall deem  appropriate at
the time, continue to make its own credit analysis,  appraisals and decisions in
taking  or  not  taking  action  under  this  Agreement,   and  will  make  such
investigation  as it deems  necessary to inform itself as to the Loan,  the Loan
Documents,  the Subsidiary  Documents,  Borrower and any  collateral;  provided,
however,  nothing  contained in this Section shall limit  Agent's  obligation to
provide  the  Lender  with the  information  and  documents  Agent is  expressly
required to deliver under this Agreement;

          (f) The Loan  Documents  executed  by the Lender are valid and binding
obligations of the Lender.

Section 11.02  Waiver of Loan Provisions or Interest or Principal Payments.

          A waiver of an interest  or  principal  payment,  a  declaration  of a
Default  or any  amendment,  modification  or  waiver of this  Agreement  or the
Debentures  will  require the  consent of the Lender,  which may be given by the
Agent on behalf of the Lender.

Section 11.03     Agency.

          (a) Lender hereby  designates  and appoints  Renaissance  Group as its
Agent under this  Agreement and  authorizes the Agent to take such action on its
behalf under the  provisions of this  Agreement and the other Loan Documents and
the Subsidiary  Documents and to exercise such powers as are set forth herein or
therein,  together with such other powers as are reasonably  incidental thereto.
In performing its functions and duties under this Agreement, the Agent shall act
solely as agent of the  Lender and does not  assume,  and shall not be deemed to
have assumed,  any obligation  toward or relationship of agency or trust with or
for Borrower.  The Agent may perform any of its duties under this Agreement,  or
under the other Loan  Documents or the Subsidiary  Documents,  by or through its
agents or employees.

          (b) The Agent shall have no duties or  responsibilities  except  those
expressly  set forth in this  Agreement,  in the other Loan  Documents or in the
Subsidiary  Documents.  Except as expressly  provided herein,  the duties of the

                                       45
<PAGE>

Agent shall be mechanical and  administrative  in nature.  The Agent shall have,
and may use, its sole  discretion  with respect to exercising or refraining from
taking any actions which the Agent is expressly entitled to take or assert under
this Agreement, the other Loan Documents and the Subsidiary Documents. The Agent
shall not have,  by reason of this  Agreement,  a  fiduciary  relationship  with
respect  to the  Lender.  Nothing  in  this  Agreement,  any of the  other  Loan
Documents or any of the Subsidiary Documents, express or implied, is intended to
or shall be  construed  to impose upon the Agent any  obligations  in respect of
this  Agreement,  any of  the  other  Loan  Documents  or any of the  Subsidiary
Documents  except as expressly  set forth herein or therein.  If the Agent seeks
the consent or approval  of the Lender to the taking or  refraining  from taking
any action  hereunder,  the Agent shall send notice  thereof to the Lender.  The
Agent  may  employ  agents,  co-agents  and  attorneys-in-fact  and shall not be
responsible to the Lender or Borrower, except as to money or securities received
by it or its  authorized  agents,  for the  negligence or misconduct of any such
agents or attorneys-in-fact selected by it with reasonable care.

          (c) Neither the Agent nor any of its officers, directors, employees or
agents  shall be liable to the Lender  for any action  taken or omitted by it or
any of them under this Agreement,  any of the other Loan Documents or any of the
Subsidiary  Documents,  or in connection  herewith or therewith,  except that no
Person shall be relieved of any liability  imposed by law,  intentional  tort or
gross  negligence.  The Agent  shall not be  responsible  to the  Lender for any
recitals, statements,  representations or warranties contained in this Agreement
or for the  execution,  effectiveness,  genuineness,  validity,  enforceability,
collectability or sufficiency of this Agreement, any of the other Loan Documents
or any of  the  Subsidiary  Documents  or any of the  transactions  contemplated
thereby,  or for the financial  condition of Borrower or the  Subsidiaries.  The
Agent  shall  not  be  required  to  make  any  inquiry  concerning  either  the
performance or observance of any of the terms,  provisions or conditions of this
Agreement, any of the other Loan Documents or any of the Subsidiary Documents or
the financial  condition of Borrower,  or the existence or possible existence of
any  Default or Event of  Default.  Agent  shall  give the Lender  notice of any
Default or Event of Default of which Agent has actual notice.  The Agent may, at
any time,  request  instructions  from the Lender with respect to any actions or
approvals  which,  by the  terms of this  Agreement,  of any of the  other  Loan
Documents  or of any of the  Subsidiary  Documents,  the Agent is  permitted  or
required to take or to grant, and if such  instructions are promptly  requested,
the Agent shall be  absolutely  entitled to refrain from taking any action or to
withhold  any approval and shall not be under any  liability  whatsoever  to any
Person for refraining  from any action or withholding  any approval under any of
the Loan  Documents  or any of the  Subsidiary  Documents  until  it shall  have
received such instructions from the Lender. Without limiting the foregoing,  the
Lender  shall  not have any right of action  whatsoever  against  the Agent as a
result of the Agent acting or refraining from acting under this  Agreement,  any
of the other Loan  Documents or any of the  Subsidiary  Documents in  accordance
with the instructions of the Lender.

          (d) The Agent  shall be  entitled  to rely upon any  written  notices,
statements,  certificates,  orders or other  documents or any telephone  message
believed  by it, in good  faith,  to be  genuine  and  correct  and to have been
signed,  sent or made by the proper  Person,  and with  respect  to all  matters
pertaining  to this  Agreement,  any of the other Loan  Documents  or any of the
Subsidiary  Documents  and its duties  hereunder or  thereunder,  upon advice of
counsel selected by it.

          (e) To the extent that the Agent is not reimbursed and  indemnified by
Borrower,  the Lender will reimburse and indemnify the Agent for and against any
and  all  liabilities,   obligations,   losses,  damages,  penalties,   actions,
judgments,  suits,  costs,  expenses,  advances or  disbursements of any kind or
nature  whatsoever  which may be imposed on, incurred by or asserted against the
Agent in any way relating to or arising out of this Agreement,  any of the other
Loan  Documents,  or any of the  Subsidiary  Documents  or any  action  taken or
omitted by the Agent under this  Agreement,  any of the other Loan  Documents or
any of the  Subsidiary  Documents.  The  obligations  of the  Lender  under this
indemnification provision shall survive the payment in full of the Loans and the
termination of this Agreement.

                                       46
<PAGE>

ARTICLE XII. -  MISCELLANEOUS

Section 12.01     Strict Compliance.

          Any  waiver by the Lender of any  breach or any term or  condition  of
this Agreement,  the other Loan Documents or the Subsidiary  Documents shall not
be deemed a waiver of any other  breach,  nor shall any  failure to enforce  any
provision  of  this  Agreement,  the  other  Loan  Documents  or the  Subsidiary
Documents  operate as a waiver of such provision or of any other provision,  nor
constitute  nor be deemed a waiver or release of Borrower for  anything  arising
out of, connected with or based upon this Agreement, the other Loan Documents or
the Subsidiary Documents.

Section 12.02     Waivers and Modifications.

          All modifications,  consents, amendments or waivers (herein "Waivers")
of any provision of this Agreement, the Debentures,  any other Loan Documents or
any  Subsidiary  Documents,  and any consent to  departure  therefrom,  shall be
effective  only if the same  shall be in writing by the Lender and then shall be
effective only in the specific  instance and for the purpose for which given. No
notice or demand given, in any case,  shall  constitute a waiver of the right to
take other action in the same, similar or other instances without such notice or
demand. No failure to exercise, and no delay in exercising, on the part of Agent
or Lender, any right hereunder shall operate as a waiver thereof,  nor shall any
single or  partial  exercise  thereof  preclude  any other or  further  exercise
thereof or the  exercise  of any other  right.  The rights of Lender  hereunder,
under the other Loan  Documents and under the Subsidiary  Documents  shall be in
addition to all other rights provided by law.

Section 12.03     Limitation on Liability.

          The duties,  warranties,  covenants and promises arising from the Loan
Documents and the  Subsidiary  Documents of Lender or Agent to Borrower shall be
several and not joint,  and Borrower  shall have no legal or equitable  cause of
action  against  Lender  or Agent  (or  their  successors  or  assigns)  for any
liability of the other (or its successors or assigns).

Section 12.04     [Intentionally Left Blank]

Section 12.05     Invalid Provisions.

          If any provision of any Loan  Document is held to be illegal,  invalid
or unenforceable under present or future laws during the term of this Agreement,
such provision shall be fully  severable;  such Loan Document shall be construed
and enforced as if such illegal,  invalid or  unenforceable  provision had never
comprised a part of such Loan  Document;  and the  remaining  provisions of such
Loan Document shall remain in full force and effect and shall not be affected by
the illegal,  invalid or  unenforceable  provision or by its severance from such
Loan  Document.   Furthermore,   in  lieu  of  each  such  illegal,  invalid  or
unenforceable provision shall be added as part of such Loan Document a provision
mutually  agreeable to Borrower and Lender as similar in terms to such  illegal,
invalid or  unenforceable  provision as may be possible and be legal,  valid and
enforceable.  In the event  Borrower  and  Lender  are  unable  to agree  upon a
provision to be added to the Loan Document  within a period of ten (10) business
days after a provision  of the Loan  Document is held to be illegal,  invalid or
unenforceable,  then a provision acceptable to independent arbitrators,  such to
be  selected in  accordance  with the  provisions  of the  American  Arbitration
Association,  as  similar  in terms to the  illegal,  invalid  or  unenforceable
provision  as is possible  and be legal,  valid and  enforceable  shall be added
automatically  to such Loan Document.  In either case, the effective date of the
added  provision shall be the date upon which the prior provision was held to be
illegal, invalid or unenforceable.

                                       47
<PAGE>

Section 12.06     Maximum Interest Rate.

          (a)  Regardless  of  any  provision  contained  in  any  of  the  Loan
Documents,  Lender  shall  never be  entitled  to  receive,  collect or apply as
interest on the  Debentures  any amount in excess of interest  calculated at the
Maximum Rate,  and, in the event that Lender ever receives,  collects or applies
as interest any such excess,  the amount which would be excessive interest shall
be deemed to be a partial prepayment of principal and treated hereunder as such;
and, if the principal  amount of the  Obligation is paid in full,  any remaining
excess shall  forthwith be paid to Borrower.  In determining  whether or not the
interest  paid or  payable  under  any  specific  contingency  exceeds  interest
calculated at the Maximum Rate, Borrower and Lender shall, to the maximum extent
permitted under applicable law, (i) characterize any nonprincipal  payment as an
expense,  fee or  premium  rather  than  as  interest,  (ii)  exclude  voluntary
prepayments and the effects thereof, and (iii) amortize,  pro rate, allocate and
spread,  in equal  parts,  the total  amount of interest  throughout  the entire
contemplated  term of the  Debentures;  provided that, if the Debentures is paid
and  performed in full prior to the end of the full  contemplated  term thereof,
and if the interest  received for the actual period of existence thereof exceeds
interest  calculated  at the Maximum  Rate,  Lender shall refund to Borrower the
amount of such excess or credit the amount of such excess  against the principal
amount of the Debentures and, in such event,  Lender shall not be subject to any
penalties provided by any laws for contracting for, charging,  taking, reserving
or receiving interest in excess of interest calculated at the Maximum Rate.

          (b) "Maximum  Rate" shall mean,  on any day,  the highest  nonusurious
rate of interest  permitted by  applicable  law on such day that, at any time or
from time to time, may be contracted for, taken,  reserved,  charged or received
on the  Indebtedness  evidenced  by the  Debentures  under  the laws  which  are
presently  in effect of the United  States of America  and the laws of any other
jurisdiction  which are or may be applicable to the holder of the Debentures and
such Indebtedness or, to the extent permitted by law, under such applicable laws
of the United States of America and the laws of any other jurisdiction which are
or may be applicable to the holder of the  Debentures and which may hereafter be
in effect  and  which  allow a higher  maximum  nonusurious  interest  rate than
applicable laws now allow.

Section 12.07     Participations and Assignments of the Debentures.

          (a)  Lender  and the  Agent  shall  have the  right  to  enter  into a
participation  agreement with any other party or its Affiliates  with respect to
the Debentures, or to sell or assign all or any part of the Debentures,  but any
participation,  sale or  assignment  shall not  affect  the rights and duties of
Lender or the Agent hereunder vis-a-vis Borrower;  provided,  however,  that any
purchaser  or  assignee  of all or any  participation  in a  Debenture  shall be
entitled to receive additional amounts payable with respect to Indemnified Taxes
pursuant to Section 2.10(a) or  indemnification  for Indemnified  Taxes or Other
Taxes pursuant to Section 2.10(c) only to the same extent as if it were a Lender
(and, with respect to any particular purchaser or assignee, to no greater extent
than the Lender that sold or assigned the Debenture (or  participation  therein)
to such  purchaser  or  assignee).  In the event that all or any  portion of the
Debentures  shall be at any time,  assigned,  transferred  or  conveyed to other
parties,  any action,  consent or waiver  (except for compromise or extension of
maturity),  to be given  or  taken by  Lender  or the  Agent  hereunder  (herein
"Action"),  shall be such  action as taken by the holder of a majority in amount
of the Principal Amount of the Debentures then  outstanding,  as such holder are
recorded on the books of Borrower and  represented  by the Agent as described in
subsection (b) below.

                                       48
<PAGE>

          (b) Any Lender,  and any  purchaser or assignee of a Debenture (or any
participation  therein)  held by such  Lender,  that  changes  its  domicile  or
residence  for tax  purposes,  shall be entitled to receive  additional  amounts
payable  with  respect to  Indemnified  Taxes  pursuant  to  Section  2.10(a) or
indemnification for Indemnified Taxes or Other Taxes pursuant to Section 2.10(c)
only to the same  extent  that such  Lender,  or  purchaser  or assignee of such
Lender, was entitled to receive such additional amounts (taking into account the
limitations  imposed by  subparagraph  (a),  hereof)  immediately  prior to such
change in domicile or residence for tax purposes.

          (c) Assignment or sale of a Debenture  shall be effective on the books
of Borrower only upon (i) endorsement of the Debentures, or part thereof, to the
proposed new holder,  along with a current notation of the amount of payments or
installments  received  and net  Principal  Amount yet  unfunded or unpaid,  and
presentment  of  such   Debentures  to  Borrower  for  issue  of  a  replacement
Debentures,  in the name of the new  holder;  (ii)  delivery  of an  opinion  of
counsel,  reasonably  satisfactory to Borrower,  that transfer shall not require
registration or qualification under applicable state or federal securities laws;
and (iii) delivery of any Prescribed Forms applicable to such new holder.

          (d) The  Debentures  may be  sold,  transferred  or  assigned  only to
Affiliates  of Lender or permitted  transferees  in multiples of Fifty  Thousand
Dollars ($50,000).

Section 12.08     Confidentiality.

          (a)  Subject  to the  penultimate  sentence  of this  Subsection,  all
financial  reports or  information  that are furnished to Lender or Holders,  or
their respective director designees or other  representatives,  pursuant to this
Agreement  or  pursuant  to the  Debentures,  the other  Loan  Documents  or the
Subsidiary  Documents shall be treated as confidential  unless and to the extent
that such  information has been otherwise  publicly  disclosed by Borrower,  but
nothing herein contained shall limit or impair the Lender's or Holders' right to
disclose such reports to any appropriate Governmental Authority or member of the
United States Congress, or to use such information to the extent pertinent to an
evaluation  of the  Obligation,  or to  enforce  compliance  with the  terms and
conditions of this  Agreement,  or to take any lawful action which the Lender or
Holders  deem  necessary  to  protect  their  respective  interests  under  this
Agreement.  Notwithstanding the foregoing,  Borrower shall not deliver financial
and  other  information  to  Lender  which  will  be  material  and  non  public
information following the next filing by Borrower of a report on Form 10Q unless
Borrower shall specifically  designate that information as such in writing prior
to delivery  thereof to Lender,  and Lender  shall be given the  opportunity  to
decline  to  receive  such  information  for a so  long  as  Lender  shall  deem
appropriate.  To the extent that Lender shall reasonably request, Borrower shall
cooperate with Lender by delivering any material nonpublic  information declined
by Lender  pursuant to the  preceding  sentence to a third party  designated  by
Lender,  but such delivery  shall not be deemed a delivery to Lender of material
nonpublic information and none of such information shall be imputed to Lender.

          (b) Lender and the Agent shall use their reasonable efforts to protect
and preserve the confidentiality of Borrower's confidential information,  except
for such  disclosure  as shall be  required  for  compliance  by  Lender  or its
respective   director   designees  with  SEC  reporting   requirements   or  any
administrative or judicial proceeding or otherwise as required by law or process
of law. The provisions of Section 5.01  notwithstanding,  Borrower may refuse to
provide  information as required pursuant thereto to an assignee or successor in
interest  to Lender,  unless and until such  assignee  or  successor  shall have
executed an agreement  to maintain the  confidentiality  of the  information  as
provided herein.

          (c) Notwithstanding anything herein to the contrary, any party subject
to  confidentiality  obligations  hereunder or under any other related  document

                                       49
<PAGE>

(and any employee, representative or other agent of any such party) may disclose
to any and all persons,  without limitation of any kind, the U.S. federal income
tax  treatment of the U.S.  federal  income tax  structure  of the  transactions
contemplated  herein and all materials of any kind (including  opinions or other
tax  analyses)  that are provided to it relating to such tax  treatment  and tax
structure. In addition, the confidentiality provisions hereof shall not restrict
any person from disclosing any matter to any representative of the United States
government or any of its agencies or any member of the United States Congress.

Section 12.09     Binding Effect.

          The Loan  Documents  shall be binding upon and inure to the benefit of
Borrower  and  Lender  and  their  respective  successors,   assigns  and  legal
representatives;  provided,  however,  that Borrower may not,  without the prior
written  consent of Lender,  assign any rights,  powers,  duties or  obligations
thereunder.

Section 12.10     No Third Party Beneficiary.

          Except as  contemplated  with  respect to  Indemnitees  and Holders in
Section  5.20 and  Article  IX,  respectively,  the  parties  do not  intend the
benefits of this Agreement to inure to any third party, nor shall this Agreement
be  construed  to make or render  Lender  liable to any  materialman,  supplier,
contractor,  subcontractor,  purchaser  or  lessee  of  any  property  owned  by
Borrower,  or for debts or claims accruing to any such persons against Borrower.
Notwithstanding anything contained herein, in the Debentures,  in any other Loan
Document or in any Subsidiary Document,  no conduct by any or all of the parties
hereto, before or after signing this Agreement,  any other Loan Document nor any
Subsidiary Document, shall be construed as creating any right, claim or cause of
action against Lender, or any of its respective officers,  directors,  agents or
employees,  in favor of any materialman,  supplier,  contractor,  subcontractor,
purchaser or lessee of any property  owned by Borrower,  nor to any other person
or entity other than Borrower.

Section 12.11     Entirety.

          This  Agreement  and the  Debentures,  the other Loan  Documents,  the
Subsidiary  Documents and any other  documents or instruments  issued or entered
into  pursuant  hereto and  thereto  contain  the entire  agreement  between the
parties and supersede all prior agreements and  understandings,  written or oral
(if any), relating to the subject matter hereof and thereof.

Section 12.12     Headings.

          Section  headings are for convenience of reference only and, except as
a  means  of   identification   of  reference,   shall  in  no  way  affect  the
interpretation of this Agreement.

Section 12.13     Survival.

          All  representations  and  warranties  made by Borrower  herein  shall
survive delivery of the Debentures and the making of the Loans.

Section 12.14     Multiple Counterparts.

          This Agreement may be executed in any number of  counterparts,  all of
which taken together shall constitute one and the same agreement, and any of the
parties hereto may execute this Agreement by signing any such  counterpart.  The
parties  contemplate  that one or more of the signatures to this Agreement or to
the other Loan Documents may be delivered by facsimile transmission.

                                       50
<PAGE>

Section 12.15     Knowledge of Borrower.

          As used herein or in any of the other Loan  Documents,  all references
to  "Borrower's  best  knowledge"  or "to the knowledge of Borrower" or words or
phrases of similar  import  (whether or not modified by any  additional  phrase)
shall in each case mean the  knowledge of Borrower,  the  Subsidiaries  or their
respective executive officers and directors.

Section 12.16     Notices.

          Any notices or other communications  required to be given hereunder or
under any other  documents and  instruments  referred to herein must be given in
writing and personally  delivered sent by reputable  overnight service,  such as
FedEx. Provided,  however, that any notice permitted to be given hereunder,  and
not required to be delivered in accordance with the preceding sentence,  and any
communication or report required to be delivered under Sections 5.01, 5.02, 5.03
or 5.04 may be delivered by  electronic  mail,  telex or facsimile  transmission
delivered or  transmitted to the party to whom such notice or  communication  is
directed,  with confirmation thereupon given in writing and personally delivered
or mailed by prepaid certified or registered mail.

          If to Borrower:                Gasco Energy, Inc.
                                         14 Inverness Drive East
                                         Building H, Suite 236
                                         Englewood, CO 80112
                                         Attn:    Mark Erickson
                                         Telephone:        (303) 483-0044
                                         Telecopier:       (303) 483-0011

          with a copy to:                Vinson & Elkins L.L.P.
                                         2300First City Tower
                                         1001 Fannin
                                         Houston, Texas  77002
                                         Attn:    Michael Finch
                                         Telephone:        (713)-758 2158
                                         Telecopier:       (713) 615-5282

          If to Lender:                  Renaissance Capital Growth & Income
                                          Fund III, Inc.
                                         c/o Renaissance Capital Group, Inc.
                                         8080 N. Central Expressway,
                                          Suite 210-LB59
                                         Dallas, TX 75206
                                         Attn:    Russell Cleveland
                                                  President and CEO
                                         Telephone:      (214) 891-8294
                                         Telecopier:     (214) 891-8291

                                       51
<PAGE>

                                         Renaissance US Growth & Investment
                                           Trust PLC
                                         c/o Renaissance Capital Group, Inc.
                                         8080 N. Central Expressway,
                                           Suite 210-LB59
                                         Dallas, TX 75206
                                         Attn:    Russell Cleveland
                                                  President and CEO
                                         Telephone:      (214) 891-8294
                                         Telecopier:     (214) 891-8291

                                         BFSUS Special Opportunities Trust PLC
                                         c/o Renaissance Capital Group, Inc.
                                         8080 N. Central Expressway,
                                           Suite 210-LB59
                                         Dallas, TX 75206
                                         Attn:    Russell Cleveland
                                                  President and CEO
                                         Telephone:      (214) 891-8294
                                         Telecopier:     (214) 891-8291

          with a copy to:                Jackson Walker L.L.P.
                                         901 Main Street, Suite 6000
                                         Dallas, Texas  75202
                                         Attn:    Jeffrey M. Sone
                                         Telephone:      (214) 953-6107
                                         Telecopier:     (214) 953-5822

          If to Agent:                   Renn Capital Group, Inc.
                                         8080 N. Central Expressway,
                                           Suite 210-LB59
                                         Dallas, TX 75206
                                         Attn:    Russell Cleveland
                                                  President and CEO
                                         Telephone:      (214) 891-8294
                                         Telecopier:     (214) 891-8291

          with a copy to:                Jackson Walker L.L.P.
                                         901 Main Street, Ste 6000
                                         Dallas, Texas  75202
                                         Attn:    Jeffrey M. Sone
                                         Telephone:      (214) 953-6107
                                         Telecopier:     (214) 953-5822

          Any notice delivered  personally in the manner provided herein will be
deemed  given to the  party to whom it is  directed  upon  the  party's  (or its
agent's) actual receipt.  Any notice addressed and mailed in the manner provided
herein will be deemed given to the party to whom it is addressed at the close of
business,  local time of the recipient, on the fourth business day after the day
it is placed in the mail, or, if earlier, the time of actual receipt.

                                       52
<PAGE>

Section 12.17     Tax Residence

          Each Lender  represents that it is either (i) a corporation  organized
under the laws of the United  States or a state or other  political  subdivision
thereof or the  District of Columbia,  or (ii) a resident of the United  Kingdom
for tax  purposes  that is  eligible  for the  benefits of the Income Tax Treaty
between the United  States and the United  Kingdom,  including  the  benefits of
Article 11  thereof.  Each  Lender that makes the  representation  described  in
clause  (ii) of the  preceding  sentence  agrees  that it shall  provide  to the
Borrower  prior to any  payment  under the  Debenture  (and at such times as are
required  thereafter) a Form W-8BEN (or applicable  successor  form)  certifying
that it is a resident  of the United  Kingdom  and that it is  eligible  for the
benefits  of the  Income  Tax Treaty  between  the United  States and the United
Kingdom,  including the benefits of Article 11. Borrower shall, unless otherwise
instructed  by  Lender  to the  contrary,  withhold  any  payment  due under the
Debenture until such time as the Form W-8BEN has been provided. Lender shall use
commercially  reasonable  efforts  to apply for a U.S.  Taxpayer  Identification
Number not later than 5 days following the Closing Date.

Section 12.18     Governing Law.

          THIS LOAN  AGREEMENT  SHALL BE GOVERNED BY,  CONSTRUED AND ENFORCED IN
ACCORDANCE WITH THE SUBSTANTIVE LAWS OF THE STATE OF COLORADO, WITHOUT REFERENCE
TO CONFLICTS OF LAWS PRINCIPLES,  AND THE APPLICABLE  FEDERAL LAWS OF THE UNITED
STATES OF  AMERICA,  EXCEPT THAT THE LAWS OF THE STATE OF UTAH,  AND  APPLICABLE
FEDERAL LAW, SHALL GOVERN MATTERS RELATED TO THE  INTERPRETATION AND APPLICATION
OF THE PROVISIONS OF THE MORTGAGE.

                            [Signature page follows.]

                                       53
<PAGE>

          IN WITNESS WHEREOF, this Agreement has been duly executed as of the
              date and year written above.
                                                BORROWER:

                                                GASCO ENERGY, INC.

                                                By:
                                                   ----------------------------
                                                   W. King Grant
                                                   Chief Financial Officer

                                                LENDER:

                                                BFSUS SPECIAL OPPORTUNITIES
                                                TRUST PLC

                                                By:
                                                   -----------------------------
                                                   Russell Cleveland, Director

                                                RENAISSANCE US GROWTH &
                                                INVESTMENT TRUST PLC

                                                By:
                                                   -----------------------------
                                                   Russell Cleveland, Director

                                              RENAISSANCE CAPITAL GROWTH &
                                              INCOME FUND III, INC.

                                              By:Renaissance Capital Group,Inc.,
                                                       Investment Adviser

                                              By:
                                                 -------------------------------
                                                   Russell Cleveland
                                                   President and CEO

                                                AGENT:

                                                RENN CAPITAL GROUP, INC.

                                                By:
                                                   ----------------------------
                                                   Russell Cleveland
                                                   President and CEO

                                       54
<PAGE>

ARTICLE XIII. -  SCHEDULES TO CONVERTIBLE LOAN AGREEMENT

Schedule 2.02              The Drilling Program

Schedule 2.09              Finder's Fees

Schedule 3.01              Closing Conditions

Schedule 4.03              Conflicts and Consents

Schedule 4.05              Liens

Schedule 4.06              Financial Condition

Schedule 4.08              Material Agreements

Schedule 4.09              Litigation

Schedule 4.10              Taxes

Schedule 4.11              Capitalization

Schedule 4.13              Employee Matters

Schedule 4.14              Employee Benefit Plans

Schedule 4.15              Permits

Schedule 4.16              Licenses and Permits

Schedule 4.17              Contracts

Schedule 4.19              Insider Agreements not listed on SEC Filings

Schedule 4.20              Subsidiaries

Schedule 4.21              Casualties

Schedule 4.25              Insurance

Schedule 4.27              Real Property

Schedule 4.28              Environmental Matters

Schedule 5.21              Ownership of Subsidiaries

Schedule 6.01              Indebtedness

Schedule 6.04              Transactions with Affiliates

                                       55
<PAGE>

                      SCHEDULE 2.02 - THE DRILLING PROGRAM

See attached schedule.

                                       56
<PAGE>

                          SCHEDULE 2.09 - FINDER'S FEES

Bruce Lazier - 1.5% Finder's Fee    $37,500.00

                                       57
<PAGE>

                        SCHEDULE 3.01 CLOSING CONDITIONS

(h) Lock-Up Letters

Michael K. Decker
W. King Grant
Marc Bruner

(m) Consents

Gasco  will need to obtain BLM  permits  for  drilling  wells on the Oil and Gas
Collateral and for constructing necessary pipelines.

                                       58
<PAGE>

                    SCHEDULE 4.03 - NO CONFLICTS OR CONSENTS

Gasco  obtained  the  waiver of  Section  2.5 and  Section  2.6 of the Shama Zoe
Property  Purchase  Agreement  dated  October 3, 2003.  Section 2.5 requires the
prior written consent of the general partner of Shama Zoe for Gasco to issue any
shares of its  common  stock for cash  consideration  less than  $1.80 per share
prior to certain events.

Section 2.6 requires the prior written  consent of the general  partner of Shama
Zoe for Gasco to issue any  shares  of its  common  stock  that are  subject  to
registration rights prior to certain events.

                                       59
<PAGE>

                              SCHEDULE 4.05 - LIENS

None.

                                       60
<PAGE>

                       SCHEDULE 4.06 - FINANCIAL CONDITION

None.

                                       61
<PAGE>

                       SCHEDULE 4.08 - MATERIAL AGREEMENTS
<TABLE>

----------------------------------------------------------------------------------------------------------------------------------
<S>                <C>                              <C>          <C>                                       <C>          <C>
   Agreement No.              Parties                  Date          Agreement Type                          County       State
----------------------------------------------------------------------------------------------------------------------------------
      A-1015       Burlington Oil & Gas Company       08/15/01   Muddy Creek Exploration Agreement          Sublette     Wyoming
----------------------------------------------------------------------------------------------------------------------------------
      A-1027       Burlington Oil & Gas Company       08/15/01   CD Exploration Agreement                   Sublette     Wyoming
----------------------------------------------------------------------------------------------------------------------------------
      A-1004       Shama Zoe Limited Partnership      8/9/2002   Property Purchase Agreement                Sublette     Wyoming
----------------------------------------------------------------------------------------------------------------------------------
      A-1018       Caza Drilling Inc.                 8/1/2002   Drilling Agreement                         Sublette     Wyoming
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       62
<PAGE>

                           SCHEDULE 4.09 - LITIGATION

Gasco  has  received  an  inquiry  fromt he FCC  asking  for  information  about
unsolicited fax  advertisements  sent on behalf of Gasco. Gasco has responded to
the inquiry and is awaiting response from the FCC.

Burlington  Resources Oil & Gas Company LP v. Gasco Energy, Inc., filed July 15,
2003 in District Court, Midland County, Texas.

Burlington  Resources Oil & Gas Company LP v. Pannonian Energy, Inc., filed June
9, 2003 in District Court, Midland County, Texas.

Both of these suits relate to costs  incurred by  Burlington  in drilling  wells
subject to an AMI.

A wrongful death suit has been filed against three entities, which were involved
in the  drilling of a well of which  Pannonian  Energy,  Inc.  is the  operator.
Neither  Gasco nor  Pannonian  has been  named in this  lawsuit  and  management
believes  that the chance of either  company  being  included in this lawsuit is
remote.

                                       63
<PAGE>

                              SCHEDULE 4.10 - TAXES

None.

                                       64
<PAGE>

                         SCHEDULE 4.11 - CAPITALIZATION

Shares of Common Stock held in treasury         73,700

Options to purchase shares of Common Stock  5,353,250

Number of Options   Exercise Price          Expiration
                                              Date*

         2,258,000       $1.00            6/10/08-1/2/11
           150,000       $1.58            6/1/07-2/1/09
           100,000       $1.73            5/2/07-1/2/09
            50,000       $1.80               8/29/11
         1,301,000       $2.00               12/31/11
             8,000       $2.20           3/14/07-11/14/08
           670,000       $3.00            6/22/06-8/8/11
           613,750       $3.15            5/4/06-7/2/08
           202,500       $3.70            5/4/06-5/4/08
          -------

         5,353,250

* Outstanding  options are  calculated  assuming  continued  employment  vesting
requirements as consideration.

Shares of Series B Preferred Stock outstanding:      11,339
         Each  share of Series B  Preferred  Stock is  convertible  into  628.57
shares of Common Stock, subject to adjustment upon certain corporate events..

                                       65
<PAGE>

                           SCHEDULE 4.13 - EMPLOYMENT

None.

                                       66
<PAGE>

                       SCHEDULE 4.16 - LICENSE AND PERMITS

See Attached.

                                       67
<PAGE>

                            SCHEDULE 4.17 - CONTRACTS

         See Attached.

                                       68
<PAGE>

                     SCHEDULE 4.19 LIST OF 13D INDIVIDUALS

Richard C. McKenzie, Jr.
Margaret Byrne McKenzie
Seven Bridges Foundation, Inc.
Big Cat Energy Partners LP
Big Dog Energy Capital Management LLC
Paul Leibman
Wellington Management Company, LLP
Shama Zoe Limited Partnership
J. Caird Partners, L. P.
J. Caird Investors (Bermuda) L.P.

                                       69
<PAGE>

                          SCHEDULE 4.20 - SUBSIDIARIES

   Subsidiary of Borrower                                 Borrower Ownership

   Pannonian Energy, Inc.                                       100%
   San Joaquin Oil and Gas, Ltd.                                100%

                                       70
<PAGE>

                           SCHEDULE 4.21 - CASUALTIES

                                       71
<PAGE>

                            SCHEDULE 4.25 - INSURANCE

<TABLE>

----------------------------------------- ------------------------------------------- --------------------------------- -- ---
<S>                                                <C>                                   <C>
                 Policy                                    Provider                            Benefit Limits
----------------------------------------- ------------------------------------------- ---------------------------------
----------------------------------------- ------------------------------------------- ---------------------------------

----------------------------------------- ------------------------------------------- ---------------------------------
Business Property                                   IMA of Colorado, Inc.                   $5,000 - $1,000,000
----------------------------------------- ------------------------------------------- ---------------------------------
Extra Expense                                       IMA of Colorado, Inc.                         $25,000
----------------------------------------- ------------------------------------------- ---------------------------------
Valuable Papers                                     IMA of Colorado, Inc.                         $50,000
----------------------------------------- ------------------------------------------- ---------------------------------
Data Processing                                     IMA of Colorado, Inc.                    $30,000 - $90,000
----------------------------------------- ------------------------------------------- ---------------------------------
Crime                                               IMA of Colorado, Inc.                         $50,000
----------------------------------------- ------------------------------------------- ---------------------------------
Commercial General Liability                        IMA of Colorado, Inc.                   $5,000 - $3,000,000
----------------------------------------- ------------------------------------------- ---------------------------------
Business Automobile                                 IMA of Colorado, Inc.                 $1,000,000 per accident
----------------------------------------- ------------------------------------------- ---------------------------------
Umbrella Liability                                  IMA of Colorado, Inc.                  $500,000 - $10,000,000
----------------------------------------- ------------------------------------------- ---------------------------------
Worker's Compensation                               IMA of Colorado, Inc.                         $500,000
----------------------------------------- ------------------------------------------- ---------------------------------
Fiduciary Liability                                 IMA of Colorado, Inc.                         $500,000
----------------------------------------- ------------------------------------------- ---------------------------------
Directors & Officers Liability                     Royal Indemnity Company                       $5,000,000
----------------------------------------- ------------------------------------------- ---------------------------------
Management    Liability    and   Company
Reimbursement                                    Greenwich Insurance Company                     $5,000,000
----------------------------------------- ------------------------------------------- ---------------------------------
</TABLE>

                                       72
<PAGE>

               SCHEDULE 4.27 - REAL PROPERTY, OIL AND GAS PROPERTY

Well Name:                 Lytham Federal No. 22-22-9-19

Lessor:                    United States of America

                         Lessee: Pannonian Energy, Inc.

Serial No.:                UTU - 78433

Effective Date:            July 1, 1999

Recorded:                  January 9, 2001, Book 748, page 495

Description:               Township 9 South, Range 19 East
                           -------------------------------
                           Section 22:  SE/4 NW/4
                           Uintah County, Utah

Well Name:                 Federal No. 23-21-9-19

Lessor:                    United States of America

                         Lessee: Pannonian Energy, Inc.

Serial No.:                UTU - 78433

Effective Date:            July 1, 1999

Recorded:                  January 9, 2001, Book 748, page 495

Description:               Township 9 South, Range 19 East
                           -------------------------------
                           Section 21:  NE/4 SW/4
                           Uintah County, Utah

Well Name:                 Federal No. 32-31-9-19

Lessor:                    United States of America

                        Lessee: Retamco Operating, Inc.

Serial No.:                UTU - 76489

Effective Date:            July 1, 1997

Recorded:                  January 9, 2001, Book 748, page 459

Description:               Township 9 South, Range 19 East
                           -------------------------------
                           Section 31:  SW/4 NE/4
                           Uintah County, Utah

Well Name:                 Federal No. 23-29-9-19

Lessor:                    United States of America

Lessee:                    Medallion Exploration

Serial No.:                UTU - 76262

Effective Date:            April 1, 1997

Recorded:                  December 21, 2001, Book 747, page 245

Description:               Township 9 South, Range 19 East
                           -------------------------------
                           Section 29:  NE/4 SW/4
                           Uintah County, Utah

Well Name:                 Federal No. 42-29-9-19

Lessor:                    United States of America

Lessee:                    Medallion Exploration

Serial No.:                UTU - 76262

Effective Date:            April 1, 1997

Recorded:                  December 21, 2001, Book 747, page 245

Description:               Township 9 South, Range 19 East
                           -------------------------------
                           Section 29:  SE/4 NE/4
                           Uintah County, Utah

See also attached schedule.

..

                                       73
<PAGE>

                          SCHEDULE 4.28 - ENVIRONMENTAL

     (a)  None.

     (b)  None known of.

     (c)  Gasco Energy has been notified by the Wyoming State Oil and Gas
              Conservation Commission that the following wells should be plugged
              and abandoned and the wellsites reclaimed:

          i.   13-16 Muddy Creek Unit

          ii.  16-36 Muddy Creek Unit

          iii. 7-16 Luman

          iv.  16-21 Luman

     (d)  None known

     (e)

          i.   None known of.

          ii.  None known of.

          iii. None known of. .

                                       74
<PAGE>

                    SCHEDULE 5.21 - OWNERSHIP OF SUBSIDIARIES

None.

                                       75
<PAGE>

                          SCHEDULE 6.01 - INDEBTEDNESS

None.

                                       76
<PAGE>

                  SCHEDULE 6.04 - TRANSACTIONS WITH AFFILIATES

<TABLE>
<S>                    <C>                       <C>                          <C>                        <C>
      Affiliate         Relationship             Type of Transaction                   Payments                    Term

Marc A. Bruner          Director                 Consulting Contract           $10,000 per month          1/2/03 - 1/31/06

</TABLE>

                                       77
<PAGE>--------------------------------------------------------------------------------
This  Debenture has not been  registered  under the  Securities  Act of 1933, as
amended ("Act"),  or applicable state securities laws ("State Acts"),  and shall
not be sold,  hypothecated,  or otherwise  transferred,  unless such transfer is
made in compliance with the Act and the State Acts.
--------------------------------------------------------------------------------

                               GASCO ENERGY, INC.

                           8.00% Convertible Debenture

$_______                                                                 No. __

                         Date of Issue: October 15, 2003

     GASCO ENERGY, INC., a Nevada corporation (the "Company" or "Borrower"), for
value received, promises to pay to:

                                      --------------------------------------

                                     ----------------------------------------

                                                -------------------

or to its order, (together with any assignee, jointly or severally, the "Holder"
or  "Lender")  on or before  October  15,  2008 (the "Due  Date")  (unless  this
Debenture  shall  have been  sooner  called  for  redemption  or  presented  for
conversion  as  herein  provided),  the sum of  ________________________________
Dollars  ($_______) (the  "Principal  Amount") and to pay interest on the unpaid
Principal  Amount at the rate of 8.00% per annum. All payments of both principal
and interest  shall be made at the address of the Holder hereof as it appears in
the  books  and  records  of the  Borrower,  or at such  other  place  as may be
designated by the Holder hereof.

     1. Interest. Interest on the Principal Amount outstanding from time to time
shall be payable in monthly  installments  commencing  November  15,  2003,  and
subsequent  payments  shall be made on the  first day of each  month  thereafter
until the Principal  Amount and all accrued and unpaid  interest shall have been
paid in full.  Overdue  principal  and  interest  on the  Debenture  shall  bear
interest at the lesser of Eighteen  percent (18%) or the maximum rate  permitted
by applicable law.

     2.  Maturity.  If not sooner paid,  redeemed or converted,  this  Debenture
shall mature on October 15, 2008 at which time the  remaining  unpaid  Principal
Amount, and all accrued and unpaid interest and any other charges then due under
the Convertible Loan Agreement, shall be due and payable in full. This Debenture
shall be prepaid pro rata with any prepayments of Indebtedness other than Senior
Obligations.  This  Debenture  shall be senior in right of  payment to all other
Indebtedness of the Company, except the Senior Obligations.

                                       1
<PAGE>

     3.  Mandatory  Principal  Installments.  If this  Debenture  is not  sooner
redeemed or  converted  as  provided  hereunder,  Borrower  shall pay to Holder,
commencing  on  November  15,  2005  and  continuing  on the  first  day of each
successive month thereafter prior to maturity,  mandatory  principal  redemption
installments,  each of such  installments to be in the amount of Fifteen Dollars
($15) per One Thousand Dollars ($1,000) of the original  Principal  Amount,  and
further,  at maturity,  Borrower shall pay to Holder a final  installment of the
remaining  unpaid  Principal  Amount and all accrued and unpaid interest on this
Debenture and any other charges then due under this Debenture or the Convertible
Loan Agreement.

     4. Optional Redemption by Holder.

          (a) If at any time  after the date  hereof  (i) the  Company's  Common
     Stock, par value $0.01 per share ("Common Stock"), is not listed on the New
     York Stock Exchange  ("NYSE") or the American Stock Exchange  ("AMEX"),  or
     quoted on the NASDAQ  National  Market  System  ("National  Market") or the
     NASDAQ SmallCap System ("SmallCap") or the Over-the-Counter  Bulletin Board
     ("OTCBB"),  (ii)  there is a change  of  control  of the  Company's  voting
     securities,  without  the written  consent of the Holder,  (iii) there is a
     change of at least  two-thirds  (2/3) of the members of the Company's Board
     of  Directors  as it shall  exist on the date  hereof,  without the written
     consent  of the  Holder,  (iv) all or  substantially  all of the  assets or
     capital  stock of the  Company or its  subsidiaries  are sold,  without the
     consent of the Holder, or (v) the Company or its subsidiaries are merged or
     consolidated  with or  into  unaffiliated  entities,  without  the  written
     consent  of  Holder,  the  Holder  shall  have the  right to  require  this
     Debenture  to be  redeemed  by the  Company  at the sum equal to the unpaid
     Principal Amount plus the Makeup Amount (as subsequently  defined.) If this
     Debenture is redeemed  pursuant to this Section 4(a), the Borrower  intends
     for  Lender to  receive  the  return  of its  principal,  together  with an
     eighteen percent (18%) annualized return on the principal  outstanding from
     time to time hereunder.  Thus, for the purposes hereof, the "Makeup Amount"
     shall be the amount of money, above the repayment of outstanding  principal
     and accrued and unpaid interest,  that must be received by Lender as of the
     Redemption  Date, to assure that during the term of this Debenture,  Lender
     has received an eighteen percent (18%) return on its principal  outstanding
     from time to time. The date of redemption shall be the "Redemption Date".

          (b) The Holder may  exercise  its right to  require  that the  Company
     redeem this Debenture  pursuant to Section 4(a) prior to maturity by giving
     notice  thereof to the Company,  which  notice  shall  specify the terms of
     redemption  (including  the place at which the Holder may obtain  payment),
     the total redemption  payment and the Redemption Date, which date shall not
     be less than 30 days nor more than 90 days after the date of the notice.

     5. Optional Redemption by Company.

          (a) On any interest  payment date,  and after  receipt of  irrevocable
     notice  from  the  Borrower  as  provided  for  below,  this  Debenture  is
     redeemable,  in whole  but not in  part,  at 101% of the  unpaid  Principal
     Amount,  together with accrued and unpaid  interest  through the Redemption
     Date, by the Company, if all of the following conditions are satisfied: (i)
     the  average  closing  bid price for the Common  Stock for the twenty  (20)
     consecutive  trading  days  prior to the date of notice  exceeds  an amount
     equal to three and one third (3 1/3)  times the  Conversion  Price  then in
     effect,  and the Common Stock is listed or quoted on the  National  Market,
     the SmallCap,  AMEX,  OTCBB or NYSE;  (ii) the average daily trading volume
     for the  twenty  (20)  consecutive  trading  days  prior to the date of the
     irrevocable  notice  shall be no less than One Hundred  Thousand  (100,000)
     shares;  (iii) the market  price for the Common Stock at the time of notice
     reflects a  price-to-book  value ratio,  based upon the most recently filed
     quarterly  financial  statements of the Borrower,  of no greater than three
     (3), and (iv) the shares of Common Stock  issuable upon  conversion of this
     Debenture  shall have been fully  registered  under  applicable  securities
     laws.  The Company's  right of redemption is subject to the Holder's  prior
     right of conversion of the Debenture.

                                       2
<PAGE>

          (b) If the Holder shall notify the Company in writing of its intent to
     sell or otherwise  transfer the Debenture  (other than to an affiliate or a
     nominee  holder of record),  this Debenture is redeemable at the Borrower's
     option,  in whole  but not in part,  at 101% of the then  unpaid  Principal
     Amount,  together with accrued and unpaid  interest  through the Redemption
     Date,  by the Company for a period of up to thirty (30) days after the date
     of notice.

          (c) The  Company  may  exercise  its  right to redeem  this  Debenture
     pursuant  to  Sections  5(a) and (b) prior to  maturity  by  giving  notice
     thereof to the Holder of this  Debenture  as such name appears on the books
     of the  Borrower,  which  notice  shall  specify  the  terms of  redemption
     (including  the place at which the Holder may  obtain  payment),  the total
     redemption  payment and the Redemption  Date,  which date shall not be less
     than 30 days nor more than 90 days after the date of the notice.

     6. Conversion  Right. The Holder of this Debenture shall have the right, at
Holder's option, at any time, to convert all, or, in multiples of $125,000,  any
part of this Debenture into such number of fully paid and  nonassessable  shares
of Common Stock as provided  herein.  The Holder of this  Debenture may exercise
the  conversion  right by giving  written  notice (the  "Conversion  Notice") to
Borrower  of the  exercise  of such right and stating the name or names in which
the stock  certificate or stock  certificates for the shares of Common Stock are
to be issued and the address to which such certificates shall be delivered.  The
Conversion Notice shall be accompanied by the Debenture. The number of shares of
Common Stock that shall be issuable upon conversion of the Debenture shall equal
the  outstanding  Principal  Amount of the Debenture  divided by the  Conversion
Price (as  defined  below)  and in effect on the date the  Conversion  Notice is
given; provided,  however, that in the event that this Debenture shall have been
partially redeemed,  shares of Common Stock shall be issued pro rata, rounded to
the nearest whole share. Conversion shall be deemed to have been effected on the
date the Conversion  Notice is received (the "Conversion  Date"). In the case of
any Debenture  called for redemption,  the conversion  rights will expire at the
close of business on the Redemption Date. Within twenty (20) business days after
receipt of the  Conversion  Notice,  Borrower  shall  issue and  deliver by hand
against a signed receipt therefor or by United States  registered  mail,  return
receipt  requested,  to the address designated in the Conversion Notice, a stock
certificate or stock certificates of Borrower  representing the number of shares
of Common  Stock to which  Holder is entitled  and a check or cash in payment of
all  interest  accrued  and  unpaid on the  Debenture  up to and  including  the
Conversion  Date.  The  conversion  rights  will be  governed  by the  following
provisions:

                                       3
<PAGE>

          (a) Conversion  Price. On the issue date hereof and until such time as
     an adjustment shall occur, the initial Conversion Price shall be $0.60.

          (b) One Time  Adjustment.  In the event that  Company's  net cash flow
     from  operations for the period  commencing with the date of this Debenture
     through the end of the  Company's  fiscal year ending in 2004, is less than
     $1,000,000, and for the ten (10) trading days following the announcement of
     the Company's  financial results for that period,  whether by press release
     or  public  announcement  or public  filing,  the  volume-weighted  average
     closing bid price for the Common  Stock (the "New  Average  Price") is less
     than the  Conversion  Price,  the  Conversion  Price  shall be  immediately
     reduced to the New Average Price.

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

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

          (e) Stock  Splits,  Subdivisions  or  Combinations.  In the event of a
     stock split or  subdivision of shares of Common Stock into a greater number
     of shares, the Conversion Price shall be proportionately  decreased, and in
     the event of a combination  of shares of Common Stock into a smaller number
     of shares,  the Conversion Price shall be proportionately  increased,  such
     increase or decrease,  as the case may be, becoming effective at the record
     date.

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

                                       4
<PAGE>

          (g) Exceptions.  The term "Additional  Common Stock" herein shall mean
     all shares of Common Stock or securities  convertible or  exercisable  into
     shares of Common Stock hereafter issued by Borrower (including Common Stock
     held in the treasury of Borrower),  except (A) Common Stock issued upon the
     conversion  of  any of the  Debentures;  (B)  Common  Stock  issuable  upon
     conversion of presently issued and outstanding shares of Preferred Stock of
     the  Borrower,  (C)  Common  Stock  issuable  upon  exercise  of  presently
     outstanding  stock  options and warrants or (D) up to  6,000,000  shares of
     Common Stock issued prior to November 30, 2003  resulting in gross proceeds
     to the Company of not less than $0.50 per share in cash.

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

          (i)  Distributions.  In the event of  distribution to all Common Stock
     holders of any securities,  cash or properties or assets or other rights to
     purchase securities or assets,  then, after such event, this debenture will
     also be convertible into the kind and amount of securities,  cash and other
     property which the Holder would have been entitled to receive if the Holder
     owned  the  Common  Stock   issuable  upon   conversion  of  the  Debenture
     immediately prior to the occurrence of such event.

          (j)  Capital  Reorganization  and  Reclassification.  In  case  of any
     capital  reorganization or reclassification of the Common Stock of Borrower

                                       5
<PAGE>

     (other  than a change  in par  value or as a  result  of a stock  dividend,
     subdivision,  split up or combination of shares),  this Debenture  shall be
     convertible into the kind and number of shares of stock or other securities
     or property of  Borrower  to which the Holder of the  Debenture  would have
     been entitled to receive if the Holder owned the Common Stock issuable upon
     conversion of the  Debenture  immediately  prior to the  occurrence of such
     event. The provisions of the immediately foregoing sentence shall similarly
     apply to  successive  reorganizations,  reclassifications,  consolidations,
     exchanges,   leases,   transfers  or  other  dispositions  or  other  share
     exchanges.

          (k) Notice.  In the event  Borrower  shall  propose to take any action
     which shall result in an adjustment in the Conversion Price, Borrower shall
     give notice to the Holder of this Debenture, which notice shall specify the
     record date, if any, with respect to such action and the date on which such
     action  is to take  place.  Such  notice  shall be given on or  before  the
     earlier of 10 days  before the  record  date or the date which such  action
     shall be taken.  Such notice  shall also set forth all facts (to the extent
     known)  material to the effect of such action on the  Conversion  Price and
     the number,  kind or class of shares or other  securities or property which
     shall be deliverable  or purchasable  upon the occurrence of such action or
     deliverable upon conversion of this Debenture.

          (l) Certificate.  Following completion of an event which results in an
     adjustment to the Conversion Price, Borrower shall furnish to the Holder of
     this Debenture a statement,  signed by the Chief Executive  Officer and the
     Secretary  of the  Borrower,  of the facts  creating  such  adjustment  and
     specifying the resultant  adjusted  Conversion Price then in effect,  which
     statement shall constitute an amendment to this Debenture.

          (m)  Vote  of  Shareholders.  In the  event  of an  adjustment  to the
     Conversion  Price due to a sale of  securities  by the  Borrower  below the
     Conversion  Price  which  would  result in the  Holders  of all  Debentures
     evidencing  the Loan having the right to acquire  more than 20% of the then
     outstanding  shares of Common Stock,  the Borrower agrees to hold a vote of
     the  shareholders  prior to such event to authorize such an adjustment.  In
     the event the shareholders do not authorize the issuance of such additional
     shares  within such  period,  the Holder  shall have the right to cause the
     Company  to redeem the  Debenture  in  accordance  with the  provisions  of
     Section 4.

     7. Reservation of Shares. Borrower warrants and agrees that it shall at all
times  reserve  and keep  available,  free from  preemptive  rights,  sufficient
authorized  and  unissued  shares of Common  Stock or treasury  shares of Common
Stock necessary to effect conversion of this Debenture.

     8. Taxes.  The Company  shall pay any  documentary  or other  transactional
taxes  attributable  to the issuance or delivery of this Debenture or the shares
of Common Stock issued upon  conversion  by the Holder  (excluding  any federal,
state or local income taxes and any  franchise  taxes or taxes  imposed upon the
Holder by the jurisdiction,  or any political  subdivision thereof,  under which
such Holder is organized or is qualified to do business).

     9. Default.

                                       6
<PAGE>

          (a) Event of Default.  An "Event of Default"  shall exist if an "Event
     of Default" (as defined in that certain Convertible Loan Agreement,  dated,
     October 15, 2003, among Borrower,  Lenders and RENN Capital Group,  Inc., a
     Texas corporation,  as Agent for the Lenders (the "Agent")) shall occur and
     be continuing.

          (b) Remedies Upon Event of Default.  If an Event of Default shall have
     occurred and be continuing, then the Holder may exercise any one or more of
     the rights and remedies  provided in the Loan Documents,  as the Holder, in
     its sole discretion, may deem necessary or appropriate.

          (c) Remedies  Nonexclusive.  Each right, power or remedy of the Holder
     hereof upon the  occurrence of any Event of Default as provided for in this
     Debenture  or now or  hereafter  existing at law or in equity or by statute
     shall be cumulative  and concurrent and shall be in addition to every other
     right,  power or remedy  provided for in this Debenture or now or hereafter
     existing at law or in equity or by statute,  and the  exercise or beginning
     of the  exercise by the Holder or  transferee  hereof of any one or more of
     such rights,  powers or remedies  shall not preclude  the  simultaneous  or
     later  exercise  by the Holder of any or all such other  rights,  powers or
     remedies.

          (d) Expenses. Upon the occurrence of a Default or an Event of Default,
     which occurrence is not cured within the notice provisions, if any provided
     therefore,  Borrower  agrees to pay and shall pay all reasonable  costs and
     expenses (including attorneys' fees and expenses) incurred by the Holder in
     connection with the  preservation  and enforcement of Holder's rights under
     the Convertible Loan Agreement, the Debenture, or any other Loan Document.

     10. Failure to Act and Waiver.  No failure or delay by the Holder hereof to
require  the  performance  of any  term or  terms  of this  Debenture  or not to
exercise any right or any remedy  shall  constitute a waiver of any such term or
of any right or of any  default,  nor shall such delay or failure  preclude  the
Holder hereof from exercising any such right,  power or remedy at any later time
or times.  By accepting  payment after the due date of any amount  payable under
this Debenture,  the Holder hereof shall not be deemed to waive the right either
to require payment when due of all other amounts payable,  or to later declare a
default for failure to effect such payment of any such other amount. The failure
of the Holder of this  Debenture  to give notice of any failure or breach of the
Borrower  under this  Debenture  shall not  constitute  a waiver of any right or
remedy in respect of such continuing failure or breach or any subsequent failure
or breach.

     11. [Intentionally Left Blank]

     12. Holder's Right to Request Multiple  Debentures.  The Holder shall, upon
written  request  and  presentation  of the  Debenture,  have the right,  at any
interest  payment  date,  to request  division of this  Debenture  into multiple
instruments, each of such to be in such amounts as shall be requested; provided,
however,  that no  Debenture  shall be  issued  in  denominations  of less  than
$100,000.

                                       7
<PAGE>

     13.  Transfer.  Subject to Section 12.08 of the Convertible Loan Agreement,
this Debenture may be transferred on the books of the Borrower by the registered
Holder hereof, or by Holder's attorney duly authorized in writing,  in multiples
of  $125,000,  only  upon  (i)  delivery  to the  Borrower  of a  duly  executed
assignment of the Debenture,  or part thereof, to the proposed new Holder, along
with a current  notation of the amount of payments  received  and net  Principal
Amount yet unfunded, and presentment of such Debenture to the Borrower for issue
of a replacement Debenture,  or Debentures,  in the name of the new Holder, (ii)
the  designation by the new Holder of the Lender's agent for notice,  such agent
to be the sole party to whom Borrower  shall be required to provide  notice when
notice  to  Holder  is  required  hereunder  and who  shall  be the  sole  party
authorized to represent  Lender in regard to  modification  or waivers under the
Debenture,  the  Convertible  Loan Agreement,  or other Loan Documents;  and any
action,  consent or waiver  (other than a compromise  of principal and interest)
when  given or taken by  Lender's  agent for  notice,  shall be deemed to be the
action of the  holders of a majority  in amount of the  Principal  Amount of the
Debenture,  as such holders are recorded on the books of the Borrower, and (iii)
in compliance with the legend to read as follows:

         "This  Debenture has not been  registered  under the  Securities Act of
         1933, as amended  ("Act"),  or applicable state securities laws ("State
         Acts"), and shall not be sold, hypothecated,  or otherwise transferred,
         unless such transfer is made in  compliance  with the Act and the State
         Acts."

         The  Company  shall be  entitled  to treat any  holder of record of the
Debenture  as the Holder in fact thereof and of the  Debenture  and shall not be
bound to recognize any equitable or other claim to or interest in this Debenture
in the name of any other  person,  whether or not it shall have express or other
notice thereof, except as otherwise provided by applicable law.

     14. Notices.  All notices and communications  under this Debenture shall be
in writing and shall be either delivered in person or by overnight service, such
as FedEx, and accompanied by a signed receipt  therefor;  or mailed  first-class
United States certified mail,  return receipt  requested,  postage prepaid,  and
addressed as follows: (i) if to the Borrower at its address for notice as stated
in the Convertible Loan Agreement;  and (ii) if to the Holder of this Debenture,
to the address (a) of such Holder as it appears on the books of the  Borrower or
(b) in the case of a partial assignment to one or more Holders,  to the Lender's
agent for  notice,  as the case may be.  Any  notice of  communication  shall be
deemed given and received as of the date of such  delivery if  delivered;  or if
mailed, then three days after the date of mailing.

     15. Maximum Interest Rate.

          (a) Regardless of any provision  contained in this  Debenture,  Lender
     shall never be  entitled  to  receive,  collect or apply as interest on the
     Debenture any amount in excess of interest  calculated at the Maximum Rate,
     and,  in the event  that  Lender  ever  receives,  collects  or  applies as
     interest  any such excess,  the amount  which would be  excessive  interest
     shall be  deemed  to be a  partial  prepayment  of  principal  and  treated
     hereunder as such; and, if the principal amount of the Debenture is paid in
     full,  any  remaining  excess  shall  forthwith  be  paid to  Borrower.  In
     determining  whether or not the interest paid or payable under any specific
     contingency  exceeds interest  calculated at the Maximum Rate, Borrower and

                                       8
<PAGE>

     Lender shall,  to the maximum extent  permitted  under  applicable law, (i)
     characterize any non principal payment as an expense, fee or premium rather
     than as  interest,  (ii)  exclude  voluntary  prepayments  and the  effects
     thereof, and (iii) amortize, pro rate, allocate and spread, in equal parts,
     the total amount of interest throughout the entire contemplated term of the
     Debenture;  provided  that,  if the Debenture is paid and performed in full
     prior to the end of the full contemplated term thereof, and if the interest
     received  for the  actual  period of  existence  thereof  exceeds  interest
     calculated at the Maximum Rate,  Lender shall refund to Borrower the amount
     of such  excess or credit the amount of such excess  against the  principal
     amount of the Debenture and, in such event,  Lender shall not be subject to
     any penalties provided by any laws for contracting for,  charging,  taking,
     reserving or  receiving  interest in excess of interest  calculated  at the
     Maximum Rate.

          (b) "Maximum  Rate" shall mean,  on any day,  the highest  nonusurious
     rate of interest (if any)  permitted by applicable law on such day that, at
     any time or from time to time,  may be  contracted  for,  taken,  reserved,
     charged or received on the  Indebtedness  evidenced by the Debenture  under
     the laws which are  presently in effect of the United  States of America or
     by the laws of any other jurisdiction which are or may be applicable to the
     Holders of the Debenture and such  Indebtedness or, to the extent permitted
     by law,  under such  applicable  laws of the United States of America or by
     the laws of any other  jurisdiction  which are or may be  applicable to the
     Holder of the  Debenture  and which may  hereafter  be in effect  and which
     allow a higher maximum  nonusurious  interest rate than applicable laws now
     allow.

     16. Convertible Loan Agreement,  Guaranty and Deed Trust. This Debenture is
issued pursuant to the Convertible Loan Agreement, and the Holder is entitled to
all the  rights and  benefits  thereunder.  Both  Borrower  and the Holder  have
participated  in  the  negotiation  and  preparation  of  the  Convertible  Loan
Agreement and of this Debenture.  Borrower agrees that a copy of the Convertible
Loan Agreement with all amendments,  additions and substitutions  therefor shall
be  available  to the  Holder  at the  offices  of  Borrower.  The  indebtedness
evidenced by this Debenture is secured pursuant to a Deed of Trust dated of even
date one of more of the Company's  subsidiaries to the Holder, and the Holder is
entitled to all rights and benefits of a secured party  thereunder.  The payment
and  performance of this  Debenture is guaranteed by the Company's  subsidiaries
pursuant to their Guaranty dated of even date herewith.

     17. Defined Terms. Capitalized terms used but not defined herein shall have
the meaning given them in the Convertible Loan Agreement.

                                       9
<PAGE>

     18.  Governing Law. This  Debenture  shall be governed by and construed and
enforced  in  accordance  with the  substantive  laws of the State of  Colorado,
without regard to the conflicts of laws provisions  thereof,  and the applicable
laws of the United States.

         IN WITNESS  WHEREOF,  the Company has caused this  Debenture to be duly
issued, executed and delivered on the date and year above stated.

                                   GASCO ENERGY, INC.

                                   By:
                                      -----------------------------------------
                                       Name:
                                            ------------------------------------
                                       Title:
                                             -----------------------------------

                                       10
<PAGE>

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